<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

<TABLE>
<S>        <C>
/X/        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
           1934

                          FOR THE YEAR ENDED DECEMBER 31, 1996,

                                            OR

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

         FOR THE TRANSITION PERIOD FROM            TO

                         COMMISSION FILE NUMBER 0-21917

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

                                   VDI MEDIA

             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                       <C>
              CALIFORNIA                                95-4272619
  (State of or other jurisdiction of                 (I.R.S. Employer
    incorporation or organization)                 Identification No.)

  6920 SUNSET BOULEVARD, HOLLYWOOD,                       90028
              CALIFORNIA
   (Address of principal executive                      (Zip Code)
               offices)
</TABLE>

       Registrant's telephone number, including area code (213) 957-5500

           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 / / No /X/

    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 is approximately $26,902,800 based upon the closing price of such
stock on March 26, 1997. As of March 26, 1997, there were 9,580,000 shares of
Common Stock outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

GENERAL

    VDI Media ("VDI" or the "Company") provides broadcast quality video
duplication, distribution and related value-added services including
distribution of national television spot advertising, trailers and electronic
press kits. The primary users of the Company's videotape duplication and
distribution services are those motion picture companies and advertising
agencies which generally outsource such services. The Company serviced over
1,200 customers in the year ended December 31, 1996.

    The Company's services include (i) the physical and electronic delivery of
broadcast quality advertising, including spots, trailers, electronic press kits
and infomercials, and syndicated television programming to more than 945
television stations, cable companies and other end-users nationwide and (ii) a
broad range of video services including the duplication of video in all formats,
element storage, standards conversion, closed captioning and transcription
services, and video encoding for air play verification purposes.

    The primary method of distribution by the Company, and by others in the
industry, continues to be the physical delivery of videotape to end-users. In
1994, to enhance its competitive position, the Company created Broadcast One, a
national distribution network which employs fiber optic and satellite
technologies in combination with physical distribution methods to deliver
broadcast quality material throughout the United States. The Company's use of
fiber optic and satellite technologies provides rapid and reliable electronic
transmission of video spots and other content with a high level of quality,
accountability and flexibility to both advertisers and broadcasters. Through the
Company's distribution hub in Tulsa, Oklahoma (the Tulsa Control Center),
Broadcast One has enabled the Company to expand its presence in the national
advertising market, allowing for greater diversification of its customer base.
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 accepted. The Company intends to add new methods
of distribution as technologies become both standardized and cost-effective.

    The Company operates broadcast tape duplication facilities at its California
locations and at the Tulsa Control Center, which the Company believes together
currently distribute on average 3,600 videotapes a day. By capitalizing on
Broadcast One's ability through fiber optic and satellite technologies to link
instantaneously the Company's facilities in Los Angeles with its other
facilities and by leveraging the Tulsa Control Center's geographic proximity to
the center of the country, the Company is able to utilize the optimal delivery
method to extend its deadline for same or next-day delivery of time-sensitive
material. As the Company develops or acquires facilities in new markets, the
Broadcast One network will enable it to maximize the usage of its network-wide
duplication capacity by instantaneously transmitting video content to facilities
with available capacity. The Company's Broadcast One network and California
facilities are designed to serve cost-effectively the time-sensitive
distribution needs of the Company's clients. Management believes that the
Company's success is based on its strong customer relationships which are
maintained through the reliability, quality and cost-effectiveness of its
services, and its extended deadline for processing customer orders.

    The Company derives revenues primarily from major and independent motion
picture and television studios, cable television program suppliers, advertising
agencies and, on a more limited basis, national television networks, local
television stations, television program syndicators, corporations and
educational institutions. 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
via the Company's Hollywood facility or the Tulsa Control Center. 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

                                       2
<PAGE>
stations either electronically, over fiber optic lines and/or satellite, or via
the most suitable package carrier. The Company believes that fiber optic
delivery is superior to satellite delivery due to its transmission quality.

    On February 24, 1997 the Company completed a public offering (the
"Offering") of 2,800,000 shares of Common Stock, 200,000 of which were sold on
behalf of a selling shareholder. In March 1997, the underwriters of the Offering
exercised their over-allotment option (the "Over-allotment Option") to purchase
an additional 320,000 shares of Common Stock from the Company. The net proceeds
of the Offering to the Company, including net proceeds from the Over-allotment
Option, were approximately $18.0 million after deducting the underwriters'
discount of approximately $1.5 million and offering expenses of approximately
$1.0 million. For a discussion of the Offering and the Over-allotment Option see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

    The Company was incorporated in 1990. The Company's principal executive
offices are located at 6920 Sunset Boulevard, Hollywood, California 90028, and
its telephone number is (213) 957-5500.

DISTRIBUTION NETWORK

    VDI operates a full service distribution network providing its customers
with reliable, time-sensitive 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
region. In 1994, the Company created the Broadcast One network to enhance its
national distribution capabilities. The Company provides tape duplication,
shipping, satellite and point-to-point fiber optic transmission services at its
California facilities, which process video that is both received from and
distributed within the Los Angeles region, and at the Tulsa Control Center, the
distribution hub of the Broadcast One network.

    Commercials, trailers, electronic press kits and related distribution
instructions are typically collected at the Company's Hollywood headquarters
facility and are processed locally or transmitted over Broadcast One's fiber
optic or satellite network for processing at the Tulsa Control Center. Video
content collected from Broadcast One's clients is generally transmitted via
Broadcast One's fiber optic network directly to the Tulsa Control Center 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.

    Upon receipt of an order, the Company creates a master by completing the
required production services, such as closed-captioning, local market
customization or value-added editing services. Once complete, the master is
distributed to television stations either physically or electronically. For
television stations desiring physical distribution, the master is duplicated
onto specific tape formats and, in most cases, shipments of multiple spots are
combined, or tied, onto one tape, then sorted and consolidated into packages by
destination. The increase in the Company's volume has historically provided a
decreasing delivery cost per order due to order consolidation and the volume
discount structure inherent in air courier pricing.

    The Tulsa Control Center, which provides the main hub of the Company's
distribution capabilities, is located near the geographic center of the country
which provides an extended deadline for air courier shipments. Currently, the
Tulsa Control Center delivers a majority of VDI's overnight deliveries. A
significant portion of the operating expenses of the Tulsa Control Center are
fixed and the facility contains ample space in which to expand operations,
providing the opportunity for improved operating margins as the Company's
business continues to grow. By utilizing the Tulsa Control Center's full
capacity, the Company believes it can further increase its duplication and
distribution capacity without significant additional capital expenditures.

                                       3
<PAGE>
    For electronic distribution, the master is digitized and delivered by fiber
optic or satellite transmission to television stations equipped to receive such
transmissions. The Company's Hollywood and Tulsa facilities have 24-hour access
to its fiber optic network, allowing it to transmit finished projects to end-
users upon completion. 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 accepted.

    In March 1994, the Company entered into a joint operating agreement with
Vyvx, a subsidiary of the Williams Companies, which provides the fiber optic
capability of the Broadcast One network. Under the joint operating agreement,
the Company and Vyvx agree to provide electronic delivery of spot advertisements
to broadcast stations and to share equally in revenues generated therefrom. To
date no such revenues have been earned pursuant to this agreement. The joint
operating agreement terminates in 1999, subject to automatic renewal unless one
or both parties determine to terminate the agreement.

    The Company's Hollywood headquarters facility has more than 150 broadcast
quality videotape duplication machines. The Hollywood headquarters facility
operates 24 hours a day, seven days a week.

    Traffic instructions that detail air play information accompany all
deliveries. For fiber optic and satellite deliveries, the traffic instructions
are telecopied to network stations and arrive with or prior to the video
content. For physical deliveries, a printed copy of the traffic instructions is
included with the tape duplications. The Company's customer service staff
contacts television stations each morning to verify receipt of the prior night's
distribution, allowing timely retransmission of any unconfirmed deliveries. Tape
deliveries are verified electronically through an on-line interface with the
Company's air courier services.

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.
Production services are performed at the Company's facilities in Hollywood and
West Los Angeles, California, and at the Tulsa Control Center. The Hollywood and
West Los Angeles facilities also enable the Company to provide duplication and
post-production services for local customers, which include the Columbia/Tri
Star Motion Picture Companies, Metro-Goldwyn-Mayer Film Group, Fox Filmed
Entertainment and MCA Motion Picture Group.

    The following summarizes the value-added post-production services that the
Company provides to its customers:

        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 color system. VDI's headquarters in Hollywood, California has
    facilities for the conversion of videotape between all international
    formats, including NTSC, PAL and SECAM.

        VIDEOTAPE EDITING.  VDI provides digital editing services at its West
    Los Angeles and Tulsa locations. The editing suites are equipped with (i)
    state-of-the-art digital editing equipment that provides precise and
    repeatable electronic transfer of video and/or audio information from one or
    more sources to a new master videotape and (ii) large production switchers
    to effect complex transitions from source to source while simultaneously
    inserting titles and/or digital effects over background video. Videotape can
    be edited into completed programs such as television shows, infomercials,
    commercials, movie trailers, electronic press kits, specials, and corporate
    and educational presentations.

        ENCODING.  VDI provides encoding services, known as "veil encoding," in
    which a code is placed within the video portion of an advertisement or an
    electronic press kit. Such codes can be monitored

                                       4
<PAGE>
    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 has recently acquired an "ice encoding" system which will enable it
    to place codes within the audio portion of a videotape thereby enhancing the
    overall quality of the encoded videotape.

        ANCILLARY AUDIO SERVICES.  VDI provides videotape audio editing and
    rerecording services for motion pictures and television programming in
    addition to commercial and other non-broadcast purposes. VDI provides such
    services through non-linear audio editing systems which allow sound to be
    generated, processed, modified, digitized and manipulated to the artistic
    requirements of the client. Other audio services available through VDI
    include voice overs, live sound effects, digital audio recording with pulse
    code modulation equipment and an "automated dialog replacement" system which
    enables the Company to reproduce and recreate synchronized dialog.
    Management anticipates that the Woodholly Acquisition will complement the
    Company's services in this area.

        ELEMENT STORAGE.  The Company provides its clients with storage space
    for their master tapes and is positioned to receive follow-on orders for
    duplication and distribution requests with respect to those tapes. The
    Company believes that it currently stores more than 100,000 masters and that
    as a result of growth in its Broadcast One network, it will have the
    opportunity to increase revenues from this service.

NEW MARKETS

    The Company believes that the development of the Broadcast One 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.  Woodholly currently provides video duplication services
    for suppliers to international markets. Through the Woodholly Acquisition,
    the Company intends to leverage these relationships in order to offer access
    to international markets for its existing customers. 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.

        RADIO.  The Company believes that the growth of Broadcast One will
    strengthen its relationships with advertisers who make spot market purchases
    of both television and radio advertising, resulting in the expansion of its
    presence in the distribution of radio advertisements. The Company presently
    provides spot radio advertising distribution for a small number of its
    clients.

        CABLE.  The Company believes that continued consolidation of cable
    system ownership among multiple system operators will attract increasing
    national spot advertising on local cable systems, especially in major
    markets, increasing the volume of advertisements which could be distributed
    to cable operators.

                                       5
<PAGE>
WOODHOLLY ACQUISITION

    The Company from time to time considers the acquisition of content delivery
or other businesses complementary to its current operations. As part of the
implementation of its strategy to acquire assets that increase its value-added
duplication and distribution capabilities, the Company expanded its operations
with the Woodholly Acquisition in January 1997. Woodholly provides duplication,
distribution, video content storage and ancillary services to major motion
picture studios, advertising agencies and independent production companies. VDI
believes that the acquisition of Woodholly will allow it to gain valuable
customer relationships, offer a more complete range of services to its customers
and give VDI the opportunity to capture a larger portion of its current
customers' video duplication and distribution business. The purchase price,
which is subject to adjustment and offset, consisted of $4.0 million in
promissory notes paid in February 1997 and up to $4.0 million in earn-out
payments. The Company will make an additional bonus payment of $1.0 million if
Woodholly achieves certain additional revenue and profitability targets. The
earn-out payments are due in each quarter in the period ending December 31, 2001
to the extent that Woodholly, as a separate division of the Company, achieves
specified operating income results. If Woodholly fails to achieve these results
in any particular quarter, the related earn-out payment will be deferred for up
to two years until the results are achieved. No earn-out payments will be
payable after December 31, 2003.

SALES AND MARKETING

    Historically, the Company has marketed its services almost exclusively
through industry contacts and referrals and has engaged in very limited formal
advertising. While VDI intends to continue to rely primarily on its reputation
and business contacts within the industry for the marketing of its services, the
Company has recently expanded its direct sales force to communicate the
capabilities and competitive advantages of the Company's distribution network 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
representatives located in New York and Los Angeles. 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.

CUSTOMERS

    Since its inception in 1990, VDI has added customers and increased its sales
based on a combination of reliability, timeliness, quality and price. The
integration of the Tulsa Control Center with 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, cable television program
suppliers, advertising agencies and, on a more limited basis, national
television networks, local television stations, television program syndicators,
corporations and educational institutions. The Company's motion picture clients
include, among others, the Columbia/ Tri Star Motion Picture Companies,
Metro-Goldwyn-Mayer Film Group, Fox Filmed Entertainment, The Walt Disney Motion
Picture Group, Paramount Pictures Corporation and Warner Bros.

    The Company solicits the motion picture and television industries, other
advertisers and their agencies to generate duplication and distribution
revenues. In the twelve months ended December 31, 1996 the Company serviced more
than 1,200 customers of which the seven major motion picture studios accounted
for approximately 49%, including the Columbia/Tri Star Motion Picture Companies
which accounted for approximately 11%, of the Company's revenues for the twelve
months ended December 31, 1996. If one or more of these companies were to stop
using the Company's services, the business of the Company could be adversely
affected.

                                       6
<PAGE>
    The Company has no long-term or exclusive agreements with any of 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.

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 are trained to emphasize the Company's ability to confirm delivery,
meet difficult delivery time frames and provide reliable and cost-effective
service.

COMPETITION

    The videotape 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, currently the principal market for the Company's services. Due to
the current and anticipated future demand for videotape duplication and
distribution services in the Los Angeles area, the Company believes that both
existing and new competitors may expand or establish videotape post-production
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, some of which have a national presence,
certain post-production companies and, to a lesser extent, the in-house
duplication and distribution operations of major motion picture studios and ad
agencies, that have traditionally distributed taped advertising spots via
physical delivery. 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
distribution and duplication firms such as Cycle-Sat, Inc., Indenet, Inc., and
Digital Generation Systems, Inc., and post-production companies may have greater
financial, distribution and marketing resources and some of which 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 and price or
otherwise.

EMPLOYEES

    The Company had 144 full-time employees as of December 31, 1996. 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 conducts its duplication and distribution operations primarily
from its headquarters in Hollywood, California and conducts its post-production
operations primarily from its West Los Angeles facilities.

