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

                                    FORM 10-Q


             (Mark One)

             X  Quarterly  report  pursuant  to  Section  13  or  15(d)  of  the
                Securities Exchange Act - of 1934.

             For the quarterly period ended March 31, 2001 or

             __ Transition  report  pursuant  to  Section  13 or  15(d)  of  the
                Securities Exchange Act of 1934.

                       For the transition period from to
                               ------------------

                         Commission file number 0-21917
                                  -------------

                                    Point.360
              ---------------------------------------------------
                     (Exact Name of Registrant as Specified)

                                   California
              -----------------------------------------------------
                         (State or Other Jurisdiction of
                         Incorporation or Organization)

                                   95-4272619
                     -------------------------------------
                   (IRS Employer Identification Number)

                                   California
                         (State or Other Jurisdiction of
                         Incorporation or Organization)

                                   95-4272619
                      (IRS Employer Identification Number)

            7083 Hollywood Boulevard, Suite 200, Hollywood, CA 90028
               (Address of principal executive offices) (Zip Code)

                                 (323) 957-7990
                     -------------------------------------
              (Registrant's Telephone Number, Including Area Code)

                                 VDI MultiMedia
                     -------------------------------------
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)


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 ____
                 --------


As of July 20, 2001,  there were  9,046,004  shares of the  registrant's  common
stock outstanding.


<PAGE>
<TABLE>
<CAPTION>
                                    POINT.360
                            (formerly VDI MultiMedia)
                           CONSOLIDATED BALANCE SHEETS

                                   ASSETS
                                                                     December 31,           June 30,
                                                                         2000                 2001
                                                                                           (unaudited)
Current assets:
<S>                                                                 <C>                 <C>
Cash and cash equivalents                                          $      769,000       $       536,000

Accounts receivable, net of allowances for doubtful
   accounts of $1,473,000 and $686,000, respectively                   16,315,000            12,823,000
Notes receivable from officers                                          1,001,000             1,037,000
Income tax receivable                                                   1,362,000             2,193,000
Inventories                                                             1,031,000             1,102,000
Prepaid expenses and other current assets                               2,066,000             2,012,000
Deferred income taxes                                                   1,574,000             1,089,000
                                                                   --------------        --------------
Total current assets                                                   24,118,000            20,792,000

Property and equipment, net                                            25,236,000            24,523,000
Other assets, net                                                         920,000               914,000
Goodwill and other intangibles, net                                    27,387,000            27,032,000
                                                                   --------------        --------------
Total assets                                                       $   77,661,000        $   73,261,000
                                                                   ==============        ==============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable                                                   $    8,850,000        $    5,406,000
Accrued expenses                                                        2,513,000             3,188,000
Current portion of notes payable                                                -            29,950,000
Current portion of capital lease obligations                               54,000                46,000
                                                                   --------------        --------------
Total current liabilities                                              11,417,000            38,590,000
                                                                   --------------        --------------

Deferred income taxes                                                   2,271,000             2,231,000
Notes payable, less current portion                                    31,024,000                     -
Capital lease obligations, less current portion                            30,000                40,000
Derivative valuation liability                                                  -               250,000

Shareholders' equity
Preferred stock - no par value; 5,000,000 authorized;
  none outstanding                                                              -
Common stock - no par value; 50,000,000 authorized; 9,162,670
  and 9,046,004 shares issued and outstanding, respectively            18,272,000            18,082,000
Comprehensive income - FAS 133                                                  -               268,000
Retained earnings                                                      14,647,000            13,800,000
                                                                    -------------        --------------
Total shareholders' equity                                             32,919,000            32,140,000
                                                                    -------------        --------------
Total liabilities and shareholders' equity                          $  77,661,000        $   73,261,000
                                                                    =============        ==============

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       2
<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                            (formerly VDI MultiMedia)
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                                   (Unaudited)

