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                                    FORM 10-K

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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

(Mark One)

X        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                    For the fiscal year ended July 31, 1997.

                                       OR

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

           For the transition period from              to             .

                         Commission file number 1-13580

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                        ALLIED DIGITAL TECHNOLOGIES CORP.

             (Exact name of registrant as specified in its charter)

                Delaware                                         38-3191597
    (State or other jurisdiction of                            (IRS Employer
     incorporation or organization)                         Identification No.)
  140 Fell Court, Hauppauge, New York                              11788
(Address of principal executive offices)                         (Zip Code)

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        Registrant's telephone number, including area code (516) 232-2323

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

                                                          Name of exchange on
Title of each class                                         which registered
-------------------                                       -------------------

Common Stock                                            American Stock Exchange
Class A Redeemable Common Stock Purchase Warrants       American Stock Exchange
Class B Redeemable Common Stock Purchase Warrants       American Stock Exchange


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

                                      None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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. [ ]

As of October 21, 1997, 13,619,644 shares of the registrant's common stock were
outstanding and the aggregate market value of common stock held by
non-affiliates of the registrant, computed by reference to the closing price for
the registrant's common stock on the American Stock Exchange at that date was
$12,266,824.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.

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                                     PART I

Item 1. Business

         Allied Digital Technologies Corp., a Delaware corporation (the
"Company"), is engaged primarily in the duplication and replication of
multimedia software products. Through its subsidiary, Allied Digital, Inc.
(formerly known as Hauppauge Records Manufacturing, Ltd.), a New York
corporation ("Allied"), the Company duplicates and replicates film and video
products for the corporate communications, educational, religious and special
interest video markets, as well as analog audiocassettes for the recorded music
and spoken word industries and compact discs with a primary focus on the
recorded music industry. The Company's principal executive office is located at
140 Fell Court, Hauppauge, New York 11788 and its telephone number is (516)
232-2323.

Corporate Organization

         The Company was incorporated in 1994 to acquire Allied Film Laboratory,
Inc., a Michigan corporation engaged in the duplication of multimedia software
products since 1960 ("AFL"), and HMG Digital Technologies Corp. ("HMG"), a
Delaware corporation of which Allied is a wholly-owned subsidiary. See "-The
Reorganization". As of November 1, 1996, AFL was merged with and into Allied
(the "Allied Merger") and, commencing as of that date, all operations of the
Company are conducted through Allied. References in this Form 10-K to the
Company as of any date refer to the Company and its subsidiaries on a
consolidated basis.

         The portion of the Company's business previously conducted by AFL
consists of duplication of various film and video products for the corporate
communications and educational, religious and special interest (e.g.,
children's, exercise, travel) video markets. The portion of the Company's
business conducted by Allied prior to and following the Allied Merger consists
of the duplication and replication of analog audiocassettes, videocassettes and
compact discs, with a primary focus on the recorded music industry. As part of
its business, the Company also provides various related services, such as dealer
and consumer order fulfillment, film-to-tape and tape-to-film transfers, video
editing and videocassette duplication in all popular formats.

         The Reorganization. On January 12, 1995, the Company acquired all of
the outstanding capital stock of each of AFL and HMG. As a result, each of HMG,
HRM Holdings Corp., a wholly-owned subsidiary of HMG, Allied and AFL became a
direct or indirect wholly-owned subsidiary of the Company (the
"Reorganization").

         The Allied Merger. Pursuant to the Allied Merger, which was consummated
on November 1, 1996, AFL merged with and into Allied and each issued share of
AFL was converted into one share of Allied. In connection with the Allied
Merger, the credit facility between AFL and its senior lender, American National
Bank & Trust Company of Chicago ("ANB"), was terminated and the credit facility
between Allied and ANB was restructured in numerous material respects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation".


Forward-Looking Statements

         Certain statements contained in this Item 1 and elsewhere in this
Annual Report regarding matters that are not historical facts, such as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities, the Company's
sales and marketing program and similar matters, may be deemed to be
"forward-looking" statements under the Private Securities Litigation Reform Act
of 1995, which provides a safe harbor for making such statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business include competition, technological change, dependence on significant
customers and the recorded music industry, future capital requirements, reliance
on key personnel and competitive pricing pressures.

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Multimedia Software Industry

         General. The multimedia software industry is fragmented and seasonal.
Although the types and sizes of the businesses in the industry vary greatly, the
industry is generally categorized into specific sub-markets, including
theatrical (i.e., primarily movies), prerecorded music, spoken word, foreign
language, corporate communications, premium promotional, religious, educational,
instructional "How To" and special interest.

Demand for Primary Products and Services.

         Compact Discs - Audio. Consumer demand for audio compact discs ("CDs")
has been increasing steadily since their introduction to the marketplace in the
mid-1980's. Industry analysts estimate that the current U.S. installed CD-audio
player base is approximately 67%, up from approximately 60% last year. Based on
information supplied by the Recording Industry Association of America ("RIAA"),
total shipments in the United States net of returns ("Shipments") of audio CDs
increased by 10% between 1995 and 1996 from 745 million units to approximately
822 million units.

         CD-ROM. CD-ROM drives were introduced to the marketplace in 1991.
Industry analysts estimate that in 1993, the year that CDs surpassed
audiocassettes in unit volume, U.S. household penetration of CD-ROM drives was
approximately 2.5 million or 8% of the 29 million home computers in the United
States. By the end of 1997, industry experts expect the number of CD-ROM drives
to grow to 36 million out of approximately 42 million United States home
computers, or 86%.

         Various industry sources estimate that Shipments of CD-ROM software
products were approximately 338 million units in 1996, up from approximately 280
million units in 1995. These products were concentrated in three major
categories: educational, entertainment and games. The Company believes there is
a growing use for CD-ROM products in the corporate communications and

premium/promotional market sectors, and this belief is reflected in the
Company's sales and marketing plans for the fiscal year ending July 31, 1998
("Fiscal 1998"). See "Sales and Marketing" below.

         Audiocassettes. Audiocassettes were the music market's most popular
audio medium until 1993 when they were surpassed in unit volume by CDs. Industry
analysts predict that because of the high existing penetration of the
audiocassette player in United States households and automobiles, Shipments of
audiocassettes in 1997 will remain stable as compared with 1996 with only a mild
decline over the next several years, despite the increasing demand for CDs.
According to the RIAA, aggregate Shipments of pre-recorded music cassettes
declined by 17% in 1996 versus 1995. This decline was due in large part to the
continuing growth in the CD-audio configuration as well as an overall slowing of
growth in the pre-recorded music industry. This decline has been offset in part
by the dramatic growth in the spoken word audiocassette business.

         Videocassettes. Veronis, Suhler and Associates, a market analyst firm
specializing in media ("VS&A"), estimates that over 78% of households in the
United States own at least one videocassette recorder ("VCR"), with many
households owning multiple VCRs. According to VS&A and the RIAA, although
theatrical video software comprises over 40% of video software sales, there is
significant growth being demonstrated in the corporate communications,
premium/promotional and special interest sub-markets.

         There are two primary videocassette formats: standard play and extended
play. Standard play is used for virtually all movies, music videos and certain
other specialty applications. Extended play is used for many applications in
non-theatrical and non-music sub-markets where the superior playback quality of
standard play is not required. In these non-critical applications, the extended
play format is desirable because it uses one third of the tape required for
standard play and can utilize high speed duplication technology. These
characteristics make extended play less costly to produce than standard play.

                                        2

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Sales and Marketing

         The Company markets its products and services nationally through the
use of its own internal staff of approximately 55 sales and marketing employees
located throughout the United States in key markets. In March 1997, the Company
opened a regional sales office in Los Angeles, California to coordinate sales
efforts in the western region of the United States. This office is staffed with
sales personnel specializing in the theatrical home video, music and CD-ROM
markets and complements the national sales and marketing office in New York
City. The Company also operates sales facilities in Landover (MD), Orlando, Elk
Grove (IL), Detroit, Dallas, Houston, Nashville and San Francisco. Remote sales
coverage exists in Philadelphia, Atlanta, Miami, Austin, Seattle, Boston,
Charlotte, Copley (OH) and Tampa.

         Approximately 60% of the Company's business is repeat business
resulting from ongoing relationships with its customers. The remainder of the
Company's business comes from new customers, one time orders and occasional

orders from other industry duplicators and replicators.

         The Company's manufacturing facilities are geographically distributed
throughout the United States. See "Manufacturing". The Company believes that
this geographic distribution of manufacturing facilities enhances its sales and
marketing efforts by giving the Company a regional and local presence, which
facilitates direct contact with customers.

         Due to the highly competitive nature of the Company's core
duplication/replication business, the Company has developed additional
"value-added" services in an effort to gain a competitive advantage over its
competitors. These services include graphic design and special packaging,
component security and inventory management, retail order distribution and
direct-to-customer fulfillment.

         In addition to the core duplication/replication and value-added
services described above, the Company also offers motion picture film
processing, film-to-tape transfer, video post-production services and recordable
laser video disc services.

         The following sets forth the Company's market share and sales
performance for each of its primary product categories:

         CD and CD-ROM. The Company replicates CDs and CD-ROMs (collectively,
"CD Products") for which its most significant customers are the domestic music
recording companies. For the fiscal year ended July 31, 1997 ("Fiscal 1997"),
the Company produced approximately 41,800,000 units of CD Products which
generated revenues of approximately $31,905,000, or approximately 20.0% of the 
Company's sales revenues. These units consisted of approximately 10,500,000
CD-ROM units and approximately 31,300,000 CD units, which generated revenues of
approximately $7,240,000 and $24,665,000, respectively. Based upon these results
and externally generated market data, the Company estimates that, on a
consolidated basis, it currently holds a 3% market share of all domestic
production of CDs. The Company believes that there is significant growth
opportunity in CD Products, especially as CD-ROM drive penetration into American
households increases and new applications such as DVD (Digital Versatile Disc),
a new high-density compact disc format which allows for significantly greater
data storage than existing disc formats, are introduced to the marketplace.

         Audiocassettes. The Company duplicates audiocassettes, for which its
most significant customers are the domestic music recording companies. In Fiscal
1997, the Company produced approximately 56,000,000 audiocassette units
(consisting of approximately 43,000,000 music audiocassette units and 13,000,000
spoken word audiocassette units), which generated revenues of approximately
$27,520,000, or approximately 17.3% of the Company's aggregate revenues. Based 
on internal sales statistics and externally-generated market data, the Company
believes it has a music audiocassette market share of approximately 12%, the
largest of any independent replicator. The Company believes that despite the
long-term trend toward replacing audiocassettes with CDs, there remain
opportunities for growth in this market, especially in the non-music and special
interest sectors.

                                        3


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         In Fiscal 1997, the Company's spoken word audiocassettes production
included books-on-tape and corporate communications, as well as products for the
foreign language and religious submarkets. The Company's most significant spoken
word audiocassette customers in Fiscal 1997 were domestic publishing companies.

         Reliable external market data is not readily available for the spoken
word audiocassette submarket. Consequently, the Company's market share is
difficult to estimate. The Company believes there is significant growth
opportunity in spoken word audiocassettes because of the deep penetration of the
audiocassette player and the relatively low cost of duplicating audiocassettes.

         Videocassettes. Based on a combination of industry data and data
generated by its own management, the Company believes it is one of the two
largest duplicators of music videos in the United States with an estimated
current market share of approximately 25%, and the largest independent
duplicator of videocassettes for non-theatrical, non-music video applications,
which include corporate communications, premium/promotional, educational,
instructional "How-To", special interest and religious. In total, the Company
believes its current share of the overall videocassette duplication market in
the United States is approximately 7%. This belief is based upon the fact that
in Fiscal 1997, the Company's domestic sales of videocassettes were
approximately 56 million units compared to approximately 800 million total
domestic unit sales reported by the entire industry for calendar 1996. In Fiscal
1997, the Company had total sales of videocassettes of approximately
$97,080,000, which represented approximately 61.0% of the Company's total
revenues. The Company believes that there is significant growth opportunity in
videocassettes because of the deep penetration of the videocassette player into
American households and the extensive use of videocassettes for entertainment
and information software.

         Other Services. Motion picture film processing, film-to-tape transfer,
video pre and post-production and recordable laser disc services represented
approximately 1.7% of the Company's sales revenues during Fiscal 1997.

         Marketing Strategy. The Company has allocated approximately $700,000 of
its operating budget for Fiscal 1998 to support an aggressive and diversified
series of marketing initiatives designed to broaden the Company's customer base.
The Company's sales and marketing program is targeting the counter-seasonal
consumption patterns typical of industry and business. The purpose of this
strategy is to build counter-seasonal flow in the Company's manufacturing
facilities, and to take advantage of the increase in demand by many industries
and businesses for multimedia products for all types of corporate applications,
including internal communications, training, marketing and sales. The
initiatives include mailings to companies in specific industry segments
identified by a variety of standard industry codes (SICs) within which the
Company's business has been historically successful, and promoting the use of
video and CD-ROM applications for direct-mail marketing.

         Although the Company will continue to focus on the entertainment
industry, the Company believes that the pre-recorded music industry may offer
diminishing returns to the Company in the future as the industry matures due to
(i) new technologies developing for delivery of pre-recorded music media to

consumers and (ii) proprietary manufacturing capabilities of the major recording
companies. For this reason, many of the Company's new sales and marketing plans
involve the non-entertainment sector, where the Company believes there are many
opportunities to develop new, profitable and continuing relationships. There has
been a growing use of CD-ROM drives by the corporate community due to the
transition of many consumers from video media to CD-ROM. CD-ROM offers consumers
a cheaper and faster way to communicate with employees, shareholders and outside
consumers. The Company believes that the development of the corporate CD-ROM
market will provide many opportunities to develop new business relationships.

         The Company has installed new sophisticated sales lead management
software, which has significantly improved tracking and management of sales
leads and has made possible the distribution of such leads for prompt review and
follow-up to the appropriate sales facility.

         The Company has expended resources and capital of approximately $75,000
during Fiscal 1996, and approximately $100,000 during Fiscal 1997, for
development of a prototype technology to be marketed under the name "CD Online."
The product is designed to link the multimedia capability and capacity of a
CD-Rom disc with real-time communications capability of network dial-up services
to yield a versatile and interactive medium for consumer products companies,
corporate communications and other commercial applications. In addition to its
involvement in the authoring process for the CD-Rom's content, the Company
proposes to manufacture the disc for customers and supply, via joint venture or
other relationship, the network service required to support the real-time
communications component of the technology. The Company anticipates that
marketing and promotion of CD-Online will commence in mid-Fiscal 1998 pending
its integration into the Company's overall strategic focus on value added
services.

                                        4

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         Significant Customers. The Company has more than 2,000 accounts in its
current customer base. Approximately 50% of the Company's sales come from
approximately 40 customers. During Fiscal 1997, PolyGram Group Distribution,
Inc. ("PGD") and Bertelsmann Music Group, Inc. ("BMG") each accounted for more
than 10% of the Company's net sales.

         Most of the Company's customers operate without contractual obligations
except for commitments to purchase a certain percentage of their needs from the
Company. The commitments typically last one year or less. However, there are no
adverse consequences to customers with this type of commitment who do not
ultimately place orders with the Company or whose orders do not reach the
committed percentage.

         In June 1995, the Company entered into a five year agreement with
Anchor Bay Entertainment ("Anchor Bay") to provide videocassette duplication and
order fulfillment services. Under this agreement, as modified in September 1997,
the Company is Anchor Bay's exclusive videocassette duplicator. While it is not
assured, it is expected that this contract will provide significant annual
revenues for the Company over its term without material impact on liquidity or
capital expenditures.


         In September 1997, the Company entered into a three year agreement with
Sofsource, Inc. ("Sofsource") to provide CD replication and order fulfillment
services. Under this agreement, the Company is Sofsource's exclusive duplicator.
While it is not assured, it is expected that this contract will provide
significant annual revenues for the Company over its term without material
impact on liquidity or capital expenditures.


         Seasonality. Although demand for the Company's products exists
throughout the year, there is an increase in demand from August through November
due to the extra requirements of customers for the holiday selling season,
particularly sales of theatrical videocassettes and pre-recorded musical CDs and
audiocassettes. During Fiscal 1996 and Fiscal 1997, approximately 38% of the
Company's revenues were generated during these months.

         Backlog. As of July 31, 1997 and 1996, the Company had open orders on a
consolidated basis of approximately $3.3 million and $1.9 million, respectively.
As of September 30, 1997, the Company had open orders on a consolidated basis of
approximately $6.4 million. The Company expects that the open orders as of
September 30, 1997 will be filled within a 60 day period.

         Typically, the Company's customers demand turnaround times (the time
from which a duplicating/replicating order is received until that order is
shipped) of seven days or less. Because of this characteristic of the industry,
the Company does not believe that the size of the backlog at any given time in
and of itself is an effective indication of its ongoing revenues going forward.

Manufacturing

         General. The Company's manufacturing facilities are geographically
distributed throughout the United States so that high volume manufacturing can
be accomplished in three facilities: Hauppauge (NY) (videocassettes,
audiocassettes and CDs), Clinton (TN) (videocassettes) and Elk Grove (IL)
(videocassettes). The Company has six other facilities for smaller volume video
manufacturing: Landover (MD), Orlando, Detroit and San Francisco, as well as
Dallas and Houston where film, in addition to video, is duplicated.

         CD Products. The Company's production of CD Products begins with
pre-mastering and mastering in controlled "clean room" environments that are
designed to eliminate airborne particles from the manufacturing process. Using
lasers and computer-based photo resist technology, the Company creates exact
digital replicas of the customer's original disc. These glass replicas, or
"masters," are used in the replication process to manufacture duplicates through
an injection molding process using high grade, optical quality polycarbonate.
The polycarbonate is pressed against a metal stamper to create a replica of the
CD Master at a rate of approximately one every four seconds. The clear
polycarbonate disc containing all of the data is then covered with a metallic
coating to provide for reflection of the


                                        5


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reading laser beam in the CD player. A thin layer of lacquer is applied over the
metal to protect it and to serve as a base for printing on the disc. The
finished CD Products are then checked to ensure they conform to strict standards
established by the Company and the industry. The finished CD Products are then
released to the packaging department where they are inserted into sleeves or
boxes and processed through high speed shrink-wrapping machines for distribution
to the Company's customers.

         As a result of the recent expansion of the Company's Hauppauge, New
York facility and the installation at such facility of production and
multi-media packaging equipment, the Company has increased its maximum annual
capacity of CD Products to approximately 62 million units in Fiscal 1997 from 54
million units per year capacity in Fiscal 1996.

         Audiocassettes. The manufacturing process for audiocassettes utilizes
machines that duplicate a tape 80 times faster than normal listening speed.
Master transports are used to download master recordings through the use of
electronic signals to duplicating machines, which allow multiple copies of the
same recording to be duplicated simultaneously. At various points in the
manufacturing process, the tape goes through both a statistical quality control
procedure, to ensure that it meets the technical standards established by RIAA,
and the Company's quality control procedure, which includes a random sampling of
audio levels, physical characteristics, program content, signals and other
characteristics of the tape. The finished audiocassette products are then
released to the packaging department where they are inserted into sleeves or
boxes and processed through high speed shrink-wrapping machines for distribution
to the Company's customers.

         The Company's audiocassette plant production capacity is between
250,000 and 275,000 audio tapes per 24 hour day, depending upon the length of
the tapes. The expansion of the Company's Hauppauge, New York manufacturing
facility in 1995 provided the Company with the capability for multimedia
packaging for audiobook and other spoken word audiocassettes. When necessary,
the Company is able to deliver finished product to its customers approximately
48 to 72 hours after receipt of the sales order.

         Videocassettes. The manufacturing process for videocassettes generally
utilizes duplicating machines that copy from a master in "real time" speed,
i.e., the regular speed of the videocassette being duplicated. In this process,
high speed tape winders are used to wind blank tape loaded to specific program
lengths into video shells. The video shells are then loaded into the duplicating
machines which receive the program being copied from a master transport. In
addition, the Company utilizes high speed machines, which allow it to duplicate
a master 150 times faster than in "real time" speed. Real time duplicating
machines are used to duplicate videocassettes in standard play mode. High speed
duplicating machines are capable of duplicating videocassettes in either the
extended play mode or the standard play mode. The extended play format utilizes
less tape than regular speed machines require for the same program content.

         The entire video duplicating and winding process takes place in an
environment that is designed to eliminate airborne particles from the
duplicating process. These areas are air conditioned and pressurized to filter
out such particles. The Company believes that its use of these areas prolongs

the head life on videocassette recorders and results in a higher quality
product.

         Once a videocassette is loaded with tape and duplicated, the finished
product is checked to ensure that it conforms to strict audio and visual
standards established by the Company and the industry. The videocassettes are
then released to the packaging department where they are labeled, inserted into
sleeves or boxes and processed through high speed shrink-wrapping machines for
distribution to the Company's customers.

         In Fiscal 1997, the Company increased the production capacity of its
facilities in Clinton, Tennessee and Hauppauge, New York by a combined nine
million annual videocassette unit capacity. The Company's total videocassette
capacity is the equivalent of approximately 67 million 90-minute programs
annually. When necessary, the Company is able to deliver finished product to its
customers approximately 24 to 48 hours after receipt of the sales order.

                                        6

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         Raw Materials; Supplies. Although the Company's practice is to seek
cost savings and enhanced quality by purchasing from a limited number of
suppliers, all raw materials and components necessary to manufacture CD Products
are readily available from several sources of supply at competitive prices.

         Blank audiocassettes, videocassettes, cartridges, magnetic tape and
other component parts utilized by the Company in the duplication/replication
process generally are readily available in the marketplace at prices that are
generally stable. The Company purchases its components from a variety of
manufacturers, most of which are located in China, South Korea, Mexico and the
United States. The Company does not believe the loss of any one of its current
suppliers would have a material adverse effect on its business because
alternative sources of supply are generally readily available at competitive
prices. However, a significant change in the Company's ability to obtain
components at comparable prices from suppliers located in China, South Korea,
Mexico and the United States, whether through the imposition of tariffs or other
trade barriers or from any foreign or U.S. supplier for any other reason, could
have a material adverse effect on the Company. The Company does not have long
term contracts with any such suppliers. The Company's customers generally supply
the printed components used in the packaging of the videocassettes.

Licenses

         CD Products. The Company, like most other CD Product manufacturers,
uses patented technology primarily under nonexclusive licenses from the holders
of patents which generally provide for the payment of royalties based upon the
number of CD Products sold. For Fiscal 1997, fees for these licenses of
approximately $2,261,000 were charged against earnings, related primarily to the
licenses with U.S. Philips Corporation and Discovision Associates.

         Audiocassettes. The Company does not require any licenses for the
duplication of audiocassettes.


         Videocassettes. The industry does not have established quality
standards for the duplication of videocassettes, although the Victor Company of
Japan, Ltd. ("JVC"), which owns the "VHS" logo, has established standards for
the physical characteristics of the videocassette. Compliance with the JVC
standards ensures that the videocassette will be compatible with any VHS
machine. Duplicators whose product conforms to the JVC standards are permitted
to apply the "VHS" logo to such product and pay JVC a license fee for such
privilege. The Company ensures that all of its video product conforms to the JVC
standards and pays JVC a license fee for the privilege of applying the "VHS"
logo to its video product. For Fiscal 1997, fees for this license of
approximately $523,000 were charged against earnings.

         Since 1986, the Company has had a license with Macrovision Corporation
to encode videocassettes with anti-piracy protection. The license is for a
one-year term, renewable annually by agreement of both parties. The Company pays
a license fee to Macrovision Corporation equal to a portion of the sublicense
fees received by the Company from its customers. For Fiscal 1997, the license
fees paid by the Company to Macrovision under this arrangement were
approximately $240,000, all of which was billed to the Company's customers.

Competition

         The Company's core business of replication/duplication is highly
competitive. Although the Company believes that it is the largest independent
manufacturer of pre-recorded multi-media products-audiocassettes,
videocassettes, audio CDs and CD ROMs, it is in competition with approximately
50 audiocassette duplicators, approximately 100 videocassette duplicators and
approximately seven compact disc replicators. The Company believes it is one of
only three companies in the domestic replication/duplication industry in North
America that manufactures audiocassette, videocassette and CD Products for the
prerecorded music industry.

         The Company believes that the principal competitive factors in the
replication/duplication business are: price, terms of sale, quality of service,
range of pre-and post-production services, scope of graphics and packaging
capabilities, order turnaround time, large order capability, order fulfillment
capability, ability to customize small orders to customer specifications, and
certain other value-added service offerings.