                                       7
<PAGE>
    The Company's 30,000 square foot headquarters in Hollywood, California
houses facilities for its duplication services, a vault utilized for storage of
master videotapes, and offices for the Company's management, administrative and
accounting personnel. The Tulsa Control Center is a 20,000 square foot facility
utilized by the Company as the Broadcast One network control center as well as
VDI's nationwide physical duplication and distribution center. The Company also
maintains an 8,000 square foot facility in West Los Angeles, California utilized
for film-to-tape transfers, video tape editing and audio services.

    The Company's leases for its Hollywood headquarters and Tulsa facilities
expire in 1999. The Company's lease for the West Los Angeles facility expires in
December 1997. The Company's aggregate rental cost in 1996 was approximately
$0.6 million.

    Except for approximately 5% of the Company's equipment which is leased on a
long-term basis for terms ranging through 1999, all of the Company's equipment
has been purchased either for cash, on an installment basis or through a
like-kind exchange. However, approximately $2.0 million in capital lease
obligations were outstanding as of December 31, 1996 for Woodholly Productions
which was acquired by the Company as of January 1, 1997.

ITEM 3.  LEGAL PROCEEDINGS

    There are currently no legal proceedings to which the Company is a party,
other than routine matters incidental to the business of the Company. From time
to time the Company may become party to various legal actions and complaints
arising in the ordinary course of business.

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.

                                       8
<PAGE>
                                    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 Common Stock began trading on the NNM on
February 19, 1997. The following table sets forth, for the periods indicated,
the high and low closing sales price per share for the Common Stock.

<TABLE>
<CAPTION>
                                                                                 COMMON STOCK
                                                                             --------------------
                                                                                LOW       HIGH
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
YEAR ENDING DECEMBER 31, 1997..............................................  $    6.75  $     8.0
  First Quarter (through March 26, 1997)
</TABLE>

    On March 26, 1997, the closing sale price of the Common Stock as reported on
the NNM was $6.75 per share. As of March 26, 1997, there were 42 holders of
record of the Common Stock.

DIVIDENDS

    Other than prior distributions by the Company to its then shareholders of
record of previously taxed and undistributed earnings (the "S Corp
distribution), and the final S Corp distribution to be made based upon earnings
to shareholders of record prior to the Offering, the Company did not pay
dividends on its Common Stock during the years ended December 31, 1996, 1995 or
1994 and currently does not intend to pay any dividends on its Common Stock in
the foreseeable future. See "Management's Discussion and Analysis--Liquidity and
Capital Resources."

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

    The following data, insofar as it relates to each of the years 1992 to 1996,
has been derived from annual financial statements, including the balance sheets
at December 1995 and 1996 and the related statements of income and of cash flows
for the three years ended December 31, 1996 and the notes thereto and elsewhere
herein.

                                       9
<PAGE>
    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.

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                      -----------------------------------------------------
                                                                        1992       1993      1994(1)     1995       1996
                                                                      ---------  ---------  ---------  ---------  ---------
                                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                   <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA
  Revenues..........................................................  $  11,546  $  17,044  $  14,468  $  18,538  $  24,780
  Cost of goods sold................................................      7,710     10,595     10,042     11,256     14,933
                                                                      ---------  ---------  ---------  ---------  ---------
  Gross profit......................................................      3,836      6,449      4,426      7,282      9,847
  Selling, general and administrative expense.......................      3,498      4,290      3,545      5,181      5,720
  Costs related to establishing a new facility......................     --         --            981     --         --
  Dispute settlement................................................     --         --            458     --         --
                                                                      ---------  ---------  ---------  ---------  ---------
  Operating income (loss)...........................................  $     338  $   2,159       (558)     2,101      4,127
  Interest expense, net.............................................        170        241        271        333        223
  Provision for income tax..........................................     --             29     --             26         68
                                                                      ---------  ---------  ---------  ---------  ---------
  Net income (loss).................................................  $     168  $   1,889  $    (829) $   1,742  $   3,836
                                                                      ---------  ---------  ---------  ---------  ---------
                                                                      ---------  ---------  ---------  ---------  ---------
PRO FORMA STATEMENT OF OPERATIONS DATA(2)
  Pro forma provision (benefit) for income taxes....................  $      67  $     767  $    (332) $     707  $   1,562
  Pro forma net income (loss).......................................        101      1,151       (497)     1,061      2,342
  Pro forma net income per share....................................     --         --         --         --           0.35
  Pro forma weighted average common shares outstanding..............     --         --         --         --          6,695
  Supplemental pro forma net income per share(3)....................     --         --         --         --           0.36
  Supplemental weighted average common shares outstanding...........     --         --         --         --          7,007

OTHER DATA
  EBITDA(4).........................................................  $   1,059  $   3,152  $   2,209  $   3,680  $   5,781
  Cash flows provided by operating activities.......................        710      2,003      1,121      2,553      6.306
  Cash flows (used in) provided by financing activities.............        971       (635)       977     (1,061)    (4,966)
  Capital expenditures..............................................      1,672      1,379      2,071      1,137      1,191
SELECTED BALANCE SHEET DATA
  Cash..............................................................  $      44  $      33  $      60  $     415  $     564
  Working capital (deficit).........................................       (646)       392     (1,329)     1,079      1,925
  Property and equipment, net.......................................      3,271      3,670      4,402      3,992      3,520
  Total assets......................................................      5,806      7,253      8,189      9,340     11,178
  Borrowings under revolving credit agreement.......................        775        525      1,644        100         --
  Long-term debt, net of current portion............................      1,552      1,388      1,457      2,150      1,177
  Shareholders' equity..............................................      1,253      2,803      1,706      3,019      5,241
</TABLE>

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

(1) The 1994 results of operations reflect (i) the disposition of the Company's
    telecine (film-to-videotape transfer) business during the first quarter of
    1994, (ii) one-time start-up costs of $1.0 million related to establishing
    the Tulsa Control Center, which costs were in addition to capital
    expenditures of $0.9 million and (iii) one-time costs of $0.5 million in
    connection with a settlement of a dispute. See "Management's Discussion and
    Analysis of Financial Condition and Results of Operations."

(2) The Company has been exempt from payment of federal income taxes and has
    paid certain state income taxes at a reduced rate as a result of its S
    Corporation election. Prior to the closing of the Offering the Company's
    shareholders elected to terminate the Company's S Corporation status. Pro
    forma statement of operations data reflect the income tax expense that would
    have been recorded had

                                       10
<PAGE>
    the Company not been exempt from paying taxes under the S Corporation
    election. As a result of terminating the Company's S Corporation status, the
    Company will be 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 will occur in the quarter ending March
    31, 1997. If this charge were recorded at December 31, 1996, the amount
    would have been approximately $0.2 million. See "Management's Discussion and
    Analysis of Financial Condition and Results of Operations" and Notes 2 and 3
    of Notes to Financial Statements.

(3) Supplemental pro forma net income per share is calculated after giving
    effect to the number of shares of Common Stock whose net proceeds were used
    to retire certain outstanding debt upon completion of the Offering and the
    elimination of interest expense related to such debt.

(4) EBITDA is defined herein as earnings before interest, taxes, depreciation,
    amortization and non-recurring charges. Such non-recurring charges comprise
    costs related to establishing a new facility and the settlement of a dispute
    of $1.0 million and $0.5 million, respectively, both of which were recorded
    during the year ended December 31, 1994. EBITDA does not represent cash
    generated from operating activities in accordance with 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.

                                       11
<PAGE>
                CERTAIN PRO FORMA COMBINED FINANCIAL STATEMENTS

    The following unaudited pro forma financial statements give effect to the
Woodholly Acquisition. The unaudited pro forma combined balance sheet presents
the combined financial position of the Company and Woodholly at December 31,
1996 as if the Company had acquired Woodholly on December 31, 1996. Such pro
forma information is based upon the historical balance sheet data of the Company
and Woodholly on that date. The unaudited pro forma combined statements of
operations for the year ended December 31, 1996 give effect to the Woodholly
Acquisition as if the Company had acquired Woodholly on January 1, 1996.

    The unaudited pro forma combined statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transaction been in effect as of the beginning of the periods presented
and should not be construed as representative of future operations.

    The purchase price paid by the Company consists of an initial purchase price
of $4.0 million plus an as yet undetermined contingent purchase price. The
contingent purchase price, payable to the partners of Woodholly, is to be earned
and paid based on the financial results of Woodholly as a separate division of
the Company. The contingent purchase price, in total, is limited to $4.0
million. The Company will make an additional bonus payment of $1.0 million if
Woodholly achieves certain additional revenue and profitability targets. The
unaudited pro forma combined financial statements reflect the Company's
allocation of the initial purchase price of $4.0 million to the assets and
liabilities of Woodholly based upon the Company's current estimates of the fair
values of the assets acquired and liabilities assumed. The excess of the initial
consideration over the fair value of the assets acquired and liabilities assumed
of approximately $1.8 million was allocated to goodwill. The contingent purchase
price, to the extent earned, will be treated as an increase in goodwill and will
be amortized coterminously with the original 20 year period. To the extent
additional contingent purchase price payments are made, amortization will
increase in future periods. If the full contingent purchase price were earned,
goodwill would be increased by a total of $5.0 million, and annual amortization
expense associated with such additional goodwill would be $0.3 million (for an
aggregate annual amortization expense of $0.4 million). Management of the
Company is in the process of reviewing the allocation of the purchase price and,
when completed, may modify its preliminary allocation. The final allocation of
the purchase price may vary as additional information is obtained, and
accordingly, the ultimate allocation may differ from that used in the unaudited
pro forma combined financial statements. The Woodholly Acquisition will be
accounted for by the Company under the purchase method of accounting.

    The historical financial statements of the Company and Woodholly are
included at Item 14 of this Annual Report on Form 10-K. These unaudited pro
forma combined financial statements should be read in conjunction with those
financial statements and related notes.

                                       12
<PAGE>
PRO FORMA COMBINED BALANCE SHEET

    The following unaudited pro forma combined balance sheet presents the
combined financial position of the Company and Woodholly as of December 31,
1996. Such unaudited pro forma information is based on the combined historical
balance sheets of the Company and Woodholly as of December 31, 1996, giving
effect to (i) the Woodholly Acquisition accounted for under the purchase method
of accounting and (ii) the pro forma adjustments described in the accompanying
Notes to Pro Forma Combined Financial Statements.

<TABLE>
<CAPTION>
                                                                              AS OF DECEMBER 31, 1996
                                                                 -------------------------------------------------
                                                                       HISTORICAL                PRO FORMA
                                                                 ----------------------  -------------------------
                                                                    VDI      WOODHOLLY   ADJUSTMENTS      COMBINED
                                                                 ---------  -----------  ------------     --------
                                                                                  (IN THOUSANDS)(UNAUDITED)
<S>                                                              <C>        <C>          <C>              <C>
                                                      ASSETS
Current assets:
  Cash.........................................................  $     564   $      19   $     (564)(A)   $    19
  Accounts receivable, net.....................................      4,537       1,592         (107)(B)     6,022
  Amount receivable from officer...............................      1,214                                  1,214
  Other receivables............................................        224                                    224
  Inventories..................................................        144      --           --               144
  Prepaid expenses.............................................          2          63                         65
                                                                 ---------  -----------  ------------     --------
      Total current assets.....................................      6,685       1,674         (671)        7,688
  Property and equipment, net..................................      3,520       3,145       --             6,665
  Intangible and other assets..................................        973      --            1,810         2,783
                                                                 ---------  -----------  ------------     --------
      Total assets.............................................  $  11,178   $   4,819   $    1,139       $17,136
                                                                 ---------  -----------  ------------     --------
                                                                 ---------  -----------  ------------     --------

                                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Notes payable................................................  $     728      --           --           $   728
  Accounts payable.............................................      2,394         597         (107)(B)     2,884
  Accrued distribution to shareholder..........................        269                                    269
  Other accrued liabilities....................................      1,337      --           --             1,337
  Current portion of capitalized lease obligations.............         32         844       --               876
  Deferred income taxes........................................     --          --              176(C)        176
                                                                 ---------  -----------  ------------     --------
      Total current liabilities................................      4,760       1,441           69         6,270
                                                                 ---------  -----------  ------------     --------
  Capitalized lease obligations, less current portion..........         75       1,188       --             1,263
                                                                 ---------  -----------  ------------     --------
  Long-term portion of notes payable...........................      1,102      --           --             1,102
                                                                 ---------  -----------  ------------     --------
  Shareholders' equity:
    Partners' capital..........................................     --           2,190       (2,190)(A)     --
    Common stock...............................................      1,015                    3,436(A)      4,451
    Retained earnings..........................................      4,226      --             (176)(C)     4,050
                                                                 ---------  -----------  ------------     --------
      Total shareholders' equity...............................      5,241       2,190        1,070         8,501
                                                                 ---------  -----------  ------------     --------
      Total liabilities and shareholder equity.................  $  11,178   $   4,819   $    1,139       $17,136
                                                                 ---------  -----------  ------------     --------
                                                                 ---------  -----------  ------------     --------
</TABLE>

       See accompanying Notes to Pro Forma Combined Financial Statements

                                       13
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS

    The following unaudited pro forma combined statements of operations presents
the combined results of operations of the Company and Woodholly for year ended
December 31, 1996 by combining the historical statements of operations of the
Company and Woodholly for the period, giving effect to (i) the Woodholly
Acquisition as of January 1, 1996, accounted for under the purchase method of
accounting and (ii) the pro forma adjustments described in the accompanying
Notes to Pro Forma Combined Financial Statements.

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31, 1996
                                                                 --------------------------------------------------
                                                                       HISTORICAL                PRO FORMA
                                                                 ----------------------  --------------------------
                                                                    VDI      WOODHOLLY   ADJUSTMENTS      COMBINED
                                                                 ---------  -----------  ------------     ---------
<S>                                                              <C>        <C>          <C>              <C>
Revenues.......................................................  $  24,780   $   7,840   $     (356)(D)   $ 32,264
Cost of good sold..............................................     14,933       5,592         (356)(D)     20,169
                                                                 ---------  -----------       -----       ---------
    Gross profit...............................................      9,847       2,248       --             12,095
Selling, general and administrative expenses...................      5,720       1,503          288(E)       7,511
                                                                 ---------  -----------       -----       ---------
Income from operations.........................................      4,127         745         (288)         4,584
Interest expense, net..........................................        291         352       --                643
Other income, net..............................................        (68)        (64)                       (132)
                                                                 ---------  -----------       -----       ---------
Income before income taxes.....................................      3,904         457         (288)         4,073
Pro forma provision for income taxes...........................      1,562      --               68(F)       1,630
                                                                 ---------  -----------       -----       ---------
Pro forma net income...........................................  $   2,342   $     457   $     (356)      $  2,443
                                                                 ---------  -----------       -----       ---------
                                                                 ---------  -----------       -----       ---------
Pro forma earnings per share...................................  $    0.35                                $   0.34
                                                                 ---------                                ---------
                                                                 ---------                                ---------
Pro forma weighted average number of shares....................      6,695(H)                   554(G)       7,249
                                                                 ---------                    -----       ---------
                                                                 ---------                    -----       ---------
</TABLE>

       See accompanying Notes to Pro Forma combined Financial Statements.

