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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

            (Mark One)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended June 30, 1998
                                       OR
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
            For the transition period from  _____ to _____
                         Commission File Number 0-23388

                           VIDEO SERVICES CORPORATION
                          (Exact name of registrant as
                            Specified in its charter)

           DELAWARE                                      13-3735647
(State or other jurisdiction of                       (I.R.S. Employer
 incorporation or organization)                      Identification No.)

     240 Pegasus Avenue
    Northvale, New Jersey                                  07647
    (Address of principal                                (Zip Code)
      executive offices)


        Registrant's telephone number, including area code (201) 767-1000
                                ----------------
           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                     Common Stock, par value $.01 per share
                                (Title of Class)
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      None
                                ----------------
         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 (ss.229.405) is not contained herein, and will not be
contained  to the  best  of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].

                               ------------------
         The aggregate market value of the registrant's  common stock, par value
$.01 per share,  held by persons other than  affiliates of the  registrant as of
August 31, 1998, was approximately $7,237,224.

                               ------------------
         The number of outstanding shares of the registrant's  common stock, par
value $.01 per share, as of August 31, 1998, was: 13,264,307.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None
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<PAGE>
                                     PART I

     Certain  statements  contained  in this  Annual  Report  on Form  10-K  are
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995 and are thus  prospective.  These  statements are
generally (but not necessarily)  preceded or followed by, or include, such words
as "believes", "expects",  "anticipates" or similar expressions. Such statements
reflect  management's  current views, are based on many assumptions,  including,
but not limited  to, that no  significant  changes  will occur in the  operating
environment of the Company,  and are subject to risks,  uncertainties  and other
factors  which could  cause  these  statements  to differ  materially  from what
actually  occurs.  The Company may execute new  agreements,  terminate  existing
agreements or enter into new financing arrangements that may affect the accuracy
of these statements.  Other important factors that could cause results to differ
materially  from  current  views  include,  but are not  limited to, the general
performance  of  the  economy,  specifically  as  it  affects  the  advertising,
entertainment   and   television  and  video  and  broadcast   industries;   the
international  economic  and  political  climate  which could impact the sale of
domestic  programming  overseas;  significant changes in video technology in the
post-production, video and communications industries; the loss of key personnel;
and the  loss of key  customers.  None of these  events  can be  predicted  with
certainty and,  accordingly,  are not taken into  consideration in the making of
the  forward-looking  statements  contained  herein.  Readers are  cautioned  to
carefully consider such factors. There is no assurance that the assumptions used
are  necessarily  the most  likely to occur.  The  Company  does not  assume any
obligation to update any  forward-looking  statement to reflect actual  results,
changes in assumptions or changes in other factors affecting such statement.

ITEM 1. BUSINESS

Background

     Video Services  Corporation,  a privately held New Jersey corporation ("Old
Video"),  was  incorporated  in 1979 to  service  select  segments  of the video
industry which its founders, Louis H. Siracusano,  Arnold P. Ferolito and Martin
Irwin, had identified as being under-serviced. Originally, Old Video focused its
efforts on building  advanced  video  systems and providing  professional  video
equipment  to  particular  segments of the  television  and  professional  video
services  industries.  Over the years,  Old Video identified  additional  market
segments  which it believed  presented  opportunities  for  significant  revenue
growth and its lines of business gradually  expanded to include  post-production
and  standards  conversion,  as well as satellite  and fiber optic  transmission
services.  In 1992, Old Video divested itself of its  post-production  business,
which  divestiture  ultimately  resulted in the formation of International  Post
Limited, a Delaware  Corporation ("IPL"), in October 1993. In February 1994, Old
Video sold its standards  conversion  business to IPL in  connection  with IPL's
initial public offering and used the sale proceeds to repay  indebtedness and to
expand  certain  business  segments,  particularly  satellite  and  fiber  optic
transmission  services.  After such sale,  Old Video owned  approximately  3% of
IPL's outstanding Common Stock.

     On August 27, 1997,  Old Video merged with and into IPL, with IPL being the
surviving corporation,  and the separate corporate existence of Old Video ceased
(the "Merger").  The Merger was accounted for as a reverse  acquisition  whereby
the pre-Merger financial statements of Old Video became the historical financial
statements of the company after the Merger. At the effective time of the Merger,
IPL's name was changed to Video Services  Corporation.  References herein to the
"Company" refer to the combined Company after giving effect to the Merger.

Overview

     The  Company is a leading  provider  of  value-added  video  services  to a
diverse base of customers  within the television  network,  cable and syndicated
programming  markets.  These  services  are  divided  into three  segments:  (i)
Satellite  and  Distribution  Services,  (ii)  Systems  and  Products  and (iii)
Production  Services  (see Note 12). The  Satellite  and  Distribution  Services
segment  integrates  and  distributes  broadcast  quality  video  content  via a
satellite and fiber optic transmission network routed through its digital/analog
switching center and is an international  provider of technical and distribution
services to  distributors  of television  programming.  The Systems and Products
segment  designs,  engineers  and produces  advanced  video  facilities  for the
broadcast and cable  television,  post-production  and corporate  markets.  This
segment also develops,  manufactures  and markets  advanced color correcting and
manipulation systems for the film, post-production and multimedia industries and
rents  professional  video  equipment  to the  sports,  entertainment  and other
segments of the  broadcast  and cable  television  and  corporate  markets.  The
Production  Services  segment is an  international  provider  of  technical  and
creative services to owners and producers of television programming,  television
advertising and other programming content.
 <PAGE>
     On January 2, 1997,  Old Video's  management,  which had the  authority  to
approve the action,  committed  Old Video to a formal  plan to  discontinue  the
operations of its Diversified  Products segment as a condition to the Merger. In
August 1997 and prior to the Merger, Old Video spun off the Diversified Products
segment to Old Video's stockholders. On November 30, 1997, management, which had
the  authority to approve the action,  committed the Company to a formal plan to
dispose  of the  Consulting  Services  segment  providing  strategic  consulting
services in the area of communications,  design and implementation of intranets,
extranets and internets.

     The Company is a leading  single  source  provider of  satellite  and fiber
optic video  transmission  services in the New York metropolitan area and one of
the largest  independent (i.e., not affiliated with, or related to, an equipment
manufacturer)  providers  of  technical  services  and  equipment  to its target
markets.  The Company  believes that it will  continue to experience  increasing
demand for its engineering services as a result of the anticipated conversion of
existing  television  and cable  facilities  to  digital,  emerging  compression
technologies and an increasing  demand for programming  content  worldwide.  The
Company  provides  (i)  producers of original  programming  with  technical  and
creative services necessary to transform original film or video to final product
for airing on network,  syndicated,  cable or foreign television;  (ii) users of
special video effects with services  required to digitally  create or manipulate
images in high resolution  formats for integration  into television  commercials
and programming;  (iii)  international  programmers  with studio  facilities and
multi-standard  post-production services necessary to assemble programming;  and
(iv) international  programmers and owners of television and film libraries with
standards conversion,  network playback, and duplication and audio services, all
in multiple  standards  and formats.  The Company  believes  that its  principal
strengths  in  these  areas   include  the  depth  and  breadth  of  its  client
relationships,  the  depth  and  continuity  of its  creative  talent,  and  its
technologically advanced equipment and facilities.

     Demand  for  the  Company's  post-production  services  and  facilities  is
principally  derived from the production of new television  commercials  and the
distribution of previously  released motion pictures and television  programming
through international syndicators and programmers.  Historically,  the Company's
post-production   clients  have  outsourced   their   post-production   services
requirements,  and the  Company  expects  that such  clients  will  continue  to
outsource  many of the services  required for  production,  post-production  and
distribution  of film and  television  programming.  The Company  believes  that
demand will also be created by the continuing trend toward  globalization in the
entertainment  and  media  industries.   The  worldwide  market  penetration  of
distribution channels such as home video and digital satellite broadcast is also
anticipated  to  contribute  to a  growing  demand  for  original  and  reissued
programming.

Business Strategy

     The Company's  business strategy is to capitalize on opportunities  created
by changes in technology and markets,  as well as to become the leading supplier
of services to the market segments in which it currently  competes.  The Company
has  developed  good  customer  relationships  with all of the major  television
networks  and  many  of  the  established  and  developing   cable  networks  by
maintaining  high levels of technical  capabilities  and customer  service.  For
example,  AT&T's SKYNET Satellite Services  acknowledged the Company's satellite
uplink  performance  in 1997  and  1996  by  presenting  the  Company  with  the
prestigious  SKYNET  Uplinker  Award,  which is awarded to  companies  that have
accessed  AT&T  satellites  without any  interferences,  incidents  or procedure
violations over a period of one year. The Company  believes that it will be able
to continue to grow the  businesses by selling  additional  services to existing
customers  and by  acquiring  new  customers  as a result  of its  technological
capabilities, superior service, strong reputation and aggressive sales force.

     The Company is also focused on  capitalizing  on  opportunities  created by
emerging  industry  trends such as the emergence of digital  television  and its
more  advanced  variant,   high-definition   television;  the  proliferation  of
alternative  transmission/distribution  methods such as direct-to-home satellite
services  and  multipoint  microwave  systems;  and the  conversion  of existing
television facilities from analog to digital and from videotape-based to digital
server-based technologies. The Company believes that the continued proliferation
of new distribution  technologies,  as well as the  industry-wide  conversion of
equipment and systems from analog to digital,  will create an increasing  demand
for technical  expertise and resources  which can be outsourced by the end-user.
The  Company  believes  that  the  aggressive  timetable  associated  with  such
conversion,  which  has  resulted  both  from  recent  mandates  by the  Federal
Communications Commission (the "FCC") for digital television and high-definition
television  as well as  competitive  forces  in the  marketplace,  is  likely to
accelerate the rate of increase in the demand for these  services.  As a result,
the Company  believes  that  significant  opportunities  exist for it to provide
services  for  the  upgrading  and  conversion  of  the   industry's   technical
infrastructure.
<PAGE>
     The Company has implemented  several  strategies for  capitalizing on these
growth  opportunities,  including the expansion of its engineering staff to meet
market  demand,  the  introduction  of additional  services,  such as repair and
maintenance contracts, and, most important the negotiation and implementation of
strategic  partnerships  to  position  itself as a leader in the  conversion  to
digital  television  and   high-definition   television.   In  June  1997,  A.F.
Associates,  Inc.,  one of the  Company's  subsidiaries,  signed a contract with
Comark Digital Systems pursuant to which it has engineered and built new digital
master control and studio facilities for two analog television stations owned by
Sinclair Communications,  Inc. in Birmingham, Alabama and Milwaukee,  Wisconsin.
In March 1998, the Company executed a "Strategic Alliance Agreement" with one of
the  nation's   largest   manufacturers  of  television   transmitters,   Comark
Communications,  Inc. ("Comark"), relating to joint marketing of turnkey systems
for the  broadcasting  industry's  conversion  to  digital  television  and high
definition  television.  The Company  believes  that this  alliance will provide
technological leadership for broadcasters in the conversion process.

     In  addition,   the  Company  seeks  to  become  the  leading  full-service
post-production  house for the United  States and  international  markets and to
continue  to  seek  new  ways  to  enhance  its  ability  to  provide   one-stop
post-production  services while  maintaining  the high quality of such services.
The  Company  plans  for  further  growth  and the  expansion  of its  range  of
post-production  and other services through strategic  acquisitions and internal
growth.  In the first  quarter  of  fiscal  year  1999,  the  Company  opened an
additional  13,000 sq. ft. facility in Burbank,  California to provide technical
and distribution  services to international  television program  originators and
distributors.  Management  believes  that the facility  will give the company an
opportunity to recapture business lost to those of its competitors  operating in
California,  as well as to  attract  additional  customers  located  on the West
Coast. Historically, the Company invested significant sums in its infrastructure
to ensure that each of its divisions remained at the technological  forefront of
the post-production industry.

Principal Services

Satellite and Distribution Services

     Through   two   of   its   operating   subsidiaries,   Atlantic   Satellite
Communications,   Inc.  ("Atlantic  Satellite")  and  Waterfront  Communications
Corporation ("Waterfront"),  the Company provides integrated satellite and fiber
optic video and data  transmission  services to a wide range of  customers  with
whom it has enjoyed  long-term  relationships,  including  the major  television
broadcast networks and several cable television  networks,  independent national
and  international  television  stations and producers of syndicated  television
shows.  Satellite  and  fiber  optic  transmission  services  are  used by these
customers independently and in combination to integrate editing and transmission
of video  content as quickly as possible.  The  Company's use of fiber optic and
satellite  technologies  enables  it to  provide  its  customers  with rapid and
reliable  transmission  of broadcast  quality video content with a high level of
flexibility.  The Company  believes  that,  in the New York  metropolitan  area,
Atlantic  Satellite is a leading single source provider of satellite and related
transmission  services  and that  Waterfront  is the leading  provider of "first
mile" and "last mile" fiber optic video and data transmission  services.  "First
mile" transmission  services are services whereby content is transmitted from an
origination  point,  via local  transmission  means,  to a long  distance  video
network  carrier  (such as VYVX or AT&T) or  satellite  earth  station  (such as
Atlantic  Satellite) and "last mile" transmission  services are services whereby
content is received into, via local  transmission  means, the final  destination
point for the content (such as a television  network local  broadcaster or cable
channel). Atlantic Satellite's teleport facilities provide customers with access
to the full  complement  of  satellite  and fiber  optic  transmission  services
provided by Atlantic Satellite and Waterfront.

     Atlantic Satellite's teleport facility is located on contiguous  properties
in Northvale,  New Jersey and Tappan, New York. This facility contains broadcast
quality  satellite  dishes,  which  transmit and receive  domestic feeds in both
C-Band and KU Band frequencies,  and provides international transmission to both
PanAmSat and Orion satellites.  At this facility,  Atlantic  Satellite  provides
primary up-link and down-link  services,  as well as ancillary  services such as
tape playback and recording,  tape duplication,  syndication services (including
spot insertion and editing),  and digitally  compressed  satellite  transmission
expertise. Atlantic Satellite provides over 3,000 hours per year of playback and
uplink services for pre-taped, syndicated television programs produced by Warner
Brothers,  Hearst and  KingWorld  among  others.  It also  downlinks and records
numerous  live  sporting  events for clients such as the National  Hockey League
(NHL) and the  National  Basketball  Association  (NBA) and  provides  satellite
transmission services for clients such as Fox Sports, NHK, NFL Films and Phoenix
Communications Group Inc.  ("Phoenix"),  which is the  communications/production
provider for Major League Baseball.

     Waterfront's  services  are  provided  through a video  switching  facility
located in New York City which is connected to all major news  organizations and
all  New  York  area  teleports  including  Atlantic  Satellite's.  Waterfront's
extensive  network of both analog and digital video fiber optic  connections and
multiple  paths  to  Atlantic   Satellite  enable  domestic  and   international
broadcasters  to take  advantage of the  Company's  single  source  transmission
services at competitive  rates.  The Company  believes that  Waterfront's  fully
manned  facility  provides  it  with a  competitive  advantage  over  its  major
competitor,  "The Switch"  (operated by  Globecast),  which does not provide the
same level of service. Waterfront's fiber optic connections are located in local
venues such as the New York Stock  Exchange  and the United  Nations in New York
City,  as well  as  Giants  Stadium,  the  Continental  Airlines  Arena  and the
Meadowlands  Racetrack  in New  Jersey.  These fiber  optic  connections  enable
Waterfront's  customers to transmit video content  directly from those venues to
their  studios  or,  alternatively,  to  Atlantic  Satellite  for  national  and
international  distribution.  In addition to local fiber optic  transmission and
connections to Atlantic Satellite's  transmission facility,  Waterfront provides
its customers with access to several  long-distance fiber optic carriers through
its remote  facility  located in downtown  Manhattan.  Waterfront  also provides
transportable  services,   including   point-to-point   microwave  transmission,
transportable  up-link  and  down-link   transmission,   and  broadcast  quality
teleconference  services,  as well as access to other teleport  facilities.  The
Company  believes  that  Waterfront's  switching  facility is the  largest  such
facility in the New York metropolitan area and that Waterfront's  connections to
major events and sports  venues  within the New York  metropolitan  area provide
clients with extensive and essential coverage.

     The Company  believes  that its ability to combine  "first  mile" and "last
mile" fiber optic transmission and satellite  transmission  services provides it
with a  competitive  advantage  over  providers of  satellite-only  transmission
services.  These integrated  capabilities offer  broadcasters,  cable television
networks and others the ability to edit news,  sports and other video content in
their Manhattan  studios (which are linked to Waterfront) and, after alteration,
to transmit that content  anywhere in the world almost  instantaneously  through
the  Waterfront/Atlantic  Satellite fiber optic link. The Company  believes that
the  combined  services  provided  by Atlantic  Satellite  and  Waterfront  have
achieved a reputation  for quality and  reliability  in the industry,  which has
resulted in  contracts  with Fox News,  Fox Sports,  Court TV,  PanAmSat,  CNBC,
MS/NBC, the NHL and Worldwide Television Network.

     Through Audio Plus Video  International,  Inc.  ("Audio Plus  Video"),  the
Company  provides  the  following  broad  range of  technical  and  distribution
services to distributors of television  programming to the international  market
and,  to  a  lessor  extent,  a  variety  of  international  television  program
originators,  including  standards  conversion,  international  duplication  and
specialized video services.

     Standards  Conversion:  Throughout the world, video signals are recorded in
four principal  standards:  NTSC-used in several countries,  including the U.S.,
Canada,  Mexico and Japan;  PAL-used in numerous  countries,  including England,
Italy,  Australia  and  China;  PAL-Modified-used  exclusively  in  Brazil;  and
SECAM-used  in  France,  Russia  and the  Middle  East.  A program  recorded  in
one-standard  cannot be  broadcast or played back  through  equipment  employing
another standard unless the program is first  "converted" to the other standard.
If, for  example,  RTL, a German  television  broadcaster,  wants to air "Sesame
Street" (a program produced in the U.S. and,  therefore,  in the NTSC standard),
the video signal must first be converted to PAL to make it  compatible  with the
German standard. The Company provides conversion services to and from all of the
standards currently available.

     International Duplication: Duplication services are required to accommodate
multiple  broadcast  locations  receiving the same product in the same standard,
but utilizing a variety of videotape  formats.  Using the same analogy as above,
the  German  broadcaster  received  a PAL  tape  for  his  1"  equipment,  but a
Scandinavian  broadcaster  needs  to  receive  a PAL tape of that  same  "Sesame
Street" episode for his D2 equipment. Accordingly, the Company would "duplicate"
the tape to the different format in the same standard.

     Specialized Video Services: The Company is meeting an increasing demand for
specialized services using state-of-the art, multistandard film-to-tape, editing
and  audio  suites.  Audio  capabilities   include  restoration,   layback,  ADR
(automatic dialogue replacement),  audio-for-video  editing, and the recreation,
or enhancement of music and sound effects tracks.  Additional  services  include
screen-by-screen  color  correction of film or tape,  video  restoration  and I3
(International  Image   Interpretation),   an  innovative  standards  conversion
technology, which achieves extremely high quality for film-originated material.

     The  Company's  services that are provided to the  television  industry and
program  originators,  and the  specialized  video services that are provided to
television  program  distributors  to the  international  market,  are generally
offered on an hourly or daily rate basis.  Standards  conversion and duplication
services provided to television program distributors to the international market
are offered at rates that are based on program length.  The Company maintains an
in-house  engineering  staff to facilitate the modification of equipment to meet
client requirements.

     Through  fiber  optic  connections,  Audio Plus Video is linked to Atlantic
Satellite giving them the ability to send and receive signals both  domestically
and  internationally.  This service is especially  essential with time sensitive
material such as sporting  events.  For example,  satellite  services aid in the
rapid   international   distribution  the  Company  provides  for  the  National
Basketball Association.
<PAGE>
     In the fourth  quarter  of fiscal  year  1998,  Audio  Plus Video  began an
expansion  to the West  Coast  with the  leasing  of a new  13,000  square  foot
facility in Burbank,  California.  That business became operational in July 1998
and the Company  expects to capture both new  customers  and existing  customers
whose operations were transferring to the West Coast.

