SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   -----------

                                    FORM 10-K


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

                      For the year ended December 31, 2000

                                       OR

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                         Commission File Number 0-21917
                                   -----------
                                 VDI MULTIMEDIA
             (Exact name of registrant as specified in its charter)

                              California 95-4272619
     (State of or other jurisdiction of (I.R.S. Employer Identification No.)
                         incorporation or organization)
            7083 Hollywood Boulevard, Suite 200, Hollywood, CA 90028
               (Address of principal executive offices) (Zip Code)

        Registrant's telephone number, including area code (323) 957-7990

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

           Securities registered pursuant to Section 12(g) of the Act
                           Common Stock, no par value.
                                   -----------

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

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K 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. ___

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant was approximately  $19,100,000 on March 5, 2001 based upon the
closing  price of such  stock on that  date.  As of March 5,  2001,  there  were
9,112,670 shares of Common Stock outstanding.

<PAGE>


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrant's  definitive  proxy  statement are  incorporated by
reference in Part III of this report.  The  definitive  proxy  statement will be
filed no later than 120 days after the close of the Company's fiscal year.



<PAGE>


                                     PART I

ITEM 1. BUSINESS

GENERAL

         VDI MultiMedia ("VDI" or the "Company") is a leading provider of video
and film asset  management  services to owners,  producers and  distributors  of
entertainment and advertising  content.  VDI provides the services  necessary to
edit,  master,  reformat,  archive and ultimately  distribute its clients' video
content,  including television programming,  feature films, spot advertising and
movie trailers.

         The Company provides  worldwide  electronic  distribution,  using fiber
optics,  satellites and the Internet.  The Company delivers  commercials,  movie
trailers,  electronic press kits,  infomercials and syndicated  programming,  by
both physical and electronic means, to thousands of broadcast outlets worldwide.

         The Company  seeks to  capitalize  on growth in demand for the services
related to the  distribution  of  entertainment  content,  without  assuming the
production or ownership risk of any specific television program, feature film or
other  form  of  content.  The  primary  users  of the  Company's  services  are
entertainment   studios  and  advertising  agencies  that  generally  choose  to
outsource  such  services  due to the  sporadic  demand  and the fixed  costs of
maintaining a high-volume physical plant.

         Since January 1, 1997,  the Company has  successfully  completed  eight
acquisitions of companies providing similar services.  The Company will continue
to  evaluate   acquisition   opportunities   to  enhance  its   operations   and
profitability.  As a result of these acquisitions, VDI is one of the largest and
most  diversified  providers  of  technical  and  distribution  services  in its
markets,  and  therefore  is able offer its  customers a single  source for such
services at prices that reflect the Company's scale economies.

         The Company was  incorporated  in  California  in 1990.  The  Company's
executive offices are located at 7083 Hollywood Boulevard, Hollywood, California
90028, and its telephone number is (323) 957-7990.

MARKETS

         The  Company  derives  revenues  primarily  from (i) the  entertainment
industry;  consisting of major and  independent  motion  picture and  television
studios,  cable television program suppliers and television program syndicators,
and (ii) the  advertising  industry;  consisting  of  advertising  agencies  and
corporate  advertisers.  On a more  limited  basis,  the Company  also  services
national  television   networks,   local  television   stations,   corporate  or
instructional   video   providers,   infomercial   advertisers  and  educational
institutions.

ENTERTAINMENT  INDUSTRY.  The  entertainment  industry  creates motion pictures,
television  programming,  and interactive  multimedia  content for  distribution
through  theatrical  exhibition,  home video,  pay and basic  cable  television,
direct-to-home,  private cable, broadcast television, on-line services and video
games.  Content is released into a "first-run"  distribution  channel, and later
into one or more  additional  channels or media.  In addition to newly  produced
content,   film  and  television  libraries  may  be  released  repeatedly  into
distribution.  Entertainment  content  produced in the United States is exported
and is in increasingly  high demand  internationally.  The Company believes that
several  trends in the  entertainment  industry have and will continue to have a
positive  impact on the  Company's  business.  These  trends  include  growth in
worldwide  demand for original  entertainment  content,  the  development of new
markets for existing  content  libraries,  increased  demand for  innovation and
creative  quality in domestic  and foreign  markets,  and wider  application  of
digital  technologies for content  manipulation and distribution,  including the
emergence of new distribution channels.

ADVERTISING  INDUSTRY.  The  advertising  industry  distributes  video and audio
commercials,  or spots,  to radio and television  broadcast  outlets  worldwide.
Advertising  content  is  developed  either  by the  originating  company  or in
conjunction  with an  advertising  agency.  The  Company  receives  orders  with
specific routing and timing instructions provided by the customer.  These orders
are then entered into the Company's computer system and scheduled for electronic
or physical  delivery.  When a video spot is  received,  the  Company's  quality
control   personnel   inspect  the  video  to  ensure  that  it  meets  customer
specifications  and then  initiate the sequence to  distribute  the video to the
designated  television  stations either  electronically,  over fiber optic lines
and/or satellite, or via the most suitable package carrier. The Company believes
that the growth in the number of video advertising outlets,  driven by expansion
in the number of broadcast,  cable,  Internet and satellite channels  worldwide,
will have a positive impact on the Company's businesses.

VALUE-ADDED SERVICES

         VDI maintains video and audio post-production and editing facilities as
components  of its full  service,  value-added  approach to its  customers.  The
following summarizes the value-added  post-production  services that the Company
provides to its customers:

                                       1
<PAGE>

FILM-TO-TAPE TRANSFER.  Substantially all film content ultimately is distributed
to  the  home  video,  broadcast,  cable  or  pay-per-view  television  markets,
requiring that film images be transferred electronically to a video format. Each
frame must be color  corrected  and  adapted  to the size and aspect  ratio of a
television  screen in order to ensure the  highest  level of  conformity  to the
original film version.  The Company  transfers  film to videotape  using Spirit,
URSA and Cintel MK-3 telecine  equipment and DaVinci(R) digital color correction
systems. In 2000, the Company added high definition television ("HDTV") services
to this product line. The remastering of studio film and television libraries to
this new  broadcast  standard  has  begun to  contribute  to the  growth  of the
Company's film transfer business, as well as affiliated services such as foreign
language mastering, duplication and distribution.

VIDEO EDITING. VDI provides digital editing services in Hollywood, Burbank, West
Los  Angeles  and San  Francisco.  The  editing  suites  are  equipped  with (i)
state-of-the-art  digital  editing  equipment,  including the Avid(R) 9000, that
provides  precise  and  repeatable  electronic  transfer of video  and/or  audio
information  from one or more  sources  to a new  master  video  and (ii)  large
production  switchers to effect complex  transitions from source to source while
simultaneously  inserting  titles and/or digital effects over background  video.
Video is edited into completed programs such as television shows,  infomercials,
commercials,  movie trailers, electronic press kits, specials, and corporate and
educational presentations.

STANDARDS   CONVERSION.   Throughout  the  world  there  are  several  different
broadcasting "standards" in use. To permit a program recorded in one standard to
be  broadcast  in  another,  it is  necessary  for the  recorded  program  to be
converted to the applicable standard.  This process involves changing the number
of video lines per frame, the number of frames per second, and the color system.
VDI is able to convert video between all international formats,  including NTSC,
PAL and SECAM. The Company's competitive advantages in this service line include
its  state-of-the-art  systems and its detailed  knowledge of the  international
markets   with   respect   to   quality-control   requirements   and   technical
specifications.

BROADCAST  ENCODING.  VDI provides  encoding  services  for  tracking  broadcast
airplay  of  spots  or  television  programming.  Using a  process  called  VEIL
encoding,  a code is placed within the video portion of an  advertisement  or an
electronic  press kit.  Such codes can be  monitored  from  standard  television
broadcasts to determine  which  advertisements  or portions of electronic  press
kits are shown on or during specific  television  programs,  providing customers
direct  feedback  on  allotted  air time.  The Company  provides  VEIL  encoding
services  for a number of its motion  picture  studio  clients to enable them to
customize  their  promotional  material.  The Company also provides ICE encoding
services  which  enable it to place codes  within the audio  portion of a video,
thereby enhancing the overall quality of the encoded video.

AUDIO  POST-PRODUCTION.  Through its facilities in Burbank and West Los Angeles,
the Company  digitally  edits and creates  sound  effects,  assists in replacing
dialog  and  re-records  audio  elements  for  integration  with  film and video
elements.  The Company  designs  sound effects to give life to the visual images
with a library of sound effects.  Dialog  replacement  is sometimes  required to
improve  quality,  replace  lost dialog or eliminate  extraneous  noise from the
original  recording.  Re-recording  combines  sound effects,  dialog,  music and
laughter  or  applause  to  complete  the  final  product.   In  addition,   the
re-recording  process  allows the  enhancement  of the  listening  experience by
adding specialized sound treatments, such as stereo, Dolby Digital(R),  SDDS(R),
THX(R) and Surround Sound(R).

AUDIO  LAYBACK.  Audio  layback is the process of creating  duplicate  videotape
masters with sound tracks that are different from the original  recorded  master
sound track.  Content owners selling their assets in foreign markets require the
replacement of dialog with voices speaking local  languages.  In some cases, all
of the audio elements,  including dialog, sound effects,  music and laughs, must
be  recreated,  remixed and  synchronized  with the  original  videotape.  Audio
sources are premixed  foreign  language  tracks or tracks that contain music and
effects only. The latter is used to make a final videotape  product that will be
sent to a foreign country to permit addition of a foreign  dialogue track to the
existing music and effects track.

FOREIGN  LANGUAGE  MASTERING.  Programming  designed for distribution in markets
other than those for which it was  originally  produced is  prepared  for export
through language translation and either subtitling or voice dubbing. The Company
provides  dubbed  language  versioning with an audio layback and conform service
that supports  various audio and  videotape  formats to create an  international
language-specific  master videotape. The Company's Burbank facility also creates
music and  effects  tracks from  programming  shot before an audience to prepare
television sitcoms for dialog recording and international distribution.

SYNDICATION.  The Company offers a broad range of technical services to domestic
and international programmers. The Company services the basic and premium cable,
broadcast  syndication  and  direct-to-home  market  segments by  providing  the
facilities  and services  necessary to assemble and distribute  programming  via
satellite  to viewers in the United  States,  Canada  and  Europe.  The  Company
provides  facilities  and  services for the  delivery of  syndicated  television

                                       2
<PAGE>

programming  in the United  States  and  Canada.  The  Company's  customer  base
consists of the major  studios and  independent  distributors  offering  network
programming,   world-wide  independent  content  owners  offering  niche  market
programming,  and pay-per-view  services  marketing movies and special events to
the  cable  industry  and  direct-to-home  viewers.  Broadcast  and  syndication
operations are conducted in Hollywood and West Los Angeles.

ARCHIVAL SERVICES.  The Company currently stores more than two million videotape
and film  elements in a  protected  environment.  The  storage  and  handling of
videotape  and film  elements  require  specialized  security and  environmental
control  procedures.  The Company operates a state-of-the-art  secure management
system in its West Los Angeles and Hollywood facilities, trade named Reel-SafeSM
 . The Company  intends to install this system in its other  facilities  over the
next few years.  The Company  believes  this system is the most  advanced in the
media  industry  with  respect to  security,  environmental  control  and access
features.  The  Company  offers  on-line  access  to  archival  information  for
advertising clients, and may offer this service to other clients in the future.

DISTRIBUTION NETWORK

         VDI  operates  a  full  service   distribution  network  providing  its
customers  with reliable,  timely and high quality  distribution  services.  The
Company's  historical  customer base consists of motion  picture and  television
studios and  post-production  facilities  located  primarily  in the Los Angeles
area.  In  1997,  the  Company  acquired  Woodholly  Productions  ("Woodholly"),
Multi-Media Services, Inc. ("Multi-Media"), Video-It, Inc. ("Video-It") and Fast
Forward,  Inc. ("Fast Forward"),  providing it with a more diversified  customer
base  and  facilities  in  New  York,  Chicago,  San  Francisco  and  additional
facilities in Los Angeles.  In 1998,  the Company  acquired The Dub House,  Inc.
(the "Dub House"),  All Post, Inc. ("All Post"), and Dubs, Inc. ("Dubs"),  which
substantially expanded its market share in Los Angeles. In 2000, the acquisition
of  Creative   Digital,   Inc.,  based  in  Los  Angeles,   brought   additional
post-production capabilities to the Company.

         Commercials,  trailers,  electronic press kits and related distribution
instructions are typically collected at one of the Company's regional facilities
and are  processed  locally or  transmitted  to another  regional  facility  for
processing.  Orders are  routinely  received into the evening hours for delivery
the next morning.  The Company has the ability to process  customer  orders from
receipt to  transmission  in less than one hour.  Customer  orders that  require
immediate,   multiple   deliveries  in  remote   markets  are  often   delivered
electronically  to and serviced by third parties with  duplication  and delivery
services in such  markets.  The Company  provides the advantage of being able to
service  customers  from  both  of  its  primary  markets   (entertainment   and
advertising)  in all of its  facilities  to achieve the most  efficient  project
turnaround. The Company's network operates 24 hours a day.

         For electronic distribution,  a video master is digitized and delivered
by fiber optic, Internet,  ISDN or satellite transmission to television stations
equipped to receive such  transmissions.  The Company  currently derives a small
percentage of its revenues from electronic  deliveries and anticipates that this
percentage will increase as such technologies become more widely adopted.

         The Company  intends to add new methods of distribution as technologies
become both  standardized and  cost-effective.  The Company  currently  operates
facilities in Los Angeles (six  locations),  New York,  Chicago,  Dallas and San
Francisco.  By capitalizing on electronic  technologies to link  instantaneously
all of the Company's facilities,  the Company is able to optimize delivery, thus
extending  the  deadline  for  same-  or  next-day  delivery  of  time-sensitive
material.

         As the  Company  continues  to develop and  acquire  facilities  in new
markets,  its  network  enables  it to  maximize  the usage of its  network-wide
capacity  by  instantaneously  transmitting  video  content to  facilities  with
available capacity.  The Company's network and facilities are designed to serve,
cost-effectively,   the  time-sensitive   distribution  needs  of  its  clients.
Management  believes that the Company's  success is based on its strong customer
relationships  that  are  maintained   through  the  reliability,   quality  and
cost-effectiveness  of its services,  and its extended  deadline for  processing
customer orders.

NEW MARKETS

         The Company  believes that the development of its network and its array
of value-added  services will provide the Company with the  opportunity to enter
or significantly increase its presence in several new or expanding markets.

INTERNATIONAL.  The Company currently  provides video  duplication  services for
suppliers to  international  markets.  Through the  Woodholly  Acquisition,  the
Company  acquired and  subsequently  has leveraged  this  capability by offering
access to  international  markets  to its entire  customer  base.  Further,  the
Company  believes  that  electronic  distribution  methods will  facilitate  its
expansion into the international  distribution arena as such technologies become
standardized  and  cost-effective.  In addition,  the Company  believes that the
growth in the distribution of domestic content into  international  markets will
create  increased  demand for  value-added  services  currently  provided by the
Company such as standards conversion and audio and digital mastering.

                                       3
<PAGE>

HIGH  DEFINITION  TELEVISION  (HDTV).  The Company is 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.
HDTV has quickly become the mastering  standard for domestic content  providers.
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.  The Company
opened a state-of-the-art  HDTV center at its Burbank,  California,  facility in
2000.

DVD AUTHORING.  Digital formats, such as DVD, have the potential to overtake VHS
videocassettes in the home video market.  Industry research shows that DVD sales
will surpass VHS  videocassettes  by 2003.  The Company  believes that there are
significant opportunities in this market. With the increasing rate of conversion
of existing analog  libraries,  as well as new content being mastered to digital
formats,  we believe  that the  Company  has  positioned  itself well to provide
value-added  services to new and existing clients.  The Company has made capital
investments  to expand and  upgrade  its  current  DVD and  digital  compression
operations in anticipation  of the increasing  demand for DVD and video encoding
services.

SALES AND MARKETING

         The Company  markets its  services  through a  combination  of industry
referrals, formal advertising, trade show participation,  special client events,
and its  Internet  website.  While VDI relies  primarily on its  reputation  and
business  contacts  within the industry for the marketing of its  services,  the
Company also maintains a direct sales force to communicate the  capabilities and
competitive advantages of the Company's services to potential new customers.  In
addition, the Company's sales force solicits corporate advertisers who may be in
a position to influence  agencies in directing  deliveries  through the Company.
The Company currently has sales personnel located in Los Angeles, San Francisco,
Chicago and New York.  The  Company's  marketing  programs are  directed  toward
communicating its unique capabilities and establishing itself as the predominant
value-added   distribution  network  for  the  motion  picture  and  advertising
industries.

