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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2000

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 in its charter)

California 95-4272619
(State of or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7083 Hollywood Boulevard, Suite 200, Hollywood, CA 90028
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (323) 957-7990

Securities registered pursuant to Section 12(b) of the Act
None

Securities registered pursuant to Section 12(g) of the Act
Common Stock, no par value.
-----------

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

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

The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $19,100,000 on March 5, 2001 based upon the
closing price of such stock on that date. As of March 5, 2001, there were
9,112,670 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement are incorporated by
reference in Part III of this report. The definitive proxy statement will be
filed no later than 120 days after the close of the Company's fiscal year.

PART I

ITEM 1. BUSINESS

GENERAL

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. VDI provides the services necessary to
edit, master, reformat, archive and ultimately distribute its clients' video
content, including television programming, feature films, spot advertising and
movie trailers.

The Company provides worldwide electronic distribution, using fiber
optics, satellites and the Internet. The Company delivers commercials, movie
trailers, electronic press kits, infomercials and syndicated programming, by
both physical and electronic means, to thousands of broadcast outlets worldwide.

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 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 is one of the largest and
most diversified providers of technical and distribution services in its
markets, and therefore is able offer its customers a single source for such
services at prices that reflect the Company's scale economies.

The Company was incorporated in California in 1990. The Company's
executive offices are located at 7083 Hollywood Boulevard, Hollywood, California
90028, and its telephone number is (323) 957-7990.

MARKETS

The Company derives revenues primarily from (i) the entertainment
industry; consisting of major and independent motion picture and television
studios, cable television program suppliers and television program syndicators,
and (ii) the advertising industry; consisting of advertising agencies and
corporate advertisers. On a more limited basis, the Company also services
national television networks, local television stations, corporate or
instructional video providers, infomercial advertisers and educational
institutions.

ENTERTAINMENT INDUSTRY. The entertainment industry creates motion pictures,
television programming, and interactive multimedia content for distribution
through theatrical exhibition, home video, pay and basic cable television,
direct-to-home, private cable, broadcast television, on-line services and video
games. Content is released into a "first-run" distribution channel, and later
into one or more additional channels or media. In addition to newly produced
content, film and television libraries may be released repeatedly into
distribution. Entertainment content produced in the United States is exported
and is in increasingly high demand internationally. The Company believes that
several trends in the entertainment industry have and will continue to have a
positive impact on the Company's business. These trends include growth in
worldwide demand for original entertainment content, the development of new
markets for existing content libraries, increased demand for innovation and
creative quality in domestic and foreign markets, and wider application of
digital technologies for content manipulation and distribution, including the
emergence of new distribution channels.

ADVERTISING INDUSTRY. The advertising industry distributes video and audio
commercials, or spots, to radio and television broadcast outlets worldwide.
Advertising content is developed either by the originating company or in
conjunction with an advertising agency. The Company receives orders with
specific routing and timing instructions provided by the customer. These orders
are then entered into the Company's computer system and scheduled for electronic
or physical delivery. When a video spot is received, the Company's quality
control personnel inspect the video to ensure that it meets customer
specifications and then initiate the sequence to distribute the video to the
designated television stations either electronically, over fiber optic lines
and/or satellite, or via the most suitable package carrier. The Company believes
that the growth in the number of video advertising outlets, driven by expansion
in the number of broadcast, cable, Internet and satellite channels worldwide,
will have a positive impact on the Company's businesses.

VALUE-ADDED SERVICES

VDI maintains video and audio post-production and editing facilities as
components of its full service, value-added approach to its customers. The
following summarizes the value-added post-production services that the Company
provides to its customers:

FILM-TO-TAPE TRANSFER. Substantially all film content ultimately is distributed
to the home video, broadcast, cable or pay-per-view television markets,
requiring that film images be transferred electronically to a video format. Each
frame must be color corrected and adapted to the size and aspect ratio of a
television screen in order to ensure the highest level of conformity to the
original film version. The Company transfers film to videotape using Spirit,
URSA and Cintel MK-3 telecine equipment and DaVinci(R) digital color correction
systems. In 2000, the Company added high definition television ("HDTV") services
to this product line. The remastering of studio film and television libraries to
this new broadcast standard has begun to contribute to the growth of the
Company's film transfer business, as well as affiliated services such as foreign
language mastering, duplication and distribution.

VIDEO EDITING. VDI provides digital editing services in Hollywood, Burbank, West
Los Angeles and San Francisco. The editing suites are equipped with (i)
state-of-the-art digital editing equipment, including the Avid(R) 9000, that
provides precise and repeatable electronic transfer of video and/or audio
information from one or more sources to a new master video and (ii) large
production switchers to effect complex transitions from source to source while
simultaneously inserting titles and/or digital effects over background video.
Video is edited into completed programs such as television shows, infomercials,
commercials, movie trailers, electronic press kits, specials, and corporate and
educational presentations.

STANDARDS CONVERSION. Throughout the world there are several different
broadcasting "standards" in use. To permit a program recorded in one standard to
be broadcast in another, it is necessary for the recorded program to be
converted to the applicable standard. This process involves changing the number
of video lines per frame, the number of frames per second, and the color system.
VDI is able to convert video between all international formats, including NTSC,
PAL and SECAM. The Company's competitive advantages in this service line include
its state-of-the-art systems and its detailed knowledge of the international
markets with respect to quality-control requirements and technical
specifications.

BROADCAST ENCODING. VDI provides encoding services for tracking broadcast
airplay of spots or television programming. Using a process called VEIL
encoding, a code is placed within the video portion of an advertisement or an
electronic press kit. Such codes can be monitored from standard television
broadcasts to determine which advertisements or portions of electronic press
kits are shown on or during specific television programs, providing customers
direct feedback on allotted air time. The Company provides VEIL encoding
services for a number of its motion picture studio clients to enable them to
customize their promotional material. The Company also provides ICE encoding
services which enable it to place codes within the audio portion of a video,
thereby enhancing the overall quality of the encoded video.

AUDIO POST-PRODUCTION. Through its facilities in Burbank and West Los Angeles,
the Company digitally edits and creates sound effects, assists in replacing
dialog and re-records audio elements for integration with film and video
elements. The Company designs sound effects to give life to the visual images
with a library of sound effects. Dialog replacement is sometimes required to
improve quality, replace lost dialog or eliminate extraneous noise from the
original recording. Re-recording combines sound effects, dialog, music and
laughter or applause to complete the final product. In addition, the
re-recording process allows the enhancement of the listening experience by
adding specialized sound treatments, such as stereo, Dolby Digital(R), SDDS(R),
THX(R) and Surround Sound(R).

AUDIO LAYBACK. Audio layback is the process of creating duplicate videotape
masters with sound tracks that are different from the original recorded master
sound track. Content owners selling their assets in foreign markets require the
replacement of dialog with voices speaking local languages. In some cases, all
of the audio elements, including dialog, sound effects, music and laughs, must
be recreated, remixed and synchronized with the original videotape. Audio
sources are premixed foreign language tracks or tracks that contain music and
effects only. The latter is used to make a final videotape product that will be
sent to a foreign country to permit addition of a foreign dialogue track to the
existing music and effects track.

FOREIGN LANGUAGE MASTERING. Programming designed for distribution in markets
other than those for which it was originally produced is prepared for export
through language translation and either subtitling or voice dubbing. The Company
provides dubbed language versioning with an audio layback and conform service
that supports various audio and videotape formats to create an international
language-specific master videotape. The Company's Burbank facility also creates
music and effects tracks from programming shot before an audience to prepare
television sitcoms for dialog recording and international distribution.

SYNDICATION. The Company offers a broad range of technical services to domestic
and international programmers. The Company services the basic and premium cable,
broadcast syndication and direct-to-home market segments by providing the
facilities and services necessary to assemble and distribute programming via
satellite to viewers in the United States, Canada and Europe. The Company
provides facilities and services for the delivery of syndicated television

programming in the United States and Canada. The Company's customer base
consists of the major studios and independent distributors offering network
programming, world-wide independent content owners offering niche market
programming, and pay-per-view services marketing movies and special events to
the cable industry and direct-to-home viewers. Broadcast and syndication
operations are conducted in Hollywood and West Los Angeles.

ARCHIVAL SERVICES. The Company currently stores more than two million videotape
and film elements in a protected environment. The storage and handling of
videotape and film elements require specialized security and environmental
control procedures. The Company operates a state-of-the-art secure management
system in its West Los Angeles and Hollywood facilities, trade named Reel-SafeSM
. The Company intends to install this system in its other facilities over the
next few years. The Company believes this system is the most advanced in the
media industry with respect to security, environmental control and access
features. The Company offers on-line access to archival information for
advertising clients, and may offer this service to other clients in the future.

DISTRIBUTION NETWORK

VDI operates a full service distribution network providing its
customers with reliable, timely and high quality distribution services. The
Company's historical customer base consists of motion picture and television
studios and post-production facilities located primarily in the Los Angeles
area. In 1997, the Company acquired Woodholly Productions ("Woodholly"),
Multi-Media Services, Inc. ("Multi-Media"), Video-It, Inc. ("Video-It") and Fast
Forward, Inc. ("Fast Forward"), providing it with a more diversified customer
base and facilities in New York, Chicago, San Francisco and additional
facilities in Los Angeles. In 1998, the Company acquired The Dub House, Inc.
(the "Dub House"), All Post, Inc. ("All Post"), and Dubs, Inc. ("Dubs"), which
substantially expanded its market share in Los Angeles. In 2000, the acquisition
of Creative Digital, Inc., based in Los Angeles, brought additional
post-production capabilities to the Company.

Commercials, trailers, electronic press kits and related distribution
instructions are typically collected at one of the Company's regional facilities
and are processed locally or transmitted to another regional facility for
processing. Orders are routinely received into the evening hours for delivery
the next morning. The Company has the ability to process customer orders from
receipt to transmission in less than one hour. Customer orders that require
immediate, multiple deliveries in remote markets are often delivered
electronically to and serviced by third parties with duplication and delivery
services in such markets. The Company provides the advantage of being able to
service customers from both of its primary markets (entertainment and
advertising) in all of its facilities to achieve the most efficient project
turnaround. The Company's network operates 24 hours a day.

For electronic distribution, a video master is digitized and delivered
by fiber optic, Internet, ISDN or satellite transmission to television stations
equipped to receive such transmissions. The Company currently derives a small
percentage of its revenues from electronic deliveries and anticipates that this
percentage will increase as such technologies become more widely adopted.

The Company intends to add new methods of distribution as technologies
become both standardized and cost-effective. The Company currently operates
facilities in Los Angeles (six locations), New York, Chicago, Dallas and San
Francisco. By capitalizing on electronic technologies to link instantaneously
all of the Company's facilities, the Company is able to optimize delivery, thus
extending the deadline for same- or next-day delivery of time-sensitive
material.

As the Company continues to develop and acquire facilities in new
markets, its network enables it to maximize the usage of its network-wide
capacity by instantaneously transmitting video content to facilities with
available capacity. The Company's network and facilities are designed to serve,
cost-effectively, the time-sensitive distribution needs of its clients.
Management believes that the Company's success is based on its strong customer
relationships that are maintained through the reliability, quality and
cost-effectiveness of its services, and its extended deadline for processing
customer orders.

NEW MARKETS

The Company believes that the development of its network and its array
of value-added services will provide the Company with the opportunity to enter
or significantly increase its presence in several new or expanding markets.

