UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, ~~2000~~2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR (15d) OF THE

SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ______ to ______

Commission File No.: 0-11927

MOTO PHOTO, INC.

(Exact name of registrant as specified in its charter)

Delaware ~~31-1080650~~

31-1080650

(State of Incorporation) (Employer Identification No.)

4444 Lake Center Dr. Dayton, OH ~~45426~~

45426

(Address of principal executive offices) (Zip Code)

(937) 854-6686

(Registrant's telephone number, including area code)

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

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

Voting Common Stock, $.01 per share value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part of this Form 10-K or any amendment to this Form 10-K. [ ]

State the aggregate market value of the voting stock held by non-affiliates of the registrant:

$~~862~~520,~~657~~228 in Voting Common Stock

as of ~~May~~March 1115, ~~2001~~2002

(last actual transaction price)

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes _____ No _____

Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock

as of ~~May~~March 1115, ~~2001~~2002:

78,~~809~~227,~~338~~389 shares of Voting Common

0 shares of Non-Voting Common

DOCUMENTS INCORPORATED BY REFERENCE

None

MOTO PHOTO, INC.

FORM 10-K

For the year ended December 31, ~~2000~~2001

TABLE OF CONTENTS

PART I
* ITEM 1. BUSINESS
*

General
*

Developments in 2001
*

Operating Segments
*

Development

Competition

Trade Names, Service Marks and Logo Types

Regulation

Royalty and Advertising

Wholesale

Company Stores

The Business as a Whole *
*

Seasonality

Employees

~~Supply Contract and~~ Amended Series G Preferred Stock and Fuji Relationship

Supply Contract

Competition

Expansion Plans

Development of the System in ~~2000~~2001 *
*

Summary of Store Development
*

ITEM 2. PROPERTIES *
*

ITEM 3. LEGAL PROCEEDINGS
*

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

PART II
*

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

STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
*

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

CONDITION AND RESULTS OF OPERATIONS

General

Market Risk

Results of Operations 2001 vs. 2000

Results of Operations 2000 vs. 1999

Results of Operations 1999 vs. 1998

Liquidity and Capital Resources

Forward Looking Statements

~~ITEM~~Risk ~~7A.~~Factors ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES~~
*

~~ABOUT~~The ~~MARKET~~Company's ~~RISK~~ability to continue as a going concern is uncertain.
*

Fuji could assume control of the Company.
*

The Company encounters significant competition in the photo processing market.
*

The Company's business may be adversely affected by new technology.
*

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
*

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
*

PART III
*

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
*

ITEM 11. EXECUTIVE COMPENSATION
*

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

AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
*

PART IV.
*

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
*

REPORTS ON FORM 8-K
PART I
ITEM 1. BUSINESS
General
Operating Segments
Development
Competition
Trade Names, Service Marks and Logo Types
Regulation
Royalty and Advertising
Wholesale
Company Stores
The Business as a Whole
Seasonality 778
Employees
Supply Contract and Amended Series G Preferred Stock
Competition
Expansion Plans
Development of the System in 2000
Summary of Store Development
ITEM 2. PROPERTIES 121213
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Market Risk
Results of Operations 2000 vs. 1999
Results of Operations 1999 vs. 1998
Liquidity and Capital Resources
Forward Looking Statements
ITEM 7A.
ITEM 8.
ITEM 9.
PART III 222122
ITEM 10.
ITEM 11.
ITEM 13.
During 2000, Caroline Zsambok, wife of Michael F. Adler, provided consultation to the Company on training and organizational learning services through her company, Z Research and Consulting ("Z Research"). During 2000, the Company paid Z Research fees of approximately $29,441. The Company has agreed to provide Z Research with an office at the Company's headquarters and limited secretarial support for non-Company work it performs. Z Research compensates the Company for all out-of-pocket expenses the Company incurs in providing Z Research with an office and secretarial support. 3534
PART IV. 3534
ITEM 14.
PART I 231
ITEM 1. BUSINESS 231
General 231
Operating Segments 231
Development 231
Competition 453
Trade Names, Service Marks and Logo Types 453
Regulation 564
Royalty and Advertising 564
Wholesale 675
Company Stores 675
The Business as a Whole 675
Seasonality 675
Associates 786
Supply Contract 786
Competition 897
Expansion Plans 9108
Development of the System in 2000 10119
Summary of Store Development 10119
ITEM 2. PROPERTIES 111210
ITEM 3. LEGAL PROCEEDINGS 121311
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 121311
PART II 121311
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 121311
ITEM 6. SELECTED FINANCIAL DATA 131412
General 141513
Market Risk 151613
Results of Operations 2000 vs. 1999 151614
Results of Operations 1999 vs. 1998 171816
Liquidity and Capital Resources 181917
Forward Looking Statements 202118
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 202119
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 202119
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 202119
PART III 202219
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 202219
ITEM 11. EXECUTIVE COMPENSATION 232422
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 282926
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 313229
PART IV. 333431
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 333431
MOTO PHOTO, INC.

FORM 10-K

PART I

ITEM 1. BUSINESS

General

Moto Photo, Inc., together with its subsidiaries ("the Company"), is engaged in the franchising and ownership of stores offering one-hour photo processing services, portrait, and related imaging services and merchandise under the trade ~~names~~ name and service ~~marks~~mark of "MOTOPHOTO"~~, "ONE HOUR MOTOPHOTO", and "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO"~~.

The Company was incorporated as an Oklahoma corporation on July 29, 1981 and was reincorporated under Delaware law in 1983.

Developments in 2001

The Company had key changes in senior management during 2001. Effective July 1, 2001, Lawrence P. Destro became the Chief Executive Officer of the Company, and on November 1, 2001, also became President. Mr. Destro came to the Company from an almost 20-year career in the quick service restaurant industry, most recently, as President of an international business where he was responsible for 4,000 stores in 50 countries. On September 17, 2001, Alfred E. Lefeld was promoted to Chief Financial Officer and Treasurer. He has been with the Company approximately eight years, most recently as Vice President and Controller. Certain other senior management positions were eliminated or consolidated. Michael F. Adler, formerly Chief Executive Officer, and David A. Mason, formerly Executive Vice President--Finance, both retired as officers, but will continue as directors and consultants to the Company. Mr. Adler also continues as Chairman of the Board of Directors.

During 2001, the Company changed its primary supplier of photo processing paper and chemicals. On September 17, 2001, the Company terminated its supply contract with Fuji Photo Film U.S.A., Inc. ("Fuji") following Fuji's refusal to renegotiate contract prices as permitted under the supply contract. Also on September 17, 2001, the Company signed a supply contract with Eastman Kodak Company ("Kodak") for photo processing paper, chemicals, film, and batteries. See "Item 1 - Business - Supply Contract" elsewhere in this report.

During fall of 2001, the Company developed a strategic plan for 2002 and 2003 to increase brand awareness, to improve the system's core competencies, and to develop new services and products with potential to significantly drive sales and profits. As part of this strategy, the Company also announced its intention to franchise, sell or close most of its company stores. See "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations".

Operating Segments

The operating segments of the Company's business are Development, Royalty and Advertising, Wholesale, and Company Stores. Development markets the Company's franchise and recruits franchisees. Royalty and Advertising provides services to current franchisees. Wholesale sells to franchisees products and related services not covered under the franchise agreement which the franchisees need to operate their businesses. Company Stores operates retail photo processing and portrait stores owned by the Company. See Note RS to the Consolidated Financial Statements of the Company included elsewhere in this Report for information concerning the revenue, profit contribution or loss, and assets of each operating segment.

Development

The Company offers franchises for stores which provide one-hour photo processing, portraiture, and sales of related imaging services and merchandise under the trade ~~names~~name and service ~~marks of~~ mark "MOTOPHOTO"~~, "ONE HOUR MOTOPHOTO", and "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO"~~. See "Business - Trade Names, Service Marks and Logo Types." The Company, as franchisor, licenses to the franchisee such trade ~~names,~~name and service ~~marks,~~mark and other proprietary names and marks. The franchisee has the right to use such trade names and service marks in an exclusive territory, the size of which varies based on factors including the size of the market and the location of the store. The Company offers a franchise agreement for a single store.

The Company offers franchises in the United States through area developers and Company personnel, who generate leads through advertising, brokers, referrals, ~~franchise shows,~~ and the Internet. At December 31, ~~2000~~2001, the Company had a total of ten area developers covering twenty-three states and the District of Columbia. An area developer receives a portion of the initial franchise fee as compensation for the recruitment of a franchisee in its area and for providing assistance in opening the store. The ~~and~~area developer also receives a portion of the royalty paid to the Company by franchised stores in its area (including the area developer's own stores) and a portion of any transfer fee paid, as compensation for performing training, marketing, quality control and other services which would otherwise be performed by the Company. For the year ended December 31, ~~2000~~2001, ~~area~~Company ~~developers~~personnel accounted for ~~twelve~~seven new franchises and ~~franchise~~area ~~brokers~~developers accounted for ~~three new franchises~~one. InArea ~~addition, area~~ developers also assist in finding buyers for existing stores; induring ~~2000~~2001, ~~twenty-five~~twelve franchises were transferred to new owners.

~~During~~The ~~2000, the~~ Company ~~continued~~receives toinitial ~~use~~franchise ~~its~~fees for new ~~store~~franchises ~~design~~of inup ~~all~~to ~~new~~$35,000; ~~stores~~it ~~opening~~offers ina ~~the~~discounted ~~system. The~~franchise ~~new~~fee ~~design,~~for ~~Project~~each ~~Aspire,~~additional isstore ~~intended~~opened toby ~~appeal~~an toexisting franchisee. Beginning in 2002, the ~~target~~Company ~~customers~~also ofoffers ~~MOTOPHOTO~~a ~~stores~~discounted ~~and~~franchise fee if the ~~Company~~franchisee ~~believes~~agrees itto ~~will complement~~purchase ~~the~~photo ~~services~~processing ~~the~~paper ~~stores~~and ~~offer. Project~~chemicals ~~Aspire~~from ~~will~~the beCompany ~~also~~during bethe ~~used~~initial toten-year ~~retrofit~~term ~~existing~~of ~~stores~~the ~~over~~franchise ~~time~~agreement.

~~The~~During 2001, the Company ~~receives~~continued ~~initial~~to ~~franchise~~offer ~~fees~~financing for new franchises ofthrough upthe toMotoPhoto ~~$35,000~~QuickStart(SM) financing program which began in 1998. Nine franchised stores and eleven company stores previously opened using QuickStart financing; ithowever, ~~offers~~no stores opened using this financing during 2001 and four of these stores have closed. Under this program, a ~~discounted~~third ~~franchise~~party ~~fee~~lender ~~for~~offered ~~each~~financing ~~additional~~which enabled franchisees to open a MOTOPHOTO store ~~opened~~for bya anmuch ~~existing~~smaller initial cash investment than a franchisee who used traditional financing methods would have. Financing was provided by The Provident Bank, Fuji guaranteed the franchisees' obligations under the financing arrangements, and the Company agreed to reimburse Fuji for half of any payments made under the guarantee. The program was terminated in December 2001.

~~During~~The ~~2000, the~~ Company ~~offered~~targets afor ~~reduced~~conversion ~~fee~~into ~~program pursuant to which~~ the Company's ~~lowered its initial~~ franchise ~~fee~~system ~~from~~independently ~~$35,000~~operated tostores ~~$15,000~~offering ~~for first~~one-~~time~~hour ~~franchisees~~photo ~~and~~processing toservices ~~$7,500~~that ~~for~~meet ~~existing franchisees and agreed to contribute $4,000 to grand opening advertising expenses. This limited time offer was contingent upon~~ the ~~franchisee~~Company's ~~signing~~criteria afor ~~franchise~~location ~~agreement by December 31, 2000, opening its store by December 31, 2001~~ and ~~agreeing~~have toan ~~purchase~~acceptable ~~all~~operating ofhistory. The ~~its~~Company ~~store's~~has ~~requirements for~~developed ~~photo~~certain ~~processing~~programs ~~paper~~ and ~~chemistry~~incentives ~~from~~described ~~the~~below ~~Company~~that ~~for~~are ~~the~~intended ~~first~~to ~~three~~encourage ~~years~~such of"conversion ~~operation~~franchises. ~~The~~" ~~Company is no longer offering this reduced fee program.~~

The Company ~~offers~~is ~~financing~~continuing ~~for~~its ~~new franchises through the MotoPhoto QuickStart(SM) financing~~ program~~. Under~~ ~~this~~of ~~program, a third party lender offers~~ financing ~~which~~incentives ~~enables~~intended ~~franchisees~~ to ~~open~~increase athe ~~MOTOPHOTO~~number ~~store~~of ~~for~~conversion ~~a much smaller initial cash investment (currently approximately $60,000) than a franchisee who used traditional financing methods would have (currently approximately $120,000)~~franchises. The ~~MotoPhoto QuickStart(SM) program has two components: (1) the~~ Company's ~~will finance the~~ initial franchise fee for ~~qualified~~conversion ~~new~~franchises ~~franchisees,~~is ~~payable at 9~~$10,000.4% ~~over~~The ~~ten~~Company ~~years;~~will ~~and~~subsidize ~~(2)~~up ~~Provident~~to ~~Bank~~$5,000 ~~will~~of ~~finance~~ the cost of converting the ~~photo~~store ~~processing~~to ~~equipment,~~the ~~office~~MOTOPHOTO ~~equipment,~~store ~~and~~design ("the ~~computerized~~Store ~~point-of-sale~~Design ~~system~~Allowance") ~~and~~by ~~will~~giving ~~provide~~the afranchisee ~~store build-out~~credits ~~allowance~~against ofwholesale uppurchases tofrom ~~approximately~~the ~~$37,900~~Company. ~~Repayment~~In isaddition, ~~made over eight years in specified weekly payments. These payments are lower in~~ the ~~earlier~~Company ~~years~~will, toon ~~take~~a ~~into~~quarterly ~~account~~basis, ~~the~~credit ~~normal~~six ~~sales~~percent ~~ramp-up~~ of anthe ~~average~~conversion ~~store. The~~ franchisee's ~~will~~first ~~be personally~~year ~~liable~~net ~~for~~retail ~~the~~sales ~~payments~~against ~~for~~its ~~the~~purchases ~~full~~from ~~eight-year term of~~ the ~~business~~Company ~~lease agreement. As a condition~~ of ~~the MotoPhoto QuickStart(SM) program~~film, ~~the franchisee must purchase all~~ photo processing paper, and ~~chemicals~~chemistry, ~~from~~provided the ~~Company,~~franchisee ~~must~~signs ~~purchase and~~a ~~display~~three-year ~~certain~~agreement ~~other~~to ~~products~~purchase ~~made~~such byitems ~~Fuji~~from ~~Photo~~the ~~Film U~~Company.~~S.A.,~~ ~~Inc.~~The ~~("Fuji"),~~credit ~~and~~will ~~must~~be ~~use~~applied ~~certain~~only ~~Fuji equipment. Fuji has agreed~~ to ~~guarantee~~ the ~~franchisees'~~extent ~~payments~~that topurchases ~~Provident~~exceed ~~Bank under~~ the ~~MotoPhoto~~credits ~~QuickStart(SM)~~due ~~program and~~ the ~~Company~~franchisee ~~has agreed to indemnify Fuji~~ for ~~one-half~~the ofStore ~~any~~Design ~~guarantee payments it makes to the Bank~~Allowance.

The Company targets for conversion into the Company's franchise system independently operated stores offering one-hour photo processing services that meet the Company's criteria for location and have an acceptable operating history. The Company has developed certain programs and incentives described below that are intended to encourage such "conversion franchises".

The Company has a program to increase the number of conversion franchises. The Company has lowered its initial franchise fee for conversion franchises to $10,000. If the conversion franchisee's sales in the preceding twelve months were over $167,000, the Company will give the conversion franchisee a credit equal to 6% of the previous year's sales, with a maximum credit of $10,000. A new system franchisee who acquires an independent store for the purpose of converting it pays an initial franchise fee of $20,000 without any credit. In addition, the Company will subsidize up to $5,000 of the cost of converting the store to the MOTOPHOTO store design ("the Store Design Allowance") by giving the franchisee credits against wholesale purchases from the Company. Lastly, the Company will, on a quarterly basis, credit six percent of the conversion franchisee's first year net retail sales against its purchases from the Company of film, photo processing paper, and chemistry, provided the franchisee signs a three-year agreement to purchase such items from the Company. The credit will be applied only to the extent that purchases exceed the credits due the franchisee for the Store Design Allowance and it is available only to new conversion franchisees and not to existing or new franchisees who acquire a store to convert it.

In addition to the MotoPhoto QuickStart(SM) program, the Company has arranged in the past and may in the future arrange for financing of portions of the initial investment for franchisees through third parties, which the Company may be required to guarantee in whole or in part.

The Company believes that the "going concern" comment of the auditor's report on the Company's audited financial statements for 2001 and 2000 (see Note C to the Consolidated Financial Statements of the Company included elsewhere in this report) and the significant initial investment cost for opening a MOTOPHOTO store have adversely affected the Company's ability to sell franchises. The Company is working on ways to lower the initial investment cost and to increase the profitability of MOTOPHOTO stores to make MOTOPHOTO franchises more attractive as business opportunities. In 2002, the initial investment cost for a franchise has been lowered by approximately $74,000 to approximately $255,000 as a result of the franchise fee discount for paper and chemistry and of the lower cost for new photo processing equipment. However, until the Company has improved its financial condition, its ability to sell franchises may continue to be adversely affected.

Competition

In marketing its franchise, the Company faces competition from franchisors of other types of businesses. The opportunities available and costs associated with other franchise operations may affect the Company's ability to market MOTOPHOTO franchises. In addition, the Company's franchisees face competition from other providers of photo processing services. See "The Business as a Whole - Competition" below. Accordingly, as market conditions change, it may be necessary to change some or all of the strategies discussed above.

Trade Names, Service Marks and Logo Types

The Company owns no patents. The Company's principal service marks "MOTO-PHOTO", "ONE HOUR MOTOPHOTO", "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO", and "CLUBMOTO" are registered on the principal register of the United States Patent and Trademark Office. New stores operate under the mark "MOTOPHOTO"; older stores operate under the marks "ONE HOUR MOTOPHOTO", and "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO". In addition, the Company has registered other secondary principal service marks. The initial period of registration is for twenty years and registration is renewable so long as the Company is using the marks. The marks "MOTO PHOTO", "MOTO-PHOTO", "MOTOPHOTO", and/or "moto-photo" plus design also are registered in Australia, Belgium, Canada, France, Germany, Italy, ~~Kuwait,~~ Luxembourg, the Netherlands, Norway, and the United Kingdom. In addition, the Company has registered the mark "ONE HOUR MOTOPHOTO" in Canada, ~~Mexico,~~ and ~~Saudi~~Mexico ~~Arabia~~ and the mark "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO" in Mexico ~~and Saudi Arabia~~. The initial period of registration varies among the countries. These registrations are renewable at the Company's option regardless of usage but if the marks are not used, the registrations are subject to expungement upon challenge by a third party. The Company's trade names and marks are licensed to franchisees under franchise agreement provisions strictly regulating their use.

The Company has devoted substantial time, effort and expense toward developing name recognition and goodwill for stores operated under the trade names of "MOTOPHOTO", "ONE HOUR MOTOPHOTO", and "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO". The Company intends to maintain the integrity of its trade names, service marks and other proprietary names and marks against unauthorized use and to protect the franchisees' use against claims of infringement and unfair competition where circumstances warrant. Failure to defend and protect such trade names and other proprietary names and marks could adversely affect the Company's sales of franchises under such trade names and other proprietary names and marks. The Company knows of no current materially infringing uses.

Regulation

The Company is subject to Federal Trade Commission ("FTC") regulation and certain state laws that regulate the offer and sale of franchises. The Company is also subject to a number of state laws that regulate substantive aspects of the franchisor-franchisee relationship.

Several additional states have enacted or proposed legislation concerning certain key aspects of the franchisor-franchisee relationship, including termination and renewal of the franchise, franchise transfers, and encroachment. Similar legislation has been proposed at the federal level. If such legislation were enacted, it could ultimately weaken the cohesiveness of franchise systems and could affect the way the Company does business in the future. The Company believes that its operations comply substantially with FTC regulations and applicable state franchise laws.

Royalty and Advertising

The Company provides to franchisees operation, management, and marketing programs and systems and other services designed to promote the business of the franchisee. The Company develops advertising materials for its franchisees which promote the franchisee's business and build goodwill and name recognition for the "MOTOPHOTO", ~~"ONE HOUR MOTOPHOTO", and "ONE HOUR MOTOPHOTO & PORTRAIT STUDIO"~~ trade ~~names~~name and service ~~marks~~mark and other proprietary names and marks of the Company. In turn, management believes such advertisement and promotion expands the Company's base of prospects for ~~recruitment~~recruiting as new franchisees.

The Company also has devoted substantial efforts to the development of detailed operations and management guidelines and standards for stores. These guidelines and standards deal with, among other things, technical operations, store design, marketing, portraiture, and merchandising. These guidelines and standards are proprietary information belonging to the Company and are made available for use by a franchisee of the Company so long as the franchisee operates its store pursuant to the terms of the franchise agreement. The Company has developed these guidelines and standards, as well as other training and operational materials, and makes them available to its franchisees in written form, through computer-based training, and through its ~~newly-developed~~ intranet for franchisees, which ~~will~~has bebecome its primary method of communication and ongoing guidance for franchisees.

The Company enforces a quality control program to ensure the high quality of products, services, and the maintenance of appearance and image of both franchised and company stores. The quality control program requires the franchisee to conduct daily testing of equipment and chemicals used in processing and printing. Store management is encouraged to stress personal service to build customer loyalty.

Generally, the franchise agreements are for a period of ten years and are renewable at the option of the franchisee if certain conditions are met. Franchise agreements for most franchises do not give franchisees a unilateral right to terminate. However, ~~fourteen~~sixteen stores are operated under older agreements that allow the franchisee to terminate the agreement on three months prior notice. Franchises are transferable only with the prior approval of the Company. ~~For~~Except ~~transfers~~in ~~of franchises~~limited ~~sold before March 2001~~circumstances, the Company charges a transfer fee of $5,250 ~~except~~for intransfers ~~limited~~of ~~circumstances. This~~franchises ~~transfer~~sold ~~fee~~through ~~will~~March be2001 and $7,500 for transfers of franchises sold after March 2001.

Under the form of franchise agreement for new franchises, the Company receives a royalty of 6% of the franchisee's net retail sales and 3% of net wholesale sales. The franchise agreement requires franchisees to expend for advertising or contribute to their local advertising cooperative ~~for advertising~~ an amount of at least 5.5% of net retail sales. In addition, franchisees are required to pay to the Company 0.5% of net retail sales for advertising development.

Management of the Company believes that relations with franchisees are generally satisfactory.

Wholesale

The franchisee is required to purchase MOTOPHOTO private label film, ~~single~~private label one-time-use cameras and certain start-up advertising materials from the Company. The franchisee generally is not required to purchase other supplies or equipment from the Company but is required to purchase or lease supplies and equipment in accordance with certain specifications in order to maintain the quality and integrity of the franchise. The Company is a distributor to franchisees of photo processing paper, chemistry, promotional materials and other items and, at the present time, is the sole approved supplier of certain photo packaging materials and point of sale materials. ~~Franchisees~~ Beginning ~~obtaining~~in ~~financing~~2002, ~~under~~ the ~~MotoPhoto~~Company ~~QuickStart(SM)~~is ~~program~~offering ~~must~~a ~~use Fuji~~discounted initial franchise fee to franchisees who agree to purchase photo processing paper and ~~Fuji~~chemistry orfrom ~~Fuji/Hunt~~the ~~chemistry~~Company ~~throughout~~during the initial ten-year term of the ~~business~~franchise ~~lease~~ agreement. In ~~and~~addition, ~~must~~it ~~purchase~~offers ~~these~~certain ~~supplies~~credits ~~through~~to ~~the~~conversion ~~Company. Franchisees~~franchisees ~~who~~against ~~bought~~their ~~franchises~~purchases ~~under~~from the ~~reduced~~Company ~~fee~~of ~~program~~film, ~~offered~~photo ~~during~~processing ~~2000~~paper, ~~must~~and ~~purchase~~chemistry, ~~such supplies~~provided ~~through~~ the ~~Company~~franchisees ~~for~~sign ~~the~~a ~~first~~ three-year ~~years~~agreement ofto ~~operation~~purchase ofsuch ~~their~~items ~~stores~~from the Company.

The Company has negotiated arrangements with a number of suppliers that provide favorable pricing to the Company's franchisees on supplies and equipment. In return for providing services for certain suppliers, the Company may receive as compensation a rebate or commission on certain products and equipment sold directly to its franchisees by those suppliers. See also "The Business as a Whole - Supply Contract ~~and Amended Series G Preferred Stock~~" below.

Company Stores

At December 31, ~~2000~~2001, the Company had 4232 company stores in operation compared to 4442 at year-end ~~1999~~2000. ~~This~~In ~~decrease~~November in2001, the ~~number~~Company ofannounced ~~company~~its ~~stores~~intention ~~partially~~to ~~resulted~~franchise, ~~from~~sell, aor ~~management decision to~~ close ~~four~~all ~~under-performing~~company stores ~~near~~ ~~the~~except ~~end~~those ofin ~~2000. In~~the ~~early~~Dayton, ~~2001~~Ohio market, ~~two~~which ~~more~~it ~~company~~will ~~stores~~retain ~~were~~as ~~closed~~testing and ~~one~~research ~~was~~sites. In ~~sold~~accordance aswith athis ~~franchise. The~~decision, the Company ~~has~~franchised nosix ~~plans~~stores toin ~~open~~December ~~additional~~2001 ~~company~~and closed two stores ~~during~~in late 2001. The Company ~~will~~closed ~~continue~~a tototal ~~offer some~~ of ~~its~~four stores ~~for~~in ~~sale~~2001. ~~The~~ In early 2002, the Company ~~operates~~closed ~~its~~three ~~company~~stores and sold two stores as independents in a ~~source~~market ofthe ~~revenue,~~Company asis ~~training~~exiting. The ~~sites~~Company ~~and~~will ascontinue ~~testing~~to ~~and~~offer ~~research~~the ~~sites~~remaining Company stores for ~~products,~~sale ~~services,~~or ~~and~~evaluate ~~systems~~for closure.

The Business as a Whole

Seasonality

Seasonal demand in the photo processing industry is at its greatest during the Christmas season and in the summer and at its lowest during the winter following the Christmas season. Demand for photo processing services during spring and fall is fairly equal.

Employees

As of ~~May~~March 719, ~~2001~~2002, the Company had ~~418~~315 employees, ~~200~~139 of whom were employed part-time. None of the Company's employees is represented by labor unions. The Company believes its relationship with its employees is good.

~~Supply Contract and~~ Amended Series G Preferred Stock and Fuji Relationship

~~The~~In December 1999, the Company ~~has~~exchanged aits ~~supply~~Series ~~contract~~G ~~with~~Preferred ~~Fuji~~Stock, inall one million shares of which were held by Fuji, for the ~~Company~~Amended ~~has~~Series ~~agreed~~G toStock ~~use~~issue ~~best~~of ~~efforts~~one tomillion ~~have~~shares. The ~~all~~Amended ~~system~~Series ~~stores~~G ~~purchase~~Stock ~~Fuji~~extended ~~products~~the mandatory redemption date from January 1, 2000 to ~~meet~~January ~~the~~1, ~~stores'~~2003 ~~requirements~~and eliminated scheduled penalty payments for ~~photographic~~non-redemption ~~paper,~~of ~~equipment~~the Series G Preferred Stock of $800,000 ~~chemistry~~in 2000, ~~certain film~~$900,000 in 2001 and ~~other~~$1,000,000 ~~items~~annually thereafter. ~~The~~If ~~supply~~the ~~contract~~Company ~~has~~fails ato ~~term~~redeem ~~ending~~the Amended Series G Stock on ~~December~~January 311, ~~2001~~2003, ~~and~~the ~~automatically~~Company ~~renews~~must ~~every~~make ~~three~~penalty ~~years~~payments of $.90 per share, ~~absent~~or ~~notice~~$900,000, ~~from~~in ~~either~~2003 ~~party~~and ~~that~~$1.00 itper ~~does~~share, ~~not~~or ~~wish~~$1,000,000, toin ~~renew~~2004 and each year thereafter until the stock is redeemed. The ~~supply~~Amended ~~contract~~Series ~~was~~G ~~executed~~Stock is redeemable by the Company at any time in ~~1992~~aggregate amounts of at least $1,000,000. No dividends are payable in connection with ~~a series~~the ofAmended ~~transactions~~Series ~~also~~G ~~involving~~Stock. The Amended Series G Stock is redeemable only out of the ~~issuance~~proceeds toof ~~Fuji~~an equity offering or in Company common stock valued at 90% of ~~all~~the ~~shares~~market price at the time of ~~what~~redemption. Fuji ismay ~~now~~refuse any proposed redemption by the Company's in shares of common stock and elect to continue to hold the Amended Series G ~~Preferred~~ Stock ("without impairment of any right to require redemption at a later time. The redemption price for the Amended Series G Stock") is $10.00 per share, or an aggregate of $10 million.

InFuji ~~December~~may ~~1999,~~also require the Company ~~exchanged~~to ~~its~~redeem ~~Series G Preferred Stock, all one million shares of which were held by Fuji, for~~ the Amended Series G Stock ~~issue~~under ofcertain ~~one~~other ~~million~~circumstances ~~shares. The~~("Redemption ~~Amended~~Event"), ~~Series~~including ~~G Stock extended~~ the ~~mandatory redemption~~termination ~~date~~of ~~from~~a ~~January~~supply 1,contract ~~2000~~between toFuji ~~January 1, 2003~~ and ~~eliminated~~the ~~scheduled~~Company ~~penalty payments~~ for ~~non-redemption~~any ofreason ~~the~~other ~~Series~~than Gdefault ~~Preferred~~by ~~Stock~~Fuji. In ofApril ~~$800,000 in 2000, $900,000 in~~ 2001 ~~and $1~~,~~000,000~~ ~~annually thereafter. If~~ the Company ~~fails~~requested tothat ~~redeem the~~Fuji ~~Amended~~renegotiate ~~Series~~prices Gwith ~~Stock on January 1, 2003,~~ the Company, ~~must~~as ~~make~~permitted ~~penalty~~under ~~payments~~the ofsupply $contract.90 Fuji ~~per~~failed ~~share,~~to ordo ~~$900,000,~~so ~~in 2003~~ and, ~~$1.00~~on ~~per~~September ~~share~~17, ~~or $1~~2001,~~000,000,~~ ~~in 2004 and each year thereafter until~~ the ~~stock~~Company isterminated ~~redeemed. The Amended Series G Stock is redeemable by~~ the ~~Company~~supply atcontract ~~any~~with ~~time in aggregate amounts of at least $1~~Fuji,~~000,000. No~~ ~~dividends~~although ~~are~~Fuji ~~payable~~remains ina ~~connection~~vendor ~~with~~to the ~~Amended Series G Stock~~Company. ~~The~~This ~~Amended~~termination, ~~Series~~after Ga ~~Stock~~six-month iscure ~~redeemable~~period, ~~only~~is ~~out~~a ofRedemption ~~the~~Event ~~proceeds~~which ofpermits ~~an equity offering or in Company common stock valued at 90% of the market price at the time of redemption.~~ Fuji, ~~may~~to ~~refuse~~require ~~any proposed redemption by~~ the Company ~~in shares of common stock and elect~~ to ~~continue~~redeem ~~to hold~~ the Amended Series G Stock ~~without impairment of any right to require redemption at a later time~~. The redemption price for the Amended Series G Stock is $10.00 per share, or an aggregate of $10 million. If the Amended Series G Stock is redeemed in shares of common stock, depending upon the market price of the common stock and the number of shares of common stock outstanding, such redemption could result in Fuji's acquiring control of the Company.