         In  addition  to  its  traditional  sales  efforts  directed  at  those
individuals  responsible for placing orders with VDI's  facilities,  the Company
also  strives  to  negotiate  "preferred  vendor"  relationships  with its major
customers.  Through this process,  the Company negotiates  discounted rates with
large  volume  clients  in  return  for  being  promoted   within  the  client's
organization as an established and accepted vendor. This selection process tends
to favor  larger  service  providers  such as VDI that (i)  offer  lower  prices
through scale  economies;  (ii) have the capacity to handle large orders without
outsourcing  to other  vendors;  and (iii) can offer a strategic  partnership on
technological  and other  industry-specific  issues.  To date,  the  Company has
successfully  negotiated four such agreements with major  entertainment  studios
and national broadcast networks.

CUSTOMERS

         Since its inception in 1990, VDI has added  customers and increased its
sales through  acquisitions  and by  delivering a favorable mix of  reliability,
timeliness,  quality  and  price.  The  integration  of the  Company's  regional
facilities  has given its  customers a time  advantage in the ability to deliver
broadcast  quality  material.  The  Company  markets  its  services to major and
independent  motion picture and  television  production  companies,  advertising
agencies,  television  program suppliers and, on a more limited basis,  national
television   networks,   infomercial   providers,   local  television  stations,
television program syndicators,  corporations and educational institutions.  The
Company's  motion picture clients include Disney,  Sony Pictures  Entertainment,
Twentieth Century Fox, Universal Studios, Warner Bros.,  Metro-Goldwyn-Mayer and
Paramount   Pictures.   The  Company's   advertising  agency  customers  include
TBWA/Chiat Day, Young & Rubicam and Saatchi & Saatchi.

         The Company  solicits  the motion  picture and  television  industries,
advertisers and their agencies to generate revenues.  In the year ended December
31, 2000, the seven major motion picture studios accounted for approximately 37%
of the Company's revenues.  No single customer accounted for greater than 10% of
the Company's revenues for the year ended December 31, 2000.

         The Company generally does not have exclusive  service  agreements with
its clients. Because clients generally do not make arrangements with the Company
until  shortly  before its  facilities  and services are  required,  the Company
usually does not have any significant  backlog of service orders.  The Company's
services are generally offered on an hourly or per unit basis based on volume.

                                       4
<PAGE>

CUSTOMER SERVICE

         VDI  believes it has built its strong  reputation  in the market with a
commitment  to  customer  service.  VDI  receives  customer  orders via  courier
services,  telephone,  telecopier and the Internet.  The customer  service staff
develops  strong  relationships  with clients within the studios and advertising
agencies and is trained to emphasize the Company's  ability to confirm delivery,
meet  difficult  delivery  time frames and provide  reliable and  cost-effective
service.  Several studios are customers because of the Company's ability to meet
often changing or rush delivery schedules.

         The Company has a customer service staff of approximately 75 people, at
least one member of which is  available  24 hours a day.  This staff serves as a
single  point  of  problem  resolution  and  supports  not  only  the  Company's
customers,  but also the  television  stations  and cable  systems  to which the
Company delivers.

COMPETITION

         The video duplication and distribution industry is a highly competitive
service-oriented  business.  Certain competitors (both independent companies and
divisions of large  companies)  provide all or most of the services  provided by
the  Company,  while  others  specialize  in one or several  of these  services.
Substantially  all of the  Company's  competitors  have a  presence  in the  Los
Angeles area, which is currently the largest market for the Company's  services.
Due to the current  and  anticipated  future  demand for video  duplication  and
distribution  services in the Los Angeles area,  the Company  believes that both
existing and new competitors may expand or establish video service facilities in
this area.

         The Company  believes that it maintains a  competitive  position in its
market by virtue of the quality and scope of the services it  provides,  and its
ability to provide timely and accurate  delivery of these services.  The Company
believes  that prices for its  services  are  competitive  within its  industry,
although some  competitors  may offer  certain of their  services at lower rates
than the Company.

         The   principal   competitive   factors   affecting   this  market  are
reliability,  timeliness, quality and price. The Company competes with a variety
of duplication and distribution firms, certain post-production companies and, to
a lesser extent, the in-house  operations of major motion picture studios and ad
agencies. Some of these competitors have long-standing ties to clients that will
be  difficult  for the Company to change.  Several  companies  have  systems for
delivering video content electronically.  Moreover, some of these firms, such as
Vyvx (a subsidiary of the Williams Companies), Digital Generation Systems, Inc.,
Liberty  Live  Wire  and  other  post-production   companies  may  have  greater
financial,  operational and marketing resources,  and may have achieved a higher
level of brand recognition than the Company. As a result,  there is no assurance
that the Company will be able to compete  effectively  against these competitors
merely on the basis of reliability, timeliness, quality, price or otherwise.

EMPLOYEES

         The Company had 517  full-time  employees as of December 31, 2000.  The
Company's   employees  are  not   represented  by  any   collective   bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good.

ITEM 2. PROPERTIES

         The Company  currently  leases all 16 of its facilities.  Nine of these
facilities  have  production  capabilities  and/or  sales  activities,  five are
storage  vaults and one is used as the Company's  corporate  offices.  The lease
terms expire at various dates from December 2001 to October 2008.  The following
table sets forth the location and  approximate  square  footage of the Company's
properties as of December 31, 2000:

                                       5
<PAGE>

<TABLE>
<CAPTION>

<S>                                                                     <C>
                                                                          SQUARE
LOCATION                                                                 FOOTAGE

Hollywood, CA............................................................  9,475
Hollywood, CA............................................................ 45,000
Hollywood, CA............................................................  4,000
Hollywood, CA............................................................  7,200
Hollywood, CA............................................................ 13,000
Hollywood, CA............................................................ 27,000
Hollywood, CA............................................................ 13,400
Burbank, CA.............................................................. 32,000
Burbank, CA.............................................................. 10,000
North Hollywood, CA...................................................... 27,000
Los Angeles, CA..........................................................  4,000
Santa Monica, CA......................................................... 13,400
San Francisco, CA........................................................ 10,200
Chicago, IL.............................................................. 12,200
New York, NY.............................................................  9,000
Dallas, TX............................................................... 11,300
</TABLE>

ITEM 3. LEGAL PROCEEDINGS

         From  time to time the  Company  may  become a party to  various  legal
actions and complaints  arising in the ordinary course of business,  although it
is not currently involved in any material legal proceedings.

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

         No matters were  submitted  to the  Company's  stockholders  for a vote
during the fourth quarter of the fiscal year covered by this report.



                                     PART II

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

MARKET INFORMATION

         The  Company's  Common Stock is traded on the National  Association  of
Securities  Dealers,  Inc. Automated Quotation System ("NASDAQ") National Market
("NNM") under the symbol VDIM. The following  table sets forth,  for the periods
indicated, the high and low closing bid price per share for the Common Stock.

<TABLE>
<CAPTION>
<S>                                                                     <C>     <C>
                                                                        COMMON STOCK
                                                                        LOW     HIGH

YEAR ENDED DECEMBER 31, 1999
   First Quarter ...................................................    $ 4.25  $10.38
   Second Quarter...................................................      5.13    8.00
   Third Quarter....................................................      6.44   11.50
   Fourth Quarter...................................................      8.25   15.00
YEAR ENDED DECEMBER 31, 2000
   First Quarter ...................................................    $12.63  $14.50
   Second Quarter...................................................      6.19   14.08
   Third Quarter....................................................      3.13    7.00
   Fourth Quarter...................................................      2.50    5.69

</TABLE>

On March 30, 2001, the closing sale price of the Common Stock as reported on the
NNM was $1.50 per share.  As of March 30,  2001,  there  were  1,057  holders of
record of the Common Stock.

DIVIDENDS

         The Company did not pay  dividends on its Common Stock during the years
ended December 31, 1999 or 2000. The Company's  ability to pay dividends depends
upon  limitations  under applicable law and covenants under its bank agreements.
The Company  currently  does not intend to pay any dividends on its Common Stock
in  the  foreseeable  future.  See  "Management's  Discussion  and  Analysis  of
Financial   Condition  and  Results  of  Operations  --  Liquidity  and  Capital
Resources."

                                       6
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

         The following data, insofar as they relate to each of the years 1996 to
2000,  have been derived from the Company's  annual  financial  statements.  For
1997, 1998 and 1999, certain  adjustments have been made to previously  reported
amounts.  Fiscal 2000 results also reflect the changed accounting  practices and
other significant adjustments described in "Management's Discussion and Analysis
of Financial  Condition and Results of Operations."  This information  should be
read in  conjunction  with  the  Financial  Statements  and  Notes  thereto  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  included  elsewhere  herein.  All amounts  are shown in  thousands,
except per share data.

<TABLE>
<CAPTION>

                                                                            YEAR ENDED DECEMBER 31,
                                                                            -----------------------
<S>                                                     <C>             <C>             <C>             <C>             <C>
                                                        1996            1997            1998            1999            2000
                                                        ----            ----            ----            ----            ----
                                                                        (as restated)   (as restated)   (as restated)

STATEMENT OF INCOME DATA (1)
Revenues..............................................  $  24,780       $  40,772       $  59,697       $  78,248       $  74,841
Cost of goods sold....................................     14,933          25,381          36,902          47,685          45,894
                                                        ---------       ---------       ---------       ---------       ---------
Gross profit..........................................      9,847          15,391          22,795          30,563          28,947
Selling, general and administrative expense...........      5,720           9,253          13,201          18,473          21,994
                                                        ---------       ---------       ---------       ---------       ---------
Operating income .....................................      4,127           6,138           9,594          12,090           6,953
Interest expense, net.................................        223              68             976           2,147           2,889
Provision for income tax (2)..........................         68           2,379           3,577           4,340           1,814
                                                        ---------       ---------       ---------       ---------       ---------
Income before extraordinary item
and adoption of SAB 101(4)............................  $   3,836       $   3,691       $   5,041       $   5,603       $   2,250
Extraordinary item (net of tax benefit of $168)(3)....          -               -               -               -            (232)
Cumulative effect of adopting SAB 101 (4).............          -               -               -               -            (322)
                                                        ---------       ---------       ---------       ---------       ---------
Net income............................................  $   3,836       $   3,691       $   5,041       $   5,603       $   1,696
                                                        =========       =========       =========       =========       =========
Earnings per share:
Basic:
Income per share before extraordinary item
and adoption of SAB 101...............................  $    0.58       $    0.40       $    0.52       $    0.60       $    0.24
Extraordinary item (3)................................          -               -               -               -           (0.03)
Cumulative effect of adopting SAB 101 (4).............          -               -               -               -           (0.03)
                                                        ---------       ---------       ---------       ---------       ---------
Net income............................................  $    0.58       $    0.40       $    0.52       $    0.60       $    0.18
Diluted:
Income per share before extraordinary item
and adoption of SAB 101...............................  $    0.58       $    0.40       $    0.51       $    0.58       $    0.24
Extraordinary item (3)................................          -               -               -               -           (0.03)
Cumulative effect of adopting SAB 101 (4).............          -               -               -               -           (0.03)
                                                        ---------       ---------       ---------       ---------       ---------
Net income............................................  $    0.58       $    0.40       $    0.51       $    0.58       $    0.18

Weighted Average Common Shares Outstanding
Basic.................................................      6,660           9,123           9,737           9,322           9,216
Diluted...............................................      6,660           9,208           9,816           9,599           9,491

Pro forma net income and earnings per share data
for the periods  shown as if SAB 101 had been
adopted at the beginning of each applicable year (6)
Previously reported net income........................                                  $   5,041       $   5,603
Adjustment............................................                                       (253)            (81)
                                                                                        ---------       ---------
Pro forma net income..................................                                  $    4,788      $   5,522
                                                                                        ==========      =========
Pro forma earnings per share:
Basic -
Previously reported...................................                                  $     0.52      $    0.60
Adjustment............................................                                       (0.03)             -
                                                                                        ----------      ---------
Pro forma.............................................                                  $     0.49      $    0.60
                                                                                        ==========      =========
Diluted -
Previously reported...................................                                  $     0.51      $    0.58
Adjustment............................................                                       (0.03)         (0.01)
                                                                                        ----------      ---------
Pro forma.............................................                                  $     0.48      $    0.57
                                                                                        ==========      =========
</TABLE>

                                       7
<PAGE>

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                            -----------------------
<S>                                                     <C>             <C>             <C>             <C>             <C>
                                                        1996            1997            1998            1999            2000
                                                        ----            ----            ----            ----            ----
                                                                        (as restated)   (as restated)   (as restated)
OTHER DATA
EBITDA (5)............................................  $   5,781       $   9,835      $  14,320       $  16,878       $  12,171
Cash flows provided by operating activities...........      6,306           5,809          5,821          12,023          10,963
Cash flows used in investing activities...............     (1,191)        (13,397)       (33,406)        (11,668)         (9,488)
Cash flows (used in) provided by financing activities.     (4,966)          9,945         26,712          (1,553)         (1,556)
Capital expenditures..................................      1,191           1,178          6,199           6,181           9,717

SELECTED BALANCE SHEET DATA
Cash and cash equivalents.............................  $     564       $   2,921       $  2,048        $  3,030        $    769
Working capital ......................................      1,925           5,354          8,863           1,195          12,701
Property and equipment, net...........................      3,520           7,325         16,723          19,564          25,236
Total assets..........................................     11,178          32,617         63,940          72,931          77,661
Borrowings under revolving credit agreements..........          -           1,086            233           5,888               -
Long-term debt, net of current portion................      1,177           1,279         22,448          16,501          31,054
Shareholders' equity..................................       5,241         21,242         28,351          30,941          32,919
</TABLE>
-----------
(1)       During 2000, the Company restated  financial results of 1997, 1998 and
          1999 to  reflect  (i)  expensing  repairs  and  maintenance  costs  on
          equipment  when  incurred  rather  than  capitalizing  such  costs and
          depreciating  them in  future  periods;  (ii)  depreciating  leasehold
          improvements  over the shorter of the  estimated  useful asset life or
          the remaining lease term rather than ten years;  (iii) the retroactive
          write off of  undepreciated  leasehold  improvements  to correspond to
          certain lease termination  dates; (iv) accrual of legal costs incurred
          for a failed merger to the year in which the expenses  were  incurred;
          and (v) increase of tax  provision  for  nondeductible  items in 1999.
          Reductions  in 1997 pre-tax and net income of $483,000  and  $290,000,
          respectively, relate to the expensing of repairs and maintenance costs
          on equipment  when incurred  rather than  capitalizing  such costs and
          depreciating them in future periods.

(2)       Prior to its  initial  public  offering,  the  Company was exempt from
          payment of federal  income  taxes and had paid  certain  state  income
          taxes at a reduced rate as a result of its S Corporation status. Prior
          to the closing of the initial  public  offering in February  1997, the
          Company's   shareholders   elected  to  terminate   the   Company's  S
          Corporation  status.  As a  result  of  terminating  the  Company's  S
          Corporation  status,  the Company  was  required to record a one-time,
          non-cash charge against  historical  earnings for additional  deferred
          taxes  based  upon the  increase  in the  effective  tax rate from the
          Company's S Corporation  status (1.5%) to C Corporation  status (40%).
          This charge of $184,000 occurred in the quarter ending March 31, 1997.

(3)       Amount  represents the write off of deferred  financing  costs, net of
          tax benefit,  related to a bank credit  agreement which was terminated
          in Fiscal 2000.

(4)       Effective  January 1,  2000,  the  Company  adopted  Staff  Accounting
          Bulletin  No.  101  ("SAB  101"),  Revenue  Recognition  in  Financial
          Statements.  The amount represents the cumulative  effect, net of tax,
          on January 1, 2000  retained  earnings as if SAB 101 had been  adopted
          prior to Fiscal 2000.  See Note 2 of Notes to  Consolidated  Financial
          Statements elsewhere in this Form 10-K.