INTERNATIONAL. The Company currently provides video duplication services for
suppliers to international markets. Through the Woodholly Acquisition, the
Company acquired and subsequently has leveraged this capability by offering
access to international markets to its entire customer base. Further, the
Company believes that electronic distribution methods will facilitate its
expansion into the international distribution arena as such technologies become
standardized and cost-effective. In addition, the Company believes that the
growth in the distribution of domestic content into international markets will
create increased demand for value-added services currently provided by the
Company such as standards conversion and audio and digital mastering.

HIGH DEFINITION TELEVISION (HDTV). The Company is focused on capitalizing on
opportunities created by emerging industry trends such as the emergence of
digital television and its more advanced variant, high-definition television.
HDTV has quickly become the mastering standard for domestic content providers.
The Company believes that the aggressive timetable associated with such
conversion, which has resulted both from recent mandates by the Federal
Communications Commission (the "FCC") for digital television and high-definition
television as well as competitive forces in the marketplace, is likely to
accelerate the rate of increase in the demand for these services. The Company
opened a state-of-the-art HDTV center at its Burbank, California, facility in
2000.

DVD AUTHORING. Digital formats, such as DVD, have the potential to overtake VHS
videocassettes in the home video market. Industry research shows that DVD sales
will surpass VHS videocassettes by 2003. The Company believes that there are
significant opportunities in this market. With the increasing rate of conversion
of existing analog libraries, as well as new content being mastered to digital
formats, we believe that the Company has positioned itself well to provide
value-added services to new and existing clients. The Company has made capital
investments to expand and upgrade its current DVD and digital compression
operations in anticipation of the increasing demand for DVD and video encoding
services.

SALES AND MARKETING

The Company markets its services through a combination of industry
referrals, formal advertising, trade show participation, special client events,
and its Internet website. While VDI relies primarily on its reputation and
business contacts within the industry for the marketing of its services, the
Company also maintains a direct sales force to communicate the capabilities and
competitive advantages of the Company's services to potential new customers. In
addition, the Company's sales force solicits corporate advertisers who may be in
a position to influence agencies in directing deliveries through the Company.
The Company currently has sales personnel located in Los Angeles, San Francisco,
Chicago and New York. The Company's marketing programs are directed toward
communicating its unique capabilities and establishing itself as the predominant
value-added distribution network for the motion picture and advertising
industries.

In addition to its traditional sales efforts directed at those
individuals responsible for placing orders with VDI's facilities, the Company
also strives to negotiate "preferred vendor" relationships with its major
customers. Through this process, the Company negotiates discounted rates with
large volume clients in return for being promoted within the client's
organization as an established and accepted vendor. This selection process tends
to favor larger service providers such as VDI that (i) offer lower prices
through scale economies; (ii) have the capacity to handle large orders without
outsourcing to other vendors; and (iii) can offer a strategic partnership on
technological and other industry-specific issues. To date, the Company has
successfully negotiated four such agreements with major entertainment studios
and national broadcast networks.

CUSTOMERS

Since its inception in 1990, VDI has added customers and increased its
sales through acquisitions and by delivering a favorable mix of reliability,
timeliness, quality and price. The integration of the Company's regional
facilities has given its customers a time advantage in the ability to deliver
broadcast quality material. The Company markets its services to major and
independent motion picture and television production companies, advertising
agencies, television program suppliers and, on a more limited basis, national
television networks, infomercial providers, local television stations,
television program syndicators, corporations and educational institutions. The
Company's motion picture clients include Disney, Sony Pictures Entertainment,
Twentieth Century Fox, Universal Studios, Warner Bros., Metro-Goldwyn-Mayer and
Paramount Pictures. The Company's advertising agency customers include
TBWA/Chiat Day, Young & Rubicam and Saatchi & Saatchi.

The Company solicits the motion picture and television industries,
advertisers and their agencies to generate revenues. In the year ended December
31, 2000, the seven major motion picture studios accounted for approximately 37%
of the Company's revenues. No single customer accounted for greater than 10% of
the Company's revenues for the year ended December 31, 2000.

The Company generally does not have exclusive service agreements with
its clients. Because clients generally do not make arrangements with the Company
until shortly before its facilities and services are required, the Company
usually does not have any significant backlog of service orders. The Company's
services are generally offered on an hourly or per unit basis based on volume.

CUSTOMER SERVICE

VDI believes it has built its strong reputation in the market with a
commitment to customer service. VDI receives customer orders via courier
services, telephone, telecopier and the Internet. The customer service staff
develops strong relationships with clients within the studios and advertising
agencies and is trained to emphasize the Company's ability to confirm delivery,
meet difficult delivery time frames and provide reliable and cost-effective
service. Several studios are customers because of the Company's ability to meet
often changing or rush delivery schedules.

The Company has a customer service staff of approximately 75 people, at
least one member of which is available 24 hours a day. This staff serves as a
single point of problem resolution and supports not only the Company's
customers, but also the television stations and cable systems to which the
Company delivers.

COMPETITION

The video duplication and distribution industry is a highly competitive
service-oriented business. Certain competitors (both independent companies and
divisions of large companies) provide all or most of the services provided by
the Company, while others specialize in one or several of these services.
Substantially all of the Company's competitors have a presence in the Los
Angeles area, which is currently the largest market for the Company's services.
Due to the current and anticipated future demand for video duplication and
distribution services in the Los Angeles area, the Company believes that both
existing and new competitors may expand or establish video service facilities in
this area.

The Company believes that it maintains a competitive position in its
market by virtue of the quality and scope of the services it provides, and its
ability to provide timely and accurate delivery of these services. The Company
believes that prices for its services are competitive within its industry,
although some competitors may offer certain of their services at lower rates
than the Company.

The principal competitive factors affecting this market are
reliability, timeliness, quality and price. The Company competes with a variety
of duplication and distribution firms, certain post-production companies and, to
a lesser extent, the in-house operations of major motion picture studios and ad
agencies. Some of these competitors have long-standing ties to clients that will
be difficult for the Company to change. Several companies have systems for
delivering video content electronically. Moreover, some of these firms, such as
Vyvx (a subsidiary of the Williams Companies), Digital Generation Systems, Inc.,
Liberty Live Wire and other post-production companies may have greater
financial, operational and marketing resources, and may have achieved a higher
level of brand recognition than the Company. As a result, there is no assurance
that the Company will be able to compete effectively against these competitors
merely on the basis of reliability, timeliness, quality, price or otherwise.

EMPLOYEES

The Company had 517 full-time employees as of December 31, 2000. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good.

ITEM 2. PROPERTIES

The Company currently leases all 16 of its facilities. Nine of these
facilities have production capabilities and/or sales activities, five are
storage vaults and one is used as the Company's corporate offices. The lease
terms expire at various dates from December 2001 to October 2008. The following
table sets forth the location and approximate square footage of the Company's
properties as of December 31, 2000:

SQUARE
LOCATION FOOTAGE

Hollywood, CA............................................................ 9,475
Hollywood, CA............................................................ 45,000
Hollywood, CA............................................................ 4,000
Hollywood, CA............................................................ 7,200
Hollywood, CA............................................................ 13,000
Hollywood, CA............................................................ 27,000
Hollywood, CA............................................................ 13,400
Burbank, CA.............................................................. 32,000
Burbank, CA.............................................................. 10,000
North Hollywood, CA...................................................... 27,000
Los Angeles, CA.......................................................... 4,000
Santa Monica, CA......................................................... 13,400
San Francisco, CA........................................................ 10,200
Chicago, IL.............................................................. 12,200
New York, NY............................................................. 9,000
Dallas, TX............................................................... 11,300

ITEM 3. LEGAL PROCEEDINGS

From time to time the Company may become a party to various legal
actions and complaints arising in the ordinary course of business, although it
is not currently involved in any material legal proceedings.

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

No matters were submitted to the Company's stockholders for a vote
during the fourth quarter of the fiscal year covered by this report.

PART II

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

MARKET INFORMATION

The Company's Common Stock is traded on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") National Market
("NNM") under the symbol VDIM. The following table sets forth, for the periods
indicated, the high and low closing bid price per share for the Common Stock.

COMMON STOCK
LOW HIGH

YEAR ENDED DECEMBER 31, 1999
First Quarter ................................................... $ 4.25 $10.38
Second Quarter................................................... 5.13 8.00
Third Quarter.................................................... 6.44 11.50
Fourth Quarter................................................... 8.25 15.00
YEAR ENDED DECEMBER 31, 2000
First Quarter ................................................... $12.63 $14.50
Second Quarter................................................... 6.19 14.08
Third Quarter.................................................... 3.13 7.00
Fourth Quarter................................................... 2.50 5.69

On March 30, 2001, the closing sale price of the Common Stock as reported on the
NNM was $1.50 per share. As of March 30, 2001, there were 1,057 holders of
record of the Common Stock.

DIVIDENDS

The Company did not pay dividends on its Common Stock during the years
ended December 31, 1999 or 2000. The Company's ability to pay dividends depends
upon limitations under applicable law and covenants under its bank agreements.
The Company currently does not intend to pay any dividends on its Common Stock
in the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following data, insofar as they relate to each of the years 1996 to
2000, have been derived from the Company's annual financial statements. For
1997, 1998 and 1999, certain adjustments have been made to previously reported
amounts. Fiscal 2000 results also reflect the changed accounting practices and
other significant adjustments described in "Management's Discussion and Analysis
of Financial Condition and Results of Operations." This information should be
read in conjunction with the Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. All amounts are shown in thousands,
except per share data.

YEAR ENDED DECEMBER 31,
-----------------------

1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(as restated) (as restated) (as restated)

STATEMENT OF INCOME DATA (1)
Revenues.............................................. $ 24,780 $ 40,772 $ 59,697 $ 78,248 $ 74,841
Cost of goods sold.................................... 14,933 25,381 36,902 47,685 45,894
--------- --------- --------- --------- ---------
Gross profit.......................................... 9,847 15,391 22,795 30,563 28,947
Selling, general and administrative expense........... 5,720 9,253 13,201 18,473 21,994
--------- --------- --------- --------- ---------
Operating income ..................................... 4,127 6,138 9,594 12,090 6,953
Interest expense, net................................. 223 68 976 2,147 2,889
Provision for income tax (2).......................... 68 2,379 3,577 4,340 1,814
--------- --------- --------- --------- ---------
Income before extraordinary item
and adoption of SAB 101(4)............................ $ 3,836 $ 3,691 $ 5,041 $ 5,603 $ 2,250
Extraordinary item (net of tax benefit of $168)(3).... - - - - (232)
Cumulative effect of adopting SAB 101 (4)............. - - - - (322)
--------- --------- --------- --------- ---------
Net income............................................ $ 3,836 $ 3,691 $ 5,041 $ 5,603 $ 1,696
========= ========= ========= ========= =========
Earnings per share:
Basic:
Income per share before extraordinary item
and adoption of SAB 101............................... $ 0.58 $ 0.40 $ 0.52 $ 0.60 $ 0.24
Extraordinary item (3)................................ - - - - (0.03)
Cumulative effect of adopting SAB 101 (4)............. - - - - (0.03)
--------- --------- --------- --------- ---------
Net income............................................ $ 0.58 $ 0.40 $ 0.52 $ 0.60 $ 0.18
Diluted:
Income per share before extraordinary item
and adoption of SAB 101............................... $ 0.58 $ 0.40 $ 0.51 $ 0.58 $ 0.24
Extraordinary item (3)................................ - - - - (0.03)
Cumulative effect of adopting SAB 101 (4)............. - - - - (0.03)
--------- --------- --------- --------- ---------
Net income............................................ $ 0.58 $ 0.40 $ 0.51 $ 0.58 $ 0.18

