**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**___________**





**FORM
      10** **-Q**








(Mark
      One)





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





For
      the
      quarterly period ended September 30, 2007 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
                of 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.





Yes x No
o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
      accelerated filer o Accelerated
      Filer  o Non-accelerated
      filer x





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





Yes
o No
x




As
      of
      September 30, 2007, there were 10,553,410 shares of the registrant’s common
      stock outstanding.











**PART
      I - FINANCIAL INFORMATION**




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


**POINT.360**


**CONSOLIDATED
      BALANCE SHEETS**




**June
                30,**
            
            **September
                30,****Assets**
            
            **2007**
            
            **2007**Current
                assets:Cash
                and cash equivalents
            
            $
            7,302,000
            
            $
            10,962,000Accounts
                receivable, net of allowances for doubtful accounts of $490,000 and
                $497,000,respectively
            
            
            6,253,000
            
            
            7,123,000Inventories,
                net
            
            
            555,000
            
            
            567,000Prepaid
                expenses and other current assets
            
            
            868,000
            
            
            2,279,000Prepaid
                income taxes
            
            
            1,535,000
            
            
            1,754,000Deferred
                income taxes
            
            
            531,000
            
            
            947,000Total
                current assets
            
            
            17,045,000
            
            
            23,632,000Property
                and equipment, net
            
            
            11,130,000
            
            
            10,567,000Other
                assets, net
            
            
            322,000
            
            
            359,000Goodwill
            
            
            9,868,000
            
            
            9,868,000Total
                assets
            
            $
            38,565,000
            
            $
            44,426,000**Liabilities
                and Shareholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            2,497,000
            
            $
            2,005,000Accrued
                wages and benefits
            
            
            2,216,000
            
            
            1,413,000Other
                accrued expenses
            
            
            726,000
            
            
            1,591,000Income
                tax payable
            
            
            —
            
            
            —Due
                to parent company
            
            
            1,614,000
            
            
            —Current
                portion of borrowings under notes payable
            
            
            —
            
            
            1,771,000Current
                portion of capital lease obligations
            
            
            —
            
            
            4,000Current
                portion of deferred gain on sale of real estate
            
            
            178,000
            
            
            178,000Total
                current liabilities
            
            
            7,231,000
            
            
            6,962,000Deferred
                income taxes
            
            
            4,216,000
            
            
            4,632,000Notes
                payable, less current portion
            
            
            —
            
            
            4,202,000Due
                to parent company, less current portion
            
            
            4,257,000
            
            
            —Deferred
                gain on sale of real estate, less current portion
            
            
            2,274,000
            
            
            2,223,000Total
                long-term liabilities
            
            
            10,747,000
            
            
            11,057,000Total
                liabilities
            
            
            17,978,000
            
            
            18,019,000Commitments
                and contingencies
            
            
            —
            
            
            —Shareholders’
                equityParent
                company’s invested equity
            
            
            20,587,000
            
            
            —Preferred
                stock - no par value; 5,000,000 shares authorized; none
                outstanding
            
            
            —
            
            
            —Common
                stock - no par value; 50,000,000 shares authorized; 10,553,410shares
                issued and outstanding on each date
            
            
            —
            
            
            17,632,000Additional
                paid-in capital
            
            
            —
            
            
            9,245,000Retained
                earnings (deficit)
            
            
            —
            
            
            (470,000
            )Total
                shareholders’ equity
            
            
            20,587,000
            
            
            26,407,000Total
                liabilities and shareholders’ equity
            
            $
            38,565,000
            
            $
            44,426,000


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




-2-




**POINT.360**





**PRO
      FORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS)**


**(Unaudited)**


**Three
                Months Ended September 30,****2006**
            
            **2007****July
                1-**
              **August
                13**
            
            **August
                14-****September
                30**
            
            **Total**Revenues
            
            $
            10,409,000
            
            $
            4,453,000
            
            $
            5,908,000
            
            $
            10,361,000Cost
                of services
            
            
            (7,328,000
            )
            
            (3,621,000
            )
            
            (4,370,000
            )
            
            (7,991,000
            )Gross
                profit
            
            
            3,081,000
            
            
            832,000
            
            
            1,538,000
            
            
            2,370,000Selling,
                general and administrative expense
            
            
            (3,206,000
            )
            
            (1,326,000
            )
            
