UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


___________





FORM
10-Q





(Mark
One)





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





For the
quarterly period ended September 30, 2010 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.





þYes                       ̈No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈Yes                          ̈No





Indicate
by check mark 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                      þNo





As of
September 30, 2010, there were 10,763,166 shares of the registrant’s common
stock outstanding.







PART
I – FINANCIAL INFORMATION




ITEM
1.  FINANCIAL STATEMENTS


POINT.360


CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in
thousands)





June 30,
                                                                                                          
                                                                                                          
                                                                                                          Sept. 30,2010*
                                                                                                          
                                                                                                          
                                                                                                          2010AssetsCurrent
      assets:Cash
      and cash equivalents
                                                                                                          
                                                                                                          $
                                                                                                          249
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          185Accounts
      receivable, net of allowances for doubtful accounts of  $393 and
      $399, respectively
                                                                                                          
                                                                                                          
                                                                                                          7,581
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          7,626Inventories,
      net
                                                                                                          
                                                                                                          
                                                                                                          548
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          594Prepaid
      expenses and other current
      assets                                                              .
                                                                                                          
                                                                                                          
                                                                                                          437
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          456Prepaid
      income taxes
                                                                                                          
                                                                                                          
                                                                                                          1,565
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          66Total
      current assets
                                                                                                          
                                                                                                          
                                                                                                          10,380
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          8,927Property
      and equipment, net
                                                                                                          
                                                                                                          
                                                                                                          20,157
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          19,676Other
      assets, net
                                                                                                          
                                                                                                          
                                                                                                          607
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1,102Total
      assets
                                                                                                          
                                                                                                          $
                                                                                                          31,144
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          29,705Liabilities
      and Shareholders’ EquityCurrent
      liabilities:Current
      portion of notes payable
                                                                                                          
                                                                                                          $
                                                                                                          1,038
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          564Current
      portion of capital lease obligations
                                                                                                          
                                                                                                          
                                                                                                          159
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          160Line
      of credit
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          400Accounts
      payable
                                                                                                          
                                                                                                          
                                                                                                          2,828
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          3,406Accrued
      wages and benefits
                                                                                                          
                                                                                                          
                                                                                                          1,432
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1,560Other
      accrued expenses
                                                                                                          
                                                                                                          
                                                                                                          2,300
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1,777Current
      portion of deferred gain on sale of real estate
                                                                                                          
                                                                                                          
                                                                                                          178
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          178Total
      current liabilities
                                                                                                          
                                                                                                          
                                                                                                          7,935
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          8,045Notes
      payable, less current portion
                                                                                                          
                                                                                                          
                                                                                                          9,383
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          9,367Capital
      lease obligations, less current portion
                                                                                                          
                                                                                                          
                                                                                                          263
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          222Deferred
      gain on sale of real estate, less current portion
                                                                                                          
                                                                                                          
                                                                                                          1,733
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1,688Total
      long-term liabilities
                                                                                                          
                                                                                                          
                                                                                                          11,379
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          11,277Total
      liabilities
                                                                                                          
                                                                                                          
                                                                                                          19,314
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          19,322Commitments
      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; 10,513,166 and
      10,763,166shares
      issued and outstanding on June 30, 2010 and September 30, 2010,
      respectively
                                                                                                          
                                                                                                          
                                                                                                          21,542
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          22,042Additional
      paid-in capital
                                                                                                          
                                                                                                          
                                                                                                          9,808
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          9,876Retained
      (deficit)
                                                                                                          
                                                                                                          
                                                                                                          (19,520
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (21,535
                                                                                                          )Total
      shareholders’ equity
                                                                                                          
                                                                                                          
                                                                                                          11,830
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          10,383Total
      liabilities and shareholders’ equity
                                                                                                          
                                                                                                          $
                                                                                                          31,144
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          29,705





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





*Amounts
derived from audited financial statements


2


POINT.360




CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended
                                                      September 30,2009
                                                    
                                                    
                                                    2010Revenues
                                                    
                                                    $
                                                    9,419,000
                                                    
                                                    
                                                    $
                                                    8,272,000Cost
      of services sold
                                                    
                                                    
                                                    (7,360,000
                                                    )
                                                    
                                                    
                                                    (6,406,000
                                                    )Gross
      profit
                                                    
                                                    
                                                    2,059,000
                                                    
                                                    
                                                    
                                                    1,866,000Selling,
      general and administrative expense
                                                    
                                                    
                                                    (3,788,000
                                                    )
                                                    
                                                    
                                                    (3,641,000
                                                    )Research
      and development expense
                                                    
                                                    
                                                    (109,000
                                                    )
                                                    
                                                    
                                                    (274,000
                                                    )Operating
      (loss)
                                                    
                                                    
                                                    (1,838,000
                                                    )
                                                    
                                                    
                                                    (2,049,000
                                                    )Interest
      expense
                                                    
                                                    
                                                    (222,000
                                                    )
                                                    
                                                    
                                                    (202,000
                                                    )Interest
      income
                                                    
                                                    
                                                    9,000
                                                    
                                                    
                                                    
                                                    61,000Other
      income
                                                    
                                                    
                                                    79,000
                                                    
                                                    
                                                    
                                                    176,000Loss
      before income taxes
                                                    
                                                    
                                                    (1,972,000
                                                    )
                                                    
                                                    
                                                    (2,014,000
                                                    )Benefit
      from income taxes
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      loss
                                                    
                                                    $
                                                    (1,972,000
                                                    )
                                                    
                                                    $
                                                    (2,014,000
                                                    )Loss
      per share:Basic:Net
      loss
                                                    
                                                    $
                                                    (0.19
                                                    )
                                                    
                                                    $
                                                    (0.19
                                                    )Weighted
      average number of shares
                                                    
                                                    
                                                    10,152,422
                                                    
                                                    
                                                    
                                                    10,532,188Diluted:Net
      loss
                                                    
                                                    $
                                                    (0.19
                                                    )
                                                    
                                                    $
                                                    (0.19
                                                    )Weighted
      average number of shares including the dilutive effect of stock
      options
                                                    
                                                    
                                                    10,152,422
                                                    
                                                    
                                                    
                                                    10,532,188





See
accompanying notes to condensed consolidated financial
statements.


