VARI LITE INTERNATIONAL INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR

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

COMMISSION FILE NUMBER: 0-23159

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VARI-LITE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 75-2239444
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

201 REGAL ROW, DALLAS, TEXAS 75247
(Address of principal executive (Zip Code)
offices)

Registrant's telephone number including area code: (214) 630-1963

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

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.10 PAR VALUE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 on January 10, 2001 was $7,442,552. As of that date, 7,800,003 shares
of the registrant's Common Stock were outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE:

Certain information required by Part III of this Annual Report on Form 10-K
is incorporated by reference from the registrant's definitive proxy statement
for its annual meeting of stockholders to be held on March 2, 2001.

INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 10

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 11
Item 6. Selected Consolidated Financial Data........................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 22
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure...................................... 22

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 23
Item 13. Certain Relationships and Related Transactions.............. 23

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 24
SIGNATURES............................................................ 30
INDEX TO FINANCIAL STATEMENTS......................................... F-1

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PART I

ITEM 1. BUSINESS

GENERAL

The Company is a leading worldwide designer, manufacturer and distributor of
automated lighting systems. The Company provides automated lighting and other
related equipment and production services primarily to the entertainment
industry, serving markets such as concert touring, theater, television and film
and corporate events. The Company sells and rents its
VARI*LITE-Registered Trademark- automated lighting systems through its own
domestic and international offices, rental associates and worldwide independent
dealers. Historically, the Company has only rented its
VARI*LITE-Registered Trademark- products rather than offering products for sale,
however, the Company began selling certain VARI*LITE-Registered Trademark-
products in fiscal 2000. The Company is also a leader in providing complementary
products and services to the entertainment industry, including conventional
lighting equipment, and design and production management services for
conventions, business meetings and special events. Prior to the sale of its
concert sound reinforcement business in November 2000, the Company was also a
leading provider of concert sound reinforcement systems primarily to the concert
touring market.

The Company's predecessor was incorporated in 1988 in the State of Texas as
a holding company for operations, which began in 1981 and was reincorporated in
the State of Delaware in 1997. The Company's principal executive offices are
located at 201 Regal Row, Dallas, Texas 75247 and its telephone number is
(214) 630-1963.

PRODUCTS AND SERVICES

VARI*LITE-REGISTERED TRADEMARK- AUTOMATED LIGHTING PRODUCTS.

The Company designs, manufactures and distributes an extensive line of
integrated automated lighting systems, including light fixtures, or
"luminaires," control consoles and support equipment, and provides system
operators and maintenance services. To accommodate users who prefer to operate
the Company's lighting systems independently, the Company also conducts
extensive training programs. Historically, the Company had only rented its
VARI*LITE-Registered Trademark- products through its rental offices rather than
offering products for sale. However, as a result of the emergence of competing
products along with the increased demand of certain customers to own rather than
rent the products, the Company began selling certain
VARI*LITE-Registered Trademark- products in fiscal 2000.

SERIES 200-TM- SYSTEM. The Company's VL2C-TM- spot luminaire, VL4-TM- wash
luminaire and Artisan-Registered Trademark-Plus and
mini-Artisan-Registered Trademark-2 control consoles constitute the Company's
Series 200-TM- system. Spot luminaires create a hard-edged, crisp beam which can
be used for precisely focused illumination and visual effects, as well as for
projecting custom light images and designs through the use of "gobos", designs
etched into a piece of glass or cut into a piece of metal through which a light
beam is directed to create an image. The VL2C-TM- spot luminaire can change
light color in one-tenth of a second and can produce more than 120 separate
light colors through the use of the Company's patented color changing system. In
designing the Series 200-TM- system, the Company patented a number of features
which it believes makes the Company's light systems superior to those of its
competitors. The Company is the only industry participant which combines
patented dichroic filter color changing systems, advanced heat removal
techniques and computer control systems that utilize distributed processing and
resident cue memory in each luminaire. By using such technology to execute a
lighting effect (or cue), an operator can transmit a single command to up to
1,000 luminaires simultaneously, each of which stores its own set of cues. As a
result, customers using the Company's systems can create lighting presentations
with greater flexibility, complexity, speed and precision than with competing
products.

The VL4-TM- wash luminaire projects a dispersed soft-edge light beam for
even illumination of objects and areas. The VL4-TM- luminaire's patented color
changing system allows the user to select 30 preset and

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160 programmable colors from thousands of available colors and to change these
colors in less than three-tenths of a second, or program the system for timed
color cross-fades. In addition, the VL4-TM- luminaire features precisely timed
control of light intensity, including the ability to instantaneously turn the
light fixture on and off. Continuous adjustment of diffusion and beam angle
provides enhanced control of the beam shape. In 1991, Vari-Lite, Inc
("Vari-Lite") was awarded its first Primetime Emmy-Registered Trademark- award
for engineering the Series 200 system.

SERIES 300-TM- SYSTEM. The Company developed its Series 300-TM- automated
lighting system principally to satisfy the demands of the theater and television
and film markets for virtually silent, light weight automated lighting products
with sophisticated color changing features. The Company's Series 300-TM- system
appeals to major concert touring clients who want to rent large systems. The
Series 300 system includes the VL5-TM-, VL5Arc-TM- and VL5B-TM- wash luminaires,
the VL6-TM-, VL6B-TM-, VL7-TM- and VL7B-TM- spot luminaires, and the VLM-TM-
automated moving mirror, as well as the Artisan-Registered Trademark-Plus,
mini-Artisan-Registered Trademark-2, Virtuoso-TM- and Virtuoso DX-TM- control
consoles. The VL5-TM- luminaire is lighter than the VL4-TM- luminaire, and its
cold-mirror reflector both eliminates the need for noisy cooling fans and
reduces the amount of heat the lights emit onto the stage. Color changes for the
VL5-TM- are controlled by a system that allows color cross-fades in as little as
seven-tenths of a second and interchangeable lenses work with an internal
diffusing mechanism to provide a wide variety of beam sizes and shapes. The
VL5Arc-TM- luminaire has a brighter bulb than the VL5-TM- luminaire. In 1994,
Vari-Lite was awarded its second Primetime Emmy-Registered Trademark- award for
engineering for the VL5-TM- wash luminaire. The VL6-TM- spot luminaire is the
companion to the VL5-TM- wash luminaire, and has two interchangeable 12-position
wheels of dichroic color filters and gobos for split second color and image
changes and multi-color beams. The VL6B-TM- spot luminaire adds a 3:1 zoom
optics system and rotating gobos to the VL6-TM- luminaire. The VL7-TM- spot
luminaire has a revolutionary collection optics system that produces a bright
beam and provides an 8:1 zoom. Other features of the VL7-TM- fixture include
full color spectrum crossfades with unparalleled precision and repeatability via
the unique CVF-TM- System, strobe, image morphing and fixed and rotating gobos.
The VL7B-TM- spot luminaire adds a four frame shuttering system to the VL7-TM-
fixture. The VLM-TM- automated moving mirror is a dual-sided highly reflective
Lexan-Registered Trademark- polycarbonate mirror panel. With its ability to both
pan and tilt 360 degrees, the VLM-TM- automated moving mirror can be used to
augment the effects produced by VARI*LITE-Registered Trademark- wash and spot
luminaires, or it can be used with conventional lights to create limited beam
motion at a very low cost.

SERIES 2200-TM- SPOT LUMINAIRES. The VL2201-TM- spot luminaire was designed
based on the VL6B-TM- spot luminaire with a more industry standard configuration
and interface. The VL2201-TM- luminaire features an upper enclosure that houses
the control electronics, as well as a power factor corrected arc power supply
for the lamp. The VL2201-TM- luminaire supports a wide variety of colors and
gobos with two 11 position wheels for interchangeable dichroic color and gobo
selections, as well as a five position rotating gobo wheel for gobos or effects.
A 3:1 zoom optics system and a programmable iris combine to create a wide
variety of beam sizes. The luminaire features full field dimming, strobe effects
and smooth, repeatable motion. The VL2202-TM- spot luminaire enjoys all of the
same features as the VL2201-TM- luminaire, in the same configuration, with a 700
watt lamp producing twice the light output of the VL2201-TM- fixture. Both of
these spot luminaires are small, lightweight and virtually silent.

SERIES 2400-TM- WASH LUMINAIRES. The VL2416-TM- wash luminaire is based on
the Emmy-Registered Trademark- award winning VL5-TM- luminaire with a more
industry standard configuration and interface. The VL2416-TM- luminaire includes
an upper enclosure that houses the control electronics, as well as a power
factor corrected arc power supply for the lamp. It features a 1200 watt arc lamp
and an innovative zoomable beam spreading optics system that can provide a field
from 5 to 55 degrees. A rotatable, indexable front lens assembly that accepts
standard PAR 64 lenses can be used for many unique beam effects. The
DICHRO*TUNE-TM- radial color changer employs enhanced dichroic color filters to
produce smooth, full spectrum color crossfades as well as very quick color
changes. An internal douser allows intensity control as well as strobe effects.
The VL2402-TM- wash luminaire is identical in configuration and size to the

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VL2202-TM- spot luminaire. It features an upper enclosure that houses the
control electronics as well as a power factor corrected arc power supply for the
700 watt lamp. The VL2402-TM- luminaire includes three color wheels for smooth,
full spectrum color crossfades, as well as a fixed color wheel for rapid, "snap"
color changes. It also features the same zoomable beam spreading optics for beam
control as the VL2416-TM- wash luminaire. Smooth dimming and strobe effects are
also provided.

All of the VL 2200-TM- and VL 2400-TM- luminaires will operate from the
various line voltages around the world. These luminaires, like all of the
Company's other luminaires are compatible with the industry standard DMX-512
digital protocol and, as such, can be operated from DMX-512 control consoles, as
well as the Company's more sophisticated, higher performance proprietary control
consoles which use a high speed, bi-directional communications protocol.

LIGHTING CONTROL SYSTEMS. The Company's control console, the
Artisan-Registered Trademark- Plus, is used to operate all of the Company's
Series 200-TM- and Series 300-TM- VARI-LITE-Registered Trademark- products. It
provides control of up to 1,000 luminaires, dimmers and other equipment with up
to 1,000 cues per channel, allowing the operator to control each luminaire or to
store and play back preset cues. The Company also rents the smaller, less
expensive mini-Artisan-Registered Trademark- 2 console which has substantially
the same capabilities as the Artisan-Registered Trademark- Plus console. The
mini-Artisan-Registered Trademark- 2 console is used either as the primary
console where space is limited or as a backup system when the
Artisan-Registered Trademark- Plus console is used as the primary console. The
Company's newest control system, featuring the Virtuoso-TM- control console
offers much expanded control over VARI-LITE-Registered Trademark- luminaires,
DMX automated lights and conventional fixtures. The system is capable of
controlling up to 2,000 luminaires with up to 10,000 cues per channel, depending
on the types of luminaires in the system. The system includes an advanced, 3-D
graphical interface that allows users to have a real-time view of system status
and performance. The 3-D graphical interface can also be used to program cues
while the luminaires are off-line to maximize programming efficiency in busy
production environments or for pre-production work before the actual lighting
system is available. The Virtuoso-TM- system comprises a sophisticated computer
network allowing for multiple consoles to be connected and programmed
simultaneously, a major advantage in very large productions and when time is
very limited. Advance fiber optic connections are provided for maximum system
performance. The latest product in the Company's Virtuoso-TM- product line,
introducted in 2000, is the Virtuoso DX-TM- console. The Virtuoso DX-TM- console
offers all of the performance and features as the original Virtuoso DX-TM-
console in a much smaller, less expensive platform. The Virtuoso DX-TM- console
connects directly into the Virtuoso-TM- system with either traditional network
wiring or with the same advanced fiber optics used in the original console. The
Virtuoso DX-TM- console also offers the additional advantage of outputing 8
universes of DMX-512 control directly from the console. This allows the console
to be used with equal ease with VARI-LITE-Registered Trademark- luminaires, DMX
automated lights or conventional fixures. The Virtuoso DX-TM- console was
developed as the primary control console to be sold with the Company's
luminaires and has also become a very popular console in the Company's rental
business. Another member of the Virtuoso-TM- product line is the Company's
Visionary 3D-TM- software package. This software allows users to create actual
Virtuoso-TM- cues and showfiles, using the 3-D graphical interface, without the
presence of a console or lighting system, using only their personal computers.
These showfiles can then be transported to the Virtuoso-TM- or Virtuoso DX-TM-
console for use with the lighting system. This software has also become a
popular training aid for those learning to use the Virtuoso-TM- system.

OTHER PRODUCTS AND SERVICES. The Company provides trained personnel to
operate its automated lighting systems and offers training courses, maintenance
and other support services to customers. The Company maintains training
facilities in its Dallas, New York, Los Angeles, Tokyo and London offices, where
it trains both its own personnel and customers who find it more efficient to
have their personnel operate and maintain the VARI*LITE-Registered Trademark-
equipment.

In addition to luminaires and control consoles, the Company rents related
equipment required to operate the Company's systems, such as power and control
signal distribution equipment, dimmers and cables. The Company also developed a
unique stackable, plastic injection-molded storage case for

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transporting its equipment. The Company's cases are custom-designed to protect
VARI*LITE-Registered Trademark- equipment and last longer than the
industry-standard carpet covered wood or laminate cases. These cases are also
significantly lighter than other cases, thereby reducing transportation costs.

COMPLEMENTARY BUSINESSES

CONVENTIONAL LIGHTING PRODUCTS. The Company offers conventional lighting
and rigging equipment, including numerous types of luminaires and control
consoles, large search lights, automatic gel scrollers, trusses, motors, dimmers
and smoke machines.

CORPORATE MEETINGS AND SPECIAL EVENTS. The Company, through its IGNITION!
Creative Group, Inc. ("Ignition") subsidiary, provides design and production
management services to businesses for conventions, business meetings and special
events. The Company provides concept development, scenery, lighting, sound,
special effects, scripting, media production and entertainment production for
such events.

The Company also rented sound reinforcement systems, provided custom stage
and stage set design and construction services and sold architectural lighting
systems until the sale of those businesses in November 2000, December 1998 and
October 1998, respectively.

MARKETING, SALES AND DISTRIBUTION

The Company markets its products and services to the entertainment industry,
including concert touring, theater, television and film and corporate events
markets. Depending on the circumstances, the Company solicits business from
lighting and set designers and consultants, artist managers, producers,
production managers and production companies, promoters, corporations and
business associations. The Company believes that its quality products,
reputation for innovation, customer relationships, worldwide distribution and
excellent service are the keys to its success. No customer has accounted for
more than 10% of the Company's revenues for at least the last three fiscal
years.

In 1998, the Company began to emphasize its full-service strategy by
expanding the products and services it offers to include a more extensive
selection of conventional lighting products and related production services.
This effort is designed to accommodate the comprehensive lighting needs of the
Company's rental customers by offering "one-stop" shopping.

VARI*LITE-REGISTERED TRADEMARK- AUTOMATED LIGHTING PRODUCTS. Historically,
the Company had only rented its VARI*LITE-Registered Trademark- products rather
than offering the products for sale. The initial decision to distribute the
Company's products through a rental network was largely driven by the demands of
the Company's primary customers at the time--the concert touring market. In
addition, the rental only strategy provided the Company with a higher level of
quality control over its rental products, which require trained operators and
maintenance personnel. The Company also believed renting had enabled it to
better protect its intellectual property and generate revenue from each product
over an extended time period. However, as a result of the emergence of competing
automated lighting products, along with the increased demand of certain
customers to own rather to rent the products, the Company began selling certain
VARI*LITE-Registered Trademark- products in fiscal 2000.

The Company markets its automated lighting systems and services in the
United States through both Company-owned offices located in Dallas, New York,
Los Angeles, Nashville, Orlando, Las Vegas and Chicago and independent dealers
and rental associates. Each Company-owned office is strategically located to
take advantage of specific market segments. For example, the New York office
targets the theater market, the Nashville office targets the country music,
television and concert touring markets, the Los Angeles office targets the
television, film and concert touring market, and the Orlando, Las Vegas, and
Chicago offices target the corporate events market. The independent dealers
focus on specific geographic

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markets and rental associates tend to rent to all market segments. The Company's
international distribution system comprises Company-owned locations in London
and Tokyo, as well as, independent dealers and rental associates over 25 cities
in North America, Europe and Asia.

Prior to fiscal 2000, in order to satisfy customers who wanted to purchase
the Company's lighting systems, the Company offered sales-type leases. Under the
typical sales-type lease, the customer rented the Company's equipment for either
a five- or a ten-year term, with unlimited one-year renewal options, for a lump
sum payment at the commencement of the term, plus a nominal renewal option
exercise price. The customer was normally responsible for maintaining the
equipment under these arrangements, but often entered into a maintenance
agreement with the Company.