Weighted Average Common Shares Outstanding
Basic................................................. 6,660 9,123 9,737 9,322 9,216
Diluted............................................... 6,660 9,208 9,816 9,599 9,491

Pro forma net income and earnings per share data
for the periods shown as if SAB 101 had been
adopted at the beginning of each applicable year (6)
Previously reported net income........................ $ 5,041 $ 5,603
Adjustment............................................ (253) (81)
--------- ---------
Pro forma net income.................................. $ 4,788 $ 5,522
========== =========
Pro forma earnings per share:
Basic -
Previously reported................................... $ 0.52 $ 0.60
Adjustment............................................ (0.03) -
---------- ---------
Pro forma............................................. $ 0.49 $ 0.60
========== =========
Diluted -
Previously reported................................... $ 0.51 $ 0.58
Adjustment............................................ (0.03) (0.01)
---------- ---------
Pro forma............................................. $ 0.48 $ 0.57
========== =========

YEAR ENDED DECEMBER 31,
-----------------------

1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(as restated) (as restated) (as restated)
OTHER DATA
EBITDA (5)............................................ $ 5,781 $ 9,835 $ 14,320 $ 16,878 $ 12,171
Cash flows provided by operating activities........... 6,306 5,809 5,821 12,023 10,963
Cash flows used in investing activities............... (1,191) (13,397) (33,406) (11,668) (9,488)
Cash flows (used in) provided by financing activities. (4,966) 9,945 26,712 (1,553) (1,556)
Capital expenditures.................................. 1,191 1,178 6,199 6,181 9,717

SELECTED BALANCE SHEET DATA
Cash and cash equivalents............................. $ 564 $ 2,921 $ 2,048 $ 3,030 $ 769
Working capital ...................................... 1,925 5,354 8,863 1,195 12,701
Property and equipment, net........................... 3,520 7,325 16,723 19,564 25,236
Total assets.......................................... 11,178 32,617 63,940 72,931 77,661
Borrowings under revolving credit agreements.......... - 1,086 233 5,888 -
Long-term debt, net of current portion................ 1,177 1,279 22,448 16,501 31,054
Shareholders' equity.................................. 5,241 21,242 28,351 30,941 32,919

- -----------
(1) During 2000, the Company restated financial results of 1997, 1998 and
1999 to reflect (i) expensing repairs and maintenance costs on
equipment when incurred rather than capitalizing such costs and
depreciating them in future periods; (ii) depreciating leasehold
improvements over the shorter of the estimated useful asset life or
the remaining lease term rather than ten years; (iii) the retroactive
write off of undepreciated leasehold improvements to correspond to
certain lease termination dates; (iv) accrual of legal costs incurred
for a failed merger to the year in which the expenses were incurred;
and (v) increase of tax provision for nondeductible items in 1999.
Reductions in 1997 pre-tax and net income of $483,000 and $290,000,
respectively, relate to the expensing of repairs and maintenance costs
on equipment when incurred rather than capitalizing such costs and
depreciating them in future periods.

(2) Prior to its initial public offering, the Company was exempt from
payment of federal income taxes and had paid certain state income
taxes at a reduced rate as a result of its S Corporation status. Prior
to the closing of the initial public offering in February 1997, the
Company's shareholders elected to terminate the Company's S
Corporation status. As a result of terminating the Company's S
Corporation status, the Company was required to record a one-time,
non-cash charge against historical earnings for additional deferred
taxes based upon the increase in the effective tax rate from the
Company's S Corporation status (1.5%) to C Corporation status (40%).
This charge of $184,000 occurred in the quarter ending March 31, 1997.

(3) Amount represents the write off of deferred financing costs, net of
tax benefit, related to a bank credit agreement which was terminated
in Fiscal 2000.

(4) Effective January 1, 2000, the Company adopted Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. The amount represents the cumulative effect, net of tax,
on January 1, 2000 retained earnings as if SAB 101 had been adopted
prior to Fiscal 2000. See Note 2 of Notes to Consolidated Financial
Statements elsewhere in this Form 10-K.

(5) EBITDA is defined herein as earnings before interest, taxes,
depreciation and amortization. EBITDA does not represent cash
generated from operating activities in accordance with Generally
Accepted Accounting Principles ("GAAP"), is not to be considered as an
alternative to net income or any other GAAP measurements as a measure
of operating performance and is not necessarily indicative of cash
available to fund all cash needs. While not all companies calculate
EBITDA in the same fashion and therefore EBITDA as presented may not
be comparable to other similarly titled measures of other companies,
management believes that EBITDA is a useful measure of cash flow
available to the Company to pay interest, repay debt, make
acquisitions or invest in new technologies. The Company is currently
committed to use a portion of its cash flows to service existing debt,
if outstanding, and, furthermore, anticipates making certain capital
expenditures as part of its business plan.

(6) Net income would not have been affected in 1996 or 1997 had SAB 101
been adopted at the beginning of those periods.

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

Except for the historical information contained herein, certain
statements in this annual report are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995, which involve certain
risks and uncertainties, which could cause actual results to differ materially
from those discussed herein, including but not limited to competition, customer
and industry concentration, depending on technological developments, risks
related to expansion, dependence on key personnel, fluctuating results and
seasonality and control by management. See the relevant discussions in the
Company's documents filed with the Securities and Exchange Commission, including
the Company's registration statement on Form S-1 as declared effective on
February 14, 1997, and Cautionary Statements and Risk Factors in this Item 7,
for a further discussion of these and other risks and uncertainties applicable
to the Company's business.

OVERVIEW

The Company generates revenues principally from duplication,
distribution and ancillary services. Duplication services are comprised of the
physical duplication of video materials from a source video or audiotape
"master" to a target tape "clone." Distribution services include the physical or
electronic distribution of video and audio materials to a customer-designated
location utilizing one or more of the Company's delivery methods. Distribution
services typically consist of deliveries of national television spot commercials
and electronic press kits and associated trafficking instructions to designated
stations and supplemental deliveries to non-broadcast destinations. Ancillary
services include video and audio editing, element storage, closed captioning,
transcription services, standards conversion, video encoding for air play
verification, audio post-production and layback and foreign language mastering.

RESULTS OF OPERATIONS

During 2000, the Company restated financial results of prior years. The
adjustments are summarized as follows (in thousands):

DECREASE INCOME
---------------
BEFORE TAX BENEFIT AFTER TAX BENEFIT
------------------ -----------------

ADJUSTMENTS TO PREVIOUSLY ISSUED FISCAL FISCAL FISCAL FISCAL
FINANCIAL STATEMENTS: 1998 1999 1998 1999
--------------------- ---- ---- ---- ----
To expense repairs and maintenance costs that were
previously capitalized $ 448 $ 1,143 $ 269 $ 686
To depreciate leasehold improvements over the
proper period and to write off any undepreciated
amounts at the lease termination date - 221 - 133
To recognize merger expenses in the period incurred - 408 - 245
To revise the provision for income taxes - - - 180
------- ------- ------- -------
Total $ 448 $ 1,772 $ 269 $ 1,244
======= ======= ======= =======

The cumulative effect on retained earnings as of January 1, 1998 was a reduction
of $290,000, net of tax. The following table sets forth the amount and
percentage relationship to revenues of certain items included within the
Company's Consolidated Statement of Income for the years ended December 31,
1998, 1999 and 2000, after giving effect to the above adjustments. The
commentary below is based on the restated financial statements.

YEAR ENDED DECEMBER 31
----------------------
(dollars in thousands)
1998 1999 2000
---- ---- ----

PERCENT PERCENT PERCENT
OF OF OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ -------- ------ -------- ------ --------
(as restated) (as restated)

Revenues............................................. $ 59,697 100.0% $ 78,248 100.0% $ 74,841 100.0%
Costs of goods sold.................................. 36,902 61.8 47,685 60.9 45,894 61.3
--------- -------- ---------- --------- --------- --------
Gross profit......................................... 22,795 38.2 30,563 39.1 28,947 38.7
Selling, general and administrative expense.......... 13,201 22.1 18,473 23.6 21,994 29.4
--------- -------- ---------- --------- --------- --------
Operating income..................................... 9,594 16.1 12,090 15.5 6,953 9.3
Interest expense, net................................ 976 1.6 2,147 2.7 2,889 3.9
Provision for income taxes........................... 3,577 6.0 4,340 5.5 1,814 2.4
--------- -------- ---------- --------- --------- --------
Income before extraordinary item and
adoption of SAB 101.................................. 5,041 8.4 5,603 7.2 $ 2,250 3.0
Extraordinary item (net of tax benefit of $168)...... - - - - (232) (0.3)
Cumulative effect on prior years of
adopting SAB 101..................................... - - - - (322) (0.4)
--------- -------- ---------- --------- --------- --------
Net income .......................................... $ 5,041 8.4% $ 5,603 7.2% $ 1,696 2.3%
========= ======== ========== ========= ========= ========

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

REVENUES. Revenues decreased by $3.4 million or 4.4% to $74.8 million
for the year ended December 31, 2000 compared to $78.2 million for the year
ended December 31, 1999. This decrease in revenue was due to a decrease in the
use of the Company's services in 2000 by certain customers resulting from
service failures that occurred during the integration of its two largest
facilities in 1999, and the loss of certain key sales personnel in 2000.
Revenues were also negatively impacted by an actors' strike in the advertising
industry.

GROSS PROFIT. Gross profit decreased $1.7 million or 5.3% to $28.9
million for the year ended December 31, 2000 compared to $30.6 million for the
year ended December 31, 1999. As a percentage of revenues, gross profit
decreased from 39.1% to 38.7%. The decrease in gross profit as a percentage of
revenues was due to increased depreciation associated with investments in high
definition equipment.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $3.5 million or 19.1% to $22.0 million for the
year ended December 31, 2000 compared to $18.5 million for the year ended
December 31, 1999. As a percentage of revenues, selling, general and
administrative expense increased to 29.4% for the year ended December 31, 2000
compared to 23.6% for the year ended December 31, 1999. This increase was due to
an increase in the provision for doubtful accounts of $1.4 million, $0.5 million
of severance costs, increased wages related to new management appointments and
increased depreciation related to investments in computer systems. Additionally,
in 2000, the Company recognized $0.8 million in expenses related to the proposed
merger with an affiliate of Bain Capital, which was terminated in April 2000,
compared to $0.4 million in 1999. The increase in the provision for doubtful
accounts resulted from numerous delinquent accounts which, in management's
judgment, were deemed to be no longer collectible in the fourth quarter due to
the age of the account, financial condition of the customer or the inability to
resolve disputes.

OPERATING INCOME. Operating income decreased $5.1 million or 42.5% to
$7.0 million for the year ended December 31, 2000 compared to $12.1 million for
the year ended December 31, 1999. As a percentage of revenue, operating income
decreased from 15.5% to 9.3%.

INTEREST EXPENSE. Interest expense, net, increased 34.6% from $2.1
million in 1999 to $2.9 million in 2000. This increase was due to increased
borrowings under the Company's debt agreements.

INCOME TAXES. The Company's effective income tax rate was 45.5% for
2000 and 43.7% for 1999 due to the effect of permanent differences on a lower
pre-tax income base.

