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

                                 VDI MultiMedia
              ---------------------------------------------------
                     (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)

                     -------------------------------------
              (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 May 10, 2001, there were 9,046,004 shares of the registrant's common stock
outstanding.

<PAGE>
<TABLE>
<CAPTION>

                                 VDI MULTIMEDIA
                           CONSOLIDATED BALANCE SHEET

                                   ASSETS
                                                                     December 31,          March 31,
                                                                         2000                2001
                                                                                          (unaudited)
Current assets:
<S>                                                                 <C>                 <C>
Cash and cash equivalents                                           $     769,000       $   1,180,000
Accounts receivable, net of allowances for doubtful
   accounts of $1,473,000 and $1,417,000, respectively                 16,315,000          15,436,000
Notes receivable from officers                                          1,001,000           1,001,000
Income tax receivable                                                   1,362,000           1,422,000
Inventories                                                             1,031,000           1,116,000
Prepaid expenses and other current assets                               2,066,000           2,095,000
Deferred income taxes                                                   1,574,000           1,574,000
                                                                    -------------       -------------
Total current assets                                                   24,118,000          23,824,000

Property and equipment, net                                            25,236,000          25,334,000
Other assets, net                                                         920,000             912,000
Goodwill and other intangibles, net                                    27,387,000          27,298,000
                                                                    -------------       -------------
Total assets                                                        $  77,661,000       $  77,368,000
                                                                    =============       =============
                    LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable                                                    $   8,850,000       $   7,676,000
Accrued expenses                                                        2,513,000           3,480,000
Current portion of capital lease obligations                               54,000              34,000
                                                                    -------------       -------------
Total current liabilities                                              11,417,000          11,190,000
                                                                    -------------       -------------
Deferred income taxes                                                   2,271,000           2,083,000
Notes payable, less current portion                                    31,024,000          31,024,000
Capital lease obligations, less current portion                            30,000              21,000
Derivative valuation liability                                                  -             279,000

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, respectively, issued
   and outstanding                                                     18,272,000          18,012,000
Comprehensive income - FAS 133                                                  -             283,000
Retained earnings                                                      14,647,000          14,476,000
                                                                    -------------       -------------
Total shareholders' equity                                             32,919,000          32,771,000
                                                                    -------------       -------------
Total liabilities and shareholders' equity                          $  77,661,000       $  77,368,000
                                                                    =============       =============

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       2
<PAGE>
<TABLE>
<CAPTION>

                                 VDI MULTIMEDIA
                        CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)

                                                                   Three Months Ended
                                                                        March 31,
                                                                 2000              2001
                                                                 ----              ----
<S>                                                          <C>               <C>
Revenues                                                     $  19,090,000     $  19,108,000
Cost of goods sold                                             (10,885,000)      (12,643,000)
                                                             -------------     -------------
Gross profit                                                     8,205,000         6,465,000
Selling, general and administrative expense                     (5,335,000)       (5,499,000)
                                                             -------------     -------------
Operating income                                                 2,870,000           966,000
Interest expense, net                                             (685,000)         (785,000)
Derivative fair value change (Note 5)                                    -          (253,000)
                                                             -------------     -------------
Income (loss) before income taxes                                2,185,000           (72,000)
(Provision for) benefit from income taxes                         (898,000)           40,000
                                                             -------------     -------------
Income (loss) before adoption of SAB 101 (2000)
   and FAS 133 (2001)                                            1,287,000           (32,000)
Cumulative effect of adopting SAB 101 (2000)
   and FAS 133 (2001)                                             (322,000)         (139,000)
                                                             -------------     -------------
Net income (loss)                                            $     965,000     $    (171,000)
                                                             =============     =============
Earnings per share:
Basic:
Income (loss) per share before
   adoption of SAB 101 (2000) and FAS 133 (2001)             $       0.14      $           -
Cumulative effect of adopting SAB 101 (2000)
   and FAS 133 (2001)                                               (0.04)             (0.02)
                                                             ------------      -------------
Net income (loss)                                            $       0.10      $       (0.02)
                                                             ============      =============
Weighted average number of shares                               9,214,808          9,136,559
Diluted:
Income (loss) per share before
   adoption of SAB 101 (2000) and FAS 133 (2001)             $       0.13      $           -
Cumulative effect of adopting SAB 101 (2000)
   and FAS 133 (2001)                                               (0.03)             (0.02)
                                                             ------------      -------------
Net income (loss)                                            $       0.10      $       (0.02)
                                                             ============      =============
Weighted average number of shares including
   the dilutive effect of stock options                         9,848,996          9,145,516