                                       14
<PAGE>
                NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

    THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS HAVE BEEN PREPARED
ASSUMING THAT THE INTERIM FINANCING OBTAINED IN CONNECTION WITH THE WOODHOLLY
ACQUISITION WAS REPAID USING PROCEEDS FROM THE OFFERING. ACCORDINGLY, NO PRO
FORMA ADJUSTMENTS WERE MADE FOR INTEREST EXPENSE.

    The following significant adjustments were made to the historical balance
sheets of the Company and Woodholly at December 31, 1996 or historical
statements or operations of the Company and Woodholly, as applicable, to arrive
at the pro forma combined balance sheet and pro forma combined statements of
operations:

       (A) Pro forma adjustments have been made to (i) record estimated goodwill
    of $1.8 million equal to the excess of the initial consideration over the
    fair market value assigned to specific assets less liabilities assumed, (ii)
    eliminate the equity of Woodholly and (iii) reflect the use of available
    cash and net proceeds from the Offering to repay the interim financing
    obtained in connection with the Woodholly Acquisition.

        (B) Pro forma adjustments have been made to accounts receivable and
    accounts payable to eliminate outstanding amounts due between the Company
    and Woodholly.

        (C) A pro forma adjustment has been made to reflect an increase in the
    Company's deferred tax liability of $0.2 million calculated in accordance
    with SFAS No. 109 as if termination of the Company's S Corporation status
    occurred on December 31, 1996.

       (D) Pro forma adjustments have been made to revenues and cost of goods
    sold to reverse amounts related to sales between the Company and Woodholly.

        (E) Pro forma adjustments have been made to (i) reflect reductions in
    selling, general and administrative expenses related to life insurance
    premiums and other expenses paid by Woodholly on behalf of the former
    owners, (ii) recognize compensation expense to be paid to the former owners
    of Woodholly under the terms of the purchase agreement and (iii) recognize
    amortization expense for the goodwill related to the Woodholly Acquisition,
    as if the acquisition had occurred at January 1, 1996. Goodwill is amortized
    over the estimated useful life of 20 years. The amounts of these adjustments
    are as follows:

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED
                                                                              DECEMBER 31, 1996
                                                                             -------------------
                                                                               (IN THOUSANDS)
<S>                                                                          <C>
 (i) expenses paid on behalf of owners.....................................       $     (42)
 (ii) compensation expense.................................................             240
(iii) amortization of goodwill.............................................              90
                                                                                      -----
    Total additional expense...............................................       $     288
                                                                                      -----
                                                                                      -----
</TABLE>

        (F) A pro forma adjustment has been made to adjust the pro forma
    provision for income taxes to a 40% rate on pro forma income before income
    taxes.

       (G) Pro forma adjustments have been made to the pro forma weighted
    average common shares and pro forma earnings per share to reflect the
    issuance of 553,987 shares of Common Stock in the Offering in order to raise
    the net proceed necessary to repay the financing obtained for the Woodholly
    Acquisition, as if such shares had been outstanding during each period
    presented.

       (H) Pro forma weighted average number of shares is calculated after
    giving effect to the number of shares of common Stock whose proceeds are to
    be used to pay a distribution to the Company's shareholders in connection
    with the termination of its S corporation status.

                                       15
<PAGE>
          NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)

                                   VDI MEDIA
                 Schedule II--Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                                  BALANCE AT  CHARGED TO                 BALANCE
                                                                  BEGINNING    COSTS AND                  AT END
ALLOWANCE FOR DOUBTFUL ACCOUNTS                                   OF PERIOD    EXPENSES    DEDUCTIONS   OF PERIOD
----------------------------------------------------------------  ----------  -----------  -----------  ----------
<S>                                                               <C>         <C>          <C>          <C>
Year ended December 31, 1996....................................  $  350,000   $ 110,000       --       $  460,000
                                                                  ----------  -----------  -----------  ----------
                                                                  ----------  -----------  -----------  ----------
Year ended December 31, 1995....................................  $  103,000   $ 247,000       --       $  350,000
                                                                  ----------  -----------  -----------  ----------
                                                                  ----------  -----------  -----------  ----------
Year ended December 31, 1994....................................  $   63,000   $  40,000       --       $  103,000
                                                                  ----------  -----------  -----------  ----------
                                                                  ----------  -----------  -----------  ----------
</TABLE>

                                       16
<PAGE>
          NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)

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

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 videotape 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 services, closed captioning services,
standards conversion and other services related to the modifications of video
and audio content materials prior to distribution.

    The Company recognizes revenues for services based on the shipment and/or
delivery of customer materials. Rates charged to customers vary based upon the
time-sensitivity of delivery, number of locations and the time at which video or
audio materials are made available to the Company to begin the duplication and
distribution process. Shorter delivery schedules and shorter lead times
typically command higher prices.

    Duplication services generally are priced from $11.00 to $13.50 depending on
the format, length of source material and quantity of tapes ordered. Customers
often combine multiple commercials, or spots, on the same duplication order
("tied spots"). Tied spots are priced at a lower level reflecting the lower
variable cost of adding additional content to single duplication orders. The
Company charges $2.00 to $5.00 for each additional tied spot, depending on the
number of additional spots. Distribution services rates range from $11.00 to
$13.00 for single spots delivered the following morning and from $4.00 to $10.00
for two day delivery. The price is determined by the number of packages and
delivery locations. Production services are typically billed at an hourly rate
for use of the Company's production facilities or on a firm price for specific
services.

    The Company's historical business has been concentrated in the provision of
duplication and other services to the major motion picture studios primarily
located in the Los Angeles area. The Company believes that the significant
operating leverage provided by the Broadcast One network and the Tulsa Control
Center could provide the Company the opportunity to grow its revenues at a rate
faster than the growth in its operating costs due to (i) lower per unit delivery
expenses as multiple orders destined for particular television stations are
consolidated and (ii) the reduction of per unit electronic delivery costs as the
use of such services increases. The Company believes that the Tulsa Control
Center can support a substantially higher volume of production and distribution
with low incremental cost increases. The Company has not historically accounted
for revenues derived from its duplication, delivery and ancillary services
separately.

    The Company's cost of goods sold includes salary expenses for personnel in
the areas of customer service, operations and shipping, as well as shipping
expenses, videotape materials, equipment maintenance and packaging supplies.
Additionally, a significant portion of fixed costs, including a portion of
depreciation and occupancy costs, is allocated to cost of goods sold, which
creates operating leverage at higher sales levels.

    Selling, general and administrative expenses include the salary, travel
expenses and insurance of all sales and administrative personnel. The Company
believes that its current selling and administrative infrastructure will sustain
higher sales levels.

                                       17
<PAGE>
    Except for the historical information contained herein, certain of the
markets discussed 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 elsewhere herein, and 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, for a further
discussion of these and other risks and uncertainties applicable to the
Company's business.

RESULTS OF OPERATIONS

    The following table sets forth the amount, and percentage relationship to
revenues, of certain items included within the Company's Statement of Operations
for the years ended December 31, 1994, 1995 and 1996.

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                  -------------------------------------------------------------------------
                                                           1994                     1995                     1996
                                                  -----------------------  -----------------------  -----------------------
                                                               PERCENT                  PERCENT                  PERCENT
                                                                  OF                       OF                       OF
                                                   AMOUNT      REVENUES     AMOUNT      REVENUES     AMOUNT      REVENUES
                                                  ---------  ------------  ---------  ------------  ---------  ------------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                               <C>        <C>           <C>        <C>           <C>        <C>
Revenues........................................  $  14,468       100.0%   $  18,538       100.0%   $  24,780       100.0%
Costs of good sold..............................     10,042        69.4       11,256        60.7       14,933        60.3
                                                  ---------       -----    ---------       -----    ---------       -----
Gross profit....................................      4,426        30.6        7,282        39.3        9,847        39.7
Selling, general and administrative expense.....      3,545        24.5        5,181        27.9        5,720        23.1
Costs related to establishing a new facility....        981         6.8       --           --          --           --
Dispute Settlement..............................        458         3.2       --           --          --           --
                                                  ---------       -----    ---------       -----    ---------       -----
Operating income (loss).........................       (558)       (3.9)       2,101        11.4        4,127        16.6
Interest expense, net...........................        271         1.8          333         1.9          223         0.8
Provision for income taxes......................     --           --              26         0.1           68         0.3
                                                  ---------       -----    ---------       -----    ---------       -----
                                                  $    (829)       (5.7%)  $   1,742         9.4%   $   3,836        15.5%
                                                  ---------       -----    ---------       -----    ---------       -----
                                                  ---------       -----    ---------       -----    ---------       -----
</TABLE>

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

    REVENUES.  Revenues increased by $6.2 million or 33.7% to $24.8 million for
the year ended December 31, 1996 compared to $18.5 million for the year ended
December 31, 1995 due to the increased use of the Company's services by existing
customers and the addition of new customers. This increase in use of the
Company's services and addition of new customers was due to substantially
increased marketing of the Company's national distribution network through the
Tulsa Control Center. In addition, the year ended December 31, 1996 includes
incremental revenues derived from the Company's West Los Angeles duplication and
distribution facility which opened late in fiscal 1995.

    GROSS PROFIT.  Gross profit increased $2.6 million or 35.6% to $9.9 million
for the year ended December 31, 1996 compared to $7.3 million for the year ended
December 31, 1995. As a percentage of revenues, gross profit increased from
39.3% to 39.7%. The increase in gross profit as a percentage of revenues was
attributable to a decrease in the cost of direct materials and by a decrease in
fixed costs, which are allocated to cost of goods, as a percentage of sales.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSE.  Selling, general and
administrative expense increased $0.5 million or 10.4% to $5.7 million of the
year ended December 31, 1996 compared to $5.2 million for the year ended
December 31, 1995. As a percentage of revenues, selling, general and
administrative expense

                                       18
<PAGE>
decreased to 23.1% for the year ended December 31, 1996 compared to 27.9% for
the year ended December 31, 1995. This decrease in selling, general and
administrative expense as a percentage of revenues was primarily due to the
spreading of fixed overhead expenses, in particular the fixed portion of
administrative wages, over a higher revenue base in the year ended December 31,
1996 than in the comparable period in 1995. Management believes that future
increases in revenues may lead to further decreases in selling, general and
administrative expenses as a percentage of revenues.

    OPERATING INCOME.  Operating income increased $2.0 million or 96.4% to $4.1
million for the year ended December 31, 1996 compared to $2.1 million for the
year ended December 31, 1995.

    INCOME TAXES.  The Company previously has operated as an S Corporation. As
such, the Company was not responsible for federal income taxes and provided for
state income taxes at reduced rates. As a result of the Offering, the Company's
S Corporation status has terminated. Accordingly, the Company will, in future
periods, provide for all income taxes at higher statutory rates. These factors
are estimated to result in an effective tax rate for periods subsequent to the
Offering of approximately 40%. For the quarter ending March 31, 1997, the
Company will record an additional one-time non-cash charge for additional
deferred taxes based upon an increase in the effective tax rate for the
Company's S Corporation status (1.5%) to C Corporation status (40%) applied to
the temporary differences between the financial reporting and tax bases of the
Company's assets and liabilities. If this charge had been recorded at December
31, 1996, the amount would have been approximately $0.2 million.

    NET INCOME.  Net income for the year ended December 31, 1996 increased $2.1
million or 120% to $3.8 million compared to $1.7 million for the year ended
December 31, 1995. Such increase is primarily attributable to the previously
described factors.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

    REVENUES.  Revenues increased by $4.0 million or 28.1% to $18.5 million for
the year ended December 31, 1995 compared to $14.5 million for the year ended
December 31, 1994. The primary reason for this increase was the increased use of
the Company's services by existing customers and the addition of new customers.
New customers were obtained as a result of marketing the Company's national
distribution network through the Tulsa Control Center and the Company's revenues
office in New York, both of which opened in September 1994.

    GROSS PROFIT.  Gross profit increased $2.9 million or 64.5% to $7.3 million
for the year ended December 31, 1995 compared to $4.4 million for the year ended
December 31, 1994. As a percentage of revenues, gross profit increased to 39.3%
in 1995 from 30.6% in 1994. The increase in 1995 gross profit resulted from
several factors, including (i) the spreading of fixed costs over a higher
revenue base, which cost base decreased from 13% of revenues to 11% of revenues,
(ii) decreased videotape costs through the tying of multiple spots onto a single
videotape and negotiation of consignment inventory agreements, both of which
reduced the usage of high cost "fill-in" vendors thereby reducing direct
materials usage from 29% of revenues in 1994 to 23% of revenues in 1995 and
(iii) decreased direct labor expenses due to more efficient production and
higher volume reduced production wages from 19% of revenues in 1994 to 15% of
revenue in 1995. These factors which positively impacted 1995 gross profit were
partially offset by increased expenses associated with subcontracting
duplication services in certain regions which increased from 1.9% of revenues in
1994 to 4.5% of revenues in 1995 and increased shipping expenses due to the
Company's establishment of national distribution capabilities which increased
from 1.5% of revenues in 1994 to 3.9% of revenues in 1995. Furthermore, 1994
gross profit was adversely impacted by the Company's decision to discontinue its
telecine operation and the absorption of costs related to the operations of the
Tulsa Control Center which was opened in September 1994, before the generation
of associated Broadcast One revenue. The Company's decision to discontinue its
telecine operation was due to the excessively capital-intensive nature of that
business, as well as the Company's desire to focus on VDI's core duplication and
distribution business.

                                       19
<PAGE>
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSE.  Selling, general and
administrative expense increased $1.7 million or 46.1% to $5.2 million for the
year ended December 31, 1995 compared to $3.5 million for the year ended
December 31, 1994. As a percentage of revenues, selling, general and
administrative expense increased to 27.9% in 1995 from 24.5% in 1994. This
increase in selling, general and administrative expense as a percentage of
revenues was primarily due to increased expenses relating to the Company's
national distribution network, including the Tulsa Control Center and the
Company's sales office in New York, both of which opened in the third quarter of
1994. These expenses were partially offset by the spreading of certain fixed
expenses, in particular rent and depreciation, over a larger revenue base.

    OTHER.  During 1994, the Company established the Tulsa Control Center.
Pre-operating costs incurred in connection with the establishment of this
facility, aggregating $1.0 million, have been charged to results of operations.
Such costs were comprised primarily of payroll and other expenses necessary to
prepare this facility for operations and to ensure that the quality of
videotapes produced at the facility conformed to the Company's standards. In
addition, during 1994, management settled a dispute with an equipment lessor
regarding ownership of certain video duplication equipment. The settlement
amount of $0.5 million was recognized as a period cost in the Company's results
of operations.

    OPERATING INCOME.  Operating income was $2.1 million for the year ended
December 31, 1995 compared to an operating loss of $0.6 million for the year
ended December 31, 1994, primarily as a result of increased production volume
and greater operating leverage as fixed costs related to the Tulsa Control
Center were spread over greater revenues. In addition, the prior year included
certain expenses relating to the establishment of the Broadcast One facility and
the settlement of a dispute with an equipment lessor.

    INTEREST EXPENSE.  Interest expense for the year ended December 31, 1995
increased $0.1 million or 22.9% to $0.3 million as a result of increased bank
borrowings in connection with the establishment of the Tulsa Control Center.