EXTRAORDINARY ITEM. During 2000, the Company wrote off $0.4 million of
deferred financing costs related to prior credit facilities that were
terminated. This item was treated as an extraordinary item in Fiscal 2000 and is
reported net of income taxes.

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 will now recognize these revenues when
the entire project is completed.

NET INCOME. Net income for the year ended December 31, 2000 decreased
$3.9 million or 69.7% to $1.7 million compared to $5.6 million for the year
ended December 31, 1999.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

REVENUES. Revenues increased by $18.6 million or 31.1% to $78.2 million
for the year ended December 31, 1999 compared to $59.7 million for the year
ended December 31, 1998. This increase in revenue was due to increased volume
resulting from (i) the acquisitions of All Post and the Dub House in June 1998
and Dubs in November 1998, and (ii) increased marketing of the Company's media
services.

GROSS PROFIT. Gross profit increased $7.8 million or 34.1% to $30.6
million for the year ended December 31, 1999 compared to $22.8 million for the
year ended December 31, 1998. As a percentage of revenues, gross profit
increased from 38.2% to 39.1%. The increase in gross profit as a percentage of
revenues was due primarily to the lower cost of direct materials resulting from
scale purchasing discounts and the effect of changing depreciation lives of
certain property and equipment from five to seven years as of January 1, 1999,
partially offset by increased wages which resulted primarily from additional
overtime related to the integration of two of the Company's largest facilities.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $5.3 million or 39.9% to $18.5 million for the
year ended December 31, 1999 compared to $13.2 million for the year ended
December 31, 1998. As a percentage of revenues, selling, general and
administrative expense increased to 23.6% for the year ended December 31, 1999
compared to 22.1% for the year ended December 31, 1998. This increase was due to
increased amortization costs associated with acquisitions, an increase in the
Company's provision for doubtful accounts and the incurrence of $0.4 million in
expenses related to the proposed merger with an affiliate of Bain Capital, which
was terminated in April 2000.

OPERATING INCOME. Operating income increased $2.5 million or 26.0% to
$12.1 million for the year ended December 31, 1999 compared to $9.6 million for
the year ended December 31, 1998. As a percentage of revenue, operating income
decreased from 16.1% to 15.5%.

INTEREST EXPENSE. Interest expense, net, increased 120.0% from $1.0
million in 1998 to $2.1 million in 1999. This increase was due to increased
borrowings under the Company's debt agreements related to the acquisitions of
the Dub House, All Post and Dubs.

INCOME TAXES. The Company's effective income tax rate was 43.7% for
1999 and 41.5% for 1998.

NET INCOME. Net income for the year ended December 31, 1999 increased
$0.6 million or 11.1% to $5.6 million compared to $5.0 million for the year
ended December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations through
internally generated cash flow, borrowings under lending agreements with
financial institutions, the initial public offering and, to a lesser degree,
borrowings from related parties. In the first quarter of 1997, the Company
completed its initial public offering. The net proceeds of the initial public
offering to the Company were approximately $17.9 million after deducting the
underwriters' discounts and commissions and offering expenses.

At December 31, 2000, the Company's cash and cash equivalents
aggregated $0.8 million and net working capital was $12.7 million. The Company's
operating activities provided cash of $5.8 million in 1998, $12.0 million in
1999 and $11.0 million for the year ended December 31, 2000.

The Company's investing activities used cash of $33.4 million in 1998,
$9.5 million in 1999 and $11.7 million 2000. Investing activities during 2000
included the expenditure of $9.7 million for the addition and replacement of
capital equipment, including approximately $6.0 million for investments in HDTV
technologies. The Company's business is equipment intensive, requiring periodic
expenditures of cash or the incurrence of additional debt to acquire additional
video equipment in order to increase capacity or replace existing equipment. The
Company expects to spend approximately $4.0 million during 2001 on capital
expenditures for the addition and replacement of equipment and for management
information system upgrades. Other than capital expenditures, net cash used in
investing activities was for acquisitions in all three years.

The Company's financing activities provided cash of $26.7 million in
1998 and used cash of $1.6 million in 1999 and 2000. Cash flows from financing
activities during the year ended December 31, 2000 include the use of $0.7
million to repurchase 171,400 shares of the Company's common stock.

In September 2000, the Company entered into a credit agreement with a
group of banks providing a revolving credit facility ("Facility") of up to
$45,000,000. The facility was used to repay previously outstanding amounts under
prior agreements and may be used to 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 borrowing base
under the Facility 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 aggregate commitment under
the Facility will decline by $5,000,000 on December 31, 2002, 2003 and 2004. The
entire commitment expires on December 31, 2005. Loans under the Facility are
secured by substantially all of the Company's assets and include covenants
regarding the maintenance of various financial ratios.

As of December 31, 2000, the total amount outstanding under the
Facility was $31,024,000. After recording adjustments to write off previously
capitalized repairs and maintenance expense and the adoption of SAB 101, the
borrowing base under the Facility was $30,965,000 and the Company was not in
compliance with its financial covenants. The bank has waived compliance with the
covenants and the Company has renegotiated the breached financial covenants.

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

The Company reviews the acquisition of businesses complementary to its
current operations on an ongoing basis and, depending on the number, size and
timing of such transactions, may be required to secure additional financing.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of APB Opinion No. 25 ("APB 25"). FIN 44
clarifies the application of APB 25, including the following: the definition of
an employee for purposes of applying APB 25; the criteria for determining
whether a plan qualifies as a non-compensatory plan; the accounting consequences
of various modifications to the terms of previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 was effective July 1, 2000, but certain conclusions
in FIN 44 cover specific events that occurred after either December 15, 1998 or
January 1, 2000. Application of this pronouncement has not had a material impact
on the Company's financial position or results of operations.

In December 1999, the U.S. Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. SAB 101 summarizes the SEC's views in applying generally
accepted accounting principles to selected revenue recognition issues in
financial statements. In June 2000, the SEC issued SAB 101B, an amendment to SAB
101, which delays the implementation of SAB 101. The Company adopted SAB 101
effective January 1, 2000.

On June 15, 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. The standard, as amended by
Statement of Financial Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133, an amendment of FASB Statement No. 133, and Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133 (referred to hereafter as "FAS 133"), is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the
Company). FAS 133 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 current earnings or in other comprehensive income,
depending on whether a derivative is designated as part of a hedging
relationship and, if it is, depending on the type of hedging relationship. The
Company estimates that the effect of adopting FAS 133 on January 1, 2001 will be
to record a net-of-tax cumulative-effect-type adjustment of $179,000 (loss) in
earnings.

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:

* Our highly competitive marketplace.

* The risks associated with dependence upon significant customers.

* Our ability to execute our expansion strategy.

* The uncertain ability to manage growth.

* Our dependence upon and our ability to adapt to technological
developments.

* Dependence on key personnel.

* Our ability to maintain and improve service quality.

* Fluctuation in quarterly operating results and seasonality in certain
of our markets.

* Possible significant influence over corporate affairs by significant
shareholders.

* 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.

CUSTOMER AND INDUSTRY CONCENTRATION. Although we have an active client list of
over 2,500 customers, seven motion picture studios accounted for approximately
37% of the Company's revenues during the year ended December 31, 2000. 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
investment in the high definition television area. 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
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.

ITEM 7A. 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 December 31, 2000 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%.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE

Report of Independent Accountants.............................................16

Financial Statements:

Consolidated Balance Sheets -
December 31, 1999 and 2000....................................................18

Consolidated Statements of Income -
Fiscal Years Ended December 31, 1998, 1999 and 2000...........................19

Consolidated Statements of Shareholders' Equity -
Fiscal Years Ended December 31, 1998, 1999 and 2000...........................20

Consolidated Statements of Cash Flows -
Fiscal Years Ended December 31, 1998, 1999 and 2000...........................21

Notes to Consolidated Financial Statements....................................22

Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts...............................36

Consent of Independent Accountants............................................41

Schedules other than those listed above have been omitted since they are either
not required, are not applicable or the required information is shown in the
financial statements or the related notes.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of VDI MultiMedia

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of VDI MultiMedia ("the
Company") and its subsidiaries at December 31, 2000 and December 31, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company
restated its financial statements for the years ended December 31, 1999 and
1998.

As discussed in Note 2 to the consolidated financial statements, during the year
ended December 31, 2000 the Company changed its method of accounting for revenue
to conform to the requirements of SEC Staff Accounting Bulletin No. 101.

PricewaterhouseCoopers LLP (signed)
Century City, California
March 30, 2001

VDI MULTIMEDIA
CONSOLIDATED BALANCE SHEET
DECEMBER 31,

1999 2000
---- ----
(as restated)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 3,030,000 $ 769,000
Accounts receivable, net of allowances for doubtful accounts of $971,000 and
$1,473,000, respectively ................................................... 19,836,000 16,315,000
Notes receivable from officers (Note 12) ....................................... - 1,001,000
Income tax receivable........................................................... - 1,362,000
Inventories..................................................................... 1,122,000 1,031,000
Prepaid expenses and other current assets....................................... 948,000 2,066,000
Deferred income taxes........................................................... 1,259,000 1,574,000
----------- -----------
Total current assets............................................................ 26,195,000 24,118,000

Property and equipment, net (Note 4)............................................ 19,564,000 25,236,000
Other assets, net............................................................... 662,000 920,000
Goodwill and other intangibles, net (Note 3).................................... 26,510,000 27,387,000
----------- -----------
$72,931,000 $77,661,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 6,998,000 $ 8,850,000
Accrued expenses................................................................ 2,989,000 2,513,000
Income taxes payable............................................................ 599,000 -
Borrowings under revolving credit agreement (Note 5)............................ 5,888,000 -
Current portion of notes payable (Note 6)....................................... 8,309,000 -
Current portion of capital lease obligations (Note 6)........................... 217,000 54,000
----------- -----------
Total current liabilities....................................................... 25,000,000 11,417,000
----------- -----------
Deferred income taxes........................................................... 489,000 2,271,000
Notes payable, less current portion (Note 6).................................... 16,433,000 31,024,000
Capital lease obligations, less current portion (Note 6)........................ 68,000 30,000

Commitments and contingencies (Note 8)

Shareholders' equity
Preferred stock - no par value; 5,000,000 shares authorized; none outstanding - -
Common stock - no par value; 50,000,000 shares authorized; 9,210,697 and
9,162,670 shares issued and outstanding, respectively........................... 17,935,000 18,272,000
Retained earnings............................................................... 13,006,000 14,647,000
----------- -----------
Total shareholders' equity...................................................... 30,941,000 32,919,000
----------- -----------
$72,931,000 $77,661,000
=========== ===========

VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31,
-----------------------

1998 1999 2000
---- ---- ----
(as restated) (as restated)

Revenues........................................................................ $ 59,697,000 $ 78,248,000 $ 74,841,000
Cost of goods sold.............................................................. 36,902,000 47,685,000 45,894,000
------------ ------------ ------------
Gross profit.................................................................... 22,795,000 30,563,000 28,947,000

Selling, general and administrative expense..................................... 13,201,000 18,473,000 21,994,000
------------ ------------ ------------
Operating income................................................................ 9,594,000 12,090,000 6,953,000
Interest expense................................................................ 997,000 2,151,000 2,920,000
Interest income................................................................. 21,000 4,000 31,000
------------ ------------ ------------
Income before income taxes...................................................... 8,618,000 9,943,000 4,064,000
Provision for income taxes...................................................... 3,577,000 4,340,000 1,814,000
------------ ------------ ------------
Income before extraordinary item and
adoption of SAB 101 (Note 2).............................................. 5,041,000 5,603,000 2,250,000
Extraordinary item (net of tax benefit of $168,000) (Note 6).................... - - (232,000)
Cumulative effect of adopting SAB 101 (Note 2) - - (322,000)
------------ ------------ ------------
Net income...................................................................... $ 5,041,000 $ 5,603,000 $ 1,696,000
============ ============ ============
Earnings per share:
Basic:
Income per share before extraordinary item and adoption of SAB 101.............. $ 0.52 $ 0.60 $ 0.24
Extraordinary item.............................................................. - - (0.03)
Cumulative effect of adopting SAB 101 ......................................... - - (0.03)
------------ ------------ ------------
Net income...................................................................... $ 0.52 $ 0.60 $ 0.18
============ ============ ============
Weighted average number of shares.............................................. 9,737,392 9,322,249 9,216,163
Diluted:
Income per share before extraordinary item and adoption of SAB 101.............. $ 0.51 $ 0.58 $ 0.24
Extraordinary item.............................................................. - -
Cumulative effect of adopting SAB 101 ......................................... - - (0.03)
------------ ------------ ------------
Net income...................................................................... $ 0.51 $ 0.58 $ 0.18
============ ============ ============
Weighted average number of shares including the dilutive effect of
stock options (78,513, 276,305 and 275,261 for 1998, 1999 and
2000, respectively).......................................................... 9,815,905 9,598,554 9,491,424

The accompanying notes are an integral part of
these consolidated financial statements.

VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

COMMON STOCK TOTAL
------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- ------

Balance at December 31, 1997, as previously reported...... $ 9,580,000 $ 18,880,000 $ 2,652,000 $ 21,532,000
Effect on periods prior to 1998 of restatement
to financial statements (Note 2).......................... - - (290,000) (290,000)
Net income (as restated).................................. - - 5,041,000 5,041,000
Shares issued in connection with company
acquisitions.............................................. 30,770 342,000 - 342,000
Shares issued and tax benefit associated with
exercise of stock options................................. 165,324 1,726,000 - 1,726,000
------------ ------------ ------------ ------------
Balance at December 31, 1998 (as restated)................ 9,776,094 20,948,000 7,403,000 28,351,000
Net income (as restated).................................. - - 5,603,000 5,603,000
Shares repurchased in connection with stock
repurchase plan........................................... (572,700) (3,064,000) - (3,064,000)
Shares issued in connection with exercise
of stock options.......................................... 7,303 51,000 - 51,000
------------ ------------ ------------ ------------
Balance at December 31, 1999 (as restated)................ 9,210,697 17,935,000 3,006,000 30,941,000
Net income................................................ - - 1,696,000 1,696,000
Shares repurchased in connection with stock
repurchase plan........................................... (171,400) (710,000) - (710,000)
Shares issued and tax benefit associated with
exercise of stock options................................. 47,698 368,000 - 368,000
Shares issued in connection with company
acquisition............................................... 75,675 350,000 - 350,000
Non-cash compensation related to option
grants to consultants..................................... - 329,000 - 329,000
Distribution to shareholder (Note 1)...................... - - (55,000) (55,000)
------------ ------------ ------------ ------------
Balance at December 31, 2000................................. $ 9,162,670 $ 18,272,000 $ 14,647,000 $ 32,919,000
============ ============ ============ ============

The accompanying notes are an integral part of
these consolidated financial statements.

VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31,
-----------------------

1998 1999 2000
---- ---- ----
(as restated) (as restated)
Cash flows from operating activities:
Net income......................................................................$ 5,041,000 $ 5,603,000 $ 1,696,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................................... 4,726,000 4,788,000 5,773,000
Provision for doubtful accounts................................................. 51,000 790,000 2,195,000
Abandonment of leasehold improvements........................................... - 190,000 -
Deferred income taxes .......................................................... (297,000) 170,000 476,000
Noncash compensation charges.................................................... - - 329,000
Cumulative effect of adopting SAB 101........................................... - - 322,000
Extraordinary item.............................................................. - - 232,000
Changes in assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable...................................... 49,000 (3,297,000) 1,359,000
Decrease (increase) in inventories.............................................. 185,000 (388,000) 91,000
(Increase) decrease in prepaid expenses and other current assets................ (195,000) 28,000 (1,108,000)
(Increase) decrease in other assets............................................. (162,000) 109,000 (5,000)
(Decrease) increase in accounts payable......................................... (1,995,000) 2,518,000 1,683,000
(Decrease) increase in accrued expenses......................................... (1,906,000) 1,461,000 (668,000)
Increase in income taxes payable (receivable), net.............................. 326,000 51,000 (1,412,000)
------------- ------------ ------------
Net cash provided by operating activities....................................... 5,821,000 12,023,000 10,963,000

Cash used in investing activities:
Capital expenditures............................................................ (6,199,000) (6,181,000) (9,717,000)
Net cash paid for acquisitions.................................................. (27,207,000) (3,307,000) (1,951,000)
------------- ------------ -----------
Net cash used in investing activities........................................... (33,406,000) (9,488,000) (11,668,000)
-------------- ------------ -----------
Cash flows from financing activities:
S Corporation distributions to shareholders..................................... - - (55,000)
Issuance of notes receivable.................................................... - - (1,001,000)
Repurchase of common stock...................................................... - (3,064,000) (710,000)
Proceeds from exercise of stock options......................................... 1,157,000 51,000 256,000
Change in revolving credit agreement............................................ (853,000) 5,655,000 (5,888,000)
Deferred financing costs........................................................ - (365,000) (239,000)
Proceeds from bank note......................................................... 29,000,000 2,500,000 32,174,000
Repayment of notes payable...................................................... (1,846,000) (5,819,000) (25,892,000)
Repayment of capital lease obligations.......................................... (746,000) (511,000) (201,000)
------------- ------------ -----------
Net cash provided by (used in) financing activities............................. 26,712,000 (1,553,000) (1,556,000)
------------- ------------ -----------
Net (decrease) increase in cash................................................. (873,000) 982,000 (2,261,000)
Cash at beginning of period..................................................... 2,921,000 2,048,000 3,030,000
------------- ------------ -----------
Cash at end of period...........................................................$ 2,048,000 $ 3,030,000 $ 769,000
============= ============ ===========

The accompanying notes are an integral part of
these consolidated financial statements.

VDI MULTIMEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY:

VDI MultiMedia ("VDI" or the "Company") provides 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, archive and distribute its clients' video content, including
television programming, spot advertising and movie trailers. The Company
provides worldwide electronic distribution, using fiber optics and satellites.
The Company delivers commercials, movie trailers, electronic press kits,
infomercials and syndicated programming, by both physical and electronic means,
to thousands of broadcast outlets worldwide. The Company operates in one
reportable segment.

In February 1997, the Company completed the sale of a portion of its
common shares in an initial public offering ("IPO"). Prior to the offering, the
Company had elected S-Corporation status for federal and state income tax
purposes. As a result of the offering, the S-Corporation status terminated.
Thereafter, the Company has paid federal and state income taxes as a
C-Corporation. In connection with the termination of S-Corporation status, the
Company made a final $55,000 distribution to a shareholder in Fiscal 2000, which
has been recorded as a reduction of retained earnings.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.

RECLASSIFICATIONS

Certain previously reported amounts have been restated to conform to
classifications adopted in 2000.

ADJUSTMENTS TO PRIOR PERIOD FINANCIAL STATEMENTS

During 2000, the Company restated financial results of 1998 and 1999 to
reflect (i) expensing repairs and maintenance costs on equipment when incurred
rather than capitalizing such costs and depreciating them over future periods;
(ii) depreciating leasehold improvements over the shorter of the estimated
useful asset life or the remaining lease term rather than ten years; (iii) the
retroactive write off of undepreciated leasehold improvements to correspond to
certain lease termination dates; and (iv) accrual of legal costs incurred for a
failed merger to the year in which the expenses were incurred; and (v) increase
of tax provision for nondeductible items. The cumulative effect on retained
earnings as of January 1, 1998 was a reduction of $290,000, net of tax, which
related to the expensing of repairs and maintenance costs in 1997 rather than
capitalizing and subsequently depreciating such costs. The adjustments to fiscal
1998 and 1999 are summarized as follows (in thousands):

DECREASE INCOME
---------------
BEFORE TAX BENEFIT AFTER TAX BENEFIT
------------------ -----------------

(1) Charged to cost of goods sold.
(2) Charged to cost of goods sold and selling, general and administrative
expense.
(3) Charged to selling, general and administrative expense.

These adjustments reduced net income and basic and diluted net income per share
for such years as follows:

1998 1999
---- ----
Previously reported net income $ 5,310,000 $ 6,847,000
Adjustments (269,000) (1,244,000)
----------- -----------
As adjusted $ 5,041,000 $ 5,603,000
=========== ===========
Basic earnings per share:
Previously reported $ 0.55 $ 0.73
Adjustments (0.03) ( 0.13)
----------- -----------
As adjusted $ 0.52 $ 0.60
=========== ===========
Diluted earnings per share:
Previously reported $ 0.54 $ 0.71
Adjustments (0.03) (0.13)
----------- -----------
As adjusted $ 0.51 $ 0.58
=========== ===========

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash equivalents represent highly liquid short-term investments with
original maturities of less than three months.

REVENUES AND RECEIVABLES

The Company records revenues when the services have been completed.
Although sales and receivables are concentrated in the entertainment and
advertising industries, credit risk due to financial insolvency is limited
because of the financial stability of the customer base (i.e., large studios and
advertising agencies). However, in 2000, the Company's evaluation of accounts
receivable balances resulted in an increase in the reserve for doubtful accounts
of approximately $2.2 million which was related primarily to smaller entities.

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, net of tax benefit of $233,000. 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, revenues of $555,000 were
recognized in the year ended December 31, 2000 which were also recognized in the
year ended December 31, 1999.

The table below sets forth pro forma net income and earnings per share
data for the periods shown as if the change in accounting policy had been
adopted at the beginning of each year. See Note 13 for information on quarterly
data regarding the change in accounting policy.

1998 1999
---- ----
Previously reported (A) $ 5,041,000 $ 5,603,000
Adjustment (253,000) (81,000)
----------- -----------
Pro forma $ 4,788,000 $ 5,522,000
=========== ===========
Pro forma earnings per share:
Basic -
Previously reported (A) $ 0.52 $ 0.60
Adjustment (0.03) -
----------- -----------
Pro forma $ 0.49 $ 0.60
=========== ===========
Diluted -
Previously reported (A) $ 0.51 $ 0.58
Adjustment (0.03) (0.01)
----------- -----------
Pro forma $ 0.48 $ 0.57
=========== ===========

(A) After retroactive adjustments described above.

INVENTORIES

Inventories comprise raw materials, principally tape stock, and are
stated at the lower of cost or market. Cost is determined using the average cost
method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Expenditures for additions
and major improvements are capitalized. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the estimated useful lives of the improvements or the
remaining lease term. The estimated useful life of property and equipment is
seven years and leasehold improvements are ten years.

Effective January 1, 1999, the Company changed its estimate of useful
lives of property and equipment. During 1998 and prior, the Company depreciated
property and equipment over five years. In 1999, the Company began depreciating
its property and equipment over seven years. The Company believes that this
change best reflects the future benefit of property and equipment. Had the
Company not changed its estimate of useful lives, it would have resulted in
approximately $1,400,000 of additional depreciation expense in 1999.

