U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                 ---------------

                                    FORM 10-Q

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended November 30, 1998
                         Commission file number 0-27664


                                 UNIDIGITAL INC.
        -----------------------------------------------------------------
        (Exact Name of Small Business Issuer as Specified in Its Charter)


        Delaware                                      13-3856672
-------------------------------          ------------------------------------
(State or Other Jurisdiction of          (I.R.S. Employer Identification No.)
Incorporation or Organization)


                 229 West 28th Street, New York, New York 10001
                 ----------------------------------------------
                    (Address of Principal Executive Offices)

                                 (212) 244-7820
                           ---------------------------
                           (Issuer's Telephone Number,
                              Including Area Code)

     Check  whether  the Issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 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:
                       ---                              ---

     State the number of shares  outstanding of each of the Issuer's  classes of
common equity, as of December 31, 1998:

Class                                                Number of Shares
-----                                                ----------------
Common Stock,  $.01 par value                            5,247,248

     Transitional Small Business Disclosure Format (check one):

                   Yes:                              No: X
                       ---                              ---


<PAGE>


                        UNIDIGITAL INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS
                                -----------------

                                                                      Page
PART I       FINANCIAL INFORMATION

     Item 1. Financial Statements.......................................1

          CONSOLIDATED BALANCE SHEETS
          as at November 30, 1998 (unaudited) and
          August 31, 1998 (audited).....................................2

          CONSOLIDATED INCOME STATEMENTS
          For the Three Months Ended November 30, 1998 and
          November 30, 1997 (unaudited).................................3

          CONSOLIDATED  STATEMENT  OF CASH  FLOWS
          For the Three  Months  Ended
          November 30, 1998 and November 30, 1997
          (unaudited)...................................................4

          NOTES TO CONSOLIDATED FINANCIAL
          STATEMENTS (unaudited)........................................5

     Item 2. Management's Discussion and Analysis
             or Plan of Operation......................................13

          General......................................................13

          Results of Operations........................................13

          Liquidity, Capital Resources and Other Matters...............15

 PART II      OTHER INFORMATION

     Item 2. Changes in Securities and Use of Proceeds.................20

     Item 6. Exhibits and Reports on Form 8-K..........................21

SIGNATURES.............................................................25


                                       i
<PAGE>










                          PART I FINANCIAL INFORMATION

                          Item 1. Financial Statements










<PAGE>

<TABLE>
<CAPTION>

                        UNIDIGITAL INC. AND SUBSIDIARIES
                        --------------------------------
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------

                                                                        November 30,     August 31,
                                                                           1998            1998
                                                                        ------------     ----------
                                                                        (unaudited)
                          ASSETS

<S>                                                                     <C>              <C>        
Current assets:
  Cash and cash equivalents......................................       $    886,000     $   287,000
  Accounts receivable (less allowance for doubtful
   accounts of $649,000 and $331,000 at
   November 30, 1998 and August 31, 1998, respectively)..........         22,695,000      16,917,000
  Deferred financing costs, net..................................          1,453,000       1,013,000
  Prepaid expenses...............................................          4,479,000       2,727,000
  Other current assets...........................................          3,193,000       3,360,000
                                                                        ------------     -----------
     Total current assets........................................         32,706,000      24,304,000
                                                                        ============     ===========

Property and equipment, net......................................         17,314,000      14,591,000
Intangible assets, net...........................................         59,104,000      28,107,000
Other assets.....................................................            606,000         313,000
                                                                        ------------     -----------
     Total assets................................................       $109,730,000     $67,315,000
                                                                        ============     ===========

                          LIABILITIES
Current liabilities:
  Accounts payable and accrued expenses..........................       $ 10,747,000     $ 8,571,000
  Current portion of capital lease obligations...................          2,499,000       1,935,000
  Current portion of long-term debt..............................          5,183,000       3,610,000
  Income taxes payable...........................................          1,556,000         887,000
  Deferred income taxes..........................................            272,000         249,000
  Loans and notes payable to stockholders........................            435,000         155,000
                                                                        ------------     -----------
     Total current liabilities...................................         20,692,000      15,407,000


Capital lease obligations, net of current portion................          4,682,000       2,830,000
Long-term debt, net of current portion...........................         59,688,000      33,978,000
Deferred income taxes............................................            491,000         500,000
Loans and notes payable to stockholders, net of current portion..            207,000         207,000
                                                                         -----------      ----------
     Total liabilities...........................................         85,760,000      52,922,000
                                                                         -----------      ----------

                     STOCKHOLDERS' EQUITY
Preferred stock -- authorized 5,000,000 shares,
  $.01 par value each; none issued or outstanding................                 --              --
Common stock -- authorized 10,000,000 shares,
  $.01 par value each; 5,247,248 shares and 5,089,085 shares
  issued and outstanding at November 30, 1998 and
  August 31, 1998, respectively..................................             53,000          39,000
Additional paid-in capital.......................................         19,140,000       9,865,000
Retained earnings................................................          4,745,000       4,374,000
Cumulative foreign translation adjustment........................             32,000         115,000
                                                                         -----------      ----------
     Total stockholders' equity..................................         23,970,000      14,393,000
                                                                         -----------      ----------
     Total liabilities and stockholders' equity..................       $109,730,000     $67,315,000
                                                                        ============     ===========
</TABLE>

     The Notes to Consolidated Financial Statements are made a part hereof.

                                      -2-
<PAGE>

                        UNIDIGITAL INC. AND SUBSIDIARIES
                         CONSOLIDATED INCOME STATEMENTS
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                   Three Months Ended,
                                                               ---------------------------
                                                                November 30,  November 30,
                                                                   1998            1997
                                                               -------------  ------------

<S>                                                            <C>            <C>         
REVENUES
Net sales................................................      $  15,953,000  $  9,726,000

EXPENSES
Cost of sales............................................          8,748,000     5,041,000
Selling, general and administrative expenses.............          5,404,000     3,420,000
Expenses incurred due to restructuring...................            198,000            --
                                                               -------------  ------------
Total operating expenses.................................         14,350,000     8,461,000
                                                               -------------  ------------

Income from operations...................................          1,603,000     1,265,000

Interest expense.........................................         (1,167,000)     (423,000)
Interest expense -- deferred financing costs.............            (56,000)     (138,000)
Interest and other income - net..........................            271,000        80,000
                                                               -------------  ------------
Income before income taxes...............................            651,000       784,000

Provision for income taxes...............................            280,000       276,000
                                                               -------------  ------------
Net income ..............................................      $     371,000  $    508,000
                                                               =============  ============

Net income per share available to common stockholders:
 Basic...................................................      $        0.08  $       0.16
                                                               =============  ============
 Diluted.................................................      $        0.08  $       0.14
                                                               =============  ============

Shares used to compute net income per share:
 Basic...................................................          4,798,731     3,243,293
                                                               =============  ============
 Diluted.................................................          4,885,905     3,512,579
                                                               =============  ============
</TABLE>


     The Notes to Consolidated Financial Statements are made a part hereof.