     Audio Plus Video is beginning its ninth year of worldwide  distribution for
the NBA and eleventh year for Children's  Television Workshop's "Sesame Street".
Other programs include "Samurai - X", "Baywatch", "Ricki Lake", "Third Rock From
the Sun",  "Bewitched",  "South Park" and "Dr.  Katz".  Specials during the year
included The Academy Awards, NCAA Basketball Tournament,  The Oscars, The Golden
Globe  Awards and The  Grammy's.  In December  1995,  Turner  Entertainment  Co.
awarded  Audio  Plus  Video  its  International  Vendor  of the Year  Award  for
outstanding service.

     Audio  Plus  Video  clients  include:  Sony  Pictures  Entertainment,   CBS
International, NBC, ABC, Buena Vista, Warner Brothers, Hearst, Worldvision, NBA,
Children's Television Workshop and Discovery Channel.

     Systems and Products

     Through AF Associates,  Inc. ("AFA"), the Company designs, builds, installs
and services  advanced  video  systems for the  broadcast  and cable  television
industries,  and for professional and corporate markets.  AFA's services include
project  management;  design and engineering;  consultation  with architects and
building  contractors;  drafting  and  technical  documentation,  equipment  and
materials   specification  and  procurement;   pre-wiring  and  assembly;   site
installation;  system  testing  and  commissioning;  and  training.  The Company
believes that AFA is one of the leading independent providers of such services.

     Systems are designed by AFA's  in-house  engineers  utilizing  computerized
design  programs and are assembled in AFA's  facility in Northvale,  New Jersey.
Assembly   includes  custom   fabrication  of  all  audio,   video  and  control
interconnect  wiring,  mounting of  equipment  into rack  enclosures  and custom
operating  consoles,  pre-wiring  of all  interconnecting  cabling and subsystem
testing. The entire system is then shipped to the customer's location,  where it
is installed and tested by AFA's technicians and engineers. The end product is a
professionally  designed  and  built  system,   utilizing  advanced  design  and
construction  concepts and incorporating  state-of-the-art  broadcast equipment.
Through the use of AFA's systems integration services,  the client need only set
overall system and  operational  requirements.  AFA engineers and constructs the
entire system and manages all aspects of technical construction.

     AFA's clients include the four (4) major  networks,  numerous cable channel
networks  (e.g.,  Cable News Network,  Inc.,  CNBC,  Fox News Channel,  Lifetime
Television,  USA Networks,  Inc. and Home and Garden Cable  Network),  satellite
broadcasters  (e.g.,  Direct TV and SKY  Latin  America),  corporate  television
networks  (e.g.,  Merrill Lynch & Co.,  Inc.,  Pfizer,  AT&T and Toys R Us), and
numerous production and post-production  facilities.  Over 50% of AFA's business
is repeat  business  from  clients  who seek  AFA's  technical  and  engineering
expertise.  The Company  believes that increases in cable,  direct satellite and
independent broadcasting made possible by emerging compression technologies,  as
well as the migration of  broadcasting  standards  from analog to digital,  will
provide significant opportunities for AFA to expand its customer base.

     Projects  recently  completed by AFA  include:  new studio  facilities  and
technical center for the "Shop at Home" cable network,  the broadcast center for
Warner  Brothers,  "WEB"  network;  an  expansion  of the  playback  center  for
satellite   broadcaster  NetSat  in  Brazil  and  several  corporate  television
operations  for AT&T.  Current  projects  include a new all  digital  television
station for the PBS  affiliate  Channel  13/WNET in New York City, a large cable
operation for Golden Channels in Israel,  a regional cable news channel for Time
Warner,  a  corporate  training  center for  Pfizer  and a major  direct-to-home
satellite television facility for DTH/TechCo Partners.

     In May 1998, AFA acquired a product group with the objective of developing,
manufacturing and marketing  advanced color correcting and manipulation  systems
for the film,  post-production and multimedia  industries.  Its products enhance
any visual representation medium that requires a true color image where a better
picture is essential.  The color correction process, when interfaced with a film
scanner or tape  machine,  compensates  for color  problems  in the medium  that
detract from its quality.  The process,  though expensive,  is cost effective in
that its application reduces production time by not having to "reshoot" the film
or tape. The process is also required when filming special effects.  The current
industry  trend toward  ultra-high  resolution  and high  definition  television
(HDTV) will further enhance the need for this technology.

     Through Video Rentals,  Inc.  ("VRI"),  the Company supplies  broadcast and
industrial  video equipment for rental to the broadcast and  professional  video
industries and provides support and maintenance services for such equipment. VRI
rents cameras,  super slo-mo  systems,  interformat  portable  editing  systems,
character  generators,  graphic  equipment and specialized  equipment for sports
production.  Equipment rentals may range from a period of one (1) day to as long
as a year.  Specialized  equipment packages,  such as editing systems,  are also
rented for longer  periods by certain  customers,  including  MTV,  Phoenix  and
others.  VRI's purchases of equipment to be held for rental are made both on the
basis of anticipated

<PAGE>
rental demand and in response to specific  customer orders and commitments  from
such  customers  for  minimum  rental  terms  (in the  case of more  specialized
equipment).

     VRI specializes in network sports  production.  As the exclusive field shop
for Fox  Sports,  VRI is  responsible  for  storing,  shipping  and  maintaining
equipment  owned by the network and used for its  football,  hockey and baseball
broadcasts.  VRI also serves as a rental agent for the rental of this  equipment
to third parties.  Major customers of VRI include ABC, CBS, NBC, Fox and MTV, as
well as major mobile truck operators.

     The  Company  believes  that VRI is one of the  largest  independent  video
equipment rental suppliers on the East Coast and that it provides  complementary
outsourcing  solutions for clients of its other subsidiaries.  For example,  VRI
provides editing systems for NHL Productions, which are used in conjunction with
Atlantic Satellite's provision of satellite transmission services.

Production Services

     The  production  of  every  commercial,  television  program  or  corporate
communications  video  involves the recording of the image on film or videotape.
This is done on  location  or in a  studio  by a  production  company.  Once the
footage  has been  recorded,  the  post-production  process  begins  in order to
transform  the raw recorded  footage into a final usable  product.  Creative and
technical input, which includes the transfer of film-to-tape,  color correction,
editing,  addition  of  special  effects  utilizing  3D  and  computer-generated
graphics  and audio,  is needed to complete the process and generate a videotape
master for duplication and  distribution  to  broadcasters.  The master tape may
need  additional   post-production   services,   such  as  standards  or  format
conversion, audio layback of a foreign language track, or the enhancement of the
music and effects tracks to facilitate international distribution.

     Through CABANA corp.  ("CABANA"),  the Company provides creative  editorial
services to the television  advertising industry.  The creative editing process,
or the first stage of post  production,  for a television  commercial  generally
involves the  selection of the best footage from several  thousand  feet of film
and the  combination  of that footage  through  editing along with special video
effects to create a cohesive message with audience  appeal.  The creative editor
typically is involved with all facets of the post-production process and usually
selects the  post-production  facilities  (such as  Manhattan  Transfer and Post
Edge),  in which the remaining and final stages of the  television  commercial's
post-production takes place. Television commercials created by Cabana during the
year include ads for Beck's Beer,  Pearle Vision,  Gillette,  Lancome,  Schering
Plough, IBM, Sprint, L'Oreal and Ford, among others.

     Through two of its operating  subsidiaries  Manhattan  Transfer/Edit,  Inc.
("Manhattan  Transfer")  and The Post Edge,  Inc.  ("Post  Edge"),  the  Company
provides the art and science of completing high-end  television  commercials and
programs with the finest quality to the television  advertising industry.  Their
services include the following:

     Film-to-Videotape  Transfer:  The  Company has film to  videotape  transfer
suites for the  transferring  of images and sound from film to  videotape.  This
process can be used for either  positive or negative,  16 or 35 millimeter  film
and for both composite and multi-track  systems. The Company's skilled colorists
operate state-of-the-art  electronic equipment,  which provides color correction
and  expansion or  repositioning  of film images.  In addition,  the Company can
correct and enhance the color of projects originated on videotape. The videotape
element masters  resulting from the transfer process can be edited to create the
final product which can then be  duplicated  for a variety of markets  including
television advertising,  corporate video cassettes, home video cassettes,  cable
television,  television program  syndication,  airline in-flight  entertainment,
foreign distribution and ancillary applications.  Transfers are made in both the
PAL (Europe and South America) and NTSC (North America and Japan) standards.

     Computer-Generated     Visual     Effects:     Company    artists    create
computer-generated   television  imagery  working  with  sophisticated  computer
software for applications such as main titles for television shows,  credits and
various  electronic  special visual  effects  including  computer  animation and
electronic graphics in both two and three dimensions.

     Electronic Video Editing:  The Company operates a combination of analog and
digital edit suites.  The editing  process  ranges from simple cuts and assembly
with dissolves,  wipes and titles, to complicated layering of images and special
effects.   Videotape  is  edited  in  many  tape  formats  (sizes)  for  use  in
commercials, shows, corporate and educational videos and other presentations.

     Videotape  Duplication:  The Company  offers  videotape  duplication in all
professional  broadcast  formats,  including D1, D2, BetaCam SP, 1" and 3/4", to
meet the needs of the commercial  advertising,  corporate video, motion picture,
television production and syndicated television program distribution industries.
The Company also creates  duplication  masters  with closed  captioning  for the
hearing impaired.
<PAGE>
     Additional Services: In addition,  Post Edge provides studio facilities and
technical  personnel  for MTV Latino and  network  playback  operations  for the
Cisneros Locomotion Channel.

     Commercials  finished this past year at Manhattan  Transfer include:  Visa,
Pepsi, Pizza Hut, Macy's, Hawaiian Punch, Wendy's,  Pringle's, MCI, Burger King,
Bell South,  Bell Atlantic and Volkswagen.  In addition to Manhattan  Transfer's
commercial  activities,  it provides  post-production  services  for the Peabody
Award winning  episode  network  television  series  "Homicide",  for "Oz",  the
episodic series on HBO and for the network situation comedy, "Cosby".

     Commercials  finished this last year at Post Edge include  American Express
Latin, Red Global,  Pepsi, Gloria Estefan,  Burdines,  Citibank,  Miami Heat and
Florida Lottery among others.

     The Company's major  post-production  clients include advertising agencies,
film editors and video production  companies.  Among the advertising agencies to
which the Company provides services are BBDO New York,  Saatchi & Saatchi,  Grey
Advertising, Uniworld Group, Lintas, Ogilvy & Mather, J. Walter Thompson, Jordan
McGrath Case, McCann Erickson and Young and Rubicam.

     The Company's  post-production  business is dependent on the success of the
television  programming  and  advertising  industries,  which success in turn is
highly  dependent  upon a number of  factors,  including  the quality of content
produced,  the availability of alternative  forms of  entertainment  and leisure
activities,  general economic  conditions and  international  demand for content
originated  in the United  States.  The  Company's  business  also is subject to
downturns in the television,  programming and advertising  industries.  Although
the Company  generally does not have long-term or exclusive  agreements with its
post-production  clients,  the Company has long-term  relationships with many of
such clients. Because post-production clients generally do not make arrangements
with the Company  until shortly  before its services are  required,  the Company
usually does not have any significant backlog of service orders.

Sales and Marketing

     Historically,  the Company  markets its services  through its  management's
efforts to exploit its industry contacts and attendance at industry trade shows,
as  well as  advertisements  in  trade  journals  and  referrals  from  existing
customers and suppliers.  Atlantic Satellite and Waterfront jointly market their
services  through the efforts of  management  and a full-time  sales force which
emphasizes  quality and the range of their offered  services.  In addition,  AFA
maintains a full-time  sales force which  emphasizes to potential  customers the
extensive  experience of its  professional  engineers,  AFA's leadership role in
systems  technology  and its  comprehensive  project  management  services.  VRI
focuses on its market  leadership  position,  round-the-clock  customer service,
diversity  and  reliability  of  its  inventory  and  its  competitive   pricing
structure,  as  well as the  value-added  services  it  provides  to its  larger
customers, such as logistics and inventory management.

     A full-time sales force, together with editors,  graphic artists and senior
management,  actively  market the  Company's  post-production  services  through
industry contacts and through  advertising in the major industry trade magazines
such as Shoot, Ad Week and Post. The focus of this advertising is to promote the
Company's  image  for  quality  services,  its  technical  capabilities  and its
state-of-the-art facilities.

     The Company's marketing strategy,  with respect to the services it provides
for television program  distributors to the international  market is to focus on
the needs of the  end-users as well as on the needs of the clients.  The Company
actively  develops  relationships  with  overseas  facilities  and  broadcasters
through visits and  multi-lingual  communication,  to learn and respond to their
individual technical and operational requirements. This strategy has resulted in
end-users  requesting that their international  television program  distributors
utilize the Company's  services and has  alleviated  many  problems  between the
distributors and the  broadcasters.  Sales and marketing  efforts  emphasize the
needs of the client and the end-user,  technical proficiency,  and the Company's
global perspective.

     The  Company  had sales to two  individual  Systems  and  Products  segment
customers  in 1996 and to one Systems and Products  segment  customer in 1997 in
excess of 10% of  consolidated  1996 and 1997 revenues,  respectively.  Sales to
such customers  aggregated 30% and 15% of 1996 and 1997 revenues,  respectively.
Revenues from such customers  were derived from one-time  contracts for services
provided by AFA and do not necessarily represent a recurring source of revenues.
<PAGE>
Supply of Services and Equipment

     In most situations where Atlantic Satellite is providing  satellite up-link
services,  the customer has secured the transponder time and instructs  Atlantic
Satellite as to which satellite and transponder to transmit the signal. In those
situations where Atlantic  Satellite is providing  transponder time as part of a
service package to a customer,  Atlantic Satellite obtains transponder time from
third-party  re-sellers  of  transponder  time.  Satellite  owners  do not  sell
occasional transponder time directly to end-users or service providers.  Rather,
they sell or lease  transponders on a full-time basis for a minimum of one year.
However,  the success of Atlantic  Satellite's business depends in part upon the
price and availability of satellite transponders. A shortage of transponders can
be caused by several factors,  including the malfunctioning or expiration of the
useful lives of existing  satellites or the unsuccessful launch of additional or
replacement  satellites,  all of  which  are  beyond  the  control  of  Atlantic
Satellite or its customers. A shortage of satellite transponders would be likely
to increase  the price of  available  transponders,  which would have an adverse
impact upon Atlantic  Satellite's,  and thus the  Company's,  ability to operate
profitably.  Waterfront  may either  order  fiber  optic  lines from third party
providers to be installed between Waterfront's  facility and the customer or the
customer  may order  these items  directly  from a third  party  provider,  with
Waterfront  providing  only the connection  with its switch.  AFA and VRI obtain
their  equipment  from a variety  of  sources,  including  the  major  equipment
manufacturers  such as Sony  Corporation  of America,  BTS Broadcast  Television
Systems and Tektronix.  AFA orders equipment used in the production of its video
systems based upon customer  purchase  orders after receipt of deposits.  Larger
systems are funded through periodic customer  payments,  which relate closely to
the capital needs of the project.  Although the Company did not  experience  any
significant  difficulty in obtaining  equipment,  there can be no assurance that
shortages  will  not  arise  in  the  future.  The  loss  of  any  one  or  more
manufacturing  sources  could  have  an  adverse  effect  on the  Company  until
alternative  arrangements could be secured.  The Company believes that there are
alternative adequate sources of components of sufficient quality and quantity.

Competition

     The competitive video services industry is both specialized and fragmented.
Major  competitors  for  Atlantic  Satellite's   transmission  services  include
Micronet (a subsidiary of American Tower Corporation),  Group W (a subsidiary of
Westinghouse Electric  Corporation),  Globecast (a subsidiary of French Telecom)
and National Gateway (a subsidiary of Williams  Communications,  Inc.).  Some of
these  competitors  have  significantly  greater  resources  than  the  Company.
Atlantic  Satellite competes primarily based upon customer service and its large
and valued  subscriber  base,  which  permits a high degree of  inter-subscriber
connections.  Although the Company  believes that  Waterfront's  video switching
facility  is the  largest  in the  New  York  metropolitan  area,  "The  Switch"
(operated  by  Globecast)  has "first  mile" and "last  mile"  capabilities  and
competes with Waterfront.  AT&T also competes in the switching  business to some
extent. However, the Company believes that its fully manned facility provides it
with an advantage over its  competitors,  which do not provide the same level of
service.  AFA's primary  competitors  are Sony  Corporation,  The Systems Group,
Communications Engineering Inc. and National TeleConsultants,  as well as small,
regionally  based  integrators and dealers.  Competition is based upon technical
expertise,  experience and price. VRI's major competitors are Bexel Corporation,
which has locations in several metropolitan areas, as well as smaller companies,
which do not offer the variety of services provided by VRI. Competition is based
upon price,  diversity and availability of inventory and customer  service.  The
Company believes that the ability of its operating  subsidiaries to cross-market
to  existing  customers  using other  services  offered by the  Company's  other
subsidiaries  provides  the  Company  with a  competitive  advantage  over  many
competitors who lack the full complement of services provided by the Company.

     Certain post-production services businesses (both independent companies and
divisions of diversified  companies)  provide most of the same services provided
the  Company,  while  others  specialize  in one or several  of these  services.
Certain film production companies also provide post-production services. Many of
the Company's  competitors for post-production  services are located in New York
City, one of the principal domestic markets for such services. Certain of these,
as well as other competitors of the Company,  have greater  financial  resources
than the Company.

     With regard to its  post-production  services,  the Company competes on the
basis of  customer  satisfaction  with the  range,  quality  and  pricing of its
offered  services.  The Company  also  competes in this area on the basis of its
ability to attract and retain qualified,  highly skilled personnel.  The Company
believes that prices for its post-production services are competitive within its
industry, although some competitors may offer certain of their services at lower
rates than the Company.  The  post-production  services industry has been and is
likely to  continue to be subject to  technological  change to which the Company
must  respond in order to remain  competitive.  The Company has no  long-term or
exclusive  agreements  with  customers  for  which it  provides  post-production
services  (other than with MTV Latin  America,  Inc.  with  respect to providing
services to MTV Latino);  however,  the Company has had long-term  relationships
with many of such customers.
<PAGE>
     Major competitors of the Company in providing standards conversion services
include  Devlin Video  Services,  Magno Sound & Video,  Four Media  Corporation,
Vidfilms,  Intercontinental  Televideo and International Image based in Toronto,
Canada.  Major  competitors  of the  Company  in  providing  creative  editorial
services  include Crew Cuts Film & Tape, Red Car, Blue Rock Editing  Company and
Progressive  Image  Group.   Major  competitors  of  the  Company  in  providing
film-to-videotape  transfer,  electronic  video  editing and  computer-generated
graphic  services  include  Post  Perfect  (a  subsidiary  of The New York Media
Group), The Tape House Editorial Co., PrinczCo Productions,  Nice Shoes, L.L.C.,
Click 3X and Broadcast Video, Inc.

Government Regulation

     The Communications Act of 1934, as amended by the Telecommunications Act of
1996,  prohibits the operation of satellite  earth  station  facilities  such as
those operated by Atlantic  Satellite,  except under licenses issued by the FCC.
Atlantic  Satellite  holds  the  following  five  satellite  earth  station  FCC
licenses:

                           Call Sign                 License Expiration Date

                           E960405                   September 6, 2006

                           E910152                   March 22, 2001

                           E881160                   February 17, 1999

                           E4626                     September 10, 2002

                           E970418                   October 10, 2007

     No FCC  authorization  is  required  for  reception  of  transmission  from
domestic  satellites to points within the United States.  When  applicable,  the
Company will continue to rely on third party FCC licenses or authorizations when
it transmits certain domestic  satellite traffic through earth stations operated
by such third parties.

     The  FCC  establishes   technical  standards  for  satellite   transmission
equipment,  which change from time to time, and it also requires coordination of
earth  stations with  land-based  microwave  systems at certain  frequencies  to
assure  noninterference.  Transmission  equipment  must  also be  installed  and
operated  in  a  manner  that  avoids  exposing  humans  to  harmful  levels  of
radio-frequency  radiation. The placement of earth stations or other antennae is
typically  subject to  regulation  under local  zoning  ordinances.  The Company
believes that Atlantic  Satellite's  equipment meets and is operated in material
compliance with all applicable laws, regulations and industry standards.

     Waterfront holds two point-to-point microwave licenses from the FCC for the
transmission of signals from a single point to temporary fixed locations  within
25 miles of the license coordinates. There are two microwave licenses:


                           Call Sign                 License Expiration Date

                           WNEI382                   June 23, 1999

                           WMQ-537                   February 1, 2001

     While the FCC generally renews  satellite earth station and  point-to-point
microwave  licenses on a routine basis,  there can be no assurance that Atlantic
Satellite's and Waterfront's licenses will be renewed at their expiration dates.
Failure to obtain renewal of such licenses would have a material  adverse effect
on the Company.