                                                                   Three Months Ended                    Six Months Ended
                                                                        June 30,                             June 30,
                                                                        --------                             --------
                                                                 2000              2001               2000               2001
                                                                 ----              ----               ----               ----
<S>                                                          <C>               <C>                <C>               <C>
Revenues                                                     $ 18,480,000      $ 16,446,000       $ 37,570,000       $ 35,554,000
Cost of goods sold                                            (11,321,000)      (11,487,000)       (22,206,000)       (24,130,000)
                                                             ------------      ------------       ------------       ------------
Gross profit                                                    7,159,000         4,959,000         15,364,000         11,424,000
Selling, general and administrative expense                    (5,005,000)       (5,518,000)       (10,340,000)       (11,017,000)
                                                             ------------      ------------       ------------       ------------
Operating income (loss)                                         2,154,000          (559,000)         5,024,000            407,000
Interest expense, net                                            (703,000)         (734,000)        (1,388,000)        (1,519,000)
Derivative fair value change (Note 5)                                   -            44,000                  -           (209,000)
                                                             ------------      ------------       ------------       ------------
Income (loss) before income taxes                               1,451,000        (1,249,000)         3,636,000         (1,321,000)
(Provision for) benefit from income taxes                        (665,000)          573,000         (1,564,000)           613,000
                                                             ------------      ------------       ------------       ------------
Income (loss) before adoption of SAB 101 (2000)
   and FAS 133 (2001)                                             786,000          (676,000)         2,072,000           (708,000)
Cumulative effect of adopting SAB 101 (2000)
   and FAS 133 (2001)                                                   -                 -           (322,000)          (139,000)
                                                             ------------      ------------       ------------       ------------
Net income (loss)                                            $    786,000      $   (676,000)      $  1,750,000       $   (847,000)

                                                             ============      ============       ============       ============
Other comprehensive income:
Derivative fair value change                                 $          -      $     15,000       $          -       $    268,000
                                                             ------------      ------------       ------------       ------------
Comprehensive income (loss)                                  $    786,000      $   (661,000)      $  1,750,000       $   (579,000)
                                                             ============      ============       ============       ============

Earnings per share:
Basic:
Income (loss) per share before adoption
  of SAB 101 (2000) and FAS 133 (2001)                       $       0.09      $      (0.07)      $      0.22        $      (0.08)
Cumulative effect of adopting SAB 101 (2000)
  and FAS 133 (2001)                                                    -                 -             (0.03)              (0.02)
                                                             ------------      ------------       -----------        ------------
Net income (loss)                                            $       0.09      $      (0.07)      $      0.19        $      (0.10)
                                                             ============      ============       ===========        ============
Weighted average number of shares                               9,238,843         9,046,004         9,226,825           9,090,387

Diluted:
Income (loss) per share before adoption
  of SAB 101 (2000) and FAS 133 (2001)                       $       0.08      $      (0.07)      $      0.21        $      (0.08)
Cumulative effect of adopting SAB 101 (2000)                            -                 -             (0.03)              (0.01)
  and FAS 133 (2001)
                                                             ------------      ------------       -----------        ------------
Net income (loss)                                            $       0.08      $      (0.07)      $      0.18        $      (0.09)
                                                             ============      ============       ===========        ============
Weighted average number of shares including
  the dilutive effect of stock options                          9,472,899         9,092,319         9,660,947           9,133,069

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                            (formerly VDI MultiMedia)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                                      Six Months Ended
                                                                         March 31,
                                                                  2000                  2001
                                                                 ----                   ----
Cash flows from operating activities:
<S>                                                          <C>                   <C>
Net income (loss)                                            $   1,750,000         $    (847,000)
Adjustments to reconcile net income (loss)
  to net cash provided by operating activities:
Depreciation and amortization                                    2,720,000             3,465,000
Provision for doubtful accounts                                    169,000               279,000
Deferred income taxes                                              112,000               306,000
Other non cash item                                                      -               378,000
Cumulative effect of adopting SAB 101                              322,000                     -
Cumulative effect of adopting FAS 133                                    -               139,000

Changes in assets and liabilities:
Decrease in accounts receivable                                  2,415,000             3,213,000
Decrease (increase) in inventories                                 100,000               (71,000)
(Increase) decrease in prepaid expenses and
  other current assets                                            (759,000)               54,000
(Increase) in other assets                                         (79,000)              (30,000)
Increase (decrease) in accounts payable                            470,000            (3,444,000)
(Decrease) increase in accrued expenses                            (93,000)              925,000
Decrease in income taxes payable                                (1,393,000)             (831,000)
                                                             -------------         -------------
Net cash provided by operating activities                        5,734,000             3,536,000
                                                             -------------         -------------
Cash used in investing activities:
Capital expenditures                                            (5,228,000)           (1,846,000)
Net cash paid for acquisitions                                    (481,000)             (508,000)
                                                             -------------         -------------
Net cash used in investing activities                           (5,709,000)           (2,354,000)
                                                             -------------         -------------
Cash flows used in financing activities:
Change in revolving credit agreement                             2,500,000                     -
Repurchase of common stock                                               -              (300,000)
Proceeds from exercise of stock options                            195,000                     -
Repayment of notes payable                                      (5,409,000)           (1,074,000)
Repayment of capital lease obligations                            (108,000)              (41,000)
                                                             -------------         -------------
Net cash used in financing activities                           (2,822,000)           (1,414,000)
                                                             -------------         -------------
Net (decrease) in cash                                          (2,797,000)             (233,000)
Cash and cash equivalents at beginning of period                 3,030,000               769,000
                                                             -------------         -------------
Cash and cash equivalents at end of period                   $     233,000         $     536,000
                                                             =============         =============