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
<TABLE>
<CAPTION>

                                 VDI MULTIMEDIA
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

                                                                       Three Months Ended
                                                                            March 31,
                                                                    2000                 2001
                                                                    ----                 ----
Cash flows from operating activities:
<S>                                                          <C>                   <C>
Net income                                                   $     965,000         $    (171,000)
Adjustments to reconcile net income
   to net cash provided by operating activities:
Depreciation and amortization                                    1,311,000             1,649,000
Provision for doubtful accounts                                    144,000               143,000
Deferred income taxes                                              392,000              (327,000)
Other non cash items                                                     -               323,000
Cumulative effect of adopting SAB 101                              322,000                     -
Cumulative effect of adopting FAS 133                                    -               139,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable                        (219,000)              736,000
Decrease (increase) in inventories                                  95,000               (85,000)
(Increase) in prepaid expenses and
   other current assets                                           (676,000)              (29,000)
Decrease in other assets                                            14,000                 8,000
(Decrease) in accounts payable.                                   (833,000)           (1,174,000)
Increase in accrued expenses                                       532,000             1,246,000
(Decrease) in income taxes payable                                (842,000)              (60,000)
                                                             -------------         -------------
Net cash provided by operating activities                        1,205,000             2,398,000
                                                             -------------         -------------
Cash used in investing activities:
Capital expenditures                                            (2,178,000)           (1,325,000)
Net cash paid for acquisitions                                    (299,000)             (333,000)
                                                             --------------        -------------
Net cash used in investing activities                           (2,477,000)           (1,658,000)

Cash flows from financing activities:
Repurchase of common stock                                               -              (300,000)
Proceeds from exercise of stock options                            165,000                     -
Repayment of notes payable                                      (1,459,000)                    -
Repayment of capital lease obligations                             (61,000)             (29,000)
                                                             --------------        -------------
Net cash used in financing activities                           (1,355,000)             (329,000)
Net (decrease) increase in cash                                 (2,627,000)              411,000
Cash at beginning of period                                      3,030,000               769,000
                                                             ------------          -------------
Cash at end of period                                        $     403,000         $   1,180,000
                                                             =============         =============
Supplemental disclosure of cash flow information
Cash paid for:
Interest                                                     $     685,000         $     565,000
                                                             =============         =============
Income tax                                                   $     820,000         $      37,000
                                                             =============         =============
</TABLE>

           See accompanying notes to consolidated financial statements

                                       4
<PAGE>

                                 VDI MULTIMEDIA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 March 31, 2001


NOTE 1 - THE COMPANY

     VDI MultiMedia  ("VDI" or the "Company") is a leading provider of video and
film  asset  management  services  to  owners,  producers  and  distributors  of
entertainment  and  advertising  content.  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, VDI 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 months ended March 31, 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 months ended March
31, 2000, which was included in the cumulative effect adjustment, was $555,000.

     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.

                                      5
<PAGE>
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 March 31, 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  provides that
the  aggregate  commitment  will  decline  by  $5,000,000  on each  December  31
beginning  in 2002 until  expiration  of the entire  commitment  on December 31,
2005.

     The Agreement also contains  covenants  requiring  certain levels of annual
earnings before interest,  taxes, depreciation and amortization (EBITDA) and net
worth, and limits the amount of capital expenditures.  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 will be expensed in the second quarter of 2001.

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
                                        -----------    ------------      ------------
1. Initial cumulative-effect type
<S>                                     <C>             <C>              <C>
   adjustment                           $ (309,000)     $  170,000       $ (139,000)
                                        ==========      ==========       ==========
2. Amortization of cumulative-effect
   type adjustment                      $   26,000      $  (14,000)      $   13,000

3. Difference in the derivative
   fair value between the
   beginning and end of the
   quarter                                (279,000)        153,000         (126,000)
                                        ----------      ----------       ----------
                                        $ (253,000)     $  139,000       $ (113,000)
                                        ==========      ==========       ==========
</TABLE>
                                       6
<PAGE>

                                 VDI MULTIMEDIA
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

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

THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000.

     REVENUES.  Revenues increased by $0.01 million or 0.1% to $19.1 million for
the three-month  period ended March 31, 2001,  compared to $19.0 million for the
three-month period ended March 31, 2000.

     GROSS PROFIT.  Gross profit decreased $1.7 million or 21.2% to $6.5 million
for the  three-month  period ended March 31, 2001,  compared to $8.2 million for
the  three-month  period ended March 31, 2000.  As a percent of revenues,  gross
profit  decreased  from  43.0% to  33.8%.  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 $0.1 million,  or 3.1% to $5.4 million for the
three-month  period  ended  March 31,  2001,  compared  to $5.3  million for the
three-month  period ended March 31, 2000. The fiscal 2000 quarter  included $0.8
million of expenses  associated  with a terminated  merger.  As a percentage  of
revenues, selling, general and administrative expense increased to 28.8% for the
three-month  period ended March 31, 2001,  compared to 27.9% for the three-month
period ended March 31, 2000.  This increase was due to $0.3 million of severance
accruals and $0.4 million of higher consulting and administrative salary costs.

