10-K 1 v161477_10k.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended June 30, 2009

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

For the transition period from _________________ to _________________

Commission File Number 001-33468

POINT.360

(Exact name of registrant as specified in its charter)

California	01-0893376
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

2777 North Ontario Street, Burbank, CA	91504
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code (818) 565-1400

Securities registered pursuant to Section 12(b) of the Act:

		Name of each exchange
Title of each class		on which registered
Common Stock, no par value		Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ 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. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated Filer	o

Non-accelerated filer	¨	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The aggregate market value of the voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (December 31, 2008) was approximately $9.2 million. As of August 31, 2009, there were 10,148,700 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement (to be filed by October 28, 2009) relating to its 2009 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

CAUTIONARY STATEMENT

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

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

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

our recent history of losses;

Point.360’s prior breach of credit agreements;

our highly competitive marketplace;

the risks associated with dependence upon significant customers;

our ability to execute our expansion strategy;

the uncertain ability to manage in a changing environment;

our dependence upon, and our ability to adapt to, technological developments;

dependence on key personnel;

our ability to maintain and improve service quality;

fluctuation in quarterly operating results and seasonality in certain of our markets;

possible significant influence over corporate affairs by significant shareholders;

our ability to operate effectively as a stand-alone, publicly traded company; and

the cost associated with becoming compliant with the Sarbanes-Oxley Act of 2002 and the consequences of failing to implement effective internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002.

Other factors not identified above, including the risk factors described in the “Risk Factors” section of this Form 10-K may also cause actual results to differ materially from those projected by our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control.

You should consider the areas of risk described above, as well as those set forth under the heading “Risk Factors” below, in connection with considering any forward-looking statements that may be made in this Form 10-K and elsewhere by us and our businesses generally. Except to the extent of obligation to disclose material information under the federal securities laws or the rules of the NASDAQ Global Market, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.

PART 1

ITEM 1. BUSINESS

The Company was formed as a wholly-owned subsidiary (named “New 360”) of Point.360 ( “Parent Company”) in April 2007. The post production assets of the Parent Company were contributed to New 360 on August 14, 2007, after which all New.360 common stock was distributed to the Parent Company’s shareholders. New 360 subsequently changed its name to Point.360 after the merger of the Parent Company with DG FastChannel, Inc. (“DG FastChannel”). The Parent Company is hereinafter referred to as Old Point.360.

Point.360 (“Point.360” or the “Company”) is a leading integrated media management services company providing film, video and audio post-production, archival, duplication, computer graphics and data distribution services to motion picture studios, television networks, independent production companies and multinational companies. We provide the services necessary to edit, master, reformat and archive our clients’ audio, video, and film content, which includes television programming, feature films, and movie trailers.

The Company, previously part of Old Point.360, was spun off to Old Point.360’s shareholders on August 14, 2007. References to the activities of the Company prior to the spin-off refer to those of Old Point.360’s post production business which constitutes the continuing operations of the Company.

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

Since January 1, 1997, Old Point.360 successfully completed acquisitions of companies providing similar services. We will continue to evaluate acquisition opportunities to enhance our operations and profitability. In 2004, Old Point.360 acquired International Video Conversions, Inc. (“IVC”), a leading digital intermediate and digital mastering facility. In 2005, Old Point.360 acquired Visual Sound, a provider of captioning services. In 2007, Old Point.360 purchased the business of Eden FX, a producer of sophisticated visual effects and graphics for feature films, television programming and commercials. In November 2008, the Company purchased the assets and business of Video Box Studios, and in April 2009, the Company purchased the assets and business of MI Post. As a result of these acquisitions, we are one of the largest and most diversified providers of technical and distribution services in our markets, and therefore are able to offer our customers a single source for such services at prices that reflect our scale economies.

Markets

We derive revenues primarily from the entertainment industry, consisting of major and independent motion picture and television studios, cable television program suppliers, television program syndicators, and advertising agencies. On a more limited basis, we also service national television networks, local television stations, corporate or instructional video providers, infomercial advertisers and educational institutions.

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

Value-Added Services

Point.360 maintains video and audio post-production and editing facilities as components of its full service, value-added approach to its customers. The following summarizes the value-added post-production services that we provide to our customers:

Visual Effects. We provide premiere visual effects for feature films, television programs and commercial advertising content. Content creation across all media is in continual need of highly realistic, imaginative and intriguing visual effects. Due to the lower costs of digital content as compared to the cost of live production, more heightened “realism” has been made possible by today’s highly skilled artists using sophisticated software. This offers producers of films, TV programs and commercials more production flexibility and time savings.

Video and Data Editing. Digital editing services are located in Hollywood, Burbank, West Los Angeles, California and New York City. The editing suites are equipped with state-of-the-art digital editing equipment, including the Film Master Nucoda and Avid® Symphony Nitris which provides precise and repeatable electronic transfer of data, video and/or audio information from one or more sources to a new master and production switchers to effect complex transitions from source to source while simultaneously inserting titles and/or digital effects over background video. Video is edited into completed programs such as television shows, DVD Compression masters, infomercials, commercials, movie trailers, electronic press kits, specials, and corporate and educational presentations.

Digital Color Correction . Substantially all film content ultimately is distributed to the home video, broadcast, cable or pay-per-view television markets, requiring that film images be transferred electronically to a digital video format. Each frame must be color corrected and adapted to the size and aspect ratio of a television screen in order to ensure the highest level of conformity to the original film version. We transfer film and data to digital formats using Spirit, 4k Telecine equipment, daVinci® 2k,and Digital Vision Film Master color correction systems. The re-mastering of studio film and television libraries to the HDTV broadcast standard has become a growing portion of our film transfer business, as well as affiliated services such as foreign language mastering, duplication and distribution.

Picture Restoration. Digital picture restoration occurs in all titles targeted for Blu-ray and standard definition DVD distribution as well as cable markets. Flaws in the picture such as dirt, scratches, splice bumps and excessive grain can be removed using our vast array of technologies and expertise. Tools incorporated in this process are daVinci Revival®, MTI Film DRS, and Diamant. Once the picture elements are restored, new film negatives can also be derived from these polished digital elements.

Audio Post-Production. We digitally mix television shows, commercials, and independent features. We edit and create sound effects, assist in replacing dialog and re-record audio elements for integration with film and video elements. We design sound effects to give life to the visual images with a library of sound effects. Dialog replacement is sometimes required to improve quality, replace lost dialog or eliminate extraneous noise from the original recording. Re-recording combines sound effects, dialog, music and laughter or applause to complete the final product. In addition, the re-recording process allows the enhancement of the listening experience by adding specialized sound treatments, such as stereo, Dolby Digital®, SDDS®, THX® and Surround Sound®.

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

Closed Caption and Subtitling. All broadcast material requires closed captioning. We are able to create closed captioning formatted for High Definition and Standard definition markets and DVD markets when requested. Subtitling is offered in over twenty foreign languages.

Foreign Language Mastering. Programming designed for distribution in markets other than those for which it was originally produced is prepared for export through language translation and either subtitling or voice dubbing. We provide dubbed language recording and versioning followed by an audio layback and conform service that supports various audio, data and videotape formats to create an international language-specific master videotape. We also create music and effects tracks from programming shot before an audience to prepare television sitcoms for dialog recording and international distribution.

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

Broadcast Encoding. We provide encoding services for tracking global broadcast verification and intelligence service. Using processes which include High Definition and Standard Definition Teletrax, AMOL, SIGMA and VEIL encoding; a code is placed within the video portion of an advertisement or an electronic press kit. Such codes can be monitored from television broadcasts to determine which advertisements or portions of electronic press kits are shown on or during specific television programs, providing customers direct feedback on allotted airtime. We provide encoding services for a number of our motion picture studio clients to enable them to customize their promotional material.

Global Distribution and Syndication. We offer a broad range of technical services to domestic and international programmers. We service the basic and premium cable, broadcast syndication and direct-to-home market segments by providing the facilities and services necessary to assemble and distribute programming via High Definition and Standard Definition satellite as well as fiber feeds to viewers in the United States, Canada and Europe. We provide facilities and services for the delivery of syndicated television programming in the United States and Canada. Our customer base consists of the major studios and independent distributors offering network programming, world-wide independent content owners offering niche market programming, and pay-per-view services marketing movies and special events to the cable industry and direct-to-home viewers.

Archival Services. We currently store approximately one million videotape, audio and film elements in a protected environment. The storage and handling of videotape, audio and film elements require specialized security and environmental control procedures. We perform secure management archival services in all of our operating facilities as well as our state-of-the-art Media Center in Los Angeles. We offer on-line access to archival information for advertising clients, and may offer this service to other clients in the future.

New Markets

We believe that the development of value-added services will provide us with the opportunity to enter or increase our presence in several new or expanding markets.

International. Point.360 currently provides electronic and physical duplication and distribution services for rich media content providers. Furthermore, we believe that available electronic distribution methods will facilitate further expansion into the international distribution arena as such technologies become standardized and cost-effective. In addition, we believe that the growth in the distribution of domestic content into international markets will create increased demand for value-added services currently provided by us such as standards conversion and audio and digital mastering.

High Definition Television (“HDTV”). We are capitalizing on opportunities created by emerging industry trends such as the emergence of digital television and its more advanced variant, high-definition television. HDTV has quickly become the mastering standard for domestic content providers. We believe that the aggressive timetable associated with such conversion, which has resulted both from mandates by the Federal Communications Commission for digital television and high-definition television as well as competitive forces in the marketplace, is likely to accelerate the rate of increase in the demand for these services. We maintain a state-of-the-art HDTV capability.

DVD Authoring. We believe that there are significant opportunities in the DVD authoring market. With the increasing rate of conversion of existing analog libraries, as well as new content being mastered to digital formats, we believe that Point.360 has positioned itself well to provide value-added services to new and existing clients. We have made capital investments to expand and upgrade our current DVD and digital compression operations in anticipation of the increasing demand for DVD and video encoding services.

Sales and Marketing

We market our services through a combination of industry referrals, formal advertising, trade show participation, special client events, and our Internet website. While we rely primarily on our reputation and business contacts within the industry for the marketing of our services, we also maintain a direct sales force to communicate the capabilities and competitive advantages of our services to potential new customers. Our marketing programs are directed toward communicating our unique capabilities and establishing us as the predominant value-added partner for entertainment, advertising and corporate customers.

In addition to our traditional sales efforts directed at those individuals responsible for placing orders with our facilities, we also strive to negotiate “preferred vendor” relationships with our major customers. Through this process, we negotiate discounted rates with large volume clients in return for being promoted within the client’s organization as an established and accepted vendor. This selection process tends to favor larger service providers such as Point.360 that (1) offer lower prices through scale economies, (2) have the capacity to handle large orders without outsourcing to other vendors, and (3) can offer a strategic partnership on technological and other industry-specific issues. We negotiate such agreements periodically with major entertainment studios and national broadcast networks.

Customers

Point.360 has added customers through acquisitions and by delivering a favorable mix of reliability, timeliness, quality and price. The integration of our facilities has given our customers a time advantage in the ability to deliver broadcast quality material. We market our services to major and independent motion picture and television production companies, television program suppliers and, on a more limited basis, national television networks, infomercial providers, local television stations, television program syndicators, corporations and educational institutions. Our motion picture clients include Disney, Sony Pictures Entertainment, Twentieth Century Fox, NBC Universal, Warner Bros., Metro-Goldwyn-Mayer and Paramount Pictures.

We solicit the motion picture and television industries to generate revenues. In the six months ended June 30, 2007 and the fiscal years ended June 30, 2008 and 2009, five major motion picture studios accounted for approximately 56%, 52% and 48% of Point.360’s revenues, respectively, while sales to Twentieth Century Fox and affiliates comprised 34%, 26% and 21% of revenues in those periods, respectively. Sales to Twentieth Century Fox and affiliates were made to approximately 50 individual customers within the group.

We generally do not have exclusive service agreements with our clients. Because clients generally do not make arrangements with us until shortly before our facilities and services are required, we usually do not have any significant backlog of service orders. Our services are generally offered on an hourly or per unit basis based on volume.

Customer Service

We believe we have built a strong reputation in the market with a commitment to customer service. We receive customer orders via courier services, telephone, telecopier and the Internet. The sales and customer service staff develops strong relationships with clients within the studios and is trained to emphasize our ability to confirm delivery, interpret supplied technical specifications, and meet difficult delivery time frames and provide reliable and cost-effective service. Several studios are customers because of our ability to meet often changing or rush delivery schedules.

We have a sales and customer service staff of approximately 45 people, and we provide services 24 hours per day. This staff serves as a single point of problem resolution and supports not only our customers but also the television stations and cable systems to which we deliver.

Competition

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

Employees

The Company had approximately 300 full-time employees as of June 30, 2009. The Company’s employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage. The Company believes that its relations with its employees are good.

ITEM 1A. RISK FACTORS

You should carefully consider each of the following risk factors and all of the other information set forth in this Form 10-K. The risk factors have been separated into three groups: (1) risks relating to our business, (2) risks relating to the separation of New 360 from Point.360, and (3) risks relating to our common stock. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our company in each of these categories of risks. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

If any of the following risks and uncertainties develops into actual events, these events could have a material adverse effect on our business, financial condition or results of operations. In such case, the trading price of our common stock could decline.

Risks Relating to Point.360’s Business

We have a history of losses, and we may incur losses in the future.

Point.360 had losses in each of the five fiscal years ended June 30, 2009 due, in part, to increased price competition, the cost of being a publicly traded company and a number of unusual charges. There is no assurance as to future profitability on a quarterly or annual basis.

Old Point.360 previously breached its credit agreements, and we may do so in the future.

Due to lower operating cash amounts resulting from reduced sales levels in prior years and the consequential net losses, Old Point.360 breached certain covenants of its credit facility. The breaches were temporarily cured based on amendments and forbearance agreements among Old Point.360 and the banks which called for, among other provisions, scheduled payments to reduce amounts owed to the banks to the permitted borrowing base.

Although we were in a cash positive position as of June 30, 2009 and expect to be for the foreseeable future, if we continue to incur losses in the future as a separate company, there is a risk that we will default under financial covenants contained in any new credit agreements and/or will not be able to pay off revolving or term loans when due. If a default condition exists in future banking arrangements, all amounts that may be outstanding under the new agreements will be due and payable which could materially and adversely affect our business.

We may be unable to compete effectively in a highly competitive marketplace.

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

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

We may also face competition from companies in related markets that could offer similar or superior services to those offered by us. We believe that an increasingly competitive environment as evidenced by recent price pressure and some related loss of work and the possibility that customers may utilize in-house capabilities to a greater extent could lead to a loss of market share or additional price reductions, which could have a material adverse effect on our financial condition, results of operations and prospects.

We would be adversely affected by the loss of key customers.

Although we have an active client list of approximately 1,900 customers, five motion picture studios and and/or their affiliates accounted for approximately 58%, 56%, 52% and 48% of our revenues in calendar year 2006, and the fiscal years ended June 30, 2007, 2008 and 2009, respectively. Twentieth Century Fox (and affiliates) was the only customer which accounted for more than 10% of sales in any of the periods, or 33% in calendar year 2006, and 34%, 26% and 21% in the fiscal years ended June 30, 2007, 2008 and 2009, respectively. If one or more of these companies were to stop using our services, our business could be adversely affected. Because we derive substantially all of our revenue from clients in the entertainment industry, our financial condition, results of operations and prospects could also be adversely affected by an adverse change in conditions which impact those industries.

Our expansion strategy may fail.

Our growth strategy involves both internal development and expansion through acquisitions. We currently have no agreements or commitments to acquire any company or business. Even though Point.360 completed a number of acquisitions in the past, the most recent of which was in April 2009, we cannot be sure additional acceptable acquisitions will be available or that we will be able to reach mutually agreeable terms to purchase acquisition targets, or that we will be able to profitably manage additional businesses or successfully integrate such additional businesses without substantial costs, delays or other problems.

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

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

If we acquire any entities, we may have to finance a large portion of the anticipated purchase price and/or refinance then existing credit agreements. The cost of any new financing may be higher than our then-existing credit facilities. Future earnings and cash flow may be negatively impacted if any acquired entity does not generate sufficient earnings and cash flow to offset the increased costs.

We are operating in a changing environment that may adversely affect our business.

In prior years, we experienced industry consolidation, changing technologies and increased regulation, all of which resulted in new and increased responsibilities for management personnel and placed, and continues to place, increased demands on our management, operational and financial systems and resources. To accommodate these circumstances, compete effectively and manage future growth, we will be required to continue to implement and improve our operational, financial and management information systems, and to expand, train, motivate and manage our work force. We cannot be sure that our personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to do so could have a material adverse effect on our financial condition, results of operations and prospects.