    NET INCOME (LOSS).  Net income increased $2.6 million to $1.7 million for
the year ended December 31, 1995 from a loss of $0.8 million for the year ended
December 31, 1994. This increase is primarily attributable to the revenues and
gross profit increases described above.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

    REVENUES.  Revenues decreased $2.5 million or 15.1 % to $14.5 million for
the year ended December 31, 1994 compared to $17.0 million for the year ended
December 31, 1993. This decrease was primarily attributable to the Company's
disposition of its telecine operation in March 1994 due to the excessively
capital-intensive nature of that business and its reliance upon creative
personnel. The Company exchanged its telecine production equipment for
previously leased video duplication equipment. This decrease was offset in part
by growth in the Company's core duplication and distribution business.

    GROSS PROFIT.  Gross profit decreased $2.0 million or 31.4% to $4.4 million
for the year ended December 31, 1994 compared to $6.4 million for the year ended
December 31, 1993. As a percentage of revenues, gross profit decreased to 30.6%
in 1994 from 37.8% in 1993. The decrease in gross profit as a percentage of
revenues was primarily attributable to increased video tape costs as a
percentage of revenues, which resulted from the disposition of the Company's
higher margin telecine operations in the first quarter of 1994, as well as the
spreading of certain fixed expenses, in particular rent and depreciation, over a
smaller revenue base. This decrease was partially offset by decreased wage and
equipment rental expenses which also resulted from the disposition of the
Company's telecine operation.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSE.  Selling, general and
administrative expense decreased $0.8 million or 17.4% to $3.5 million for the
year ended December 31, 1994 compared to $4.3 million for the year ended
December 31, 1993. As a percentage of revenues, selling, general and
administrative expense decreased to 24.5% in 1994 from 25.2% in 1993. This
decrease in selling, general and administrative

                                       20
<PAGE>
expense as a percentage of revenues was primarily due to the elimination of
certain expenses related to the disposition of the Company's telecine business.

    OTHER.  During 1994, the Company established the Tulsa Control Center.
Pre-operating costs incurred in connection with the establishment of this
facility, aggregating $1.0 million, have been charged to results of operations.
Such costs principally comprised payroll and other costs necessary to prepare
this facility for operations and to ensure that the quality of videotapes
produced at the facility conformed to the Company's standards. In addition,
during 1995, management settled a dispute with an equipment lessor regarding
ownership of certain video duplication equipment. The settlement amount of $0.5
million was recognized as a period cost in the Company's 1994 results of
operations, as the settlement represented the culmination of events occurring
prior to that date.

    OPERATING INCOME (LOSS).  Operating income decreased $2.7 million to a loss
from operations of $0.8 million for the year ended December 31, 1994 compared to
income from operations of $1.9 million for the year ended December 31, 1993. The
loss is principally attributable to costs incurred in connection with the
establishment of the Tulsa Control Center, the settlement of a dispute with an
equipment lessor and management's disposition of the Company's telecine
operation in 1994.

    NET INCOME (LOSS).  The Company incurred a loss of $0.8 million for the year
ended December 31, 1994 compared to net income of $1.9 million for the year
ended December 31, 1993. The loss is primarily attributable to the revenue
decrease related to disposition of the telecine operation, the incurrence of
preoperating costs of $1.0 million related to the establishment of the Tulsa
Control Center and the settlement of a dispute in the amount of $0.5 million.

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 and, to a lesser degree, borrowings from related parties.
On February 24, 1997 the Company completed the Offering of 2,800,000 shares of
Common Stock, 200,000 of which were sold on behalf of a selling shareholder. The
net proceeds of the Offering to the Company were approximately $15.9 million
after deducting the underwriters' discount of approximately $1.3 million and
offering expenses of approximately $1.0 million. The net proceeds of the
Offering were used (i) to repay indebtedness incurred with respect to the
initial purchase price of the Woodholly Acquisition, (ii) to pay the S Corp
distribution and (iii) to repay $1.7 million of debt outstanding under the
Company's term loan.

    In March 1997, the underwriters of the Offering exercised the Over-allotment
Option for an additional 320,000 shares of Common Stock with net proceeds to the
Company of approximately $2.1 million after deduction of the underwriters'
discount of approximately $0.2 million.

    At December 31, 1996, the Company's cash and cash equivalents aggregated
$0.6 million. The Company's operating activities provided cash of $2.0 million
in 1993, $1.1 million in 1994, $2.6 million in 1995 and $6.3 million in 1996.

    The Company's investing activities used cash of $1.4 million in 1993, $2.1
million in 1994, $1.1 million in 1995 and $1.2 million in 1996. Such activities
represent addition of capital equipment related to facilities expansion to
accommodate increased customer demands for the Company's services and the
establishment of the Tulsa Control Center. Such additions were financed through
a combination of internally-generated funds, bank borrowing and capital leasing
arrangements with equipment manufacturers and leasing companies. The Company's
business is equipment intensive, requiring periodic expenditures of cash or the
incurrence of additional debt to acquire additional videotape duplication
equipment in order to increase capacity or replace existing equipment.

                                       21
<PAGE>
    During 1996, the Company made $1.2 million of capital expenditures in tenant
improvements to upgrade its archiving facilities and increase storage capacity,
as well as to build out and to purchase equipment for both its West Los Angeles
and its Hollywood headquarters facilities. The Company expects to spend
approximately $0.5 million on capital expenditures during the first quarter of
1997 to upgrade and replace equipment, and for management information systems
upgrades.

    The Company's financing activities used cash of $5.0 million in 1996 and
$1.1 million in 1995 and provided cash of $1.0 million in 1994. Financing
activities in 1995 and 1994 included distributions to the Company's
shareholders, which principally represented amounts for the payment of income
tax obligations during the period the Company was an S Corporation, and the
borrowing and/or repayment of borrowing for capital additions. In addition to
the aforementioned activities, financing activities in 1996 included payment of
certain deferred costs associated with the Offering and the Company's loan to
its chief executive officer, which was repaid in 1997. See "Certain
Relationships and Related Transactions."

    In January 1997 the Company acquired substantially all of the assets and
assumed certain liabilities of Woodholly Productions. In connection with the
Woodholly Acquisition the Company executed $4.0 million promissory notes. These
promissory notes bore interest at 8% per annum and were repaid on February 28,
1997. The purchase price paid by the Company in the Woodholly Acquisition
consists of an initial purchase price of $4.0 million plus an as yet
undetermined contingent purchase price. The contingent purchase price, payable
to the partners of Woodholly, is to be earned and paid based on the total
operating income (as defined) resulting from the financial results of Woodholly
as a separate division of the Company. The contingent purchase price, in total,
is limited to $4.0 million, with an additional bonus payment of $1.0 million to
be made by the Company if Woodholly achieves certain additional revenue and
profitability targets. The excess of the initial consideration over the fair
value of the assets acquired and liabilities assumed of approximately $1.8
million was allocated to goodwill. The contingent purchase price, to the extent
earned, will be treated as an increase in goodwill and will be amortized
coterminously with the original 20 year period. To the extent additional
contingent purchase price payments are made, amortization will increase in
future periods. If the full contingent purchase price were earned or paid,
goodwill would be increased by a total of $5.0 million, and annual amortization
expense associated with such additional goodwill would be $0.3 million (for an
aggregate annual amortization expense of $0.4 million). Management of the
Company is in the process of reviewing the allocation of the purchase price and,
when completed, may modify its preliminary allocation. The final allocation of
the purchase price may vary as additional information is obtained, and
accordingly, the ultimate allocation may differ from that used in the unaudited
pro forma combined financial statements. The Woodholly Acquisition was accounted
for by the Company under the purchase method of accounting.

    In connection with the purchase of a portion of the Common Stock owned by
one of the Company's founders in April 1996, the Company borrowed an additional
$1.2 million under its revolving credit agreement and loaned such amount to the
Company's chief executive officer. This loan was repaid after consummation of
the Offering from distributions to the Company's shareholders of record prior to
the Offering of previously taxed but undistributed earnings.

    As a result of termination of its S Corporation status, the Company will be
required to record deferred taxes which relate primarily to timing differences
between financial and income tax reporting of depreciation and certain valuation
allowances that were attributable to periods it had elected to be treated as an
S Corporation. This one-time non-cash charge will be recorded in the quarter
ending March 31, 1997. If this charge were recorded at December 31, 1996, the
amount would have been approximately $0.2 million. See Notes 2 and 3 of Notes to
the Financial Statements. In addition, the Company distributed approximately
$4.5 million of the net proceeds of the Offering to the Company's shareholders
of record prior to the Offering in respect of previously taxed and undistributed
earnings of the Company for the period ending December 31, 1996. The Company
also declared, but has not yet paid, a dividend to such shareholders to account
for the period in 1997 prior to the Offering during which the Company was an S
Corporation.

                                       22
<PAGE>
    The Company has a $2.0 million revolving credit agreement with Union Bank
(the "Revolving Credit Agreement"). Amounts available pursuant to this agreement
are determined by eligible accounts receivable, as defined, and are secured by
substantially all of the Company's assets. In addition, repayment of amounts
borrowed is guaranteed by the Company's principal shareholder. Interest accrues
at either the London Interbank Offering Rate "(LIBOR)" plus 2.25% or the bank's
reference rate. The Revolving Credit Agreement imposes a number of financial and
other conditions upon the Company, including limitations on indebtedness and
changes in lines of business, restrictions on the disposition of assets,
restrictions on acquisitions and certain financial tests. In particular,
consummation of significant acquisitions may be subject to obtaining prior bank
consent under the Revolving Credit Agreement. At December 31, 1996, the Company
was in compliance with these covenants and conditions. The Revolving Credit
Agreement expires on June 30, 1997. At December 31, 1996, no balance was
outstanding.

    In July 1995, the Company obtained a term loan in the original amount of
approximately $2.8 million with a bank. The term loan was secured by the assets
of the Company and was to be repaid in monthly installments of principal and
interest through July 2000. Interest accrued at LIBOR plus 2.5%. The terms of
the loan agreement included covenants regarding the maintenance of various
financial ratios. Amounts outstanding under the term loan were repaid by the
Company in February 1997 with a portion of the proceeds of the Offering.

    Management believes that cash generated from the Offering, ongoing
operations, borrowings under its bank line of credit and its existing working
capital will fund necessary capital expenditures and provide adequate working
capital for at least the next twelve months. The Company believes that its
current banking relationship will be enhanced through the potential availability
of a larger working capital line of credit. Management is currently negotiating
with its bank to increase the amounts available under, and the term of, its
credit facility.

    The Company, from time to time, considers the acquisition of businesses
complementary to its current operations. Consummation of any such acquisition or
other expansion of the business conducted by the Company, if beyond the
Company's capital resources, would be subject to the Company securing additional
financing to the extent required.

    IMPACT OF NEW ACCOUNTING STANDARDS.  In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", which is
effective for the Company beginning January 1, 1997. SFAS 123 requires expanded
disclosures on stock-based compensation arrangements with employees and
encourages, but does not require, compensation cost to be measured based upon
the fair value of the equity instrument awarded. Companies are permitted,
however, to continue to apply APB Opinion No. 25, which recognizes compensation
cost based on the intrinsic value of the equity instrument awarded. The Company
will apply APB Opinion No. 25 for stock-based compensation awards to employees
pursuant to the Company's 1996 Stock Incentive Plan and will disclose the
required pro forma effect on its net income and earnings per share.

    INFLATION.  The Company does not believe that inflation will have a
significant impact on its financial condition, results of operations or
prospects.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The financial statements and supplementary data required by Item 8 are set
forth in the pages indicated in Item 14(a)(1).

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

    None.

                                       23
<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

    Set forth below is certain information concerning each person who is
presently an executive officer or director of the Company. All officers and
directors hold office until their respective successors are elected and
qualified, or until their earlier resignation or removal.

<TABLE>
<CAPTION>
NAME                                                             POSITION                                     AGE
-----------------------------  -----------------------------------------------------------------------------  ---
<S>                            <C>                                                                            <C>
R. Luke Stefanko.............  Chairman of the Board, Chief Executive Officer, President and Director         36

Donald R. Stine(1)...........  Chief Financial Officer, Secretary and Director                                35

Thomas J. Ennis..............  Vice President of Sales and Marketing and Director                             38

Steven W. Terry..............  Vice President and General Manager of Operations                               49

Russell R. Ruggieri..........  Vice President of Engineering                                                  47

Eric H. Bershon..............  Vice President and General Manager of Broadcast One                            31

Steven J. Schoch(1)(2).......  Director                                                                       38

Edward M. Philip(1)(2).......  Director                                                                       31
</TABLE>

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

(1) Member of the Audit Committee

(2) Member of the Compensation Committee

    R. Luke Stefanko has been Chief Executive Officer and Director since he
co-founded the Company in 1990. Mr. Stefanko was appointed President on April 1,
1996 and was elected to the newly-created position of Chairman of the Board in
May 1996. Mr. Stefanko has more than 17 years of experience in the videotape
duplication and distribution industry, including serving as a director and Vice
President/ Operations of A.M.E., Inc. ("AME"), a video duplication company, from
1979 to January 4, 1990. Mr. Stefanko is Mr. Stine's brother-in-law.

    Donald R. Stine has been Chief Financial Officer and Secretary of the
Company since he joined the Company in August, 1994 and became a Director in May
1996. Mr. Stine was a Director of Finance for The Walt Disney Company from 1988
to 1994. Mr. Stine is a director of Sight Effects, Inc., a privately held
production and computer animation company. Mr. Stine is Mr. Stefanko's
brother-in-law.

    Thomas J. Ennis joined the Company as a consultant in August 1995 and has
been Vice President of Sales and Marketing since March 1996 and a Director since
May 1996. Prior to joining the Company, Mr. Ennis served as Vice President of
Sales and Infomercial Services at Starcom Television Services from 1990 to 1995.

    Steven W. Terry has been Vice President and General Manager of Operations
since he joined the Company in 1990. Mr. Terry has 27 years of experience in the
video duplication and distribution industry, including positions held at
Vidtronics, Compact Video and AME.

    Russell R. Ruggieri joined the Company in 1990 as Director of Engineering
and is currently serving as Vice President of Engineering. Mr. Ruggieri has over
23 years of experience in the television broadcasting and video duplication and
distribution business.

    Eric H. Bershon joined the Company in 1993 as Vice President of Sales and is
currently Vice President and General Manager of Broadcast One. Prior to joining
the Company, Mr. Bershon worked at MediaTech West as Vice President and General
Manager from 1988 to 1992.

                                       24
<PAGE>
    Steven J. Schoch became a Director of the Company in February 1997. Mr.
Schoch is vice president and treasurer of Times Mirror Corporation. Prior to
joining Times Mirror in November 1995, Mr. Schoch was treasurer of Euro Disney
S.C.A., an affiliate of The Walt Disney Company. He joined that company in 1991
as director of corporate finance, and was promoted to vice president, assistant
treasurer in 1992 prior to his appointment at Euro Disney in 1994.