(5)       EBITDA  is  defined  herein  as  earnings  before   interest,   taxes,
          depreciation  and   amortization.   EBITDA  does  not  represent  cash
          generated  from  operating  activities  in accordance  with  Generally
          Accepted Accounting Principles ("GAAP"), is not to be considered as an
          alternative to net income or any other GAAP  measurements as a measure
          of operating  performance  and is not  necessarily  indicative of cash
          available to fund all cash needs.  While not all  companies  calculate
          EBITDA in the same fashion and  therefore  EBITDA as presented may not
          be comparable to other similarly  titled measures of other  companies,
          management  believes  that  EBITDA  is a useful  measure  of cash flow
          available  to  the  Company  to  pay   interest,   repay  debt,   make
          acquisitions or invest in new  technologies.  The Company is currently
          committed to use a portion of its cash flows to service existing debt,
          if outstanding,  and, furthermore,  anticipates making certain capital
          expenditures as part of its business plan.

(6)       Net income  would not have been  affected  in 1996 or 1997 had SAB 101
          been adopted at the beginning of those periods.

                                       8
<PAGE>

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

         Except  for  the  historical   information  contained  herein,  certain
statements in this annual report are "forward-looking  statements" as defined in
the Private  Securities  Litigation  Reform Act of 1995,  which involve  certain
risks and  uncertainties,  which could cause actual results to differ materially
from those discussed herein, including but not limited to competition,  customer
and industry  concentration,  depending  on  technological  developments,  risks
related to  expansion,  dependence  on key  personnel,  fluctuating  results and
seasonality  and control by  management.  See the  relevant  discussions  in the
Company's documents filed with the Securities and Exchange Commission, including
the  Company's  registration  statement  on Form S-1 as  declared  effective  on
February 14, 1997,  and  Cautionary  Statements and Risk Factors in this Item 7,
for a further  discussion of these and other risks and uncertainties  applicable
to the Company's business.

OVERVIEW

         The  Company   generates   revenues   principally   from   duplication,
distribution and ancillary services.  Duplication  services are comprised of the
physical  duplication  of  video  materials  from a source  video  or  audiotape
"master" to a target tape "clone." Distribution services include the physical or
electronic  distribution of video and audio  materials to a  customer-designated
location utilizing one or more of the Company's  delivery methods.  Distribution
services typically consist of deliveries of national television spot commercials
and electronic press kits and associated trafficking  instructions to designated
stations and supplemental  deliveries to non-broadcast  destinations.  Ancillary
services include video and audio editing,  element storage,  closed  captioning,
transcription  services,  standards  conversion,  video  encoding  for air  play
verification, audio post-production and layback and foreign language mastering.

RESULTS OF OPERATIONS

         During 2000, the Company restated financial results of prior years. The
adjustments are summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                 DECREASE INCOME
                                                                                 ---------------
                                                                BEFORE TAX BENEFIT              AFTER TAX BENEFIT
                                                                ------------------              -----------------
<S>                                                             <C>             <C>             <C>             <C>
ADJUSTMENTS TO PREVIOUSLY ISSUED                                FISCAL          FISCAL          FISCAL          FISCAL
   FINANCIAL STATEMENTS:                                        1998            1999            1998            1999
  ---------------------                                         ----            ----            ----            ----
To expense repairs and maintenance costs that were
     previously capitalized                                     $   448         $ 1,143         $  269          $    686
To depreciate leasehold improvements over the
     proper period and to write off any undepreciated
   amounts at the lease termination date                              -             221              -               133
To recognize merger expenses in the period incurred                   -             408              -               245
To revise the provision for income taxes                              -               -              -               180
                                                                -------         -------         -------          -------
Total                                                           $   448         $ 1,772         $   269          $ 1,244
                                                                =======         =======         =======          =======

</TABLE>

                                       9
<PAGE>

The cumulative effect on retained earnings as of January 1, 1998 was a reduction
of  $290,000,  net of tax.  The  following  table  sets  forth  the  amount  and
percentage  relationship  to  revenues  of  certain  items  included  within the
Company's  Consolidated  Statement  of Income for the years ended  December  31,
1998,  1999  and  2000,  after  giving  effect  to the  above  adjustments.  The
commentary below is based on the restated financial statements.
<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31
                                                                                   ----------------------
                                                                                   (dollars in thousands)
                                                                 1998                     1999                      2000
                                                                 ----                     ----                      ----
<S>                                                       <C>         <C>           <C>         <C>           <C>         <C>
                                                                      PERCENT                   PERCENT                   PERCENT
                                                                         OF                        OF                        OF
                                                          AMOUNT      REVENUES      AMOUNT      REVENUES      AMOUNT      REVENUES
                                                          ------      --------      ------      --------      ------      --------
                                                       (as restated)             (as restated)

Revenues.............................................    $  59,697       100.0%  $   78,248       100.0%    $  74,841        100.0%
Costs of goods sold..................................       36,902        61.8       47,685        60.9        45,894         61.3
                                                         ---------    --------   ----------   ---------     ---------     --------
Gross profit.........................................       22,795        38.2       30,563        39.1        28,947         38.7
Selling, general and administrative expense..........       13,201        22.1       18,473        23.6        21,994         29.4
                                                         ---------    --------   ----------   ---------     ---------     --------
Operating income.....................................        9,594        16.1       12,090        15.5         6,953          9.3
Interest expense, net................................          976         1.6        2,147         2.7         2,889          3.9
Provision for income taxes...........................        3,577         6.0        4,340         5.5         1,814          2.4
                                                         ---------    --------   ----------   ---------     ---------     --------
Income before extraordinary item and
adoption of SAB 101..................................        5,041         8.4        5,603         7.2     $   2,250          3.0
Extraordinary item (net of tax benefit of $168)......            -           -            -           -          (232)        (0.3)
Cumulative effect on prior years of
adopting SAB 101.....................................            -           -            -           -          (322)        (0.4)
                                                         ---------    --------   ----------   ---------     ---------     --------
Net income ..........................................    $   5,041         8.4%  $    5,603         7.2%    $   1,696          2.3%
                                                         =========    ========   ==========   =========     =========     ========
</TABLE>


YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

         REVENUES.  Revenues  decreased by $3.4 million or 4.4% to $74.8 million
for the year ended  December  31, 2000  compared  to $78.2  million for the year
ended  December 31, 1999.  This decrease in revenue was due to a decrease in the
use of the  Company's  services  in 2000 by  certain  customers  resulting  from
service  failures  that  occurred  during  the  integration  of its two  largest
facilities  in 1999,  and the  loss of  certain  key  sales  personnel  in 2000.
Revenues were also  negatively  impacted by an actors' strike in the advertising
industry.

         GROSS  PROFIT.  Gross  profit  decreased  $1.7 million or 5.3% to $28.9
million for the year ended  December 31, 2000  compared to $30.6 million for the
year ended  December  31,  1999.  As a  percentage  of  revenues,  gross  profit
decreased  from 39.1% to 38.7%.  The decrease in gross profit as a percentage of
revenues was due to increased  depreciation  associated with investments in high
definition equipment.

         SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSE.  Selling,  general and
administrative  expense increased $3.5 million or 19.1% to $22.0 million for the
year ended  December  31,  2000  compared  to $18.5  million  for the year ended
December  31,  1999.  As  a  percentage  of  revenues,   selling,   general  and
administrative  expense  increased to 29.4% for the year ended December 31, 2000
compared to 23.6% for the year ended December 31, 1999. This increase was due to
an increase in the provision for doubtful accounts of $1.4 million, $0.5 million
of severance costs,  increased wages related to new management  appointments and
increased depreciation related to investments in computer systems. Additionally,
in 2000, the Company recognized $0.8 million in expenses related to the proposed
merger with an affiliate of Bain  Capital,  which was  terminated in April 2000,
compared to $0.4  million in 1999.  The increase in the  provision  for doubtful
accounts  resulted from numerous  delinquent  accounts  which,  in  management's
judgment,  were deemed to be no longer  collectible in the fourth quarter due to
the age of the account,  financial condition of the customer or the inability to
resolve disputes.

         OPERATING  INCOME.  Operating income decreased $5.1 million or 42.5% to
$7.0 million for the year ended  December 31, 2000 compared to $12.1 million for
the year ended December 31, 1999. As a percentage of revenue,  operating  income
decreased from 15.5% to 9.3%.

         INTEREST  EXPENSE.  Interest  expense,  net,  increased 34.6% from $2.1
million in 1999 to $2.9  million in 2000.  This  increase  was due to  increased
borrowings under the Company's debt agreements.

                                       10
<PAGE>

         INCOME  TAXES.  The Company's  effective  income tax rate was 45.5% for
2000 and 43.7% for 1999 due to the effect of  permanent  differences  on a lower
pre-tax income base.

         EXTRAORDINARY  ITEM. During 2000, the Company wrote off $0.4 million of
deferred   financing  costs  related  to  prior  credit   facilities  that  were
terminated. This item was treated as an extraordinary item in Fiscal 2000 and is
reported net of income taxes.

         CUMULATIVE  EFFECT OF ADOPTING SAB 101. During Fiscal 2000, the Company
adopted SAB 101. The effect of applying this change in accounting principle is a
cumulative charge, after tax, of $322,000, or $0.03 per share.  Previously,  the
Company had recognized  revenues from certain post production  processes as work
was performed. Under SAB 101, the Company will now recognize these revenues when
the entire project is completed.

         NET INCOME.  Net income for the year ended  December 31, 2000 decreased
$3.9  million or 69.7% to $1.7  million  compared  to $5.6  million for the year
ended December 31, 1999.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

         REVENUES. Revenues increased by $18.6 million or 31.1% to $78.2 million
for the year ended  December  31, 1999  compared  to $59.7  million for the year
ended  December 31, 1998.  This increase in revenue was due to increased  volume
resulting from (i) the  acquisitions  of All Post and the Dub House in June 1998
and Dubs in November 1998, and (ii) increased  marketing of the Company's  media
services.

         GROSS  PROFIT.  Gross profit  increased  $7.8 million or 34.1% to $30.6
million for the year ended  December 31, 1999  compared to $22.8 million for the
year ended  December  31,  1998.  As a  percentage  of  revenues,  gross  profit
increased  from 38.2% to 39.1%.  The increase in gross profit as a percentage of
revenues was due primarily to the lower cost of direct materials  resulting from
scale  purchasing  discounts  and the effect of changing  depreciation  lives of
certain  property and equipment  from five to seven years as of January 1, 1999,
partially  offset by increased  wages which resulted  primarily from  additional
overtime related to the integration of two of the Company's largest facilities.

         SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSE.  Selling,  general and
administrative  expense increased $5.3 million or 39.9% to $18.5 million for the
year ended  December  31,  1999  compared  to $13.2  million  for the year ended
December  31,  1998.  As  a  percentage  of  revenues,   selling,   general  and
administrative  expense  increased to 23.6% for the year ended December 31, 1999
compared to 22.1% for the year ended December 31, 1998. This increase was due to
increased  amortization costs associated with  acquisitions,  an increase in the
Company's  provision for doubtful accounts and the incurrence of $0.4 million in
expenses related to the proposed merger with an affiliate of Bain Capital, which
was terminated in April 2000.

         OPERATING  INCOME.  Operating income increased $2.5 million or 26.0% to
$12.1 million for the year ended  December 31, 1999 compared to $9.6 million for
the year ended December 31, 1998. As a percentage of revenue,  operating  income
decreased from 16.1% to 15.5%.

         INTEREST  EXPENSE.  Interest expense,  net,  increased 120.0% from $1.0
million in 1998 to $2.1  million in 1999.  This  increase  was due to  increased
borrowings  under the Company's debt agreements  related to the  acquisitions of
the Dub House, All Post and Dubs.

         INCOME  TAXES.  The Company's  effective  income tax rate was 43.7% for
1999 and 41.5% for 1998.

         NET INCOME.  Net income for the year ended  December 31, 1999 increased
$0.6  million or 11.1% to $5.6  million  compared  to $5.0  million for the year
ended December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

         Since its inception,  the Company has financed its  operations  through
internally  generated  cash  flow,  borrowings  under  lending  agreements  with
financial  institutions,  the initial  public  offering and, to a lesser degree,
borrowings  from  related  parties.  In the first  quarter of 1997,  the Company
completed its initial  public  offering.  The net proceeds of the initial public
offering to the Company were  approximately  $17.9 million  after  deducting the
underwriters' discounts and commissions and offering expenses.

         At  December  31,  2000,  the  Company's  cash  and  cash   equivalents
aggregated $0.8 million and net working capital was $12.7 million. The Company's
operating  activities  provided  cash of $5.8 million in 1998,  $12.0 million in
1999 and $11.0 million for the year ended December 31, 2000.

                                       11
<PAGE>

         The Company's investing  activities used cash of $33.4 million in 1998,
$9.5 million in 1999 and $11.7 million 2000.  Investing  activities  during 2000
included the  expenditure  of $9.7 million for the addition and  replacement  of
capital equipment,  including approximately $6.0 million for investments in HDTV
technologies.  The Company's business is equipment intensive, requiring periodic
expenditures of cash or the incurrence of additional debt to acquire  additional
video equipment in order to increase capacity or replace existing equipment. The
Company  expects to spend  approximately  $4.0  million  during  2001 on capital
expenditures  for the addition and  replacement  of equipment and for management
information system upgrades.  Other than capital expenditures,  net cash used in
investing activities was for acquisitions in all three years.

         The Company's  financing  activities  provided cash of $26.7 million in
1998 and used cash of $1.6 million in 1999 and 2000.  Cash flows from  financing
activities  during the year ended  December  31,  2000  include  the use of $0.7
million to repurchase 171,400 shares of the Company's common stock.

         In September 2000, the Company  entered into a credit  agreement with a
group of banks  providing  a revolving  credit  facility  ("Facility")  of up to
$45,000,000. The facility was used to repay previously outstanding amounts under
prior   agreements  and  may  be  used  to  fund  working  capital  and  capital
expenditures and for general corporate  purposes,  including up to $5,000,000 of
stock repurchases  under the Company's  repurchase  program.  The borrowing base
under the  Facility is limited to 90% of eligible  accounts  receivable,  50% of
inventory  and 100% of operating  machinery  and  equipment,  which  percentages
decline after 2001 for receivables and equipment. The aggregate commitment under
the Facility will decline by $5,000,000 on December 31, 2002, 2003 and 2004. The
entire  commitment  expires on December 31,  2005.  Loans under the Facility are
secured by  substantially  all of the  Company's  assets and  include  covenants
regarding the maintenance of various financial ratios.

         As of  December  31,  2000,  the  total  amount  outstanding  under the
Facility was  $31,024,000.  After recording  adjustments to write off previously
capitalized  repairs and  maintenance  expense and the  adoption of SAB 101, the
borrowing  base under the  Facility was  $30,965,000  and the Company was not in
compliance with its financial covenants. The bank has waived compliance with the
covenants and the Company has renegotiated the breached financial covenants.

         Management  believes that cash generated  from its ongoing  operations,
existing  working  capital and its credit  facility will fund necessary  capital
expenditures and provide adequate working capital for the next twelve months.

         The Company reviews the acquisition of businesses  complementary to its
current  operations on an ongoing basis and,  depending on the number,  size and
timing of such transactions, may be required to secure additional financing.

RECENT ACCOUNTING PRONOUNCEMENTS

         In March 2000,  the Financial  Accounting  Standards  Board issued FASB
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions  Involving
Stock  Compensation - an interpretation of APB Opinion No. 25 ("APB 25"). FIN 44
clarifies the application of APB 25, including the following:  the definition of
an employee  for  purposes  of applying  APB 25; the  criteria  for  determining
whether a plan qualifies as a non-compensatory plan; the accounting consequences
of various  modifications  to the terms of  previously  fixed  stock  options or
awards;  and the  accounting for an exchange of stock  compensation  awards in a
business combination. FIN 44 was effective July 1, 2000, but certain conclusions
in FIN 44 cover specific  events that occurred after either December 15, 1998 or
January 1, 2000. Application of this pronouncement has not had a material impact
on the Company's financial position or results of operations.

         In December 1999, the U.S.  Securities and Exchange  Commission ("SEC")
issued Staff  Accounting  Bulletin No. 101 ("SAB 101"),  Revenue  Recognition in
Financial  Statements.  SAB 101 summarizes the SEC's views in applying generally
accepted  accounting  principles  to  selected  revenue  recognition  issues  in
financial statements. In June 2000, the SEC issued SAB 101B, an amendment to SAB
101,  which delays the  implementation  of SAB 101. The Company  adopted SAB 101
effective January 1, 2000.