CONVENTIONAL LIGHTING PRODUCTS AND PRODUCTION SERVICES. The Company's
conventional lighting operations and production services were integrated into
the Company's operations in 1998 to improve the Company's position as a
full-service provider. These operations rely heavily on the Company's reputation
for quality and service, which is enhanced by its high visibility projects and
customers. The Company reinforces this reputation by advertising in trade and
specialty magazines. Although most of the Company's conventional lighting
contracts are procured through a bidding process, the Company believes that
competition in this industry is based on expertise, quality, price and full
service capabilities.

CORPORATE MEETINGS AND SPECIAL EVENTS. The Company sells its design and
production management services to corporate meeting planners and sales and
marketing executives. In-house salespeople seek requests for proposals through
cold calls, sales letters and professional mailings and, to a lesser extent,
through advertising in trade publications. Upon receiving an invitation to
submit a proposal, the Company assembles a project team which develops concepts
and designs for a multi-media presentation to the potential client.

RESEARCH AND DEVELOPMENT; INTELLECTUAL PROPERTY

The Company's proprietary technology and development of innovative products
that meet the needs of its customers have enabled it to expand the applications
for its technology to new products and markets. From time to time, the Company
collaborates with unaffiliated entities to supplement and complement its
internal research and development activities.

The Company's research and development group consists of over 40 engineers,
technicians and related personnel. These internal capabilities enable the
Company to continually improve existing products, design new products and
develop new technology to meet the needs of its customers. In the fiscal years
ended September 30, 1998, 1999 and 2000, the Company's research and development
expenditures totaled $6.7 million, $5.6 million and $5.2 million, respectively.

The Company's extensive research and development efforts have produced a
number of leading-edge technological developments in the automated lighting
industry. When appropriate, the Company seeks patent protection for its
products. The Company had registered and received more than 45 domestic patents
and more than 220 foreign patents in several different countries and
territories. In addition, the Company had more than five patent applications
pending in the United States on automated lighting technology and more than 30
patent applications pending worldwide. The Company's patents cover the basic
concepts, control software, control hardware and features unique to each of the
Company's VARI*LITE-Registered Trademark- luminaire models. The Company believes
that its patents provide it with a substantial competitive advantage in the
automated lighting industry, and the Company's ability to compete in the future
will depend in part on maintaining its technological advantage over its
competitors.

The Company has obtained trademark protection in the United States and
numerous foreign countries on various names, including, among others,
VARI*LITE-Registered Trademark-, Artisan-Registered Trademark-, Virtuoso-TM-,
Virtuoso DX-TM-, Visionary 3D-TM-, ArtisanVLQ-TM-, Series 200-TM-,
Series 300-TM-, VL2C-TM-, VL4-TM-, VL5-TM-, VL5Arc-TM-,

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VL5B-TM-, VL6-TM-, VL6B-TM-, VL7-TM-, VL7B-TM-, VL2200-TM-, VL2201-TM-,
VL2202-TM-, VL2400-TM-, VL2402-TM-, VL2416-TM-, VLM-TM-, VARI*IMAGE-TM-,
DICHRO*TUNE-TM- and DICHRO*WHEEL-TM-.

MANUFACTURING

The Company's manufacturing facilities are located in Dallas, Texas. The
Company's manufacturing process principally consists of procuring, inspecting
and assembling components custom-made by others to the Company's specifications.
The Company generally provides its suppliers with specifications for its
components and pays for all tooling used in their production. The Company
emphasizes the quality and reliability of its products and, accordingly, submits
all finished products to rigorous testing both at the time they are manufactured
and when they are returned to the Company at the termination of each rental
agreement.

The Company has frequently worked in concert with certain of its key
suppliers to design and develop new technologies which have been incorporated
into the Company's products specifically to meet its requirements. As a result,
although most components and raw materials used by the Company are available
from more than one supplier, many important components for the Company's
lighting systems are provided by one vendor and are custom-designed (often
jointly by the Company and its vendors). The Company attempts to maintain
adequate inventories of these components and, based on its experience, does not
anticipate problems obtaining sufficient supplies in the foreseeable future. The
loss of any supplier that is the sole vendor of a component would delay the
Company's manufacturing schedules and possibly force the Company to purchase new
tooling, but the Company believes substitute suppliers can be found for all
components of all of its products.

EQUIPMENT INVENTORY MANAGEMENT

The Company uses an inventory control and management system to locate its
rental equipment at all times anywhere in the world. Each piece of equipment is
serialized for identification purposes. Equipment utilization is centrally
monitored at the Company's headquarters to determine, which products are in
highest demand in various geographic markets and whether certain equipment
should be relocated to increase utilization and revenue, whether product
shortages that require the production of additional units exist, whether current
pricing is at the appropriate level, and whether excess quantities exist that
may be sold.

The maximum utilization rates of the Company's equipment are affected by
production scheduling requirements of the customers' various markets.
Utilization rates are also impacted by the quantity of inventory, maintenance
requirements and shipping time. The Company's inventory control system helps the
Company optimize its utilization rates in light of these factors in order to
satisfy customer requirements, maximize revenue and optimize equipment levels.

COMPETITION

Each of the Company's businesses is highly competitive. In its automated
lighting business, the Company primarily competes with Coemar SPA, Clay Paky
SPA, High End Systems, Inc., Martin Gruppen A/S and Production Resource Group,
PLC. Of these competitors, only Production Resource Group, PLC rents equipment,
while the others sell equipment to other rental companies. The Company's rental
operations compete with a number of lighting rental companies. The Company
competes primarily on the basis of product capabilities, quality, reliability,
price, worldwide distribution, full service capabilities, brand name
recognition, reputation, customer service and support. The
VARI*LITE-Registered Trademark- brand name has been recognized for years as the
preeminent brand name for automated lighting.

The market for design and production management services is highly
competitive and fragmented, including hundreds of free-lance producers and
designers. Competition in this industry is based primarily on personal
relationships and creativity.

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EMPLOYEES

The Company has 397 full-time employees. In addition, the Company has 168
part-time and temporary employees. None of the Company's employees is a party to
any collective bargaining agreement and the Company has never experienced a work
stoppage. The Company considers its relations with its employees to be good.

FINANCIAL INFORMATION

Financial information regarding segments and operations by geographic area
is set forth in Note B and Note M of the notes to consolidated financial
statements.

ITEM 2. PROPERTIES

The Company leases all of its facilities, including four facilities
comprising approximately 120,200 square feet in Dallas, Texas under leases that
expire in April 2003. The Dallas facilities contain the Company's executive
offices, manufacturing, warehouse, maintenance, research and development
facilities and training center. The executive offices and warehouse space of
Vari-Lite Production Services, Ltd. ("London") are located in London, England in
one facility comprising approximately 57,000 square feet and the associated
lease expires in April 2010. The executive offices of Vari-Lite Asia, Inc.
("Vari-Lite Asia"), as well as its technical center, are located in Tokyo in two
leased facilities aggregating approximately 23,300 square feet, the terms of
which expire in February 2003 and November 2004. The Company also leases office
and warehouse space in New York and Los Angeles of 35,300 and 58,000 square
feet, respectively, with lease term expirations of August 2010 and April 2004,
respectively. In addition, the Company leases sales offices in Chicago, Las
Vegas, Nashville and Orlando. The Company believes it maintains generally
adequate insurance with respect to its properties.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business, the Company is from time to time
threatened with or named as a defendant in various lawsuits, including patent
infringement claims. Additionally, the Company has filed lawsuits claiming
infringements of its patents by third parties for which the Company has been
subject to counterclaims.

In November 1998, the Company brought suit in the United States District
Court for the Eastern District of Texas asserting a number of claims of
infringement of several of its patents by Martin Gruppen A/S and Martin
Professional A/S (collectively "Martin") seeking monetary damages and injunctive
relief to prevent future patent infringement. In July 1999, the court entered a
preliminary injunction prohibiting Martin from making, using, leasing or
offering for sale or lease in the United States, or importing into the United
States, certain products. In August 2000, the Company negotiated a settlement
with Martin, the terms of which included a cash payment of $5.0 million to the
Company and authorization for Martin to continue to sell all existing products
that were subject to the Company's patents. At the request of the Company and
Martin, the lawsuit was dismissed by the court in September 2000.

In November 1999, Coemar S.p.A. and Clay Paky S.p.A. filed separate lawsuits
against the Company in the United States Distict Court for the Southern District
of New York. The suits were transferred to the United States District Court for
the Northern District of Texas on July 12, 2000. The lawsuits seek declarations
from the court that a certain patent of the Company is invalid, unenforceable,
and/or not infringed by Coemar S.p.A. and Clay Paky S.p.A. In December 2000, the
Company negotiated a settlement with Coemar S.p.A. and Clay Paky S.p.A, the
specific terms of which are confidential, but included a cash settlement paid to
the Company and authorization for Coemar S.p.A and Clay Paky S.p.A to continue
to sell all existing products that were subject to the Company's patents. The
lawsuits are currently stayed pending Coemar S.p.A and Clay Paky S.p.A's
compliance with settlement terms.

9

In November 1999, SGM Elettronica, s.r.l. and Studio Due s.r.l. each filed a
lawsuit against the Company in the United States District Court for the Southern
District of New York. Both lawsuits sought declarations from the court that a
certain patent of the Company is invalid, unenforceable, and/or not infringed by
SGM Elettronica, s.r.l. nor Studio Due s.r.l. The lawsuit was dismissed by the
court for lack of subject matter juridiction on July 12, 2000.

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

Not Applicable.

10

PART II

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

The Company's Common Stock trades on the Nasdaq National Market under the
symbol "LITE." The Company consummated its initial public offering of Common
Stock on October 16, 1997. The following table sets forth, on a per share basis
for the periods indicated, the high and low sale prices for the Common Stock as
reported by the Nasdaq National Market:

PRICE RANGE
-------------------
HIGH LOW
-------- --------

FISCAL YEAR 1999
First Quarter............................................. $4.750 $2.000
Second Quarter............................................ $4.250 $2.625
Third Quarter............................................. $2.813 $2.000
Fourth Quarter............................................ $2.125 $0.875

FISCAL YEAR 2000
First Quarter............................................. $1.688 $0.938
Second Quarter............................................ $4.000 $0.938
Third Quarter............................................. $2.750 $0.875
Fourth Quarter............................................ $1.500 $0.688

FISCAL YEAR 2001
First Quarter............................................. $2.500 $0.625
Second Quarter (through January 10, 2001)................. $1.625 $0.750

There were 70 stockholders of record of Common Stock on January 10, 2001.

The Company has not paid, and does not anticipate paying in the foreseeable
future, any cash dividends and expects that future earnings will be retained to
finance operations and expansion. The payment of cash dividends in the future
will be at the discretion of the Board of Directors and will depend upon the
Company's earnings levels, capital requirements and financial condition and such
other factors the Board of Directors deems relevant.

11

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for the Company as of and
for each of the five fiscal years in the period ended September 30, 2000, have
been derived from the audited consolidated financial statements of the Company.
This data should be read in conjunction with the information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes thereto included
elsewhere in this report.

YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA:
Rental revenues........................................... $ 60,291 $ 66,095 $ 73,235 $ 78,520 $ 76,366
Product sales and service revenues........................ 16,847 24,563 15,141 13,012 17,322
-------- -------- -------- -------- --------
Total revenues.......................................... 77,138 90,658 88,376 91,532 93,688
Rental costs.............................................. 23,462 26,746 33,172 39,557 35,990
Product sales and service costs........................... 10,746 13,301 10,472 7,393 10,881
-------- -------- -------- -------- --------
Gross profit.............................................. 42,930 50,611 44,732 44,582 46,817
Selling, general and administrative expense............... 29,878 32,779 35,014 38,224 37,102
Research and development expense.......................... 4,404 6,657 6,690 5,586 5,152
Impairment of assets...................................... -- -- 3,542 -- 3,850
Restructuring costs....................................... -- -- 1,080 600 --
Gains on lawsuit settlement and sale of lease............. -- -- -- -- (3,993)
-------- -------- -------- -------- --------
Operating income (loss)................................... 8,648 11,175 (1,594) 172 4,706
Interest expense (net).................................... 3,291 3,930 2,881 4,540 5,180
-------- -------- -------- -------- --------
Income (loss) before taxes, extraordinary loss and
cumulative effect of change in accounting principle..... 5,357 7,245 (4,475) (4,368) (474)
Income taxes (benefit).................................... 2,238 2,916 (1,785) (1,725) (187)
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle................ 3,119 4,329 (2,690) (2,643) (287)
Extraordinary loss from early extinguishment of debt...... -- -- (737) -- --
Cumulative effect of change in accounting principle....... -- -- (195) -- --
-------- -------- -------- -------- --------
Net income (loss)......................................... $ 3,119 $ 4,329 $ (3,622) $ (2,643) $ (287)
======== ======== ======== ======== ========
Net income (loss) per basic share......................... $ 0.54 $ 0.75 $ (0.47) $ (0.34) $ (0.04)
Net income (loss) per diluted share....................... $ 0.53 $ 0.74 $ (0.47) $ (0.34) $ (0.04)
Cash dividends per share(1)............................... $ 0.11 $ 0.18 $ -- $ -- $ --
Weighted average basic shares outstanding................. 5,813 5,799 7,712 7,800 7,800
Weighted average diluted shares outstanding............... 5,912 5,819 7,712 7,800 7,800

OTHER DATA:
EBITDA(2)................................................... $ 18,716 $ 22,838 $ 11,984 $ 15,538 $ 18,547
Net cash provided by operations............................. 7,925 15,237 6,474 8,494 9,653
Net cash provided (used) by investing activities............ (11,826) (23,071) (27,576) (10,040) 4,314
Net cash provided (used) by financing activities............ 2,564 8,346 23,673 (2,181) (10,284)
Capital expenditures........................................ 11,981 23,212 25,841 12,914 3,980

AS OF SEPTEMBER 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------

BALANCE SHEET DATA:
Total assets................................................ $78,581 $96,704 $114,627 $107,700 $94,703
Total debt.................................................. 37,349 46,242 50,333 48,050 37,735
Stockholders' equity........................................ 24,538 27,541 44,704 43,235 41,748

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

(1) The Company does not anticipate paying any cash dividends on the Common
Stock for the foreseeable future and anticipates that future earnings will
be retained to finance operations and expansion. See "Market for
Registrant's Common Equity and Related Stockholder Matters."

(2) EBITDA is calculated herein as income before income taxes, extraordinary
loss and cumulative effect of change in accounting principle plus
depreciation, amortization and net interest expense. The Company believes
that EBITDA serves as an important financial analysis tool for measuring and
comparing financial information such as liquidity, operating performance and
leverage. EBITDA should not be considered an alternative to net income or
other cash flow measures determined under generally accepted accounting
principals as an indicator of the Company's performance or liquidity. EBITDA
as disclosed herein may not be comparable to EBITDA as disclosed by other
companies.

12

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

GENERAL

The Company is a leading worldwide designer, manufacturer and distributor of
automated lighting systems. The Company provides automated lighting and other
related equipment and production services primarily to the entertainment
industry, serving markets such as concert touring, theater, television and film
and corporate events. The Company sells and rents its
VARI*LITE-Registered Trademark- automated lighting systems through its own
domestic and international offices, rental associates and worldwide independent
dealers. Historically, the Company has only rented its
VARI*LITE-Registered Trademark- products rather than offering products for sale,
however, the Company began selling certain VARI*LITE-Registered Trademark-
products in fiscal 2000. The Company is also a leader in providing complementary
products and services to the entertainment industry, including conventional
lighting equipment, and design and production management services for
conventions, business meetings and special events. Prior to the sale of its
concert sound reinforcement business in November 2000, the Company was also a
leading provider of concert sound reinforcement systems primarily to the concert
touring market.

The Company's rental revenues are generated from the rental of
VARI*LITE-Registered Trademark- automated lighting systems and conventional
lighting equipment, and through November 2000 still included the rental of
concert sound reinforcement systems. Product sales and services revenues are
derived from the sale of VARI*LITE-Registered Trademark- automated lighting
equipment and design and production management services.

Rental revenues were $73.2 million, $78.5 million and $76.4 million or
82.9%, 85.8% and 81.5% of total revenues during fiscal 1998, 1999 and 2000,
respectively. The majority of the Company's rental revenues are earned from the
rental of VARI*LITE-Registered Trademark- automated lighting systems, with the
remainder from the rental of conventional lighting equipment and, prior to the
sale of the business in November 2000, concert sound reinforcement systems. The
Company's rental revenues are recorded as earned over the term of each contract.
Rental costs consist of direct costs of maintaining, supporting and delivering
the rental equipment and the depreciation costs of the capital expenditures
incurred to manufacture or purchase the rental equipment. The Company
depreciates rental equipment over periods of five to ten years.