    Edward M. Philip became a Director of the Company in February 1997. Mr.
Philip is the Chief Operating Officer and Secretary of Lycos, Inc. (an Internet
services company) and has served in this capacity since December 1995. From July
1991 to December 1995, Mr. Philip was employed with The Walt Disney Company
where he served in various finance positions, most recently as Vice President
and Assistant Treasurer.

    The directors serve until the next annual meeting of shareholders and the
election and qualification of their successors. The officers are elected by the
directors and serve at the discretion of the Board of Directors.

ITEM 11.  EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

    Each director who is not an employee of the Company is paid a fee of $1,000
for each meeting of the Board of Directors attended. Members of the Board of
Directors who are not employees of the Company receive stock option grants upon
election or re-election. See "--1996 Stock Incentive Plan." Directors are
reimbursed for travel and other reasonable expenses relating to meetings of the
Board of Directors.

EXECUTIVE COMPENSATION

    The following table sets forth all cash compensation, including bonuses and
deferred compensation, paid for the years ended December 31,1995 and 1996 by the
Company to (i) its Chief Executive Officer, (ii) each of the Company's four
other most highly compensated individuals who were serving as officers on
December 31, 1996 and whose salary plus bonus exceeded $100,000 for such year
and (iii) its former president who resigned during the year ending December 31,
1996 (the persons described in (i), (ii) and (iii) above, the "Named
Executives"). Except for Messrs. Stefanko, Semmer, Stine, and Bershon, no Named
Executives received salaries in excess of $100,000 in the year ended December
31, 1995. With the exception of Mr. Bershon who received a bonus, no bonuses or
long term compensation awards were granted to any of the foregoing persons for
the year ended December 31, 1996.

                                       25
<PAGE>
                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                           OTHER
NAME AND PRINCIPAL POSITION                                            YEAR       SALARY      BONUS    COMPENSATION
-------------------------------------------------------------------  ---------  ----------  ---------  -------------
<S>                                                                  <C>        <C>         <C>        <C>
R. Luke Stefanko, Chief Executive Officer .........................       1995  $  273,000  $       0  $  138,177(1)
                                                                          1996  $  273,000  $       0     848,790(2)

Robert C. Semmer, then President(3) ...............................       1995  $  200,000  $       0  $        0
                                                                          1996  $  200,000  $       0  $        0

Donald R. Stine, Chief Financial Officer ..........................       1995  $  120,000  $       0  $        0
                                                                          1996  $  120,000  $       0      34,200(4)

Steven W. Terry, Vice President and General Manager of
  Operations.......................................................       1996  $  114,400  $       0  $        0

Russell R. Ruggieri, Vice President of Engineering.................       1996  $  104,000  $       0  $        0

Eric H. Bershon, Vice President and General Manager of Broadcast
  One .............................................................       1995  $  114,230  $       0  $        0
                                                                          1996    $119,808  $  20,000  $        0
</TABLE>

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

(1) Includes $136,773 paid by the Company to federal and state taxing
    authorities on behalf of Mr. Stefanko to satisfy federal and state taxes
    owed by Mr. Stefanko by virtue of the Company's status as a Subchapter S
    Corporation for federal and state tax purposes. Also includes $1,404 in
    premiums paid by the Company on life insurance policy for the benefit of Mr.
    Stefanko.

(2) Includes $847,386 paid by the Company to federal and state taxing
    authorities on behalf of Mr. Stefanko to satisfy federal and state taxes
    owed by Mr. Stefanko by virtue of the Company's status as a Subchapter S
    Corporation for federal and state tax purposes. Also includes $1,404 in
    premiums paid by the Company on life insurance policy for the benefit of Mr.
    Stefanko.

(3) Mr. Semmer resigned as President effective May 15, 1996.

(4) Represents payments by the Company to federal and state taxing authorities
    on behalf of Mr. Stine to satisfy federal and state taxes owed by Mr. Stine
    by virtue of the Company's status as a Subchapter S Corporation for federal
    and state tax purposes.

EMPLOYMENT AGREEMENTS

    The Company entered into employment agreements with each of R. Luke
Stefanko, Thomas J. Ennis and Eric H. Bershon, commencing June 27, 1996, March
19, 1996 and August 31, 1996. respectively. Mr. Stefanko's agreement has a term
of five years ending in June, 2001. The term of Mr. Bershon's agreement expires
in August 1998. In March 1997, the Company exercised its option to extend the
term of Mr. Ennis' agreement to March 1998. Under these agreements, the current
annual salaries of Messrs. Stefanko, Bershon, and Ennis are $250,000, $120,000,
and $125,000, respectively. Mr. Stefanko's base salary increases each year in
accordance with increases in the Consumer Price Index, while Mr. Bershon's base
salary increases at a rate of 2.5% per year. Mr. Ennis' base salary does not
change during the term of the agreement. These base salaries are subject to
further annual increase if approved by the Compensation Committee. Mr. Stefanko
is provided with an automobile expense reimbursement allowance and an annual
allowance to cover premiums for life, health and disability insurance. Mr.
Stefanko's employment agreement entitles him to receive quarterly bonus payments
to the extent the Company achieves quarterly earnings per share results ratified
by the Board of the Directors at the beginning of each year ("Targeted
Earnings"). If the Company attains the Targeted Earnings with respect to a
particular quarter, Mr. Stefanko shall receive a bonus payment of $6,250. If the
Company's actual earnings per share are less than 75% of the Targeted Earnings,
Mr. Stefanko is not entitled to a bonus. If the Company's actual earnings per
share equal 125% or more of the Targeted Earnings, Mr. Stefanko shall receive an
increased bonus payment (subject to a maximum payment in any quarter of
$12,500). To the extent the Company's earnings per share equal

                                       26
<PAGE>
between 75% and 125% of the Targeted Earnings, Mr. Stefanko shall be entitled to
receive a pro rated bonus payment in accordance with the range set forth above.

    Mr. Bershon's employment agreement entitles him to receive an annual bonus
to the extent the Company achieves sales results ("Projected Sales") and
maintains the minimum gross margin percentages ("Projected Gross Margin")
ratified by the Board of the Directors at the beginning of each year. If the
Broadcast One division of the Company attains the Projected Sales and meets or
exceeds the Projected Gross Margin, Mr. Bershon shall receive a bonus payment of
$40,000. If the division's sales are less than 80% of the Projected Sales or if
gross margins do not meet or exceed the Projected Gross Margin, Mr. Bershon is
not entitled to a bonus. If the division's sales equal 133% or more of the
Projected Sales and if gross margins meet or exceed the Projected Gross Margin,
Mr. Bershon shall receive an additional bonus of $40,000. To the extent the
division's sales equal between 80% and 133% of the Projected Sales with gross
margins meeting or exceeding Projected Gross Margins, Mr. Bershon shall be
entitled to receive a pro rated bonus payment in accordance with the range set
forth above.

KEY EXECUTIVE SEVERANCE AGREEMENT

    Mr. Stefanko is party to a key executive severance agreement with the
Company as part of his employment agreement. The key executive severance
agreement provides that if Mr. Stefanko's employment is terminated without cause
(as defined in the agreement), except in the event of disability or retirement,
he shall be entitled to receive the following: (i) if he is terminated within
two years following a change in control of the Company, then he shall be
entitled to receive payment of his full base salary for a period of two years,
plus payment of the amount of any bonus for a past fiscal year which has not yet
been awarded or paid, and continuation of benefits for a period of two years, or
(ii) if his employment is terminated other than within two years following a
change in control of the Company, then Mr. Stefanko shall be entitled to receive
payment of his full base salary for the remainder of the term of his agreement,
payment of the amount of bonuses, and continuation of benefits. A change in
control of the Company is defined to mean a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Such a change in control is deemed conclusively to have
occurred in the event of certain tender offers, mergers or consolidations, the
sale, lease, exchange or transfer of substantially all of the assets of the
Company, the acquisition by a person or group (other than Mr. Stefanko) of 25%
or more of the outstanding voting securities of the Company, the approval by the
shareholders of a plan of liquidation or dissolution of the Company, or certain
changes in the members of the Board of Directors of the Company. In the event of
a decrease in Mr. Stefanko's then current base salary, a removal from
eligibility to participate in the Company's bonus plan and other events as
described in the agreement, then Mr. Stefanko shall have the right to treat such
event as a termination of his employment by the Company without cause and to
receive the payments and benefits described above.

OPTION GRANTS IN LAST FISCAL YEAR

    No stock option or stock appreciation rights were granted to the Named
Executives during the fiscal year ended December 31, 1996.

1996 STOCK INCENTIVE PLAN

    PLAN SUMMARY.  The 1996 Stock Incentive Plan (the "1996 Plan" or the "Plan")
authorizes the granting of awards to officers and key employees of the Company,
as well as to third parties providing valuable services to the Company, e.g.,
independent contractors, consultants and advisors to the Company. Members of the
Board of Directors are eligible to receive awards under the 1996 Plan.
Non-employee directors presently receive the non-discretionary stock option
awards described below. Awards can be Stock Options ("Options"), Stock
Appreciation Rights ("SARs"), Performance Share Awards ("PSAs") and Restricted
Stock Awards ("RSAs"). The 1996 Plan is administered by a committee appointed by
the Board of Directors and consisting of two or more members, each of whom must
be a non-employee

                                       27
<PAGE>
Director, in the absence of a committee, the Board of Directors, if each member
qualifies as a non-employee Director, (the "Committee"). The Committee
determines the number of shares to be covered by an award, the term and exercise
price, if any, of the award and other terms and provisions of awards. Members of
the Board of Directors who are not also employees of the Company receive, at
such time as they are appointed, elected or re-elected to serve as members of
the Board of Directors, non-discretionary awards of stock options to purchase
15,000 shares of Common Stock at the fair market value on the date the stock
option is granted. The number and kind of shares available under the 1996 Plan
are subject to adjustment in certain events. Shares relating to Options or SARs
which are not exercised, shares relating to RSAs which do not vest and shares
relating to PSAs which are not issued will again be available for issuance under
the 1996 Plan. The Company has reserved 900,000 shares of Common Stock for
issuance under the Plan.

    An Option granted under the 1996 Plan may be an incentive stock option
("ISO") or a non-qualified Option. ISOs will only be granted to employees of the
Company. The exercise price for Options is to be determined by the Committee,
but in the case of an ISO is not to be less than fair market value of the Common
Stock on the date the Option is granted (110% of fair market value in the case
of an ISO granted to any person who owns more than 10% of the voting power of
the Company). In general, the exercise price is payable in any combination of
cash, shares of Common Stock already owned by the participant for at least six
months, or, if authorized by the Committee, a promissory note secured by the
Common Stock issuable upon exercise. In addition, the award agreement may
provide for "cashless" exercise and payment. The aggregate fair market value
(determined on the date of grant) of the shares of Common Stock for which ISOs
may be granted to any participant under the 1996 Plan and any other plan by the
Company or its affiliates which are exercisable for the first time by such
participant during any calendar year may not exceed $100,000.

    The Options granted under the 1996 Plan become exercisable on such dates as
the Committee determines in the terms of each individual Option. A Director who
is not also an employee of the Company will, upon appointment, election or
re-election to the Board of Directors, automatically be granted a nonqualified
option to purchase 15,000 shares, vesting in equal tranches over three years, at
an exercise price equal to the fair market value of Common Stock on the date of
grant. Options become immediately exercisable in full in the event of a
disposition of all or substantially all of the assets or capital stock of the
Company by means of a sale, merger, consolidation, reorganization, liquidation
or otherwise, unless the Committee arranges for the optionee to receive new
Options covering shares of the corporation purchasing or acquiring the assets or
stock of the Company, in substitution of the Options granted under the plan
(which Options shall there terminate). The Committee in any event may, on such
terms and conditions as it deems appropriate accelerate the exercisability of
Options granted under the Plan. An ISO to a holder of more than 10% of the
voting power of the Company must expire no later than five years from the date
of grant. A non-qualified Option must expire no later than ten years from the
date of the grant.

    The Options granted under the 1996 Plan are not transferable other than by
will or the laws of descent and distribution. Options which have become
exercisable by the date of termination of employment or of service on the
Committee must be exercised within certain specified periods of time from the
date of termination. the period of time to depend on the reason for termination.
Such Options generally lapse three months after termination of employment other
than by reason of retirement, total disability or death, in which case they
generally terminate one year thereafter. If a participant is discharged for
cause, all Options will terminate immediately. Options which have not yet become
exercisable on the date the participant terminates employment or service on the
Committee for a reason other than retirement, death or total disability shall
terminate on that date.

    An SAR is the right to receive payment based on the appreciation in the fair
market value of Common Stock from the date of grant to the date of exercise. At
its discretion, the Committee may grant an SAR concurrently with the grant of an
Option. Such SAR is only exercisable at such time, and to the extent, that the
related Option is exercisable. Upon exercise of an SAR, the holder receives for
each share with respect to which the SAR is exercised an amount equal to the
difference between the exercise price under the related

                                       28
<PAGE>
Option and the fair market value of a share of Common Stock on the date of
exercise of the SAR. The Committee in its discretion may pay the amount in cash,
shares of Common Stock or a combination thereof.

    Each SAR granted concurrently with an Option will have the same termination
provisions and exercisability periods as the related Option. In its discretion,
the Committee may also grant SARs independently of any Option, subject to such
conditions consistent with the terms of the Plan as the Committee may provide in
the award agreement. Upon the exercise of an SAR granted independently of any
Option, the holder receives for each share with respect to which the SAR is
exercised an amount in cash based on the percentage specified in the award
agreement of the excess, if any, of fair market value of a share of Common Stock
on the date of exercise over such fair market value on the date the SAR was
granted. The termination provisions and exercisability periods of an SAR granted
independently of any Option will be determined by the Committee.

    An RSA is an award of a fixed number of shares of Common Stock subject to
transfer restrictions. The Committee specifies the purchase price, if any, the
recipient must pay for such shares. Shares included in an RSA may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered until they
have vested. The recipient is entitled to dividend and voting rights pertaining
to such RSA shares even though they have not vested, so long as such shares have
not been forfeited.

    A PSA is an award of a fixed number of shares of Common Stock, the issuance
of which is contingent upon the attainment of such performance objectives, and
the payment of such consideration, if any, as is specified by the Committee.

    The 1996 Plan permits a participant to satisfy his tax withholding with
shares of Common Stock instead of cash if the Committee agrees.

    Upon the date a participant is no longer employed by the Company for any
reason, shares subject to the participant's RSAs which have not become vested by
that date or shares subject to a participant's PSAs which have not been issued
shall be forfeited in accordance with the terms of the related award agreements.

    The exercisability of all of the outstanding awards may be accelerated,
subject to the discretion of the Committee, upon the occurrence of an "Event",
(defined in the Plan) to include approval by the shareholders of the dissolution
on liquidation of the Company, certain mergers, consolidations, sale of
substantially all of the Company's business and/or assets and a "change in
control". The 1996 Plan defines a change in control to have occurred (i) if a
"person," as defined in Section 13(d) and 14(d) under the Exchange Act acquires
20% or more of the voting power of the then outstanding securities of the
Company and (ii) if during any two consecutive year periods there is a change of
a majority of the members of the Board of Directors, unless the election or
nomination of the new directors is approved by at least three-fourths of the
members still in office from the beginning of the two year period.

