**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-Q**




(Mark
      One)





þ
            Quarterly
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934.




For
      the
      quarterly period ended September 30, 2008 or





o
            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**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **01-0893376**
              (I.R.S.
                Employer Identification No.)**2777
                North Ontario Street, Burbank, CA**
              (Address
                of principal executive offices)
            **91504**
              (Zip
                Code)





(818)
      565-1400


**(Registrant’s
      Telephone Number, Including Area Code)**





**____________________________________________**


**(Former
      Name, Former Address and Former Fiscal Year,**


**if
      Changed Since Last Report)**




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





þ  Yes o  No





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 filero
            Accelerated
                fileroNon-accelerated
                filero
            Smaller
                reporting companyþ





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





oYesþNo





As
      of
      September 30, 2008, there were 10,493,410 shares of the registrant’s common
      stock outstanding.





**PART
      I - FINANCIAL INFORMATION**




**ITEM
      1.**  **FINANCIAL STATEMENTS**




**POINT.360**


**CONSOLIDATED
      BALANCE SHEETS**




**June
                30,**
                **2008**
            
            **Sept
                30,**
              **2008****(unaudited)****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            13,056,000
            
            $
            9,759,000Accounts
                  receivable, net of allowances for doubtful accounts of $541,000
                  and
                  $548,000,respectively
            
            
            6,971,000
            
            
            7,688,000Inventories,
                net
            
            
            502,000
            
            
            547,000Prepaid
                expenses and other current assets
            
            
            667,000
            
            
            881,000Prepaid
                income taxes
            
            
            1,441,000
            
            
            1,718,000Deferred
                income taxes
            
            
            490,000
            
            
            490,000Total
                current assets
            
            
            23,127,000
            
            
            21,084,000Property
                and equipment, net
            
            
            8,667,000
            
            
            15,851,000Deferred
                income taxes
            
            
            210,000
            
            
            366,000Other
                assets, net
            
            
            533,000
            
            
            359,000Goodwill
            
            
            9,820,000
            
            
            9,847,000Total
                assets
            
            $
            42,358,000
            
            $
            47,508,000**Liabilities
                and Shareholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            1,716,000
            
            $
            1,827,000Accrued
                wages and benefits
            
            
            2,109,000
            
            
            1,614,000Other
                accrued expenses
            
            
            816,000
            
            
            935,000Current
                portion of borrowings under notes payable
            
            
            1,810,000
            
            
            1,884,000Current
                portion of deferred gain on sale of real estate
            
            
            178,000
            
            
            178,000Total
                current liabilities
            
            
            6,631,000
            
            
            6,439,000Notes
                payable, less current portion
            
            
            2,839,000
            
            
            8,314,000Deferred
                gain on sale of real estate, less current portion
            
            
            2,089,000
            
            
            2,044,000Total
                long-term liabilities
            
            
            4,928,000
            
            
            10,358,000Total
                liabilities
            
            
            11,558,000
            
            
            16,797,000Commitments
                and contingencies
            
            
            —
            
            
            —Shareholders’
                equityPreferred
                stock - no par value; 5,000,000 shares authorized; none
                outstanding
            
            
            —
            
            
            —Common
                  stock - no par value; 50,000,000 shares authorized; 10,493,410 shares
                  issued and outstanding on each date
            
            
            21,583,000
            
            
            21,488,000Additional
                paid-in capital
            
            
            9,320,000
            
            
            9,371,000Retained
                earnings (deficit)
            
            
            (103,000
            )
            
            (148,000
            )Total
                shareholders’ equity
            
            
            30,800,000
            
            
            30,711,000Total
                liabilities and shareholders’ equity
            
            $
            42,358,000
            
            $
            47,508,000





See
      accompanying notes to consolidated financial statements.