The Company generates sales revenue from the sale of
VARI*LITE-Registered Trademark- automated lighting equipment as well as its
design and production management services to corporations and business
associations for conventions, business meetings and special events. Through the
first quarter of 1999, the Company generated sales revenue from its custom stage
and stage set design and construction service and from the sale of architectural
automated lighting systems. During fiscal 1998, the Company made a strategic
decision to dispose of its architectural lighting product line. As a result of
this decision, its architectural lighting assets were written down to their net
realizable values, resulting in a charge of $3.5 million for the impairment of
these assets in fiscal 1998. On October 30, 1998, the Company sold substantially
all of its architectural assets for their net book value. During fiscal 1998,
the Company's architectural lighting product line experienced operating losses
of $1.7 million and operating income of $0.2 million in 1999. On December 31,
1998, the Company sold substantially all of the assets of Brilliant
Stages, Ltd., ("Brilliant Stages") one of the Company's European subsidiaries,
which incurred an operating loss of $0.5 million in fiscal 1998 and experienced
break even operating results in 1999.

13

The following table reflects the percentages of total revenues by market:

YEARS ENDED
SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------

Concert Touring........................................ 35.0% 31.3% 27.6%
Theatre................................................ 18.2 13.1 10.0
Television and Film.................................... 15.5 20.9 21.8
Corporate Events....................................... 23.2 26.9 26.1
Dealer Sales........................................... -- 1.7 11.9
Other.................................................. 8.1 6.1 2.6
----- ----- -----
Total Revenue...................................... 100.0% 100.0% 100.0%
===== ===== =====

Although the Company expects revenues earned from concert touring (primarily
rental revenues) to continue to represent a significant percentage of the
Company's total revenues, from fiscal 1998 to fiscal 2000 concert touring
revenues have decreased as a percentage of the Company's total revenues due to
an increase in rental revenues generated from the Company's other customer
markets and the increase in revenues from product sales. The Company has
experienced fluctuations in its concert touring revenues because of the
unpredictable nature of the timing and duration of such tours and expects such
fluctuations to continue in the future. Revenues earned from the theater market
decreased from fiscal 1998 through fiscal 2000 primarily as a result of a
decrease in sales-type leases to this market segment. The Company anticipates
revenue from the theater market will continue to fluctuate with the development
of new theatrical productions and the cloning of productions. Revenues earned
from the television and film market have increased from fiscal 1998 to fiscal
2000 as a result of the expanding worldwide television market and the need to
meet additional programming requirements. In addition, the Company has
experienced an increase in revenues from the corporate events market as a result
of an increasing number of companies that have exhibited the desire to create
entertainment-like productions. The increase in dealer sales from fiscal 1998 to
fiscal 2000 is the result of the Company's strategic decision to begin selling
VARI*LITE-Registered Trademark- products in fiscal 2000.

The following table reflects the Company's geographic region revenues as a
percentage of total revenues (see Note M of the "Notes to Consolidated Financial
Statements"):

1998 1999 2000
-------- -------- --------

North America.......................................... 54.3% 52.0% 60.9%
Europe................................................. 34.6 35.3 28.0
Asia................................................... 11.1 12.7 11.1
----- ----- -----
Total Revenue...................................... 100.0% 100.0% 100.0%
===== ===== =====

The majority of European and Asian revenues are denominated in British
pounds sterling and Japanese yen, respectively. The Company has offices in
London and Tokyo. Prior to their sale in July and October 2000, the Company also
had offices in Brussels, Paris, Madrid, Stockholm and Amsterdam. Fluctuations in
foreign currencies have impacted, and will continue to impact, the Company's
consolidated results of operations due to the translation of foreign currencies
into U.S. dollars. The Company has typically maintained foreign currency
borrowings to act as an economic hedge against fluctuations in British pounds
sterling and Japanese yen. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

14

RESULTS OF OPERATIONS

The following table sets forth the percentages of total revenues (or as
percentages of a component of total revenues as shown) represented by certain
consolidated income statement data and other data for the indicated periods:

YEARS ENDED
SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------

Income Statement Data:
Rental revenues........................................... 82.9% 85.8% 81.5%
Product sales and service revenues........................ 17.1 14.2 18.5
----- ----- -----
Total revenues.......................................... 100.0 100.0 100.0
Rental costs.............................................. 37.5 43.2 38.4
Product sales and service costs........................... 11.9 8.1 11.6
----- ----- -----
Gross margin.............................................. 50.6 48.7 50.0
Selling, general and administrative expense............... 39.6 41.7 39.6
Research and development expense.......................... 7.6 6.1 5.5
Impairment of assets...................................... 4.0 -- 4.1
Restructuring costs....................................... 1.2 0.7 --
Gains on lawsuit settlement and sale of lease............. -- -- (4.2)
----- ----- -----
Operating income (loss)................................... (1.8) 0.2 5.0
Interest expense (net).................................... 3.3 5.0 5.5
----- ----- -----
Loss before income taxes, extraordinary item and
cumulative effect of change in accounting principle..... (5.1) (4.8) (0.5)
Income tax benefit........................................ (2.0) (1.9) (0.2)
----- ----- -----
Loss before extraordinary item and cumulative effect of
change in accounting principle.......................... (3.1) (2.9) (0.3)
Extraordinary loss........................................ (0.8) -- --
Cumulative effect of change in accounting principle....... (0.2) -- --
----- ----- -----
Net loss.................................................. (4.1)% (2.9)% (0.3)%
===== ===== =====
Other Data:
Rental revenues........................................... 100.0% 100.0% 100.0%
Rental costs.............................................. 45.3 50.4 47.1
----- ----- -----
Rental gross margin....................................... 54.7% 49.6% 52.9%
===== ===== =====
Product sales and service revenues........................ 100.0% 100.0% 100.0%
Product sales and service costs........................... 69.2 56.8 62.8
----- ----- -----
Product sales and service gross margin.................... 30.8% 43.2% 37.2%
===== ===== =====
EBITDA(1)................................................. 13.6% 17.0% 19.8%

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

(1) EBITDA is calculated herein as income before income taxes, extraordinary
loss and cumulative effect of change in accounting principle plus
depreciation, amortization and net interest expense. The Company believes
that EBITDA serves as an important financial analysis tool for measuring and
comparing financial information such as liquidity, operating performance and
leverage. EBITDA should not be considered an alternative to net income or
other cash flow measures determined under generally accepted accounting
principals as an indicator of the Company's performance or liquidity. EBITDA
as disclosed herein may not be comparable to EBITDA as disclosed by other
companies.

15

FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1999

REVENUES. Total revenues increased 2.4%, or $2.2 million, to $93.7 million
in fiscal 2000, compared to $91.5 million in fiscal 1999. The revenue increase
was attributable primarily to the factors set forth below.

RENTAL REVENUES. Rental revenues decreased 2.7%, or $2.1 million, to
$76.4 million in fiscal 2000, compared to $78.5 million in fiscal 1999. This
decrease was primarily due to a decrease in the revenues earned by the Company's
European and Asian rental operations, partially offset by increased revenues
from the Company's North American rental operations.

PRODUCT SALES AND SERVICES REVENUES. Product sales and services revenues
increased 33.1%, or $4.3 million, to $17.3 million in fiscal 2000, compared to
$13.0 million in fiscal 1999. This increase was primarily due to sales of new
and used VARI*LITE-Registered Trademark- automated lighting equipment which
increased $3.6 million to $10.4 million for fiscal 2000 compared to
$6.8 million in fiscal 1999

RENTAL COSTS. Rental costs decreased 9.0%, or $3.6 million, to
$36.0 million in fiscal 2000, compared to $39.6 million in fiscal 1999. Rental
costs as a percentage of rental revenues decreased to 47.1% in fiscal 2000, from
50.4% in fiscal 1999. The decrease in rental costs as a percentage of total
rental revenues was primarily due to improvement in rental prices and general
reductions in variable operating costs.

PRODUCT SALES AND SERVICES COSTS. Product sales and services costs
increased 47.2%, or $3.5 million, to $10.9 million in fiscal 2000, compared to
$7.4 million in fiscal 1999. Product sales and services costs as a percentage of
product sales and services revenues increased to 62.8% in fiscal 2000, from
56.8% in fiscal 1999. The increase in product sales and services costs as a
percentage of the related revenues was primarily the result of a decrease in
revenues from sales-type leases which have historically had a lower cost of
sales compared to product sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased 2.9%, or $1.1 million, to $37.1 million in
fiscal 2000, compared to $38.2 million in fiscal 1999. This expense as a
percentage of total revenues decreased to 39.6% in fiscal 2000 from 41.7% in
fiscal 1999. This decrease was primarily due to lower overhead costs as a result
of the Company's restructuring efforts.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
decreased 7.8%, or $0.4 million, to $5.2 million in fiscal 2000, compared to
$5.6 million in fiscal 1999. This expense as a percentage of total revenues
decreased to 5.5% in fiscal 2000, from 6.1% in fiscal 1999. This decrease was
primarily the result of a decrease in employee related costs as a result of
employee terminations from the restructuring of the Company in fiscal 1999.

IMPAIRMENT OF ASSETS. In June and October 2000, the Company made a
strategic decision to sell a portion of its European operations. As a result,
these European assets were written down to their net realizable value, resulting
in a pre-tax charge of $3.9 million for fiscal 2000.

GAINS ON LAWSUIT SETTLEMENT AND SALE OF LEASE. In August 2000, the Company
settled a patent infringement lawsuit for $5.0 million which resulted in a net
gain of $1.7 million and also negotiated the sale of a building lease in New
York which resulted in a net gain of $2.3 million.

RESTRUCTURING COSTS. In 1999, the Company recorded a $0.6 million pretax
charge for the estimated costs of restructuring the Company's operations. The
charge includes severance payments and other costs associated with the
termination of approximately 15 employees. The charge also includes costs
associated with terminating leases and the write off of the net book value of
leasehold improvements associated with the closing of two offices.

INTEREST EXPENSE. Interest expense increased 14.1%, or $0.7 million, to
$5.2 million in fiscal 2000, compared to $4.5 million in fiscal 1999. This
increase was due to higher interest rates in fiscal 2000.

16

INCOME TAXES. The effective tax rate in fiscal 2000 and 1999 was 39.5%.

FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998

REVENUES. Total revenues increased 3.6%, or $3.1 million, to $91.5 million
in fiscal 1999, compared to $88.4 million in fiscal 1998. The revenue increase
was attributable primarily to the factors set forth below.

RENTAL REVENUES. Rental revenues increased 7.2%, or $5.3 million, to
$78.5 million in fiscal 1999, compared to $73.2 million in fiscal 1998. This
increase was primarily due to the acquisition of several of the Company's
European distributors in fiscal 1998. Prior to acquiring each distributor, the
Company received and recognized approximately one-half of the rental revenue
earned by the distributor in accordance with the terms of the distributor
agreement. After acquiring each distributor, the Company's results reflect all
of the revenues the distributor would have earned.

PRODUCT SALES AND SERVICES REVENUES. Product sales and services revenues
decreased 14.1%, or $2.1 million, to $13.0 million in fiscal 1999, compared to
$15.1 million in fiscal 1998. This decrease was primarily due to the sale of the
Company's architectural automated lighting product line in October 1998 and
substantially all of the assets of Brilliant Stages in December 1998. Offsetting
these decreases were increases in revenues from sales-type lease revenues which
increased as a result of the conversion of several North American dealers from a
monthly rental arrangement to a fully paid long term lease program. Revenues
from sales-type leases increased $3.5 million, to $4.7 million for fiscal 1999
compared to $1.2 million for fiscal 1998.

RENTAL COSTS. Rental costs increased 19.3%, or $6.4 million, to
$39.6 million in fiscal 1999, compared to $33.2 million in fiscal 1998. Rental
costs as a percentage of rental revenues increased to 50.4% in fiscal 1999, from
45.3% in fiscal 1998. The increase in rental costs as a percentage of total
rental revenues was primarily due to increased costs associated with the higher
level of conventional equipment rentals which has a higher cost associated with
it than automated equipment, pricing pressures from competitors and the
inclusion of all of the costs of the operations of the European distributors
that were acquired in fiscal 1998. Prior to acquiring each distributor, the
Company's rental costs associated with distributor rental revenues were almost
exclusively the depreciation on the equipment assigned to the distributor. After
acquiring the distributor, the Company's results reflect all of the additional
rental costs incurred from operating the business previously operated by the
distributor.

PRODUCT SALES AND SERVICES COSTS. Product sales and services costs
decreased 29.4%, or $3.1 million, to $7.4 million in fiscal 1999, compared to
$10.5 million in fiscal 1998. Product sales and services costs as a percentage
of product sales and services revenues decreased to 56.8% in fiscal 1999, from
69.2% in fiscal 1998. The decrease in product sales and services costs as a
percentage of the related revenues was primarily the result of the sale of the
Company's architectural automated lighting product line in October 1998 and the
sale of substantially all of the assets of Brilliant Stages in December 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 9.2%, or $3.2 million, to $38.2 million in
fiscal 1999, compared to $35.0 million in fiscal 1998. This increase resulted
primarily from the additional administrative costs associated with the
acquisition of certain of the Company's European distributors in fiscal 1998.
This expense as a percentage of total revenues increased to 41.7% in fiscal 1999
from 39.6% in fiscal 1998.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
decreased 16.5%, or $1.1 million, to $5.6 million in fiscal 1999, compared to
$6.7 million in fiscal 1998. This expense as a percentage of total revenues
decreased to 6.1% in fiscal 1999, from 7.6% in fiscal 1998. This decrease was
primarily the result of a decrease in employee-related costs as a result of
employee terminations from the restructuring of the Company in fiscal 1998.

IMPAIRMENT OF ASSETS. In October 1998, the Company made a strategic
decision to dispose of its architectural automated product line. As a result,
the Company's architectural lighting assets were written down to their net
realizable value, resulting in a pre-tax charge of $3.5 million during the
period ended September 30, 1998.

17

RESTRUCTURING COSTS. In 1999, the Company recorded a $0.6 million pretax
charge for the estimated costs of restructuring the Company's operations. The
charge includes severance payments and other costs associated with the
termination of approximately 15 employees. The charge also includes the cost
associated with terminating leases and the write off of the net book value of
leasehold improvements associated with the closing of two offices. In 1998, the
Company recorded a pretax charge of $1.1 million for the estimated costs of
restructuring the Company's operations. The costs included the cost of employee
terminations and were comprised of primarily severance payments and other
employee related costs associated with terminating the employment of
approximately 75 people.

INTEREST EXPENSE. Interest expense increased 57.6%, or $1.6 million, to
$4.5 million in fiscal 1999, compared to $2.9 million in fiscal 1998. This
increase was due to higher interest rates.

EXTRAORDINARY LOSS. A non-cash extraordinary loss of $0.7 million was
recorded in fiscal 1998, net of $0.4 million of tax benefit, relating to the
early extinguishment of debt under the Company's old credit facility.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In fiscal 1998, the
Company recorded a cumulative effect of change in accounting principle loss of
$0.2 million, net of $0.1 million of tax benefit, relating to start-up costs
that had previously been capitalized.

INCOME TAXES. Effective tax rates in fiscal 1999 and 1998 were 39.5% and
39.9%, respectively.

QUARTERLY FLUCTUATIONS AND SEASONALITY

The following table sets forth certain quarterly income statement data and
EBITDA for each of the Company's last three fiscal years, which were derived
from unaudited financial statements of the Company. In the opinion of the
Company's management, this income statement data contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation thereof.

QUARTERS ENDED
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 FISCAL YEAR
----------- -------- -------- ------------ -----------
(IN THOUSANDS)

FISCAL 1998
Total Revenues.......................... $22,519 $19,227 $22,529 $24,101 $88,376
EBITDA.................................. 6,067 3,139 4,107 (1,329) 11,984
Operating income (loss)................. 2,842 (123) 670 (4,983) (1,594)

FISCAL 1999
Total Revenues.......................... $25,248 $23,170 $20,066 $23,048 $91,532
EBITDA.................................. 5,339 4,415 3,073 2,711 15,538
Operating income (loss)................. 1,466 347 (661) (980) 172

FISCAL 2000
Total Revenues.......................... $27,679 $20,719 $21,509 $23,781 $93,688
EBITDA.................................. 6,938 2,714 4,004 4,891 18,547
Operating income (loss)................. 3,315 (838) 502 1,727 4,706

EBITDA is calculated herein as income before income taxes, extraordinary
loss and cumulative effect of change in accounting principle plus depreciation,
amortization and net interest expense. The Company believes that EBITDA serves
as an important financial analysis tool for measuring and comparing financial
information such as liquidity, operating performance and leverage. EBITDA should
not be considered an alternative to net income or other cash flow measures
determined under generally accepted accounting principles as an indicator of the
Company's performance or liquidity. EBITDA as disclosed herein may not be
comparable to EBITDA as disclosed by other companies.