Employees

     The  Company  and  its  subsidiaries   have   approximately  516  full-time
employees. None of the Company's employees is represented by a labor union or is
subject to a collective bargaining agreement.  The Company has never experienced
a work stoppage and believes that its employee relations are satisfactory.
<PAGE>
     The Company's success depends in large part on the continued service of its
executive officers, key creative artists and skilled technicians,  and other key
personnel.   The  Company  has  employment  agreements  containing   non-compete
provisions  with most of its  current  key  executive  officers,  including  the
president and chief executive  officer.  However,  the Company does not have any
long-term employment agreements and/or any covenants not to compete with most of
its key artists and  technicians.  A  significant  percentage  of the  Company's
revenues can be attributed to services  requiring  highly  compensated  creative
technicians.  Competition  for highly  qualified  employees  is intense  and the
process of acquiring key technical,  creative and management  personnel with the
requisite combination of skills and attributes is often lengthy. There can be no
assurance  that the Company  will  continue to attract,  motivate and retain key
personnel.  Failure by the Company to attract and retain qualified key personnel
could have a material adverse effect on the Company.

 Backlog

     At  June  30,  1998  and  June  30,  1997,  the  Company  had  backlogs  of
approximately  $11,144,000 and $6,815,000  respectively.  All of such backlog is
attributable to AFA's video production systems projects.

ITEM 2. PROPERTIES

     The Company's  corporate  headquarters (which are owned by the Company) are
located at 240 Pegasus  Avenue,  Northvale,  New Jersey  ("240  Pegasus")  where
Atlantic  Satellite  also occupies an aggregate of  approximately  15,000 square
feet plus outdoor  antenna  pads.  The Company owns another  facility at 183 Oak
Tree Road in Tappan,  New York ("183 Oak  Tree"),  which is  adjacent to the 240
Pegasus property in which Atlantic  Satellite and VRI also occupy  approximately
13,000 and 7,000 square feet, respectively. Atlantic Satellite has leased 10,000
square  feet at 183 Oak Tree  Road to the  NHL.  Atlantic  Satellite's  teleport
facility is located at 240 Pegasus and 183 Oak Tree.  In  addition,  the Company
subleases approximately 50,000 square feet at 235 Pegasus Avenue, Northvale, New
Jersey from an unaffiliated  entity,  which in turn leases such property from an
unaffiliated  third  party.  The  terms  of  the  lease  and  the  sublease  are
substantially  identical.  Approximately  38,000 square feet of such facility is
used by Audio Plus Video for production purposes and approximately 12,000 square
feet is used for general and warehouse purposes.  In addition,  the Company also
owns approximately 8 acres of vacant land in Northvale, New Jersey.

     The Company leases six principal production facilities,  two located in New
York City,  three located in South Florida and one in Burbank,  California.  The
Company's  two New York City  production  facilities  consist  of  approximately
68,000  square feet in midtown  Manhattan  where CABANA leases one 18,000 square
foot facility and Manhattan  Transfer leases  approximately  50,000 square feet.
Post Edge leases three South  Florida  production  facilities  of  approximately
30,000 square feet. Post Edge is moving and  consolidating its 9,000 square foot
Hollywood,  Florida  facility  to the South  Beach  Miami  facility in the first
quarter of fiscal year 1999.  Audio Plus Video  leased a new 13,000  square foot
facility in Burbank, California during the fourth quarter of fiscal year 1998.

     Waterfront  leases  approximately  7,200  square feet in midtown  Manhattan
which houses  Waterfront's  Technical Operation Center and executive offices and
approximately  2,600  square  feet in  downtown  Manhattan  which  is  used  for
Waterfront's  remote  switching  hub. AFA leases from an entity owned by Messrs.
Siracusano  and Ferolito  approximately  30,000 square feet at another  facility
located in Northvale, New Jersey, which facility serves as its executive offices
and its engineering and fabrication facility.

ITEM 3. LEGAL PROCEEDINGS

     The Company and its  subsidiaries  are involved in various claims and legal
proceedings  of a nature  considered  normal  to its  business.  While it is not
possible to predict or determine the outcome of these claims and proceedings, it
is the  opinion  of  management  that  their  outcomes  will not have a material
adverse effect on the Company.

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

     None.
<PAGE>
                                     PART II

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

    The Company's common stock is listed on the American Stock Exchange ("AMEX")
under the symbol "VS". The common stock began trading on February 8, 1994 at the
effective time of IPL's initial public  offering on the NASDAQ  National  Market
under the symbol "POST".  Prior to such time, there was no public market for the
common stock. Following the merger and until February 11, 1998, the common stock
traded on the NASDAQ National Market under the symbol "VSCX".

    As of August 31, 1998, there were approximately 176 holders of record of the
Common Stock.

     The  following  table  sets forth the high and low bid prices of the Common
Stock on the Nasdaq  National  Market for each full quarterly  period within the
two most recent fiscal years.


         Fiscal Year 1997                                   High            Low
         ----------------                                   ----            ---
         First Quarter......................................4 1/8          3 5/8
         (August 1 to October 31)
         Second Quarter.....................................4 3/4          3 1/2
         (November 1 to January 31)
         Third Quarter......................................4 1/8          3 3/8
         (February 1 to April 30)
         Fourth Quarter ....................................3 1/2          2 7/8
         (May 1 to July 31)

         Fiscal Year 1998                                   High            Low
         -----------------                                  -----           ---
         First Quarter......................................3 13/16        2 3/4
         (July 1 to September 30)
         Second Quarter.....................................3 3/4        2 15/16
         (October 1 to December 31)
         Third Quarter......................................3 1/2        2 13/16
         (January 1 to March 31)
         Fourth Quarter.....................................4 3/8          2 7/8
         (April 1 to June 30)

     No cash  dividends  have ever been  declared  by the  Company on the Common
Stock.  The Company  intends to retain  earnings to finance the  development and
growth of its business.  Accordingly,  the Company does not anticipate  that any
dividends  will be  declared  on the Common  Stock for the  foreseeable  future.
Future payment of cash dividends, if any, will depend on the Company's financial
condition,  results of operations,  business conditions,  capital  requirements,
restrictions contained in agreements,  future prospects and other factors deemed
relevant  by  the  Company's  Board  of  Directors.  Presently  the  Company  is
prohibited from paying any dividends per the Credit Agreement.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

     The following table sets forth selected historical  consolidated  financial
data for Video and its subsidiaries for the periods and at the dates indicated.
<TABLE>

                                                                        Year Ended Year Ended Year Ended    Year Ended    Year Ended
                                                                          June 30,   June 30,   June 30,      June 30,      June 30,
                                                                           1994       1995       1996          1997(1)       1998(3)
                                                                          -------    -------    -------       -------       -------


                                                                                (in thousands, except per share amounts)
Statement of Operations Data: (3)

<S>                                                                     <C>        <C>        <C>           <C>           <C>
Revenues ............................................................   $20,391    $19,439    $29,740       $27,610       $72,995

Depreciation and amortization .......................................     2,170      1,629      1,653         1,824         7,958

Operating income (loss) from
     continuing operations ..........................................    (2,169)       490      2,387         1,750         6,692

Income (loss) before income taxes,
     discontinued operations, and
     extraordinary item .............................................    (4,321)       223      1,999         1,825         3,290

Income before discontinued 
     operations and extraordinary item ..............................     8,824        223      1,212         1,638         1,699

Income (loss) from discontinued
     operations, net of tax (2) (4) .................................    12,508        (74)      (388)       (1,688)       (1,860)

Gain on debt extinguishment,
     net of tax .....................................................     5,951         --         --            --            --

Net  (loss) income ..................................................   $27,283       $149       $824          $(50)        $(161)

Pro forma income before discontinued
     Operations - basic (3) .........................................      --         --        $0.17         $0.23         $0.14

Pro forma net (loss)  income per share -
    basic (3) .......................................................      --         --        $0.12         $(0.01)       $(0.01)

Weighted average number of shares -
     Outstanding (3) ...............................................       --         --       $6,961         $7,011        $12,276
</TABLE>
<TABLE>

                                                                         As of      As of      As of           As of         As of
                                                                        June 30,   June 30,   June 30,        June 30,      June 30,
                                                                         1994       1995       1996             1997         1998(3)
                                                                       -------    -------    -------          -------       -------
                                                                                               (in thousands)
<S>                                                                   <C>        <C>         <C>              <C>           <C>
Balance Sheet Data: (3)
Total assets ......................................................   $13,731    $16,005     $17,672          $20,801       $81,860
Long-term debt, net of current portion ............................     2,042      2,388       2,140            5,330        30,968
Subordinated debt, net of
     current portion ..............................................      --         --          --               --           5,442
Stockholders' equity ..............................................   $ 1,663    $ 1,812     $ 2,655           $2,733       $20,725
</TABLE>

 ...........................
(1)  Included  in the year ended June 30,  1997 is  approximately  $500 of other
     income  pertaining to the payment of a note  receivable for which Old Video
     had established a full valuation allowance. The note receivable was partial
     consideration for the sale of a radio station in fiscal 1991.
(2)  The operating results of Old Video's Diversified Products segment have been
     reflected  as  discontinued  operations  for the years ended June 30, 1994,
     1995,  1996 and 1997.  The operating  results of Old Video's  International
     Services Group have been reflected as discontinued  operations for the year
     ended June 30, 1994. The operating  results of Old Video's Post  Production
     Group have been  reflected as  discontinued  operations  for the year ended
     June 30, 1994.
(3)  Reflects the Merger with and into IPL as of August 27, 1997. The Merger was
     accounted for as a reverse  acquisition  whereby the  pre-Merger  financial
     statements of Old Video became the historical  financial  statements of the
     Company  after the Merger.  Pro forma  income  (loss)  before  discontinued
     operations  and  extraordinary  item per share and pro forma net income per
     share gave effect to the  conversion  of Old Video Common Stock into common
     stock (i.e., shares of the combined company) in the merger.
(4)  The  operating  results  of  the  Consulting   Services  segment  providing
     strategic   consulting   services  have  been  reflected  as   discontinued
     operations for the year ended June 30, 1998.
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.

     On August 27, 1997,  Video Services  Corporation  ("Old Video") merged with
and into  International  Post  Limited  ("IPL")  with IPL  being  the  surviving
corporation (the "Merger"). At the effective time of the Merger, IPL changed its
name to Video Services Corporation.  References herein to the "Company" refer to
the combined company after giving effect to the Merger. The Merger was accounted
for as a reverse acquisition whereby the pre-Merger  financial statements of Old
Video became the historical  financial statements of the Company. As a result of
the Merger,  the results of operations  and cash flows  reported for the Company
for the year ended June 30, 1998 are not necessarily comparable to those periods
prior to the  Merger.  The  results of  operations  and cash  flows as  reported
represent  those of the  Company  for the year ended June 30, 1998 and Old Video
for the  years  ended  June 30,  1997 and  1996,  and  include  the  results  of
operations  and cash flows of IPL from the date of the Merger  through  June 30,
1998. All references to IPL's 1997 figures represent pre-acquisition amounts and
are not included in the financial statements,  but are included in the following
discussions for comparative purposes only. In addition, in August 1997 and prior
to the Merger:  (i) Old Video  discontinued  the  operations of its  Diversified
Products  segment through a spinoff of the Diversified  Products  segment to Old
Video's   stockholders  and  (ii)  the  principal   stockholders  of  Old  Video
contributed  by merger  (the  "Contribution")  the  stock of two S  corporations
holding all of the general and limited partnership interests in MAL Partners and
L.I.M.A.  Partners, which partnerships owned real estate and equipment which was
leased  solely  to Old Video  and IPL.  The  Contribution,  which  represents  a
transfer between  entities under common control,  has been recorded at the lower
of  historical  amortized  cost  or  fair  value.  See  Note 1 to the  Company's
consolidated  financial statements included herein. The following discussion and
analysis  should  be read  in  conjunction  with  such  historical  consolidated
financial statements and the notes thereto.

Overview

     The  Company's  business is  currently  divided  into three  segments:  (i)
Satellite  and  Distribution  Services,  (ii)  Systems  and  Products  and (iii)
Production  Services  (see Note 12). The  Satellite  and  Distribution  Services
segment  integrates  and  distributes  broadcast  quality  video  content  via a
satellite and fiber optic transmission network routed through its digital/analog
switching center and is an international  provider of technical and distribution
services to  distributors  of television  programming.  The Systems and Products
segment  designs,  engineers  and produces  advanced  video  facilities  for the
broadcast and cable  television,  post-production  and corporate  markets.  This
segment also develops,  manufactures  and markets  advanced color correcting and
manipulation systems for the film, post-production and multimedia industries and
rents  professional  video  equipment  to the  sports,  entertainment  and other
segments of the  broadcast  and cable  television  and  corporate  markets.  The
Production  Services  segment is an  international  provider  of  technical  and
creative services to owners and producers of television programming,  television
advertising and other programming content.

Discontinued Operations

On January 2, 1997, Old Video's  management,  which had the authority to approve
the action,  committed Old Video to a formal plan to discontinue  the operations
of its Diversified Products segment as a condition to the Merger. In August 1997
and prior to the Merger, Old Video spun off the Diversified  Products segment to
Old  Video's  stockholders.  On November  30,  1997,  management,  which had the
authority  to approve  the  action,  committed  the  Company to a formal plan to
dispose  of the  Consulting  Services  segment  providing  strategic  consulting
services in the area of communications,  design and implementation of intranets,
extranets and  internets.  The Consulting  Services  segment was acquired in the
Merger(See Note 17).

Results of Continuing Operations

Year Ended June 30,  1998  compared  to Year Ended  June 30,  1997  (dollars  in
thousands)

     Total  revenues  increased  by $45,385  to $72,995 in 1998 from  $27,610 in
1997. Revenues from the Satellite and Distribution Services segment increased by
$11,405 to $21,384 in 1998 from  $9,979 in 1997.  $10,017 of the $21,384 of 1998
Satellite  and  Distribution   Services  segment  revenue  was  attributable  to
post-Merger  contribution to revenues from Satellite and  Distribution  Services
provided by IPL.  Revenues from the Satellite and Distribution  Services segment
other  than those  provided  by IPL  increased  by 14.0% to $11,367 in 1998 from
$9,979 in 1997.  This increase was due primarily to an increase in the number of
customers  connected to the Company's  satellite and fiber optic network and the
receipt of additional  transmission  revenue from existing customers,  which was
partially  offset by a  decrease  in  syndication  revenues  due to  programming
cancellations.  Revenues from the Satellite and  Distribution  Services  segment
provided by IPL decreased by 19.0% from $12,360 in 1997 to $10,017 in 1998.  The
decrease is primarily due to reduced volume of standards conversion services and
duplication. Revenues from the Systems and Products segment increased by 5.7% to
$18,631  in 1998 from  $17,631  in 1997 due to  increased  demand for design and
installation of video systems;  however,  the amount of the increase was reduced
as a result of a change in the structure of certain contracts pursuant to which

<PAGE>
the  Company  now  receives  a  commission  based  upon  equipment  used in such
videosystems  which is purchased  directly by the customer  from third  parties.
Previously, the Company had recorded revenues from the sale of such equipment as
well as the cost related to the purchase thereof. The equipment rental division,
of the Systems and  Products  segment,  revenue  decreased  20.5% to $1,989 from
$2,501  in 1997 as a  result  of  strong  demand  for  video  equipment  in 1997
generated by the Atlanta  Olympics,  1996  presidential  election,  and the 1996
professional  baseball World Series. The Production Services segment revenues of
$32,980 in 1998 was solely attributable to post-Merger contributions provided by
IPL.  Revenues provided by IPL increased by 6.4% to $32,980 in 1998 from $31,004
in 1997. The increase is primarily due to a higher volume of creative  editorial
and visual effects services.

     Total costs of sales,  services and rentals increased by $23,903 to $41,175
in 1998 from $17,272 in 1997. Costs of the Satellite and  Distribution  Services
segment increased by $4,689 to $9,511 in 1998 from $4,822 in 1997. This increase
was  primarily  attributable  to costs of Satellite  and  Distribution  Services
provided  by IPL of $4,283 and a $406  increase  in costs of  non-IPL  services.
Costs of IPL Satellite and  Distribution  Services  decreased  $760 to $4,283 in
1998 from $5,043 in 1997.  This  decrease  consisted  primarily  of reduced tape
stock usage, lower equipment repairs and reduced usage of part time and per diem
personnel.  Costs of the  Systems  and  Products  segment  increased  by $663 to
$13,113 in 1998 from  $12,450 in 1997.  The growth in costs of the  Systems  and
Products  segment was driven by the increased  volume of  installations of video
systems and additional salaries of engineers. These increases were offset by the
decrease in the cost of  equipment  rentals of $233 to $576 in 1998 from $809 in
1997 as a result of lower demand for video  equipment.  Costs of the  Production
Services  segment of $18,551 in 1998 was solely  attributed to costs provided by
IPL. Cost of Production Services provided by IPL increased by $152 to $18,551 in
1998 from $18,399 in 1997.

    The Company's overall gross profit margin (excluding depreciation) increased
to 43.6% in 1998 from 37.4% in 1997.  Gross  profit  margin from the Systems and
Products  segment  increased  to 29.6% in 1998 from 29.4% in 1997  primarily  as
result of the change in  contract  structure  discussed  above and from  reduced
amount of sub-rentals,  which were required in 1997 to meet increased demand for
equipment rentals in connection with the Atlanta  Olympics.  Gross profit margin
from the  Satellite  and  Distribution  Services  segment  other  than  services
provided by IPL  increased to 54.0% in 1998 from 51.7% in 1997 as a result of an
increase  in  revenues  combined  with  stable  fixed  costs for  materials  and
equipment. Gross profit margin from Satellite and Distribution Services provided
by IPL  decreased  from 59.2% in 1997 to 57.2% in 1998 as a result of a decrease
in revenues without a corresponding  decrease in costs.  Since a high proportion
of costs  attributable to the Satellite and  Distribution  Services  segment are
fixed, decreases in revenues do not result in proportionate  decreases in costs.
Gross profit  margin from  Production  Services  increased to 43.8% in 1998 from
40.7% in 1997 as a result of an increase in revenues  combined with stable fixed
costs.

     Selling,  general and administrative  expenses increased to $17,170 in 1998
from $6,764 in 1997,  which  increases  primarily  resulted from the  additional
administrative  salaries and occupancy costs  associated with IPL's  operations.
However,  as a result of the Company's increased revenue,  selling,  general and
administrative  expenses as a percentage of revenues  decreased to 23.5% in 1998
from 24.5% in 1997.

     Depreciation  expense  increased  to $7,109  in 1998  from  $1,807 in 1997,
primarily due to the  significant  amount of fixed assets of IPL acquired in the
Merger.  Amortization  expense  increased  to  $849  in  1998  from  $17 in 1997
reflecting the  amortization of the goodwill (excess of cost over the fair value
of net assets acquired)  recorded in connection with the Merger,  which is being
amortized over 25 years.

     Interest  expense  increased to $3,619 in 1998 from $517 in 1997  primarily
due to the assumption and refinancing by the Company of IPL's existing long-term
indebtedness as part of the Merger. See "Liquidity and Capital Resources."

     The effective tax rate applied against pre-tax income was 48.4% in 1998 and
10.2% in 1997.  The  effective  tax rate  for 1998 as  compared  to the  federal
statutory  tax rate of 34% was  primarily  the result of state  income taxes and
goodwill  amortization  created by the Merger which is not deductible for income
tax purposes.  The State net operating loss valuation  decreased by $258 in 1998
as a result of the use of net operating  losses.  The Federal net operating loss
valuation  allowance  decreased  by  approximately  $622 in 1997 as a result  of
revised  estimates  of  future  taxable  income   principally  as  a  result  of
discontinuing  the  Old  Video's  Diversified   Products  segment.  A  valuation
allowance  of $679 remains as of June 30, 1998 for state net  operating  losses.
The state  valuation  allowance is provided as a result of  estimates  regarding
future operations for certain subsidiaries.