Supplemental disclosure of cash flow information -
Cash paid for:
Interest                                                     $   1,066,000         $   1,306,000
                                                             =============         =============
Income tax                                                   $   3,854,000         $      52,000
                                                             =============         =============
Non-financing activities:
Capital lease obligations incurred                           $           -         $      43,000
                                                             =============         =============

</TABLE>

           See accompanying notes to consolidated financial statements

                                       4
<PAGE>


                                    POINT.360
                            (formerly VDI MultiMedia)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                  June 30, 2001

NOTE 1 - THE COMPANY

        Point.360 (the "Company") is a leading  provider of video and film asset
management  services to owners,  producers and distributors of entertainment and
advertising  content.  The Company  provides  the  services  necessary  to edit,
master, reformat, digitize, archive and ultimately distribute its clients' video
content.

        The Company  provides  physical and electronic  delivery of commercials,
movie trailers,  electronic press kits,  infomercials and syndicated programming
to  thousands  of  broadcast  outlets  worldwide.  The  Company  operates in one
reportable  segment.  The Company provides  worldwide  electronic  distribution,
using fiber optics and satellites.  Additionally,  the Company  provides a broad
range of video  services,  including  the  duplication  of video in all formats,
element storage,  standards  conversions,  closed  captioning and  transcription
services and video encoding for air play verification purposes. The Company also
provides its customers  value-added post  production,  editing and digital media
services.

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

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

        The accompanying  unaudited  financial  statements have been prepared in
accordance with generally accepted accounting  principles and the Securities and
Exchange  Commission's  rules and  regulations for reporting  interim  financial
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring  adjustments)  considered  necessary for a fair presentation
have been included.  Operating results for the three and six month periods ended
June 30, 2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2001. These financial statements should be read
in conjunction with the financial  statements and related notes contained in the
Company's Form 10-K for the year ended December 31, 2000.

NOTE 2 - ACCOUNTING PRONOUNCEMENTS

        Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101 ("SAB 101"), Revenue Recognition in Financial Statements.  The effect of
applying this Staff  Accounting  Bulletin has been  accounted for as a change in
accounting principle,  with a cumulative charge of $322,000, or $0.03 per share,
being recorded on that date.  Previously,  the Company had  recognized  revenues
from certain post production services as work was performed.  Under SAB 101, the
Company now recognizes these revenues when all services have been completed.  As
a result of  adopting  SAB 101,  revenue  recognized  in the three and six month
periods  ended  June 30,  2000,  which was  included  in the  cumulative  effect
adjustment, was $555,000.

                                       5
<PAGE>

        Effective  January 1, 2001, the Company  adopted  Statement of Financial
Accounting Standards No. 133, Accounting for Derivative  Instruments and Hedging
Activities ("FAS 133"). The standard,  as amended,  requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives  are recorded each period in other income.  See Note 5
for further detail.

        In June 2001, the Financial  Accounting  Standards Board ("FASB") issued
Statement  of  Financial  Accounting  Standards  Nos.  141  and  142,  "Business
Combinations"  and  "Goodwill and Other  Intangible  Assets" ("FAS 141" and "FAS
142",  respectively).  FAS 141  replaces  Accounting  Principals  Board  ("APB")
Opinion No. 16. It also provides guidance on purchase  accounting related to the
recognition of intangible assets and accounting for negative  goodwill.  FAS 142
changes the accounting for goodwill and other intangible  assets with indefinite
useful lives  ("goodwill")  from an  amortization  method to an  impairment-only
approach. Under FAS 142, goodwill will be tested annually and whenever events or
circumstances occur indicating that goodwill might be impaired.  FAS 141 and FAS
142 are effective for all business  combinations  completed after June 30, 2001.
Upon  adoption  of FAS 142,  amortization  of  goodwill  recorded  for  business
combinations consummated prior to July 1, 2001 will cease, and intangible assets
acquired  prior to July 1, 2001 that do not meet the  criteria  for  recognition
under FAS No. 141 will be reclassified to goodwill. The Company will be required
to perform a transitional goodwill impairment assessment.  The Company is in the
process of evaluating the impact of adopting FAS 141 and FAS 142.