18

The Company has experienced and is expected to continue to experience
fluctuations in quarterly operating results, both between different quarters
within the same fiscal year and with respect to the same quarter between
different fiscal years. These fluctuations arise from several factors, including
the timing and dollar value of product sales, the dependence of the Company on
concert tours, which are unpredictable in timing and duration, the introduction
of new products and general economic conditions both domestically and
internationally. Because of the possibilities of significant fluctuations,
results for any quarter may not be indicative of results that may be achieved in
a full year. EBITDA and operating loss for the quarter ended September 30, 1998,
include charges totaling $4.6 million for the write-down of impaired
architectural lighting assets to their net realizable value and employee
termination and lease cancellation costs associated with restructuring the
Company's operations. EBITDA and operating loss for the quarter ended
September 30, 1999, include charges totaling $0.6 million for employee
termination costs associated with restructuring the Company's operations. EBITDA
and operating income for the quarter ended June 30, 2000, includes charges
totaling $0.7 million for the impairment of assets used in the Company's Madrid,
Spain operations which were sold. EBITDA and operating loss for the quarter
ended September 30, 2000, includes total gains on the settlement of the patent
infringement lawsuit and the sale of a building lease in New York of
$4.0 million partially offset by charges totaling $3.2 million for the
impairment of assets used in the Company's continental European operations which
were sold.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has financed its operations and capital
expenditures with cash flow from operations, bank borrowings and advances from
distributors and customers. The Company's operating activities generated cash
flow of approximately $6.5 million, $8.5 million and $9.7 million during fiscal
1998, 1999 and 2000, respectively.

On October 21, 1997, the Company consummated the initial public offering of
its common stock and used the net proceeds of approximately $21.3 million to
repay its outstanding indebtedness. On December 19, 1997, the Company entered
into a $50.0 million multicurrency revolving credit facility (the "Old Credit
Facility") and canceled its existing credit facility. As a result of the
cancellation, the Company expensed deferred financing costs of $0.7 million (net
of tax benefit of $0.4 million), which have been reflected in the consolidated
statements of income as an extraordinary loss. Borrowings under the Old Credit
Facility were $32.2 million at September 30, 2000. Subsequent to September 30,
2000, the Company used proceeds of $22.2 million from the sale of the Company's
sound reinforcement business, the sale of the Company's continental European
rental operations and the funding of the London Bank Loan (hereinafter defined)
to reduce borrowings under the Old Credit Facility to $10.0 million.

On December 29, 2000, Vari-Lite entered into a three-year $24.5 million
credit facility (the "New Credit Facility") which includes a $12.0 million term
loan (the "Term Loan"), a $5.0 million revolving credit facility (the
"Revolver") and a $3.0 million term commitment to fund capital expenditures (the
"Capital Expenditure Loan"). The Revolver and the Capital Expenditure Loan
commitments will increase to $7.5 million and $5.0 million, respectively, by
January 15, 2002, if the Company achieves specified financial performance. The
Term Loan and Capital Expenditure Loan amortize over 84 months (subject to a
balloon payment on termination of the New Credit Facility as discussed below).
Borrowings under the Revolver are subject to availability under a borrowing base
of eligible inventory and accounts receivable (as defined in the New Credit
Facility). Initially, all outstanding borrowings under the New Credit Facility
bear interest at the lender's base rate or LIBOR, plus a rate margin of .75% and
2.50%, respectively. Beginning on January 15, 2002, all outstanding balances
under the New Credit Facility will bear interest at the lender's base rate or
LIBOR plus a rate margin ranging from 0.25% to 0.75% or 2.00% to 2.50%,
respectively, based upon the Company's ratio of Adjusted Funded Debt to EBITDA
(as defined in the New Credit Facility). The New Credit Facility is guaranteed
by the Company and is secured by all of the stock and substantially all of the
assets of Vari-Lite and a pledge of 65% of the outstanding capital stock of the
Company's foreign subsidiaries. A commitment fee of 0.25% is charged on the
average daily unused

19

portion of the Revolver. The New Credit Facility contains compliance covenants,
including requirements that the Company achieve certain financial ratios. In
addition, the New Credit Facility places limitations on annual capital
expenditures and on the ability to incur additional indebtedness, make certain
loans or investments, sell assets, pay dividends or reacquire the Company's
stock. The New Credit Facility terminates on December 31, 2003. Upon termination
of the New Credit Facility, the entire outstanding indebtedness thereunder
becomes due and payable in full.

On November 23, 2000, the Company entered into a British pounds sterling
4.0 million (USD 5.8 million) term loan with a United Kingdom bank (the "London
Bank Loan"). The loan, which accrues interest at the rate of 9.1% per annum and
amortizes over 48 months, is secured by all of the assets of the Company's
London operations. Other terms of the loan include certain financial covenants,
limitations on capital expenditures and intercompany payments and the guarantee
of the Company.

The Company typically hedged a portion of its currency fluctuation risk by
borrowing foreign currencies under the Old Credit Facility. Cash generated from
the Company's European and Asian operations is typically denominated in the
local currencies of these foreign offices and is used to pay expenses incurred
in those currencies and service the foreign currency borrowings. The London Bank
Loan is serviced by cash generated from the Company's London operations and
serves as an economic hedge for net cash generated from those operations. This
would not qualify for hedge accounting under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In the future, the Company may use other financial instruments to
hedge its foreign currency fluctuation risk.

Prior to fiscal 1999, the Company had funded the costs to manufacture
automated lighting equipment to be rented to certain distributors with advances
made by the distributors under the terms of the Company's distributorship
agreements. The distributors typically advanced to the Company an amount equal
to the cost to manufacture the equipment, and entered into agreements whereby
the distributors had the exclusive right to sublease the lighting equipment
within defined territories. Borrowings by the Company under these agreements,
which were secured by liens against the applicable equipment, were repaid by the
Company through future rentals due from the distributors under the terms of
their distributorship agreements. Outstanding borrowings from distributors at
September 30, 1998, 1999 and 2000 were approximately $1.2 million, $0.3 million
and zero, respectively. All amounts advanced by distributors are accounted for
by the Company as short-term debt.

The Company has borrowed money to purchase computer equipment, office
furniture and fixtures and conventional lighting equipment. These loans
typically amortize over three years and bear interest at various rates ranging
from 1.6% to 9.3%. Proceeds received under this type of financing were
approximately $2.0 million, $1.4 million and $2.9 million for fiscal 1998, 1999
and 2000, respectively, and borrowings outstanding at September 30, 1998, 1999
and 2000 were approximately $3.2 million, $2.6 million and $3.8 million,
respectively.

In fiscal 2000, the Company also borrowed $1.9 million to purchase computer
equipment and office furniture and fixtures through capitalized leases which
bear interest at a rates from 2.3% to 10.35%. At September 30, 2000, the
outstanding borrowings were $1.7 million.

The Company uses customer advances to fund short-term working capital and
immediate capital expenditure needs for specific contracts. As of September 30,
1998, 1999 and 2000, the Company had unearned revenue related to customer
advances of approximately $1.7 million, $2.6 million and $3.3 million,
respectively.

The Company did not pay dividends in fiscal 1998, 1999 and 2000 and does not
anticipate paying any additional cash dividends for the foreseeable future.

The Company's business requires significant capital expenditures. Capital
expenditures for fiscal 1998, 1999 and 2000 were approximately $25.8 million,
$12.9 million and $4.0 million, respectively, of which

20

approximately $22.6 million, $11.2 million and $2.6 million were for rental
equipment inventories. The majority of the Company's revenues are generated
through equipment rentals and, as such, the Company must maintain a significant
amount of rental equipment to meet customer demands. Total rental equipment
inventories increased from approximately $90.1 million at the beginning of
fiscal 1996 to $123.2 million at September 30, 2000. This increase primarily
consisted of automated lighting equipment, including new products, additional
inventory of existing products and the replacement of equipment sold or
otherwise disposed.

Inventory included in current assets consists primarily of raw materials,
finished goods and spare parts inventory for the Company's automated lighting
equipment. Raw materials represented 87%, 90% and 90% of total inventory at
September 30, 1998, 1999 and 2000, respectively.

The Company had a working capital surplus of $6.2 million at September 30,
1998, a working capital deficit of approximately $0.2 million at September 30,
1999 and $2.1 million at September 30, 2000. The Company has historically
maintained working capital deficits since the bulk of its revenue generating
assets are classified as long-term assets rather than current assets. The
working capital surplus in 1998 was primarily the result of the refinancing of
the Company's senior bank debt which resulted in more of he Company's debt being
classified as long-term.

Management believes that cash flow generated from operations and borrowing
capacity under the New Credit Facility will be sufficient to meet the Company's
anticipated operating cash and capital expenditure needs for the next twelve
months. Because the Company's future operating results will depend on a number
of factors, including the demand for the Company's products and services, the
success of the Company to market, sell and support products, the level of
competition, the success of the Company's research and development programs, the
Company's ability to achieve competitive and technological advances and general
and economic conditions and other factors beyond the Company's control, there
can be no assurance that sufficient capital resources will be available to fund
the expected expansion of its business beyond such period.

INFLATION

The Company has generally been able to offset cost increases with increases
in the rental rates and sales prices charged for its products and services.
Accordingly, the Company does not believe that inflation has had a material
effect on its results of operations to date. However, there can be no assurance
that the Company's business will not be adversely affected by inflation in the
future.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report includes "forward-looking statements" as that phrase is defined
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "will," "could," "may" and
similar expressions, as they relate to management or the Company, are intended
to identify forward-looking statements. Such statements reflect the current
views of management with respect to future events and are subject to certain
risks, uncertainties and assumptions, including without limitation the following
as they relate to the Company: fluctuations in operating results and
seasonality; the success of the Company to market, sell and support products
sold; technological changes; reliance on intellectual property; dependence on
entertainment industry; competition; dependence on management; foreign exchange
risk; international trade risk; and dependence on key suppliers and dependence
on manufacturing facility. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein.

21

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk primarily due to fluctuations in
interest rates and foreign currency.

As of September 30, 2000, with all other variables held constant, a
hypothetical one percentage point increase in interest rates would result in an
increase in interest expense of approximately $0.3 million.

The Company has typically hedged a portion of its currency fluctuation risk
by borrowing foreign currencies under the Old Credit Facility. Cash generated
from the Company's European and Asian operations is typically denominated in the
local currencies of these foreign offices and is used to pay expenses incurred
in those currencies and service the foreign currency borrowings. The London Bank
Loan is serviced by cash generated from the Company's UK operations and serves
as an economic hedge for net cash generated from these operations. This would
not qualify for hedge accounting under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In the future, the Company may use other financial instruments to
hedge its foreign currency fluctuation risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and its subsidiaries
which are required by this Item 8 are listed in Part IV, Item 14(a) of this
report. Such consolidated financial statements are included herein beginning on
page F-1.

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

Not Applicable.

22

PART III

Certain information required by Part III is omitted from this Report on the
basis that the registrant will file a definitive proxy statement pursuant to
Regulation 14A for its annual meeting of shareholders to be held on March 2,
2001 (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Report of the Compensation
Committee and Omnibus Committee on Executive Compensation, the Report of the
Audit Committee or the Stock Performance Graph included in the Proxy Statement.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the Company's directors and executive officers
required by this item is incorporated by reference to the sections entitled
"Election of Directors" and "Management--Executive Officers" in the Proxy
Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
section entitled "Outstanding Capital Stock" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not Applicable

23

PART IV

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

(a) Financial Statements

The Financial Statements listed below are filed as part of this Annual
Report on Form 10-K.

(b) Financial Statement Schedule

SCHEDULE DESCRIPTION PAGE
- -------- ----------- --------

II Valuation and Qualifying Accounts........................... S-1

The auditors' report with respect to the above-listed financial statement
schedule appears on page F-2 of this report. All other financial statements and
schedules not listed are omitted either because they are not applicable or not
required, or the required information is included in the consolidated financial
statements.

(c) Reports on Form 8-K

A Form 8-K was filed on November 13, 2000 reporting on the sale of a
portion of the Company's European operations. A Form 8-K was filed
December 4, 2000 reporting on the sale of Showco, Inc.

(d) Exhibits

EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------

3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 No. 333-33559)

3.2 By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 No. 333-33559)

3.3 Certificate of Desigation of Rights, Preferences and
Privileges of Series A Junior Participating Preferred Stock,
Dated September 22, 1999 (incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1999)

4.1 Form of certificate representing shares of the Company's
Common Stock (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1
No. 333-33559)

4.2 Warrant Agreement, dated as of July 31, 1996, among the
Company, Brown Brothers Harriman & Co., NBD Bank, SunTrust
Bank, Atlanta (formerly known as Trust Company Bank) and
Comerica Bank Texas (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on
Form S-1 No. 333-33559)

4.3 Supplement, dated as of August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and Chase Bank of Texas, N.A. (incorporated by reference to
Exhibit 4.3 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1999)

4.4 Amendment No. 1, dated as of August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and Brown Brothers Harriman & Co. (incorporated by reference
to Exhibit 4.4 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1999)

24

EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------

4.5 Amendment No. 1, dated as of August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and Suntrust Bank, Atlanta (incorporated by reference to
Exhibit 4.5 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1999)

4.6 Amendment No. 1, dated as of August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and Comerica Bank-Texas (incorporated by reference to
Exhibit 4.6 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1999)

4.7 Amendment No. 1, dated as of August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and The First National Bank of Chicago (as successor to NBD
Bank) (incorporated by reference to Exhibit 4.7 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 1999)

4.8 Supplement, dated as of August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company,
Brown Brothers Harriman & Co., the First National Bank of
Chicago as successor to NBD Bank, Suntrust Bank, Comerica
Bank-Texas, and Chase Bank of Texas, N.A. (incorporated by
reference to Exhibit 4.8 to the Company's Annual Report on
Form 10-K for the year ended September 30, 1999)

10.1 Employment Agreement, dated as of July 1, 1995, between the
Company and H.R. Brutsche III (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.2 Amendment No. 1, dated as of August 11, 1997, to the
Employment Agreement, dated as of July 1, 1995, between the
Company and H.R. Brutsche III (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.3 Consulting Agreement, dated as of July 1, 1995, between the
Company and J. Anthony Smith (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.4 Consulting Agreement, dated as of July 1, 1995, between the
Company and John D. Maxson (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.5 Amendment No. 1, dated as of August 11, 1997, to the
Consulting Agreement, dated as of July 1, 1995, between the
Company and John D. Maxson (incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.6 Consulting Agreement, dated as of July 1, 1995, between the
Company and James H. Clark, Jr. (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.7 Deferred Compensation Agreement, dated as of July 1, 1995,
between the Company and H. R. Brutsche III (incorporated by
reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.8 Deferred Compensation Agreement, dated as of July 1, 1995,
between the Company and John D. Maxson (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.9 Deferred Compensation Agreement, dated as of July 1, 1995,
between the Company and James H. Clark, Jr. (incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 No. 333-33559)

25

EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------

10.10 Deferred Compensation Agreement, dated as of July 1, 1995,
between the Company and J. Anthony Smith (incorporated by
reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.11 Compensation Continuation Agreement, dated as of March 31,
1994, among the Company, Vari-Lite, Inc., Showco, Inc. and
H. R. Brutsche III (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.12 Compensation Continuation Agreement, dated as of March 31,
1994, among the Company, Vari-Lite, Inc., Showco, Inc. and
John D. Maxson (incorporated by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1
No. 333-33559)

10.13 Compensation Continuation Agreement, dated as of March 31,
1994, among the Company, Vari-Lite, Inc., Showco, Inc. and
James H. Clark, Jr. (incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.14 Statement and Terms of Employment, dated as of April 1,
1994, between Vari-Lite Europe Ltd. and Brian L. Croft
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 No. 333-33559)

10.15 Split-Dollar Agreement, dated as of October 12, 1995, among
the Company, Brown Brothers Harriman Trust Company of Texas,
trustee of the H.R. Brutsche III Insurance Trust, and H. R.
Brutsche III (incorporated by reference to Exhibit 10.15 to
the Company's Registration Statement on Form S-1
No. 333-33559)