GOODWILL AND OTHER INTANGIBLES

Goodwill is amortized on a straight-line basis over 20 years. Other
intangibles consist primarily of covenants not to compete and are amortized on a
straight-line basis over 3-5 years.

The Company identifies and records impairment losses on long-lived
assets, including goodwill that is not identified with an impaired asset, when
events and circumstances indicate that such assets might be impaired. Events and
circumstances that may indicate that an asset is impaired include significant
decreases in the market value of an asset, a change in the operating model or
strategy and competitive forces.

If events and circumstances indicate that the carrying amount of an
asset may not be recoverable and the expected undiscounted future cash flow
attributable to the asset is less than the carrying amount of the asset, an
impairment loss equal to the excess of the asset's carrying value over its fair
value is recorded. Fair value is determined based on the present value of
estimated expected future cash flows using a discount rate commensurate with the
risk involved, quoted market prices or appraised values, depending on the nature
of the assets. To date, no such impairment has been recorded.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
carrying amounts for financial reporting purposes and the tax basis of assets
and liabilities. A valuation allowance is recorded for that portion of deferred
tax assets for which it is more likely than not that the assets will not be
realized.

FAIR VALUE OF FINANCIAL INSTRUMENTS

To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments," the
Company calculates the fair value of financial instruments and includes this
additional information in the notes to financial statements when the fair value
is different than the book value of those financial instruments. When the fair
value is equal to the book value, no additional disclosure is made. The Company
uses quoted market prices whenever available to calculate these fair values.

The accrual method of accounting is used for the interest rate swap
agreement entered into by the Company which converts the interest rate on $15
million of the Company's variable-rate debt to a fixed rate (see Note 6). Under
the accrual method, each net payment or receipt due or owed under the derivative
is recognized in income in the period to which the payment or receipt relates.
Amounts to be paid/received under these agreements are recognized as an
adjustment to interest expense. The related amounts payable to/receivable, if
any, from the counter parties are included in other accrued liabilities. The
estimated fair value of the interest rate swap agreement is a net payable of
$309,000 at December 31, 2000.

ACCOUNTING FOR STOCK-BASED COMPENSATION

As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("FAS 123"), the Company measures
compensation costs in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, but provides pro forma disclosures
of net income and earnings per share using the fair value method defined by FAS
123. Under APB No. 25, compensation expense is recognized over the vesting
period based on the difference, if any, on the date of grant between the deemed
fair value for accounting purposes of the Company's stock and the exercise price
on the date of grant. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods and Services.

EARNINGS PER SHARE

The Company follows Statement of Financial Accounting Standards No.
128, Earnings per Share ("FAS 128") and related interpretations for reporting
Earnings per Share. FAS 128 requires dual presentation of Basic Earnings per
Share ("Basic EPS") and Diluted Earnings per Share ("Diluted EPS"). Basic EPS
excludes dilution and is computed by dividing net income by the weighted average
number of common shares outstanding during the reported period. Diluted EPS
reflects the potential dilution that could occur if stock options were exercised
using the treasury stock method.

COMPREHENSIVE INCOME

In 1998, the Company adopted Statement of SFAS No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The implementation of SFAS No. 130 did not
have an impact on the Company's results of operations.

SUPPLEMENTAL CASH FLOW INFORMATION

Selected cash payments and noncash activities were as follows:

1998 1999 2000
---- ---- ----
Cash payments for income taxes $ 3,779,000 $ 4,154,000 $ 2,447,000
Cash payments for interest 997,000 2,151,000 2,920,000

Noncash investing and financing activities:
Capitalized lease obligations incurred - 57,000 -
Tax benefits related to stock options 569,000 - 112,000

Detail of acquisitions:
Fair value of assets, net of cash acquired 14,031,000 - 147,000
Goodwill (1) 16,322,000 3,307,000 2,515,000
Liabilities (2) (3,145,000) - (711,000)
----------- ------------ ------------
Net cash paid for acquisitions $27,207,000 $ 3,307,000 $ 1,951,000
=========== ============ ============

(1) Includes additional purchase price payments made to former owners in
periods subsequent to various acquisitions of $1,157,000, $3,307,000 and
$1,353,000 in 1998, 1999 and 2000, respectively.

(2) Includes common stock issued to sellers totaling $342,000 in 1998 and
$350,000 in 2000.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2000, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB Opinion No.
25. FIN 44 clarifies the application of APB Opinion No. 25 ("APB 25") for (a)
the definition of an employee for purposes of applying APB 25, (b) the criteria
for determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 became effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a
significant impact on the Company's financial position, results of operations or
cash flows.

3. ACQUISITIONS

On November 3, 2000, the Company acquired the assets and assumed
certain liabilities of Creative Digital, Inc. ("Creative Digital"). The purchase
price of the transaction was approximately $1,309,000. This amount included
$500,000 paid in cash, $98,000 in estimated transaction costs and 75,675 shares
of VDI common stock valued at $350,000. The acquisition was accounted for using
the purchase method of accounting. The purchase price was allocated to the fair
value of net assets of $147,000 and goodwill of $1,162,000. Creative Digital
provides colorization, editing, and other post production services to major
motion picture studios and television producers. The Company may also pay up to
an additional $3,000,000 in earn-out payments if Creative Digital achieves
certain performance goals through 2005. No earn-out amounts have been paid as of
December 31, 2000.

On November 9, 1998, the Company acquired substantially all of the
assets of Dubs, Inc. ("Dubs"). Dubs provides full service duplication,
distribution, video content storage and ancillary services to major motion
picture studios and independent production companies for both domestic and
international use. As consideration, the Company paid Dubs $11,312,000, of which
$10,437,000 was paid in 1998 and $875,000 was paid in 1999.

On June 12, 1998, the Company acquired substantially all of the assets
of All Post, Inc. ("All Post). All Post provides full service duplication,
distribution, video content storage and ancillary services to major motion
picture studios and independent production companies for both domestic and
international use. As consideration, the Company paid All Post $13,000,000 in
1998.

On June 9, 1998, the Company acquired all of the assets of the Dub
House, Inc. ("Dub House"). The Dub House distributes broadcast media for
advertising agencies, independent producers and other broadcast media providers.
As consideration, the Company paid the owners of the Dub House $1,561,000 in
1998.

On November 21, 1997, the Company acquired all of the outstanding
shares of Fast Forward, Inc. ("Fast Forward"), a provider of video duplication
and distribution services primarily to advertising agencies and post production
companies. The purchase price consisted of $1,400,000 of cash, of which
$1,150,000 was paid during 1998, 30,770 shares of common stock which were issued
in December 31, 1997 and earn-out payments of up to $600,000 based upon Fast
Forward attaining certain performance goals through December 2000. As of
December 31, 2000, the Company has paid $405,000 in earn-out payments.

In August 1997, the Company acquired all of the outstanding capital
stock of Multi-Media Services, Inc. ("Multi-Media"). Multi-Media principally
provides video duplication, distribution, and content storage to major
advertising agencies. Through the acquisition of Multi-Media, the Company
acquired facilities in Los Angeles, Chicago, New York and San Francisco. The
purchase price paid by the Company for Multi-Media was $6,867,000 (including the
immediate repayment of $1,545,000 of indebtedness). In addition, the Company may
be required to pay, as an earn-out, up to an aggregate of $2,000,000, plus
interest from the closing date, in the event that Multi-Media, as a separate
subsidiary of the Company, achieves certain financial goals through December
2002. If Multi-Media fails to achieve the targeted results in any particular
quarter, the related earn-out payment will be deferred up to two years until the
results are achieved. No earn-out payments will be made after December 31, 2004.
As of December 31, 2000, the Company has paid $639,000 in earn-out payments.

On January 1, 1997, the Company acquired all of the assets and certain
liabilities of Woodholly Productions ("Woodholly"). Woodholly provides full
service video duplication, distribution, content storage and ancillary services
to major motion picture studios, advertising agencies and independent production
companies for both domestic and international use. As consideration, the Company
will pay the partners of Woodholly a maximum of $8,000,000, of which $4,000,000
was paid in January 1997. The remaining balance is subject to earn-out
provisions that are predicated upon Woodholly attaining certain operating income
goals, as set forth in the purchase agreement in each quarter through December
31, 2001. As of December 31, 2000, the Company has paid $2,877,000 in earn-out
payments.

The above acquisitions were accounted for as purchases, with the excess
of the purchase price over the fair value of the net assets acquired allocated
to goodwill. The contingent purchase price, to the extent earned, will be
recorded as an increase to goodwill and will be amortized over the remaining
useful life of the goodwill. As of December 31, 2000, based on prior performance
of the applicable acquired entities, there can be no assurance that additional
earn-out amounts will be paid. The consolidated financial statements reflect the
operations of the acquired companies since their respective acquisition dates.
Pro forma results of operations have not been presented for Creative Digital
because the effect of this acquisition would not be significant.

Goodwill and other intangibles, net consist of the following:

December 31,

1999 2000
---- ----
Goodwill $ 28,394,000 $ 30,889,000
Covenant not to compete 942,000 962,000
------------- -------------
$ 29,336,000 $ 31,851,000
Less accumulated amortization (2,826,000) (4,464,000)
-------------- -------------
$ 26,510,000 $ 27,387,000
============= =============

Amortization expense totaled $954,000, $1,581,000 and $1,638,000 for
the periods ended December 31, 1998, 1999 and 2000, respectively.

4. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

DECEMBER 31,
1999 2000
---- ----
(as restated)

Machinery and equipment $ 24,596,000 $ 32,615,000
Leasehold improvements 6,789,000 7,304,000
Equipment under capital lease 2,220,000 2,220,000
Computer equipment 1,920,000 3,165,000
------------- -------------
35,525,000 45,304,000
Less accumulated depreciation and
amortization (15,961,000) (20,068,000)
------------- -------------
$ 19,564,000 $ 25,236,000
============= =============

Depreciation expense totaled $3,772,000, $3,207,000 and $4,135,000 for
the periods ended December 31, 1998, 1999 and 2000, respectively.

5. REVOLVING CREDIT AGREEMENT:

On December 31, 1999, the Company had a $6,000,000 revolving credit
agreement with a bank. The outstanding borrowing on this line of credit was
$5,888,000 at December 31, 1999. The Company repaid all amounts outstanding
under the agreement in 2000.

6. LONG TERM DEBT AND NOTES PAYABLE:

TERM LOANS

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
Company had $22,233,000 outstanding on this loan at December 31, 1999. The term
loan was repaid in 2000 with the proceeds of a new borrowing arrangement with a
group of banks. Deferred financing costs related to the term loan of
approximately $232,000, net of tax benefit of $168,000, were concurrently
written off and treated as an extraordinary item during Fiscal 2000.

During 1999, the Company established a $2,500,000 note with the same
bank. At December 31, 1999, the Company had $2,500,000 outstanding on this note.
This note was repaid in 2000.

REVOLVING CREDIT

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 (as of December 31, 2000, the
borrowing base was $30,965,000). 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. At 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 (see Note 2). The bank has waived compliance with the
covenants and the Company has renegotiated the breached financial covenants.

INTEREST RATE SWAP

EQUIPMENT FINANCING AND CAPITAL LEASES

The Company has financed the purchase of certain equipment through the
issuance of notes payable and under capital leasing arrangements. The notes bear
interest at rates ranging from 6.10% to 18.35%. Such obligations are payable in
monthly installments through November 2002.