            (1,998,000
            )
            
            (3,325,000
            )Restructuring
                costs
            
            
            —
            
            
            (513,000
            )
            
            —
            
            
            (513,000
            )Operating
                income (loss)
            
            
            (125,000
            )
            
            (1,007,000
            )
            
            (461,000
            )
            
            (1,468,000
            )Interest
                expense, net
            
            
            (133,000
            )
            
            (57,000
            )
            
            (9,000
            )
            
            (66,000
            )Income
                (loss) before income taxes
            
            
            (258,000
            )
            
            (1,064,000
            )
            
            (470,000
            )
            
            (1,534,000
            )(Provision
                for) benefit from income taxes
            
            
            135,000
            
            
            223,000
            
            
            —
            
            
            223,000Net
                income (loss)
            
            $
            (123,000
            )
            $
            (841,000
            )
            $
            (470,000
            )
            $
            (1,311,000
            )Basic
                and diluted earnings (loss) per share:Net
                income (loss)
            
            $
            (0.01
            )
            $
            (0.08
            )
            $
            (0.04
            )
            $
            (0.12
            )Weighted
                average number of shares
            
            
            10,553,410
            
            
            10,553,410
            
            
            10,553,410
            
            
            10,553,410


See
      accompanying notes to consolidated financial statements.


-3-




**POINT.360**




**PRO
      FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**




**Three
                Months Ended September 30,****2006**
            
            **2007****July
                1-**
              **August
                13**
            
            **August
                14-**
              **September
                30**
            
            **Total**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (123,000
            )
            $
            (
                841,000
            )
            $
            (470,000
            )
            $
            (1,311,000
            )Adjustments
                to reconcile net incometo
                net cash provided by operatingactivities:Depreciation
                and amortization
            
            
            1,163,000
            
            
            527,000
            
            
            636,000
            
            
            1,163,000Provision
                for doubtful accounts
            
            
            (23,000
            )
            
            (42,000
            )
            
            49,000
            
            
            7,000Changes
                in assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            151,000
            
            
            854,000
            
            
            (1,730,000
            )
            
            (876,000
            )Decrease
                in inventories
            
            
            (63,000
            )
            
            (23,000
            )
            
            11,000
            
            
            (12,000
            )(Increase)
                decrease in prepaid expenses andother
                current assets
            
            
            36,000
            
            
            (9,605,000
            )
            
            7,976,000
            
            
            (1,629,000
            )(Increase)
                in goodwill and other tangibles
            
            
            —
            
            
            —
            
            
            —
            
            
            —(Increase)
                decrease in other assets
            
            
            21,000
            
            
            (17,000
            )
            
            (20,000
            )
            
            (37,000
            )(Increase)
                decrease in deferred tax asset
            
            
            —
            
            
            (416,000
            )
            
            —
            
            
            (416,000
            )Increase
                (decrease) in accounts payable
            
            
            237,000
            
            
            (729,000
            )
            
            238,000
            
            
            (491,000
            )(Decrease)
                in accrued expenses
            
            
            (457,000
            )
            
            1,415,000
            
            
            (1,353,000
            )
            
            62,000Increase
                (decrease) in income taxes payable
            
            
            (1,503,000)
            
            
            417,000
            
            
            —
            
            
            417,000Increase
                in other current liabilities
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                cash provided by (used in) operating activities
            
            
            (561,000
            )
            
            (8,460,000
            )
            
            5,337,000
            
            
            (3,123,000
            )Cash
                used in investing activities:Capital
                expenditures
            
            
            (737,000
            )
            
            (82,000
            )
            
            (319,000
            )
            
            (401,000
            )Amount
                paid for acquisitions
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                cash used in investing activities
            
            
            (737,000
            )
            
            (82,000
            )
            
            (319,000
            )
            
            (401,000
            )Cash
                flows provided by (used in) financing activities:Amortization
                of deferred gain on sale of realestate.
            