         On June 15,  1998,  the  Financial  Accounting  Standards  Board (FASB)
issued  Statement of Financial  Accounting  Standards  No. 133,  Accounting  for
Derivative  Instruments  and Hedging  Activities.  The  standard,  as amended by
Statement of Financial  Accounting  Standards No. 137, Accounting for Derivative
Instruments  and  Hedging  Activities  Deferral  of the  Effective  Date of FASB
Statement  No. 133, an amendment  of FASB  Statement  No. 133, and  Statement of
Financial  Accounting  Standards  No. 138,  Accounting  for  Certain  Derivative
Instruments and Certain Hedging  Activities,  an amendment of FASB Statement No.
133 (referred to hereafter as "FAS 133"),  is effective for all fiscal  quarters
of all fiscal  years  beginning  after June 15,  2000  (January  1, 2001 for the
Company).  FAS 133 requires that all  derivative  instruments be recorded on the
balance sheet at their fair value.  Changes in the fair value of derivatives are
recorded  each  period in current  earnings  or in other  comprehensive  income,
depending  on  whether  a  derivative   is  designated  as  part  of  a  hedging
relationship and, if it is, depending on the type of hedging  relationship.  The
Company estimates that the effect of adopting FAS 133 on January 1, 2001 will be
to record a net-of-tax  cumulative-effect-type  adjustment of $179,000 (loss) in
earnings.

                                       12
<PAGE>

CAUTIONARY STATEMENTS AND RISK FACTORS

         In our  capacity as Company  management,  we may from time to time make
written  or  oral  forward-looking  statements  with  respect  to our  long-term
objectives  or  expectations  which  may be  included  in our  filings  with the
Securities and Exchange  Commission,  reports to  stockholders  and  information
provided in our web site.

         The  words  or  phrases   "will   likely,"   "are   expected  to,"  "is
anticipated,"  "is  predicted,"  "forecast,"  "estimate,"  "project,"  "plans to
continue,"   "believes,"  or  similar  expressions   identify   "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.  Such  forward-looking  statements  are  subject to  certain  risks and
uncertainties  that  could  cause  actual  results  to  differ  materially  from
historical  earnings and those  presently  anticipated or projected.  We wish to
caution you not to place undue reliance on any such forward-looking  statements,
which  speak  only as of the date made.  In  connection  with the "Safe  Harbor"
provisions  on the  Private  Securities  Litigation  Reform Act of 1995,  we are
calling to your  attention  important  factors that could  affect our  financial
performance  and  could  cause  actual  results  for  future  periods  to differ
materially  from any  opinions or  statements  expressed  with respect to future
periods in any current statements.

         The following list of important  factors may not be all inclusive,  and
we  specifically  decline to  undertake  an  obligation  to publicly  revise any
forward-looking   statements   that  have  been  made  to   reflect   events  or
circumstances  after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Among the factors that could have an impact
on our  ability to achieve  expected  operating  results  and growth  plan goals
and/or  affect  the market  price of our stock  are:

      *   Our highly competitive marketplace.

      *   The risks associated with dependence upon significant customers.

      *   Our ability to execute our expansion strategy.

      *   The uncertain ability to manage growth.

      *   Our  dependence  upon  and  our  ability  to  adapt  to  technological
          developments.

      *   Dependence on key personnel.

      *   Our ability to maintain and improve service quality.

      *   Fluctuation in quarterly  operating results and seasonality in certain
          of our markets.

      *   Possible  significant  influence over corporate affairs by significant
          shareholders.

      *   The potential  impact of a possible labor action  affecting our studio
          and television customers.


These risk factors are discussed further below.

COMPETITION.  Our broadcast video post production,  duplication and distribution
industry is a highly competitive,  service-oriented  business. In general, we do
not have long-term or exclusive service agreements with our customers.  Business
is  acquired  on a  purchase  order  basis and is based  primarily  on  customer
satisfaction with reliability, timeliness, quality and price.

We  compete  with a variety of post  production,  duplication  and  distribution
firms,  some of which  have a national  presence,  and to a lesser  extent,  the
in-house post  production  and  distribution  operations of major motion picture
studios and advertising  agencies.  Some of these firms, and all of the studios,
have greater financial, distribution and marketing resources and have achieved a
higher level of brand recognition than the Company. In the future, we may not be
able to compete  effectively  against these  competitors  merely on the basis of
reliability, timeliness quality and price or otherwise.

We may also face competition from companies in related markets which could offer
similar or  superior  services to those  offered by the  Company.  For  example,
telecommunications   providers  could  enter  the  market  as  competitors  with
materially lower electronic  delivery  transportation  costs. We believe that an
increasingly  competitive  environment  could lead to a loss of market  share or
price  reductions,  which could have a material  adverse effect on our financial
condition, results of operations and prospects.

CUSTOMER AND INDUSTRY  CONCENTRATION.  Although we have an active client list of
over 2,500 customers,  seven motion picture studios  accounted for approximately
37% of the Company's revenues during the year ended December 31, 2000. If one or
more of these  companies were to stop using our services,  our business could be

                                       13
<PAGE>

adversely  affected.  Because we derive  substantially  all of our revenue  from
clients  in  the  entertainment  and  advertising   industries,   the  financial
condition,  results of  operations  and  prospects of the Company  could also be
adversely  affected  by an  adverse  change in  conditions  which  impact  those
industries.

EXPANSION STRATEGY.  Our growth strategy involves both internal  development and
expansion through  acquisitions.  We currently have no agreements or commitments
to  acquire  any  company  or  business.  Even  though we have  completed  eight
acquisitions  in the last  three  fiscal  years,  we cannot  be sure  additional
acceptable  acquisitions  will be  available  or  that we will be able to  reach
mutually  agreeable terms to purchase  acquisition  targets,  or that we will be
able to profitably manage additional  businesses or successfully  integrate such
additional  businesses into the Company  without  substantial  costs,  delays or
other  problems.

Certain of the businesses previously acquired by the Company reported net losses
for their most  recent  fiscal  years  prior to being  acquired,  and our future
financial  performance  will be in  part  depend  on our  ability  to  implement
operational improvements in, or exploit potential synergies with, these acquired
businesses.

Acquisitions may involve a number of special risks including: adverse effects on
our  reported   operating  results   (including  the  amortization  of  acquired
goodwill),  diversion of management's  attention and  unanticipated  problems or
legal  liabilities.  In addition,  we may require  additional funding to finance
future  acquisitions.  We  cannot  be sure  that  we  will  be  able  to  secure
acquisition  financing  on  acceptable  terms or at all. We may also use working
capital or equity, or raise financing through equity offerings or the incurrence
of debt, in connection with the funding of any acquisition. Some or all of these
risks could negatively affect our financial condition, results of operations and
prospects  or  could  result  in  dilution  to the  Company's  shareholders.  In
addition,  to the  extent  that  consolidation  becomes  more  prevalent  in the
industry,  the prices  for  attractive  acquisition  candidates  could  increase
substantially. We may not be able to effect any such transactions. Additionally,
if we are able to complete such transactions they may prove to be unprofitable.

The  geographic  expansion of the  Company's  customers  may result in increased
demand for services in certain  regions  where it  currently  does not have post
production, duplication and distribution facilities. To meet this demand, we may
subcontract.  However,  we have not  entered  into any  formal  negotiations  or
definitive agreements for this purpose.  Furthermore,  we cannot assure you that
we will be able to effect such  transactions or that any such  transactions will
prove to be profitable.

MANAGEMENT  OF GROWTH.  During the last four years  (except  for 2000),  we have
experienced rapid growth that has resulted in new and increased responsibilities
for management personnel and has placed and continues to place increased demands
on  our  management,   operational  and  financial  systems  and  resources.  To
accommodate this growth,  compete  effectively and manage future growth, we will
be required to continue to implement and improve our operational,  financial and
management  information systems, and to expand,  train,  motivate and manage our
work force. We cannot be sure that the Company's personnel,  systems, procedures
and controls will be adequate to support our future  operations.  Any failure to
do so could have a material adverse effect on our financial  condition,  results
of operations and prospects.

DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS. Although we intend to utilize the most
efficient  and  cost-effective   technologies   available  for  telecine,   high
definition  formatting,  editing,  coloration  and  delivery  of video  content,
including digital  satellite  transmission,  as they develop,  we cannot be sure
that we will be able to adapt to such  standards in a timely  fashion or at all.
We believe our future growth will depend in part, on our ability to add to these
services and to add customers in a timely and  cost-effective  manner. We cannot
be sure we will be successful in offering such services to existing customers or
in obtaining new customers for these  services,  including the Company's  recent
investment in the high  definition  television  area. We intend to rely on third
part vendors for the development of these technologies and there is no assurance
that such  vendors will be able to develop  such  technologies  in a manner that
meets the needs of the Company and its customers.  Any material  interruption in
the supply of such services could  materially and adversely affect the Company's
financial condition, results of operations and prospects.

DEPENDENCE  ON KEY  PERSONNEL.  The  Company is  dependent  on the  efforts  and
abilities  of certain of its senior  management,  particularly  those of R. Luke
Stefanko,  Chairman of the Board of Directors and Chief Executive  Officer.  The
loss or interruption  of the services of key members of management  could have a
material  adverse effect on our financial  condition,  results of operations and
prospects if a suitable  replacement is not promptly obtained.  Although we have
employment  agreements with Mr. Stefanko and certain of our other key executives
and technical personnel, we cannot be sure that such executives will remain with
the  Company  during  or  after  the  term of their  employment  agreements.  In
addition,  our  success  depends to a  significant  degree  upon the  continuing
contributions  of,  and  on  our  ability  to  attract  and  retain,   qualified
management,   sales,   operations,   marketing  and  technical  personnel.   The
competition for qualified personnel is intense and the loss of any such persons,
as well as the failure to recruit  additional  key personnel in a timely manner,
could have a material  adverse  effect on our  financial  condition,  results of
operations and prospects. There is no assurance that we will be able to continue
to  attract  and  retain  qualified  management  and  other  personnel  for  the
development of our business.

                                       14
<PAGE>

ABILITY TO MAINTAIN AND IMPROVE  SERVICE  QUALITY.  Our business is dependent on
our  ability to meet the  current  and future  demands of our  customers,  which
demands include  reliability,  timeliness,  quality and price. Any failure to do
so,  whether or not caused by factors  within our control could result in losses
to such clients. Although we disclaim any liability for such losses, there is no
assurance that claims would not be asserted or that dissatisfied customers would
refuse  to make  further  deliveries  through  the  Company  in the  event  of a
significant  occurrence of lost deliveries,  either of which could have material
adverse effect on our financial condition,  results of operations and prospects.
Although we maintain insurance against business interruption, such insurance may
not  be  adequate  to  protect  the  Company  from  significant  loss  in  these
circumstances  or that a major  catastrophe  (such  as an  earthquake  or  other
natural disaster) would not result in a prolonged  interruption of our business.
In addition, our ability to make deliveries within the time periods requested by
customers  depends  on a number of  factors,  some of which are  outside  of our
control, including equipment failure, work stoppages by package delivery vendors
or interruption in services by telephone or satellite service providers.

FLUCTUATING RESULTS, SEASONALITY. Our operating results have varied in the past,
and may  vary  in the  future,  depending  on  factors  such  as the  volume  of
advertising in response to seasonal buying  patterns,  the timing of new product
and service introductions, the timing of revenue recognition upon the completion
of longer term projects, increased competition, timing of acquisitions,  general
economic   factors   and  other   factors.   As  a  result,   we  believe   that
period-to-period  comparisons of our results of operations  are not  necessarily
meaningful and should not be relied upon as an indication of future performance.
For  example,   our  operating  results  have  historically  been  significantly
influenced by the volume of business from the motion picture industry,  which is
an  industry  that  is  subject  to  seasonal  and  cyclical   downturns,   and,
occasionally,  work stoppages by actors, writers and others. In addition, as our
business from advertising  agencies tends to be seasonal,  our operating results
may be subject to  increased  seasonality  as the  percentage  of business  from
advertising  agencies  increases.  In any period  our  revenues  are  subject to
variation  based on changes in the volume and mix of services  performed  during
the period.  It is possible that in some future quarter the Company's  operating
results  will  be  below  the  expectations  of  equity  research  analysts  and
investors.  In such event,  the price of the Company's Common Stock would likely
be materially  adversely affected.  Fluctuations in sales due to seasonality may
become more pronounced if the growth rate of the Company's sales slows.

CONTROL  BY  PRINCIPAL  SHAREHOLDER;  POTENTIAL  ISSUANCE  OF  PREFERRED  STOCK;
ANTI-TAKEOVER PROVISIONS. The Company's Chairman,  President and Chief Executive
Officer,  R.  Luke  Stefanko,   beneficially  owned  approximately  28%  of  the
outstanding common stock as of December 31, 2000. Mr. Stefanko's ex-spouse owned
approximately  25% of the  common  stock  on that  date.  Together,  they  owned
approximately  53%. In August 2000, Mr. Stefanko was granted a one-time proxy to
vote his ex-spouse's  shares in connection with the election of directors at the
Company's annual meeting. By virtue of his stock ownership,  Mr. Stefanko may be
able to significantly  influence the outcome of matters required to be submitted
to a vote of shareholders, including (i) the election of the board of directors,
(ii) amendments to the Company's  Restated  Articles of Incorporation  and (iii)
approval of mergers and other significant corporate transactions.  The foregoing
may have the effect of  discouraging,  delaying or  preventing  certain types of
transactions  involving an actual or potential change of control of the Company,
including  transactions  in which the holders of common  stock  might  otherwise
receive a premium for their  shares over  current  market  prices.  Our Board of
Directors  also has the  authority to issue up to 5,000,000  shares of preferred
stock  without par value (the  "Preferred  Stock") and to  determine  the price,
rights,  preferences,  privileges and  restrictions  thereof,  including  voting
rights,  without  any  further  vote or  action by the  Company's  shareholders.
Although we have no current  plans to issue any shares of Preferred  Stock,  the
rights of the holders of common  stock would be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in  the  future.   Issuance  of  Preferred   Stock  could  have  the  effect  of
discouraging,  delaying,  or  preventing  a change in  control  of the  Company.
Furthermore,   certain   provisions  of  the  Company's   Restated  Articles  of
Incorporation  and By-Laws and of  California  law also could have the effect of
discouraging, delaying or preventing a change in control of the Company.

POSSIBLE   STRIKE   AFFECTING  OUR  CUSTOMERS.   In  May  2001  and  July  2001,
screenwriters  and actors,  respectively,  may conduct a work stoppage  directly
affecting our studio and television customers. We cannot predict the length of a
strike by  either  of these  groups  or the  ultimate  impact on our  customers'
production  and ability to provide  work to the Company.  Either work  stoppage,
should it occur,  could have a material adverse effect on the Company's  results
of operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         MARKET  RISK.  The  Company's  market  risk  exposure  with  respect to
financial  instruments  is to  changes  in the London  Interbank  Offering  Rate
("LIBOR").  The Company had borrowings of $31,024,000 at December 31, 2000 under
a credit agreement and may borrow up to an additional $14 million subject to the
level of Company assets (borrowing base).  Amounts  outstanding under the credit
agreement bear interest at the bank's reference rate plus a base rate margin not
to exceed 1.00%, or, at the Company's election, at LIBOR plus a LIBOR margin not
to exceed 2.75%.

                                       15
<PAGE>

         The Company entered into an interest rate swap  transaction with a bank
on November  28,  2000.  The swap  transaction  was for a  notational  amount of
$15,000,000  for three years and fixes the interest  rate paid by the Company on
such amount at 6.50%, plus the applicable LIBOR margin, not to exceed 2.75%.