NOTE 3 - STOCK REPURCHASE

        In February 1999, the Company commenced a stock repurchase program.  The
board of  directors  authorized  the  Company to allocate  up to  $4,000,000  to
purchase its common stock at suitable  market  prices.  In September  2000,  the
board of directors  authorized the Company to allocate an additional  $5,000,000
to purchase its common stock.  As of June 30, 2001, the Company had  repurchased
860,766 shares of the Company's common stock in connection with this program.

NOTE 4 - LONG TERM DEBT AND NOTES PAYABLE

        In November 1998, the Company borrowed $29,000,000 on a term loan with a
bank,  payable in 60 monthly  installments  of $483,000 plus interest.  The term
loan was repaid in 2000 with the proceeds of a new borrowing  arrangement with a
group of banks.

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

        The Agreement also contains covenants requiring certain levels of annual
earnings before interest,  taxes, depreciation and amortization (EBITDA) and net
worth, and limits the amount of capital expenditures.  By December 31, 2000, the
Company had borrowed  $31,024,000  under the Agreement and was not in compliance
with certain financial covenants due to adjustments recorded to prior years' and
2000  results.  The bank waived  compliance  with the  covenants and amended the
Agreement in April 2001. In connection with the amendment,  the Company paid the
banks $225,000 which was expensed in the second quarter of 2001.

                                       6
<PAGE>

        As of April 30, May 31 and June 30, 2001,  outstanding amounts under the
line of credit  exceeded the borrowing  base. On June 11 and July 20, 2001,  the
Company entered into amendment and  forbearance  agreements with the banks which
required  the Company to repay the amount of excess  borrowings  and amended the
Agreement to reduce the aggregate  commitment  from  $45,000,000  to $30,050,000
until the expiration of the commitment on December 31, 2005. In August 2001, the
Company  did not make  required  debt  payments  which  created  a breach of the
amendment  and  forbearance  agreements.  As a  consequence  of the breach,  all
amounts outstanding under the credit facility is immediately due and payable and
, therefore,  has been  reclassified as a current liability as of June 30, 2001.
The Company is negotiating with the banks for an additional forbearance.

NOTE 5 - DERIVATIVE AND HEDGING ACTIVITIES

        The Company entered into an interest rate swap  transaction  with a bank
on  November  28,  2000.  The swap  transaction  was for a  notional  amount  of
$15,000,000  for three years and fixes the interest  rate paid by the Company on
such amount at 6.50%, plus the applicable LIBOR margin, not to exceed 2.75%. FAS
133  requires  that the  hedge  contract  be  "marked-to-market"  at the time of
adoption of FAS 133 and  quarterly by  recording  (i) a  cumulative-effect  type
adjustment  at January 1, 2001 equal to the fair value of the hedge  contract on
that date, (ii) amortizing the cumulative-effect  type adjustment quarterly over
the life of the derivative  contract,  and (iii) a charge or credit to income in
the amount of the difference between the theoretical value of the hedge contract
at the beginning and end of such quarter. By the end of the hedge contract,  the
initial  cumulative-effect  type adjustment and any amounts recognized as income
or  expense  will  reverse  to zero as the  contract  will then have no  further
theoretical  value.  Other than the economic impact of fixing the interest rate,
the amount of income and  expense  required by  application  of FAS 133 does not
impact the Company's cash flow. The effect of adopting FAS 133 was to record the
following adjustments:
<TABLE>
<CAPTION>
                                                                 Increase (Decrease) Income
                                                       ---------------------------------------------
                                                       Derivative    (Provision for)   Net Derivative
                                                       Fair Value     Benefit from       Fair Value
                                                         Change       Income Taxes         Change
                                                       -----------    ------------      ------------
For the three months ended June 30, 2001:
<S>                                                    <C>             <C>              <C>
1. Amortization of cumulative-effect type
   adjustment                                          $    15,000     $    (7,000)     $     8,000