10.16 Amended and Restated Split-Dollar Agreement, dated as of
October 12, 1995, among the Company, Brown Brothers Harriman
Trust Company of Texas, trustee of the H.R. Brutsche III
Insurance Trust, and H. R. Brutsche III (incorporated by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.17 Amended and Restated Split-Dollar Agreement, dated as of
October 12, 1997, among the Company, Brown Brothers Harriman
Trust Company of Texas, trustee of the John D. Maxson 1995
Irrevocable Trust, and John D. Maxson (incorporated by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.18 Split-Dollar Life Insurance Agreement, dated as of
October 12, 1995, among the Company, James Howard Cullum
Clark and James H. Clark, Jr. (incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.19 Amended and Restated Split-Dollar Agreement, dated as of
October 12, 1995, between the Company, James Howard Cullum
Clark and James H. Clark, Jr. (incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.20 Vari-Lite International, Inc. 1997 Omnibus Plan (including
forms of Incentive Stock Option Agreement and Nonqualified
Stock Option Agreement) (incorporated by reference to
Exhibit 10.20 to the Company's Registration Statement on
Form S-1 No. 333-33559)

10.21 Vari-Lite International, Inc. Employees' Stock Ownership
Plan (incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1 No. 333-33559)

10.22 Vari-Lite International, Inc. Employees' Stock Equivalence
Plan (incorporated by reference to Exhibit 10.22 to the
Company's Registration Statement on Form S-1 No. 333-33559)

10.23 Vari-Lite International, Inc. Annual Incentive Plan (as
amended and restated) (incorporated by reference to
Exhibit 10.23 to the Company's Registration Statement on
Form S-1 No. 333-33559)

26

EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------

10.24 Employment Agreement, dated as of August 28, 1995, by and
between the Company and James E. Kinnu (incorporated by
reference to Exhibit 10.34 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.25 Severance Agreement, dated as of September 30, 1996, by and
between the Company and James E. Kinnu (incorporated by
reference to Exhibit 10.35 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.26 Ground Lease, dated as of December 21, 1995, among Brazos
Beltline Development, Inc. and Vari-Lite, Inc.,
Showco, Inc., IGNITION! Creative Services, Inc., Concert
Production Lighting, Inc. and Irideon, Inc. (incorporated by
reference to Exhibit 10.36 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.27 Guaranty, dated as of December 21, 1995, by the Company
(incorporated by reference to Exhibit 10.37 to the Company's
Registration Statement on Form S-1 No. 333-33559)

10.28 Form of Indemnification Agreement with Directors and
Officers (incorporated by reference to Exhibit 10.38 to the
Company's Registration Statement on Form S-1 No. 333-33559)

10.29 Agreement and Plan of Merger, dated as of August 27, 1997,
between the Company and Vari-Lite Texas (incorporated by
reference to Exhibit 10.39 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.30 International Swap Dealers Association, Inc. Master
Agreement, dated as of November 23, 1993, between the
Company and Brown Brothers, Harriman & Co. (along with
confirmation of Interest Rate Swap Transaction)
(incorporated by reference to Exhibit 10.40 to the Company's
Registration Statement on Form S-1 No. 333- 33559)

10.31 International Swap Dealers Association, Inc. Master
Agreement, dated as of September 13, 1996, between
Vari-Lite, Inc. and SunTrust Bank, Atlanta (along with
confirmations of Interest Rate Transactions) (incorporated
by reference to Exhibit 10.41 to the Company's Registration
Statement on Form S-1 No. 333-33559)

10.32 Multicurrency Credit Agreement, dated as of December 19,
1997, among the Company and SunTrust Bank, Atlanta, as agent
for the other banks thereunder (incorporated by reference to
Exhibit 10.32 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1997)

10.33 Amendment No.1, dated April 24, 1998 to the Multicurrency
Credit Agreement, dated as of December 19, 1997, among the
Company and SunTrust Bank, Atlanta, as agent for the other
banks thereunder (incorporated by reference 10.33 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998)

10.34 Amendment No. 2, dated July 31, 1998 to the Multicurrency
Credit Agreement, dated as of December 19, 1997, among the
Company and SunTrust Bank, Atlanta, as agent for the other
banks thereunder (incorporated by reference to
Exhibit 10.34 to the Company's Quarterly Report for the
quarterly period ended June 30, 1998)

10.35 Amendment No. 3, dated December 15, 1998 to the
Multicurrency Credit Agreement, dated as of December 19,
1997, among the Company and SunTrust Bank, Atlanta, as agent
for the other banks thereunder (incorporated by reference to
Exhibit 4.5 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1999)

10.36 Amendment No. 1, effective November 2, 1998, to the Deferred
Compensation Agreement, dated as of July 1, 1995, between
the Company and H.R. Brutsche III (incorporated by reference
to Exhibit 4.5 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1999)

27

EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------

10.37 Amendment No. 1, effective November 2, 1998, to the Deferred
Compensation Agreement, dated as of July 1, 1995, between
the Company and John D. Maxson (incorporated by reference to
Exhibit 4.5 to the Company's Annual Report on Form 10-K for
the year ended September 30, 1999)

10.38 Amendment No. 1, effective November 2, 1998, to the Deferred
Compensation Agreement, dated as of July 1, 1995, between
the Company and James H. Clark, Jr. (incorporated by
reference to Exhibit 10.38 to the Company's Quarterly Report
for the quarterly period ended December 31, 1998)

10.39 Amendment No. 1, effective November 2, 1998, to the Deferred
Compensation Agreement, dated as of July 1, 1995, between
the Company and J. Anthony Smith (incorporated by reference
to Exhibit 10.39 to the Company's Quarterly Report for the
quarterly period ended December 31, 1998)

10.40 Amendment No. 1, effective January 1, 1998, to the Vari-Lite
International, Inc. Employees' Stock Ownership Plan dated
September 27, 1995 (incorporated by reference to
Exhibit 10.40 to the Company's Quarterly Report for the
quarterly period ended March 31, 1999)

10.41 Amendment No. 1, effective January 1, 1998, to the Vari-Lite
International, Inc. Employees' Stock Ownership Trust dated
September 27, 1995 (incorporated by reference to
Exhibit 10.41 to the Company's Quarterly Report for the
quarterly period ended March 31, 1999)

10.42 Amendment No. 4, dated April 1, 1999, to the Multicurrency
Credit Agreement, dated as of December 19, 1997, among the
Company and SunTrust Bank, Atlanta, as agent for the banks
thereunder (incorporated by reference to Exhibit 10.42 to
the Company's Quarterly Report for the quarterly period
ended March 31, 1999)

10.43 Temporary Waiver Agreement, dated August 12, 1999, to the
Multicurrency Credit Agreement, dated as of December 19,
1997, among the Company and SunTrust Bank, Atlanta, as agent
for the banks thereunder (incorporated by reference to
Exhibit 10.43 to the Company's Quarterly Report for the
quarterly period ended June 30, 1999)

10.44 Rights Agreement, dated September 27, 1999, by and between
the Company and Chas Mellon Shareholder Services, L.L.C.
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K filed September 22, 1999)

10.45 Amendment No. 5, dated August 25, 1999, to the Multicurrency
Credit Agreement, dated as of December 19, 1997, among the
Company and SunTrust Bank, Atlanta, as agent for the banks
thereunder (incorporated by reference to Exhibit 10.45 to
the Company's Annual Report on Form 10-K for the year ended
September 30, 1999)

10.46 Amendment No. 6, dated January 11, 2000, to the
Multicurrency Credit Agreement, dated as of December 19,
1997, among the Company and SunTrust Bank, Atlanta, as agent
for the banks thereunder (incorporated by reference to
Exhibit 10.46 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1999)

10.47 Share Purchase Agreement, dated October 26, 2000, between
Vari-Lite International, Inc. and First Events B.V.
(incorporated by reference to Exhibit 2.1 to the Company's
Form 8-K filed November 13, 2000)

10.48 Asset Purchase Agreement, dated October 26, 2000, between
Vari-Lite, Inc. and First Events B.V. (incorporated by
reference to Exhibit 2.2 to the Company's Form 8-K filed
November 13, 2000)

28

EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------

10.49 Asset Transfer Agreement, dated November 17, 2000, by and
among Vari-Lite International, Inc., Showco, Inc. and
Clearsho, LLC (incorporated by reference to Exhibit 2.1 to
the Company's Form 8-K filed December 4, 2000)

10.50 Equity Purchase Agreement, dated November 17, 2000, by and
among Vari-Lite International, Inc., Showco, Inc., Clair
Brothers Audio Enterprises, Inc. and Clair Acquisition Corp.
(incorporated by reference to Exhibit 2.2 to the Company's
Form 8-K filed December 4, 2000)

*10.51 Financing Agreement, dated December 29, 2000, between
Vari-Lite, Inc. and Firstar Bank, National Association

*10.52 Security Agreement, dated December 29, 2000, between
Vari-Lite, Inc. and Firstar Bank, National Association

*10.53 Guaranty Agreement, dated December 29, 2000, made by the
Company in favor of Firstar Bank, National Association

*10.54 Patent, Trademark and License Security Agreement, dated
December 29, 2000, between Vari-Lite, Inc. and Firstar Bank,
National Association

*10.55 Chattel Mortgage Facility Offer, dated November 9, 2000,
between Vari-Lite Production Services, Ltd. and Barclays
Mercantile Business Finance Limited

*10.56 Mortgage, dated November 23, 2000, between Vari-Lite
Production Services, Ltd. and Barclays Mercantile Business
Finance Limited

*10.57 Guarantee & Idemnity--Cross Border, dated November 23, 2000,
between the Company and Barclays Mercantile Business Finance
Limited on behalf of Vari-Lite Production Services, Ltd.

*21.1 List of Company's Subsidiaries

*23.1 Consent of Deloitte & Touche LLP

*27.1 Financial Data Schedule

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

* Filed herewith.

29

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas
and State of Texas on the 16th day of January, 2001.

VARI-LITE INTERNATIONAL, INC.

By: /s/ H.R. BRUTSCHE III
-----------------------------------------
H.R. Brutsche III
CHAIRMAN OF THE BOARD 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 on the 16th day of January, 2001.

/s/ H.R. BRUTSCHE III Chariman of the Board and Chief Executive
- -------------------------------------------- Officer (Principal Executive Officer)
H.R. Brutsche III

/s/ JEROME L. TROJAN III Vice President--Finance, Chief Financial
- -------------------------------------------- Officer, Treasurer and Secretary (Principal
Jerome L. Trojan III Financial and Accounting Officer)

/s/ JAMES H. CLARK, JR. Director
- --------------------------------------------
James H. Clark, Jr.

/s/ JOHN D. MAXSON Director
- --------------------------------------------
John D. Maxson

/s/ JOHN R. RETTBERG Director
- --------------------------------------------
John R. Rettberg

/s/ J. ANTHONY SMITH Director
- --------------------------------------------
J. Anthony Smith

30

INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES

Independent Auditors' Report................................ F-2

Consolidated Balance Sheets as of September 30, 1999 and
2000...................................................... F-3

Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended September 30, 1998, 1999, and 2000.... F-4

Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1998, 1999 and 2000............. F-5

Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1999 and 2000......................... F-6

Notes to Consolidated Financial Statements.................. F-7

The following financial statement supplementary schedule of
the Registrant and its subsidiaries required to be included in
Item 14(b) is listed below:

Schedule II--Valuation and Qualifying Accounts.............. S-1

F-1

INDEPENDENT AUDITORS' REPORT

To the Stockholders of
Vari-Lite International, Inc.
Dallas, Texas

We have audited the accompanying consolidated balance sheets of Vari-Lite
International, Inc. and subsidiaries (herein referred to as "the Company") as of
September 30, 1999 and 2000, and the related consolidated statements of
operations and comprehensive loss, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 2000. Our audits also
included the financial statement schedule listed in the index at Item 14(b).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at September 30,
1999 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
December 12, 2000
(December 29, 2000 as to the fourth paragraphs of Notes E and Q)

F-2

VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

1999 2000
-------- --------

ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1,969 $ 4,315
Receivables, less allowance for doubtful accounts of $720
and $740................................................ 13,056 12,369
Inventory................................................. 6,586 13,695
Prepaid expense and other current assets.................. 1,715 1,352
-------- --------
TOTAL CURRENT ASSETS.................................... 23,326 31,731
EQUIPMENT AND OTHER PROPERTY:
Lighting and sound equipment.............................. 135,220 123,210
Machinery and tools....................................... 6,044 5,678
Furniture and fixtures.................................... 5,009 5,089
Office and computer equipment............................. 11,060 10,377
Work in progress and raw materials inventory.............. 3,040 680
-------- --------
160,373 145,034
Less accumulated depreciation and amortization.......... 83,323 84,097
-------- --------
77,050 60,937
OTHER ASSETS................................................ 7,324 2,035
-------- --------
TOTAL ASSETS............................................ $107,700 $ 94,703
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 11,855 $ 10,873
Unearned revenue.......................................... 2,606 3,272
Income taxes payable...................................... 440 82
Current portion of long-term obligations.................. 8,591 19,599
-------- --------
TOTAL CURRENT LIABILITIES............................... 23,492 33,826
LONG-TERM OBLIGATIONS....................................... 39,459 18,136
DEFERRED INCOME TAXES....................................... 1,514 993
-------- --------
TOTAL LIABILITIES....................................... 64,465 52,955
COMMITMENTS AND CONTINGENCIES (Note F and H)................ -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.10 par value (10,000,000 shares
authorized; no shares issued)........................... -- --
Common Stock, $0.10 par value (40,000,000 shares
authorized; 7,845,167 shares issued; 7,800,003 shares
outstanding)............................................ 785 785
Treasury Stock............................................ (186) (186)
Additional paid-in capital................................ 25,026 25,026
Stockholder notes receivable.............................. (30) (19)
Accumulated other comprehensive income (loss)--foreign
currency translation adjustment......................... 892 (319)
Retained earnings......................................... 16,748 16,461
-------- --------
TOTAL STOCKHOLDERS' EQUITY.............................. 43,235 41,748
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $107,700 $ 94,703
======== ========

See notes to consolidated financial statements.

F-3

VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

1998 1999 2000
--------- --------- ---------

Rental revenues............................................. $ 73,235 $ 78,520 $ 76,366
Product sales and services revenues......................... 15,141 13,012 17,322
--------- --------- ---------
TOTAL REVENUES............................................ 88,376 91,532 93,688
Rental cost................................................. 33,172 39,557 35,990
Product sales and services cost............................. 10,472 7,393 10,881
--------- --------- ---------
TOTAL COST OF SALES....................................... 43,644 46,950 46,871
--------- --------- ---------
GROSS PROFIT.............................................. 44,732 44,582 46,817
Selling, general and administrative expense................. 35,014 38,224 37,102
Research and development expense............................ 6,690 5,586 5,152
Impairment of assets........................................ 3,542 -- 3,850
Restructuring costs......................................... 1,080 600 --
Gains on lawsuit settlement and sale of lease............... -- -- (3,993)
--------- --------- ---------
TOTAL OPERATING EXPENSES.................................. 46,326 44,410 42,111
--------- --------- ---------
OPERATING INCOME (LOSS)..................................... (1,594) 172 4,706
Interest expense (net)...................................... 2,881 4,540 5,180
--------- --------- ---------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CHANGE IN
ACCOUNTING PRINCIPLE...................................... (4,475) (4,368) (474)
Income tax benefit.......................................... (1,785) (1,725) (187)
--------- --------- ---------
LOSS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE............................ (2,690) (2,643) (287)
Extraordinary loss from early extinguishment of debt........ (737) -- --
Cumulative effect of change in accounting principle......... (195) -- --
--------- --------- ---------
NET LOSS.................................................... (3,622) (2,643) (287)
Other comprehensive income (loss)--foreign currency
translation adjustment.................................... (591) 1,122 (1,211)
--------- --------- ---------
COMPREHENSIVE LOSS.......................................... $ (4,213) $ (1,521) $ (1,498)
========= ========= =========

WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING....... 7,712,332 7,800,003 7,800,003
========= ========= =========

PER SHARE INFORMATION
BASIC AND DILUTED:
Loss before extraordinary loss and cumulative effect of
change in accounting principle.......................... $ (0.35) $ (0.34) $ (0.04)
Extraordinary loss........................................ $ (0.10) $ -- $ --
Cumulative effect of change in accounting principle....... $ (0.02) $ -- $ --
--------- --------- ---------
Net loss.................................................. $ (0.47) $ (0.34) $ (0.04)
========= ========= =========

See notes to consolidated financial statements.

