UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
 
 FORM
10-Q/A
 
 (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
 
  ̈    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                       ̈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 filer     ̈                          Accelerated
filer    ̈
 Non-accelerated
filer    ̈                             Smaller
reporting company     þ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 
  ̈Yes                      þ  No
 
 As of
September 30, 2008, there were 10,493,410 shares of the registrant’s common
stock outstanding.
 
 
  EXPLANATORY
NOTE
 
 The
purpose of this Form 10-Q/A of Point.360 (the “Company”) for the three months
ended September 30, 2008 is to restate the Company’s interim consolidated
financial statements as of and for the three months ended September 30, 2008
contained in the Company’s original Form 10-Q (the “Original Form 10-Q”) to
correct amounts on the Company’s consolidated balance sheet, statements of
income (loss) and cash flows.  Specifically, the amounts presented in
the Company’s consolidated balance sheet, statements of income (loss) and cash
flows as of and for the three months ended September 30, 2008 in this Form
10-Q/A reflect a correction with respect to sales cutoff errors related to the
timing of revenue recognition under the proportional performance
method.  The adjustment to revenues was as follows:
 
 Three
months ended September 30, 2008 (increase
revenues)     $190,000
 
 As a
result of the correction, the Company has determined it to be necessary to amend
the Original Form 10-Q.  This Form 10-Q/A amends and restates, in its
entirety, Part I, Item 1, Item 2 and Item 4T of the Original Form
10-Q.  This Form 10-Q/A continues to reflect circumstances as of the
date of the filing of the Original Form 10-Q and does not reflect events
occurring after the filing of the Original Form 10-Q, or modify or update those
disclosures in any way, except as required to reflect the effects of the
restatement as described in Note 12 to the accompanying interim consolidated
financial statements.
 
 2
  PART
I – FINANCIAL INFORMATION
  ITEM
1.   FINANCIAL STATEMENTS
 POINT.360
 CONSOLIDATED
BALANCE SHEETS
 
 June 30,
                                    2008
                                  
                                  
                                  Sep 30,
                                    2008
                                    (As Restated,
                                    See Note 12)(unaudited)AssetsCurrent
      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
                                  
                                  
                                  
                                  7,878,000Inventories,
      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
                                  
                                  
                                  
                                  21,274,000Property
      and equipment, net
                                  
                                  
                                  8,667,000
                                  
                                  
                                  
                                  15,851,000Deferred
      income taxes
                                  
                                  
                                  210,000
                                  
                                  
                                  
                                  280,000Other
      assets, net
                                  
                                  
                                  533,000
                                  
                                  
                                  
                                  359,000Goodwill
                                  
                                  
                                  9,820,000
                                  
                                  
                                  
                                  9,847,000Total
      assets
                                  
                                  $
                                  42,358,000
                                  
                                  
                                  $
                                  47,612,000Liabilities and Shareholders’
      EquityCurrent
      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;
    10,493,410shares
      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
                                  )
                                  
                                  
                                  (44,000
                                  )Total
      shareholders’ equity
                                  
                                  
                                  30,800,000
                                  
                                  
                                  
                                  30,815,000Total
      liabilities and shareholders’ equity
                                  
                                  $
                                  42,358,000
                                  
                                  
                                  $
                                  47,612,000
 
 See
accompanying notes to consolidated financial statements.
  3
  POINT.360
 
 CONSOLIDATED
STATEMENTS OF INCOME (LOSS)
 (Unaudited)
 
 Three Months Ended
                          September 30,2007
                        
                        
                        2008
                          (As Restated,
                          See Note 12)Revenues
                        
                        $
                        10,361,000
                        
                        
                        $
                        11,556,000Cost
      of services
                        
                        
                        (7,991,000
                        )
                        
                        
                        (7,636,000
                        )Gross
      profit
                        
                        
                        2,370,000
                        
                        
                        
                        3,920,000Selling,
      general and administrative expense
                        
                        
                        (3,325,000
                        )
                        
                        
                        (3,708,000
                        )Restructuring
      costs
                        
                        
                        (513,000
                        )
                        
                        
                        -Operating
      income (loss)
                        