                                        7

<PAGE>

         Virtually all raw materials, machinery and equipment are readily
available on the open market, and no industry competitor holds proprietary
rights or positions with respect to these factors. Although this fact results in
low barriers to entry, the Company believes that the relatively low margins
offered by the core business and the number of competitors (including the
Company) who offer an array of value-added services, serve as deterrents to
entry by most potential competitors.

         The Company also believes that the goodwill and loyalty of many of its
established relationships combined with the excellent reputation which the
Company believes it has in the marketplace give the Company a significant

competitive advantage. The Company further believes that its geographic
diversity, fulfillment capabilities, and national/regional/market-specific sales
and marketing and its geographically dispersed manufacturing and fulfillment
capabilities add to its competitive advantage.

         The Company budgets for price erosion which occurs as competition for
market share increases and competitors lower prices to gain that market share.
The Company attempts to limit margin erosion by lowering its material costs and
by achieving unit volume sales increases. While there can be no assurance that
such a margin protection strategy will be successful in the future, the
Company's efforts to reduce operating costs and its new series of marketing and
sales initiatives are intended to forestall and curtail such erosion of margins.

         The Company believes that its principal competitors in each of its
product offerings are as follows:

         CD Products. In music CD replication, the Company's competitors are
major independent replicators such as Cinram and Nimbus, and the in-house
capacity of five of the six major domestic pre-recorded music companies: SONY
Music Entertainment, PGD, Warner-Elektra-Atlantic, BMG, and EMI, each of which
has CD manufacturing capacity to meet all its production needs except in times
of unusually high output. Additionally, there are approximately 70 small to
medium-sized (i.e., having an annual capacity of approximately five million to
75 million units, as compared to an average annual capacity of 100-200 million
units for the major domestic pre-recorded music companies) CD Products
manufacturers in the marketplace. The Company believes it is among the larger of
the medium-sized companies in the CD Products replication industry segment.

         Audiocassettes. In audiocassettes, the Company believes that it is the
largest independent duplicator of prerecorded audiocassette products in the
United States. The Company's principal competitors are Cinram, Ltd., a
publicly-traded Canadian-based company with operations in the United States, and
Sonopress Audio, a division of BMG.

         Videocassettes. Based on 120-minute (feature film) lengths, the Company
believes that its primary competitor is Technicolor, Inc., a division of Carlton
Communications PLC, followed by Rank Organization PLC. Both of these companies
concentrate their efforts on the feature film business and other
entertainment-related videocassette products. While the Company does a
significant amount of entertainment (i.e., music and feature film) videocassette
duplication, it has concentrated its efforts in the non-entertainment sectors,
focusing those efforts within businesses and industries that make extensive use
of multimedia products for all types of corporate and consumer communications.

Employees

         At October 29, 1997, the Company had approximately 1,372 full-time
employees of whom approximately 459 (representing those employees employed at
the Hauppauge location) are covered by a collective bargaining agreement between
Allied and Local 810, Steel, Metals, Alloys and Hardware Fabricators and
Warehousemen affiliated with the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers of America. This agreement was renewed in
January 1997 and expires in January 2000. Management, supervisors and clerical
workers are not covered by the collective bargaining agreement. The Company has

never experienced a strike and believes its relationship with its employees is
satisfactory. The Company provides paid vacations, sick leave, group life,
disability, hospitalization and medical insurance for its employees. During
Fiscal 1997, eligible employees were able to participate in Allied's
401(k)/profit-sharing plan.

                                        8

<PAGE>

Item 2. Properties

         The Company's headquarters are located at 140 Fell Court, Hauppauge,
New York, where the Company leases approximately 7,165 square feet of office
space from Shivom Enterprises LLC for a term expiring October 31, 2001 at an
annual rate of approximately $127,000 in 1997.

         The Company's Long Island CD products replication and audiocassette and
videocassette duplication operations are conducted at two locations. The first
location is at 15 Gilpin Avenue, Hauppauge, New York, where the Company leases
approximately 144,000 square feet of manufacturing, warehouse and office space
from Keelson Associates, a general partnership of which George N. Fishman,
Co-Chairman of the Company, is a partner, at an annual rental rate of
approximately $1,058,000 for a term expiring November 1, 2015. Future cumulative
rentals under this agreement are approximately $19,389,000. The second location
is at 30 Gilpin Avenue, Hauppauge, New York, where the Company leases
approximately 78,000 square feet of manufacturing warehouse and office space for
a term expiring January 31, 2008, at an annual rental rate of approximately
$591,000 in 1997.

         The Company leases various facilities from Greenfield Land Company, a
Michigan co-partnership ("Greenfield Land") of which William H. Smith
(Co-chairman of the Board and a principal stockholder of the Company), members
of his family and Werner H. Jean (a Director of the Company) are partners. The
office and warehouse space for all locations leased from Greenfield Land
aggregates approximately 284,000 square feet. The 1997 annual rental payments
from the Company to Greenfield Land were approximately $1,548,000. Future
cumulative rentals due under existing leases with Greenfield Land for 1998 and
thereafter are approximately $11,700,000. The existing leases are for properties
located at: 7375 Woodward Avenue (office, warehouse, and manufacturing),
Detroit, Michigan; 7411 and 7371 Woodward Avenue (parking lots), Detroit,
Michigan; 35 W. Bethune (parking lot), Detroit, Michigan; 4364 35th Street
(office, warehouse and manufacturing facility), Orlando, Florida; 370 JD Yarnell
Industrial Parkway (office, warehouse, and manufacturing facility), Clinton,
Tennessee; Clinton, Tennessee Warehouse (warehouse facility).

         The Company subleases approximately 22,160 square feet of
manufacturing, warehouse and office space located at 480 Valley Drive, Brisbane,
California, from Frase Enterprises Inc. for a term expiring June 30, 2008 at an
annual rental rate of approximately $166,200.

         The Company also leases manufacturing, warehouse and office space from
Dallas Communications Complex at 6301 and 6305 N. O'Connor Road, Irving, Texas,
representing 18,712 square feet (manufacturing and office facilities), 11,936

square feet (warehouse facility) and 18,900 square feet (manufacturing and
office facilities), respectively. The aggregate annual rent payable under these
leases in 1997 is approximately $380,000. The current leases expire December 31,
1999, January 1, 2000, and December 31, 1999, respectively.

         The Company leases approximately 17,614 square feet of manufacturing
and office space located at 819 Brightseat Road, Landover, Maryland, from Centre
Pointe Business Park, L.P. for a term expiring October 24, 2001 at an annual
rental rate of approximately $100,000 in 1997.

         On a month-to-month basis, the Company leases approximately 25,000
square feet of warehouse space located at Highway 25 West, Clinton, Tennessee,
from HomeCrest Corporation for $5,000 per month.

         The Company leases approximately 51,000 square feet of warehouse space
located at 108 Centre Stage Business Park, Clinton, Tennessee from Joseph A.
Hollingsworth, Jr. for a term expiring July 2, 2000 at a rental rate of $13,750
per month.

         The Company leases approximately 3,600 square feet of manufacturing,
warehouse and office space located at 4140B Directors Row, Houston, Texas, from
Weingarten Realty Investors for a term expiring December 31, 1999 at an annual
rate of approximately $22,000 in 1997.

                                        9

<PAGE>

         The Company leases 97,888 square feet of manufacturing, warehouse and
office space located at Elk Grove Industrial Park #33, Elk Grove Village,
DePage, Illinois, from Elk Grove Village Industrial Park Ltd. for a term
expiring May 31, 1999 at an annual rental rate of approximately $649,000.

         The Company subleases approximately 4,832 square feet of office space
at 1301 Avenue of the Americas, New York, New York from The Bibb Company for a
term expiring December 30, 2000 at an annual rental rate of approximately
$149,000 per year.

         In addition, from time to time, the Company leases temporary warehouse
space on a month-to-month basis for the storage of customer components and
finished goods.

         The Company believes its facilities are adequate for the conduct of its
existing business, including anticipated growth of its CD Products replication
business in Fiscal 1998.

         Substantially all of the Company's property is encumbered by security
interests in favor of American National Bank and Trust Company of Chicago
("ANB"), in connection with the credit facility extended by ANB to Allied. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" below. Allied's property also
is subject to landlord liens filed by landlords in Texas and Illinois (Irving,
Texas, and Elk Grove, Illinois).


Item 3. Legal Proceedings

         The Company is involved in various legal proceedings which are
incidental to the conduct of its business. The Company does not believe that the
outcome of these matters, even if unfavorable to the Company, will have a
material adverse effect on its financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

         None.

                                       10

<PAGE>

                                     PART II


Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

         Market Information. The Company's Common Stock is traded on the
American Stock Exchange, Inc. ("AMEX") under the symbol "ADK".

         The Company's Class A Redeemable Warrants and the Company's Class B
Redeemable Warrants are traded on AMEX under the symbols "ADK.WS.A." and
"ADK.WS.B." The Company's Class C Warrants are privately held and no trading
market for the Company's Class C Warrants currently exists.

         The following table sets forth for the periods indicated the high and
low sales prices per share for the Common Stock and the high and low sales
prices per warrant of the Redeemable Warrants on the AMEX. The information with
respect to AMEX quotations was obtained from AMEX.

<TABLE>
<CAPTION>
                                                                                     Allied Digital          Allied Digital
                                                                                        Class A                 Class B
                                                              Allied Digital           Redeemable              Redeemable
                                                               Common Stock             Warrants                Warrants
                                                            ------------------     ------------------      -------------------
                                                             High        Low        High        Low         High         Low
                                                            ------      ------     ------      ------      ------       ------
<S>                                                         <C>         <C>        <C>         <C>         <C>          <C>    
Fiscal 1996:
First Quarter (quarter ended October 31, 1995)............  $6 3/8      $5 1/8     $1          $ 7/8        $ 5/8       $ 1/2
Second Quarter (quarter ended January 31, 1996)...........  $4 1/8      $3 3/4     $  3/4      $ 5/16       $ 3/8       $ 1/4
Third Quarter (quarter ended April 30, 1996)..............  $4 1/8      $3 3/8     $  5/8      $ 3/8        $3/16       $ 1/4
Fourth Quarter (quarter ended July 31, 1996)..............  $3 1/4      $2 5/8     $  3/8      $ 1/4        $ 1/8       $ 1/8

Fiscal 1997:
First Quarter (quarter ended October 31, 1996)............  $3 1/8      $2 9/16    $  5/16     $ 1/16       $1/8        $ 1/8
Second Quarter (quarter ended January 31, 1997)...........  $3 3/8      $2         $  1/8      $ 1/64       $1/8        $ 1/16
Third Quarter (quarter ended April 30, 1997)..............  $2 5/8      $1 7/8     $  1/32     $ 1/64       $1/8        $ 1/16
Fourth Quarter (quarter ended July 31, 1997)..............  $2 1/8      $1 1/2     $  1/32     $ 1/32       $1/16       $ 1/16

</TABLE>

         As of October 21, 1997, the last sales price reported on AMEX for the
Common Stock was $2.4375. The last sales prices reported on AMEX for the Class A
Redeemable Warrants and the Class B Redeemable Warrants were $.078 on October
21, 1997 and $.0625 on October 21, 1997, respectively.

         Holders. As of October 14, 1997, there were approximately 525 record
holders of Common Stock, 156 record holders of Class A Redeemable Warrants, 82
record holders of Class B Redeemable Warrants, and 15 record holders of Class C
Warrants.

         Dividends. The Company has not paid any dividends on the Common Stock
since its inception. The payment of dividends, if any, will be contingent upon
the Company's revenues and earnings, if any, capital requirements and general
financial condition. It is the current policy of the Company's Board, in view of
the Company's contemplated financial requirements, to retain all earnings, if
any, for use in the Company's business operations.

         In July 1997, the Board of Directors voted to extend the expiration
date of the Class A Redeemable Warrants and the Class B Redeemable Warrants one
year to July 28, 1998.

         The Company is a legal entity separate and distinct from its
subsidiaries. As a holding company with no significant operations of its own,
the principal sources of its funds will be dividends and other distributions
from its operating subsidiaries, borrowings and sales of equity. The right of
the Company, and consequently its shareholders, to participate in any
distribution of assets of any of its subsidiaries is subject to prior claims of
creditors of such subsidiary (except to the extent claims of the Company in its
capacity as a creditor are recognized). Restrictions contained in Allied's
credit agreement of impose limitations on the amount of distributions that the
Company's subsidiaries may make to the Company and prohibit the Company from
using any such distributions to pay dividends to its shareholders.

Item 6. Selected Financial Data

         The following selected financial data should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Form 10-K. The consolidated financial
statements of the Company as of July 31, 1997 and 1996 and for the fiscal years
ended July 31, 1997, 1996 and 1995, together with the reports thereon of Grant
Thornton LLP and Arthur Andersen LLP, appear elsewhere in this Report on Form
10-K.

                                       11

<PAGE>

                         Statement of Operations Data
<TABLE>
<CAPTION>
                                               Year Ended        Year Ended            Year Ended   
                                                July 31,          July 31,              July 31,    
                                                  1997              1996                  1995      
                                             -------------      -------------         ------------- 
<S>                                          <C>                <C>                   <C>           
Net Sales ..............................     $ 159,147,638      $ 160,941,632         $ 116,564,144 
Cost of Sales ..........................       127,034,302        132,261,644            89,442,592 
Nonrecurring charge ....................              --            1,250,000(1)               --   
                                             -------------      -------------         ------------- 
Gross Profit ...........................        32,113,336         27,429,988            27,121,552 
Operating Expenses(2) ..................        24,829,835         30,029,406(1)         23,814,608 
                                             -------------      -------------         -------------

Income (loss) from Operations ..........         7,283,501         (2,599,418)            3,306,944 

Interest Expense .......................        (5,024,905)        (6,186,049)           (3,816,376)
Other Income, Net ......................           168,328            665,160               762,331 
                                             -------------      -------------         -------------  

Income (loss) before Income
Taxes ..................................         2,426,924         (8,120,307)              252,899 
Income Tax Provision (Credit) ..........         1,760,000         (2,534,847)           (2,575,618)
                                             -------------      

Net Income (Loss) ......................     $     666,924      $  (5,585,460)        $   2,828,517 
                                             =============

Net Income (Loss) per Share(3) .........     $         .05      $        (.41)        $         .05
                                             =============

Cash Dividends(4) ......................              --                 --                    --   
</TABLE>


See page 14 for footnotes.

                         Statement of Operations Data
<TABLE>
<CAPTION>

                                                     Seven Months Ended                         Year Ended
                                                          July 31,                             December 31,
                                             -----------------------------------      --------------------------------
                                                 1994                  1993               1993               1992
                                             -------------         -------------      -------------      -------------
<S>                                          <C>                   <C>                <C>                <C>          
Net Sales ..............................     $  40,939,224         $  54,898,361      $  93,191,029      $  69,133,860
Cost of Sales ..........................        28,998,070            38,328,802         63,862,188         46,552,980
Nonrecurring charge ....................              --                    --                 --                 --
                                             -------------         -------------      -------------      -------------
Gross Profit ...........................        11,941,154            16,569,559         29,328,841         22,580,880
Operating Expenses(2) ..................        11,074,704(2)         11,986,078         20,873,006         16,376,061
                                             -------------         -------------      -------------      -------------

Income (loss) from Operations ..........           866,450             4,583,481          8,455,835          6,204,819

Interest Expense .......................        (1,136,736)             (564,652)          (983,694)          (283,937)
Other Income, Net ......................           238,382               123,780            230,436            537,147
                                             -------------         -------------      -------------      -------------

Income (loss) before Income
  Taxes ................................           (31,904)            4,142,609          7,702,577          6,458,029
Income Tax Provision (Credit) ..........            85,218               159,675            375,400            322,800
                                             -------------         -------------      -------------      -------------

Net Income (Loss) ......................     $    (117,122)        $   3,982,934      $   7,327,177      $   6,135,229
                                             =============         =============      =============      =============

Net Income (Loss) per Share(3) .........     
                                             =============         =============      =============      =============

Cash Dividends(4) ......................              --                    --                --                 --  
</TABLE>

See page 14 for footnotes.

                                       12

<PAGE>

<TABLE>
<CAPTION>
                                                        Balance Sheet Data
                                                                                              As of July 31,         
                                                                                     ------------------------------- 
                                                      1997              1996              1995              1994     
                                                 -------------     -------------     -------------     ------------- 
<S>                                              <C>               <C>               <C>               <C>           
Excess of Cost over Fair Value of 
   Net Assets Acquired ......................    $  43,064,233     $  45,537,736     $  48,118,050     $   4,066,899 
Total Assets ................................      107,880,392       113,877,633       125,867,285        38,603,511 
Long-Term Debt and Capitalized Lease 
   Obligations, Including Current 
   Maturities................................       36,548,206        39,386,050        46,170,133        16,897,702 
Subordinated Notes Payable to
   Stockholders .............................       10,060,366        10,996,386         8,416,659        14,000,000 
Total Liabilities ...........................       69,236,614        75,900,779        82,304,971        38,136,459 
Retained Earnings (Accumulated
   Deficit) .................................       (6,234,491)       (6,901,415)       (1,315,955)       (1,452,254)
Working Capital (deficiency) ................        3,944,039          (491,026)        9,690,774        13,998,752 
Stockholders' Equity ........................       38,643,778        37,976,854        43,562,314           467,052 

<CAPTION>
                                                                         As of December 31,
                                                                  ------------------------------
                                                      1993             1993             1992
                                                 -------------    -------------    -------------
<S>                                              <C>              <C>              <C>        
Balance Sheet Data
Excess of Cost over Fair Value of 
   Net Assets Acquired ......................    $   4,370,022    $   4,243,719    $        --
Total Assets ................................       49,848,926       41,095,847       31,809,884
Long-Term Debt and Capitalized Lease
   Obligations, Including Current
   Maturities ...............................       12,546,539       12,154,219        3,640,565
Subordinated Notes Payable to
   Stockholders .............................             --               --               --
Total Liabilities ...........................       32,827,419       23,468,087       17,290,729
Retained Earnings (Accumulated
   Deficit) .................................       16,142,436       16,748,689       13,953,542
Working Capital (deficiency) ................        9,344,272       10,673,332        9,493,276
Stockholders' Equity ........................       17,021,507       17,627,760       14,519,155
</TABLE>

See page 14 for footnotes.

                                       13

<PAGE>

-----------


(1)      The Fiscal 1996 results of operations were adversely impacted by a
         $1,250,000 nonrecurring charge associated with a customer allowance and
         a restructuring charge of $3,077,295 included in operating expenses.
         See Notes 9 and 10, respectively, to the Consolidated Financial
         Statements.

(2)      Prior to the Reorganization, AFL had a book value stock plan whereby
         certain employees of AFL could utilize bonus payments to purchase AFL
         Common Stock at a price based on a book value formula. Upon termination
         of employment, the employees were required to resell the AFL Common
         Stock to AFL at a price based on the book value formula. In connection
         with the Reorganization, AFL presumed that the 2,108 shares issued
         during the seven month period ended July 31, 1994 were issued in
         contemplation of the Reorganization. Accordingly, AFL recognized
         non-cash, nonrecurring, compensation expense of $500,000, which is the
         difference between the book value price paid and the estimated fair
         market value of the AFL Common Stock.

(3)      Historical earnings per share data is computed by dividing the
         historical earnings data by the weighted average number of shares
         outstanding during each of the periods. The weighted average number of
         shares outstanding were 13,619,644 at July 31, 1997 and 1996. Earnings
         per common share has not been presented for periods prior to year ended
         July 31, 1995 due to the recapitalization for AFL through the Company.
         For the year ended July 31, 1995, net income per share is based on pro 
         forma net earnings as if both the recapitalization and merger of 
         the Company, AFL and HMG had occurred as of August 1, 1994. Pro forma 
         weighted average shares outstanding were 13,621,113 for the year 
         ended July 31, 1995. See Notes 2 and 3 to the Consolidated Financial 
         Statements.

(4)      Prior to the Reorganization, AFL had elected to be treated as an S
         corporation under the Code. Historically, AFL has not paid cash
         dividends other than distributions of approximately 45% to 55% of its
         taxable income for each year. These distributions totaled $666,878 for
         the year ended July 31, 1995, $18,083,822 and $1,794,041 for the seven
         month periods ended July 31, 1994 and 1993, and $4,532,030 and
         $4,473,969 for the years ended December 31, 1993 and 1992,
         respectively.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Introduction

         Effective January 12, 1995, the Company acquired all of the outstanding
common stock of AFL and HMG in exchange for approximately 55% and 45% of the
outstanding common shares of the Company, respectively. Subsequently, on March
10, 1995, the Company changed its fiscal year end from December 31 to July 31.
Consequently, the results of operations (i) for the twelve months ended July 31,
1996 (and thereafter) include the consolidated operations of AFL and HMG for 
such period, and (ii) for the twelve month period ended July 31, 1995 include
the earnings of AFL for the twelve months ended July 31, 1995 and the earnings
of HMG for the period January 12, 1995 through July 31, 1995. Therefore, the

results of operations for the twelve month period ended July 31, 1995 are not
necessarily indicative of the performance of AFL and HMG expected for a full (12
month) year.

Results of Operations - Year Ended July 31, 1997 compared to Year Ended 
July 31, 1996

         Net sales for the twelve month period ended July 31, 1997 ("Fiscal
1997") were $159.1 million, a decrease of $1.8 million or 1% as compared to the
twelve month period ended July 31, 1996 ("Fiscal 1996"). Such decrease was
attributable to a large promotional video sale to one customer which was
recognized during Fiscal 1996, partially offset by sales to new customers in
Fiscal 1997. The Company believes that future sales growth will be generated
through continued penetration of its existing markets and the expanding market
of CDs, especially DVD ((Digital Versatile Disc) and CD-ROM products in the
corporate communications and premium/promotional market sectors.

         Gross profit for Fiscal 1997 increased $4.7 million to $32.1 million or
20% of net sales, from $27.4 million, or 17% of net sales for Fiscal 1996. The
increase in gross margin dollars and percentage, despite decreased sales, was
primarily attributable to the favorable (declining) trend in material costs, a
reduction in the direct labor force, and a

                                       14

<PAGE>

$1.3 million non-recurring charge in Fiscal 1996 resulting from a sales contract
signing allowance with a large customer and increased costs in Fiscal 1996
associated with the start-up efforts in preparing to process orders for this
large customer in the Company's Tennessee manufacturing plant.

         Operating expenses for Fiscal 1997 were $24.8 million, or 16% of net
sales, compared to $30.0 million, or 19% of net sales for Fiscal 1996. The $5.2
million decrease was primarily a result of a $3.1 million restructuring charge 
recorded in Fiscal 1996 in connection with the Company's June 1996 plan to
streamline and reduce resources utilized in the business, $1.3 million decrease
in administrative costs realized in Fiscal 1997 as a result of this
restructuring and a $0.5 million of capitalized employee work force expenditures
associated with the implementation phase of a computer software system developed
for internal use.

         The Company's interest expense decreased to $5.0 million for Fiscal
1997 from $6.2 million for Fiscal 1996. This decrease was primarily a result of
a reduction in interest expense attributable to a rate reduction and a reduction
in the principal amount of interest bearing debt.

         Other income net of other expenses for Fiscal 1997 was $0.2 million
compared to $0.7 million in Fiscal 1996. The decrease of $0.5 million was
primarily attributable to a reduction in finance charges collected from the
Company's customers on past due invoices and a reduction in scrap material 
sales.

         For Fiscal 1997, the Company reported a pre-tax profit of $2.4 million,

compared to a pre-tax loss of $8.1 million for Fiscal 1996. The increase in
income of $10.5 million occurred for the reasons noted above.

         A provision for income taxes of $1.8 million was recognized for Fiscal
1997 compared to a net tax credit of $2.5 million for Fiscal 1996. The 
Company's effective tax rate of 72.5% for Fiscal 1997 is attributable to the 
non-deductibility for tax purposes of a significant portion of the 
amortization of excess of costs over fair value of net assets acquired.

         After recognition of applicable income taxes, the Company reported net
income in Fiscal 1997 of $0.7 million as compared to a net loss of $5.6 million
in Fiscal 1996 for the reasons noted above.

Results of Operations - Year Ended July 31, 1996 compared to Year Ended 
July 31, 1995

         Net sales for Fiscal 1996 were $160.9 million, an increase of $44.3
million compared to the twelve month period ended July 31, 1995 ("Fiscal 1995").
Such increase was attributable primarily to the full year inclusion of HMG's
operations in the Fiscal 1996 results ($36.2 million) and increased sales volume
in Fiscal 1996 resulting primarily from the commencement of videocassette
duplication and order fulfillment services under a five-year sales contract
entered into with a customer in June 1995.

