UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended: January 31, 1996
OR

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

For the transition period from to
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Commission file number: 0-15424

VAUGHN COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)

Minnesota 41-0626191
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State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)

5050 W. 78th Street, Minneapolis, Minnesota 55435
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (612) 832-3200
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Securities registered pursuant to Section 12(b) of the Act: None

Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.10 par value
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(Title of Class)

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(Title of Class)

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 twelve 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Exhibit Index appears on Page 22. Page 1 of 22 Pages.

The aggregate market value of the registrant's voting shares held by non-
affiliates (based upon the closing sale price therefor on the NASDAQ National
Market System on April 12, 1996) was approximately $20,008,500. As of April 12,
1996, 3,302,748 shares of the Registrant's Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated herein by reference:

1. The financial information set forth in the sections captioned
"SELECTED FINANCIAL DATA from Continuing Operations (in Thousands)" to be
included in the Registrant's Annual Report to Shareholders for the Year Ended
January 31, 1996 (the "1996 Shareholder Report") are incorporated herein by
reference in response to Item 6 of Part II hereof.

2. The discussion under the section captioned "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" to be included in
the 1996 Shareholder Report is incorporated herein by reference in response to
Item 7 of Part II hereof.

3. The Registrant's audited financial statements to be included in the
1996 Shareholder Report are incorporated herein by reference in response to Item
8 of Part II hereof.

4. The discussions under the sections captioned "COMPLIANCE WITH SECTION
16(a) OF THE SECURITIES EXCHANGE ACT", "PROPOSAL 1 ELECTION OF DIRECTORS" and
"EXECUTIVE OFFICERS" to be included in the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission and delivered
to the Registrant's shareholders pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934 with respect to the Annual Meeting of the
Shareholders to be held on June 19, 1996 (the "1996 Proxy Statement") are
incorporated herein by reference in response to Item 10 of Part III hereof.

5. The discussions under the sections captioned "COMPENSATION OF
DIRECTORS" and "EXECUTIVE COMPENSATION" but excluding the discussions included
under the subsections captioned "EXECUTIVE COMPENSATION - "Compensation
Committee Report on Executive Compensation" and "EXECUTIVE COMPENSATION -
Comparative Stock Performance" to be included in the 1996 Proxy Statement are
incorporated herein by reference in response to Item 11 of Part III hereof.

6. The discussions under the sections captioned "VOTING SECURITIES AND
PRINCIPAL HOLDERS THEREOF", "PROPOSAL 1 ELECTION OF DIRECTORS" and "TRANSACTIONS
WITH MANAGEMENT - E. D. Willette Stock Put Redemption Agreement, Including
Change of Control Provision" to be included in the 1996 Proxy Statement are
incorporated herein by reference in response to Item 12 of Part III hereof.

7. The discussion under the section captioned "TRANSACTIONS WITH
MANAGEMENT" to be included in the 1996 Proxy Statement is incorporated herein by
reference in response to Item 13 of Part III hereof.

VAUGHN COMMUNICATIONS, INC.
1996 FORM 10-K ANNUAL REPORT

Table of Contents
and
Cross Reference Sheet

PART 1
Page
----

Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .10

Item 4. Submission of Matters to a Vote of Security Holders . . . . . . .10

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . .11

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . .11

Item 8. Consolidated Financial Statements and Supplementary Data. . . . .11

Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . .12

PART III

Item 10. Directors and Executive Officers of the Registrant. . . . . . . .12

Items 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . .12

Item 12. Security Ownership of Certain Beneficial Owners and Management. .12

Item 13. Certain Relationships and Related Transactions. . . . . . . . . .12

PART IV

Item 14. Exhibit, Financial Statement Schedule and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . .13

iii

PART 1

ITEM 1. BUSINESS

GENERAL

The Company was founded under the name Vaughn Displays, Inc. in 1943 and
changed its name to VAUGHN COMMUNICATIONS, INC. in 1987. The Company is engaged
in two business segments. Its Vaughn Communications Division is a high volume
video tape duplicator, accounting for approximately 87% of the Company's sales
in fiscal 1996. Vaughn Products Division is a manufacturer and distributor of
gift and leather products sold by gift shops and western stores, accounting for
approximately 13% of the Company's sales in fiscal 1996.

During the fiscal years ended January 31, 1996, 1995 and 1994, the
percentage of sales of the Vaughn Communications Division and the Vaughn
Products Division as compared to total sales of the Company were as follows:

Year Ended January 31,
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Division 1996 1995 1994
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Vaughn Communications Division 87% 83% 82%
Vaughn Products Division 13% 17% 18%

The Company's strategic objective is to grow and expand its two businesses
through internal growth and acquisitions. (See "Former Businesses" and "Recent
Acquisitions" below.) The term "Company" herein refers to the registrant
(VAUGHN COMMUNICATIONS, INC.), including its two operating divisions. The
Company's principal executive offices are located at 5050 West 78th Street,
Minneapolis, Minnesota 55435, and its telephone number is (612) 832-3200.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Financial information about industry segments for the years ended
January 31, 1996, 1995 and 1994 included in the notes to the Registrant's
audited consolidated financial statements to be included in the 1996 Shareholder
Report are incorporated herein by reference.

VAUGHN COMMUNICATIONS DIVISION

The Company's operations in the communication industry are conducted
through its Vaughn Communications Division. The Communications Division
currently has video tape duplication facilities in Minneapolis, Milwaukee,
Phoenix, Tampa, Portland, Atlanta, Dallas, Houston, Raleigh, Chicago and Denver
and has additional sales offices in St. Louis, New York City, Los Angeles,
Seattle, Nashville and Ft. Lauderdale. It serves markets that are principally
located in the United States.