         On June 15,  1998,  the  Financial  Accounting  Standards  Board (FASB)
issued  Statement of Financial  Accounting  Standards  No. 133,  Accounting  for
Derivative  Instruments  and Hedging  Activities.  The  standard,  as amended by
Statement of Financial  Accounting  Standards No. 137, Accounting for Derivative
Instruments  and  Hedging  Activities  Deferral  of the  Effective  Date of FASB
Statement  No. 133, an amendment  of FASB  Statement  No. 133, and  Statement of
Financial  Accounting  Standards  No. 138,  Accounting  for  Certain  Derivative
Instruments and Certain Hedging  Activities,  an amendment of FASB Statement No.
133 (referred to hereafter as "FAS 133"),  is effective for all fiscal  quarters
of all fiscal  years  beginning  after June 15,  2000  (January  1, 2001 for the
Company).  FAS 133 requires that all  derivative  instruments be recorded on the
balance sheet at their fair value.  Changes in the fair value of derivatives are
recorded  each  period in current  earnings  or in other  comprehensive  income,
depending  on  whether  a  derivative   is  designated  as  part  of  a  hedging
relationship and, if it is, depending on the type of hedging  relationship.  The
Company estimates that the effect of adopting FAS 133 on January 1, 2001 will be
to record a net-of-tax  cumulative-effect-type  adjustment of $179,000 (loss) in
earnings.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                                                                            PAGE

Report of Independent Accountants.............................................16

Financial Statements:

Consolidated Balance Sheets -
December 31, 1999 and 2000....................................................18

Consolidated Statements of Income -
Fiscal Years Ended December 31, 1998, 1999 and 2000...........................19

Consolidated Statements of Shareholders' Equity -
Fiscal Years Ended December 31, 1998, 1999 and 2000...........................20

Consolidated Statements of Cash Flows -
Fiscal Years Ended December 31, 1998, 1999 and 2000...........................21

Notes to Consolidated Financial Statements....................................22

Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts...............................36

Consent of Independent Accountants............................................41



Schedules  other than those listed above have been omitted since they are either
not required,  are not  applicable or the required  information  is shown in the
financial statements or the related notes.




                                       16
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and
Shareholders of VDI MultiMedia



In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of income,  shareholders' equity and cash flows present
fairly, in all material respects, the financial position of VDI MultiMedia ("the
Company") and its  subsidiaries  at December 31, 2000 and December 31, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with  accounting  principles
generally accepted in the United States of America.  These financial  statements
are the  responsibility of the Company's  management;  our  responsibility is to
express  an  opinion  on these  financial  statements  based on our  audits.  We
conducted our audits of these  statements in accordance with auditing  standards
generally  accepted in the United States of America,  which 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,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the  consolidated  financial  statements,  the Company
restated  its  financial  statements  for the years ended  December 31, 1999 and
1998.

As discussed in Note 2 to the consolidated financial statements, during the year
ended December 31, 2000 the Company changed its method of accounting for revenue
to conform to the requirements of SEC Staff Accounting Bulletin No. 101.



PricewaterhouseCoopers LLP (signed)
Century City, California
March 30, 2001



                                       17
<PAGE>
<TABLE>
<CAPTION>

                                 VDI MULTIMEDIA
                           CONSOLIDATED BALANCE SHEET
                                                                                             DECEMBER 31,
<S>                                                                                 <C>                <C>
                                                                                        1999               2000
                                                                                        ----               ----
                                                                                    (as restated)
                                            ASSETS
Current assets:
Cash and cash equivalents.......................................................    $ 3,030,000         $   769,000
Accounts receivable, net of allowances for doubtful accounts of $971,000 and
    $1,473,000, respectively ...................................................     19,836,000          16,315,000
Notes receivable from officers (Note 12) .......................................              -           1,001,000
Income tax receivable...........................................................              -           1,362,000
Inventories.....................................................................      1,122,000           1,031,000
Prepaid expenses and other current assets.......................................        948,000           2,066,000
Deferred income taxes...........................................................      1,259,000           1,574,000
                                                                                    -----------         -----------
Total current assets............................................................     26,195,000          24,118,000

Property and equipment, net (Note 4)............................................     19,564,000          25,236,000
Other assets, net...............................................................        662,000             920,000
Goodwill and other intangibles, net (Note 3)....................................     26,510,000          27,387,000
                                                                                    -----------         -----------
                                                                                    $72,931,000         $77,661,000
                                                                                    ===========         ===========
                             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................    $ 6,998,000         $ 8,850,000
Accrued expenses................................................................      2,989,000           2,513,000
Income taxes payable............................................................        599,000                   -
Borrowings under revolving credit agreement (Note 5)............................      5,888,000                   -
Current portion of notes payable (Note 6).......................................      8,309,000                   -
Current portion of capital lease obligations (Note 6)...........................        217,000              54,000
                                                                                    -----------         -----------
Total current liabilities.......................................................     25,000,000          11,417,000
                                                                                    -----------         -----------
Deferred income taxes...........................................................        489,000           2,271,000
Notes payable, less current portion (Note 6)....................................     16,433,000          31,024,000
Capital lease obligations, less current portion (Note 6)........................         68,000              30,000

Commitments and contingencies (Note 8)

Shareholders' equity
Preferred stock - no par value; 5,000,000 shares authorized; none outstanding                 -                   -
Common stock - no par value; 50,000,000 shares authorized; 9,210,697 and
9,162,670 shares issued and outstanding, respectively...........................     17,935,000          18,272,000
Retained earnings...............................................................     13,006,000          14,647,000
                                                                                    -----------         -----------
Total shareholders' equity......................................................     30,941,000          32,919,000
                                                                                    -----------         -----------
                                                                                    $72,931,000         $77,661,000
                                                                                    ===========         ===========

</TABLE>
                                       18
<PAGE>

                                 VDI MULTIMEDIA
                        CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
                                                                                            YEAR ENDED DECEMBER 31,
                                                                                            -----------------------
<S>                                                                               <C>              <C>              <C>
                                                                                      1998             1999             2000
                                                                                      ----             ----             ----
                                                                                  (as restated)    (as restated)

Revenues........................................................................  $ 59,697,000     $ 78,248,000     $ 74,841,000
Cost of goods sold..............................................................    36,902,000       47,685,000       45,894,000
                                                                                  ------------     ------------     ------------
Gross profit....................................................................    22,795,000       30,563,000       28,947,000

Selling, general and administrative expense.....................................    13,201,000       18,473,000       21,994,000
                                                                                  ------------     ------------     ------------
Operating income................................................................     9,594,000       12,090,000        6,953,000
Interest expense................................................................       997,000        2,151,000        2,920,000
Interest income.................................................................        21,000            4,000           31,000
                                                                                  ------------     ------------     ------------
Income before income taxes......................................................     8,618,000        9,943,000        4,064,000
Provision for income taxes......................................................     3,577,000        4,340,000        1,814,000
                                                                                  ------------     ------------     ------------
Income before extraordinary item and
      adoption of SAB 101 (Note 2)..............................................     5,041,000        5,603,000        2,250,000
Extraordinary item (net of tax benefit of $168,000) (Note 6)....................             -                -         (232,000)
Cumulative effect of adopting SAB 101 (Note 2)                                               -                -         (322,000)
                                                                                  ------------     ------------     ------------
Net income......................................................................  $  5,041,000     $  5,603,000     $  1,696,000
                                                                                  ============     ============     ============
Earnings per share:
Basic:
Income per share before extraordinary item and adoption of SAB 101..............  $       0.52     $       0.60     $       0.24
Extraordinary item..............................................................             -                -            (0.03)
Cumulative effect of adopting SAB 101 .........................................              -                -            (0.03)
                                                                                  ------------     ------------     ------------
Net income......................................................................  $       0.52     $       0.60     $       0.18
                                                                                  ============     ============     ============
Weighted average number of shares..............................................      9,737,392        9,322,249        9,216,163
Diluted:
Income per share before extraordinary item and adoption of SAB 101..............  $       0.51     $       0.58     $       0.24
Extraordinary item..............................................................             -                -
Cumulative effect of adopting SAB 101 .........................................              -                -            (0.03)
                                                                                  ------------     ------------     ------------
Net income......................................................................  $       0.51     $       0.58     $       0.18
                                                                                  ============     ============     ============
Weighted average number of shares including the dilutive effect of
   stock options (78,513,  276,305 and 275,261 for 1998, 1999 and
   2000, respectively)..........................................................     9,815,905        9,598,554        9,491,424

</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                       19
<PAGE>

                                 VDI MULTIMEDIA
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<S>                                                             <C>             <C>             <C>             <C>
                                                                    COMMON STOCK                                TOTAL
                                                                    ------------                RETAINED        SHAREHOLDERS'
                                                                SHARES          AMOUNT          EARNINGS        EQUITY
                                                                ------          ------          --------        ------

Balance at December 31, 1997, as previously reported......      $  9,580,000    $ 18,880,000    $  2,652,000    $ 21,532,000
Effect on periods prior to 1998 of restatement
to financial statements (Note 2)..........................                 -               -        (290,000)       (290,000)
Net income (as restated)..................................                 -               -       5,041,000       5,041,000
Shares issued in connection with company
acquisitions..............................................            30,770         342,000               -         342,000
Shares issued and tax benefit associated with
exercise of stock options.................................           165,324       1,726,000               -       1,726,000
                                                                ------------    ------------    ------------    ------------
Balance at December 31, 1998 (as restated)................         9,776,094      20,948,000       7,403,000      28,351,000
Net income (as restated)..................................                 -               -       5,603,000       5,603,000
Shares repurchased in connection with stock
repurchase plan...........................................          (572,700)     (3,064,000)              -      (3,064,000)
Shares issued in connection with exercise
of stock options..........................................             7,303          51,000               -          51,000
                                                                ------------    ------------    ------------    ------------
Balance at December 31, 1999 (as restated)................         9,210,697      17,935,000       3,006,000      30,941,000
Net income................................................                 -               -       1,696,000       1,696,000
Shares repurchased in connection with stock
repurchase plan...........................................          (171,400)       (710,000)              -        (710,000)
Shares issued and tax benefit associated with
exercise of stock options.................................            47,698         368,000               -         368,000
Shares issued in connection with company
acquisition...............................................            75,675         350,000               -         350,000
Non-cash compensation related to option
grants to consultants.....................................                 -         329,000               -         329,000
Distribution to shareholder (Note 1)......................                 -               -         (55,000)        (55,000)
                                                                ------------    ------------    ------------    ------------
Balance at December 31, 2000.................................   $  9,162,670    $ 18,272,000    $ 14,647,000    $ 32,919,000
                                                                ============    ============    ============    ============
</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                       20
<PAGE>

                                 VDI MULTIMEDIA
                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                YEAR ENDED DECEMBER 31,
                                                                                                -----------------------
<S>                                                                             <C>                <C>                <C>
                                                                                      1998               1999               2000
                                                                                      ----               ----               ----
                                                                                  (as restated)      (as restated)
Cash flows from operating activities:
Net income......................................................................$   5,041,000      $   5,603,000      $   1,696,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization...................................................    4,726,000          4,788,000          5,773,000
Provision for doubtful accounts.................................................       51,000            790,000          2,195,000
Abandonment of leasehold improvements...........................................            -            190,000                  -
Deferred income taxes ..........................................................     (297,000)           170,000            476,000
Noncash compensation charges....................................................            -                  -            329,000
Cumulative effect of adopting SAB 101...........................................            -                  -            322,000
Extraordinary item..............................................................            -                  -            232,000
Changes in assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable......................................       49,000         (3,297,000)         1,359,000
Decrease (increase) in inventories..............................................      185,000           (388,000)            91,000
(Increase) decrease in prepaid expenses and other current assets................     (195,000)            28,000         (1,108,000)
(Increase) decrease in other assets.............................................     (162,000)           109,000             (5,000)
(Decrease) increase in accounts payable.........................................   (1,995,000)         2,518,000          1,683,000
(Decrease) increase in accrued expenses.........................................   (1,906,000)         1,461,000           (668,000)
Increase in income taxes payable (receivable), net..............................      326,000             51,000         (1,412,000)
                                                                                -------------       ------------       ------------
Net cash provided by operating activities.......................................    5,821,000         12,023,000         10,963,000

Cash used in investing activities:
Capital expenditures............................................................   (6,199,000)        (6,181,000)        (9,717,000)
Net cash paid for acquisitions..................................................  (27,207,000)        (3,307,000)        (1,951,000)
                                                                                -------------       ------------        -----------
Net cash used in investing activities...........................................  (33,406,000)        (9,488,000)       (11,668,000)
                                                                                --------------      ------------        -----------
Cash flows from financing activities:
S Corporation distributions to shareholders.....................................            -                  -            (55,000)
Issuance of notes receivable....................................................            -                  -         (1,001,000)
Repurchase of common stock......................................................            -         (3,064,000)          (710,000)
Proceeds from exercise of stock options.........................................    1,157,000             51,000            256,000
Change in revolving credit agreement............................................     (853,000)         5,655,000         (5,888,000)
Deferred financing costs........................................................            -           (365,000)          (239,000)
Proceeds from bank note.........................................................   29,000,000          2,500,000         32,174,000
Repayment of notes payable......................................................   (1,846,000)        (5,819,000)       (25,892,000)
Repayment of capital lease obligations..........................................     (746,000)          (511,000)          (201,000)
                                                                                -------------       ------------        -----------
Net cash provided by (used in) financing activities.............................   26,712,000         (1,553,000)        (1,556,000)
                                                                                -------------       ------------        -----------
Net (decrease) increase in cash.................................................     (873,000)           982,000         (2,261,000)
Cash at beginning of period.....................................................    2,921,000          2,048,000          3,030,000
                                                                                -------------       ------------        -----------
Cash at end of period...........................................................$   2,048,000       $  3,030,000        $   769,000
                                                                                =============       ============        ===========
</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                       21
<PAGE>

                                 VDI MULTIMEDIA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       THE COMPANY:

         VDI MultiMedia  ("VDI" or the "Company")  provides video and film asset
management  services to owners,  producers and distributors of entertainment and
advertising  content.  The Company  provides  the  services  necessary  to edit,
master, reformat,  archive and distribute its clients' video content,  including
television  programming,  spot  advertising  and  movie  trailers.  The  Company
provides worldwide electronic  distribution,  using fiber optics and satellites.
The  Company  delivers  commercials,  movie  trailers,  electronic  press  kits,
infomercials and syndicated programming,  by both physical and electronic means,
to  thousands  of  broadcast  outlets  worldwide.  The  Company  operates in one
reportable segment.

         In February  1997,  the Company  completed the sale of a portion of its
common shares in an initial public offering ("IPO").  Prior to the offering, the
Company  had  elected  S-Corporation  status for  federal  and state  income tax
purposes.  As a result of the offering,  the  S-Corporation  status  terminated.
Thereafter,   the  Company  has  paid  federal  and  state  income  taxes  as  a
C-Corporation.  In connection with the termination of S-Corporation  status, the
Company made a final $55,000 distribution to a shareholder in Fiscal 2000, which
has been recorded as a reduction of retained earnings.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION

         The  consolidated  financial  statements  include  the  accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.

RECLASSIFICATIONS

         Certain  previously  reported  amounts have been restated to conform to
classifications adopted in 2000.

ADJUSTMENTS TO PRIOR PERIOD FINANCIAL STATEMENTS

         During 2000, the Company restated financial results of 1998 and 1999 to
reflect (i) expensing  repairs and maintenance  costs on equipment when incurred
rather than  capitalizing  such costs and depreciating them over future periods;
(ii)  depreciating  leasehold  improvements  over the  shorter of the  estimated
useful asset life or the remaining  lease term rather than ten years;  (iii) the
retroactive write off of undepreciated  leasehold  improvements to correspond to
certain lease termination  dates; and (iv) accrual of legal costs incurred for a
failed merger to the year in which the expenses were incurred;  and (v) increase
of tax provision for  nondeductible  items.  The  cumulative  effect on retained
earnings as of January 1, 1998 was a reduction  of $290,000,  net of tax,  which
related to the  expensing of repairs and  maintenance  costs in 1997 rather than
capitalizing and subsequently depreciating such costs. The adjustments to fiscal
1998 and 1999 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                 DECREASE INCOME
                                                                                 ---------------
                                                                BEFORE TAX BENEFIT              AFTER TAX BENEFIT
                                                                ------------------              -----------------
<S>                                                             <C>             <C>             <C>             <C>
ADJUSTMENTS TO PREVIOUSLY ISSUED                                FISCAL          FISCAL          FISCAL          FISCAL
   FINANCIAL STATEMENTS:                                        1998            1999            1998            1999
  ---------------------                                         ----            ----            ----            ----
To expense repairs and maintenance costs that were
     previously capitalized                                     $   448         $ 1,143         $  269          $    686
To depreciate leasehold improvements over the
     proper period and to write off any undepreciated
   amounts at the lease termination date                              -             221              -               133
To recognize merger expenses in the period incurred                   -             408              -               245
To revise the provision for income taxes                              -               -              -               180
                                                                -------         -------         -------          -------
Total                                                           $   448         $ 1,772         $   269          $ 1,244
                                                                =======         =======         =======          =======


(1)   Charged to cost of goods sold.
(2)   Charged  to cost of goods sold and  selling,  general  and  administrative
      expense.
(3)   Charged to selling, general and administrative expense.
</TABLE>
                                       22
<PAGE>

These adjustments  reduced net income and basic and diluted net income per share
for such years as follows:

                                                1998                 1999
                                                ----                 ----
Previously reported net income              $ 5,310,000         $ 6,847,000
Adjustments                                    (269,000)         (1,244,000)
                                            -----------          -----------
As adjusted                                 $ 5,041,000         $ 5,603,000
                                            ===========         ===========
Basic earnings per share:
Previously reported                         $      0.55         $      0.73
Adjustments                                       (0.03)             ( 0.13)
                                            -----------         -----------
As adjusted                                 $      0.52         $      0.60
                                            ===========         ===========
Diluted earnings per share:
Previously reported                         $      0.54         $      0.71
Adjustments                                       (0.03)              (0.13)
                                            -----------         -----------
As adjusted                                 $      0.51         $      0.58
                                            ===========         ===========


USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

         Cash equivalents  represent highly liquid  short-term  investments with
original maturities of less than three months.