InIf ~~connection~~Fuji ~~with~~requests redemption of the Amended Series G Stock ~~transactions~~, the ~~supply~~Company ~~agreement~~may ~~was~~redeem ~~amended~~by tooffering ~~reduce~~at ~~the~~its ~~associated~~option ~~revolving~~the ~~credit~~requisite ~~agreement~~cash byor $2common stock.7 If ~~million~~redemption were to $4occur ~~million~~in shares of common stock, depending on the market price of the common stock and the number of shares of common stock outstanding at the time of redemption, Fuji could acquire control of the Company. ~~The~~Based ~~Company~~on ~~executed~~current amarket ~~note~~prices toof ~~pay~~the common stock, full redemption of the Amended Series G Stock in shares of common stock would result in Fuji's having the ~~$2.7~~right ~~million over~~to ~~three~~receive ~~years. The~~common ~~principal~~shares ~~balance~~representing approximately 95% of ~~such~~the ~~note~~Company's ~~was~~outstanding $2stock following such redemption.1 If ~~million~~the asCompany fails to give notice of ~~December~~redemption 31of all of the Amended Series G Stock upon request by Fuji, ~~2000~~Fuji ~~and~~would ~~was~~have ~~$1.9~~the ~~million~~right, asuntil all the shares of ~~March~~the 31Amended Series G Stock are redeemed or the Redemption Event is cured, ~~2001~~to elect the majority of the Board of Directors.

~~Fuji~~The ~~may terminate the supply contract upon, after appropriate cure periods, failure by the~~ Company tocurrently ~~make~~has ~~payments when due under the supply contract~~21, ~~failure by the parties to renegotiate prices for the Fuji products as required by the supply contract~~772,611 orauthorized ~~bankruptcy~~but orunissued ~~insolvency~~shares of ~~the~~voting ~~Company. Fuji~~common ~~may~~stock, ~~require the Company to redeem the Amended Series G Stock under certain other circumstances ("Redemption Event")~~ which ~~include,~~would after appropriate cure periods, termination of the supply contract other than as a result of a material default by Fuji, default by the Company under certain other agreements between the Company and Fuji, failure by the Company to meet its obligations under other indebtedness in excess of $100,000, or if either Michael F. Adler or David A. Mason ceases to be ~~involved~~insufficient inat ~~the~~current ~~day-to-day~~share ~~management~~prices ~~of the Company and the Company does not replace him or them, within a specified period, with an executive reasonably acceptable~~ to ~~Fuji. Change~~redeem inall ~~control~~shares of the ~~Company,~~ ~~other than the acquisition of control by Fuji, would give Fuji the right to require redemption of the~~ Amended Series G Stock ~~but~~should ~~would~~Fuji ~~not~~request ~~affect the validity of the supply contract~~redemption. IfIn ~~the~~such ~~Company redeems the Amended Series G Stock~~case, the ~~supply contract~~Company ~~will~~would behave ~~extended~~ to ~~the~~seek ~~third~~shareholder ~~anniversary~~authorization of ~~the~~additional ~~redemption~~shares ~~without right~~ of ~~renewal. The~~common Company has the right to terminate the supply agcontractreement under certain circumstances including failure of Fuji to maintain appropriate pricing levels as required under the agreement or if Fuji defaults on its obligationsstock.

OnThe ~~April~~Company has a $1.9 million note with Fuji, as well as accounts payable as of December 31, 2001 of approximately $3.2 million, subject to reduction for certain claims. In May 2001, the Company's ~~gave~~primary ~~Fuji~~bank ~~notice~~declared ofthe ~~its~~Company ~~intent~~ to ~~renegotiate~~be ~~the~~in ~~prices~~default asof ~~permitted~~certain financial covenants under ~~the~~an ~~supply~~agreement ~~contract. If~~with the ~~parties~~bank, ~~are~~although ~~unable~~the toCompany ~~agree~~remains ~~upon~~current ~~new~~with ~~prices~~its ~~within~~bank ~~sixty~~payment ~~days~~obligations. The ofbank therefore has the ~~date~~right to accelerate repayments of the ~~notice,~~bank ~~either party~~debt ~~may~~and ~~terminate~~lease ~~the~~obligations; ~~supply~~however, ~~contract~~the ~~upon~~bank ~~thirty~~has ~~days~~not given notice of any intent to ~~the~~accelerate ~~other~~these payments. InThe ~~such~~bank ~~case,~~agreement prohibits principal payments on the note payable to Fuji until covenant compliance is achieved. The Company ~~cwould~~has been in negotiations with Fuji to change ~~theto~~the aCompany's ~~key~~payment ~~supplier~~schedule on the $1.9 million note, ~~other~~of ~~than~~which ~~Fuji~~approximately $0.7 million was past due at December 31, ~~for~~2001, ~~system~~on ~~requirements~~its accounts payable, of ~~paper~~which approximately $2.0 million was past due at December 31, ~~chemistry~~2001, and ~~equipment~~on the terms of the Amended Series G Stock. The Company ~~believes~~has ~~these~~been ~~products are~~unable ~~available~~to ~~from~~obtain ~~alternative~~agreement ~~vendors~~ at ~~comparable~~this ~~prices~~point. On March 21, ~~but~~2002 ~~there~~the Company advised Fuji that it was substantially reducing its monthly payments on its past due trade payables while negotiations are pending. There can be no ~~assurances~~assurance ~~that~~negotiations will be successful (see Note H to the ~~Company~~Consolidated ~~can~~Financial ~~obtain~~Statements). The ~~favorable~~Company ~~pricing~~continues ~~and~~to ~~terms~~explore ~~without~~various ~~disruption~~possibilities to ~~wholesale~~negotiate ~~activities~~a resolution of the Fuji relationship that would enhance shareholder value.

~~The~~Supply Company has a revolving credit arrangement with Fuji under the supply contract pursuant to which the Company may have outstanding amounts due to Fuji for purchases under the supply contract for a period of approximately 120 days without interest. If the supply contract is terminated, the balance outstanding under the revolving credit arrangement, which currently is approximately $3.4 million (was $4 million at December 31, 2000), would become payable according to its terms over the approximately 120 day period following termination of the supply contract. In connection with a change to a new key supplier, the Company would seek similar credit terms, but there can be no assurances that similar credit terms would be obtained. Contract

~~Termination~~On ofSeptember the supply contract other than as a result of a material default by Fuji would also constitute a Redemption Event under the Amended Series G Stock and would give Fuji the right to require redemption of the Amended Series G Stock. If Fuji requests redemption17, ~~the Company can cure the Redemption Event by offering the requisite cash or common stock to redeem all of the Amended Series G Stock. If redemption were to occur in shares of common stock~~2001, ~~baseddepending~~as onnoted ~~the market price of the common stock and the number of shares of common stock outstanding at the time of redemption~~above, ~~Fuji could acquire control of~~ the Company~~. Based~~ onterminated ~~current~~its ~~market~~supply ~~prices~~contract ofwith ~~the common stock, full redemption of the Amended Series G Stock in shares of common stock would result in~~ Fuji ~~having~~and ~~the~~signed right to receive common shares representing approximately 90% of the Company's outstanding stock following such redemption. If the Company fails to tender the requisite cash or common stock in order to redeem all of the Amended Series G Stock upon request by Fuji following the occurrence of a ~~Redemption Event, Fuji has the right, until all the shares of the Amended Series G Stock are redeemed or the Redemption Event is cured, to elect the majority of the Board of Directors.~~

three-year contract with Eastman Kodak Company ("Kodak") for the purchase of photo processing paper, film, and batteries. The Company has agreed to purchase 100 million square feet of photo processing paper from Kodak over three years; if the Company does not meet its purchase requirement, the contract will be extended for another year. The Company believes that, at current purchasing levels, it will be able to meet the purchase commitment within the four-year period. In addition, the Company has agreed to purchase at least one million rolls of film and/or one-time-use cameras from Kodak each year during the term of the supply contract; if the Company fails to do so, Kodak has the right to increase film prices. Purchases from Kodak will be made primarily for resale to franchisees.

In addition, the Company purchases photo processing supplies from several other vendors.

Competition

The Company is the largest franchisor of one-hour photo processing franchises in the United States, based on number of franchises. However, competition in the photo processing industry in general, and the one-hour photo processing industry in particular, is intense. There is pervasive competition in the provision of photo processing services, particularly through the increasing number of one-hour labs in drug stores and other mass merchants, and also through other channels of distribution, such as specialty stores and photographic chains, large retail stores, the Internet, and mail order. The Company's competitors are many individuals and companies, some of which are large and established and have substantially greater resources than those of the Company. The Company competes in the marketplace in securing attractive locations for the opening of one-hour photo processing stores, in ~~the~~selling ~~sale of~~ one-hour photo processing and related products and services, and in attracting franchisees for one-hour photo processing stores. The success of the Company depends on the success of the Company's franchises ~~and company one-hour photo processing stores~~.

Principal competitive factors in the industry are convenience, price, quality of service, quality of product, ~~price,~~ and timeliness. Centralized photo processors can offer their services at significantly lower prices than those of the Company and its franchisees, although the customer may wait several days for photo processing. The Company's one-hour concept provides the market with more timely service than centralized photo processors. In addition, personnel at MOTOPHOTO stores are trained to offer a high level of customer service, including the ability to advise customers on picture-taking and on the array of imaging services offered at the stores. The Company maintains quality control standards intended to assure that the quality of one-hour processing is at least comparable to other methods of photo processing.

The operating history of the Company and its franchisees indicates that substantial demand exists for the one-hour photo service offered by the Company and its franchisees; however, lower prices offered by already established centralized photo processing outlets and other one-hour outlets and the high quality of product made possible by new automated photo processing equipment may adversely affect the business of the Company and its franchisees. Factors allowing the Company and its franchisees to realize premium prices are the variety of imaging services offered by the Company and its franchisees and the personalized service and photographic expertise of store employees, the result of the Company's training programs.

The photo processing industry in which the Company operates is continuing to introduce new products and services, such as digital imaging services and products both through retail stores and through the internet. The Company has introduced, and will continue to introduce, these products and services into its franchised and company stores as the markets for these products demonstrate commercial viability.

The Company does not have exclusive right to the use of the photo processing equipment, which is available from several manufacturers. To the Company's knowledge, no manufacturers currently offer exclusive rights to the use of their equipment or are anticipated to offer such rights in the future.

Expansion Plans

The Company is planning to expand its offerings of services and products as quickly as commercially practicable in order to reinforce its market position in the rapidly changing retail photo processing industry. The Company has ~~formed~~ developed a ~~concept~~strategic ~~development~~plan ~~team~~for ~~that~~2002 isand ~~dedicating~~2003 ~~itself~~ to ~~rethinking~~increase ~~every~~brand ~~aspect~~awareness, ofto improve the ~~MOTOPHOTO~~system's ~~concept~~core competencies, and to ~~exploring~~develop ~~and testing~~ new services and products with potential to significantly drive sales and profits. ~~The~~ ~~concept development team also looks for new ways of serving customers and motivating and rewarding franchisees and employees that may also enhance sales and profits.~~

The Company continues to add digital imaging to the services which may be offered by MOTOPHOTO stores. The Company is working to develop marketing strategies and services to meet customers' digital imaging needs. The Company is expanding its CLUBMOTO program and broadening its portrait offerings and capabilities. The Company intends to expand its offerings of services and products as market tests indicate their potential profitability.

During ~~2001~~2002, the Company will continue to offer new franchises and to seek to convert profitable existing independent stores to MOTOPHOTO stores. The Company is also devoting increased efforts to developing and implementing operations and training programs to improve the profitability of ~~existing company stores and~~ franchised stores and to assisting in the transfer to new owners of under-performing stores in good locations. In addition, the Company will seek to promote growth of the system through alliance opportunities with other firms. In ~~September 2000, the Company and PhotoChannel Networks, Inc., a digital imaging network company, signed a letter of intent to merge that was later allowed to expire.~~

~~The~~Development ~~Company~~of ~~continues~~the toSystem ~~explore~~in ~~other alliance opportunities.~~2001

~~Development~~During of2001, the ~~System~~Company granted eight new franchises, while twenty-seven franchises were canceled or terminated, for a net decrease of nineteen franchises in ~~2000~~the United States.

~~During~~The ~~2000,~~number ~~the~~of stores in Canada declined overall during 2001. The Company's master franchisor for Canada, CIS Franchising, Limited, granted ~~fifteen~~one new ~~franchises~~franchise, while ~~sixteen~~four franchises were canceled or terminated, for a net decrease of ~~one~~three ~~franchise~~international infranchises. In ~~the~~2001, ~~United~~all ~~States~~foreign source revenue represented less than 1% of total revenue.

~~The~~During ~~number~~2001, ofthe ~~stores~~Company inopened ~~foreign~~no ~~countries~~new ~~declined~~company ~~overall~~stores, ~~during~~franchised ~~2000. The~~seven ~~Company's~~company ~~master~~stores, ~~franchisor~~acquired ~~for~~one ~~Canada~~franchised store, ~~Canadian~~and ~~Industrial~~closed ~~Systems,~~four ~~Inc~~under-performing stores., The ~~granted~~Company ~~two~~has ~~new~~announced ~~franchises,~~its ~~while~~intention ~~four~~to ~~franchises~~franchise, ~~were~~sell, ~~canceled~~ or ~~terminated,~~close ~~for~~all aof ~~net~~its ~~decrease~~company ofstores ~~two~~except ~~international~~those ~~franchises. In~~in ~~addition,~~ the ~~Company~~Dayton, ~~and~~Ohio ~~G.L. Gruppen~~market, ~~A/S,~~which ~~allowed~~it anwill ~~affiliate~~retain ~~program~~as ~~relating~~testing toand 47research ~~stores in Norway to expire~~sites. InIt ~~2000,~~will ~~all~~continue ~~foreign~~during ~~source~~2002 ~~revenue~~to ~~represented~~emphasize ~~less~~development ~~than~~of 1%the ~~of total~~system ~~revenue~~through franchised stores.

During 2000, the Company opened four new company stores and closed six under-performing stores. The Company does not plan to open or acquire additional company stores during 2001 and will continue during 2001 to emphasize development of the system through franchised stores. The Company will continue to offer for sale as franchises some of its company stores.
Summary of Store Development

Set forth below is a summary of the store development of the Company in the United States and abroad during ~~1999~~2000 and ~~2000~~2001:

	2000			1999
	2001			2000
	U.S.	Int'l.	Total	U.S.	Int'l.	Total
Stores Open at Beginning of Year	~~332~~331	8738	~~419~~369	~~333~~332	9487	~~427~~419
New Stores Opened	17-	21	191	17	92	2619
Conversions	31	-	31	53	-	53
Terminations or Non-Renewals	2030	4	2434	2321	164	3925
Expiration of Norway affiliate program	-	47-	47-	-	-47	-47
Stores Open at End of Year	~~332~~302	3835	~~370~~337	~~332~~331	8738	~~419~~369
Company Stores Open at End of Year	4232	-	4232	4442	-	4442
Franchised Stores Open at End of Year (a)	~~290~~270	3835	~~328~~305	~~288~~289	4038	~~328~~327
Affiliate Stores Open at End of Year	-	-	-	-	47	47
Stores Under Development at End of Year (b)	10	-	10	13	1	14
Stores Under Development at End of Year (b)	13	1	14	23	1	24

(a) As of December 31, ~~2000~~2001, a total of ~~227~~209 franchisees owned the ~~290~~270 franchised stores in the United States.

(b) Stores under development ~~include,~~represent ~~at year-end 1999, two stores closed pending relocation which were not subsequently relocated. The balance for 1999 and 2000 include~~ those for which franchise agreements have been signed but which have not yet opened. There is no assurance that these stores will open.

As indicated in the chart above, a number of franchises were terminated or failed to renew in ~~1999~~2000 and ~~2000~~2001. Reasons for terminated franchises relate to franchise management, failure to follow system requirements, market conditions, location, sales of stores, and other factors typically affecting franchisee operations.

Set forth below is the geographical location of the stores in operation at December 31, ~~2000~~2001:

Arizona	1210	Kentucky	5	Oklahoma	2221
California	2422	Maryland	1918	Pennsylvania	7
Colorado	17	Maine	1	Rhode Island	1
Connecticut	1311	Massachusetts	109	Tennessee	6
Florida	3	Michigan	126	Texas	75
Georgia	64	North Carolina	1	Utah	54
Illinois	2522	New Jersey	4947	Virginia	2725
Indiana	2	New York	1615	Wisconsin	3
Kansas	2	Ohio	2523
		District of Columbia 12
		Canada 38
		Canada 35

ITEM 2. PROPERTIES

The Company's corporate offices are located at 4444 Lake Center Drive, Dayton, Ohio 45426. Such offices, which have approximately 33,000 square feet on approximately 2.4 acres of land, have been leased by the Company, pursuant to a lease providing for rent of $20,327 per month through June 2004 and $22,374 from July 2004 through June 2009. There are two five-year renewal options on the lease. These offices are leased from a partnership controlled by certain officers and/or directors of the Company. In 1998, at the direction of the Audit Committee of the Board of Directors, an independent appraisal was made of rental value for comparable business properties in the Dayton, Ohio area. Based on this appraisal, ~~management and~~ the Audit Committee ~~believe~~believes that, at the time the lease was negotiated, the terms of the lease ~~are~~were no less favorable to the Company than terms that could have been obtained from unaffiliated third parties. The Company has also leased additional warehouse space from a third party away from the primary offices.

Management of the Company believes these facilities are generally adequate for its current operations. In addition, management of the Company believes it will be able to secure additional facilities if needed.

In connection with the resale of stores acquired by it, the Company assigns or subleases to the franchisee the lease for the store premises. In addition, in certain instances, the Company has secured a lease for rental space and then assigned the lease to a franchisee. The Company is currently the lessee or assignee of the leases for approximately ~~five~~ten MOTOPHOTO stores, which have in turn been assigned to franchisees, and two stores which have been sold out of the system. In addition, at December 31, ~~2000~~2001, the Company was the lessee or assignee of the leases for 4932 company stores~~, including leases which will expire during 2001 for six stores now closed~~.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in legal proceedings that it believes are routine and incidental to its business. These actions are being contested and defended. Management of the Company is of the opinion that such actions are not likely to result in any liability that would have a material adverse effect on the consolidated financial position of the Company.

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

No matters were submitted by the Company to a vote of its security holders during the quarter ended December 31, ~~2000~~2001.

PART II

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

The only shares of common stock that the Company has issued are Voting Common. At ~~May~~March 1118, ~~2001~~2002, there were approximately ~~630~~617 record holders and approximately 1,~~220~~077 beneficial holders of the Company's Voting Common. On October 31, 2000, the Company's Voting Common was removed from trading on the Nasdaq Small Cap Market(SM) because it had failed to meet Nasdaq's minimum bid price requirements for continued inclusion. The Voting Common immediately began trading on the OTC Bulletin Board under the symbol "MOTO."

The following table sets forth for the periods indicated the range of high and low last actual transaction prices for the Company's Voting Common, as reported by the Nasdaq Small-Cap Market(SM)for periods through October 30, 2000, and on the OTC Bulletin Board after that date. The stock prices shown do not include mark-ups, markdowns, and commissions.

		Voting Common Price
		High	Low
1999:
	First Quarter	$ 1.63	$ 1.00
	Second Quarter	1.25	0.94
	Third Quarter	2.25	0.94
	Fourth Quarter	1.50	0.47
2000:
	First Quarter	$ 1.38	$ 0.75
	Second Quarter	1.13	0.69
	Third Quarter	1.13	0.44
	Fourth Quarter	0.97	0.28
2001:
	First Quarter	$ 0.41	$ 0.19
	Second Quarter	0.25	0.11
	Third Quarter	0.20	0.08
	Fourth Quarter	0.11	0.04

The Company has never declared a cash dividend on any class of its common stock. It is the present policy of the Company not to pay cash dividends on common stock and to retain earnings for use in its business and to pay debt. The Company may not pay any dividends on common stock so long as any Amended Series G Stock is outstanding. Should the Amended Series G Stock be redeemed, any payment of cash dividends on common stock in the future will depend upon the amount of funds legally available, the Company's earnings, financial condition, capital requirements, satisfaction of debt and other contractual covenants restricting the payment of dividends, and other factors which the Board of Directors deems relevant.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data of the Company is set forth below

	Years Ended December 31
	2000	1999	1998	1997	1996
	2001	2000	1999	1998	1997
Revenue	$ 3630,~~450~~589,~~935~~227	$ 3736,~~061~~450,~~455~~935	$ 37,~~664~~061,~~183~~455	$ 4237,~~148~~664,~~727~~183	$ 4342,~~547~~148,~~291~~727
Net Income (Loss)	$ (38,~~200~~966,~~661~~538)	$ 1(3,~~653~~200,~~543~~661)	$ 1,~~690~~653,~~253~~543	$ 1,~~703~~690,~~535~~253	$ 1,~~073~~703,~~873~~535
Net Income (Loss) Applicable
to Common Shares	$ (39,~~933~~788,~~433~~203)	$ 1(3,~~388~~933,~~432~~433)	$ 1,~~415~~388,~~691~~432	$ 1,~~420~~415,~~707~~691	$ ~~784~~1,~~583~~420,707
Net Income (Loss) Per Common Share
Basic	$ (1.5125)	$ (.1851)	$ .18	$ .18	$ .1018
Diluted	$ (1.5125)	$ (.1251)	$ .1812	$ .18	$ .1018
Working Capital (Deficit)	$ (17,~~867~~262,~~468~~570)	$ 4(1,~~238~~867,~~962~~468)	$ 34,~~383~~238,~~017~~962	$ 3,~~112~~383,~~852~~017	$ ~~(371~~3,~~998)~~112,852
Stockholders' Equity	$ 2,591,224	$ 5,756,792	$ 4,920,906	$ 3,771,156	$ 2,538,198
Stockholders' Equity (Deficit)	$ (6,360,932)	$ 2,591,224	$ 5,756,792	$ 4,920,906	$ 3,771,156
Long-term Obligations	$ 5,291,104	$ 10,037,325	$ 9,064,001	$ 9,783,805	$ 8,207,762
Long-Term Obligations	$ 350,672	$ 5,291,104	$ 10,037,325	$ 9,064,001	$ 9,783,805
Total Assets	$ 177,~~415~~703,~~886~~224	$ 2417,~~084~~415,~~018~~886	$ 2224,~~171~~084,~~661~~018	$ 2122,~~369~~171,~~261~~661	$ 21,~~013~~369,~~477~~261
Common Shares Outstanding (1)	7,~~747~~830,~~567~~477	7,~~814~~747,~~063~~567	7,~~816~~814,~~165~~063	7,~~793~~816,~~905~~165	7,~~785~~793,~~973~~905
Number of Stores Open: North America	~~370~~337	~~372~~369	~~383~~372	~~407~~383	~~418~~407
Norway (2)	-	47-	4447	2644	26

(1) Weighted-Average Common Shares Outstanding - Basic

(2) Affiliate store program in Norway was allowed to expire in 2000

The Company has never paid a cash dividend on its common shares.

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

General

~~Through~~During fall of 2001, the ~~granting~~Company ofdeveloped ~~franchises~~a strategic plan for 2002 and 2003 to increase brand awareness, ~~conversion~~to ofimprove ~~independent~~the ~~stores~~system's core competencies, to develop new services and ~~acquisitions~~products with potential to significantly drive franchisee sales and profits, ~~the~~and to eliminate all non-value-added costs. The Company's ~~has~~goal ~~developed~~is ato ~~system~~expand ofits ~~370~~store ~~operational~~concept ~~stores~~to atsignificantly ~~December~~increase 31the average annual sales per store, ~~2000~~while ~~compared~~reducing tothe ~~372~~initial ~~operational~~investment ~~stores~~cost atfor ~~December~~new 31franchises. The primary areas of focus on expanding the store concept will be portraiture, ~~1999~~additions to the Company's digital capabilities and ~~47 affiliate~~selection ~~stores~~of inconvenience-related ~~Norway~~merchandise. ~~The~~Improved ~~program~~franchisee training and support, in conjunction with ~~respect~~more effective customer communications, primarily in-store, about the broad range of imaging services and products the Company makes available to customers, should support achieving this goal. During 2001, the ~~Norway~~Company ~~affiliated~~reduced ~~stores~~its ~~expired~~estimated infranchise ~~2000~~initial investment cost by approximately $74,000 to approximately $255,000, which should make new franchises a more attractive business opportunity.

~~Systemwide~~As ~~sales,~~part ~~which~~of ~~include~~this ~~sales~~focused ~~by franchisees~~strategy, ~~were~~the ~~approximately~~Company ~~$129,000,000~~also inannounced ~~2000~~its ~~compared~~intention to ~~$131~~franchise,~~000,000~~ insell ~~1999~~or close most of its company stores. ~~Both~~This ~~years~~will ~~exclude~~enable ~~approximately~~the ~~$9,000,000~~Company into ~~sales~~eliminate ~~from~~or ~~the~~redeploy ~~Norway~~corporate ~~affiliated~~resources, ~~stores~~reducing costs and improving franchisee support.

The Company's ~~goal~~also ishad tokey ~~expand~~changes ~~its~~in ~~store~~senior ~~concept~~management toduring ~~increase~~2001. Effective ~~the~~July ~~average~~1, ~~annual~~2001, ~~sales~~Lawrence ~~per~~P. ~~store~~Destro ~~from~~became ~~approximately~~the ~~$400~~Chief Executive Officer of the Company,~~000~~ toand ~~$600~~on November 1,~~000~~ by2001, ~~2005~~also became President. ~~The~~Mr. ~~primary~~Destro ~~areas~~came ofto ~~focus~~the onCompany ~~expanding~~from ~~the~~an ~~store~~almost ~~concept~~20-year ~~will~~career ~~be portraiture,~~in ~~additions~~the toquick ~~the~~service ~~Company's~~restaurant ~~digital~~industry, ~~capabilities~~most ~~and~~recently, ~~selection~~as President of ~~convenience-related~~an ~~merchandise,~~international ~~and~~business ~~focused~~where ~~training~~he ~~and~~was ~~communications~~responsible for 4,000 ~~primarily~~stores in~~-store~~ 50 countries. On September 17, ~~with~~2001, ~~customers~~Alfred ~~about~~E. ~~the~~Lefeld ~~broad~~was ~~range~~promoted ofto ~~imaging~~Chief ~~services~~Financial Officer and ~~products~~Treasurer. He has been with the Company ~~makes~~ ~~available~~approximately toeight ~~customers~~years, most recently as Vice President and Controller. Certain other senior management positions were eliminated or consolidated.

The Company ~~believes~~has ~~that~~developed ~~successful~~a ~~implementation~~system of ~~the~~337 ~~above~~operational ~~strategies~~stores ~~will~~at ~~make~~December ~~its~~31, ~~franchise~~2001 ~~investment~~compared ~~opportunity~~to ~~more~~369 ~~attractive~~operational tostores ~~prospects~~at ~~and~~December ~~will~~31, ~~make~~2000, ~~its~~a ~~company~~decrease ~~stores~~of ~~more profitable~~8.7%. ~~This~~Systemwide ~~will~~store ~~lead~~sales, towhich ~~system~~include ~~growth through~~sales ~~granting~~by offranchisees, ~~new~~were ~~franchises~~approximately $120,000,000 ~~conversion~~in of2001 ~~independent~~compared ~~stores~~ to ~~franchise stores~~$129,000,000 ~~and~~in ~~opening~~2000, ~~and/or~~a ~~acquiring~~decrease ~~new~~of ~~company stores~~7.0%.

The Company believes that successful implementation of the above strategies will make its franchise investment opportunity more attractive to prospective franchise owners. This should lead to system growth through granting of new franchises and conversion of independent stores to franchise stores; however, due to the Company's uncertainties in its financial condition and the Fuji relationship, the Company has experienced difficulty in selling franchises and expanding the system.

The Company's experience suggests the more system stores in a local market, the better individual stores in that market perform. Therefore, growth in existing markets and opening new markets with multiple stores are important for the Company's long-range growth.

Competition in the photo processing industry in general, and the one-hour photo processing industry in particular, is intense. There is pervasive competition in the provision of photo processing services, particularly through the increasing number of one-hour labs in drug stores and other mass merchants, and also through other channels of distribution, such as specialty stores and photographic chains, large retail stores, the Internet, and mail order. The Company operates primarily in the specialty retail channel of the photo processing industry. See ~~(see~~ "Item 1. Business - Competition"). There is a consolidation of photographic specialty retail outlets occurring and the Company estimates that the ~~three~~two largest chains, of which the Company is one, have approximately 20-25% of the U.S. specialty retail photo processing market. The Company estimates its share at approximately 7-8-9% of the U.S. stand-alone one-hour processing market.

The Company believes it operates a "recession resistant" business; however, a growing economy is beneficial for demand for the Company's products and services. Favorable weather, particularly on weekends, is important to store results and, therefore, Company results. The Company's business as a whole is subject to seasonal fluctuations. The demand for photo processing services is lowest in the first quarter and highest in the fourth quarter of the year.

Market Risk

The Company has market risk exposure to interest rates. At December 31, ~~2000~~2001, the Company has interest-bearing debt obligations that are subject to market risk exposure relating to changes in interest rates. At December 31, ~~2000~~2001, $~~712~~46,~~282~~968 of outstanding debt is at ~~fixed rates with~~ a ~~weighted-average~~fixed interest rate of 9.375% and $21,~~699~~837,~~664~~775 is at variable rates with a weighted-average rate of 95.46%. The estimated fair value of the Company's debt at December 31, ~~2000~~2001 is equal to its carrying amount.