- 1 -

PRIMARY PRODUCTS AND SERVICES OF THE VIDEO TAPE DUPLICATION BUSINESS

There are two main formats in the video tape duplication industry regarding
VHS tape -- standard play and extended play. Standard play is currently the
acceptable format for theatrical movies and certain other products. Extended
play is garnering a larger segment of the non-theatrical segment. Promotional
products, "how to" videos and other videos are moving toward extended play
format. The primary reason for this shift in format is that extended play uses
one-third the amount of tape required for standard play and can be done in high
speed duplication which is ultimately less costly than standard play.

In addition to the primary products and services noted above, the
Communications Division offers international standards conversion, graphic
design, product fulfillment, MPEG compression, and rents video production and
editing equipment on a short-term basis. This group of ancillary services
represents approximately 5% of net sales in fiscal 1996.

The Company has continued to expand facilities for the Communications
Division's high volume video tape duplication. During the Company's fiscal year
ended January 31, 1996 ("fiscal 1996"), the Communications Division acquired
Centercom, Inc., which had facilities in Milwaukee, Chicago and Tampa, and
Advanced Audio/Visual Productions, Inc., based in Denver (see also "Purchase of
Centercom and Related Transactions" and "RECENT ACQUISITIONS - Purchase of
Advanced Audio/Video Productions, Inc." below). Expansion has been financed by
cash flow generated from operations, equipment leasing and bank financing.

The Company expended approximately $1,570,000 during fiscal 1996 for
additional video tape duplication equipment. It expects to spend an additional
$1,650,000 in fiscal 1997 to further expand its duplication facilities.

MANUFACTURING PROCESS

The manufacturing process for video cassettes generally utilizes
duplicating machines that copy from a master in "real time" speed, that is the
regular speed of the video being duplicated. In its Minneapolis, Milwaukee and
Atlanta facilities, the Company utilizes high speed machines which allow it to
duplicate a master 150 times faster than in "real time" speed and to utilize
less tape than regular speed machines utilize for the same content. In this
process, high speed tape loaders are used to load tape spliced to specific
program lengths into video shells.

LICENSES

The Victor Company of Japan, Ltd. ("JVC"), which owns the "VHS" logo, has
established standards for the physical characteristics of the video cassette.
Compliance with the JVC standards ensures that the video cassette will be
compatible with any VHS machine. Duplicators whose product conforms to the JVC
standards are permitted to apply the "VHS" logo to such product and pay JVC a
license fee for such privilege. The Communications Division paid JVC a license
fee of approximately $400,000 in fiscal 1996 for the privilege of applying the
"VHS" logo to its video product.

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SIGNIFICANT CUSTOMERS

The Communications Division sells to more than 6,000 accounts in any given
year. Approximately 20% of its sales come from ten customers, none of which
amount to more than 5% of net sales.

Illustrative of the Communications Division's duplication customers are
companies that use videotape to promote their products or instruct their
customers on the use of their products, financial service companies which
produce videotapes to present new financial products to sales personnel and
customers, high technology companies which use videotapes to train sales and
service personnel and corporations with many employees or locations that wish to
communicate a significant Company development to all employees simultaneously.
Such high volume customers are generally those who need 100 or more duplicate
videotapes reproduced, addressed to individual locations and forwarded for
delivery, often within a few hours or on an overnight basis. The Communications
Division also has the capacity to convert one international standard videotape
format to either of two other standard formats used around the world or for
various specific communication applications. Customers for these services
generally require lower volume reproduction.

MARKETING

The Communications Division markets its products nationally through the use
of 61 sales personnel who operate throughout the United States. To a lesser
degree, the Company also uses advertising in trade publications and
participation in trade shows.

SEASONALITY

The Communications Division's products are used consistently throughout the
year except for a slight rise in demand in September, October, and November to
supply extra requirements to customers for the holiday selling season.

COMPETITION

Though it is not possible to reliably state the Communications Division's
relative position in the absence of published statistics, based upon data
generated by its own management, the Company believes it is one of the largest
duplicators of video tape for the non-theatrical, non-music video segment of the
U.S. market. This market is comprised of exercise, educational, corporate,
promotional and instructional videos, etc.

The primary competitive factors in the video tape duplication business are
price, quality of service and range of products. The Communication Division
attempts to compete by offering high volume videotape duplication services, at a
competitive price, emphasizing service and customer support.

- 3 -

The Company's principal competitors are HHG Digital Technologies (formerly
Allied Film and Video Company) and The Duplication Factory. The video
duplication business is highly competitive, not only with these competitors, but
also with many smaller duplicators.

The Company believes that its regional locations, its wide range of product
offerings, and national marketing capabilities are competitive advantages over
many others in the industry. While selling prices have been declining in recent
years as competitors continue to seek market share by lowering prices, the
Company has been reasonably successful in maintaining its margins by lowering
its material costs and achieving unit volume increases.

VAUGHN PRODUCTS DIVISION

Vaughn Products Division is engaged in the manufacture and sale of leather
and gift items sold primarily to retail merchants located in the United States
and Canada. The Products Division's manufacturing facilities are located in the
Company's Minneapolis, Minnesota plant where it produces a line of over 200
leather items such as purses, billfolds, and personal accessory items. The
Products Division also sells gift products which it purchases for resale. These
gift products are sold at wholesale prices for resale, primarily by gift shops
and western stores, and are marketed under the "Bloom Brothers" name. The
Products Division also has a line of silk screen tom-tom novelties sold under
the name "Cranberry Lake".