2




**POINT.360**





**CONSOLIDATED
      STATEMENTS OF INCOME (LOSS)**


**(Unaudited)**


**Three
                  Months Ended**
                **September
                  30,****2007**
              
              **2008**Revenues
              
              $
              10,361,000
              
              $
              11,366,000Cost
                  of services
              
              
              (7,991,000
              )
              
              (7,636,000
              )Gross
                  profit
              
              
              2,370,000
              
              
              3,730,000Selling,
                  general and administrative expense
              
              
              (3,325,000
              )
              
              (3,708,000
              )Restructuring
                  costs
              
              
              (513,000
              )
              
              —Operating
                  income (loss)
              
              
              (1,468,000
              )
              
              22,000Interest
                  expense
              
              
              (66,000
              )
              
              (129,000
              )Interest
                  income
              
              
              —
              
              
              23,000Other
                  income (expense)
              
              
              —
              
              
              —Income
                  (loss) before income taxes
              
              
              (1,534,000
              )
              
              (83,000
              )(Provision
                  for) benefit from income taxes
              
              
              223,000
              
              
              38,000Net
                  income (loss)
              
              $
              (1,311,000
              )
              $
              (45,000
              )Earnings
                  (loss) per share:Basic:Net
                  income (loss)
              
              $
              (0.12
              )
              $
              (0.00
              )Weighted
                  average number of shares
              
              
              10,553,410
              
              
              10,504,072Diluted:Net
                  income (loss)
              
              $
              (0.12
              )
              $
              (0.00
              )Weighted
                  average number of shares including the dilutive effect of stock
                  options
              
              
              10,553,410
              
              
              10,504,572




See
      accompanying notes to consolidated financial statements.




3


**POINT.360**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**





**Three
                Months Ended**
              **Sept
                30,****2007**
            
            **2008**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (1,311,000
            )
            $
            (45,000
            )Adjustments
                to reconcile net incometo
                net cash provided by operatingactivities:Depreciation
                and amortization
            
            
            1,163,000
            
            
            1,244,000Provision
                for doubtful accounts
            
            
            7,000
            
            
            7,000Changes
                in assets and liabilities:(Increase)
                in accounts receivable
            
            
            (876,000
            )
            
            (724,000
            )(Increase)
                in inventories
            
            
            (12,000
            )
            
            (
                46,000
            )(Increase)
                decrease in prepaid expenses andother
                current assets
            
            
            1,629,000
            
            
            (491,000
            )(Increase)
                decrease in other assets
            
            
            (37,000
            )
            
            174,000(Increase)
                in deferred tax asset
            
            
            (416,000
            )
            
            (156,000
            )Increase
                (decrease) in accounts payable
            
            
            (491,000
            )
            
            111,000(Decrease)
                in accrued expenses
            
            
            62,000
            
            
            (375,000
            )Increase
                in other current liabilities
            
            
            417,000
            
            
            —Net
                cash (used in) operating activities
            
            
            (3,123,000
            )
            
            (301,000
            )Cash
                used in investing activities:Capital
                expenditures
            
            
            (401,000
            )
            
            (8,428,000
            )Net
                cash used in investing activities
            
            
            (401,000
            )
            
            (8,428,000
            )Cash
                flows provided by (used in) financing activities:Amortization
                of deferred gain on sale of real estate.
            
            
            (52,000
            )
            
            (45,000
            )(Increase)
                in invested equity
            
            
            (7,131,000
            )
            
            (44,000
            )Increase
                in notes payable
            
            
            106,000
            
            
            5,548,000Repayment
                of capital lease and otherobligations
            
            
            (1,000
            )
            
            (27,000
            )Net
                cash provided by (used in) financing activities
            
            
            (7,184,000
            )
            
            5,432,000Net
                increase (decrease) in cash
            
            
            3,660,000
            
            
            (3,297,000
            )Cash
                and cash equivalents at beginning of period
            
            
            7,302,000
            
            
            13,056,000Cash
                and cash equivalents at end of period
            
            $
            10,962,000
            
            $
            9,759,000Supplemental
                disclosure of cash flow information -Cash
                paid for:Interest
            
            $
            145,000
            
            $
            114,000Income
                tax
            
            $
            6,000
            
            $
            395,000




See
      accompanying notes to consolidated financial statements.