         Gross profit for Fiscal 1996 increased $0.3 million to $27.4 million,
or 17% of net sales, from $27.1 million, or 23% of net sales for Fiscal 1995.
The increase in gross margin dollars was primarily due to the full year
inclusion of HMG margin of $12.0 million in the Fiscal 1996 results as compared
to a margin contribution in Fiscal 1995 by HMG of $8.7 million for the period
January 12, 1995 through July 31, 1995. This net $3.3 million gross margin
increase was partially offset by a $1.3 million non-recurring charge in Fiscal
1996 resulting from a sales contract signing allowance with a large customer.
The gross margin was further reduced by the start-up efforts commencing in June
1995 in preparing to process orders for this large customer in the Company's
Tennessee manufacturing plant. Moreover, declining unit prices to customers due
to continuing price pressures and a change in the Company's sales mix which
includes the adverse impact on average margins caused by a production and
fulfillment sales contract with a large customer further contributed to the 6%
gross margin decline in Fiscal 1996.

         Operating expenses for Fiscal 1996 were $30.0 million, or 18% of net
sales, compared to $23.8 million, or 20% of net sales for Fiscal 1995. Of the
$6.2 million increase, $3.1 million resulted from a current year restructuring
charge in connection with the Company's June 1996 plan to streamline and reduce
resources utilized in the business and the full year inclusion of HMG operations
in Fiscal 1996 resulting in an incremental increase of approximately

                                       15

<PAGE>

$2.3 million in operating expenses over Fiscal 1995 of which $1.0 million
results from the full year inclusion of the amortization of the excess cost over
fair value of the net assets acquired associated with the Reorganization.

Operating expenses for Fiscal 1996 also included a $0.4 million increase in bad
debt expense over the prior year.

         The Company's non-operating expenses increased to $5.5 million for
Fiscal 1996 from $3.1 million for Fiscal 1995. This $2.4 million increase was
due to increased interest expense primarily associated with the full year
inclusion of HMG in Fiscal 1996 results together with increased average
borrowings for the Company related to the additional debt required to finance
capital expenditures.

         For Fiscal 1996, the Company reported a pre-tax loss of $8.1 million,
compared to pre-tax earnings of $0.3 million for Fiscal 1995. The decrease in
income of $8.4 million occurred for the reasons noted above.

         A net credit for federal, state and local income taxes of $2.5 million
was recognized for Fiscal 1996 compared to a net credit for federal, state and
local income taxes of $2.6 million for Fiscal 1995. This $2.5 million net credit
relates primarily to a net operating loss, restructuring costs and a
non-recurring charge which will be deductible in future periods, as well as
state investment tax credits realized during this period. The effective tax rate
was approximately 31%. Non deductible expenses related to the amortization of
excess of cost over fair value of net assets acquired arising from the
Reorganization were offset in part during the period by state income tax
benefits and investment tax credits resulting from purchase of equipment in the
State of New York. The effective tax rate is expected to be higher in future
periods due to the non deductible amortization of costs in excess of net assets
acquired, net of non-recurring benefits from investment tax credits.

         After recognition of applicable income taxes, the Company reported a
net loss in Fiscal 1996 of $5.6 million as compared to net income of $2.8
million in Fiscal 1995 for the reasons noted above.

Liquidity and Capital Resources

         In conjunction with the Company's restructuring plan and merger of AFL
into Allied, the separate senior loan credit facilities previously maintained by
AFL and Allied with American National Bank & Trust Company of Chicago ("ANB")
were combined under an amended and restated loan and security agreement dated as
of October 30, 1996 between Allied and ANB and effectuated November 1, 1996 (the
"ANB Loan Agreement"). The ANB Loan Agreement provides for (i) a revolving loan
(the "ANB Revolving Loan") of $22 million (subject to certain borrowing base
limitations based on Allied's accounts receivable and inventory), which
revolving loan includes a $1.5 million letter of credit facility, (ii) a term
loan (the "ANB Term Loan") in the original principal amount of $25.4 millon, and
(iii) an additional loan (the "ANB Additional Loan") in the original principal
amount of $1.5 million. As of August 19, 1997, the Company entered into an
amendment to the Loan and Security Agreement dated October 30, 1996 with ANB
which provides the Company with a $3,450,000 capital expenditure credit facility
(the "ANB CAPEX Loans"). The ANB Revolving Loan bears interest at the base rate
published by ANB plus 1.25%. The ANB Term Loan, the ANB Additional Loan and the
ANB CAPEX Loans bear interest at the base rate published by ANB plus 1.50%. At 
July 31, 1997, the ANB base rate was 8.50%. The Revolving Facility carries an
unused commitment fee of 0.50%. The obligations of Allied under the ANB Loan
Agreement are secured by a lien on substantially all of Allied's assets.


         At July 31, 1997, the aggregate amount of total indebtedness
outstanding of $46.6 million was as follows: (i) under the ANB Term Loan, $18.8
million, (ii) under the ANB Revolving Loan, $14.4 million, (iii) under the ANB
Additional Loan, $1.0 million, (iv) the 10% Notes Payable to Stockholders, $7.2
million, (v) the Additional Subordinated 10% Notes payable to Stockholders, $2.0
million, (vi) the 11% Series B Notes Payable to Stockholders, $0.9 million,
(vii) the Note Payable to VCA (related to the VCA acquisition), $1.2 million,
(viii) capitalized lease obligations, $1.0 million and (ix) other debt of $0.1
million.

         The ANB Term Loan is payable in an initial installment aggregating
$1,695,462 on October 31, 1996 (of which $1,179,000 was paid on November 8,
1996), 30 consecutive monthly installments of $548,054 thereafter through April
30, 1999 and a final installment of $293,098 on May 30, 1999, together with
additional prepayments of principal of $2,000,000 on October 31, 1997 and
$5,000,000, on October 31, 1998. No prepayment fees result from these scheduled
prepayments.

         The ANB Additional Loan is payable in 25 consecutive monthly
installments of $60,000 each, which commenced on December 31, 1996. 

                                       16

<PAGE>

         The ANB CAPEX Loans are payable based on a 36-month amortization
schedule with a final payment of the entire unpaid principal balance on July 31,
2000. In addition, the Company is required to pay a $103,500 fee to ANB, payable
at a rate of 3% of each advance with a final payment for any unpaid amount of
the fee payable on July 31, 1998. As of October 24, 1997, no amounts were
outstanding under this capital expenditure credit facility.

         The 10% Notes Payable to Stockholders (the "10% Notes") are unsecured
obligations which bear interest at 10% per annum. Interest accrues only on the
original principal sum of $6.0 million and is payable quarterly. Upon default,
the interest rate increases to 12% per annum. To the extent interest is not
permitted to be paid pursuant to the terms of the ANB Loan Agreement, such
accrued and unpaid interest becomes payable on January 1, 2001. Payment of these
notes is subordinated to the payment of the obligations under the ANB Loan
Agreement. The notes mature on January 1, 2001.

         In connection with the Company's restructuring and merger referred to
above, the Subordinated 12% Series A Note Payable to Stockholder was repaid in
full on November 8, 1996 with the $1.5 million proceeds of the Additional Loan
and $2.0 million advanced by certain other stockholders in the form of
additional subordinated notes dated October 30, 1996. Additionally, the payment
terms of the 10% Notes having an original principal sum of $6.0 million, plus
unpaid interest thereon were extended.

         The Series B Notes Payable to Stockholders are unsecured obligations
which bear interest at 11% per annum, payable quarterly. Payment of these notes
is subordinated to the payment of the obligations under the ANB Loan.
The notes mature on January 1, 1999.


         The note payable to VCA is unsecured and is payable in annual
installments beginning January 31, 1995 through January 1, 2001, including
annual interest of 12%.

         Proceeds from the ordinary operations of Allied are applied to reduce
the principal amount of borrowings outstanding under the ANB Loan Agreement.
Unused portions of the Revolving Loan may be borrowed and reborrowed, subject to
availability in accordance with the then applicable commitment and borrowing
limitations.

         The ANB Loan Agreement contains covenants which, among other things,
(a) require the Company to (i) maintain increasing levels of net worth, (ii)
maintain minimum debt service ratios and (iii) limit its annual capital
expenditures, and (b) place limitations on (i) additional indebtedness,
encumbrances and guarantees, (ii) consolidations, mergers or acquisitions, (iii)
investments or loans, (iv) disposal of property, (v) compensation to officers
and others, (vi) dividends and stock redemptions, (vii) issuance of stock, and a
(viii) transactions with affiliates, all as defined in the ANB Loan Agreement.

         Cash Requirements. The Company's current cash requirements, including
working capital and capital expenditure requirements, are funded from the
operations and the proceeds of borrowings by Allied under the ANB Loan
Agreement.

         As of July 31, 1997, the Company had working capital of $3.9 million
and $7.3 million unused and available under the ANB Revolving Loan. Net cash
provided by operating activities during Fiscal 1997 was $8.5 million, consisting
of net income of $0.7 million increased by depreciation and amortization of
$10.4 million, a provision for doubtful accounts of $1.2 million, a charge for
noncash accrued interest to a stockholder of $0.6 million and a change in
deferred income taxes of $1.7 million, and decreased by net changes in operating
assets and liabilities of $6.1 million. Net cash used in investing activities
during Fiscal 1997 totaled $2.6 million. Of this amount, $1.3 million was used
for the purchase of replication equipment and leasehold improvements and $1.3
million was used for expenditures associated with the computer software system
developed for internal use.

         The Company currently expects that capital expenditures will be divided
primarily between maintenance capital expenditures and capital projects.
Maintenance capital expenditures include those required to maintain production
performance, while capital projects relate primarily to extending the life of
existing equipment, increasing capacity, and decreasing production costs. The
Company incurs approximately $1.5 million per year in cost of sales for
maintenance and repairs.

         The Company has not paid any dividends on the Company's Common Stock
since its inception. The payment of dividends, if any, will be contingent upon
the Company's revenues and earnings, if any, capital requirements and


                                       17



<PAGE>

general financial condition. It is the current policy of the Board of the
Company, in view of the Company's contemplated financial requirements, to retain
all earnings, if any, for use in the Company's business operation.

         The Company is a legal entity separate and distinct from its
subsidiaries. As a holding company with no significant operations of its own,
the principal sources of its funds will be dividends and other distributions
from its operating subsidiary, borrowings and sales of equity. Restrictions
contained in the ANB Loan Agreement impose limitations on the amount of
distributions that Allied may make to the Company and prohibit the Company 
from using any such distributions to pay dividends to its stockholders.

Impact of Inflation

         During recent years, the Company has experienced decreasing margins as
a result of competitive pressures in its market segment. The Company believes
that, historically, the decline in its margins has been partially offset by
increases in volume as well as decreases in the cost of components.

         The Company from time to time experiences increases in the costs of
material and labor, as well as other manufacturing and operating expenses. The
Company's ability, consistent with that of its competitors, to pass along such
increased costs through increased prices has been difficult due to competitive
pressures. By attempting to control costs, the Company attempts to minimize any
effects of inflation on its operations.

Item 8. Financial Statements and Supplementary Data

         The financial statements of the Company, on a consolidated basis,
together with notes, supplemental schedules and the Independent Auditors'
Reports, are set forth immediately following Item 14 of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and 
        Financial Disclosure

         None.


                                       18


<PAGE>

                                    PART III


Item 10. Directors and Executive Officers of the Registrant

         Directors and Executive Officers

         The Certificate of Incorporation and Bylaws of the Company provide for
a Board of Directors of not more than 12 directors with the number of directors

to be determined from time to time by the Board of Directors. Currently, the
Board of Directors has fixed the number of directors at eight. The Board of
Directors is divided into three classes with each class of directors elected to
a three-year term of office on a rotating basis. Two classes of directors
(Classes I and II) consist of three directors each, and one class (Class III)
consists of two directors. At each annual meeting of shareholders, a class of
directors is elected to succeed the class of directors whose term of office
expires at that meeting. The term of office of William H. Smith, George N.
Fishman and Donald L. Olesen, the three Class I Directors, will expire at the
annual meeting of shareholders to be held in 1999, the term of office of Eugene
A. Gargaro, Jr., Seymour Leslie and John A. Morgan, the three Class II Directors
will expire at the annual meeting of shareholders to be held in 2000, and the
term of office of Werner H. Jean and H. Sean Mathis, the two Class III Directors
will expire at the annual meeting of shareholders to be held in 1998, and, in
each case, until the election and qualification of their respective successors
or upon their earlier resignation or removal. The executive officers of the
Company are appointed by, and serve at the discretion of the Board of Directors.
There are no family relationships among the directors and executive officers of
the Company.

Name                        Age              Position with the Company
----                        ---              -------------------------

William H. Smith            72      Co-Chairman of the Board, President and a
                                    director of the Company; director of HMG and
                                    Allied.

George N. Fishman           73      Co-Chairman of the Board, Chief Executive
                                    Officer and a director of the Company;
                                    Chairman of the Board, Chief Executive
                                    Officer and a director of HMG; Chairman of
                                    the Board, Chief Executive Officer and a
                                    director of Allied.

Donald L. Olesen            55      President - National Sales and Marketing
                                    Division and a director of the Company;
                                    President of HMG; President of Allied.

John K. Mangini             54      Chief Operating Officer of the Company.

Charles P. Kavanagh         48      Executive Vice President and Secretary of
                                    the Company; Vice President - Finance and
                                    Administration of Allied.

Charles A. Mantione         57      Vice President - Finance of the Company.

Eugene A. Gargaro, Jr.      55      Director of the Company.

Werner H. Jean              73      Director of the Company.

Seymour Leslie              74      Director of the Company.

H. Sean Mathis              50      Director of the Company.


John A. Morgan              67      Director of the Company.

         The business experience of each of the foregoing persons, during the
past five years, is as follows:

         Mr. Smith has been Co-Chairman of the Board and a director of the
Company since January 1995 and President of the Company since November 1995 and
a director of HMG and Allied since January 1995. Mr. Smith also was Co-Chief
Executive Officer of the Company from November 1995 until March 1996. Mr. Smith
founded AFL in 1960, was President and a director of AFL from 1960 until 1993,
and its Chairman of the Board from 1990 until November 1996. Mr. Smith has been
active in many business and industry organizations, including the American Video
Duplication Association and the International Tape and Disc Association, where
he currently serves on the Board. Mr. Smith holds a business degree from the
University of Colorado.

                                       19

<PAGE>

         Mr. Fishman has been Co-Chairman of the Board and a director of the
Company since January 1995 and Chief Executive Officer since March 1996. Mr.
Fishman also has been the Chairman of the Board, Chief Executive Officer and a
director of HMG since 1993, the Chairman of the Board and a director of Allied
since 1981 and the Chief Executive Officer of Allied since 1991. Mr. Fishman has
been active in the music industry since 1946. He was the former owner of a
predecessor corporation to Allied prior to the acquisition of that company in
1973 by Pickwick International Inc. ("Pickwick"). In 1981, Mr. Fishman led the
management buyout of the record manufacturing business of American Can Company,
the successor to Pickwick, whereupon Allied was formed as a New York
corporation. Mr. Fishman is a former physicist and holds a master of science
degree.

         Mr. Olesen has been President - National Sales and Marketing Division
and a director of the Company since January 1995. Mr. Olesen also has been the
President of HMG since 1993 and President of Allied since July 1991. He also was
a director of HMG and Allied until January 1995. Mr. Olesen has been Allied's
primary sales executive since 1981. Mr. Olesen has 32 years of pre-recorded
music experience beginning in 1965 with RCA Records as a management trainee. In
1968, Mr. Olesen joined CBS Records where he spent 13 years in a variety of
positions. From 1971 to 1981, Mr. Olesen served as the East Coast Regional Sales
Manager of CBS Records.

         Mr. Mangini has been Chief Operating Officer of the Company since
January 15, 1996. Prior to his joining the Company, he spent five years with
PolyGram Group Distribution, Inc. as Senior Vice President of Operations. Mr.
Mangini's experience in the entertainment field includes 14 years with RCA
Corporation (1973-1987) beginning as Director of Strategic Planning for the
Entertainment Companies (NBC, Random House and RCA Records) and then becoming
Worldwide Chief Financial Officer of RCA Records, then Vice President - General
Manager of the International Subsidiaries and Senior Vice President - Operations
- Worldwide. In the non-entertainment area, Mr. Mangini was Executive Vice
President -U.S. Operations for Adidas USA (1988-1989), Project Manager for Grace
Corporation (1969-1973), specializing in acquisitions and mergers. He had

similar experience with Olin Chemical Corporation (1966-1969). In 1995, Mr.
Mangini plead guilty to an information alleging tax evasion, paid a $7,500 fine
and was placed on probation for a period of five years. Mr. Mangini has 34 years
of business experience and for the past 16 years has concentrated on various
turnaround situations.

         Mr. Kavanagh has been Executive Vice President of the Company since
June 1997 and Secretary of the Company since January 1995. Mr. Kavanagh also has
been the Chief Financial Officer of HMG since 1993 and the Vice President -
Finance and Administration of Allied since 1990. Mr. Kavanagh also was a
director of Allied until January 1995.

         Mr. Mantione has been Vice President - Finance of the Company since
June 1997. Mr. Mantione had been a financial consultant to the Company from June
1996 to June 1997. Mr. Mantione, who is a certified public accountant, was
founder and partner in Mantione and Rogan, CPA's from July 1969 until November
1983, and a partner in Arthur Yorkes & Co., CPA's from January 1988 to October
1989. From November 1989 to May 1997, Mr. Mantione was self-employed rendering
accounting and management consulting services.

         Mr. Gargaro has been a director of the Company since January 1995. Mr.
Gargaro has been Vice President and Secretary of Masco Corporation, a
manufacturer of products for the home, since 1993. For more than five years
prior to 1993, Mr. Gargaro was a partner with the law firm of Dykema Gossett
PLLC in Detroit, Michigan. Mr. Gargaro is a director and Secretary of MascoTech,
Inc., a transportation and automotive after-market manufacturing firm, and
TriMas Corporation, an industrial components manufacturing firm.

         Mr. Jean has been a director of the Company since January 1995. Mr.
Jean has been a consultant in operations management since 1983. Mr. Jean was a
director of AFL from 1983 until January 1995. Prior to 1983, Mr. Jean held
positions at American Motors Corporation as Vice President of Operations, and at
AM General as Corporate Director of Manufacturing, General Plant Manager for 
Car and Jeep Operations, Controller and Corporate Director of Budgets and
Facilities Planning. Mr. Jean holds a degree in electrical engineering from New
York  University.

         Mr. Leslie has been a director of the Company since January 1995. Mr.
Leslie has been Chairman of Leslie Group, Inc., a diversified investment
company, since 1977 and Co-Chairman of Leslie/Linton Entertainment, Inc., a
diversified investment company, since 1989. Mr. Leslie is a director of
Shorewood Packaging Corporation, a

                                       20

<PAGE>

packaging company. He was a director of HMG from 1993 until January 1995. Mr.
Leslie has been active in the music industry since 1953, when he founded
Pickwick International, Inc. Mr. Leslie was Chairman of the Board of Pickwick
until 1977. During his tenure, Pickwick became a dominant force in the industry
which included the development of the Musicland chain into the largest record
retailer in the world. Since 1977, Mr. Leslie has been Chairman of Leslie Group,
Inc., a diversified investment company. Mr. Leslie was named President of CBS
Video Enterprises ("CBSVE") in 1980. In 1982, Mr. Leslie left CBSVE to form the

MGM/UA Home Entertainment Group, Inc. where he served as Chairman until 1987.

         Mr. Mathis has been a director of the Company since January 1995. Mr.
Mathis is Chairman of the Board of Allis Chalmers, Inc. an industrial
manufacturer, whose main asset is a net operating loss tax carryforward. From
July 1996 to September 1997, Mr. Mathis was Chairman of the Board of
Universal Gym Equipment Inc., a privately owned company. In July 1997, Universal
filed for protection under the Federal Bankruptcy Laws. In September 1997, Mr.
Mathis resigned as Chairman of the Board of Universal. From 1991 to 1993, Mr.
Mathis was President of RCL, the predecessor firm of HMG, and from 1993 to
present a Director of the Company. From 1993 to 1995 Mr. Mathis was president
and a director of RCL Capital Corporation, which was merged into DISC Graphics
in November 1995. From 1988 to October 1993, Mr. Mathis was a Director and Chief
Operating Officer of Ameriscribe Corporation ("Ameriscribe"), a national
provider of reprographic and related facilities management services whose stock
was traded on the New York Stock Exchange. From August 1992 to May 1994, Mr.
Mathis acted as the Federal Court Appointed Trustee for International Wire News
Service Liquidation Corp., formerly United Press International ("UPI"). From
November 1991 through July 1992, Mr. Mathis was Vice Chairman and a Director of
UPI (then a news syndication service). In August 1991, as a part of a
restructuring program, UPI filed for protection under the Federal Bankruptcy
laws. Mr. Mathis is also a director of Thousand Trails, Inc., an operator of
recreational parks.

         Mr. Morgan has been a director of the Company since November 1995. Mr.
Morgan has been a Managing Director of Morgan Lewis Githens and Ahn, Inc., an
investment banking firm, since 1982. Mr. Morgan is a director of Masco
Corporation, a manufacturer of products for the home, MascoTech, Inc., a
transportation and automotive after-market manufacturing firm, and TriMas
Corporation, an industrial components manufacturing firm.

         Certain shareholders of the Company, including William H. Smith, Donald
L. Olesen and George N. Fishman, are parties to the Allied Digital Shareholders
Agreement, which, among other things, contains agreements with respect to the
disposition and voting of shares of Common Stock. See "Certain Relationships and
Related Transactions - Allied Digital Shareholders Agreement."

Section 16(a) Beneficial Ownership Reporting Compliance

         Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under the Securities Exchange Act of 1934 (the
"Exchange Act") during Fiscal 1997 and Forms 5 and amendments thereto furnished
to the Company with respect to Fiscal 1997 and a review of written
representations received by the Company, no person who at any time during Fiscal
1997 was a director, executive officer or beneficial owner of 10% or more of the
outstanding shares of Common Stock failed to file, on a timely basis, reports
required by Section 16(a) of the Exchange Act during the most recent fiscal year
except that (i) Mr. Mathis, a director of the Company, filed Forms 5 reporting
an aggregate of seven transactions effected during the months of August and
September, 1996 involving the disposition of Common Stock and (ii) Mr. Mangini,
the Company's Chief Operating Officer, who failed to file a Form 4 to report his
acquisition of options in August 1996.

Item 11. Executive Compensation


         Summary of Compensation

         The following table sets forth information regarding compensation for
services rendered, in all capacities, awarded or paid to or earned by the Chief
Executive Officer and each of the four other most highly compensated

                                       21

<PAGE>

executive officers of the Company who received compensation from the Company
aggregating at least $100,000 during Fiscal 1997 (collectively, the "Named
Executive Officers").

                           Summary Compensation Table

<TABLE>
<CAPTION>
Name and                                          Fiscal                                                  Shares Underlying
Principal Position                                 Year             Salary($)       Bonus ($)(1)            Options (#)(3)
------------------                                ------            ---------       ------------            --------------
                                                                                                              Long-Term
                                                                         Annual Compensation(2)              Compensation
                                                                         ----------------------              ------------
<S>                                                <C>              <C>             <C>                      <C> 
William H. Smith(4)..............................  1997               $166,074            --                       --
Co-Chairman and President                          1996             190,151(5)         $1,229(6)                   --
                                                   1995             244,376(6)        154,013(6)                   --

George N. Fishman(4).............................  1997                173,153            --                       --
Co-Chairman and Chief Executive Officer            1996                188,880            --                       --
                                                   1995                204,451            --                       --

Donald L. Olesen.................................  1997                323,245            --                       --
President-National Sales and Marketing             1996                312,760            --                       --
Division                                           1995                323,686            --                     30,000

Charles P. Kavanagh..............................  1997                157,251            --                       --
Executive Vice President and Secretary             1996                141,970            --                       --
                                                   1995                142,263          20,000                   20,000

John K. Mangini(7)...............................  1997                215,523            --                     25,000
Chief Operating Officer                            1996                107,692            --                       --
                                                   1995                   --              --                       --
</TABLE>


-----------

(1)      Amounts shown include (i) discretionary cash bonuses and (ii) profit
         sharing contributions.