Through its recent acquisition of Indian Arts and Crafts, Inc. ("IAAC") the
Products Division has added a line of soft goods to its product offerings,
including custom-designed, silk-screened T-shirts and sweatshirts. These
products are currently being designed for and sold in the Pacific Northwest and
Alaska to retail and gift shops. The manufacturing facility for IAAC is located
in Seattle, Washington. See "RECENT ACQUISITIONS - Purchase of Indian Arts and
Crafts, Inc."

SALES AND DISTRIBUTION

Sales of the Products Division's products are made throughout the United
States and Canada by independent manufacturer's representatives. These
personnel are exclusive of the personnel that recently joined the Products
Division and which are described under "RECENT ACQUISITIONS - Purchase of Indian
Arts and Crafts, Inc." below. The Products Division employs two sales managers
and retains 35 manufacturer's representatives. The products are included in a
Company catalog, periodically sent to prospective and known customers and made
available for use by the sales organization. The Company also participates in
trade shows.

The principal markets for the Products Division's products are gift and
souvenir shops that serve the tourist industry.

The Products Division sells to over 3,000 customers, none of which account
for more than 5% of its sales.

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MANUFACTURING AND RAW MATERIALS

The Products Division's manufacturing operations consists primarily of
assembly, fabricating and converting leather to finished products and silk
screening of T-shirts. Numerous subcontractors are utilized to furnish
components and subassembly. Materials utilized in these products are standard
and readily available from multiple sources at competitive prices.

SEASONAL OPERATIONS

The operations of the Company's Vaughn Products Division are seasonal in
nature. Approximately half of the production and sale of its products are
delivered to customers from March through June.

COMPETITION

The primary competitive factors in the Products Division line of business
are price, product offering, quality and meeting delivery times. The Company
believes that the Products Division is competitive in each of these areas. The
Company does not have a significant share of the overall gift market and
competes for sales with many national and regional companies throughout the
United States and Canada. Many of such competitors have significantly greater
resources than the Company.

FORMER BUSINESSES

The Company originally operated as a manufacturer and distributor of flags
and banners, Christmas and seasonal decorative displays and parade and float
materials. In addition to these businesses and its two current business
segments, in 1986 the Company also entered radio broadcasting. The radio
broadcast business was not profitable for the Company and the Company's original
businesses did not always operate at predictable or acceptable levels of
profitability.

Consequently, in 1990 the Company began to redeploy its corporate and
personnel resources to the more firmly profitable current businesses operated by
the Vaughn Communications and Vaughn Products Divisions. In 1990 and 1991, the
Company sold its radio station interests and its audio and video equipment sales
and engineering businesses. In February 1992, the Company also withdrew from
the Christmas display business.

On March 1, 1994, the Company completed this redeployment by selling its
flag, banner, seasonal decorative display and parade and float products
operations and assets to Chromatic Concepts Co., a Minneapolis, Minnesota based
corporation ("Buyer"). These businesses previously occupied approximately 5,000
square feet of the Company's principal manufacturing plant in Minneapolis,
Minnesota and its 12,000 square foot manufacturing plant in Tampa, Florida, and
employed 21 manufacturing, sales and administrative personnel. The Buyer
reemployed substantially all of these employees. The Company retained its Tampa
plant, subject to a short-term lease to the Buyer which expired October 31,
1994, after which this facility was sold to an unrelated party. The portion of
the Minneapolis plant previously used by these businesses has been rededicated
to use by the Company's Vaughn Communications and Vaughn Products Divisions (see
Item 2 "Properties" below).

- 5 -

The Purchase and Sale Agreement with the Buyer provided for a purchase
price of $1,500,000, with $800,000 cash paid at closing, plus a $700,000
promissory note payable in installments over seven years with variable interest
at .25% per annum over the prime rate. The Company is also entitled to certain
additional payments of up to $250,000 over fifteen years contingent upon
performance of the businesses sold over this period. These businesses accounted
for approximately $2,904,000 of sales and an operating profit of $145,000 in
fiscal 1994.

BACKLOG

Order backlog is not generally a significant factor in the Company's
business. The Company relies primarily on current selling efforts coupled with
near term delivery or performance.

EMPLOYEES

On March 31, 1996, the Company had 673 employees, including 86 in sales and
marketing, 476 in manufacturing and 111 in executive, finance and administrative
positions. One hundred fifty-eight of the Company's manufacturing and clerical
employees are part-time employees. These personnel are exclusive of the
personnel described under "RECENT ACQUISITIONS" below. The Company's employees
are not represented by a union. The Company considers its employee relations to
be satisfactory.

COMPLIANCE WITH ENVIRONMENTAL LAWS

The costs associated with the Company's compliance with Federal, state and
local environmental laws are minimal. For these reasons, the Company's
compliance with such laws does not have a material effect on its capital
expenditures, earnings or its competitive position in the marketplace.

RECENT ACQUISITIONS

PURCHASE OF CENTERCOM AND RELATED TRANSACTIONS

On April 4, 1995, the Company completed the acquisition of all of the
capital stock of Centercom, Inc., a Wisconsin corporation, and Centercom South,
Inc., a Florida corporation (collectively "Centercom") pursuant to a Stock
Purchase Agreement of even date (the "Purchase Agreement"). The effective date
of the acquisition is April 1, 1995. The Company accounted for the acquisition
as a purchase.