2. Difference in the derivative fair value
   between the beginning and end of the quarter             29,000         (14,000)          15,000
                                                       -----------     -----------      -----------
                                                       $    44,000     $   (21,000)     $    23,000
                                                       ===========     ===========      ===========
For the six months ended June 30, 2001:

1. Initial cumulative-effect type adjustment
                                                       $  (309,000)    $   170,000      $  (139,000)
2. Amortization of cumulative-effect type
   adjustment                                               41,000         (20,000)          21,000

3. Difference in the derivative fair value
   between the beginning and end of the period            (250,000)         98,000         (152,000)
                                                       -----------     -----------      -----------
                                                       $  (518,000)    $   248,000      $  (270,000)
                                                       ===========     ===========      ===========
</TABLE>

                                       7
<PAGE>


                                    POINT.360
                            (formerly VDI MultiMedia)

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000.

        REVENUES. Revenues decreased by $2.1 million or 11% to $16.4 million for
the  three-month  period ended June 30, 2001,  compared to $18.5 million for the
three-month  period  ended  June  30,  2001  due to a  decline  in  studio  post
production sales.

        GROSS  PROFIT.  Gross  profit  decreased  $2.2  million or 30.7% to $5.0
million for the three-month period ended June 30, 2001, compared to $7.2 million
for the three-month period ended June 30, 2000. As a percent of revenues,  gross
profit  decreased  from  38.7% to  30.2%.  The  decrease  in gross  profit  as a
percentage of revenues was due to higher wages related to the digital television
services  department,   higher  maintenance  and  equipment  rental  costs,  and
increased depreciation associated with investments in high definition equipment.

        SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSE.  Selling,  general  and
administrative  expense increased $0.5 million, or 10.2% to $5.5 million for the
three-month  period  ended  June 30,  2001,  compared  to $5.0  million  for the
three-month  period ended June 30, 2000. As a percentage  of revenues,  selling,
general and administrative expense increased to 33.6% for the three-month period
ended June 30, 2001, compared to 27.1% for the three-month period ended June 30,
2000.  This  increase  was due to $0.4 million of bank  agreement  restructuring
charges,  and $0.3 million of employee benefit plan one-time expense,  offset by
other cost reductions.

        OPERATING  INCOME.  Operating  income (loss)  decreased  $2.7 million to
$(0.5) million for the three-month period ended June 30, 2001,  compared to $2.2
million for the three-month period ended June 30, 2000.

        INTEREST  EXPENSE.  Interest expense for the three-month  ended June 30,
2001 of $0.7 million was the same as that of the  three-month  period ended June
30, 2001 of $0.7 million.

        ADOPTION OF FAS 133 AND DERIVATIVE FAIR VALUE CHANGE. During the quarter
ended June 30, 2001, the Company recorded the difference  between the derivative
fair value of the Company's  interest  rate hedge  contract at the beginning and
end of the  second  quarter,  or  $29,000  ($15,000  net  of tax  benefit),  and
amortization of the cumulative-effect adjustment during the quarter.

        INCOME TAXES.  The  Company's  effective tax rate was 46% for the second
quarter of 2001 and 46% for the second  quarter of 2000.

        NET INCOME  (LOSS).  The net income  (loss) for the  three-month  period
ended June 30, 2001 was $(0.6) million,  a decrease of $1.4 million  compared to
$0.8 million for the three-month period ended June 30, 2000.

SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000.

        REVENUES.  Revenues  decreased by $2.0 million or 5.4% to $35.6  million
for the six-month period ended June 30, 2001,  compared to $37.6 million for the
six-month  period ended June 30, 2000 due to a decline in studio post production
sales in the second quarter.

                                       8
<PAGE>

        GROSS  PROFIT.  Gross  profit  decreased  $3.9 million or 25.6% to $11.4
million for the six-month period ended June 30, 2001,  compared to $15.4 million
for the six-month  period ended June 30, 2000.  As a percent of revenues,  gross
profit  decreased  from  40.9% to  32.1%.  The  decrease  in gross  profit  as a
percentage of revenues was due to higher wages related to the digital television
services  department,   higher  maintenance  and  equipment  rental  costs,  and
increased depreciation associated with investments in high definition equipment.

        SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSE.  Selling,  general  and
administrative  expense increased $0.7 million, or 6.5% to $11.0 million for the
six-month  period  ended  June  30,  2001,  compared  to $10.3  million  for the
six-month  period ended June 30, 2000.  As a  percentage  of revenues,  selling,
general and  administrative  expense increased to 31.0% for the six-month period
ended June 30, 2001,  compared to 27.5% for the six-month  period ended June 30,
2000. The fiscal 2000 period included $0.8 million of expenses associated with a
terminated  merger.  The 2001 period  included  $0.4  million of bank  agreement
restructuring  charges,  $0.3 million of employee  benefit plan one-time  change
expense, $0.2 million of severance accruals,  $0.3 million of consulting expense
associated  with the  Company's  rebranding  efforts  and higher  administrative
salary costs.

        OPERATING  INCOME.  Operating  income decreased $4.6 million or 91.9% to
$0.4 million for the  six-month  period  ended June 30,  2001,  compared to $5.0
million for the six-month period ended June 30, 2000.

        INTEREST EXPENSE.  Interest expense increased $0.1 million,  or 9.4%, to
$1.5 million for the  six-month  period  ended June 30,  2001,  compared to $1.4
million for the six-month period ended June 30, 2000.

        ADOPTION  OF FAS 133 AND  DERIVATIVE  FAIR VALUE  CHANGE.  On January 1,
2001, the Company adopted FAS 133 by recording a cumulative effect adjustment of
$139,000  after tax  benefit.  During the six months  ended June 30,  2001,  the
Company  recorded  the  difference  between  the  derivative  fair  value of the
Company's  hedge  contract at the beginning  and end of the period,  or $209,000
($112,000 net of tax benefit),  offset by amortization of the  cumulative-effect
adjustment during the quarter.

        INCOME  TAXES.  The  Company's  effective tax rate was 48% for the first
half of 2001 and 43% for the first  half of 2000.  The higher tax rate is due to
the effect of permanent differences on a lower pre-tax income base.

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

        NET INCOME (LOSS).  The net income (loss) for the six-month period ended
June 30, 2001 was $(0.8),  a decrease  of $2.6  million  compared to a profit of
$1.8 million for the six-month period ended June 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

        This  discussion  should  be read in  conjunction  with the notes to the
financial  statements and the corresponding  information more fully described in
the Company's Form 10-K for the year ended December 31, 2000.

        On June 30, 2001,  the Company's  cash and cash  equivalents  aggregated
$0.5 million.  The Company's operating  activities provided cash of $3.5 million
for the six months ended June 30, 2001.

                                       9

<PAGE>

        The Company's investing  activities used cash of $2.4 million in the six
months  ended  June 30,  2001.  The  Company  spent  approximately  $1.9 for the
addition  and  replacement  of  capital  equipment  and  management  information
systems.  The  Company's  business is equipment  intensive,  requiring  periodic
expenditures of cash or the incurrence of additional debt to acquire  additional
fixed assets in order to increase  capacity or replace existing  equipment.  The
Company  also made $0.5  million in  acquisition  earn-out  payments  in the six
months ended June 30, 2001.

        In September  2000,  the Company signed a $45 million  revolving  credit
facility  agented by Union Bank of California.  The amount of the commitment was
reduced to $30 million in July 2001.  The  facility  provides  the Company  with
funding  for capital  expenditures,  working  capital  needs and support for its
acquisition  strategies.  The facility  expires on December 31, 2005. As of June
30, 2001, there was $30 million outstanding under the facility, which amount was
in excess of the permitted borrowing base by $1.0 million.

        Due to lower  sales  levels in the  quarter  ended  June 30,  2001,  the
borrowing  base  (eligible  accounts  receivable,  inventory  and  machinery and
equipment)  securing the Company's  bank line of credit was less than the amount
borrowed  under the line.  Consequently,  the  Company  was in breach of certain
covenants.  On June 11 and on July 20, 2001, the Company  entered into amendment
and  forbearance  agreements  with the banks and  agreed to repay the  overdraft
amount in weekly  increments.  In August  2001,  the Company  failed to meet the
repayment  schedule  and  again  entered   discussions  with  the  banks,  which
discussions are ongoing.

        The Company,  from time to time, considers the acquisition of businesses
complementary to its current operations. Consummation of any such acquisition or
other  expansion of the business  conducted by the Company may be subject to the
Company securing additional financing.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

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

                                       10
<PAGE>

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

    o   Recent history of losses and breach of credit agreement covenants.
    o   Our highly competitive marketplace.
    o   The risks associated with dependence upon significant customers.
    o   Our ability to execute our expansion strategy.
    o   The uncertain ability to manage growth.
    o   Our  dependence   upon  and  our  ability  to  adapt  to   technological
        developments.
    o   Dependence on key personnel.
    o   Our ability to maintain and improve service quality.
    o   Fluctuation in quarterly operating results and seasonality in certain of
        our markets.
    o   Possible  significant  influence over  corporate  affairs by significant
        shareholders.