(2)      The incremental cost of providing perquisites and other personal
         benefits paid to each named individual for each year aggregated less
         than the lesser of (a) $50,000 and (b) 10% of the total annual salary
         and bonus set forth in the columns entitled "Salary" and "Bonus" for
         such person. Accordingly, such perquisites and personal benefits have
         been omitted from the table as permitted by the rules of the
         Commission.

(3)      Represents incentive stock options granted under the Incentive Plan.


(4)      Mr. Smith has served as President since November 1995, Messrs. Smith
         and Fishman served as Co-Chief Executive Officers from November 1995
         until March 1996 and Mr. Fishman has served as the sole Chief Executive
         Officer since March 1996.

(5)      During Fiscal 1996 and Fiscal 1995 compensation for Mr. Smith was paid
         by AFL.

(6)      Consists of (i) distributions from the AFL profit sharing plan in
         Fiscal 1996 and (ii) payments in Fiscal 1995 which were used by Mr.
         Smith to pay life insurance premiums.

                                       22

<PAGE>

(7)      Mr. Mangini joined the Company as Chief Operating Officer on January
         15, 1996.


Stock Options

Stock Options Granted In Fiscal 1997

         No stock options were granted in Fiscal 1997 to the Named Executive
Officers other than 25,000 incentive stock options granted in August 1996 to Mr.
Mangini in connection with his employment arrangement. See "Executive
Compensation - Employment Agreements."

Stock Options Held at the End of Fiscal 1997

         The following table sets forth the total number of exercisable and
unexercisable stock options held by each of the Named Executive Officers named
who held any stock options as of July 31, 1997. No options to purchase Common
Stock were exercised during Fiscal 1997 and no stock appreciation rights were
outstanding during Fiscal 1997.

<TABLE>
<CAPTION>
                                                  Number of Securities Underlying             Value of Unexercised In-the
                                                unexercised Options at July 31, 1997         Money Options at July 31, 1997
                                                ------------------------------------         ------------------------------
Name                                               Exercisable       Unexercisable          Exercisable         Unexercisable
----                                               -----------       -------------          -----------         -------------
<S>                                                <C>               <C>                    <C>                 <C>
William H. Smith .......................                --                  --                  --                  --
George N. Fishman ......................                --                  --                  --                  --
Donald L. Olesen .......................              15,000              15,000                   0                   0
Charles P. Kavanagh ....................              10,000               5,000                   0                   0
John K. Mangini ........................                   0              25,000                   0                   0
</TABLE>

Description of the Incentive Plan


         The Incentive Plan is designed to encourage selected employees of or
consultants to the Company or an affiliated company to acquire a proprietary
interest in the Company in order to create an increased incentive for them to
contribute to the Company's success, and to enhance the Company's ability and
that of its affiliates to attract and retain exceptionally qualified employees
and consultants, thus enhancing the value of the Company for the benefit of its
shareholders. The Incentive Plan permits the issuance of (a) options to purchase
shares of Common Stock ("Options"), (b) shares of such stock ("Restricted
Stock") or units denominated in such shares ("Restricted Stock Units") that are
nontransferable and subject to forfeiture for a designated restricted period,
(c) awards of the right to receive the excess of the fair market value at the
time of exercise of a share of Common Stock over a designated price determined
at the time of grant ("Stock Appreciation Rights" or "SARs"), (d) awards
denominated, or which may be settled in, shares of Common Stock, subject to
satisfaction of designated performance criteria during a designated performance
period ("Performance Awards"), (e) rights to receive the equivalent of dividends
or other distributions upon Common Stock ("Dividend Equivalents"), and (e) other
types of awards denominated or payable in shares of Common Stock ("Other
Stock-Based Awards"). In addition, in connection with the Reorganization, the
holders of options to purchase shares of HMG common stock were issued in
substitution thereof an equivalent number of Options (the "Substitute Options")
under the Incentive Plan.

         Subject to adjustment as required or permitted by the Incentive Plan,
the maximum number of shares of Common Stock available for awards under the
Incentive Plan (including Options) is 2,400,000 shares, of which no more than
half may be newly-issued shares.

                                       23

<PAGE>

         In general, any employee of or consultant to the Company or an
affiliate of the Company, including any officer or officer-director of the
Company, but not including any non-employee director (unless such person also
serves as a consultant to the Company), may be selected by the Compensation
Committee to receive any type of award under the Incentive Plan; provided,
however, that Other Stock-Based Awards may not be granted to directors or
executive officers.

         Options granted under the Incentive Plan may be either "Incentive Stock
Options" as that term is defined in Section 422 of the Internal Revenue Code of
1986, or options which do not qualify as Incentive Stock Options ("Non-Qualified
Stock Options"). Incentive Stock Options may be granted only to employees of the
Company. An Incentive Stock Option must expire within ten years from the date it
is granted (five years in the case of such options granted to a holder of more
than 10% of the outstanding Common Stock). Incentive Stock Options are first
exercisable not earlier than one year from the date of grant. The exercise price
of an Incentive Stock Option must be at least equal to the fair market value of
the Common Stock on the date such Incentive Stock Option is granted (or 110% of
the fair market value of the Common Stock in the case of such options granted to
a holder of more than 10% of the outstanding Common Stock). To the extent that
the aggregate fair market value of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by an optionee during

any calendar year exceeds $100,000, such options will be treated as
Non-Qualified Stock Options. In addition, Options may include a so-called
"reload" feature under which, at the time of exercise of the Option, if the
holder continues to be eligible to be granted awards under the Incentive Plan
and if the exercise price is paid at least in part in shares of Common Stock
owned by the holder for at least six months, the holder automatically would
receive another Option.

         The Incentive Plan also permits the grant of Restricted Stock,
Restricted Stock Units, Stock Appreciation Rights, Performance Awards, Dividend
Equivalents, and/or Other Stock-Based Awards to eligible individuals. Any such
award may be granted in tandem with any other such award or with any Option,
whether at the time of grant of the first award or subsequently. In addition,
subject to the terms of a given award, the Compensation Committee may permit
settlement of any award (other than an award of Restricted Stock or, without the
holder's consent, a Substituted Option) in cash, in shares of Common Stock, by
grant of another award, or in such other form of consideration as it deems
appropriate. The Compensation Committee also may permit settlement in
installments, or defer settlement of, any award (other than Restricted Stock or,
without the holder's consent, a Substituted Option) as it deems appropriate,
subject to the terms of the award, and, regardless of the terms of an award
(other than a Substituted Option), is entitled at any time to cancel the award
upon payment to the holder of its value (as determined by the Compensation
Committee) in cash or another award.

         Subject to the limitations and requirements of the Incentive Plan and
applicable law and the terms and conditions of any Option or other award, the
Compensation Committee has the authority, among other things, to determine the
expiration date, any vesting schedule, and the per share exercise price for any
Option, the method and form of payment for any exercised Option (which may
include payment in cash, by delivery of shares of Common Stock already held by
the grantee valued at their fair market value or any combination thereof), the
grant price for any SAR, the restricted period for any award of Restricted Stock
or Restricted Stock Units, the performance criteria and performance period for
any Performance Award, and the effect of termination of employment and/or
consulting relationships upon any outstanding award.

Employment Agreements

         Allied has employment agreements with Messrs. Fishman and Olesen with
terms expiring December 31, 1997, and with Mr. Mangini with a term expiring
July 31, 2000. 

         Pursuant to such employment agreements, (i) Mr. Fishman continues to
serve as the Chairman of the Board and Chief Executive Officer of Allied and
serves as Co-Chairman of the Board of the Company at a base salary of $206,000
per annum, (ii) Mr. Olesen continues to serve as the President of Allied and
serves as President-National Sales and Marketing Division of the Company at a
base salary of $298,700 per annum and (iii) Mr. Mangini continues to serve as
the Chief Operating Officer of the Company at a base salary of $275,000 per
annum. In Fiscal 1997, Mr. Fishman, upon his own initiative, accepted a reduced
base salary of $173,153. Each of

                                       24


<PAGE>


such executive officer's base salary is subject to a cost of living increase on
an annual basis based upon a percentage equal to the percentage rate of
inflation during the previous calendar year as measured by the Consumer Price
Index for urban wage earners published by the U.S. Department of Labor, Bureau
of Labor Statistics for the New York-Northern New Jersey area.

         If any of Messrs. Fishman, Olesen or Mangini is terminated without
cause prior to the expiration of his employment term, such executive will be
entitled to receive an amount equal to his respective base salary (as adjusted)
until the scheduled expiration of such term. In addition, each employment
agreement prohibits such executive from competing with the Company during the
term of the agreement, provided that in the case of termination by the employer
without cause, the employer continues to pay such executive his salary.

         In connection with his employment agreement, Mr. Mangini was granted an
option under the Incentive Plan to acquire 200,000 Shares of Common Stock at an
exercise price of $2.00 per share.

         In November 1995, the Company and Mr. James Merkle, the former
President and Chief Executive Officer of the Company, entered into a severance
agreement pursuant to which Mr. Merkle's employment agreement was terminated and
Mr. Merkle agreed to provide consulting services to the Company and its
subsidiaries through the end of the original term of his employment agreement
(December 31, 1997) at an annual fee equal to the base salary in the employment
agreement and to refrain from competition with the Company during such period.
In addition, consistent with the Incentive Plan, the expiration date of the
option granted to Mr. Merkle during Fiscal 1995 was changed to December 31, 1997
and the number of shares covered by such option was reduced from 50,000 to
25,000.

Compensation of Directors

         The Company pays each of its directors who is not also an officer or
employee of the Company or any subsidiary an annual retainer of $10,000 and an
additional $1,000 for each meeting of the Board of Directors or a committee
thereof attended plus reimbursement for reasonable expenses in connection with
attending meetings. In addition, Mr. Mathis provides consulting services to HMG
for which he is separately compensated. See "Certain Relationships and Related
Transactions."

Item 12. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth, as of October 21, 1997, information
with respect to the beneficial ownership of Common Stock by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each executive officer of the Company named in the Summary Compensation Table
and (iv) all directors and current executive officers of the Company as a group
(11 persons):


                                                              Percentage of
                                                               Beneficial
Name and Address(1)                       Number of Shares      Ownership
-------------------                       ----------------      ---------

William H. Smith(2) ....................       7,307,762          49.8%
7375 Woodward Avenue
Detroit, Michigan 48202
Patricia M. Smith(3) ...................       1,491,533          10.8%
7375 Woodward Avenue
Detroit, Michigan 48202
399 Venture Partners Inc.(4) ...........       1,100,110           8.1%
399 Park Avenue
6th Floor, Zone 11
New York, New York 10043

                                       25

<PAGE>

Donald L. Olesen(5) ....................         909,000           6.7%
1301 Avenue of the Americas
New York, New York 11109
George N. Fishman(6) ...................         894,022           6.6%
140 Fell Court
Hauppauge, New York 11788
Seymour Leslie(7) ......................         352,327           2.6%
1370 Avenue of the Americas
New York, New York 10019
Charles P. Kavanagh(8) .................         160,275           1.2%
140 Fell Court
Hauppauge, New York 11788
H. Sean Mathis(9) ......................          88,050            *
1301 Avenue of the Americas
New York, New York 10019
Eugene A. Gargaro, Jr. (10) ............          30,000            *
21001 Van Born Road
Taylor, Michigan 48180
John K. Mangini(11) ....................           6,250            *
140 Fell Court
New York, New York 11788
Werner H. Jean(12) .....................           4,000            *
16288 Barryknoll Way
Granger, Indiana 46530
John A. Morgan .........................               0           --
767 Fifth Avenue
New York, New York 10153
All directors and executive
officers as a group (13) ...............       9,751,686          66.0%

-----------

*        Less than 1%


(1)      Unless otherwise noted, the Company believes that all persons named in
         the table have (i) sole voting and investment power with respect to all
         shares of Common Stock owned by them, except to the extent that
         authority is shared by spouses under applicable law, and (ii) record
         and beneficial ownership of such shares. All information in the table
         is based upon reports filed by such persons with the Securities and
         Exchange Commission and the Company and upon questionnaires submitted
         by such persons to the Company in connection with the preparation of
         this Proxy Statement.

(2)      Consists of (i) 3,302,507 shares of Common Stock owned by the William
         H. Smith Trust, of which Mr. Smith is the trustee, (ii) 550,235 shares
         of Common Stock issuable upon exercise of the Class C Warrants owned by
         the William H. Smith Trust, (iii) 5,000 shares of Common Stock owned
         jointly with his wife, Patricia M. Smith, (iv) 1,273,945 shares of
         Common Stock owned by the Patricia M. Smith Trust and 212,588 shares of
         Common Stock issuable upon exercise of the Class C Warrants owned by
         the Patricia M. Smith Trust (see note (3) below), and (v) 1,682,975
         shares owned by Mr. Smith's children and 280,512 shares of Common Stock
         issuable upon exercise of Class C Warrants owned by Mr. Smith's
         children. All the shares of Common Stock owned by Mrs. Smith and Mr.
         Smith's children will be voted as directed by Mr. Smith or his
         successor as provided in a ten year shareholder voting agreement, dated
         as of January 11, 1995, among the Company and each of the above persons
         and trusts (the "Smith Family Shareholders Agreement"). The 3,302,507
         shares of Common Stock owned by the William H. Smith Trust, the 5,000
         shares jointly owned by Mr. and


                                       26

<PAGE>

         Mrs. Smith and the 550,235 shares of Common Stock issuable upon
         exercise of the Class C Warrants owned by the William H. Smith Trust
         are subject to the Allied Digital Shareholders Agreement. See "Certain
         Relationships and Related Transactions - Allied Digital Shareholders
         Agreement."

(3)      Consists of (i) 1,273,945 shares of Common Stock owned by the Patricia
         M. Smith Trust, of which Mrs. Smith is the trustee, (ii) 5,000 shares
         of Common Stock owned jointly with Mr. Smith, and (iii) 212,588 shares
         of Common Stock issuable upon exercise of the Class C Warrants owned by
         the Patricia M. Smith Trust. All such shares are subject to the Smith
         Family Shareholders Agreement and the Allied Digital Shareholders
         Agreement. See "Certain Relationships and Related Transactions - Allied
         Digital Shareholders Agreement." Mrs. Smith is the spouse of William H.
         Smith.

(4)      All of the shares of Common Stock owned by Venture Partners are subject
         to the Allied Digital Shareholders Agreement. See "Certain
         Relationships and Related Transactions - Allied Digital Shareholders
         Agreement."


(5)      Consists of (i) 894,000 shares of Common Stock owned by Mr. Olesen and
         (ii) 15,000 shares of Common Stock issuable upon the exercise of
         presently exercisable options granted to Mr. Olesen under the Incentive
         Plan. See "Executive Compensation - Stock Options." All of the shares
         owned by Mr. Olesen are subject to the Allied Digital Shareholders
         Agreement. See "Certain Relationships and Related Transactions - Allied
         Digital Shareholders Agreement."

(6)      All of the shares of Common Stock owned by Mr. Fishman are subject to
         the Allied Digital Shareholders Agreement. See "Certain Relationships
         and Related Transactions - Allied Digital Shareholders Agreement."

(7)      Consists of (i) 327,327 shares of Common Stock owned by Leslie/Linton
         Entertainment Inc., a company of which Seymour Leslie is Co-Chairman
         and a minority shareholder and (ii) 25,000 shares of Common Stock
         issuable upon the exercise of Substituted Options granted to Mr. Leslie
         under the Incentive Plan. See "Executive Compensation - Stock Options."
         The shares of Common Stock owned by Leslie/Linton Entertainment Inc.
         are subject to the Allied Digital Shareholders Agreement. See "Certain
         Relationships and Related Transactions - Allied Digital Shareholders
         Agreement." Number of shares does not include shares of Common Stock
         owned by Mr. Leslie's children, as to all of which he disclaims
         beneficial ownership.

(8)      Consists of (i) 150,275 shares of Common Stock owned by Mr. Kavanagh
         and (ii) 10,000 shares of Common Stock issuable upon the exercise of
         presently exercisable options granted to Mr. Kavanagh under the
         Incentive Plan. See "Executive Compensation - Stock Options."

(9)      Consists of (i) 38,050 shares of Common Stock owned by Mr. Mathis and
         (ii) 50,000 shares of Common Stock issuable upon the exercise of
         presently exercisable options granted to Mr. Mathis under the Incentive
         Plan. See "Executive Compensation - Stock Options."

(10)     Consists of (i) 15,000 shares of Common Stock owned by Mr. Gargaro and
         (ii) 15,000 shares of Common Stock owned by the Eugene A. Gargaro, Jr.
         Trust, of which Mr. Gargaro is the trustee.

(11)     Consists of 6,250 shares of Common Stock issuable upon the exercise of
         presently excisable options granted to Mr. Mangini under the Incentive
         Plan. See "Executive Compensation - Stock Options".

(12)     Consists of 4,000 shares of Common Stock owned by the Werner H. Jean
         Trust, of which Mr. Jean is the trustee.

(13)     Consists of the shares of Common Stock referred to in notes (2) and
         (5)-(12) above.

         The Company does not know of any arrangements, including a pledge by
any person of securities of the Company, the operation of which at a subsequent
date may result in a change in control of the Company.

                                       27


<PAGE>

Item 13. Certain Relationships and Related Transactions

Loans from Certain Shareholders

         On April 1, 1994, AFL distributed to its shareholders approximately
$18,000,000 consisting of its accumulated previously-taxed earnings through
December 31, 1993. Mr. Smith, Mrs. Smith and certain members of their family and
Mr. Merkle, a former executive officer of the Company, loaned to AFL an
aggregate of approximately $14,000,000 received by them, pursuant to unsecured
promissory notes (the "AFL Shareholder Notes"). The proceeds of these loans were
used to repay a portion of certain bank indebtedness incurred to fund the
distribution. The AFL Shareholder Notes had an original maturity date of January
1, 2000, bore interest at an annual rate of ten percent (10%), and were
subordinated to the payment of certain bank indebtedness of AFL. On January 24,
1995, the AFL Shareholder Notes were repaid by AFL with proceeds of new
financing provided by a lender, except for $4,000,000 of such AFL Shareholder
Notes issued to Mr. Smith (the "Smith Note"). On November 8, 1995, Mr. Smith
made an additional $2,000,000 subordinated loan to AFL (the "Additional Smith
Note") for working capital purposes. In connection with the Allied Merger and
the restructuring of the AFL and Allied's credit facilities into one credit
facility, each of the Smith Note and the Additional Smith Note (the "Smith
Notes") was amended and restated. The Smith Notes are each due January 1, 2001,
are subordinated to the payment of the indebtedness to the senior lender, and
bear interest at 10% per annum. The payment of interest on the Smith Notes is
conditional upon Allied achieving certain financial benchmarks. To the extent
that interest is not paid when due, it is due and payable on the maturity date
of the Smith Notes. During Fiscal 1997, no interest was paid in respect of the
Smith Notes.

         In connection with the Allied Merger and the restructuring of the
credit facilities of AFL and Allied, HMG prepaid certain indebtedness owed to
399 Venture Partners, Inc., then the Company's principal shareholder, in the
aggregate principal amount of $3,500,000. In order to help finance such
prepayment, Mr. Smith, Mr. Fishman and Mr. Olesen loaned HMG $1,600,000,
$200,000 and $200,000, respectively, (the "HMG Loans"). The HMG Loans are
evidenced by identical promissory notes, except for the name of the payee and
the principal amount (the "HMG Notes"). The HMG Notes are subordinated to the
payment of Allied's indebtedness to its senior lender, bear interest at the rate
of 10% per annum, and are due December 31, 1998. The payment of interest and
principal on the HMG Notes is conditional upon Allied achieving certain
financial benchmarks. To the extent that interest is not paid when due, it is
due and payable upon maturity of the HMG Notes. In all events, principal and
accrued but unpaid interest on the HMG Notes is due and payable January 1, 2001.
During Fiscal 1997, interest payments made to Messrs. Smith, Fishman and Olesen
in respect of the HMG Notes aggregated $107,555, $13,445 and $13,445,
respectively. No principal payments were made in respect of the HMG Notes 
during Fiscal 1997.

         HMG is indebted to certain shareholders of the Company, including Mr.
Fishman, Mr. Olesen, Mr. Kavanagh and Venture Partners in the aggregate
principal amount of $880,640 (the "Series B Debt"). The Series B Debt is
evidenced by a series of identical promissory notes, except for the name of the

payee and the principal amount (the "Series B Notes"). The Series B Notes are
subordinated to the payment of Allied's indebtedness to its senior lender, bear
interest at the rate of 11% per annum, and are due January 1, 1999. The payment
of interest and principal on the HMG Notes is conditional upon Allied achieving
certain financial benchmarks. During Fiscal 1997, interest payments made to the
holders of the Series B Notes aggregated $86,870. No principal payments were
made during Fiscal 1997 in respect of the Series B Notes other than $36,020
which was paid to a holder as a final payment in respect of his note upon his
termination as an employee of the Company.

Guarantee of Certain Obligations of Greenfield Land

         The Company has unconditionally guaranteed certain obligations of
Greenfield Land Company ("Greenfield Land") under certain bank financing that
was originally incurred by Greenfield Land in connection with its acquisition
and development of the facilities in Illinois, Michigan and Tennessee that are
leased to the Company. As of July 31, 1997, the aggregate amount of debt of
Greenfield Land which the Company has guaranteed under the bank financing for
Greenfield Land was $527,050 and the largest amount which the Company had
guaranteed since the beginning of

                                       28
<PAGE>

Fiscal 1997 was $1,513,437. Greenfield Land has unconditionally guaranteed
certain obligations of the Company as part of such bank financing.

Leases

         The Company leases certain of its manufacturing, warehouse and office
space from affiliates. See "Properties." The Company believes that the terms of
such leases are at least as favorable to the Company as those it would receive
from an unaffiliated third party.

Indemnification for Environmental Liabilities

         Pursuant to a Global Indemnification Agreement dated June 17, 1994,
among Greenfield Land, Mr. Smith, Mr. Smith's revocable living trust
(collectively, the "beneficiaries"), Allied (as the successor to AFL), has
agreed to indemnify the beneficiaries against all liabilities, losses, costs and
expenses (including, without limitation, fines, penalties, judgments, and legal
fees) arising out of, or in anyway related to, (i) the presence, manufacturing
or processing of "hazardous substances" in, on or about the properties leased or
subleased to Allied by the beneficiaries (where caused by Allied or a
predecessor occupier of the premises), or (ii) the violation of any
"environmental law" by Allied. For purposes of the foregoing:
"hazardous substances" are materials or substances regulated under any
environmental law (including, without limitation, chemical wastes, radioactive
materials, and petroleum products and byproducts); and "environmental laws" are
any laws, rules and regulations relating to the protection of human health,
safety, or the environment (including, without limitation, the Toxic Substances
Control Act, the Comprehensive Environment Response, Compensation and Liability
Act, and the Resource Conservation and Recovery Act of 1976). The beneficiaries
paid $25,000 to AFL for this indemnification.


Allied Digital Shareholders Agreement

         In connection with the consummation of the Reorganization, the Company,
Mr. Smith, Mrs. Smith, certain trusts of which Mr. Smith or Mrs. Smith act as
trustees (the "AFL Shareholders"), Mr. Fishman, Mr. Olesen, The Donald L. Olesen
Annuity Trust Leslie/Linton Entertainment, Inc., and Venture Partners (the "HMG
Shareholders" and, together with the AFL Shareholders, the "Shareholder
Parties"), entered into the Allied Digital Shareholders Agreement (the
"Shareholders Agreement"). Pursuant to the Shareholders Agreement, among other
things, (i) the number of directors of the Company was initially fixed at nine
members, divided into three classes of three members each, and Mr. Smith, James
A. Merkle (who resigned effective November 6, 1995), Mr. Jean, Jerry E. Stone
(who requested that the Company not nominate him for re-election at the Annual
Meeting held in 1996), and Mr. Gargaro (the "AFL Nominees"), and Mr. Fishman,
Mr. Leslie, Mr. Mathis and Mr. Olesen (the "HMG Nominees"), were elected to the
initial Board of Directors of the Company, (ii) Mr. Smith, Mr. Olesen and Mr.
Fishman were re-elected as directors of the Company for an additional three-year
term at the Annual Meeting held in 1996, (iii) the Shareholder Parties agreed to
vote all shares of Common Stock owned by them against, and to use their best
efforts to cause the then directors of the Company, subject to such directors'
fiduciary duties, to vote against, any proposed change in the size or rights or
powers of the Board of Directors of the Company and (iv) the Shareholder Parties
agreed until at least the day preceding the date of the annual meeting of
shareholders of the Company held in 1998 (the "1998 Annual Meeting") to use
their best efforts to secure the election of Mr. Fishman, Mr. Smith and a person
designated by the AFL Shareholders to the Executive Committee of the Board of
Directors of the Company and the boards of directors of the Company's
subsidiaries. The Shareholders Agreement was amended in November 1995 (the "1995
Amendment") to provide that Mr. Olesen would be appointed to fill the vacancy in
the Class I directors resulting from Mr. Merkle's resignation and that Mr.
Olesen would be nominated for election at the Annual Meeting held in 1996 and to
appoint John A. Morgan to fill the vacancy in the Class II Directors resulting
from Mr. Olesen's appointment as a Class I Director.