We may be unable to adapt our business to changing technological requirements.

Although we intend to utilize the most efficient and cost-effective technologies available for telecine, high definition formatting, editing, coloration and delivery of audio and video content as they develop, we cannot be sure that we will be able to adapt to such standards in a timely fashion or at all. We believe our future growth will depend in part on our ability to add to these services and to add customers in a timely and cost-effective manner. We cannot be sure we will be successful in offering such services to existing customers or in obtaining new customers for these services. We intend to rely on third-party vendors for the development of these technologies, and there is no assurance that such vendors will be able to develop such technologies in a manner that meets our needs and the needs of our customers.

The loss of key personnel would adversely affect our business.

We are dependent on the efforts and abilities of certain senior management, particularly those of Haig S. Bagerdjian, Chairman, President and Chief Executive Officer. The loss or interruption of the services of key members of management could have a material adverse effect on our financial condition, results of operations and prospects if a suitable replacement is not promptly obtained. Mr. Bagerdjian beneficially owns approximately 40% of Point.360’s outstanding stock. Although we have severance agreements with Mr. Bagerdjian and certain key executives, we cannot be sure that either Mr. Bagerdjian or other executives will remain with Point.360. In addition, our success depends to a significant degree upon the continuing contributions of, and on our ability to attract and retain, qualified management, sales, operations, marketing and technical personnel. The competition for qualified personnel is intense and the loss of any such persons, as well as the failure to recruit additional key personnel in a timely manner, could have a material adverse effect on our financial condition, results of operations and prospects. There is no assurance that we will be able to continue to attract and retain qualified management and other personnel for the development of our business.

We may be unable to meet the demands of our customers.

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

Our quarterly operating results have fluctuated significantly in the past and may fluctuate in the future.

Our operating results have varied in the past, and may vary in the future, depending on factors such as sales volume fluctuations due to seasonal buying patterns, the timing of new product and service introductions, the timing of revenue recognition upon the completion of longer term projects, increased competition, timing of acquisitions, the ability of our customers to finance projects, general economic factors and other factors. In fiscal 2009, we impaired goodwill in full. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. Our operating results have historically been significantly influenced by the volume of business from the motion picture industry, which is an industry that is subject to seasonal and cyclical downturns, and, occasionally, work stoppages by actors, writers and others. For example, the 12,000-member Writer’s Guild of America began a strike on November 5, 2007 which affected portions of our business, which strike was not settled until February 12, 2008. In any period our revenues are subject to variation based on changes in the volume and mix of services performed during the period. It is possible that in a future quarter our operating results will be below the expectations of equity research analysts and investors. In such event, the price of our common stock would likely be materially adversely affected.

We determined that there were material weaknesses in our internal controls over financial reporting and that our internal controls were not effective as of June 30, 2008 and 2009. In the event a material weakness occurs again in the future, our financial statements and results of operations could be harmed and you my not be justified in relying on those financial statements.

For the years ended June 30, 2008 and 2009, we determined that or internal controls over financial reporting were not effective, as we identified a material weakness in our internal controls over financial reporting related to certain deficiencies in the controls surrounding monitoring and oversight of accounting and financial reporting related to the calculation of deferred tax liability in 2008, and in the application of the proportional performance method of recognizing revenues in 2009. In the event that this or any other material weakness occurs in the future, our financial statements and results of operations could be harmed and you may not be justified in relying on those financial statements, either of which could result in a decrease in our stock price.

Risks Relating to the Separation

of the Company from Old Point.360

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Old Point.360.

As a stand-alone, independent public company, we believe that our business will benefit from, among other things, allowing our management to design and implement corporate policies and strategies that are based primarily on the characteristics of our business, allowing us to focus our financial resources wholly on our own operations and implement and maintain a capital structure designed to meet our own specific needs. However, by separating from Old Point.360, there is a risk that we may be more susceptible to market fluctuations and other adverse events than we would have been were we still a part of Old Point.360. As part of Old Point.360, we were able to enjoy certain benefits from Old Point.360’s operating diversity, purchasing and borrowing leverage; available capital for investments and opportunities to pursue integrated strategies with Old Point.360’s other businesses. As such, we may not be able to achieve some or all of the benefits that we expect to achieve as a stand alone, independent post-production company.

We have limited operating history as a separate public company, and our historical and pro forma financial information is not necessarily representative of the results we would have achieved as a separate publicly traded company, and may not be a reliable indicator of our future results.

The historical and pro forma financial information included in this Form 10-K does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the following factors:

Prior to our August 14, 2007 separation from Old Point.360, our business had been operated by Old Point.360 as part of its broader corporate organization, rather than as an independent company. Old Point.360 performed various corporate functions for the post-production business, including, but not limited to, tax administration, certain governance functions (including compliance with the Sarbanes-Oxley Act of 2002) and external reporting. Our historical and pro forma financial results reflect allocations of corporate expenses from Old Point.360 for these and similar functions based on the relationship of our sales to sales of Old Point.360 for certain administrative functions necessary to complete the sales cycle (sales, personnel, billing, accounting, etc.), specific balance sheet accounts comprising long-lived assets (term loan interest expense) and net working capital (revolving loan interest expense), and other measurements. We believe that these allocations are comparable to the expenses we would have incurred had we operated as a separate publicly traded company, although there is a risk that we may incur higher expenses as an independent company.

Prior to our separation from Old Point.360, our business has been integrated with the other businesses of Point.360. Historically, we have shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. The loss of these benefits could have an adverse effect on our business, results of operations and financial condition following the completion of the separation.

Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of Old Point.360. Without the opportunity to obtain financing from Old Point.360, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements.

Subsequent to the completion of our separation from Old Point.360, the cost of capital for our business may be higher than Old Point.360’s cost of capital prior to our separation because Old Point.360 operating results were higher than what ours are contemplated to be following the separation.

Other significant changes may occur in our cost structure, management, financing and business operations as a result of our operating as a company separate from Old Point.360.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company, and we may experience increased costs after our separation from Old Point.360 or as a result of the separation.

Following the completion of our separation from Old Point.360, the costs of being a public entity will be spread over a lower revenue base, which may negatively affect operating results.

We will be responsible for paying certain liabilities incurred by Old Point.360 prior to the date of our separation from Old Point.360.

Pursuant to agreements between us and DG FastChannel, Inc. (“DG”), we assumed responsibility for the payment of various liabilities that were incurred by Old Point.360 prior to the date of our separation from Old Point.360, including accounts payable and other expenses not exclusively related to Old Point.360’s ads business, taxes for periods prior to the separation date and other liabilities of Old Point.360, including contingent liabilities whose amount is not yet known, arising out of the operation of Old Point.360’s business (other than the ads business) during the period prior to the separation. Although we do not currently have any knowledge that the IRS, other governmental agencies or third parties intend to file lawsuits or initiate proceedings with respect to the operation of Old Point.360’s business prior to the separation date, that possibility exists and the payment by us of any such contingent liabilities for which we are responsible could materially and adversely affect our financial condition.

Risks Relating to the Company’s Common Stock

A trading market that will provide adequate liquidity for our common stock may not develop. In addition, the market price of our shares may fluctuate widely.

Our common stock began public trading on August 14, 2007. There is no assurance that an active trading market will be sustained in the future.

We cannot predict the prices at which our common stock may trade. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:

our business profile and market capitalization may not fit the investment objectives of our shareholders and, as a result, our shareholders may sell our shares after the distribution;

a shift in our investor base;

our quarterly or annual earnings, or those of other companies in our industry;

actual or anticipated fluctuations in our operating results due to the seasonality of our business and other factors related to our business;

changes in accounting standards, policies, guidance, interpretations or principles;

announcements by us or our competitors of significant acquisitions or dispositions;

our ability to meet earnings estimates of shareholders;

the operating and stock price performance of other comparable companies;

overall market fluctuations, and;

general economic conditions.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

Investors may be unable to accurately value our common stock.

Investors often value companies based on the stock prices and results of operations of other comparable companies. Currently, no public post-production company exists that is directly comparable to our size, scale and service offerings. As such, investors may find it difficult to accurately value our common stock, which may cause our common stock price to trade below our true value.

Your percentage ownership in the Company may be diluted in the future.

Your percentage ownership in the Company may be diluted in the future because of equity awards that have been or may be granted to our directors, officers and employees. We have adopted the 2007 Equity Incentive Plan, which provides for the grant of equity based awards, including restricted stock, restricted stock units, stock options, stock appreciation rights and other equity-based awards to our directors, officers and other employees, advisors and consultants.

Our shareholder rights agreement and ability to issue preferred stock may discourage, delay or prevent a change in control of the Company that would benefit our shareholders.

Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions thereof, including voting rights, without any further vote or action by the Company’s shareholders. Although we have no current plans to issue any other shares of preferred stock, the rights of the holders of common stock would be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Issuance of preferred stock could have the effect of discouraging, delaying, or preventing a change in control of the Company that would be beneficial to our shareholders.

On the date that the Company’s shares were distributed to Old Point.360 shareholders, each shareholder also received one preferred share purchase right for each share of our common stock received by the shareholder. The rights will be attached to the common stock and will trade separately and be exercisable only in the event that a person or group acquires or announces the intent to acquire 20% or more of our common stock. Each right will entitle shareholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $10. If we are acquired in a merger or other business combination transaction after a person has acquired 20% or more of our outstanding common stock, each right will entitle its holder to purchase, at the right’s then-current exercise price, a number of the acquiring company’s common shares having a market value of twice such price. In addition, if a person or group acquires 20% or more of our outstanding common stock, each right will entitle its holder (other than such person or members of such group) to purchase, at the right’s then-current exercise price, a number of Point.360 common shares having a market value of twice such price. Before a person or group acquires beneficial ownership of 20% or more of our common stock, the rights are redeemable for $.0001 per right at the option of the Board of Directors.

Although our shareholder rights agreement is intended to encourage anyone seeking to acquire the Company to negotiate with the Board prior to attempting a takeover, the rights agreement may have the effect of discouraging, delaying or preventing a change in control of the Company that would be beneficial to our shareholders.

We do not expect to pay dividends.

We do not believe that we will have the financial strength to pay dividends for the foreseeable future. If we do not pay dividends, the price of our common stock that you receive in the distribution must appreciate for you to receive a gain on your investment in the Company. This appreciation may not occur.

Our controlling shareholders may cause the Company to be operated in a manner that is not in the best interests of other shareholders.

Our Chairman, President and Chief Executive Officer, Haig S. Bagerdjian, beneficially owns approximately 40% of our common stock. By virtue of his stock ownership, Mr. Bagerdjian may be able to significantly influence the outcome of matters required to be submitted to a vote of shareholders, including (1) the election of the Board of Directors, (2) amendments to our Articles of Incorporation and (3) approval of mergers and other significant corporate transactions. The foregoing may have the effect of discouraging, delaying or preventing certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of common stock might otherwise receive a premium for their shares over current market prices.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable

ITEM 2. PROPERTIES

The Company currently owns or leases 7 facilities which all have production capabilities and/or sales activities. The terms of leases for leased facilities expire at various dates from 2009 to 2021. The following table sets forth the location and approximate square footage of the Company's properties:

	Square Footage
Hollywood, CA (owned)		18,300
Hollywood, CA (leased)		8,000
Burbank, CA (owned)		32,000
Burbank, CA (leased)		45,500
Los Angeles, CA (leased)		64,600
Los Angeles, CA (leased)		13,400
New York, NY (leased)		11,000

ITEM 3. LEGAL PROCEEDINGS

In July 2008, the Company was served with a complaint filed in the Superior Court of the State of California for the County of Los Angeles by Aryana Farshad and Aryana F. Productions, Inc. (“Farshad”). The complaint alleges that Point.360 and its janitorial cleaning company failed to exercise reasonable care for the protection and preservation of Farshad’s film footage which was lost. As a result of the defendant’s negligence, Farshad claims to have suffered damages in excess of $2 million and additional unquantified general and special damages. While the outcome of this claim cannot be predicted with certainty, management does not believe that the outcome will have a material effect on the financial condition or results of operation of the Company.

On May 1, 2009 the Company was served with a “Verified Unlawful Detainer Complaint” by 1220 Highland, LLC, the landlord of a facility in Hollywood, CA that had been rented by the Company for many years. The Company’s lease on the facility expired in March 2009. The Company vacated the facility as of June 30, 2009. The Complaint seeks possession of the property, damages for each day of the Company’s possession from May 1, 2009, and other damages and legal fees. While the outcome of the claim cannot be predicted with certainty, management does not believe that the outcome will have a material effect on the financial condition of the Company, especially since full rent was paid until the property was returned to the landlord on June 30, 2009.

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

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

No matters were submitted to the Company’s shareholders for a vote during the fourth quarter of the fiscal year ended June 30, 2009.

PART II

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Company's Common Stock is traded on the NASDAQ Global Market under the symbol PTSX. The following table sets forth, for the periods since the separation on August 14, 2007 from Old Point.360, the high and low closing price per share for the Common Stock.

	Common Stock
	Low		High
Year Ended June 30, 2009
First Quarter	$	1.39	$	1.74
Second Quarter	$	1.10	$	1.63
Third Quarter	$	1.12	$	1.38
Fourth Quarter	$	1.16	$	1.45
Year Ended June 30, 2008
First Quarter	$	2.00	$	2.59
Second Quarter	$	1.80	$	2.24
Third Quarter	$	1.25	$	2.01
Fourth Quarter	$	1.50	$	1.75

On August 31, 2009, the closing sale price of the Common Stock as reported on the NASDAQ Global Market $1.26 per share. On that date, there were approximately 1,000 holders of record of the Common Stock.

Dividends

Neither the Company nor Old Point.360 have paid dividends on its Common Stock. The Company’s ability to pay dividends depends upon limitations under applicable law and covenants under its bank agreements. The Company currently does not intend to pay any dividends on its Common Stock in the foreseeable future (see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”).

Stock Repurchases

The following table sets forth information regarding purchases by the Company of shares of its common stock during the quarter ended June 30, 2009:

Period		(a) Total Number of Shares (or Units) Purchased(1)				(b) Average Price Paid per Share (or Unit)				(c) Total Number of Shares (or Units) Purchased as Part Of Publicly Announced Plans or Programs(1)				(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs
April 1 to April 30, 2009			76,600			$	1.29				76,600				-

(1)

The Company purchased all shares of common stock listed in this column under Rule 10b5-1 plans adopted pursuant to a stock purchase program that the Company’s Board authorized in February 2008. The Company did not purchase any other shares of its common stock during the quarter ended June 30, 2009. Under the stock purchase program, the Company may purchase outstanding shares of its common stock on the open market at such times and prices as are determined in the sole discretion of management. Under the current version of the stock purchase program, described in a Form 10-Q report for the quarter ended December 31, 2008 which the Company filed with the Securities and Exchange Commission on February 17, 2009, there is no maximum dollar amount or maximum number of shares that may be purchased under the program and the program does not have a specified expiration date.

ITEM 6. SELECTED FINANCIAL DATA

The following data, insofar as they relate to each of the calendar years 2004 to 2006, and the fiscal years ended June 30, 2007 to 2009 have been derived from the Company’s annual financial statements. This information should be read in conjunction with the Financial Statements and Notes thereto (particularly Note 1 with respect to the Spin-off of the Company from Old Point.360 on August 14, 2007) and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. All amounts are shown in thousands, except per share data.