3


POINT.360




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)


Three Months Ended
                                                            September 30,
                                                            (in thousands)2009
                                                          
                                                          
                                                          2010Cash
      flows from operating activities:Net
      loss
                                                          
                                                          $
                                                          (1,972
                                                          )
                                                          
                                                          $
                                                          (2,014
                                                          )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:(Gain)
      on sale of fixed assets
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          (101
                                                          )Depreciation
      and amortization
                                                          
                                                          
                                                          991
                                                          
                                                          
                                                          
                                                          938Amortization
      of deferred gain on real estate
                                                          
                                                          
                                                          (44
                                                          )
                                                          
                                                          
                                                          (44
                                                          )Provision
      for doubtful accounts
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          6Stock
      compensation expense
                                                          
                                                          
                                                          56
                                                          
                                                          
                                                          
                                                          67Changes
      in operating assets and liabilities (net of acquisitions):(Increase)
      decrease in accounts receivable
                                                          
                                                          
                                                          894
                                                          
                                                          
                                                          
                                                          (52
                                                          )(Increase)
      in inventories
                                                          
                                                          
                                                          (19
                                                          )
                                                          
                                                          
                                                          (112
                                                          )(Increase)
      decrease in prepaid expensesand
      other current assets
                                                          
                                                          
                                                          541
                                                          
                                                          
                                                          
                                                          (19
                                                          )Decrease
      in prepaid income taxes
                                                          
                                                          
                                                          312
                                                          
                                                          
                                                          
                                                          1,499(Increase)
      in other assets
                                                          
                                                          
                                                          (319
                                                          )
                                                          
                                                          
                                                          (495
                                                          )(Decrease)
      increase in accounts payable
                                                          
                                                          
                                                          (389
                                                          )
                                                          
                                                          
                                                          578Increase
      (decrease) in accrued wages and benefits
                                                          
                                                          
                                                          (126
                                                          )
                                                          
                                                          
                                                          128Increase
      (decrease) in other accrued expenses
                                                          
                                                          
                                                          199
                                                          
                                                          
                                                          
                                                          (23
                                                          )Net
      cash and cash equivalents provided by operating activities
                                                          
                                                          
                                                          124
                                                          
                                                          
                                                          
                                                          356Cash
      flows from investing activities:Capital
      expenditures
                                                          
                                                          
                                                          (471
                                                          )
                                                          
                                                          
                                                          (389
                                                          )Proceeds
      from sale of equipment or real estate
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          101Net
      cash and cash equivalents (used in) investing activities
                                                          
                                                          
                                                          (471
                                                          )
                                                          
                                                          
                                                          (288
                                                          )Cash
      flows from financing activities:Proceeds
      from line of credit, net
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          400(Repayment)
      of notes payable
                                                          
                                                          
                                                          (475
                                                          )
                                                          
                                                          
                                                          (491
                                                          )(Repayment)
      of capital lease obligations
                                                          
                                                          
                                                          (35
                                                          )
                                                          
                                                          
                                                          (41
                                                          )Net
      cash (used in) financing activities
                                                          
                                                          
                                                          (510
                                                          )
                                                          
                                                          
                                                          (132
                                                          )Net  (decrease)
      in cash and cash equivalents
                                                          
                                                          
                                                          (857
                                                          )
                                                          
                                                          
                                                          (64
                                                          )Cash
      and cash equivalents at beginning of year
                                                          
                                                          
                                                          5,235
                                                          
                                                          
                                                          
                                                          249Cash
      and cash equivalents at end of year
                                                          
                                                          $
                                                          4,378
                                                          
                                                          
                                                          $
                                                          185




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




Three Months EndedSeptember 30,2009
                        
                        
                        2010Cash
      payments for income taxes (net of refunds)
                        
                        $
                        (312
                        )
                        
                        $
                        (1,499
                        )Cash
      payments for interest
                        
                        $
                        183
                        
                        
                        $
                        189Settlement
      of a lawsuit for common stock
                        
                        $
                        -
                        
                        
                        $
                        500Fixed
      assets purchased for common stock
                        
                        $
                        500
                        
                        
                        $
                        -





See
accompanying notes to condensed consolidated financial
statements.


4





POINT.360





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





September
30, 2010





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. Clients include major motion picture studios, advertising
agencies and corporations.  The Company also rents and sells DVDs and
video games directly to consumers through its Movie>Q retail
stores.




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




The
accompanying unaudited Condensed Consolidated Financial Statements include the
accounts and transactions of the Company, including those of the Company’s
subsidiaries.  The accompanying Condensed 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 Condensed Consolidated Financial
Statements.




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




In fiscal
2010, the Company purchased assets and intellectual property for a research and
development project to address the viability of the DVD and video game rental
business being abandoned by the closure of Movie Gallery/Hollywood Video and
Blockbuster stores.  The DVD rental market consists principally of
online services (Netflix), vending machines (Redbox) and large video
stores.




As of
September 30, 2010, the Company had opened three Movie>Q “proof-of-concept”
stores in Southern California.  The stores employ an automated
inventory management (“AIM”) system in a 1,200-1,600 square foot
facility.  By saving space and personnel costs which caused the big
box stores to be uncompetitive with lower priced online and vending machine
rental alternatives, Movie>Q can offer up to 10,000 unit selections to a
customer at competitive rental rates.  Movie>Q provides online
reservations, an in-store destination experience, first run movie and game
titles and a large unit selection (as opposed to 400-700 for a Redbox vending
machine).




Based on
the success of the proof-of-concept, the Company may seek to rapidly expand the
number of Movie>Q stores while further streamlining the design and production
of the AIM system.  Movie>Q provides the Company with a content
distribution capability complimentary to the Company’s post production
business.




The accompanying unaudited Condensed
Consolidated 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, 2010 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30,
2011.  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, 2010.  Certain immaterial
reclassifications have been made to the prior period’s financial statements to
conform to the current year presentation.


5




Earnings
Per Share




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


Three Months
                    Ended
                    September 30,
                  
                  
                  Three Months
                    Ended
                    September 30,2009
                  
                  
                  2010Pro
      forma weighted average of number of sharesWeighted
      average number of common shares outstanding used in computation of basic
      EPS
                  
                  
                  10,152
                  
                  
                  
                  10,532Dilutive
      effect of outstanding stock options
                  
                  
                  -
                  
                  
                  
                  -Weighted
      average number of common and potential Common shares outstanding used in
      computation of Diluted EPS
                  
                  
                  10,152
                  
                  
                  
                  10,532Effect
      of dilutive options excluded in the computation of diluted EPS due to net
      loss
                  
                  
                  22
                  
                  
                  
                  98




The weighted average number of common
shares outstanding was the same amount for both basic and diluted income or loss
per share in each of the periods presented.  The effect of potentially
dilutive securities at September 30, 2010 and 2009 were excluded from the
computation of diluted earnings per share because the Company reported a net
loss, and the effect of inclusion would be antidilutive (i.e., including such
securities would result in a lower loss per share).  These potentially
dilutive securities consist of stock options whose exercise price is less than
the Company’s stock price at September 30, 2010.  The number of
potentially dilutive shares at September 30, 2010 was 665,575.