The ~~scheduled~~$1.9 ~~aggregate~~million ~~annual~~note ~~maturities~~payable ~~of the Company's variable interest debt obligations for the five years subsequent~~ to ~~December~~Fuji ~~31,~~carries ~~2000~~a ~~are~~fixed asinterest ~~follows: $861,888,~~rate ~~$659,265,~~of ~~$659,265,~~8.5%; ~~$451~~however,~~034~~ ~~and $68,212. However,~~ the ~~total variable~~ interest ~~debt~~expense ~~obligation of $2,699,664~~ is ~~classified~~reduced asby ~~current~~supplier onmarketing ~~the~~allowances ~~consolidated~~equal ~~balance~~to ~~sheet as of December 31, 2000, as~~ the ~~Company~~interest ~~was~~paid ~~not~~on inthis ~~compliance~~note. ~~with certain bank debt covenants~~

~~Foreign~~The ~~currency~~scheduled ~~transactions~~aggregate ~~are~~annual ~~not~~maturities ~~material~~of to the Company's ~~because~~variable ~~transactions~~interest ~~with~~debt ~~the~~obligations ~~Company's~~for ~~suppliers~~the ~~are~~five inyears ~~U.S.~~subsequent ~~dollars~~to ~~and~~December ~~the~~31, ~~majority~~2001 ofare ~~the~~as ~~key~~follows: ~~supplier's~~$659,265, ~~manufacturing~~$659,265, is$451,033, ~~currently~~$68,212 ~~done~~and ~~domestically~~zero. However, ~~costs~~the ~~of certain~~total ~~photoprocessing~~variable ~~equipment~~interest ~~could~~debt beobligation ~~influenced~~of by$1,837,775 ~~exchange~~is ~~rates. Foreign~~classified ~~currency~~as ~~fluctuations~~current ~~can~~on ~~cause~~the ~~arbitrage~~consolidated ~~opportunities~~balance ~~between~~sheet ~~currencies,~~as ~~which~~of ~~can~~December ~~create~~31, ~~pricing~~2001, ~~pressures~~as ~~on photographic supplies~~ the Company ~~sells~~was tonot ~~its franchisees. Responding~~in tocompliance ~~these~~with ~~situations~~certain ~~could~~bank ~~affect~~debt ~~the~~covenants ~~profitability~~(see ofNote H to the ~~wholesale~~Consolidated ~~segment.~~Financial Statements).

Foreign currency transactions are not material to the Company because transactions with the Company's suppliers are in U.S. dollars and the majority of the key supplier's manufacturing is currently done domestically. However, costs of certain photo processing equipment could be influenced by exchange rates. Foreign currency fluctuations can cause arbitrage opportunities between currencies, which can create pricing pressures on photographic supplies the Company sells to its franchisees. Responding to these situations could affect the profitability of the wholesale segment.

Results of Operations 2001 vs. 2000

The Company recorded a net loss of $8,966,538, or $1.25 loss per basic and diluted common share. This compared to a net loss of $3,200,661, or $0.51 loss per basic and diluted common share in 2000. All per share calculations are made after providing for preferred dividend accretion.

The results for operations include a charge of $6.6 million for restructuring as a result of the Company's decision in November 2001 to franchise or sell 33 of its company-owned stores and close four unprofitable company stores. The Company plans to operate a small number of stores in the Dayton, Ohio area as test centers for new concepts and training. The Company believes this decision will enable it to more sharply focus on supporting the franchisees. The Company franchised six of its company stores in December 2001, sold two company stores in February 2002, and closed the four unprofitable stores from November 2001 through January 2002. As company stores are franchised, sales and operating expenses from company owned stores would decrease, but royalty revenue would increase. Corporate and support overhead for company store operations would be reduced or redeployed elsewhere to support the franchise owners.

Development segment revenue decreased $288,000, or 87.8% in 2001 compared to 2000, primarily due to selling or transferring 20 franchises during 2001 at lower average fees compared to 39 franchises during 2000. The improvement of $252,000 in development segment operating profit contribution from 2000 was primarily due to reduced advertising and payroll-related costs, partially offset by the lower revenue. The Company anticipates having approximately 15 transfers in 2002, excluding the franchising of company stores. The franchising of company stores is not anticipated to generate development segment revenue as the Company does not charge a separate franchise fee for these transactions.

Company store revenue decreased $2,004,000, or 13.4% in 2001 compared to 2000. Revenue from company stores open during all of 2001 and 2000 decreased 5.4% from 2000, primarily from decreased number of rolls processed. In January 2001 the Company closed two unprofitable stores and sold one, while closing two unprofitable stores and franchising six in the fourth quarter of 2001. Two other unprofitable stores were closed and two stores were sold in early 2002. The Company opened four stores in early 2000 and closed one store in early 2000, one store in mid-year, and four in December 2000. The Company does not plan to open any company stores in 2002, and, as previously mentioned, plans to franchise, sell or close all but the Dayton, Ohio market.

Company store operating profit contribution prior to restructuring charges improved by $133,000 from 2000. This improvement is primarily attributable to the following: reduced district and allocated corporate expenses of approximately $438,000 and reduced operating losses due to closed stores of approximately $390,000, partially offset by lower comparable store margin of approximately $593,000 primarily due to lower sales.

Royalty and advertising revenue decreased $569,000, or 11.3%, in 2001 compared to 2000, due to approximately 8.5% fewer franchise stores and approximately 3.3% lower comparable store sales. Segment operating profit contribution decreased $250,000 from 2000, due to the reduced sales and partially offset by reduced overhead allocations and improved operating costs. The Company believes that royalty and advertising revenue for 2002 may decrease approximately 7% to 8% compared to 2001, as an expected decrease in comparable store royalty revenues of approximately 3%, coupled with fewer franchisees in the system, should be slightly offset by any additional royalty revenue from company stores that may be franchised.

Wholesale revenue decreased $2.9 million, or 18.3% in 2001 compared to 2000. Approximately 18% of this decrease is a result of a 3.3% decrease in comparable franchisee store sales. The balance of the decline is primarily attributable to fewer franchisees purchasing their supply requirements through the Company. Wholesale segment operating contribution improved by $69,000 from 2000 due to reduced overhead allocations of approximately $405,000, decreased normal operating costs of approximately $157,000 and improved margin rates totaling approximately $130,000, that were partially offset by $497,000 from lower margin amounts associated with the reduced sales and by approximately $126,000 in incremental costs to convert franchisees to new supplies. In September 2001 the Company changed a key supplier. See "Item 1. Business - Supply Contract". The Company anticipates that wholesale revenue for 2002 will decrease 10% to 15%; however, improvement in operating expenses and margin rates should result in a higher operating segment contribution.

Selling, general and administrative expenses decreased by $1,010,000, or 13.9%, in 2001 compared to 2000. In 2001, the Company reduced corporate payroll and related expense by over $700,000 and legal expenses by approximately $180,000, while recording a charge for deferred executive compensation of approximately $845,000 for future payments to certain former executive officers for services rendered. In 2001 the Company charged to selling, general and administrative expenses approximately $63,000 for various asset disposals occurring prior to November 2001, while in 2000 the Company recorded a charge in selling, general and administrative expenses of approximately $800,000 related to asset write-downs, lease obligations and other costs associated with closing company stores. After the strategic restructuring announcement in November 2001, charges for estimated asset write-downs, lease obligations, selling, closing and severance costs have been reported in restructuring for 2001.

See Note D to the Consolidated Financial Statements.

Advertising expense decreased $629,000, or 43.7%, for 2001 as compared to 2000 primarily due to $185,000 in lower store advertising as a result of a lower company store advertising percentage, $137,000 in reduced franchise development advertising, and $135,000 in lower store advertising from lower company store sales.

Depreciation and amortization expenses decreased $86,000, or 5.7%, for 2001 as compared to 2000, primarily due to a reduction in the number of company stores. Depreciation and amortization expense for 2002 is estimated to be approximately $250,000, as no depreciation or amortization expense will be recorded for the assets of any of the remaining 27 company stores held for sale as the assets have been reduced to estimated fair value.

Interest expense in 2001 decreased $121,000 from 2000, primarily because of lower interest rates on variable-rate debt and by lower levels of interest-bearing debt. Interest income, which is primarily from notes receivable and temporary investments of cash, decreased $93,000 in 2001 compared to 2000, primarily due to lower receivable balances and lower interest rates for invested cash.

Due to the uncertainty of the Company recovering any tax benefits generated from 2001 results, there was no income tax benefit or expense recorded for 2001. The valuation allowance was deemed necessary as a result of the uncertainty of the recoverability of such tax benefits (see Note L to the Consolidated Financial Statements).

Results of Operations 2000 vs. 1999

The Company recorded a net loss of $3,200,661, or $.51 per basic and diluted common share. This compared to net income of $1,653,543, or $.18 per common share basic and $.12 per common share diluted in 1999. All per share calculations are made after providing for preferred dividend requirements. As a result of its planning efforts, the Company decided to close or sell seven under-performing company stores and reduce overhead expenses by approximately $1.7 million. Approximately 50% of these reductions are in corporate expenses which will result in lower allocations in 2001 to each operating segment.

Development segment revenue decreased $96,000, or 22.6% in 2000 compared to 1999, primarily due to planned lower average fees associated with the sale of franchises. The number of franchises sold in 2000 was fourteen compared to ten in 1999. Twenty-five franchises were transferred within the system during 2000, compared to eleven in 1999.

The decrease of $150,000 in development segment operating profit contribution from 1999 was primarily due to higher advertising and sales incentive costs and lower revenue.

Company store revenue increased $1,409,000, or 10.4% in 2000 compared to 1999. The Company opened four stores in early 2000 and closed one store in early 2000, one store in mid-year, and four in December 2000. In January 2001 two more were closed and one was sold. Stores opened and acquired in the last six months of 1999 and early 2000 continued their ramp-up of sales, contributing ~~in 2000~~ an additional $2.9 million in sales ~~abovein 19992000. The stores opened~~ in 2000 ~~and 1999 should continue to increase sales in 2001 compared to 2000, as they will continue in their ramp-up phase~~. ~~The Company does not plan to open any company stores in 2001.~~ Revenue from company stores open during all of 2000 and 1999 decreased 7% from 1999. Four percent of this 7% ~~This~~ decrease is due to ~~is primarily due to a 4%~~ decreased ~~in the~~ number of rolls processed, while ~~and~~ 1.5% is due to lower merchandise sales and 1.5% is due to lower portrait sales~~, each accounting for approximately a 1~~.~~5% decrease~~ ~~in revenue.~~

Company store operating profit contribution decreased $1.5 million from 1999. This decrease is primarily attributable to the following: lower comparable store margins of $666,000, primarily from decreased sales; increased depreciation expense of $288,000, primarily from the additional stores in 2000; $206,000 in additional operating losses during the ramp-up phase on the new and acquired stores as compared to a partial year in 1999; and increased allocated corporate expenses. The Company expects increased company store operating contribution in 2001 as compared to 2000 based on the continued ramp-up of sales in new stores and flat sales for other stores. For the four months ended April 30, 2001, comparable sales have declined approximately 5%. The Company believes this decrease is largely due to unfavorable weather conditions, growth in the number of competitive outlets, and generally weak photographic demand.

Royalty and advertising revenue decreased $79,000, or 1.5%, in 2000 compared to 1999, due to a decrease in franchise comparable store sales. Segment operating profit contribution decreased $174,000 from 1999, due to the reduced sales and increased allocated corporate expenses.

Wholesale revenue decreased $1.8 million, or approximately 10% in 2000 compared to 1999. Of this decrease, 40% is attributable to lower prices of photographic paper from April 1, 2000. Approximately 15% of this decrease is a result of the 1.5% decrease in comparable franchisee store sales. The balance of the decline is primarily attributable to fewer franchisees purchasing their supply requirements through the Company. Wholesale segment operating contribution decreased $960,000 from 1999 consistent with the decrease in revenue as well as lower product margins of 1.9%, or $580,000. The Company is re-evaluating its supply contract and, if necessary, may change its key supplier (see "Item 1. Business - Supply Contract and Amended Series G Preferred Stock"). The Company believes it can obtain a different supplier, but there is no assurance the Company can obtain favorable pricing and terms with no disruption to wholesale activities.

Selling, general and administrative expenses increased by $1,497,000, or 25.8%, in 2000 compared to 1999. In 2000 the Company recorded a charge of approximately $800,000 related to asset write-downs, lease obligations and other costs associated with closing company stores. This is compared to expenses of $99,000 from the closings in 1999. In 2000 the Company also recorded a charge of $284,000 associated with staff reductions. During 2000, expenses of approximately $424,000 ~~wasere associated~~were ~~withincurred~~incurred by the concept development team and the implementation of Motonetwork.com, a highly robust, "24/7" Intranet site which conveys information and orders between franchisees and company management in a timely and efficient manner. Excluding the above-mentioned charges, the increase in selling, general and administrative expenses was approximately $81,000, or 1.4%.

Advertising expense increased $113,000, or 8.5%, for 2000 as compared to 1999, consistent with increased company store revenue.

Depreciation and amortization expenses increased $230,000, or 18.1%, for 2000 as compared to 1999, primarily due to assets in eleven new company stores opened in late 1999 and during early 2000.

Interest expense in 2000 increased $49,000 from 1999, primarily because of increased interest rates on variable-rate debt partially offset by lower levels of interest-bearing debt. Interest income, which is primarily from notes receivable and temporary investments of cash, decreased $35,000 in 2000 compared to 1999, primarily due to lower receivable balances.

Income tax expense in 2000 was $996,000 compared to a tax benefit of $403,000 in 1999. The expense in 2000 was primarily due to an increase in the deferred tax valuation allowance to $3,540,000 to effectively eliminate from the consolidated balance sheet all deferred taxes, partially offset by the tax loss incurred in 2000. The valuation allowance was deemed necessary as a result of the uncertainty of the recoverability of such tax benefits. ~~(see~~See Note KL to the Consolidated Financial Statements).

Results of Operations 1999 vs. 1998
In 1999 the Company recorded net income of $1,653,543, or $.18 per common share basic and $.12 per common share diluted. This compared to net income of $1,690,253, or $.18 per common share basic and $.18 per common share diluted in 1998. Per share amounts are after preferred dividend requirements.
Development segment revenue decreased $135,000, or 24.2% in 1999 compared to 1998, primarily due to $100,000 of revenue in 1998 from the sale of development rights in Canada. The decreased revenue led to a decrease of $66,000 in operating segment contribution. During 1999 the Company modified its MotoPhoto QuickStart(SM) financing program, restructured its franchise offering and had a lower cost franchise fee program for stores that open by December 31, 2000.
Company store revenue declined $150,000, or 1%, in 1999 compared to 1998. One company store was sold to a franchisee in 1999 and three others were closed. Additionally, the Company opened seven new company stores during the year and acquired six stores, including two from a franchisee. However, these openings and acquisitions occurred over the last six months of 1999 and, hence, only contributed low start-up level revenue for a partial year.
The change in mix in stores along with a 1.7% comparable store sales decrease accounted for the 1% decrease in revenue. Operating segment contribution declined $430,000 as a result of the opening of the new stores, which were responsible for $309,000 of the decline with increased allocations of overhead expenses primarily accountable for the balance
Royalty and advertising revenue decreased $186,000, or 3.5%, in 1999 compared to 1998 due to a decrease in eight stores during the year offset by a 1.3 % comparable store sales increase and a decrease in revenue earned from rebates on franchisee's equipment purchases. This decrease in revenue led to a $186,000 decrease in operating segment contribution.
Wholesale revenue increased $136,000, or 0.8%, in 1999 compared to 1998. The increases in revenue are due to a reversal of the sales declines the Company suffered during the first half of 1998 due to uncompetitive pricing on certain products, primarily photographic paper and film, offset by lost revenue of $426,000 contributed in 1998 by telemarketing which was closed in 1998. The increased revenue, lower costs of certain products for resale, and the absence of the telemarketing operation contributed to an increase in the operating segment contribution of $852,000 in 1999 versus 1998.
In 1999, the Company disposed of certain fixed assets from its stores at a loss aggregating $99,000 compared to a $137,000 loss in 1998 from the same activity. Also, in 1998 the Company closed its telemarketing operation creating a loss on disposal of furniture and fixtures, and leasehold write-offs totaling $75,000.
Selling, general and administrative expenses decreased by $939,000, or 14%, in 1999 compared to 1998 primarily as a result of $840,000 reduced expenses from closing the telemarketing operation.
Depreciation and amortization expenses increased $254,000, or 25%, for 1999 as compared to 1998. Additions to property and equipment in company stores led to increased depreciation of $267,000. Depreciation in the wholesale segment decreased $75,000 due to the absence of telemarketing
Interest expense in 1999 increased $68,000 from 1998, primarily because of the Company's short-term bond transaction. Interest income, which is primarily from notes receivable and temporary investments of cash, decreased $155,000 in 1999 compared to 1998, due to greater collections in 1998 of interest on notes classified as non-performing
Income tax benefit in 1999 was $403,000, with an effective tax benefit rate of 32% compared to a tax benefit of $360,000 and an effective tax benefit rate of 27% in 1998. The tax benefits are due to the closing of certain company stores which created a deductible tax expense for assets previously written off for book purposes, generating a realization of tax deductions for which no deferred tax asset recognition was available as of December 31, 1998.
Liquidity and Capital Resources

This portion should be read in conjunction with Note C to the Consolidated Financial Statements, which addresses uncertainties about the Company's ability to continue as a going concern.

In ~~2000~~2001, the Company's net cash provided by operating activities ~~used~~was ~~approximately~~ $32.51 million ~~more~~higher ~~cash~~ than in ~~1999~~2000. ~~Reductions~~The reduction in accounts ~~receivable,~~payable ~~inventory~~for 2001, ~~prepaid~~net ~~expenses~~of ~~and~~the ~~income~~$3.2 ~~tax~~million ~~receivable~~of ~~approximating~~accounts payable reclassified from long-term debt to accounts payable at December 31, 2001, was approximately $1.12 million, ~~along~~less ~~with~~than ~~losses on~~for ~~disposition~~2000 ofdue ~~assets~~to changing key vendor terms and decreased purchases. During 2001 the Company received a ~~$230~~vendor advance,~~000~~ ~~increase~~a infederal ~~depreciation~~tax refund and ~~amortization,~~a ~~are~~landlord ~~approximately~~incentive ~~equal~~totaling toapproximately ~~the~~ $20.19 million, ~~reduction~~which inthe ~~accounts~~Company ~~payable~~does ~~and~~not ~~various~~expect ~~accrued~~to ~~expenses~~receive during 2002. ~~Net~~An ~~deferred~~increased ~~taxes~~focus ofon ~~$1.2~~reducing ~~million~~wholesale ~~were~~inventory ~~eliminated~~levels ~~due~~provided toapproximately ~~the uncertainty~~$0.4 ~~of recoverability~~million. The Company ~~anticipates~~generated apositive ~~smaller~~cash ~~reduction~~from inoperations ~~accounts~~for ~~payable~~2001 and ~~accrued~~plans ~~expenses~~to ingenerate ~~2001~~a similar amount for 2002, prior to any repayment of past due Fuji accounts payable.

In 2000, ~~net~~the ~~cash~~Company's ~~provided~~operating ~~by investing~~ activities ~~was~~used approximately $13.75 million more cash than in 1999. OfReductions ~~this, $1.9 million was accounted for by opening only two stores~~ in ~~2000~~accounts asreceivable, ~~compared~~inventory, toprepaid ~~opening~~expenses ~~seven~~ and ~~acquiring~~income ~~six~~tax ~~stores~~receivable inapproximating ~~1999~~$1. ~~Net~~1 ~~cash received~~million, onalong ~~payments~~with oflosses ~~notes~~on ~~receivable~~disposition ~~was~~of ~~approximately~~assets ~~$300,000~~and ~~higher in 2000 than 1999. In 1999~~ a ~~short-term bond transaction generated~~ $~~475~~230,000 ~~from~~increase ~~investing activities. The Company is not planning to open any company stores~~ in ~~2001~~depreciation and ~~its planned capital expenditures will approximate $675~~amortization,~~000,~~ ~~concentrating~~are onapproximately ~~areas~~equal ofto ~~strategic~~the ~~importance~~$2.1 ~~such~~million asreduction ~~expansion~~in ofaccounts ~~digital~~payable ~~capabilities~~ and ~~state-of-the-art~~various ~~portrait~~accrued ~~upgrades~~expenses. ~~The~~Net ~~Company~~deferred ~~anticipates~~taxes ~~leasing approximately $500,000~~ of ~~its capital expenditure requirements~~$1. In2 ~~1999,~~million ~~net~~were ~~cash~~eliminated ~~realized~~due ~~from~~to ~~investing activities was $350,000 more than in 1998, primarily as a result of~~ the ~~opening~~uncertainty ~~and acquisition~~ of ~~stores referred to above~~recoverability.

In ~~2000,~~2001 ~~financing~~net cash provided by investing activities ~~utilized~~was $10.74 million ~~more~~less ~~cash~~ than in ~~1999~~2000. OfLower ~~this~~payments ~~change,~~on ~~$1.4~~notes ~~million~~receivable ~~was~~were apartially ~~reduction~~offset inby ~~proceeds~~reduced ~~from~~capital ~~long-term~~expenditures ~~borrowings~~due ~~and~~to annot ~~additional~~opening $1any new company stores during 2001.2 The ~~million~~Company ~~was~~is ~~used~~not planning to ~~pay~~open ~~principal~~any oncompany ~~long-term~~stores ~~debt obligations~~during 2002 and has announced its intention to franchise, sell or close most of its existing company stores. No ~~preferred~~See ~~dividends~~Note ~~were~~D ~~paid~~to inthe ~~2000~~Consolidated ~~nor~~Financial ~~are~~Statements. The ~~any~~Company ~~required~~anticipates incapital ~~2001~~expenditures ~~and~~for 2002 will be less than $100,000, as ~~opposed~~compared to atotal capital expenditures including capitalized leases of approximately $~~700~~313,000 ~~dividend~~in ~~payment~~2001 and $1.1 million in ~~1999~~2000. The Company also anticipates ~~leasing~~less ~~approximately~~than $~~500~~100,000 in payments received on notes payable for 2002, as compared to payments received on notes payable of ~~its~~approximately ~~capital~~$279,000 ~~expenditure~~in ~~requirements~~2001 and $894,000 in 2000.

In ~~1999~~2000, asnet ~~compared~~cash toprovided ~~1998,~~by ainvesting ~~change~~activities inwas ~~net~~$1.7 ~~proceeds~~million ~~from~~more ~~long-term~~than ~~borrowing~~in ~~and~~1999. Of ~~principal~~this, ~~payments of~~ $~~767,000~~1.9 ~~primarily~~million was accounted for ~~the~~by ~~$466,000~~opening ~~less~~only ~~cash~~two ~~utilized~~stores in ~~finance~~2000 ~~activities~~as ~~between~~compared ~~the~~to ~~two~~opening ~~years~~seven and acquiring six stores in 1999. ~~Purchase~~Net ofcash ~~common shares~~received on payments of ~~$179,000~~notes ~~and~~receivable awas approximately $~~100,000~~0.3 million higher ~~dividend~~in ~~payment~~2000 inthan 1999. In as1999 ~~compared~~a toshort-term ~~1998~~bond ~~accounted~~transaction ~~for~~generated ~~the~~$0.5 ~~difference~~million from investing activities.

~~The~~In ~~Company~~2001, ~~had~~financing ~~available~~activities autilized $~~1,500,000~~0.6 ~~unused~~million ~~line~~less ofcash ~~credit~~than asin of2000, ~~December~~primarily ~~31,~~due ~~2000~~to ~~that~~lower ~~expired~~payments ~~April~~made ~~30,~~on ~~2001~~a note to a supplier. ~~The~~No ~~Company~~preferred isdividends ~~currently~~were ~~negotiating~~paid ~~with~~in a2000 ~~bank~~or ~~for~~2001, anor ~~new~~are ~~line~~any ~~for~~required in 2002, as opposed to a ~~lesser~~$700,000 ~~amount~~dividend payment in 1999.

AtIn ~~December 31,~~ 2000, ~~the~~financing ~~Company~~activities ~~had~~utilized ~~a working capital deficit of~~ $1.97 million~~. Working~~ ~~capital~~more ascash ofthan ~~December~~in ~~31,~~1999. Of ~~2000~~this ~~was~~change, ~~reduced by~~ $3.1.4 million ~~due~~was toa ~~the~~reduction ~~classification~~in ofproceeds ~~all~~from ~~bank~~ long-term ~~debt~~borrowings and capitalized lease obligations as current because the Company was not in compliance with restrictive covenants on certain bank obligations (see Notes G and H to the Consolidated Financial Statements). In May 2001, the Company's primary bank declared the Company to be in default of certain financial covenants under an ~~agreement~~additional with the bank, although the Company remains current with its bank payment obligations. The bank therefore has the right to accelerate repayments of the bank debt and lease obligations; however, the bank has not given notice of any intent to accelerate these payments. The bank has also prohibited principal payments on the note payable to Fuji of $2.1 ~~million (balance of $1~~.92 million atwas ~~March~~used ~~31,~~to ~~2001)~~pay ~~beyond March 31, 2001. Future~~ principal ~~payments~~ on ~~the~~long-term Fuji note may not occur until covenant compliance is achieved, or December 31, 2001, whichever is later. The Company believes the nature of the business allows it to operate with little or no working capital in a situation where debt ~~payments~~ ~~are not accelerated~~obligations. ~~Factors~~ ~~that contribute to this are having a substantial percentage of sales for cash, favorable terms from suppliers, and non-cash charges to income resulting from depreciation and amortization expenses.~~

The Company's ~~material~~unused ~~capital~~$1.5 ~~commitments~~million ~~consist~~line ~~primarily~~ of ~~long-term~~credit ~~debt~~expired ~~and~~April ~~lease~~30, ~~obligations~~2001. The ~~(See~~Company ~~Notes~~is Gcurrently ~~and~~negotiating Hwith toa ~~the~~bank ~~Consolidated Financial Statements). Funds~~ for ~~repaying~~a ~~these~~new ~~commitments~~short-term ~~are~~line ~~anticipated~~for toa besubstantially ~~generated primarily~~lesser ~~from~~amount. There ~~operations~~can ~~and~~be ~~from~~no ~~working~~assurances ~~capital~~negotiations inwill ~~future~~be ~~years~~successful.

At December 31, ~~2000~~2001, the Company had ~~income~~a ~~tax~~working ~~loss~~capital ~~carryforwards~~deficit of $7.3 million. Of this, ~~tax~~$2.2 ~~credits~~million is due to the classification of all bank long-term debt and ~~deductible~~capitalized ~~temporary~~lease ~~differences~~obligations as current because the Company was not in compliance with arestrictive ~~tax~~covenants ~~benefit~~on certain bank obligations. See Notes H and I to the Consolidated Financial Statements. On termination of the Fuji supply contract on September 17, 2001, the long-term revolving credit arrangement with Fuji totaling approximately $3.52 million as of December 31, 2001 ($3.6 million as of the termination date) and subject to reduction for certain claims, was also reclassified as accounts payable. The ~~tax~~Company ~~benefit~~has ofbeen making payments against these ~~carryforwards~~accounts payable amounts. The Company has been ~~offset~~in bynegotiations awith Fuji to change the Company's payment schedule on these accounts payable. The Company has been unable to obtain agreement at this point; however, on March 21, 2002 the Company advised Fuji that it was substantially reducing its monthly payments its past due accounts payable while negotiations are pending. There can be no assurance negotiations will be successful. The Company has been making timely payments within shortened credit terms on new Fuji purchases. In May 2001, the Company's primary bank declared the Company to be in default of certain financial covenants under an agreement with the bank, although the Company remains current with its bank payment obligations. The bank therefore has the right to accelerate repayments of the bank debt and lease obligations; however, the bank has not given notice of any intent to accelerate these payments. The bank agreement also prohibits principal payments on the note payable to Fuji of $31.5 9 million ~~valuation~~until ~~allowance~~covenant ~~for~~compliance ~~financial~~is ~~reporting~~achieved. The ~~purposes~~Company ~~(see~~believes ~~Note~~the Knature of the business allows it to operate with little or no working capital as long as debt payments are not accelerated and a satisfactory arrangement can be reached with Fuji regarding repayment of accounts and note payables.

The Company's ~~has~~material ~~$10,000,000~~capital ofcommitments ~~Amended~~consist ~~Series~~primarily Gof ~~Stock~~long-term ~~outstanding~~debt ~~which~~and ~~the~~lease ~~holder~~obligations. See ~~may~~Notes ~~require~~H ~~the~~and ~~Company~~I to ~~redeem commencing in 2003 or earlier with~~ the ~~occurrence~~Consolidated ofFinancial ~~a redemption event ("Redemption Event")~~Statements. ~~These~~ Funds ~~shares can be redeemed only by an exchange~~ for ~~Company~~repaying ~~common~~these ~~shares~~commitments orare ~~from~~anticipated ~~the proceeds of an equity offering. A Redemption Event includes, after appropriate cure periods, failure by the Company~~ to ~~meet~~be ~~certain~~generated ~~requirements~~primarily ~~under~~from aoperations ~~supply contract with Fuji or termination of the supply contract other than as a result of default by Fuji, default by the Company under certain other agreements between the Company~~ and ~~Fuji,~~from ~~the~~working ~~termination~~capital ~~of involvement~~ in ~~the~~future ~~day-to-day management of the Company of either Michael F~~years. If ~~Adler or David A. Mason if~~ the Company ~~does~~could not ~~replace~~generate ~~him~~sufficient orfunds ~~them, within a specified period, with an executive reasonably acceptable~~ to ~~Fuji,~~repay athese ~~change in control of the Company~~commitments, the Company's ~~bankruptcy~~would orneed ~~insolvency, or failure by the Company~~ to ~~meet~~raise ~~its~~additional ~~obligations under other indebtedness in excess of $100,000~~capital. IfThere the Company fails to tender the requisite cash or common stock in order to redeem all of the Amended Series G Stock upon request by Fuji following the occurrence of a Redemption Event, Fuji has the right, until all of the shares of Amended Series G Stock are redeemed or the Redemption Event is ~~cured,~~no toassurance ~~elect~~ the ~~majority~~Company ofcould ~~the~~do ~~Board of Directors. If the Amended Series G Stock is redeemed in shares of common stock~~so, ~~depending upon the market price of the common stock~~ and ~~the~~if ~~number of shares of common stock outstanding, such redemption could result in Fuji's acquiring control of~~ the Company~~. Based~~ onwere ~~current market prices of the common stock~~successful, ~~full redemption~~existing ofshareholders ~~the~~could ~~Amended~~suffer ~~Series~~significant ~~G Stock in shares of common stock would result in Fuji having the right to receive common shares representing approximately 90% of the Company's outstanding stock following such redemption~~dilution. ~~The Company is uncertain at this time how the Amended Series G Stock will be retired (see~~

At December 31, 2001, the Company had income tax loss carryforwards, tax credits and deductible

temporary differences with a tax benefit of approximately $6.6 million. The tax benefit of these carryforwards has been offset by a $6.6 million valuation allowance for financial reporting purposes. See Note L to the Consolidated Financial Statements. These items, if and when used for tax purposes, preserve liquidity and capital resources because tax payments are reduced by realization of these deferred tax assets. However, there can be no assurance the tax benefits can be realized.