                                      -3-
<PAGE>

                        UNIDIGITAL INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                                          Three Months Ended,
                                                                                       --------------------------
                                                                                       November 30,  November 30,
                                                                                          1998          1997
                                                                                       --------------------------
<S>                                                                                    <C>            <C>        
OPERATING ACTIVITIES
Net income.........................................................................    $   371,000    $   508,000
Adjustments to reconcile net income to
  net cash provided by (used in) operating activities:
    Depreciation and amortization..................................................      1,481,000        808,000
    Gain on sale of assets.........................................................       (315,000)            --
    Provision for deferred income taxes............................................         17,000        (37,000)
    Provision for bad debts........................................................         74,000         23,000
Net changes in assets and liabilities net of effects of businesses acquired:
  Accounts receivable..............................................................     (1,634,000)    (1,775,000)
  Prepaid expenses and other current assets........................................        130,000     (1,317,000)
  Other assets.....................................................................       (204,000)      (461,000)
  Accounts payable and accrued expenses............................................     (2,154,000)       832,000
  Income taxes payable.............................................................        230,000        244,000
                                                                                        -----------    -----------
Net cash used in operating activities..............................................     (2,004,000)    (1,175,000)
                                                                                        -----------    -----------

INVESTING ACTIVITIES
Additions to property and equipment................................................       (396,000)      (358,000)
Proceeds of sale of fixed assets...................................................        800,000             --
Business acquisitions..............................................................    (24,521,000)            --
                                                                                        -----------     ----------
Net cash used in investing activities..............................................    (24,117,000)      (358,000)
                                                                                        -----------     ----------

FINANCING ACTIVITIES
Payments of capital lease obligations..............................................       (617,000)      (445,000)
Proceeds from long-term debt.......................................................     27,471,000        793,000
Payments of long-term debt.........................................................       (132,000)       (14,000)
Shareholder loan...................................................................        (50,000)            --
Common stock issued................................................................         92,000             --
                                                                                        -----------      ---------
Net cash provided by financing activities..........................................     26,764,000        334,000
                                                                                        -----------      ---------

Effect of foreign exchange rates on cash...........................................        (44,000)       190,000
                                                                                        -----------      ---------

Net increase (decrease) in cash and cash equivalents...............................        599,000     (1,009,000)
Cash and cash equivalents at beginning of period...................................        287,000      3,203,000
                                                                                        -----------     ----------
Cash and cash equivalents at end of period.........................................    $   886,000     $2,194,000
                                                                                        ===========    ===========

SUPPLEMENTAL DISCLOSURES
Interest paid......................................................................    $ 1,317,000     $  461,000
                                                                                        ===========    ===========
Income taxes paid..................................................................    $    20,000     $   82,000
                                                                                        ===========    ===========
Noncash transactions:
Equipment acquired under capital lease obligations.................................    $ 2,032,000     $  261,000
                                                                                        ===========    ===========
Business acquisitions (net of liabilities of $5,010,000)...........................    $ 2,466,000     $       --
                                                                                        ===========    ===========
Stock issued for business acquisitions.............................................    $ 7,886,000     $       --
                                                                                        ===========    ===========
Warrants issued for business acquisition...........................................    $   931,000     $       --
                                                                                        ===========    ===========
Warrants issued for additional financing...........................................    $   380,000     $       --
                                                                                        ===========    ===========
</TABLE>

     The Notes to Consolidated Financial Statements are made a part hereof.

                                      -4-
<PAGE>

                        UNIDIGITAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (unaudited)

NOTE A - BASIS OF PRESENTATION:

     The  information  presented for November 30, 1998, and for the  three-month
periods ended November 30, 1998 and November 30, 1997, is unaudited, but, in the
opinion of the management of Unidigital Inc., its wholly-owned  subsidiaries and
its and their subsidiaries, affiliated companies and predecessors (collectively,
the "Company"),  the accompanying  unaudited  consolidated  financial statements
contain all adjustments (consisting only of normal recurring accruals) which the
Company considers necessary for the fair presentation of the Company's financial
position as of November 30, 1998 and the results of its  operations and its cash
flows for the three-month periods ended November 30, 1998 and November 30, 1997.

     The consolidated financial statements included herein have been prepared by
the Company in accordance  with  generally  accepted  accounting  principles for
interim  financial  information and the instructions to Form 10-Q and Rule 10-01
of Regulation S-X.  Accordingly,  certain  information and footnote  disclosures
normally included in financial  statements prepared in accordance with generally
accepted   accounting   principles   have  been  condensed  or  omitted.   These
consolidated  financial  statements  should  be read  in  conjunction  with  the
Company's audited  consolidated  financial  statements for the year ended August
31, 1998,  which were  included as part of the  Company's  Annual Report on Form
10-KSB.

     The consolidated  financial  statements  include the accounts of Unidigital
Inc.  and its direct and indirect  subsidiaries.  All  significant  intercompany
balances have been eliminated.

     Interim  results  are not  necessarily  indicative  of results  that may be
expected for the full fiscal year.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     ORGANIZATION AND BUSINESS:

     The Company is a leading service  business within the graphic arts industry
that provides  imaging,  reproduction and integrated media solution  services to
advertising agencies, retailers,  corporations,  marketing/communications firms,
publishers, government agencies and financial institutions in the New York City,
Boston, San Francisco and London markets. Through active cross-selling among its
four divisions,  Unison, KWIK, Elements and the Regent Group (collectively,  the
"Unidigital  Enterprise"),   the  Company  provides  imaging,  reproductive  and
integrated  media  solutions to each of the large format,  digital  prepress and
digital printing  segments of the industry.  Cross-selling  among the Unidigital
Enterprise  offers a total  solution for customers,  which the Company  believes
creates a distinct advantage over competitors within the marketplace.

                                      -5-
<PAGE>

                        UNIDIGITAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (unaudited)

     FOREIGN CURRENCY TRANSLATION:

     The portion of the Company's financial statements relating to the Company's
United Kingdom operations are translated into United States Dollars using period
exchange rates ((pound)1.00 = $1.67 at August 31, 1998 and $1.65 at November 30,
1998,  respectively  for balance sheet  accounts),  and average  exchange  rates
((pound)1.00  = $1.67 and $1.70 for the three months ended November 30, 1998 and
November 30, 1997, respectively for income statement accounts).  The translation
difference is reflected as a separate component of stockholders' equity.


     EARNINGS PER SHARE:

     In February 1997, the Financial Accounting Standards Board issued Statement
of  Financial  Accounting  Standards  No. 128,  "Earnings  per Share,"  which is
required to be adopted for years  ending after  December 15, 1997.  Accordingly,
the Company has adopted the provisions of the new statement.

     The  following  table  sets  forth the  computation  of basic and  dilutive
earnings per share:

                                                     Three Months Ended,
                                                   -----------------------
                                                         November 30,
                                                     1998           1997
                                                   -----------------------
Numerator for basic and diluted earnings per
   share-net income available for common
   stockholders...............................     $  371,000   $  508,000
                                                    =========    =========
Denominator:
  Denominator for basic earnings per share-
   weighted average shares....................      4,798,731    3,243,293
  Effect of dilutive securities:
   Stock options..............................          9,515       79,931
   Warrants...................................         77,659      189,355
                                                    ---------    ---------
  Denominator for diluted earnings per share-
   adjusted weighted-average shares and 
   assumed conversions........................      4,885,905    3,512,579
                                                    =========    =========

                                      -6-
<PAGE>

                        UNIDIGITAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (unaudited)

     The  following  securities  have been  excluded from the dilutive per share
computation as they are antidilutive:

                                 Three Months Ended,
                               -------------------------
                                     November 30,
                                   1998        1997
                               -------------------------
Stock Options..................  563,066      30,000
Warrants.......................  342,000      25,000


NOTE C - STOCKHOLDERS' EQUITY:

     COMMON STOCK:

     As of December  31, 1998  5,247,248  shares of Common Stock were issued and
outstanding.


     PREFERRED STOCK:

     As of December 31, 1998 there were no shares of  Preferred  Stock issued or
approved for issuance.


NOTE D - STOCK OPTION PLANS AND WARRANTS:

     Subsequent  to the end of the  quarter,  on January 4,  1999,  the  Company
granted  options to purchase  2,500  shares of its Common Stock to each of David
Wachsman and Harvey Silverman, at an exercise price of $5.00 per share.