Income from continuing  operations  increased 3.7% to $1,699 in 1998 from $1,638
in 1997 primarily as a result of the factors discussed above.
<PAGE>
Fiscal Year Ended June 30, 1997 compared to Year Ended June 30, 1996 (dollars in
thousands)

     Total revenues  decreased 7.2% to $27,610 in 1997 from $29,740 in 1996. The
decrease in total  revenues was due to a decrease in revenues of the Systems and
Products  segment to $17,631 in 1997 from $20,499 in 1996,  which was  partially
offset by an increase in revenues of the  Satellite  and  Distribution  Services
segment to $9,979 in 1997 from $9,241 in 1996.  The  decrease in revenues of the
Systems and Products  segment  resulted  primarily from a mid-year change in the
structure  of a  significant  contract  pursuant  to which Old Video  received a
commission  on  equipment   purchased  by  the  customer  from  third   parties.
Previously,  Old Video had recorded  revenues from the sale of such equipment as
well as costs related to the purchase  thereof.  The increase in revenues of the
Satellite and Distribution  Services segment was due primarily to an increase in
the number of  customers  connected  to Old  Video's  satellite  and fiber optic
network  and the  receipt of  additional  transmission  revenues  from  existing
customers,  partially  offset  by a  decrease  in  syndication  revenues  due to
programming cancellations.

     Total cost of sales, services and rentals decreased to $17,272 in 1997 from
$19,691  in 1996  primarily  as a result of the change in the  structure  of the
contract  described above.  Gross profit margins increased to 37.4% in 1997 from
33.8% in 1996 as a result of a change in the service mix,  which favored  higher
margin  services.  Gross  profit  margins of the  Systems and  Products  segment
increased  to 29.4% in 1997  from  26.6% in 1996 due to a higher  proportion  of
revenues  contributed  by the equipment  rental  division in 1997 as well as the
effects  of the  significant  contract  pursuant  to which Old Video  received a
commission  as  discussed  above.  Gross  profit  margins of the  Satellite  and
Distribution  Services  segment  increased  to 51.7% in 1997 from  49.8% in 1996
primarily as a result of increased revenues without a corresponding  increase in
costs.  Since a high  proportion  of costs  attributable  to the  Satellite  and
Distribution  Services  segment are fixed increases in revenues do not result in
proportionate increases in costs.

     Selling,  general and administrative  expenses increased 12.6% to $6,764 in
1997 from $6,009 in 1996. Such expenses as a percentage of revenues increased to
24.5% in 1997 from 20.2% in 1996, primarily due to the initiation of a marketing
study,  preparation  of sales  brochures  and the  payment  of  increased  sales
commissions,  combined with the reduction of revenues.  Old Video  believed that
these additional costs would continue to be incurred.

     Operating  income from continuing  operations  decreased 26.7% to $1,750 in
1997 from $2,387 in 1996.  This decrease was due to increased  selling,  general
and  administrative  expenses partially offset by the increased gross profits in
both the Systems and Products and Satellite and Distribution Services.

     Depreciation  and amortization  expenses  increased 12.4% to $1,807 in 1997
from $1,608 in 1996 due to the acquisition of additional equipment for expansion
and replacement.

     Interest  expense  increased  6.6% to $517 in 1997  from  $485 in 1996 as a
result of increased borrowings under Old Video's credit facility.

     Other income  increased to $592 in 1997 from $97 in 1996 as a result of the
payment on a note receivable,  previously  fully reserved,  relating to the 1991
sale of a radio station.

     The effective  income tax rate applied  against pre-tax income was 10.2% in
1997 and 39.4% in 1996.  The  Federal net  operating  loss  valuation  allowance
decreased  by  approximately  $622 in 1997 as a result of revised  estimates  of
future taxable income  principally as a result of discontinuing  the Old Video's
Diversified Products segment.

     Income  before  discontinued  operations  increased  to $1,638 in 1997 from
$1,212 in 1996 primarily as a result of the tax factors discussed above.

Liquidity and Capital Resources (dollars in thousands)

     The Company meets its liquidity needs and capital expenditures requirements
with  internally  generated  funds,  borrowing  under its bank  credit  facility
(including line of credit),  equipment  financing and capital leases. Such funds
are used for  capital  expenditures,  working  capital  needs and  repayment  of
outstanding indebtedness.

     In connection with the Merger, the Company refinanced  substantially all of
Old Video's and IPL's long-term indebtedness (excluding convertible subordinated
debt, Old Video's mortgage  payable,  note payable to Cognitive  Communications,
Inc. and obligations  under capital leases),  including lines of credit,  with a
$33,000  term loan and a
<PAGE> 
$17,000 revolving line of credit (the "Credit Agreement"). The revolving line of
credit bears  interest at: (i) the lenders  prime rate minus 1.00% or (ii) LIBOR
plus a number of basis points based upon the  Company's  leverage  ratio (funded
debt divided by EBITDA (defined as operating  earnings before  interest,  taxes,
depreciation and amortization), which is initially LIBOR plus 1.75% (the Company
has the  option to choose the  applicable  interest  rate).  The term loan bears
interest  at  LIBOR  plus a number  of basis  points  based  upon the  Company's
leverage rate, which is initially LIBOR plus 1.75%. Principal payments of $1,000
per  quarter  in  respect  to the term loan  portion  of the  facility  were due
beginning  December 31, 1997.  Such  quarterly  principal  payments  increase to
$1,250 per quarter on December 31, 1998 and then  increase to $1,750 per quarter
on  December  31,  1999 and then  further  increase  to $2,000  per  quarter  on
September 30, 2001 with a balloon  payment of $3,750 in respect of the term loan
portion of the facility due on  September  30, 2002.  The facility is secured by
all of the assets of the Company and its  subsidiaries  (after  giving effect to
the Merger).  No  significant  gain or loss resulted from the  refinancing.  The
facility  contains  covenants,  which  require the  Company to maintain  certain
financial  ratios,  prohibit  dividends  and similar  payments  and restrict the
incurrence  of other  indebtedness.  The  facility is  guaranteed  by all of the
Company's subsidiaries (after giving effect to the Merger).

     The  Company,  made  capital  expenditures  totaling  $8,486 on a pro forma
basis,  which was a breach under the Credit Agreement as the Company was limited
to $8,000 of capital  expenditures  on a pro forma  basis for fiscal  year ended
June 30,  1998.  The lenders  have waived that  requirement  of the facility for
fiscal year ended June 30, 1998.

     The  proceeds  of the new  facility  were  used as  follows:  approximately
$23,400 to refinance IPL's  outstanding  long-term  indebtedness,  approximately
$2,900 to refinance Old Video's outstanding long-term indebtedness and $1,485 of
mortgage  obligations of MAL Partners and approximately  $1,900 to refinance Old
Video's outstanding short-term line of credit.  Approximately $3,300 was used to
pay the fees and expenses incurred in connection with the Merger.

     In August 1997, the Company entered into an interest rate swap agreement on
the $33,000 term loan,  which decreases in accordance  with scheduled  principal
payments on the company's Term Loan. The swap agreement effectively converts the
Company's borrowings under its Term Loan to a fixed rate of 8.33% per annum.

     At June 30, 1998, the Company's outstanding  indebtedness was approximately
$41,748 including $2,600 under the revolving credit facility.  At June 30, 1998,
the weighted  average  interest  rate was  approximately  8.31% on the Company's
outstanding indebtedness.  The remainder of the facility (approximately $13,383)
will be available for future working capital  requirements and general corporate
purposes.

     The  Company  opened an  additional  13,000-sq.  ft.  facility  in Burbank,
California  in the first  quarter of fiscal  year 1999.  The new  facility  will
provide Technical and Distribution services to international  television program
originators and distributors;  such services will include  standards  conversion
and international  duplication.  Management believes that the facility will give
the  company  an  opportunity  to  recapture  business  lost  to  those  of  its
competitors operating in California,  as well as to attract additional customers
located on the West Coast.  Management  currently  estimates this expansion will
require  approximately  $5,100  in  capital  expenditures,  and will  result  in
increased   revenues  and  operating   expenses.   The  source  of  the  capital
expenditures  and operating  funds is expected to be a combination of internally
generated funds and borrowings under the Company's Credit Agreement.

     The 4%  convertible  subordinated  notes due May 4,  2003 in the  principal
amount of $6,350 issued by IPL, in connection with the CABANA acquisition in May
1995 still remain outstanding after the refinancing described above. These notes
are  convertible  into Common  Stock at a  conversion  price of $14.00 per share
after May 2000 and are redeemable after May 2001.

     Cash Flow from Operating Activities.  For the year ended June 30, 1998, net
cash  provided in  operating  activities  was $5,536  primarily  resulting  from
earnings before interest,  taxes,  depreciation  and amortization  ("EBITDA") of
$14,867 which was offset by increases in working capital requirements, primarily
the payment of transaction costs associated with the Merger.  For the year ended
June 30, 1997, net cash provided by operating  activities  was $1,071  primarily
resulting from EBITDA of $4,166 which was offset by increases in working capital
requirements.

     Cash Flows from Investing Activities. For the year ended June 30, 1998, the
Company  used  $6,669 for  investing  activities,  consisting  of $6,448 for the
purchase of additional equipment, which was offset by a sale of fixed assets and
repayment  of an advance to an  affiliate.  Approximately  $3,000 of  additional
equipment was used for the new West Coast facility.  For the year ended June 30,
1997, Old Video used $2,392 for investing  activities,  consisting of $1,000 for
the  purchase  of vacant  land from an  affiliate  with the  remainder  utilized
primarily  for the purchase of new rental  equipment  which was offset by a $562
repayment of an advance to an affiliate.
<PAGE>
     Cash Flow from Financing Activities. For the year ended June 30, 1998, cash
provided by financing  activities,  net of repayments of borrowings of long-term
indebtedness, was $2,235. Such amount primarily consisted of $33,000 in proceeds
from the  senior  secured  term  loan and  $2,600  in net  borrowings  under the
revolving  line of  credit  described  above.  The  Company  repaid  $29,685  of
borrowings  primarily in connection  with the  refinancing  described  above and
$3,787 of scheduled  repayments  of long term debt.  For the year ended June 30,
1997,  cash  provided by  financing  activities,  net of  repayment of long-term
indebtedness,  was $1,191,  consisting of $904 in increased borrowings under Old
Video's line of credit,  $2,655 of equipment  financing and capital leases and a
$600 mortgage secured by the vacant land from an affiliate.

     The  foregoing  activities  resulted in a net increase in cash of $1,102 in
1998, a net decrease in cash of $130 in fiscal year 1997,  and a net decrease in
cash of $775 in 1996.

Forward-Looking Statements

     The above discussion contains forward-looking statements. There are certain
important  factors  that could  cause  results to differ  materially  from those
anticipated by the statements  made above.  These factors  include,  but are not
limited to: general  performance of the economy,  specifically as it affects the
advertising industry, entertainment, television, video and broadcast industries;
the international  economic and political climate which could impact the sale of
domestic  programming  overseas:  significant changes in video technology in the
post-production industry and the loss of key personnel.

Impact of Year 2000

     Some of the Company's older computer programs were written using two digits
rather than four to define the  applicable  year.  As a result,  those  computer
programs have  time-sensitive  software that  recognize a date using "00" as the
year 1900  rather  than the year  2000.  This  could  cause a system  failure or
miscalculations causing disruption of operations, including, among other things,
a temporary  inability  to process  transactions,  send  invoices,  or engage in
similar normal business activities.

     The Company has completed an assessment and will have to modify portions of
its  administrative  and accounting  software so that its computer  systems will
function  properly with respect to dates in the year 2000 and thereafter.  Based
on the nature of the  Company's  business,  the  Company  anticipates  it is not
likely to experience  material  business  interruption due to the impact of year
2000 compliance on its customers and vendors.  As a result, the Company does not
anticipate the incremental  expenditures to address year 2000 compliance will be
material to the Company's liquidity, financial position or results of operations
over the next few years.

ITEM 7A. QUANTATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK.

     Market risks  relating to the Company's  operations  result  primarily from
changes in  interest  rates as well as credit  risk  concentrations.  To address
these risks the Company  entered into an interest rate swap as described  below.
The Company does not use financial instruments for trading purposes.

Credit Risks

     The  Company's  customer  base is composed of companies  in the  television
network,   cable  and  advertising  industries  which  are  located  principally
throughout the United States. No single customer  accounted for more than 10% of
the Company's sales during the fiscal year ended June 30, 1998.

Interest Rate Risks

     The Company  hedges its exposure to changes in interest rates on its senior
secured term loan. In August 1997, the Company entered into a five year interest
rate hedge agreement with a total notional principal amount of $33,000 to manage
interest costs associated with changing interest rates. This agreement  converts
underlying  variable rate debt based on LIBOR under the  Company's  term loan to
fixed rate debt with an interest rate of 8.33%.
 <PAGE>
     The following  table provides  information  about the Company's  derivative
financial  instruments  and other  financial  instruments  that are sensitive to
changes in interest  rate. For debt  obligations,  the table presents cash flows
and related  weighted-average  interest rates by expected  maturity  dates.  For
interest  swaps,  the  table  presents  notional  amounts  and  weighted-average
interest  rates by  contractual  maturity  dates.  Notional  amounts are used to
calculate the contractual cash flows to be exchanged under the contract.
<TABLE>

                                                                                                                       Fair Value
  (dollars in thousands)         1999           2000           2001           2002          2003          Total           1998
--------------------------- -- ---------- --- ---------- -- ----------- -- ----------- - ----------- -- ---------- --- -----------
<S>                            <C>             <C>           <C>           <C>           <C>            <C>
Long-term debt including
      Current portion
   Fixed rate                  $  5,350       $  7,052      $  7,568       $  9,970      $  6,366       $  36,306      $  36,338
   Average interest rate           8.30%          8.29%         8.26%          8.00%         8.00%

Subordinated Debt
   Fixed rate                  $     ---      $     ---     $  2,117       $  2,117      $  2,116       $   6,350      $   5,442
   Average interest rate           8.34%          8.34%         8.34%          8.34%         8.34%

Interest rate swap
   Pay variable/receive fixed  $  4,750       $  6,500      $  7,000       $  8,000      $  3,750       $  30,000      $   (638)
   Average pay rate                7.58%          7.58%         7.58%          7.58%         7.58%
   Average receive rate            6.66%          6.66%         6.66%          6.66%         6.66%
</TABLE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The response to this item appears in Item 14(a) of this Form 10-K.

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

     None.

                                    PART III
ITEMS 10, 11, 12, AND 13

    The information called for by Items 10, 11, 12 and 13 of this Form 10-K will
be included in an amendment to this Form 10-K which will be filed not later than
October 28, 1998.
<PAGE>
                                     PART IV

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

(a)      (1) The consolidated  financial  statements,  related notes thereto and
         report of independent  public  accountants  required by Item 8 begin at
         page F-1 herein.

     (2) The financial statement schedule appears on page F-29 herein.

     (3) Exhibits:

                                    Exhibits
Exhibit Number

3.1       Certificate of incorporation of the Company.
3.2+      By-Laws of the Company.
4.1       Form of 4% Convertible  Subordinated Note of the  Company(incorporated
          by  reference  to the  exhibit  of the same  number  contained  in the
          Company's Current Report on Form 8-K, dated May 18, 1995).
10.1*(M)  Form of International Post Group Inc. Long-term Incentive Plan,
          together with form of International Post Group Inc. Stock Option
          Agreement.
10.2*(M)  Form of  International  Post Group Inc.  Restricted Share Plan for
          Directors, together with form of Restricted Share Agreement.
10.3**    Form  of Lease  Agreements  between  Audio  Plus Video and L.I.M.A.
          Partners.
10.4+     Lease Agreements, dated as of June 30, 1993, between MTE Co. and
          Nineteen New York Properties Limited Partnership.
10.5**(M) Form of Stock Option Agreement between the Company and Jeffrey J.
          Kaplan.
10.6**    Form of Services and Option Agreement between Holdings and Kenneth F.
          Gorman.
10.7**    Form of Services and Option Agreement between Holdings and Terrence
          A. Elkes.
10.8**    Form of Stock Option Agreement between VSC and Kenneth F. Gorman.
10.9**    Form  of Stock Option Agreement between VSC and Terrence A. Elkes.
10.10**(M)Form  of Stock Option Agreement  between the Company and Kenneth F.
          Gorman.
10.11**(M)Form of Stock Option Agreement between the Company and Terrence A.
          Elkes.
10.12++(M)Employment  Agreement dated as of April 21, 1994,  between the Company
          and Daniel Rosen.
10.13++(M)Stock  Option  Agreement,  dated as of April  21,  1994,  between  the
          Company and Daniel Rosen.
10.14(M)  Employment  Agreement dated as of May 4, 1995,  among Big Picture/Even
          Time  Limited,  the Company and Barbara  D'Ambrogio  (incorporated  by
          reference to exhibit  number 10.2  contained in the Company's  Current
          Report on Form 8-K, dated May 18, 1995).
10.15(M)  Employment  Agreement dated as of May 4, 1995,  among Big Picture/Even
          Time  Limited,  the  Company  and David  D'Ambrogio  (incorporated  by
          reference to exhibit  number 10.3  contained in the Company's  Current
          Report on Form 8-K, dated May 18, 1995).
10.16(M)  Employment  Agreement dated as of May 4,1995,  among Big  Picture/Even
          Time  Limited,   the  Company  and  Gregory  Letson  (incorporated  by
          reference to exhibit  number 10.4  contained in the Company's  Current
          Report on Form 8-K, dated May 18, 1995).
10.17     (M)  Employment   Agreement  dated  as  of  May  4,  1995,  among  Big
          Picture/Even   Time  Limited,   the  Company  and  Michael   Schenkein
          (incorporated  by  reference to exhibit  number 10.5  contained in the
          Company's Current Report Form 8-K, dated May 18, 1995).
10.18(M)  Employment  Agreement dated as of May 4, 1995,  among Big Picture/Even
          Time  Limited,  the Company and Leonard  Smalheiser  (incorporated  by
          reference to exhibit  number 10.6  contained in the Company's  Current
          Report on Form 8-K, dated May 18, 1995).
10.19(M)  Employment  Agreement dated as of May 4, 1995,  among Big Picture/Even
          Time Limited,  the Company and Jane Stuart  (incorporated by reference
          to exhibit  number 10.7  contained in the Company's  Current Report on
          Form 8-K, dated May 18, 1995).
10.20     Put/Call Agreement dated as of May 4, 1995, between Gregory Letson and
          the  Company   (incorporated  by  reference  to  exhibit  number  10.8
          contained  in the  Company's  Current  Report on Form  8-K,  dated May
          18,1995).
10.21     Pledge  Agreement,   dated  as  of  May  4,  1995,  by  and  among  BP
          Partnership,  ET Partnership,  Barbara  D'Ambrogio,  David D'Ambrogio,
          Michael  Schenkein,  Leonard  Smalheiser,  Jane Stuart and the Company
          (incorporated  by  reference to exhibit  number 10.9  contained in the
          Company's Current Report on Form 8-K, dated May 18, 1995).
10.22     Pledge  Agreement,  dated as of May 4, 1995,  by and  between  Gregory
          Letson and the Company  (incorporated  by reference to exhibit  number
          10.10 contained in the Company's Current Report on Form 8-K, dated May
          18, 1995).
10.23     Escrow Agreement dated as of May 4,1995,  by and among ET Partnership,
          David D'Ambrogio,  Barbara  D'Ambrogio,  the Company and Cowan,  Gold,
          DeBaets,  Abrahams  &  Sheppard,  as  Escrow  Agent  (incorporated  by
          reference to exhibit number 10.11  contained in the Company's  Current
          Report on Form 8-K, dated May 18, 1995).
10.24     Escrow Agreement dated as of May 4, 1995, by and among BP Partnership,
          Michael Schenkein,  Leonard Smalheiser,  Jane Stuart,  Gregory Letson,
          the Company and Cowan, Gold, DeBaets,  Abrahams & Sheppard,  as Escrow
          Agent  (incorporated by reference to exhibit number 10.12 contained in
          the Company's Current Report on Form 8-K, dated May 18,1995).
10.25***  Agreement  dated as of June 7,1993,  by and between MTV Latin America,
          Inc. and The Post Edge, Inc.
10.26***  Agreement, dated as of December 9, 1993, by and between  Discovery
          Communications, Inc. and The Post Edge, Inc., and Amendment No. 1
          thereto.
10.27+++  Amendment No. 1, dated as of September 15, 1995, to the Agreement,
          dated as of June 7, 1993, by and between MTV Latin America, Inc.
          and The Post Edge, Inc.
10.28     Voting  Agreement,  dated as of June  27,  1997,  by and  among
          International Post Limited,  Video Services  Corporation,  Terrence A.
          Elkes,  The Equitable  Life  Assurance  Society of the United  States,
          Equitable  Deal  Flow  Fund,  L.P.,  Louis H.  Siracusano,  Arnold  P.
          Ferolito  and Donald H. Buck  (incorporated  by  reference  to exhibit
          number 10.58  contained in the Company's  Current  Report on Form 8-K,
          dated  July 7,  1997).
10.29     Asset  Purchase  Agreement  dated as of January 22, 1997, by and among
          Cognitive  Communications,  Inc.,  Susan Wiener,  Michael  Rudnick and
          Cognitive  Communications,  LLC  (incorporated by reference to exhibit
          number 10.1 contained in the Company's  Quarterly  Report on Form 10-Q
          for the quarterly period ended January 31, 1997).
10.30     Agreement,  dated as of  January  22,1997,  by and among the  Company,
          Susan Wiener,  Michael  Rudnick,  Cognitive  Communications,  Inc. and
          David  Leveen  (incorporated  by  reference  to  exhibit  number  10.2
          contained in the Company's Quarterly Report on Form 10-Q for the
          quarterly period ended January 31, 1997).
10.31(M)  Employment  Agreement,  dated as of  January  22,  1997,  by and among
          Cognitive  Communications,  LLC  and  Susan  Wiener  (incorporated  by
          reference to exhibit number 10.3 contained in the Company's  Quarterly
          Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.32(M)  Employment  Agreement,  dated as of  January  22,  1997,  by and among
          Cognitive  Communications,  LLC and Michael Rudnick  (incorporated  by
          reference to exhibit number 10.4 contained in the Company's  Quarterly
          Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.33(M   )  Employment  Agreement,  dated as of January  22,1997,  by and among
          Cognitive  Communications,  LLC  and  David  Leveen  (incorporated  by
          reference to exhibit number 10.5 contained in the Company's  Quarterly
          Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.34     Put  Agreement,  dated as of January 22, 1997, by and among  Cognitive
          Communications,  LLC, the Company,  Susan Wiener,  Michael Rudnick and
          David  Leveen  (incorporated  by  reference  to  exhibit  number  10.6
          contained in the Company's Quarterly Report on Form 10-Q for the
          quarterly  period ended  January 31, 1997).
10.35     Sale  Option  Agreement,  dated as of January 22,  1997,  by and among
          Cognitive  Communications,  LLC  and  Susan  Wiener  (incorporated  by
          reference to exhibit number 10.7 contained in the Company's  Quarterly
          Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.36     Sale  Option  Agreement,  dated as of January 22,  1997,  by and among
          Cognitive  Communications,  LLC and Michael Rudnick  (incorporated  by
          reference to exhibit number 10.8 contained in the Company's  Quarterly
          Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.37     Sale  Option  Agreement,  dated as of January 22,  1997,  by and among
          Cognitive  Communications,  LLC  and  David  Leveen  (incorporated  by
          reference to exhibit number 10.9 contained in the Company's  Quarterly
          Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.38(M)  Incentive Compensation Agreement, dated as of January 22, 1997, by and
          among Cognitive Communications, LLC, Susan Wiener, Michael Rudnick and
          David  Leveen  (incorporated  by reference  to exhibit  number  10.10.
          contained  in the  Company's  Quarterly  Report  on Form  10-Q for the
          quarterly period ended January 31, 1997).
10.39(M)  Form of Incentive Option Agreement,  undated, by and between Cognitive
          Communications, LLC and Optionee (incorporated by reference to exhibit
          number 10.11 contained in the Company's Quarterly Report on Form I O-Q
          for the quarterly period ended January 31, 1997).
10.40(M)  Consulting  Agreement,  dated  February  15,  1997,  by and  among the
          Company and Jeffrey J. Kaplan  (incorporated  by  reference to exhibit
          number 10. 12 contained in the Company's Quarterly Report on Form 10-Q
          for the quarterly period ended January 31, 1997).
10.41     Stock Resale Agreement,  dated as of August 26,1997,  by and among the
          Company, Louis H. Siracusano, Donald H. Buck and Arnold P.
          Ferolito.
10.42     Registration  Rights  Agreement  dated as of August 26,  1997,  by and
          among the Company, Louis H. Siracusano, Donald H. Buck and Arnold P.
          Ferolito.
10.43(M)  Employment  Agreement dated as of August 26, 1997, by and between the
          Company and Louis H. Siracusano.
10.44(M)  Employment  Agreement  dated as of August 26, 1997, by and between the
          Company and Donald H. Buck.
10.45     Losses Escrow Agreement, dated as of August 26, 1997, by and among the
          Company, Louis H. Siracusano, Donald H. Buck,  Arnold P.  Ferolito and
          IBJ Schroder  Bank & Trust  Company.
10.46(M)  Agreement  dated as of August 26, 1997, by and between the Company and
          Martin Irwin.
10.47(M)  Agreement dated as of August 26, 1997,  by and between the Company
          and Arnold P. Ferolito.
10.48(M)  Consulting  Agreement,  dated  February  15,  1997,  by and  among the
          Company and Jeffrey J. Kaplan  (incorporated  by  reference to exhibit
          number 10.12 contained in the Company's  Quarterly Report on Form 10-Q
          for the quarterly period ended January 31, 1997).
<PAGE>
10.49     Stock Resale  Agreement,  dated as of August 26, 1997 by and among the
          Company,  Louis H.  Siracusano,  Donald H. Buck and Arnold P. Ferolito
          (incorporated by reference to exhibit 10.70 contained in the Company's
          Annual Report on Form 10-K for the fiscal year ended July 31, 1997
10.50     Registration  Rights  Agreement,  dated as of August 26, 1997,  by and
          among the Company,  Louis H. Siracusano,  Donald H. Buck and Arnold P.
          Ferolito  (incorporated  by  reference  to exibit  of the same  number
          contained in the  Company's  Annual Report on Form 10-K for the fiscal
          year ended July 31, 1997).
10.51(M)  Employment Agreement,  dated as of August 26, 1997, by and between the
          Company and Louis H. Siracusano  (incorporated by reference to exhibit
          of the same number  contained in the  Company's  Annual Report on Form
          10-K for the fiscal year ended July 31, 1997).
10.52(M)  Employment Agreement,  dated as of August 26, 1997, by and between the
          Company and Donald H. Buck  (incorporated  by  reference to exhibit of
          the same number  contained in the Company's Anuual Report on Form 10-K
          for the fiscal year ended July 31, 1997.
10.53     Losses Escrow Agreement, dated as of August 26, 1997, by and among the
          Company,  Louis H. Siracusano,  Donald H. Buck, Arnold P. Ferolito and
          IBJ  Schroder  Bank & Trust  Company  (incorporated  by  reference  to
          exhibit of the same number contained in the Company's Annual Report on
          Form 10-K for the fiscal year July 31, 1997).
10.54(M)  Agreement, dated as of August 26, 1997, by and between the Company and
          Martin Irwin  (incorporated by reference to exhibit of the same number
          contained in the  Company's  Annual Report on Form 10-K for the fiscal
          year ended July 31, 1997).
10.55(M)  Agreement,  dated as of August 26, 1997 by and between the Company and
          Arnold P. Ferolito  (incorporated  by reference to exhibit of the same
          number  contained in the Company's  Annual Report on Form 10-K for the
          fiscal year ended July 31, 1997).
10.56(M)  Agreement, dated as of October 17, 1997, by and between the Company
          and Steven G. Crane.
10.57     Credit  Agreement,  dated as of August 27,  1997,  by and among  Video
          Services  Corporation,  VSC MAL Corp.,  the Lenders  party thereto and
          KeyBank National Association.
10.58     Security Agreement,  dated as of August 27, 2997, by and between Video
          Services Corporation and KeyBank National Association.  10.81 Guaranty
          and Secuity Agreement, dated as of August 27, 1997, by and among the
          Guarators and KeyBank National Association.
10.59     Amendement  No.1 and Waiver  No.1,  dated July 21,  1998 to the Credit
          Agreement,  dated as of August 27, 1998 by and among the Company,  the
          Lenders party thereto and KeyBank National Association,  as the Issuer
          and as Agent.
21.1      Subsidiaries of the Company.
23.       Consent  of Ernst & Young LLP.
27        Financial  Data  Schedule,  which is submitted  electronically  to the
          Securities and Exchange  Commission for information  purposes only and
          not filed.

-----------------
*    Incorporated  by reference  to the exhibit of the same number  contained in
     Amendment  No.  4  to  IPL's  Registration   Statement  on  Form  S-1  (the
     "Registration   Statement"),   filed  with  the   Securities  and  Exchange
     Commission (the "SEC" on February 4, 1994.

+    Incorporated  by reference  to the exhibit of the same number  contained in
     Amendment  No.  1 to IPL's  Registration  Statement  filed  with the SEC on
     October 21, 1993.

**   Incorporated  by reference  to the exhibit of the same number  contained in
     Amendment  No.  3 to IPL's  Registration  Statement  filed  with the SEC on
     January 10, 1994.

++   Incorporated  by reference  to the exhibit of the same number  contained in
     IPL's Annual Report on Form 10-K for the fiscal year ended July 31, 1994.

***  Incorporated  by reference  to the exhibit of the same number  contained in
     IPL's Annual Report on Form 10-K for the fiscal year ended July 31, 1995.

+++  Incorporated  by reference  to the exhibit of the same number  contained in
     IPL's Annual Report on Form 10-K for the fiscal year ended July 31, 1996.

(M) Management contract or compensatory plan or arrangement.

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

(b)      None.

(c)      See Item 14(a)(3) above.

(d)      Financial Statement Schedule.

Schedule II - Valuation and Qualifying Accounts.
<PAGE>
                                   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.

Date: September 28, 1998          VIDEO SERVICES CORPORATION,

                                  By: /s/ Louis H. Siracusano

                                  Name: Louis H. Siracusano
                                  Title:   President and Chief Executive Officer

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

Name and Signature            Title                                       Date

/s/ Louis H. Siracusano       President, Chief Executive Officer         9/28/98
Louis H. Siracusano           and Director (Principal Executive
                              Officer)


/s/ Steven G. Crane           Vice President and                         9/28/98
Steven G. Crane               Chief Financial Officer
                             (Principal Financial Officer)


/s/ Michael E. Fairbourne     Vice President-Administration              9/28/98
Michael E. Fairbourne        (Principal Accounting Officer)


/s/ Terrence A. Elkes         Chairman of the Board of Directors         9/28/98
Terrence A. Elkes


/s/ Robert H. Alter           Director                                   9/28/98
Robert H. Alter


/s/ Martin Irwin              Director                                   9/28/98
Martin Irwin


/s/ Frank Stillo              Director                                   9/28/98
Frank Stillo


/s/ Raymond L. Steele         Director                                   9/28/98
Raymond L. Steele
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE






                                                                Page Number

REPORTS OF INDEPENDENT AUDITORS                                   F-2

FINANCIAL STATEMENTS:

Consolidated Balance Sheets as of
June 30, 1997 and 1998                                            F-3

Consolidated Statements of Operations for the
years ended June 30, 1996, 1997 and 1998.                         F-4

Consolidated Statements of Stockholders'
Equity for the years ended June 30, 1996,
1997 and 1998                                                     F-5

Consolidated Statements of Cash Flows for the
years ended June 30, 1996, 1997 and 1998.                         F-6

Notes to Consolidated Financial Statements.                       F-7 to F-28





SUPPLEMENTAL SCHEDULE:

II. Valuation and Qualifying Accounts                            F-29









NOTE:

         Schedules  other than  those  referred  to above  have been  omitted as
         inapplicable  or not  required  under  the  instructions  contained  in
         Regulation  S-X  or  the  information  is  included  elsewhere  in  the
         financial statements or the notes thereto.





                                       F-1
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS





To the Board of Directors and Stockholders
   of Video Services Corporation:

     We have  audited  the  accompanying  consolidated  balance  sheets of Video
Services  Corporation  and  subsidiaries  as of June 30, 1997 and 1998,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended June 30, 1998.  Our audits
also  included  the  financial  statement  schedule  listed in the index at item
14(a).  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.

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

        In our opinion, the consolidated  financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Video Services  Corporation  and  subsidiaries as of June 30, 1997 and 1998, and
the  consolidated  results of their  operations and their cash flows for each of
the three years in the period ended June 30, 1998, in conformity  with generally
accepted  accounting  principles.  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.










                                                               ERNST & YOUNG LLP

White Plains, New York
September 15, 1998
















                                       F-2
<PAGE>


                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      As of June 30, 1997 and June 30, 1998
                             (dollars in thousands)

<TABLE>



                                                                        June 30,           June 30,
ASSETS                                                                    1997               1998
------
                                                                     ---------------     --------------
<S>                                                                      <C>                 <C>
Current assets:
         Cash and cash equivalents                                            $ 390            $ 1,492
         Accounts receivable, net                                             6,173             14,169
         Inventories                                                            688              1,083
         Costs and estimated earnings in excess of billings on
            uncompleted contracts                                               363                187
         Deferred income taxes                                                  674              1,535
         Prepaid expenses and other current assets                              574                907
                                                                     ---------------     --------------
                  Total current assets                                        8,862             19,373

Fixed assets, net                                                             5,852             36,590
Excess of cost over fair value of net assets acquired, net                      449             22,289
Receivable from affiliates                                                    1,192                 42
Receivable from officers                                                        211                  -
Deferred income taxes                                                           622              1,667
Net assets to be disposed                                                       634                  -
Other assets                                                                  2,979              1,899
                                                                     ---------------     --------------
                  Total assets                                             $ 20,801           $ 81,860
                                                                     ===============     ==============
</TABLE>

<TABLE>

LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                       <C>                <C>
Current liabilities:
         Accounts payable and accrued expenses                              $ 7,812            $ 8,443
         Billings in excess of costs and estimated
           earnings on uncompleted contracts                                    462              3,290
         Current portion of long-term debt                                      149              5,338
         Income taxes payable                                                     -                708
         Other current liabilities                                            1,789              3,881
                                                                     ---------------     --------------
                  Total current liabilities                                  10,212             21,660

Long-term debt                                                                5,330             30,968
Subordinated debt                                                                 -              5,442
Deferred income taxes                                                           2,017                -
Other liabilities                                                               509              3,065
                                                                     ---------------     --------------
                  Total liabilities                                          18,068             61,135
                                                                     ---------------     --------------

Commitments and contingencies

Stockholders' equity:
         Preferred stock:   $.01 par value - 3,000,000 shares
                authorized;  no shares outstanding at June 30, 1997
                and June 30, 1998                                                 -                  -
         Common stock: no and $.01 par value, 7,500,000 and 25,000,000
                shares authorized, and 2,678,162 and 13,264,307 shares issued
                and outstanding at June 30, 1997 and June 30, 1998,
                respectively                                                    103                132
         Additional paid-in-capital                                             419             21,196
         Retained earnings (deficit)                                          2,211               (603)
                                                                     ---------------     --------------
                  Total stockholders' equity                                  2,733             20,725
                                                                     ---------------     --------------
                  Total liabilities and stockholders' equity               $ 20,801           $ 81,860
                                                                     ===============     ==============
</TABLE>


                                        See accompanying notes

                                                 F-3

<PAGE>


                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                For the Years  Ended June 30,  1996,  1997 and 1998
                (dollars in thousands, except per share amounts)
<TABLE>
<S>                                                              <C>             <C>             <C>


                                                                     1996             1997             1998
                                                                 -------------    -------------    -------------

Revenues:
     Sales                                                           $ 18,258         $ 15,130         $ 16,642
     Services                                                           9,241            9,979           54,364
     Rentals                                                            2,241            2,501            1,989
                                                                 -------------    -------------    -------------
                                                                       29,740           27,610           72,995

Costs:
     Costs of sales                                                    14,512           11,641           12,537
     Costs of services                                                  4,643            4,822           28,062
     Costs of rentals                                                     536              809              576
                                                                 -------------    -------------    -------------
                                                                       19,691           17,272           41,175

Depreciation                                                            1,608            1,807            7,109
                                                                 -------------    -------------    -------------

Gross profit                                                            8,441            8,531           24,711

Selling, general and administrative expenses                            6,009            6,764           17,170

Amortization                                                               45               17              849
                                                                 -------------    -------------    -------------

Operating income from continuing operations                             2,387            1,750            6,692

Other (expense) income:

          Interest expense                                               (485)            (517)          (3,619)

          Interest income and other                                        97              592              217
                                                                 -------------    -------------    -------------

Income before income taxes and discontinued operations                  1,999            1,825            3,290

Income tax expense                                                        787              187            1,591
                                                                 -------------    -------------    -------------

Income from continuing operations                                       1,212            1,638            1,699

Discontinued operations:
          Loss from operations of Diversified Products and
            Consulting Services segments (less applicable income
            tax benefit of $248, $380 and $73)                           (388)            (776)            (140)

          Estimated loss on disposal of Diversified Products and
            Consulting Services segments (less applicable income
            tax benefit of $--, $447 and $1,147)                            -             (912)          (1,720)
                                                                 -------------    -------------    -------------

Net (loss) income                                                       $ 824            $ (50)          $ (161)
                                                                 =============    =============    =============

Earnings per share:
   Basic:
       Income from continuing operations                               $ 0.17           $ 0.23           $ 0.14
       Loss from discontinued operations                                (0.05)           (0.24)           (0.15)
                                                                 -------------    -------------    -------------
       Net (loss) income                                               $ 0.12          $ (0.01)         $ (0.01)
                                                                 =============    =============    =============

   Diluted:
       Income from continuing operations                               $ 0.17           $ 0.23           $ 0.14
       Loss from discontinued operations                                (0.05)           (0.24)           (0.15)
                                                                 =============    =============    =============
       Net (loss) income                                               $ 0.12          $ (0.01)         $ (0.01)
                                                                 =============    =============    =============

Non cash dividend per share                                            $ -             $ -              $ 0.22
                                                                 =============    =============    =============

Weighted average number of shares outstanding for basic and
 diluted earnings per share                                         6,961,183        7,011,349       12,276,278
                                                                 =============    =============    =============
</TABLE>
                             See accompanying notes

                                       F-4

<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                For the Years Ended June 30, 1996, 1997 and 1998
                             (dollars in thousands)

<TABLE>

<S>                                              <C>             <C>         <C>         <C>            <C>

                                                     Common       Common
                                                     Stock        Stock       Paid-In      Retained
                                                     Shares       Amount      Capital      Earnings       Total
                                                  ------------------------------------------------------------------

Balance at June 30, 1995                             2,640,162         $ 84        $ 291      $ 1,437       $ 1,812

Issuance of common stock                                38,000           19            -            -            19

Net income                                                   -            -            -          824           824

                                                  ------------------------------------------------------------------
Balance at June 30, 1996                             2,678,162          103          291        2,261         2,655

Issuance of consultant compensatory stock options            -            -          128            -           128

Net loss                                                     -            -            -          (50)          (50)

                                                  ------------------------------------------------------------------
Balance at June 30, 1997                             2,678,162          103          419        2,211         2,733

Merger with IPL                                     10,560,145           29       21,766            -        21,795

Contribution of real estate affiliates                       -            -       (1,263)           -        (1,263)

Issuance of stock options                                    -            -          199            -           199

Non cash dividend to shareholders                            -            -            -       (2,653)       (2,653)

Stock related compensation                              26,000            -           75            -            75

Net loss                                                     -            -            -         (161)         (161)

                                                  ------------------------------------------------------------------
Balance at June 30, 1998                            13,264,307        $ 132     $ 21,196       $ (603)     $ 20,725
                                                  ==================================================================
</TABLE>























                             See accompanying notes

                                       F-5
<PAGE>


                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the Years Ended June 30, 1996, 1997 and 1998
                             (dollars in thousands)


<TABLE>


<S>                                                          <C>                <C>              <C>

                                                                  1996               1997              1998
                                                              --------------     --------------    --------------

Operating Activities
Net (loss) income                                                     $ 824              $ (50)           $ (161)
Adjustments to reconcile net income to net cash provided
  by continuing operations:
     Depreciation                                                     1,868              2,015             7,109
     Amortization                                                        46                 18               849
     Issuance of consultant compensatory stock options                    -                128                 -
     Loss on disposal of discontinued operations                          -                823               481
     Loss (gain) on sale of equipment                                  (351)                27              (164)
     Deferred income taxes                                              411               (103)              537
     Provision for bad debts                                            133                 76               166
     (Increase) decrease in operating assets:
       Accounts receivable                                           (1,488)            (1,057)            1,156
       Inventories                                                     (369)              (404)              107
       Costs and estimated earnings in excess of billings on
         uncompleted contracts                                         (252)                53               176
       Prepaid expenses and other assets                               (399)            (1,663)              (42)
     Increase (decrease) in operating liabilities:
       Accounts payable and accrued expenses                          2,277              2,674            (7,581)
       Billings in excess of costs and estimated earnings on
           uncompleted contracts                                          5               (459)            2,828
       Other liabilities                                               (754)            (1,007)               75
                                                              --------------     --------------     -------------
Net cash provided by continuing operations                            1,951              1,071             5,536

Investing Activities
Additions to fixed assets                                            (2,970)            (3,053)           (6,448)
Proceeds from sale of fixed assets                                      380                 99               168
(Increase) decrease in receivable from affiliates                      (581)               562              (389)
                                                              --------------     --------------    --------------
Net cash used in investing actvities                                 (3,171)            (2,392)           (6,669)

Financing Activities
Proceeds from issuance of stock                                          19                  -                 -
Proceeds from subordinated debt                                           -                  -               158
Proceeds from long-term borrowing                                     1,663              4,159            54,561
Repayments of borrowings                                             (1,237)            (2,968)          (52,484)
                                                              --------------     --------------    --------------
Net cash provided by financing activites                                445              1,191             2,235

Net increase (decrease) in cash                                        (775)              (130)            1,102
Cash and cash equivalents, beginning of year                          1,295                520               390
                                                              --------------     --------------    --------------
Cash and cash equivalents, end of year                                $ 520              $ 390           $ 1,492
                                                              ==============     ==============    ==============

</TABLE>











                             See accompanying notes

                                       F-6
<PAGE>


                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          As of June 30,  1997 and 1998 and for the years  ended
              June 30, 1996, 1997 and 1998
                (dollars in thousands, except for share amounts)



Note 1 - Basis of and Presentation

     Video  Services  Corporation  and  its  subsidiaries   (collectively,   the
"Company"),  is a leading  provider of  value-added  video services to a diverse
base  of  customers  within  the  television   network,   cable  and  syndicated
programming  markets.  These  services  are  divided  into three  segments:  (i)
Satellite  and  Distribution  Services,  (ii)  Systems  and  Products  and (iii)
Production Services.  The Satellite and Distribution Services segment integrates
and distributes  broadcast quality video content via a satellite and fiber optic
transmission  network routed through its digital/analog  switching center and is
an international provider of technical and distribution services to distributors
of television programming.  The Systems and Products segment designs,  engineers
and produces  advanced video facilities for the broadcast and cable  television,
post-production and corporate markets. This segment also develops,  manufactures
and markets  advanced color  correcting and  manipulation  systems for the film,
post-production and multimedia industries and rents professional video equipment
to the  sports,  entertainment  and other  segments of the  broadcast  and cable
television  and  corporate  markets.  The  Production  Services  segment  is  an
international  provider of technical and creative services to owners,  producers
of television programming, television advertising and other programming content.