REVENUES AND RECEIVABLES

         The Company  records  revenues when the services  have been  completed.
Although  sales  and  receivables  are  concentrated  in the  entertainment  and
advertising  industries,  credit  risk due to  financial  insolvency  is limited
because of the financial stability of the customer base (i.e., large studios and
advertising  agencies).  However, in 2000, the Company's  evaluation of accounts
receivable balances resulted in an increase in the reserve for doubtful accounts
of approximately $2.2 million which was related primarily to smaller entities.

         Effective  January  1,  2000,  the  Company  adopted  Staff  Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial  Statements.  The
effect of applying this Staff  Accounting  Bulletin has been  accounted for as a
change in accounting  principle,  with a cumulative charge of $322,000, or $0.03
per  share,  net of  tax  benefit  of  $233,000.  Previously,  the  Company  had
recognized revenues from certain post production services as work was performed.
Under SAB 101, the Company now recognizes  these revenues when all services have
been  completed.  As a result of adopting  SAB 101,  revenues  of $555,000  were
recognized in the year ended December 31, 2000 which were also recognized in the
year ended December 31, 1999.

         The table below sets forth pro forma net income and  earnings per share
data for the  periods  shown as if the  change  in  accounting  policy  had been
adopted at the beginning of each year. See Note 13 for  information on quarterly
data regarding the change in accounting policy.

                                                1998                 1999
                                                ----                 ----
Previously reported (A)                     $ 5,041,000         $ 5,603,000
Adjustment                                     (253,000)            (81,000)
                                            -----------         -----------
Pro forma                                   $ 4,788,000         $ 5,522,000
                                            ===========         ===========
Pro forma  earnings per share:
Basic -
Previously reported (A)                     $      0.52         $      0.60
Adjustment                                        (0.03)                  -
                                            -----------         -----------
Pro forma                                   $      0.49         $      0.60
                                            ===========         ===========
Diluted -
Previously reported (A)                     $      0.51         $      0.58
Adjustment                                        (0.03)              (0.01)
                                            -----------         -----------
Pro forma                                   $      0.48         $      0.57
                                            ===========         ===========


(A)   After retroactive adjustments described above.

                                       23
<PAGE>

INVENTORIES

         Inventories  comprise raw materials,  principally  tape stock,  and are
stated at the lower of cost or market. Cost is determined using the average cost
method.

PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost.  Expenditures  for additions
and major  improvements  are  capitalized.  Depreciation  is computed  using the
straight-line  method over the  estimated  useful  lives of the related  assets.
Amortization  of  leasehold  improvements  is computed  using the  straight-line
method over the lesser of the estimated  useful lives of the improvements or the
remaining  lease term.  The  estimated  useful life of property and equipment is
seven years and leasehold improvements are ten years.

         Effective  January 1, 1999, the Company  changed its estimate of useful
lives of property and equipment.  During 1998 and prior, the Company depreciated
property and equipment over five years. In 1999, the Company began  depreciating
its property and  equipment  over seven years.  The Company  believes  that this
change best  reflects  the future  benefit of property  and  equipment.  Had the
Company not changed its  estimate  of useful  lives,  it would have  resulted in
approximately $1,400,000 of additional depreciation expense in 1999.

GOODWILL AND OTHER INTANGIBLES

         Goodwill is amortized  on a  straight-line  basis over 20 years.  Other
intangibles consist primarily of covenants not to compete and are amortized on a
straight-line basis over 3-5 years.

         The Company  identifies  and records  impairment  losses on  long-lived
assets,  including  goodwill that is not identified with an impaired asset, when
events and circumstances indicate that such assets might be impaired. Events and
circumstances  that may indicate that an asset is impaired  include  significant
decreases in the market value of an asset,  a change in the  operating  model or
strategy and competitive forces.

         If events and  circumstances  indicate  that the carrying  amount of an
asset may not be  recoverable  and the  expected  undiscounted  future cash flow
attributable  to the asset is less than the  carrying  amount of the  asset,  an
impairment loss equal to the excess of the asset's  carrying value over its fair
value is  recorded.  Fair  value is  determined  based on the  present  value of
estimated expected future cash flows using a discount rate commensurate with the
risk involved, quoted market prices or appraised values, depending on the nature
of the assets. To date, no such impairment has been recorded.

INCOME TAXES

         The Company  accounts for income taxes in accordance  with Statement of
Financial  Accounting  Standards  No. 109,  "Accounting  for Income Taxes" ("FAS
109").  FAS 109 requires the  recognition of deferred tax assets and liabilities
for the expected future tax  consequences of temporary  differences  between the
carrying  amounts for financial  reporting  purposes and the tax basis of assets
and liabilities.  A valuation allowance is recorded for that portion of deferred
tax assets  for which it is more  likely  than not that the  assets  will not be
realized.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial  Instruments," the
Company  calculates  the fair value of financial  instruments  and includes this
additional  information in the notes to financial statements when the fair value
is different than the book value of those financial  instruments.  When the fair
value is equal to the book value, no additional  disclosure is made. The Company
uses quoted market prices whenever available to calculate these fair values.

         The accrual  method of  accounting  is used for the interest  rate swap
agreement  entered into by the Company  which  converts the interest rate on $15
million of the Company's  variable-rate debt to a fixed rate (see Note 6). Under
the accrual method, each net payment or receipt due or owed under the derivative
is recognized  in income in the period to which the payment or receipt  relates.
Amounts  to  be  paid/received  under  these  agreements  are  recognized  as an
adjustment to interest expense.  The related amounts payable  to/receivable,  if
any,  from the counter  parties are included in other accrued  liabilities.  The
estimated  fair value of the  interest  rate swap  agreement is a net payable of
$309,000 at December 31, 2000.

                                       24
<PAGE>

ACCOUNTING FOR STOCK-BASED COMPENSATION

         As permitted by Statement of Financial  Accounting  Standards  No. 123,
Accounting  for  Stock-Based  Compensation  ("FAS  123"),  the Company  measures
compensation  costs in accordance with Accounting  Principles  Board Opinion No.
25, Accounting for Stock Issued to Employees, but provides pro forma disclosures
of net income and earnings per share using the fair value method  defined by FAS
123.  Under APB No. 25,  compensation  expense is  recognized  over the  vesting
period based on the difference,  if any, on the date of grant between the deemed
fair value for accounting purposes of the Company's stock and the exercise price
on the date of grant.  The Company accounts for stock issued to non-employees in
accordance  with the  provisions of SFAS No. 123 and Emerging  Issues Task Force
("EITF") 96-18,  Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods and Services.

EARNINGS PER SHARE

         The Company  follows  Statement of Financial  Accounting  Standards No.
128,  Earnings per Share ("FAS 128") and related  interpretations  for reporting
Earnings per Share.  FAS 128 requires dual  presentation  of Basic  Earnings per
Share ("Basic EPS") and Diluted  Earnings per Share ("Diluted  EPS").  Basic EPS
excludes dilution and is computed by dividing net income by the weighted average
number of common  shares  outstanding  during the reported  period.  Diluted EPS
reflects the potential dilution that could occur if stock options were exercised
using the treasury stock method.

COMPREHENSIVE INCOME

         In 1998,  the Company  adopted  Statement  of SFAS No. 130,  "Reporting
Comprehensive  Income." This Statement  establishes  standards for the reporting
and  display  of  comprehensive  income  and  its  components  in a full  set of
general-purpose financial statements. The implementation of SFAS No. 130 did not
have an impact on the Company's results of operations.

SUPPLEMENTAL CASH FLOW INFORMATION

         Selected cash payments and noncash activities were as follows:
<TABLE>
<CAPTION>

<S>                                                     <C>             <C>             <C>
                                                            1998            1999            2000
                                                            ----            ----            ----
Cash payments for income taxes                          $ 3,779,000     $  4,154,000    $  2,447,000
Cash payments for interest                                  997,000        2,151,000       2,920,000

Noncash investing and financing activities:
Capitalized lease obligations incurred                            -           57,000               -
Tax benefits related to stock options                       569,000                -         112,000

Detail of acquisitions:
Fair value of assets, net of cash acquired               14,031,000                -         147,000
Goodwill (1)                                             16,322,000        3,307,000       2,515,000
Liabilities (2)                                          (3,145,000)               -        (711,000)
                                                        -----------     ------------    ------------
Net cash paid for acquisitions                          $27,207,000     $  3,307,000    $  1,951,000
                                                        ===========     ============    ============
</TABLE>

(1)   Includes  additional  purchase  price  payments  made to former  owners in
      periods subsequent to various  acquisitions of $1,157,000,  $3,307,000 and
      $1,353,000 in 1998, 1999 and 2000, respectively.

(2)   Includes  common  stock  issued to sellers  totaling  $342,000 in 1998 and
      $350,000 in 2000.

                                       25
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

         On June 15,  1998,  the  Financial  Accounting  Standards  Board (FASB)
issued  Statement of Financial  Accounting  Standards  No. 133,  Accounting  for
Derivative  Instruments  and Hedging  Activities.  The  standard,  as amended by
Statement of Financial  Accounting  Standards No. 137, Accounting for Derivative
Instruments  and  Hedging  Activities  Deferral  of the  Effective  Date of FASB
Statement  No. 133, an amendment  of FASB  Statement  No. 133, and  Statement of
Financial  Accounting  Standards  No. 138,  Accounting  for  Certain  Derivative
Instruments and Certain Hedging  Activities,  an amendment of FASB Statement No.
133 (referred to hereafter as "FAS 133"),  is effective for all fiscal  quarters
of all fiscal  years  beginning  after June 15,  2000  (January  1, 2001 for the
Company).  FAS 133 requires that all  derivative  instruments be recorded on the
balance sheet at their fair value.  Changes in the fair value of derivatives are
recorded  each  period in current  earnings  or in other  comprehensive  income,
depending  on  whether  a  derivative   is  designated  as  part  of  a  hedging
relationship and, if it is, depending on the type of hedging  relationship.  The
Company estimates that the effect of adopting FAS 133 on January 1, 2001 will be
to record a net-of-tax  cumulative-effect-type  adjustment of $179,000 (loss) in
earnings.

         In March 2000,  the  Financial  Accounting  Standards  Board,  or FASB,
issued  FASB   Interpretation   No.  44  ("FIN  44"),   Accounting  for  Certain
Transactions Involving Stock Compensation - an Interpretation of APB Opinion No.
25. FIN 44 clarifies  the  application  of APB Opinion No. 25 ("APB 25") for (a)
the  definition of an employee for purposes of applying APB 25, (b) the criteria
for  determining  whether a plan qualifies as a  non-compensatory  plan, (c) the
accounting  consequence  of various  modifications  to the terms of a previously
fixed stock  option or award,  and (d) the  accounting  for an exchange of stock
compensation awards in a business  combination.  FIN 44 became effective July 1,
2000,  but certain  conclusions  cover  specific  events that occur after either
December  15, 1998,  or January 12, 2000.  The adoption of FIN 44 did not have a
significant impact on the Company's financial position, results of operations or
cash flows.

3. ACQUISITIONS

         On  November  3, 2000,  the  Company  acquired  the assets and  assumed
certain liabilities of Creative Digital, Inc. ("Creative Digital"). The purchase
price of the  transaction  was  approximately  $1,309,000.  This amount included
$500,000 paid in cash, $98,000 in estimated  transaction costs and 75,675 shares
of VDI common stock valued at $350,000.  The acquisition was accounted for using
the purchase method of accounting.  The purchase price was allocated to the fair
value of net assets of $147,000 and  goodwill of  $1,162,000.  Creative  Digital
provides  colorization,  editing,  and other post  production  services to major
motion picture studios and television producers.  The Company may also pay up to
an  additional  $3,000,000  in earn-out  payments if Creative  Digital  achieves
certain performance goals through 2005. No earn-out amounts have been paid as of
December 31, 2000.

         On November  9, 1998,  the Company  acquired  substantially  all of the
assets  of  Dubs,  Inc.  ("Dubs").   Dubs  provides  full  service  duplication,
distribution,  video  content  storage and  ancillary  services to major  motion
picture  studios and  independent  production  companies  for both  domestic and
international use. As consideration, the Company paid Dubs $11,312,000, of which
$10,437,000 was paid in 1998 and $875,000 was paid in 1999.

         On June 12, 1998, the Company acquired  substantially all of the assets
of All Post,  Inc.  ("All Post).  All Post  provides  full service  duplication,
distribution,  video  content  storage and  ancillary  services to major  motion
picture  studios and  independent  production  companies  for both  domestic and
international  use. As  consideration,  the Company paid All Post $13,000,000 in
1998.

         On June 9,  1998,  the  Company  acquired  all of the assets of the Dub
House,  Inc.  ("Dub  House").  The Dub  House  distributes  broadcast  media for
advertising agencies, independent producers and other broadcast media providers.
As  consideration,  the Company paid the owners of the Dub House  $1,561,000  in
1998.

         On November  21,  1997,  the Company  acquired  all of the  outstanding
shares of Fast Forward,  Inc. ("Fast Forward"),  a provider of video duplication
and distribution  services primarily to advertising agencies and post production
companies.  The  purchase  price  consisted  of  $1,400,000  of  cash,  of which
$1,150,000 was paid during 1998, 30,770 shares of common stock which were issued
in December  31, 1997 and  earn-out  payments of up to $600,000  based upon Fast
Forward  attaining  certain  performance  goals  through  December  2000.  As of
December 31, 2000, the Company has paid $405,000 in earn-out payments.

                                       26
<PAGE>

         In August 1997,  the Company  acquired all of the  outstanding  capital
stock of Multi-Media Services,  Inc.  ("Multi-Media").  Multi-Media  principally
provides  video  duplication,   distribution,   and  content  storage  to  major
advertising  agencies.  Through  the  acquisition  of  Multi-Media,  the Company
acquired  facilities in Los Angeles,  Chicago,  New York and San Francisco.  The
purchase price paid by the Company for Multi-Media was $6,867,000 (including the
immediate repayment of $1,545,000 of indebtedness). In addition, the Company may
be required to pay, as an  earn-out,  up to an  aggregate  of  $2,000,000,  plus
interest  from the closing date,  in the event that  Multi-Media,  as a separate
subsidiary of the Company,  achieves  certain  financial goals through  December
2002. If  Multi-Media  fails to achieve the targeted  results in any  particular
quarter, the related earn-out payment will be deferred up to two years until the
results are achieved. No earn-out payments will be made after December 31, 2004.
As of December 31, 2000, the Company has paid $639,000 in earn-out payments.

         On January 1, 1997, the Company  acquired all of the assets and certain
liabilities  of Woodholly  Productions  ("Woodholly").  Woodholly  provides full
service video duplication,  distribution, content storage and ancillary services
to major motion picture studios, advertising agencies and independent production
companies for both domestic and international use. As consideration, the Company
will pay the partners of Woodholly a maximum of $8,000,000,  of which $4,000,000
was  paid in  January  1997.  The  remaining  balance  is  subject  to  earn-out
provisions that are predicated upon Woodholly attaining certain operating income
goals, as set forth in the purchase  agreement in each quarter through  December
31, 2001. As of December 31, 2000,  the Company has paid  $2,877,000 in earn-out
payments.