4


**POINT.360**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





**September
      30, 2008**





**NOTE
      1**  **-
      THE COMPANY**




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.




The
      Company seeks to capitalize on growth in demand for the services related to
      the
      distribution of entertainment content, without assuming the production or
      ownership risk of any specific television program, feature film or other form
      of
      content. The primary users of the Company’s services are entertainment studios
      and advertising agencies that choose to outsource such services due to the
      sporadic demand of any single customer for such services and the fixed costs
      of
      maintaining a high-volume physical plant.




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.




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.




The
      accompanying unaudited financial statements have been prepared in accordance
      with generally accepted accounting principles and the Securities and Exchange
      Commission’s rules and regulations for reporting interim financial statements
      and footnotes. In the opinion of management, all adjustments (consisting of
      normal recurring adjustments) considered necessary for a fair presentation
      have
      been included. Operating results for the three month period ended September
      30,
      2008 are not necessarily indicative of the results that may be expected for
      the
      fiscal year ending June 30, 2009. These financial statements should be read
      in
      conjunction with the financial statements and related notes contained in the
      Company’s Form 10-K for the period ended June 30, 2008.




*Earnings
      Per Share*




The
      weighted number of shares outstanding reflects the dilutive effect of stock
      options outstanding.




5




**NOTE
      2**  **-
      LONG TERM DEBT AND NOTES PAYABLE**




On
      December 30, 2005, Old Point.360 entered into a new $10 million term loan
      agreement. The term loan provides for interest at LIBOR (3.12% as of September
      30, 2008) plus 6.27%, or 6.27% on that date, and is secured by equipment. The
      term loan will be repaid in 60 equal monthly principal payments plus interest.
      Proceeds of the term loan were used to repay a previously existing term loan.
      In
      March 2006, Old Point.360 prepaid $4 million of the term loan. Monthly principal
      payments were subsequently reduced pro rata.




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
      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.




In
      August
      2007, the Company entered into a new credit agreement which provides up to
      $8
      million of revolving credit. The two-year agreement provides for interest at
      either (i) prime (5.00% as of September 30, 2008) minus 0% - 1.00% or (ii)
      LIBOR
      plus 1.5% - 2.5%, depending on the level of the Company’s ratio of outstanding
      debt to fixed charges (as defined), or 4.25% and 4.96%, respectively, on
      September 30, 2008. The facility is secured by all of the Company’s assets,
      except for equipment securing the term loans. The revolving credit agreement
      requires the Company to comply with various financial and business covenants.
      There are cross default provisions contained in both the revolving and term
      loan
      agreements.





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, of which
      $2.4 million was allocated to land). Pursuant to the Note, the Company borrowed
      $6,000,000 payable in monthly installments of principal and interest on a fully
      amortized bases 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% (6.72% as of September
      30, 2008). 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.





**NOTE
      3- SALE OF REAL ESTATE**




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 Sale and 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 improvement advance (approximately
      $13.8
      million) were used to pay off the mortgage and other outstanding
      debt.




All
      rights and obligations under the lease were transferred to the Company in the
      Spin-off. 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, increasing annually thereafter based on the Consumer
      Price Index change from year to year.





**NOTE
      4- CONTINGENCIES**





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.





**NOTE
      5- 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, were 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.




6




**NOTE
      6- 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
      ended
      September 30, 2008 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-Q 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-Q, expected
      forfeitures are immaterial. The Company will re-asses 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 period
      ended September 30, 2008 was $51,000 ($28,000 net of tax benefit).