The Company has $10,000,000 of Amended Series G Stock outstanding that Fuji may require the Company to redeem at any time subsequent to March 17, 2002, due to the occurrence of a redemption event ("Redemption Event"). If Fuji requests redemption, the Company may redeem by offering the requisite cash or common stock at its option. If redemption were to occur in shares of common stock, depending upon the market price of the common stock and the number of shares of common stock outstanding at the time of redemption, Fuji could acquire control of the Company. Based on current market prices of the common stock, full redemption of the Amended Series G Stock in shares of common stock would result in Fuji having the right to receive shares representing approximately 95% of the Company's outstanding common stock following such redemption. If the Company fails to give notice of redemption of all of the Amended Series G Stock upon request by Fuji, Fuji would have the right, until all the shares of the Amended Series G Stock are redeemed or the Redemption Event is cured, to elect the majority of the Board of Directors. The Company is uncertain at this time how and when the Amended Series G Stock will be retired. See "Item 1. Business - Amended Series G Preferred Stock and Fuji Relationship", and Notes C and J to the Consolidated Financial Statements. The Company continues to explore various possibilities to negotiate a resolution of the Fuji relationship that would enhance shareholder value.

The Company currently has 21,772,611 authorized but unissued shares of voting common stock, which would be insufficient at current share prices to redeem all shares of the Amended Series G Stock should Fuji request redemption. In such case, the Company would have to seek shareholder authorization of additional shares of common stock.

Forward Looking Statements

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by such words as "anticipates", "believes", "assumes", "expects", "intends", "estimates", "planned", "scheduled", "may", "will", "would", "could" or similar expressions. Such forward-looking statements, which reflect the Company's current views of future events and financial performance, involve known and unknown risks and uncertainties that may cause the Company's actual results to differ materially from planned or expected results. Those risks and uncertainties include, but are not limited to: ~~competitive~~those ~~pressures,~~risk ~~technological~~factors ~~changes~~described ~~affecting~~below ~~the~~as ~~Company's ability~~well toas ~~compete,~~uncertainty ~~the~~relating ~~ability~~ to ~~expand the Company's franchising operations, potential future change in control of the Company,~~ new store development and expansion, decline in consumer or franchisee demand for the products and services offered, consumer acceptance of new programs and services, stability in market prices of key supply items, continuity of management, liquidity of the Company and franchise system, lender and supply relationships, economic conditions, the ability of the Company to locate and obtain favorable store sites at acceptable lease terms, management's ability to manage its franchisees, the effect of severe weather or natural disasters, and the ~~continued~~ availability of capital and financing at acceptable interest rates. For all of the foregoing reasons, actual results may vary materially from the forward-looking statements. The Company assumes no obligation to update any forward-looking statements.

Risk Factors

The Company's ability to continue as a going concern is uncertain.

In their reports on the audited financial statements of the Company for both 2000 and 2001, the Company's independent auditors have included a comment about the ability of the Company to continue as a going concern. At December 31, 2001, the Company had a negative stockholders equity of $6.4 million, resulting from a net loss applicable to common shares of approximately $9.8 million, including restructuring charges of approximately $6.6 million relating to the decision of the Company to franchise or sell most of its company stores, and charges of approximately $845,000 recorded in connection with deferred compensation agreements with certain directors for their past services as executive officers. At December 31, 2001, the Company was in default on its bank debt and had a working capital deficiency of $7.3 million. The "going concern" comment has affected the Company's ability to sell franchises and expand the system. There is no assurance that the Company will achieve profitability or be able to meet all of its obligations.

Fuji could assume control of the Company.

Fuji is the holder of all shares of the Amended Series G Stock and currently has the right to request the Company to redeem the stock for $10 million by paying the cash or common stock. The Company does not have the resources to redeem in cash. If redemption were to occur in shares of common stock, depending on the market price of the common stock and the number of shares of common stock outstanding at the time of redemption, Fuji could acquire control of the Company. Based on current market prices of the common stock, full redemption of the Amended Series G Stock in shares of common stock would result in Fuji's having the right to receive common shares representing approximately 95% of the Company's outstanding stock following such redemption. If the Company fails to give notice of redemption of all of the Amended Series G Stock upon request by Fuji Redemption Event, Fuji would have the right, until all the shares of the Amended Series G Stock are redeemed or the Redemption Event is cured, to elect the majority of the Board of Directors. See "Item 1 - Business - Amended Series G Preferred Stock and Fuji Relationship."

The Company encounters significant competition in the photo processing market.

Photo processing services are provided through various methods of distribution and there are many companies involved in the photo processing business, many of which have greater resources than does the Company. Competition is intense in the photo processing industry and particularly pervasive in the one-hour segment. In addition, there is competition among companies offering franchises. See "Item 1 - Business - Competition."

The Company's business may be adversely affected by new technology.

Photo processing and other imaging techniques are subject to technological changes which could render current techniques and processes obsolete and could seriously affect the Company's or its franchisees' ability to compete in the marketplace. The photo processing industry in which the Company operates is continuing to introduce new products and services, such as digital imaging services and

products both through retail stores and through the internet. See "Item 1 - Business - Competition."

The Company's ability to expand its franchise system is adversely affected by the Company's uncertain financial condition and control.

Because of the uncertainties with respect to the Company's financial condition and control, the Company's ability to market franchises has been significantly impaired. Until these uncertainties are resolved, the Company expects to have continued difficulty in growing its system.

The Company's ability to grow may be hindered if it were unable to develop new products and new services.

The Company's ability to compete in the photo processing services industry may depend on its ability to provide ancillary products and services to our customers. If the Company was unable to develop products and services acceptable to the marketplace, its ability to compete and grow revenues and systems may be adversely affected.

The Company's current financial condition and control uncertainty may prevent the Company from obtaining additional equity or other sources of financing
.

Without sources of additional financing, the Company's ability to resolve issues relating to Fuji's preferred stock and satisfy its other financial obligations is adversely affected. Obtaining such financing is likely dependent on favorable resolution of Fuji's claims on its debt and preferred stock. There is no assurance that Fuji will cooperate in any negotiations to permit a resolution.

The Company's common stock trades in a limited public market, is subject to price volatility and there can be no assurance an active trading market will be sustained.

There has been a limited public trading market for the Company's common stock and there can be no assurance an active trading market will be sustained. There can be no assurance that the common stock will trade at or above any particular price in the public market, if at all.

The Company's common stock is subject to secondary trading restrictions related to "penny stocks".

Certain transactions involving the purchase or sale of common stock of the Company may be affected by a Securities and Exchange Commission rule for "penny stocks" that imposes additional sales practice burdens and requirements upon broker/dealers that purchase or sell such securities. For transactions covered by this penny stock rule, broker/dealers must make certain disclosures to purchasers prior to the purchase or sale. Consequently, the penny stock rule may impede the ability of broker/dealers to purchase or sell the Company stock for their customers and the ability of persons now owning or subsequently acquiring the Company's stock to resell such securities.

The Company's ability to successfully accomplish its restructuring plan is dependent upon its ability to sell or franchise stores at estimated market prices.

The Company incurred a restructuring charge in 2001 which resulted in a write-down of the carrying value of existing company stores to estimated fair value in connection with its plan to sell or franchise all but a few company stores. The value of these stores is based on appraisals or management's estimates and the Company may be unsuccessful in selling stores at the estimated prices. If so, the Company may incur additional restructuring charges in connection with the planned sale of stores.

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

Quantitative and qualitative disclosures about market risk are included in Management's Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data of the Company are included in this report after the signature page.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors
Michael F. Adler
Frank W. Benson
D. Lee Carpenter.
Leslie Charm
Dexter B. Dawes
Harry D. Loyle
David A. Mason
James F. Robeson, Ph.D.
Executive Officers
In addition to Messrs. Adler and Mason, who are listed above under the heading "Directors," the following individuals serve as executive officers of the Company.
Frank M. Montano
Paul Pieschel
Linda I. Kramer.
Alfred E. Lefeld.
Stephen M. Adler.
Michael F. Adler and Stephen M. Adler are father and son.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires directors and executive officers of the Company and persons who beneficially own more than 10% of the Company's Common Stock to file reports of ownership and changes in ownership of the Company's Common Stock with the Securities and Exchange Commission. The Company is required to disclose delinquent filings of reports by such persons. Based on a review of the copies of such reports and amendments thereto received by the Company, or written representations that no filings were required, the Company believes that no person who at any time during 2000 was director, executive officer, or beneficial owner of more than ten percent of any class of the equity securities of the Company failed to file reports as required by Section 16(a) of the Securities Exchange Act of 1934, except as described below.
Through inadvertence, Frank M. Montano filed one late report as to one transaction; the report was filed as soon as the failure to file was discovered.
ITEM 11. EXECUTIVE COMPENSATION

Compensation of Outside Directors
The Company pays certain compensation to its outside directors for their services to the Company. Directors who are also employees of the Company receive no additional remuneration for serving as directors.
During 2000, outside directors were entitled to receive monthly fees of $400, as well as a fee of $750 per Board of Directors meeting attended in person, $225 per committee meeting attended in person, and $150 per meeting attended via telephone conference call. The fee structure is unchanged for 2001. The Board of Directors has also approved a plan to compensate outside directors who choose to participate in the plan with shares of Common Stock instead of cash payments. During 2000, each director who participated in the plan received shares having a value, based on the average closing sale prices of the Common Stock during December 1999 ($1.003), equal to 150% of the cash compensation that the director would otherwise have been entitled to receive. For 2001, the formula for calculating stock in lieu of cash compensation will be the same but will be based on the average closing sale price of the Common Stock during December 2000 ($.409). Messrs. Benson, Carpenter, Dawes, Loyle, and Robeson elected to receive Common Stock as compensation during 2000 and have elected to do so again in 2001.
In addition, for consulting services provided to the Company during 2000, Mr. Charm received $3,200, and his firm, Restoration Associates, received $1,200.
Compensation of Executive Officers
The following table provides information with respect to compensation received for the preceding three fiscal years by the Company's chief executive officer, the four other most highly compensated executive officers of the Company, and by two other individuals who would have been among the four other most highly compensated executive officers for 2000 except that they were no longer employed by the Company as of December 31, 2000. All of the foregoing individuals are referred to herein as the "named executive officers."
Annual Compensation Long Term Compensation
Name and Principal Position Fiscal Year Salary Bonus Other Annual Compen-sation(1) Securities Underlying Options(#) All Other Compen-sation(2)
Michael F. Adler Chairman and Chief Executive Officer Frank M. Montano President and Chief Operating Officer David A. Mason Executive Vice President, Chief Financial Officer And Treasurer Leonard S. Swartz Former Senior Vice President - Franchise Operations (3) Lloyd F. Nolandd Former Senior Vice President Marketing (4) Former Senior Vice President Marketing (4) Paul Pieschel Senior Vice President - Franchise Sales (5) Alfred E. Lefeld Vice President - Controller 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 $200,000 200,000 189,634 $168,300 167,437 162,604 $127,500 126,846 123,223 $109,878 112,058 108,332 $139,050 137,991 54,519 $ 95,508 91,500 89,301 $ 95,261 81,772 78,559 $ - 25,906 - $ - 21,048 - $ - 21,125 - $ - 2,500 - $ - 20,619 15,000 $ 17,233 20,656 23,493 $ 9,500 5,000 - $ 29,525 28,561 23,544 $ 4,704 4,090 3,895 $ 4,022 4,090 3,895 $ 3,713 3,498 2,776 - - - $ 16,608 4,090 3,895 $ 4,704 4,090 3,895 - - 38,760 - 7,544 37,464 - 7,023 28,416 - 6,160 25,299 - 17,585 75,000 9,323 4,384 20,808 4,168 3,616 17,816 $ 5,870 7,370 5,900 $ 3,200 6,782 13,044 $ 3,200 2,787 3,200 $ 1,850 2,446 2,523 $197,365 14,530 8,453 $ 2,404 2,434 2,496 $ 2,307 1,807 1,811
The primary component of "Other Annual Compensation" for Mr. Adler is a car allowance. In 2000, 1999, and 1998, the car allowances were $14,406, $14,468 and $14,225, respectively. The primary components of "Other Annual Compensation" for Mr. Pieschel are a car allowance and reimbursement for car-related expenses. In 2000, Mr. Pieschel's car allowance was $6,464, and he received reimbursement of $4,328 for car-related expenses.
"All Other Compensation" in 2000 for Mr. Adler consists of (i) $2,670 of insurance premiums paid by the Company with respect to a $500,000 term life insurance policy covering Mr. Adler that is maintained by the Company for Mr. Adler's benefit pursuant to his employment agreement, and (ii) $3,200 consisting of the Company's contributions for Mr. Adler to the Company's defined contribution retirement plan. "All Other Compensation" in 2000 for Mr. Noland consists of (i) $155,277 of salary and related benefits which, absent mitigation by Mr. Noland (which he has the affirmative obligation to seek), will be paid to Mr. Noland during 2001 under the terms of his employment agreement (see "Employment Contracts, Termination of Employment and Change-in-Control Arrangements" below), (ii) $38,888 of indebtedness (principal, interest and tax liability) forgiven by the Company during 2000 under transition loans made by the Company to Mr. Noland during 1998 in connection with his employment by the Company, and (iii) $3,200 representing the Company's contribution for Mr. Noland to the Company's defined contribution retirement plan. "All Other Compensation" in 2000 for Messrs. Montano, Mason, Swartz, Lefeld and Pieschel consists of the Company's contributions for them to the Company's defined contribution retirement plan.
Mr. Swartz retired from the Company November 17, 2000.
Mr. Noland joined the Company August 3, 1998 and left the Company's employ as of December 28, 2000.
Bonus to Mr. Pieschel for 2000, 1999, and 1998 represents commissions paid to Mr. Pieschel in connection with the sale of franchises.
Option Grants During 2000
The following table provides information concerning the grant of stock options during the year ended December 31, 2000 to each of the named executive officers who received option grants during such year.
Individual Grants Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2)
Name Number of Securities Underlying Options Granted(1) % of Total Options Granted to Employees in 2000 Exercise Price Per Share Expiration Date 5% 10%
Paul Pieschel 9,323 9% $.4062 12/13/2005 $1,042 $2,310
Alfred E. Lefeld 4,168 4% $.4062 12/13/2005 1,066 2,700
All of the options shown were granted under the Company's Stock Ownership Program under the 1992 Performance and Equity Incentive Plan. All of the options are exercisable in 25% increments per year on each successive anniversary date of the grant.
The Potential Realizable Values upon exercise of stock options are equal to the product of the number of shares underlying the options and the difference between (i) the respective hypothetical stock prices on the date of option exercise, and (ii) the exercise price per share of the options. The hypothetical stock prices are equal to the price per share of the Common Stock as of the date of the option grant compounded annually at the rates of 5% and 10%, respectively, over the term of the option. The rates of appreciation used are required by the Securities and Exchange Commission and do not represent a projection or estimate by the Company on the potential growth of the value of its Common Stock. Therefore, there can be no assurance that the rate of stock price appreciation presented in this table can be achieved.
Option Exercises and Year-eEnd Option Values
None of the named executive officers exercised any stock option during the year ended December 31, 2000. The following table provides information concerning unexercised stock options held by the named executive officers as of December 31, 2000.
Number of Unexercised Options Held at Fiscal Year End Value of Unexercised in-the-Money Options at Fiscal Year End($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
Michael F. Adler 228,295 33,799 - -
Frank M. Montano 238,300 38,648 - -
David A. Mason 84,486 30,398 - -
Paul Pieschel 19,507 30,493 - -
Alfred E. Lefeld 13,882 26,218 - -
Leonard S. Swartz 52,086 - - -
Lloyd F. Noland 13,517 54,068 - -
(1)
$0.375 per share as reported on the OTC Bulletin Board.
Employment Contracts, Termination of Employment and Change-in-Control Arrangements
In April, 1997, Michael F. Adler, the Company's Chairman and Chief Executive Officer, entered into an employment contract which is automatically renewed at the end of each fiscal year for an additional three years unless the Board takes other action. The employment contract provides for a base salary of $161,500 per year, subject to annual review by the Board of Directors. Beginning April, 1998, Mr. Adler's base salary was set at $200,000 per year. The employment contract calls for Mr. Adler's bonuses to be determined by the Board of Directors or a committee of the Board. The employment contract requires the Company to maintain for Mr. Adler's benefit a $500,000 term life insurance policy covering Mr. Adler. The Company paid premiums of $2,670 for this policy during 2000. The employment contract also provides that, in the event Mr. Adler's employment is terminated without cause, he will be entitled to salary continuation equal to thirty-six months of the salary he was receiving immediately prior to termination, as well as continuation of benefits which he was receiving at the time of termination, including health insurance and use of suitable office and secretarial support, but excluding a car allowance. Mr. Adler has announced that he plans to retire as CEO and limit his time spend on Company business by the end of 2001. He intends to continue as a director of the Company.
David A. Mason, the Company's Executive Vice President, Chief Financial Officer and Treasurer, is employed under an employment contract with a term through December 31, 2002. Commencing January 1, 2002, the term of the employment agreement will be extended so that the term of the agreement will always be for a period of one year unless Mr. Mason or the Company elects not to continue the contract or unless Mr. Mason's employment is terminated earlier. The employment contract, as amended, provides for a base salary of $127,500 per year, subject to annual review by Mr. Adler after consultation with the Compensation Committee of the Board of Directors. Under the employment contract, Mr. Mason's eligibility for bonus payments will be determined by Mr. Adler after consultation with the Compensation Committee. The employment contract provides that, if there is a change in control of the Company, the employment contract will be extended for three years from the date of the change of control. Mr. Mason has announced that he plans to limit his time spend on Company business by the end of 2001. He intends to continue as a director of the Company.
Frank M. Montano, the Company's President and Chief Operating Officer, is employed under an employment contract with a term through December 31, 2002. Commencing January 1, 2002, the term of the employment agreement will be extended so that the term of the agreement will always be for a period of one year unless Mr. Montano or the Company elects not to continue the contract or unless Mr. Montano's employment is terminated earlier. The employment contract provides for a base salary of $169,125 per year, subject to annual review by Mr. Adler after consultation with the Compensation Committee. Under the employment contract, Mr. Montano's eligibility for bonus payments will be determined by Mr. Adler after consultation with the Compensation Committee. The employment contract provides that, if there is a change in control of the Company, the employment contract will be extended for three years from the date of the change of control.
In January, 1999, Lloyd F. Noland entered into an employment contract with a term through December 31, 2001 to serve as the Company's Senior Vice President of Marketing. The employment contract provided for a base salary of $135,000 per year. Mr. Noland left the Company's employ effective December 28, 20010. Pursuant to a severance agreement between the Company and Mr. Noland, he will receive his salary and related benefits for the remainder of the term of his employment contract term and reimbursement of approximately $2,200 for home office expenses in connection with his job search. Salary and benefits paid to Mr. Noland will be offset by any salary and benefits he obtains through new employment, which he has an affirmative obligation to seek.
Effective April, 1999, Paul Pieschel, the Company's Senior Vice President of Marketing, entered into an employment contract with a term through December 31, 2001. Commencing January 1, 2001, the term of the employment agreement will be extended so that the term of the agreement will always be for a period of one year unless Mr. Pieschel or the Company elects not to continue the contract or unless Mr. Pieschel's employment is terminated earlier. The employment contract provides for a base salary of $91,971 per year, subject to annual review by Mr. Adler after consultation with the Compensation Committee. Mr. Pieschel's eligibility for bonus payments is determined by Mr. Adler after consultation with the Compensation Committee.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Board of Directors are Frank W. Benson, Chairman of the Committee, D. Lee Carpenter, and James F. Robeson, Ph.D. All of such current members are independent non-employee directors of the Company. The Committee establishes the compensation of the Chief Executive Officer, subject to the terms of his employment contract. Michael F. Adler, Chairman and Chief Executive Officer of the Company, sets compensation for all other executive officers, subject to applicable employment contracts, but reviews such decisions with the Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

At May 11, 2001, the Company had 7,809,338 shares of common stock outstanding and entitled to vote. The following table sets forth certain information regarding the beneficial ownership of the Company's common stock as of May 11, 2001 by (i) each of the Company's directors, its chief executive officer and the other named executive officers, (ii) all directors and executive officers of the Company as a group, and (iii) each person who is known by the Company to beneficially own more than 5% of the Company's common stock. Unless otherwise indicated, the Company believes that the persons named in the table have sole voting and investment power with respect to the shares indicated as beneficially owned by them.
Name Number of Shares Percent of Class (1)
Directors and Certain Executive Officers Michael F. Adler (2) 4444 Lake Center Drive Dayton, OH 45426 Harry D. Loyle (3) Linwood Greene, Suite 15 210 New Road Linwood, NJ 08221 David A. Mason (4) Dexter B. Dawes (5) Frank W. Benson (5) D. Lee Carpenter (5) James F. Robeson, Ph.D. (6) Leslie Charm (5) Frank M. Montano (7) Leonard S. Swartz (8) Paul Pieschel (9) Alfred E. Lefeld (10) Lloyd F. Noland All Directors and Executive Officers as a Group (13 persons) (11)
Beneficial Owners of More than
5% of the Common Stock
Fuji Photo Film U.S.A. Inc. (12)
555 Taxter Road
Elmsford, NY 10523
Mark E. Brady (13)
Robert J. Suttman (13)
Ronald L. Eubel (13)
William Hazen (13)
Bernie Holtgreive (13)
c/o Eubel Brady & Suttman
Asset Management, Inc.
7777 Washington Village Drive, Suite 210
Dayton, OH 45459
1,6642,712380
572,160
185,130
89,585
72,663
58,453
53,262
25,000
259,765
88,442
36,505
33,151
-0-
3,074,581
1,000,000
519,210
20.2%
7.3%
2.3%
1.1%
*
*
*
*
3.2%
1.0%
*
*
0%
34.8
11.4%
6.6%
* Less than 1%
Percent of class is calculated without regard to shares of common stock issuable upon exercise of outstanding warrants or stock options, except that any shares a person is deemed to own by having the right to acquire upon exercise of a warrant or option are considered to be outstanding solely for purpose of calculating such person's percentage ownership.
The shares of Common Stock indicated as beneficially owned by Mr. Adler: (i) include 2,332 shares owned by Michael F. Adler as custodian for Elizabeth Adler's estate; (ii) include 6,000 shares owned by the Elizabeth Adler Trust for which Mr. Adler is trustee; (iii) include 6,000 shares owned by the Robert Adler Trust for which Mr. Adler is co-trustee and shares voting and investment power with Jacob A. Myers, an officer of the Company; (ivii) include 418,295 shares that he has the right to acquire by exercise of stock options that are currently exercisable; and (iv) exclude a total of 11,000 shares owned by Mr. Adler's spouse, as to which Mr. Adler disclaims beneficial ownership. Such shares also include 1,149,039 shares of Common Stock owned by Progressive Industries Corporation ("Progressive"), which is 99% owned by Mr. Adler and his family, which shares of common stock Mr. Adler may be deemed to own beneficially due to his ownership of a controlling interest in Progressive and his position as President of Progressive.
Includes 25,000 shares that he has the right to acquire by exercise of stock options that are currently exercisable. Mr. Loyle shares voting and investment power with his wife.
Includes 143,740 shares that Mr. Mason has the right to acquire upon exercise of stock options that are currently exercisable and excludes 2,000 shares owned by Mr. Mason's wife, as to which Mr. Mason disclaims beneficial ownership.
Includes 25,000 shares that this individual has the right to acquire upon exercise of stock options that are currently exercisable.
Includes 10,000 shares that Dr. Robeson has the right to acquire upon exercise of stock options that are currently exercisable.
Includes 243,555 shares that Mr. Montano has the right to acquire upon exercise of stock options that are currently exercisable.
Includes 52,086 shares that Mr. Swartz has the right to acquire upon exercise of stock options that are currently exercisable and excludes 850 shares owned by Mr. Swartz's wife, as to which Mr. Swartz disclaims beneficial ownership.
Includes 22,465 shares that Mr. Pieschel has the right to acquire upon exercise of stock options that are currently exercisable.
Includes 20,093 shares that Mr. Lefeld has the right to acquire upon exercise of stock options that are currently exercisable.
Includes 1,016,306 shares that such group has the right to acquire upon exercise of stock options that are currently exercisable.
Consists of 1,000,000 shares issuable upon exercise of warrants owned by Fuji Photo Film U.S.A., Inc. ("Fuji").
(123) Consists of shares as to which Mark E. Brady, Robert J. Suttman, Ronald Eubel, William Hazel, and Bernie Holtgreive each share voting and investment power. Mr. Suttman and Mr. Brady together beneficially own 82,750 shares, as to which they share voting and investment power. Also, Mr. Suttman beneficially owns 5,000 additional shares as to which he has sole voting and investment power, and Mr. Brady beneficially owns 1,900 additional shares as to which he has sole voting and investment power.
Potential Future Change in Control
Fuji is the holder of 1,000,000 shares of the Amended Series G Stock and warrants to purchase 1,000,000 shares of the Company's common stock for $2.375 per share which expire in 2002.
The Amended Series G Stock has a mandatory redemption date of January 1, 2003. The Amended Series G Stock is redeemable by the Company at any time in aggregate amounts of at least $1 million. No dividends are payable in connection with the Amended Series G Stock. If the Company does not redeem the Amended Series G Stock on January 1, 2003, the Company must make penalty payments of $.90 per share, or $900,000, in 2003 and $1.00 per share, or $1,000,000, per year in 2004 and each year thereafter until the stock is redeemed. Any redemption of the Amended Series G Stock must be either in cash from the proceeds of an equity offering or in the Company's common stock valued at 90% of the market price at the time of redemption. Fuji may refuse any proposed redemption by the Company in shares of common stock and elect to continue to hold the Amended Series G Stock without impairment of any right to require redemption at a later time. The redemption price for the Amended Series G Stock is $10.00 per share, or an aggregate of $10 million. If the Amended Series G Stock is redeemed in shares of common stock, depending upon the market price of the common stock and the number of shares of common stock outstanding, such redemption could result in Fuji's acquiring control of the Company. Based on current market prices of the common stock, full redemption of the Amended Series G Stock in shares of common stock would result in Fuji having the right to receive common shares representing approximately 90% of the Company's outstanding stock following such redemption.
The Amended Series G Stock is also redeemable under certain other circumstances ("Redemption Event") which include, after appropriate cure periods, failure by the Company to meet certain requirements under a supply contract with Fuji or termination of the supply contract other than as a result of default by Fuji, default by the Company under certain other agreements between the Company and Fuji, the termination of involvement in the day-to-day management of the Company of either Michael F. Adler or David A. Mason if the Company does not replace him or them, within a specified period, with an executive reasonably acceptable to Fuji, a change in control of the Company, the Company's bankruptcy or insolvency, or failure by the Company to meet its obligations under other indebtedness in excess of $100,000. If the Company fails to tender the requisite cash or common stock in order to redeem all of the Amended Series G Stock upon request by Fuji following the occurrence of a Redemption Event, Fuji has the right, until all of the shares of Amended Series G Stock are redeemed or the Redemption Event is cured, to elect the majority of the Board of Directors (see
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

~~Messrs.~~Items ~~Adler, Mason, Swartz, and Pieschel own 23% of the outstanding common stock of National Photo Labs II, Inc. ("NPL II"). NPL II owns one one~~10-~~hour~~13 ~~photo~~are ~~processing~~incorporated ~~store. The store owned~~ by ~~NPL~~reference IIfrom ~~is managed by~~ the ~~Company pursuant~~definitive toproxy astatement ~~management agreement and is operated as a MOTOPHOTO store under a franchise agreement. The management agreement provides~~ for ~~an annual incentive fee based on cash generated. The franchise agreement provides for monthly royalties equal to~~ the ~~greater of 5% of net sales or $1,000. During the year ended December 31, 2000, the~~ Company's ~~received~~2002 ~~from~~annual ~~NPL~~meeting ~~II total revenues~~ of ~~approximately~~shareholders ~~$233,000,~~to ~~including~~be ~~all~~filed ~~royalty~~pursuant ~~and incentive fees paid and revenues derived from the sale by the Company~~ to ~~NPL~~Regulation ~~II of operating supplies and merchandise~~14A. ~~This amount constituted approximately 0.6% of the Company's total revenues.~~

Progressive operates a MOTOPHOTO store under a franchise agreement. During 2000, total revenues derived by the Company from this store, including all royalty and advertising fees paid and revenues derived from the sale of operating supplies and merchandise, were approximately $87,000. This amount constituted approximately 0.2% of the Company's total revenues.
The Company's corporate offices are located at 4444 Lake Center Drive, Dayton, Ohio 45426. The building in which the Company's offices are located is 76% owned by Michael F. Adler, members of Mr. Adler's family, Stephen Adler, and David A. Mason. The Company leases such offices, consisting of approximately 33,000 square feet on approximately 2.4 acres of land, under a lease with an initial term ending June 30, 2009, and two five-year renewal options. The rent is $20,327 per month through June 2004 and $22,374 from July 2004 through June 2009. During 2000, the Company made lease payments totaling $243,924.
In February, 1997, the Company agreed to manage a MOTOPHOTO franchised store owned by W. P. Enterprises, Inc. ("WP"), a corporation owned by Richard Zsambok, the brother-in-law of Michael F. Adler. The management agreement provides for an annual incentive fee based on cash generated and a monthly fee, which supersedes the royalty fee required by the franchise agreement, equal to the greater of 5% of net sales or $1,000. During 2000, total revenues derived by the Company from this store, including all monthly and advertising fees paid and revenues derived from the sale of operating supplies and merchandise, were approximately $72,000. This amount constituted approximately 0.2% of the Company's total revenues.
The foregoing transactions were and all future transactions with or loans to officers, directors, key employees or their affiliates will be approved by a majority of the members of the Board of Directors, or as appropriate, of the Compensation Committee, who were not officers of the Company and/or were not interested in the transaction.
Harry D. Loyle, a director of the Company, is a shareholder, officer, and director in four MOTOPHOTO franchisees: Corral Photographic Corporation, Post Imaging Corporation, KEKOA Management, Inc., and The Positive Negative, Inc. Each such franchisee owns and operates one store under a franchise agreement which provides for a royalty fee of six percent of net retail sales and an advertising fee of one-half percent of net retail sales. During 2000, total revenues derived by the Company from these four stores were approximately $429,000, which constituted approximately 1.2% of the Company's total revenues.
In addition, Mr. Loyle is owner and President of ProMoto Management Corporation ("ProMoto"), which acts as an area developer for the Company pursuant to an area development agreement. As area developer, ProMoto receives a portion of the initial franchise fee as compensation for the recruitment of a franchisee in its area and also receives a portion of the royalty paid to the Company by any franchised store in its area (including the stores owned by the four franchisees named above) as compensation for performing training, marketing, quality control and other services which would otherwise be performed by the Company. During 2000, the Company paid ProMoto fees of approximately $436,000. The terms of the Company's area development agreement with ProMoto are the same as those in the agreements of most of the Company's other area developers.
During 2000, Caroline Zsambok, wife of Michael F. Adler, provided consultation to the Company on training and organizational learning services through her company, Z Research and Consulting ("Z Research"). During 2000, the Company paid Z Research fees of approximately $29,441. The Company has agreed to provide Z Research with an office at the Company's headquarters and limited secretarial support for non-Company work it performs. Z Research compensates the Company for all out-of-pocket eexpenses the Company incurs in providing Z Research with an office and secretarial support.
PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K

The following documents are filed as part of this report:

Financial Statements: See Financial Statements and Schedules immediately following signature page of this report.
Exhibits: See Exhibit Index immediately preceding Exhibits.