     In  connection  with  the  Company's   subordinated   unsecured  loan  (the
"Subordinated  Loan") in the aggregate principal amount of $10,000,000 from CIBC
Wood Gundy Capital Corp.  ("CWGCC"),  on November 25, 1998,  the Company  issued
ten-year  warrants to CWGCC to purchase  440,000 shares of the Company's  Common
Stock at an exercise price of $4.50 per share.  In the event the Company has not
paid the Subordinated Loan in full by November 30, 1999 (subject to extension in
certain  instances),  the  Company  will  issue  ten-year  warrants  to CWGCC to
purchase  an  additional  200,000  shares of the  Company's  Common  Stock at an
exercise price not to exceed $5.00 per share. In the event the Subordinated Loan
has not been paid in full by May 31, 2001,  the exercise  price of such warrants
shall be reduced by $1.00 per share and, on each  anniversary of such date, such
exercise  price shall be reduced an  additional  $1.00 per share.  In  addition,
subject  to  certain  limitations,  the  Company  granted  registration  rights,
including demand registration rights, to CWGCC.

                                      -7-
<PAGE>

                        UNIDIGITAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (unaudited)

     In connection with its acquisition (the "SuperGraphics Acquisition") of all
of the issued and outstanding  capital stock of  SuperGraphics  Holding Company,
Inc.  ("SuperGraphics"),  on November 30,  1998,  the Company  issued  five-year
warrants to purchase 225,000 shares of the Company's Common Stock at an exercise
price of $5.64 per share to the stockholders of SuperGraphics.

NOTE E - ACQUISITIONS:

     On September 2, 1998, the Company  consummated the  acquisition  (the "Mega
Art Acquisition") of all of the issued and outstanding capital stock of Mega Art
Corp.,  a New York  corporation  ("Mega  Art").  As a result,  Mega Art became a
wholly-owned  subsidiary of the Company.  The purchase price included an initial
cash  payment of  $5,800,000  and the issuance of 754,148  shares of  restricted
Common  Stock of the Company  ($5,000,000).  In  addition,  the  purchase  price
includes a deferred cash payment of $1,200,000 (the "Deferred Payment"), payable
180  calendar  days after the closing  date,  and an  earn-out  payment of up to
$1,200,000 in cash and $1,200,000 in restricted Common Stock of the Company (the
"Earn-Out  Payment"),  payable  on or  before  November  29,  1999.  Each of the
Deferred Payment and the Earn-Out Payment are subject to adjustment based on the
financial  performance  of Mega Art. In addition,  the Deferred  Payment and the
Earn-Out  Payment may also be used to satisfy any  indemnification  claims.  The
Company  funded the cash  portion of the  purchase  price from the proceeds of a
$5,000,000 acquisition loan and a portion of a $10,000,000 revolving credit loan
from Canadian Imperial Bank of Commerce ("CIBC").

     On October 30, 1998, the Company  consummated the acquisition  (the "Zazula
Acquisition") of Hy Zazula Associates,  Inc., a New York corporation ("Zazula").
The purchase  price  included an aggregate  cash payment of  $2,275,000  and the
issuance  of  433,076   shares  of  restricted   Common  Stock  of  the  Company
($2,275,000).  Of the  purchase  price,  $150,000  in cash and 28,552  shares of
restricted Common Stock of the Company  ($150,000) is being held in escrow for a
period of two years to satisfy any  indemnification  claims.  The Company funded
the  cash  portion  of the  purchase  price  from  proceeds  of a  portion  of a
$15,000,000 revolving credit loan from CIBC.

     On  November  30,  1998,   the  Company   consummated   the   SuperGraphics
Acquisition.  As a result SuperGraphics became a wholly-owned  subsidiary of the
Company.   The  purchase  price   included  a  cash  payment  of   approximately
$15,900,000,  the issuance of 135,393  shares of restricted  Common Stock of the
Company  (approximately  $600,000)  and the  issuance of  five-year  warrants to
purchase  225,000  shares of the Company's  Common Stock at an exercise price of
$5.64 per share.  The purchase price also includes a deferred cash payment equal
to the  difference  between (i) EBITDA,  as defined,  multiplied by six and (ii)
$16,500,000.  Such deferred cash payment, if any, is payable no later than March
15,  1999.  In addition,  subject to

                                      -8-
<PAGE>
                        UNIDIGITAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (unaudited)


certain limitations,  the Company granted "piggyback" registration rights to the
sellers of SuperGraphics.  Of the purchase price, approximately $233,000 in cash
and 135,393  shares of  restricted  Common Stock of the Company is being held in
escrow  for a period of one year to  satisfy  any  indemnification  claims.  The
Company  funded the cash  portion of the purchase  price from  proceeds of (i) a
portion of a $32,000,000 term loan from CIBC and (ii) the Subordinated Loan.

     The warrants issued to the sellers of  SuperGraphics,  which were deemed to
have a value of  approximately  $931,000,  subject to an independent  appraisal,
have been recorded as goodwill, and are being amortized on a straight-line basis
over twenty-five years.

     The following  supplemental  pro forma  information  is presented as if the
Company had completed the Kwik  Acquisition (as hereinafter  defined),  the Mega
Art Acquisition,  the Zazula Acquisition and the SuperGraphics Acquisition as of
September 1, 1998 and 1997, respectively:



                                          Three Months Ended,
                                      -------------------------
                                             November 30,
                                           1998        1997
                                      -------------------------
Net sales......................       $ 19,120,000  $18,695,000
Income from operations.........          1,659,000    2,901,000
Net (loss) income..............            (26,000)   1,656,000
Net income per share-basic.....               0.00         0.36
Net income per share-diluted...               0.00         0.34


                                      -9-
<PAGE>

                        UNIDIGITAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (unaudited)

NOTE F - LONG-TERM DEBT:

     Long-term debt consists of the following:

<TABLE>
<CAPTION>

                                                                                      Facility
                                                                                       Amount          Amount Outstanding
                                                                                     November 30,   November 30,   August 31,
                                                                                        1998           1998          1998
                                                                                   ------------------------------------------
<S>                                          <C>       <C>                            <C>           <C>            <C>       
Credit facilities in the United Kingdom; interest at either the bank's overdraft
     rate plus 2% or 2.5%,  including  a  temporary  facility  of  approximately
     $330,000  commencing  September  1, 1998 and  renewable  in December  1998;
     facility amount is approximately (pound)2,500,000 ($4,122,000)                   $4,122,000    $2,616,000     $2,135,000
Term loan,  matures in March  2003;  payable in sixteen  quarterly  installments
     ranging  from  $960,000  to  $1,920,000,  commencing  in June 1999,  with a
     balloon payment of $8,960,000 in March 2003, plus interest at the Base Rate
     or at the  Eurodollar  Rate,  as defined,  plus an  Applicable  Margin,  as
     defined, ranging from 0.75% to 3.0%                                              32,000,000    32,000,000     25,000,000
Revolving line of credit; matures in March 2003, interest at the Base Rate or at
     the Eurodollar  Rate, as defined,  plus an Applicable  Margin,  as defined,
     ranging from 0.75% to 3.0%                                                       15,000,000    13,435,000      8,435,000
Acquisition line of credit;  matures in March 2003,  payable in eleven quarterly
     installments of 5.0% of the outstanding balance in March 2000 commencing in
     June 2000 and one installment of 45.0% of the outstanding  balance in March
     2000, plus interest at the Base Rate or at the Eurodollar Rate, as defined,
     plus an Applicable Margin, as defined, ranging from 0.75% to 3.0%                 5,000,000     5,000,000
Subordinated loan matures in March 2004;  base  interest of 12 1/2%;  plus 0.25%
     the first day after the first anniversary of the Note; plus 0.25% following
     the last day of each 90 day period until payment in full                         10,000,000    10,000,000
Installment  note  due  seller  of  Elements (SF);  payable in  eight  quarterly
     installments of $11,600, including interest at 6.0%                                                    --         11,000
Installment note due seller of Unison (MA);  matures in January 1999, payable in
     two annual installments of $75,000 including interest at 8.0%                                      75,000         75,000
Notes payable for certain equipment, maturing on dates between October, 1998 and
     September,  2003, payable in monthly  installments of $22,000 until October
     1998  and  $14,000  thereafter,  including  interest  at  8.54%  and  8.4%,
     respectively.                                                                                     562,000        618,000
Treasury loan  facility  in United  Kingdom;  matures in July  2001,  payable in
     monthly  installments of $19,000 plus interest of LIBOR,  as defined,  plus
     the Banks Margin of 2.4%                                                                          586,000        651,000
Note payable,  payable in monthly  installments of approximately $1000 including
     interest at 14,000 17,000 10.35%                                                                   14,000         17,000