These risk factors are discussed further below.

RECENT HISTORY OF LOSSES AND CASH  CONSTRAINTS.  The Company has reported losses
for each of the three fiscal quarters ended June 30, 2001 due, in part, to lower
gross margins and lower sales levels. These factors caused the Company to breach
certain  covenants of its credit facility.  The breaches were temporarily  cured
based on amendments and forbearance  agreements  among the Company and the banks
which called for, among other provisions,  scheduled  payments to reduce amounts
owed to the banks to the permitted  borrowing  base. In August 2001, the Company
failed to meet the repayment schedule and was once again in breach of the credit
facility.  We cannot be sure a mutually  satisfactory  agreement  with the banks
will be reached upon completion of current negotiations or, if successful,  that
the Company will not again breach established covenants.

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

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

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

                                       11
<PAGE>

CUSTOMER AND INDUSTRY  CONCENTRATION.  Although we have an active client list of
over 2,500 customers,  seven motion picture studios  accounted for approximately
35% of the Company's  revenues during the six months ended June 30, 2001. If one
or more of these  companies were to stop using our services,  our business could
be adversely affected.  Because we derive  substantially all of our revenue from
clients  in  the  entertainment  and  advertising   industries,   the  financial
condition,  results of  operations  and  prospects of the Company  could also be
adversely  affected  by an  adverse  change in  conditions  which  impact  those
industries.

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

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

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

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

MANAGEMENT  OF GROWTH.  During the three  years  ended  December  31,  1999,  we
experienced rapid growth that resulted in new and increased responsibilities for
management  personnel and placed and continues to place increased demands on our
management, operational and financial systems and resources. To accommodate this
growth,  compete  effectively  and manage future growth,  we will be required to
continue to implement  and improve our  operational,  financial  and  management
information systems, and to expand,  train,  motivate and manage our work force.
We cannot be sure that the Company's personnel, systems, procedures and controls
will be adequate to support  our future  operations.  Any failure to do so could
have a material adverse effect on our financial condition, results of operations
and prospects.

                                       12
<PAGE>

DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS. Although we intend to utilize the most
efficient  and  cost-effective   technologies   available  for  telecine,   high
definition  formatting,  editing,  coloration  and  delivery  of video  content,
including digital  satellite  transmission,  as they develop,  we cannot be sure
that we will be able to adapt to such  standards in a timely  fashion or at all.
We believe our future growth will depend in part, on our ability to add to these
services and to add customers in a timely and  cost-effective  manner. We cannot
be sure we will be successful in offering such services to existing customers or
in  obtaining  new  customers  for  these  services,   including  the  Company's
significant  investment in high definition technology in 2000. We intend to rely
on third party vendors for the development of these technologies and there is no
assurance  that such  vendors  will be able to develop  such  technologies  in a
manner  that meets the needs of the  Company  and its  customers.  Any  material
interruption  in the supply of such  services  could  materially  and  adversely
affect the Company's financial condition, results of operations and prospects.

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

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

FLUCTUATING RESULTS, SEASONALITY. Our operating results have varied in the past,
and may  vary  in the  future,  depending  on  factors  such  as the  volume  of
advertising in response to seasonal buying  patterns,  the timing of new product
and service introductions, the timing of revenue recognition upon the completion
of longer term projects, increased competition, timing of acquisitions,  general
economic   factors   and  other   factors.   As  a  result,   we  believe   that
period-to-period  comparisons of our results of operations  are not  necessarily
meaningful and should not be relied upon as an indication of future performance.

                                       13
<PAGE>

For  example,   our  operating  results  have  historically  been  significantly
influenced by the volume of business from the motion picture industry,  which is
an  industry  that  is  subject  to  seasonal  and  cyclical   downturns,   and,
occasionally,  work stoppages by actors, writers and others. In addition, as our
business from advertising  agencies tends to be seasonal,  our operating results
may be subject to  increased  seasonality  as the  percentage  of business  from
advertising  agencies  increases.  In any period  our  revenues  are  subject to
variation  based on changes in the volume and mix of services  performed  during
the period.  It is possible that in some future quarter the Company's  operating
results  will  be  below  the  expectations  of  equity  research  analysts  and
investors.  In such event,  the price of the Company's Common Stock would likely
be materially  adversely affected.  Fluctuations in sales due to seasonality may
become more pronounced if the growth rate of the Company's sales slows.