Annual maturities for debt, under both the Agreement and capital lease
obligations as of December 31, 2000, are as follows:

2001................................ $ 54,000
2002................................ 30,000
2003................................ -
2004................................ 1,024,000
2005................................ 30,000,000
------------
$ 31,108,000
============

7. INCOME TAXES:

The Company's provision for income taxes for the three years ended
December 31, 2000 consists of the following:

Year Ended December 31,
--------------------------------------------
1998 1999 2000
---- ---- ----
(as restated) (as restated)
Current tax expense:

Federal................................. $ 3,025,000 $ 3,201,000 $ 683,000
State................................... 849,000 969,000 254,000
------------ ------------ ------------
Total current........................... 3,874,000 4,170,000 937,000

Deferred tax (benefit) expense:
Federal................................. (278,000) 107,000 416,000
State................................... (19,000) 63,000 60,000
------------ ------------ ------------
Total deferred.......................... (297,000) 170,000 476,000
------------ ------------ ------------
Total provision for income taxes........ $ 3,577,000 $ 4,340,000 $ 1,413,000
============ ============ ============

The following is a reconciliation of the components of the provision
for income taxes for Fiscal 2000:

Provision for income taxes per the income statement $ 1,814,000
Extraordinary item tax benefit (168,000)
Cumulative effect tax benefit of adopting SAB 101 (233,000)
------------
Total provision for income taxes $ 1,413,000
============

The composition of the deferred tax assets (liabilities) at December
31, 1999 and December 31, 2000 are listed below.

1999 2000
---- ----
(as restated)

Accrued liabilities............................... $ 811,000 $ 617,000
Allowance for doubtful accounts................... 416,000 631,000
Other............................................. 32,000 326,000
------------ ------------
Total current deferred tax assets................. 1,259,000 1,574,000
------------ ------------
Property and equipment............................ (327,000) (2,212,000)
Non deductible goodwill and other intangibles .... (162,000) (138,000)
Other............................................. - 79,000
----------- ------------
Total non-current deferred tax liabilities........ (489,000) (2,271,000
----------- ------------
Net deferred tax asset (liability)................ $ 770,000 $ (697,000)
=========== ============

The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. Statutory income taxes rates to
income before taxes as a result of the following differences:

1999 2000
---- ----
Federal tax computed at statutory rate............ 34% 34%
State taxes, net of federal benefit............... 6% 6%
Non-deductible goodwill........................... 1% 5%
Other............................................. 3% 1%
---- ----
44% 46%
==== ====

8. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company leases office and production facilities in California,
Illinois, Texas and New York under various operating leases. Approximate minimum
rental payments under these noncancellable operating leases as of December 31,
2000 are as follows:

2001........................... $ 3,035,000
2002........................... 2,984,000
2003........................... 2,586,000
2004........................... 2,188,000
2005........................... 1,600,000
Thereafter..................... 3,262,000
------------
$ 15,655,000

Total rental expense was approximately $2,460,000, $3,251,000 and
$3,206,000 for the three years in the period ended December 31, 2000,
respectively.

9. STOCK REPURCHASE PLAN:

In February 1999, the Company announced that it would commence a stock
repurchase program. The Company did not set a target number of shares to be
repurchased. Instead, the board authorized the Company to allocate up to
$4,000,000 to purchase its common stock at suitable market prices. Under the
stock repurchase program, the Company may purchase outstanding shares in such
amounts and at such times and prices determined at the sole discretion of
management.

The funds for the stock repurchases were provided by an amendment to
the Company's existing credit agreement with a bank. There is no assurance that
the Company will repurchase the entire $4,000,000 of common stock. During 1999
and 2000, the Company repurchased $3,064,000 and $710,000 of common stock,
respectively.

10. STOCK INCENTIVE PLAN:

In May 1996, the Board of Directors, approved the 1996 Stock Incentive
Plan (the "1996 Plan"). The 1996 Plan provides for the award of options to
purchase up to 900,000 shares of common stock, as well as stock appreciation
rights, performance share awards and restricted stock awards. In July 1999, the
Company's shareholders approved an amendment to the 1996 Plan increasing the
number of shares reserved for grant to 2,000,000 and providing for automatic
increases of 300,000 shares on each August 1 thereafter to a maximum of
4,000,000 shares. As of December 31, 2000, there were 1,940,000 options
outstanding under the 1996 Plan and 440,000 options were available for grant.

In December 2000, the Company's Board of Directors adopted the 2000
Nonqualified Stock Option Plan (the "2000 Plan") providing for the award of
options to purchase up to 2,000,000 shares of common stock. Options may be
granted under the 2000 Plan solely to attract people who have not previously
been employed by the Company as a substantial inducement to join the Company. As
of December 31, 2000, there were 957,000 options outstanding under the plan and
1,043,000 options were available for grant.

Under both plans, the stock option price per share for options granted
is determined by the Board of Directors and is based on the market price of the
Company's common stock on the date of grant, and each option is exercisable
within the period and in the increments as determined by the Board, except that
no option can be exercised later than ten years from the date it was granted.
The stock options generally vest over one to five years and for some options,
earlier if the market price of the Company's common stock exceeds certain
levels.

In accounting for its plans, the Company, in accordance with the
provisions of FAS 123, applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." As a result of this election, the
Company does not recognize compensation expense for its stock option plans since
the exercise price of the options granted equals the fair value of the stock on
the date of grant. Had the Company determined compensation cost based on the
fair value for its stock options at grant date, as set forth under FAS 123, the
Company's net income and earning per share would have been reduced to the pro
forma amounts indicated below:

1998 1999 2000
---- ---- ----
Net income:

As reported.................................. $ 5,041,000 $ 5,603,000 $ 1,696,000
Pro forma.................................... 4,888,000 4,993,000 731,000
Earnings per share:
As reported:
Basic........................................ 0.52 0.60 0.18
Diluted...................................... 0.51 0.58 0.18
Pro forma:
Basic........................................ 0.50 0.54 0.08
Diluted...................................... 0.50 0.52 0.08

The fair value for these options was estimated at the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999 and 2000, respectively: expected volatility
of 63% and 70% and risk-free interest rates of 5.28% and 5.59%. A dividend yield
of 0% and expected life of five years was assumed for 1999 and 2000 grants. The
weighted average fair value of options granted in 1999 and 2000 were $4.37 and
$2.35, respectively. No options were granted during 1998.

Transactions involving stock options are summarized as follows:

NUMBER WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------

Balance at December 31, 1997........................ 337,660 $ 7.12

Exercised during 1998............................... (165,324) 7.00
Cancelled during 1998............................... (13,105) 7.00
--------- --------
Balance at December 31, 1998........................ 159,231 $ 7.24
--------- --------
Granted during 1999................................. 1,295,437 7.51
Exercised during 1999............................... (7,303) 7.00
Cancelled during 1999............................... ( 39,044) 7.00
---------- --------
Balance at December 31, 1999........................ 1,408,321 $ 7.50
---------- --------
Granted during 2000................................. 1,779,100 3.76
Exercised during 2000............................... (47,698) 5.37
Cancelled during 2000............................... (242,716) 6.12
---------- --------
Balance at December 31, 2000........................ 2,897,007 $ 5.43
========== ========

The Company granted 212,500 stock options to consultants in Fiscal
2000, of which 100,000 were vested as of December 31, 2000. The fair value of
the vested options estimated at the grant date using the Black-Scholes option
pricing model following the assumptions mentioned above was $329,000. During
Fiscal 2000, $151,000 was attributable to services related to the revolving
credit agreement, accordingly, such amount was capitalized as a deferred
financing cost to be amortized over the five-year life of a new credit agreement
(see Note 6), and $178,000 was expensed as a consulting cost.

Additional information with respect to the outstanding options as of
December 31, 2000 is as follows (shares in thousands):

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------

AVERAGE
OPTION EXERCISE REMAINING WEIGHTED AVERAGE NUMBER OF AVERAGE
PRICE RANGE NUMBER OF SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
----------- ---------------- ---------------- -------------- ------ --------------

$ 3.75 to 5.38 2,167 9.4 $ 3.93 250 $ 4.24
7.00 to 10.00 543 8.1 8.38 235 8.10
10.75 to 15.00 187 8.3 14.48 69 14.13
----- ---
2,897 554
===== ===

11. SALES TO MAJOR CUSTOMER:

Sales to a single customer were $7,824,000 in 1998. No sales to a
single customer were more than ten percent of sales for 1999 and 2000.

12. NOTES RECEIVABLE FROM OFFICERS:

At December 31, 2000, the Company had a loan outstanding to its Chief
Executive Officer totaling $850,000, including accrued interest of $30,000. The
loan is collateralized by a trust deed and bears interest at a rate of 6.19%.
The loan is due on or before August 20, 2001.

At December 31, 2000, the Company also had a $151,000 loan outstanding
to one of its Division Presidents, including accrued interest of $1,000. This
loan is collateralized by 75,675 shares of the Company's common stock owned by
the Division President and bears interest at a rate of 7%. The loan is due on or
before November 15, 2002.

13. SUPPLEMENTAL DATA (UNAUDITED)

The following tables set forth quarterly supplementary data for each of
the years in the two-year period ended December 31, 2000 (in thousands except
per share data). The amounts have been restated from amounts previously
reported, as indicated. A reconciliation from amounts previously reported
appears at the end of each table.

2000
QUARTER ENDED
MARCH 31 JUNE 30 SEPT 30 DEC 31
-------- ------- ------- ------
(as restated) (as restated) (as restated)

Revenues........................................... $ 19,090 $ 18,480 $ 18,121 $ 19,150
Gross Profit (1)................................... 8,205 7,159 6,708 6,875
Income before extraordinary item and
adoption of SAB 101................................ 1,287 786 812 (635)
Extraordinary item, net of $168 tax benefit (2) ... - - (232) -
Cumulative effect of adopting SAB 101 (3).......... (322) - - -
--------- --------- --------- ---------
Net income (loss).................................. $ 965 $ 786 $ 580 $ (635)
========= ========= ========= =========
EARNINGS PER SHARE:
Basic -
Income per share before extraordinary item
and adoption of SAB 101............................ $ 0.14 $ 0.09 $ 0.09 $ (0.07)
Extraordinary item (2)............................. - - (0.03) -
Cumulative effect of adopting SAB 101 (3).......... (0.04) - - -
--------- --------- --------- ---------
Net income (loss).................................. $ 0.10 $ 0.09 $ 0.06 $ (0.07)
========= ========= ========= =========
Diluted -
Income per share before extraordinary item
and adoption of SAB 101............................ $ 0.13 $ 0.08 $ 0.09 $ (0.07)
Extraordinary item (2)............................. - - (0.03) -
Cumulative effect of adopting SAB 101 (3).......... (0.03) - - -
--------- --------- --------- ---------
Net income (loss).................................. $ 0.10 $ 0.08 $ 0.06 $ (0.07)
========= ========= ========= =========

Reconciliation from net income amounts previously reported:

EFFECT OF
AS PREVIOUSLY ADOPTING
REPORTED ADJUSTMENTS (1) SAB 101 (3) AS RESTATED
-------- --------------- ----------- -----------
Quarter ended March 31, 2000:

Revenues........................................ $ 19,181 $ - $ (91) $ 19,090
Gross profit.................................... 8,349 (53)(5) (91) 8,205
Income before adoption of SAB 101............... 1,140 200 (6) (53)(7) 1,287
Cumulative effect of adopting SAB 101 (3)....... - - (322) (322)
Net income...................................... $ 1,140 $ 200 $ (375) $ (965)
========= ========= ========= =========
Earnings per share
Basic -
Income per share before
adoption of SAB 101............................. $ 0.12 $ 0.02 $ - $ 0.14
Cumulative effect of adopting SAB 101 (3)....... - - (0.04) (0.04)
--------- --------- --------- ---------
Net income...................................... $ 0.12 $ 0.02 $ (0.04) $ 0.10
========= ========= ========= =========
Diluted -
Income per share before
adoption of SAB 101............................. $ 0.12 $ 0.02 $ (0.01) $ 0.13
Cumulative effect of adopting SAB 101 (3)....... - - (0.03) (0.03)
--------- --------- ---------- ---------
Net income...................................... $ 0.12 $ 0.02 $ (0.04) $ 0.10
========= ========= ========== =========
Quarter ended June 30, 2000
Revenues........................................ $ 18,430 $ - $ 50 $ 18,480
Gross profit.................................... 7,631 (522)(5) 50 7,159
Net income...................................... $ 1,063 $ (306) $ 29 $ 786
========= ========= ========== =========
Earnings per share
Basic........................................... $ 0.12 $ (0.03) $ - $ 0.09
Diluted......................................... $ 0.11 $ (0.03) $ - $ 0.08
========= ========= ========== =========
Quarter ended September 30, 2000
Revenues........................................ $ 18,004 $ - $ 117 $ 18,121
Gross profit.................................... 7,022 (431)(5) 117 6,708
Income before extraordinary item................ 771 (76) 117 812
Extraordinary item, net of $168 tax benefit (2). - (232) - (232)
Net income...................................... $ 771 $ (259) $ 68 $ 580
========= ========= ========== =========
Earnings per share
Basic -
Income per share before extraordinary item...... $ 0.08 $ - $ 0.01 $ 0.09
Extraordinary item (2).......................... - (0.03) - (0.03)
--------- --------- ---------- ---------
Net income...................................... $ 0.08 $ (0.03) $ 0.01 $ 0.06
========= ========= ========== =========
Diluted -
Income per share before extraordinary item...... $ 0.08 $ - $ 0.01 $ 0.09
Extraordinary item (2).......................... - (0.03) - (0.03)
--------- --------- ---------- ---------
Net income...................................... $ 0.08 $ (0.03) $ 0.01 $ 0.06
========= ========= ========== =========

1999
----
QUARTER ENDED
------------- YEAR ENDED
MARCH 31 JUNE 30 SEPT 30 DEC 31 DEC 31
-------- ------- ------- ------ ------
(as restated) (as restated) (as restated) (as restated) (as restated)

Revenues.................................. $ 19,784 $ 18,657 $ 20,366 $ 19,441 $ 78,248
Gross Profit.............................. 7,778 7,669 7,454 7,662 30,563
Net income................................ 1,294 1,609 1,495 1,205 5,603

Earnings per share:
Basic..................................... 0.13 0.17 0.16 0.13 0.60
Diluted................................... 0.13 0.17 0.16 0.12 0.58

Reconciliation from net income
amounts previously reported:
Previously reported....................... $ 1,595 $ 1,832 $ 1,852 $ 1,568 $ 6,847
Adjustments (1)........................... (301) (222) (357) (363) (1,244)
--------- ---------- --------- --------- ---------
As adjusted............................... 1,294 1,609 1,495 1,205 5,603
Adjustment to earnings per share.......... (0.03) (0.04) (0.04) (0.13) (0.03)

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

(1) Adjustments to previously issued financial statements reflect (i)
expensing repairs and maintenance costs on operating equipment when
incurred rather than capitalizing such costs and depreciating them over
future periods; (ii) depreciating leasehold improvements over the shorter
of the estimated useful asset life or the remaining lease term rather than
ten years; (iii) the retroactive write off of leasehold improvements to
correspond to certain lease termination dates; (iv) with respect to the
quarters ended December 31, 1999 and March 31, 2000, accrual of legal
costs incurred for a failed merger to the quarter in which the expenses
were incurred; and (v) increase of tax provision for non-deductible items
throughout all four quarters in 1999.

(2) Amount represents the write off of deferred financing costs, net of tax
benefit, related to a bank credit agreement which was terminated in Fiscal
2000.

(3) Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. The
amount represents the cumulative effect, net of tax, on January 1, 2000
retained earnings as if SAB 101 had been adopted prior to Fiscal 2000. The
pro forma effect on Fiscal 1999 of adopting SAB 101 would have been to
reduce net income by approximately $81,000, or $0.00 per basic $0.01 per
diluted share. The pro forma impact of adopting SAB 101 on the fourth
quarter of 1999 would have been to reduce net income by $122,000, or $0.01
per basic and diluted share.

(4) In the fourth quarter of Fiscal 2000, the Company recorded additional bad
debt expense of approximately $1,500,000 for certain accounts receivable
balances which were previously considered to be collectable.

(5) The principal component of the adjustments to gross profit was to expense
repairs and maintenance costs on operating equipment when incurred rather
than capitalizing such costs and depreciating them over future periods.
Such amounts were immaterial for the quarter ended March 31, $431 for the
quarter ended June 30 and $370 for the quarter ended September 30.

(6) Consists primarily of a $237 reduction of legal costs incurred for a
failed merger, net of tax benefit.

(7) Includes $53 for the effect on the quarter of adopting SAB 101 and $322
cumulative effect of SAB 101 had it been adopted prior to January 1, 2000.

To the Board of Directors
and Shareholders of VDI Multimedia

Our audits of the consolidated financial statements referred to in our report
dated March 30, 2001 appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in Item 8 of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.

PricewaterhouseCoopers LLP
Century City, California
March 30, 2001

VDI MULTIMEDIA
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS

BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS/ END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD EXPENSES OTHER WRITE-OFFS PERIOD
- ------------------------------- ------ -------- ----- ---------- ------

Year ended December 31, 2000 $ 971,000 $ 2,195,000 $ -- $(1,693,000) $ 1,473,000

Year ended December 31, 1999 878,000 790,000 -- (697,000) 971,000

Year ended December 31, 1998 607,000 51,000 220,000(1) -- 878,000

(1) Amount reflects purchase price adjustments associated with an acquired
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 information under the captions "Election of Directors,"
"Management" and "Section 16 (a) Beneficial Ownership Reporting Compliance" in
the Company's definitive proxy statement for the annual meeting of shareholders
to be held on May 8, 2001 (the "Proxy Statement") is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information under the caption "Management" in the Proxy Statement
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.

PART IV

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

(a) Documents Filed as Part of this Report:

1,2. Financial Statements and Schedules.

The financial statements and schedules of the Company are set
forth in the "Index to Financial Statements and Financial
Statement Schedules" on page 15.

(3) EXHIBIT
NUMBER DESCRIPTION

3.1 Restated Articles of Incorporation of the Company . (3)

3.2 By-laws of the Company. (3)

10.1 Agreement and Plan of Merger, dated as of December 24, 1999,
among VDI MultiMedia, VDI MultiMedia, Inc. and VMM Merger Corp.
(1)

10.2 Shareholders Agreement, dated as of December 24, 1999, among VMM
Merger Corp., R. Luke Stefanko and Julia Stefanko. (2)

10.3 1996 Stock Incentive Plan of the Company. (3)

10.4 2000 Stock Incentive Plan of the Company.

10.5 Employment Agreement between the Company and Luke Stefanko. (3)

10.6 Business Loan Agreement (Revolving Credit) between the Company
and Union Bank dated July 1, 1995, as amended on April 1, 1996,
and June 1996. (3)

10.7 Joint Operating Agreement effective as of March 1, 1994, between
the Company and Vyvx, Inc. (3)

10.8 Lease Agreement between the Company and 6920 Sunset Boulevard
Associates dated May 17, 1994 (Hollywood facility) . (3)

10.9 Lease Agreement between the Company and 3767 Overland
Associates, Ltd. dated April 25, 1996 (West Los Angeles
facility). (3)

10.10 Asset Purchase Agreement, dated as of December 28, 1996 by and
among VDI Media, Woodholly Productions, Yvonne Parker, Rodger
Parker, Jim Watt and Kim Watt. (3)

10.11 Asset Purchase Agreement, dated as of June 12, 1998 by and
between VDI Media and All Post, Inc. (4)

10.12 Asset Purchase Agreement, dated as of November 9, 1998 by and
among VDI Media, Dubs Incorporated, Vincent Lyons and Barbara
Lyons. (5)

10.13 Second Amended and Restated Credit Agreement dated September 28,
2000 between the Company and Union Bank of California, N.A. (6)

10.14 Secured Promissory Note dated December 28, 2000 between R. Luke
Stefanko and the Company.

10.15 Employment Agreement dated November 3, 2000 between the Company
and Alan R. Steel.

10.16 Employment Agreement dated January 20, 2000 between the Company
and Neil Nguyen.

10.17 Asset Purchase Agreement dated November 3, 2000 by and among the
Company, Creative Digital, Inc. and Larry Hester.

10.18 First Amendment to Second Amended and Restated Credit Agreement
and Waiver dated March 30, 2001 among the Company, the Lenders
party to the Credit Agreement and Union Bank of California, N.A.
as administrative agent for such Lenders.

21.1 Subsidiaries of the registrant.

23.1 Consent of Independent Accountants.

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

(1) Filed with the Securities and Exchange Commission ("SEC") on
January 11, 2000 as an exhibit to the Company's Form 8-K and
incorporated herein by reference.

(2) Filed with the SEC on January 3, 2000 at part of the Schedule
13D of VMM Corp, Bain Capital Fund VI, L.P., Bain Capital
Partners VI, L.P. and Bain Capital Investors VI, Inc. and
incorporated herein by reference.

(3) Filed with the SEC as an exhibit to the Company's Registration
Statement on Form S-1 filed with the SEC on May 17, 1996 or as
an exhibit to Amendment No. 1 to the Form S-1 filed with the SEC
on December 31, 1996 and incorporated herein by reference.

(4) Filed with the SEC on June 29, 1998 as an exhibit to the
Company's Form 8-K and incorporated herein by reference (5)
Filed with SEC on December 2, 1998 as an exhibit to the
Company's Form 8-K and incorporated herein by reference. (6)
Filed with the SEC on November 14, 2000 as an exhibit to the
Company's Form 10-Q and incorporated herein by reference.

(b) Reports on 8-K:

No reports on Form 8-K were filed during the quarter ended
December 31, 2000.

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.

Dated: March 27, 2001

VDI MULTIMEDIA

By: /s/ R. Luke Stefanko
------------------------
R. Luke Stefanko
Chairman and Chief Executive Officer

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
Registrant and in the capacities and on the dates indicated.

/s/ R. Luke Stefanko
--------------------
R. Luke Stefanko Chairman of the Board and March 27, 2001
Chief Executive Officer
(Principal Executive Officer)

/s/ Alan R. Steel
-----------------
Alan R. Steel Executive Vice President, March 30, 2001
Finance and Administration

/s/ Clark W. Brewer
-------------------
Clarke W. Brewer Chief Financial Officer and Treasurer March 22, 2001
(Principal Accounting and Financial Officer)

/s/ Robert A. Baker
--------------------
Robert A. Baker Director March 12, 2001

/s/ Haig S. Bagerdjian
-----------------------
Haig S. Bagerdjian Director March 29, 2001

/s/ Greggory J. Hutchins
-------------------------
Greggory J. Hutchins Director March 12, 2001

/s/ Robert M. Loeffler
-----------------------
Robert M. Loeffler Director March 12, 2001