The purchase price for the capital stock of Centercom was $6,420,000, which
was paid equally to the two equal former shareholders of Centercom, Jeffrey
Johnson and Robert Harmon (the "Sellers"). The Company paid $5,250,000 in cash
and issued 180,000 shares of the Company's authorized and previously unissued
Common Stock, valued at $6.50 per share ($1,170,000 in the aggregate), equal to
the closing sale price of the stock on NASDAQ on April 3, 1995. Pursuant to the
terms of the Purchase Agreement, the Sellers have been elected as directors of
the Company and appointed as members of the Company's Audit Committee.

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The Sellers will also be paid $100,000 each per year for a period of seven
years under consulting and noncompete agreements. In addition, the Company has
entered into two ten-year leases for the video tape duplication facilities
totaling approximately 38,000 square feet owned by a partnership of the Sellers
in Milwaukee, Wisconsin, at an aggregate annual net rent of $186,353 for the
first three years and $199,225 for the remaining seven years of the lease term.
Management of the Company believes that the facilities leased from Sellers are
necessary for its video tape duplication business and that the lease terms and
conditions are no less favorable to the Company than could be obtained from an
unrelated third party (see "Description of Centercom's Business" below).

FINANCING FOR THE ACQUISITION

The Company borrowed the cash consideration for the Centercom acquisition
from a bank, under an Amended and Restated Loan Agreement entered into as of
March 31, 1995 (the "Loan Agreement"). The Loan Agreement provided a $5,000,000
term loan due March 31, 2000, payable in consecutive quarterly principal
installments of $250,000 commencing July 1, 1995, plus interest at one-quarter
percent over the bank's prime rate. The Loan Agreement also provides a
revolving credit facility of up to $8,000,000 to be used to finance working
capital at the bank's prime interest rate. Three million dollars of the
revolving facility may be used for term loans to replace existing debt or
finance new equipment purchases. The interest rate on these term loans was one-
quarter percent over the bank's prime rate. The Company has utilized $850,000
of the revolving facility to provide a term loan due March 31, 1998, to repay a
like amount of preexisting Centercom long-term debt. On April 1, 1996, the
Company entered into an amended agreement with its bank which reduced the
interest rate on the term loans to the prime rate.

DESCRIPTION OF CENTERCOM'S BUSINESS

Centercom is a national video tape duplicator whose business, with the
exception of specific customer identity and geographic concentration, is
substantially similar to the video tape duplication business of the Company's
Vaughn Communications Division of which Centercom has become a part. Centercom
has video tape duplication facilities in Milwaukee, Wisconsin, Chicago, Illinois
and Tampa, Florida. The Company has merged its preexisting facilities in
Milwaukee, Chicago and Tampa into those of Centercom. Centercom, Inc. and
Centercom South, Inc. have been and will continue as wholly-owned subsidiaries
of the Company for the immediately foreseeable future.

For Centercom's fiscal years ended June 30, 1994 and 1993, it had annual
sales of $8,700,000 and $7,700,000, respectively. Net income for the same
periods was $645,000 and $412,000.

Centercom's operations involve the use of several hundred real time video
tape duplicating machines and three high-speed (150 times real time rates)
duplicating machines similar to those utilized by the Company.

At the time of the acquisition, Centercom had 73 employees, including six
in sales and marketing, 51 in operations and 16 in administration and support.
Substantially all of these persons are

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currently employees of Vaughn Communications Division. These employees are not
represented by a union. Centercom has not had a work stoppage during the past
five years and the Company considers Centercom's employee relations to be
satisfactory.

The Company believes that the Centercom acquisition has enabled the Company
to be a dominant competitor in the Milwaukee market, enhanced the Company's
already dominant position in the Tampa market and increased the Company's
presence in the Chicago market.

PURCHASE OF ADVANCED AUDIO/VIDEO PRODUCTIONS, INC.

Pursuant to a Purchase and Sale Agreement dated December 29, 1995, on
January 1, 1996 the Company acquired substantially all the assets and assumed
substantially all the liabilities of Advanced Audio/Video Productions, Inc.
("Advanced Video"), a Colorado corporation. The Company accounted for the
acquisition as a purchase.

The purchase price for the assets of Advanced Video in the amount of
approximately $282,000 included $182,000 of cash and $100,000 of long-term debt
to the seller. The note is payable in three annual installments of $33,333.33
starting January 5, 1997, plus interest at the prime rate adjusted on the
anniversary date.

Advanced Video is a regional video tape duplicator with its facility
located in Denver, Colorado. Its business is substantially similar to the video
tape duplication business of the Company's Vaughn Communications Division of
which Advanced Video has become a part.

For Advanced Video's fiscal year ended December 31, 1995, it had annual
sales of $1,204,000 and net income of $60,000.

PURCHASE OF INDIAN ARTS AND CRAFTS, INC.

Pursuant to a Purchase and Sale Agreement dated January 31, 1996 the
Company acquired substantially all the assets and assumed substantially all the
liabilities of Indian Arts and Crafts, Inc. ("IAAC"), a Washington corporation.
The Company accounted for the acquisition as a purchase.

The purchase price of approximately $2,332,000 was paid to the five
shareholders of IAAC (the "Sellers"). The Company paid approximately $82,000 in
cash, issued 145,138 shares of the Company's authorized and previously unissued
Common Stock valued at $8.6125 per share ($1,250,000 in the aggregate), equal to
the average closing sale price of the stock on NASDAQ for the 10 days prior to
January 31, 1996, and issued $1,000,000 of long-term debt to the Sellers. The
long-term debt consists of two promissory notes; one in the principal amount of
$250,000 payable in three equal annual installments beginning January 31, 1997,
and the other in the principal amount of $750,000 payable in seven equal annual
installments starting on January 31, 1997. The interest rate on both notes is
8.5% per annum.