The
      Company’s determination of fair value of share-based payment awards to employees
      and directors on the date of grant uses the Black-Sholes 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 quarter ended March 31, 2008, the Company granted awards of stock options
      for 1,045,600 shares at an average market price of $1.79 per share, which
      represent the only options outstanding as of September 30, 2008. The estimated
      fair value of all awards granted was $890,000. The total fair value of options
      expensed during the quarter ended September 30, 2008 was $51,000. 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:





Risk-free
                interest rate
            
            
            3.02
            %Expected
                term (years)
            
            
            5.0Volatility
            
            
            51
            %Expected
                annual dividends
            
            
            —




The
      following table summarizes the status of the 2007 Plan as of September 30,
      2008:




Options
                originally available
            
            
            2,000,000Stock
                options outstanding
            
            
            1,045,600Options
                available for grant
            
            
            954,400




7





Transactions
      involving stock options are summarized as follows:




**Number**
              **of
                Shares**
            
            **Weighted
                Average**
              **Exercise
                Price**Balance
                at June 30, 2008
            
            
            1,045,600
            
            $
            1.79Granted
                during
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —Cancelled
            
            
            —
            
            
            —Balance
                at September 30, 2008
            
            
            1,045,600
            
            $
            1.79





As
      of
      September 30, 2008, the total compensation costs related to non-vested awards
      yet to be expensed was approximately $0.7 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
      September 30, 2008 were as follows:





**As
                of March, 2008**
            
            **Number
                of**
              **Shares**
            
            **Weighted
                Average****Exercise
                Price**
            
            **Weighted
                Average Remaining Contractual Life****(Years****)**
            
            **Intrinsic**
              **Value**Employees
                - Outstanding
            
            
            1,045,600
            
            $
            1.79
            
            
            4.42
            
            $
            —Employees-
                Expected to Vest
            
            
            951,040
            
            $
            1.79
            
            
            4.42
            
            $
            —Employees
                - Exercisable
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —




Additional
      information with respect to outstanding options as of September 30, 2008 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
            
            
            1,046
            
            
            4.4
                Years
            
            $
            1.79
            
            
            —
            
            $
            1.79





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).





**NOTE
      7- 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 quarter ended September 30, 2008.





8




**NOTE
      8- SHAREHOLDER’S EQUITY**





The
      following table analyzes the components of shareholders’ equity from June 30,
      2008 to September 30, 2008 (in thousands):





**Common**
              **Stock**
            
            **Pain-in**
              **Capital**
            
            **Retained**
              **Earnings**
            
            **Shareholders’**
              **Equity**Balance,June
                30, 2008
            
            $
            21,583
            
            $
            9,320
            
            $
            (103
            )
            $
            30,800FAS
                123R
                option expense
            
            
            —
            
            
            51
            
            
            —
            
            
            51Net
                income (loss)
            
            
            —
            
            
            —
            
            
            (45
            )
            
            (45
            )Stock
                buyback
            
            
            (94
            )
            
            —
            
            
            —
            
            
            (94
            )Balance,September
                30, 2008
            
            $
            21,488
            
            $
            9,371
            
            $
            (148
            )
            $
            30,711




**NOTE
      9- 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.





**NOTE
      10- STOCK REPURCHASE PLAN**





In
      February 2008, the Company’s Board of Directors authorized a stock repurchase
      program. Under the stock repurchase program, the Company may purchase
      outstanding shares of its common stock on the open market at such times and
      prices determined in the sole discretion of management . In July 2008, the
      Company purchased 60,000 shares for $94,000. In October and November 2008,
      the
      Company purchased an additional 60,700 shares for $93,000.





**NOTE
      11- POTENTIAL ACQUISITION**




On
      September 29, 2008, the Company and Centerstaging Musical Productions, Inc.
      (“CMPI”) entered an Asset Purchase Agreement (the “Agreement”) whereby the
      Company intends to acquire certain assets of CMPI for $3 million and the
      assumption of $1.3 million of equipment financing obligations subject to
      bankruptcy court approval and overbid in CMPI’s pending Chapter 11 bankruptcy
      case. The Company has been approved as the “stalking horse” bidder pursuant to a
      motion to approve sale procedures in the United States Bankruptcy
      Court.