F-4

VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
(IN THOUSANDS EXCEPT SHARE DATA)

PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL STOCKHOLDER
-------------------- -------------------- ------------------- PAID-IN NOTES
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
--------- -------- --------- -------- -------- -------- ---------- -----------

BALANCE, OCTOBER 1, 1997............ -- $ -- 5,845,167 $585 (45,164) $(186) $ 3,344 $(176)
Initial Public Offering............. 2,000,000 200 21,082
Payments on stockholder notes
receivable........................ 94
Other comprehensive loss--foreign
currency translation adjustment...
Net loss............................
--------- ------ --------- ---- ------- ----- ------- -----
BALANCE, SEPTEMBER 30, 1998......... 7,845,167 785 (45,164) (186) 24,426 (82)
Payments on stockholder notes
receivable........................ 52
Revaluation of stock warrants....... 600
Other comprehensive income--foreign
currency translation adjustment...
Net loss............................
--------- ------ --------- ---- ------- ----- ------- -----
BALANCE, SEPTEMBER 30, 1999......... -- -- 7,845,167 785 (45,164) (186) 25,026 (30)
Payments on stockholder notes
receivable........................ 11
Other comprehensive loss--foreign
currency translation adjustment...
Net loss............................
--------- ------ --------- ---- ------- ----- ------- -----
BALANCE, SEPTEMBER 30, 2000......... -- $ -- 7,845,167 $785 (45,164) $(186) $25,026 $ (19)
========= ====== ========= ==== ======= ===== ======= =====

ACCUMULATED
STOCK OTHER
PURCHASE COMPREHENSIVE RETAINED
WARRANTS INCOME (LOSS) EARNINGS TOTAL
-------- ------------- -------- --------

BALANCE, OCTOBER 1, 1997............ $ 600 $ 361 $23,013 $27,541
Initial Public Offering............. 21,282
Payments on stockholder notes
receivable........................ 94
Other comprehensive loss--foreign
currency translation adjustment... (591) (591)
Net loss............................ (3,622) (3,622)
----- ------- ------- -------
BALANCE, SEPTEMBER 30, 1998......... 600 (230) 19,391 44,704
Payments on stockholder notes
receivable........................ 52
Revaluation of stock warrants....... (600) --
Other comprehensive income--foreign
currency translation adjustment... 1,122 1,122
Net loss............................ (2,643) (2,643)
----- ------- ------- -------
BALANCE, SEPTEMBER 30, 1999......... -- 892 16,748 43,235
Payments on stockholder notes
receivable........................ 11
Other comprehensive loss--foreign
currency translation adjustment... (1,211) (1,211)
Net loss............................ (287) (287)
----- ------- ------- -------
BALANCE, SEPTEMBER 30, 2000......... $ -- $ (319) $16,461 $41,748
===== ======= ======= =======

See notes to consolidated financial statements.

F-5

VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS)

1998 1999 2000
-------- -------- --------

Cash flows from operating activities:
Net loss.................................................. $ (3,622) $ (2,643) $ (287)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 13,515 15,230 13,841
Amortization of note discount and deferred loan fees.... 83 136 453
Provision for doubtful accounts......................... 641 140 178
Extraordinary loss from early extinguishment of debt.... 737 -- --
Cumulative effect of change in accounting principle..... 195 -- --
Impairment of Assets.................................... 3,542 -- 3,850
Gain on sale of lease................................... -- -- (2,251)
Deferred income taxes................................... (2,735) (2,194) (521)
Gain on sale of equipment and other property............ (18) (159) (626)
Gains on sale of Brilliant Stages and cancellation of
land lease and loss on sale of Dubai................... -- (462) --

Net change in assets and liabilities:
Accounts receivable................................... 1,758 268 (130)
Inventory............................................. (3,561) (2,545) (6,852)
Prepaid expenses...................................... 746 12 324
Other assets.......................................... (3,085) 1,668 2,583
Accounts payable, accrued liabilities and income taxes
payable.............................................. (318) (1,869) (1,588)
Unearned revenue...................................... (1,404) 912 679
-------- -------- --------
Net cash provided by operating activities............... 6,474 8,494 9,653

Cash flows from investing activities:
Capital expenditures, including rental equipment.......... (25,841) (12,914) (3,980)
Acquisition of European companies, net of cash acquired... (1,833) (1,192) --
Proceeds from sale of the Madrid operations and sale of
lease................................................... -- -- 4,714
Proceeds from sale of Irideon, Brilliant Stages and Dubai
assets and cancellation of land lease................... -- 3,666 --
Proceeds from sale of equipment........................... 98 400 3,580
-------- -------- --------
Net cash provided (used) by investing activities........ (27,576) (10,040) 4,314

Cash flows from financing activities:
Proceeds from issuance of debt............................ 79,760 33,178 29,198
Principal payments on debt................................ (76,418) (34,765) (39,214)
Proceeds from issuance of distributor advances............ 690 -- --
Principal payments on distributor advances................ (1,735) (646) (279)
Proceeds from payments on stockholder notes receivable.... 94 52 11
Proceeds from public offering of common stock............. 21,282 -- --
-------- -------- --------
Net cash provided (used) by financing activities........ 23,673 (2,181) (10,284)
Effect of exchange rate changes on cash and cash
equivalents............................................... (595) 1,858 (1,337)
-------- -------- --------
Net increase (decrease) during the year..................... 1,976 (1,869) 2,346
Cash, beginning of year..................................... 1,862 3,838 1,969
-------- -------- --------
Cash, end of year........................................... $ 3,838 $ 1,969 $ 4,315
======== ======== ========

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense............................ $ 2,732 $ 3,958 $ 5,459
Cash paid for income taxes................................ $ 1,313 $ 821 $ 427
Non-cash transactions:
Warrants revalued....................................... $ -- $ (600) $ --

See notes to consolidated financial statements.

F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

NOTE A--ORGANIZATION:

The Company is a leading worldwide designer, manufacturer and distributor of
automated lighting systems. The Company provides automated lighting and other
related equipment and production services primarily to the entertainment
industry, servicing markets such as concert touring, theater, television and
film and corporate events. The Company sells and rents its
VARI*LITE(-Registered Trademark-) automated lighting systems through its own
domestic and international offices, rental associates and worldwide independent
dealers.

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES

The consolidated financial statements of Vari-Lite International, Inc.
include the accounts of its wholly-owned subsidiaries which consist of operating
and holding companies. The operating companies consist of Vari-Lite, Inc.
("Vari-Lite"), Showco, Inc. ("Showco"), IR Sub, Inc. (formerly Irideon, Inc.),
IGNITION! Creative Group, Inc., BS, Ltd. (formerly Brilliant Stages, Ltd.),
Vari-Lite Asia, Inc., Vari-Lite Hong Kong Limited, Vari-Lite Production
Services, Ltd., ("VLPS London") Vari-Lite Production Services, SA. ("VLPS
Madrid"), Vari-Lite Production Services, N.V. ("VLPS Brussels"), Vari-Lite
Production Services, AB. ("VLPS Stockholm"), and Vari-Lite Production Services,
SAS ("VLPS Paris"). The wholly-owned holding companies include Vari-Lite Europe
Holdings Limited, Vari-Lite Europe International, B.V. ("VLI Europe") and
Vari-Lite Production Services Europe, N.V. During 1998, the Company acquired two
of its distributors for a total purchase price of approximately $3,160 which
created approximately $1,000 of goodwill. In October 1998, the Company acquired
the VARI-LITE(-Registered Trademark-) distribution rights and related assets of
its French distributor for approximately $1,200, virtually all of which was
recorded as goodwill.

On October 30, 1998, the Company sold substantially all of the assets of its
Irideon architectural automated lighting product line for its net book value,
after writedown, of approximately $2,000 (see Note I). On December 31, 1998, the
Company sold substantially all of the assets of Brilliant Stages, Ltd., one of
the Company's European subsidiaries. On September 23, 1999, the Company sold
substantially all of the assets of its Dubai operation. On June 30, 2000, the
Company sold its entire interest in VLPS Madrid and the
VARI*LITE(-Registered Trademark-) equipment used in the operations for a loss of
$650. On October 26, 2000, the Company sold 100% of its interest in VLI Europe
and 0.4% of its interest in VLPS Paris and all the
VARI*LITE(-Registered Trademark-) lighting equipment used in those operations.
VLI Europe owned 100% of VLPS Brussels, 99.6% of VLPS Paris and 100% of VLPS
Stockholm. This transaction resulted in a pre-tax charge of $3,200 which
included the write off of all the associated goodwill. All material intercompany
transactions and balances have been eliminated.

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 liabilities at the date of the financial statements.
Actual results could differ from these estimates.

Certain reclassifications have been made to the September 30, 1998 and 1999
consolidated financial statements to conform to the presentation in the
September 30, 2000 consolidated financial statements.

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

INVENTORY

Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes certain indirect purchasing and handling costs incurred to
acquire and manage inventory and certain overhead costs. Market for raw
materials is based on replacement cost and for other inventory classifications
on net realizable value. Appropriate consideration is given to deterioration,
obsolescence and other factors in evaluating net realizable value.

EQUIPMENT AND OTHER PROPERTY

Equipment and other property are stated at cost or, in the case of
capitalized leases, at the lower of the present value of future lease payments
or the fair value of the equipment. Depreciation and amortization are provided
on the straight-line method over the estimated useful lives ranging from three
to ten years of the various classes of equipment and other property.

LONG-LIVED ASSETS

As required by Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to be
Disposed Of," the Company assesses potential impairments to its long-lived
assets when there is evidence that events or changes in circumstances have made
recovery of the assets' carrying value unlikely. An impairment loss would be
recognized when the sum of the expected future net cash flows is less than the
carrying amount of the asset.

OTHER ASSETS

The Company capitalizes and includes in other assets deferred financing
costs and the costs of acquiring patents and trademarks on its products.
Deferred financing costs are amortized over the term of the related debt.
Amortization on patents and trademarks is computed on the straight-line basis
over the lives of the patents or trademarks or the period of expected benefit,
if shorter. In addition, the Company capitalizes legal costs associated with the
pursuit of third parties for infringement of certain of the Company's patents,
copyrights and trademarks when the Company is successful, or management believes
it will be successful, and that these costs will be recovered pursuant to SFAS
No. 121. These costs are amortized over the lives of the applicable patents,
copyrights and trademarks.

GOODWILL

Goodwill represents the excess of purchase price over the fair value of
identifiable tangible and intangible net assets of businesses acquired. Goodwill
is amortized on a straight-line basis over periods not exceeding 25 years. The
recoverability of carrying values of intangible assets is evaluated on a
recurring basis. The primary indicators are current and forecasted profitability
of the related acquired business.

FOREIGN CURRENCY TRANSLATION

In accordance with SFAS No. 52, "Foreign Currency Translation," the asset
and liability accounts of the Company's non-U.S. subsidiaries are translated
into U.S. dollars using rates of exchange in effect at the balance sheet date.
Revenues and expenses are translated at exchange rates which approximate the
average rates prevailing during the year. The cumulative translation gains and
losses are a component of comprehensive income and included in stockholders'
equity.

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

REVENUE RECOGNITION

Revenues related to equipment rental and services are recognized as earned
over the terms of the contracts. Revenues related to the sale of products are
recognized upon shipment of the equipment.

RESEARCH AND DEVELOPMENT

Costs incurred in connection with the development of new products are
considered research and development costs and are charged to operations as
incurred.

DERIVATIVE INSTRUMENTS

Prior to fiscal year 1998, the Company had entered into an interest rate
swap agreement to reduce the risks associated with variable interest rates. The
interest rate swap agreement corresponded to a portion of the outstanding
principal balance of the Company's line of credit. The Company recorded the
amount paid or received pursuant to the swap agreement as an adjustment to
interest expense, and the related payable or receivable to or from the
counterparty as a liability or asset, respectively. In August 1999, the
termination of the interest swap prior to the scheduled maturity resulted in a
charge to expense for the amount of unamortized costs and payments required
under the agreement. The Company terminated the interest rate swap agreement in
August 1999 for $300 in cash from the counterparty. As a result, the Company
recorded a gain for the amount of cash received in excess of the unamortized
costs. The gain is included in selling, general and administrative expenses in
the accompanying financial statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS

In assessing the fair value of financial instruments at September 30, 1999
and 2000, the Company has used available market information and other valuation
methodologies. Some judgment is necessarily required in interpreting market data
to develop the estimates of fair value, and, accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.

The carrying amounts of cash, receivables, payables and long term
obligations approximated fair value as of September 30, 1999 and 2000.

EQUITY-BASED COMPENSATION

SFAS No. 123 establishes a method of accounting whereby recognized option
pricing models are used to estimate the fair value of equity based compensation,
including options. The Company has elected, as provided by SFAS No. 123, not to
recognize compensation expense for employee equity based compensation as
calculated under SFAS No. 123, but will recognize any related expense in
accordance with the provisions of APB Opinion No. 25. Disclosure of amounts
required by SFAS 123 are included in Note G.

INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," and files a consolidated federal income tax
return. Deferred tax assets and liabilities are recorded based on the difference
between the tax basis of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary differences. Provision is
made for deferred taxes relating to temporary differences in the recognition of
income and expense for financial reporting and for income tax purposes.

F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

NET INCOME PER SHARE

Net income per share is calculated by dividing net income by the weighted
average shares outstanding for the applicable period. Common stock equivalents,
including warrants and options, are included, to the extent considered dilutive,
using the treasury stock method and are assumed to be outstanding for the full
period in the period of issuance. Options to purchase 556,000, 736,100 and
657,900 shares of Common Stock at prices ranging from $13.20 to $1.125 were
outstanding at September 30, 1998, 1999 and 2000, respectively. Warrants to
purchase 242,233 shares of Common Stock at a price of $11.53 were outstanding at
September 30, 1998. In addition, warrants to purchase 296,057 shares of Common
Stock at a price of $3.75 were outstanding at September 30, 1999 and 2000. None
of the options or warrants in 1998, 1999 and 2000 were included in the
computation of diluted EPS as they were antidilutive.

ACCOUNTING STANDARDS CHANGES

In 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that the costs of starting significant new
operations be expensed as incurred. The Company's practice had been to record
such costs as deferred charges and to amortize them over periods of not more
than five years. The Company early adopted the SOP effective October 1, 1997 and
recorded a pre-tax charge of $282 ($195 after taxes, or $0.02 per basic and
diluted share) in the first quarter 1998 results as a cumulative effect of this
accounting change.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." As amended by SFAS No. 137 and
SFAS No. 138, the Statement is effective for all fiscal years beginning after
June 15, 2000. SFAS 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS No. 133,
certain contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS No. 133 effective
October 1, 2000. The adoption of SFAS No. 133 did not have a significant impact
on the financial position or results of operations of the Company because the
Company does not have significant derivative activity.

SEGMENT REPORTING

The Company operates in geographic segments located in North America, Europe
and Asia. The Company markets its products and services to the entertainment
industry, including the concert touring, theater, television and film and
corporate events markets. Depending on the circumstances, the Company solicits
business from lighting and set designers and consultants, artist managers,
producers, production managers and production companies, promoters, corporations
and business associations. No customer has accounted for more than 10% of the
Company's revenues for at least the last three fiscal years. The Company does
not rely on any major customer for a significant amount of its operation. See
Note M for segment information.

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

NOTE C--INVENTORY:

Inventory consists of the following:

1999 2000
-------- --------

Raw materials.............................................. $5,941 $12,341
Work in progress........................................... 500 698
Finished goods............................................. 145 656
------ -------
$6,586 $13,695
====== =======

NOTE D--OTHER ASSETS:

Other assets consist of the following:

1999 2000
-------- --------

Patents and trademarks..................................... $3,170 $ 263
Goodwill................................................... 2,482 --
Deferred financing costs................................... 900 778
Other, including sales-type lease receivables.............. 1,555 1,862
------ -------
8,107 2,903
Less accumulated amortization.............................. (783) (868)
------ -------
$7,324 $ 2,035
====== =======

In fiscal 1999, patents and trademarks included amounts capitalized by the
Company relating to patent infringement suits in which the Company is the
plaintiff. In fiscal 2000, these amounts were written off against the proceeds
received from the settlement (see Note F).

NOTE E--LONG-TERM OBLIGATIONS:

Long-term obligations expressed in U.S. dollars consist of the following:

1999 2000
-------- --------

Revolving lines of credit:
U.S. dollars.......................................... 33,360 32,200
British pounds sterling............................... 7,330 --
Japanese yen.......................................... 2,587 --
French franc.......................................... 1,222 --
------- -------
Total revolving lines of credit..................... 44,499 32,200
Advances from distributors................................ 279 --
Obligations under capital leases with interest at 2.3% to
10.35%, maturities through 2003......................... 647 1,692
Term loans with interest at 1.6% to 9.3%.................. 2,625 3,843
------- -------
48,050 37,735
Less current portion...................................... (8,591) (19,599)
------- -------
$39,459 $18,136
======= =======

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

Based on the total borrowings outstanding under the Old Credit Facility as
of September 30, 1999 and 2000, the weighted average interest rates were 8.42%
and 11.75%, respectively.