         The Shareholders Agreement was further amended as of January 15, 1997
(the "1997 Amendment"), among other things, (i) to reduce the number of
directors from nine to eight, (ii) to reduce the number of Class III directors
from three to two, and (iii) to provide that until the day preceding the annual
meeting of shareholders of the Company to be held in 2003, the Shareholder
Parties will use their best efforts to secure the election of Mr. Fishman,

                                       29

<PAGE>

Mr. Smith, Mr. Jean and Mr. Leslie (or, in the case of Mr. Jean, another person
designated by the AFL Shareholders who is reasonably acceptable to the HMG
Shareholders, and in the case of Mr. Leslie, another person designated by the
HMG Shareholders who is reasonably acceptable to the AFL Shareholders) to the
Executive Committee of the Board of Directors of the Company and the boards of
directors of the Company's subsidiaries. All references below to the
Shareholders Agreement shall refer to the Shareholders Agreement as amended by
the 1995 Amendment and the 1997 Amendment.


         In connection with the 1997 Amendment, the Board of Directors of the
Company voted to amend the Bylaws of the Company to require that any vacancy on
the Board of Directors of the Company be filled at a special meeting called by
the Secretary of the Company to be held within ten days following the event that
created the vacancy.

         Under the Shareholders Agreement, during the period commencing on the
date of the Shareholders Agreement (January 11, 1995) and ending on the day
preceding the date of the annual meeting of shareholders of the Company to be
held in 2003 (the "2003 Annual Meeting"), if a seat on the Board of Directors of
the Company or on the Executive Committee of the Board of Directors held by any
AFL Nominee or HMG Nominee becomes vacant during such director's term for any
reason (including, without limitation, such director's death, resignation or
removal), then (i) with respect to a vacant seat previously held by an AFL
Nominee, the AFL Shareholders shall have the right to designate a nominee, who
shall be reasonably acceptable to the HMG Shareholders, to fill such vacancy
until the next annual meeting of shareholders of the Company at which such
director's term would expire and the HMG Shareholders shall use their best
efforts to cause the HMG Nominees on the Board of Directors of the Company,
subject to such nominees' fiduciary duties, to vote in favor of the election and
continuation in office of such nominee designated by the AFL Shareholders, and
(ii) with respect to a vacant seat previously held by an HMG Nominee, the HMG
Shareholders shall have the right to designate a nominee, who shall be
reasonably acceptable to the AFL Shareholders, to fill the vacancy until the
next annual meeting of shareholders of the Company at which such director's term
would expire and the AFL Shareholders shall use the best efforts to cause the
AFL Nominees on the Board of Directors of the Company, subject to such nominees'
fiduciary duties, to vote in favor of the election and continuation in office of
such nominee designated by the HMG Shareholders; provided, however, that the
obligations set forth in clauses (i) and (ii) above will terminate with respect
to (x) a Class III director at any time on or following the annual meeting of
shareholders of the Company to be held in 2001, (y) a Class I director at any
time on or following the annual meeting of shareholders of the Company to be
held in 2002, or (z) a Class II director at any time on or following the 2003
Annual Meeting.

         The Shareholders Agreement also provides that (i) except for transfers
among themselves, to family members, to trusts for the benefit of themselves or
their families or to affiliates, prior to July 11, 1997, none of the AFL
Shareholders may transfer any of their shares of Common Stock, other than in
compliance with the volume limitations contained in Rule 144 under the
Securities Act of 1933, (ii) except for transfers among themselves, to family
members, to trusts for the benefit of themselves or their families or to
affiliates, prior to January 11, 1998, none of the AFL Shareholders may transfer
any of their Class C Warrants, and (iii) until the day preceding the date of the
annual meeting of shareholders of the Company to be held in 2003, none of the
AFL Shareholders may transfer any of their shares of Common Stock among
themselves, to family members, to trusts for the benefit of themselves or their
families or to affiliates of any of the foregoing unless any such transferee
becomes a party to the Shareholders Agreement and agrees in writing to be bound
by the terms thereof.

         In addition, under the terms of the Shareholders Agreement, until

January 11, 1998, and subject to certain limited exceptions relating to
transfers among themselves, to family members, to trusts for the benefit of
themselves or their families and to affiliates, none of the AFL Shareholders may
transfer, in any single transaction or series of related transactions to a
single transferee or to a "group," any shares of Common Stock now owned or
hereafter acquired by them if such transfer would cause the number of shares of
Common Stock transferred by all of the AFL Shareholders, individually or in the
aggregate, to such transferee or group to equal or exceed 30% of the Common
Stock outstanding as of the date of the Shareholders Agreement unless, prior to
such transfer, the proposed transferee (whether an individual or a group) of
such shares of Common stock executes and delivers to the Company a written
agreement to the effect that such proposed transferee will not, for a period of
18 months from the closing of such transfer, purchase or cause the Company,
directly or indirectly, to purchase Common Stock at a price which is less

                                       30
<PAGE>

than the highest price paid by the proposed transferee for such Common Stock
from any AFL Shareholder, or for a different form of consideration.

         In the event Mr. Smith dies or becomes incapacitated prior to January
11, 1998, each of the AFL Shareholders (a) is required during the period ending
on such date to vote all shares of Common Stock beneficially owned as directed
by Mr. Jean (currently a director of the Company) or his successor, and (b) is
prohibited during the period ending on January 11, 1998 from transferring any
such shares of Common Stock in a block (or series of sales) or more than 500,000
shares to a single person or group other than (i) a transfer among themselves,
to family members, to trusts for the benefit of themselves or their families or
to affiliates, (ii) in connection with or to fund the payment of federal and
state estate and inheritance taxes and administration and related expenses and
otherwise for the orderly administration of the estate of Mr. Smith or any trust
for his benefit and/or any member of his family, (iii) as any AFL Shareholder
shall reasonably determine to be necessary and ample for the support,
maintenance and education of the AFL Shareholders and family members, or (iv)
with the consent of Mr. Fishman (currently Co-Chairman of the Board) or his
successor.

         The Shareholders Agreement also prohibits the Shareholder Parties and
the Company from engaging in a "going private" transaction under Rule 13d-3
under the Exchange Act prior to January 11, 1998 unless such transaction is
approved by a majority of the votes cast by shareholders who are neither parties
to the Shareholders Agreement nor affiliates or associates of such parties.

Other Transactions

         H. Sean Mathis, a director of the Company, provides strategic advisory
services to Allied pursuant to a five-year consulting agreement expiring in
January 2000. Pursuant to such agreement, Mr. Mathis received a fee of $96,000
payable in 24 monthly installments which ended in December 1996. 

                                       31

<PAGE>

<TABLE>
<S>                                                                                                           <C>        
Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

         (a)   Financial Statements and Schedules

               1.   List of Financial Statements Included in this Report

                    Reports of Independent Certified Public Accountants                                         F-2 - F-3

                    Consolidated Balance Sheets - July 31, 1997 and 1996                                           F-4

                    Consolidated Statements of Earnings for the years ended
                        July 31, 1997, 1996 and 1995                                                               F-6

                    Consolidated Statement of Stockholders' Equity for the years
                        ended July 31, 1997, 1996 and 1995                                                         F-7

                    Consolidated Statements of Cash Flows for the years ended
                        July 31, 1997, 1996 and 1995                                                               F-8

                    Notes to Consolidated Financial Statements                                                F-10 - F-35

               2.   Consolidated Financial Statement Schedules

                    Schedule II - Valuation and Qualifying Accounts                                                F-36

               All other schedules have been omitted because they are
               inapplicable, not required, or the information is included
               elsewhere in the consolidated financial statements or notes
               thereto.

         (b)   No reports on Form 8-K were filed during the last quarter of the
               period covered by this report.

         (c)   Exhibits
</TABLE>

                                      F-1

<PAGE>


                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS


Board of Directors and Stockholders
     Allied Digital Technologies Corp.


We have audited the accompanying consolidated balance sheets of Allied Digital
Technologies Corp. and subsidiaries (the "Company") as of July 31, 1997 and
1996, and the related consolidated statements of earnings, stockholders' equity
and cash flows for the years then ended. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allied Digital
Technologies Corp. and subsidiaries as of July 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.

We have also audited Schedule II of Allied Digital Technologies Corp. and
subsidiaries as of and for the years ended July 31, 1997 and 1996. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.



GRANT THORNTON LLP


Melville, New York
October 24, 1997

                                      F-2

<PAGE>


                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS


To Allied Digital Technologies Corp.


We have audited the accompanying consolidated statements of earnings,
stockholders' equity and cash flows of Allied Digital Technologies Corp. (a
Delaware corporation) and subsidiaries for the year ended July 31, 1995. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Allied Digital Technologies Corp. and subsidiaries for the year ended July 31,
1995 in conformity with generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule, as of and for the year ended July 31, 1995 has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.



ARTHUR ANDERSEN LLP


Detroit, Michigan
November 9, 1995

                                      F-3

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                    July 31,


<TABLE>
<CAPTION>
                        ASSETS                                 1997                 1996
                                                           -------------        -------------
<S>                                                        <C>                  <C>          
CURRENT ASSETS
    Cash                                                   $   1,192,827        $     830,723
    Accounts receivable, less allowance for doubtful
       accounts of $1,650,000 and $1,515,000
       at July 31, 1997 and 1996, respectively                25,516,385           23,906,859
    Inventories                                                4,380,126            5,374,498
    Prepaid expenses                                             785,737              756,009
    Deferred income taxes                                      3,422,006            3,312,869
                                                           -------------        -------------

           Total current assets                               35,297,081           34,180,958



PROPERTY AND EQUIPMENT, AT COST
    Manufacturing equipment                                   63,182,825           62,266,718
    Leasehold improvements                                    10,728,648           10,408,703
    Furniture and fixtures                                     8,154,766            8,072,625
    Capitalized leased equipment                               4,000,922            2,900,312
    Automobiles                                                  197,499              197,499
                                                           -------------        -------------

                                                              86,264,660           83,845,857

    Less accumulated depreciation and amortization           (59,481,974)         (51,620,715)
                                                           -------------        -------------

                                                              26,782,686           32,225,142

OTHER ASSETS
    Excess of cost over fair value of net assets
       acquired, net of accumulated amortization of
       $7,203,805 and $4,620,134 at July 31,
       1997 and 1996, respectively                            43,064,233           45,537,736
    Deferred income taxes                                                             708,173
    Deferred charges and other                                 2,736,392            1,225,624
                                                           -------------        -------------


                                                              45,800,625           47,471,533
                                                           -------------        -------------

                                                           $ 107,880,392        $ 113,877,633
                                                           =============        =============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-4

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

                     CONSOLIDATED BALANCE SHEETS (continued)

                                    July 31,


<TABLE>
<CAPTION>
           LIABILITIES AND STOCKHOLDERS' EQUITY              1997                 1996
                                                         -------------        -------------
<S>                                                      <C>                  <C>          
CURRENT LIABILITIES
    Current maturities of long-term debt
       and capitalized lease obligations                 $   9,836,946        $   9,153,641
    Accounts payable                                        14,780,703           16,805,887
    Accrued liabilities                                      6,735,393            8,712,456
                                                         -------------        -------------

           Total current liabilities                        31,353,042           34,671,984


LONG-TERM DEBT AND CAPITALIZED LEASE
    OBLIGATIONS, less current portion above                 26,711,260           30,232,409


SUBORDINATED NOTES PAYABLE TO
    STOCKHOLDERS                                            10,060,366           10,996,386



DEFERRED INCOME TAXES                                        1,111,946                 --



COMMITMENTS AND CONTINGENCIES




STOCKHOLDERS' EQUITY
    Preferred stock, $0.01 par value, 1,000 shares
      authorized, no shares issued and outstanding                --                   --
    Common stock, $0.01 par value, 25,000,000
      shares authorized, 13,619,644 shares issued
      and outstanding                                          136,196              136,196
    Additional paid-in capital                              44,742,073           44,742,073
    Accumulated deficit                                     (6,234,491)          (6,901,415)
                                                         -------------        -------------

                                                            38,643,778           37,976,854
                                                         -------------        -------------

                                                         $ 107,880,392        $ 113,877,633
                                                         =============        =============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

                       CONSOLIDATED STATEMENTS OF EARNINGS

                               Year ended July 31,


<TABLE>
<CAPTION>
                                                            1997                 1996                 1995
                                                        -------------        -------------        -------------
<S>                                                     <C>                  <C>                  <C>          
Net sales                                               $ 159,147,638        $ 160,941,632        $ 116,564,144
Cost of sales                                             127,034,302          132,261,644           89,442,592
Nonrecurring charge                                                              1,250,000                     
                                                        -------------        -------------        -------------


       Gross profit                                        32,113,336           27,429,988           27,121,552
                                                        -------------        -------------        -------------

Operating expenses
   Selling, general and administrative                     22,246,164           24,371,797           22,254,730
   Amortization of excess of cost over fair value
     of net assets acquired                                 2,583,671            2,580,314            1,559,878
   Restructuring charge                                                          3,077,295                     
                                                        -------------        -------------        -------------



       Total operating expenses                            24,829,835           30,029,406           23,814,608
                                                        -------------        -------------        -------------

       Income (loss) from operations                        7,283,501           (2,599,418)           3,306,944

Other income (expense)
   Interest expense                                        (5,024,905)          (6,186,049)          (3,816,376)
   Other, net                                                 168,328              665,160              762,331
                                                        -------------        -------------        -------------

       Total other income (expense)                        (4,856,577)          (5,520,889)          (3,054,045)
                                                        -------------        -------------        -------------

       Income (loss) before income taxes                    2,426,924           (8,120,307)             252,899

Provision (credit) for income taxes                         1,760,000           (2,534,847)          (2,575,618)
                                                        -------------        -------------        -------------

       NET INCOME (LOSS)                                      666,924           (5,585,460)           2,828,517

Pro forma data (unaudited)
   AFL as a C Corporation subject to
     Federal income tax (Note 8)
       Adjustment to income tax credit                                                                2,529,990
                                                        -------------        -------------        -------------

       Net income (loss)                                $     666,924        $  (5,585,460)       $     298,527
                                                        =============        =============        =============

Earnings (loss) per share reflecting
   consolidated operations of AFL
   and HMG (Notes 2 and 3)
     Net income (loss) per common share                 $         .05        $        (.41)       $         .05
                                                        =============        =============        =============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-6

<PAGE>


                        Allied Digital Technologies Corp.

                                and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                     Allied Digital Technologies Corp.        
                                          --------------------------------------------------- 
                                             Common            Paid-in           (Accumulated 
                                              stock            capital             deficit)   
                                          ------------       ------------        ------------ 

<S>                                       <C>                <C>                 <C>          
Balance as of August 1, 1994              $          2       $      1,998                     

Net income (loss)                                                                $ (1,315,955)
Distributions to stockholders                                                                 
ADT organization costs                                           (500,000)                    
Recapitalization and pooling of AFL
   and ADT                                      74,907          3,867,739                     
Stock issued to purchase HMG                    61,287         41,372,336                     
                                          ------------       ------------        ------------ 


Balance as of July 31, 1995                    136,196         44,742,073          (1,315,955)

Net loss                                                                           (5,585,460)
                                          ------------       ------------        ------------ 


Balance as of July 31, 1996                    136,196         44,742,073          (6,901,415)

Net income                                                                            666,924 
                                          ------------       ------------        ------------ 


Balance as of July 31, 1997               $    136,196       $ 44,742,073        $ (6,234,491)
                                          ============       ============        ============ 

<CAPTION>
                                                    Allied Film Laboratory, Inc.
                                          ----------------------------------------------------
                                                                                    Retained
                                                                                    earnings
                                             Common              Paid-in          (accumulated
                                              stock              capital            deficit)              Total
                                          ------------        ------------        ------------        ------------

<S>                                       <C>                 <C>                 <C>                 <C>         
Balance as of August 1, 1994              $     23,715        $  1,893,591        $ (1,452,254)       $    467,052

Net income (loss)                                                                    4,144,472           2,828,517
Distributions to stockholders                                                         (666,878)           (666,878)
ADT organization costs                                                                                    (500,000)
Recapitalization and pooling of AFL
   and ADT                                     (23,715)         (1,893,591)         (2,025,340)
Stock issued to purchase HMG                                                                            41,433,623
                                          ------------        ------------        ------------        ------------


Balance as of July 31, 1995                       --                  --                  --            43,562,314

Net loss                                                                                                (5,585,460)
                                          ------------        ------------        ------------        ------------


Balance as of July 31, 1996                       --                  --                  --            37,976,854

Net income                                                                                                 666,924
                                          ------------        ------------        ------------        ------------


Balance as of July 31, 1997               $       --          $       --          $       --          $ 38,643,778
                                          ============        ============        ============        ============
</TABLE>

The accompanying notes are an integral part of this statement.

                                      F-7

<PAGE>

                        Allied Digital Technologies Corp.
                                and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                               Year ended July 31,

<TABLE>
<CAPTION>
                                                                    1997                1996                1995
                                                                ------------        ------------        ------------
<S>                                                             <C>                 <C>                 <C>         
Cash flows from operating activities
   Net income (loss)                                            $    666,924        $ (5,585,460)       $  2,828,517
   Adjustments to reconcile net income (loss) to net cash
     provided by operating activities
       Noncash accrued interest to stockholder                       600,000             579,726                    
       Abandoned asset write-off                                                         837,935                    
       Depreciation and amortization of property and
         equipment                                                 7,861,259           8,716,315           6,871,693
       Amortization of excess of cost over fair value
         of net assets acquired                                    2,583,671           2,580,314           1,559,878
       Deferred income taxes                                       1,710,982          (2,534,847)         (2,575,618)
       Gain on sale of property and equipment                                            (19,662)            (35,502)
       Provision for doubtful accounts                             1,242,860           1,297,294             937,504
       Changes in operating assets and liabilities, net
         of effect of acquisitions and mergers
           Accounts receivable                                    (2,852,386)          5,048,617          (4,177,330)
           Inventories                                               994,372           4,037,751           2,595,669
           Prepaid expenses                                          (29,728)             (1,437)             41,009
           Other assets                                             (317,183)          1,403,582          (1,474,849)
           Accounts payable and accrued liabilities               (4,002,247)         (2,042,770)          2,496,259
                                                                ------------        ------------        ------------

       Net cash provided by operating activities                   8,458,524          14,317,358           9,067,230
                                                                ------------        ------------        ------------

Cash flows from investing activities
   Purchases of property and equipment                            (1,312,361)         (9,304,407)         (7,887,612)
   Costs of HMG acquisition                                                                               (1,520,856)
   Proceeds from sale of property and equipment                                           42,443             150,792
   Proceeds from cash surrender value of life insurance                                                      754,648
   Internally developed software                                  (1,303,753)                               (643,723)
                                                                ------------        ------------        ------------


       Net cash used in investing activities                      (2,616,114)         (9,261,964)         (9,146,751)
                                                                ------------        ------------        ------------
</TABLE>

                                      F-8


<PAGE>

                        Allied Digital Technologies Corp.
                                and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                               Year ended July 31,

<TABLE>
<CAPTION>
                                                                        1997                1996                1995
                                                                    ------------        ------------        ------------
<S>                                                                 <C>                 <C>                 <C>         
Cash flows from financing activities
   Net borrowings (payments) under revolving loan                   $  3,922,348        $ (6,764,383)       $  6,023,372
   ADT organization costs                                                                                       (500,000)
   Repayment of long-term debt and subordinated notes payable        (12,588,107)         (7,335,188)        (27,472,086)
   Borrowing of long-term debt and subordinated notes
     payable to stockholders                                           3,500,000           9,470,620          23,174,729
   Principal payments under capitalized lease obligations               (314,547)           (155,131)
   Payment of deferred financing fees                                                                           (731,672)
   Distributions to stockholders                                                                                (666,878)
                                                                    ------------        ------------        ------------


       Net cash used in financing activities                          (5,480,306)         (4,784,082)           (172,535)
                                                                    ------------        ------------        ------------

       NET INCREASE (DECREASE) IN CASH                                   362,104             271,312            (252,056)

Cash at beginning of year                                                830,723             559,411             811,467
                                                                    ------------        ------------        ------------

Cash at end of year                                                 $  1,192,827        $    830,723        $    559,411
                                                                    ============        ============        ============

Supplemental disclosures of cash flow information:
   Cash paid during the period for
     Interest                                                       $  4,421,026        $  5,671,786        $  4,459,248
                                                                    ============        ============        ============

     Income taxes                                                   $    117,836        $      8,978        $  1,144,500
                                                                    ============        ============        ============

Supplemental schedule of noncash financing
   and investing activities:
     Equipment under capitalized lease                              $  1,106,442        $    105,784                    
                                                                    ============        ============                    
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-9

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1997 and 1996



NOTE 1 - BASIS OF PRESENTATION

     The consolidated financial statements have been prepared by Allied Digital
     Technologies Corp. ("Allied Digital"), including the accounts of its
     wholly-owned subsidiaries, HMG Digital Technologies Corp. ("HMG") and
     subsidiary, HRM Holdings Corp. ("Holdings") and its wholly-owned
     subsidiary, Allied Digital, Inc. (formerly known as Hauppauge Record
     Manufacturing, Ltd.) ("Allied"), and Allied Film Laboratories Inc. ("AFL"),
     hereinafter referred to collectively as the "Company." Allied Digital is a
     holding company; all assets, liabilities and operating activities are
     related to its wholly-owned subsidiaries. The consolidated statements of
     earnings include the operations of Allied Digital and AFL (entities under
     common control through January 12, 1995) for all periods presented. The
     results of operations of HMG, Holdings and Allied have been included in the
     consolidated results of operations since the date of merger (Note 2). In
     conjunction with the Company's restructuring plan (Note 10), AFL merged
     with and into Allied on November 1, 1996 as a condition to the Company's
     debt refinancings described in Note 4 below.

     The Company (i) provides video cassette duplication and fulfillment
     services in addition to processing and duplicating commercial film and
     offering post-production services, and (ii) replicates cassette tapes, VHS
     video tapes and compact discs under production contracts with companies
     primarily in the recorded music industry.


NOTE 2 - MERGERS AND ACQUISITIONS

     HMG Merger

     Effective January 12, 1995, Allied Digital acquired all of the outstanding
     common stock of AFL and HMG in exchange for approximately 55% and 45%,
     respectively, of the then outstanding common shares of Allied Digital. In
     addition, AFL stockholders were issued Class C warrants to purchase an
     additional 1,250,000 shares of Allied Digital common stock (Note 7). Upon
     consummation of the merger, existing HMG warrants totalling 3,067,500
     shares, were converted into Allied Digital warrants on similar terms. In
     addition, options to acquire up to 400,000 shares of common stock were
     issued in substitution for outstanding options of HMG. The acquisition of
     AFL stock was

                                      F-10

<PAGE>

                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996


NOTE 2 (continued)

     accounted for as a merger under the pooling of interests method of
     accounting as the companies were under common control. The merger of HMG
     was accounted for under the purchase method of accounting as a reverse
     acquisition of HMG by AFL. Accordingly, the assets acquired and liabilities
     assumed of HMG were recorded at their estimated fair values of
     approximately $88,666,000 and $45,776,000, respectively. The excess of fair
     value of HMG over the estimated fair value of the net assets acquired was
     approximately $45,611,000. This asset has been recorded as excess of cost
     over fair value of net assets acquired and is being amortized on a
     straight-line basis over 20 years.

     The unaudited consolidated results of operations on a pro forma basis for
     the year ended July 31, 1995 as though HMG had been acquired as of August
     1, 1994 are presented below. The pro forma information does not purport to
     be indicative of what would have occurred had the acquisition been made as
     of that date or of results which may occur in the future.