         The above acquisitions were accounted for as purchases, with the excess
of the purchase price over the fair value of the net assets  acquired  allocated
to goodwill.  The  contingent  purchase  price,  to the extent  earned,  will be
recorded as an increase to goodwill  and will be  amortized  over the  remaining
useful life of the goodwill. As of December 31, 2000, based on prior performance
of the applicable  acquired entities,  there can be no assurance that additional
earn-out amounts will be paid. The consolidated financial statements reflect the
operations of the acquired  companies since their respective  acquisition dates.
Pro forma results of  operations  have not been  presented for Creative  Digital
because the effect of this acquisition would not be significant.

         Goodwill and other intangibles, net consist of the following:
<TABLE>
<CAPTION>

                                                         December 31,
<S>                                             <C>                       <C>
                                                1999                      2000
                                                ----                      ----
Goodwill                                   $  28,394,000             $  30,889,000
Covenant not to compete                          942,000                   962,000
                                           -------------             -------------
                                           $  29,336,000             $  31,851,000
Less accumulated amortization                 (2,826,000)               (4,464,000)
                                           --------------            -------------
                                           $  26,510,000             $  27,387,000
                                           =============             =============
</TABLE>

         Amortization  expense totaled  $954,000,  $1,581,000 and $1,638,000 for
the periods ended December 31, 1998, 1999 and 2000, respectively.


                                       27
<PAGE>

4.   PROPERTY AND EQUIPMENT:

         Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                1999                      2000
                                                ----                      ----
                                           (as restated)

<S>                                        <C>                       <C>
Machinery and equipment                   $  24,596,000              $  32,615,000
Leasehold improvements                        6,789,000                  7,304,000
Equipment under capital lease                 2,220,000                  2,220,000
Computer equipment                            1,920,000                  3,165,000
                                          -------------              -------------
                                             35,525,000                 45,304,000
Less accumulated depreciation and
amortization                                (15,961,000)               (20,068,000)
                                          -------------              -------------
                                          $  19,564,000              $  25,236,000
                                          =============              =============

</TABLE>
         Depreciation expense totaled $3,772,000,  $3,207,000 and $4,135,000 for
the periods ended December 31, 1998, 1999 and 2000, respectively.

5.   REVOLVING CREDIT AGREEMENT:

         On December 31, 1999,  the Company had a  $6,000,000  revolving  credit
agreement  with a bank.  The  outstanding  borrowing  on this line of credit was
$5,888,000  at December 31,  1999.  The Company  repaid all amounts  outstanding
under the agreement in 2000.

6.   LONG TERM DEBT AND NOTES PAYABLE:

TERM LOANS

         In November 1998, the Company borrowed  $29,000,000 on a term loan with
a bank,  payable in 60 monthly  installments  of  $483,000  plus  interest.  The
Company had $22,233,000  outstanding on this loan at December 31, 1999. The term
loan was repaid in 2000 with the proceeds of a new borrowing  arrangement with a
group  of  banks.   Deferred  financing  costs  related  to  the  term  loan  of
approximately  $232,000,  net of tax  benefit  of  $168,000,  were  concurrently
written off and treated as an extraordinary item during Fiscal 2000.

         During 1999,  the Company  established a $2,500,000  note with the same
bank. At December 31, 1999, the Company had $2,500,000 outstanding on this note.
This note was repaid in 2000.

REVOLVING CREDIT

         In  September  2000,  the  Company  entered  into  a  credit  agreement
("Agreement")  with a group of banks providing a revolving credit facility of up
to $45,000,000.  The purpose of the facility was to repay previously outstanding
amounts under a prior  agreement with a bank,  fund working  capital and capital
expenditures and for general  corporate  purposes  including up to $5,000,000 of
stock repurchases under the Company's repurchase program. The Agreement provides
for interest at the banks' reference rate, the federal funds effective rate plus
0.5%,  or  a  LIBOR   adjusted   rate.   Loans  made  under  the  Agreement  are
collateralized by substantially all of the Company's assets.  The borrowing base
under the Agreement is limited to 90% of eligible  accounts  receivable,  50% of
inventory  and 100% of operating  machinery  and  equipment,  which  percentages
decline after 2001 for  receivables  and equipment (as of December 31, 2000, the
borrowing  base was  $30,965,000).  The  Agreement  provides  that the aggregate
commitment  will  decline by  $5,000,000  on each  December 31 beginning in 2002
until expiration of the entire commitment on December 31, 2005.

         The  Agreement  also contains  covenants  requiring  certain  levels of
annual earnings before interest,  taxes,  depreciation and amortization (EBITDA)
and net worth,  and limits the amount of capital  expenditures.  At December 31,
2000,  the Company had borrowed  $31,024,000  under the Agreement and was not in
compliance with certain financial covenants due to adjustments recorded to prior
years' and 2000  results (see Note 2). The bank has waived  compliance  with the
covenants and the Company has renegotiated the breached financial covenants.

                                       28
<PAGE>

INTEREST RATE SWAP

         The Company entered into an interest rate swap  transaction with a bank
on November  28,  2000.  The swap  transaction  was for a  notational  amount of
$15,000,000  for three years and fixes the interest  rate paid by the Company on
such amount at 6.50%, plus the applicable LIBOR margin, not to exceed 2.75%. The
financial impact of the interest rate swap agreement in 2000 was immaterial.

EQUIPMENT FINANCING AND CAPITAL LEASES

         The Company has financed the purchase of certain  equipment through the
issuance of notes payable and under capital leasing arrangements. The notes bear
interest at rates ranging from 6.10% to 18.35%.  Such obligations are payable in
monthly installments through November 2002.

         Annual  maturities for debt, under both the Agreement and capital lease
obligations as of December 31, 2000, are as follows:


        2001................................ $     54,000
        2002................................       30,000
        2003................................            -
        2004................................    1,024,000
        2005................................   30,000,000
                                             ------------
                                             $ 31,108,000
                                             ============


7.   INCOME TAXES:

         The  Company's  provision  for income  taxes for the three  years ended
December 31, 2000 consists of the following:
<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                --------------------------------------------
                                                    1998            1999            2000
                                                    ----            ----            ----
                                                (as restated)   (as restated)
Current tax expense:
<S>                                             <C>             <C>             <C>
Federal.................................        $  3,025,000    $  3,201,000    $    683,000
State...................................             849,000         969,000         254,000
                                                ------------    ------------    ------------
Total current...........................           3,874,000       4,170,000         937,000

Deferred tax (benefit) expense:
Federal.................................            (278,000)        107,000         416,000
State...................................             (19,000)         63,000          60,000
                                                ------------    ------------    ------------
Total deferred..........................            (297,000)        170,000         476,000
                                                ------------    ------------    ------------
Total provision for income taxes........        $  3,577,000    $  4,340,000    $  1,413,000
                                                ============    ============    ============
</TABLE>

         The following is a  reconciliation  of the  components of the provision
for income taxes for Fiscal 2000:


Provision for income taxes per the income statement             $  1,814,000
Extraordinary item tax benefit                                      (168,000)
Cumulative effect tax benefit of adopting SAB 101                   (233,000)
                                                                ------------
Total provision for income taxes                                $  1,413,000
                                                                ============

                                       29
<PAGE>

         The  composition of the deferred tax assets  (liabilities)  at December
31, 1999 and December 31, 2000 are listed below.

<TABLE>
<CAPTION>
                                                            1999            2000
                                                            ----            ----
                                                        (as restated)

<S>                                                     <C>             <C>
Accrued liabilities...............................      $    811,000    $    617,000
Allowance for doubtful accounts...................           416,000         631,000
Other.............................................            32,000         326,000
                                                        ------------    ------------
Total current deferred tax assets.................         1,259,000       1,574,000
                                                        ------------    ------------
Property and equipment............................         (327,000)      (2,212,000)
Non deductible goodwill and other intangibles ....         (162,000)        (138,000)
Other.............................................                -           79,000
                                                        -----------     ------------
Total non-current deferred tax liabilities........         (489,000)      (2,271,000
                                                        -----------     ------------
Net deferred tax asset (liability)................      $   770,000     $   (697,000)
                                                        ===========     ============
</TABLE>

         The  provision  for income taxes  differs from the amount of income tax
determined  by applying  the  applicable  U.S.  Statutory  income taxes rates to
income before taxes as a result of the following differences:

                                                            1999            2000
                                                            ----            ----
Federal tax computed at statutory rate............           34%             34%
State taxes, net of federal benefit...............            6%              6%
Non-deductible goodwill...........................            1%              5%
Other.............................................            3%              1%
                                                            ----            ----
                                                             44%             46%
                                                            ====            ====

8. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

         The Company  leases office and  production  facilities  in  California,
Illinois, Texas and New York under various operating leases. Approximate minimum
rental payments under these  noncancellable  operating leases as of December 31,
2000 are as follows:


        2001........................... $  3,035,000
        2002...........................    2,984,000
        2003...........................    2,586,000
        2004...........................    2,188,000
        2005...........................    1,600,000
        Thereafter.....................    3,262,000
                                        ------------
                                        $ 15,655,000

         Total  rental  expense was  approximately  $2,460,000,  $3,251,000  and
$3,206,000  for  the  three  years  in  the  period  ended  December  31,  2000,
respectively.

9.   STOCK REPURCHASE PLAN:

         In February 1999, the Company  announced that it would commence a stock
repurchase  program.  The  Company  did not set a target  number of shares to be
repurchased.  Instead,  the board  authorized  the  Company  to  allocate  up to
$4,000,000  to purchase its common stock at suitable  market  prices.  Under the
stock repurchase  program,  the Company may purchase  outstanding shares in such
amounts  and at such  times and  prices  determined  at the sole  discretion  of
management.

         The funds for the stock  repurchases  were  provided by an amendment to
the Company's  existing credit agreement with a bank. There is no assurance that
the Company will repurchase the entire  $4,000,000 of common stock.  During 1999
and 2000,  the Company  repurchased  $3,064,000  and  $710,000 of common  stock,
respectively.

                                       30
<PAGE>

10.  STOCK INCENTIVE PLAN:

         In May 1996, the Board of Directors,  approved the 1996 Stock Incentive
Plan (the  "1996  Plan").  The 1996 Plan  provides  for the award of  options to
purchase up to 900,000  shares of common  stock,  as well as stock  appreciation
rights,  performance share awards and restricted stock awards. In July 1999, the
Company's  shareholders  approved an amendment to the 1996 Plan  increasing  the
number of shares  reserved for grant to 2,000,000  and  providing  for automatic
increases  of  300,000  shares  on each  August 1  thereafter  to a  maximum  of
4,000,000  shares.  As of  December  31,  2000,  there  were  1,940,000  options
outstanding under the 1996 Plan and 440,000 options were available for grant.

         In December  2000,  the Company's  Board of Directors  adopted the 2000
Nonqualified  Stock  Option Plan (the "2000  Plan")  providing  for the award of
options to  purchase  up to  2,000,000  shares of common  stock.  Options may be
granted  under the 2000 Plan  solely to attract  people who have not  previously
been employed by the Company as a substantial inducement to join the Company. As
of December 31, 2000, there were 957,000 options  outstanding under the plan and
1,043,000 options were available for grant.

         Under both plans,  the stock option price per share for options granted
is  determined by the Board of Directors and is based on the market price of the
Company's  common  stock on the date of grant,  and each  option is  exercisable
within the period and in the increments as determined by the Board,  except that
no option can be  exercised  later than ten years from the date it was  granted.
The stock  options  generally  vest over one to five years and for some options,
earlier  if the market  price of the  Company's  common  stock  exceeds  certain
levels.

         In  accounting  for its plans,  the  Company,  in  accordance  with the
provisions  of FAS 123,  applies  Accounting  Principles  Board  Opinion No. 25,
"Accounting  for Stock Issued to Employees."  As a result of this election,  the
Company does not recognize compensation expense for its stock option plans since
the exercise price of the options  granted equals the fair value of the stock on
the date of grant.  Had the Company  determined  compensation  cost based on the
fair value for its stock  options at grant date, as set forth under FAS 123, the
Company's  net income and earning  per share would have been  reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>

                                                    1998            1999            2000
                                                    ----            ----            ----
Net income:
<S>                                             <C>             <C>             <C>
As reported..................................   $ 5,041,000     $ 5,603,000     $ 1,696,000
Pro forma....................................     4,888,000       4,993,000         731,000
Earnings per share:
As reported:
Basic........................................          0.52            0.60            0.18
Diluted......................................          0.51            0.58            0.18
Pro forma:
Basic........................................          0.50            0.54            0.08
Diluted......................................          0.50            0.52            0.08
</TABLE>

         The fair value for these  options was estimated at the grant date using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions used for grants in 1999 and 2000, respectively:  expected volatility
of 63% and 70% and risk-free interest rates of 5.28% and 5.59%. A dividend yield
of 0% and expected life of five years was assumed for 1999 and 2000 grants.  The
weighted  average fair value of options  granted in 1999 and 2000 were $4.37 and
$2.35, respectively. No options were granted during 1998.


                                       31
<PAGE>

         Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
                                                          NUMBER      WEIGHTED AVERAGE
                                                        OUTSTANDING     EXERCISE PRICE
                                                        -----------     --------------
<S>                                                     <C>             <C>
Balance at December 31, 1997........................       337,660      $   7.12

Exercised during 1998...............................      (165,324)         7.00
Cancelled during 1998...............................       (13,105)         7.00
                                                         ---------      --------
Balance at December 31, 1998........................       159,231      $   7.24
                                                         ---------      --------
Granted during 1999.................................     1,295,437          7.51
Exercised during 1999...............................        (7,303)         7.00
Cancelled during 1999...............................      ( 39,044)         7.00
                                                        ----------      --------
Balance at December 31, 1999........................     1,408,321      $   7.50
                                                        ----------      --------
Granted during 2000.................................     1,779,100          3.76
Exercised during 2000...............................       (47,698)         5.37
Cancelled during 2000...............................      (242,716)         6.12
                                                        ----------      --------
Balance at December 31, 2000........................     2,897,007      $   5.43
                                                        ==========      ========
</TABLE>

         The Company  granted  212,500  stock options to  consultants  in Fiscal
2000,  of which  100,000 were vested as of December 31, 2000.  The fair value of
the vested options  estimated at the grant date using the  Black-Scholes  option
pricing model  following the assumptions  mentioned  above was $329,000.  During
Fiscal 2000,  $151,000 was  attributable  to services  related to the  revolving
credit  agreement,  accordingly,  such  amount  was  capitalized  as a  deferred
financing cost to be amortized over the five-year life of a new credit agreement
(see Note 6), and $178,000 was expensed as a consulting cost.

         Additional  information  with respect to the outstanding  options as of
December 31, 2000 is as follows (shares in thousands):
<TABLE>
<CAPTION>

                                         OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                        -------------------------------------------------------   ---------------------------

                                               AVERAGE
    OPTION EXERCISE                           REMAINING        WEIGHTED AVERAGE    NUMBER OF       AVERAGE
     PRICE RANGE        NUMBER OF SHARES   CONTRACTUAL LIFE     EXERCISE PRICE      SHARES      EXERCISE PRICE
     -----------        ----------------   ----------------     --------------      ------      --------------
   <S>                     <C>                <C>                  <C>            <C>          <C>
   $ 3.75 to 5.38            2,167              9.4                $  3.93            250          $  4.24
     7.00 to 10.00             543              8.1                   8.38            235             8.10
    10.75  to 15.00            187              8.3                  14.48             69            14.13
                             -----                                                    ---
                             2,897                                                    554
                             =====                                                    ===
</TABLE>

11.  SALES TO MAJOR CUSTOMER:

         Sales to a  single  customer  were  $7,824,000  in 1998.  No sales to a
single customer were more than ten percent of sales for 1999 and 2000.

12.      NOTES RECEIVABLE FROM OFFICERS:

         At December 31, 2000,  the Company had a loan  outstanding to its Chief
Executive Officer totaling $850,000,  including accrued interest of $30,000. The
loan is  collateralized  by a trust deed and bears  interest at a rate of 6.19%.
The loan is due on or before August 20, 2001.

         At December 31, 2000, the Company also had a $151,000 loan  outstanding
to one of its Division  Presidents,  including accrued interest of $1,000.  This
loan is  collateralized  by 75,675 shares of the Company's common stock owned by
the Division President and bears interest at a rate of 7%. The loan is due on or
before November 15, 2002.