On October 21, 1997, the Company consummated the initial public offering of
its common stock and used the net proceeds of, approximately $21,300 to repay
its outstanding indebtedness. On December 19, 1997, the Company entered into a
$50,000 multicurrency revolving credit facility (the "Old Credit Facility") and
canceled its existing credit facility. As a result of the cancellation, the
Company expensed deferred financing costs of $737 (net of tax benefit of $481),
which have been reflected in the consolidated statements of income as an
extraordinary loss. Borrowings under the Old Credit Facility were $32,200 at
September 30, 2000. Subsequent to September 30, 2000, the Company used proceeds
of $22,200 from the sale of the Company's sound reinforcement business, the sale
of the Company's continental European rental operations and the funding of the
London Bank Loan (hereinafter defined) to reduce borrowings under the Old Credit
Facility to $10,000.

On December 29, 2000, Vari-Lite entered into a three-year $24,500 credit
facility (the "New Credit Facility") which includes a $12,000 term loan (the
"Term Loan"), a $5,000 revolving credit facility (the "Revolver") and a $3,000
term commitment to fund capital expenditures (the "Capital Expenditure Loan").
The Revolver and the Capital Expenditure Loan commitments will increase to
$7,500 and $5,000, respectively, by January 15, 2002, if the Company achieves
specified financial performance. The Term Loan and Capital Expenditure Loan
amortize over 84 months (subject to a balloon payment on termination of the New
Credit Facility as discussed below). Borrowings under the Revolver are subject
to availability under a borrowing base of eligible inventory and accounts
receivable (as defined in the New Credit Facility). Initially, all outstanding
borrowings under the New Credit Facility bear interest at the lender's base rate
or LIBOR, plus a rate margin of .75% and 2.50%, respectively. Beginning on
January 15, 2002, all outstanding balances under the New Credit Facility will
bear interest at the lender's base rate or LIBOR plus a rate margin ranging from
0.25% to 0.75% or 2.00% to 2.50%, respectively, based upon the Company's ratio
of Adjusted Funded Debt to EBITDA (as defined in the New Credit Facility). The
New Credit Facility is guaranteed by the Company and is secured by all of the
stock and substantially all of the assets of Vari-Lite, and a pledge of 65% of
the outstanding capital stock of the Company's foreign subsidiaries. A
commitment fee of 0.25% is charged on the average daily unused portion of the
New Credit Facility. The New Credit Facility contains compliance covenants,
including requirements that the Company achieve certain financial ratios. In
addition, the New Credit Facility places limitations on annual capital
expenditures and on the ability to incur additional indebtedness, make certain
loans or investments, sell assets, pay dividends or reacquire the Company's
stock. The New Credit Facility terminates on December 31, 2003. Upon termination
of the New Credit Facility, the entire outstanding indebtedness thereunder
becomes due and payable in full.

On November 23, 2000, the Company entered into a British pounds sterling
4,000 (USD 5,800) term loan with a United Kingdom bank (the "London Bank Loan").
The loan, which accrues interest at the rate of 9.1% per annum and amortizes
over 48 months, is secured by all of the assets of the Company's London
operations. Other terms of the loan include certain financial covenants,
limitations on capital expenditures and intercompany payments and the guarantee
of the Company.

The Company typically hedged a portion of its currency fluctuation risk by
borrowing foreign currencies under the Old Credit Facility. Cash generated from
the Company's European and Asian operations is typically denominated in the
local currencies of these foreign offices and is used to pay expenses incurred
in those currencies and service the foreign currency borrowings. The London Bank
Loan is serviced by cash generated from the Company's London operations and
serves as an economic

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

hedge for net cash generated from those operations. This would not qualify for
hedge accounting in accordance with SFAS No. 133. In the future, the Company may
use other financial instruments to hedge its foreign currency fluctuation risk.

As of September 30, 1998, the Company had interest rate swap agreements with
two of its primary lenders relating to a notional principal amount of $24,200,
which effectively changed the Company's variable LIBOR interest rate exposure on
a substantial portion of its U.S. dollar borrowings to a fixed weighted average
interest rate of 7.79%. In August 1999, the Company terminated the interest swap
agreements for $300 in cash which was recorded as a gain and is included in
selling, general and administrative expenses in the accompanying financial
statements.

In December 1997, the Company expensed deferred financing costs related to
the prior debt facility of $737 (net of tax benefit of $481) due to the early
extinguishment of debt, which have been reflected in the consolidated statements
of income as an extraordinary loss for the year ended September 30, 1998. In
1999, the Company expensed a portion of the deferred financing costs related to
the Old Credit Facility as a result of the modification in terms. The write-off
of $271 is included in the interest expense in the accompanying financial
statements.

In connection with prior distributor agreements, the Company had received
advances to provide the necessary funds for construction of the leased lighting
systems (see Note H). The remaining balances outstanding under such borrowings
at September 30, 1999 and 2000, were $279 and $0, respectively.

As discussed in Notes E and Q, the Company entered into a new credit
facility and as a result $15,063 has been reclassified to long-term obligations
in accordance with SFAS No. 6 "Classification of Short-Term Obligations Expected
to be Refinanced" Maturities of long-term obligations, including capital lease
obligations, are approximately as follows at September 30, 2000:

2001........................................................ $19,599
2002........................................................ 5,028
2003........................................................ 11,196
2004........................................................ 1,450
2005........................................................ 462
-------
$37,735
=======

NOTE F--COMMITMENTS AND CONTINGENCIES:

In the ordinary course of its business, the Company is from time to time
threatened with or named as a defendant in various lawsuits, including patent
infringement claims. Additionally, the Company has filed lawsuits claiming
infringements of its patents by third parties for which the Company has been
subject to counterclaims.

In November 1999, Coemar S.p.A. and Clay Paky S.p.A. filed separate lawsuits
against the Company in the United States Distict Court for the Southern District
of New York. The suits were transferred to the United States District Court for
the Northern District of Texas on July 12, 2000. The lawsuits seek declarations
from the court that a certain patent of the Company is invalid, unenforceable,
and/or not infringed by Coemar S.p.A. and Clay Paky S.p.A. In December 2000, the
Company negotiated a settlement with Coemar S.p.A. and Clay Paky S.p.A, the
specific terms of which are confidential, but included a cash settlement paid to
the Company and authorization for Coemar S.p.A and Clay Paky S.p.A to continue
to

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

sell all existing products that were subject to the Company's patents. The
lawsuits are currently stayed pending Coemar S.p.A and Clay Paky S.p.A's
compliance with settlement terms.

In November 1999, SGM Elettronica, s.r.l. and Studio Due, s.r.l. filed a
lawsuit against the Company in the United States District Court for the Southern
District of New York. The lawsuit sought declarations from the court that a
certain patent of the Company is invalid, unenforceable, and/or not infringed by
SGM Elettronica, s.r.l. nor Studio Due, s.r.1. The lawsuit was dismissed by the
court for lack of subject matter juridiction on July 12, 2000.

NOTE G--STOCKHOLDERS' EQUITY:

On October 15, 1997, in conjunction with the Company's reincorporation in
Delaware and an initial public offering, the Board of Directors of the Company
created a new class of common stock and authorized 40,000,000 shares. As a
result of the reincorporation, stockholders received 3.76368 shares of common
stock for each share of the Company's Class A common stock and Class B common
stock held by the stockholders. Share amounts and the weighted average shares
outstanding for all periods presented give effect to the recapitalization of the
common stock. In addition, the Company authorized 10,000,000 shares of preferred
stock which the Company's Board of Directors may issue for such consideration
and on such terms as it deems desirable, including voting and conversion rights
that could adversely affect the holders of common stock.

The Company filed a Registration Statement (Commission file no. 333-33559)
for the public offering of 2,000,000 shares of common stock with the Securities
and Exchange Commission, which became effective October 16, 1997. The shares
were sold for $12.00 per share for an aggregate amount of $24,000. All of the
shares sold were offered by the Company. The net offering proceeds to the
Company of $21,282 was used to repay indebtedness under the Company's Credit
Facility.

On September 27, 1999, the Board of Directors approved the adoption of a
Stockholders Rights Plan (the "Rights Plan"). The Rights Plan is designed to
provide protection against coercive or unfair takeover tactics. Under the Rights
Plan, the Company made a dividend distribution of one preferred stock purchase
right for each share of common stock held of record as of September 27, 1999.
Each right entitles the holder to buy one-one thousandth of a share of the
Company's Series A Junior Participating Preferred Stock at an initial exercise
price of $8.50. The Rights will be exercisable only if a person or group
acquires beneficial ownership of 15% or more of the Company's common stock or
announces a tender offer which would result in such a person or group
beneficially owning 15% or more of the Company's common stock. At that time,
each Right not owned by such person or group will entitle its holder to
purchase, at the Rights then current exercise price, shares of the Company's
common stock having a value of twice the Right's exercise price. The Rights are
redeemable by the Company and expire on September 26, 2009.

The Company adopted a fixed option plan during fiscal 1998 which issues
stock options and reserves shares of common stock for issuance to executives,
key employees and directors. No compensation cost has been recognized for the
stock options which were issued at or above fair value at the date of grant in
fiscal 1998, 1999 and 2000. Had compensation cost for the Company's stock option
plans been determined based on the fair value at the grant date for awards in
fiscal 1998, 1999 and 2000 consistent with the provisions in SFAS No. 123, the
Company's net loss and loss per share would have been as follows:

1998 1999 2000
-------- -------- --------

Net loss........................................... $(3,911) $(3,200) $ (745)
Basic and diluted net loss per share............... $ (0.51) $ (0.41) $(0.10)

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

The weighted-average fair value of the individual options granted during
fiscal 1998, 1999 and 2000 was estimated at $4.44, $1.52 and $0.47,
respectively, on the date of grant. The fair values were determined using a
Black-Scholes option pricing model with the following assumptions for 1998, 1999
and 2000:

1998 1999 2000
-------- -------- --------

Dividend yield......................................... 0 0 0
Volatility............................................. 30% 30% 30%
Risk-free interest rate................................ 6% 6% 6%
Expected life.......................................... 5 yrs. 5 yrs. 5 yrs.

Under the plan, the total number of stock options that may be granted is
1,200,000. The price of the options granted pursuant to the plan will be equal
to the fair market value of the common stock on the date of grant. The options
vest over a two month to five year period and expire after ten years from the
date of grant.

1998 1999 2000
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
-AVERAGE -AVERAGE -AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
-------- -------- -------- -------- -------- --------

Outstanding-Beginning of year.................... -- $ -- 556 $ 12.00 736 $ 4.58
Granted.......................................... 576 12.00 651 3.07 77 1.38
Exercised........................................ -- -- -- -- -- --
Forfeited........................................ (20) 12.00 (74) (7.91) (155) (3.08)
Canceled or expired.............................. -- -- (397) (11.87) -- --
--- ---- ----
Outstanding-End of year.......................... 556 12.00 736 4.58 658 4.56
=== ==== ====
Exercisable-End of year.......................... 8 13.20 33 12.61 195 5.97
=== ==== ====

At September 30, 2000, exercise prices, number of options outstanding and
remaining contractual life are shown in the following table:

OUTSTANDING EXERCISABLE
----------------------- -----------
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICE (000) LIFE (YEARS) (000)
- -------------- -------- ------------ -----------

$1.125...................................................... 130 8.90 26
$1.375...................................................... 77 9.19 --
$ 3.75...................................................... 329 7.27 112
$12.00...................................................... 80 7.04 32
$13.20...................................................... 42 2.04 25

On November 28, 1998, the Company cancelled options to acquire 12,000 shares
of Common Stock at $7.875, 6,000 shares of Common Stock at $11.875 and 378,700
shares of Common Stock at $12.00. The Company simultaneously issued options to
acquired 396,700 shares of Common Stock at $3.75 per share which was above the
fair market value on the date of grant.

In July 1996, in connection with an amendment to the Company's Credit
Facility, the Company issued warrants to purchase up to 242,233 shares of Common
Stock at an exercise price based on the Company's

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

earnings as defined in the warrant agreement ($11.53 per share). These warrants
were valued at $600 and recorded in stockholders' equity. The terms of the
warrants also provide for registration rights and adjustments to the price and
number of shares in certain circumstances. In August 1999, as part of an
amendment to the Company's Credit Facility, the Company issued additional
warrants to purchase 53,824 shares of Common Stock at $3.75 per share. These
warrants were assigned no value. The amendment also repriced the warrants to
purchase 242,233 shares from a price of $11.53 per share to $3.75 per share. In
connection with the repricing, the value of the warrants was written off to
additional paid in capital. The warrants expire on December 31, 2004 and as of
September 30, 2000, no warrants had been exercised.

NOTE H--LEASES:

AS LESSOR

As lessor, the Company has agreements whereby it has leased certain lighting
equipment to various distributors. These agreements are accounted for as
operating leases. Under the terms of these agreements, these distributors have
the exclusive right for a specified time period to market the lighting equipment
by subrental within defined territories. The distributors' lease payments to the
Company are based on a pre-determined percentage of the gross rental revenue
received by the distributors from their subrental of the lighting equipment and
amounted to approximately $2,693, $1,253 and $517 for the years ended
September 30, 1998, 1999, and 2000, respectively. The lighting equipment under
these leasing arrangements had a net book value of approximately $6,594 and
$3,850 at September 30, 1998 and 1999, respectively, and $0 at September 30,
2000 as a result of termination of the agreements.

The Company is also the lessor under sales-type leases. Leases classified as
sales-type leases generally stipulate that all lease payments be made within
30 days of the commencement of the lease term; however, the Company has also
entered into certain sales-type leases that allow for periodic payments
throughout the term of the lease. The Company recorded revenues of $1,154,
$4,665 and $1,222 and cost of products and services of $369, $1,674 and $683 for
the years ended September 30, 1998, 1999 and 2000, respectively, related to
sales-type leases.

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

AS LESSEE

The Company leases certain computers and equipment. The following is a
summary of assets held under capital leases:

1999 2000
-------- --------

Computers and equipment under capital leases................ $4,070 $3,664
Less accumulated depreciation............................... (3,263) (3,360)
------ ------
Property under capital leases, net.......................... $ 807 $ 304
====== ======

The Company also leases manufacturing facilities and office space. The
future minimum lease payments as of September 30, 2000, including those which
relate to capital leases which are included in long-term obligations, are as
follows:

CAPITAL OPERATING
-------- ---------

2001....................................................... $ 906 $1,406
2002....................................................... 836 1,354
2003....................................................... 136 1,166
2004....................................................... -- 782
2005....................................................... -- 514
Thereafter................................................. -- 1,874
----- ------
Total minimum lease payments............................... 1,878 $7,096
======
Less amount representing interest.......................... (186)
-----
Present value of net minimum lease payments................ 1,692
Less current portion....................................... (777)
-----
Long-term lease obligations................................ $ 915
=====

Rental expense for the years ended September 30, 1998, 1999 and 2000 was
$2,809, $3,100 and $3,405, respectively.

In December 1995, the Company entered into a lease with an unaffiliated
developer for land. Rent expense under this lease was $388 and $99 for the years
ended September 30, 1998 and 1999. In December 1998, the lease was canceled as a
result of the sale of the land by the lessor, resulting in a gain to the Company
of approximately $500 which is included in selling, general and administrative
expense in the accompanying financial statements.

NOTE I--IMPAIRMENT OF ASSETS:

On October 26, 2000, the Company sold 100% of its interest in VLI Europe and
0.4% of its interest in VLPS Paris. VLI Europe owned 100% of VLPS Brussels,
99.6% of VLPS Paris, and 100% of VLPS Stockholm and all the
VARI*LITE-Registered Trademark- lighting equipment used in those operations.
This transaction resulted in a pre-tax charge of $3,200 which was recorded as an
asset impairment in the fourth quarter of fiscal year 2000. On June 30, 2000 the
Company sold its entire interest in VLPS Madrid and the
VARI*LITE-Registered Trademark- equipment used in the operations resulting in a
pre-tax charge of $650 which was recorded as an asset impairment in the third
quarter of fiscal year 2000. During 1998, the Company made a strategic decision
to

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

dispose of its architectural automated lighting product line. As a result of
this decision, the assets were written down to their net realizable value in
accordance with SFAS No. 121. This resulted in a pre-tax charge of $3,542 (or
$2,179 after taxes, $0.28 per basic and diluted share). On October 30, 1998, the
Company sold substantially all of the architectural automated lighting assets
for their net book value.

NOTE J--RESTRUCTURING COSTS:

In the fourth quarter of fiscal 1999, the Company recorded a pretax charge
of $600 (or $369 after taxes, $0.05 per basic and diluted share) for the
estimated costs of restructuring certain of the Company's operations. The charge
includes severance payments and other costs associated with the termination of
approximately 15 employees. The charge also included the cost associated with
terminating leases and the write off of the net book value of leasehold
improvements associated with the closing of two offices. Communication of the
employee terminations and office closings occurred prior to September 30, 1999
and severance payments were completed by the end of fiscal 2000. In the fourth
quarter of fiscal 1998, the Company recorded a pretax charge of $1,080 (or $664
after taxes, $0.09 per basic and diluted share) for the estimated costs of
restructuring the Company's operations. The costs were comprised primarily of
severance payments and other employee related costs associated with terminating
the employment of approximately 75 people.