                                                               Year ended
                                                                July 31,
                                                                  1995
                                                              ------------
                                                               (unaudited)

       Net sales                                              $158,079,000
       Income before extraordinary item                            667,000
       Net income                                                  667,000
       Earnings per common share before
         extraordinary item                                            .05
       Net earnings per common share                                   .05
       Weighted average shares                                  13,621,113

     In preparing the pro forma data, adjustments have been made for: (i) the
     amortization of the excess of cost over fair value of net assets acquired
     and stepped-up property and equipment; (ii) the interest expense related to
     the borrowings to finance the shareholder distributions of previously taxed
     income and the conversion of preferred stock into subordinated debt; (iii)
     the elimination of intercompany sales; (iv) the elimination of merger
     related costs and redundant general and administrative costs; and (v) the
     related tax impacts including the revocation of the Subchapter S election.

                                      F-11

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996


NOTE 2 (continued)

     The following is a reconciliation from reported net income for Allied
Digital to pro forma consolidated operations of HMG and AFL:

                                                           Year ended
                                                            July 31,
                                                              1995
                                                           (unaudited)
                                                           -----------

        Net income as reported                             $ 2,829,000
        HMG net earnings, pre-acquisition                      768,000
        Elimination of merger costs and redundancies         1,344,000
        Amortization of cost in excess of fair value
            of net assets acquired                          (1,013,000)
        Interest expense                                      (231,000)
        Reversal of tax credit arising from
            revoking S election                             (1,625,000)
        Pro forma tax provision                             (1,193,000)
        Depreciation of excess of fair value over
            book for acquired assets                          (212,000)
                                                           -----------

                                                           $   667,000
                                                           ===========

     AFL provided certain video replication services to HMG. For the period from
     August 1, 1994 through January 11, 1995, sales to HMG amounted to
     approximately $4,000,000.

     VCA Acquisition

     Effective January 12, 1993, the Company acquired certain assets and assumed
     certain liabilities of VCA/Teletronics, Inc. ("VCA") for cash of $1,000,000
     and a long-term note payable of $1,570,315 (Note 4). Also, under the
     purchase agreement, the Company is contingently liable to VCA for certain
     royalty payments payable for each of the calendar years ending December 31,
     1996 through

                                      F-12

<PAGE>



                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 2 (continued)

     and including December 31, 2000 in an amount based on the number of
     videotape duplication units sold during those years. As the amount of
     videotape duplication units to be sold during those open years is not
     reasonably estimable, a liability has not been reflected in the
     accompanying financial statements. The purchase agreement also contained a
     covenant not-to-compete for a period of three years.

     The Company accounted for the acquisition as a purchase. The initial excess
     of consideration paid over the estimated fair value of the net assets
     acquired in the amount of $4,546,842 has been recorded as excess of fair
     value over the cost of net assets acquired and is being amortized on a
     straight-line basis over 15 years. Contingent purchase price consideration
     paid during fiscal 1997 of approximately $119,000 pertaining to calendar
     year ended December 31, 1996 is being amortized on a straight-line basis
     over the remaining amortization period.


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A summary of the significant accounting policies applied in the preparation
     of the consolidated financial statements follows:

     Principles of Consolidation

     The consolidated financial statements include the accounts of Allied
     Digital and its wholly-owned subsidiaries. Significant intercompany
     accounts and transactions have been eliminated.

                                      F-13

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996




NOTE 3 (continued)

     Inventories

     Inventories utilized in the manufacturing and loading of videocassettes,
     audiocassettes and manufacturing of compact discs are valued at the lower
     of cost or market, using the first-in, first-out (FIFO) method. Elements
     included in the determination of cost include direct materials, direct
     labor and certain other manufacturing labor and overhead costs.

     Inventories consist of the following classifications:

                                                          July 31,
                                                 ---------------------------
                                                    1997             1996
                                                 ----------       ----------

       Raw materials                             $3,415,970       $3,882,455
       Work-in-process                              674,125          827,142
       Finished goods                               290,031          664,901
                                                 ----------       ----------

                                                 $4,380,126       $5,374,498
                                                 ==========       ==========

     Property and Equipment

     Property and equipment are stated at historical cost. Depreciation and
     amortization are provided for over the estimated service lives of the
     assets. Leasehold improvements are amortized over the lives of the
     respective leases or the service lives of the improvements, whichever is
     shorter. Straight-line and accelerated methods are used for reporting
     purposes. Accelerated methods are used for income tax purposes. Accumulated
     amortization on capitalized leased equipment amounted to $3,006,637 and
     $2,685,744 as of July 31, 1997 and 1996, respectively.

     Long-Lived Assets

     Management reviews and evaluates its long-lived assets (including the
     excess of cost over fair value of net assets acquired and property and
     equipment) for impairment whenever events or changes in circumstances
     indicate that the carrying amount of such assets may not be recoverable. As
     part of this review and evaluation, the Company considers the value of
     anticipated undiscounted cash flow attributable to such long-lived assets
     in assessing potential impairment.

                                      F-14

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 3 (continued)

     Deferred Charges and Other

     Deferred charges and other consist principally of customer allowances under
     long-term contracts, internally developed software costs, and loan
     origination fees associated with the Company's financing transactions.
     Customer allowances are amortized over the term of the contract provided
     recoverability is assured (Note 9). Internally developed software is being
     amortized on a straight-line basis over a five-year expected useful life;
     however, internally developed software costs incurred prior to fiscal 1997
     were written off in fiscal 1996 as an abandoned asset in connection with
     the Company's restructuring plan (Note 10). Loan origination fees are being
     amortized over the term of the underlying credit agreement.

     Revenue Recognition

     Revenue from substantially all production contracts is generally recognized
     upon shipment of the finished goods. In addition, for certain contracts,
     where risk and rewards of ownership have passed to the customer, the
     Company recognizes revenue when production is complete.

     Significant Customers

     During the year ended July 31, 1997, sales to two customers accounted for
     17% and 14% of net sales with corresponding accounts receivable from these
     customers totaling 11% and 9% of accounts receivable as of July 31, 1997,
     respectively. During the year ended July 31, 1996, sales to two customers
     accounted for 16% and 13% of net sales with corresponding accounts
     receivable from these customers totaling 13% and 8% of accounts receivable
     as of July 31, 1996, respectively. During the year ended July 31, 1995,
     sales to one customer accounted for 15% of net sales with corresponding
     accounts receivable from this customer totaling 12% of accounts receivable
     as of July 31, 1995.

     Other Income

     Other income, net includes interest income, recovery of accounts receivable
     previously written off as uncollectible and scrap material sales.

                                      F-15


<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 3 (continued)

     Stock-Based Compensation

     The Company applies Accounting Principles Board Opinion No. 25 and related
     interpretations in accounting for stock-based compensation awards.
     Accordingly, no compensation cost has been recognized for the awards
     granted under the Plan.

     Income Taxes

     The Company follows the asset and liability method of accounting for income
     taxes by applying statutory tax rates in effect at the balance sheet date
     to differences among the book and tax bases of assets and liabilities. The
     resulting deferred tax liabilities or assets are adjusted to reflect
     changes in tax laws or rates by means of charges or credits to income tax
     expense. A valuation allowance is recognized to the extent a portion or all
     of a deferred tax asset may not be realizable.

     Earnings (Loss) Per Share

     Net income (loss) per common share for the years ended July 31, 1997 and
     1996 was computed by dividing the net income (loss) by the weighted average
     shares outstanding. The effect of stock options and warrants on the fiscal
     1997 and 1996 computation was not dilutive. Pro forma earnings per common
     share for the year ended July 31, 1995 have been computed by dividing pro
     forma net earnings by the pro forma weighted average shares of common stock
     issued as a result of the recapitalization and merger. Pro forma
     presentation has been made as if both the recapitalization and merger had
     occurred as of August 1, 1994 (Note 2). Actual and pro forma weighted
     average shares outstanding were 13,619,644 for the years ended July 31,
     1997 and 1996 and 13,621,113 for the year ended July 31, 1995.

     Financial Instruments

     The Company's principal financial instruments consist of accounts
     receivable, accounts payable, long-term debt and subordinated notes payable
     to stockholders. The Company believes that the carrying amount of such
     instruments approximates fair value.

                                      F-16


<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 3 (continued)

     Use of Estimates in the Preparation of Financial Statements

     In preparing financial statements in conformity with generally accepted
     accounting principles, management is required to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements, as well as the reported amounts of revenues and
     expenses during the reporting period. Actual results could differ from
     those estimates.

     Accounting Pronouncement Not Yet Adopted

     In February 1997, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards No. 128, Earnings Per Share, which is
     effective for financial statements for both interim and annual periods
     ending after December 15, 1997. Early adoption of the new standard is not
     permitted. The new standard eliminates primary and fully diluted earnings
     per share and requires presentation of basic and diluted earnings per
     share, together with disclosure of how the per share amounts were computed.
     The adoption of this new standard is not expected to have a material impact
     on the disclosure of earnings per share in the financial statements.

     Reclassifications

     Certain reclassifications have been made to the prior years' amounts to
     conform with the current year's presentation.

                                      F-17

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 4 - LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE  AND
           CAPITALIZED LEASE OBLIGATIONS

     Long-term debt, subordinated notes payable and capitalized lease
     obligations consist of the following:

<TABLE>
<CAPTION>
                                                                                    July 31,
                                                                        --------------------------------
                                                                            1997                1996
                                                                        ------------        ------------
<S>                                                                     <C>                 <C>         
        Loan and Security Agreement
            Term loan                                                   $ 18,782,232        $ 27,112,055
            Revolving loan                                                14,480,840          10,558,492
            Additional loan                                                1,020,000
        Subordinated 10% Notes Payable to Stockholders                     7,179,726           6,579,726
        Additional Subordinated 10% Notes Payable to Stockholders          2,000,000
        Subordinated 12% Series A Note Payable to Stockholder                                  3,500,000
        Subordinated 11% Series B Notes Payable to Stockholders              880,640             916,660
        Note Payable to VCA                                                1,170,514           1,389,186
        Capitalized lease obligations                                        995,137             203,252
        Other                                                                 99,483             123,065
                                                                        ------------        ------------

                                                                          46,608,572          50,382,436
        Less current portion                                              (9,836,946)         (9,153,641)
                                                                        ------------        ------------

                                                                        $ 36,771,626        $ 41,228,795
                                                                        ============        ============
</TABLE>

     Debt Refinancings

     In conjunction with the Company's restructuring plan and merger of AFL into
     Allied referred to in Note 1 above, (i) the separate senior loan credit
     facilities previously maintained by AFL and Allied with a bank were
     combined under an amended and restated loan and security agreement between
     Allied and such bank dated as of October 30, 1996 and effectuated as of
     November 1, 1996, (ii) the Subordinated 12% Series A Note Payable to

     Stockholder was repaid in full on November 8, 1996 with funds of (a) $1.5
     million available as an additional loan under the October 30, 1996 amended
     and restated loan and security agreement and (b) $2 million advanced by
     certain other stockholders in the form of additional subordinated notes
     dated October 30, 1996 and (iii) the payment terms of the Subordinated 10%
     Notes Payable to Stockholders having an original principal sum of
     $6,000,000, plus unpaid interest thereon of $1,179,726 through July 31,
     1997 ($579,726 as of July 31, 1996) were extended.


                                      F-18


<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 4 (continued)

     Loan and Security Agreement

     The October 30, 1996 loan and security agreement provided the Company with
     borrowings of up to $48,910,169 under credit facilities consisting of a (i)
     $25,410,169 term loan, (ii) $22,000,000 revolving loan facility (combined
     with a $1,500,000 letter of credit facility) and (iii) $1,500,000
     additional loan. As of August 19, 1997, Allied entered into an amendment to
     the October 30, 1996 loan and security agreement with the bank which
     provides the Company with a $3,450,000 capital expenditure credit facility.

     The loan and security agreement (as amended) is collateralized by
     substantially all of the assets of the Company. The agreement contains
     covenants which, among other matters, (1) require the Company to (i)
     maintain increasing levels of net worth, (ii) maintain a minimum debt
     service ratio and (iii) limit its annual capital expenditures, and (2)
     place limitations on (i) additional indebtedness, encumbrances and
     guarantees, (ii) consolidations, mergers or acquisitions, (iii) investments
     or loans, (iv) disposal of property, (v) compensation to officers and
     others, (vi) dividends and stock redemptions, (vii) issuance of stock, and
     (viii) transactions with affiliates, all as defined in the agreement. As of
     July 31, 1997, there is no equity available for the payment of dividends to
     stockholders. The agreement also contains provisions for fees payable to
     the bank upon prepayment and an increased rate of interest during periods
     of default. The term of this agreement extends to November 30, 2000.

     a.  Term Loan


         The $25,410,169 term loan dated October 30, 1996 ($27,112,055 at July
         31, 1996) is payable in an initial scheduled installment aggregating
         $1,695,462 on October 31, 1996 (of which $1,179,000 was paid on
         November 8, 1996), 30 consecutive monthly installments of $548,054
         thereafter through April 30, 1999 and a final installment on May 30,
         1999 of $273,098, together with additional prepayments of principal of
         $2,000,000 on October 31, 1997 and $5,000,000 on October 31, 1998. No
         prepayment fees result from these scheduled prepayments. In addition,
         interest is payable monthly at 1.5% over the bank's base rate (10% at
         July 31, 1997). In the event the loan and security agreement has not
         been terminated prior to October 31, 1997, a $125,000 fee due on such
         date to the bank will not be required to be paid by the Company if on
         and as of such date no default or event of default has occurred and is
         continuing and the Company has made all principal and interest payments
         required to be paid on the term loan when due.

                                      F-19

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 4 (continued)

     b.  Revolving Loan

         Under the revolving loan facility combined with a $1,500,000 letter of
         credit facility, the Company may borrow up to a maximum of $22,000,000
         based upon a percentage of accounts receivable and inventory, as
         defined, less the sum of the undrawn face amount of any letters of
         credit outstanding. Interest is payable monthly at 1.25% over the
         bank's base rate. In addition, the Company is required to pay, on a
         monthly basis, an unused facility fee of .5% per annum. At July 31,
         1997, the Company had approximately $7,270,000 unused and available
         under the revolving loan facility.

     c.  Additional Term Loan

         The $1,500,000 additional loan dated October 30, 1996 is payable in 25
         consecutive monthly installments which commenced December 31, 1996 of
         $60,000 each plus interest at 1.5% over the bank's base rate (10% at
         July 31, 1997). In the event the additional loan is paid in full on or
         before December 31, 1997 and the loan and security agreement has not
         been terminated on or before such date, the Company will not be
         required to pay a $100,000 fee to the bank on December 31, 1998.


     d.  Capital Expenditure Credit Facility

         The $3,450,000 capital expenditure credit facility provides the Company
         with a credit line through July 31, 1998 to finance up to 80% of the
         value of capital equipment purchases (as defined). Such loans under the
         facility are payable based on a 36-month amortization schedule with a
         final payment of the entire unpaid principal balance on July 31, 2000.
         These loans bear interest at 1.5% over the bank's base rate. In
         addition, the Company is required to pay a $103,500 fee to the bank,
         payable at a rate of 3% of each advance with a final payment for any 
         unpaid amount of the fee payable on July 31, 1998. As of October 24, 
         1997, no amounts were outstanding under this capital expenditure 
         credit facility.

                                      F-20

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 4 (continued)

     Subordinated 10% Notes Payable to Stockholders

     The subordinated 10% notes payable to stockholders are uncollateralized and
     payable in full on January 1, 2001. Interest accrues only on the original
     principal sum of $6,000,000 and is payable quarterly at 10% per annum (12%
     upon default); however, to date, interest is not permitted to be paid
     pursuant to the terms of the amended and restated loan and security
     agreement with the bank, and, accordingly, such accrued and unpaid interest
     becomes payable on January 1, 2001.

     Additional 10% Subordinated Notes Payable to Stockholders

     The additional 10% subordinated notes payable to stockholders are
     uncollateralized and payable in full on December 31, 1998 with interest
     payable quarterly; however, payment of principal and interest may be
     extended in full or in part to January 1, 2001 to the extent not permitted
     to be paid pursuant to the terms of the amended and restated loan and
     security agreement with the bank.

     Subordinated 11% Series B Notes Payable to Stockholders

     These uncollateralized notes mature on January 1, 1999 with interest
     payable quarterly.


     Note Payable to VCA

     This uncollateralized note is payable in annual installments of $385,374
     beginning January 1995 through January 2001, including interest at 12%.

     Capitalized Lease Obligations

     The Company leases certain equipment under agreements accounted for as
     capital leases. During fiscal 1997, the Company leased approximately
     $1,100,000 of equipment which were accounted for as capital leases. The
     obligations for the equipment require the Company to make monthly payments
     through December 2002, with implicit interest rates from 5.27% to 19.48%.

                                      F-21

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 4 (continued)

     The following is a summary of the aggregate annual maturities of long-term
     debt, subordinated notes payable and capitalized lease obligations as of
     July 31, 1997:


                      Year ending July 31,
                          1998                                $ 9,836,946
                          1999                                 13,955,946
                          2000                                    579,547
                          2001                                 22,231,494
                          2002                                      4,639
                                                              -----------

                                                              $46,608,572
                                                              ===========

NOTE 5 - EMPLOYEE BENEFIT PLANS

     401(k)/Profit-sharing Plan

     The Company has a 401(k)/profit-sharing plan. Contributions to the plan are
     discretionary and are determined annually by the Board of Directors. No
     contributions were made for the years ended July 31, 1997, 1996 and 1995.

     Retirement Plan


     Allied participates in a defined benefit multi-employer pension plan
     covering union employees. Contributions for the years ended July 31, 1997
     and 1996, and for the period from January 12, 1995 to July 31, 1995 totaled
     $306,000, $308,000 and $153,000, respectively.

                                      F-22

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 6 - COMMITMENTS AND CONTINGENCIES

     Related Party and Other Leases

     The Company leases certain of its processing and administrative facilities
     from affiliated companies under noncancellable operating leases which
     expire at various dates between 1997 and 2015. Rent expense under these
     leases amounted to approximately $2,594,000, $2,369,000 and $1,706,000 for
     the years ended July 31, 1997, 1996 and 1995, respectively. The Company has
     guaranteed certain mortgage debt on these facilities totalling
     approximately $527,050 at July 31, 1997.

     The Company also leases other processing facilities from various nonrelated
     parties under noncancellable operating leases which expire at various dates
     between 1997 and 2008 and provide for renewals at various rates and terms.
     Amounts charged to operations for these facilities amounted to
     approximately $2,448,000, $2,237,000 and $2,547,000 for the years ended
     July 31, 1997, 1996 and 1995, respectively.

     The minimum annual rental commitments required under all facility leases
     are as follows:

                      Year ending July 31,
                          1998                                  $ 4,515,000
                          1999                                    4,429,000
                          2000                                    3,194,000
                          2001                                    2,822,000
                          2002                                    2,631,000
                          Thereafter                             23,496,000
                                                                -----------

                                                                $41,087,000
                                                                ===========


                                      F-23
<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 6(continued)

     Other Leases

     The Company also leases various office equipment and automobiles under
     noncancellable operating leases expiring through fiscal 2001. The minimum
     rent commitments required under these leases are as follows:

                      Year ending July 31,
                          1998                                   $  395,000
                          1999                                      356,000
                          2000                                      261,000
                          2001                                      164,000
                                                                 ----------

                                                                 $1,176,000
                                                                 ==========

     Employment Agreements

     The Company maintains employment agreements with certain executive
     officers. Salary continuation is provided for any executive who is
     terminated without cause, as defined. Effective August 1, 1997, the Company
     entered into an employment agreement with an executive officer expiring
     July 31, 2000.

     As of July 31, 1997, the aggregate minimum compensation obligation under
     active employment agreements is as follows (taking into effect the August
     1, 1997 agreement described above):

                       Year ending July 31,
                           1998                                  $  614,000
                           1999                                     275,000
                           2000                                     275,000
                                                                 ----------

                                                                 $1,164,000
                                                                 ==========

                                      F-24


<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 6 (continued)

     Global Indemnification Agreement

     On June 17, 1994, the Company entered into a Global Indemnification
     Agreement with affiliates from whom it rents property. The Agreement
     indemnifies the affiliates and holds them harmless for liabilities, if any,
     related to environmental law and hazardous substance utilization on the
     leased properties. This indemnification excludes any hazardous substance
     that may be placed on the leased properties by someone other than the
     Company, after the Company ceases to occupy the applicable property. In
     exchange for indemnifying the affiliates, the Company received $25,000 from
     the affiliates.

     Litigation Matters

     The Company is involved in various routine litigation which arise through
     the normal course of business. Management believes that the resolution of
     these matters will not have a material adverse effect on the consolidated
     financial position or results of operations.


NOTE 7 - STOCKHOLDERS' EQUITY

     The Company's issued and outstanding common stock warrants and options are
     as follows:

     Common Stock Warrants

     The Company has 1,353,750 Class A redeemable warrants and 1,353,750 Class B
     redeemable warrants outstanding as of July 31, 1997. Each Class A and Class
     B redeemable warrant entitles the registered holder thereof to purchase one
     share of common stock at a price of $6.75 and $7.50 per share,
     respectively, subject to certain adjustment, until July 28, 1998
     (originally July 28, 1997). The Company, at its own option, may redeem the
     Class A redeemable warrants and the Class B redeemable warrants, in each
     case as a class and not in part, at a price of $.05 per warrant provided
     the reported closing bid price of the common stock equals or exceeds $8.50
     per share for a length of time as specified in the agreements. The warrant
     holders have exercise rights until the close of business on the date fixed
     for redemption.


                                      F-25
<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 7 (continued)

     The Company had 120,000 units exercisable through July 28, 1997 at an
     exercise price of $9.90 per unit. Each unit consisted of one share of
     common stock, one Class A redeemable warrant and one Class B redeemable
     warrant. The exercise price of the Class A and the Class B redeemable
     warrants, in accordance with these units, was $9.79 and $10.88,
     respectively. All of these units expired on July 28, 1997.

     The Company also has 1,250,000 Class C warrants outstanding as of July 31,
     1997. Each Class C warrant entitles the registered holder thereof to
     purchase one share of common stock at a price of $9.00 per share, beginning
     two years after the date of the HMG merger (January 12, 1997) and expiring
     three years after becoming exercisable.

     Stock Options

     The Company established an Amended and Restated 1994 Long-Term Incentive
     Plan (the "Plan") under which options to purchase shares of the Company's
     common stock and other stock incentives may be granted to eligible
     participants. The maximum number of shares available for awards under the
     Plan is 2,400,000 shares, of which no more than half may be newly-issued
     shares. Shares issued to holders of HMG common stock or AFL common stock in
     the merger and subsequently reacquired by Allied Digital, as well as any
     other shares acquired by Allied Digital after the merger, in the public
     market or otherwise, would not be considered newly-issued shares for this
     purpose. Options granted under the Plan may be either incentive stock
     options or nonqualified stock options. Incentive stock options may be
     granted only to employees of the Company. An incentive stock option must
     expire within ten years from the date it is granted (five years in the case
     of such options granted to a holder of more than 10% of the outstanding
     common stock). Incentive stock options are first exercisable not earlier
     than one year from the date of grant. The exercise price of an incentive
     stock option must be at least equal to the fair market value of the common
     stock on the date such incentive stock option is granted (or 110% of the
     fair market value of the common stock in the case of such options granted
     to a holder of more than 10% of the outstanding common stock). To the
     extent that the aggregate fair market value of the common stock with
     respect to which incentive stock options are exercisable for the first time
     by an optionee during any calendar year exceeds $100,000, such options will
     be treated as nonqualified stock options.


                                      F-26

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 7 (continued)

     At July 31, 1997, the Company has 522,500 options outstanding (of which
     423,750 are exercisable) at prices ranging from $2.875 to $8.63, vesting at
     various dates through July 1999 and expiring at various dates between
     November 1998 and September 2003.