    The 1996 Plan provides for anti-dilution adjustments in the event of a
reorganization. merger, combination recapitalization, reclassification, stock
dividend, stock split or reverse stock split. Upon the dissolution or
liquidation of the Company, or upon a reorganization, merger or consolidation of
the Company as a result of which the Company is not the surviving entity, the
Plan will terminate, and any outstanding awards will terminate and be forfeited,
subject to the Committee's ability to provide for (i) certain payments to
participants in cash or Common Stock in lieu of such outstanding awards, (ii)
the assumption by the successor corporation of either the Plan or the awards
outstanding under the Plan and (iii) continuation of the Plan.

    The Board of Directors may, at any time, terminate or suspend the 1996 Plan.
The 1996 Plan currently provides that the Board of Directors or the Committee
may amend the 1996 Plan at any time without the approval of the holders of a
majority of the shares of Common Stock except in certain situations enumerated
in the 1996 Plan and then only to the extent such approval is required by Rule
16b-3 under the Exchange Act or Section 162(m) of the Internal Revenue Code.

                                       29
<PAGE>
401(K) PLAN

    Effective October 1, 1991, the Company adopted an employee defined
contribution 401(k) investment plan (the "401(k) Plan") which is administered by
True Consultants. All full-time employees are eligible to participate in the
401(k) Plan after six months of continuous service with the Company. Under the
401(k) Plan, participants may make regular pre-tax contributions of up to 15% of
their compensation. While the Company does not make matching contributions, it
may, but is not obligated to make profit-sharing contributions in an amount
determined by the Board of Directors. All participant contributions to the
401(k) Plan are vested 100%, while any profit sharing contributions vest in
accordance with the participant's years of service. To date, the Company has not
elected to contribute to the 401(k) Plan. As of December 31, 1996, 44 then
current employees were enrolled in the 401(k) Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    The Company did not have a Compensation Committee during 1996. As a result,
Messrs. Stefanko and Stine participated in deliberations concerning executive
officer compensation. The Board of Directors established a Compensation
Committee which took office on February 24, 1997.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 26, 1997, as
adjusted to reflect the sale of the Common Stock in the Offering and the
exercise of the Over-allotment Option, by (i) each person who is known by the
Company to beneficially own more than five percent of the Company's outstanding
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executives and (iv) all current directors and executive officers as a group. The
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.

<TABLE>
<CAPTION>
                                                                       SHARES OF COMMON STOCK
                                                                         BENEFICIALLY OWNED
                                                                       -----------------------
NAME                                                                     NUMBER      PERCENT
---------------------------------------------------------------------  ----------  -----------
<S>                                                                    <C>         <C>
R. Luke Stefanko(1)..................................................   5,594,400       58.4%
Donald R. Stine(1)...................................................     666,000        7.0%
Thomas J. Ennis......................................................      --          --
Edward M. Philip(2)..................................................      --          --
Steven J. Schoch(2)..................................................      --          --
Robert C. Semmer.....................................................      --          --
Steven W. Terry......................................................      --          --
Russell R. Ruggieri..................................................      --          --
Eric H. Bershon......................................................      --          --
All current directors and executive officers as a group (8
  persons)...........................................................   6,260,400       65.4%
</TABLE>

    Unless otherwise indicated the address of each of these shareholders is 6920
Sunset Boulevard, Hollywood, California 90028.

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

(1) Of such shares, 2,644,400 held by Mr. Stefanko and all of Mr. Stine's shares
    are pledged to Robert Bajorek, the co-founder of the Company. See "Certain
    Relationships and Related Transactions."

(2) Excludes 15,000 time vested options, granted in 1997 and exercisable for
    shares of Common Stock, that have not yet vested and are not subject to
    vesting within 60 days.

                                       30
<PAGE>
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Pursuant to a stock purchase agreement dated as of April 1, 1996 (the
"Agreement"), Mr. Stefanko and Mr. Stine purchased 2,264,400 and 666,000 shares
of Common Stock, respectively, from Robert Bajorek, the co-founder of the
Company, for a total of $6.7 million (or $2.28 per share). Pursuant to the
Agreement, Mr. Stefanko paid Mr. Bajorek $1.1 million on April 1, 1996. The
Company extended Mr. Stefanko a $1.1 million demand loan bearing interest at an
annual rate of 7.0% to make that cash payment. Mr. Stefanko repaid this loan in
1997 with a portion of the proceeds of his S Corporation distribution. Mr.
Stefanko and Mr. Stine executed non-recourse notes in the amount of $4.0 million
and $1.6 million, respectively, in favor of Mr. Bajorek for the balance of the
aggregate purchase price. These notes amortize commencing in 1998, reach
maturity in 2005 and bear interest at a rate of 4.5%. The notes are secured by
the Common Stock purchased thereby and contain acceleration provisions which
require Mr. Stefanko or Mr. Stine, as the case may be, to apply one-half of the
proceeds of a sale of his Common Stock or the sale of substantially all of the
assets of VDI towards the prepayment of the amount then outstanding under such
note. In connection with his sale of Common Stock, Mr. Bajorek agreed not to
compete with the Company in California for a period of three years.

    Upon its formation in 1990 the Company elected to be treated as an S
Corporation for federal income tax purposes which resulted in the taxable income
of the Company being taxed directly to its shareholders rather than to the
Company. Prior to the closing of the Offering, the Company's shareholders
elected to terminate the Company's S Corporation status. Shortly after the
change in tax status, all the persons that were shareholders of the Company
between January 1, 1997, through and including the date of such termination,
consented to allocate all of the Company's items of income, gain, loss,
deduction, or credit for the 1997 taxable year between the short year for which
the Company is treated as an S Corporation and the short year for which the
Company is treated as a C Corporation on a pro rata basis. The Company maintains
an accumulated adjustments account (the "AAA account") which currently holds its
taxed but undistributed earnings. The Company distributed approximately $4.5
million of the amount in the AAA account, to the Company's shareholders of
record prior to the Offering in respect of previously taxed and undistributed
earnings of the Company for the period ending on December 31, 1996. It is
anticipated that the Company will distribute the balance of the amount in the
AAA account to such shareholders for the period in 1997 prior to the Offering.

    A relative of Mr. Stefanko loaned the Company $300,000 in 1991 and an
additional $300,000 in 1995. These loans bore interest at an annual rate of 9%
and 13%, respectively. The Company repaid these loans in full on June 14, 1996.
In 1994 the Company loaned Robert Semmer, a former executive officer of the
Company, $253,000, of which $204,000 remained outstanding as of December 31,
1996. This loan bore interest at an annual rate of 10% and amortized over five
years beginning in June 1996. This loan was repaid in 1997.

                                       31
<PAGE>
                                    PART IV

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

    (a) Documents Filed as Part of this Report:

        (1) Financial Statements

<TABLE>
<CAPTION>
                                                                                         PAGE
                                                                                         -----
<S>                                                                                      <C>
VDI MEDIA

Report of Independent Accountants......................................................    F-1
Balance Sheet at December 31, 1995 and 1996............................................    F-2
Statement of Operations for each of the three years in the period ended December 31,
  1996.................................................................................    F-3
Statement of Shareholders' Equity for each of the three years in the period ended
  December 31, 1996....................................................................    F-4
Statement of Cash Flows for each of the three years in the period ended December 31,
  1996.................................................................................    F-5
Notes to Financial Statements..........................................................    F-6

WOODHOLLY PRODUCTIONS

Report of Independent Accountants......................................................   F-12
Balance Sheet at December 31, 1995 and 1996............................................   F-13
Statement of Income for each of the two years in the period ended December 31, 1996....   F-14
Statement of Partners' Capital for each of the two years in the period ended December
  31, 1996.............................................................................   F-15
Statement of Cash Flows for each of the two years in the period ended December 31,
  1996.................................................................................   F-16
Notes to Financial Statements..........................................................   F-17
</TABLE>

    The following financial statement schedule of the Company and its
subsidiaries is included in Item 14(a)(1):

<TABLE>
<CAPTION>
                                                                                         PAGE
                                                                                         -----
<S>            <C>                                                                       <C>
Schedule II    Valuation and Qualifying Accounts.......................................  16
</TABLE>

    All other financial statement schedules not listed above have been omitted
since the required information is included in the consolidated financial
statements or the notes thereto, or is not applicable or required.

<TABLE>
<S>        <C>
           (2) Exhibits

 3.1       Restated Articles of Incorporation of the Company (incorporated by reference to the
             same numbered Exhibit to the Company's Amendment No. 1 to the Registration
             Statement on Form S-1 filed with the Securities and Exchange Commission (the
             "SEC") on May 17, 996 (the "S-1") filed with the SEC on December 31, 1996
             ("Amendment No. 1")).

 3.2       By-laws of the Company (incorporated by reference to the same numbered Exhibit to
             the Company's Amendment No. 1.)

 4.1       Specimen Certificate for Common Stock (incorporated by reference to the same
             numbered Exhibit to the Company's Amendment No. 1.)
</TABLE>

                                       32
<PAGE>
<TABLE>
<S>        <C>
 4.2       1996 Stock Incentive Plan of the Company (incorporated by reference to the same
             numbered Exhibit to the Company's Amendment No. 1.)

10.1       Employment Agreement between the Company and Luke Stefanko (incorporated by
             reference to the same numbered Exhibit to the Company's Amendment No. 1.)

10.2       Employment Agreement between the Company and Tom Ennis (incorporated by reference to
             the same numbered Exhibit to the Company's Amendment No. 1.)

10.3       Employment Agreement between the Company and Eric Bershon (incorporated by reference
             to the same numbered Exhibit to the Company's Amendment No. 1.)

10.5       Business Loan Agreement (Revolving Credit) between the Company and Union Bank dated
             July 1, 1995, as amended on April 1, 1996, and June 1996 (incorporated by
             reference to the same numbered Exhibit to the Company's Amendment No. 1.)

10.6       Joint Operating Agreement effective as of March 1, 1994, between the Company and
             Vyvx, Inc. (incorporated by reference to the same numbered Exhibit to the
             Company's Amendment No. 1.)

10.7       Lease Agreement between the Company and 6920 Sunset Boulevard Associates dated May
             17, 1994 (Hollywood facility) (incorporated by reference to the same numbered
             Exhibit to the Company's S-1.)

10.8       Lease Agreement between the Company and 3767 Overland Associates, Ltd. dated April
             25, 1996 (West Los Angeles facility) (incorporated by reference to the same
             numbered Exhibit to the Company's S-1.)

10.9       Lease Agreement between the Company and The Bovaird Supply Company dated June 3,
             1994 (Tulsa Control Center) (incorporated by reference to the same numbered
             Exhibit to the Company's S-1.)

10.10      Loan Agreement between the Company and R. Luke Stefanko dated as of April 1, 1996
             (incorporated by reference to the same numbered Exhibit to the Company's S-1.)

10.12      Term Loan Agreement between the Company and Union Bank (incorporated by reference to
             the same numbered Exhibit to the Company's Amendment No. 1).

10.13      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
             (incorporated by reference to the same numbered Exhibit to the Company's Amendment
             No. 1).

11.        Statement re computation of Earnings Per Share.

27.        Financial Data Schedule.

(B)  REPORTS ON 8-K:

           None.
</TABLE>

                                       33
<PAGE>
                                   SIGNATURES

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

Dated: March 28, 1997

   VDI MEDIA

   By:             /s/ Donald R. Stine
        -----------------------------------------

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

<TABLE>
<C>                             <S>                         <C>
     /s/ R. LUKE STEFANKO
------------------------------  Chairman of the Board and     March 28, 1997
       R. Luke Stefanko           Chief Executive Officer

                                Director, Chief Financial
     /s/ DONALD R. STINE          Officer and Treasurer
------------------------------    (principal financial        March 28, 1997
       Donald R. Stine            officer)

        /s/ TOM ENNIS
------------------------------  Director                      March 28, 1997
          Tom Ennis

        /s/ PAUL RUBEL
------------------------------  Principal Accounting          March 28, 1997
          Paul Rubel              Officer

      /s/ STEVEN SCHOCH
------------------------------  Director                      March 28, 1997
        Steven Schoch

      /s/ EDWARD PHILIP
------------------------------  Director                      March 28, 1997
        Edward Philip
</TABLE>

                                       34
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of VDI Media

    In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of VDI Media at December 31, 1996 and
1995, and the results of its operations and its cash flows for the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards 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 the opinion expressed above.

Price Waterhouse LLP
Costa Mesa, California
March 24, 1997

                                      F-1
<PAGE>
                                   VDI MEDIA
                                 BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                       ---------------------------
                                                                                           1995          1996
                                                                                       ------------  -------------
<S>                                                                                    <C>           <C>
                                                      ASSETS

Current assets:
  Cash...............................................................................  $    415,000  $     564,000
  Accounts receivable, net of allowances for doubtful accounts of $350,000 and
    $460,000, respectively...........................................................     4,398,000      4,537,000
  Amount receivable from officer (Note 9)............................................                    1,214,000
  Amounts receivable from employees (Note 4).........................................       207,000        224,000
  Inventories........................................................................       178,000        144,000
  Prepaid expenses and other current assets..........................................        52,000          2,000
                                                                                       ------------  -------------
      Total current assets...........................................................     5,250,000      6,685,000
  Property and equipment, net (Note 5)...............................................     3,992,000      3,520,000
  Deferred offering costs............................................................                      876,000
  Other assets, net..................................................................        98,000         97,000
                                                                                       ------------  -------------
                                                                                       $  9,340,000  $  11,178,000
                                                                                       ------------  -------------
                                                                                       ------------  -------------

                                       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable...................................................................  $  2,237,000  $   2,394,000
  Accrued expenses...................................................................       843,000      1,337,000
  Accrued distribution to shareholders...............................................                      269,000
  Accrued settlement obligation (Note 8).............................................        41,000
  Borrowings under revolving credit agreement (Note 6)...............................       100,000
  Current portion of notes payable (Note 7)..........................................       773,000        728,000
  Current portion of subordinated notes payable to related party (Note 7)............        30,000
  Current portion of capital lease obligations.......................................       147,000         32,000
                                                                                       ------------  -------------
      Total current liabilities......................................................     4,171,000      4,760,000
                                                                                       ------------  -------------
  Notes payable, less current portion (Note 7).......................................     1,821,000      1,102,000
                                                                                       ------------  -------------
  Subordinated notes payable to related party, less current portion (Note 7).........       225,000
                                                                                       ------------  -------------
Capital lease obligations, less current portion......................................       104,000         75,000
                                                                                       ------------  -------------
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; 6,660,000 shares issued
    and outstanding..................................................................     1,015,000      1,015,000
Retained earnings....................................................................     2,004,000      4,226,000
                                                                                       ------------  -------------
      Total shareholders' equity.....................................................     3,019,000      5,241,000
                                                                                       ------------  -------------
                                                                                       $  9,340,000  $  11,178,000
                                                                                       ------------  -------------
                                                                                       ------------  -------------
</TABLE>