- 8 -

The Company also entered into a three-year employment agreement with Howard
Lowen, the president and largest shareholder of IAAC. In addition, the Company
entered into two leases with the Sellers. One lease is for a production
facility in Seattle totaling approximately 42,300 square feet at an aggregate
annual rent of $250,000. The term of this lease is 44 months starting February
1, 1996. The second lease is for a sales office in Anchorage ( 1,400 square
feet) at an annual rental of $14,400 and has a three-year term. Management of
the Company believes that the facilities leased from the Sellers are necessary
for the business of the Products Division and that the terms of the leases are
no less favorable to the Company than could be obtained from an unrelated third
party.

FINANCING FOR THE ACQUISITION

The Company used its revolving credit facility to fund the $82,000 cash
portion of the purchase price. To fund the anticipated increase in working
capital needs, the Company entered into an Amended and Restated Loan Agreement
with a bank on February 1, 1996 (the "Amended Agreement"). The Amended
Agreement increases the total credit facility from $13,000,000 to $17,000,000
and provides for long-term financing to finance acquisitions and equipment
purchases, and a revolving credit facility to finance working capital. The
interest rate on the long-term debt (approximately $5,085,000 at January 31,
1996) is 1/4% over the prime rate, while the interest rate on the revolving debt
is at the prime rate.

DESCRIPTION OF IAAC'S BUSINESS

IAAC's business consists primarily of the manufacture and sale of gift and
souvenir products. Its principal products are custom-designed soft goods,
including T-shirts, sweatshirts and hats sold primarily in Alaska and the
Pacific Northwest. The Company has an art department which develops custom
designs that are silk-screened on apparel and then sold to retailers by direct
salespeople or independent manufacturer's representatives. IAAC also resells
other gift and souvenir products through the same sales channels. IAAC will be
merged into Vaughn Products Division, and it is the intention of the Company to
move the operations of the entire Products Division to Seattle during fiscal
1997.

For IAAC's fiscal years ended December 31, 1995 and 1994, it had annual
sales of $7,543,000 and $7,593,000, respectively. Net income for the same
periods was $227,000 and $360,000, respectively.

At January 31, 1996, IAAC had 45 employees, including 17 in sales and
marketing, 22 in operations, and 6 in administration and support, all of whom
have become employees of the Vaughn Products Division. These employees are not
represented by a union, there have been no work stoppages, and the Company
believes IAAC employee relations to be satisfactory.

ITEM 2. PROPERTIES

The Company owns its executive and administrative offices and principal
manufacturing plant consisting of approximately 67,000 square feet located on a
4.1 acre site at 5050 West 78th Street, Minneapolis, Minnesota. Approximately
33,000 square feet is devoted to and equipped for the

- 9 -

fabrication and warehousing of the Vaughn Products Division's products and raw
materials. Approximately 29,600 square feet is used for the Vaughn
Communications Division's separate administrative and sales offices, showrooms,
videotape duplication, shipping, warehouse and handling. The remaining space of
approximately 4,400 square feet houses the Company's executive and
administrative offices. These facilities include a separate adjacent building
of approximately 10,600 square feet. See the Notes to the audited financial
statements of the Company incorporated by reference for a description of the
mortgage term loan to the Company secured by these facilities.

The Company leases Vaughn Communications Division's facilities in
Milwaukee, Wisconsin; Phoenix, Arizona; Tampa, Florida; Portland, Oregon;
Atlanta, Georgia; Dallas, Texas; Houston, Texas; Raleigh, North Carolina;
Chicago, Illinois and Denver, Colorado for sales offices and videotape
reproduction, totaling approximately 187,000 square feet under leases expiring
from 1997 through 2006, at a current total annual rental of approximately
$900,000.

The Products Division's Seattle facilities leased from the IAAC Sellers are
described under "RECENT ACQUISITIONS - Purchase of Indian Arts and Crafts, Inc."
in Item 1 above.

The Company is presently utilizing approximately 75% of its manufacturing
plant capacity measured on a five-day week/three shift per day basis.
Production capacity, however, can be expanded by adding additional personnel or
acquiring additional manufacturing equipment. Management believes its
manufacturing facilities are generally sufficient for the Company's immediately
foreseeable needs.

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings pending against or involving the Company or
its properties which, in the opinion of management, will have a material adverse
effect upon the Company's financial position or results of operations.

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

No matters were submitted to a vote of the Company's shareholders during
the quarter ended January 31, 1996.

PART II

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

The Company's Common Stock is traded over-the-counter and has been included
in the National Association of Securities Dealers, Inc. Automated Quotations
System ("NASDAQ") National Market System since March 26, 1994, under the symbol
VGHN. For the periods indicated through March 25, 1994, the table sets forth
the quarterly high and low closing sales prices as reported in the NASDAQ's
Small Cap Market. For the periods indicated after March 25, 1994, the
information presented is the quarterly high and low closing sale prices as
reported in the NASDAQ's National Market System. All prices are without retail
markups, markdowns or commissions.