                                      -10-
<PAGE>

                        UNIDIGITAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (unaudited)

Installment  note due  seller  of Kwik  International;  matures  in April  2001,
     payable  in  thirty-six  monthly  installments  of  approximately   $21,000
     including interest at 5.7%                                                                         583,000       646,000

                                                                                                     ------------------------
                                                                                                     64,871,000    37,588,000
Less current portion                                                                                  5,183,000     3,610,000
                                                                                                     ------------------------
                                                                                                    $59,688,000   $33,978,000
                                                                                                     ========================
</TABLE>

     During  the First  Quarter of Fiscal  1999 (as  hereinafter  defined),  the
Company  amended its existing bank financing  facilities with CIBC. As a result,
the  Company  has  credit  facilities  with  CIBC  in the  aggregate  amount  of
$52,000,000,  consisting  of a: (i)  $32,000,000  term  loan;  (ii)  $15,000,000
revolving  line of  credit  facility  which is  available  for  working  capital
purposes;  and (iii) $5,000,000 credit facility which is available for corporate
acquisition  purposes.  Such credit  facilities  are guaranteed by the Company's
United  States  subsidiaries,   including   subsidiaries   currently  owned  and
subsequently  acquired.  In  addition,  the  Company  pledged  all of its equity
interests in its United States subsidiaries,  including  subsidiaries  currently
owned and subsequently  acquired,  and two-thirds of its equity interests in its
wholly-owned United Kingdom subsidiary as collateral for such credit facilities.
Interest under such credit  facilities is, at the Company's  option, at the Base
Rate or at the  Eurodollar  Rate,  as defined,  plus an  Applicable  Margin,  as
defined, ranging from 0.75% to 3.0% depending on the Company's consolidated debt
to earnings ratio and the type of loan. As of November 30, 1998, the Company had
an outstanding balance of $32,000,000 under the term loan, $13,435,000 under the
revolving credit facility and $5,000,000 under the acquisition loan.

     The credit  facilities  contain  covenants  which  require  the  Company to
maintain certain earnings and debt to earnings ratio  requirements  based on the
combined operations of the Company and its subsidiaries. The Company's agreement
with  CIBC  restricts  the  Company's  ability  to  pay  dividends.  The  credit
facilities  are  secured  by a first  priority  lien on all of the assets of the
Company and its subsidiaries.

     Subsequent  to the end of the fiscal year,  in November  1998,  the Company
borrowed a principal amount of $10,000,000 pursuant to a subordinated  unsecured
loan (the "Subordinated  Loan"). The Subordinated Loan matures on March 31, 2004
and bears  interest at a rate per annum equal to the sum of (i) 12.50% plus (ii)
an additional  percentage  amount equal to 0.25% commencing on November 30, 1999
and increasing by 0.25% following the last day of each 90-day period thereafter.
Until  November  30, 1999,  at the option of the lender,  interest is payable in
additional  notes,  Common  Stock of the Company or warrants to purchase  Common
Stock of the Company. Thereafter, interest is payable in either additional notes
or cash,  depending on certain coverage ratios and, in the case of cash interest
payments, the approval of the Bank. The Company will incur an additional premium
of 5.0% on any prepayments of the  Subordinated

                                      -11-
<PAGE>
                        UNIDIGITAL INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (unaudited)

Loan made prior to November 30, 1999. Such additional premium will be reduced by
100 basis points on December 1, 1999 and shall be reduced by such amount on each
December  1st  thereafter  until  December  1,  2003.  In  connection  with  the
Subordinated  Loan,  the  Company  issued  ten-year  warrants  to the  lender to
purchase  440,000 shares of the Company's  Common Stock at an exercise price not
to exceed  $5.00 per share.  In the event the  Company  has not paid the loan in
full by November  30, 1999  (subject to  extension  in certain  instances),  the
Company  will issue  ten-year  warrants to the lender to purchase an  additional
200,000 shares of the Company's  Common Stock at an exercise price not to exceed
$5.00 per share. In the event the Subordinated Loan has not been paid in full by
May 31, 2001,  the exercise price of such warrants shall be reduced by $1.00 per
share and,  on each  anniversary  of such date,  such  exercise  price  shall be
reduced  by an  additional  $1.00 per  share.  In  addition,  subject to certain
limitations,   the  Company  granted  registration  rights,  including  "demand"
registration rights, to such lender.

     The  warrants  issued  to  CWGCC,  which  were  deemed  to have a value  of
approximately $380,000,  subject to an independent appraisal, have been recorded
as deferred  financing costs,  and are being amortized on a straight-line  basis
over approximately five years.

      The Company's  credit  facility with its London bank provides for combined
lines of credit  of  (pound)2,500,000  (approximately  $4,122,000)  for  working
capital for its United Kingdom  operations.  Such credit  facility was increased
from (pound)1,400,000 (approximately $2,308,000) on May 13, 1998. These lines of
credit  renewed  annually and bear interest at 2.0% or 2.5% over the bank's Base
Rate, as defined.  In addition,  the Company is required to pay a service charge
equal to 0.2% of invoice value.  These lines of credit contain  covenants  which
require the  Company's  United  Kingdom  subsidiaries  to maintain a minimum net
worth of  (pound)500,000,  limit borrowings up to specified  amounts of accounts
receivable  aged 120  days or less and are  guaranteed  by the  Company  for the
principal amount of up to (pound)500,000. Amounts outstanding are collateralized
by substantially  all of the Company's United Kingdom assets. As of November 30,
1998, the Company had an outstanding balance of (pound)1,587,000  (approximately
$2,616,000) under its United Kingdom credit facility.

      In  connection  with its  acquisition  of certain of the assets (the "Five
Star  Acquisition") of Five Star Finishers,  Ltd., a United Kingdom  corporation
("Five Star"), the Company entered into a three-year term loan of (pound)400,000
(approximately  $660,000) with its London bank. Such term loan bears interest at
2.4% over the bank's Base Rate, as defined, and contains covenants which require
the Company to maintain certain debt to earnings ratios and Net Tangible Assets,
as defined,  and limits borrowings to 75% of Net Tangible Assets.  The Company's
obligations   under  the  term  loan  are   guaranteed  by  its  United  Kingdom
subsidiaries. As of November 30, 1998, the Company had an outstanding balance of
(pound)356,000 (approximately $586,000) under the term loan.