                        
                        (1,468,000
                        )
                        
                        
                        212,000Interest
      expense
                        
                        
                        (66,000
                        )
                        
                        
                        (129,000
                        )Interest
      income
                        
                        
                        -
                        
                        
                        
                        23,000Other
      income (expense)
                        
                        
                        -
                        
                        
                        
                        -Income
      (loss) before income taxes
                        
                        
                        (1,534,000
                        )
                        
                        
                        106,000(Provision
      for) benefit from  income taxes
                        
                        
                        223,000
                        
                        
                        
                        (47,000
                        )Net
      income (loss)
                        
                        $
                        (1,311,000
                        )
                        
                        $ _ __ 59,000Earnings
      (loss) per share:Basic:Net
      income (loss)
                        
                        $
                        (0.12
                        )
                        
                        $
                        0.01Weighted
      average number of shares
                        
                        
                        10,553,410
                        
                        
                        
                        10,504,072Diluted:Net
      income (loss)
                        
                        $
                        (0.12
                        )
                        
                        $
                        0.01Weighted
      average number of shares including the dilutive effect of stock
      options
                        
                        
                        10,553,410
                        
                        
                        
                        10,504,572
 
 See
accompanying notes to consolidated financial statements.
 
 4
  POINT.360
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Three Months Ended
                            Sept 30,2007
                          
                          
                          2008
                            (As Restated,
                            See Note 12)Cash flows from operating activities:Net
      income (loss)
                          
                          $
                          (1,311,000
                          )
                          
                          $
                          59,000Adjustments
      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
                          )
                          
                          
                          (914,000
                          )(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
                          )
                          
                          
                          (70,000
                          )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.
  5
  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.
  6
  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.
 
 7
 
 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/A 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/A, 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
  8
  Transactions
involving stock options are summarized as follows:
 Number
                      of Shares
                    
                    
                    Weighted Average
                      Exercise PriceBalance
      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
                        ValueEmployees
      – 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 ExercisableOptions 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.
 
 9
 
 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’
                      EquityBalance,
      June 30, 2008
                    
                    $
                    21,583
                    
                    
                    $
                    9,320
                    
                    
                    $
                    (103
                    )
                    
                    $
                    30,800FAS
      123R option expense
                    
                    
                    -
                    
                    
                    
                    51
                    
                    
                    
                    -
                    
                    
                    
                    51Net
      income (loss)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    58
                    
                    
                    
                    58Stock
      buyback
                    
                    
                    (94
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (94
                    )Balance,
      September 30, 2008
                    
                    $
                    21,488
                    
                    
                    $
                    9,371
                    
                    
                    $
                    (44
                    )
                    
                    $
                    30,815
  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.
  10


NOTE
12- RESTATEMENT OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS
  Subsequent
to the issuance of our September 30, 2008 interim consolidated financial
statements, we determined that amounts reflected as revenues for the three month
period ended September 30, 2008 required an adjustment to correct sales cutoff
errors related to the timing of revenue recognition under the proportional
performance method.  The correction resulted in an increase of
$190,000 in revenues for the three months ended September 30, 2008 and related
adjustments to other line items in the consolidated statements of income (loss),
balance sheet and cash flows as of and for the period as follows.
  Changes to Consolidated Statements of Income (Loss) for the Three Months
                      Ended September 30, 2008:
                    
                    Increase (Decrease)Three Months
                      Ended
                      September 30, 2008Revenues
                    
                    $
                    190,000Gross
      profit
                    
                    
                    190,000Operating
      income (loss)
                    
                    
                    190,000Income
      (loss) before income taxes
                    
                    
                    190,000(Provision
      for) benefit from income taxes
                    
                    
                    (85,000
                    )Net
      income (loss)
                    
                    
                    106,000Basic
      and diluted earnings (loss) per share
                    
                    
                    0.01
 
 Changes in Consolidated Balance Sheet
                      as of September 30, 2008:
                    
                    Increase
                      (Decrease)Accounts
      receivable, net of allowances for doubtful accounts of
      $555,000
                    