Fair
Value Measurements




As of September 30, 2010 and June 30,
2010, the carrying value of cash, accounts receivable, accounts payable, accrued
expenses and interest payable approximates fair value due to the short-term
nature of such instruments.  The carrying value of other long-term
liabilities approximates fair value as the related interest rates approximate
rates currently available to the Company.





Fair
Value Measurement





The
Company follows a framework for consistently measuring fair value under
generally accepted accounting principles, and the disclosures of fair value
measurements. The framework provides a fair value hierarchy to classify the
source of the information.





The
fair value hierarchy is based on three levels of inputs, of which the first two
are considered observable and the last unobservable, that may be used to measure
fair value and include the following:





Level 1 –
Quoted prices in active markets for identical assets or
liabilities.





Level 2 –
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.





Level 3 –
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.





Cash, the only Level 1 input applicable
to the Company (there are no Level 2 or 3 inputs), is stated on the Condensed
Consolidated Balance Sheet at fair value.




The carrying amounts reported in the
balance sheets for cash and cash equivalents, short-term marketable securities,
accounts receivable and accounts payable approximate their fair values due to
the short term nature of these financial instruments.





Recent
Accounting Pronouncements





In
October 2009, the FASB issued guidance for arrangements with multiple
deliverables. Specifically, the updated accounting standard requires an entity
to allocate arrangement consideration at the inception of an arrangement to all
of its deliverables based on their relative selling prices.  The
guidance also eliminates the residual method of allocation and requires use of
the relative-selling-price method in all circumstances in which an entity
recognizes revenue for an arrangement with multiple deliverables.  The
guidance is effective as of January 2011 with early adoption permitted. We
intend to adopt the provisions of the guidance as of January 1, 2011 which is
not expected to have a material impact on our financial
statements.


6





In
January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements.”This guidance amends the disclosure
requirements related to recurring and nonrecurring fair value measurements and
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally,
the guidance requires a roll forward of activities on purchases, sales, issuance
and settlements of the assets and liabilities measured using significant
unobservable inputs (Level 3 fair value measurements). The guidance became
effective for the reporting period beginning January 1, 2010, except for the
disclosure on the roll forward activities for Level 3 fair value measurements,
which will become effective for the reporting period beginning January 1, 2011.
Other than requiring additional disclosures, adoption of this new guidance will
not have a material impact on our financial statements.




NOTE
2 - LONG TERM DEBT AND NOTES PAYABLE





In August
2009 the Company entered into a credit agreement which provides up to $5 million
of revolving credit based on 80% of acceptable accounts receivables, as
defined.  The 15 month agreement provides for interest of either (1)
prime (3.25% at September 30, 2010)  minus .5% - plus .5% or (2) LIBOR
plus 2.0% - 3.0% depending on the level of the Company’s ratio of outstanding
debt to fixed charges (as defined), or 3.75% or 3.48%, respectively, on
September  30, 2010.  The facility is secured by all of the
Company’s accounts receivable and inventory.  As of September 30,
2010, the Company owed $400,000 under the credit agreement.  The
amount outstanding under the credit agreement is the result of a draw made on a
standby letter of credit by our Media Center landlord.  Under the
lease, the Company is required to maintain a $500,000 lease deposit or standby
letter of credit until April 1, 2011.  The $500,000 has been recorded
as a deposit in “Other assets, net” in the Condensed Consolidated Balance Sheet
as of September 30, 2010.




Our bank
revolving credit agreement requires us to maintain a minimum “leverage ratio”
and “fixed charge coverage ratio.” The leverage ratio compares tangible assets
to total liabilities (excluding the deferred real estate gain).  Our
fixed charge coverage ratio compares, on a rolling twelve-month basis, (i)
EBITDA plus rent expense and non-cash charges less income tax payments, to (ii)
interest expense plus rent expense, the current portion of long term debt and
maintenance capital expenditures.  As of September 30, 2010, the
leverage ratio was 1.70 compared to a minimum requirement of 1.75, and the fixed
charge coverage ratio was 0.21 as compared to a minimum requirement of
1.10.  As of September 30, 2010, the Company was not in compliance
with the leverage and fixed charge ratios, and received a forbearance from the
bank.  The forbearance period extends to December 31, 2010, during
which time the amount available under the credit agreement will be limited to
the outstanding $400,000.  The entire balance is due on December 31,
2010.





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





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





On
December 30, 2005, the Company entered into a $10 million term loan
agreement.  The term loan provides for interest at LIBOR (0.48% as of
September 30, 2010) plus 3.15%, or 3.63% on that date, and is secured by
equipment.  The term loan will be repaid in 60 equal monthly principal
payments plus interest.  In March 2006, $4 million of the term loan
was prepaid.  Monthly principal payments were subsequently reduced pro
rata.  On March 30, 2007, the Company 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 term loans
are scheduled to be repaid completely by December 31, 2010.





In
November 2010, the Company converted approximately $1 million of accounts
payable into a note secured by a lien of all the Company’s
assets.  The note is due in 48 monthly installments of $20,000 plus
interest at 3% per annum.  The total amount due under the note is
subject to a 12.5% or 6% discount if completely paid within 12 months or 18
months, respectively.





NOTE
3- PROPERTY AND EQUIPMENT




In March 2006, the Company 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, the Company
received $0.5 million from the purchaser for improvements.  In
accordance with the Accounting Standards Codification, 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.


7




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.




Property
and equipment consist of the following as of September 30, 2010:




Land
                    
                    $
                    3,985,000Building
                    
                    
                    9,245,000Machinery
      and equipment
                    
                    
                    36,644,000Leasehold
      improvements
                    
                    
                    6,839,000Computer
      equipment
                    
                    
                    7,316,000Equipment
      under capital lease
                    
                    
                    671,000Office
      equipment, CIP
                    
                    
                    1,241,000Less
      accumulated depreciation and amortization
                    
                    
                    (46,265,000
                    )Property
      and equipment, net
                    
                    $
                    19,676,000





NOTE
4- CONTINGENCIES





In July 2008, the Company was served
with a complaint filed in the Superior court of the State of California for the
County of Los Angeles by Aryana Farshad and Aryana F. Productions,
Inc.  (“Farshad”).  The complaint alleges that Point.360 and
its janitorial cleaning company failed to exercise reasonable care for the
protection and preservation of Farshad’s film footage which was
lost.  As a result of the defendants’ negligence, Farshad claims to
have suffered damages in excess of $2 million and additional unquantified
general and special damages.  The lawsuit was settled in October 2010
for $120,000, which amount was recorded as a liability at September 30,
2010.