     OPERATING INCOME.  Operating income decreased $1.9 million or 66.3% to $1.0
million  for the  three-month  period  ended  March 31,  2001,  compared to $2.9
million for the three-month period ended March 31, 2000.

     INTEREST  EXPENSE.  Interest expense  increased $0.1 million,  or 14.6%, to
$0.8 million for the three-month  period ended March 31, 2001,  compared to $0.7
million for the  three-month  period ended March 31, 2000. This increase was due
to increased borrowing under credit facilities.

     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 quarter ended March 31, 2001, the Company
recorded the difference between the derivative fair value of the Company's hedge
contract at the beginning and end of the first  quarter,  or $279,000  ($126,000
net of tax benefit), offset by amortization of the cumulative-effect  adjustment
during the quarter.

     INCOME  TAXES.  The  Company's  effective  tax rate  was 55% for the  first
quarter of 2001 and 41% for the first  quarter  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 loss for the three-month period ended March 31,
2001 was $171,000,  a decrease of $1.1 million  compared to $1.0 million for the
three-month  period ended March 31, 2000. The Company earned  $82,000,  or $0.01
per share, in the current quarter before the FAS 133 adjustments.

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 March 31, 2001, the Company's cash and cash equivalents  aggregated $1.2
million.  The Company's  operating  activities provided cash of $2.4 million for
the three months ended March 31, 2001.

     The Company's  investing  activities used cash of $1.7 million in the three
months  ended March 31,  2001.  The  Company  spent  approximately  $1.3 for the
addition and  replacement  of capital  equipment and for  investments in digital
television services 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's  financing
activities used cash of $0.3 million in the three months ended March 31, 2001.

                                       7
<PAGE>
     In  September  2000,  the  Company  signed a $45 million  revolving  credit
facility  agented by Union Bank of  California.  The new  facility  provides the
Company with funding for capital expenditures, working capital needs and support
for its acquisition strategies.  The amount available under the facility reduces
to $40 million on December 31, 2002,  to $35 million on December 31, 2003 and to
$30 million on December 31, 2004. The facility  expires on December 31, 2005. As
of March 31, 2001, there was $31 million outstanding under the facility.

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

     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.

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

These risk factors are discussed further below.

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

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

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

                                      8
<PAGE>
CUSTOMER AND INDUSTRY  CONCENTRATION.  Although we have an active client list of
over 2,500 customers,  seven motion picture studios  accounted for approximately
33% of the  Company's  revenues  during the three months ended March 31 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  three  fiscal  years,  we cannot  be sure  additional
acceptable  acquisitions  will be  available  or  that we will be able to  reach
mutually  agreeable terms to purchase  acquisition  targets,  or that we will be
able to profitably manage additional  businesses or successfully  integrate such
additional  businesses into the Company  without  substantial  costs,  delays or
other problems.

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

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

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

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

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

DEPENDENCE  ON KEY  PERSONNEL.  The  Company is  dependent  on the  efforts  and
abilities  of certain of its senior  management,  particularly  those of R. Luke
Stefanko,  Chairman of the Board of Directors and Chief Executive  Officer.  The
loss or interruption  of the services of key members of management  could have a
material  adverse effect on our financial  condition,  results of operations and
prospects if a suitable  replacement is not promptly obtained.  Although we have

                                       9
<PAGE>
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.
For  example,   our  operating  results  have  historically  been  significantly
influenced by the volume of business from the motion picture industry,  which is
an  industry  that  is  subject  to  seasonal  and  cyclical   downturns,   and,
occasionally,  work stoppages by actors, writers and others. In addition, as our
business from advertising  agencies tends to be seasonal,  our operating results
may be subject to  increased  seasonality  as the  percentage  of business  from
advertising  agencies  increases.  In any period  our  revenues  are  subject to
variation  based on changes in the volume and mix of services  performed  during
the period.  It is possible that in some future quarter the Company's  operating
results  will  be  below  the  expectations  of  equity  research  analysts  and
investors.  In such event,  the price of the Company's Common Stock would likely
be materially  adversely affected.  Fluctuations in sales due to seasonality may
become more pronounced if the growth rate of the Company's sales slows.

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

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

                                       10
<PAGE>
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 $31,024,000 at March 31, 2001 under a credit agreement
and may borrow up to an additional  $14 million  subject to the level of Company
assets  (borrowing  base).  Amounts  outstanding under the credit agreement bear
interest  at the  bank's  reference  rate plus a base rate  margin not to exceed
1.00%, or, at the Company's election, at LIBOR plus a LIBOR margin not to exceed
2.75%.

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




                                       11
<PAGE>

                                 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 Form of indemnity  agreement.

          (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:   May 15, 2001          BY:/s/  Alan Steel
                                ------------------------------
                                Alan Steel
                                Executive Vice President, Finance
                                  and Administration (duly authorized officer
                                  and principal financial officer)