	Year Ended December 31,									Six Months Ended June 30,						Year Ended June 30,

Statement of Income (Loss) Data	2004			2005			2006			2006			2007			2007			2008			2009
										(unaudited)						(unaudited)

Revenues	$	38,588		$	43,059		$	43,533		$	21,692		$	20,850		$	42,691		$	45,150		$	45,619

Cost of services sold		(27,958	)		(29,472	)		(29,976	)		(14,948	)		(15,760	)		(30,788	)		(31,156	)		30,804

Gross profit		10,631			13,587			13,557			6,744			5,090			11,903			13,994			14,815

Selling, general and administrative expense		(13,649	)		(14,972	)		(13,554	)		(6,995	)		(7,071	)		(13,631	)		(14,611	)		(16,475	)

Restructuring costs		-			-			-			-			-			-			(513	)		-

Impairment charges		-			-			-			-			-			-			-			(9,961	)

Operating income (loss)		(3,018	)		(1,385	)		3			(251	)		(1,981	)		(1,728	)		(1,130	)		(11,621	)

Interest expense, net		(654	)		(1,280	)		(659	)		(448	)		(263	)		(473	)		(205	)		(628	)

Other income		-			-			-			-			-			-			100			152

(Provision for) benefit from income tax		1,489			1,045			342			280			607			668			292			(363	)

Net income (loss)	$	(2,183	)	$	(1,620	)	$	(314	)	$	(419	)	$	(1,637	)	$	(1,533	)	$	( 943	)	$	(12,460	)

Pro forma earnings (loss) per share							$	(0.03	)	$	(0.04	)	$	(0.16	)	$	(0.15	)	$	(0.09	)	$	(1.20	)

Pro forma weighted average common share outstanding								10,554			10,554			10,554			10,554			10,554			10,358

	Year Ended December 31,									Year Ended June 30,

Other Data	2004			2005			2006			2007			2008		2009

Capital expenditures	$	4,014		$	2 ,317		$	2,064		$	839		$	2,037	$	17,167	(3)

Selected Balance Sheet Data

Cash and cash equivalents	$	668		$	595		$	—		$	7,302		$	13,056		5,235

Working capital (deficit)		1,565			(234	)		1,325			9,814			16,497		10,048

Property and equipment, net		29,437			26,474			12,850	(1)		11,330			8,667		20,417

Total assets		49,108			47,229			33,482	(1)		38,103			42,358		37,394

Due to parent company		17,126			17,416			5,690	(1)		5,871			-		-

Invested or Shareholders’ Equity		20,541	(2)		19,757	(2)		17,424	(2)		24,035	(2)		30,800		18,009

(1)	On March 29, 2006, Old Point.360 sold and leased back its Media Center facility. Proceeds were used to repay debt. See Notes 4 and 6 of the notes to consolidated financial statements included elsewhere herein.

(2)	Represents Old Point.360’s invested equity in the Company.

(3)	Includes $12,939,000 for the purchase of real estate

In presenting the financial data above in conformity with general accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported. See “Critical Accounting Policies” included elsewhere herein for a detailed discussion of the accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.

Between January 1, 2004 and June 30, 2007, Old Point.360 completed a number of acquisitions, the results of operations and financial position of which have been included from their acquisition dates forward. See Note 3 to our consolidated financial statements for a discussion of the acquisitions for the annual periods ended 2004, 2005 and 2006 and the first six months of 2007, respectively.

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained herein, certain statements in this annual report are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involve certain risks and uncertainties, which could cause actual results to differ materially from those discussed herein, including but not limited to competition, customer and industry concentration, depending on technological developments, risks related to expansion, dependence on key personnel, fluctuating results and seasonality and control by management. See the relevant portions of the Company's documents filed with the Securities and Exchange Commission and Risk Factors in Item 1A of this Form 10-K, for a further discussion of these and other risks and uncertainties applicable to the Company's business.

Overview

Point.360 is one of the largest providers of video and film asset management services to owners, producers and distributors of entertainment content. We provide the services necessary to edit, master, reformat and archive our clients’ film and video content, including television programming, feature films and movie trailers using electronic and physical means. Clients include major motion picture studios and independent producers.

We operate in a highly competitive environment in which customers desire a broad range of services at a reasonable price. There are many competitors offering some or all of the services provided by us. Additionally, some of our customers are large studios, which also have in-house capabilities that may influence the amount of work outsourced to companies like Point.360. We attract and retain customers by maintaining a high service level at reasonable prices.

The market for our services is primarily dependent on our customers’ desire and ability to monetize their entertainment content. The major studios derive revenues from re-releases and/or syndication of motion pictures and television content. While the size of this market is not quantifiable, we believe studios will continue to repurpose library content to augment uncertain revenues from new releases. The current uncertain economic environment and entertainment industry labor unrest have negatively impacted the ability and willingness of independent producers to create new content.

The demand for entertainment content should continue to expand through web-based applications. We believe long and short form content will be sought by users of personal computers, hand held devices and home entertainment technology. Additionally, changing formats from standard definition, to high definition, to Blu Ray and perhaps to 3D will continue to give us the opportunity to provide new services with respect to library content.

To meet these needs, we must be prepared to invest in technology and equipment, and attract the talent needed to serve our client needs. Labor, facility and depreciation expenses constitute approximately 75% of our cost of sales. Our goals include maximizing facility and labor usage, and maintaining sufficient cash flow for capital expenditures and acquisitions of complementary businesses to enhance our service offerings.

We continue to look for opportunities to solidify our businesses. During the fiscal year ending June 30, 2009, we have completed the following:

We purchased the 32,000 square foot Burbank facility to enhance future cash flow

and secure that operational capability for the future.

We purchased the assets of Video Box Studios and consolidated its operations into our West

Los Angeles location.

We purchased the assets of MI Post providing the Company with an East Coast presence.

We purchased an 18,300 square foot building in Hollywood into which we will move operations that have previously occupied 37,000 square feet of rented space.

We have an opportunity to expand our business by establishing closer relationships with our customers through excellent service at a competitive price and adding to our service offering. Our success is also dependent on attracting and maintaining employees capable of maintaining such relationships. Also, growth can be achieved by acquiring similar businesses (for example, the acquisitions of IVC in July 2004, Eden FX in March 2007 and those described above) that can increase revenues by adding new customers, or expanding current services to existing customers.

Our business generally involves the immediate servicing needs of our customers. Most orders are fulfilled within several days, with occasional larger orders spanning weeks or months. At any particular time, we have little firm backlog.

We believe that our interconnected facilities provide the ability to better service customers than single-location competitors. We will look to expand both our service offering and geographical presence through acquisition of other businesses or opening additional facilities.

In conjunction with the merger of Old Point.360 into DG FastChannel, we changed our fiscal year end from December 31 to June 30, a date closer to the transaction. The following table sets forth the amount and percentage relationship to revenues of certain items included within our consolidated statement of income (loss) for the twelve month periods ended June 30, 2007 (unaudited), 2008 and 2009. The commentary below is based on these financial statements (in thousands).

	Twelve Months Ended June 30,
	2007						2008						2009
	Amount			Percent of Revenues			Amount			Percent of Revenues			Amount			Percent of Revenues
	(unaudited)

Revenues	$	42,691			100.0		$	45,150			100.0		$	45,619			100.0
Costs of services sold		(30,788	)		(72.1	)		(31,156	)		( 69.0	)		(30,804	)		( 67.5	)
Gross profit		11,903			27.9			13,994			31.0			14,815			32.5
Selling, general and administrative expense		(10,395	)		24.3			(14,491	)		(32.1	)		(16,475	)		(36.1	)
Restructuring costs		-			-			(513	)		(1.1	)		-			-
Impairment charges		-			-			-			-			(9,961	)		(21.8	)
Allocation of Old Point.360 corporate expenses		(3,236	)		7.6			(120	)		(0.3	)		-			-
Operating income (loss)		(1,728	)		(4.0	)		(1,130	)		(2.5	)		(11,621	)		(25.5	)
Interest expense, net		(473	)		(1.1	)		(105	)		(0.2	)		(476	)		(1.0	)
Benefit from income taxes		668			1.6			292			0.6			(363	)		(0.8	)
Net income (loss)	$	(1,533	)		(3.6	)	$	(943	)		(2.1	)	$	(12,460	)		(27.3	)

Twelve Months Ended June 30, 2009 Compared to Twelve Months Ended June 30, 2008

Revenues. Revenues were $45.6 million for the year ended June 30, 2009, compared to $45.2 million for the year ended June 30, 2008. We expect revenues to come under some downward pressure in the future if major studios reduce output due to current difficult financial conditions and other competitors reduce prices to compete for our business. Additionally, revenues for the last quarter of fiscal 2009 were lower than prior quarters by approximately $0.4 million due to the move of the operations to one of our Hollywood facilities (“Highland”) to two of our other locations as we renovate the Vine Property to house both Highland and Eden FX. We expect the negative effect on revenues to continue into fiscal 2010 as we consolidate approximately 37,000 square feet of operating space into approximately 20,000 square feet by December 31, 2010. We are continuing to invest in high definition capabilities where demand is expected to grow. We believe our high definition service platform will attract additional business in the future.

Cost of Services. Costs of services consist principally of wages and benefits, facility costs and depreciation of physical assets. During the year ended June 30, 2009, total costs of services were 67.5% of sales compared to 69.0% in the prior year. Depreciation costs were consistent between periods. Wages and benefits declined $241,000 due to personnel reductions following the August 2007 divestiture of the ADS Business, offset by increases with the addition of personnel with the purchases of Video Box Studios and MI Post. Personnel costs will be reduced during the first half of fiscal 2010 due to layoffs associated with relocation of the Highland operation. Facility expenses declined $335,000 due to elimination of rent for one of our Burbank facilities which we purchased in July 2008. Offsetting the reductions was an increase in the cost of outsourced work of $253,000 due to unusually fast turnaround requirements for several projects (we occasionally farm out certain tasks for which we have insufficient production capacity). While outsourcing generally involves lower margins, it allows us to better meet infrequent unusually fast delivery time requirements of our clients.

Gross Profit. In 2009, gross margin was 32.5% of sales, compared to 31.0% for the same period last year. The increase in gross profit percentage is due to the factors cited above. From time to time, we will increase staff capabilities to satisfy potential customer demand. If the expected demand does not materialize, we will adjust personnel levels. We expect gross margins to fluctuate in the future as the sales mix changes.

Selling, General and Administrative Expense. SG&A expense was $16.5 million (36.1% of sales) in 2009 as compared to $14.6 million (32.4% of sales) in 2008. During 2009, the Company incurred approximately $406,000 of costs associated with documentation of its internal control processes in anticipation of performing its first management assessment of internal controls for the fiscal year ended June 30, 2009. Additionally, the Company spent approximately $279,000 in consulting fees to improve its information technology infrastructure. Moving and other costs associated with the move of the Highland operation were approximately $357,000. Excluding these costs, SG&A expenses for 2009 were $15.4 million, or 33.7% of sales.

Restructuring Costs. In the fiscal year ended June 30, 2008, in conjunction with the completion of the Merger and Spin-off transactions, we decided to close down one of our post production facilities. Future costs associated with the facility lease and certain severance payments were treated as restructuring costs.

Impairment Charge. As part of the Company’s annual assessment of goodwill impairment required by SFAS No. 142, at June 30 2009, the Company determined that goodwill was fully impaired, and recorded an impairment charge of $10 million.

Operating Income (Loss). Operating loss was $11.6 million in 2009 compared to a loss of $1.1 million in 2008. Unusual SG&A and restructuring costs and the impairment charge contributed $11.0 and $0.5 million to the loss as in 2009 and 2008, respectively.

Interest Expense. Net Interest expense for 2009 was $0.5 million, an increase of $0.1 million from 2008. The increase was due to a mortgage related to real estate purchased in July 2008.

Other Income. During the current period, the Company realized $0.2 million of income from the sale of equipment.

Net Income (Loss). Net loss for 2009 was $12.5 million compared to a loss of $0.9 million in 2008.

Twelve Months Ended June 30, 2008 Compared to Twelve Months Ended June 30, 2007 (unaudited)

Revenues. Revenues were $45.2 million for the twelve months ended June 30, 2008, compared to $42.7 million for the twelve months ended June 30, 2007 (unaudited). The addition of Eden FX in March 2007 contributed an additional $3.5 million of revenues in the 2008 period. Excluding the net effect of Eden FX, revenues declined by $1.0 million or 2.5% from the prior period. We expect revenues to be under some downward pressure in the future due to lower prices being offered by some studio clients, offset by potential future increases as we continue to invest in high definition capabilities where demand is expected to grow. We believe our high definition service platform will attract additional business in the future.

Cost of Services. Costs of services consist principally of wages and benefits, facility costs and depreciation of physical assets. During the year ended June 30, 2008, total costs of services were 69.0% of sales compared to 72.1% in the prior year’s period. Wages and benefits increased $747,000 due to the addition of Eden FX which was acquired in the third fiscal quarter of 2007 offset by personnel reductions following the August 2007 divestiture of the ADS Business. The cost of outsourced work of increased $825,000 due to unusually fast turnaround requirements for several projects (we occasionally farm out certain tasks for which we have insufficient production capacity). While outsourcing generally involves lower margins, it allows us to better meet infrequent unusually fast delivery time requirements of our clients. Offsetting these increases, depreciation expense decreased $609,000 due to assets becoming fully depreciated.

Gross Profit. In 2008, gross margin was 31.0% of sales, compared to 27.9% for the same period last year. The increase in gross profit percentage is due to the contribution of Eden FX as compared to last year and the elimination of a facility (see “restructuring charge” below). Additionally, headcount was reduced by 37 employees during fiscal 2008, offset by wage increases cited above. From time to time, we will increase staff capabilities to satisfy potential customer demand. If the expected demand does not materialize, we will adjust personnel levels. We expect gross margins to fluctuate in the future as the sales mix changes.

Selling, General and Administrative Expense. SG&A expense was $14.5 million (32.1% of sales) in the 2008 period as compared to $13.6 million (31.9% of sales) in 2007. Approximately $0.9 of the increase was due to the addition of Eden FX for an entire year.

Restructuring Costs. In the first quarter of 2008, in conjunction with the completion of the Merger and Spin-off transactions, we decided to close down one of our post production facilities. Future costs associated with the facility lease and certain severance payments were treated as restructuring costs.

Allocation of Point.360 Corporate Expenses. Corporate expense allocation in the 2008 period was $0.1 million, or 0.3% of sales, compared to $3.2 million, or 7.6% of sales in 2007. Such amounts are included in the explanation of SG&A variances above.

Operating Income (Loss). Operating loss was $1.1 million in 2008 compared to a loss of $1.7 million in 2007.

Interest Expense, Net. Interest expense, net for 2008 was $0.1 million, a decrease of $0.4 million from 2007. The decrease was due to lower debt levels and payment of revolving credit debt with the proceeds of employee stock option exercises, offset partially by higher rates on remaining variable interest debt. Interest income in 2008 was $0.3 million, an increase of $0.3 million from 2007 due to higher cash balances.

Net Loss. Net loss for 2008 was $0.9 million compared to $1.5 million in 2007.

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006 (unaudited)

	Six Months Ended June 30,
	2006						2007
	Amount			Percent of Revenues			Amount			Percent of Revenues
	(unaudited)

Revenues	$	21,642			100.0		$	20,850			100.0
Costs of services sold		(14,948	)		(68.9	)		(15,760	)		(75.6	)
Gross profit		6,744			31.1			5,090			24.4
Selling, general and administrative expense		(5,303	)		(24.4	)		(5,590	)		(26.8	)
Allocation of Old Point.360 corporate expenses		(1,692	)		(7.8	)		(1,481	)		(7.1	)
Operating income (loss)		(251	)		(1.2	)		(1,981	)		(9.5	)
Interest expense, net		(448	)		(2.0	)		(263	)		(1.2	)
Benefit from income taxes		280			1.3			607			3.8
Net income (loss)	$	(419	)		(1.9	)	$	(1,637	)		(7.0	)

Revenues. Revenues were $20.9 million for the six months ended June 30, 2007, compared to $21.7 million for the six months ended June 30, 2006 (unaudited). The addition of Eden FX in March 2007 contributed $0.6 million of revenues in the 2007 period. Excluding the effect of Eden FX, revenues declined by $1.4 million or 6.5% from the prior period due to lower ordering patterns of our major studio customers.

Cost of Services. Costs of services consist principally of wages and benefits, facility costs and depreciation of physical assets. During the six months ended June 30, 2007, total costs of services were 75.6% of sales compared to 68.9% in the prior year’s period. While depreciation costs were consistent between periods, wages and benefits increased $731,000 due to personnel added with the acquisition of Eden FX in March 2007. Facility expenses increased $421,000 due to a full six months of lease expenses in the 2007 period resulting from the March 2006 sale/leaseback of our Media Center property, general rent increases and the addition of the Eden FX space. Offsetting the increases were $306,000 of reductions in the cost of outsourced work and equipment rentals.

Gross Profit. In 2007, gross margin was 24.4% of sales, compared to 31.1% for the same period last year.

Selling, General and Administrative Expense. SG&A expense was $5.6 million (26.8% of sales) in the 2007 period as compared to $5.3 million (24.4% of sales) in 2006. The increase of $0.3 million was due principally to the addition of Eden FX.

Allocation of Point.360 Corporate Expenses. Corporate expense allocation in the 2007 period was $1.5 million, or 7.1% of sales, compared to $1.7 million, or 7.8% of sales in 2006.

Operating Income (Loss). Operating loss was $2.0 million in 2007 compared to a loss of $0.3 million in 2006. The operating loss associated with Eden FX was $0.5 million as Eden’s business is seasonally low as it participates largely in the television episodic market.