            
            (45,000
            )
            
            (22,000
            )
            
            (30,000
            )
            
            (52,000
            )Exercise
                of stock options
            
            
            —
            
            
            —
            
            
            —
            
            
            —Change
                in revolving credit agreement
            
            
            735,000
            
            
            —
            
            
            —
            
            
            —Proceeds
                from bank note
            
            
            —
            
            
            —
            
            
            —
            
            
            —Increase
                decrease in invested equity
            
            
            939,000
            
            
            7,198,000
            
            
            (67,000
            )
            
            7,131,000Increase
                (decrease) in notes payable
            
            
            (347,000
            )
            
            330,000
            
            
            (224,000
            )
            
            106,000Repayment
                of capital lease and otherobligations
            
            
            (23,000
            )
            
            (5,000
            )
            
            4,000
            
            
            (1,000
            )Net
                cash provided by (used in) financing activities
            
            
            1,259,000
            
            
            7,501,000
            
            
            (317,000
            )
            
            7,184,000Net
                increase (decrease) in cash
            
            
            (39,000
            )
            
            (1,041,000
            )
            
            4,701,000
            
            
            3,660,000Cash
                and cash equivalents at beginning of period
            
            
            31,000
            
            
            7,301,000
            
            
            6,261,000
            
            
            7,302,000Cash
                and cash equivalents at end of period
            
            $
            (8,000
            )
            $
            6,261,000
            
            $
            10,962,000
            
            $
            10,962,000Supplemental
                disclosure of cash flow information -Cash
                paid for:Interest
            
            $
            111,000
            
            $
            63,000
            
            $
            82,000
            
            $
            145,000Income
                tax
            
            $
            1,090,000
            
            $
            —
            
            $
            6,000
            
            $
            6,000


See
      accompanying notes to consolidated financial statements.


-4-




**POINT.360**





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





**September
      30, 2007**





**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 Fast Channel, 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”).




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
      is
      now 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
      statements of income (loss) and cash flows for the three months ended September
      30, 2007 show (i) the results of the post production business of Old Point.360
      for the period from July 1 to August 13, 2007 and (ii) the Company’s results
      from August 14 to September 30, 2007, to facilitate quarter to quarter
      comparisons between periods. See Note 7 for description of the accounting for
      the Merger.




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.
      Additionally, balance sheet amounts shown as “Due to parent company” and “Due


-5-




to
      parent
      company, less current portion” have been allocated by Old Point.360 to the
      Company based on the ratio of the Company’s working capital and net fixed assets
      to total Old Point.360 working capital and net fixed assets, respectively.
      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 will perform administrative functions using
      internal resources or purchased services.




Invested
      equity at June 30, 2007 reflects the applications of estimating techniques
      described above. Changes in invested equity from period to period 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.




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 periods ended September
      30,
      2007 are not necessarily indicative of the results that may be expected for
      the
      fiscal year ending June 30, 2008. These financial statements should be read
      in
      conjunction with the financial statements and related notes contained in the
      Company’s Form S-1, dated July 26, 2007.




*Earnings
      Per Share*




The
      pro
      forma weighted number of outstanding shares represents the number of Point.360
      shares outstanding upon consummation of the separation.




**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 (5.54% as of September
      30, 2007) plus 3.15% 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 (7.75% as of September 30, 2007) minus 0% - 1.00% or (ii)
      LIBOR
      plus 1.50% - 2.5%, depending on the level of the Company’s ratio of outstanding
      debt to fixed charges (as defined), or 6.75% and 6.85%, respectively, on
      September 30, 2007. 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. As of September 30, 2007, the Company was in compliance with
      revolving and term loan agreement covenants.




**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.


-6-




**NOTE
      5- ACQUISITION**





On
      March
      7, 2007, Old Point.360 acquired substantially all of the assets and business
      of
      Eden FX, Inc. (“Eden”) for $1.9 million in cash. The purchase agreement requires
      possible additional payments of $0.7 million, $0.9 million and $1.2 million
      in
      2008, 2009 and 2010, respectively, if earnings before interest, taxes,
      depreciation and amortization during the three years after the acquisition
      reach
      certain predetermined levels. As part of the transaction, the Old Point.360
      entered into employment and non competition agreements with three senior
      officers of Eden which fix responsibilities, salaries and other benefits and
      set
      forth limitations on the individual’s ability to compete with the Company for
      the term of the earn-out period (three years). Eden is a producer of computer
      generated visual effects for feature films, television program and commercial
      advertising content. All rights and obligations of these transactions were
      transferred to the Company in the Spin-off.





The
      total
      purchase consideration has been allocated to the assets and liabilities acquired
      based on their respective estimated fair values as summarized
      below.