                                       32
<PAGE>

13.  SUPPLEMENTAL DATA (UNAUDITED)

         The following tables set forth quarterly supplementary data for each of
the years in the two-year  period ended  December 31, 2000 (in thousands  except
per  share  data).  The  amounts  have been  restated  from  amounts  previously
reported,  as  indicated.  A  reconciliation  from amounts  previously  reported
appears at the end of each table.
<TABLE>
<CAPTION>
                                                                                2000
                                                                            QUARTER ENDED
                                                        MARCH 31        JUNE 30         SEPT 30         DEC 31
                                                        --------        -------         -------         ------
                                                      (as restated)   (as restated)   (as restated)
<S>                                                     <C>             <C>             <C>             <C>
Revenues...........................................     $  19,090       $  18,480       $  18,121       $  19,150
Gross Profit (1)...................................         8,205           7,159           6,708           6,875
Income before extraordinary item and
adoption of SAB 101................................         1,287             786             812            (635)
Extraordinary item, net of $168 tax benefit (2) ...             -               -            (232)              -
Cumulative effect of adopting SAB 101 (3)..........          (322)              -               -               -
                                                        ---------       ---------       ---------       ---------
Net income (loss)..................................     $     965       $     786       $     580       $    (635)
                                                        =========       =========       =========       =========
EARNINGS PER SHARE:
Basic -
Income per share before extraordinary item
and adoption of SAB 101............................     $    0.14       $    0.09       $    0.09       $   (0.07)
Extraordinary item (2).............................             -               -           (0.03)              -
Cumulative effect of adopting SAB 101 (3)..........         (0.04)              -               -               -
                                                        ---------       ---------       ---------       ---------
Net income (loss)..................................     $    0.10       $    0.09       $    0.06       $   (0.07)
                                                        =========       =========       =========       =========
Diluted -
Income per share before extraordinary item
and adoption of SAB 101............................     $    0.13       $    0.08       $    0.09       $   (0.07)
Extraordinary item (2).............................             -               -           (0.03)              -
Cumulative effect of adopting SAB 101 (3)..........         (0.03)              -               -               -
                                                        ---------       ---------       ---------       ---------
Net income (loss)..................................     $    0.10       $    0.08       $    0.06       $   (0.07)
                                                        =========       =========       =========       =========
</TABLE>


                                       33
<PAGE>

Reconciliation from net income amounts previously reported:
<TABLE>
<CAPTION>
                                                                                        EFFECT OF
                                                      AS PREVIOUSLY                     ADOPTING
                                                        REPORTED      ADJUSTMENTS (1)   SAB 101 (3)    AS RESTATED
                                                        --------      ---------------   -----------    -----------
Quarter ended March 31, 2000:
<S>                                                     <C>            <C>              <C>             <C>
Revenues........................................        $  19,181       $       -       $     (91)      $  19,090
Gross profit....................................            8,349             (53)(5)         (91)          8,205
Income before adoption of SAB 101...............            1,140             200 (6)         (53)(7)       1,287
Cumulative effect of adopting SAB 101 (3).......                -               -            (322)           (322)
Net income......................................        $   1,140       $     200       $    (375)      $    (965)
                                                        =========       =========       =========       =========
Earnings per share
Basic -
Income per share before
adoption of SAB 101.............................        $    0.12       $    0.02       $       -       $    0.14
Cumulative effect of adopting SAB 101 (3).......                -               -           (0.04)          (0.04)
                                                        ---------       ---------       ---------       ---------
Net income......................................        $    0.12       $    0.02       $   (0.04)      $    0.10
                                                        =========       =========       =========       =========
Diluted -
Income per share before
adoption of SAB 101.............................        $    0.12       $    0.02       $    (0.01)     $    0.13
Cumulative effect of adopting SAB 101 (3).......                -               -            (0.03)         (0.03)
                                                        ---------       ---------       ----------      ---------
Net income......................................        $    0.12       $    0.02       $    (0.04)     $    0.10
                                                        =========       =========       ==========      =========
Quarter ended June 30, 2000
Revenues........................................        $  18,430       $       -       $       50      $  18,480
Gross profit....................................            7,631            (522)(5)           50          7,159
Net income......................................        $   1,063       $    (306)      $       29      $     786
                                                        =========       =========       ==========      =========
Earnings per share
Basic...........................................        $    0.12       $   (0.03)      $        -      $    0.09
Diluted.........................................        $    0.11       $   (0.03)      $        -      $    0.08
                                                        =========       =========       ==========      =========
Quarter ended September 30, 2000
Revenues........................................        $  18,004       $       -       $      117      $  18,121
Gross profit....................................            7,022            (431)(5)          117          6,708
Income before extraordinary item................              771             (76)             117            812
Extraordinary item, net of $168 tax benefit (2).                -            (232)               -           (232)
Net income......................................        $     771       $    (259)      $       68      $     580
                                                        =========       =========       ==========      =========
Earnings per share
Basic -
Income per share before extraordinary item......        $    0.08       $       -       $     0.01      $    0.09
Extraordinary item (2)..........................                -           (0.03)               -          (0.03)
                                                        ---------       ---------       ----------      ---------
Net income......................................        $    0.08       $   (0.03)      $     0.01      $    0.06
                                                        =========       =========       ==========      =========
Diluted -
Income per share before extraordinary item......        $    0.08       $       -       $     0.01      $    0.09
Extraordinary item (2)..........................                -           (0.03)               -          (0.03)
                                                        ---------       ---------       ----------      ---------
Net income......................................        $    0.08       $   (0.03)      $     0.01      $    0.06
                                                        =========       =========       ==========      =========
</TABLE>
                                       34
<PAGE>
<TABLE>
<CAPTION>
                                                                         1999
                                                                         ----
                                                                     QUARTER ENDED
                                                                     -------------                            YEAR ENDED
                                                MARCH 31        JUNE 30         SEPT 30         DEC 31          DEC 31
                                                 --------        -------         -------         ------          ------
                                               (as restated)   (as restated)   (as restated)   (as restated)   (as restated)

<S>                                             <C>             <C>             <C>             <C>             <C>
Revenues..................................      $  19,784       $  18,657       $  20,366       $  19,441       $  78,248
Gross Profit..............................          7,778           7,669           7,454           7,662          30,563
Net income................................          1,294           1,609           1,495           1,205           5,603

Earnings per share:
Basic.....................................           0.13            0.17            0.16            0.13            0.60
Diluted...................................           0.13            0.17            0.16            0.12            0.58

Reconciliation from net income
amounts previously reported:
Previously reported.......................      $   1,595       $    1,832      $   1,852       $   1,568       $   6,847
Adjustments (1)...........................           (301)            (222)          (357)           (363)         (1,244)
                                                ---------       ----------      ---------       ---------       ---------
As adjusted...............................          1,294            1,609          1,495           1,205           5,603
Adjustment to earnings per share..........          (0.03)           (0.04)         (0.04)          (0.13)          (0.03)
</TABLE>

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

(1)   Adjustments  to  previously  issued  financial   statements   reflect  (i)
      expensing  repairs  and  maintenance  costs on  operating  equipment  when
      incurred rather than  capitalizing  such costs and depreciating  them over
      future periods; (ii) depreciating  leasehold improvements over the shorter
      of the estimated useful asset life or the remaining lease term rather than
      ten years;  (iii) the retroactive  write off of leasehold  improvements to
      correspond to certain lease  termination  dates;  (iv) with respect to the
      quarters  ended  December  31, 1999 and March 31,  2000,  accrual of legal
      costs  incurred  for a failed  merger to the quarter in which the expenses
      were incurred;  and (v) increase of tax provision for non-deductible items
      throughout all four quarters in 1999.

(2)   Amount  represents the write off of deferred  financing  costs, net of tax
      benefit, related to a bank credit agreement which was terminated in Fiscal
      2000.

(3)   Effective  January 1, 2000, the Company adopted Staff Accounting  Bulletin
      No. 101 ("SAB 101"),  Revenue  Recognition  in Financial  Statements.  The
      amount  represents the cumulative  effect,  net of tax, on January 1, 2000
      retained earnings as if SAB 101 had been adopted prior to Fiscal 2000. The
      pro forma  effect on Fiscal  1999 of  adopting  SAB 101 would have been to
      reduce net income by approximately  $81,000,  or $0.00 per basic $0.01 per
      diluted  share.  The pro forma  impact of  adopting  SAB 101 on the fourth
      quarter of 1999 would have been to reduce net income by $122,000, or $0.01
      per basic and diluted share.

(4)   In the fourth quarter of Fiscal 2000, the Company recorded  additional bad
      debt expense of approximately  $1,500,000 for certain accounts  receivable
      balances which were previously considered to be collectable.

(5)   The principal  component of the adjustments to gross profit was to expense
      repairs and maintenance costs on operating  equipment when incurred rather
      than  capitalizing  such costs and depreciating  them over future periods.
      Such amounts were  immaterial for the quarter ended March 31, $431 for the
      quarter ended June 30 and $370 for the quarter ended September 30.

(6)   Consists  primarily  of a $237  reduction  of legal costs  incurred  for a
      failed merger, net of tax benefit.

(7)   Includes  $53 for the effect on the quarter of  adopting  SAB 101 and $322
      cumulative effect of SAB 101 had it been adopted prior to January 1, 2000.


                                       35
<PAGE>



To the Board of Directors
and Shareholders of VDI Multimedia



Our audits of the consolidated  financial  statements  referred to in our report
dated March 30, 2001  appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in Item 8 of this Form 10-K.
In our opinion,  this  financial  statement  schedule  presents  fairly,  in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated financial statements.


PricewaterhouseCoopers LLP
Century City, California
March 30, 2001






                                 VDI MULTIMEDIA
                 SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>

                                        BALANCE AT      CHARGED TO                                     BALANCE AT
                                       BEGINNING OF     COSTS AND                      DEDUCTIONS/       END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS           PERIOD         EXPENSES        OTHER         WRITE-OFFS        PERIOD
-------------------------------           ------         --------        -----         ----------        ------
<S>                                     <C>             <C>             <C>            <C>             <C>
Year ended December 31, 2000            $ 971,000       $ 2,195,000     $  --          $(1,693,000)    $ 1,473,000

Year ended December 31, 1999              878,000           790,000        --             (697,000)        971,000

Year ended December 31, 1998              607,000            51,000       220,000(1)        --             878,000


(1)   Amount  reflects  purchase price  adjustments  associated with an acquired
      company.

</TABLE>
                                       36
<PAGE>


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

         None.


                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The   information   under  the  captions   "Election   of   Directors,"
"Management" and "Section 16 (a) Beneficial  Ownership Reporting  Compliance" in
the Company's  definitive proxy statement for the annual meeting of shareholders
to be held on May 8, 2001 (the  "Proxy  Statement")  is  incorporated  herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION

         The information  under the caption  "Management" in the Proxy Statement
is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  under the  caption  "Security  Ownership  of  Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated  herein
by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information  under the caption "Certain  Transactions" in the Proxy
Statement is incorporated herein by reference.



                                       37
<PAGE>

                                     PART IV

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

   (a)   Documents Filed as Part of this Report:

         1,2.     Financial Statements and Schedules.

                  The financial  statements and schedules of the Company are set
                  forth in the  "Index to  Financial  Statements  and  Financial
                  Statement Schedules" on page 15.

   (3)   EXHIBIT
         NUMBER                      DESCRIPTION

         3.1    Restated Articles of Incorporation of the Company . (3)

         3.2    By-laws of the Company. (3)

         10.1   Agreement  and Plan of Merger,  dated as of December  24,  1999,
                among VDI MultiMedia, VDI MultiMedia,  Inc. and VMM Merger Corp.
                (1)

         10.2   Shareholders Agreement, dated as of December 24, 1999, among VMM
                Merger Corp., R. Luke Stefanko and Julia Stefanko. (2)

         10.3   1996 Stock Incentive Plan of the Company. (3)

         10.4   2000 Stock Incentive Plan of the Company.

         10.5   Employment Agreement between the Company and Luke Stefanko. (3)

         10.6   Business Loan Agreement  (Revolving  Credit) between the Company
                and Union Bank dated July 1, 1995,  as amended on April 1, 1996,
                and June 1996. (3)

         10.7   Joint Operating Agreement effective as of March 1, 1994, between
                the Company and Vyvx, Inc. (3)

         10.8   Lease  Agreement  between the Company and 6920 Sunset  Boulevard
                Associates dated May 17, 1994 (Hollywood facility) . (3)

         10.9   Lease   Agreement   between  the   Company  and  3767   Overland
                Associates,   Ltd.  dated  April  25,  1996  (West  Los  Angeles
                facility). (3)

         10.10  Asset Purchase  Agreement,  dated as of December 28, 1996 by and
                among VDI Media,  Woodholly  Productions,  Yvonne Parker, Rodger
                Parker, Jim Watt and Kim Watt. (3)

         10.11  Asset  Purchase  Agreement,  dated  as of June  12,  1998 by and
                between VDI Media and All Post, Inc. (4)

         10.12  Asset  Purchase  Agreement,  dated as of November 9, 1998 by and
                among VDI Media,  Dubs  Incorporated,  Vincent Lyons and Barbara
                Lyons. (5)

         10.13  Second Amended and Restated Credit Agreement dated September 28,
                2000 between the Company and Union Bank of California, N.A. (6)

         10.14  Secured  Promissory Note dated December 28, 2000 between R. Luke
                Stefanko and the Company.

         10.15  Employment  Agreement dated November 3, 2000 between the Company
                and Alan R. Steel.

         10.16  Employment  Agreement dated January 20, 2000 between the Company
                and Neil Nguyen.

         10.17  Asset Purchase Agreement dated November 3, 2000 by and among the
                Company, Creative Digital, Inc. and Larry Hester.

                                       38
<PAGE>

         10.18  First Amendment to Second Amended and Restated Credit  Agreement
                and Waiver dated March 30, 2001 among the  Company,  the Lenders
                party to the Credit Agreement and Union Bank of California, N.A.
                as administrative agent for such Lenders.

         21.1   Subsidiaries of the registrant.

         23.1   Consent of Independent Accountants.

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

         (1)    Filed with the  Securities  and Exchange  Commission  ("SEC") on
                January  11,  2000 as an exhibit to the  Company's  Form 8-K and
                incorporated herein by reference.

         (2)    Filed with the SEC on  January  3, 2000 at part of the  Schedule
                13D of VMM  Corp,  Bain  Capital  Fund VI,  L.P.,  Bain  Capital
                Partners  VI, L.P.  and Bain  Capital  Investors  VI,  Inc.  and
                incorporated herein by reference.

         (3)    Filed with the SEC as an exhibit to the  Company's  Registration
                Statement  on Form S-1 filed with the SEC on May 17,  1996 or as
                an exhibit to Amendment No. 1 to the Form S-1 filed with the SEC
                on December 31, 1996 and incorporated herein by reference.

         (4)    Filed  with  the  SEC on June  29,  1998  as an  exhibit  to the
                Company's  Form 8-K and  incorporated  herein by  reference  (5)
                Filed  with  SEC  on  December  2,  1998  as an  exhibit  to the
                Company's  Form 8-K and  incorporated  herein by reference.  (6)
                Filed  with the SEC on  November  14,  2000 as an exhibit to the
                Company's Form 10-Q and incorporated herein by reference.

                (b)    Reports on 8-K:

                No  reports on Form  8-K were filed  during  the  quarter  ended
December 31, 2000.



                                       39
<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.

Dated: March 27, 2001

                                                     VDI MULTIMEDIA

                            By: /s/ R. Luke Stefanko
                            ------------------------
                                R. Luke Stefanko
                                Chairman and Chief Executive Officer

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


       <S>                                          <C>                                                 <C>
         /s/ R. Luke Stefanko
         --------------------
         R. Luke Stefanko                            Chairman of the Board and                            March 27, 2001
                                                     Chief Executive Officer
                                                      (Principal Executive Officer)

         /s/ Alan R. Steel
         -----------------
         Alan R. Steel                               Executive Vice President,                            March 30, 2001
                                                      Finance and Administration

         /s/ Clark W. Brewer
         -------------------
         Clarke W. Brewer                            Chief Financial Officer and Treasurer                March 22, 2001
                                                     (Principal Accounting and Financial Officer)

         /s/  Robert A. Baker
         --------------------
         Robert A. Baker                             Director                                             March 12, 2001

         /s/  Haig S. Bagerdjian
         -----------------------
         Haig S. Bagerdjian                          Director                                             March 29, 2001


         /s/  Greggory J. Hutchins
         -------------------------
         Greggory J. Hutchins                        Director                                             March 12, 2001

         /s/  Robert M. Loeffler
         -----------------------
         Robert M. Loeffler                          Director                                             March 12, 2001


</TABLE>
                                       40