Interest Expense, Net. Interest expense, net for 2007 was $0.3 million, a decrease of $0.1 million from 2006. The decrease was due to lower debt levels resulting from the sale/leaseback transaction and payment of revolving credit debt with the proceeds of employee stock option exercises, offset partially by higher rates on remaining variable interest debt.

Net Loss. Net loss for 2007 was $1.6 million compared to $0.4 million in 2006.

LIQUIDITY AND CAPITAL RESOURCES

This discussion should be read in conjunction with the notes to the financial statements and the corresponding information more fully described elsewhere in this Form 10-K.

On August 14, 2007 and thereafter, the Company received $7 million from DG FastChannel upon completion of the Merger. The Company also received approximately $2.2 million for reimbursement of merger expenses and prepayment for ADS Business working capital.

On December 30, 2005, Old Point.360 entered a $10 million term loan agreement. The term loan provides for interest at LIBOR (1.80% at March 31, 2009) plus 3.15% (4.95% on that date) and is secured by the Company’s equipment. The term loan will be repaid in 60 equal principal payments plus interest.

On March 30, 2007, Old Point.360 entered into an additional $2.5 million term loan agreement. The loan provides for interest at 8.35% per annum and is secured by the Company’s equipment. The loan is being repaid in 45 equal monthly installments of principal and interest. Both the December 2005 and March 2007 term loans were assumed by the Company in the Spin-off.

After June 30, 2009, in August 2009, the Company entered into a new credit agreement which provides up to $5 million of revolving credit based on 80% of acceptable accounts receivables, as defined. The agreement provides for interest of either (i) prime (3.25% at June 30, 2009) minus .5% - to plus .5% or (ii) LIBOR plus 2.0% - 3.00% depending on the level of the Company’s ratio of outstanding debt to fixed charges (as defined), or 3.25% or 3.68%, respectively, at June 30, 2009. The facility is secured by all of the Company’s accounts receivable.

In March 2006, Old Point.360 entered into a sale and leaseback transaction with respect to its Media Center vaulting real estate. The real estate was sold for $13,946,000 resulting in a $1.3 million after tax gain. Additionally, Old Point.360 received $500,000 from the purchaser for improvements. In accordance with SFAS No. 28, “Accounting for Sales with Leasebacks” (“SFAS28”), the gain and the improvement allowance will be amortized over the initial 15-year lease term as reduced rent.

In July 2008, the Company entered into a Promissory Note with a bank (the “Note”) in order to purchase land and a building that has been occupied by the Company since 1998 (the total purchase price was approximately $8.1 million). Pursuant to the Note, the company borrowed $6,000,000 payable in monthly installments of principal and interest on a fully amortized basis over 30 years at an initial five-year interest rate of 7.1% and thereafter at a variable rate equal to LIBOR plus 3.6% (5.40% as of March 31, 2009).

In June 2009, the Company entered into a $3,562,500 million Purchase Money Promissory Note secured by a Deed of Trust for the purchase of land and a building (“Vine Property”). The note bears interest at 7% fixed for ten years. The principal amount of the note is payable on June 12, 2019. The note is secured by the property.

The following table summarizes the June 30, 2009 amounts outstanding under our revolving line of credit, and term (including capital lease obligations) and mortgage loans:

Revolving credit	$	-

Current portion of term loan and mortgages		2,085,000
Long-term portion of term loan and mortgages		10,844,000
Total	$	12,929,000

Monthly and annual principal and interest payments due under the term debt and mortgages are approximately $244,000 and $2.9 million, respectively, assuming no change in interest rates.

Our new bank revolving credit agreement requires us to maintain a minimum “leverage ratio” and “fixed charge coverage ratio.” The leverage ratio compares tangible assets to total liabilities (excluding the deferred real estate gain. Our fixed charge coverage ratio compares, on a rolling twelve-month basis, (i) EBITDA plus rent expense and non-cash charges less income tax payments, to (ii) interest expense plus rent expense, the current portion of long term debt and maintenance capital expenditures. On a pro forma basis, as of June 30, 2009, the leverage ratio was 2.16 compared to a minimum requirement of 1.75, and the fixed charge coverage ratio was 1.31 as compared to a minimum requirement of 1.10. Under the previous credit agreement which contained only a fixed charge coverage ratio, the ratio at June 30, 2009 was 1.18 compared to a minimum requirement of 1.10.

We expect that amounts available under the revolving credit arrangement (approximately $3.5 million at August 31, 2009), the availability of bank or institutional credit from new sources and cash generated from operations will be sufficient to fund debt service, operating needs and about $2.0 – $3.0 million of capital expenditures for the next twelve months including approximately $1.5 million to complete the renovation of the Vine Property.

In March 2007, we acquired substantially all the assets of Eden FX for approximately $2.2 million in cash. The purchase agreement requires additional payments of $0.7 million, $0.9 million and $1.2 million in March of 2008, 2009 and 2010, respectively, if earnings during the three years after acquisition meet certain predetermined levels. The earnings levels for calendar 2007 and 2008 were not met; therefore, the 2008 and 2009 payments were not made.

The Company’s cash balance decreased from $13,056,000 on July 1, 2008 to $5,235,000 at June 30, 2009, principally due to the following:

Balance July 1, 2008	$	13,056,000
Increase in accounts receivable		(1,353,000	)
Capital expenditures for equipment		(3,315,000	)
Acquisition of Video Box Studios		(422,000	)
Acquisition of MI Post		(300,000	)
Purchase of Hollywood Way real estate		(2,100,000	)
Purchase of Vine real estate		(1,200,000	)
Purchase of Point.360 common stock		(459,000	)
Debt principal and interest payments		(2,511,000	)
Other		3,839,000
Balance June 30, 2009	$	5,235,000

Cash generated by operating activities is directly dependent upon sales levels and gross margins achieved. We generally receive payments from customers in 50-90 days after services are performed. The larger payroll component of cost of sales must be paid currently. Payment terms of other liabilities vary by vendor and type. Income taxes must be paid quarterly. Fluctuations in sales levels will generally affect cash flow negatively or positively in early periods of growth or contraction, respectively, because of operating cash receipt/payment timing. Other investing and financing cash flows also affect cash availability.

In recent quarters, the underlying drivers of operating cash flows (sales, receivable collections, the timing of vender payments, facility costs and employment levels) have been consistent, except that days sales outstanding in accounts receivable have risen from approximately 49 days to 61 days within the last 12 months. Major studios have generally delayed payments in response to the general economic slowdown. However, we do not expect days sales outstanding to materially increase in the future.

As of June 30, 2009, our facility costs consisted of building rent, maintenance and communication expenses. In July 2008, rents were reduced by the purchase of our Hollywood Way facility in Burbank, CA, eliminating approximately $625,000 of annual rent expense. The real estate purchase involved a down payment of $2.1 million and $6 million of mortgage debt. The mortgage payments are approximately $488,000 per year.

In March 2009, the lease on one of our facilities in Hollywood, CA (“Highland”) expired and the Company became a holdover tenant. The landlord issued a Notice to Quit which required us to move out of the facility. The Highland operations have been temporarily housed at several other of our facilities.

The Company purchased the Vine Property in June 2009. The purchase price of the Vine Property was $4.75 million, $1.2 million of which was paid in cash with the balance being financed by the seller over ten years, interest only at 7% for the entire term, with the principal amount being due at the end of the term. Building renovations will cost about $1.5 million. After renovation, we expect to move our Eden FX and Highland operations into the Vine Property by October 2009.

When Highland and Eden FX are moved into the Vine Property, annual cash outlays for the two operations will be reduced from $1.1 million of rent payments to about $250,000 of interest payments. While we will spend about $2.7 million for the down payment and renovation of the Vine Property, annual cash flow will improve by approximately $600,000 (rent payments less interest and other incremental operating costs).

We believe our current cash position and a difficult economy may provide us with the opportunity to invest in facility assets that will not only help fix our operating costs, but give us the potential to own appreciating real estate assets. We will continue to evaluate opportunities to reduce facility costs.

The mortgage payments are approximately $488,000 per year. We believe our current cash position and a difficult economy may provide us with the opportunity to invest in facility assets that will not only help fix our operating costs, but give us the potential to own appreciating real estate assets. We will continue to evaluate opportunities to reduce facility costs.

The following table summarizes contractual obligations as of June 30, 2009 due in the future:

	Payment due by Period
Contractual Obligations	Total		Less than 1 Year		Years 2 and 3		Years 4 and 5		Thereafter
Long Term Debt Principal Obligations	$	12,352,000	$	1,935,000	$	1,105,000	$	167,000	$	9,145,000
Long Term Debt Interest Obligations (1)		10,196,000		814,000		1,365,000		1,285,000		6,731,000
Capital Lease Obligations		577,000		156,000		328,000		94,000		-
Capital Lease Interest Obligations		73,000		34,000		37,000		3,000		-
Operating Lease Obligations		22,447,000		2,785,000		6,896,000		5,094,000		7,672,000
Total	$	45,645,000	$	5,724,000	$	9,730,000	$	6,643,000	$	23,548,000

(1) Interest on variable rate debt has been computed using the rate on the latest balance sheet date.

During the past year, the Company has generated sufficient cash to meet operating, capital expenditure and debt service needs and obligations, as well as to provide sufficient cash reserves to address contingencies. When preparing estimates of future cash flows, we consider historical performance, technological changes, market factors, industry trends and other criteria. In our opinion, the Company will continue to be able to fund its needs for the foreseeable future.

We will continue to consider the acquisition of businesses which compliment our current operations and possible real estate transactions. Consummation of any acquisition, real estate or other expansion transaction by the Company may be subject to the Company securing additional financing, perhaps at a cost higher than our existing term loans. In the current economic climate, additional financing may not be available. Additionally, our current bank line of credit might not be renewed upon its November 2010 expiration due to recent changes in the bank lending environment. Future earnings and cash flow may be negatively impacted to the extent that any acquired entities do not generate sufficient earnings and cash flow to offset the increased financing costs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to allowance for doubtful accounts, valuation of long-lived assets, and accounting for income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Critical accounting policies are those that are important to the portrayal of the Company’s financial condition and results, and which require management to make difficult, subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. We have made critical estimates in the following areas:

Revenues. We perform a multitude of services for our clients, including film-to-tape transfer, video and audio editing, standards conversions, adding special effects, duplication, distribution, etc. A customer orders one or more of these services with respect to an element (commercial spot, movie, trailer, electronic press kit, etc.). The sum total of services performed on a particular element (a “package”) becomes the deliverable (i.e., the customer will pay for the services ordered in total when the entire job is completed). Occasionally, a major studio will request that package services be performed on multiple elements. Each element creates a separate revenue stream which is recognized only when all requested services have been performed on that element. At the end of an accounting period, revenue is accrued for un-invoiced but shipped work.

Certain jobs specify that many discrete tasks must be performed which require up to four months to complete. In such cases, we use the proportional performance method for recognizing revenue. Under the proportional performance method, revenue is recognized based on the value of each stand-alone service completed. See Note 14 of Notes to Consolidated Financial Statements included in this Form 10-K for a discussion of the need to restate quarterly results for the quarters ended September 30, 2008, December 31, 2008 and March 31, 2009 to correct errors in the application of the proportional performance method with respect to the timing of when such revenues were recognized.

In some instances, a client will request that we store (or “vault”) an element for a period ranging from a day to indefinitely. The Company attempts to bill customers a nominal amount for storage, but some customers, especially major movie studios, will not pay for this service. In the latter instance, storage is an accommodation to foster additional business with respect to the related element. It is impossible to estimate (i) the length of time we may house the element, or (ii) the amount of additional services we may be called upon to perform on an element. Because these variables are not reasonably estimable and revenues from vaulting are not material (billed vaulting revenues are approximately 3% of sales), we do not treat vaulting as a separate deliverable in those instances in which the customer does not pay.

The Company records all revenues in accordance with SAB 104, which states that revenue is realized or realizable and earned when all of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or the services have been rendered; (iii) the Company’s price to the customer is fixed or determinable; and (iv) collectability is reasonably assured. Additionally, in instances where package services are performed on multiple elements or where the proportional performance method is applied, the Company adheres to EITF 00-21 “Revenue Arrangements with Multiple Elements”.

Allowance for doubtful accounts. We are required to make judgments, based on historical experience and future expectations, as to the collectability of accounts receivable. The allowances for doubtful accounts and sales returns represent allowances for customer trade accounts receivable that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross trade receivables to their net realizable value. The Company records these allowances as a charge to selling, general and administrative expenses based on estimates related to the following factors: (i) customer specific allowance; (ii) amounts based upon an aging schedule and (iii) an estimated amount, based on the Company’s historical experience, for issues not yet identified.

Valuation of long-lived and intangible assets. Long-lived assets, consisting primarily of property, plant and equipment and intangibles (consisting principally of goodwill), comprise a significant portion of the Company’s total assets. Long-lived assets, including goodwill are reviewed for impairment whenever events or changes in circumstances have indicated that their carrying amounts may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to its fair value in a current transaction between willing parties, other than in a forced liquidation sale.

Factors we consider important which could trigger an impairment review include the following:

Significant underperformance relative to expected historical or projected future operating results;

Significant changes in the manner of our use of the acquired assets or the strategy of our overall business;

Significant negative industry or economic trends;

Significant decline in our stock price for a sustained period; and

Our market capitalization relative to net book value.

When we determine that the carrying value of intangibles, long-lived assets and related goodwill and enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on comparing the carrying amount of the asset to its fair value in a current transaction between willing parties or, in the absence of such measurement, on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Any amount of impairment so determined would be written off as a charge to the income statement, together with an equal reduction of the related asset. Net long-lived assets amounted to approximately $20.4 million as of June 30, 2009.

In 2002, Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill and Other Intangible Assets” (“SFAS 142”) became effective. As a result, Old Point.360 ceased to amortize approximately $26.3 million of goodwill in 2002 and performed an annual impairment review thereafter. The initial test on January 1, 2002, and the Fiscal 2002 to 2007 tests performed as of September 30 of each year required no goodwill impairment. On August 14, 2007, the Company was formed by a spin-off transaction, and a certain portion of Old Point.360’s goodwill was assigned to the Company. In the 2009 test performed as of June 30, 2009, the discounted cash flow method was used to evaluate goodwill impairment and included cash flow estimates for 2010 and subsequent years. As a result, the Company recorded a goodwill impairment charge of $10 million as of June 30, 2009.

Accounting for income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The net deferred tax assets as of June 30, 2009 were $0.0 million.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement FAS 109. This interpretation prescribes a recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. The Company assumed all liability for income taxes of Old Point.360 related to operations prior to the Spin-off and Merger. Effectively, the Company therefore adopted FIN 48, effective January 1, 2007. The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal state or local income tax examinations by tax authorities for years before 2002. The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns. Old Point.360, and consequently, the Company, was last audited by New York taxing authorities for the years 2002 through 2004 resulting in no change. Old Point.360, and consequently, the Company, was previously notified by the U.S. Internal Revenue Service of its intent to audit the calendar 2005 tax return. The audit has since been cancelled by the IRS without change; however, the audit could be reopened at the IRS’ discretion. Upon the implementation of FIN 48, the Company did not recognize any increase in the liability for unrecognized tax benefits. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2008, FASB issues FASB Staff Position (FSP) 140-4 and FIN 46(R)-8, Disclosures by Public Entities about Transfers of Financial Assets and Interests in Variable Interest Entities. The purpose of this FSP is to promptly increase disclosures by public entities and enterprises until the pending amendments to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, (FAS 140) and FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (FIN 46(R)) are finalized and approved by the FASB. The FSP is effective for reporting periods (interim and annual) ending after December 15, 2008. We adopted this FSP for our year ended June 30, 2009 and the adoption did not have any impact on our consolidated financial statements.

In April 2009, the FASB issued three related FASB Staff Positions: (i) FSP FAS No. 115-2 and FAS No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”); (ii) FSP FAS No. 107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), and; (iii) FSP FAS No. 157-4, Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”), which are effective for interim and annual reporting periods ending after June 15, 2009. FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in generally accepted accounting principles (“GAAP”) for debt securities to modify the requirement for recognizing other-than-temporary impairments, change the existing impairment model and modify the presentation and frequency of related disclosures. FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. FSP FAS 157-4 provides additional guidance for estimating fair value in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate in accordance with SFAS No. 157. The impact of the adoption of these three Staff Positions is not expected to be significant to our consolidated financial statements.