Reports on Form 8-K

. The Company filed no reports on Form 8-K during the quarter ended December 31, 2001.

SIGNATURES

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

MOTO PHOTO, INC.

By /s/ ~~David~~ AAlfred E. ~~Mason~~ Lefeld

~~David~~ Alfred AE. ~~Mason~~Lefeld

~~Executive~~ Vice President and CFO

Date: ~~May~~ March ~~2 18~~29, ~~2001~~2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ ~~Michael~~ FLawrence P. ~~Adler~~Destro

March 29, 2002

~~Michael~~Lawrence FP. ~~Adler Chairman~~Destro President, ofChief ~~the Board,~~Executive

Chief Executive

Officer, and Director

(Principal Executive

Officer)

/s/ ~~David~~ AAlfred E. ~~Mason~~ Lefeld

March 29, 2002

~~David~~Alfred AE. ~~Mason Executive~~ Lefeld Vice President and Chief,

Financial Officer, Treasurer, ~~Assistant~~

~~Secretary,~~ And ~~and Director~~Assistant Secretary

(Principal Financial

and Accounting Officer)

/s/ ~~Frank~~ MMichael F. ~~Montano~~Adler

March 29, 2002

~~Frank~~Michael MF. ~~Montano President~~Adler Chairman ~~and~~of ~~Chief~~the ~~Operating~~Board

~~Officer~~ Of Directors

/s/ Frank W. Benson

March 29, 2002

Frank W. Benson Director

/s/ D. Lee Carpenter

D. Lee Carpenter Director

/s/ Leslie Charm

March 29, 2002

Leslie Charm Director

/s/ Dexter B. Dawes

March 27, 2002

Dexter B. Dawes Director

/s/ Harry D. Loyle

March 29, 2002

Harry D. Loyle Director

/s/ David A. Mason

March 29, 2002

David A. Mason Director

/s/ James F. Robeson

March 29, 2002

James F. Robeson Director

/s/ Alfred E. Lefeld
Alfred E. Lefeld Vice President and Controller
(Principal Accounting Officer)
Report of Independent Public Accountants

To the Board of Directors and Stockholders of ~~Moto Photo,~~ ~~Inc.~~

~~We have audited the accompanying consolidated balance sheet of~~ Moto Photo, Inc. and subsidiaries (a Delaware Corporation) as of December 31, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit. The consolidated financial statements of the Company as of December 31, 1999 and for the two years in the period ended December 31, 1999, were audited by other auditors whose report dated February 11, 2000, expressed an unqualified opinion on those statements.

We ~~conducted~~have ~~our~~audited ~~audit~~the inaccompanying ~~accordance~~consolidated ~~with~~balance ~~auditing~~sheets ~~standards~~of ~~generally~~Moto ~~accepted~~Photo, inInc. ~~the~~(a ~~United~~Delaware ~~States. Those~~Corporation) ~~standards~~and ~~require~~subsidiaries ~~that~~as weof ~~plan~~December 31, 2001 and ~~perform~~2000, and the ~~audit~~related toconsolidated ~~obtain~~statements ~~reasonable~~of ~~assurance~~operations, ~~about~~stockholders' ~~whether~~equity (deficit) and cash flows for the years then ended. These consolidated financial statements are ~~free~~ the responsibility of ~~material~~the ~~misstatement~~Company's management. AnOur ~~audit~~responsibility ~~includes~~is ~~examining,~~to onexpress aan ~~test~~opinion ~~basis,~~on ~~evidence~~these ~~supporting~~consolidated ~~the~~financial ~~amounts~~statements ~~and~~based ~~disclosures~~on inour ~~the financial statements~~audits. AnThe ~~audit~~consolidated ~~also~~financial ~~includes~~statements ~~assessing~~of the ~~accounting~~Company ~~principles~~for ~~used~~the ~~and~~year ~~significant~~ended ~~estimates~~December ~~made~~31, ~~by management~~1999, aswere ~~well~~audited asby ~~evaluating~~other ~~the~~auditors ~~overall~~whose ~~financial~~report ~~statement~~dated ~~presentation. We~~February ~~believe~~11, ~~that~~2000, ~~our~~expressed ~~audit~~an ~~provides~~unqualified aopinion ~~reasonable~~on ~~basis~~those ~~for our opinion~~statements.

InWe conducted our ~~opinion,~~audits in accordance with auditing standards generally accepted in the ~~financial~~United ~~statements~~States. Those ~~referred~~standards torequire ~~above~~that ~~present~~we ~~fairly,~~plan inand ~~all~~perform ~~material~~the ~~respects,~~audits to obtain reasonable assurance about whether the consolidated financial ~~position~~statements ofare ~~Moto~~free ~~Photo,~~of ~~Inc~~material misstatement. An ~~and~~audit ~~subsidiaries~~includes asexamining, ofon ~~December~~a ~~31,~~test ~~2000~~basis, evidence supporting the amounts and disclosures in the ~~results~~consolidated offinancial ~~their~~statements. An ~~operations~~audit also includes assessing the accounting principles used and ~~their cash~~significant ~~flows~~estimates ~~for~~made by management, as well as evaluating the ~~year~~overall ~~then~~financial ~~ended~~statement inpresentation. We ~~conformity~~believe ~~with~~that ~~accounting~~our ~~principles~~audits ~~generally~~provide ~~accepted~~a inreasonable ~~the~~basis ~~United~~for ~~States~~our opinion.

~~The~~In ~~accompanying~~our ~~financial~~opinion, ~~statements have been prepared assuming that~~ the ~~Company~~consolidated ~~will~~financial ~~continue~~statements asreferred ato ~~going~~above ~~concern. As~~present ~~discussed~~fairly, in ~~Note~~all Cmaterial torespects, the financial ~~statements,~~position ~~the~~of ~~Company~~Moto ~~has suffered losses from continuing operations in the current year~~Photo, ~~has~~Inc. ~~negative~~and ~~working~~subsidiaries ~~capital~~as atof December 31, 2001 and 2000, and isthe inresults ~~default~~ of ~~several covenants in~~ their ~~borrowing~~operations ~~arrangements~~and ~~with both~~ their ~~primary~~cash ~~bank~~flows ~~and~~for athe ~~major~~years ~~vendor~~then ~~that~~ended ~~raises substantial doubt about its ability to continue as a going concern. Management's plans~~ in ~~regard~~conformity towith ~~these~~accounting ~~matters~~principles ~~are~~generally ~~also~~accepted ~~described~~ in ~~Note C. The financial statements do not include any adjustments relating to~~ the ~~recoverability~~United ~~and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern~~States.

~~Our~~The ~~audit~~accompanying ~~was~~consolidated ~~made~~financial ~~for~~statements ~~the~~have ~~purpose~~been ofprepared ~~forming~~assuming anthat ~~opinion on~~ the ~~basic~~Company ~~financial~~will ~~statements~~continue ~~taken~~ as a ~~whole~~going concern. ~~The~~As ~~schedule~~discussed ~~listed~~ in ~~the~~Note ~~index~~C ofto the financial statements, isthe ~~presented~~Company ~~for~~has ~~purposes~~suffered oflosses ~~complying~~from ~~with~~continuing operations in the ~~Securities~~current year, has negative working capital and ~~Exchange~~ ~~Commission's~~negative ~~rules~~equity at December 31, 2001, and is ~~not~~in ~~part~~default of ~~the~~several ~~basic~~covenants ~~financial~~in ~~statements. This~~their ~~schedule~~borrowing ~~has~~arrangements ~~been~~with ~~subjected~~both their primary bank and a major vendor that raises substantial doubt about its ability to ~~the~~continue ~~auditing~~as ~~procedures~~a ~~applied~~going concern. Management's plans in ~~the~~regard ~~audit~~to ofthese ~~the~~matters ~~basic~~are also described in Note C. The financial statements ~~and,~~do innot ~~our~~include ~~opinion,~~any ~~fairly~~adjustments ~~states~~relating into ~~all~~the ~~material~~recoverability ~~respects the~~and ~~financial~~classification ~~data~~of ~~required~~asset tocarrying beamounts ~~set~~or ~~forth~~the ~~therein~~amount inand ~~relation~~classification toof liabilities that might result should the ~~basic~~Company ~~financial~~be ~~statements~~unable ~~taken~~to continue as a ~~whole~~going concern.

/s/ Arthur Andersen LLP

~~ARTHUR~~Arthur ~~ANDERSEN~~Andersen LLP

~~Dayton~~Cincinnati, Ohio

~~May~~March 218, ~~2001~~2002

Report of Independent Auditors

The Board of Directors and Stockholders

Moto Photo, Inc.

We have audited the accompanying consolidated balance sheet of Moto Photo, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for ~~each of~~ the ~~two~~year ~~years in~~then ~~the period~~ ended ~~December 31, 1999~~. Our ~~audits~~audit also included the financial statement schedules listed in the Index at Item 14(a) as of December 31, 1999 and for ~~each of~~ the ~~two~~year ~~years~~then ~~in the period~~ ended ~~December 31, 1999~~. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our ~~audits~~audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Moto Photo, Inc. and subsidiaries at December 31, 1999, and the consolidated results of their operations and their cash flows for ~~each of~~ the ~~two~~year ~~years~~then ~~in the period~~ ended ~~December 31~~, ~~1999,~~ in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Ernst & Young LLP

Dayton, Ohio

February 11, 2000

Report of Independent Auditors - ESTIMATED
The Board of Directors and Stockholders
Moto Photo, Inc.
We have audited the accompanying consolidated balance sheets of Moto Photo, Inc. and subsidiaries (the "Company") as of December 31, 2000, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note xxx, the Company's failure to reach satisfactory agreement with its primary supplier on a number of key issues, including the principal payment on a $2.1 million term note that was not made as required on April 1, 2001, and the 2000 loss from operations and negative working capital raise doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note XX. The financial statements do not include adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Ernst & Young LLP
Dayton, Ohio
February 11, 2000
Moto Photo, Inc. and Subsidiaries

Consolidated Balance Sheets

	December 31,
	2000	1999
	2001	2000
Assets
Current Assets:
Cash	$ 1,~~504~~372,~~233~~657	$ 31,~~953~~504,~~375~~233
Accounts receivable, less allowances of $822,000 in 2000 and $636,000 in 1999	3,475,782	4,015,690
Accounts receivable, less allowances of $858,000 in 2001 and $822,000 in 2000	2,541,825	3,475,782
Notes receivable, less allowances of $41,000 in 2000 and $89,000 in 1999	190,669	281,669
Notes receivable, less allowances of $18,000 in 2001 and $41,000 in 2000	73,000	190,669
Inventory	1,~~875~~014,~~500~~729	21,~~381~~875,~~148~~500
Income taxes receivable	~~240,784~~-	~~390~~240,~~000~~784
Deferred tax assets	-	1,063,000
Deferred club costs	111,000	160,305
Deferred club costs	160,305	167,204
Prepaid expenses	25,782	218,817
Prepaid expenses	218,817	276,777
Total current assets	5,138,993	7,666,090
Total current assets	7,666,090	12,528,863
Property and equipment, net	660,237	4,955,205
Property and equipment, net	4,955,205	5,315,573
Assets held for sale	1,496,000	-
Other assets:
Notes receivable, less allowances of $1,861,000 in 2000 and $1,536,000 in 1999	671,282	1,393,440
Notes receivable, less allowances of $1,840,000 in 2001 and $1,861,000 in 2000	269,960	671,282
Cost of franchises and contract acquired	8653,~~424~~381	~~120~~86,~~293~~424
Goodwill, net	~~3,282,415~~-	3,~~635~~282,~~596~~415
Deferred tax assets	-	130,000
Other assets	84,653	754,470
Other assets	754,470	960,253
Total assets	$ 7,703,224	$ 17,415,886
Total assets	$ 17,415,886	$ 24,084,018

See accompanying notes.
Moto Photo, Inc. and Subsidiaries
Consolidated Balance Sheets, continued

	December 31,
	2000	1999
	2001	2000
Liabilities and stockholders' equity
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable	$1 4,~~628~~739,~~098~~305	$3 1,~~725~~628,~~527~~098
Accrued payroll and benefits	~~964~~876,~~735~~122	~~736~~964,~~771~~735
Accrued expenses	~~888~~881,~~314~~100	~~903~~888,~~125~~314
Current portion of long-term obligations	5,644,600	2,403,000
Accrued restructuring expenses	727,000	-
Deferred club revenue	275,231	277,748
Current portion of long-term obligations	4,808,050	5,644,600
Other	132,580	243,730
Deferred club revenue	264,536	275,231
Total current liabilities	9,533,558	8,289,901
Other	105,450	132,580
Long-term debt	5,272,046	9,498,069
Total current liabilities	12,401,563	9,533,558
Capitalized leases	19,058	539,256
Long-term debt	290,743	5,272,046
Total liabilities	14,824,662	18,327,226
Capital lease obligations, less current portion	59,929	19,058
Deferred compensation, less current portion	645,250	-
Deferred income	666,671	-
Total liabilities	14,064,156	14,824,662
Commitments and contingencies	-	-
Stockholders' equity:
Stockholders' equity (deficit):
Preferred stock $.01 par value:
Authorized shares - 2,000,000:
Amended Series G cumulative nonvoting preferred shares, 1,000,000 shares issued and outstanding with preferences aggregating $10,000,000	10,000	10,000
Common shares $.01 par value:
Authorized shares - 31,000,000
Issued and outstanding shares - 7,884,565 in 2000 and 1999	78,845	78,845
Issued and outstanding shares - 7,884,565 in 2001 and 2000	78,845	78,845
Treasury stock - 101,551 shares in 2000 and 151,294 shares in 1999, at par	(1,016)	(1,513)
Treasury stock - 1,227 shares in 2001 and 101,551 shares in 2000, at par	(12)	(1,016)
Paid-in capital	67,~~818~~653,~~059~~102	6,~~030~~818,~~523~~059
Accumulated d(Deficit) retained earnings subsequent to June 30, 1991	(4,314,664)	(361,063)
Accumulated deficit subsequent to June 30, 1991	(14,102,867)	(4,314,664)
Total stockholders' equity	2,591,224	5,756,792
Total stockholders' equity (deficit)	(6,360,932)	2,591,224
Total liabilities and stockholders' equity	$17,415,886	$24,084,018
Total liabilities and stockholders' equity (deficit)	$ 7,703,224	$ 17,415,886

See accompanying notes.

Moto Photo, Inc. and Subsidiaries
Consolidated Statements of Operations

	Years Ended December 31,
	2000	1999	1998
	2001	2000	1999
Revenues
Sales and other revenue	$3630,~~227~~458,~~700~~728	$36,~~803~~227,~~388~~700	$3736,~~139~~803,~~096~~388
Interest income	~~223~~130,~~235~~499	~~258~~223,~~067~~235	~~413~~258,~~087~~067
Other income	-	-	112,000
	30,589,227	36,450,935	37,061,455
	36,450,935	37,061,455	37,664,183
Expenses
Cost of sales and operating expenses	2724,~~897~~054,~~611~~346	2627,~~942~~897,~~025~~611	26,~~872~~942,~~589~~025
Selling, general, and administrative expenses	76,~~291~~281,~~675~~459	57,~~794~~291,~~632~~675	65,~~733~~794,~~132~~632
Advertising expense	1809,~~438,030~~343	1,~~324~~438,~~990~~030	1,~~300~~324,~~988~~990
Depreciation and amortization	1,~~499~~413,~~493~~603	1,~~269~~499,~~909~~493	1,~~015~~269,~~611~~909
Interest expense	~~528~~408,~~787~~036	~~479~~528,~~356~~787	~~411~~479,~~610~~356
	38,655,596	35,810,912	36,333,930
Restructuring charge	6,588,978	-	-
Income (loss) before income taxes	(2,204,661)	1,250,543	1,330,253
	39,555,765	38,655,596	35,810,912
Income (loss) before income taxes	(8,966,538)	(2,204,661)	1,250,543
Income tax benefit (expense):
Current	~~197,000~~-	~~480~~197,000	~~172~~480,000
Deferred	~~(1,193,000)~~-	(771,193,000)	~~188~~(77,000)
	(996,000)	403,000	360,000
	-	(996,000)	403,000
Net income (loss)	(38,~~200~~966,~~661~~538)	1(3,~~653~~200,~~543~~661)	1,~~690~~653,~~253~~543
Preferred stock dividend accretion or requirement	(~~732~~821,~~772~~665)	(~~265~~732,~~111~~772)	(~~274~~265,~~562~~111)
Net income (loss) applicable to common shares	$(39,~~933~~788,~~433~~203)	$1(3,~~388~~933,~~432~~433)	$1,~~415~~388,~~691~~432
Net income (loss) per common shares - basic	$ (01.5125)	$ (0.1851)	$ 0.18
Net income (loss) per common share - diluted	$ (01.5125)	$ (0.1251)	$ 0.1812

See accompanying notes.
Moto Photo, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity (Deficit)

		Amended Series G Preferred Stock						Common Stock							Treasury Stock						Paid-in		Accumulated
			(Series G through 1998)		Common Stock				Treasury Stock				Paid-in		(Deficit) Retained
			Shares		Amount				Shares			Amount				Shares			Amount		Capital		Deficit		Total
	Shares			Amount		Shares	Amount			Shares	Amount			Capital		Earnings	Total
Balance at December 31, 1998	1,000,000			10,000			7,833,573				78,336			-				-		6,404,734		(1,572,164)		4,920,906
Balance at December 31, 1997	1,000,000			$ 10,000		7,802,973	$ 78,030			-	$ -			$ 6,670,981		$ (2,987,855)	$ 3,771,156
Common stock issued							50,955				509									60,678				61,187
Common stock issued						30,600	306							59,191			59,497
Treasury shares repurchased														(151,294)				(1,513)				(177,331)		(178,844)
Preferred stock dividend requirement														(325,438)		(274,562)	(600,000)
Preferred stock dividend paid																				(434,889)		(265,111)		(700,000)
Net income																~~1,690,253~~	~~1,690,253~~					1,653,543		1,653,543
Balance at December 31, 1998	1,000,000			10,000		7,833,573	78,336			-	-			6,404,734		(1,572,164)	4,920,906
Balance at December 31, 1999	1,000,000			10,000			7,884,528				78,845			(151,294)				(1,513)		6,030,523		(361,063)		5,756,792
Common stock issued						50,955	509							60,678			61,187
Treasury shares repurchased														(22,600)				(226)				(20,168)		(20,394)
Treasury shares repurchased										(151,294)	(1,513)					(177,331)	(178,844)
Treasury shares issued														72,343				723		53,351				54,074
Preferred stock dividend requirement														(434,889)		(265,111)	(700,000)
Preferred stock dividend accretion																				732,772		(732,772)		-
Net income																1,653,543	1,653,543
Contributed capital																				1,413				1,413
Balance at December 31, 1999	1,000,000			10,000		7,884,528	78,845			(151,294)	(1,513)			6,030,523		(361,063)	5,756,792
Net loss																						(3,200,661)		(3,200,661)
Treasury shares repurchased										(22,600)	(226)					(20,168)	(20,394)
Balance at December 31, 2000	1,000,000			$10,000			7,884,528				$78,845			(101,551)				$(1,016)		$6,818,059		$ (4,314,664)		$2,591,224
Treasury shares issued										~~72,343~~	~~723~~			53100,~~351~~324			~~54,074~~	1,004		13,378				14,382
Preferred stock dividend accretion														~~732,772~~		~~(732,772)~~	-			821,665		(821,665)		-
Contributed capital														1,413			1,413
Net loss																						(8,966,538)		(8,966,538)
Net loss																(3,200,661)	(13,871200,661661)
Balance at December 31, 2001	1,000,000			$10,000			7,884,528				$78,845			(1,227)				$(12)		$7,653,102		$ (14,102,867)		$(6,360,932)
Balance at December 31, 2000	1,000,000			$ 10,000		7,884,528	$ 78,845			(101,551)	$ (1,016)			$ 6,818,059		$ (4,314,664)	$ 2,591,224

See accompanying notes
Moto Photo, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

	Year s eEnded December 31,
	Years Ended December 31,
	2000	1999	1998
	2001	2000	1999
Operating activities
Net income (loss)	$ (38,~~200~~966,~~661~~538)	$ 1(3,~~653~~200,~~543~~661)	$ 1,~~690~~653,~~253~~543
Adjustments to reconcile to net cash provided by (utilized in ) operating activities:
Depreciation and amortization	1,~~499~~413,~~493~~603	1,~~269~~499,~~909~~493	1,~~015~~269,~~611~~909
Provision for losses on inventory and receivables	~~425~~1,~~998~~215,012	~~(322~~425,~~000)~~998	~~543~~(322,~~031~~000)
Notes receivable increases as a result of franchise activities	(54108,~~816~~551)	(2054,~~000~~816)	(1720,~~422~~000)
Gain on short term bond trade	-	~~(474,610)~~-	-(474,610)
Loss on sale of store	-	~~3,962~~-	~~646~~3,962
Loss on write-downs and disposition of assets	816,028	99,218	354,682
Asset write-down charges	5,637,336	816,028	99,218
Noncash directors fees expense	5414,~~075~~381	6154,~~187~~075	3761,~~622~~187
Deferred taxes	~~1,193,000~~-	771,193,000	~~(188~~77,000)
Increase (decrease) resulting from changes in (other than changes resulting from acquisitions):
Accounts receivable	~~336~~75,~~965~~203	~~545~~336,~~655~~965	~~(678~~545,~~631)~~655
Inventory, prepaid expenses and deferred club costs	~~599~~955,~~507~~110	38599,~~832~~507	(138,~~241,275)~~832
Income tax receivable	~~149~~240,~~216~~784	~~(390~~149,~~000)~~216	-(390,000)
Accounts payable, accrued payroll, benefits, and accrued expenses	(2257,~~149,278~~620)	~~545~~(2,~~515~~149,278)	~~266~~545,~~076~~515
Deferred revenue and other liabilities	~~(113~~1,~~666)~~473,846	(55113,~~700~~666)	~~109~~(55,~~656~~700)
Net cash provided by (utilized in) operating activities	~~(444~~1,~~139)~~692,566	3(444,~~032,511~~139)	13,~~892~~032,~~249~~511
Investing activities
Purchases of property and equipment	(~~457~~217,~~380~~177)	(2457,~~048,237~~380)	(12,~~368~~048,~~316~~237)
Acquisition of company stores	-	~~(341,700)~~-	-(341,700)
Issue notes receivable	-	~~(153,478)~~-	-(153,478)
Payments received on notes receivable	~~894~~279,~~383~~284	~~781~~894,~~179~~383	~~643~~781,~~253~~179
Other assets	242,~~244~~517	(924,~~236)~~244	(~~241~~9,~~113~~236)
Proceeds from sale of property and equipment	-	~~40,512~~-	6140,~~000~~512
Purchase of U.S. Treasury Bond investments	-	~~(75,011,718)~~-	-(75,011,718)
Sale of U.S. Treasury Bond investments	-	~~75,486,328~~-	-75,486,328
Net cash provided by (utilized in) investing activities	~~461~~64,~~247~~624	(1461,~~256,350)~~247	(~~905~~1,~~176~~256,350)
Financing activities
Proceeds from long-term borrowing	~~292,806~~-	1292,~~680,320~~806	1,~~250~~680,~~000~~320
Principal payments on long-term debt and capital lease obligations	(21,~~740~~888,~~075~~766)	(12,~~542~~740,~~658~~075)	(1,~~879~~542,~~804~~658)
Payments of preferred dividends	-	~~(700,000)~~-	(~~600~~700,000)
Purchase of common shares for treasury stock	~~(20,394)~~-	(~~178~~20,~~844~~394)	-(178,844)
Contributed capital	~~1,413~~-	-1,413	-
Common shares issued	-	-	21,875
Net cash utilized in financing activities	(1,888,766)	(2,466,250)	(741,182)
Net cash utilized in financing activities	(2,466,250)	(741,182)	(1,207,929)
Increase (decrease) in cash	(131,576)	(2,449,142)	1,034,979
Increase (decrease) increase in cash	(2,449,142)	1,034,979	(220,856)
Cash at beginning of year	1,504,233	3,953,375	2,918,396
Cash at beginning of year	3,953,375	2,918,396	3,139,252
Cash at end of year	$ 1,372,657	$ 1,504,233	$ 3,953,375
Cash at end of year	$ 1,504,233	$ 3,953,375	$ 2,918,396

See accompanying notes.

Moto Photo, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

A. The Company

Moto Photo, Inc. and its subsidiaries ("the Company") is engaged in the franchising and ownership of stores offering one-hour processing services, portrait and related imaging services and merchandise under the trade names and service marks of "ONE HOUR MOTOPHOTO", "MOTOPHOTO" and "ONE HOUR MOTOPHOTO & Portrait Studio" and related marks.

At December 31, ~~2000~~2001, the ~~370~~337 stores of the MOTOPHOTO system included ~~290~~270 franchise stores in the United States, 4232 company stores in the United States and 3835 franchise stores in Canada. ~~During~~In ~~2000,~~ the ~~Company~~United ~~awarded~~States, 15during ~~franchises~~2001, ~~including~~ ~~three~~the ~~conversions~~Company ofawarded ~~independent~~eight ~~stores~~franchises toand ~~franchises,~~closed ~~opened~~26 orfranchised ~~acquired~~and four company stores. In Canada, ~~allowed~~one ~~the~~franchise ~~terminated~~was ~~the~~awarded ~~Norway~~and ~~affiliate~~four ~~program~~franchised ~~relating tocovering 47~~ stores towere ~~expire, and~~ closed ~~18 franchise and six company stores~~.

B. Summary of Significant Accounting Policies

The following is a summary of the Company's significant accounting policies used in the preparation of the accompanying consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Moto Photo, Inc., and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Accounts and Notes Receivable

Accounts and notes receivable are composed primarily of accounts and notes due from various franchisees. The notes receivable carry interest rates which approximate the prevailing interest rate at the time of the notes ~~receivable~~ inception. The carrying value of each account and note receivable is evaluated to determine if facts and circumstances suggest the receivable has become impaired. IfInterest ~~the~~income ~~review~~on ~~indicates~~accounts ~~that a note has become impaired as determined by an analysis of creditworthiness~~ and ~~payment~~notes ~~history,~~receivable ~~interest income on that note~~ is not recognized unless collected. During ~~2000~~2001 and ~~1999~~2000, approximately $~~300~~69,000 and $~~225~~300,000, respectively, were transferred to notes receivable from accounts receivable. The carrying value of all accounts and notes receivable approximates fair value.

Inventory

Inventory is valued at the lower of cost or market. Cost is determined using the first in, first out method. Inventory is shown net of allowances of $8290,000 in ~~2000~~2001 and $~~111~~82,000 in ~~1999~~2000.

Property and Equipment

The cost of equipment and leasehold improvements is capitalized. Maintenance and repairs are charged to expense as incurred while betterments and renewals are capitalized. When equipment is retired or sold, the cost and applicable accumulated depreciation are removed from the respective accounts and the resulting gain or loss is recorded in operations.

Property and equipment, including capitalized leases, are depreciated or amortized by the straight-line method over the estimated useful lives, primarily up to ~~eight~~seven years for processing equipment, up to five years for furniture, fixtures, and automobiles, ~~and~~ up to three years for software and hardware, and over the lesser of the remaining term of the lease or the lives of ~~the~~ leasehold improvements.

During the fourth quarter of 2001, the assets of 33 company stores were reduced to net realizable value. The asset impairment loss was determined based upon independent appraisals for certain locations, in conjunction with estimated cash flow multiples, discounted cash flows, and management's estimates. The assets are considered held for sale and, as such, will not be depreciated subsequent to 2001. See Note D to the Consolidated Financial Statements.

Cost of Franchises and Contract Acquired

Franchises and contract acquired are valued at cost and are amortized by the straight-line method over the term of the agreement. These costs are shown net of accumulated amortization of $~~759~~790,~~477~~819 in ~~2000~~2001 and $~~715~~759,~~679~~477 in ~~1999~~2000.

Long-Lived Assets

The carrying value of long-lived assets, including goodwill, property and equipment related to company stores, is reviewed if the facts and circumstances suggest that it may be permanently impaired. If this review indicates that the asset will not be recoverable, as determined by the undiscounted cash flows of the store(s) over the remaining amortization period, the Company's carrying value of the asset is adjusted to its estimated fair value. When a decision is made to dispose of a store through sale or closure, the Company's carrying value of the store, including goodwill, is adjusted to its estimated fair value less costs to sell (see Note D to the Consolidated Financial Statements).

Assets Held for Sale

During the fourth quarter of 2001, the assets of 33 company stores were reduced to net realizable value, as the Company announced its intention of franchising, selling or closing substantially all its company stores, except for the stores the Company operates in the Dayton, Ohio area. The asset impairment loss was determined based upon independent appraisals for certain locations, in conjunction with estimated cash flow multiples, discounted cash flows, and management's estimates. The assets are considered held for sale and, as such, will not be depreciated subsequent to 2001 (see Note D to the Consolidated Financial Statements). The amount of assets held for sale at December 31, 2001 was $1,496,000.

Goodwill

The excess of the cost over the fair value of the net assets of stores purchased is recorded as goodwill and has been amortized on a straight-line basis not to exceed 40 years. Goodwill recorded after January 1, 1999 ishas ~~being~~been amortized over a period not to exceed 15 years. Goodwill is shown net of accumulated amortization of $21,~~078~~571,~~155~~549 in ~~2000~~2001 and $2,~~035~~078,~~497~~155 in ~~1999~~2000, and net of a valuation allowance of $3,725,959 in 2001 and $2,243,091 in 2000. The ~~and~~valuation allowance recorded in 2001 was due to the Company's analysis of fair market value of all the assets, including goodwill, for substantially all company stores that were announced as being held for sale (see Note D to the Consolidated Financial Statements). In addition, $2982,~~387~~894 was written off during 2001 in connection with the franchising of certain company stores,~~298~~ resulting in ~~1999~~no net balance for goodwill as of December 31, 2001. There will be no amortization expense subsequent to 2001.

~~Long~~Non-~~lived~~Compete ~~Assets~~Agreements

The ~~carrying~~Company ~~value~~amortizes ~~of long~~non-~~lived~~compete ~~assets,~~agreements ~~including~~by ~~goodwill and property, plant and equipment related to operating stores is reviewed if~~ the ~~facts~~straight-line ~~and~~method ~~circumstances~~over ~~suggest that it may be permanently impaired. If this review indicates that goodwill will not be recoverable, as determined by~~ the ~~undiscounted~~life ~~cash flows~~ of the ~~store(s)~~contract. The ~~over the~~ remaining ~~amortization~~net ~~period,~~book ~~the Company's carrying~~ value of ~~the~~$571,542 ~~goodwill~~for isthe ~~adjusted~~non-compete toagreements ~~its~~was ~~estimated~~written ~~fair~~off ~~value. When~~in aconnection ~~decision~~with isthe ~~made~~franchising ~~to dispose~~ of acertain ~~store~~company ~~through~~stores ~~sale~~during ~~or closure,~~ the ~~Company's~~fourth ~~carrying~~quarter ~~value~~ of ~~the store, including goodwill, is adjusted to its estimated fair value less costs to sell~~2001.