CMPI
      is
      primarily engaged in the business of (i) providing production and support
      services for live musical performances for major television programs; (ii)
      renting its studio and soundstage facilities, and (iii) renting musical
      instruments and related equipment for use at its studios and other venues as
      debtor and debtor in possession pursuant to Sections 1107(a) and 1108 of the
      Bankruptcy Code. The Agreement provides that CMPI will sell, transfer, convey,
      assign and deliver to the Company, in accordance with Section 363 and 365 and
      the other applicable provisions of the Bankruptcy Code, certain assets and
      liabilities of CMPI upon the terms and subject to the conditions set forth
      in
      the Agreement.




The
      proposed sale of CMPI’s assets to the Company will be subject to overbid
      pursuant to sale procedures approved by the Bankruptcy Court and any sale will
      be pursuant to a Sale Order of the Bankruptcy Court approving such sale under
      Section 363 of the Bankruptcy Code and will include the assumption and
      assignment of certain executory contracts, unexpired leases and liabilities
      thereunder pursuant to Section 365 of the Bankruptcy Code and the terms and
      conditions of the Agreement.




All
      of
      the obligations of the parties under the Agreement are conditioned upon the
      approval of the bankruptcy court. Additionally, the Company’s obligation to
      complete the purchase is subject to satisfactory negotiation of real estate
      and
      personal property leases and other conditions. Assuming all conditions are
      met,
      the Company expects the transaction to close in the quarter ended December
      31,
      2008. There can be no assurance that the conditions precedent to the Company’s
      obligation to close the transaction will occur, that the Company will be the
      ultimate successful bidder or that the transaction will ultimately be approved
      by the Bankruptcy Court.




9




**POINT.360**




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**




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




*Except
      for the historical information contained herein, certain statements in this
      quarterly 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, dependence 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 Part II of this Form 10-Q,
      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.




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 and Eden FX in March 2007) 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.





**Three
      Months Ended September 30, 2008 Compared To Three Months Ended September 30,
      2007**





*Revenues* .
      Revenues were $11.4 million for the three months ended September 30, 2008,
      compared to $10.4 million for the quarter ended September 30, 2007. While
      revenues increased 10%, quarter over quarter, the current period revenues were
      similar to the previously three calendar quarters. No unusual trends have been
      noted; however, revenues may 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.





*Gross
      Profit* .
      In
      2008, gross margin was 32.8% of sales, compared to 22.9% for the same period
      last year. The increase in gross profit percentage is due to lower material
      and
      wage costs as a percentage of sales. In addition, facility costs declined due
      to
      the elimination of lease costs associated with previously occupied real estate
      purchased during the period occupied. 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 $3.7 million (32.6% of sales) in the 2008 period as compared to
      $3.3
      million (31.6% of sales) in 2007. We expect SG&A expenses to remain at
      similar levels in future quarters.




10


*Restructuring
      Costs.* In the
      quarter ended September 30, 2007, 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. In the quarter
      ended September 30, 2008, there were no restructuring charges.




*Operating
      Income.* Operating
      income was $0.0 million in 2008 compared to a 1.5 million operating loss in
      2007.




*Interest
      Expense.* Net
      interest expense in the current quarter was $0.1 million, compared to $0.1
      million in the prior year period.




*Net
      Loss.* Net
      loss
      for the current quarter was $0.0 million compared to a $1.3 million loss in
      the
      prior year’s quarter.




**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-Q.




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. The Company expects to receive an additional $0.4 million
      from
      DG FastChannel for ADS Business working capital, which amount is included in
      other assets and is considered fully collectible.




On
      December 30, 2005, Old Point.360 entered a $10 million term loan agreement.
      The
      term loan provides for interest at LIBOR (3.12% at September 30, 2008) plus
      3.15% or 6.27% 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 will be 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.




In
      August
      2007, the Company entered into a new credit agreement which provides up to
      $8
      million of revolving credit based on 80% of acceptable accounts receivables,
      as
      defined. The two-year agreement provides for interest of either (i) prime (5.00%
      at September 30, 2008) minus 0% - 1.00% or (ii) LIBOR plus 1.50% - 2.50%
      depending on the level of the Company’s ratio of outstanding debt to fixed
      charges (as defined), or 4.25% or 4.96%, respectively, at September 30, 2008.
      The facility is secured by all of the Company’s assets, except for equipment
      securing term loans as described above.