The following represents a rollforward of the restructuring accrual which is
included in accounts payable and accrued expenses in the accompanying financial
statements:

Balance at September 30, 1998............................... $1,080
Severance payments to employees............................. (977)
Legal fees.................................................. (54)
Other....................................................... (9)
Restructuring accrual recorded.............................. 600
------
Balance at September 30, 1999............................... 640
Severance payments to employees............................. (563)
Legal fees.................................................. --
Other....................................................... (77)
------
Balance at September 30, 2000............................... $ --
======

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

NOTE K--INCOME TAXES:

The provision (benefit) for income taxes consists of the following:

1998 1999 2000
-------- -------- --------

Current:
U.S. Federal..................................... $ -- $ -- $ --
State............................................ 33 8 4
International.................................... 917 461 330
Deferred:
U.S. Federal..................................... (2,244) (1,608) (494)
State............................................ (264) (262) (44)
International.................................... (807) (324) 17
------- ------- -----
Income tax benefit................................. (2,365) (1,725) (187)
Less:
Deferred income taxes related to extraordinary
losses......................................... (452) -- --
Deferred income taxes related to cumulative
effect of change in accounting principle....... (128) -- --
------- ------- -----
Income tax benefit excluding income taxes related
to extraordinary losses and cumulative effect of
change in accounting principle................... $(1,785) $(1,725) $(187)
======= ======= =====

A reconciliation of income taxes computed at the U.S. Federal statutory tax
rate to the provision for income taxes is as follows:

1998 1999 2000
-------- -------- --------

Income tax benefit at U.S. Federal statutory
rate............................................. $(2,036) $(1,485) $(161)
International taxes................................ (167) (126) (47)
State taxes........................................ (240) (131) (24)
Foreign and general business tax credits........... -- -- --
Other.............................................. 78 17 45
------- ------- -----
$(2,365) $(1,725) $(187)
======= ======= =====

Deferred income taxes reflect the net tax effects of deductible temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

tax purposes. The tax effects of significant items comprising the Company's net
deferred income taxes consists of the following:

1999 2000
-------- --------

Deferred tax asset
Foreign tax credit carryover............................. $ 2,615 $2,159
Net operating loss carryover............................. 6,890 4,031
Alternative minimum tax credit carryover................. 507 507
General business credits................................. 636 636
Accrued impairment costs--sale of European Operations.... -- 1,221
Other tax asset items.................................... 1,213 455
Deferred tax liability
Depreciation............................................. (12,270) (9,463)
Other tax liability items................................ (561) (282)
------- ------
Total...................................................... (970) (736)
Less: Valuation allowance.................................. (544) (257)
------- ------
Net deferred income taxes.................................. $(1,514) $ (993)
======= ======

For tax purposes, the Company has approximately $2,159 of foreign tax
credits that expire in 2001 through 2002 and a net loss carryover of $10,894
that will expire in 2011 through 2019. In addition, approximately $507 of
alternative minimum tax credits (which do not expire) are available to offset
future regular tax liability. The benefit of this tax credit carryforward has
been recognized for financial statement purposes as part of deferred taxes. In
fiscal 1999 and 2000, there was a valuation allowance of $544 and $257,
respectively, related to foreign tax credits.

International income taxes relate to the Company's operations in England,
Japan, Belgium, Sweden, Spain, France and Hong Kong, as well as to withholding
taxes on revenue generated by the Company's foreign distributors.

NOTE L--EMPLOYEE BENEFIT PLANS:

The Company has a defined contribution 401(k) plan in which substantially
all its U.S. employees can elect to be participants. Under the terms of the
401(k) plan, employees can defer up to 20% of their earnings up to the permitted
maximum as defined by IRS regulations. The Company matches 50% of the employee's
contribution up to 5% of the employee's earnings during the plan year. During
the years ended September 30, 1998, 1999 and 2000, the Company's cost to match
employee contributions was approximately $274, $310 and $320, respectively.

Substantially all employees of the Company's London-based operations may
elect to be participants in the Vari-Lite Europe Pension Plan. The plan is a
defined contribution plan under which employees may contribute up to 3% of their
base salaries. The Company makes contributions at a rate of 200% of the employee
contributions, with additional contributions made for certain key employees. The
Company incurred costs of $231, $208 and $154, representing matching
contributions for the years ended September 30, 1998, 1999 and 2000,
respectively.

The Company adopted an employee stock ownership plan ("ESOP"), effective
January 1, 1995, in which its U.S. employees are eligible to participate after
completing one year of service, attaining age

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

twenty-one and being a participant making elective deferrals in the Company's
401(k) Plan. Each year the Company may make discretionary contributions of cash
to the ESOP as determined by the Board of Directors or a committee thereof.
Participants' interests in the ESOP are distributed in the form of cash or stock
upon normal retirement, disability, death or at a specific time after any other
termination of employment.

The Company adopted an employee stock equivalence plan ("ESEP") for the
Company's non-U.S. subsidiaries, effective January 1, 1995, in which its
employees are eligible to participate after completing one year of service,
attaining age twenty-one and for London-based employees, participating in the
VLEH Pension Plan. Each year the Company may make discretionary contributions of
stock to the ESEP as determined by the Board of Directors or a committee
thereof. Participants' interests in the ESEP are distributed in the form of cash
upon normal retirement, disability, death or at a specific time after any other
termination of employment. Subsequent to the end of fiscal 2000, the Company
terminated the ESEP.

In 1998, the Company accrued $250 and subsequently in 1999 made a cash
contribution to the Trustee who in turn purchased 91,000 shares on the open
market. In 1999, the Company accrued $250 and subsequently in 2000 made a cash
contribution to the Trustee who in turn purchased 183,000 shares on the open
market. In 2000, the Company has accrued $250 for contribution to the ESOP and
ESEP and has subsequently purchased 42,495 shares on the open market with $183
remaining to be funded.

NOTE M--SEGMENT INFORMATION:

In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
product lines, geographic areas and major customers. The method for determining
what information to report is based on the way that management organizes the
operational segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating decision
maker is considered to be the Company's Chief Operating Officer ("COO"). The COO
reviews financial information presented on a consolidated basis accompanied by
disaggregated information about revenues by geographic region and by product
lines for purposes of making operating decisions and assessing financial
performance. The Company has three reportable segments: North America, Europe
and Asia, which are organized, managed and analyzed geographically and operate
in one

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

industry segment. Information about the Company's operations by geographic
segment for the fiscal years ended September 30, 1998, 1999 and 2000 is
presented below:

NORTH
AMERICA ASIA EUROPE INTERCOMPANY TOTAL
SEPTEMBER 30, 1998: -------- -------- -------- ------------ --------

Net Revenues from unaffiliated customers.... $47,953 $ 9,858 $30,565 $ -- $88,376
Intersegment sales.......................... 6,039 -- -- (6,039) --
------- ------- ------- ------- -------
Total net revenues........................ 53,992 9,858 30,565 (6,039) 88,376
Operating income (loss)..................... (1,821) 1,384 (1,157) -- (1,594)
Depreciation and amortization............... 10,506 157 2,915 -- 13,578
Total assets................................ 99,409 5,599 17,265 (7,646) 114,627
SEPTEMBER 30, 1999:
Net Revenues from unaffiliated customers.... $47,598 $11,668 $32,266 $ -- $91,532
Intersegment sales.......................... 20,065 -- -- (20,065) --
------- ------- ------- ------- -------
Total net revenues........................ 67,663 11,668 32,266 (20,065) 91,532
Operating income (loss)..................... 816 1,306 (1,950) -- 172
Depreciation and amortization............... 12,421 139 2,806 -- 15,366
Total assets................................ 93,747 7,585 15,386 (9,018) 107,700
SEPTEMBER 30, 2000:
Net Revenues from unaffiliated customers.... $57,004 $10,430 $26,254 $ -- $93,688
Intersegment sales.......................... 19,668 251 1,139 (21,058) --
------- ------- ------- ------- -------
Total net revenues........................ 76,672 10,681 27,393 (21,058) 93,688
Operating income (loss)..................... 4,057 (8) 657 -- 4,706
Depreciation and amortization............... 11,654 182 2,005 -- 13,841
Total assets................................ 76,671 8,157 16,222 (6,347) 94,703

NOTE N--RELATED PARTY TRANSACTIONS:

Certain directors provided consulting services to the Company and received
fees totaling approximately $241 for each of the years ended September 30, 1998,
1999 and 2000.

At September 30, 1999 and 2000, the Company had notes receivable from
stockholders totaling $30 and $19, respectively, related to common stock
purchases. The notes bear interest at 9.75% and are collateralized by 16,937
shares of common stock as of September 30, 2000. These notes are due on
December 31, 2000.

The Company received from certain stockholders of the Company $2,303, $51
and $10 in the years ended September 30, 1998, 1999 and 2000, respectively, for
the rental of automated lighting products and other services.

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

NOTE O--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The following summarizes the unaudited quarterly results of operations for
the years ended September 30, 1998, 1999 and 2000:

YEAR ENDED SEPTEMBER 30, 1998
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------

Total revenues.................................... $22,519 $19,227 $22,529 $24,101
Operating income (loss)........................... 2,842 (123) 670 (4,983)
Net income (loss)................................. 326 (421) 0 (3,527)
Net income (loss) per basic and diluted share..... 0.04 (0.05) 0.00 (0.46)
Common stock price per share
High............................................ 13.125 12.688 10.000 6.375
Low............................................. 11.750 11.375 5.750 2.000

YEAR ENDED SEPTEMBER 30, 1999
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------

Total revenues.................................... $25,248 $23,170 $20,066 $23,048
Operating income (loss)........................... 1,466 347 (661) (980)
Net income (loss)................................. 242 (409) (1,100) (1,376)
Net income (loss) per basic and diluted share..... 0.03 (0.05) (0.14) (0.18)
Common stock price per share
High............................................ 4.750 4.250 2.813 2.125
Low............................................. 2.000 2.625 2.000 0.875

YEAR ENDED SEPTEMBER 30, 2000
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------

Total revenues.................................... $27,679 $20,719 $21,509 $23,781
Operating income (loss)........................... 3,315 (838) 502 1,727
Net income (loss)................................. 1,272 (1,241) (392) 74
Net income (loss) per basic and diluted share..... 0.16 (0.16) (0.05) 0.01
Common stock price per share
High............................................ 1.688 4.000 2.750 1.500
Low............................................. 0.938 0.938 0.875 0.688

The Company early adopted SOP 98-5 in the first quarter of 1998 and recorded
a pre-tax charge of $282 as a cumulative effect of change in accounting
principle.

The operating loss for the quarter ended September 30, 1998, includes
charges totaling $4,600 for the write-down of impaired architectural automated
lighting assets to their net realizable value and employee termination costs
associated with restructuring the Company's operations.

The operating loss for the quarter ended September 30, 1999, includes
charges totaling $600 for employee termination costs associated with
restructuring the Company's operations.

The operating loss for the quarter ended June 30, 2000, includes a $650
write-down of VLPS Madrid assets to their net realizable value. The operating
income for the quarter ended September 30, 2000, includes gains on the
settlement of the patent infringement lawsuit and the sale of a building lease
in New

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

York of $4,000 partially offset by charges of $3,200 for the impairment of
assets used in the Company's continental European operations.

NOTE P--PRO FORMA FINANCIAL STATEMENTS (UNAUDITED):

Pro forma adjustments to the condensed consolidated statement of operations
for the years ended September 30, 1999 and 2000 reflect adjustments to eliminate
the results of the continental European operations and Showco due to the sale of
these businesses (see Notes I and Q) and the reduction of interest expense as a
result of the decrease in debt. The Pro Forma Financial Statements are presented
for informational purposes only and do not purport to be indicative of the
results of operations that actually would have been achieved had the disposition
been consummated on the financial statement date or for any future period.

1999 2000
-------- --------

Total revenues.............................................. 70,025 71,294
Total cost of sales......................................... 34,834 34,687
------- --------
Gross profit................................................ 35,191 36,607
Operating expenses.......................................... 37,472 35,805
Gains on lawsuit settlement and sale of lease............... -- (3,993)
------- --------
Total operating expenses.................................... 37,472 31,812
------- --------
Operating income............................................ (2,281) 4,795
Interest expense (net)...................................... 2,939 3,215
------- --------
Income (loss) before income taxes........................... (5,220) 1,580
Income tax expense (benefit)................................ (2,062) 624
------- --------
Net income (loss)........................................... $(3,158) $ 956
======= ========

NOTE Q--SUBSEQUENT EVENTS:

On October 26, 2000, the Company sold 100% of its interest in VLI Europe and
0.4% of its interest in VLPS Paris and all of the VARI*LITE equipment used in
those operations. VLI Europe owned 100% of VLPS Brussels, 99.6% of VLPS Paris
and 100% of VLPS Stockholm. This transaction resulted in a pre-tax charge of
$3,200 which was recorded as an asset impairment in the fourth quarter of fiscal
year 2000.

On November 17, 2000, the Company transferred substantially all of the
assets of Showco to Clearsho, Inc. ("Clearsho"), which assumed certain of
Showco's contract liabilities, in exchange for the sole membership interest in
Clearsho. On November 17, 2000, Showco sold 100% of its interest in Clearsho
which resulted in a net pre-tax gain of $7,100.

On November 23, 2000, the Company entered into a British pounds sterling
4,000 (USD 5,800) term loan with a United Kingdom bank. The loan, which accrues
interest at the rate of 9.1% per annum and amortizes over 48 months, is secured
by all of the assets of the Company's London operations. Other terms of the loan
include certain financial covenants, limitations on capital expenditures and
intercompany payments and the guarantee of the Company.

On December 29, 2000, Vari-Lite entered into a three-year $24,500 credit
facility which includes a $12,000 term loan, a $5,000 revolving credit facility
and a $3,000 term commitment to fund capital expenditures. The Revolver and the
Capital Expenditure Loan commitments will increase to $7,500 and

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000

(IN THOUSANDS EXCEPT SHARE DATA)

$5,000, respectively, by January 15, 2002, if the Company achieves specified
financial performance. The Term Loan and Capital Expenditure Loan amortize over
84 months (subject to a balloon payment on termination of the New Credit
Facility as discussed below). Borrowings under the Revolver are subject to
availability under a borrowing base of eligible inventory and accounts
receivable (as defined in the New Credit Facility). Initially, all outstanding
borrowings under the New Credit Facility bear interest at the lender's base rate
or LIBOR, plus a rate margin of .75% and 2.50%, respectively. Beginning on
January 15, 2002, all outstanding balances under the New Credit Facility will
bear interest at the lender's base rate or LIBOR plus a rate margin ranging from
0.25% to 0.75% or 2.00% to 2.50%, respectively, based upon the Company's ratio
of Adjusted Funded Debt to EBITDA (as defined in the New Credit Facility). The
New Credit Facility is guaranteed by the Company and is secured by all of the
stock and substantially all of the assets of Vari-Lite, and a pledge of 65% of
the outstanding capital stock of the Company's foreign subsidiaries. A
commitment fee of 0.25% is charged on the average daily unused portion of the
New Credit Facility. The New Credit Facility contains compliance covenants,
including requirements that the Company achieve certain financial ratios. In
addition, the New Credit Facility places limitations on annual capital
expenditures and on the ability to incur additional indebtedness, make certain
loans or investments, sell assets, pay dividends or reacquire the Company's
stock. The New Credit Facility terminates on December 31, 2003. Upon termination
of the New Credit Facility, the entire outstanding indebtedness thereunder
becomes due and payable in full.

F-25

SCHEDULE II
VARI-LITE INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
(IN THOUSANDS OF DOLLARS)

CHARGED TO WRITE-OFFS
BEGINNING COSTS AND AND DISCOUNTS ENDING
DESCRIPTION BALANCE EXPENSES ALLOWED BALANCE
- ----------- --------- ---------- ------------- --------

September 30, 1998
Allowances deducted from assets to which they apply
Allowance for doubtful accounts................... 450 641 (191) 900
Allowance for excess and obsolete inventory....... 409 15 -- 424
Allowance for foreign tax credits................. 544 -- -- 544

September 30, 1999
Allowances deducted from assets to which they apply
Allowance for doubtful accounts................... 900 140 (320) 720
Allowance for excess and obsolete inventory....... 424 200 -- 624
Allowance for foreign tax credits................. 544 -- -- 544

September 30, 2000
Allowances deducted from assets to which they apply
Allowance for doubtful accounts................... 720 178 (158) 740
Allowance for excess and obsolete inventory....... 624 -- (232) 392
Allowance for foreign tax credits................. 544 -- (287) 257

S-1