     On August 27, 1997,  Video Services  Corporation  ("Old Video") merged with
and  into   International  Post  Limited  ("IPL")  with  IPL  as  the  surviving
corporation (the "Merger"). At the effective time of the Merger, IPL changed its
name to Video  Services  Corporation.  The  "Company"  refers  to the  surviving
corporation  after  the  Merger.  The  Merger  was  accounted  for as a  reverse
acquisition  whereby  pre-Merger  financial  statements  of Old Video became the
historical  financial  statements of the Company. As such, the net assets of IPL
have been recorded at fair value and Old Video's pre-Merger stockholders' equity
has been  retroactively  restated for the equivalent  number of shares of common
stock of the Company,  with differences  between the par value of the IPL common
stock  and the Old Video  common  stock  recorded  as an  adjustment  to paid in
capital. An aggregate of 7,011,349 shares of Company common stock were issued to
the  stockholders of Old Video in the Merger (plus an additional  212,096 shares
of common  stock which were  issued to replace an equal  number of shares of IPL
common stock owned by Old Video which were canceled upon the Merger). Such newly
issued  shares  in  the  aggregate   represented   approximately  54.6%  of  the
outstanding shares of common stock immediately after the Merger.

     As  part  of the  Merger,  the  Company  made  a  strategic  evaluation  of
facilities and personnel requirements and determined that certain IPL facilities
would be closed with the equipment being  consolidated into other facilities and
determined  that certain IPL  personnel  would be  redundant.  Accordingly,  the
Company recorded a reserve for severance costs of $1,426 and lease related costs
of $993 as of August 27,  1997.  The Company has made  payments of $614  against
this  reserve  in  fiscal  1998.  At  June  30,  1998  it  was  estimated   that
approximately  $1,101 of such expenditures would be made in fiscal 1999, $380 in
fiscal  2000,  $196  in  fiscal  2001  and  $128 in  fiscal  2002.  The  Company
anticipates that funding for these amounts will be provided by operations.

     At the time of the Merger, IPL had combined assets of $43,677, net accounts
receivable ($9,966), prepaid and other current assets ($1,348), net fixed assets
($29,259),  net deferred tax assets ($2,324), and other long-term assets ($780).
The  combined  liabilities  consisted of accounts  payable and accrued  payables
($6,707),  long-term  debt  ($30,464),  income taxes payable  ($298),  and other
liabilities  ($1,463).  Consideration  in applying  purchase  accounting  to the
Merger is based  upon the IPL  shares of common  stock  outstanding  immediately
prior to the Merger of 6,226,958 at a per share value of $3.50.

     The Company  recorded  goodwill of $22,483 in  connection  with the Merger,
which is being amortized over 25 years.






                                       F-7
<PAGE>


                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



     In connection with, and as a condition to the Merger,  immediately prior to
the Merger,  the Diversified  Products  segment and certain assets of Old Video,
including cash surrender value of officers life  insurance,  was spun-off to the
stockholders  of Old  Video in a  non-cash  dividend  of  approximately  $2,653.
Immediately  prior  to the  Merger,  the  principal  stockholders  of Old  Video
contributed (the  "Contribution") the stock of two S corporations holding all of
the general and limited  partnership  interests  in MAL  Partners  and  L.I.M.A.
Partners,  which  partnerships  owned real estate and equipment which was leased
solely to Old Video and IPL.  The  Contribution,  which  represents  a  transfer
between  entities  under  common  control,  has been  recorded  at the  lower of
historical amortized cost or fair value.

     The S  corporations,  through their  ownership of MAL Partners and L.I.M.A.
Partners,  at the time of the  Contribution  had combined assets of $3,801,  net
accounts  receivable  ($9),  prepaid  expenses and other  current  assets ($74),
buildings,  satellite  equipment and land ($3,198),  and other long-term  assets
($520).  The  combined  liabilities  consisted  of accounts  payable and accrued
expenses ($62), mortgage obligations ($3,588),  deferred taxes ($19), payable to
the Company ($1,314),  payable to affiliates ($52) and other current liabilities
($29).

     The following presents the combined pro forma results of operations for the
years  ended  June 30,  1997 and 1998,  as if the Merger  and  Contribution  had
occurred  as of July 1,  1996  and July 1,  1997,  respectively.  The  unaudited
combined pro forma results of operations are not  necessarily  indicative of the
results of operations  that would have  occurred had IPL and Old Video  actually
combined during the periods  presented or of future results of operations of the
combined operations.


                                (dollars in thousands, except per share amounts)


<TABLE>
                                                                   1997               1998
      <S>                                                     <C>               <C>
                                                              ---------------    ---------------
       Revenues                                                      $78,430            $80,386
       Income from continuing operations                               1,955              1,743
       Income from continuing operations per share                      0.15               0.13
       Net loss                                                         (182)              (176)
       Net loss per share                                            $ (0.01)             (0.01)
</TABLE>

     Pro forma  income  from  continuing  operations  and net loss per share are
based on the weighted average number of shares  outstanding  after the Merger of
13,238,307.  Included  in the net  loss  for the year  ended  June  30,  1997 is
approximately  $1,688 of loss from discontinued  operations  relating to certain
subsidiaries (Diversified Products segment) of Old Video which were discontinued
in  connection  with  the  Merger  and  approximately  $449  of  loss  from  the
discontinued  operations  relating to the Consulting  Services segment which was
previously  owned by IPL.  Also  included  in the year  ended  June 30,  1997 is
approximately  $500 of other income pertaining to partial  consideration for the
sale of a radio  station in fiscal  1991.  Included in the net loss for the year
ended  June 30,  1998 is  approximately  $1,919  of loss  from the  discontinued
operations relating to the Consulting Services segment (see Note 17).

Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

      The  consolidated  financial  statements  include  the  accounts  of Video
Services  Corporation  and  its  subsidiaries.   All  significant  inter-company
balances and transactions have been eliminated in consolidation.

Use of Estimates

      The  preparation  of 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.




                                       F-8
<PAGE>


                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Reclassification

     Certain  prior year  amounts  have been  reclassified  to conform  with the
current year presentation.


Revenue Recognition

     Revenue from  services  (except  editorial)  is recorded at  completion  of
services  for the  customer.  Revenue  for  editorial  services  is  recorded as
services are provided to customers on a percentage of completion method. Revenue
from the sales of  equipment  is recorded at the time of shipment of  equipment.
Revenue    from     long-term     contracts    is    recognized     under    the
percentage-of-completion  method,  under  which  method the  Company  recognizes
revenues  based  on the  ratio  that  incurred  costs  bear to  estimated  total
completion  costs.  Provision is made currently for estimated losses, if any, on
uncompleted contracts.

Inventories

      Inventories  consist of system components and equipment which is valued at
the lower of specific cost or market and tape stock which is valued at the lower
of cost or market on a FIFO basis.

Fixed Assets

     Property and equipment are carried at cost and depreciated predominantly by
the   straight-line   method  over  their  estimated  useful  lives.   Leasehold
improvements  are amortized over the shorter of their estimated  useful lives or
the term of the underlying lease.  Estimated useful lives by class of assets are
as follows:

                  Machinery and equipment.....................3-10 years
                  Equipment held for rental...................3-10 years
                  Furniture and fixtures......................3-10 years
                  Leasehold improvements......................3-14 years
                  Transportation equipment....................3-7 years

    Repairs and  maintenance  are charged to expense as  incurred.  Expenditures
that  result in the  enhancement  of the value of the  facilities  involved  are
treated as additions to property and  equipment.  Cost of property and equipment
disposed of and  accumulated  depreciation  thereon are removed from the related
accounts, and gain or loss, if any, is recognized.

Goodwill

      The  excess  of  cost  over  net  assets   acquired  is   amortized  on  a
straight-line  basis  principally  over 25 years.  Amortization  expense for the
years ended June 30, 1996,  1997 and 1998 was $14,  $14 and $742,  respectively.
Accumulated  amortization  at  June  30,  1997  and  1998  was  $105  and  $847,
respectively.   The  Company  periodically   evaluates  the  carrying  value  of
intangible  assets  by  relating  the  estimated  cash  flows of the  underlying
businesses.  An  impairment  loss may be recognized if the expected cash flow is
less than book value.

Advertising

     The Company expenses advertising costs as incurred. Advertising expense was
$143,  $128,  and  $310  for the  years  ended  June 30,  1996,  1997 and  1998,
respectively.








                                       F-9
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Asset Impairment

     In March 1995, the Financial  Accounting  Standards Board issued  Statement
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which  addresses the accounting and reporting for the
impairment of long-lived assets, certain identifiable intangibles,  and goodwill
related  to those  assets  to be held and used  and for  long-lived  assets  and
certain  identifiable  intangibles  to be disposed  of. The Company  adopted the
provisions of this new standard effective August 1, 1996. The effect of adoption
was not material to the Company's financial  condition,  results of operation or
cash flow.

Long-Lived Assets

      Long-lived  assets,  including  intangibles,  are reviewed for  impairment
whenever events or circumstances  indicate that the assets undiscounted expected
cash flows are not  sufficient  to recover  its  carrying  amount.  The  Company
measures  an  impairment  loss by  comparing  the fair value of the asset to its
carrying  amount.  Fair value of an asset is  calculated  based upon the present
value of expected future cash flows.

Cash and Cash Equivalents

      The  Company  considers  cash and cash  equivalents  to include all highly
liquid  investments  with a  maturity  of  three  months  or less at the date of
purchase.

     Cash equivalents at June 30, 1997 and 1998 of $34 and $35, respectively are
used to collateralize a standby letter of credit, related to an operating lease.

Financial Instruments

      The  carrying  amounts  reported in the balance  sheet for cash,  accounts
receivable,  accounts  payable and other accrued  liabilities  approximate  fair
value due to the short  maturity  of these  items.  The  carrying  amount of the
amounts due under the line of credit approximate fair value because the interest
rates vary with market  interest  rates.  The carrying  amount of long-term debt
which have no quoted market price, is estimated by discounting  projected future
cash flows using the Company's incremental borrowing rate.

     The Company  entered  into an  interest-rate  swap  agreement to modify the
interest   characteristics   of  its   outstanding   debt  (see  Note  10).  The
interest-rate  swap  agreement  is  designated  with  all  or a  portion  of the
principal  balance  and  term of a  specific  debt  obligation.  This  agreement
involves the exchange of amounts  based on a variable  interest rate for amounts
based on fixed interest rate over the life of the agreement  without an exchange
of the notional amount upon which the payments are based. The differential to be
paid or received  as  interest  rates  change is accrued  and  recognized  as an
adjustment  of  interest  expense  related to the debt (the  accrual  accounting
method).  The related amount payable to or receivable  from the  counterparty is
included in other  liabilities  or assets.  The fair value of the swap agreement
and  changes in the fair value as a result of changes in market  interest  rates
are not recognized in the financial statements.  The fair value is the amount at
which  the  swap  agreement  could  be  settled  based  on  quotes  provided  by
counterparty.

     Gains and losses on  terminations  of  interest-rate  swap  agreements  are
deferred as an adjustment  to the carrying  amount of the  outstanding  debt and
amortized  as an  adjustment  to interest  expense  related to the debt over the
remaining term of the original  contract life of the terminated  swap agreement.
In the event of the early  extinguishment  of a designated debt obligation,  any
realized or unrealized  gain or loss from the swap would be recognized in income
coincident with the extinguishment gain or loss.






                                      F-10
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



     The following table presents the carrying amounts and estimated fair values
of material financial instruments used by the Company in the normal cause of its
business.
<TABLE>

                                                                     1998
                                                        Carrying               Fair
                                                         Amount                Value
                                                     -----------------    -----------------
<S>                                                        <C>                  <C>
       Long-term debt                                       $ 36,306             $  36,338
       Off - balance sheet financial instruments:
          Unrealized loss on swap agreement                 $    ---                 (638)
</TABLE>

     For June 30, 1997, the carrying  amounts  reported in the balance sheet for
cash,  accounts  receivable,  accounts  payable,  and other accrued  liabilities
approximate  fair value due to the short  maturity of these items.  The carrying
amount  of the  amounts  due under the line of  credit  approximate  fair  value
because the interest rates vary with market interest rates.  The carrying amount
of long-term debt approximates fair value based on prevailing interest rates.

Customer Concentrations

      Financial   instruments,   which   potentially   subject  the  Company  to
concentration of credit risk, consist principally of trade accounts  receivable.
The Company conducts most of its operations in the television network, cable and
advertising  industries.  The Company performs ongoing credit evaluations of its
customers'  financial  condition and generally  requires no collateral  from its
customers.   Management  believes  it  has  reasonably   estimated  losses  from
uncollectible  receivables.  Concentration  of credit risk with respect to trade
receivables  is limited  due to the large  number of  customers  included in the
Company's  customer base.  The Company had sales to two  individual  Systems and
Products  segment  customers  in 1996 and to one  Systems and  Products  segment
customer  in 1997 in  excess  of 10% of  consolidated  1996 and  1997  revenues,
respectively.  Sales to such  customers  aggregated 30% and 15% of 1996 and 1997
revenues, respectively.

Income Taxes

     The Company  accounts for income taxes  pursuant to the  provisions  of the
Statement of Financial  Accounting  Standards  ("SFAS") No. 109  "Accounting for
Income Taxes."

     The Company uses different  methods of accounting  for financial  reporting
and  tax  purposes,   principally   through  the   utilization   of  accelerated
depreciation  methods for income tax purposes,  certain valuation allowances and
net operating loss  carryforwards;  accordingly,  deferred taxes are provided on
the basis of such differences.




















                                      F-11
<PAGE>

                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Supplemental Statement of Cash Flow Information
<TABLE>

                                                                       (In Thousands)
                                                         -------------------------------------------

                                                         ------------    -----------     -----------
                                                            1996            1997            1998
                                                         ------------    -----------     -----------

Amounts paid for:

     <S>                                                   <C>            <C>           <C>
     Interest                                               $    522       $    517      $    3,325
                                                         ------------    -----------     -----------
     Income taxes                                           $    500        $ 1,300      $      420
                                                         ------------    -----------     -----------

Non-cash transactions:
Investing-
     Contribution of real estate affiliates
     Asset acquired                                                                      $    3,801
                                                                                         -----------
     Liabilities assumed                                                                 $    5,064
                                                                                         -----------

     Merger with and into International Post Limited
     Asset acquired                                                                      $   43,677
                                                                                         -----------
     Liabilities assumed                                                                 $   38,932
                                                                                         -----------
Financing-
    Non cash dividend to shareholders                                                    $    2,653
                                                                                         -----------
</TABLE>



New Accounting Standards

     In 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 128,  Earnings  per Share.  Statement  128
replaced the previously  reported  primary and fully diluted  earnings per share
with basic and diluted  earnings per share.  Unlike primary  earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible  securities.  Diluted  earnings  per share are very  similar  to the
previously  reported  fully diluted  earnings per share.  All earnings per share
amounts for all periods have been presented,  and where  necessary,  restated to
conform to the Statement 128 requirements.

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131  "Disclosures  about  Segments  of an
Enterprise and Related  Information"  which is required to be adopted for fiscal
years  beginning  after  December 15, 1997.  Statement  No. 131 will require the
Company  to  disclose  revenues,   earnings  and  other  financial   information
pertaining to the business segments by which the Company is managed,  as well as
what  factors  management  used to  determine  these  segments.  The  Company is
currently  evaluating  the effects  Statement No. 131 will have on its financial
statements and related disclosures. This statement will become effective for the
fiscal year ending, June 30, 1999.

         In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years  beginning  after June 15, 1999.  The  Statement
permits early  adoption as of the beginning of any fiscal  quarter.  The Company
expects to adopt the new Statement  effective  July 1, 1999.  The Statement will
require the company to recognize all derivatives,  which currently consist of an
interest  rate swap on the balance sheet at fair value  through  income.  If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair




                                      F-12
<PAGE>


                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive  income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.

     The Company has not yet determined what the effect of Statement 133 will be
on their results of operations and financial position of the Company.