                 See accompanying notes to financial statements

                                      F-2
<PAGE>
                                   VDI MEDIA
                            STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                  FOR THE YEAR ENDED
                                                                                     DECEMBER 31,
                                                                      -------------------------------------------
                                                                          1994           1995           1996
                                                                      -------------  -------------  -------------
<S>                                                                   <C>            <C>            <C>
Revenues............................................................  $  14,468,000  $  18,538,000  $  24,780,000
Cost of goods sold..................................................     10,042,000     11,256,000     14,933,000
                                                                      -------------  -------------  -------------
Gross profit........................................................      4,426,000      7,282,000      9,847,000

Selling, general, and administrative expense........................      3,545,000      5,181,000      5,720,000
Dispute settlement (Note 8).........................................        458,000
Cost related to establishing a new facility (Note 5)................        981,000
                                                                      -------------  -------------  -------------
Operating income (loss).............................................       (558,000)     2,101,000      4,127,000
Interest expense....................................................        293,000        375,000        291,000
Interest income.....................................................         22,000         42,000         68,000
                                                                      -------------  -------------  -------------
Income (loss) before income taxes...................................       (829,000)     1,768,000      3,904,000
Provision for income taxes..........................................                        26,000         68,000
                                                                      -------------  -------------  -------------
Net income (loss)...................................................  $    (829,000) $   1,742,000  $   3,836,000
                                                                      -------------  -------------  -------------
                                                                      -------------  -------------  -------------
Unaudited pro forma data (Note 3):
  Income (loss) before income taxes.................................  $    (829,000) $   1,768,000  $   3,904,000
Pro forma provision for (benefit from) income taxes.................       (332,000)       707,000      1,562,000
                                                                      -------------  -------------  -------------
Pro forma net income (loss).........................................  $    (497,000) $   1,061,000  $   2,342,000
                                                                      -------------  -------------  -------------
                                                                      -------------  -------------  -------------
Pro forma net income per share......................................                                $        0.35
                                                                                                    -------------
                                                                                                    -------------
Pro forma weighted average number of shares.........................                                    6,694,503
                                                                                                    -------------
                                                                                                    -------------
Supplemental pro forma net income per share.........................                                $        0.36
                                                                                                    -------------
                                                                                                    -------------
Supplemental weighted average number of shares......................                                    7,006,806
                                                                                                    -------------
                                                                                                    -------------
</TABLE>

                 See accompanying notes to financial statements

                                      F-3
<PAGE>
                                   VDI MEDIA
                       STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                 COMMON STOCK                           TOTAL
                                                           ------------------------    RETAINED     SHAREHOLDERS'
                                                             SHARES       AMOUNT       EARNINGS        EQUITY
                                                           ----------  ------------  -------------  -------------
<S>                                                        <C>         <C>           <C>            <C>
Balance at December 31, 1993.............................   6,660,000  $  1,015,000  $   1,789,000   $ 2,804,000
Net loss.................................................                                 (829,000)     (829,000)
Distributions to shareholders............................                                 (269,000)     (269,000)
                                                           ----------  ------------  -------------  -------------
Balance at December 31, 1994.............................   6,660,000     1,015,000        691,000     1,706,000
Net income...............................................                                1,742,000     1,742,000
Distributions to shareholders............................                                 (429,000)     (429,000)
                                                           ----------  ------------  -------------  -------------
Balance at December 31, 1995.............................   6,660,000     1,015,000      2,004,000     3,019,000
Net income...............................................                                3,836,000     3,836,000
Distributions to shareholders............................                               (1,614,000)   (1,614,000)
                                                           ----------  ------------  -------------  -------------
Balance at December 31, 1996.............................   6,660,000  $  1,015,000  $   4,226,000   $ 5,241,000
                                                           ----------  ------------  -------------  -------------
                                                           ----------  ------------  -------------  -------------
</TABLE>

                 See accompanying notes to financial statements

                                      F-4
<PAGE>
                                   VDI MEDIA
                            STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                       -------------------------------------------
                                                                           1994           1995           1996
                                                                       -------------  -------------  -------------
<S>                                                                    <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss)..................................................  $    (829,000) $   1,742,000  $   3,836,000
  Adjustments to reconcile net income (loss) to net cash provided by
    operating activities.............................................
  Depreciation and amortization......................................      1,328,000      1,579,000      1,654,000
  Provision for doubtful accounts....................................         40,000        181,000        110,000
Changes in assets and liabilities:
  (Increase) decrease in accounts receivable.........................         12,000     (1,616,000)      (249,000)
  (Increase) decrease in amounts receivable from employees...........       (281,000)       176,000        (17,000)
  Decrease in inventories............................................         52,000         74,000         34,000
  (Increase) decrease in prepaid expenses and current other assets...        (28,000)       (24,000)        49,000
  (Increase) decrease in other assets................................         39,000         (8,000)        10,000
  Increase in accounts payable.......................................        661,000        474,000        158,000
  Increase (decrease) in accrued expenses............................       (331,000)       392,000        721,000
  Increase (decrease) in accrued settlement obligation...............        458,000       (417,000)
                                                                       -------------  -------------  -------------
  Net cash provided by operating activities..........................      1,121,000      2,553,000      6,306,000
                                                                       -------------  -------------  -------------
  Cash used in investing activities:
    Capital expenditures.............................................     (2,071,000)    (1,137,000)    (1,191,000)
                                                                       -------------  -------------  -------------
Cash flows from financing activities:
  Distributions to shareholders......................................       (269,000)      (429,000)    (1,614,000)
  Change in revolving credit agreement...............................      1,119,000     (1,544,000)      (100,000)
  Proceeds from notes payable........................................      1,000,000      2,783,000
  Repayment of notes payable.........................................       (427,000)    (2,021,000)      (764,000)
  Proceeds from subordinated notes payable to related parties........                       300,000
  Repayment of subordinated notes payable to related parties.........       (110,000)      (135,000)      (255,000)
  Proceeds from capital leases.......................................                       149,000
  Repayment of capital lease obligations.............................       (336,000)      (164,000)      (144,000)
  Increase in amount receivable from officer.........................                                   (1,214,000)
  Increase in deferred offering costs................................                                     (875,000)
                                                                       -------------  -------------  -------------
  Net cash provided by (used in) financing activities................        977,000     (1,061,000)    (4,966,000)

  Net increase in cash...............................................         27,000        355,000        149,000

  Cash at beginning of period........................................         33,000         60,000        415,000
                                                                       -------------  -------------  -------------
Cash at end of period................................................  $      60,000  $     415,000  $     564,000
                                                                       -------------  -------------  -------------
                                                                       -------------  -------------  -------------
Supplemental disclosure of cash flows information:
  Cash paid for:
    Interest.........................................................  $     294,000  $     375,000  $     296,000
                                                                       -------------  -------------  -------------
                                                                       -------------  -------------  -------------
    Income tax.......................................................  $      30,000  $      (6,000) $      72,000
                                                                       -------------  -------------  -------------
                                                                       -------------  -------------  -------------
</TABLE>

                 See accompanying notes to financial statements

                                      F-5
<PAGE>
                                   VDI MEDIA

                         NOTES TO FINANCIAL STATEMENTS

NOTE 1--THE COMPANY:

    VDI Media (the "Company") is a provider of high quality value-added video
distribution and duplication services including distribution of national
television spot advertising, trailers and electronic press kits. The Company's
services consist of (i) the physical and electronic delivery of broadcast
quality advertising, including spots, trailers, electronic press kits and
infomercials, and syndicated television programming to television stations,
cable television and other end-users nationwide and (ii) a broad range of video
services, including the duplication of video in all formats, element storage,
standards conversions, closed captioning and transcription services, and video
encoding for air play verification purposes. The Company also provides its
customers value-added post-production and editing services. The Company is
headquartered in Hollywood, California and has additional facilities in Culver
City, California and Tulsa, Oklahoma.

    In February 1997, the Company completed the sale of a portion of its common
shares in an initial public offering. 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 will terminate. Thereafter, the
Company will pay federal and state income taxes as a C Corporation (see Notes 2
and 3).

    In May 1996, the Company effected a 333-for-1 common stock split and
increased the number of authorized shares to 50,000,000. All share amounts in
the accompanying financial statements have been retroactively restated to
reflect this split.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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 effect 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.

REVENUES AND RECEIVABLES

    The Company records revenues and receivables at the time products are
delivered to customers. Although sales and receivables are concentrated in the
entertainment industry, credit risk is limited due to the financial stability of
the customer base. The Company performs on-going credit evaluations and
maintains reserves for potential credit losses. Such losses have historically
been within management's expectations.

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. Maintenance, repairs and minor renewals are
expensed as incurred. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets. Amortization of

                                      F-6
<PAGE>
                                   VDI MEDIA

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 and leasehold
improvements is five years.

INCOME TAXES

    For the year ended December 31, 1996, the Company was taxed as an S
Corporation for both federal and state income tax purposes, and, as a result, is
not subject to federal taxation and is subject to state taxation on income at a
reduced rate (1.5%). Therefore, no asset or liability for federal income taxes
has been included in the historical financial statements. The shareholders are
liable for individual federal and state income taxes on their allocated portions
of the Company's taxable income. The provision for income taxes includes state
taxes currently payable and deferred taxes arising from the expected future tax
consequences of temporary differences between the carrying amount and the tax
bases of certain assets and liabilities.

    As a consequence of the public offering discussed in Note 1, the Company's S
Corporation status for federal and state income tax purposes will terminate.
This will result in the establishment of a net deferred tax liability calculated
at normal federal and state income tax rates, causing a one-time non-cash charge
against earnings for additional income tax expense equal to the amount of the
net change in the deferred tax liability. As of December 31, 1996, the amount of
the deferred tax liability which would have been recorded had the Company's S
Corporation status terminated on that date was $176,000 (Note 3). The deferred
tax liability comprises certain asset valuation allowances which are not
currently deductible and differing methods of calculating depreciation for
income tax and financial reporting purposes.

FAIR VALUE OF FINANCIAL INSTRUMENTS

    To meet the reporting requirements of SFAS 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.

NOTE 3--PRO FORMA INFORMATION:

    As discussed in Note 2, the Company has elected treatment as an S
Corporation for federal and state income tax purposes. Upon completion of the
offering discussed in Note 1, the S Corporation status will terminate. The
accompanying statement of operations includes unaudited pro forma income tax
provisions, using a tax rate of 40%, to reflect the estimated income tax expense
of the Company as if it had been subject to normal federal and state income
taxes for the periods presented.

    Pro forma net income per share is calculated using the weighted average
number of common shares outstanding after giving effect to the increase in the
number of shares whose proceeds are used to pay a distribution to the Company's
shareholders in excess of current period net income in connection with the
termination of its S Corporation status (see Note 1).

    Supplemental pro forma net income per share is calculated after giving
effect to the number of shares of common stock whose proceeds were used to
retire certain outstanding debt upon completion of the offering and the
elimination of interest expense related to such debt.

                                      F-7
<PAGE>
                                   VDI MEDIA

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--AMOUNTS RECEIVABLE FROM EMPLOYEES:

    Amounts loaned to employees are unsecured and bear interest at rates
approximating 10%.

NOTE 5--PROPERTY AND EQUIPMENT:

    Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                  ----------------------------
                                                                      1995           1996
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Machinery and equipment.........................................  $   7,146,000  $   8,125,000
Leasehold improvements..........................................        742,000        781,000
Equipment under capital lease...................................        687,000        687,000
Vehicles........................................................        210,000        275,000
Computer equipment..............................................        106,000        205,000
                                                                  -------------  -------------
                                                                      8,891,000     10,073,000
Less: Accumulated depreciation and amortization.................     (4,899,000)    (6,553,000)
                                                                  -------------  -------------
                                                                  $   3,992,000  $   3,520,000
                                                                  -------------  -------------
                                                                  -------------  -------------
</TABLE>

    Depreciation expense aggregated $1,328,000, $1,579,000, and $1,654,000 for
the three years in the period ended December 31, 1996, respectively.

    In August 1994, the Company established a distribution facility in Tulsa,
Oklahoma. Equipment and leasehold improvements were capitalized. Costs incurred
in establishing this facility, such as employee costs and initial facility
rental and tape stock, were charged against 1994 results of operations.

    In March 1994, the Company entered into a noncash exchange of production
equipment with a net book value of $433,000 for substantially similar assets.

NOTE 6--REVOLVING CREDIT AGREEMENT:

    The Company has a $2,000,000 revolving credit agreement with a bank. Amounts
available pursuant to this agreement are determined by eligible accounts
receivable, as defined, and are secured by substantially all of the Company's
assets. In addition, repayment of amounts borrowed is guaranteed by the
Company's principal shareholder. Interest accrues at either the London Interbank
Offering Rate ("LIBOR") (5.56 % at December 31, 1996) plus 2.25% or the bank's
reference rate (9% at December 31, 1996). The terms of the revolving credit
agreement include covenants regarding the maintenance of various financial
ratios. At December 31, 1996, the Company was in compliance with these
covenants. The revolving credit agreement expires on June 30, 1997. At December
31, 1996, no amounts have been borrowed persuant to this agreement.

NOTE 7--LONG-TERM DEBT AND NOTES PAYABLE:

TERM LOAN

    In July 1995, the Company obtained a term loan in the original amount of
$2,825,000 with a bank. The term loan is secured by the assets of the Company
and is to be repaid in monthly installments of principal and interest through
July 2000. At December 31, 1996, $1,784,000 was outstanding pursuant to this
agreement and is reflected in notes payable. Interest accrues at LIBOR plus
2.5%. The terms of the loan

                                      F-8
<PAGE>
                                   VDI MEDIA

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--LONG-TERM DEBT AND NOTES PAYABLE: (CONTINUED)
agreement include covenants regarding the maintenance of various financial
ratios. The Company was in compliance with these covenants as of December 31,
1996. Subsequent to year end, the Company repaid amounts outstanding persuant to
the term loan using proceeds from the initial public offering.

SUBORDINATED NOTES PAYABLE TO RELATED PARTY

    The subordinated notes arose from an agreement between the Company and a
relative of the Company's principal shareholder. Such notes payable were
subordinated to amounts borrowed under the revolving credit agreement and term
loan. Interest expense aggregated $36,000, $21,000, and $13,000 for the three
years in the period ended December 31, 1996, respectively. The subordinated
notes were repaid in June 1996.

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. Such
obligations are payable in monthly installments through April 2000.

    Annual maturities for debt and notes payable are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------------------
<S>                                                                               <C>
1997............................................................................  $    728,000
1998............................................................................       548,000
1999............................................................................       447,000
2000............................................................................       107,000
                                                                                  ------------
                                                                                  $  1,830,000
                                                                                  ------------
                                                                                  ------------
</TABLE>

NOTE 8--COMMITMENTS AND CONTINGENCIES:

    In connection with the termination of its S Corporation status, the Company
will pay a distribution to its shareholders comprising its previously taxed and
undistributed earnings as of the termination date. The amount of this
distribution will be approximately $4.9 million.