<TABLE>
<CAPTION>
                                               Incentive Stock Options           Nonqualified Stock Options
                                           ------------------------------       ---------------------------       Weighted
                                              Exercise                             Exercise                        average
                                                price            Quantity           price          Quantity     exercise price
                                           ---------------       --------       -------------      --------     --------------
<S>                                        <C>                   <C>            <C>                <C>          <C>           
        Outstanding as of
          August 1, 1995                   $5.5625 - $6.94        349,500       $6.66 - $8.63       275,000          $6.6185

        Forfeited                               5.5625            (77,000)            -                -              5.5625
                                                                  -------                           -------

        Outstanding as of
          July 31, 1996                     5.5625 -  6.94        272,500        6.66 -  8.63       275,000           6.7670

        Granted                                 2.875              25,000             -                -               2.875
        Expired                                5.5625             (12,500)            -                               5.5625
        Forfeited                              5.5625             (37,500)            -                -              5.5625
                                                                  -------                           -------

        Outstanding as of
          July 31, 1997                    $2.875  - $6.94        247,500       $6.66 - $8.63       275,000          $6.6140
                                           ===============        =======       =============       =======          =======

        Amounts exercisable as of
            July 31, 1997                  $5.5625 - $6.94        148,750       $6.66 - $8.63       275,000          $7.5541
                                           ===============        =======       =============       =======          =======
</TABLE>

                                      F-27


<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 7 (continued)

     The following table summarizes information concerning currently exercisable
     stock options under the Plan:

<TABLE>
<CAPTION>
                                                                   Weighted-
                                                                    average           Weighted-
                                                                   remaining           average
                                                   Number         contractual         exercise
        Range of exercise prices                exercisable      life (months)          price
        ------------------------                -----------      -------------        ---------
<S>                                             <C>              <C>                  <C>  
        $5.5625 - $6.94                           298,750         37 months              $6.34

        $8.63                                     125,000         74 months              $8.63
</TABLE>

     The weighted-average option fair value on the grant date was $1.38 for
     options issued during the year ended July 31, 1997.

     The Company has adopted the disclosure provisions of Statement of Financial
     Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
     ("SFAS No. 123"); it applies APB Opinion No. 25, "Accounting for Stock
     Issued to Employees," and related interpretations in accounting for the
     Plan and does not recognize compensation expense for such Plan. If the
     Company had elected to recognize compensation expense based upon the fair
     value at the grant dates for awards under these plans consistent with the
     methodology prescribed by SFAS No. 123, the Company's reported net income
     and earnings per share would be reduced to the pro forma amount indicated
     below for the year ended July 31, 1997:

                      Net income
                          As reported                              $666,924
                          Pro forma                                 658,299
                      Earnings per common share
                          As reported                                   .05
                          Pro forma                                     .05

                                      F-28


<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 7 (continued)

     These pro forma amounts may not be representative of future disclosures
     because they do not take into effect pro forma compensation expense related
     to grants made before fiscal 1996. The fair value of these options was
     estimated at the date of grant using the Black-Scholes option-pricing model
     with the following weighted-average assumptions for the fiscal year ended
     July 31, 1997: expected volatility of 45%; risk-free interest rate of 6.32%
     and expected term of 5 years.

     The Black-Scholes option valuation model was developed for use in
     estimating the fair value of traded options which have no vesting
     restrictions and are fully transferable. In addition, option valuation
     models require the use of highly subjective assumptions including the
     expected stock price volatility. Because the Company's employee stock
     options have characteristics significantly different from those of traded
     options, and because changes in the subjective assumptions can materially
     affect the fair value estimate, in management's opinion, the existing
     models do not necessarily provide a reliable single measure of the fair
     value of its employee stock options.

     In connection with a June 1995 sales contract (Note 9), the Company granted
     to a customer 250,000 options to acquire shares of Company common stock at
     an exercise price of $5.5625, equivalent to the quoted market price on such
     date. In consideration for modifying certain provisions of the June 1995
     sales contract in September 1997, the Company repriced these options to an
     exercise price of $3.00 per share for which the Company expects to
     recognize a noncash pretax charge to earnings of approximately $150,000
     during the fiscal 1998 period. These options expire in June 2000.

                                      F-29

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996




NOTE 7 (continued)

     The following information summarizes the Company's stock options and
warrants at July 31, 1997:

<TABLE>
<CAPTION>
                                                                                                            Range of
                                                                                                            exercise
        Description                          Authorized             Issued            Exercisable             price
        -----------                          ----------            ---------          -----------        --------------
<S>                                          <C>                   <C>                <C>                <C>           
        Class A warrants                      1,353,750            1,353,750           1,353,750            $ 6.75
        Class B warrants                      1,353,750            1,353,750           1,353,750              7.50
        Class C warrants                      1,250,000            1,250,000           1,250,000              9.00
        Incentive stock options/
          nonqualified stock options          2,400,000              522,500             423,750          2.875 - 9.00
        Options - other                         250,000              250,000             250,000              5.562
                                              ---------            ---------           ---------         --------------

        Balance as of July 31, 1997           6,607,500            4,730,000           4,631,250         $2.875 - $9.00
                                              =========            =========           =========         ==============
</TABLE>

     In connection with the August 1, 1997 employment agreement described in
     Note 6, the Company granted incentive stock options to an executive officer
     to acquire 200,000 shares of common stock with an exercise price of $2.00
     representing the quoted market price on such date. These options become
     exercisable over a four-year period commencing August 1, 2001 at a rate of
     25% each year with possible acceleration based upon the market performance
     of the Company's common stock.

     On October 21, 1997, the Company: (i) repriced all outstanding incentive
     stock options to an exercise price of $2.4375, representing the quoted
     market price on such date and (ii) granted 27,500 incentive stock options
     to employees which become exercisable equally over five years with an
     exercise price of $2.4375.


NOTE 8 - INCOME TAXES

     Prior to January 12, 1995, the stockholders of AFL had elected, under the
     provisions of Subchapter S of the Internal Revenue Code, to have the income
     and related tax benefits of AFL included in the taxable income of the
     individual stockholders. As a result, no provision for Federal income taxes
     has been included in the historical statements of earnings prior to January
     12, 1995.

                                      F-30

<PAGE>



                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 8 (continued)

     On January 12, 1995, AFL became disqualified, under the provisions of
     Subchapter S of the Internal Revenue Code, to have the income of the
     Company included in the taxable income of the individual stockholders. In
     connection with this disqualification, the Company established net deferred
     tax assets of approximately $1,625,000. The effect of establishing the
     deferred tax assets was included in income for the year ended July 31,
     1995. Subsequent to January 12, 1995, the Company has provided Federal
     income taxes in the statements of earnings based on the effective tax rate.
     The unaudited pro forma adjustment to income tax provision and net income
     have been presented in the consolidated statement of earnings for the year
     ended July 31, 1995 as if the Subchapter S election had been terminated
     prior to August 1, 1994.

     The provision (credit) for income taxes is as follows:

                                       Year ended July 31,
                         -------------------------------------------------
                            1997               1996               1995
                         -----------        -----------        -----------

        Federal
          Current        $    40,000        $      --          $      --
          Deferred         1,578,500         (1,758,663)        (1,556,409)
                         -----------        -----------        -----------

                           1,618,500         (1,758,663)        (1,556,409)
                         -----------        -----------        -----------

        State
          Current             10,000
          Deferred           131,500           (776,184)        (1,019,209)
                         -----------        -----------        -----------

                             141,500           (776,184)        (1,019,209)
                         -----------        -----------        -----------

                         $ 1,760,000        $(2,534,847)       $(2,575,618)
                         ===========        ===========        ===========

                                      F-31


<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 8 (continued)

     Deferred income tax assets (liabilities) resulting from differences between
     accounting for financial statement purposes and tax purposes are as
     follows:

                                                      July 31,
                                           ------------------------------
                                              1997               1996
                                           -----------        -----------

        Restructuring costs                $   501,000        $ 1,115,000
        Nonrecurring charge                    293,000            391,000
        Accounts receivable                    637,000            585,000
        Inventory                              121,000            144,000
        Accrued salaries                       304,000            378,000
        Net operating loss carryover         2,500,000          2,365,000
        State investment tax credits         1,572,000          1,239,000
                                           -----------        -----------

                                             5,928,000          6,217,000
                                           -----------        -----------

        Property and equipment              (2,747,000)        (1,332,000)
        Other accrued expenses                  19,000           (133,000)
                                           -----------        -----------

                                            (2,728,000)        (1,465,000)
                                           -----------        -----------

        Valuation allowance                   (890,000)          (732,000)
                                           -----------        -----------

        Net deferred tax asset             $ 2,310,000        $ 4,020,000
                                           ===========        ===========

                                      F-32

<PAGE>

                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996


NOTE 8 (continued)

     The Company's effective income tax rate was 72.5% in 1997, 31.2% in 1996
     and (1,018)% in 1995. The components of the reconciliation of the Company's
     effective tax provision (credit) to the tax provision (credit) pursuant to
     the U.S. statutory rate of 34% are as follows:

<TABLE>
<CAPTION>
                                                                            Year ended July 31,
                                                             -------------------------------------------------
                                                                1997               1996               1995
                                                             -----------        -----------        -----------
<S>                                                          <C>                <C>                <C>        
        Federal tax provision (credit) computed at
            statutory rate                                   $   825,154        $(2,760,904)       $    85,986
        S Corporation earnings                                                                        (880,464)
        Amortization of costs in excess of net assets
            acquired                                             637,989            625,949            427,582
        Nondeductible entertainment expenses                      45,468             47,775             32,884
        State tax expense (benefit) net of Federal tax           425,738           (341,448)          (202,370)
        Recognition of investment tax credit                    (332,349)          (319,219)          (414,401)
        Increase in valuation allowance                          158,000            213,000               --
        Reinstatement of deferred taxes                             --                 --           (1,624,835)
                                                             -----------        -----------        -----------

        Actual tax provision (credit)                        $ 1,760,000        $(2,534,847)       $(2,575,618)
                                                             ===========        ===========        ===========
</TABLE>

     HMG is in the process of undergoing an IRS tax examination. In connection
     with this examination, management does not anticipate any material adverse
     effect on the Company's consolidated financial position and results of
     operations upon its ultimate resolution.

     The Company has an NOL carryforward as of July 31, 1997 for Federal
     purposes of approximately $6,585,000 which expires during the fiscal years
     ending 2010 through 2012.

     The Company uses the flow-through method of accounting for investment tax
     credits. The Company has state investment tax credit carryforwards at July
     31, 1997 approximating $2,035,000 which expire between fiscal 2003 and
     2007.


                                      F-33

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 9 - NONRECURRING CHARGE

     In June 1995, the Company, in connection with consummating a five-year
     production and fulfillment sales contract, agreed to, among other things, a
     customer signing allowance in the amount of $1,250,000 to be amortized over
     the term of the contract. Based on the fiscal 1996 financial results
     relating thereto and an assessment made in the fiscal 1996 fourth quarter
     of anticipated future results of performing thereunder, the Company
     determined that the unamortized balance of the deferred charge was not
     recoverable and, accordingly, charged to operations the remaining
     unamortized balance.


NOTE 10 - RESTRUCTURING CHARGE

     In June 1996, the Company adopted a plan to streamline and reduce resources
     utilized in the business which resulted in recording a restructuring charge
     of approximately $3.1 million in the fourth quarter of fiscal 1996. The
     restructuring charge comprised of work force related expenses of
     $1,126,358, idle plant lease costs of $863,000, abandoned asset write off
     of $837,935 and other related costs of $250,000.

     The status of the components of the restructuring charge was:

<TABLE>
<CAPTION>
                                         Balance at                             Balance at
                                          July 31,          Fiscal 1997          July 31,
                                            1996             activity              1997
                                         -----------        -----------        -----------
<S>                                      <C>                <C>                <C>        
       Work force related expenses       $ 1,126,000        $(1,022,000)       $   104,000
       Idle plant lease costs                863,000           (452,500)           410,500
       Other related costs                   250,000            (62,500)           187,500
                                         -----------        -----------        -----------

                                         $ 2,239,000        $(1,537,000)       $   702,000
                                         ===========        ===========        ===========
</TABLE>


                                      F-34

<PAGE>


                        Allied Digital Technologies Corp.
                                and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                             July 31, 1997 and 1996



NOTE 11 - QUARTERLY FINANCIAL DATA

     Summarized quarterly financial data is as follows (unaudited and in
     thousands):

                                                                Net income
                                                     Gross        (loss)
                                      Revenue       margin      (ii) (iii)
                                      -------       ------      ----------

         1997
            First quarter             $43,329       $ 8,599       $   488
            Second quarter             38,785         7,594            43
            Third quarter              38,509         7,676            98
            Fourth quarter             38,525         8,244            38


         1996
            First quarter             $46,335       $ 9,606       $   851
            Second quarter             39,389         6,048        (1,465)
            Third quarter              37,933         6,656        (1,012)
            Fourth quarter             37,284         5,120        (3,959)


         1995
            First quarter             $20,968       $ 9,084       $ 2,513
            Second quarter (iv)        22,694         6,171         1,578
            Third quarter (i)          35,430         7,508           237
            Fourth quarter             37,472         4,359        (1,499)

     (i)   Effective January 12, 1995, the Company consummated a reverse
           acquisition merger of HMG (Note 2).

     (ii)  Historical earnings per share have not been presented due to the
           recapitalization of AFL via Allied Digital (Note 3).

     (iii) Prior to January 12, 1995, the Company was not taxable for Federal
           income tax purposes under the provisions of Subchapter S of the
           Internal Revenue Code (Note 8).


     (iv)  Upon becoming disqualified under the provision of Subchapter S on
           January 12, 1995, the Company established net deferred tax assets of
           $1,625,000 in the second quarter of fiscal 1995 (Note 8).

                                      F-35

<PAGE>


               Allied Digital Technologies Corp. and Subsidiaries

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>
                  Column A                  Column B                 Column C                 Column D          Column E
                  --------                  --------                 --------                 --------          --------

                                                                    Additions
                                                            ---------------------------
                                                               (1)              (2)
                                                                             Charged to
                                           Balance at       Charged to         other                           Balance at
                                            beginning        costs and       accounts -      Deductions -        end of
                                            of period        expenses         describe         describe          period
                                           ----------       ----------       ----------       ----------       ----------
           Description
           -----------
<S>                                        <C>              <C>              <C>              <C>              <C>       
Allowance for doubtful accounts
    For the year ended July 31, 1997       $1,515,000       $1,242,860                        $1,107,860 (a)   $1,650,000
                                           ==========       ==========       ==========       ==========       ==========

    For the year ended July 31, 1996       $  871,000       $1,297,294                        $  653,294 (a)   $1,515,000
                                           ==========       ==========       ==========       ==========       ==========

    For the year ended July 31, 1995       $  918,000       $  937,504       $  395,000 (b)   $1,379,504 (a)   $  871,000
                                           ==========       ==========       ==========       ==========       ==========
</TABLE>

(a)  Write-off of uncollectible accounts

(b)  Attributable to HMG Merger

                                      F-36

<PAGE>


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

(2)(a)                  Amended and Restated Reorganization Agreement, dated as
                        of October 31, 1994, among Allied Digital Technologies
                        Corp., Allied Film Laboratory, Inc., EOS Acquisition
                        Corp., Aurora Acquisition Corp., HMG Digital
                        Technologies Corp., HRM Holdings Corp., and Hauppauge
                        Record Manufacturing Ltd. (herein incorporated by
                        reference to Exhibit (2)/(10)(a) filed as part of
                        registrant's Registration Statement on Form S-4, File
                        No. 33-86530).

(2)(b)                  Amended and Restated Agreement and Plan of Merger, dated
                        as of October 31, 1994, among Allied Digital
                        Technologies Corp., Allied Film Laboratory, Inc., and
                        Aurora Acquisition Corp. (herein incorporated by
                        reference to Annex B (pages B-1 through B-10) to the
                        Proxy Statement and Prospectus that formed a part of
                        registrant's Registration Statement on Form S-4, File
                        No. 33-86530).

(2)(c)                  Amended and Restated Agreement of Merger, dated as of
                        October 31, 1994, among Allied Digital Technologies
                        Corp., EOS Acquisition Corp., and HMG Digital
                        Technologies Corp. (herein incorporated by reference to
                        Annex C (pages C-1 through C-9) to the Proxy Statement
                        and Prospectus that formed a part of registrant's
                        Registration Statement on Form S-4, File No. 33-86530).

(3)(i)                  Certificate of Incorporation of Allied Digital
                        Technologies Corp. and all amendments thereto (herein
                        incorporated by reference to Exhibit (3)(a)/(4)(a) filed
                        as part of registrant's Registration Statement on Form
                        S-4, File No. 33-86530).

(3)(ii)(a)              Amended and Restated By-laws of Allied Digital
                        Technologies Corp. (herein incorporated by reference to
                        Exhibit (3)(b)/(4)(b) filed as part of registrant's
                        Registration Statement on Form S-4, File No. 33-86530).

(3)(ii)(b)              First Amendment to Allied Digital Technologies Corp.
                        Amended and Restated Bylaws (herein incorporated by
                        reference to Exhibit 3 to registrant's Form 10-Q for the
                        quarterly period ended January 31, 1995).

(4)(a)                  Specimen certificate for Allied Digital Technologies
                        Corp. Common Stock (herein incorporated by reference to
                        Exhibit (4)(f) filed as part of registrant's
                        Registration Statement on Form S-4, File No. 33-86530).


(4)(b)                  Form of specimen note for HMG 12% Series A Note (herein
                        incorporated by reference to Exhibit (4)(g)/(10)(b)
                        filed as part of registrant's Registration Statement on
                        Form S-4, File No. 33-86530).

(4)(c)                  Amendment No. 1 to the HMG 12% Series A Note (herein
                        incorporated by reference to Exhibit 4(i)(b) to HMG
                        Digital Technologies Corp. Annual Report on Form 10-K
                        for the year ended July 31, 1995, Commission File No.
                        0-20014).

(4)(d)                  Form of specimen note for HMG 11% Series B Subordinated
                        Note (herein incorporated by reference to Exhibit
                        (4)(h)/(10)(c) filed as part of registrant's
                        Registration Statement on Form S-4, File No. 33-86530).

(4)(e)                  Warrant Agreement, dated as of July 29, 1992, between
                        HMG Digital Technologies Corp. and RAS Securities Corp.
                        (herein incorporated by reference to Exhibit 4.4 of HMG
                        Digital Technologies Corp.'s Registration Statement on
                        Form S-1, File No. 33-44942).

(4)(f)                  Warrant Agreement, dated as of July 29, 1992, between
                        HMG Digital Technologies Corp. and American Stock
                        Transfer & Trust Company (herein incorporated by
                        reference to Exhibit 4.5 of HMG Digital Technologies
                        Corp.'s Registration Statement on Form S-1, File No.
                        33-44942).

(4)(g)                  Form of Supplemental Warrant Agreement among Allied
                        Digital Technologies Corp., HMG Digital Technologies
                        Corp. and RAS Securities Corp. (herein incorporated by
                        reference to Exhibit (4)(m) filed as part of
                        registrant's Registration Statement on Form S-4, File
                        No. 33-86530).


                                       33

<PAGE>

(4)(h)                  Form of Supplemental Warrant Agreement among Allied
                        Digital Technologies Corp., HMG Digital Technologies
                        Corp. and American Stock Transfer & Trust Company
                        (herein incorporated by reference to Exhibit (4)(n)
                        filed as part of registrant's Registration Statement on
                        Form S-4, File No. 33-86530).

(4)(i)                  Form of Class C Warrant Agreement between Allied Digital
                        Technologies Corp. and American Stock Transfer & Trust
                        Company (herein incorporated by reference to Exhibit
                        (4)(o)(i) filed as part of registrant's Registration
                        Statement on Form S-4, File No. 33-86530).


                        (ii)           Form of Class C Warrant Certificate
                                       (herein incorporated by reference to
                                       Exhibit (4)(o)(ii) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

(10)(a)                 Agreements with American National Bank and Trust Company
                        of Chicago ("ANB"):

                        (i)            Amended and Restated Loan and Security
                                       Agreement, dated as of October 30, 1996,
                                       between Hauppauge Record Manufacturing
                                       Ltd. and ANB (herein incorporated by
                                       reference to Exhibit 10(a)(i) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996).

                        (ii)           Amended and Restated Revolving Loan Note,
                                       dated October 30, 1996, made by Hauppauge
                                       Record Manufacturing Ltd. to the order of
                                       ANB in the principal amount of
                                       $22,000,000 (herein incorporated by
                                       reference to Exhibit 10(a)(ii) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996).

                        (iii)          Amended and Restated Term Note, dated
                                       October 30, 1996, made by Hauppauge
                                       Record Manufacturing Ltd. and payable to
                                       Lender in the aggregate principal amount
                                       of $25,410,168.93 (herein incorporated by
                                       reference to Exhibit 10(a)(iii) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996.

                        (iv)           Additional Term Note, dated October 30,
                                       1996, made by Hauppauge Record
                                       Manufacturing Ltd. and payable to ANB in
                                       the aggregate principal amount of
                                       $1,500,000 (herein incorporated by
                                       reference to Exhibit 10(a)(iv) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996.

                        (v)            Amended and Restated Guaranty Agreement,
                                       dated as of October 30, 1996, made by HRM
                                       Holdings Corp. in favor of ANB (herein
                                       incorporated by reference to Exhibit
                                       10(a)(v) to registrant's Annual Report on
                                       Form 10-K for the fiscal year ended July
                                       31, 1996).

                        (vi)           Amended and Restated Guaranty Agreement
                                       dated October 30, 1996, made by Hauppauge

                                       Record Manufacturing Ltd. in favor of ANB
                                       (herein incorporated by reference to
                                       Exhibit 10(a)(vi) to registrant's Annual
                                       Report on Form 10-K for the fiscal year
                                       ended July 31, 1996).

                        (vii)          Amended and Restated Subordination
                                       Agreement, dated as of October 30, 1996,
                                       between HRM Holdings Corp. and ANB
                                       (herein incorporated by reference to
                                       Exhibit 10(a)(vii) to registrant's Annual
                                       Report on Form 10-K for the fiscal year
                                       ended July 31, 1996).

                        (viii)         Fee Letter, dated October 30, 1996,
                                       between Hauppauge Record Manufacturing
                                       Ltd. and ANB (herein incorporated by
                                       reference to Exhibit 10(a)(viii) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996).

                        (ix)           Collateral Patent, Trademark, Copyright
                                       and License Agreement, dated October 30,
                                       1996, made by Hauppauge Record
                                       Manufacturing Ltd. in favor of ANB
                                       (herein incorporated by reference to
                                       Exhibit 10(a)(ix) to registrant's Annual
                                       Report on Form 10-K for the fiscal year
                                       ended July 31, 1996).

                        (x)            Security Agreement, dated as of October
                                       30, 1996, made by Allied Digital
                                       Technologies Corp., HMG Digital
                                       Technologies Corp. and HRM Holdings Corp.
                                       in favor of ANB (herein incorporated by
                                       reference to Exhibit 10(a)(x) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996).

                                       34

<PAGE>

                        (xi)           Amended and Restated Guaranty Agreement,
                                       dated as of October 30, 1996, made by
                                       Allied Digital Technologies Corp. in
                                       favor of ANB (herein incorporated by
                                       reference to Exhibit 10(a)(xi) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996).

                        (xii)          Amendment No. 1 to Amended and Restated
                                       Loan and Security Agreement, dated as of
                                       August 19, 1997 between Allied Digital,

                                       Inc. (formerly known as Hauppauge Record
                                       Manufacturing Ltd.) and ANB.

                        (xiii)         Capex Note, dated August 19, 1997, made
                                       by Allied Digital, Inc. (formerly known
                                       as Hauppauge Record Manufacturing Ltd.)
                                       to the order of ANB in the aggregate
                                       principal amount of $3,450,000.

(10)(b)(i)              Amended and Restated Promissory Note, dated October 30,
                        1996, made by Hauppauge Record Manufacturing Ltd. in
                        favor of William H. Smith, Trustee, in the principal
                        amount of $4,000,000 (herein incorporated by reference
                        to Exhibit 10(b)(i) to registrant's Annual Report on
                        Form 10-K for the year ended July 31, 1996).

(10)(b)(ii)             Amended and Restated Promissory Note dated October 30,
                        1996, made by Hauppauge Record Manufacturing Ltd. in
                        favor of William H. Smith, in the principal amount of
                        $2,000,000 (herein incorporated by reference to Exhibit
                        10(b)(ii) to registrant's Annual Report on Form 10-K for
                        the year ended July 31, 1996).

(10)(c)                 Global Indemnification Agreement dated June 17, 1994,
                        among Allied Film Laboratory, Inc. and Greenfield Land
                        Company and William H. Smith, individually, d/b/a
                        William H. Smith Realty and William H. Smith, as
                        Trustee, under the William H. Smith Trust Agreement
                        dated November 13, 1978 (herein incorporated by
                        reference to Exhibit (99)(j) filed as part of
                        registrant's Registration Statement on Form S-4, File
                        No. 33-86530).