Goodwill
            
            $
            2,071,000Property,
                plant and equipment
            
            
            107,000Covenant
                not to compete
            
            
            20,000Total
                assets acquired
            
            
            2,198,000Liabilities
                assumed
            
            
            (39,000
            )Net
                assets acquired over liabilities,and
                purchase price.
            
            $
            2,159,000


The
      operating results of Eden FX for the quarter ended September 30, 2007 were
      as
      follows:





Revenues
            
            $
            873,000Cost
                of services
            
            $
            (882,000
            )Gross
                margin (deficit)
            
            
            (9,000
            )Selling,
                general andAdministrative
                expenses
            
            
            (272,000
            )Operating
                loss
            
            $
            (281,000
            )


**NOTE
      6- 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, are currently under
      audit by the U.S. Internal Revenue Service for calendar 2005. The Company
      believes that its income tax filing positions and deductions for 2005 and later
      periods will be sustained and does not anticipate any adjustments that will
      result in a material change to its financial position. As a 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.


-7-




**NOTE
      7- SPIN-OFF TRANSACTION**





Upon
      completion of the Spin-off and Merger, DG FastChannel 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 Company expects to receive approximately $1.9 million additional
      cash from DG FastChannel pursuant to the Working Capital Reconciliation
      Agreement among Old Point.360, DG FastChannel and the Company.





The
      following table sets forth the Company’s cash and cash equivalents and
      shareholder’s equity as of June 30, 2007 on a 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 $1.9 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
            )
            $
            16,6027,000(b
            )Invested
                equity
            
            $
            20,587
            
            $
            (20,587)(c
            )
            $
            —Common
                stock
            
            
            —
            
            
            20,587(c
            )
            $
            20,587Additional
                paid-in capital
            
            
            —
            
            
            7,000(b
            )
            
            9,3002,300(a
            )Total
                invested/shareholder’s equity
            
            $
            20,587
            
            $
            9,300
            
            $
            29,887





(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.




**NOTE** **8-
      STOCK OPTION PLAN**





In
      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. There were no options outstanding under the 2007 Plan as of September
      30, 2007.




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 over one to five years.


-8-


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).




**NOTE
      9- STOCK RIGHTS PLAN**




In
      July
      2007, the Company implemented a stock rights program. Pursuant to the program,
      stockholders of record 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.





-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 service 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.




Point.360
      has an opportunity to expand our business by establishing closer relationships
      with our customers through excellent service at a competitive price and
      expanding 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 acquisition of IVC in July 2004) that can increase
      revenues by adding new customers, or expanding services provided 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, 2007 Compared To Three Months Ended September 30,
      2006.**





*Revenues* .
      Revenues were $10.4 million for the three months ended September 30, 2007,
      compared to $10.4 million for the quarter ended September 30, 2006. The addition
      of Eden FX in March 2007 contributed $0.9 million of revenues in the 2007
      period. Excluding the effect of Eden FX, revenues declined by $0.9 million
      or 9%
from the prior period due to lower ordering patterns of our major studio
      customers. 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.





*Gross
      Profit* .
      In
      2007, gross margin was 22.9% of sales, compared to 29.6% for the same period
      last year. The decrease in gross profit percentage is due to higher wages and
      benefits due to the addition of editors, graphic artists and others associated
      with Eden FX and to attract new business and general salary increases. Excluding
      Eden FX in the current period, gross margin would have been 24.9%. 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 $3.3 million (31.6% of sales) in the 2007 period as compared to
      $3.2
      million (30.8% of sales) in 2006. The increase of $0.1 million was due
      principally to the addition of Eden FX, the absorption of all corporate SG&A
      expenses by the Company since August 14, 2007 Spin-off (the prior year’s quarter
      benefited $0.4


-10-


million
      from the allocation of corporate expenses to the ADS Business) and the 2007
      reversal of Spin-off costs previously expensed (expensed in prior quarters
      because achieving the Spin-off was not certain).




Eliminating
      the inconsistent items in the presented periods, pro forma SG&A expenses
      would be as follows:




*(in
                millions)*
            
            **2006**
              **Quarter**
            
            **2007**
              **Quarter**As
                reported
            
            $
            3.2
            
            $
            3.3Eliminate
                Eden FX effect
            
            
            —
            
            
            (0.3
            )Corporate
                expenses allocated to theADS
                Business
            
            
            0.4
            
            
            —Reversal
                of Spin-off costs previouslyExpensed
            
            
            —
            
            
            0.2Pro
                forma SG&A expenses
            
            $
            3.6
            
            $
            3.2




*Restructuring
      Costs* In
      the
      2007 period, 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.