On
October 6, 2009, DG FastChannel, Inc. (“DGFC”) filed a claim in the United
States District Court Central District of California, alleging that the Company
violated certain provisions of agreements governing transactions related to the
August 13, 2007 sale of the Company’s advertising distribution business to
DGFC.  DGFC alleges that (i) the Company did not fulfill its
obligation to restrict a former employee from competing against DGFC subsequent
to the transaction and, therefore, DGFC does not owe the Company $412,500
related to that portion of the transaction; (ii) the Company violated the
noncompetition agreement between DGFC and the Company by distributing
advertising content after the transaction; (iii) due to the violation of the
noncompetition agreement, the post production services agreement that required
DGFC to continue to vault its customers’ physical elements at the Company’s
Media Center became null and void; and (iv) the Company must return all of
DGFC’s vaulted material to DGFC.  DGFC also sought unspecified
monetary damages.




In
September 2010, a settlement between the parties included the
following:  (1) The Company will be subject to a permanent injunction
(until August 13, 2012) from competing in the commercial spot
advertising  business (as defined), (2) the Company will deliver to
DGFC vaulted elements which will result in an annual reduction of vaulting
revenues of approximately $0.9 million, (3) the Company will not be entitled to
$412,500 (relating to the working capital reconciliation), (4) the Company will
issue 250,000 shares of common stock to DGFC and (5) the parties will enter into
full mutual releases and will dismiss their respective claims with
prejudice.  In connection with the settlement, the Company has
indemnified a related party against possible losses should DGFC exercise its
right to put the stock to the related party on a specified future date, and
there is a negative difference between the stated $500,000 value of the stock
($2.00 per share) and the market value on the date of the put.  The
put may be exercised on the six-month anniversary of the settlement agreement.
As of September 30, 2010 the Company has issued the 250,000 shares of common
stock to DGFC and accrued approximately $0.4 million of estimated legal, vault
removal and other costs associated with the settlement.





In November 2010, DGFC filed an ex parte application for
enforcement of the settlement agreement and related stipulated injunction
alleging that the Company violated the terms thereof and seeking an order
enforcing the settlement agreement, an order to assess civil contempt charges
and other remedies, and an order referring criminal allegations against the
Company to the U.S. Attorney’s Office.  The Company believes it has
substantially performed its obligations under the settlement agreement and
intends to defend its position.  Potential liability related to the
outcome of the ex parte
application cannot be determined at this time.  The Company has
accrued estimated legal fees associated with this action.





Fromtime 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 except as described above.


8





NOTE
5- INCOME TAXES





The Company reviewed its ASC 740-10
documentation for the periods through September 30, 2010 to ascertain if any
changes should be made with respect to tax positions previously taken. In
addition, the Company reviewed its income tax reporting through September 30,
2010.  Based on Company’s review of its tax positions as of September
30, 2010, no new uncertain tax positions have resulted nor has new information
become available that would change management’s judgment with respect to tax
positions previously taken.





As of September 30, 2010, the Company's
net deferred tax assets were nil.  No tax benefit was recorded during the
three  month period ended September 30, 2010 because future
realizability of such benefit was not considered to be more likely than
not.  At September 30, 2010, the Company had a gross deferred tax asset of
$9.6 million, and a corresponding valuation allowance of $9.6
million.  At June 30, 2010, the Company had a gross deferred tax asset
of $7.6 million, and a corresponding valuation allowance of $7.6
million.





The Accounting Standards Codification
prescribes a recognition and measurement of a tax position taken or expected to
be taken in a tax return and provides guidance on derecognition of tax benefits,
classification on the balance sheet, interest and penalties, accounting in
interim periods, disclosure, and transition.





The Company files income tax returns in
the U.S. federal jurisdiction, and various state jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal state or local
income tax examinations by tax authorities for years before 2002. The Company
has analyzed its filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns. The Company was last audited by
New York taxing authorities for the years 2002 through 2004 resulting in no
change.  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.





The Company was notified by the IRS in
September 2009 of its intent to audit federal tax returns for calendar year 2006
and the period from January 1 to August 13, 2007.





The Company was notified by the IRS in
November 2009 of its intent to audit the federal tax return for the fiscal ended
June 30, 2008.  The audit was subsequently withdrawn.





During fiscal 2010, the Company
received a federal tax refund of approximately $0.4 million related to refunds
due for tax year 2005.  In July 2010, the Company received a refund of
$1.5 million related to tax year 2006.





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 measures and recognizes compensation expense for all share-based payment
awards made to employees and directors based on estimated fair
values.  We also 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 Condensed Consolidated Statements of
Operations.




We 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 Condensed Consolidated Statements of
Operations.  Stock-based compensation expense recognized in the
Condensed Consolidated Statements of Operations for the three months ended
September 30, 2010 included compensation expense for the share-based payment
awards based on the grant date fair value.  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 Condensed Consolidated Statements of
Operations for the periods reported in this Form 10-Q is based on awards
expected to vest, forfeitures are also estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. For the periods being reported in this Form 10-Q, expected
forfeitures are immaterial. The Company will re-assess the impact of forfeitures
if actual forfeitures increase in future quarters.  Stock-based
compensation expense related to employee or director stock options recognized
for the three month period ended September 30, 2010 was
$67,000.


9





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





During the quarter ended September 30,
2010, the Company granted a stock option award of 15,000 shares at an exercise
price of $1.27 per share.





As of September 30, 2010, there were
options outstanding to acquire 1,633,250 shares at an average exercise price of
$1.56 per share.  The estimated fair value of all awards granted
during the three-month 2010 period was $10,000.  For the 2010 period,
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
                  
                  
                  1.46
                  %Expected
      term (years)
                  
                  
                  5.0Volatility
                  
                  
                  64
                  %Expected
      annual dividends
                  
                  
                  -





The
following table summarizes the status of the 2007 Plan as of September 30,
2010:




Options
      originally available
                    
                    
                    2,000,000Stock
      options outstanding
                    
                    
                    1,633,250Options
      available for grant
                    
                    
                    354,750





Transactions involving stock options
are summarized as follows:


Number
                                of Shares
                              
                              
                              Weighted Average
                                Exercise PriceBalance at June 30, 2010
                              
                              
                              1,631,075
                              
                              
                              $
                              1.58Granted
                              
                              
                              15,000
                              
                              
                              
                              1.27Exercised
                              
                              
                              -
                              
                              
                              
                              -Cancelled
                              
                              
                              (12,825
                              )
                              