CONTROL  BY  PRINCIPAL  SHAREHOLDER;  POTENTIAL  ISSUANCE  OF  PREFERRED  STOCK;
ANTI-TAKEOVER PROVISIONS. The Company's Chairman,  President and Chief Executive
Officer,  R.  Luke  Stefanko,   beneficially  owned  approximately  27%  of  the
outstanding  common stock as of June 30, 2001. Mr.  Stefanko's  ex-spouse  owned
approximately  25% of the  common  stock  on that  date.  Together,  they  owned
approximately  53%.  In  August  2000 and May 2001,  Mr.  Stefanko  was  granted
one-time proxies to vote his ex-spouse's  shares in connection with the election
of directors at the Company's annual meetings. By virtue of his stock ownership,
Mr.  Stefanko  may be able to  significantly  influence  the  outcome of matters
required to be submitted to a vote of  shareholders,  including (i) the election
of the board of directors, (ii) amendments to the Company's Restated Articles of
Incorporation  and (iii)  approval  of mergers and other  significant  corporate
transactions.  The  foregoing may have the effect of  discouraging,  delaying or
preventing certain types of transactions involving an actual or potential change
of control of the Company, including transactions in which the holders of common
stock might  otherwise  receive a premium for their shares over  current  market
prices.  Our Board of Directors  also has the authority to issue up to 5,000,000
shares of  preferred  stock  without  par value (the  "Preferred  Stock") and to
determine the price, rights,  preferences,  privileges and restrictions thereof,
including  voting  rights,  without any further vote or action by the  Company's
shareholders. Although we have no current plans to issue any shares of Preferred
Stock, the rights of the holders of common stock would be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future.  Issuance of  Preferred  Stock could have the effect of
discouraging,  delaying,  or  preventing  a change in  control  of the  Company.
Furthermore,   certain   provisions  of  the  Company's   Restated  Articles  of
Incorporation  and By-Laws and of  California  law also could have the effect of
discouraging, delaying or preventing a change in control of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        MARKET  RISK.  The  Company's  market  risk  exposure  with  respect  to
financial  instruments  is to  changes  in the London  Interbank  Offering  Rate
("LIBOR").  The Company had  borrowings  of $30 million at June 30, 2001 under a
credit agreement.  Amounts  outstanding under the credit agreement bear interest
at the bank's reference rate plus a base rate margin not to exceed 1.00%, or, at
the Company's election, at LIBOR plus a LIBOR margin not to exceed 2.75%.

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

                                       14
<PAGE>


                                    POINT.360
                            (formerly VDI MultiMedia)

                           PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

   10.1     First Amendment to Second Amended and Restated Credit  Agreement and
            Waiver dated April 5, 2001 among the Company,  the Lenders  party to
            the  Credit  Agreement  and  Union  Bank  of  California,   N.A.  as
            administrative agent for such Lenders. (1)

   10.2     Second Amendment to Second Amended and Restated Credit Agreement and
            Forbearance dated June 11, 2001 among the Company, the Lenders party
            to the  Credit  Agreement  and Union  Bank of  California,  N.A.  as
            administrative agent for such Lenders.

   10.3     Third Amendment to Second Amended and Restated Credit  Agreement and
            Forbearance dated July 20, 2001 among the Company, the Lenders party
            to the  Credit  Agreement  and Union  Bank of  California,  N.A.  as
            administrative agent for such Lenders.

   10.4     Employment  Agreement  dated June 7, 2001 between the Company and R.
            Luke Stefanko.

   10.5     Employment Agreement dated June 7, 2001 between the Company and Alan
            R. Steel.

   10.6     Employment Agreement dated June 7, 2001 between the Company and Neil
            Nguyen.

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

            (1)  Filed with the Securities and Exchange  Commission on April 11,
                 2001 as an exhibit to the Company's Form 10-K and  incorporated
                 herein by reference.

(b) REPORTS ON FORM 8-K

           None.


                                   SIGNATURES



        Pursuant to the requirements 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.

                                 VDI MULTIMEDIA

DATE:  August 14, 2001           BY:    /s/ Alan Steel
                                 ----------------------------------
                                 Alan Steel
                                 Executive Vice President,
                                 Finance and Administration
                                 (duly authorized officer and
                                  principal financial officer)


                                       15