In April 2009, the FASB issued FSP SFAS No. 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. FSP SFAS 141R-1 amends the guidance in SFAS 141R relating to the initial recognition and measurement, subsequent measurement and accounting and disclosures of assets and liabilities arising from contingencies in a business combination. FSP SFAS 141R is effective for fiscal years beginning after December 15, 2008. We adopted FSP SFAS 141R as of the beginning of fiscal 2010. We will apply the requirements of FSP FAS 141R-1 prospectively to any future acquisitions.

Effective April 1, 2009, the Company adopted SFAS No. 165, Subsequent Events. SFAS No. 165 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that should be made about events or transactions that occur after the balance sheet date. In preparing these financial statements, the Company evaluated the events and transactions that occurred between June 30, 2009 through September 28, 2009, the date these financial statements were issued.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140 ". SFAS No. 166 amends SFAS No. 140, " Accounting for the Transfers and Servicing of Financial Assets and the Extinguishments of Liabilities, " and seeks to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about transfers of financial assets; the effects of the transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor's interest in transferred financial assets. SFAS No. 166 is effective for interim and annual reporting periods beginning after November 15, 2009. The Company does not expect the adoption of SFAS No. 166 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued SFAS No.167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends FASB Interpretation No. ("FIN") 46, Consolidation of Variable Interest Entities (revised December 2003) - an interpretation of ARB No. 51 , which requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance, and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS No. 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 167 is effective for interim and annual reporting periods beginning after November 15, 2009. The Company does not expect the adoption of SFAS No. 167 to have an impact on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. SFAS No. 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification ("Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States of America. SFAS No. 168 is effective for interim and annual reporting periods ending after September 15, 2009. The Company does not expect the adoption of SFAS No. 168 to have a material impact on its consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk. The Company had borrowings of $12.9 million on June 30, 2009 under term loan and mortgage agreements. One term loan was subject to variable interest rates. The weighted average interest rate paid during the fiscal 2009 was 6.3%. For variable rate debt outstanding at June 30, 2009, a .25% increase in interest rates will increase annual interest expense by approximately $7,000. Amounts that may become outstanding under the revolving credit facility provide for interest at the banks’ prime rate minus .5% to plus .5% or LIBOR plus 2.0% to 3.0% and LIBOR plus 3.15% for the variable rate term loan. The Company’s market risk exposure with respect to financial instruments is to changes in prime or LIBOR rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page

Report of Independent Registered Public Accounting Firm	26

Financial Statements:

Consolidated Balance Sheets – June 30, 2008 and 2009	27

Consolidated Statements of Income (Loss) – Fiscal Years Ended December 31, 2006, the six months ended June 30, 2007 and the years ended June 30, 2008 and 2009	28

Consolidated Statements of Invested and Shareholders’ Equity – Fiscal Years Ended December 31, 2006, the six months ended June 30, 2007 and the years ended June 30, 2008 and 2009	29

Consolidated Statements of Cash Flows – Fiscal Years Ended December 31, 2006, the six months ended June 30, 2007 and the years ended June 30, 2008 and 2009	30

Notes to Consolidated Financial Statements	31

Financial Statement Schedule:

Schedule II – Valuation and Qualifying Accounts	55

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Point.360

Burbank, California

We have audited the accompanying consolidated balance sheets of Point.360 (formerly New 360) and its subsidiary (collectively the “Company”) as of June 30, 2009 and 2008, and the related consolidated statements of income (loss), invested and shareholders equity and cash flows for the years ended June 30, 2009 and 2008, for the six months ended June 30, 2007 (restated) (the transition period 2007), and for the year ended December 31, 2006 (restated). Our audits also included the financial statement schedule of Point.360 listed in Item 15(a). 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 based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Point.360 and its subsidiaries as of June 30, 2009 and 2008, and the results of their operations and their cash flows for the years ended June 30, 2009 and 2008, for the six months ended June 30, 2007 (the transition period 2007), and for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related 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.

We were not engaged to examine management’s assertion about the effectiveness of Point.360’s internal control over financial reporting as of June 30, 2009 discussed in the accompanying Item 9A Controls and Procedures and, accordingly, we do not express an opinion thereon.

As described in Note 14 to the financial statements, the Company has restated its financial statements for the quarters ended September 30, 2008, December 31, 2008 and March 31, 2009 for the correction of an error with respect to the timing of recognition of revenues.

Singer Lewak LLP (signed)

Los Angeles, California

September 28, 2009

Point.360

Consolidated Balance Sheets

(in thousands)

	June 30,
	2008			2009
Assets
Current assets:

Cash and cash equivalents	$	13,056		$	5,235
Accounts receivable, net of allowances for doubtful accounts of $541 and $537, respectively		6,971			8,347
Inventories, net		502			401
Prepaid expenses and other current assets		667			819
Prepaid income taxes		1,441			1,877
Deferred income taxes		490			-
Total current assets		23,127			16,679

Property and equipment, net		8,667			20,417
Other assets, net		743			298
Goodwill		9,820			-
Total assets	$	42,358		$	37,394

Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of borrowings under notes payable	$	1,810		$	2,086
Accounts payable		1,716			1,708
Accrued wages and benefits		2,109			1,438
Other accrued expenses		816			1,220
Current portion of deferred gain on sale of real estate		178			178

Total current liabilities		6,631			6,630

Notes payable, less current portion		2,839			10,844
Deferred gain on sale of real estate, less current portion		2,089			1,911

Total long-term liabilities		4,928			12,755

Total liabilities		11,558			19,385

Commitments and contingencies		-			-

Shareholders’ equity
Parent company’s invested equity		-			-
Preferred stock – no par value; 5,000,000 shares authorized; none outstanding		-			-
Common stock – no par value; 50,000,000 shares authorized; 10,553,410 and 10,148,700 shares issued and outstanding on June 30, 2008 and 2009, respectively		21,583			21,025
Additional paid-in capital		9,320			9,547
Retained (deficit)		(103	)		(12,563	)
Total shareholders’ equity		30,800			18,009

Total liabilities and shareholders’ equity	$	42,358		$	37,394

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

Point.360

Consolidated Statements of Income (Loss)

(in thousands, except per share amounts)

	Year Ended December 31,			Six Months Ended June 30,			Year Ended June 30,
	2006			2007			2008			2009
Revenues	$	43,533		$	20,850		$	45,150		$	45,619
Cost of services sold		(29,976	)		(15,760	)		(31,156	)		(30,804	)

Gross profit		13,557			5,090			13,994			14,815

Selling, general and administrative expense		(10,108	)		(5,590	)		(14,491	)		(16,475	)
Allocation of Point.360 corporate expenses (Note 1)		(3,446	)		(1,481	)		(120	)		-
Impairment charges		-			-			-			(9,961	)
Restructuring costs		-			-			(513	)	-

Operating income (loss)		3			(1,981	)		(1,130	)		(11,621	)

Interest expense		(659	)		(299	)		(553	)		(675	)
Interest income		-			35			348			47
Other income (expense)		-			-			100			152

Loss before income taxes		(656	)		(2,244	)		(1,235	)		(12,097	)

(Provision for) benefit from income taxes		342			607			292			(363	)

Net loss	$	(314	)	$	(1,637	)	$	(943	)	$	(12,460	)

Pro forma basic and diluted (loss) per share	$	(0.03	)	$	(0.16	)	$	(0.09	)

Pro forma weighted average number of shares		10,554			10,554			10,554

Basic and diluted (loss) per share										$	(1.20	)

Weighted average number of shares											10,358

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

Point.360

Consolidated Statements of Invested and Shareholders’ Equity

(in thousands)

				Common Stock
	Invested Equity			Shares			Dollars			Paid-in Capital			Retained Earnings			Shareholders’ Equity

Balance on December 31, 2005	$	19,757					$			$			$			$

Changes in investment account due to allocation of operating activities (Note 1)		(2,019	)

Net (loss)		(314	)

Balance on December 31, 2006		17,424

Changes in investment account due to allocation of operating activities (Note 1)		8,248

Net (loss)		(1,637	)

Balance on June 30, 2007		24,035

Net (loss)		-			-			-			-			(841	)		(841	)

Balance on August 13, 2007		24,035			-			-			-			(841	)		23,194


Formation of New 360		(24,035	)		10,554			21,080			2,114			841			-

Recognition of New 360 book/tax differences		-			-			503			-			-			503

Payments by DGFC, net of transaction expenses		-			-						7,131			-			7,131

Additional transaction expenses		-			-						(2	)		-			(2	)

FAS 123R option expense		-			-						77			-			77

Net (loss)		-			-			-			-			(103	)		(103	)

Balance on June 30, 2008	$	-			10,554		$	21,583		$	9,320		$	(103	)	$	30,800

Purchases of common stock					(405	)		(558	)		-			-			(558	)

FAS 123R option expense											227						227

Net (loss)														(12,460	)		(12,460	)

Balance on June 30, 2009					10,149		$	21,025		$	9,547		$	(12,563	)	$	18,009

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

Point.360

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,			Six Months Ended June 30,			Year Ended June 30,
	2006			2007			2008			2009

Cash flows from operating activities:
Net loss	$	(314	)	$	(1,637	)	$	(943	)	$	(12,460	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,653			2,359			4,700			4,964
Provision for (recovery of) doubtful accounts		89			(23	)		51			(4	)
Deferred income taxes		(1,735	)		-			-			-
Stock compensation expense		-			-			-			227
Changes in operating assets and liabilities (net of acquisitions):
(Increase) decrease in accounts receivable		(2,159	)		3,292			(769	)		(1,372	)
(Increase) decrease in inventories		36			(16	)		53			100
(Increase) decrease in prepaid expenses and other current assets		1,826			(2,331	)		295			(587	)
Decrease in goodwill		-			-			-			9,842
(Increase) decrease in other assets		45			44			(211	)		238
(Decrease) increase in accounts payable		676			(549	)		(780	)		(8	)
Increase (decrease) in accrued expenses		(27	)		(888	)		(17	)		(267	)
Increase (decrease) in income taxes pay-able/receivable, net		(1,108	)		(123	)		-			-
(Increase) decrease in deferred tax asset		279			160			(936	)		700
Net cash and cash equivalents provided by (used in) operating activities		2,261			288			1,443			1,373

Cash flows from investing activities:
Capital expenditures		(2,064	)		(839	)		(2,037	)		(16,738	)
Proceeds from sale of equipment or real estate		13,543			56			(185	)		(178	)
(Increase) decrease in goodwill		(588	)		(635	)		48			9,842
Net cash and cash equivalents provided by (used in) investing activities		10,891			(1,464	)		(2,174	)		(16,916	)

Cash flows from financing activities:
Repurchase of common stock		-			-			-			(557	)
Change in revolving credit		(737	)		(1,464	)		-			-
(Increase) decrease in invested equity		(2,020	)		(8,248	)		7,707			-
(Repayment) proceeds from of notes payable		(10,926	)		(1,658	)		(1,217	)		7,702
Repayment proceeds from of capital lease obligations		(64	)		(10	)		(5	)		577
Net cash (used in) provided by financing activities		(13,747	)		(8,432	)		6,485			7,722

Net increase (decrease) in cash and cash equivalents		(595	)		7,302			5,754			(7,821	)
Cash and cash equivalents at beginning of year		595		-				7,302			13,056
Cash and cash equivalents at end of year	$	-		$	7,302		$	13,056		$	5,235

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

Point. 360

Notes to Consolidated Financial Statements

BASIS OF PRESENTATION:

The Company provides high definition and standard definition digital mastering, data conversion, video and film asset management and sophisticated computer graphics services to owners, producers and distributors of entertainment and advertising content. The Company provides the services necessary to edit, master, reformat, convert, archive and ultimately distribute its clients’ film and video content, including television programming feature films and movie trailers. The Company’s interconnected facilities provide service coverage to all major U.S. media centers.

On August 14, 2007, pursuant to the terms of an Agreement and Plan of Merger and Reorganization among DG FastChannel, Inc. (“DG FastChannel”), Point.360 (“Old Point.360”) and New 360 (“the Company”), a wholly owned subsidiary of Old Point.360, (the “Merger Agreement”), Old Point.360 was merged into DG FastChannel, with DG FastChannel continuing as the surviving corporation (the “Merger”). Subsequent to the Merger, the Company changed its name back to Point.360. See Note 12.

On August 13, 2007, prior to the completion of the Merger, (1) Old Point.360 contributed to the Company (the “Contribution”) all of the assets used by Old Point.360 in its post-production business and all other assets owned, licensed, or leased by Old Point.360 that were not used exclusively in connection with the business of Old Point.360 representing advertising agencies, advertisers, brands, and other media companies which require services for short-form media content (the “ADS Business”), with the Company assuming certain liabilities of Old Point.360 and (2) Old Point.360 distributed to its shareholders on a pro rata basis all of the outstanding common stock of the Company (the “Spin-off”).

In the Spin-off, each Old Point.360 shareholder received one share of Company common stock (and a related preferred share purchase right) for each share of Old Point.360 common stock held by the shareholder as of the record date of August 7, 2007. As a result of the Contribution and the Spin-off, the assets and liabilities of Old Point.360 acquired by DG FastChannel in the Merger consisted only of those assets and liabilities exclusively related to the ADS Business. Immediately after the completion of the Spin-off, DG FastChannel contributed to the Company shares of the Company common stock that it received in the Spin-off as a shareholder of Old Point.360. As a result of the Spin-off, the Company became a publicly held company whose common stock is traded on the NASDAQ Global Market and is registered under Section 12 of the Securities Exchange Act of 1934.

The accompanying Consolidated Financial Statements include the accounts and transactions of the Company, including those of the Company’s only subsidiary, International Video Conversions, Inc. (“IVC”). The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in the consolidated Financial Statements.

The Company’s consolidated results of operations, financial position and cash flow may not be indicative of its future performance and do not necessarily reflect what the consolidated results of operations, financial position and cash flows would have been had the Company operated as a separate, stand-alone entity during the periods presented, including changes in its operations and capitalization as a result of the separation and distribution form Old Point.360.

For periods prior to the Spin-off, certain corporate and general and administrative expenses, including those related to executive management, tax, accounting, legal and treasury services, have been allocated by Old Point.360 to the Company based on the ratio of the Company’s revenues to Old Point.360’s total revenues. Management believes such allocations represent a reasonable estimate of such expenses that would have been incurred by the Company on a stand-alone basis. However, the associated balance sheet amounts and expenses recorded by the Company in the accompanying Consolidated Financial Statements may not be indicative of the actual balance or expenses that would have been recorded or incurred had the Company been operating as a separate, stand-alone public company for the periods presented. Following the separation and distribution from Old Point.360, the Company has performed administrative functions using internal resources or purchased services.

The process of segregating the post production business and the ads business required the following:

Separation of sales, cost of sales, facility rents, personnel and other costs specifically related to each business.

Allocation of costs shared by all Old Point.360 businesses such as accounting, sales and information technology, based on either specific criteria or an allocation based on sales, asset levels or another appropriate means. For example, interest expense related to Old Point.360 term and revolving credit loans was allocated based on property and equipment and accounts receivable balances of the post production and ads businesses, respectively. Accounting (billing, credit and collection, etc.) was allocated based on sales.

Assets and liabilities related to each business were identified and assigned to post production or ads businesses.

Virtually all of the ads business was performed in five isolated facilities.

Invested equity at December 31, 2005 and 2006 and June 30, 2007 reflects the application of estimating techniques described above on those dates. Changes in invested equity from year to year are due to the income or loss of the Company and the net effect of the changes in balance sheet accounts determined by such estimating techniques.

In presenting the Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates.

Business Description

The Company operates in a single business segment from seven locations. Each location is electronically tied to the others and serves the same customer base. Depending on the location size, the production equipment consists of tape duplication, feature movie and commercial ad editing, encoding, standards conversion, and other machinery. Each location employs personnel with the skills required to efficiently run the equipment and handle customer requirements. While all locations are not exactly the same, an order received at one location may be fulfilled at one or more “sister” facilities to use resources in the most efficient manner.

Typically, a feature film or television show will be submitted to a facility by a motion picture studio, independent producer, advertising agency, or corporation for processing and distribution. A common sales force markets the Company’s capability for all facilities. Once an order is received, the local customer service representative determines the most cost-effective way to perform the services considering geographical logistics and facility capabilities.