                              
                              2.06Balance at September 30,
    2010
                              
                              
                              1,633,250
                              
                              
                              $
                              1.56




As of September 30, 2010, the total
compensation costs related to non-vested awards yet to be expensed was
approximately $0.5 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, 2010 were as
follows:





Number of
                          Shares
                        
                        
                        Weighted Average
                          Exercise Price
                        
                        
                        Weighted Average
                          Remaining
                          ContractualLife
                          (Years)
                        
                        
                        Intrinsic
                          ValueAs of September
      30,  2010Employees
      – Outstanding
                        
                        
                        1,458,250
                        
                        
                        $
                        1.58
                        
                        
                        
                        2.99
                        
                        
                        $
                        -Employees
      – Expected to Vest
                        
                        
                        1,364,233
                        
                        
                        $
                        1.58
                        
                        
                        
                        2.96
                        
                        
                        $
                        -Employees
      – Exercisable
                        
                        
                        500,567
                        
                        
                        $
                        1.72
                        
                        
                        
                        2.50
                        
                        
                        $
                        -Non-Employees
      – Outstanding
                        
                        
                        175,000
                        
                        
                        $
                        1.55
                        
                        
                        
                        3.03
                        
                        
                        $
                        5,000Non-Employees
      – Vested
                        
                        
                        110,000
                        
                        
                        $
                        1.47
                        
                        
                        
                        3.06
                        
                        
                        $
                        5,000Non-Employees
      – Exercisable
                        
                        
                        110,000
                        
                        
                        $
                        1.47
                        
                        
                        
                        3.06
                        
                        
                        $
                        5,000




10





The aggregate intrinsic value in the
table above is the sum of the amounts by which the quoted market price of our
common stock exceeded the exercise price of the options at September 30, 2010,
for those options for which the quoted market price was in excess of the
exercise price.





Additional information with respect to
outstanding options as of September 30, 2010 is as follows (shares in
thousands):





Options Outstanding
                      
                      Options ExercisableOptionsExercise
                        PriceRange
                      
                      Number of
                        Shares
                      
                      Weighted
                        Average
                        Remaining
                        Contractual Life
                      
                      Weighted
                        Average
                        Exercise Price
                      
                      
                      Number of
                        Shares
                      
                      
                      Weighted
                        Average Exercise
                        Price$1.79
                      
                      
                      979
                      
                      2.4
      Years
                      
                      $
                      1.79
                      
                      
                      
                      488
                      
                      
                      $
                      1.79$1.37
                      
                      
                      30
                      
                      3.1
      Years
                      
                      $
                      1.37
                      
                      
                      
                      30
                      
                      
                      $
                      1.37$1.29
                      
                      
                      314
                      
                      4.4
      Years
                      
                      $
                      1.29
                      
                      
                      
                      -
                      
                      
                      $
                      1.29$1.27
                      
                      
                      15
                      
                      5.0
      Years
                      
                      $
                      1.27
                      
                      
                      
                      -
                      
                      
                      $
                      1.27$1.20
                      
                      
                      265
                      
                      3.4
      Years
                      
                      $
                      1.20
                      
                      
                      
                      60
                      
                      
                      $
                      1.20$1.05
                      
                      
                      30
                      
                      4.1
      Years
                      
                      $
                      1.05
                      
                      
                      
                      30
                      
                      
                      $
                      1.05





In addition to the above option plan,
the Company issued 10,000 shares of restricted stock during fiscal year ended
June 30, 2010.





We use the detailed method provided in
ASC 718 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 ASC 718.





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
three months ended September 30, 2010.


11





NOTE
8- SHAREHOLDER’S EQUITY





The following table analyzes the
components of shareholders’ equity from June 30, 2010 to September 30, 2010 (in
thousands):





Common
                    Stock
                  
                  
                  Paid-in
                    Capital
                  
                  
                  Retained
                    (Deficit)
                  
                  
                  Shareholders’
                    EquityBalance,
      June 30, 2010
                  
                  $
                  21,542
                  
                  
                  $
                  9,809
                  
                  
                  $
                  (19,521
                  )
                  
                  $
                  11,830Stock-based
      compensation expense
                  
                  
                  -
                  
                  
                  
                  67
                  
                  
                  
                  -
                  
                  
                  
                  67Net
      income (loss)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,014
                  )
                  
                  
                  (2,014
                  )Stock
      issuance
                  
                  
                  500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  500Balance,
      September 30, 2010
                  
                  $
                  22,042
                  
                  
                  $
                  9,876
                  
                  
                  $
                  (21,535
                  )
                  
                  $
                  10,383





NOTE
9- 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.   No shares were acquired pursuant to
the repurchase program during the three months ended September 30, 2010 or
2009.





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, depending on technological developments, risks related
to expansion, dependence on key personnel, fluctuating results and seasonality
and control by management. See the relevant portions of  the Company's
documents filed with the Securities and Exchange Commission, including the Risk
Factors section of the Company’s most recent annual report on Form 10-K, and
Risk Factors in Item 1A of Part II of this Form 10-Q, for a further discussion
of these and other risks and uncertainties applicable to the Company's
business.





Overview




Point.360
is one of the largest providers of video and film asset management services to
owners, producers and distributors of entertainment content.  We provide
the services necessary to edit, master, reformat and archive our clients’ film
and video content, including television programming, feature films and movie
trailers using electronic and physical means. Clients include major motion
picture studios and independent producers.  The Company also rents and
sells DVDs and video games directly to consumers through its Movie>Q retail
stores.




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




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


12


The
demand for entertainment content should continue to expand through web-based
applications.  We believe long and short form content will be sought
by users of personal computers, hand-held devices and home entertainment
technology.  Additionally, changing formats from standard definition,
to high definition, to Blu-Ray and perhaps to 3D will continue to give us the
opportunity to provide new services with respect to library
content.  We also believe that a potentially large consumer market
exists for the rental of DVDs and video games, which market is being abandoned
by “big box” DVD rental stores.




To meet
these needs, we must be prepared to invest in technology and equipment, and
attract the talent needed to serve our client needs.  Labor, facility
and depreciation expenses constitute approximately 80% of our
revenues.  Our goals include maximizing facility and labor usage, and
maintaining sufficient cash flow for capital expenditures and acquisitions of
complementary businesses to enhance our service offerings.




We
continue to look for opportunities to solidify and expand our
businesses.  During the fiscal year ending June 30, 2010 and the three
months ended September 30, 2010, we have completed the following:




·
            We
      consolidated our former Hollywood and Eden FX facilities into
      another  Company
location.