O *perating
      Income (Loss).* Operating
      loss was $1.3 million in 2007 compared to a loss of $0.1 million in 2006. The
      operating loss in 2007 associated with Eden FX was $0.3 million as Eden’s
      business was seasonally low as it participates largely in the television
      episodic market.




*Interest
      Expense.* Interest
      expense for 2007 was $0.1 million, a decrease of $0.1 million from 2006. The
      decrease was due to lower debt levels, offset partially by higher rates on
      remaining variable interest debt.




*Net
      Loss.* Net
      loss
      for 2007 was $1.3 million compared to $0.1 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-Q.




On
      August
      14, 2007, the Company received $7 million from DG FastChannel upon completion
      of
      the Merger. The Company also received approximately $0.7 million for
      reimbursement of merger expenses and prepayment for ADS Business working
      capital. The Company expects to receive an additional $1.9 million from DG
      FastChannel 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 (5.54% at September 30, 2007) plus
      3.15%, or 8.69% at September 30, 2007, 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 (7.75%
      at September 30, 2007) 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 6.75% or 6.85%, respectively, at September 30, 2007.
      The facility is secured by all of the Company’s assets, except for equipment
      securing term loans as described above.




In
      March
      2006, the 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.


-11-




The
      following table summarizes the September 30, 2007 amounts outstanding under
      our
      revolving line of credit and term loans:




Revolving
                  credit
              
              $
              —Current
                  portion of term loan
              
              
              1,771,000Long-term
                  portion of term loan
              
              
              4,202,000Total
              
              $
              5,973,000


Monthly
      and annual principal and interest payments due under the term debt are
      approximately $193,000 and $2.3 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.





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, 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, 2007,
      the fixed charge coverage ratio was 1.14 as compared to a minimum requirement
      of
      1.10. If we fail to meet minimum covenant levels, amounts outstanding under
      the
      credit agreement and, by cross default provisions the term loan will become
      due
      and payable.





Subsequent
      to September 30, 2007, we expect to receive approximately $1.9 million from
      DG
      FastChannel pursuant to the Merger Agreement as additional consideration for
      the
      working capital transferred to DG FastChannel in the Merger.





We
      expect
      that amounts available under the revolving credit arrangement (approximately
      $4
      million at September 30, 2007), 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
      following table summarizes contractual obligations as of September 30, 2007
      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 Obligations
            
            $
            5,973,000
            
            $
            1,771,000
            
            $
            3,687,000
            
            $
            515,000
            
            $
            —Capital
                Lease Obligations
            
            
            4,000
            
            
            4,000
            
            
            —
            
            
            —
            
            
            —Operating
                Lease Obligations
            
            
            23,476,000
            
            
            3,888,000
            
            
            5,218,000
            
            
            4,178,000
            
            
            10,192,000Total
            
            $
            29,453,000
            
            $
            5,663,000
            
            $
            8,905,000
            
            $
            4,693,000
            
            $
            10,192,000




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 complementary to 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


-12-




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 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.




*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 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 $20.5 million as of September 30, 2007.




In
      2002,
      Statement of Financial Accounting Standards (“SFAS”) No.142, *“Goodwill
      and Other Intangible Assets”* (“SFAS
      142”) became effective and as a result, we 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 2006 tests performed
      as of September 30 of each year required no goodwill impairment. In the 2006
      test performed as of December 31, 2006, we determined the fair value of the
      enterprise by independent appraisal. If future appraisals or future performances
      are affected by the factors cited above, resulting potential impairment could
      adversely affect the reported goodwill asset value and
      earnings.


-13-




*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
      September 30, 2007 was $3.3 million. The Company did not record a valuation
      allowance against its deferred tax assets as of September 30, 2007.




In
      June
      2006, the FASB issued “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. As the Company is responsible for the taxes
      resulting from Old Point.360’s operation prior to the Spin-off, the Company
      effectively adopted FIN 48 on 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. The Company was last audited by New York taxing authorities
      for the years 2002 through 2004 resulting in no change. The Company is currently
      not under audit by income taxing authorities. If audited, the Company believes
      that its income tax filing positions and deductions will be sustained and does
      not anticipate any adjustments that will result in a material change to its
      financial position. As a 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.