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 bases 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% (6.72% as of September 30, 2008). 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.






The
      following table summarizes the September 30, 2008 amounts outstanding under
      our
      revolving line of credit and term mortgage loans:




Revolving
                credit
            
            $
            —Current
                portion of term loan
            
            
            1,824,000Mortgage
            
            
            5,996,000Long-term
                portion of term loan
            
            
            2,378,000Total
            
            $
            10,198,000





Monthly
      and annual principal and interest payments due under the term debt and mortgage
      are approximately $213,000 and $2.6 million, respectively, assuming no change
      in
      interest rates.





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.





11


The
      bank
      revolving credit agreement requires us to maintain a minimum “fixed charge
      coverage ratio.” 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. As of September
      30, 2008, the fixed charge coverage ratio was 1.41 as compared to a minimum
      requirement of 1.10.





We
      expect
      that amounts available under the revolving credit arrangement (approximately
      3.4
      million at September 30, 2008), 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.




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 level for calendar 2007 was not met;
      therefore, the 2008 payment was not made.





The
      following table summarizes contractual obligations as of September 30, 2008
      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 PrincipalObligations
            
            $
            10,198,000
            
            $
            1,884,000
            
            $
            2,508,000
            
            $
            151,000
            
            $
            5,655,000Long
                Term Debt InterestObligations(1)
            
            
            8,223,000
            
            
            670,000
            
            
            970,000
            
            
            827,000
            
            
            5,757,000Operating
                Lease Obligations
            
            
            17,782,000
            
            
            1,701,000
            
            
            4,710,000
            
            
            3,699,000
            
            
            7,672,000Total
            
            $
            36,203,000
            
            $
            4,255,000
            
            $
            8,188,000
            
            $
            4,677,000
            
            $
            19,083,000




(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. Consummation of any such acquisition or other expansion of the
      business conducted by the Company may be subject to the Company securing
      additional financing, perhaps at a cost higher than our existing term loans.
      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.




12


*Allowance
      for doubtful accounts.* We
      are
      required to make judgments, based on historical experience and future
      expectations, as to the collectibility 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 only 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.
      Fair value was estimated by an independent appraisal of the value of the
      Company.




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 intangible assets, long-lived assets and goodwill amounted
      to
      approximately $9.9 million as of September 30, 2008.




In
      2002,
      Statement of Financial Accounting Standards (“SFAS”) No.142, *“Goodwill
      and Other Intangible Assets”* (“SFAS
      142”) became effective and as a result, Old Point.360 ceased to amortize
      approximately $26.3 million of goodwill in 2002 and 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
      2008 test performed as of June 30, 2008, the discounted cash flow method was
      used to evaluate goodwill impairment and included cash flow estimates for 2009
      and subsequent years. If actual flow performance does not meet these
      expectations due to factors cited above, any resulting potential impairment
      could adversely affect reported goodwill asset values and earnings.




*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 liability as of March
      31, 2008 was $3.7 million. The Company did not record a valuation allowance
      against its deferred tax assets as of March 31, 2008.




13


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 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. 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 2007, the FASB issued SFAS No. 141R, *“Business
      Combinations”* (“SFAS
      141R”), which requires most identifiable assets, liabilities, non-controlling
      interests, and goodwill acquired in a business combination to be recorded at
      “full fair value.” SFAS 141R applies to all business combinations, including
      combinations among mutual entities and combinations by contract alone. Under
      Statement 141R, all business combinations will be accounted for by applying
      the
      acquisition method. Statement 141R is effective for business combinations for
      which the acquisition date is on or after the beginning of the first annual
      reporting period beginning on or after December 15, 2008. SFAS 141R will
      affect further acquisitions by the Company.