The Company does not have the systems to adequately segregate revenues for each product and service as orders can be for multiple services performed at several facilities. Providing information contemplated by paragraph 37 of FAS 131 is impracticable.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates in the Preparation of Financial Statements

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

Cash and Cash Equivalents

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

Revenues and Receivables

Point.360 performs a multitude of services for its clients, including film-to-tape transfer, video and audio editing, standards conversions, adding effects, duplication, distribution, etc. A customer orders one or more of these services with respect to an element (commercial spot, movie, trailer, electronic press kit, etc.). The sum total of services performed on a particular element (a “package”) becomes the deliverable (i.e., the customer will pay for the services ordered in total when the entire job is completed and delivered). Revenue is recognized only when the job is completed and delivered. Occasionally, a major studio will request that package services be performed on multiple elements. Each element creates a separate revenue stream which is recognized only when all requested services have been performed on that element. At the end of an accounting period, revenue is accrued for un-invoiced but shipped work.

Certain jobs specify that many discrete tasks must be performed which require up to four months to complete. In such cases, we use the proportional performance method for recognizing revenue. Under the proportional performance method, revenue is recognized based on the value of each stand-alone service completed. See Note 14 for a discussion of the need to restate quarterly results for the quarters ended September 30, 2008, December 31, 2008 and March 31, 2009 to correct errors in the application of the proportional performance method with respect to the timing of when such revenues were recognized.

In some instances, a client will request that Point.360 store (or “vault”) an element for a period ranging from a day to indefinitely. Point.360 attempts to bill customers a nominal amount for storage, but some customers, especially major movie studios, will not pay for this service. In the latter instance, storage is an accommodation to foster additional business with respect to the related element. It is impossible to estimate (i) the length of time we may house the element, or (ii) the amount of additional services we may be called upon to perform on an element. Because these variables are not reasonably estimable and revenues from vaulting are not material (billed vaulting revenues are approximately 3% of sales), we do not treat vaulting as a separate deliverable in those instances in which the customer does not pay.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, and accounts receivable. The Company maintains its cash and cash equivalents with high credit quality financial institutions; at times, such balances with any one financial institution may exceed FDIC insured limits.

Credit risk with respect to trade receivables is concentrated due to the large number of orders with major entertainment studios in any particular reporting period. Our five largest studio customers represented 55%, 53% and 47% of accounts receivable at June 30, 2007, 2008 and 2009 respectively. The Company reviews credit evaluations of its customers but does not require collateral or other security to support customer receivables.

The five largest studio customers accounted for 58%, 56%, 52% and 48% of net sales for the years ended December 31, 2006, the six months ended June 30, 2007 and the years ended June 30, 2008 and 2009, respectively. Twentieth Century Fox (and affiliates) was the only customer, which accounted for more than 10% of net sales in any of these periods, or 33%, 34%, 26% and 21% in the year ended December 31, 2006, the six months ended June 30, 2007 and the years ended June 30, 2008 and 2009, respectively.

Inventories

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

Property and Equipment

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

Goodwill

Prior to the January 1, 2002 implementation of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill was amortized on a straight-line basis over 5 - 20 years. Since that date, goodwill has been subject to periodic impairment tests in accordance with SFAS 142.

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

The Company evaluates its goodwill on an annual basis and when events and circumstances indicate that the carrying amount of an asset may not be recoverable. If the independent appraisal or other indicator of value of the asset or the expected undiscounted future cash flow attributable to the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. In 2007, fair value was determined using an independent appraisal, which was then compared to the carrying amount of the Company including goodwill. In 2008 and 2009, the discounted cash flow method was used to evaluate goodwill impairment and included cash flow estimates for those and subsequent years. As a result of the 2009 evaluation, the Company impaired its goodwill in full and recorded a charge of $10 million as of June 30, 2009.

Amounts shown as Goodwill in the accompanying balance sheets represent the amounts of Old Point.360’s goodwill allocable to the Company (see Note 3 for the allocation method). Certain disclosures in the footnotes include a discussion of Old Point.360’s goodwill (as opposed to only that allocable to the Company) to provide an explanation of the total goodwill to be allocated.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of assets and liabilities. A full valuation allowance has been recorded as it is more likely than not that the assets will not be realized.

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“FAS 109”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 effective July 1, 2007. As a result of the implementation of Interpretation No. 48, we did not recognize any increase in the liability for unrecognized tax benefits. In addition, we did not record a cumulative effect adjustment related to the adoption of FIN 48.

Advertising Costs

Advertising costs are not significant to the Company’s operations and are expensed as incurred.

Fair Value of Financial Instruments

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

Pro Forma Earnings (Loss) Per Share

Old Point.360 has historically followed SFAS No. 128, “Earnings per Share” (“SFAS 128”), and related interpretations for reporting earnings per share. SFAS 128 requires dual presentation of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reported period. Diluted EPS reflects the potential dilution that could occur if a company had a stock option plan and stock options were exercised using the treasury stock method. While the Company is subject to FAS 128, pro forma earnings per share in the accompanying Consolidated Statements of Income (Loss) for periods prior to the separation have been calculated based on the actual number of the Company’s shares outstanding upon separation.

A reconciliation of the denominator of the basic EPS computation to the denominator of the diluted EPS computation is as follows (in thousands):

	Year Ended December 31,		Six Months Ended June 30,		Year Ended June 30,
	2006		2007		2008		2009

Pro forma weighted average of number of shares		10,554		10,554
Weighted average number of common shares outstanding used in computation of basic EPS						10,554		10,358
Dilutive effect of outstanding stock options						-		-
Weighted average number of common and potential Common shares outstanding used in computation of Diluted EPS						10,554		10,358
Outstanding stock options excluded in the computation of diluted EPS						-		13

Supplemental Cash Flow Information

Selected cash payments and non-cash activities were as follows (in thousands):

	Year Ended December 31,		Six Months ended June 30,		Year Ended June 30,
	2006		2007		2008		2009

Cash payments for income taxes (net of refunds)	$	-	$	129	$	15	$	97

Cash payments for interest		605		197		435		603

Non-cash investing and financing activities:
Accrual for earn-out payments		2,000		-		-		-

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued SFAS No.167, Amendments to FASB Interpretation No. 46(R) . SFAS No. 167 amends FASB Interpretation No. ("FIN") 46, Consolidation of Variable Interest Entities (revised December 2003) - an interpretation of ARB No. 51 , which requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance, and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS No. 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 167 is effective for interim and annual reporting periods beginning after November 15, 2009. The Company does not expect the adoption of SFAS No. 167 to have an impact on its consolidated financial statements.

3.	ACQUISITIONS:

During 1997 to 2007, Old Point.360 acquired eleven businesses. These acquisitions were accounted for as purchases, with the excess of the purchase price over the fair value of the net assets acquired allocated to goodwill. The contingent portion of the purchase prices, to the extent earned was recorded as an increase to goodwill. The consolidated financial statements of the Company reflect the operations of the acquired post production companies since their respective acquisition dates.

Old Point.360 ceased amortizing goodwill on January 1, 2002 with the adoption of SFAS 142. The covenant not to compete was fully amortized in 2003.

On November 1, 2008, the Company acquired the assets and business of Video Box Studios, Inc., for $315,000 and the assumption of $98,000 of capital lease obligations. Of the total purchase price, $275,000 was allocated to machinery and equipment, $24,000 to a covenant not to compete and the balance to goodwill.

On April 6, 2009, the Company acquired the assets and business of Moving Images NY LLC (“MI”) for approximately $800,000 - $300,000 in cash and the assumption of approximately $500,000 of capital equipment lease obligations. In the transaction, the Company assumed the real estate obligations of MI with respect to the lease of 11,000 square feet of office space in New York City. The Lease Agreement provides for rental payments totaling approximately $4.5 million from April 6, 2009 through June 30, 2016. The Lease Agreement may be terminated by Point.360 after December 31, 2010 upon 12 months written notice and the payment of a $300,000 termination fee, which fee shall decline to $200,000 if the lease is terminated after December 31, 2011.

Old Point.360 operated in a single business segment due to the combination of facility assets, sales forces and management subsequent to the acquisitions, and the integration of branding and communications efforts. The goodwill acquired, therefore, is common to all Old Point.360 facilities. At the time of the merger, the goodwill assignable to the Company was $9,868,000, determined by comparing the value of the Company determined by an independent appraiser to the value of the advertising distribution business of Old Point.360 as evidenced by the market value of consideration to be paid by DG FastChannel for the advertising distribution business.

As of June 30, 2009, the Company recorded a goodwill impairment charge of $10 million.

4.	PROPERTY AND EQUIPMENT:

In March 2006, Old Point.360 entered into a sale and leaseback transaction with respect to its Media Center vaulting real estate. The real estate was sold for approximately $14.0 million resulting in a $1.3 million after tax gain. Additionally, Old Point.360 received $0.5 million from the purchaser for improvements. In accordance with SFAS No. 28, “Accounting for Sales with Leasebacks,” the gain will be amortized over the initial 15-year lease term as reduced rent. Net proceeds at the closing of the sale and the improvement advance (approximately $13.8 million) were used to pay off the mortgage and other outstanding debt.

The lease is treated as an operating lease for financial reporting purposes. After the initial lease term, the Company has four five-year options to extend the lease. Minimum annual rent payments for the initial five years of the lease are $1,111,000 and increasing annually thereafter based on the consumer price index change from year to year.

Property and equipment consist of the following:

	June 30,
	2008			2009

Land	$	-		$	3,866,000
Building		19,000			9,152,000
Machinery and equipment		33,855,000			35,887,000
Leasehold improvements		6,888,000			6,383,000
Computer equipment		6,606,000			6,398,000
Equipment under capital lease		285,000			770,000
Office equipment, CIP		576,000			448,000
Less accumulated depreciation and amortization		(39,022,000	)		(42,487,000	)
Property and equipment, net	$	8,667,000		$	20,417,000

Depreciation is expensed over the estimated lives of buildings (39 years), machinery and equipment (7 years), computer equipment (5 years) and leasehold improvements (2 to 10 years depending on the remaining term of the respective leases or estimated useful life of the improvement). Depreciation expense totaled $4,653,000, $2,359,000, $4,700,000 and $4,964,000 for the year ended December 31, 2006, the six months ended June 30, 2007 and the years ended June 30, 2008 and 2009, respectively. Machinery and equipment includes leased property under capital leases with a cost of $285,000 ($47,000 net of accumulated depreciation) and $781,000 ($488,000) net of accumulated depreciation) as of June 30, 2008 and 2009, respectively.

5.	401(K) PLAN:

The Company has a 401(K) plan, which covers substantially all employees. Each participant is permitted to make voluntary contributions not to exceed the lesser of 20% of his or her respective compensation or the applicable statutory limitation, and is immediately 100% vested. The Company matches one-fourth of the first 4% contributed by the employee. Contributions to the plan related to employees of the Company were, $84,000, $53,000, $96,000 and $99,000 in the year ended December 31, 2006, the six months ended June 30, 2007 and the years ended June 30, 2008 and 2009, respectively.

6.	LONG TERM DEBT AND NOTES PAYABLE:

On December 30, 2005, Old Point.360 entered into a $10 million term loan agreement. The term loan provides for interest at LIBOR (5.38% as of June 30, 2007) plus 3.15% and is secured by Old Point.360’s equipment. In March 2006, Old Point.360 prepaid $4 million of the principal with proceeds of a sale/leaseback transaction. The term loan will be repaid in 60 equal monthly principal payments plus interest. Proceeds of the term loan were used to repay the previously existing term loan.

On March 30, 2007, Old Point.360 entered into an additional $2.5 million term loan agreement. The loan provides for interest at 8.35% per annum and is secured by the Company’s equipment. The loan will be repaid in 45 equal monthly installments of principal and interest.

The Company assumed both term loan agreements upon the Spin-off.

After June 30, 2009, in August 2009 the Company entered into a new credit agreement which provides up to $5 million of revolving credit based on 80% of acceptable accounts receivables, as defined. The 15 month agreement provides for interest of either (1) prime (3.25% at June 30, 2009) minus .5% - plus .5% or (2) LIBOR plus 2.0% - 3.0% depending on the level of the Company’s ratio of outstanding debt to fixed charges (as defined), or 3.75% or 3.68%, respectively, on June 30, 2009. The facility is secured by all of the Company’s assets, except for equipment securing new term loans as described above and real property securing mortgages.

In July 2008, the Company entered into a Promissory Note with a bank (the “note”) in order to purchase land and a building that has been occupied by the Company since 1998 (the total purchase price was approximately $8.1 million). Pursuant to the note, the company borrowed $6,000,000 payable in monthly installments of principal and interest on a fully amortized base over 30 years at an initial five-year interest rate of 7.1% and thereafter at a variable rate equal to LIBOR plus 3.6% (6.4% as of the purchase date). The mortgage debt is secured by the land and building. The resulting annual mortgage and interest payments on the Note will be approximately $0.2 million less than the annual rent payments on the property at the time of the transaction.

In June 2009, the Company entered into a $3,562,500 million Purchase Money Promissory Note secured by a Deed of Trust for the purchase of land and a building. The note bears interest at 7% fixed for ten years. The principal amount of the note is payable on June 12, 2019. The note is secured by the property.

Annual maturities for debt under term note and mortgage obligations as of June 30, 2009, are as follows:

2010		2,090,000
2011		1,192,000
2012		240,000
2013		171,000

2014		90,000

Thereafter		9,146,000
	$	12,929,000

INCOME TAXES:

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”). This interpretation prescribes a recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company assumed all liability for income taxes of Old Point.360 related to operations prior to the Spin-off and Merger. Effectively, the Company therefore adopted FIN 48, effective January 1, 2007. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal state or local income tax examinations by tax authorities for years before 2002. The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns. Old Point.360, and consequently, the Company, was last audited by New York taxing authorities for the years 2002 through 2004 resulting in no change. Old Point.360, and consequently, the Company, was previously notified by the U.S. Internal Revenue Service of its intent to audit the calendar 2005 tax return. The audit has since been cancelled by the IRS without change; however, the audit could be reopened at the IRS’ discretion until September 15, 2009. Old Point.360 and consequently, the Company, was notified by the Illinois Department of Revenue that it will be auditing its 2005 and 2006 Illinois state income tax returns. The Company does not believe a material change will result. Upon the implementation of FIN 48, the Company did not recognize any increase in the liability for unrecognized tax benefits. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

The Company’s provision for, or benefit from, income taxes has been determined as if the Company filed income tax returns on a stand-alone basis.

The Company’s provision for (benefit from) income taxes for the year ended December 31, 2006, the six months ended June 30, 2007 and the years ended June 30, 2008 and 2009 consists of the following (in thousands):

	Year Ended December 31,			Six Months Ended June 30,			Year Ended June 30,
	2006			2007			2008			2009
Current tax (benefit) expense:
Federal	$	954		$	(452	)	$	28		$	(283	)
State		157			-			95			(55	)

Total current		1,111			(452	)		123			(338	)

Deferred tax (benefit) expense:
Federal		(1,283	)		(132	)		(314	)		(3,516	)
State		(170	)		(23	)		333			(1,008	)
Valuation allowance		-			-			(434	)		5,224
Total deferred		(1,453	)		(155	)		(415	)		700

Total provision for (benefit from) for income taxes	$	(342	)	$	(607	)	$	(292	)	$	362

The composition of the deferred tax assets (liabilities) at and June 30, 2007, 2008 and 2009 are listed below:

	2007			2008			2009

Accrued liabilities	$	273,000		$	253,000		$	327,000
Allowance for doubtful accounts		209,000			232,000			230,000
Other		49,000			5,000			14,000
Total current deferred tax assets		531,000			490,000			571,000

Property and equipment		(1,814,000	)		(221,000	)		511,000
Goodwill and other intangibles		(684,000	)		-			3,103,000
State net operating loss carry forward		406,000			-			485,000
Other		1,758,000			431,000			554,0000
Valuation allowance		(434,000	)		-			(5,224,000	)
Total non-current deferred tax liabilities		(768,000	)		210,000			(571,000	)

Net deferred tax liability	$	(237,000	)	$	700,000		$	0

At the end of each fiscal year, the Company updates its reconciliation of book and tax differences based on the tax return of the previous fiscal year filed with the Internal Revenue Service in the third quarter of the current fiscal year. Any resulting adjustments are reflected in the table above in the fiscal year in which the adjustments were determined. During the fiscal year ended June 30, 2008, a $503,000 reduction of deferred tax liability was credited to common stock as an adjustment of invested equity in New 360 in the Consolidated Statements of Invested and Shareholders’ Equity.