**RECENT
      ACCOUNTING PRONOUNCEMENTS**




In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      155, “ *Accounting
      for Certain Hybrid Financial Instruments* ”
(“SFAS
      155”), which amends SFAS No. 133, “ *Accounting
      for Derivatives Instruments and Hedging Activities* ”
(SFAS
      133”) and SFAS No. 140, “ *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishment of
      Liabilities* ”
(SFAS
      140”). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only
      and principal-only strips on debt instruments to include only such strips
      representing rights to receive a specified portion of the contractual interest
      or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying
      special-purpose entities to hold a passive derivative financial instrument
      pertaining to beneficial interests that it is derivative instrument. The Company
      is currently evaluating the impact of this new Standard, but believes that
      it
      will not have a material impact on the Company’s financial position, results of
      operations or cash flows.




In
      March
      2006, the FASB issued SFAS No. 156, *“Accounting
      for Servicing of Financial Assets - an amendment of FASB Statement No.
      140”* .
      The
      provisions of SFAS 156 are effective for fiscal years beginning after September
      15, 2006. This statement was issued to simplify the accounting for servicing
      rights and to reduce the volatility that results from using different
      measurement attributes. The Company is currently assessing the impact that
      the
      adoption of SFAS 156 will have on its results of operations and financial
      position.




In
      September 2006, the FASB issued SFAS No. 157, *“Fair
      Value Measurement.”* SFAS 157
      establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      SFAS 157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007. The Company is required to adopt the provision of
      SFAS
      157, as applicable, beginning in fiscal year 2008. Management does not believe
      the adoption of SFAS 157 will have a material impact on the Company’s financial
      position or results of operations.




**** In
      February 2007, the FASB issued SFAS No. 159, *“The
      Fair Value Options for Financial Assets and Financial Liabilities-Including
      an
      Amendment of FASB Statement No. 115”* (“SFAS
      159”), which expands the use of fair value. Under SFAS 159 a company may elect
      to use fair value to measure accounts and loans receivable, available-for-sale
      and held-to-maturity securities, equity method investments, accounts payable,
      guarantees, issued debt and other eligible financial instruments. SFAS 159
      is
      effective for years beginning after November 15, 2007. We do not believe that
      SFAS 159 will have a material impact on our financial position, results of
      operations or cash flows.




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




*Market
      Risk.* The
      Company had borrowings of $6.0 million at September 30, 2007 under term loan
      agreements. One term loan was subject to variable interest rates. The weighted
      average interest rate paid during the first quarter of fiscal 2008 was 8.4%.
      For
      variable rate debt outstanding at September 30, 2007, a .25% increase in
      interest rates will increase annual interest expense by approximately $8,000.
      Amounts that may become outstanding under the revolving credit facility provide
      for interest at the banks’ prime rate minus 0%


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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.**  **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 are effective in ensuring that information
      required to be disclosed in reports that the Company files or submits under
      the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the SEC’s rules and forms. No change in the Company’s
      internal control over financial reporting occurred during the Company’s most
      recent fiscal quarter that materially affected, or is reasonably likely to
      materially affect, the Company’s internal control over financial reporting.




**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 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:




l
            Recent
                history of losses.


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


l
            Our
                highly competitive marketplace.


l
            The
                risks associated with dependence upon significant
                customers.


l
            Our
                ability to execute our expansion
                strategy.


l
            The
                uncertain ability to manage in a changing
                environment.


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


l
            Dependence
                on key personnel.


l
            Our
                ability to maintain and improve service
                quality.


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


l
            Possible
                significant influence over corporate affairs by significant
                shareholders.


l
            Our
                ability to operate effectively as a stand-alone, publicly traded
                company.


l
            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 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.




-15-





Other
      factors not identified above, including the risk factors described in the “Risk
      Factors” section of the Company’s Form S-1 filed with the Securities and
      Exchange Commission on July 26, 2007 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 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 too any forward-looking statements, to report events or to report
      the
      occurrence of unanticipated events.




**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.






**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 12, 2007




BY: /s/
      Alan
      R. Steel


Alan
      R.
      Steel


Executive
      Vice President, Finance
      and Administration


(duly
      authorized officer and principal financial officer)




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