Non-Ccompete Agreements
The Company amortizes non-compete agreements by the straight-line method over the life of the contract.
Revenue Recognition

Franchise fees are recognized as revenue when substantially all services and conditions relating to the granting of the franchise have been performed or satisfied. Revenue from territorial development fees is deferred and recognized as stores are opened within the development area. Royalty and company-owned store revenue is recognized as sales are made. Revenue from the sale of CLUBMOTO membership plans is deferred and recognized over the 12-month life of the plan. Merchandise revenue generated from wholesale is recognized when the goods are shipped.

~~store~~In ~~revenue~~the isfourth ~~recognized~~quarter asof ~~sales~~2000, ~~are~~the ~~made. Revenue~~Company ~~from~~adopted the ~~sale~~Securities ofand ~~CLUBMOTO~~Exchange ~~membership~~Commission ~~plans~~Staff isAccounting ~~deferred~~Bulletin ~~and~~No. ~~recognized~~101, ~~over~~"Revenue ~~the~~Recognition ~~12-month~~in ~~life~~Financial ~~of the plan~~Statements". ~~Merchandise~~This ~~revenue~~bulletin isrequires, ~~recognized~~among ~~when~~other things, the ~~goods~~following: ~~are~~that ~~shipped.~~membership Infees ~~1998, the~~be ~~Company's~~deferred ~~master~~and ~~licensor~~earned ~~for~~over the ~~province~~life of ~~Ontario,~~the ~~Canada,~~membership ~~signed~~term; athat ~~new~~direct, ~~master~~incremental ~~license~~costs ~~agreement~~may ~~for~~be deferred over the ~~development~~membership ofterm; ~~franchises~~and ~~throughout~~additional ~~Canada~~footnote disclosure. ~~The~~All ~~Company~~prior ~~recognized~~reporting ~~$100,000~~periods inhave ~~1998~~been ~~for~~reclassified ~~the~~to ~~sale~~reflect ofthis ~~these~~change. See ~~rights~~Notes G and R to the Consolidated Financial Statements.

In the fourth quarter of 2000 the Company also adopted ~~the~~Emerging ~~Securities~~Issues ~~and~~Task ~~Exchange~~Force ~~Commission~~Issue ~~Staff~~00-10, "Accounting ~~Bulletin~~for ~~No.~~Shipping ~~101~~and ~~"Revenue~~Handling ~~Recognition~~Revenues inand ~~Financial Statements~~Costs," ~~("SAB~~which ~~101"). This bulletin~~ requires, among other things:, that ~~membership~~ ~~fees~~shipping becosts ~~deferred~~paid ~~and~~by ~~earned~~customers ~~over~~be ~~the~~reported ~~life~~as ofrevenues ~~the~~rather ~~membership~~than ~~term;~~as ~~that~~reduction ~~direct,~~of ~~incremental~~ costs. ~~may~~There beis ~~deferred~~no ~~over~~impact ~~the~~to ~~membership~~net ~~term;~~earnings ~~and~~as ~~additional~~a ~~footnote~~result ~~disclosure. All~~of this new standard, and prior ~~reporting~~year ~~periods~~financial statements have been reclassified to reflect this change. ~~. The~~See ~~effect~~Note ofR ~~this bulletin was immaterial on the financial results of the Company S(see Notes F and Q~~ to the Consolidated Financial Statements). ~~All prior reporting periods have been restated to reflect this reclassification.~~

The Company also adopted in the fourth quarter of 2000 Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Revenues and Costs", which requires, among other things, that shipping costs paid by customers be reported as revenues rather than reduction of costs. There is no impact to net earnings as a result of this new standard, and prior year financial statements have been restatedclassified to reflect this changereclassification. See Notes F and Q to the Consolidated Financial Statements.
Pre-Opening Costs

Costs incurred in connection with the opening of new stores are expensed as incurred.

401(k) Salary Savings Plan

The Company sponsors a 401(k) salary savings plan covering all employees who meet certain eligibility requirements. The Company makes partial matching contributions to the Plan~~. Additionally,~~ ~~the~~in ~~Company~~either ~~may~~cash ~~make~~or ~~discretionary contributions,~~by ~~which~~using ~~are~~participant ~~subject~~forfeitures. These toPlan ~~the~~forfeiture ~~approval~~amounts ofare the ~~Board~~unvested ofCompany ~~Directors~~matching contributions when an employee terminates employment. ~~This~~The Company's expense related to this Plan was $14,177 in 2001, $99,179 in 2000, and $95,635 in 1999. For 2001, ~~and~~the amount of the Company's Plan expense was reduced by approximately $9485,~~793~~058 inas ~~1998~~a result of using Plan participant forfeitures. Additionally, the Company may make discretionary contributions, which are subject to the approval of the Board of Directors.

Stock-Based Compensation

The Company accounts for stock-based compensation under the principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock ~~iIssued~~Issued to Employees" (APB 25), and related Interpretations. When stock options are exercised, the proceeds increase stockholders' equity.

Income Taxes

The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using tax rates and laws expected to be in effect when the differences are expected to reverse. Valuation allowances are provided against deferred tax assets ~~for~~when ~~which~~ it is "more likely than not" the assets will not be realized. The valuation allowance was increased to $36.56 million in 2001 as a result of the uncertainty of the recoverability of such tax benefits (see ~~Note~~Notes C and L to the Consolidated Financial Statements).

Supplemental Non-Cash Investing and Financing Cash Flow Information

Noncash items for ~~2000~~2001 included $~~684~~95,~~151~~636 of capital expenditures for ~~the~~ company ~~store~~stores ~~segment~~ from entering into capitalized leases ~~and from the trade-in of equipment~~. Noncash expense for directors fees for ~~2000~~2001 was $5414,~~075~~382. ~~In 1999,~~Noncash ~~the~~proceeds ~~Company~~from ~~made~~the ~~$559,658~~sale of ~~capital~~certain ~~expenditures~~company bystores ~~entering~~in ~~into~~2001 ~~capitalized~~was ~~lease~~approximately ~~transactions for~~ $~~459~~297,~~658~~000, ~~assuming~~comprised aof ~~$60,000~~an ~~note~~assumption inof ~~connection~~a ~~with~~lease anliability ~~acquisition~~of ~~and~~approximately $40212,000 byand ~~transfer~~a ~~from~~note ~~other~~receivable ~~assets~~of approximately $85,000. In ~~1999~~2000, ~~capital~~the ~~expenditures~~Company of made $~~186~~684,~~500~~151 inof ~~cash~~capital ~~were~~expenditures ~~made~~by inentering ~~connection~~into ~~with~~capitalized ~~acquisitions~~lease oftransactions ~~stores~~and ~~(see~~from ~~Note O to~~ the ~~Consolidated~~trade-in ~~Financial~~of ~~Statements)~~equipment. ~~Additionally,~~Noncash inexpense ~~1999,~~for ~~the~~directors ~~Company~~fees ~~transferred~~for ~~$1,515,000~~2000 ~~from~~was ~~a revolving credit agreement and~~ $154,~~185,004 from accounts payable to a $2,700,004 note payable~~074.

Advertising

Advertising costs are charged to expense on the first showing of the advertisement. The Company had no prepaid advertising costs at December 31, ~~2000~~2001 or ~~1999~~2000.

Net Income (Loss) Per Common Share - Basic and Diluted

Basic income (loss) per common share is based on the weighted-average number of common shares outstanding during the respective period. Diluted income (loss) per common share is based on the weighted-average number of common shares outstanding adjusted to include the effects of potentially dilutive stock options and other common stock equivalents.

	2000	1999	1998
	2001	2000	1999
Numerator:
Net income	$ (3,200,661)	$ 1,653,543	$ 1,690,253
Net income (loss)	$ (8,966,538)	$ (3,200,661)	$ 1,653,543
Preferred stock dividend requirement	(~~732~~821,~~772~~665)	(~~265~~732,~~111~~772)	(~~274~~265,~~562~~111)
Numerator for basic earnings (loss) per share-income available to common shareholders	(3,933,433)	1,388,432	1,415,691
Numerator for basic earnings (loss) per share available to common shareholders	(9,788,203)	(3,933,433)	1,388,432
Effect of dilutive securities:
Series G preferred dividend requirement	-	700,000	-
Series G preferred stock dividend requirement	-	-	700,000
Numerator for diluted earnings (loss) per share-income available to common stockholders after effect of dilutive securities	$ (3,933,433)	$ 2,088,432	$ 1,415,691
Numerator for diluted earnings (loss) per share available to common stockholders	$ (9,788,203)	$ (3,933,433)	$ 2,088,432
Denominator:
Denominator for basic earnings (loss) per share-: weighted-average share outstanding	7,747,567	7,814,063	7,816,165
Denominator for basic earnings (loss) per share: weighted-average shares outstanding	7,830,477	7,747,567	7,814,063
Effect of dilutive securities:
Employee stock options	-	~~4,348~~-	~~115~~4,~~245~~348
Convertible Series G preferred	-	9,517,030	-
Convertible Series G preferred stock	-	-	9,517,030
Denominator for diluted earnings (loss) per share: --adjusted weighted-average shares and dilutive securities	7,747,567	17,335,441	7,931,410
Denominator for diluted earnings (loss) per share: adjusted weighted-average shares and dilutive securities	7,830,477	7,747,567	17,335,441

Stores for ~~Resale~~Sale

~~Certain~~Most of the company stores are offered for sale as franchises (see Note D to the Consolidated Financial Statements). The Company generally cannot identify when or if such transactions will occur. Consequently, until a store is franchised or sold, sales, results of operations, and related assets and liabilities are included with those of the company stores in the respective line items in the financial statements. ~~The~~Assets ~~Company~~of ~~sold no~~ stores inoffered ~~2000~~for ~~and~~sale ~~one~~have ~~store~~been inreduced ~~each~~to ofnet ~~1999~~realizable value and ~~1998~~will not be depreciated subsequent to 2001. The Company sold

seven stores as franchises in 2001 and no stores in 2000.

Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the decision-making group in deciding how to allocate resources. The Company has eight business units. The business units have been aggregated into four operating segments with each segment representing a strategic segment that offers different products and services. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain amounts from prior years have been reclassified to conform to the presentation used in ~~2000~~2001.

C. Going Concern and Other Matters

The accompanying consolidated financial statements have been prepared on a going concern basis of accounting for the years 2000 and 2001, and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company expects to generate sufficient cash to meet its obligations ~~as they come due~~, assuming the Company's debt payments are not accelerated~~. However,~~ toand ~~maintain sufficient liquidity in~~ the ~~event of a downturn in~~ Company ~~performance~~reaches ~~beyond current expectations, the Company elected in April 2001 to suspend its quarterly principal payments to Fuji Photo Film U.S.A., Inc. ("Fuji") on~~ a ~~promissory~~satisfactory ~~note~~agreement having a principal balance of $2.1 million as of December 31, 2000 and a current principal balance of $1.9 million, reflecting payments prior to April 2001$2.1 million note. The Company has also entered into negotiations with Fuji toregarding ~~renegotiate~~repayment ~~its supply contract, the payment schedule on the $1.9 million notethe $2.1 million note, and the~~ terms of its ~~Amended~~ ~~Series~~trade ~~G Preferred Stock, all of which is held by Fuji. The Company has been unable to obtain agreement at this point,~~ and ~~there~~note ~~can be no assurance agreement can be reached~~payables. If no agreement is reached on the supply contract, either party could cancel the supply contract and the Company would likely seek another supplier. If the supply contract is terminated, approximately $4 million outstanding as of December 31, 2000 ($3.4 million as of March 31, 2001) under the revolving credit terms of the supply contract would become payable to Fuji over the approximately 120 day period following termination. This change could also result result in Fuji's ultimately requiring redemption of the Amended Series G Stock converting its preferred stock into Moto Photo, Inc. common shares. Based on the current market price of the common stock, Fuji could acquire approximately 90% of the Moto Photo, Inc. common shares outstanding (see

The Company has a $1.9 million note with Fuji, as well as accounts payable of approximately $3.2 million, subject to other claims. In May 2001, the Company's primary bank declared the Company to be in default of certain financial covenants under an agreement with the bank, although the Company remains current with its bank payment obligations. The bank therefore has the right to accelerate repayments of the bank debt and lease obligations; however, the bank has not given notice of any ~~intentindicated~~intent ~~it currently does not intend~~ to accelerate these payments. The ~~Company~~bank isagreement ~~seeking~~prohibits ~~amendment~~principal orpayments ~~waiver~~on of the ~~covenants~~ note payable to Fuji until covenant compliance is achieved. The ~~bank~~Company has ~~also~~been ~~prohibited~~in ~~principal~~negotiations ~~payments~~with onFuji to change the ~~note~~Company's ~~payable~~payment toschedule ~~Fuji~~on ofthe $2.1.9 million ~~(balance~~note, of which approximately $10.97 million atis ~~March~~past ~~31,~~due ~~2001)~~at ~~beyond~~December ~~March~~ 31, 2001~~. Future~~, ~~principal payments~~ on ~~the~~its ~~Fuji~~accounts ~~note~~payable, ~~may~~of ~~not~~which ~~occur~~approximately ~~until~~$2.0 ~~covenant~~million ~~compliance~~ is ~~achieved,~~past ordue at December 31, 2001, ~~whichever~~and on the terms of the Amended Series G Stock, all of which is ~~later~~held by Fuji. The ~~bank~~Company has ~~prohibited~~been ~~the~~unable ~~Company~~to ~~from~~obtain ~~making~~agreement ~~principal~~at ~~payments~~this ~~beyond~~point. On March 3121, ~~2001~~2002 ~~and until~~ the ~~later~~Company ofadvised ~~December~~Fuji ~~31,~~that ~~2001~~it orwas ~~when~~substantially ~~covenant~~reducing ~~compliance~~its ismonthly ~~achieved,~~payments on ~~the~~its $2past due trade payables while negotiations are pending.1 There ~~million~~can ~~note payable~~be tono ~~Fuji~~assurance negotiations will be successful (see Note GH to the Consolidated Financial Statements).

The Company ~~has~~terminated ~~also~~its ~~taken~~supply ~~significant~~contract ~~steps~~with toFuji ~~reduce~~on ~~expenses~~September 17, ~~including~~2001, ~~the~~giving ~~closure~~rise orto ~~sale~~a Redemption Event that could ultimately result in Fuji's acquiring control of ~~seven~~the ~~company~~Company ~~stores~~(see ~~and~~Note ~~other~~J ~~corporate~~to ~~headcount~~the ~~and~~Consolidated ~~cost~~Financial ~~reductions~~Statements).

~~The~~On ~~ability~~September ~~of the Company to continue as a going concern and the appropriateness of using the going concern basis is dependents upon~~17, ~~among~~2001 ~~other things, (i)~~ the Company's ~~ability~~signed to obtain satisfactory repayment terms on the Company's $2.1 million note payableindebtedness to Fuji, (ii) the Company's obtaining an amendment or waiver from the bank concerning its financial covenants or the bank refraining from accelerating repayment of the Company's indebtedness to the bank, and (iii) the Company's ability to generate sufficient cash from operations and/or other sources to meet its obligations. The Company believes that its revised organizational structure, adherence to its operational plan, and the closure of unprofitable company stores will provide liquidity to allow the Company to repay its obligations as they become due, assuming no acceleration of indebtedness and no significant decrease in future revenue. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amount and classification of liabilities, that might be necessary should the Company be unable to continue as a going concern, except for the increased deferred tax valuation allowance (see Note K to the Consolidated Financial Statements) and the classification of the primary bank debt and capitalized lease obligations as current (see Notes G and H to the Consolidated Financial Statements).

~~D. Property~~The Company has also taken significant steps to reduce expenses, including the closure or sale of eleven company stores in 2001 and ~~Equipment~~other corporate headcount and cost reductions.

The ability of the Company to continue as a going concern depends upon, among other things, (i) the Company's obtaining satisfactory repayment terms on the Company's indebtedness to Fuji, (ii) the Company's obtaining an amendment or waiver from the bank concerning its financial covenants or the bank's refraining from accelerating repayment of the Company's indebtedness to the bank, and (iii) the Company's generating sufficient cash from operations and/or other sources to meet its obligations. The Company believes that its revised organizational structure, adherence to its operational plan including the sale of company stores, and the closure of unprofitable company stores will provide liquidity to allow the Company to repay its obligations, assuming no acceleration of indebtedness and no significant decrease in future revenue. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amount and classification of liabilities, that might be necessary should the Company be unable to continue as a going concern, except for the increased deferred tax valuation allowance (see Note L to the Consolidated Financial Statements) and the classification of the primary bank debt and capitalized lease obligations as current (see Notes H and I to the Consolidated Financial Statements).

D. Restructuring Charges

During the fourth quarter of 2001, the Company announced its plan to exit substantially all its company-owned stores, except for the stores the Company operates in the Dayton, Ohio area. The balance of the stores will either be franchised, sold or, if unprofitable, closed. Revenue in 2001 for the stores that will be exited was approximately $12.3 million (see Note S to the Consolidated Financial Statements).

Consequently, in the fourth quarter of 2001, the Company recorded restructuring charges of $6.6 million, of which $5.1 million were non-cash charges primarily from asset impairment losses arising from the write-downs of the book value of long-lived assets, including intangible assets such as goodwill and the covenant not to compete, for stores held for sale. The asset impairment loss was determined based upon independent appraisals for certain locations, in conjunction estimated cash flow multiples, discounted cash flows, and management's estimates. Another $0.4 million in non-cash charges was from the loss on closure of four unprofitable stores.

Following is a summary of the accrued restructuring liabilities and related activity through December 31, 2001:

		Store Selling
	Severance	And Other	Total
Balance, December 31, 2000	$ -	$ -	$ -

Credited to reserves	322,712	727,000	1,049,712

Charged to reserves	(35,712)	-	(35,712)

Balance, December 31, 2001	$ 287,000	$ 727,000	$ 1,014,000

The severance accrual is for hourly and salaried employees whose positions were or will be eliminated due to the franchising, selling or closing of company stores. The store selling and other liabilities relate to estimated store fix-up and closing costs, broker and legal fees, and operating lease net termination costs. The Company estimates that approximately 232 employees will be impacted. As of December 31, 2001, approximately 42 positions had been eliminated.

Assets in the stores to be sold, consisting primarily of photo processing and printing machinery, computer equipment, furniture and fixtures, and leasehold improvements, are classified as assets held for sale (see Note B to the Consolidated Financial Statements). The stores are being actively marketed and through December 31, 2001, the Company had sold certain stores for $0.3 million, including inventory of $0.1 million.

E. Property and Equipment

The following is a summary of property and equipment as of December 31:

	2000	1999
	2001	2000
Equipment and other property	$ 84,~~732~~024,~~293~~356	$ 8,~~814~~732,~~841~~293
Leasehold improvements	21,~~884~~763,~~239~~352	2,~~902~~884,~~803~~239
Furniture and fixtures	1565,~~337,715~~639	1,~~384~~337,~~962~~715
	12,954,247	606
	6,353,347	12,954,247
Less accumulated depreciation and amortization	75,~~999~~693,~~042~~110	7,~~787~~999,~~033~~042
Net book value	$ 4660,~~955,205~~237	$ 54,~~315~~955,~~573~~205

Depreciation expense on property and equipment including amortization of assets recorded under capital leases was $1,243,935 in 2001, $1,301,426 in 2000, and $1,064,282 in 1999. The ~~and~~net book value for 2001 is net of an impairment of $~~813~~1,~~462~~565,872 in ~~1998~~connection with the decision to franchise or sell company stores (see Note D to the Consolidated Financial Statements).

EF. Other Assets

Other assets as of December 31 include the following items~~, net of accumulated amortization of $268,750 in 2000 and $287,500 in 1999~~:

	2000	1999
	2001	2000
Non-compete agreements	$ 591,250	$ 712,500
Non-compete agreement	$ -	$ 591,250
Other	163,220	247,753
Other, primarily deposits	84,653	163,220
Total Other Assets	~~470~~$ 84,653	~~253~~$ 754,470

FThe non-compete agreement is shown net of accumulated amortization of $0 in 2001 and $268,750 in 2000. ~~Deferred~~At ~~Revenue~~December 31, 2001, the remaining unamortized balance of $571,542 for the non-compete agreement was fully impaired in connection with the decision to franchise or sell company stores (see Note D to the Consolidated Financial Statements).

G. Deferred Revenue

The following is a summary of deferred revenue arising from customer membership in the CLUBMOTO program:

	2000	1999	1998
	2001	2000	1999
Beginning balance	$ ~~277~~275,~~748~~231	$ ~~337~~277,~~302~~748	$ ~~450~~337,~~178~~302
Cash received from customers	~~728~~697,~~952~~365	~~699~~728,~~699~~952	~~718~~699,~~689~~699
Revenue recognized	(~~731~~708,~~469~~060)	(~~759~~731,~~253~~469)	(~~831~~759,~~565~~253)
Ending balance	$ ~~275~~264,~~231~~536	$ ~~277~~275,~~748~~231	$ ~~337~~277,~~302~~748

~~Deferred costs associated with the CLUBMOTO program that were recognized as expenses were $6,899 in 2000, $70,664 in 1999 and $93,278 in 1998~~H. Long-Term Debt

G. Long-term Debt

The detail of long-term debt as of December 31 is:

	2000	1999
	2001	2000
Note payable to primary bank due January 2002 with interest at 9.29% per annum	$ 659,558	$ 1,470,017
Note payable to primary bank due January 2002 with interest at 9.29% per annum, paid off fourth quarter 2001	$ -	$ 659,558
Note payable to primary bank due January 2002 with interest at 9.5% (prime rate plus 1%)	312,500	750,000
Note payable to primary bank due January 2002 with interest at 5.75% (prime rate plus 1%), paid off fourth quarter 2001	-	312,500
Note payable to primary bank due January 2004 with interest at 9.0% (prime rate plus 1/2%)	750,102	1,041,768
Note payable to primary bank due January 2004 with interest at 5.25% (prime rate plus 1/2%)	541,768	750,102
Note payable to primary bank due January 2005 with interest at 9.5% (prime rate plus 1%)	1,637,062	1,680,320
Note payable to primary bank due January 2005 with interest at 5.75% (prime rate plus 1%)	1,296,007	1,637,062
Revolving credit agreement with supplier, non-interest bearing, due June 2002	4,000,000	4,000,000
Revolving credit arrangement with supplier, non-interest bearing	-	4,000,000
Note payable to supplier due January 2003, with interest at 8.5%	2,100,000	2,700,004
Note payable to Fuji due January 2003 with interest at 8.5%	1,900,000	2,100,000
Note payable to bank due October 2007 with interest at 9.5%	52,724	57,960
Note payable to bank due October 2007 with interest at 9.75%	46,968	52,724
	9,511,946	11,700,069
	3,784,743	9,511,946
Portion classified as current	43,~~239~~494,~~900~~000	24,~~202~~239,~~000~~900
	$ 5,272,046	$ 9,498,069
	$ 290,743	$ 5,272,046

AtThe ~~December~~revolving ~~31, 2000, the Company had an unused line of~~ credit arrangement with a ~~bank~~supplier ~~for~~was ~~$1,500,000~~classified atas ~~prime~~current ~~plus~~accounts ~~.50%~~payable ~~through~~in ~~April~~ 2001~~. The~~ ~~Company~~due ~~paid~~to ~~commitment fees of .25% per annum on~~ the ~~unused~~termination ~~portion~~ of the ~~line~~related ofsupply ~~credit~~contract. This ~~line~~ ~~expired~~amount ~~April~~was ~~30,~~approximately ~~2001~~$3. ~~The~~2 ~~Company~~million isas ~~negotiating for a new line for a lesser amount. The carrying value~~ of ~~all~~December ~~debt~~31, ~~approximates fair value~~2001.

AtThe ~~December 31, 2000, the~~ Company's ~~was~~unused ~~not~~line ~~in compliance with certain financial covenants related to long-term bank obligations. Because~~ of ~~this,~~credit ~~all~~for ~~long-term primary bank debt and bank-related capitalized lease obligations have been classified as current maturities~~$1.5 ~~The~~million ~~bank~~expired ~~therefore~~April ~~has the right to accelerate repayments of the bank debt and lease obligations; however~~30, ~~the bank has not given notice of any intent to accelerate these payments~~2001. The ~~bank~~Company ~~has~~is ~~indicated~~negotiating itfor ~~currently~~a ~~does not~~new ~~intend~~short-term toline ~~accelerate~~for ~~repayments~~a ofsubstantially ~~the~~lesser ~~loans and obligations earlier than originally scheduled~~amount. ~~The~~There ~~Company~~can isbe ~~seeking~~no ~~amendment~~assurances ornegotiations ~~waiver~~will ofbe ~~the covenants~~successful. The ~~bank~~Company ~~has~~believes ~~also~~that ~~prohibited~~under ~~principal~~existing ~~payments~~conditions, on the ~~note~~carrying ~~payable~~value ~~to Fuji~~ of ~~$2.1~~all ~~million (balance~~debt ofapproximates ~~$1.9~~fair ~~million at March 31, 2001) beyond March 31, 2001~~value. ~~Future principal payments on the Fuji note may not occur until and until covenant compliance is achieved, or December 31, 2001, whichever is later, on the note payable of $2.1 million to Fuji.~~

~~The~~At ~~scheduled aggregate annual maturities on long-term debt for the five years subsequent to~~ December 31, 2000 ~~are $2,344,700, $5,697,835, $916,096, $458,561~~ and ~~$76~~2001,~~507. However,~~ the ~~total~~Company ~~primary~~was ~~bank~~not ~~debt~~in ~~obligation~~compliance ofwith ~~$3,359,222 is~~certain ~~classified~~financial ascovenants ~~current~~related onto ~~the~~long-term ~~consolidated~~bank ~~balance~~obligations. Because ~~sheet as~~ of ~~December 31~~this, ~~2000,~~all aslong-term ~~the~~primary ~~Company~~bank ~~was~~debt ~~not~~and ~~in compliance with certain~~ bank-related ~~financial~~capitalized ~~covenants. Based~~lease onobligations ~~classifying~~were ~~this~~classified ~~debt~~ as current, ~~the aggregate annual~~ maturities. ofThe ~~long-term~~bank ~~debt for~~therefore has the ~~five~~right ~~years subsequent~~ to ~~December~~accelerate ~~31,~~repayments ~~2000~~of ~~are~~the ~~$4,239,900,~~bank ~~$4,981,146,~~debt ~~$256,831,~~and ~~$7,527~~lease ~~and~~obligations; $8however,~~295. Other~~ ~~long-term~~the ~~debt~~bank has nonot ~~right~~given notice of ~~acceleration~~any ~~and~~intent ~~has~~to ~~not~~accelerate ~~been~~these ~~classified as current~~payments.

The bank agreement also prohibits principal payments on the note payable to Fuji of $1.9 million until covenant compliance is achieved.

~~Cash~~The ~~paid~~scheduled aggregate annual maturities on long-term debt for ~~interest~~the ~~was~~five ~~$528~~years and thereafter subsequent to December 31,~~787~~ ~~for~~2001 ~~2000~~are $2,315,488, $~~475~~916,~~761~~112, ~~for~~$458,578, ~~1999~~$76,526, ~~and~~ $~~399~~9,~~400~~162 ~~for~~and ~~1998~~$8,877. ~~Interest~~However, ~~expense~~the onprimary abank ~~supplier~~debt ~~note~~obligation of $1,837,775 is ~~reduced~~classified byas ~~supplier~~current ~~marketing~~on ~~allowances~~the ~~equal~~consolidated tobalance sheet as of December 31, 2001, as the ~~interest~~Company ~~paid~~was not in compliance with certain bank financial covenants. Based on ~~theat~~classifying ~~note payable~~this debt as current, the aggregate annual maturities of long-term debt for the five years and thereafter subsequent to ~~that~~December ~~supplier~~31, 2001 are $3,494,000, $256,845, $7,545, $8,314, $9,162 and $8,877. Other long-term debt has no right of acceleration and has been classified consistent with its scheduled maturity dates.

~~Long-term~~Cash ~~debt~~paid isfor ~~secured~~interest bywas ~~substantially~~$408,036 ~~all~~for of2001, ~~the~~$528,787 ~~Company's~~for ~~assets~~2000 and $475,761 for 1999. ~~The~~Interest ~~supply~~expense ~~contract~~on ~~containing~~ the ~~revolving~~Fuji ~~credit~~note ~~agreement~~is ~~requires~~reduced ~~the~~by ~~Company~~supplier ~~and~~marketing ~~its~~allowances ~~franchisees~~equal ~~collectively~~ to ~~purchase~~the ~~certain~~interest ~~amounts~~paid ofon ~~their requirements~~that ~~for~~note ~~specified~~payable, ~~products~~and ~~including~~is ~~paper~~not ~~and~~included ~~film~~in ~~through~~ the ~~supplier~~above cash paid for interest amounts.

H.Long-term ~~Leases~~debt is secured by substantially all of the Company's assets.

~~The~~I. ~~detail~~Leases ~~of property and equipment included the following capitalized lease obligations at December 31:~~

	2000	1999
Processing equipment	$ 2,057,331	$ 1,144,117
Less accumulated amortization	644,815	303,880
	$ 1,412,516	$ 840,237

The detail of property and equipment included the following capital lease assets at December 31:

Scheduled future minimum lease payments for capitalized leases at December 31, 2000 are as follows:

	2001	2000

Processing equipment, net of impairment	$ 1,247,073	$ 2,057,331
Less accumulated depreciation	591,095	644,815
	$ 655,978	$ 1,412,516

Years Ending December 31,	Amount
2001	$ 271,411
2002	249,284
2003	258,198
2004	286,136
2005	314,090
2006 and thereafter	529,560
Total minimum lease payments	1,908,679
Less: amount representing interest ranging from 8.8% to 10.5%	484,921
Present value of minimum lease payments	1,423,758
Current portion	1,404,700
Capitalized leases	$ 19,058

The net book value reflects an impairment of approximately $314,000 in connection with the decision to franchise or sell company stores (see Note D to the Consolidated Financial Statements).

~~During~~Scheduled ~~2000,~~future ~~1999,~~minimum ~~and~~lease ~~1998,~~payments ~~the~~for ~~Company incurred or assumed~~ capital lease obligations ~~aggregating~~at ~~$895,380,~~December ~~$459~~31,~~658~~ ~~and~~2001 ~~$0,~~are ~~respectively,~~as ~~in connection with equipment purchases.~~ follows:

The current portion of scheduled future minimum lease payments for capitalized leases of $1,404,700 includes $1,249,100 that has been classified as current because the Company was not in compliance with financial covenants related to certain long-term primary bank obligations (see Note G to the Consolidated Financial Statements).