                    $
                    190,000Total
      current assets
                    
                    
                    190,000Deferred
      income taxes
                    
                    
                    (79,000
                    )Total
      assets
                    
                    
                    104,000Retained
      earnings (deficit)
                    
                    
                    104,000Total
      shareholders’ equity
                    
                    
                    104,000Total
      liabilities and shareholders’ equity
                    
                    
                    104,000
 
 Changes to Consolidated Changes in Cash Flows
                      for the Three Months Ended September 30, 2008:Net
      income (loss)
                    
                    $
                    104,000Increase
      (decrease) in accounts receivable
                    
                    
                    (190,000
                    )Decrease
      in deferred tax asset
                    
                    
                    86,000
  11
  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/A, 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 (as restated) Compared To Three Months Ended
September 30, 2007
 
 Revenues.  Revenues
were $11.6 million for the three months ended September 30, 2008, compared to
$10.4 million for the quarter ended September 30, 2007.  While
revenues increased 12%, 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 33.9% 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 (32.1% 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.
  12
  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 $0.2 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
income for the current quarter was $0.1 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/A.
  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.
  13
 
 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, (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 PeriodContractual Obligations
                    
                    Total
                    
                    
                    Less than 1 Year
                    
                    
                    Years
                      2 and 3
                    
                    
                    Years
                      4 and 5
                    
                    
                    ThereafterLong
      Term Debt  PrincipalObligations
                    
                    $
                    10,198,000
                    
                    
                    $
                    1,884,000
                    
                    
                    $
                    2,508,000
                    
                    
                    $
                    151,000
                    
                    
                    $
                    5,655,000Long
      Term Debt Interest Obligations  (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:
  14
 
 Revenues.We
perform a multitude of services for our clients, including film-to-tape
transfer, video and audio editing, standards conversions, adding special
effects, duplication, distribution, etc. A customer orders one or more of these
services with respect to an element (commercial spot, movie, trailer, electronic
press kit, etc.). The sum total of services performed on a particular element (a
“package”) becomes the deliverable (i.e., the customer will pay for the services
ordered in total when the entire job is completed). Occasionally, a major studio
will request that package services be performed on multiple
elements.  Each element creates a separate revenue stream which is
recognized only when all requested services have been performed on that
element.  At the end of an accounting period, revenue is accrued for
un-invoiced but shipped work.
 
 Certain
jobs specify that many discrete tasks must be performed which require up to four
months to complete.  In such cases, we use the proportional
performance method for recognizing revenue.  Under the proportional
performance method, revenue is recognized based on the value of each stand-alone
service completed.
  In some instances, a client will
request that we store (or “vault”) an element for a period ranging from a day to
indefinitely.  The Company attempts to bill customers a nominal amount
for storage, but some customers, especially major movie studios, will not pay
for this service.  In the latter instance, storage is an accommodation
to foster additional business with respect to the related element.  It
is impossible to estimate (i) the length of time we may house the element, or
(ii) the amount of additional services we may be called upon to perform on an
element.   Because these variables are not reasonably estimable
and revenues from vaulting are not material (billed vaulting revenues are
approximately 3% of sales), we do not treat vaulting as a separate deliverable
in those instances in which the customer does not pay.
 
 The Company records revenues in
accordance with SAB 104, which states that revenue is realized or realizable and
earned when all of the following criteria are met: (i) there is persuasive
evidence that an arrangement exists; (ii) delivery has occurred or the services
have been rendered; (iii) the Company’s price to the customer is fixed or
determinable; and (iv) collectability is reasonably assured.
  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.
  15
  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.
 
 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.
  16
  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 not effective as of the end of the
period covered by the report due to sales cutoff errors related to the period
covered by the report discovered during the preparation of the Company’s
financial statements as of June 30, 2009.  The errors were related to
the timing of revenue recognition under the proportional performance
method.
 
 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.
  17
 
 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.
  18
 
 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 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.
  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/A 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.
  19
 
 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 ProgramsJuly
      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.
 
 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.360DATE:September
      28, 2009
                BY:
                /s/  Alan R.
  SteelAlan
      R. SteelExecutive
      Vice President,Finance
      and Administration(duly
      authorized officer and principal financial
  officer)
  20