·
            We
      purchased assets and intellectual property in conjunction with a research
      and development project to create three “proof-of-concept” Movie>Q
      stores.




·
            We
      developed the Movie>Q automated inventory
  system.




·
            We
      closed down our New York facility due to continuing economic uncertainty
      in that market.




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




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, 2010 Compared to Three Months Ended September 30,
2009





Revenues.  Revenues
were $8.3 million for the three months ended June 30, 2010, compared to $9.4
million for the three months ended June 30, 2009.  Approximately $0.9
million of the decline in revenues in the current quarter were due to the move
of the operations of one of our Hollywood facilities (“Highland”) to other
Company locations.   We expect the negative effect on revenues to
continue as we further consolidate post production facilities to maximize space
utilization and reduce overhead.  Content storage revenues for the
current quarter were reduced by $0.3 million due to the settlement of a lawsuit,
which reduction will be ongoing.   As of June 30, 2010, we
decided to close down our New York facility, which generated $0.2 million of
revenue in the prior year quarter.  Although physical moves may
adversely affect revenues in the short term, we will continue to search for
operating efficiencies to increase income.  We are continuing to
invest in high definition and digital capabilities where demand is expected to
grow.   Our Point.360 Digital Film Lab (formerly IVC) revenues
increased $0.4 million over the prior year quarter.  We believe our
high definition and digital service platform will attract additional business in
the future.





Cost of Services. Costs of
services consist principally of wages and benefits, facility costs and
depreciation of physical assets.  During the quarter ended September
30, 2010, total costs of services were 77.4% of sales compared to 78.1% in the
prior year.   Our Hollywood operational costs were reduced by
$0.3 million due to lower sales.  Additional cost reductions of $0.6
million were realized in the current quarter with the closure of our New York
facility in June 2010.  Other costs remained consistent with the prior
year period due to the fixed nature of our service infrastructure.





Gross Profit.  In
the three months ended September 30, 2010, gross margin was 22.6% of sales,
compared to 21.9% for the same period last year. The increase in gross profit
percentage is due to the factors cited above.  From time to time, we
will increase staff capabilities to satisfy potential customer demand. If the
expected demand does not materialize, we will adjust personnel
levels.  We expect gross margins to fluctuate in the future as the
sales mix changes.


13


Selling, General and Administrative
Expense.SG&A expense was $3.6 million (44.0% of sales) in
the three months ended September 30, 2010 as compared to $3.8 million (40.2% of
sales) in the same period last year.  In the current period, the
Company incurred $0.1 million of expense associated with the settlement of a
legal action.




Research and Development
Expense.During the fiscal year ended June 30, 2010, the
Company undertook a research and development project to evaluate, develop and
commercialize “automated” stores to rent and sell digital video discs
(DVDs).  The Movie>Q stores will contain 10,000 DVDs for rent or
sale via a software-controlled automated inventory management
system  contained in 1,200 to 1,600 square feet of retail space for
each store.  As of September 30, 2010, three Movie>Q stores were
completed.  We will evaluate store performance during the coming
holiday season to further test the operating model and validate our cost/revenue
assumptions.Expenses associated with
R&D activities were $0.3 million for the quarter ended September 30,
2010.




Operating Income (Loss).Operating loss was $2.0 million in the fiscal 2011 period compared to
$1.8 million in the fiscal 2010 period.




Interest
Expense.   Net interest expense was $0.2 million in both
the 2011 and 2010 periods.




Other Income. Other income
represents principally sublease income and gain on sale of fixed
assets.




Net Loss.Net loss was $2.0
million in both the fiscal 2011 and 2010 periods.




LIQUIDITY
AND CAPITAL RESOURCES




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




On
December 30, 2005, the Company entered into a $10 million term loan agreement.
The term loan provides for interest at LIBOR (0.48% at September 30, 2010) plus
3.15% (3.63% 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, the Company entered into an additional $2.5 million term loan
agreement. The loan provides for interest at 8.35% per annum and is secured by
the Company’s equipment. The loan is being repaid in 45 equal monthly
installments of principal and interest.  Both loans are scheduled to
be repaid fully by December 31, 2010.




In March
2006, the Company 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 the
Accounting Standards Codification (ASC) 840 “Accounting for Leases”, the gain
and the improvement allowance will be amortized over the initial 15-year lease
term as reduced rent. The mortgage debt is secured by the land and
building.




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




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




In
November 2010, the Company converted approximately $1 million of accounts
payable into a note secured by a lien of all the Company’s
assets.  The note is due in 48 monthly installments of $20,000 plus
interest at 3% per annum.  The total amount due under the note is
subject to a 12.5% or 6% discount if totally paid within 12 months or 18 months,
respectively.




Monthly
and annual principal and interest payments due under the term debt and mortgages
are approximately $264,000 and $3.1 million, respectively, assuming no change in
interest rates.





In August
2009 the Company entered into a credit agreement which provides up to $5 million
of revolving credit based on 80% of acceptable accounts receivables, as
defined.  The 15 month agreement provides for interest of either (1)
prime (3.25% at September 30, 2010)  minus .5% - plus .5% or (2) LIBOR
plus 2.0% - 3.0% depending on the level of the Company’s ratio of outstanding
debt to fixed charges (as defined), or 3.75% or 3.48%, respectively, on
September  30, 2010.  The facility is secured by all of the
Company’s accounts receivable and inventory. As of September 30, 2010, the
Company owed $400,000 under the credit agreement.


14


Our bank
revolving credit agreement requires us to maintain a minimum “leverage ratio”
and “fixed charge coverage ratio.” The leverage ratio compares tangible assets
to total liabilities (excluding the deferred real estate gain).  Our
fixed charge coverage ratio compares, on a rolling twelve-month basis, (i)
EBITDA plus rent expense and non-cash charges less income tax payments, to (ii)
interest expense plus rent expense, the current portion of long term debt and
maintenance capital expenditures.  As of September 30, 2010, the
leverage ratio was 1.70 compared to a minimum requirement of 1.75, and the fixed
charge coverage ratio was 0.21 as compared to a minimum requirement of
1.10.  As of September 30, 2010, the Company was not in compliance
with the ratios and received a forbearance from the bank.  The
forbearance period extends to December 31, 2010, during which time the amount
available under the credit agreement will be limited to the outstanding
$400,000.  The entire balance is due on December 31,
2010.