                                      -12-
<PAGE>

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

GENERAL

     The Company is a leading  provider of imaging,  reproduction and integrated
media  solution  services  to  advertising  agencies,  retailers,  corporations,
marketing/communications  firms,  publishers,  government agencies and financial
institutions  in the New York City,  Boston,  San Francisco and London  markets.
Through  active  cross-selling  among the  Unidigital  Enterprise,  the  Company
provides  imaging,  reproductive  and integrated  media solutions to each of the
large format,  digital prepress and digital  printing  segments of the industry.
Cross-selling among the Unidigital  Enterprise offers a total media solution for
customers,  which the  Company  believes,  creates  a  distinct  advantage  over
competitors within the marketplace.

     The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking  statements (as such term is defined in the
Private  Securities  Litigation  Reform  Act of 1995)  that  involve  risks  and
uncertainties. Such forward-looking statements may be identified by, among other
things,  the use of forward-looking  terminology such as "believes,"  "expects,"
"may,"  "will,"  "should"  or  "anticipates"  or the  negative  thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve  risks  and  uncertainties.  From  time  to  time,  the  Company  or its
representatives have made or may make forward-looking  statements,  orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission (the "SEC"), or press
releases  or oral  statements  made by or with  the  approval  of an  authorized
executive  officer of the Company.  These  forward-looking  statements,  such as
statements regarding  anticipated future revenues,  capital  expenditures,  Year
2000 compliance and other statements  regarding  matters that are not historical
facts,  involve  predictions.  The  Company's  actual  results,  performance  or
achievements  could differ  materially from the results expressed in, or implied
by, these  forward-looking  statements.  Potential risks and uncertainties  that
could affect the Company's future operating results include, but are not limited
to:  (i)  economic  conditions,  including  economic  conditions  related to the
digital print  industry;  (ii) the  availability of equipment from the Company's
vendors at current  prices and  levels;  (iii) the  intense  competition  in the
markets for the Company's  products and services;  (iv) the Company's ability to
integrate acquired companies and businesses in a cost-effective  manner; (v) the
Company's ability to effectively  implement its branding strategy;  and (vi) the
Company's ability to develop,  market, provide, and achieve market acceptance of
new service offerings to new and existing clients.

RESULTS OF OPERATIONS

     The consolidated  financial  information includes both the Company's United
States  operations  and its United  Kingdom  operations.  On March 25,  1998 the
Company acquired  substantially  all of the assets of Kwik  International,  Ltd.
(the  "Kwik  Acquisition").  As a result of such  acquisition  the  Company  has
expanded its color separation and large format printing services in the New York
and  surrounding  area.  In July 1998,  the  Company  consummated  the Five Star
Acquisition in the United Kingdom. On September 2, 1998, the Company consummated
the

                                      -13-
<PAGE>

Mega Art  Acquisition  resulting in the  expansion  of its wide format,  digital
prepress and printing services. On October 30, 1998, the Company consummated the
Zazula  Acquisition  resulting in the expansion of its  retouching  and prepress
services,  primarily to advertising  agencies. On November 30, 1998, the Company
completed the SuperGraphics  Acquisition.  Such acquisitions have been accounted
for  under  the  purchase  method  of  accounting  and,  therefore,  results  of
operations  from such  acquisitions  are included in the Company's  consolidated
financial statements from the date of the respective acquisition.

     THREE MONTHS ENDED NOVEMBER 30, 1998 AND NOVEMBER 30, 1997
     ----------------------------------------------------------

     NET SALES.  Net sales for the three months ended  November 30, 1998 ("First
Quarter of Fiscal 1999")  increased by 64%, or $6,227,000,  to $15,953,000  from
$9,726,000  for the three  months ended  November  30, 1997  ("First  Quarter of
Fiscal 1998"). Net sales for the Company's United States operations increased by
136%,  or  $7,101,000,  from  $5,234,000  in the First Quarter of Fiscal 1998 to
$12,335,000 in the First Quarter of Fiscal 1999. This increase was  attributable
primarily to an increase in net sales resulting from the Kwik  Acquisition,  the
Mega Art  Acquisition  and, to a lesser extent,  the Zazula  Acquisition  and an
increase in net sales in the  Company's  other United States  subsidiaries.  Net
sales for the Company's United Kingdom operations decreased by 19%, or $875,000,
from  $4,493,000  in the First Quarter of Fiscal 1998 to $3,618,000 in the First
Quarter  of  Fiscal  1999.  This  decrease  was  attributable   primarily  to  a
market-driven downturn in the financial printing industry in the United Kingdom.

     COST OF SALES. Cost of sales for the First Quarter of Fiscal 1999 increased
by 74%, or $3,707,000,  to $8,748,000  from  $5,041,000 for the First Quarter of
Fiscal  1998.  As a  percentage  of net  sales,  cost of  sales  increased  as a
percentage of net sales from 52% for the First Quarter of Fiscal 1998 to 55% for
the First Quarter of Fiscal 1999.  Such increase was  attributable  primarily to
the  change in product  mix to include  more  large  format  and  digital  print
services.  Cost of sales for the Company's United States operations increased as
a percentage  of net sales from 49% for the First  Quarter of Fiscal 1998 to 54%
for the First Quarter of Fiscal 1999. Such increase was  attributable  primarily
to increased costs  incurred in connection  with the Company's  preparation  for
expansion of its large format and digital  print  businesses.  Cost of sales for
the Company's United Kingdom  operations  increased as a percentage of net sales
from 55% for the First  Quarter of Fiscal  1998 to 59% for the First  Quarter of
Fiscal 1999. Such increase was  attributable  primarily to the change in product
mix to include more digital print services as well as the reduced utilization of
the Company's financial printing facility.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses ("SG&A") increased 58%, or $1,984,000,  from $3,420,000
for the First  Quarter of Fiscal  1998 to  $5,404,000  for the First  Quarter of
Fiscal 1999. Such increase was attributable  primarily to the increased level of
operations  which resulted from the Kwik  Acquisition,  the Mega Art Acquisition
and, to a lesser  extent,  the Zazula  Acquisition  and the hiring of additional
management and administrative  personnel and costs associated with the Company's
acquisitions. As a percentage of net sales, SG&A decreased slightly from 35% for
the First  Quarter of Fiscal 1998 to 34% for the First  Quarter of Fiscal  1999.
SG&A decreased a percentage of net sales as a result of increased sales volume.

                                      -14-
<PAGE>

     RESTRUCTURING  EXPENSES.  In the First Quarter of Fiscal 1999,  the Company
continued to consolidate its United Kingdom financial printing operations.  As a
result of such  consolidation,  the Company incurred  restructuring  expenses of
$198,000.

     INCOME FROM  OPERATIONS.  Income from  operations  for the First Quarter of
Fiscal 1999 increased by 27%, or $338,000, to $1,603,000 from $1,265,000 for the
First Quarter of Fiscal 1998. Of this amount,  $1,474,000 was contributed by the
Company's United States  operations and $129,000 by the Company's United Kingdom
operations.  This  increase  resulted  from  higher net sales  offset in part by
higher  operating  costs  associated  with such net sales and the  restructuring
expenses.

      NET INTEREST EXPENSE. Net interest expense for the First Quarter of Fiscal
1999  increased by 98%, or  $470,000,  to $952,000  from  $482,000 for the First
Quarter of Fiscal 1998. This increase  resulted from increased  borrowings under
the   Company's   credit   facilities   primarily   relating  to  the  Company's
acquisitions.

      INCOME TAXES.  Income taxes for the First Quarter of Fiscal 1999 increased
by 1%, or $4,000,  to $280,000  from  $276,000  for the First  Quarter of Fiscal
1998.

      NET INCOME. As a result of the factors described above, net income for the
First  Quarter of Fiscal  1999  decreased  by 27%, or  $137,000,  to $371,000 as
compared to net income of $508,000 for the First Quarter of Fiscal 1998.

LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS

     CASH FLOW.  Net cash used in operating  activities  was  $2,004,000 for the
First  Quarter of Fiscal  1999 and  $1,175,000  for the First  Quarter of Fiscal
1998. Net cash used in investing  activities for the acquisition of property and
equipment was $396,000 for the First Quarter of Fiscal 1999 and $358,000 for the
First Quarter of Fiscal 1998. For the First Quarter of Fiscal 1999 and the First
Quarter of Fiscal 1998, the Company  acquired  equipment under capital leases of
$2,032,000 and $261,000, respectively, and made payments under capital leases of
$617,000 and  $445,000,  respectively.  Net bank  borrowings  provided  funds of
$27,339,000  for the First  Quarter of Fiscal  1999 and  $779,000  for the First
Quarter of Fiscal 1998.

     BANK  CREDIT  FACILITIES.  The  Company  has  borrowing  arrangements  with
commercial banks in both New York and London. During the First Quarter of Fiscal
1999,  the  Company  amended  its  existing  credit  facility  with  CIBC in the
aggregate amount of $52,000,000,  which consist of a: (i) $32,000,000 term loan;
(ii)  $15,000,000  revolving  line of credit  facility  which is  available  for
working  capital  purposes;  and  (iii)  $5,000,000  credit  facility  which  is
available for corporate acquisition purposes.  Such borrowings are guaranteed by
the Company's United States subsidiaries, including subsidiaries currently owned
and subsequently  acquired.  In addition,  the Company pledged all of its equity
interests in its United States subsidiaries,  including  subsidiaries  currently
owned and subsequently  acquired,  and two-thirds of its equity interests in its
wholly-owned United Kingdom subsidiary as collateral for such credit facilities.
Interest under such credit  facilities is, at the Company's  option, at the Base
Rate or at the  Eurodollar

                                      -15-
<PAGE>

Rate, as defined,  plus an Applicable Margin, as defined,  ranging from 0.75% to
3.0% depending on the Company's consolidated debt to earnings ratio and the type
of loan.  As of November 30,  1998,  the Company had an  outstanding  balance of
$32,000,000  under the term loan,  and  $13,435,000  under the revolving  credit
facility and $5,000,000 under the acquisition loan.

     The credit  facilities  contain  covenants  which  require  the  Company to
maintain certain earnings and debt to earnings ratio  requirements  based on the
combined operations of the Company and its subsidiaries. The Company's agreement
with  CIBC  restricts  the  Company's  ability  to  pay  dividends.  The  credit
facilities  are  secured  by a first  priority  lien on all of the assets of the
Company  and  its  subsidiaries,  including  subsidiaries  currently  owned  and
subsequently acquired.

     In November  1998, the Company  borrowed a principal  amount of $10,000,000
pursuant to the Subordinated  Loan. The  Subordinated  Loan matures on March 31,
2004 and bears  interest at a rate per annum equal to the sum of (i) 12.50% plus
(ii) an additional  percentage  amount equal to 0.25% commencing on November 30,
1999 and  increasing  by 0.25%  following  the  last day of each  90-day  period
thereafter.  Until  November 30, 1999, at the option of the lender,  interest is
payable in additional notes, Common Stock of the Company or warrants to purchase
Common  Stock  of  the  Company.  Thereafter,  interest  is  payable  in  either
additional notes or cash,  depending on certain coverage ratios and, in the case
of cash  interest  payments,  the  approval of CIBC.  The Company  will incur an
additional  premium of 5.0% on any  prepayments  of the  Subordinated  Loan made
prior to November 30, 1999. Such additional premium will be reduced by 100 basis
points on December 1, 1999 and shall be reduced by such amount on each  December
1st thereafter until December 1, 2003. In connection with the Subordinated Loan,
the Company issued ten-year warrants to the lender to purchase 440,000 shares of
the Company's  Common Stock at an exercise  price not to exceed $5.00 per share.
In the event the  Company  has not paid the loan in full by  November  30,  1999
(subject to extension  in certain  instances),  the Company will issue  ten-year
warrants to the lender to purchase an additional 200,000 shares of the Company's
Common Stock at an exercise  price not to exceed  $5.00 per share.  In the event
the  Subordinated  Loan has not been paid in full by May 31, 2001,  the exercise
price of such  warrants  shall  be  reduced  by $1.00  per  share  and,  on each
anniversary of such date,  such exercise price shall be reduced by an additional
$1.00 per  share.  In  addition,  subject to certain  limitations,  the  Company
granted  registration  rights,  including "demand"  registration rights, to such
lender.

     The  warrants  issued  to  CWGCC,  which  were  deemed  to have a value  of
approximately $380,000,  subject to an independent appraisal, have been recorded
as deferred  financing costs,  and are being amortized on a straight-line  basis
over approximately five years.

     The  Company's  credit  facility with its London bank provides for combined
lines of credit  of  (pound)2,500,000  (approximately  $4,122,000)  for  working
capital for its United Kingdom  operations.  Such credit  facility was increased
from (pound)1,400,000 (approximately $2,308,000) on May 13, 1998. These lines of
credit  renew  annually  and bear  interest at 2.0% or 2.5% over the bank's Base
Rate, as defined.  In addition,  the Company is required to pay a service charge
equal to 0.2% of invoice value.  These lines of credit contain  covenants  which
require the  Company's  United  Kingdom  subsidiaries  to maintain a minimum net
worth of  (pound)500,000,  limit borrowings up to specified  amounts of accounts
receivable  aged 120  days or less and are  guaranteed  by the  Company  for the
principal amount of up to (pound)500,000. Amounts outstanding are collateralized
by substantially  all of the Company's United Kingdom assets. As of November 30,
1998, the 

                                      -16-
<PAGE>

Company  had  an   outstanding   balance  of   (pound)1,587,000   (approximately
$2,616,000) under its United Kingdom credit facility.

     In connection  with the Five Star  Acquisition,  the Company entered into a
three-year term loan of (pound)400,000  (approximately $660,000) with its London
bank.  Such term loan  bears  interest  at 2.4% over the bank's  Base  Rate,  as
defined,  and contains  covenants which require the Company to maintain  certain
debt to  earnings  ratios  and Net  Tangible  Assets,  as  defined,  and  limits
borrowings to 75% of Net Tangible Assets.  The Company's  obligations  under the
term loan are guaranteed by its United Kingdom subsidiaries.  As of November 30,
1998, the Company had an outstanding  balance of  (pound)356,000  (approximately
$586,000) under the term loan.

     As of November 30,  1998,  the Company was in  compliance  under its credit
facilities.

     The Company  expects that cash flow from  operations  will be sufficient to
fund its capital lease obligations,  debt service payments, potential earn-outs,
capital  expenditures  and  operations  for at least 12 months.  The Company may
require additional  financing to consummate future  acquisitions or to repay its
bank loans.  There can be no  assurance  that the Company will be able to secure
such additional financing on terms favorable to the Company.

     WORKING CAPITAL. The Company's working capital increased by $3,117,000 from
$8,897,000 at August 31, 1997 to $12,014,000 at November 30, 1998.