- 10 -

Price
-----

Calendar Period High Low
--------------- ---- ---

1996: First Quarter $9.375 $8.375

1995: First Quarter $7.875 $6.25
Second Quarter 7.875 5.75
Third Quarter 9.375 7.125
Fourth Quarter 9.50 7.75

1994: First Quarter $5.875 $4.75
Second Quarter 5.625 4.625
Third Quarter 6.875 4.875
Fourth Quarter 7.75 5.50

The last sales price for the Company's Common Stock as reported by the
NASDAQ National Market System on April 12, 1996 was $9.25 per share. As of
January 31, 1996, the Company had 325 shareholders of record. The Company has
never paid a cash dividend on its Common Stock. It intends to retain all
earnings to finance the development of its business. The Company's loan
agreement with its bank contains limitations on paying dividends. Accordingly,
no cash dividends are anticipated for the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The financial information set forth in the sections entitled "SELECTED
FINANCIAL DATA from Continuing Operations (in Thousands, except per share
amounts)" to be included in the Company's 1996 Shareholder Report is
incorporated herein by reference in response to this Item 6. This section
should be read in conjunction with the Notes to Consolidated Financial
Statements which also appear in the 1996 Shareholder Report and are incorporated
herein by reference.

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

The discussion under the Section entitled "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" to be included in the
1996 Shareholder Report is incorporated herein by reference in response to this
Item 7.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company for each of the years
in the three-year period ended January 31, 1996, together with the report
thereon of Ernst & Young LLP, contained in the 1996 Shareholder Report, are
incorporated herein by reference in response to this Item 8.

- 11 -

The supplementary financial information requirements of Item 302 of
Regulation S-K are not applicable to the Company.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The discussions under the sections captioned "COMPLIANCE WITH SECTION 16(a)
OF THE SECURITIES EXCHANGE ACT", "PROPOSAL 1 ELECTION OF DIRECTORS" and
"EXECUTIVE OFFICERS" to be included in the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission and delivered
to the Registrant's shareholders pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934 with respect to the Annual Meeting of the
Shareholders to be held on June 19, 1996 (the "1996 Proxy Statement") are
incorporated herein by reference in response to this Item 10.

ITEM 11. EXECUTIVE COMPENSATION

The discussions under the sections captioned "COMPENSATION OF DIRECTORS"
and "EXECUTIVE COMPENSATION" but excluding the discussions included under the
subsections captioned "EXECUTIVE COMPENSATION - Compensation Committee Report on
Executive Compensation" and "EXECUTIVE COMPENSATION - Comparative Stock
Performance" to be included in the 1996 Proxy Statement are incorporated herein
by reference in response to this Item 11.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The discussions under the sections captioned "VOTING SECURITIES AND
PRINCIPAL HOLDERS THEREOF", "PROPOSAL 1 ELECTION OF DIRECTORS" and "TRANSACTIONS
WITH MANAGEMENT - E. D. Willette Stock Put Redemption Agreement, Including
Change of Control Provision" to be included in the 1996 Proxy Statement are
incorporated herein by reference in response to this Item 12.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The discussion under the section captioned "TRANSACTIONS WITH MANAGEMENT"
to be included in the 1996 Proxy Statement is incorporated herein by reference
in response to this Item 13.

- 12 -

PART IV

ITEM 14. EXHIBIT, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) 1. CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY

The consolidated financial statements listed below of the Company for
each of the years in the three-year period ended January 31, 1996,
together with the report thereon of Ernst & Young LLP, contained in
the 1996 Shareholder Report (attached as Exhibit 13) are incorporated
herein by reference in response to this Item 14 (a) (1).

Independent Auditor's Report of Ernst & Young LLP
Consolidated Balance Sheets as of January 31, 1996 and 1995
Consolidated Statements of Income for the years ended January 31,
1996, 1995 and 1994
Consolidated Statement of Shareholders' Equity for the years ended
January 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended January 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements

With the exception of the aforementioned information, and the
information specified in Parts II and III, the 1996 Shareholder Report
is not to be deemed filed as part of this Report.

2. FINANCIAL STATEMENT SCHEDULE OF THE COMPANY

Schedule No. Page
------------ ----

II Valuation and Qualifying Accounts S-1

All other schedules are omitted, because they are not applicable, or
not required, or because the information is included in the Company's
consolidated financial statements or notes thereto.

b. REPORTS ON FORM 8-K

No current Reports on Form 8-K were filed by the Company during the quarter
ended January 31, 1996.

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

(2)(a) Stock Purchase Agreement dated April 4, 1995, providing for
the Company's purchase of all of the capital stock of
Centercom, Inc., a Wisconsin corporation, and Centercom
South, Inc. a Florida

- 13 -

corporation, from Jeffrey Johnson and Robert Harmon
(incorporated herein by reference to Exhibit 2(a)-1 to the
Company's Current Report on Form 8-K with a Date of Report
of April 14, 1995).

(2)(b) Escrow Agreement dated April 14, 1995 among the Company,
Jeffrey Johnson, Robert Harmon and Firstar Trust Company
(incorporated herein by reference to Exhibit (2)(a)-2 to the
Company's Current Report on Form 8-K with a Date of Report
of April 14, 1995).

(2)(c) Purchase and Sale Agreement dated January 31, 1996 between
the Company and the Shareholders of Indian Arts and Crafts,
Inc. (without Exhibits, Schedules or Attachments).

(3)(i)(a) Restated Articles of Incorporation of the Company, and all
amendments filed with the Minnesota Secretary of State
through March 12, 1987 (incorporated herein by reference to
Exhibit 3(a) to the Company's Registration Statement on Form
S-1 No. 33-10918 hereinafter referred to as the "Company's
S-1 Registration Statement").

(3)(i)(b) Articles of Amendment to the Company's Restated Articles of
Incorporation, as filed with the Minnesota Secretary of
State on July 16, 1987 (incorporated herein by reference to
Exhibit 19 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 31, 1987).