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

	Year Ended December 31,			Six Months Ended June 30,			Year Ended June 30,
	2006			2007			2008			2009
Federal tax computed at statutory rate		34	%		34	%		34	%		34	%
State taxes, net of federal benefit and net operating loss limitation		6	%		6	%		6	%		6	%
Valuation allowance		-			(12	)%		(14	)%		(46	)%
Other (meals and entertainment)		(6	)%		(1	)%		(2	)%		3	%

		34	%		27	%		24	%		(3	)%

8.	COMMITMENTS AND CONTINGENCIES:

Operating Leases

The Company leases office and production facilities in California and New York under various operating leases. Approximate minimum rental payments under these non-cancelable operating leases as of June 30, 2009 are as follows for the indicated fiscal years ended June 30:

2010	$	2,622,000
2011		3,058,000
2012		3,153,000
2013		2,280,000
2014		2,182,000
Thereafter		7,672,000
Total minimum payments required	$	20,967,000

*Minimum payments have not been reduced by minimum sublease rentals for $3,517,000 due in the future under noncancelable subleases.

The following schedule shows the composition of total rental expense for all operating leases except those with terms of a month or less that were not renewed:

	Year Ended December 31,			Six Months Ended June 30,			Year Ended June 30,
	2006			2007			2008			2009
Minimum rentals:	$	3,229,000		$	1,869,000		$	3,661,000		$	3,437,000
Less: Sublease rentals		(53,000	)		(27,000	)		(53,000	)		(318,000	)
	$	3,176,000		$	1,842,000		$	3,608,000		$	3,119,000

As of June 30, 2009, the Company leased five of its seven facilities under operating leases. Other than one facility which is leased on a month-to-month basis, the operating leases expire on dates ranging from 2012 to 2021. Except for the New York office lease which expires in 2016, the leases contain options to extend the primary term ranging from 10 to 20 years at the then fair rental value.

In addition, the Company leases vehicles and data processing equipment under operating leases expiring during the next three years. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases.

Total rental expense was approximately, $3,176,000, $1,842,000, $3,608,000 and 3,119,000 for the years ended December 31, 2006, the six months ended June 30, 2007 and the years ended June 30, 2008 and 2009, respectively.

Severance Agreements

On September 30, 2003 Old Point.360 entered into severance agreements with its Chief Executive Officer and Chief Financial Officer which continue in effect through December 31, 2009, and are renewed automatically on an annual basis after that unless notice is received terminating the agreement by September 30 of the preceding year. The severance agreements contain a “Golden Parachute” provision. The Company assumed these severance agreements.

Contingencies

In July, 2008, the Company was served with a complaint filed in the Superior court of the State of California for the County of Los Angeles by Aryana Farshad and Aryana F. Productions, Inc. (“Farshad”). The complaint alleges that Point.360 and its janitorial cleaning company failed to exercise reasonable care for the protection and preservation of Farshad’s film footage which was lost. As a result of the defendant’s negligence, Farshad claims to have suffered damages in excess of $2 million and additional unquantified general and special damages. While the outcome of this claim cannot be predicted with certainty, management does not believe that the outcome will have a material effect on the financial condition or results of operation of the Company.

On May 1, 2009 the Company was served with a Verified Unlawful Detainer Complaint” by 1220 Highland, LLC, the landlord of the facility in Hollywood, CA that had been rented by the Company for many years. The Company’s lease on the facility expired in March 2009. The Complaint seeks possession of the property, damages for each day of the Company’s possession from May 1, 2009, and other damages and legal fees. While the outcome of the claim cannot be predicted with certainty, management does not believe that the outcome will have a material effect on the financial condition of the Company, especially since full rent was paid until the property was returned to the landlord on June 30, 2009.

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

9. STOCK OPTION PLAN, STOCK-BASED COMPENSATION

In May 2007, the Board of Directors approved the 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan provides for the award of options to purchase up to 2,000,000 shares of common stock, appreciation rights and restricted stock awards.

Under the 2007 Plan, the stock option price per share for options granted is determined by the Board of Directors and is based on the market price of the Company’s common stock on the date of grant, and each option is exercisable within the period and in the increments as determined by the Board, except that no option can be exercised later than ten years from the grant date. The stock options generally vest in one to five years.

The Company has adopted SFAS 123(R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123(R) requires companies to estimate the fair value of the award that is ultimately expected to vest to be recognized as expense over the requisite service periods in our Consolidated Statements of Income (Loss).

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards to employees and directors on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Income (Loss). Stock-based compensation expense recognized in the Consolidated Statements of Income (Loss) for the quarter and nine months ended March 31, 2009 included compensation expense for the share-based payment awards based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). For stock-based awards issued to employees and directors, stock-based compensation is attributed to expense using the straight-line single option method. As stock-based compensation expense recognized in the Statements of Consolidated Income (Loss) for the periods reported in this Form 10-K is based on awards expected to vest, SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the periods being reported in this Form 10-K, expected forfeitures are immaterial. The Company will re-assess the impact of forfeitures if actual forfeitures increase in future quarters. Stock-based compensation expense related to employee or director stock options recognized for the year ended June 30, 2009 was $227,000.

The Company’s determination of fair value of share-based payment awards to employees and directors on the date of grant uses the Black-Scholes model, which is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the expected term of the awards, and actual and projected employee stock options exercise behaviors. The Company estimates expected volatility using historical data. The expected term is estimated using the “safe harbor” provisions under SAB 110.

During the fiscal years ended June 30, 2008 and 2009, the Company granted awards of stock options as follows:

	2008		2009
Stock option awards		1,045,600		309,450
Weighted average Exercise price	$	1.79	$	1.21

As of June 30, 2009, there were options outstanding to acquire 1,322,025 shares at an average exercise price of $1.66 per share.

The estimated fair value of all awards granted during the twelve months ended June 30, 2009 was $119,000. The fair value of each option was estimated on the date of grant using the Black-Scholes option–pricing model with the following weighted average assumptions:

	2008			2009
Risk-free interest rate		3.02	%		2.39	%
Expected term (years)		5.0			5.0
Volatility		51	%		48	%
Expected annual dividends		-			-

The following table summarizes the status of the 2007 Plan as of June 30, 2009:

Options originally available			2,000,000
Stock options outstanding			1,322,025
Options available for grant			677,975

Transactions involving stock options are summarized as follows:

	Number of Shares			Weighted Average Exercise Price

Balance at June 30, 2007		-			-

Granted		1,045,600		$	1.79
Exercised		-			-
Cancelled		-			-

Balance at June 30, 2008		1,045,600		$	1.79
Granted		309,450			1.21
Exercised		-			-
Cancelled		(33,025	)		1.78

Balance at June 30, 2009		1,322,025		$	1.66

As of June 30, 2009, the total compensation costs related to non-vested awards yet to be expensed was approximately $0.6 million to be amortized over the next four years.

The weighted average exercise prices for options granted and exercisable and the weighted average remaining contractual life for options outstanding as of June 30, 2008 and 2009 were as follows:

As of June 30, 2008	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Intrinsic Value
Employees – Outstanding		945,600	$	1.79		4.63	$	-
Employees – Expected to Vest		851,040	$	1.79		4.63	$	-
Employees – Exercisable		-	$	-		-	$	-

Non-Employees-Outstanding		100,000	$	1.79		4.63	$	-
Non-Employees-Vested		-	$	-		4.63	$	-
Non-Employees-Exercisable		-	$	-		-	$	-

As of June 30, 2009
Employees – Outstanding		1,192,045	$	1.65		3.86	$	-
Employees – Expected to Vest		1,074,195	$	1.65		3.86	$	-
Employees – Exercisable		228,525	$	1.79		3.63	$	-

Non-Employees – Outstanding		130,000	$	1.69		3.80	$	-
Non-Employees – Vested		55,000	$	1.56		4.03	$	-
Non-Employees – Exercisable		55,000	$	1.56		4.03	$	-

Additional information with respect to outstanding options as of June 30, 2009 is as follows (shares in thousands):

Options Outstanding					Options Exercisable
Options Exercise Price Range		Number of Shares		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
$	1.79		1,013	3.6 Years	$	1.79		254	$	1.79
$	1.37		30	4.4 Years	$	1.37		30	$	1.37
$	1.20		279	4.6 Years	$	1.20		-	$	1.20

We have elected to adopt the detailed method provided in SFAS 123(R) for calculating the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

10. STOCK RIGHTS PLAN

In July 2007, the Company implemented a stock rights program. Pursuant to the program, stockholders of record on August 7, 2007, received a dividend of one right to purchase for $10 one one-hundredth of a share of a newly created Series A Junior Participating Preferred Stock. The rights are attached to the Company’s Common Stock and will also become attached to shares issued subsequent to August 7, 2007. The rights will not be traded separately and will not become exercisable until the occurrence of a triggering event, defined as an accumulation by a single person or group of 20% or more of the Company’s Common Stock. The rights will expire on August 6, 2017 and are redeemable at $0.0001 per right.

After a triggering event, the rights will detach from the Common Stock. If the Company is then merged into, or is acquired by, another corporation, the Company has the opportunity to either (i) redeem the rights or (ii) permit the rights holder to receive in the merger stock of the Company or the acquiring company equal to two times the exercise price of the right (i.e., $20). In the latter instance, the rights attached to the acquirer’s stock become null and void. The effect of the rights program is to make a potential acquisition of the Company more expensive for the acquirer if, in the opinion of the Company’s Board of Directors, the offer is inadequate.

No triggering events occurred in the year ended June 30, 2009.

11. RESTRUCTURING CHARGE

In the first quarter of fiscal 2008, in conjunction with the completion of the Merger and Spin-off transactions, we decided to close down one of our post production facilities. Future costs associated with the facility lease and certain severance payments totaling $513,000 were treated as restructuring costs. All matters related to the restructuring were finalized during fiscal 2008 at a cost approximating the restructuring charge.

12. SALE OF ADS DISTRIBUTION BUSINESS

On April 16, 2007, Old Point.360, the Company, a newly formed California corporation and wholly owned subsidiary of Old Point.360 and DG FastChannel, Inc. (“DG FastChannel”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), as amended by an instrument executed by the parties as of June 19, 2007.

Under the terms of the Merger Agreement, DG FastChannel agreed to make an exchange offer (the “Exchange Offer”) for all outstanding shares of Old Point.360 common stock, no par value per share, including the associated preferred stock purchase rights (collectively, the “Old Point.360 Shares”), in which Exchange Offer each Old Point.360 Share tendered and accepted by DG FastChannel would be exchanged for a number of shares of common stock, par value $0.001 per share, of DG FastChannel (the “DG Common Stock”) equal to the quotient obtained by dividing (x) 2,000,000 by (y) the number of Old Point.360 Shares (excluding Old Point.360 Shares owned by DG or Point.360) issued and outstanding immediately prior to the completion of the Exchange Offer (such amount of shares of DG Common Stock paid per Old Point.360 Share pursuant to the Exchange Offer is referred to herein as the “Exchange Offer Consideration”).

In addition, on April 16, 2007, Old Point.360, DG FastChannel, and the Company entered into a Contribution Agreement (the “Contribution Agreement”), as amended by an instrument executed by the parties as of June 19, 2007. Pursuant to the Contribution Agreement, prior to the completion of the Exchange Offer, Old Point.360 contributed (the “Contribution”) to the Company all of the assets owned, licensed, or leased by Old Point.360 that were not used exclusively in connection with the business of Old Point.360 representing advertising agencies, advertisers, brands, and other media companies which require services for short-form media content (the “ADS Business”), and the Company assumed certain liabilities of Old Point.360. Immediately following the Contribution but prior to the completion of the Exchange Offer, Old Point.360 distributed (the “Spin-off”) to its shareholders on a pro rata basis all of the capital stock then outstanding of the Company.

On July 13, 2007, the Company filed a Registration Statement on Form S-1 (the “Form S-1”) with the Securities and Exchange Commission for the purpose of registering the Spin-off under the Securities Act of 1933, as amended. Among other things, the Form S-1 contained: (1) a detailed description of the Contribution and the Spin-off; (2) a description of Old Point.360’s post-production business that was to be transferred to the Company pursuant to the Contribution; (3) risk factors relating to the Company business, the Contribution and Spin-Off and the Company’s common stock; (4) a valuation of the Company by Old Point.360’s financial advisor; (5) management’s discussion and analysis of the Company’s financial condition and results of operations for each of the three years in the period ended December 31, 2006; (6) unaudited pro forma financial statements of the Company as of December 31, 2006, and for the year then ended, giving effect to the Contribution and Spin-off; (7) audited financial statements for New 360 as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006; and (8) a description of New 360’s proposed management and executive compensation policies. The contribution and Spin-off were completed on August 14, 2007.

The Company’s common stock was approved for listing on the Nasdaq Global Market. As a result of the Contribution and the Spin-Off, at the completion of the Exchange Offer, the assets and liabilities of Old Point.360 consisted only of those assets and liabilities exclusively related to the ADS Business.

Following the completion of the Exchange Offer, DG FastChannel effected the merger of Old Point.360 with and into DG FastChannel (the “Merger”), with DG FastChannel continuing as the surviving corporation. Upon the completion of the Merger, each Old Point.360 Share not purchased in the Exchange Offer was converted into the right to receive the Exchange Offer Consideration, without interest. DG FastChannel also paid to the Company as part of the merger consideration cash of (i) $7 million in lieu of prepayment of the Company’s outstanding debt, (ii) $0.3 million for reimbursement of merger expenses and (iii) a $0.4 million prepayment for working capital of the ADS Business.

The following table sets forth the Company’s cash and cash equivalents and shareholders’ equity as of June 30, 2007 on an historical basis and on a pro forma basis after giving effect to the following separation transactions:

the formation of the Company and the contribution by Old Point.360 to the Company of all the assets and liabilities of Old Point.360 (including Old Point.360’s post-production business) other than assets and liabilities relating to the ADS Business;

the distribution of Company common stock to Old Point.360 shareholders by Old Point.360;

the payment by DG FastChannel of $7 million to the Company; and

the payment of the estimated amount of $2.3 million to the Company by DG FastChannel to compensate the Company for working capital transferred by Old Point.360 to DG FastChannel in the merger of Old Point.360 into DG FastChannel.

	June 30, 2007
(in thousands)	Historical		Separation Adjustments			Separation Pro Forma
Cash and cash equivalents	$	7,302	$	2,300	(a)	$	16,602
				7,000	(b)

Invested equity	$	24,035	$	(24,035	)(c)	$	—

Common stock		—		24,035	(c)		24,035

Additional paid-in capital		—		7,000	(b)		9,300
				2,300	(a)

Total invested/shareholder’s equity (restated)	$	24,035	$	9,300		$	33,335

(a)	Represents the receipt of the estimated amount of $2.3 million from DG FastChannel in payment for Old Point.360’s working capital (other than the Company’s working capital).

(b)	Represents the payment of $7 million to the Company as provided in the Merger Agreement.

(c)	Represents the reclassification of invested equity to common stock upon the contribution of Old Point.360’s post-production net assets to the Company and the distribution of the Company’s common stock to Old Point.360’s shareholders.

13. STOCK REPURCHASE PLAN:

In May 2008, the Company announced that its Board of Directors authorized a stock purchase plan. The board authorized the open market purchase at such times and prices determined at the discretion of management. In fiscal 2009, the Company purchased 404,710 shares for $558,000.