The
following table summarizes the September 30, 2010 amounts outstanding under our
revolving line of credit, and term (including capital lease obligations) and
mortgage loans:




Revolving
      credit
                            
                            $
                            400,000Current
      portion of term loan and mortgages
                            
                            
                            724,000Long-term
      portion of term loan and mortgages
                            
                            
                            9,589,000Total
                            
                            $
                            10,713,000




The
Company’s cash balance decreased from $249,000 on July 1, 2010 to $185,000 at
September 30, 2010, due to the following:





Balance
      July 1, 2010Capital
      expenditures for equipment
                    
                    $
                    249,000Debt
      principal and interest payments
                    
                    
                    (389,000
                    )Income
      tax refund (including interest)
                    
                    
                    (720,000
                    )Research
      and development costs
                    
                    
                    1,553,000Changes
      in other assets and liabilities
                    
                    
                    (274,000
                    )Balance
      September 30, 2010
                    
                    
                    (234,000
                    )$
                    185,000




Cash
generated by operating activities is directly dependent upon sales levels and
gross margins achieved. We generally receive payments from customers in 60-120
days after services are performed. The larger payroll and facilities components
of our cost structure must be paid currently.  Payment terms of other
liabilities vary by vendor and type.   Fluctuations in sales
levels will generally affect cash flow negatively or positively in early periods
of growth or contraction, respectively, because of operating cash
receipt/payment timing.  Other investing and financing cash flows also
affect cash availability.





In the
first quarter of fiscal 2011, the underlying drivers of operating cash flows
(sales, receivable collections, the timing of vendor payments, facility costs
and employment levels) have been consistent.  Sales outstanding in
accounts receivable have increased from approximately 61 days to 71 days within
the last 12 months, indicating major studios may delay payments in response to
the general economic slowdown.  However, we do not expect days sales
outstanding to materially fluctuate in the future.


15





As of
September 30, 2010, our facility costs consisted of building rent, maintenance
and communication expenses.  In July 2008, rents were reduced by the
purchase of our Hollywood Way facility in Burbank, CA, eliminating approximately
$625,000 of annual rent expense.  The real estate purchase involved a
down payment of $2.1 million and $6 million of mortgage debt.  The
mortgage payments are approximately $489,000 per year.





In March
2009, the lease on one of our facilities in Hollywood, CA (“Highland”) expired
and the Company became a holdover tenant.  The landlord issued a
Notice to Quit which required us to move out of the facility.  The
Highland operations have been housed at another Company facility.  Our
Eden FX facility was moved to our West Los Angeles location in September
2010.  Rent will cease on our closed New York facility in March
2011.





The
Company purchased the Vine Property in June 2009.  The purchase price
of the Vine Property was $4.75 million, $1.2 million of which was paid in cash
with the balance being financed by the seller over ten years, interest only at
7% for the entire term, with the principal amount being due at the end of the
term.  Building renovations will cost about $1.5
million.  After renovation, we expect to move our Eden FX and Highland
operations into the Vine Property in 2011.





The
mortgage payments are approximately $738,000 per year.  We believe our
current cash position and a difficult economy may provide us with the
opportunity to invest in facility assets that will not only help fix our
operating costs, but give us the potential to own appreciating real estate
assets.  We will continue to evaluate opportunities to reduce facility
costs.





The
following table summarizes contractual obligations as of September 30, 2010 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
                                    
                                    $
                                    10,731,000
                                    
                                    
                                    $
                                    1,364,000
                                    
                                    
                                    $
                                    151,000
                                    
                                    
                                    $
                                    195,000
                                    
                                    
                                    $
                                    9,021,000Long
      Term Debt InterestObligations
      (1)
                                    
                                    
                                    9,189,000
                                    
                                    
                                    
                                    673,000
                                    
                                    
                                    
                                    1,326,000
                                    
                                    
                                    
                                    1,219,000
                                    
                                    
                                    
                                    5,971,000Capital
      Lease Obligations
                                    
                                    
                                    382,000
                                    
                                    
                                    
                                    160,000
                                    
                                    
                                    
                                    222,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Capital
      Lease InterestObligations
                                    
                                    
                                    32,000
                                    
                                    
                                    
                                    21,000
                                    
                                    
                                    
                                    11,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Operating
      Lease Obligations
                                    
                                    
                                    17,909,000
                                    
                                    
                                    
                                    2,980,000
                                    
                                    
                                    
                                    3,697,000
                                    
                                    
                                    
                                    3,111,000
                                    
                                    
                                    
                                    8,121,000Total
                                    
                                    $
                                    38,243,000
                                    
                                    
                                    $
                                    5,198,000
                                    
                                    
                                    $
                                    5,407,000
                                    
                                    
                                    $
                                    4,525,000
                                    
                                    
                                    $
                                    23,113,000




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





As described in the Notes to
Consolidated Financial Statements in this Form 10-Q, the Company began a
research and development project in Fiscal 2010 to create “proof of concept”
stores to distribute digital video discs (DVDs) to consumers.  The
Company hopes to capture a portion of the DVD rental market being vacated by the
closure of many larger distribution vendors (e.g., Blockbuster and Hollywood
Video) locations.  The Company has initially issued stock (valued at
$500,000) and cash for assets and intellectual property, and has spent $3.7
million in Fiscal 2010 and $0.7 million in Fiscal 2011 to test the
concept.  We expect to spend up to an additional $1.0 million in
Fiscal 2011 to finalize the proof-of-concept.




During the past year, the Company has
generated sufficient cash to meet operating, capital expenditure and debt
service needs and most of its other obligations.  The Company also
received in July 2010, a refund of $1.5 million in federal income taxes for the
tax year 2006.  When preparing estimates of future cash flows, we
consider historical performance, technological changes, market factors, industry
trends and other criteria.  In our opinion, the Company will continue
to be able to fund its needs for the foreseeable future.




We will
continue to consider the acquisition of businesses which compliment our current
operations and possible real estate transactions.  Consummation of any
acquisition, real estate or other expansion transaction by the Company may be
subject to the Company securing additional financing, perhaps at a cost higher
than our existing term loans.  In the current economic climate,
additional financing may not be available.  Currently, we do not have
cash availability under a bank line of credit but believe similar financing is
available.   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.


16




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


Revenues.We
perform a multitude of services for our clients, including film-to-tape
transfer, video and audio editing, standards conversions, adding special
effects, duplication, distribution, etc. A customer orders one or more of these
services with respect to an element (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, we do not treat vaulting as a
separate deliverable in those instances in which the customer does not
pay.





The Company records all revenues when
all of the following criteria are met: (i) there is persuasive evidence that an
arrangement exists; (ii) delivery has occurred or the services have been
rendered; (iii) the Company’s price to the customer is fixed or determinable;
and (iv) collectability is reasonably assured.  Additionally, in
instances where package services are performed on multiple elements or where the
proportional performance method is applied, revenue is recognized based on the
value of each stand-alone service completed.