Note 3 - Accounts Receivable

<TABLE>

                                                                        June 30,               June 30,
                                                                          1997                   1998
                                                                   -------------------    -------------------

<S>                                                                 <C>                   <C>
Accounts receivable, trade                                          $           4,720     $           12,579
Contracts receivable billed:
     Uncompleted contracts                                                      1,738                  2,031
     Completed contracts                                                           17                    738
                                                                   -------------------    -------------------
                                                                                6,475                 15,348
Less:  Allowance for doubtful accounts
           and volume discounts                                                   302                  1,179
                                                                   -------------------    -------------------
                                                                   $            6,173     $           14,169
                                                                   ===================    ===================

Note 4 - Inventories

Inventories are summarized as follows:

                                                                        June 30,               June 30,
                                                                          1997                   1998
                                                                   -------------------    -------------------

System components and equipment, net of
  obsolescence allowance of $592 and $671                          $              688     $              569
Tape stock                                                                        ---                    514
                                                                   -------------------    -------------------
                                                                   $              688     $            1,083
                                                                   ===================    ===================

Note 5 - Costs and Estimated Earnings on Uncompleted Contracts

                                                                        June 30,               June 30,
                                                                          1997                   1998
                                                                   -------------------    -------------------

Costs incurred on uncompleted contracts to date                    $            8,758      $           8,702
Estimated earnings to date                                                      1,167                  2,380
                                                                   -------------------    -------------------
                                                                                9,925                 11,082
Less:  billings to date                                                        10,024                 14,185
                                                                   -------------------    -------------------
Billings in excess of costs and estimated
  earnings on uncompleted contracts                                $              (99)    $           (3,103)
                                                                   ===================    ===================
</TABLE>








                                      F-13
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Included in accompanying balance sheets under the following captions:
<TABLE>

                                                                        June 30,               June 30,
                                                                          1997                   1998
                                                                   -------------------    -------------------

<S>                                                               <C>                    <C>
Costs and estimated earnings in excess of
  billings on uncompleted contracts                                $             363      $              187
Billings in excess of costs and estimated
  earnings on uncompleted contracts                                             (462)                 (3,290)
                                                                   -------------------    --------------------
                                                                   $             (99)     $           (3,103)
                                                                   ===================    ===================
</TABLE>

Note 6 - Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:
<TABLE>


                                                                        June 30,               June 30,
                                                                          1997                   1998
                                                                   -------------------    -------------------

<S>                                                                 <C>                   <C>
Prepaid expenses                                                    $             113     $              612
Prepaid federal and state income taxes                                            442                    ---
Other                                                                              19                    295
                                                                   -------------------    -------------------
                                                                   $              574     $              907
                                                                   ===================    ===================
</TABLE>

Note 7 - Fixed Assets

Fixed assets, at cost, summarized by major categories consist of the following:
<TABLE>

                                                                        June 30,               June 30,
                                                                          1997                   1998
                                                                   -------------------    -------------------

<S>                                                                <C>                    <C>
Machinery and equipment                                            $           17,539     $           38,868
Leasehold improvements                                                          2,461                 11,195
Furniture and fixtures                                                            597                  2,028
Transportation equipment                                                          195                    281
Building                                                                          ---                  2,199
Land                                                                            1,000                  1,967
Equipment under capital lease                                                     170                  1,440
                                                                   -------------------    -------------------
                                                                               21,962                 57,978
Less:  accumulated depreciation, including
           accumulated amortization for
           equipment under capital lease                                       16,110                 21,388
                                                                   -------------------    -------------------
                                                                   $            5,852     $           36,590
                                                                   ===================    ===================

</TABLE>









                                      F-14
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Note 8 - Other Assets

Other assets, net of amortization, consist of the following:
<TABLE>

                                                                        June 30,               June 30,
                                                                          1997                   1998
                                                                   -------------------    -------------------

<S>                                                               <C>                     <C>
Cash value of officers' life insurance (net of
  borrowings of $132 and $17)                                      $            1,336      $               5
Transaction costs                                                               1,358                    ---
Other                                                                             285                  1,894
                                                                   -------------------    -------------------
                                                                   $            2,979      $           1,899
                                                                   ===================    ===================
</TABLE>

Note 9 - Other Current Liabilities

Other current liabilities consist of the following:

<TABLE>


                                                                        June 30,               June 30,
                                                                          1997                   1998
                                                                   -------------------    -------------------

<S>                                                                <C>                   <C>
Wages payable                                                      $              553                  1,874
Customer deposits                                                                 728                    376
Sales and payroll taxes payable                                                   221                    488
Reserves for loss on disposal - Diversified Products segment                      151                    ---
Reserves for loss on disposal - Consulting Services segment                       ---                    645
Other                                                                             136                    498
                                                                   -------------------    -------------------
                                                                   $            1,789     $            3,881
                                                                   ===================    ===================
</TABLE>

Note 10 - Long-Term Debt
<TABLE>

                                                                        June 30,               June 30,
                                                                          1997                   1998
                                                                   -------------------    -------------------

<S>                                                                <C>                    <C>
Senior secured term loan                                           $             --       $           30,000
Senior secured revolving credit loan                                            1,861                  2,600
Notes payable to credit institutions bearing
  interest at 10.0% - 13.0%, collateralized by fixed assets
  with a net book value of $4,566                                               2,665                    ---
Notes payable to equipment manufacturer bearing
  interest at 8.65% - 12.25%, collateralized by fixed assets
  with a book value of $286                                                       374                    ---
Mortgages payable to credit institution bearing interest at
  8.95% - prime (8.50% at June 30, 1997 and 1998) plus 1%,
  collateralized by fixed assets with net book value at $1000
  book value at $1,000 and $2,446                                                 517                  2,426
Capitalized lease obligations                                                      72                  1,280
                                                                   -------------------    -------------------
                                                                                5,479                 36,306
Less:  current maturities                                                         149                  5,338
                                                                   -------------------    -------------------
                                                                   $            5,330     $           30,968
                                                                   ===================    ===================
</TABLE>


                                      F-15
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



     In connection  with the Merger,  the Company  refinanced  all IPL's and Old
Video's long-term indebtedness (excluding capital lease obligations, Old Video's
mortgage  payable,  IPL's  subordinated debt and IPL's note payable to Cognitive
Communications,  Inc.) including lines of credit, with a $33,000 term loan and a
$17,000 revolving line of credit. The Company's current debt obligations at June
30,  1997  were  approximately   $3,900  after  giving  effect  to  the  Merger,
refinancing  and   Contribution   (see  Note  1),  which  was  less  than  IPL's
pre-refinancing  current  portion  of long- term debt of  approximately  $4,200.
Consequently,  all of the Old Video's debt at June 30, 1997,  excluding  current
capital  lease  obligations  and  mortgage  payable,  have  been  classified  as
long-term. Old Video had a short-term line of credit of $2,100 at June 30, 1997,
under which $1,861 was outstanding.

     Senior Secured  Long-Term  Debt - The Company  established a $33,000 senior
secured term loan (the "Term Loan") and the Revolving Loan (as defined  herein),
with  a  five-year  facility  provided  by  KeyBank,  as  the  agent  bank  (the
"Facility")  which are secured by all assets of the Company and its existing and
future  directly and  indirectly  owned  subsidiaries.  The Revolving Loan bears
interest  at the  lenders'  prime  rate minus  1.0% or LIBOR  (London  Interbank
Offered  Rate) plus a number of basis points based upon the  Company's  leverage
ratio (funded debt divided by EBITDA),  which is initially LIBOR plus 1.75%. The
Term Loan bears  interest at LIBOR plus a number of basis  points based upon the
Company's  leverage  ration,  which is initially LIBOR plus 1.75%.  The Facility
contains  various  covenants  that  require  the  Company  to  maintain  certain
financial ratios,  limit capital  expenditures,  prohibit  dividends and similar
payments and restrict the  company's  ability to incur other  indebtedness.  The
Facility is guaranteed by all of the Company's subsidiaries.

     The Company made capital expenditures totaling $8,486 on a pro forma basis,
which was a breach of the loan agreement as the Company was limited to $8,000 of
capital  expenditures  on a pro forma basis for fiscal year ended June 30, 1998.
The bank has waived that  requirement of the Facility for fiscal year ended June
30, 1998.

     In August 1997,  the Company  entered into an interest rate swap  agreement
with KeyBank to reduce the impact of changes in interest rates on its Term Loan.
The  agreement,  which  matures in five years,  has a total  beginning  notional
principal  amount of $33,000,  which  decreases  in  accordance  with  scheduled
principal  payments on the Company's Term Loan.  The swap agreement  effectively
converts  the  Company's  borrowings  under its Term Loan to a fixed  rate.  The
Company  pays the  counterparty  a fixed  rate of 7.58% per  annum and  receives
payments based upon the floating one month LIBOR rate. The Company is exposed to
credit loss in the event of  nonperformance by the  counterparty:  however,  the
Company does not anticipate nonperformance by the counterparty.

     Revolving  Credit  Facility  - The  Company  established  a $17,000  senior
secured  revolving  credit  facility (the  "Revolving  Loan") with KeyBank.  The
Company had outstanding  direct borrowings of $2,600 under the Revolving Loan at
June 30, 1998. The Company also has outstanding under the Revolving Loan letters
of credit of approximately $1,016 at June 30, 1998. The Company's Revolving Loan
weighted  average  interest rate was 7.5% for the period ended June 30, 1998 and
7.5% at June 30, 1998.

     Subordinated  Debt - The Company,  in connection  with the Merger,  assumed
IPL's $6,350 principal amount of eight year convertible  subordinated notes, due
May 4, 2003,  with an interest rate of 4.0%,  convertible at $14 per share after
five years and redeemable  after six years. The debt was valued at $4,890 at May
5, 1995  using an  effective  rate of 8.34%.  The  valuation  discount  is being
amortized over the life of the notes.

     Also, in connection with the merger and  Contribution,  the Company assumed
additional  long-term  indebtedness  of $3,842,  consisting of a note payable to
Cognitive  Communications,  Inc ($196),  mortgage  payable  ($2,103) and capital
lease obligations ($1,543).








                                      F-16
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



     Required  payments of principal on senior and  subordinated  debt including
accreted  interest of  approximately  $908,  exclusive  of  capitalized  leases,
outstanding at June 30, 1998, are summarized as follows:
<TABLE>

                    Fiscal Year                                              Amount
                                                                         ---------------
<S>                 <C>                                                  <C>
                    1999                                                 $        4,971
                    2000                                                          6,725
                    2001                                                          9,350
                    2002                                                         11,848
                    2003                                                          8,482
                                                                         ---------------
                                                                         $       41,376
                                                                         ===============
</TABLE>

     The Company leases certain  equipment from unaffiliated  entities.  Further
minimum lease payments under capital leases as of June 30, 1998 are:
<TABLE>

<S>                <C>                                                  <C>
                    Fiscal Year                                              Amount
                                                                         ---------------
                    1999                                                 $          467
                    2000                                                            386
                    2001                                                            369
                    2002                                                            246
                                                                         ---------------
                    Total minimum lease payments                                  1,468
                    Less:  Amount representing interest                             188
                                                                         ---------------
                    Present value of minimum lease payments              $        1,280
                                                                         ===============
</TABLE>

     Leased  property  under  capital  leases are  classified in fixed assets as
follows:
<TABLE>

                                                                        June 30,         June 30, 1998
                                                                          1997
                                                                     ---------------     --------------

<S>                                                                  <C>                         <C>
                    Equipment under capital leases                   $          170              1,440
                    Less:  Accumulated amortization                             118                281
                                                                     ===============     ==============
                                                                     $           52              1,159
                                                                     ===============     ==============
</TABLE>

Note 11 - Related Parties

     The Company  leases a building  from an entity  owned by certain  principal
stockholders of the Company,  under a lease accounted for as an operating lease,
approximately  30,000 sq. ft. located in Northvale,  New Jersey,  which facility
serves as its engineering and fabrication facility.  Such rental expenses of the
Company for the years ended June 30, 1996,  1997 and 1998 amounted to $250, $241
and $270, respectively.

     The Company has its  corporate  headquarters  as well as its  Satellite and
Distribution  facilities  in  Northvale,  New Jersey  that was  leased  from two
partnerships,  whose partners then owned a majority interest in Old Video, under
a lease accounted for as an operating lease. In August 1997,  immediately  prior
to the Merger, the principal  stockholders of Old Video contributed the stock of
two S Corporations  holding all of the general and limited partnership  interest
in the two partnerships (see Note 1). Such rental expense of the Company for the
years  ended June 30,  1996,  1997 and 1998  amounted to $927,  $826,  and $130,
respectively. At June 30, 1997, Old Video had accounts receivable of $1,233 from
the two  partnerships  referred  to above,  to whom Old  Video has made  working
capital  loans.  At June  30,  1997  and 1998  the  Company  also  had  accounts
receivable  of  $0  and  $148  and  (accounts  payable)  of  ($41)  and  ($106),
respectively from (to) other affiliated entities.





                                      F-17
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



     In August  1996,  the  Company  acquired  undeveloped  real  estate  from a
partnership,  whose  partners then owned a majority  interest in Old Video,  for
$1,000 and entered into a six year  mortgage  with a financial  institution  for
$600.  The  transaction,  which  represented a transfer  between  entities under
common control, was recorded at the lower of historical cost or fair value.

     At June 30, 1997, Old Video had amounts receivable from officers of $211.

     At June 30, 1998,  future  minimum  rental  payments  under  non-cancelable
leases with affiliated entities are as follows: (see Note 19).
<TABLE>


                                           Fiscal Year                         Amount
                            --------------------------------------     ------------------
<S>                              <C>                                  <C>
                                 1999                                  $             270
                                 2000                                                270
                                 2001                                                270
                                                                       ------------------
                                                                       $             810
                                                                       ==================
</TABLE>

Note 12 - Business Segment Information

     The Company's  continuing  operations are divided into three segments:  (i)
Satellite  and  Distribution  Services,  (ii)  Systems  and  Products  and (iii)
Production Services.  The Satellite and Distribution Services segment integrates
and distributes  broadcast quality video content via a satellite and fiber optic
transmission  network routed through its digital/analog  switching center and is
an international provider of technical and distribution services to distributors
of television programming.  The Systems and Products segment designs,  engineers
and produces  advanced video facilities for the broadcast and cable  television,
post-production and corporate markets.  This segment also develops  manufactures
and markets  advanced color  correcting and  manipulation  systems for the film,
post-production and multimedia industries and rents professional video equipment
to the  sports,  entertainment  and other  segments of the  broadcast  and cable
television  and  corporate  markets.  The  Production  services  segment  is  an
international  provider  of  technical  and  creative  services  to  owners  and
producers  of  television   programming,   television   advertising   and  other
programming  content.  The Diversified Products segment is shown as discontinued
operations  for 1996 and 1997 and the  Consulting  Services  segment is shown as
discontinued operations for 1998 (see Note 17).

     The Company operates primarily in the United States; foreign operations are
not significant. Intersegment sales are accounted for at cost.

     The Company  does not allocate  income and  expenses  that are of a general
corporate  nature to industry  segments in  computing  operating  income.  These
include general  corporate  expenses,  interest income and expense,  and certain
other  income and  expenses not  directly  attributable  to a specific  segment.
Identifiable  assets by segment include assets directly  identifiable with those
operations.   Other  assets  primarily   consist  of  corporate  cash  and  cash
equivalents and fixed assets associated with nonsegment activities.














                                      F-18
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



     Summarized  financial  information by business  segment for 1996,  1997 and
1998 is as follows:
<TABLE>


                                                                       1996                1997                 1998
                                                                 -----------------    ----------------     ----------------
<S>                                                             <C>                  <C>                  <C>
Net revenues from unaffiliated customers:
Systems and Products                                             $          20,499    $         17,631     $         18,631
Satellite and Distribution Services                                          9,241               9,979               21,384
Production Services                                                            ---                 ---               32,980
                                                                 -----------------    ----------------     ----------------
Net revenues                                                     $          29,740    $         27,610     $         72,995
                                                                 =================    ================     ================

Intersegment revenues:
Systems and Products                                             $             795    $            290     $          1,386
Satellite and Distribution Services                                            792                 705                1,160
Production Services                                                            ---                 ---                1,010
                                                                 -----------------    ----------------     ----------------
Total intersegment revenues                                      $            1587    $            995     $          3,556
                                                                 =================    ================     ================

Operating income:
Systems and Products                                             $          2,881     $         2,341       $         2,490
Satellite and Distribution Services                                         1,794               2,239                 5,830
Production Services                                                           ---                 ---                 3,542
Corporate                                                                  (2,288)             (2,830)               (5,170)
                                                                 -----------------    ----------------     ----------------
Operating income from continuing operations                                 2,387                1,750                6,692

Interest expense, net                                                       (485)                 (517)              (3,619)
Other income                                                                   97                  592                  217
                                                                 -----------------    ----------------     ----------------
Income before income taxes and discontinued operations           $          1,999     $          1,825     $          3,290
                                                                 =================    ================     ================

Identifiable assets at June 30:
Systems and Products                                             $          6,025     $         6,650      $          5,971
Satellite and Distribution Services                                         5,255               5,447                16,460
Production Services                                                           ---                 ---                29,787
Discontinued operations                                                     1,542                 634                   ---
Corporate                                                                   4,850               8,070                29,642
                                                                 ----------------     ----------------     ----------------
Total assets                                                     $         17,672     $        20,801      $         81,860
                                                                 =================    ================     ================

Additions to fixed assets:
Systems and Products                                             $          1,231     $           461      $            653
Satellite and Distribution Services                                         1,117                 953                 4,591
Production Services                                                           ---                 ---                   634
Discontinued operations                                                       557                 418                   119
Corporate                                                                      65               1,221                   451
                                                                 -----------------    ----------------     ----------------
Net capital expenditures                                         $          2,970     $         3,053      $          6,448
                                                                 =================    ================     ================

Depreciation:
Systems and Products                                             $            632     $           740      $           638
Satellite and Distribution Services                                           900                 981                2,054
Production Services                                                           ---                 ---                4,010
Corporate                                                                      76                  86                  407
                                                                 -----------------    ----------------     ----------------
Total depreciation from continuing operations                    $          1,608     $          1,807     $         7,109
                                                                 =================    ================     ================

</TABLE>







                                      F-19
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Note 13 - Earnings Per Share


     The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share:
<TABLE>

                                                               Year Ending           Year Ending            Year Ending
                                                                June 30,              June 30,               June 30,
                                                                  1996                  1997                   1998
                                                            ------------------ -- ------------------     ------------------

<S>                                                        <C>                   <C>                    <C>
Numerator:
  Income from continuing operations                         $            1,212    $            1,638     $            1,699
                                                            ------------------    ------------------     ------------------

  Numerator for basic earnings per share-
    Income available to common stockholders                              1,212                 1,638                  1,699
  Effect of dilutive securities:
     4% convertible subordinated notes and stock
     options                                                              ---                   ---                     ---
                                                            ------------------    ------------------      ------------------
  Numerator for dilutive earnings per share-
    income from continuing operations available to
    common stockholders after assumed conversions           $            1,212    $           1,638      $            1,699
                                                            ==================    ==================     ==================
Denominator:
  Denominator for basic earnings per share-
    weighted-average shares                                         6,961,183             7,011,349             12,276,278
  Effect of dilutive securities:
    4% convertible subordinated notes and stock
    options                                                               ---                   ---                     ---
                                                            ------------------    ------------------     ------------------
  Denominator for dilutive earnings per share-
   adjusted weighted-average shares and assumed
    conversions                                                     6,961,183              7,011,349             12,276,278
                                                            ==================    ==================      =================
Basic earnings per share from continuing operations         $            0.17     $             0.23      $            0.14
                                                            ==================    ==================      =================
Diluted earnings per share from continuing operations       $            0.17     $             0.23      $            0.14
                                                            ==================    ==================     ==================
</TABLE>


     Net income per share has been computed using the weighted average number of
shares  outstanding  during each period.  Pre-Merger  weighted average number of
shares outstanding has been retroactively  restated for the equivalent number of
shares of common stock of the Company.

     The effect of 4% convertible subordinated notes and stock options have been
excluded  from the diluted  earnings  per share  calculation,  because  they are
anti-dilutive.










                                      F-20
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Note 14 - Income Taxes

     The  reconciliation  between the statutory tax rate and those  reflected in
the Company's income tax provision is as follows:
<TABLE>

                                                                    1996               1997               1998
                                                                --------------     --------------    ---------------

<S>                                                             <C>               <C>                <C>
Statutory tax rate                                                         34%                34%                34%
Change in valuation allowance                                            (3.2)               (34)              (5.2)
Non-deductible intangible amortization                                    ---                ---                8.8
State & local taxes, net of federal benefit                               7.4                7.0                9.6
Non-deductible meals and entertainment                                    ---                1.0                0.9
Stock options granted by shareholders                                     ---                1.6                ---
Other                                                                     1.2                0.6                0.3
                                                                --------------     --------------    ---------------
                                                                         39.4%              10.2%              48.4%
                                                                ==============     ==============    ===============
</TABLE>

     The provision for income taxes for the Company is as follows:
<TABLE>

                                                                     1996               1997              1998
                                                                ---------------    ---------------   ---------------

<S>                                                            <C>                <C>               <C>
Current
     Federal                                                    $           21     $          556    $          ---
     State and local                                                       104                202               439
Deferred
     Federal                                                               633                 55             1,372
     State and local                                                       124                 (4)               38
     Adjustment to valuation allowance                                     (95)              (622)             (258)
                                                                ---------------    ---------------   ---------------
                                                                $          787                187              1,591
                                                                ===============    ===============   ===============

</TABLE>






















                                      F-21
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



     The   components  of  net  deferred  tax  assets   arising  from  temporary
differences as of June 30, 1997 and 1998 were as follows:
<TABLE>

                                                                           June 30,                  June 30,
                                                                             1997                      1998
                                                                     ---------------------      --------------------

<S>                                                                     <C>                        <C>
Receivable allowance                                                    $             309          $            492
Inventory reserves                                                                    262                       318
Compensation payable                                                                  ---                       479
Other                                                                                 103                       246
                                                                     ---------------------      --------------------
                                                                                      674                     1,535
Federal and state net operating loss
  carryforwards                                                                     1,808                     2,310
Valuation allowance                                                                (1,186)                     (679)
Purchase accounting reserves                                                          ---                       720
Straight lined rent                                                                   ---                       475
Other                                                                                 ---                       267
Accelerated depreciation                                                            (830)                       ---
                                                                     ---------------------      --------------------
Deferred tax asset                                                   $               466        $             4,628
                                                                     =====================      ====================
</TABLE>

     Included in deferred  income taxes are accrued  income tax  liabilities  of
$1,187 and $1,426 as of June 30, 1997 and 1998, respectively.