In
      December 2007, the FASB issued SFAS No. 160, *“Non-controlling
      Interests in Consolidated Financial Statements”* (“SFAS
      160”). SFAS 160 requires the ownership interests in subsidiaries held by parties
      other than the parent to be treated as a separate component of equity and be
      clearly identified, labeled, and presented in the consolidated financial
      statements. SFAS 160 is effective for periods beginning on or after
      December 15, 2008. Earlier adoption is prohibited. SFAS 160 has not yet
      affected the Company’s financial statements.




In
      January 2008, the SEC issued Staff Accounting Bulletin No. 110, “ *Certain
      Assumptions Used in Valuation Methods* ”
(“SAB
      100”) which amends Staff Accounting Bulletin No. 107, “ *Share-Based
      Payment* ”
(“SAB
      107”). SAB 110 allows for the continued use, under certain circumstances, of the
      “simplified” method in developing an estimate of expected term of so-called
“plain vanilla” stock options accounted for under FAS 123R. SAB 110 amends SAB
      107 to permit the use of the “simplified” method beyond December 31, 2007. The
      adoption of SAB 110 did not have a significant effect on the Company’s
      consolidated financial statements.




In
      March
      2008, the FASB issued SFAS No. 161. “ *Disclosures
      about Derivative Instruments and Hedging Activities* - *an
      amendment of FASB Statement No, 133* ”
(“FAS
      161”). The standard requires qualitative disclosures about objectives and
      strategies for using derivatives, quantitative disclosures about fair value
      amounts of gains and losses on derivative instruments, and disclosures about
      credit-risk related contingent features in derivative agreements. FAS 161 is
      effective for financial statements issued after November 15, 2008. The adoption
      of FAS 161 will not have a significant effect on the Company’s consolidated
      financial statements.




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




**** *Market
      Risk.* The
      Company had borrowings of $10.2 million on September 30, 2008 under term loan
      agreements. One term loan was subject to variable interest rates. The weighted
      average interest rate paid during the first three months of fiscal 2009 were
      6.8%. For variable rate debt outstanding at September 30, 2008, 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 0%-1.00% assuming the same amount of
      outstanding debt or LIBOR plus 1.5% to 2.5% and LIBOR plus 3.15% for the term
      loan. The Company’s market risk exposure with respect to financial instruments
      is to changes in prime or LIBOR rates.




**ITEM
      4.T CONTROLS AND PROCEDURES**




**Disclosure
      Controls**





Pursuant
      to Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation was
      performed under the supervision and with the participation of the Company’s
      management, including the Chief Executive Officer and President and the Chief
      Financial Officer, of the effectiveness of the design and operation of the
      Company’s disclosure controls and procedures as of the end of the period covered
      by this report. Based on the evaluation, the Chief Executive Officer and
      President and the Chief Financial Officer, concluded that the Company’s
      disclosure controls and procedures were effective as of the end of the period
      covered by the report.





14




**Changes
      in Internal Control over Financial Reporting**





The
      Chief
      Executive Officer and President and the Chief Financial Officer conducted an
      evaluation of our internal control over financial reporting (as defined in
      Exchange Act Rule 13a-15(f) (“Internal Control”) to determine whether any
      changes in Internal Control occurred during the quarter ended September 30,
      2008
      that have materially affected or which are reasonably likely to materially
      affect Internal Control. Based on the evaluation, no such change occurred during
      such period.





Internal
      control over financial reporting refers to a process designed by, or under
      the
      supervision of, our Chief Executive Officer and Chief Financial Officer and
      effected by our board of directors, management and other personnel, to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles and includes those policies and
      procedures that:





·
              Pertain
                  to the maintenance of records that in reasonable detail accurately
                  and
                  fairly reflect the transactions and dispositions of our
                  assets;





·
              Provide
                  reasonable assurance that transactions are recorded as necessary
                  to permit
                  the preparation of financial statements in accordance with generally
                  accepted accounting principles, and that our receipts and expenditures
                  are
                  being made only in accordance with authorizations of our management
                  and
                  members of our board of directors;
                  and





·
              Provide
                  reasonable assurance regarding the prevention or timely detection
                  of
                  unauthorized acquisition, use, or disposition of our assets that
                  could
                  have a material effect on our financial
                  statements.