NOTE 14. RESTATEMENT OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS:

Subsequent to the issuance of interim consolidated financial statements for the quarters ended September 30, 2008, December 31, 2008 and March 31, 2009, we determined that amounts reflected as revenues for the three and year-to-date cumulative periods contained in such statements required an adjustment to correct sales cutoff errors related to the timing of revenue recognition under the proportional performance method. The effect of the correction of the error on previously reported revenue is as follows:

Accounting Period	Increase (Decrease) in Reported Revenue

Three months ended September 30, 2008	$	190,000
Three months ended December 31, 2008		(277,000	)
Six months ended December 31, 2008		(87,000	)
Three months ended March 31, 2009		165,000
Nine months ended March 31, 2009		78,000

The correction resulted in related adjustments to the consolidated statements of income (loss), balance sheet and cash flows as of and for the respective periods as follows:

Changes to Consolidated Statements of Income (Loss) for the Three Months Ended September 30, 2008:	Increase (Decrease)
	Three Months Ended September 30, 2008
Revenues	$	190,000
Gross profit		190,000
Operating income (loss)		190,000
Income (loss) before income taxes		190,000
(Provision for) benefit from income taxes		(85,000	)
Net income (loss)		106,000
Basic and diluted earnings (loss) per share		0.01

Changes in Consolidated Balance Sheet as of September 30, 2008:	Increase (Decrease)
Accounts receivable, net of allowances for doubtful accounts of $555,000	$	190,000
Total current assets		190,000
Deferred income taxes		(79,000	)
Total assets		104,000
Retained earnings (deficit)		104,000
Total shareholders’ equity		104,000
Total liabilities and shareholders’ equity		104,000

Changes to Consolidated Changes in Cash Flows for the Three Months Ended September 30, 2008:
Net income (loss)	$	104,000
Increase (decrease) in accounts receivable		(190,000	)
Decrease in deferred tax asset		86,000

Changes to Consolidated Statements of Income (Loss) for the Three and Six Month Periods Ended December 31, 2008:	Increase (Decrease)
	Three Months Ended December 31, 2008			Six Months Ended December 31, 2008
Revenues	$	(277,000	)	$	(87,000	)
Gross profit		(277,000	)		(87,000	)
Operating income (loss)		(277,000	)		(87,000	)
Income (loss) before income taxes		(277,000	)		(87,000	)
(Provision for) benefit from income taxes		206,000			120,000
Net income (loss)		(72,000	)		33,000
Basic and diluted earnings (loss) per share		(.01	)		-

Changes in Consolidated Balance Sheet as of December 31, 2008:				Increase (Decrease)
Accounts receivable, net of allowances for doubtful accounts of $555,000				$	(87,000	)
Total current assets					(87,000	)
Deferred income taxes					119,000
Total assets					(33,000	)
Retained earnings (deficit)					33,000
Total shareholders’ equity					33,000
Total liabilities and shareholders’ equity					33,000

Changes to Consolidated Changes in Cash Flows for the Six Months Ended December 31, 2008:
Net income (loss)				$	33,000
Increase (decrease) in accounts receivable					87,000
Decrease in deferred tax asset					(119,000	)

Changes to Consolidated Statements of Income (Loss) for the Three and Nine Month Periods Ended March 31, 2009:	Increase (Decrease)
	Three Months Ended March 31, 2009			Nine Months Ended March 31, 2009
Revenues	$	165,000		$	79,000
Gross profit		165,000			79,000
Operating income (loss)		165,000			79,000
Income (loss) before income taxes		165,000			79,000
(Provision for) benefit from income taxes		(141,000	)		(22,000	)
Net income (loss)		24,000			57,000
Basic and diluted earnings (loss) per share		-			-

Changes in Consolidated Balance Sheet as of March 31, 2009:	Increase (Decrease)
Accounts receivable, net of allowances for doubtful accounts of $526,000	$	79,000
Total current assets	$	79,000
Deferred income taxes		(22,000	)
Total assets		57,000
Retained earnings (deficit)		57,000
Total shareholders’ equity		57,000
Total liabilities and shareholders’ equity		57,000

Changes to Consolidated Changes in Cash Flows For the Nine Months Ended March 31, 2009:
Net income (loss)	$	57,000
Increase (decrease) in accounts receivable		(79,000	)
Decrease in deferred tax asset		22,000

Point.360

Schedule II- Valuation and Qualifying Accounts

Allowance for Doubtful Accounts	Balance at Beginning of Year		Charged to Costs and Expenses		Other		Deductions/ Write-Offs			Balance at End of Year

Year ended December 31, 2006	$	424,000	$	159,000	$	—	$	(70,000	)	$	513,000

Six months ended June 30, 2007	$	513,000	$	46,000	$	—	$	(69,000	)	$	490,000

Year ended June 30, 2008	$	490,000	$	61,000	$	—	$	(10,000	)	$	541,000

Year ended June 30, 2009	$	541,000	$	48,000	$	—	$	(52,000	)	$	537,000

ITEM 9.

CHANGES CRITERIA ESTABLISHED IN INTERNAL CONTROL-IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T). CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting, as of June 30, 2009, based on Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, management concluded that, as of June 30, 2009, the Company’s internal control over financial reporting was not effective due to cutoff errors as of September 30, 2008, December 31, 2008 and March 31, 2009 related to the timing of revenue recognition under the proportional performance method. We have since reviewed and documented the controls regarding the proportional performance method and have trained personnel involved in such controls. The material weakness has also been remediated by an additional level of review by senior personnel at the Company.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

The Company’s Form 10-K report for the year ended June 30, 2008 did not include a report of management’s assessment regarding internal control over financial reporting, due to management’s belief that a transition period established by rules of the Securities Exchange Commission for newly public companies occurred. The Company was formed in a Spin-off transaction on August 14, 2007, and began trading as a public entity on that date.

In a letter commenting on the Company’s Form 10-K for the fiscal year ended June 30, 2008, the SEC stated that management’s assessment of the effectiveness of internal control over financial reporting was required in the 2008 Form 10-K because the Company had previously filed a Form 10-K/T for the six months ended June 30, 2007. The Company believed it was not required to include such an assessment until it filed its Form 10-K for the fiscal year ending June 30, 2009. Since management did not evaluate the effectiveness of the Company’s internal control over financial reporting using the COSO framework, management had no basis on which to judge the effectiveness of such controls as of June 30, 2008. Therefore, internal control over financial reporting was not effective as of June 30, 2008.

During the preparation of the June 30, 2008 consolidated financial statements, management discovered an error in the calculation of deferred income tax liability. The resulting adjustment was to reduce the liability and increase invested equity retroactively. The Company uses an independent consultant to determine the income tax effects of its operations, including deferred taxes. The clerical error giving rise to the restatement was contained in the detailed analysis prepared by the consultant.

While management believed that sufficient internal controls existed regarding the determination of deferred tax amounts through the use of qualified external consultants, the fact that an error occurred was evidence of a breakdown in such controls. The Company’s independent registered public accounting firm characterized the error as a material weakness. We have since reviewed existing disclosure controls and checks and balances with our external consultants and independent registered public accounting firm to re-emphasize and reinforce that adequate controls are in place. Specifically, the internal control deficiency has been remediated by an additional review by senior personnel at the Company, the independent consultant and on a quarterly basis.

Changes in Internal Control over Financial Reporting

During the three months ended June 30, 2009, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

On July 3, 2003 and May 30, 2007, Old Point.360 and the Company adopted a Code of Ethics (the “Code”) applicable to the Company’s Chief Executive Officer, Chief Financial Officer and all other employees. Among other provisions, the Code sets forth standards for honest and ethical conduct, full and fair disclosure in public filings and shareholder communications, compliance with laws, rules and regulations, reporting of code violations and accountability for adherence to the Code. The text of the Code has been posted on the Company’s website (www.point360.com). A copy of the Code can be obtained free-of-charge upon written request to:

Corporate Secretary

Point.360

2777 North Ontario Street

Burbank, CA 91504

If the Company makes any amendment to, or grant any waivers of, a provision of the Code that applies to our principal executive officer or principal financial officer and that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons for the amendment or waiver on our website.

Other information called for by Item 10 of Form 10-K will be set forth in the Company’s Proxy Statement to be filed by October 28, 2009.

ITEM 11. EXECUTIVE COMPENSATION

Information called for by Item 11 of Form 10-K will be set forth in the Company’s Proxy Statement to be filed by October 28, 2009.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information called for by Item 12 of Form 10-K will be set forth in the Company’s Form Proxy Statement to be filed by October 28, 2009.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information called for by Item 13 of Form 10-K will be set forth in the Company’s Proxy Statement to be filed by October 28, 2009.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information called for by Item 14 of Form 10-K will be set forth in the Company’s Proxy Statement to be filed by October 28, 2009.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

Documents Filed as Part of this Report:

(1, 2)

Financial Statements and Schedules.

The following financial documents of Point.360 are filed as part of this report under Item 8:

Consolidated Balance Sheets – June 30, 2008 and June 30, 2009

Consolidated Statements of Income (Loss) – Fiscal Year Ended December 31, 2006, the Six Months Ended June 30, 2007 and the Fiscal Years Ended June 30, 2008 and 2009

Consolidated Statements of Invested and Shareholders’ Equity – Fiscal Year Ended December 31, 2006, the Six Months Ended June 30, 2007 and Fiscal Years Ended June 30, 2008, and 2009

Consolidated Statements of Cash Flows – Fiscal Year Ended December 31, 2006, the Six Months Ended June 30, 2007 and the Fiscal Years Ended June 30, 2008 and 2009

Notes to Consolidated Financial Statements

Schedule II – Valuation and Qualifying Accounts

(3)

Exhibits:

Exhibit No.		Exhibit Description*

2.1		Agreement and Plan of Merger and Reorganization, dated as of April 16, 2007, among the Registrant, Old Point.360 and DG FastChannel, Inc. (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form 10 filed by the Registrant on May 14, 2007)

2.2		Contribution Agreement, dated as of April 16, 2007, among the Registrant, Old Point.360 and DG FastChannel, Inc. (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form 10 filed by the Registrant on May 14, 2007)

2.3		First Amendment to Agreement and Plan of Merger and Reorganization, dated as of June 22, 2007, among the Registrant, Old Point.360, and DG FastChannel, Inc. (incorporated by reference to Exhibit 2.3 to Amendment No. 1 to the Registration Statement on Form 10 filed by the Registrant on June 22, 2007)

2.4		First Amendment to Contribution Agreement, dated as of June 22, 2007, among the Registrant, Old Point.360, and DG FastChannel, Inc. (incorporated by reference to Exhibit 2.4 to Amendment No. 1 to the Registration Statement on Form 10 filed by the Registrant on June 22, 2007)

3.1		Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Form 10-K/T filed by the Registrant on November 13, 2007)

3.2		Certificate of Amendment to the Registrant’s Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on August 22, 2007)

3.3		Bylaws of the Registrant (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form 10 filed by the Registrant on May 14, 2007)

4.1		Form of the Registrant’s Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1, Registration No. 333-144547, filed by the Registrant on July 13, 2007)

4.2		Rights Agreement dated July 25, 2007 between the Registrant and American Stock Transfer & Trust Company

4.3		Certificate of Determination of Series A Junior Participating Preferred Stock of the Registrant dated July 31, 2007

4.4		Form of Right Certificate (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form S-1 filed by the Registrant on July 26, 2007)

10.1		Noncompetition Agreement dated August 13, 2007 between the Registrant and DG FastChannel, Inc.

10.2		Post Production Services Agreement dated August 13, 2007 between the Registrant and DG FastChannel, Inc.

10.3		Working Capital Reconciliation Agreement dated August 13, 2007 among the Registrant, Old Point.360 and DG FastChannel, Inc.

10.4		Indemnification and Tax Matters Agreement dated August 13, 2007 between the Registrant and DG FastChannel, Inc.

10.5		Severance Agreement, dated September 30, 2003 (assumed by the Registrant), between Old Point.360 and Haig S. Bagerdjian (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form 10 filed by the Registrant on May 14, 2007)

10.6		Severance Agreement, dated September 30, 2003 (assumed by the Registrant), between Old Point.360 and Alan R. Steel (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form 10 filed by the Registrant on May 14, 2007)

10.7		2007 Equity Incentive Plan of the Registrant (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Registration Statement on Form 10 filed by the Registrant on June 22, 2007)

10.8		Building Lease (1133 Hollywood Way, Burbank Facility), dated June 11, 1998 (assumed by the Registrant), between Old Point.360 and Hollywood Way Office Ventures LLC (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form 10 filed by the Registrant on May 14, 2007)

10.9		Standard Industrial / Commercial Single – Tenant Lease – Net (712 N. Seward St., Los Angeles facility), dated January 24, 1997 (assumed by the Registrant), between Old Point.360 and Richard Hourizadeh, as amended in July 2002 (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form 10 filed by the Registrant on May 14, 2007)

10.10		Standard Industrial / Commercial Multi-Tenant Lease-Net (West Los Angeles facility), dated March 17, 2004 (assumed by the Registrant), between Old Point.360 and Martin Shephard, as co-Trustee of the Shephard Family Trust of 1988 (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the Registration Statement on Form 10 filed by the Registrant on June 22, 2007)

10.11		Standard Industrial Lease – Net (Highland facility), dated April 3, 1989 (assumed by the Registrant), between Old Point.360 and Leon Vahn FBO for Leon Vahn Living Trust, as amended (incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the Registration Statement on Form 10 filed by the Registrant on June 22, 2007)

10.12		Standard Industrial / Commercial Multi-Tenant Lease –Net (IVC facility), dated March 1, 2002 (assumed by the Registrant), between Old Point.360 and 2777 LLC, as amended (incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the Registration Statement on Form 10 filed by the Registrant on June 22, 2007)

10.13		Lease Agreement (Media Center) dated March 29, 2006 (assumed by the Registrant), between Old Point.360 and LEAFS Properties, LP (incorporated by reference to Exhibit 10.13 to Amendment No. 1 to the Registration Statement on Form 10 filed by the Registrant on June 22, 2007)

10.14		Asset Purchase Agreement, dated as of March 7, 2007 (assumed by the Registrant), among Old Point.360, Eden FX, Mark Miller, and John Gross (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form 10 filed by the Registrant on May 14, 2007)

10.15		Standard Loan Agreement dated August 7, 2007 between the Registrant and Bank of America N.A. (incorporated by reference to Exhibit 10.15 to the Form 10-K/T filed by the Registrant on November 13, 2007)

10.16		Promissory Note dated December 30, 2005 (assumed by the Registrant), between General Electric Capital Corporation and Old Point.360 (incorporated by reference to Exhibit 10.16 to the Form 10-K/T filed by the Registrant on November 13, 2007)

10.17		Promissory Note dated March 30, 2007 (assumed by the Registrant), between General Electric Capital Corporation and Old Point.360 (incorporated by reference to Exhibit 10.17 to the Form 10-K/T filed by the Registrant on November 13, 2007)

10.18		Transfer and Assumption Agreement dated August 8, 2007 between the Registrant and Old Point.360 (incorporated by reference to Exhibit 10.18 to the Form 10-K/T filed by the Registrant on November 13, 2007)

10.19		Sale, Purchase and Escrow Agreement (1133 Hollywood Way, Burbank Facility) dated May 19, 2008 among Point.360, Hollywood Way Office Ventures, LLC and Commonwealth Land Title Insurance Company (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the company on July 7, 2008)

10.20		Promissory Note dated July 1, 2008 between Point.360 and Lehman Brothers Bank FSB (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Company on July 7, 2008)

10.21		Settlement Agreement and Release (712 N. Seaward St., Los Angeles facility) dated June 19, 2008 among Point.360, Richard Hourizadeh, Vida Hourizadeh and Travira Trust (incorporated by reference to Exhibit 10.21 to the Form 10-K filed by the Company on September 19, 2008)

10.22		Assignment and Assumption of Lease and Landlord Consent dated April 6, 2009 among Point.360, Benita Holdings, LLC and Moving Images NY LLC (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on April 10, 2009)

10.23		Standard Offer, Agreement and Escrow Instructions for the Purchase of Real Estate dated April 9, 2009 between Point.360 and Michael James Lantry, Trustee of the M.J. Lantry Trust dated June 15, 2000 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on June 10, 2009)

10.24		Purchase Money Promissory Note secured by Deed of Trust dated June 10, 2009 between Point.360 and Michael James Lantry, Trustee of the M.I. Lantry trust dated June 15, 2000 (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Company on June 10, 2009)

10.25		Standard Loan Agreement dated August 25, 2009 between the Registrant and Bank of America N.A. (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on August 28, 2009)

21.1		Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registration Statement on Form 10 filed by the Registrant on May 14, 2007)

23.1		Consent of Singer Lewak LLP

31.1		Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Prior to August 21, 2007, Point.360 was named New 360. On August 21, 2007, New 360 changed its name to Point.360. In this Exhibit Index, Point.360 (including New 360 for the period prior to August 21, 2007) is referred to as the “Registrant.”

References in this Exhibit Index to “Old Point.360” are intended to refer to the Registrant’s former parent corporation, named Point.360, which was merged into DG FastChannel, Inc. on August 14, 2007, with DG FastChannel, Inc. continuing in existence as the surviving corporation.

SIGNATURES

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

Dated: September 28, 2009

	Point.360

	By:	/s/ Haig S. Bagerdjian
		Haig S. Bagerdjian
		Chairman of the Board of Directors,
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


/s/ Haig S. Bagerdjian	Chairman of the Board of Directors,
Haig S. Bagerdjian	President and Chief Executive Officer	September 28, 2009
	(Principal Executive Officer)

/s/ Alan R. Steel	Executive Vice President,	September 28, 2009
Alan R. Steel	Finance and Administration, Chief Financial Officer
	(Principal Accounting and Financial Officer)

/s/ Robert A. Baker	Director	September 28, 2009
Robert A. Baker

/s/ Greggory J. Hutchins	Director	September 28, 2009
Greggory J. Hutchins

/s/ Sam P. Bell	Director	September 28, 2009
Sam P. Bell

/s/ G. Samuel Oki	Director	September 28, 2009
G. Samuel Oki