     The  Federal  net  operating   loss   valuation   allowance   decreased  by
approximately  $622 in 1997 as a result of revised  estimates of future  taxable
income principally as a result of discontinuing Old Video's Diversified Products
segment.

     The state net operating loss carryforward  valuation allowance decreased by
$258 in 1998 as a result of the use of net operating  losses.  A state valuation
allowance of $679 remains as of June 30 1998. The state  valuation  allowance is
provided  as a result  of  estimates  regarding  future  operations  of  certain
subsidiaries in certain states.

     At June 30, 1998, the Company has potential tax benefits from net operating
loss carryforwards for federal income tax purposes of approximately  $346, which
begin to expire in 2007.  The Company also has  potential  tax benefits from net
operating  loss  carryforwards  for state income tax  purposes of $1,523,  which
begin to expire in 2002, and an AMT credit of $441.

Note 15- Retirement Plans

     The Company  provides  retirement  benefits  through two  qualified  salary
reduction  plans for eligible  employees  under  Section  401(k) of the Internal
Revenue Code (the "Retirement Plans"). The Retirement Plans are funded by salary
reduction contributions by the participants thereof. The Company's contributions
to the  retirement  plans  are based on  participant  contributions  (which  are
limited to a fixed percentage of participant compensation) and matching employer
contributions.  Additionally, the Company may contribute a discretionary amount.
The  Retirement  Plans will be merged into one plan during the first  quarter of
fiscal year 1999. For the years ended June 30, 1996, 1997 and 1998, the matching
employer contributions amounted to $50, $57 and $191, respectively.

                                      F-22
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Note 16 - Stock Based Compensation Plans

     The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25,  "Accounting for Stock Issued to Employees" and related  interpretations
in accounting for its employee stock options. Under APB No. 25, the Company does
not recognize compensation expense since the exercise price of the stock options
granted is equal to the market value of the  Company's  common stock at the date
of grant.  Statement of Financial  Accounting Standard No. 123,  "Accounting for
Stock Based  Compensation"  (SFAS 123)  requires the Company to disclose the pro
forma impact on net income (loss) as if  compensation  expense  associated  with
employee stock options had been calculated under the fair value method.

     The  stockholders  and  directors of the Company have  approved a long-term
incentive plan (the "Stock Plan") under which eligible  employees,  consultants,
and independent  contractors may receive grants of options,  stock  appreciation
rights and  restricted  stock awards and to replace  IPL's  long-term  incentive
plan. An aggregate of 735,000  shares of common stock were reserved for issuance
under the Stock Plan and  options or other  grants with  respect  thereto may be
made over a ten-year term. Options may be either incentive  options,  within the
meaning of the Internal Revenue Code or non-qualified options. The Stock Plan is
administered  by the  compensation  committee  of the board of  directors of the
Company who determine the employees,  consultants,  and independent  contractors
entitled  to grants,  the  exercise  price,  which may not be less than the fair
market value of the Company's  common stock on the date of grant,  and the other
terms of options or grants.

     During  fiscal  year 1998,  368,000  shares of common  stock  options  were
granted.  At June 30, 1998,  there are 367,000 shares of common stock  available
for granting.

     On June 13, 1997, the principal  stockholders of the Old Video entered into
stock option  agreements (the  "Stockholder  Options") with various employees of
the Old Video to purchase 87,128 shares of the Company's  common stock from such
stockholders. The Stockholder Options were fully vested at June 30, 1997, became
exercisable  June 1998 and expire on the fifth  anniversary of the vesting date.
The exercise prices of the stockholder  options upon grant were in excess of the
estimated fair market value of the Old Video's common stock. In conjunction with
the Merger,  changes were made to the Stockholders Options to restore the option
holder's economic position.  The stockholders  options converted into options to
purchase from such  stockholders  235,000 shares of the Company's  common stock.
The changes to the  Stockholders  Option did not impact the aggregate  intrinsic
value,  reduce the ratio of  exercise  price per option to the market  value per
share, or alter vesting  provision of the option.  As a result, no expense under
APB 25 was recognized.

     The Black-Scholes  option pricing model used the following  assumptions for
grants  in 1997 and  1998,  respectively:  expected  volatility  of 0.4 for both
years,  dividend  yield of 0% for both  years,  five year and ten year  expected
lives, and risk free interest rates of 5.52% and 6.38%.














                                      F-23
<PAGE>

                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



     The following  table shows the pro forma impact of options on the Company's
net loss for the years ended June 30, 1997 and 1998 in accordance with SFAS 123.
The pro forma impact may not be representative of the effect on the future years
because of the subjective assumptions used in the fair value estimate calculated
under the  Black-Scholes  model and because new grants are  generally  made each
year.
<TABLE>

                                                                                   1997                 1998
                                                                              -----------------    -----------------

<S>                                                                           <C>                              <C>
Net loss:                                               As Reported           $            (50)                (161)
                                                        Pro Forma                         (250)                (265)
Net loss per common share - Basic:                      As Reported                       (.01)                (.01)
                                                        Pro Forma                         (.04)                (.02)
Net loss per common share - Diluted:                    As Reported                       (.01)                (.01)
                                                        Pro Forma                         (.04)                (.02)
</TABLE>

     A summary  of the  status of the Stock  Plan at June 30,  1998 and  changes
during the years then ended is presented in the table below.
<TABLE>

                                                                               1998
                                                            --------------------------------------------
                                                                                         Weighted
                                                                  Number                  Average
                                                                    of                   Exercise
                                                                  Shares                   Price
                                                            --------------------    --------------------
<S>                                                       <C>                      <C>
Outstanding at beginning of year                                    ---             $           ---
IPL vested options assumed in Merger                                    508,800                    5.00
Granted                                                                 368,000                    3.05
Exercised                                                           ---                     ---
Forfeited                                                              (19,000)                    5.00
Canceled or Expired                                                 ---                     ---
                                                            --------------------    --------------------
Outstanding at end of year                                              857,800                    4.16
                                                            ====================    ====================

Exercisable at end of year                                              489,800                    5.00
                                                            ====================    ====================

Weighted average fair value of options granted                            $1.85
                                                            ====================
</TABLE>

     The range of exercise  prices for the options  outstanding at June 30, 1998
is $2.94 - $5.00 with a weighted  average  contractual life of 8.4 years. Of the
857,800  options  outstanding at June 30, 1998,  163,267 have exercise prices of
$4.00, 163,267 have exercise prices of $5.00 and 163,266 have exercise prices of
$6.00 with  remaining  contractual  life of 7.7 years.  All of these options are
exercisable. Of the remaining 368,000 options outstanding, 268,000 have exercise
prices of $2.94 with a  remaining  contractual  life of 9.2 years;  75,000  have
exercise prices of $3.375 with a remaining  contractual  life of 9.3 years;  and
25,000 have exercise  prices of $3.25 with a remaining  contractual  life of 9.5
years.  Approximately 122,667 options become exercisable in fiscal 1999, 122,667
options become exercisable in fiscal 2000 and 122,666 options become exercisable
in fiscal 2001.

     Upon the Merger,  the Company  assumed  508,800  fully  vested IPL options,
which had previously been granted to former employees and directors of IPL.

     The  stockholders  and  directors  of the  Company  have  also  approved  a
restricted  share plan for  directors  who are not  employees of the Company.  A
total of 50,000  shares of common stock are  available  for issuance  under such
plan.  Upon grant,  these  options  will vest upon the  earliest to occur of two
consecutive years of board service,  the death or disability of the recipient or
a "change of control date" (as defined in the Company's  restricted share plan).
During  fiscal  year 1998,  6,000  shares of common  stock  were  awarded to the
directors of the Company. All such shares are currently vested. At the

                                      F-24
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



date of grant,  the share  price was  $2.88.  Compensation  expense  charged  to
operations in fiscal year 1998 was $17. During fiscal 1996, the directors of IPL
received 13,000 shares previously  awarded under the Company's  restricted share
plan by IPL.

     In August  1997,  in  connection  with the Merger as part of his  severance
agreement,  Old Video's  stockholders granted the former chief executive officer
of IPL options to purchase an aggregate of 75,000 shares at an exercise price of
$0.75 per share.  Such options are fully  vested.  Given that these  options are
below market value, the Company recorded additional paid in capital of $199.

     In February 1994, in connection with the acquisition of Audio Plus Video by
IPL,  the  then  chief  financial  officer  of the  IPL  was  granted  ten-year,
non-qualified  stock options to purchase  181,818 shares of the Company's common
stock at an exercise price of $9.35 per share. Such options are fully vested and
are presently exercisable until February 2002.

     In February  1994, IPL and Old Video each granted  five-year  non-qualified
options to purchase an aggregate of 60,000 shares of the Company's  common stock
to two  directors of IPL.  The exercise  price of such options is equal to IPL's
initial pubic offering price of $11 per share.  Such options vested three months
after the consummation of the public offering.

Note 17 - Discontinued Operations

     On November 30, 1997,  management,  which had the  authority to approve the
action, committed the Company to a formal plan to dispose of its interest in the
Consulting  Services segment,  acquired in the Merger,  which provides strategic
consulting services in the area of communications,  design and implementation of
intranets,  extranets and internets.  The Company's  management has determined a
fair  value  for the  assets  taking  into  account  offers  to date,  cash flow
projections,   customer  agreements,   and  employment  agreements.   Management
estimates  the  Consulting  Services  segment will be disposed of by sale before
December 1998.

     Losses from the discontinued  Consulting  Services segment amounted to $140
from the date of the Merger through November 30, 1997, net of applicable  income
tax benefit of $73, and are shown separately in the  consolidated  statements of
income.  Estimated  loss on disposal  of the  discontinued  Consulting  Services
segment of $1,720,  net of  applicable  income tax  benefit of $1,147,  has been
recorded  based upon  estimated  future  operating  losses and loss on disposal.
Revenues of the  discontinued  Consulting  Services segment were $1,407 from the
date of the Merger through June 30, 1998.  Included in other current liabilities
at June 30, 1998 is a reserve of $645 for future net operating  losses  expected
to  be  incurred  prior  to  disposal  of  the  Consulting   Services   segment.
Discontinued  operations  include  managements  best  estimate of future  losses
through  disposal  and  amounts  expected  to be  realized  on the  sale  of the
Consulting Services segment.  The amounts the Company will ultimately realize as
well as future losses could differ  materially in the near term from the amounts
assumed in arriving at the loss on disposal of the discontinued operations.

     On January 2, 1997,  management,  which had the  authority  to approve  the
action, committed Old Video Services Corporation to a formal plan to discontinue
the operations of its Diversified  Products segment as a condition to the Merger
(see Note 1). In August  1997,  immediately  prior to the Merger,  the Old Video
Services Corporation spun-off the operations of its Diversified Products segment
to the shareholders of Old Video Services Corporation.  The Diversified Products
segment principally provided  professional and industrial videotape  duplication
and blank videotape distribution.

     Losses from the operations of the discontinued Diversified Products segment
amounted to $388 and $1,688 for the years  ended June 30, 1996 and 1997,  net of
applicable  income  tax  benefit  of $246 and $827,  respectively,  and is shown
separately  in  the   consolidated   statements  of  income.   Revenues  of  the
discontinued  operations  of the  Diversified  Products  segment  were  $13,175,
$11,404  and  $1,421  for  the  years  ended  June  30,  1996,  1997  and  1998,
respectively.






                                      F-25
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



     Net  assets of the  discontinued  operations  of the  Diversified  Products
Segment consisted of the following:
<TABLE>

                                                                              June 30,
                                                                                1997
                                                                            -------------
<S>                                                                         <C>
                    Accounts receivable, net                                $      1,661
                    Inventories                                                      470
                    Prepaid expenses and other current assets                         15
                    Fixed assets, net                                                195
                    Other assets                                                     121
                    Accounts payable and accrued expense                          (1,601)
                    Other current liabilities                                       (227)
                    Investment in company                                            422
                    Allowance for losses in investment in company                   (422)
                                                                            -------------
                                                                            $        634
                                                                            =============
</TABLE>

     Included in other current liabilities at June 30, 1997 is a reserve of $151
for future net operating  losses  incurred prior to disposal of the  Diversified
Products segment.

     In February  1997,  Video Dub,  Inc.  (Part of the  Company's  discontinued
Diversified  Products segment mentioned above) contributed the assets ($592) and
liabilities  ($170) of its New York City  facility  to a new company in exchange
for a 30% equity  interest  ($422) in the new  entity.  The  interest in the new
entity is  included  in the net  assets of the  Company to be  disposed  and was
spun-off to its shareholders prior to the consummation of the Merger.

Note 18 - Other Income

     Included in 1997 other income is $500  pertaining  to the payment of a note
receivable for which the Company had established a full valuation allowance. The
note  receivable  was partial  consideration  for the sale of a radio station in
fiscal 1991.

Note 19 - Commitments and Contingencies

Lease  Commitments - The Company leases  property under leases  accounted for as
operating leases.  Certain leases include escalation  clauses. At June 30, 1998,
future minimum rental  payments,  including  related party leases (see Note 11),
under non-cancelable leases for buildings and equipment are as follows:
<TABLE>

                   Fiscal Year                                                 Amount
                                                                           ---------------
<S>                <C>                                                     <C>
                   1999                                                    $        4,757
                   2000                                                             4,415
                   2001                                                             4,276
                   2002                                                             3,193
                   2003                                                             2,805
                   Thereafter                                                      13,870
                                                                           ---------------
                                                                           $       33,316
                                                                           ===============
</TABLE>

     Rent expense for the years ended June 30, 1996,  1997 and 1998  amounted to
$1,286,  $1,203 and $3,719,  respectively.  The Company also has  non-cancelable
subleases of approximately  $577 of which  approximately $125 and $452 expire in
year 1999 and year 2002.






                                      F-26
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Employment  Agreements  - At June 30,  1998,  the  Company  is  obligated  under
employment  contracts  with certain key employees  providing for base salary and
incentive  bonuses  based upon the results of  operations.  Minimum  amounts due
under these contracts are as follows:
<TABLE>

                    Fiscal Year                                                 Amount
                                                                             ---------------
<S>                 <C>                                                      <C>
                    1999                                                     $         2,644
                    2000                                                               2,008
                    2001                                                               1,225
                    2002                                                                 483
                    2003                                                                  38
                                                                             ---------------
                                                                             $         6,398
                                                                             ===============
</TABLE>

Litigation

     The Company is involved in various claims and legal proceedings of a nature
considered  normal to its  business.  While it is not  possible  to  predict  or
determine the outcome of these proceedings, it is the opinion of management that
their outcome will have no material  adverse  effect on the financial  position,
liquidity or results of operations of the Company.

Note 20 - Registration Rights

     The Company has agreed to register  for sale shares of common stock held by
the Old Video's stockholders,  upon their requests.  The Company has also agreed
to register shares, on a pro-rata basis, held by the then principal  stockholder
of IPL, certain options granted to principals of the trustee at such time as the
chief  executive  officer of the Company  demands  registration of its shares of
Common Stock. In addition,  the Company is required to file a shelf registration
statement on Form S-3 under the  securities  act over the sale of such shares of
common  stock.  The  Company  will  bear  all  expenses  on  such   registration
statements, except for fees and expenses of counsel for the selling stockholders
and underwriters' discounts, fees and expenses, if any.

Note 21 - Preferred Stock

     The  Company's  certificate  of  incorporation   authorizes  the  board  of
directors to issue from time to time, in one or more series, shares of preferred
stock with such  designations  and  preferences,  relative voting rights (except
that voting  rights,  if any, in respect of the election of  directors  shall be
limited to voting with the holders of common  stock,  with no more than one vote
per share of preferred stock), redemption,  conversion,  participation and other
rights and qualifications, limitations and restrictions as permitted by law. The
board of directors by its  approval of certain  series of preferred  stock could
adversely  affect  the voting  power of the  holders of common  stock,  and,  by
issuing shares of preferred  stock with certain voting,  conversion,  redemption
rights or other terms, could delay, discourage or make more difficult changes of
control or management of the Company.

Note 22- Dividend Policy

     The board of  directors  of the  Company  does not  intend to  declare  any
dividends  in the  foreseeable  future and intends to retain all earnings in the
Company to finance  the growth of  operations,  including  acquisitions.  Future
dividend  policy  will be  based  upon  the  Company's  results  of  operations,
financial condition, capital requirements and other circumstances.







                                      F-27
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



Note 23 - Unaudited Quarterly Results

     Unaudited quarterly financial  information for fiscal year 1997 and 1998 is
set forth below. All dollar amounts are in thousands except per share data.
<TABLE>

                                                                           Quarter Ended
                                                                             Old Video
                                           ------------------------------------------------------------------------------
                                           -----------------    ----------------    -----------------    ----------------
                                            September 30,        December 31,          March 31,            June 30,
                                                 1996                1996                 1997                1997
                                           -----------------    ----------------    -----------------    ----------------
Fiscal 1997
<S>                                        <C>                  <C>                 <C>                  <C>
     Revenues                              $          6,727     $          6,529    $          5,698     $          8,656
     Gross profit                          $          2,313     $          2,265    $          1,974     $          1,979
     Income from continuing
       operations                          $            385     $            567    $            232     $            454
     Income from continuing
        operations per share - basic       $            .05     $            .08    $            .03     $            .07
     Net income (loss)                     $            145     $            125    $           (797)    $            477


                                                                           Quarter Ended
                                                                              Company
                                           ------------------------------------------------------------------------------
                                           -----------------    ----------------    -----------------    ----------------
                                            September 30,        December 31,          March 31,            June 30,
                                                 1997                1997                 1998               1998(a)
                                           -----------------    ----------------    -----------------    ----------------
Fiscal 1998
     Revenues                              $         11,418    $          19,219    $         20,456     $         21,902
     Gross profit                          $          4,227    $           6,647    $          6,702     $          7,135
     Income from continuing
       operations                          $            554    $             392    $            317     $            436
     Income from continuing
        operations per share - basic       $            .06    $             .03    $            .02     $            .03
     Net income (loss)                     $            433    $             373    $            317     $        (1,284)
</TABLE>

(a) During the fourth  quarter of 1998,  the Company  recorded an  adjustment of
$1,720 to increase  the reserve for the  estimated  loss on disposal  associated
with the  divestiture  of the  Consulting  Services  segment.  The adjustment is
primarily the result of revised estimates of sale proceeds.















                                      F-28
<PAGE>
                   VIDEO SERVICES CORPORATION AND SUBSIDIARIES

                              SUPPLEMENTAL SCHEDULE



Schedule II - Valuation and Qualifying Accounts
<TABLE>


                                      Additions
                                      Balance at              Charged to                                       Balance at
                                     Beginning of              Costs and               Deductions                End of
                                         Year                  Expenses                Write-Offs                 Year
                                  --------------------    --------------------     --------------------    --------------------

<S>                                     <C>                    <C>                       <C>                     <C>
For the year ended
 June 30, 1996:
 Allowance for doubtful
 accounts and volume
 discounts                               $121                    $156                      $97                    $180
                                  ====================    ====================     ====================    ====================

June 30, 1997:
 Allowance for doubtful
 accounts and volume
 discounts.................              $180                    $131                      $ 9                     $302
                                  ====================    ====================     ====================    ====================

June 30, 1998:
 Allowance for doubtful
 Accounts and volume
 discounts                             $1,354(a)                 $214                     $389                   $1,179
                                  ====================    ====================     ====================    ====================

</TABLE>

(a) The balance at  beginning  of year gives  effect to the Merger with and into
International Post Limited of $1,052.



















                                  F-29