During
      the quarter ended September 30, 2008, there have been no changes in the
      Company’s internal control over financial reporting, that we believe have
      materially affected, or are reasonably likely to materially affect the Company’s
      internal control over financial reporting.





**Limitations
      on Internal Control over Financial Reporting**





Internal
      control over financial reporting cannot provide absolute assurance of achieving
      financial reporting objectives because of its inherent limitations. Internal
      control over financial reporting is a process that involves human diligence
      and
      compliance and is subject to lapses in judgment and breakdowns resulting from
      human failures. Internal control over financial reporting also can be
      circumvented by collusion or improper override. Because of such limitations,
      there is a risk that material misstatements may not be prevented or detected
      on
      a timely basis by internal control over financial reporting. However, these
      inherent limitations are known features of the financial reporting process,
      and
      it is possible to design into the process safeguards to reduce, though not
      eliminate, this risk.





15





**PART
      II - OTHER INFORMATION**




**ITEM
      1. LEGAL PROCEEDINGS**




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
      1A. RISK FACTORS**




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




·
              Recent
                  history of losses.




·
              Prior
                  breach and changes in credit agreements and ongoing
                  liquidity.


·
              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.


·
              The
                  cost associated with becoming compliant with the Sarbanes-Oxley
                  Act of
                  2002, and theconsequences
                  of failing to implement effective internal controls over financial
                  reporting asrequired
                  by Section 404 of the Sarbanes-Oxley Act of 2002 by the date that
                  we must
                  complywith
                  that section of the Sarbanes-Oxley
                  Act.





Other
      factors not identified above, including the risk factors described in the “Risk
      Factors” section of the Company’s June 30, 2008, Form 10-K filed with the
      Securities and Exchange Commission 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 these areas of risk in connection with considering any
      forward-looking statements that may be made in this Form 10-Q and elsewhere
      by
      us and our business generally. Except to the extent of any 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.





16


**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





During
      the quarter ended September 30, 2008, the Company purchased shares of its common
      stock in open market transactions pursuant to a Rule 10b5-1 Purchase Plan as
      follows:





**Period**
            
            **(a)**
              **Total
                Number of**
              **Shares
                (or Units)**
              **Purchased**
            
            **(b)**
              **Average
                Price**
              **Paid
                per**
              **Share
                (or**
              **Unit)**
            
            **(c)**
              **Total
                Number of**
              **Shares
                (or Units)**
              **Purchased
                as Part**
              **Of
                Publicly**
              **Announced
                Plans**
              **or
                Programs**
            
            **(d)**
              **Maximum
                (or Approximate Dollar**
              **Value)
                of Shares (or**
              **Units)
                that May Yet be Purchased Under the****Plans
                or Programs**July
                1 to July 31, 2008
            
            
            60,000
            
            $
            1.57
            
            
            60,000
            
            
            —August
                1 to August 31, 2008
            
            
            —
            
            
            —
            
            
            —
            
            
            —September
                1 to September 30, 2008
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            60,000
            
            $
            1.57
            
            
            60,000
            
            
            —





(a)
            The
                shares were purchased pursuant to a plan dated June 19, 2008, which
                plan
                approved the purchase after July 1, 2008 of up to 60,000 shares.
                While the
                plan had a termination date of December 31, 2008, the plan terminated
                on
                July 24, 2008, upon the completion of all purchases contemplated
                by the
                plan.




**ITEM
      6. EXHIBITS**




(a)
            **Exhibits**





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.





17




**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.


POINT.360**DATE**:
              November 13, 2008
            BY:
            /s/
              Alan
              R. SteelAlan
              R. SteelExecutive
                Vice
                President,
              Finance and Administration
              (duly
                  authorized officer and principal financial
                  officer)




18