     ACQUISITIONS.  In  September  1998,  the Company  consummated  the Mega Art
Acquisition.  As a result,  Mega Art  became a  wholly-owned  subsidiary  of the
Company.  The purchase  price included an initial cash payment of $5,800,000 and
the  issuance  of  754,148  shares of  restricted  Common  Stock of the  Company
($5,000,000).  In addition,  the  purchase  price  includes  the  Deferred  Cash
Payment,  payable 180  calendar  days after the closing  date,  and the Earn-Out
Payment,  payable on or before November 29, 1999.  Each of the Deferred  Payment
and the  Earn-Out  Payment  are  subject to  adjustment  based on the  financial
performance  of Mega Art. In  addition,  the  Deferred  Payment and the Earn-Out
Payment  may also be used to satisfy  any  indemnification  claims.  The Company
funded the cash  portion of the  purchase  price from  proceeds of a  $5,000,000
acquisition loan and a portion of a $10,000,000 revolving credit loan from CIBC.

     In October  1998,  the  Company  consummated  the Zazula  Acquisition.  The
purchase price included an aggregate cash payment of $2,275,000 and the issuance
of 433,076 shares of restricted Common Stock of the Company ($2,275,000). Of the
purchase price, $150,000 in cash and 28,552 shares of restricted Common Stock of
the  Company is being  held in escrow  for a period of two years to satisfy  any
indemnification  claims.  The Company  funded the cash  portion of the  purchase
price from  proceeds of a portion of a  $15,000,000  revolving  credit loan from
CIBC.

     In November 1998, the Company  consummated the  SuperGraphics  Acquisition.
The purchase price  included a cash payment of  approximately  $15,900,000,  the
issuance  of  135,393

                                      -17-
<PAGE>

shares of restricted  Common Stock of the Company  (approximately  $600,000) and
the issuance of five-year  warrants to purchase  225,000 shares of the Company's
Common Stock at an exercise  price of $5.64 per share.  The purchase  price also
includes a deferred cash payment equal to the difference  between (i) EBITDA, as
defined, multiplied by six and (ii) $16,500,000.  Such deferred cash payment, if
any, is payable no later than March 15, 1999.  In  addition,  subject to certain
limitations,  the Company granted "piggyback" registration rights to the sellers
of  SuperGraphics.  Of the purchase  price,  approximately  $233,000 in cash and
135,393 shares of restricted Common Stock of the Company is being held in escrow
for a period of one year to satisfy  any  indemnification  claims.  The  Company
funded the cash portion of the purchase  price from proceeds of (i) a portion of
a $32,000,000 term loan from CIBC and (ii) the Subordinated Loan.

     The warrants issued to the sellers of  SuperGraphics,  which were deemed to
have a value of  approximately  $931,000,  subject to an independent  appraisal,
have been recorded as goodwill, and are being amortized on a straight-line basis
over twenty-five years.

     INFLATION,   FOREIGN  CURRENCY  FLUCTUATIONS  AND  INTEREST  RATE  CHANGES.
Although the Company cannot  accurately  determine the precise effect thereof on
its operations, it does not believe inflation, currency fluctuations or interest
rate  changes have  historically  had a material  effect on  revenues,  sales or
results of operations.  Inflation, currency fluctuations and changes in interest
rates have,  however, at various times, had significant effects on the economies
of the United  States  and the United  Kingdom  and could  adversely  impact the
Company's revenues, sales and results of operations in the future. If there is a
material adverse change in the  relationship  between the Pound Sterling and the
United  States  Dollar,  such change would  adversely  affect the results of the
Company's  United  Kingdom  operations as reflected in the  Company's  financial
statements.  The  Company  has not  hedged  its  exposure  with  respect to this
currency  risk,  and does not expect to do so in the  future,  since it does not
believe that it is practicable for it to do so at a reasonable cost.

      YEAR 2000 COMPLIANCE

     The  Company  believes  that it has  sufficiently  assessed  its  state  of
readiness with respect to its Year 2000 compliance. The Company has developed or
is  developing  a program to address  on a timely  basis the risk that  computer
applications developed,  marketed, sold and delivered or used by the Company may
be unable to recognize and properly perform  date-sensitive  functions involving
dates  prior to and after  December  31,  1999 (the  "Year 2000  Problem").  The
Company  does not  believe  that Year 2000  compliance  will  result in material
investments by the Company,  nor does the Company  anticipate that the Year 2000
Problem will have any adverse  effects on the business  operations  or financial
performance  of the  Company.  The  Company  does  not  believe  that it has any
material  exposure to the Year 2000 Problem with respect to its own  information
systems. There can be no assurance, however, that the Year 2000 Problem will not
adversely  affect  the  Company's  business,  operating  results  and  financial
condition.

     The Company  believes  that each of its  products  is Year 2000  compliant,
however,  it has no control over  whether  software  modification  made by third
parties or the combination of its products with the software  developed by third
parties and combined  with the Company's  products will be Year 2000  compliant.
Additionally,  there  can be no  assurance  that  such  potential  instances  of
non-compliance  will not  adversely  affect the  Company's  business, 

                                      -18-
<PAGE>

operating  results and  financial  condition.  The Company  has  established  no
reserve  for  auditing  its  software  products  or  for  correcting  Year  2000
compliance issues with such products.

     Although the Company  believes its  products are Year 2000  compliant,  the
purchasing  patterns of customers  and  potential  customers  may be affected by
issues  associated with the Year 2000 Problem.  As companies expend  significant
resources to correct their current data storage  solutions,  these  expenditures
may  result in  reduced  funds to  purchase  products  as those  offered  by the
Company. There can be no assurance that the Year 2000 Problem will not adversely
affect the  Company's  business,  operating  results  and  financial  condition.
Conversely,  the Year 2000  Problem  may cause  other  companies  to  accelerate
purchases,  thereby  causing an increase in  short-term  demand and a consequent
decrease in long-term demand for the Company's products.









                                      -19-
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS.

     On September  2, 1998,  the Company  issued  754,148  shares of  restricted
Common Stock of the Company (with an aggregate  value  $5,000,000) to Ehud Aloni
in partial consideration for the Mega Art Acquisition.

     On October 30, 1998 the Company issued  433,076 of restricted  Common Stock
of the Company (with an aggregate  value of $2,275,000) to the  shareholders  of
Zazula in partial consideration for the Zazula Acquisition.

     On November 25, 1998, in connection with the Subordinated Loan, the Company
issued  ten-year  warrants to CWGCC to purchase  440,000 shares of the Company's
Common Stock at an exercise price of $4.50 per share.

     On November 30,  1998,  the Company  issued  135,393  shares of  restricted
Common Stock of the Company (with an  approximate  aggregate  value of $611,000)
and five-year  warrants to purchase 225,000 shares of the Company's Common Stock
at an  exercise  price of $5.64  per  share,  in  partial  consideration  of the
SuperGraphics Acquisition.

     No underwriter was employed by the Company in connection with the issuances
and sales of the  securities  described  above.  The Company  believes  that the
issuances  and  sales  of all of  the  foregoing  securities  were  exempt  from
registration  under either (i) Section 4(2) of the  Securities  Act of 1933,  as
amended (the "Act"), as transactions not involving a public offering, or (ii) in
the case of the  shares  issued  to the  employee,  Rule 701  under the Act as a
transaction made pursuant to a written  compensatory benefit plan or pursuant to
a written contract relating to compensation. No public offering was involved and
the securities were acquired for investment and not with a view to distribution.
Appropriate  legends have been affixed to the stock  certificates  issued to Mr.
Aloni and  those  issued  in  connection  with the  Zazula  Acquisition  and the
SuperGraphics Acquisition.  In addition,  appropriate legends will be affixed to
the stock  certificates  issued upon the  respective  exercise  of the  warrants
issued  to CWGCC and the  shareholders  of  SuperGraphics.  All  recipients  had
adequate access to information about the Company.



                                      -20-
<PAGE>

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits.

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

      4.1                   Stockholders'  Agreement  dated as of  September  2,
                            1998 by and between  Unidigital  Inc. and Ehud Aloni
                            (included  as Exhibit 4.1 to the  Current  Report on
                            Form 8-K of the  Company  dated  September  14, 1998
                            and incorporated by reference herein.)