(10)(d)                 Non-Negotiable Promissory Note, dated December 29, 1992,
                        made by Allied Film Laboratory, Inc. to VTC, Inc.
                        (herein incorporated by reference to Exhibit (99)(o)
                        filed as part of registrant's Registration Statement on
                        Form S-4, File No. 33-86530).

(10)(e)                 Asset Purchase Agreement, dated December 29, 1992,
                        between Allied Film Laboratory, Inc. and VTC, Inc.
                        (herein incorporated by reference to Exhibit (99)(p)
                        filed as part of registrant's Registration Statement on
                        Form S-4, File No. 33-86530).

(10)(f)                 (i)            VHS Cassette License Agreement for
                                       Duplicators (USA), dated July 1, 1991,
                                       between Victor Company of Japan, Limited
                                       and Allied Digital Technologies Corp.
                                       (and executed by the parties on November
                                       9, 1995 and October 11, 1995,
                                       respectively) (herein incorporated by
                                       reference to Exhibit 10(f)(i) to
                                       registrant's Annual Report on Form 10-K

                                       for the year ended July 31, 1996).

                        (ii)           Addendum, dated January 1, 1995, between
                                       Allied Digital Technologies Corp. and
                                       Victor Company of Japan, Limited (herein
                                       incorporated by reference to Exhibit
                                       10(f)(ii) to registrant's Annual Report
                                       on Form 10-K for the year ended July 31,
                                       1996).

                        (iii)          License Extension Addendum, dated July 1,
                                       1996, between Allied Digital Technologies
                                       Corp. and Victor Company of Japan,
                                       Limited (herein incorporated by reference
                                       to Exhibit 10(f)(iii) to registrant's
                                       Annual Report on Form 10-K for the year
                                       ended July 31, 1996).

(10)(g)                 Licensed Duplicator Agreement for the United States and
                        Canada, dated June 1, 1993, between Macrovision
                        Corporation and Allied Film & Video (herein incorporated
                        by reference to Exhibit (99)(jj) filed as part of
                        registrant's Registration Statement on Form S-4, File
                        No. 33-86530).

(10)(h)                 CD Disc License Agreement, dated January 1, 1996,
                        between Hauppauge Record Manufacturing Ltd. and U.S.
                        Phillips Corporation (herein incorporated by reference
                        to Exhibit 10(h) to registrant's Annual Report on Form
                        10-K for the year ended July 31, 1996).

(10)(i)                 Patent License Agreement for Disc Products, dated June
                        1, 1995, between Hauppauge Record Manufacturing Ltd. and
                        Discovision Associates (herein incorporated by reference
                        to Exhibit 10(i) to registrant's Annual Report on Form
                        10-K for the year ended July 31, 1996).

                                       35

<PAGE>

(10)(j)                 (i)            Lease Agreement, dated August 9, 1983,
                                       between Dallas Communications Complex and
                                       Allied Film Laboratory, Inc. (for
                                       warehouse, office and manufacturing
                                       facilities located in Irving, Texas)
                                       (herein incorporated by reference to
                                       Exhibit (99)(u)(i) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

                        (i)(a)         Supplemental Lease Agreement, dated
                                       December 8, 1989, between Dallas
                                       Communications Complex and Allied Film

                                       Laboratory, Inc. (amending Lease
                                       Agreement, dated August 9, 1983, between
                                       Dallas Communications Complex and Allied
                                       Film Laboratory, Inc.) (herein
                                       incorporated by reference to Exhibit
                                       (99)(u)(i)(a) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

                        (ii)           Lease Agreement, dated September 7, 1989,
                                       between Dallas Communications Complex and
                                       Allied Film Laboratory, Inc. (for
                                       manufacturing and office facilities
                                       located in Irving, Texas) (herein
                                       incorporated by reference to Exhibit
                                       (99)(u)(ii) filed as part of registrant's
                                       Registration Statement on Form S-4, File
                                       No. 33-86530).

                        (iii)          Lease Agreement, dated March 8, 1993,
                                       between Dallas Communications Complex and
                                       Allied Film Laboratory, Inc. (for
                                       warehouse facilities located in Irving,
                                       Texas) (herein incorporated by reference
                                       to Exhibit (99)(u)(iii) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

(10)(k)                 (i)            Lease Agreement, dated December 1, 1986,
                                       between Greenfield Land Company and
                                       Allied Film Laboratory, Inc. (for
                                       warehouse, office, manufacturing
                                       facilities located in Detroit, Michigan)
                                       (herein incorporated by reference to
                                       Exhibit (99)(v)(i) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

                        (i)(a)         Amendment, dated July 1, 1994, to Lease
                                       Agreement dated December 1, 1986, between
                                       Greenfield Land Company and Allied Film
                                       Laboratory, Inc. (for warehouse, office,
                                       manufacturing facilities located in
                                       Detroit, Michigan) (herein incorporated
                                       by reference to Exhibit (99)(v)(i)(a)
                                       filed as part of registrant's
                                       Registration Statement on Form S-4, File
                                       No. 33-86530).

                        (ii)           Lease Agreement, dated January 2, 1987,
                                       between Greenfield Land Company and
                                       Allied Film Laboratory, Inc. (for parking
                                       area facilities located in Detroit,
                                       Michigan) (herein incorporated by

                                       reference to Exhibit (99)(v)(ii) filed as
                                       part of registrant's Registration
                                       Statement on Form S-4, File No.
                                       33-86530).

                        (iii)          Lease Agreement, dated January 2, 1987,
                                       between American National Bank and Trust
                                       Company of Chicago, as Trustee, under
                                       Trust Agreement dated February 13, 1986,
                                       for the benefit of Greenfield Land
                                       Company and Allied Film Laboratory, Inc.
                                       (for manufacturing, office and warehouse
                                       facilities located in Chicago, Illinois)
                                       (herein incorporated by reference to
                                       Exhibit (99)(v)(iii) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

                        (iv)           Lease Agreement, dated November 1, 1986,
                                       between American National Bank and Trust
                                       Company of Chicago, as Trustee, under
                                       Trust Agreement dated February 13, 1986,
                                       for the benefit of Greenfield Land
                                       Company and Allied Film Laboratory, Inc.
                                       (for manufacturing, office and warehouse
                                       facilities located in Chicago, Illinois)
                                       (herein incorporated by reference to
                                       Exhibit (99)(v)(iv) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

                        (v)            Lease Agreement, dated November 1, 1986,
                                       between American National Bank and Trust
                                       Company of Chicago, as Trustee, under
                                       Trust Agreement dated February 13, 1986,
                                       for the benefit of Greenfield Land
                                       Company and Allied Film Laboratory, Inc.
                                       (for manufacturing, office and warehouse
                                       facilities located in Chicago, Illinois)
                                       (herein incorporated by reference to
                                       Exhibit (99)(v)(v) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

                                       36

<PAGE>

                        (vi)           Lease Agreement, dated November 1, 1986,
                                       between American National Bank and Trust
                                       Company of Chicago, as Trustee, under
                                       Trust Agreement dated February 13, 1986,
                                       for the benefit of Greenfield Land
                                       Company and Allied Film Laboratory, Inc.

                                       (for manufacturing, office and warehouse
                                       facilities located in Chicago, Illinois)
                                       (herein incorporated by reference to
                                       Exhibit (99)(v)(vi) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

                        (vii)          Lease Agreement, dated March 1, 1989,
                                       between Greenfield Land Company and
                                       Allied Film Laboratory, Inc. (for
                                       manufacturing, office and warehouse
                                       facilities located in Orlando, Florida)
                                       (herein incorporated by reference to
                                       Exhibit (99)(v)(vii) filed as part of
                                       registrant's Registration Statement on
                                       Form S-4, File No. 33-86530).

                        (viii)         Lease Agreement, dated January 1, 1995,
                                       between Greenfield Land Company and
                                       Allied Film Laboratory, Inc. (for
                                       manufacturing, office and warehouse
                                       facilities located in Clinton, Tennessee)
                                       (herein incorporated by reference to
                                       Exhibit 10(k)(viii) to registrant's
                                       Annual Report on Form 10-K for the year
                                       ended July 31, 1996).

(10)(1)                 Form of Lease Agreement, dated March 1, 1993, between
                        Zellerbach Family Fund and Allied Film Laboratory, Inc.
                        (for office and warehouse facilities located in San
                        Francisco, California) (herein incorporated by reference
                        to Exhibit (99)(w) filed as part of registrant's
                        Registration Statement on Form S-4, File No. 33-86530).

(10)(m)                 (i)            Sublease Agreement, dated June 1, 1984,
                                       between William H. Smith Living Trust
                                       Agreement dated November 13, 1978,
                                       William H. Smith, Trustee, and Allied
                                       Film Laboratory, Inc. (for manufacturing,
                                       office and warehouse facilities located
                                       in San Francisco, California) (herein
                                       incorporated by reference to Exhibit
                                       (99)(x)(i) filed as part of registrant's
                                       Registration Statement on Form S-4, File
                                       No. 33-86530).

                        (ii)           Sublease Agreement, dated June 1, 1984,
                                       between William H. Smith, Trustee,
                                       William H. Smith Living Trust dated
                                       November 13, 1978, and Leo Diner, Inc.
                                       (Leo Diner, Inc. merged with Allied Film
                                       Laboratory, Inc. January 1, 1992) (for
                                       manufacturing, office and warehouse
                                       facilities located in San Francisco,

                                       California) (herein incorporated by
                                       reference to Exhibit (99)(x)(ii) filed as
                                       part of registrant's Registration
                                       Statement on Form S-4, File No.
                                       33-86530).

(10)(n)                 Lease Agreement, dated November 29, 1994, between The
                        Prudential Insurance Company of America and Allied Film
                        Laboratory, Inc. (herein incorporated by reference to
                        Exhibit 10(n) to the registrant's Annual Report on Form
                        10-K for the year ended July 31, 1996).

(10)(o)                 (i)            Lease Agreement, dated April 10, 1989
                                       (assigned to Allied Film Laboratory, Inc.
                                       1/12/93), between Elk Grove Village
                                       Industrial Park Ltd. and VCA Teletronics,
                                       Inc. (for warehouse facilities located in
                                       Elk Grove Village, Illinois) (herein
                                       incorporated by reference to Exhibit
                                       (99)(aa)(i) filed as part of registrant's
                                       Registration Statement on Form S-4, File
                                       No. 33-86530).

                        (ii)           Assignment and Assumption of Lease
                                       Agreement, dated January 12, 1993,
                                       between VCA/Teletronics, Inc. and Allied
                                       Film Laboratory, Inc. (for warehouse
                                       facilities located in Elk Grove Village,
                                       Illinois) (herein incorporated by
                                       reference to Exhibit (99)(aa)(ii) filed
                                       as part of registrant's Registration
                                       Statement on Form S-4, File No.
                                       33-86530).

(10)(p)                 Lease Agreement, dated July 1, 1994, between Security
                        Trust Company, N.A. and Allied Film Laboratory, Inc.
                        (for manufacturing and office facilities located in
                        Landover, Maryland) (herein incorporated by reference to
                        Exhibit (99)(bb) filed as part of registrant's
                        Registration Statement on Form S-4, File No. 33-86530).

(10)(q)                 Form of Lease Agreement, dated June 18, 1993, between
                        HomeCrest Corporation and Allied Film Laboratory, Inc.
                        (for warehouse facilities located in Clinton, Tennessee)
                        (herein incorporated by reference to Exhibit (99)(dd)
                        filed as part of registrant's Registration Statement on
                        Form S-4, File No. 33-86530).


                                       37


<PAGE>


(10)(r)                 (i)            Agreement of Lease, dated December 15,
                                       1994, between HMG Digital Technologies
                                       Corp. and Keelson Associates (herein
                                       incorporated by reference to an Exhibit
                                       filed as part of HMG Digital Technologies
                                       Corp. Quarterly Report on Form 10-Q for
                                       the period ended April 30, 1995,
                                       Commission File No. 0-20014).

                        (ii)           Indenture of Lease, dated February 1,
                                       1987, between Lee Halpern and Larry
                                       Halpern and HMG (herein incorporated by
                                       reference to an Exhibit filed as part of
                                       Registration Statement of HMG Digital
                                       Technologies Corp. on Form S-4, File No.
                                       33-66486).

(10)(s)                 Lease Agreement, dated September 16, 1996, between
                        Allied Digital Technologies Corp. and Shivom Enterprises
                        LLC (for office facilities in Hauppauge, New York)
                        (herein incorporated by reference to Exhibit 10(s) to
                        the registrant's Annual Report on Form 10-K for the year
                        ended July 31, 1996).

(10)(t)                 Allied Film Laboratory, Inc. Employees' Profit Sharing
                        Plan. National Bank of Detroit -Trustee under the Allied
                        Film Laboratory, Inc. Amended Profit Sharing Retirement
                        Trust Agreement between Allied Film Laboratory, Inc. and
                        National Bank of Detroit, dated February 24, 1994.
                        (herein incorporated by reference to Exhibit (99)(ff)
                        filed as part of registrant's Registration Statement on
                        Form S-4, File No. 33-86530).

(10)(u)                 Allied Film Laboratory, Inc. Five Year Bonus Program for
                        Fiscal Year 1992 through Fiscal Year 1996 (includes
                        management, supervisory and stock bonus plans) (herein
                        incorporated by reference to Exhibit (99)(gg) filed as
                        part of registrant's Registration Statement on Form S-4,
                        File No. 33-86530).

(10)(v)                 Amended and Restated 1994 Long-Term Stock Incentive Plan
                        of Allied Digital Technologies Corp. (herein
                        incorporated by reference to Exhibit (4)(i) filed as
                        part of registrant's Registration Statement on Form S-4,
                        File No. 33-86530).

(10)(w)                 Indemnification Agreements between Allied Digital
                        Technologies Corp. and each of William H. Smith, James
                        A. Merkle, Werner Jean, Jerry Stone, Eugene Gargaro,
                        Jr., George N. Fishman, Seymour Leslie, H. Sean Mathis,
                        Donald L. Olesen, Charles Kavanagh and Judith A. Szidik
                        (herein incorporated by reference to Exhibit 10(y) to
                        registrant's Transition Report on Form 10-K for the
                        period from January 1, 1994 to July 31, 1994).


(10)(x)                 Allied Digital Stockholders Agreement, dated January 11,
                        1995, among Allied Digital Technologies Corp.; William
                        H. Smith; William H. Smith Trust, William H. Smith as
                        Trustee under agreement dated November 13, 1978, as
                        amended; Patricia M. Smith; Patricia M. Smith Trust,
                        Patricia M. Smith as Trustee under agreement dated
                        November 13, 1978, as amended; George N. Fishman; Donald
                        L. Olesen; The Donald L. Olesen Annuity Trust, Donald L.
                        Olesen, co-trustee; Leslie/Linton Entertainment, Inc.;
                        and Venture Partners (herein incorporated by reference
                        to Exhibit 3 filed as a part of a Schedule 13D filed
                        February 7, 1995, by William H. Smith; William H. Smith
                        Trust, William H. Smith as Trustee under agreement dated
                        November 13, 1978, as amended; Patricia M. Smith;
                        Patricia M. Smith Trust, Patricia M. Smith as Trustee
                        under agreement dated November 13, 1978, as amended;
                        George N. Fishman; Donald L. Olesen; The Donald L.
                        Olesen Annuity Trust, Donald L. Olesen, co-trustee;
                        Leslie/Linton Entertainment, Inc.; and Venture
                        Partners.)

(10)(y)                 Form of Employment Agreements between Hauppauge Record
                        Manufacturing, Ltd. and each of: (i) George Fishman,
                        (ii) Charles Kavanagh and (iii) Donald Olesen (herein
                        incorporated by reference to Exhibit (99)(hh) filed as
                        part of registrant's Registration Statement on Form S-4,
                        File No. 33-86530).

                                       38

<PAGE>

(10)(z)                 Smith Family Shareholders Agreement, dated January 11,
                        1995, among Allied Digital Technologies Corp.; William
                        H. Smith; William H. Smith Trust, William H. Smith as
                        Trustee under agreement dated November 13, 1978, as
                        amended; Patricia M. Smith; Patricia M. Smith Trust,
                        Patricia M. Smith as Trustee under agreement dated
                        November 13, 1978, as amended; Kendall Allen Smith;
                        Scott Douglas Smith; and Wendy Allison Kubitskey (herein
                        incorporated by reference to Exhibit 2 filed as a part
                        of a Schedule 13D filed January 20, 1995, by William H.
                        Smith; William H. Smith Trust, William H. Smith as
                        Trustee under agreement dated November 13, 1978, as
                        amended; Patricia M. Smith; Patricia M. Smith Trust,
                        Patricia M. Smith as Trustee under agreement dated
                        November 13, 1978, as amended; Kendall Allen Smith;
                        Scott Douglas Smith; and Wendy Allision Kubitskey).

(10)(aa)                (i)            Consulting Agreement, dated June 16,
                                       1994, between HMG Digital Technologies
                                       Corp. and Seymour W. Zises (herein
                                       incorporated be reference to Exhibit

                                       10.22(i) of HMG Digital Technologies
                                       Corp. Annual Report on Form 10-K for the
                                       fiscal year ended July 31, 1994,
                                       Commission File No. 0-20014).

                        (ii)           Consulting Agreement, dated June 16,
                                       1994, between HMG Digital Technologies
                                       Corp. and H. Sean Mathis (herein
                                       incorporated be reference to Exhibit
                                       10.22(ii) of HMG Digital Technologies
                                       Corp. Annual Report on Form 10-K for the
                                       fiscal year ended July 31, 1994,
                                       Commission File No. 0-20014).

                        (iii)          Consulting Agreement, dated June 16,
                                       1994, between HMG Digital Technologies
                                       Corp. and Mark L. Freidman (herein
                                       incorporated be reference to Exhibit
                                       10.22(iii) of HMG Digital Technologies
                                       Corp. Annual Report on Form 10-K for the
                                       fiscal year ended July 31, 1994,
                                       Commission File No. 0-20014).

10(bb)                  (i)            Agreement between HTM Ltd. (a predecessor
                                       in interest to HMG) and Local 810, Steel,
                                       Metals, Alloys and Hardware Fabricators
                                       and Warehousemen, affiliated with the
                                       International Brotherhood of Teamsters,
                                       dated as of January 22, 1994 (herein
                                       incorporated by reference to Exhibit
                                       10.15(i) of HMG Digital Technologies
                                       Corp. Annual Report on Form 10-K for the
                                       fiscal year ended July 31, 1994,
                                       Commission File No. 0-20014).

                        (ii)           Agreement between HVM Ltd. (a predecessor
                                       in interest to HMG) and Local 810, Steel,
                                       Metals, Alloys and Hardware Fabricators
                                       and Warehousemen, affiliated with the
                                       International Brotherhood of Teamsters,
                                       dated as of January 22, 1994 (herein
                                       incorporated by reference to Exhibit
                                       10.15(ii) of HMG Digital Technologies
                                       Corp. Annual Report on Form 10-K for the
                                       fiscal year ended July 31, 1994,
                                       Commission File No. 0-20014).

                        (iii)          Agreement between HCDM Ltd. (a
                                       predecessor in interest to HMG) and Local
                                       810, Steel, Metals, Alloys and Hardware
                                       Fabricators and Warehousemen, affiliated
                                       with the International Brotherhood of
                                       Teamsters, dated as of January 22, 1994
                                       (herein incorporated by reference to

                                       Exhibit 10.15(iii) of HMG Digital
                                       Technologies Corp. Annual Report on Form
                                       10-K for the fiscal year ended July 31,
                                       1994, Commission File No. 0-20014).

(10)(cc)                Form of Indemnification Agreements, dated July 1, 1992,
                        between HMG Digital Technologies Corp. and each of
                        Seymour Zises, Wilmer J. Thomas, Jr., Thomas E.
                        Constance, Alan I. Annex and Mark L. Freidman (herein
                        incorporated by reference to Exhibit 10.7 of HMG Digital
                        Technologies Corp. Registration Statement on Form S-1,
                        File No. 33-44942).

(10)(dd)                Form of Indemnification Agreement, dated September 20,
                        1993, between HMG Digital Technologies Corp. and each of
                        Michael Delany, Brian Wilson, Philip Gouldstone, Joel
                        Ziegler and Frederick R. Cummings, Jr. (herein
                        incorporated by reference to Exhibit 10.6 of HMG Digital
                        Technologies Corp. Annual Report on Form 10-K for the
                        fiscal year ended July 25, 1993, Commission File No.
                        0-20014).

(10)(ee)                (i)            Subordinated Promissory Note dated
                                       October 30, 1996, made by HMG Digital
                                       Technologies Corp. in favor of George N.
                                       Fishman in the principal amount of
                                       $200,000 (herein incorporated by
                                       reference to Exhibit 10(ee)(i) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996).


                                       39

<PAGE>

                        (ii)           Subordinated Promissory Note dated
                                       October 30, 1996, made by HMG Digital
                                       Technologies Corp. in favor of Donald L.
                                       Olesen in the principal amount of
                                       $200,000 (herein incorporated by
                                       reference to Exhibit 10(ee)(ii) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996).

                        (iii)          Subordinated Promissory Note dated
                                       October 30, 1996, made by HMG Digital
                                       Technologies Corp. in favor of William H.
                                       Smith, Trustee, in the principal amount
                                       of $1,600,000 (herein incorporated by
                                       reference to Exhibit 10(ee)(iii) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996).


(10)(ff)                (i)            Agreement between Anchor Bay
                                       Entertainment and Allied Digital
                                       Technologies Corp. for Videotape
                                       Duplication and Order Fulfillment, dated
                                       June 16, 1995 (herein incorporated by
                                       reference to Exhibit (10)(ff) to
                                       registrant's Annual Report on Form 10-K
                                       for the fiscal year ended July 31, 1996.

                        (ii)           Modification Agreement between Anchor Bay
                                       Entertainment and Allied Digital
                                       Technologies Corp. dated September 12,
                                       1997.

(10)(gg)                Employment Agreement, dated as of July 31, 1997, between
                        John K. Mangini, Sr. and Allied Digital Technologies
                        Corp.

(10)(hh)                Exclusive CD Manufacturing Agreement, dated as of
                        September 12, 1997, between Sofsource, Inc. and Allied
                        Digital Technologies Corp.

(10)(ii)                Sublease Agreement, dated April 21, 1997, among Ambord
                        Corporation, Allied Digital, Inc. and Allied Digital
                        Technologies Corp. (for premises in Brisbane,
                        California).

(11)                    Statement re Computation of Per Share Earnings
                        No statement is required to be filed because the
                        computations can be clearly determined from the
                        materials contained in the Report.

(21)                    Subsidiaries of registrant

(23)(a)                 Consent of Grant Thornton LLP 

(23)(b)                 Consent of Arthur Andersen LLP

(27)                    Financial Data Schedule 

                                       40

<PAGE>




                                   SIGNATURES


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

Date: October 29, 1997             Allied Digital Technologies Corp.

                                   By:  /s/ George N. Fishman
                                        ---------------------------------------
                                        George N. Fishman
                                        Co-Chairman and Chief Executive Officer
                                        (Principal Executive Officer)

Date: October 29, 1997             By:  /s/ Charles A. Mantione
                                        ---------------------------------------
                                        Charles A. Mantione
                                        Vice President - Finance
                                        (Principal Financial Officer
                                        and Principal Accounting Officer)


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below as of October 29, 1997, by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.

Date: October 29, 1997                  /s/ William H. Smith
                                        ---------------------------------------
                                        William H. Smith
                                        Co-Chairman, President & Director

                                        /s/ George N. Fishman
                                        ---------------------------------------
                                        George N. Fishman
Date: October 29, 1997                  Co-Chairman, Chief Executive
                                        Officer & Director

Date: October 29, 1997                  /s/ Donald L. Olesen
                                        ---------------------------------------
                                        Donald L. Olesen,
                                        Director

Date: October 29, 1997                  /s/ Eugene L. Gargaro, Jr.
                                        ---------------------------------------
                                        Eugene L. Gargaro, Jr.,
                                        Director


                                        /s/ Werner H. Jean
                                        ---------------------------------------
Date:  October 29, 1997                 Werner H. Jean
                                        Director

Date: October 29, 1997                  /s/ Seymour Leslie
                                        ---------------------------------------
                                        Seymour Leslie
                                        Director
Date: October 29, 1997                  /s/ H. Sean Mathis
                                        ---------------------------------------
                                        H. Sean Mathis
                                        Director

                                        /s/ John A. Morgan
                                        ---------------------------------------
Date: October 29, 1997                  John A. Morgan
                                        Director


                                       41