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




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




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




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




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




·
            Significant
      negative industry or economic
trends;




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




·
            Our
      market capitalization relative to net book
  value.


17




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 statement of operations, together with an equal
reduction of the related asset. Net long-lived assets amounted to approximately
$19.7 million as of September 30, 2010.




Research and
Development.  Research and development costs include
expenditures for planned search and investigation aimed at discovery of new
knowledge to be used to develop new services or processes or significantly
enhance existing processes.  Research and development costs also
include the implementation of the new knowledge through design, testing of
service alternatives, or construction of prototypes. The cost of materials and
equipment or facilities that are acquired or constructed for research and
development activities and that have alternative future uses are capitalized as
tangible assets when acquired or constructed.  All other research and
development costs are expensed as incurred.




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.




At September 30, 2010, the
Company has no uncertain tax positions.  Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets.  The net deferred tax assets as of September 30,
2010 were $0.0 million.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Market
Risk.The Company had borrowings of $10.7 million on
September 30, 2010 under term loan and mortgage agreements.  One term
loan was subject to variable interest rates.  The weighted average
interest rate paid during the first three months of fiscal 2011 was
6.8%.  For variable rate debt outstanding at September 30, 2010, a
..25% increase in interest rates will increase annual interest expense by
approximately $1,000.  Amounts that may become outstanding under the
revolving credit facility provide for interest at the banks’ prime rate minus
..5% to plus .5% or LIBOR plus 2.0% to 3.0% and LIBOR plus 3.15% for the variable
rate term loan.  The Company’s market risk exposure with respect to
financial instruments is to changes in prime or LIBOR rates.




ITEM
4. CONTROLS AND PROCEDURES




Disclosure
Controls and Procedures





Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange
Act”), the Company’s management, with the participation of the Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company’s disclosure controls and procedures as of the end of the period covered
by this report.  Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of September 30, 2010.





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)) to determine whether any changes in internal control over financial
reporting occurred during the quarter ended September 30, 2010 that have
materially affected or which are reasonably likely to materially affect internal
control over financial reporting.  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:


18




·
            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.




19





PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





In July
2008, the Company was served with a complaint filed in the Superior court of the
State of California for the County of Los Angeles by Aryana Farshad and Aryana
F. Productions, Inc.  (“Farshad”).  The complaint alleges
that Point.360 and its janitorial cleaning company failed to exercise reasonable
care for the protection and preservation of Farshad’s film footage which was
lost.  As a result of the defendants’ negligence, Farshad claims to
have suffered damages in excess of $2 million and additional unquantified
general and special damages.  The lawsuit was settled in October 2010
for $120,000.




On
October 6, 2009, DG FastChannel, Inc. (“DGFC”) filed a claim in the United
States District Court Central District of California, alleging that the Company
violated certain provisions of agreements governing transactions related to the
August 13, 2007 sale of the Company’s advertising distribution business to
DGFC.  DGFC alleges that (i) the Company did not fulfill its
obligation to restrict a former employee from competing against DGFC subsequent
to the transaction and, therefore, DGFC does not owe the Company $412,500
related to that portion of the transaction; (ii) the Company violated the
noncompetition agreement between DGFC and the Company by distributing
advertising content after the transaction; (iii) due to the violation of the
noncompetition agreement, the post production services agreement that required
DGFC to continue to vault its customers’ physical elements at the Company’s
Media Center became null and void; and (iv) the Company must return all of
DGFC’s vaulted material to DGFC.  DGFC also sought unspecified
monetary damages.




In
September 2010, a settlement between the parties included the
following:  (1) The Company will be subject to a permanent injunction
(until August 13, 2012) from competing in the commercial spot
advertising  business (as defined), (2) the Company will deliver to
DGFC vaulted elements which will result in an annual reduction of vaulting
revenues of approximately $0.9 million, (3) the Company will not be entitled to
$412,500 (relating to the working capital reconciliation), (4) the Company will
issue 250,000 shares of common stock to DGFC and (5) the parties will enter into
full mutual releases and will dismiss their respective claims with
prejudice.  In connection with the settlement, the Company has
indemnified a related party against possible losses should DGFC exercise its
right to put the stock to the related party on a specified future date, and
there is a negative difference between the stated $500,000 value of the stock
($2.00 per share) and the market value on the date of the put.  The
put may be exercised on the six-month anniversary of the settlement agreement.
As of September 30, 2010 the Company has issued the 250,000 shares of common
stock to DGFC and accrued approximately $0.4 million of estimated legal, vault
removal and other costs associated with the settlement.





In November 2010, DGFC filed an ex parte application for
enforcement of the settlement agreement and related stipulated injunction
alleging that the Company violated the terms thereof and seeking an order
enforcing the settlement agreement, an order to assess civil contempt charges
and other remedies, and an order referring criminal allegations against the
Company to the U.S. Attorney’s Office.  The Company believes it has
substantially performed its obligations under the settlement agreement and
intends to defend its position.  Potential liability related to the
outcome of the ex parte
application cannot be determined at this time.  The Company has
accrued estimated legal fees associated with this action.





Fromtime 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 except as described above.





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.




20




·
            Prior
      breaches 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 as required by Section 404 of the
      Sarbanes-Oxley Act of 2002.





Other factors not identified above,
including the risk factors described in the “Risk Factors” section of the
Company’s June 30, 2010, Form 10-K filed with the Securities and Exchange
Commission, may also cause actual results to differ materially from those
projected by our forward-looking statements.  Most of these factors
are difficult to anticipate and are generally beyond our control.  You
should consider these areas of risk in connection with considering any
forward-looking statements that may be made in this Form 10-Q and elsewhere by
us and our business generally.  Except to the extent of any obligation
to disclose material information under the federal securities laws or the rules
of the NASDAQ Global Market, we undertake no obligation to release publicly any
revisions to any forward-looking statements, to report events or to report the
occurrence of unanticipated events.




ITEM  6.  EXHIBITS


(a)
                    
                    Exhibits10.1
                    
                    Secured
      Promissory Note dated November 1, 2010 between the Registrant and
      TroyGould PC.10.2
                    
                    Security
      Agreement dated November 1, 2010 between the Registrant and TroyGould
      PC.10.3
                    
                    Deed
      of Trust, Fixture Filing, Assignment of Rents, and Security Agreement
      dated November 1, 2010 between the Registrant and TroyGould
      PC.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:  November
      12,  2010
                BY:
                /s/  Alan R.
  SteelAlan
      R. SteelExecutive
      Vice President,Finance
      and Administration(duly
      authorized officer and principal financial
  officer)


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