Years Ending December 31,	Amount
2002	$ 356,257
2003	200,421
2004	223,761
2005	250,880
2006	265,754
2007 and thereafter	244,841
Total minimum lease payments	1,541,914
Less: amount representing interest ranging from 8.8% to 15.2%	367,685
Present value of minimum lease payments	1,174,229
Less: current portion	1,114,300
Capital lease obligations, less current portion	$ 59,929

~~The~~During ~~Company~~2001, ~~also~~2000, ~~has operating leases for the real estate facilities of several franchised~~ and ~~company-owned~~1999, ~~stores. The facilities for~~ the ~~franchised~~Company ~~stores~~incurred ~~have been subleased~~ or ~~assigned~~assumed tocapital ~~the franchisees. The~~ lease ~~agreements generally~~obligations ~~require~~aggregating ~~the lessee to pay the property taxes~~$95,636, ~~insurance~~$895,380, ~~and maintenance. Under most lease agreements~~$459,658, ~~the lessee is required to pay common area expenses and/or a contingent rental based on a percentage of gross sales. The Company also leases automobiles~~respectively, ~~office~~in ~~and~~connection ~~warehouse~~with ~~facilities, and~~ equipment ~~under operating lease agreements~~purchases. ~~Certain~~During ~~leases have renewal options that the Company may exercise. Rental expense for operating leases was $2~~2001,~~438,752~~ ina ~~2000,~~purchaser ~~$2,127,540~~of ina ~~1999,~~company ~~and $1,841,830~~store inassumed ~~1998,~~a ~~net~~capital oflease ~~sublease~~obligation ~~rentals~~ of ~~$253,354,~~approximately $~~253~~212,~~947, and $447,372, respectively~~000.

InThe ~~1998~~current ~~the~~portion ~~Company~~of ~~sold~~scheduled ~~the~~future minimum lease ~~rights~~payments for acapital ~~store~~leases ~~location~~of ~~which~~$1,114,300 ~~increased~~includes ~~net~~$980,000 ~~incomerevenues~~that byhas ~~approximately~~been ~~$112,000~~classified as current because the Company was not in compliance with financial covenants related to certain long-term primary bank obligations (see Note H to the Consolidated Financial Statements).

AtThe ~~December~~Company 31also has operating leases for the real estate facilities of several franchised and company-owned stores, ~~2000~~the longest extending through 2010. The facilities for the franchised stores have been subleased or assigned to the franchisees. The lease agreements generally require the lessee to pay the property taxes, ~~non-cancelable~~insurance and maintenance. Under most lease agreements, the lessee is required to pay common area expenses and/or a contingent rental based on a percentage of gross sales. The Company also leases automobiles, office and warehouse facilities, and equipment under operating lease agreements, the longest extending through 2010. Certain leases ~~provide~~have ~~for~~renewal options that the ~~following~~Company ~~minimum~~may ~~annual~~exercise. Rental ~~obligations~~expense for operating leases was $1,979,210 in 2001, $2,438,752 in 2000, and $2,127,540 in 1999, net of sublease rentals: of $301,064, $253,354, and $253,947, respectively.

	Lease Obligations	Sublease Rentals	Net Lease Obligations
2001	$ 2,346,495	$ 169,788	$ 2,176,707
2002	1,943,607	78,599	1,865,008
2003	1,423,399	68,936	1,354,463
2004	1,130,234	12,498	1,117,736
2005	765,532	-	765,532
2006 and thereafter	2,261,927	-	2,261,927
Totals	$ 9,871,194	$ 821	$ 9,541,373

At December 31, 2001, non-cancelable operating leases provide for the following minimum annual obligations and sublease rentals:

I. Stockholders' Equity

	Lease Obligations	Sublease Rentals	Net Lease Obligations

2002	$ 1,897,505	$ 340,060	$ 1,557,445
2003	1,355,667	250,253	1,105,414
2004	1,073,514	139,245	934,269
2005	727,006	55,605	671,401
2006	606,431	40,112	566,319
2007 and thereafter	1,518,745	120,336	1,398,409
Totals	$ 7,178,868	$ 945,611	$ 6,233,257

J. Stockholders' Equity (Deficit)

The Company has authorized 30,000,000 voting common shares and 1,000,000 nonvoting common shares. None of the nonvoting common shares are outstanding and, unless otherwise stated, any reference herein to common shares refers to voting common shares.

OnIn December 301999, ~~1999~~ the Company exchanged ~~with the holders thereof~~ its ~~one million shares of nonvoting~~ Series G Preferred Stock, ~~("Series~~all ~~G Stock") for~~ one million shares of ~~nonvoting~~which ~~Amended~~were ~~Series~~held Gby ~~Preferred~~Fuji, ~~Stock~~for ("the Amended Series G Stock") issue of one million shares. The book value of the Amended Series G Stock is $67,~~773~~594,~~295~~960. The ~~Amended~~redemption ~~Series~~price ~~G Stock~~ is ~~redeemable~~$10.00 atper ~~any~~share, ~~time~~or byan ~~the Company in~~ aggregate ~~amounts~~ of ~~at least~~ $110 million. The ~~holder can redeem the~~ Amended Series G Stock ~~after~~extended ~~January 1, 2003, or earlier upon~~ the ~~occurrence~~mandatory ~~of certain~~ redemption ~~events. The~~date ~~Series~~from GJanuary ~~Stock had an annual dividend per share of $.70 in 1999 and $.60 in 1998. In 1999 and 1998~~1, ~~$700,000~~2000 ~~and~~to ~~$600,000,~~January ~~respectively~~1, of2003 ~~dividends were paid on Series G Stock. The Series G Stock had a dividend rate lower than the previously accreted rate of the Series E~~ and Feliminated ~~Preferred~~scheduled ~~Shares. Accordingly,~~penalty ~~the~~payments ~~dividend~~for ~~requirement~~non-redemption ~~on income applicable to common shares was reduced by $434,889~~ in ~~1999~~2000 ~~and $325,438 in 1998. No dividends are payable on the Amended Series G Stock. As the Amended Series G Stock has a 0% dividend yield~~ through ~~2003, the Company imputed a dividend using a market rate beginning in the first quarter of 2000~~2002.

~~The~~No ~~redemption~~dividends ~~price~~are ~~for~~payable on the Amended Series G Stock ~~is $10~~.~~00 per share, or an aggregate of $10 million.~~ IfThe ~~the Amended~~ Series G Preferred Stock ishad ~~redeemed~~an inannual ~~shares~~dividend ofper ~~common~~share ~~stock, depending upon the market price~~ of $.70 ~~the~~in ~~common~~1999and, ~~stock~~accordingly, ~~and the number of shares of common stock outstanding~~$700,000 ~~such redemption could result in Fuji's acquiring control~~ of ~~the~~dividends ~~Company~~were paid. ~~Based~~The ~~on current market prices of the common stock, full redemption of the Amended~~ Series G Preferred Stock inhad ~~shares~~a ofdividend ~~common~~rate ~~stock~~lower ~~would result~~than ~~in Fuji having~~ the ~~right~~previously toaccreted ~~receive~~rate ~~common shares representing approximately 90%~~ of the ~~Company's~~Series ~~outstanding~~E ~~stock~~and ~~following~~F ~~such~~Preferred ~~redemption~~Shares. Accordingly, ~~The~~the ~~holder~~dividend ~~has~~requirement ~~the~~on ~~right~~income applicable to ~~refuse~~common ~~redemption~~shares in ~~stock~~1999 ~~and~~was ~~elect~~reduced toby ~~continue~~$434,889. As ~~to hold~~ the Amended Series G Stock~~. If~~ ~~redemption~~has ~~does~~a ~~not~~0% ~~occur~~dividend inyield through 2003, the Company isimputed ~~obligated~~a todividend ~~make~~using ~~penalty~~a ~~payments~~market ofrate ~~$.90~~beginning ~~per share~~ in ~~2003 and $1.00 per share per annum thereafter. The Company is uncertain at this time how~~ the ~~Amended~~first ~~Series~~quarter Gof ~~Stock will be retired~~2000.

~~The~~If ~~Amended~~the ~~Series~~Company Gfails ~~Stock~~to isredeem ~~also~~the ~~redeemable~~Amended ~~under~~Series ~~certain~~G ~~other~~Stock ~~circumstances~~on ~~("Redemption~~January ~~Event") which include~~1, ~~after appropriate cure periods~~2003, ~~failure by~~ the Company tomust ~~meet~~make ~~certain~~penalty ~~requirements~~payments ~~under~~of a$.90 ~~supply~~per ~~contract~~share, ~~with Fuji~~ or ~~termination~~$900,000, ofin ~~the~~2003 ~~supply~~and ~~contract~~$1.00 ~~other~~per ~~than~~share, asor ~~a result of default by Fuji~~$1,000,000, ~~default~~in by2004 ~~the Company under certain other agreements between the Company~~ and ~~Fuji,~~each ~~the~~year ~~termination~~thereafter ofuntil ~~involvement in~~ the ~~day-to-day~~stock ~~management~~is ~~of the Company of either Michael F~~redeemed. The ~~Adler~~Amended orSeries ~~David~~G A.Stock ~~Mason~~is ifredeemable by the Company ~~does~~at ~~not~~any ~~replace~~time ~~him~~in oraggregate ~~them,~~amounts ~~within~~of aat ~~specified~~least ~~period~~$1,000,000. The ~~with~~Amended anSeries ~~executive~~G ~~reasonably~~Stock ~~acceptable~~is toredeemable ~~Fuji,~~only aout ~~change in control~~ of the ~~Company,~~proceeds ~~the~~of ~~Company's~~an ~~bankruptcy~~equity oroffering ~~insolvency,~~ or ~~failure~~in ~~by the~~ Company tocommon ~~meet~~stock ~~its~~valued ~~obligations~~at ~~under~~90% ~~other indebtedness in excess~~ of ~~$100,000. If~~ the ~~Company~~market ~~fails~~price toat ~~tender~~ the ~~requisite~~time ~~cash or common stock in order to redeem all~~ of ~~the~~redemption. Fuji ~~Amended~~may ~~Series~~refuse Gany ~~Stock~~proposed ~~upon~~redemption ~~request~~ by ~~Fuji~~the ~~following~~Company ~~the~~in ~~occurrence~~shares of ~~a Redemption~~common ~~Event,~~stock ~~Fuji~~and ~~has~~elect ~~the~~to ~~right,~~continue ~~until~~to ~~all~~hold of the ~~shares of~~ Amended Series G Stock ~~are~~without ~~redeemed~~impairment orof ~~the~~any ~~Redemption~~right ~~Event is cured,~~ to ~~elect~~require ~~the~~redemption ~~majority~~at ofa ~~the~~later ~~Board of Directors~~time.

~~Redemption~~Fuji ~~must~~may bealso inrequire ~~either~~ the Company's ~~common~~to ~~shares~~redeem atthe ~~90%~~Amended ofSeries ~~the~~G ~~then-current~~Stock ~~market~~under ~~price~~certain orother incircumstances ~~cash~~("Redemption ~~from~~Event"), including the ~~proceeds~~termination of ana ~~equity~~supply ~~offering. The~~contract ~~holder~~between ~~has~~Fuji and the ~~right~~Company tofor ~~refuse~~any ~~redemption~~reason inother ~~stock~~than ~~and~~default ~~elect to~~by ~~continue~~Fuji. In toApril ~~hold~~2001, the ~~Amended~~Company ~~Series~~requested Gthat ~~Stock~~Fuji renegotiate prices with the Company, as permitted under the supply contract. IfFuji ~~redemption~~failed ~~does~~to ~~not~~do ~~occur~~so inand, ~~2003~~on September 17, 2001, the Company isterminated ~~obligated~~the tosupply ~~make~~contract ~~penalty~~with ~~payments~~Fuji, ofalthough ~~$.90~~Fuji ~~per~~remains ~~share~~a invendor ~~2003~~to ~~and~~the $1Company.00 This ~~per~~gave ~~share~~rise ~~per~~to ~~annum~~a ~~thereafter.~~Redemption ~~Certain~~Event ~~events~~which ~~can~~permits ~~trigger~~Fuji ~~redemption~~to ~~prior~~require the Company to ~~2003~~ ~~(see~~redeem the Amended Series G Stock.

If Fuji requests redemption of the Amended Series G Stock, the Company may redeem by offering at its option the requisite cash or common stock. If redemption were to occur in shares of common stock, depending on the market price of the common stock and the number of shares of common stock outstanding at the time of redemption, Fuji could acquire control of the Company. Based on current market prices of the common stock, full redemption of the Amended Series G Stock in shares of common stock would result in Fuji having the right to receive common shares representing approximately 95% of the Company's outstanding stock following such redemption. If the Company fails to give notice of redemption of all of the Amended Series G Stock upon request by Fuji, Fuji would have the right, until all the shares of the Amended Series G Stock are redeemed or the Redemption Event is cured, to elect the majority of the Board of Directors.

The holder of the Amended Series G Stock also holds warrants to purchase 1,000,000 common shares at $2.38 per share, subject to adjustment in certain events, through September 2002. In addition, in 1997 the Company granted 50,000 warrants, each of which entitles the holder to purchase one common share for $1.94 through September 2002. The warrants are anti-dilutive for diluted earnings per share calculations for all years.

AsThe ofCompany ~~December~~currently ~~31,~~has ~~2000~~21,772,611 ~~all~~authorized but unissued shares of ~~unissued~~voting common stock, ~~were~~which ~~reserved~~would ~~for~~be ~~issuance~~insufficient ~~pursuant~~at current share prices to ~~various~~redeem ~~outstanding~~all ~~options,~~shares ~~warrants~~of the Amended Series G Stock should Fuji request redemption. In such case, ~~and~~the ~~redeemable~~Company ~~and~~would ~~convertible~~have ~~securities~~to seek shareholder authorization of additional shares of common stock.

The Company's Board of Directors authorized a common stock repurchase program at June 30, 1999. The Board authorized management to spend up to $500,000 to make repurchases until December 31, 2000. The Company repurchased 173,894 shares for $199,238 prior to 2001 and has re-issued 72172,~~343~~667 of these shares as of December 31, 2001.

JK. Stock-Based Compensation

The Company has several incentive plans under which the Board of Directors or the Compensation Committee ("the Committee") of the Board of Directors may grant awards to directors, officers and key managerial, administrative, and professional employees of the Company. Awards may consist of incentive, non-qualified, and deferred compensation stock options, stock appreciation rights, restricted stock and restricted unit grants, performance equity and performance unit grants, and any other stock-based awards, or any combination of these awards.

The following summarizes the shares option activity for the years ended December 31:

		2000			1999			1998
	2001		2000			1999
	Common Shares	Average Price	~~Average Price~~	Common Shares	Average Price	~~Average Price~~	Common Shares	Average Price	~~Average Price~~
Outstanding at beginning of year	1,~~361~~202,~~142~~028	$1.85	~~$1.99~~	1,~~334~~361,~~081~~142	$1.99	~~$2.06~~	1,~~015~~334,~~966~~081	$2.06	~~$1.99~~
Granted	~~103~~1,~~121~~095,000	$0.21	~~$0.41~~	~~142~~103,~~669~~121	$0.41	~~$1.12~~	~~406~~142,~~219~~669	$1.12	~~$2.32~~
Expired	(262,235)		$2.00	(115,608)		$1.90	(88,104)		$2.47
Expired/cancelled	(635,677)	$1.54		(262,235)	$2.00		(115,608)	$1.90
Outstanding at end of year	1,~~202~~661,~~028~~351	$0.89	~~$1.85~~	1,~~361~~202,~~142~~028	$1.85	~~$1.99~~	1,~~334~~361,~~081~~142	$1.99	~~$2.06~~
Exercisable at end of year	~~779~~828,~~696~~355	$1.16	~~$1.89~~	~~809~~779,~~535~~696	$1.89	~~$1.91~~	~~755~~809,~~956~~535	$1.91	~~$2.56~~

The exercise price of all options granted is at least equal to the market value at the date of grant. The options generally expire five years from the grant date and generally vest over four to five years. The Company has outstanding ~~156~~ 145,~~266~~431 options granted in 1995 for $2.25 per share and ~~125~~87,~~770~~112 options granted in 1998 for $2.50 per share that expire ten years after the grant date and vest based on the Company's achieving certain earnings per share levels, but in any case will be fully exercisable no later than three months prior to expiration. The 1995 grant has ~~125~~145,~~013~~431 shares exercisable and the 1998 grant has ~~25,154~~none exercisable, both as of December 31, ~~2000~~2001.

At December 31, ~~2000~~2001, additional awards aggregating up to ~~785~~682,~~237~~364 common shares can be granted until July 14, 2002 on the terms and conditions established by the Committee. The Board of Directors may grant additional non-qualified stock options.

The range of ~~option~~ exercise prices on options outstanding and exercisable as of December 31, ~~2000~~2001 follows:

			Weighted Average		Remaining
Range of	Number of Options		Exercise Price		Life (Years)
Exercise Prices	Outstanding	Exercisable	Outstanding	Exercisable	Outstanding
$ 0.41 - $ 1.31	419,219	259,220	$ 1.03	$ 1.27	2.0
$ 0.20 - $ 0.41	1,131,815	466,704	$ 0.23	$ 0.23	4.4
$ 1.75 - $ 2.25	406,266	345,013	$ 2.02	$ 2.00	2.5
$ 1.06 - $ 2.25	230,307	184,381	$ 1.92	$ 2.10	2.9
$ 2.50 - $ 2.63	~~376~~299,~~543~~229	~~175~~177,~~463~~270	$ 2.5958	$ 2.5762	32.75

The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees", and related ~~Interpretations~~interpretations to measure the cost of stock options issued to employees. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for the awards under those plans consistent with the method of FASB Statement 123, "Accounting for Stock Based Compensation," the pro forma effect on the Company's net income/(loss) would have been as follows:

Pro Forma Earnings	~~2000~~2001	~~1999~~2000	~~1998~~1999
Net income/(loss) applicable to common shares	$ (49,~~050~~887,~~603~~203)	$ 1(4,~~296~~050,~~896~~603)	$ 1,~~330~~296,~~464~~896
Net income/(loss) per common share-basic	$ (01.5226)	$ (0.1752)	$ 0.17
Net income/(loss) per common share-diluted	$ (01.5226)	$ (0.1152)	$ 0.1711

The ~~weighted-average~~Company ~~value~~used ofthe anBlack-Scholes option ~~granted~~pricing ~~during~~model ~~2000,~~to ~~1999,~~calculate ~~and 1998 approximated 60% of~~ the ~~grant~~value ~~price~~ of the ~~respective~~stock ~~option~~options ~~using~~at the ~~Black-Scholes~~grant ~~option~~date. The ~~pricing model and the~~ following assumptions were used:

Fair Value Assumptions	~~2000~~2001	~~1999~~2000	~~1998~~1999
Dividend yield	0%	0%	0%
Expected volatility	56%	4756%	4547%
Risk-free interest rate	53.96%	65.49%	56.84%
Expected life in years	64.29	56.2	5~~-10~~

~~Because additional awards in future years are anticipated, the pro forma effects of applying this statement are not necessarily indicative of future amounts~~L. Income Taxes

K. Income Taxes

Significant components of deferred tax assets and liabilities at December 31 are:

	2000	1999
	2001	2000
Deferred tax assets:
Capital loss carryforwards	$ ~~459~~596,000	$ ~~522~~459,000
AMT credit carryforwards	353,000	85353,000
Asset impairment	~~754~~1,373,000	~~915~~754,000
Receivable allowances	~~991~~935,000	~~793~~991,000
Employee benefit accruals	~~136~~122,000	84136,000
Inventory valuation allowances	6053,000	8560,000
Reserve for store closures	90283,000	-90,000
Net operating loss carryforward	~~726~~1,954,000	-726,000
All other items, net	117,000	101,000
Depreciation	350,000	-
Total deferred tax assets	3,686,000	2,585,000
All other items, net	621,000	117,000
Total deferred tax assets	6,640,000	3,686,000
Deferred tax liability:
Depreciation	~~(146,000)~~-	(~~477~~146,000)
Total deferred tax liability	~~(146,000)~~-	(~~477~~146,000)
	3,540,000	2,108,000
	6,640,000	3,540,000
Less: valuation allowance	(36,~~540~~640,000)	(~~915~~3,540,000)
Net deferred tax assets	$ -	$ ~~1,193,000~~-

For financial reporting purposes, a valuation allowance of $36,~~540~~640,000 for ~~2000~~2001 and $~~915~~3,540,000 for ~~1999~~2000 has been recognized to offset certain deferred tax assets. The increase in the gross deferred tax asset was offset by a valuation allowance of an equal amount, resulting in no net deferred taxes. Realization of the net deferred tax assets depends on generating sufficient taxable income to utilize the tax benefit of ~~the~~these assets. A valuation allowance is necessary when it is more likely than not that the tax assets will not be realizable. The increase in the valuation allowance was deemed necessary as a result of the uncertainty of the recoverability of such tax benefits (see Note C to the Consolidated Financial Statements).

At December 31, ~~2000~~2001, the Company has capital loss carryforwards of $1,~~349~~750,000 that begin to expire in ~~2001~~2002 and approximately $353,000 of alternative minimum tax (AMT) credit ~~carryfowards~~carryforwards that have no expiration date. Net operating loss carryforwards begin to expire in 2019.

The Company paid $~~200~~0, $~~6,350~~200 and $826,~~000~~350 of income taxes in ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999, respectively.

The effective income tax rates differed from the federal statutory income tax rates as follows for the years ended December 31:

	2000	1999	1998
	2001		2000		1999
Expense (benefit):
Statutory federal income tax	~~$ (750,000)~~	$ ~~425~~(3,049,000)	~~$ 452,000~~	$ (750,000)		$ 425,000
Increase (decrease) resulting from effect of:
Nondeductible amortization	~~(52,000)~~	67196,000	~~168,000~~	(52,000)		67,000
Change in deferred tax valuation allowance	~~2,625,000~~	~~(952~~3,100,000)	~~(727,000)~~	2,625,000		(952,000)
Change in estimate Benefits arising from prior year tax return amounts differing from bookfor tax contingencies estimates	(944,000)	-	-
Change in estimate for tax contingencies		(331,000)		(944,000)		-
Other, net	~~117,000~~	9884,000	~~(233,900)~~	117,000		98,000
State income tax expense, net of federal tax benefit	-	~~(41,000)~~-	~~(19,100)~~	- )		(41,000)
	$ 996,000	$ (403,000)	$ (360,000)
		$ -		$ 996,000		$ (403,000)

Significant components of the provision for income taxes are as follows for the years ended December 31:

	2000	1999	1998
	2001	2000	1999
Federal/state income tax benefit (expense) (benefit):
Federal/state income tax expense (benefit):
Current	$ ~~( 197,000)~~-	$ (~~480~~197,000)	$ (~~172~~480,000)
Deferred	~~(1,193,000 )~~-	~~(77~~1,193,000)	~~(188~~77,000)
	$ (996,000)	$ (403,000)	$ ( 3360,000)
	$ -	$ 996,000	$ (403,000)

LM. Related Party Transactions

The Company manages a franchised store controlled by certain officers and directors of the Company. The Company derived revenue from this store, including management incentive fees, of approximately $~~233~~203,000 in ~~2000~~2001, $~~283~~233,000 in ~~1999~~ 2000 and $~~308~~283,000 in ~~1998~~1999. The amount due from this store at December 31, 2001 was $71,245.

Another franchised store is owned and managed by a corporation owned and controlled by an officer/director and his family, from which the Company derived revenue of approximately $8782,000 in ~~2000~~2001, $9887,000 in ~~1999,~~2000 and $9798,000 in ~~1998~~1999. The amounts due from this store at December 31, 2001 was $31,981.

A franchised store is owned ~~and managed~~ by a corporation owned and controlled by a relative of an officer of the Company, and managed by the Company, from which the Company derived revenue of approximately $7259,000 in ~~2000~~2001, $9172,000 in ~~1999~~2000 and $~~101~~91,000 in ~~1998~~1999. The amount due from this store at December 31, 2001 was $166,559.

The Company leases its headquarters from a partnership that is controlled by certain officers and/or directors. The lease provides for rent at $20,327 per month through June 2004 and $22,364 from July 2004 through June 2009. Rent expense was $243,924 for ~~2000~~2001, $~~225~~243,~~660~~924 for ~~1999~~2000 and $~~216~~225,~~996~~660 for ~~1998~~1999. There were no amounts due to or from the partnership as of December 31, 2001.

A corporation controlled by a director and his spouse owns one franchised store and the director is a partner in three others as of December 31, ~~2000 as compared to four others as of December 31, 1999~~2001. The Company derived revenue of $~~429~~375,000 in ~~2000~~ 2001, $~~481~~429,000 in ~~1999~~2000 and $~~444~~481,000 in ~~1998~~1999 from this group. The amount due from these stores at December 31, 2001 was approximately $45,101. The Company also made payments to another corporation controlled by this director of $~~436~~356,000 in ~~2000~~2001, $~~454~~436,000 in ~~1999~~2000 and $~~442~~454,000 in ~~1998~~1999 as fees for franchise development and operational support services. The amounts paid for operational support services are approximately one-third of royalties paid by franchisees within this corporation's territory, and are payable to the corporation soon after the Company receives the royalty payments. Based on unpaid royalties reported by franchisees and unpaid, unreported royalties estimated by the Company as of December 31, 2001, the Company's future obligation to this corporation for these unpaid royalties would range from a low estimate of approximately $30,000 to a high of approximately $120,000, assuming all unpaid royalties were paid and Company estimates for unreported royalties were accurate. The Company believes the amounts ultimately paid to this corporation for these unpaid royalties as of December 31, 2001 will be on the low side of the range, but cannot quantify with reasonable assurance.

MThe Company entered into deferred compensation agreements requiring monthly payments over five years totaling approximately $845,000, of which the current portion is approximately $199,750, to two former executives who are currently directors. ~~Contingencies~~In addition, the Company entered into agreements for consulting services and directors' fees with these two directors requiring monthly payments of $1,218 to each director for five years. These payments begin January 2002 and have not been accrued for 2001.

~~The Company is involved in legal proceedings, arising in the ordinary course of business, which are being contested and defended~~N. ~~Management~~Commitments isand ~~of the opinion that there is no contingent liability that would have a material effect on the consolidated financial statements.~~Contingencies

The Company ~~has~~is ~~agreed~~involved toin ~~reimburse~~legal aproceedings, ~~supplier~~arising ~~for~~in ~~50%~~the ofordinary ~~any~~course ~~payments~~of ~~the~~business, ~~supplier~~which ~~would~~are bebeing ~~required~~contested toand ~~make~~defended. Management ~~under~~is of the ~~supplier's~~opinion ~~agreement~~that ~~with~~there ais ~~bank~~no tocontingent ~~guarantee~~liability ~~leases~~that ~~made~~would byhave ~~the~~a ~~bank~~material toeffect ~~franchisees~~on ~~under~~ the ~~MotoPhoto~~consolidated ~~QuickStart~~ financial ~~(SM)~~statements, ~~program~~except as stated below.

NThe Company has agreed to reimburse a supplier for 50% of any payments the supplier would be required to make under the supplier's agreement with a bank to guarantee leases made by the bank to franchisees under the MotoPhoto QuickStart (SM) program. If all of these leases had defaulted on December 31, 2001, the estimated Company liability would have been approximately $1 million, less 50% of any net proceeds from the sale of the underlying assets.

~~O. Acquisitions~~On September 17, 2001, the Company terminated its supply contract with Fuji and signed a

three-year contract with Eastman Kodak Company ("Kodak") for the purchase of photo processing paper, film, and batteries. The Company has agreed to purchase 100 million square feet of photo processing paper from Kodak over three years; if the Company does not meet its purchase requirement, the contract will be extended for another year. The Company believes that, at current purchasing levels, it will be able to meet the purchasing commitment within the four-year period. In addition, the Company has agreed to purchase at least one million rolls of film and/or one-time-use cameras from Kodak each year during the term of the supply contract; if the Company fails to do so, Kodak has the right to increase film prices.

~~The Company acquired no stores during 2000 and 1998 and acquired six stores during 1999~~O. ~~The acquisitions in 1999 were accounted for as purchases. The aggregate purchase price paid in 1999 was $401,700, of which $341,700 was in cash and $60,000 in notes assumed.~~
Short Term Bond Transaction

During 1999, the Company entered into a short-term bond transaction relating to $75,000,000 of U.S. Treasury securities. The transaction was designed to generate net interest income in an increasing interest rate environment and capital gains that could be used to offset previously incurred capital losses. As a result of this transaction, the Company had interest income of $993,338, a short-term capital gain of $474,610 and interest expense of $1,532,099; the net effect of $64,151 is included in the statement of operations as interest expense in 1999.

~~The results of operations for the acquired stores are included in the consolidated statement of income operations from the acquisition date~~P. ~~Pro forma revenue, net income and earnings per share information are not material and not presented.~~Acquisitions

PThe Company purchased no stores during 2001 and 2000, and acquired six stores during 1999. ~~Pending~~The ~~Accounting~~acquisitions ~~Standards~~ were accounted for as purchases. The aggregate purchase price paid in 1999 was $401,700, of which $341,700 was in cash and $60,000 in notes assumed.

The ~~Financial~~results ~~Accounting~~of ~~Standards~~operations ~~Board issued Statement No. 133, "Accounting~~ for ~~Derivative~~the ~~Instruments~~acquired ~~and~~stores ~~Hedging~~are ~~Activities." The~~included ~~statement~~in isthe ~~not~~consolidated ~~required~~statements toof beoperations ~~adopted~~from by the ~~Company~~acquisition ~~until 2001~~date. AsPro offorma ~~December 31~~revenue, ~~2000, the~~net ~~Company~~income ~~had~~and noearnings ~~derivative~~per ~~instruments~~share ~~and~~information ~~anticipates~~are nonot material ~~impact~~and ~~from~~not ~~adopting this standard~~presented.

Q. Recently-Enacted ~~Selected~~and ~~Quarterly~~Proposed ~~Financial~~Accounting ~~Information - Unaudited~~Standards

	First	Second	Third	Fourth
2000	Quarter	Quarter	Quarter	Quarter (5)
Sales and other revenue as originally reported (1)	$ 7,232,437	$ 9,432,391	$ 9,319,439	$ 10,062,489
Reclassification of freight income (2)	49,470	67,690	63,784	-
Sales and other revenue as restated	$ 7,281,907	$ 9,500,081	$ 9,383,223	$ 10,062,489
Gross profit as originally reported (3)	$ 1,417,455	$ 2,387,251	$ 2,302,109	$ 2,382,212
Reclassification of interest rebate (4)	(57,218)	(52,979)	(48,741)	-
Gross profit as restated (3)	$ 1,360,237	$ 2,334,272	$ 2,253,368	$ 2,382,212
Net income (loss):
As originally reported and as restated	$ (546,241)	$ (53,066)	$ (64,657)	$ (2,536,697)
Net income (loss) applicable to common:
As originally reported and as restated	$ (721,645)	$ (233,564)	$ (250,395)	$ (2,727,829)
Net income (loss) per common share:
Basic - as originally reported and as restated	(0.09)	(0.03)	(0.03)	(0.35)
Diluted - as originally reported and as restated	(0.09)	(0.03)	(0.03)	(0.35)
	First	Second	Third	Fourth
1999	Quarter	Quarter	Quarter	Quarter
Sales and other revenue as originally reported (1)	$ 6,974,983	$ 9,308,361	$ 9,647,795	$ 10,655,315
Reclassification of freight income (2)	41,600	52,619	58,991	63,724
Sales and other revenue as restated	$ 7,016,583	$ 9,360,980	$ 9,706,786	$ 10,719,039
Gross profit as originally reported and restated (3)	$ 1,622,681	$ 2,629,636	$ 2,478,736	$ 3,130,310
Net income (loss):
As originally reported and as restated	$ (193,207)	$ 406,873	$ 570,707	$ 869,170
Net income (loss) applicable to common:
As originally reported and as restated	$ (260,531)	$ 340,243	$ 504,777	$ 803,943
Net income (loss) per common share:
Basic - as originally reported and as restated	(0.03)	0.04	0.06	0.10
Diluted - as originally reported and as restated	(0.03)	0.04	0.05	0.06

The Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for fiscal 2001. As of December 31, 2001, the Company had no derivative instruments.