    The Company leases office and production facilities in California and
Oklahoma under operating leases which expire in May and July 1999, respectively.
The Oklahoma lease provides for a renewal option of five years; the California
lease has no renewal option. Approximate minimum annual rentals under these
noncancellable operating leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------------------
<S>                                                                               <C>
1997............................................................................  $    553,000
1998............................................................................       553,000
1999............................................................................       244,000
                                                                                  ------------
    Total.......................................................................  $  1,350,000
                                                                                  ------------
                                                                                  ------------
</TABLE>

    Total rental expense was approximately $447,000, $595,000 and $623,000 for
the three years in the period ended December 31, 1996, respectively.

                                      F-9
<PAGE>
                                   VDI MEDIA

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--COMMITMENTS AND CONTINGENCIES:

    In February 1995, the Company settled a dispute arising out of the asset
exchange described in Note 5. In consideration of a mutual release from further
liability, including threatened litigation, the Company paid $458,000. This
amount has been recorded as of December 31, 1994, as the agreement represents
the culmination of events occurring prior to that date.

    In March 1994, the Company entered into a five year joint operating
agreement with a telecommunications company to provide access to its fiber optic
network. In consideration for access to the fiber optic network, the Company
shares 50% of revenues arising from delivery services utilizing this network
with the telecommunications company. The agreement does not include any cost
sharing arrangements. No such revenues have been earned pursuant to this
agreement as of December 31, 1996.

NOTE 9--STOCK PURCHASE TRANSACTION:

    Effective April 1, 1996, the Company's co-founder and chief executive
officer purchased 2,264,400 shares of common stock from its co-founder for total
consideration of approximately $5.1 million. In order to effect this
transaction, the chief executive officer borrowed $1.2 million from the Company
bearing an interest rate of 7.0% and issued a note payable to the co-founder in
the amount of approximately $4 million. This note is to be repaid in April 2005
and bears interest at a rate of 4.5%. This note is secured by the common stock
purchased.

    Concurrently, the co-founder agreed to sell 660,000 shares of common stock
of the Company to the Company's chief financial officer. In exchange, the chief
financial officer also executed a note payable to the co-founder in the amount
of $1.6 million; the terms of the chief financial officer's note are identical
to those issued by the chief executive officer. These notes also contain
acceleration provisions which require that the chief executive officer and chief
financial officer prepay one-half of the proceeds from the sale of any of such
shares of common stock or the sale of substantially all of the assets of VDI.

    The chief executive officer expects to repay amounts borrowed from the
Company with the proceeds from the final S Corporation distribution and future
borrowings collateralized by his common stock holdings.

NOTE 10--STOCKHOLDERS' EQUITY:

    In May 1996, the Board of Directors, approved the 1996 Stock Incentive Plan
(the "Plan"). The 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 February 1997, options
to purchase 30,000 shares at an exercise price of $7.00 per share were granted
pursuant to the provisions of the Plan.

    The Board has also authorized the issuance of up to 5,000,000 shares of
preferred stock. The voting rights, liquidation preferences and other privileges
inuring to the benefit of preferred stockholders have not yet been established
and no such shares have been issued.

NOTE 11--SALES TO MAJOR CUSTOMER:

    Sales to a single customer amounted to $1,735,000 and $2,066,000 for the
years ended December 31, 1994 and 1995. Sales to another customer amounted to
$2,724,000 for the year ended December 31, 1996.

                                      F-10
<PAGE>
                                   VDI MEDIA

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--SUBSEQUENT EVENTS:

    In December 1996, the Company agreed to acquire all of the assets of
Woodholly Productions ("Woodholly"). Woodholly provides full service
duplication, distribution, video 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 $9 million, of which $4 million
will be paid in installments, commencing January 1997. The remaining balance is
subject to earn-out provisions which are predicated upon Woodholly attaining
certain operating income goals, as set forth in the purchase agreement, in each
quarter through December 31, 2001. The transaction will close in early 1997 and
will be accounted for as a purchase. 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 such intangible asset. Management has not yet
finalized the allocation of the preliminary purchase price; the final allocation
will be calculated at the conclusion of the earn-out period.

                                      F-11
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
WoodHolly Productions

    In our opinion, the accompanying balance sheet and the related statements of
income, of partners' capital and of cash flows present fairly, in all material
respects, the financial position of Woodholly Productions at December 31, 1995
and 1996, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Partnership'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
generally accepted auditing standards 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 the opinion expressed
above.

Price Waterhouse LLP
Costa Mesa, California
March 24, 1997

                                      F-12
<PAGE>
                             WOODHOLLY PRODUCTIONS
                                 BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                        --------------------------
                                                                                            1995          1996
                                                                                        ------------  ------------
<S>                                                                                     <C>           <C>
                                                      ASSETS
Current assets:
  Cash................................................................................  $             $     19,000
  Accounts receivable, net of allowance for doubtful accounts of $140,000.............     2,207,000     1,592,000
  Prepaid expenses and other current assets...........................................       149,000        61,000
                                                                                        ------------  ------------
    Total current assets..............................................................     2,356,000     1,672,000

  Property and equipment, net (Note 3)................................................     3,357,000     3,145,000
  Other assets, net...................................................................                       2,000
                                                                                        ------------  ------------
                                                                                        $  5,713,000  $  4,819,000
                                                                                        ------------  ------------
                                                                                        ------------  ------------

                                        LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
  Cash overdraft......................................................................  $    950,000  $    324,000
  Accounts payable and accrued expenses...............................................        21,000       273,000
  Current portion of capital lease obligations (Note 5)...............................       371,000       844,000
  Revolving credit agreement (Note 4).................................................       424,000
                                                                                        ------------  ------------
    Total current liabilities.........................................................     1,766,000     1,441,000
Capital lease obligations, net of current portion (Note 5)............................     1,473,000     1,188,000
                                                                                        ------------  ------------
    Total liabilities.................................................................     3,239,000     2,629,000

Commitments and contingencies (Note 7)

Partners' capital.....................................................................     2,474,000     2,190,000
                                                                                        ------------  ------------
                                                                                        $5,713,000... $  4,819,000
                                                                                        ------------  ------------
                                                                                        ------------  ------------
</TABLE>

                See accompanying notes to financial statements.

                                      F-13
<PAGE>
                             WOODHOLLY PRODUCTIONS
                                INCOME STATEMENT

<TABLE>
<CAPTION>
                                                                                                YEAR ENDED
                                                                                               DECEMBER 31,
                                                                                        --------------------------
                                                                                            1995          1996
                                                                                        ------------  ------------
<S>                                                                                     <C>           <C>
Net revenue...........................................................................  $  7,411,000  $  7,840,000
Cost of services sold.................................................................     4,808,000     5,592,000
                                                                                        ------------  ------------
    Gross profit......................................................................     2,603,000     2,248,000

Selling, general and administrative expense...........................................     1,375,000     1,503,000
                                                                                        ------------  ------------
Operating income......................................................................     1,228,000       745,000
Interest expense......................................................................       355,000       352,000
Other income..........................................................................         9,000        64,000
                                                                                        ------------  ------------
Net income............................................................................  $    882,000  $    457,000
                                                                                        ------------  ------------
                                                                                        ------------  ------------
</TABLE>

                See accompanying notes to financial statements.

                                      F-14
<PAGE>
                             WOODHOLLY PRODUCTIONS
                         STATEMENT OF PARTNERS' CAPITAL

<TABLE>
<S>                                                                               <C>
Balance at December 31, 1994....................................................  $2,357,000
Income..........................................................................    882,000
Distributions to partners.......................................................   (765,000)
                                                                                  ---------
Balance at December 31, 1995....................................................  2,474,000
Income..........................................................................    457,000
Distributions to partners.......................................................   (741,000)
                                                                                  ---------
Balance at December 31, 1996....................................................  $2,190,000
                                                                                  ---------
                                                                                  ---------
</TABLE>

                See accompanying notes to financial statements.

                                      F-15
<PAGE>
                             WOODHOLLY PRODUCTIONS
                            STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED DECEMBER 31
                                                                                      ----------------------------
                                                                                          1995           1996
                                                                                      -------------  -------------
<S>                                                                                   <C>            <C>
Cash flows from operating activities:
  Net income........................................................................  $     882,000  $     457,000
  Adjustments to reconcile net income to net cash provided by operating activities--
    Depreciation and amortization...................................................        953,000        958,000
  Changes in assets and liabilities:
    (Increase) decrease in accounts receivable......................................       (198,000)       615,000
    (Increase) decrease in prepaid expenses and other current assets................         (3,000)        86,000
    Increase in other assets........................................................                         2,000
    Increase in accounts payable and accrued expenses...............................        609,000        252,000
                                                                                      -------------  -------------
Net cash provided by operating activities...........................................      2,243,000      2,370,000

Cash used in investing activities:
  Capital expenditures..............................................................     (1,768,000)      (746,000)
                                                                                      -------------  -------------

Cash flows from financing activities:
  Distributions to partners.........................................................       (765,000)      (741,000)
  Change in revolving credit agreement..............................................         (6,000)      (424,000)
  Repayment of cash overdraft.......................................................                      (626,000)
  Repayment of capital lease obligations............................................       (802,000)      (414,000)
  Proceeds from capital lease obligations...........................................      1,098,000        600,000
                                                                                      -------------  -------------
      Net cash used in financing activities.........................................       (475,000)    (1,605,000)

Net increase in cash................................................................                        19,000

Cash at beginning of period.........................................................
                                                                                      -------------  -------------
Cash at end of period...............................................................  $              $      19,000
                                                                                      -------------  -------------
                                                                                      -------------  -------------
Supplemental disclosure of cash flows information:
  Cash paid for:
    Interest........................................................................  $     355,000  $     315,000
                                                                                      -------------  -------------
                                                                                      -------------  -------------
</TABLE>

                See accompanying notes to financial statements.

                                      F-16
<PAGE>
                             WOODHOLLY PRODUCTIONS

                         NOTES TO FINANCIAL STATEMENTS

NOTE 1--THE PARTNERSHIP:

    Woodholly Productions, a California general partnership (the "Partnership"),
provides full service duplication, distribution, video content storage and
ancillary services to major motion picture studios, advertising agencies and
independent production companies for both domestic and international use.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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 effect 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.

REVENUES AND RECEIVABLES

    The Partnership records revenues and receivables at the time products are
delivered to customers. Although sales and receivables are concentrated in the
entertainment industry, credit risk is limited due to the financial stability of
the customer base. The Partnership performs on-going credit evaluations and
maintains reserves for potential credit losses. Such losses have historically
been within management's expectations.

PROPERTY AND EQUIPMENT

    Property and equipment are stated at cost. Expenditures for additions and
major improvements are capitalized. Maintenance, repairs and minor renewals are
expensed as incurred. 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 five years.

INCOME TAXES

    No provision for income taxes is necessary in the accompanying financial
statements because, as a partnership, it is not subject to income taxes and the
tax effect of its activities accrues to the partners.

FAIR VALUE OF FINANCIAL INSTRUMENTS

    To meet the reporting requirements of SFAS No. 107 ("Disclosures about Fair
Value of Financial Instruments"), the Partnership 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 Partnership uses quoted market prices
whenever available to calculate these fair values.

                                      F-17
<PAGE>
                             WOODHOLLY PRODUCTIONS

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--PROPERTY AND EQUIPMENT:

    Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                  ----------------------------
                                                                      1995           1996
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Equipment under capital lease...................................  $   4,289,000  $   4,897,000
Leasehold improvements..........................................      1,046,000      1,160,000
Machinery and equipment.........................................        860,000        884,000
                                                                  -------------  -------------
                                                                      6,195,000      6,941,000

Less: accumulated depreciation and amortization.................     (2,838,000)    (3,796,000)
                                                                  -------------  -------------
                                                                  $   3,357,000  $   3,145,000
                                                                  -------------  -------------
                                                                  -------------  -------------
</TABLE>

    Depreciation expense aggregated $953,000 and $958,000 for the years ended
December 31, 1995 and 1996, respectively.

NOTE 4--REVOLVING CREDIT AGREEMENT:

    The Partnership had a $460,000 revolving credit agreement with a bank.
Amounts available pursuant to this agreement were determined by eligible
accounts receivable, as defined and were secured by substantially all of the
Partnership's assets. In addition, repayment of amounts borrowed was guaranteed
by the Partners. The revolving credit agreement expired on August 31, 1996.

NOTE 5--CAPITAL LEASE OBLIGATIONS:

    The Partnership leases certain equipment under capital lease arrangements.
Future minimum lease commitments are as follows:

<TABLE>
<S>                                                               <C>
Year ending December 31,
  1997..........................................................  $1,100,000
  1998..........................................................    673,000
  1999..........................................................    477,000
  2000..........................................................    161,000
  2001..........................................................     17,000
                                                                  ---------
                                                                  2,428,000

Less: Amount representing interest..............................    396,000
                                                                  ---------
                                                                  2,032,000
Present value of future minimum lease payments..................
Less: Current portion...........................................    844,000
                                                                  ---------
Long-term portion...............................................  $1,188,000
                                                                  ---------
                                                                  ---------
</TABLE>

                                      F-18
<PAGE>
                             WOODHOLLY PRODUCTIONS

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--PROFIT SHARING PLAN:

    The Partnership sponsors a defined contribution employee benefit plan.
Contributions to this plan are made at the discretion of management. For the
years ended December 31, 1995 and 1996, contributions to this plan aggregated
$105,000 and $4,000, respectively.

NOTE 7--COMMITMENTS AND CONTINGENCIES:

    The Partnership leases its principal office and production facility under an
operating lease with one of the partners which expires in December 2001. The
Partnership also leases a warehouse facility under an operating lease which
expires in November 1998 but which provides for a renewal option of five years.
Approximate minimum annual rentals under these noncancellable operating leases
for these facilities is as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------------------------------------------------------
<S>                                                                                 <C>
1997..............................................................................  $  227,000
1998..............................................................................     223,000
1999..............................................................................     120,000
2000..............................................................................     120,000
2001..............................................................................     120,000
                                                                                    ----------
    Total.........................................................................  $  810,000
                                                                                    ----------
                                                                                    ----------
</TABLE>

    Total rental expense was approximately $174,000 and $175,000 of which
$89,000 and $89,000 was paid to a related party for the years ended December 31,
1995 and 1996, respectively.

    The Partnership has entered into an agreement with the customer described in
Note 8. Under the terms of this agreement, the Partnership rebates 10% of cash
remittances for an annual period commencing ending October 1, subject to
adjustment for sales and use taxes collected and the cost of orders requiring
revisions.

NOTE 8--SALES TO MAJOR CUSTOMER:

    For the year ended December 31, 1995 and 1996, a single customer accounted
for 29% and 28% of the Partnership's sales.

NOTE 9--SUPPLEMENTAL CASH FLOW INFORMATION:

    The Company has financed the acquisition of certain equipment through
capital lease obligations. For the years ended December 31, 1995 and 1996,
assets with costs aggregating $1,098,000 and $600,000 were acquired.

NOTE 10--SUBSEQUENT EVENTS:

    In December 1996, the partners agreed to sell their Partnership interests to
VDI Media. The acquisition was effective in January 1997.

                                      F-19