(3)(i)(c) Articles of Amendment to the Company's Restated Articles of
Incorporation, as filed with the Minnesota Secretary of
State on June 24, 1993 (incorporated herein by reference to
Exhibit 3(a) to the Company's Annual Report on Form 10-K for
the year ended January 31, 1994, (hereinafter referred to as
the "1994 Form 10-K")).

(3)(ii)(a) Restated By-Laws of the Company and all amendments thereto
through March 12, 1987 (incorporated herein by reference to
Exhibit 3(b) to the Company's S-1 Registration Statement).

(3)(ii)(b) Third Amendment to the Company's Restated By-Laws adopted
April 19, 1994 (incorporated herein by reference to Exhibit
3(b) to the 1994 Form 10-K.

(10)(a) [Intentionally left blank.]

- 14 -

(10)(b) Purchase and Sale Agreement Restated February 17, 1994,
dated as of February 28, 1994, providing for the Company's
sale of its flag, banner and parade and float products,
assets and business to Chromatic Concepts Co. (incorporated
herein by reference to Exhibit (10)(b) to the 1994
Form 10-K).

(10)(c) Purchase Agreement dated as of May 25, 1993, providing for
the Company's purchase from Cranberry Novelty Manufacturing
Company of the "Cranberry Lake" novelty product line
(incorporated herein by reference to Exhibit (10)(c) to the
1994 Form 10-K).

(10)(d) Adoption Agreement dated November 5, 1992 for Vaughn
Communications, Inc. Retirement Savings Plan (the "Plan")
adopting Fidelity Management & Research Co. standard
prototype Profit Sharing/401(K) Plan basic plan document No.
7 and copy of Retirement Service Agreement dated November 4,
1992 with Fidelity Management Trust Company, providing for
the trust and administration of the Plan, first effective as
of the Plan year beginning February 1, 1993 (incorporated
herein by reference to Exhibit (10)(d) to the 1994
Form 10-K).

(10)(e) Amended and Restated Loan Agreement dated as of March 31,
1995 between the Company and American Bank, N.A., restating
and replacing all prior loan agreements and providing the
Company a revolving credit and term loan facility of up to
$13,000,000 through May 31, 1996, secured by the Company's
non-real estate assets (incorporated herein by reference to
Exhibit (10)(e) to the Company's Annual Report on Form 10-K
for the year ended January 31, 1995 (hereinafter referred to
as the "1995 Form 10-K")).

(10)(f) 1990 Company-Wide Stock Option Plan adopted by the Company's
Board of Directors on June 26, 1990, as amended December 17,
1990, and forms of 1990 Incentive Stock Option and 1990 Non-
statutory Stock Option Agreements (incorporated herein by
reference to Exhibit 10(f) to the Company's Annual Report on
Form 10-K for the year ended January 31, 1991), and copy of
amendment to such Plan adopted by the Board June 24, 1992
(incorporated herein by reference to Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the year ended
January 31, 1993, (hereinafter referred to as the "1993 Form
10-K")).

- 15 -

(10)(g) 1988 Stock Option Plan adopted by the Company's Board of
Directors on December 20, 1988, and forms of 1988 Incentive
Stock Option and 1988 Nonstatutory Stock Option Agreements
(incorporated herein by reference to Exhibit 10(g) to the
Company's Annual Report on Form 10-K for the year ended
January 31, 1989), and copies of amendments to such Plan
adopted by the Board June 24, 1992 (incorporated herein by
reference to Exhibit 10(g) to the 1993 Form 10-K).

(10)(h) Amended and Restated Stock Put Redemption Agreement dated
August 27, 1986, between the Company and E. David Willette
(incorporated herein by reference to Exhibit 10(h) to the
1993 Form 10-K).

(10)(i) 1983 Incentive Stock Option Plan and form of 1983 Incentive
Stock Option Agreement (incorporated by reference to Exhibit
10(l) to the Company's S-1 Registration Statement), and copy
of amendment to such Plan adopted by the Board June 24, 1992
(incorporated herein by reference to Exhibit 10(i) to the
1993 Form 10-K).

(10)(j) 1985 Stock Option Plan (incorporated by reference to Exhibit
10(m) to the Company's S-1 Registration Statement), copy of
Amendment to the 1985 Stock Option Plan adopted by the
Company's Board of Directors on December 10, 1987, and
corresponding revised forms of 1985 Incentive Stock Option
Agreement and 1985 Nonstatutory Option Agreement
(incorporated by reference to Exhibit 10(j) to the Company's
Annual Report on Form 10-K for the year ended January 31,
1988), and copy of amendment to such Plan adopted by the
Board June 24, 1992 (incorporated herein by reference to
Exhibit 10(j) to the 1993 Form 10-K).

(10)(k) 1990 Non-Employee Directors Stock Option Plan adopted by the
Company's Board of Directors June 26, 1990, as amended
December 17, 1990, and form of 1990 Non-Employee Directors
Stock Option Agreement (non-statutory) (incorporated herein
by reference to Exhibit 10(k) to the 1993 Form 10-K).

(10)(l) Mortgage and Security Agreement and Fixture Financing
Statement and Promissory Note, dated February 26, 1988,
between the Company (as mortgagor and borrower) and The
Canada Life Assurance Company (as mortgagee and lender),
providing for a three year $1,600,000 mortgage loan to
the Company with three

- 16 -

year renewal options secured by the Company's Minneapolis,
Minnesota headquarters and adjacent plant and office
facilities (incorporated by reference to Exhibit 10(l) to
the Company's Annual Report on Form 10-K for the year ended
January 31, 1988).