      4.2                   Form   of   Warrant    Agreement   issued   to   the
                            stockholders  of   SuperGraphics   Holding  Company,
                            Inc.   (included  as  Exhibit  4.1  to  the  Current
                            Report  on Form 8-K of the  Company  dated  December
                            14, 1998 and incorporated by reference herein.)

      4.3                   Warrant  Agreement  dated as of November 25, 1998 by
                            and  between  Unidigital  Inc.  and CIBC Wood  Gundy
                            Capital  Corp.  (included  as  Exhibit  4.2  to  the
                            Current  Report  on Form  8-K of the  Company  dated
                            December  14,  1998 and  incorporated  by  reference
                            herein.)

      4.4                   Registration  and  Equity  Rights  Agreement  by and
                            between   Unidigital   Inc.   and  CIBC  Wood  Gundy
                            Capital  Corp.  (included  as  Exhibit  4.3  to  the
                            Current  Report  on Form  8-K of the  Company  dated
                            December  14,  1998 and  incorporated  by  reference
                            herein.)

      10.1                  Agreement  of  Purchase  and Sale dated as of August
                            3, 1998  by   and  among  Unidigital  Inc., Mega Art
                            Corp., Ehud Aloni, Amit Primor, Jeffrey  E.  Rothman
                            and Seligson, Rothman & Rothman (included as Exhibit
                            10.1  to  the Current  Report on  Form  8-K  of  the
                            Company dated September 14, 1998 and incorporated by
                            reference herein.)

      10.2                  Agreement  and Plan of  Merger  dated as of  October
                            30, 1998 by and among Unidigital Inc.,

                                      -21-
<PAGE>

                            Unison  (NY), Inc.,  Hy  Zazula  Associates,  Inc., 
                            Hyman  Zazula, Steven Zazula, David  Zazula and Gary
                            Feigenbaum (included as Exhibit 10.1 to the  Current
                            Report on Form 8-K of  the  Company  dated  November
                            16, 1998 and incorporated by reference herein.)

      10.3                  Agreement  for  Purchase  and Sale of Stock dated as
                            of  November 16, 1998 by and  among Unidigital Inc.,
                            SuperGraphics  Holding  Company,  Inc.  ("Holding"),
                            SuperGraphics Corporation  and the stockholders  of 
                            Holding (included  as  Exhibit  10.1 to  the Current
                            Report on Form 8-K of the Company dated December 14,
                            1998 and incorporated by reference herein.)

      10.4                  Employment  Agreement  dated as of September 2, 1998
                            by  and  between  Mega  Art  Corp.  and  Ehud  Aloni
                            (included as Exhibit  10.2 to the Current  Report on
                            Form 8-K of the  Company  dated  September  14, 1998
                            and incorporated by reference herein.)

      10.5                  Amendment  No.  2 to  Credit  Agreement  dated as of
                            October 30, 1998 by and among  Unidigital  Inc., the
                            several  lenders from time to time  parties  thereto
                            and  Canadian  Imperial  Bank of Commerce  (included
                            as Exhibit  10.2 to the  Current  Report on Form 8-K
                            of  the  Company   dated   November   16,  1998  and
                            incorporated by reference herein.)

      10.6                  Amendment   to  Security   Agreement   dated  as  of
                            October  30, 1998 made by  Unidigital  Inc. in favor
                            of Canadian  Imperial Bank of Commerce  (included as
                            Exhibit  10.3 to the  Current  Report on Form 8-K of
                            the   Company   dated    November   16,   1998   and
                            incorporated by reference herein.)

      10.7                  Amendment  No.  3 to  Credit  Agreement  dated as of
                            November  30,  1998 by and  among  Unidigital  Inc.,
                            the  several  lenders  from  time  to  time  parties
                            thereto  and  Canadian  Imperial

                                      -22-
<PAGE>

                            Bank  of  Commerce (included as Exhibit  10.2 to the
                            Current  Report on  Form 8-K  of the  Company  dated
                            December  16, 1998  and  incorporated  by  reference
                            herein.)

      10.8                  Securities  Purchase  Agreement dated as of November
                            25,  1998  by  and  among  Unidigital  Inc.,  Unison
                            (NY), Inc., Unison (MA), Inc.,  Unidigital  Elements
                            (NY),  Inc.,  Unidigital  Elements  (SF),  Inc.  and
                            Mega Art  Corp.  (included  as  Exhibit  10.3 to the
                            Current  Report  on Form  8-K of the  Company  dated
                            December  16,  1998 and  incorporated  by  reference
                            herein.)

      10.9                  Senior  Subordinated   Increasing  Rate  Note  dated
                            November  30,  1998 of  Unidigital  Inc.  payable to
                            CIBC  Wood  Gundy  Capital  Corp.  in the  principal
                            amount of  $10,000,000  (included as Exhibit 10.4 to
                            the  Current  Report  on  Form  8-K of  the  Company
                            dated   December  16,  1998  and   incorporated   by
                            reference herein.)

      27.1                  Financial Data Schedule.

     (b)  Reports on Form 8-K.

          On April 8, 1998,  the Company filed a Current Report on Form 8-K with
          the SEC relating to the Kwik Acquisition. Such Form 8-K also disclosed
          the terms of certain loans made to the Company,  the proceeds of which
          the Company used to fund the purchase price of the Kwik Acquisition.

          On June 8,  1998,  the  Company  filed a Current  Report on Form 8-K/A
          containing  required  financial  statements  and pro  forma  financial
          information relating to the Kwik Acquisition  disclosed in its Current
          Report on Form 8-K filed on April 8, 1998.

          On September 14, 1998,  the Company filed a Current Report on Form 8-K
          with the SEC relating to the Mega Art Acquisition.  Such Form 8-K also
          disclosed the terms of certain loans made to the Company, the proceeds
          of which the Company used to fund the  purchase  price of the Mega Art
          Acquisition.

          On November 16, 1998, the Company filed a Current Report on Form 8-K/A
          with the SEC relating to the Mega Art Acquisition containing financial
          statements and pro forma  financial  information  relating to the Mega
          Art  Acquisition  disclosed in its Current Report on Form 8-K filed on
          September 14, 1998.

                                      -23-
<PAGE>

          On November 16, 1998,  the Company filed a Current  Report on Form 8-K
          relating to the Zazula  Acquisition.  Such Form 8-K also disclosed the
          terms of certain loans made to the Company,  the proceeds of which the
          Company used to fund the purchase price of the Zazula Acquisition.

          On December 14, 1998,  the Company filed a Current  Report on Form 8-K
          relating  to  the  SuperGraphics  Acquisition.   Such  Form  8-K  also
          disclosed the terms of certain loans made to the Company, the proceeds
          of  which  the  Company  used  to  fund  the  purchase  price  of  the
          SuperGraphics Acquisition.

          On  December  17,  1998,  the Company  filed a Current  Report on Form
          8-K/A2  with the SEC  relating  the Mega  Art  Acquisition  containing
          amended  pro  forma  financial  information  relating  to the Mega Art
          Acquisition  disclosed  in its  Current  Report  on Form 8-K  filed on
          September 14, 1998 and Current  Report on Form 8-K/A filed on November
          16, 1998.







                                      -24-
<PAGE>


                                   SIGNATURES



     In accordance with the requirements of the Securities Exchange Act of 1934,
the Issuer  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                      UNIDIGITAL INC.



DATE:   January 19, 1999              By: /s/ William E. Dye
                                         --------------------------------
                                         William E. Dye, Chief Executive Officer
                                         (Principal Executive Officer)