The Financial Accounting Standards Board issued Statement No. 141, "Business Combinations", requiring companies to use the purchase method of accounting for all business combinations initiated after June 30, 2001. There was no impact from adopting this standard in 2001, and the Company does not believe that prospective adoption of this standard will have a material impact on its financial statements.

The Financial Accounting Standards Board issued Statement No. 142, "Goodwill and Other Intangible Assets", which revises the accounting for purchased goodwill and other intangible assets. This standard is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. Under this standard, purchased goodwill and intangible assets with indefinite lives are no longer amortized, but are to be tested for impairment at least annually. Intangible assets with finite lives are to continue to be amortized over their useful lives. The Company elected to adopt this standard effective on January 1, 2002, and expects the financial impact to be immaterial.

The Financial Accounting Standards Board issued Statement No. 143, "Accounting for Asset Retirement Obligations", which is effective for fiscal years beginning after June 15, 2002, and provides accounting requirements for asset retirement obligations associated with tangible long-lived assets. The Company believes the adoption of this standard will have an immaterial impact on the Company's financial statements.

The Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This standard creates one accounting model, based on the framework of Statement No. 121, to be applied to all long-lived assets including discontinued operations. Statement No. 144 is effective for fiscal years beginning after December 15, 2001. The Company believes the adoption of this standard will have an immaterial impact on the Company's financial statements.

R. Selected Quarterly Financial Information - Unaudited

	First	Second	Third	Fourth
2001	Quarter	Quarter	Quarter	Quarter (5)

Sales and other revenue (1)	$ 6,385,173	$ 8,362,467	$ 8,056,385	$ 7,654,703

Gross profit (3)	$ 1,163,516	$ 1,991,904	$ 1,717,376	$ 1,531,586

Net income (loss)	$ (622,459)	$ 110,406	$ (242,013)	$ (8,212,472)

Net income (loss) applicable to common	$ (819,141)	$ (91,988)	$ (450,284)	$ (8,426,790)

Net income (loss) per common share:
Basic and diluted	$(0.11)	$(0.01)	$(0.06)	$(1.07)


	First	Second	Third	Fourth
2000	Quarter	Quarter	Quarter	Quarter (6)

Sales and other revenue as originally reported (1)	$ 7,232,437	$ 9,432,391	$ 9,319,439	$ 10,062,489
Reclassification of freight income (2)	49,470	67,690	63,784	-
Sales and other revenue as restated	$ 7,281,907	$ 9,500,081	$ 9,383,223	$ 10,062,489

Gross profit as originally reported (3)	$ 1,417,455	$ 2,387,251	$ 2,302,109	$ 2,382,212
Reclassification of interest rebate (4)	(57,218)	(52,979)	(48,741)	-
Gross profit as restated (3)	$ 1,360,237	$ 2,334,272	$ 2,253,368	$ 2,382,212

Net income (loss):
As originally reported and as restated	$ (546,241)	$ (53,066)	$ (64,657)	$ (2,536,697)

Net income (loss) applicable to common:
As originally reported and as restated	$ (721,645)	$ (233,564)	$ (250,395)	$ (2,727,829)

Net income (loss) per common share:
Basic and diluted - as originally reported and as restated	$(0.09)	$(0.03)	$(0.03)	$(0.35)

Sales and other revenue before interest income.

Reclassified freight income to sales and from cost of sales with no effect on gross profit.

Gross profit after cost of merchandise sold and expenses associated directly with products sold and services rendered.

Reclassified supplier interest rebates from reduction in cost of sales to reduction in interest expense.

In the fourth quarter of ~~2000~~2001, the Company recorded a ~~pre-tax~~ charge of approximately $~~800,000~~6.6 million related to asset ~~write-downs~~writedowns, lease obligations, ~~and~~estimated ~~other~~store selling costs ~~associated~~and ~~with~~severance ~~closing~~arising ~~company~~from ~~stores,~~the aCompany's ~~pre-tax~~plans ~~charge~~to offranchise ~~$284,000~~substantially ~~associated~~all ~~with~~its ~~staff reductions,~~company-owned stores and ~~increased~~to ~~the~~close ~~deferred~~a ~~tax~~few ~~valuation~~unprofitable ~~allowance~~stores. Also byin 2001, $2845,~~625,~~000. was accrued for past services of two former executives.

RIn the fourth quarter of 2000, the Company recorded a pre-tax charge of approximately $800,000 related to costs associated with closing company stores, a pre-tax charge of $284,000 associated with staff reductions, and increased the deferred tax valuation allowance by $2,625,000. ~~Segments~~

~~The Company's four reportable operating segments are Development, Company Stores, Royalty and Advertising, and Wholesale~~S. Development markets the Company's franchise and recruits franchisees. Company Stores operates retail photo processing and portrait stores owned by the Company. Royalty and Advertising provides services to current franchisees. Wholesale sells to franchisees products and related services not covered under the franchise agreement which the franchisees need to operate their businesses.Segments

The Company's four reportable operating segments are Development, Company Stores, Royalty and Advertising, and Wholesale. Development markets the Company's franchise and recruits franchisees. Company Stores operates retail photo processing and portrait stores owned by the Company. When the Company has exited a substantial portion of the Company Stores segment (see Note D to the Consolidated Financial Statements), this segment will be consolidated into the Corporate section. Royalty and Advertising provides services to current franchisees. Wholesale sells to franchisees products and related services not covered under the franchise agreement which the franchisees need to operate their businesses.

Summarized financial information concerning the Company's reportable segments is shown in the following table.

Moto Photo, Inc. and Subsidiaries

	2001
	Development	Company Stores	Royalty and Advertising	Wholesale	Total
Sales and other revenue	$ 39,931	$12,965,451	$ 4,481,866	$12,971,480	$ 30,458,728
Depreciation	2,452	1,191,247	11,136	4,879	1,209,714
Operating segment contribution prior to interest income and expense, income taxes, restructuring charges, and unallocated corporate expenses	(309,072)	(2,752,190)	3,097,283	(1,078,393)	(1,042,372)
Restructuring charges	-	6,588,978	-	-	6,588,978
Identifiable segment assets	21,249	2,860,068	434,943	2,495,198	5,811,458
Capital expenditures including capital leases	-	311,762	-	-	311,762
	2000
	Development	Company Stores	~~Royalties~~Royalty and Advertising	Wholesale	Total
Sales and other revenue	$ 328,359	$ 14,969,514	$ 5,050,774	$ 15,879,053	$ 36,227,700
Depreciation	2,575	1,239,111	68,498	4,216	1,314,400
Operating segment contribution prior to interest income and expense, income taxes and unallocated corporate expenses	(560,920)	(2,885,557)	3,347,406	(1,147,340)	(1,246,411)
Identifiable segment assets	54,186	9,776,611	738,226	2,964,253	13,533,276
Capital expenditures including capitalized leases	-	1,012,128	44,500	-	1,056,628
Capital expenditures including capital leases	-	1,012,128	44,500	-	1,056,628
	1999
	Development	Company Stores	~~Royalties~~Royalty and Advertising	Wholesale	Total
Sales and other revenue	$ 424,045	$ 13,560,203	$ 5,129,929	$ 17,689,211	$ 36,803,388
Depreciation	3,878	951,274	12,244	9,013	976,409
Operating segment contribution prior to interest income and expense, income taxes and unallocated corporate expenses	(410,461)	(1,342,482)	3,520,999	(187,058)	1,580,998
Identifiable segment assets	98,963	10,631,721	757,932	4,359,745	15,848,361
Capital expenditures including capitalized leases	1,432	2,638,092	8,795	3,446	2,651,765
Capital expenditures including capital leases	1,432	2,638,092	8,795	3,446	2,651,765
	1998
	Development	Company Stores	Royalties and Advertising	Wholesale	Total
Sales and other revenue	$ 559,256	$ 13,710,748	$ 5,315,708	$ 17,553,384	$ 37,139,096
Depreciation	3,787	674,217	18,269	84,511	780,784
Operating segment contribution prior to interest income and expense, income taxes and unallocated corporate expenses	(344,535)	(911,889)	3,706,813	(1,038,767)	1,411,622
Identifiable segment assets	133,159	8,803,804	1,238,143	4,451,862	14,626,968
Capital expenditures including capitalized leases	1,812	1,115,136	4,207	24,392	1,145,547

Moto Photo, Inc. and Subsidiaries

	2000	1999	1998
	2001	2000	1999
Revenue
Total sales and other revenue for reportable segments	$3630,~~227~~458,~~700~~728	$36,~~803~~227,~~388~~700	$3736,~~139~~803,~~096~~388
Interest income	~~223~~130,~~235~~499	~~258~~223,~~067~~235	~~413~~258,~~087~~067
Other income	-	-	112,000
Total consolidated revenue	$30,589,227	$36,450,935	$37,061,455
Total consolidated revenue	$36,450,935	$37,061,455	$37,664,183

Other Significant Items	Operating Segment Totals	Corporate	Consolidated Total
2001
Depreciation and amortization	$ 1,209,714	$ 203,889	$ 1,413,603
Operating segment contribution prior to interest income and expense, investment expense, income taxes, restructuring charges, and unallocated corporate expenses for segment totals reconciled to income (loss) before taxes	(1,042,372)	(1,335,188)	(2,377,560)
Restructuring charges	6,588,978	-	6,588,978
Identifiable segment assets	5,811,458	1,891,766	7,703,224
Capital expenditures including capitalized leases	311,762	1,051	312,813
2000
Depreciation and amortization	$ 1,314,400	$ 185,093	$ 1,499,493
Operating segment contribution prior to interest income and expense, investment expense, income taxes and unallocated corporate expenses for segment totals reconciled to income (loss) before taxes	(1,246,411)	(958,250)	(2,204,661)
Identifiable segment assets	13,533,276	3,882,610	17,415,886
Capital expenditures including capitalized leases	1,056,628	84,903	1,141,531
1999
Depreciation and amortization	$ 976,409	$ 293,500	$ 1,269,909
Operating segment contribution prior to interest income and expense, investment expense, income taxes and unallocated corporate expenses for segment totals reconciled to income (loss) before taxes	1,580,998	(330,455)	1,250,543
Identifiable segment assets	15,848,361	8,235,657	24,084,018
Capital expenditures including capitalized leases	2,651,765	142,630	2,794,395
1998
Depreciation and amortization	$ 780,784	$ 234,827	$ 1,015,611
Operating segment contribution prior to interest income and expense, investment expense, income taxes and unallocated corporate expenses for segment totals reconciled to income (loss) before taxes	1,411,622	(81,369)	1,330,253
Identifiable segment assets	14,626,968	7,544,693	22,171,661
Capital expenditures including capitalized leases	1,145,547	222,769	1,368,316

Moto Photo, Inc. and Subsidiaries

Schedule II Valuation and Qualifying Accounts

Year Ended December 31, 2001	Balance at Beginning of Period	Charged to Costs and Expenses	Charged / (Credited) to Other Accounts	Deductions	Balance at End of Period

Reserves and Allowances deducted from Accounts Receivable	$ 767,000	$ 395,000	$ 22,000	$(366,000)(1)	$ 818,000

Allowance for Cash Discounts	55,000	(15,000)	-	-	40,000

Reserves and Allowances deducted from Notes Receivable	1,902,000	395,000	(13,000)	(426,000)(1)	1,858,000

Allowance for Inventory Obsolescence	82,000	16,000	-	(8,000)(2)	90,000

Total	$ 2,806,000	$ 791,000	$ 9,000	$ (800,000)	$ 2,806,000

(1) Uncollectible accounts written-off

(2) Disposal of Inventory

Moto Photo, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts

Year Ended December 31, 2000	Balance at Beginning of Period	Charged to Costs and Expenses	Charged / (Credited) to Other Accounts	Deductions	Balance at End of Period
Reserves and Allowances deducted from Accounts Receivable	$ 584,000	$ 337,000	$ 33,000	$ (187,000)(1)	$ 767,000
Allowance for Cash Discounts	52,000	3,000	-	-	55,000
Reserves and Allowances deducted from Notes Receivable	1,625,000	337,000	280,000	(340,000)(1)	1,902,000
Allowance for Inventory Obsolescence	111,000	24,000	-	(53,000)(2)	82,000
Total	$ 2,372,000	$ 701,000	$ 313,000	$ (580,000)	$ 2,806,000

(1) Uncollectible accounts written-off

(2) Disposal of Inventory

Moto Photo, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts

Year Ended December 31, 1999	Balance at Beginning of Period	Charged to Costs and Expenses	Charged / (Credited) to Other Accounts	Deductions	Balance at End of Period
Reserves and Allowances deducted from Accounts Receivable	$ 1,092,000	$ 235,000	$ (145,000)	$ (598,000)(1)	$ 584,000
Allowance for Cash Discounts	46,000	-	6,000	-	52,000
Reserves and Allowances deducted from Notes Receivable	1,400,000	235,000	368,000	(378,000)(1)	1,625,000
Allowance for Inventory Obsolescence	150,000	36,000	-	(75,000)(2)	111,000
Total	$ 2,688,000	$ 506,000	$ 229,000	$ (1,051,000)	$ 2,372,000

Uncollectible accounts written-off
Disposal of Inventory

Moto Photo, Inc. and Subsidiaries
Schedule II Valuation and Qualifying Accounts
Moto Photo, Inc. and Subsidiaries
Schedule II Valuation and Qualifying Accounts
Year Ended December 31, 1998 Balance at Beginning of Period Charged to Costs and Expenses Charged / (Credited) to Other Accounts Deductions Balance at End of Period
Reserves and Allowances deducted from Accounts Receivable $ 1,590,000 $ 224,000 (227,000) $ (495,000)(1) $ 1,092,000
Allowance for Cash Discounts 45,000 - 1,000 - 46,000
Reserves and Allowances deducted from Notes Receivable 1,018,000 225,000 432,000 (275,000)(1) 1,400,000
Allowance for Inventory Obsolescence 115,000 94,000 - (59,000)(2) 150,000
Total $ 2,768,000 $ 543,000 $ 206,000 $ (829,000) $ 2,688,000
(1) Uncollectible accounts written-off
(2) Disposal of Inventory
EXHIBIT INDEX

Copies of the following documents are filed as exhibits to this report:

NUMBER DESCRIPTION

3.01 Certificate of Incorporation, as amended (Incorporated by Reference to Exhibit 3.1 to Form 10-K dated March 29, 1995)

3.02 Bylaws, as amended (Incorporated by Reference to Exhibit 3.2 to Form 10-K dated May 5, 1989)

4.01 Certificate of Designation of Series G Preferred Stock (Incorporated by Reference to Exhibit 4.2 to Form 10-K dated March 29, 1995)

4.02 Certificate of Elimination of Series G Preferred Stock (Incorporated by Reference to Exhibit 4.02 to Form 10-K dated March 27, 2000)

4.03 Certificate of Designation of Amended Series G Preferred Stock (Incorporated by Reference to Exhibit 4.03 to Form 10-K dated March 27, 2000)

4.04 Securities Purchase Agreement dated September 9, 1992 by and between Moto Photo, Inc. and Fuji Photo film U.S.A., Inc., with Exhibits (Incorporated by ~~Reference to Exhibit 28.1 to Form 8-K dated September 9, 1992)~~

Reference to Exhibit 28.1 to Form 8-K dated September 9, 1992)

*10.01 1992 Moto Photo Performance and Equity Incentive Plan and Amendment No. 1 to the Plan, as amended through April 11, 1995 (Incorporated by Reference to Exhibit 4.1 to Registration Statement Number 033-59673 on Form S-8 dated May 30, 1995)

*10.02 Amendment No. 2 to the 1992 Moto Photo Performance and Equity Incentive Plan (Incorporated by Reference to Exhibit 10.2 to Form 10-Q dated May 14, 1998)

10.03 Management Agreement dated April 15, 1983, between Foto Fair International, Inc. and National Photo Labs II, Inc. (Incorporated by Reference to Exhibit 10.20 to Form S-1 Registration Statement, Registration No. 2-99676)

10.04 Amendment dated October 1, 1986 to Management Agreement between Moto Photo, Inc. and National Photo Labs II, Inc. (Incorporated by Reference to Exhibit 10.04 to Form 10-K dated May 21, 2001)

10.05 Amendment dated December 14, 1998 to Management Agreement between Moto Photo, Inc. and National Photos Labs II, Inc. (Incorporated by Reference to Exhibit 10.05 to Form 10-K dated May 21, 2001)

10.06 Loan and Security Agreement dated as of February 19, 1997, between Moto Photo, Inc. and The Provident Bank (Incorporated by Reference to Exhibit 10.2 to Form 10-Q dated May 9, 1997)
NUMBER DESCRIPTION

10.06 Loan and Security Agreement dated as of February 19, 1997, between Moto Photo, Inc. and The Provident Bank (Incorporated by Reference to Exhibit 10.2 to Form 10-Q dated May 9, 1997)

10.07 First Amendment to Loan and Security Agreement, dated as of May 1, 1998, by and between Moto Photo, Inc. and The Provident Bank (Incorporated by Reference to Exhibit 10.3 to Form 10-Q dated May 14, 1998)

10.08 Second Amendment to Loan and Security Agreement dated as of September 2, 1999, by and between Moto Photo, Inc. and The Provident Bank (Incorporated by Reference to Exhibit 10.1 to Form 10-Q dated November 15, 1999)

10.09 Third Amendment to Loan and Security Agreement dated as of December 30, 1999, by and between Moto Photo, Inc. and The Provident Bank (Incorporated by Reference to Exhibit 10.7 to Form 10-K dated March 27, 2000)

10.10 Amended Supply Agreement dated as of January 11, 1995 between Moto Photo, Inc. and Fuji Photo Film U.S.A., Inc. (Incorporated by Reference to Exhibit 10.12 to Form 10-K dated March 29, 1995)

10.11 Amendment Agreement to Amended Supply Agreement, dated as of December 30, 1999, by and between Moto Photo, Inc. and Fuji Photo Film U.S.A., Inc. (Incorporated by Reference to Exhibit 10.09 to Form 10-K dated March 27, 2000)

10.12 Term Note dated December 30, 1999 from Moto Photo, Inc. in favor of Fuji Photo Film U.S.A., Inc. (Incorporated by Reference to Exhibit 10.10 to Form 10-K dated March 27, 2000)

10.13 Agreement dated as of December 30, 1999, by and among Moto Photo, Inc., Fuji Photo Film U.S.A., Inc. and The Provident Bank (Incorporated by Reference to Exhibit 10.11 to Form 10-K dated March 27, 2000)

10.14 ~~Amendment No. 1 to Warrant Certificate held by Fuji Photo Film U.S.A., Inc. (Incorporated by Reference to Exhibit 10.13 to Form 10-K dated March 29, 1995)~~

Amendment No. 1 to Warrant Certificate held by Fuji Photo Film U.S.A., Inc. (Incorporated by Reference to Exhibit 10.13 to Form 10-K dated March 29, 1995)

10.15 Project Agreement dated as of February 6, 1998 between Fuji Photo Film U.S.A., Inc., and Moto Photo, Inc. (Incorporated by Reference to Exhibit 10.7 to Form 10-K dated March 30, 1998)

10.16 First Amendment to Project Agreement, dated as of September 14, 1999, by and between Fuji Photo Film U.S.A., Inc., and Moto Photo, Inc. (Incorporated by Reference to Exhibit 10.2 to Form 10-Q dated November 15, 1999)

10.17 Master Lease Agreement dated as of February 6, 1998 between Fuji Photo Film U.S.A., Inc., Moto Photo, Inc., and The Provident Bank (Incorporated by Reference to Exhibit 10.8 to Form 10-K dated March 30, 1998)
NUMBER DESCRIPTION

10.18 First Amendment to Master Lease Agreement, dated as of September 14, 1999, between Fuji Photo Film U.S.A., Inc., and Moto Photo, Inc. (Incorporated by Reference to Exhibit 10.3 to Form 10-Q dated November 15, 1999)

10.19 Lease dated as of May 7, 1999 between Moto Photo, Inc. and Sycamore Partnership (Incorporated by Reference To Exhibit 10.1 to Form 10-Q dated August 13, 1999)

10.20 ~~Master~~Supply ~~License~~Contract ~~Agreement~~ dated as of ~~December~~September 3117, ~~1998~~2001 between ~~Moto~~Eastman ~~Photo,~~Kodak ~~Inc.~~Company and ~~Canadian~~Moto ~~Industrial Services~~Photo, ~~Ltd~~Inc. (Incorporated by Reference to Exhibit 10.111 to Form 10-KQ dated ~~March~~November 2614, ~~1999~~2001)

*10.21 Employment Agreement ~~effective~~dated ~~April~~as 1of June 28, ~~1997~~2001, ~~with~~between ~~Michael~~Moto FPhoto, Inc. ~~Adler~~and Lawrence P. Destro (Incorporated by Reference to Exhibit 10.1 to Form ~~10-Q dated May 9, 1997)~~

*10.22 ~~Amendment to Employment Agreement, dated as of April 1, 1997, with Michael F. Adler (Incorporated by Reference to Exhibit~~ 10~~.1 to Form 10~~-Q dated August 714, ~~1997~~2001)

*10.2322 Employment Agreement ~~dated~~effective ~~June~~April 1, ~~1996~~1997 with ~~David~~Michael AF. ~~Mason~~Adler (Incorporated by Reference to Exhibit 10.21 to Form 10-Q dated ~~August~~May 69, ~~1996~~1997)

*10.2423 Amendment to Employment Agreement, dated as of ~~December~~April 231, 1997, with ~~David~~ Michael AF. ~~Mason~~Adler (Incorporated by Reference to Exhibit 10.131 to Form 10-KQ dated ~~March~~August 307, ~~1998~~1997)

*10.~~25 Amendment~~24 Compensation toAgreement ~~Employment~~for ~~Agreement~~Past Services, dated as of December 2021, ~~1999~~2001, ~~with David A. Mason (Incorporated by Reference to Exhibit 10.23 to Form 10-K dated March 27, 2000)~~

*10.26 Employment between Moto ~~Agreement dated June 1~~Photo, ~~1996 with Frank M~~Inc. ~~Montano~~and ~~(Incorporated~~Michael ~~by Reference to Exhibit 10~~F.1 toAdler, ~~Form~~as ~~10-Q~~amended ~~dated~~December ~~August 6~~28, ~~1996)~~2001

*10.~~27 Amendment~~25 Agreement tofor ~~Employment~~Consulting ~~Agreement,~~Services dated as of December 2321, ~~1997~~2001, ~~with Frank M. Montano (Incorporated by Reference to Exhibit 10.15 to Form 10-K dated March 30, 1998)~~ between

*10.28 Amendment Moto ~~to Employment Agreement~~Photo, ~~dated as of December 20, 1999, with Frank M~~Inc. ~~Montano~~and ~~(Incorporated~~Michael ~~by Reference to Exhibit 10~~F.26 toAdler, ~~Form~~as ~~10-K~~amended ~~dated~~December ~~March 27~~28, ~~2000)~~2001

*10.29 26 Employment Agreement dated asJune ~~of January~~ 1, ~~1999~~1996 with ~~Lloyd~~David FA. ~~Noland~~Mason (Incorporated by Reference to Exhibit 10.192 to Form 10-KQ dated ~~March~~August 266, ~~1999~~1996)

NUMBER DESCRIPTION

*10.3027 ~~Cancellation~~Amendment ~~and~~to ~~Release~~Employment Agreement, dated as of ~~March~~December 2123, ~~2000~~1997, ~~between~~with ~~Moto~~David ~~Photo, Inc~~A. ~~and~~Mason ~~Lloyd F. Noland~~ (Incorporated by Reference to Exhibit 10.113 to Form 10-QK dated ~~May~~March 1030, ~~2000~~1998)

*10.3128 ~~Amended~~Amendment to Employment Agreement, dated as of ~~January~~December 2620, ~~2001~~1999, ~~between~~with David A. Mason (Incorporated by Reference to Exhibit 10.23 to Form 10-K dated March 27, 2000)

~~Moto~~*10.29 Compensation ~~Photo~~Agreement for Past Services, ~~Inc.~~dated ~~and~~as ~~Lloyd~~of December F.27, ~~Noland~~2001,

*10.32 Employment between Moto ~~Agreement~~Photo, ~~dated~~Inc. asand ofDavid ~~April~~A. 1,Mason ~~1999, with Paul Pieschel~~

*10.30 Agreement for Consulting Services dated as of December 27, 2001, between Moto Photo, Inc. and David A. Mason

*10.31 Employment Agreement dated June 1, 1996 with Frank M. Montaño (Incorporated by Reference to Exhibit 10.1 to Form 10-Q dated August 6, 1996)

*10.32 Amendment to Employment Agreement, dated as of December 23, 1997, with Frank M. Montaño (Incorporated by Reference to Exhibit 10.15 to Form 10-K dated March 30, 1998)

*10.33 Amendment to Employment Agreement, dated as of December 20, 1999, with Frank M. Montaño (Incorporated by Reference to Exhibit 10.26 to Form 10-K dated March 27, 2000)

*10.34 Agreement Concerning Termination of Employment, dated as of November 1, 2001, with Frank M. Montaño, as amended January 4, 2002

*10.35 Employment Agreement dated as of April 1, 1999, with Paul Pieschel

(Incorporated by Reference to Exhibit 10.28 to Form 10-K dated March

27, 2000)

22*10.~~0 List~~36 Employment ofAgreement ~~subsidiaries~~dated as of ~~the~~July ~~Company~~9, ~~(Incorporated~~2001, bywith ~~Reference~~Paul ~~to Exhibit 22 to Form 10-K dated March 27, 1996)~~Pieschel

*10.37 Severance Agreement dated November 27, 2001 with Stephen M. Adler

22.01 List of subsidiaries of the Company (Incorporated by Reference to Exhibit 22 to Form 10-K dated March 27, 1996)

23.01 Consent of Arthur Andersen LLP

23.02 Consent of Ernst & Young LLP

99 Letter dated March 29, 2002 from Moto Photo, Inc. to Securities and Exchange

Commission Concerning Representations from Arthur Andersen, LLP

*Indicates management contract or compensatory plan.

	Annual Compensation				Long Term Compensation
Name and Principal Position	Fiscal Year	Salary	Bonus	Other Annual Compen-sation(1)	Securities Underlying Options(#)	All Other Compen-sation(2)
Michael F. Adler Chairman and Chief Executive Officer Frank M. Montano President and Chief Operating Officer David A. Mason Executive Vice President, Chief Financial Officer And Treasurer Leonard S. Swartz Former Senior Vice President - Franchise Operations (3) Lloyd F. Nolandd Former Senior Vice President Marketing (4) Former Senior Vice President Marketing (4) Paul Pieschel Senior Vice President - Franchise Sales (5) Alfred E. Lefeld Vice President - Controller	2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998	$200,000 200,000 189,634 $168,300 167,437 162,604 $127,500 126,846 123,223 $109,878 112,058 108,332 $139,050 137,991 54,519 $ 95,508 91,500 89,301 $ 95,261 81,772 78,559	$ - 25,906 - $ - 21,048 - $ - 21,125 - $ - 2,500 - $ - 20,619 15,000 $ 17,233 20,656 23,493 $ 9,500 5,000 -	$ 29,525 28,561 23,544 $ 4,704 4,090 3,895 $ 4,022 4,090 3,895 $ 3,713 3,498 2,776 - - - $ 16,608 4,090 3,895 $ 4,704 4,090 3,895	- - 38,760 - 7,544 37,464 - 7,023 28,416 - 6,160 25,299 - 17,585 75,000 9,323 4,384 20,808 4,168 3,616 17,816	$ 5,870 7,370 5,900 $ 3,200 6,782 13,044 $ 3,200 2,787 3,200 $ 1,850 2,446 2,523 $197,365 14,530 8,453 $ 2,404 2,434 2,496 $ 2,307 1,807 1,811

	Individual Grants					Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2)
Name	Number of Securities Underlying Options Granted(1)	% of Total Options Granted to Employees in 2000	Exercise Price Per Share	Expiration Date	5%		10%
Paul Pieschel	9,323	9%	$.4062	12/13/2005	$1,042		$2,310
Alfred E. Lefeld	4,168	4%	$.4062	12/13/2005	1,066		2,700

	Number of Unexercised Options Held at Fiscal Year End		Value of Unexercised in-the-Money Options at Fiscal Year End($)(1)
Name	Exercisable	Unexercisable	Exercisable	Unexercisable
Michael F. Adler	228,295	33,799	-	-
Frank M. Montano	238,300	38,648	-	-
David A. Mason	84,486	30,398	-	-
Paul Pieschel	19,507	30,493	-	-
Alfred E. Lefeld	13,882	26,218	-	-
Leonard S. Swartz	52,086	-	-	-
Lloyd F. Noland	13,517	54,068	-	-

Name	Number of Shares	Percent of Class (1)
Directors and Certain Executive Officers Michael F. Adler (2) 4444 Lake Center Drive Dayton, OH 45426 Harry D. Loyle (3) Linwood Greene, Suite 15 210 New Road Linwood, NJ 08221 David A. Mason (4) Dexter B. Dawes (5) Frank W. Benson (5) D. Lee Carpenter (5) James F. Robeson, Ph.D. (6) Leslie Charm (5) Frank M. Montano (7) Leonard S. Swartz (8) Paul Pieschel (9) Alfred E. Lefeld (10) Lloyd F. Noland All Directors and Executive Officers as a Group (13 persons) (11)

Year Ended December 31, 1998	Balance at Beginning of Period	Charged to Costs and Expenses	Charged / (Credited) to Other Accounts	Deductions	Balance at End of Period
Reserves and Allowances deducted from Accounts Receivable	$ 1,590,000	$ 224,000	(227,000)	$ (495,000)(1)	$ 1,092,000
Allowance for Cash Discounts	45,000	-	1,000	-	46,000
Reserves and Allowances deducted from Notes Receivable	1,018,000	225,000	432,000	(275,000)(1)	1,400,000
Allowance for Inventory Obsolescence	115,000	94,000	-	(59,000)(2)	150,000
Total	$ 2,768,000	$ 543,000	$ 206,000	$ (829,000)	$ 2,688,000

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