(10)(m) 1990 Discounted Stock Option Plan adopted by the Company's
Board of Directors on June 26, 1990, as amended December 17,
1990, and form of 1990 Discounted Stock Option Agreement
(nonstatutory) (incorporated herein by reference to Exhibit
10(m) to the Company's Annual Report on Form 10-K for the
year ended January 31, 1991), and copy of amendment to such
Plan adopted by the Board June 24, 1992 (incorporated herein
by reference to Exhibit 10(m) to the 1993 Form 10-K.

(10)(n) Leases each dated April 4, 1995, between Centercom, Inc.,
the Company's wholly-owned subsidiary, as Lessee, and
Centercom Partnership, a partnership owned by Jeffrey
Johnson and Robert Harmon, the former owners of all of the
capital stock of Centercom, Inc., as Lessor, and Specialty
Services, Inc., a real estate holding corporation owned by
Messrs. Johnson and Harmon, as Lessor, respectively
providing for the lease and rental from and after April 4,
1995, of the real estate and buildings located at 5737 West
Hemlock Street and 5621 West Hemlock Street, Milwaukee,
Wisconsin, from which the Company's wholly-owned subsidiary,
Centercom, Inc., conducts its Milwaukee, Wisconsin based
videotape duplication operations (incorporated herein by
reference to Exhibit (10)(n) to the 1995 Form 10-K).

(10)(o) Consulting and Non-Competition Agreements, each dated April
4, 1995, among the Company, its wholly-owned subsidiary,
Centercom, Inc. and each of Jeffrey Johnson and Robert
Harmon, the prior shareholders of Centercom, Inc., from whom
the Company acquired the capital stock of Centercom, Inc.,
providing for certain covenants of Jeffrey Johnson and
Robert Harmon against competition with the Company and
Centercom, Inc. and for performance of certain consulting
services by said prior shareholders (incorporated herein by
reference to Exhibit (10)(o) to the 1995 Form 10-K).

(10)(p) Shareholder Voting Agreement dated April 4, 1995, among the
Company, E. David Willette and Jeffrey Johnson and Robert
Harmon, providing that E. David Willette will vote his own
shares of the Company's Common Stock for the election of
Jeffrey

- 17 -

Johnson and Robert Harmon as members of the Company's Board
of Directors (incorporated herein by reference to Exhibit
(10)(p) to the 1995 Form 10-K).

(10)(q) Amended and Restated Loan Agreement dated February 1, 1996,
between the Company and American Bank N.A.

(11) Statement Regarding Computation of Earnings Per Share.

(13) 1996 Annual Report to Shareholders.

(23) Consent of Independent Auditors

(24) Power of Attorney (see the Signature Page of this Report)

(27) Financial Data Schedules

(d) Financial Statements required by Regulation S-X which are excluded from the
Annual Report to Shareholders.

None.

- 18 -

SIGNATURES

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

VAUGHN COMMUNICATIONS, INC.

By /s/ E. David Willette
---------------------------------
E. David Willette
Chairman, Chief Executive Officer
and Treasurer
(Principal Executive and Financial Officer)

By /s/ M. Charles Reinhart
---------------------------------
M. Charles Reinhart
Controller
(Principal Accounting Officer)

Dated: April 29, 1996

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
above or below, constitutes and appoints E. David Willette and M. Charles
Reinhart, or either of them, his true and lawful attorneys-in-fact, and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.

- 19 -

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
in their respective capacities as directors of the Company.

E. David Willette Director April 29, 1996
-------------------------
E. David Willette

Roger F. Heegaard Director April 29, 1996
--------------------------
Roger F. Heegaard

Harold G. Whalquist Director April 29, 1996
--------------------------
Harold G. Wahlquist

William D. Smith Director April 29, 1996
--------------------------
William D. Smith

Laurence F. LeJeune Director April 29, 1996
--------------------------
Laurence F. LeJeune

Michael R. Sill Director April 29, 1996
--------------------------
Michael R. Sill

Rodney P. Burwell Director April 29, 1996
--------------------------
Rodney P. Burwell

Jeffrey Johnson Director April 29, 1996
--------------------------
Jeffrey Johnson

Robert Harmon Director April 29, 1996
--------------------------
Robert Harmon

Donald J. Drapeau Director April 29, 1996
--------------------------
Donald J. Drapeau

- 20 -

VAUGHN COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------

Additions
---------

Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts- Deductions End of
Description of Period Expenses Describe Describe Period
----------- --------- -------- -------- -------- ------

Year ended
1/31/96:

Deducted from
asset account:
Allowance for
doubtful accounts $500,000 $352,860 $297,260(1) $555,600
-------- -------- -------- --------
-------- -------- -------- --------

Year ended
1/31/95:

Deducted from
asset account:
Allowance for
doubtful accounts $470,000 $253,796 $223,796(1) $500,000
-------- -------- -------- --------
-------- -------- -------- --------

Year ended
1/31/94:

Deducted from
asset account:
Allowance for
doubtful accounts $383,000 $256,273 $169,273(1) $470,000
-------- -------- -------- --------
-------- -------- -------- --------

- ------------------------
(1) Uncollectible accounts written off, net of recoveries

- 21 - S-1

VAUGHN COMMUNICATIONS, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 1996

INDEX TO EXHIBITS

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

(2)(c) Purchase and Sale Agreement dated January
31, 1996 between the Company and the
Shareholders of Indian Arts and Crafts, Inc.
(without exhibits, schedules and attachments)

(10)(q) Amended and Restated Loan Agreement dated
February 1, 1996, between the Company and
American Bank N.A.