SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   -----------

                                    FORM 10-K


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

                      For the year ended December 31, 2001

                                       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 0-21917
                                   -----------
                                    POINT.360
             (Exact name of registrant as specified in its charter)

      California                                          95-4272619
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

            7083 Hollywood Boulevard, Suite 200, Hollywood, CA 90028
               (Address of principal executive offices) (Zip Code)

        Registrant's telephone number, including area code (323) 957-7990

           Securities registered pursuant to Section 12(b) of the Act
                                      None

           Securities registered pursuant to Section 12(g) of the Act
                           Common Stock, no par value.
                                   -----------

        Indicate by check mark whether the  registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____

        Indicate by check mark if disclosure of  delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. ___

        The aggregate market value of the voting stock held by non-affiliates of
the  registrant was  approximately  $13,797,000 on March 14, 2002 based upon the
closing  price of such  stock on that  date.  As of March 14,  2002,  there were
8,992,806 shares of Common Stock outstanding.

                                     Total number of pages in this report: 42


<PAGE>

This Annual Report on Form 10-K consists of 49 pages,  including  exhibits.  The
exhibit index is on page 37.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrant's  definitive  proxy  statement are  incorporated by
reference in Part III of this report.  The  definitive  proxy  statement will be
filed no later than 120 days after the close of the Company's fiscal year.


<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

        Point.360  ("Point.360" or the "Company") is a leading  integrated media
management  services  company  providing film,  video and audio post production,
archival,  duplication  and  distribution  services to motion  picture  studios,
television networks,  advertising agencies, independent production companies and
global companies.  The Company provides the services  necessary to edit, master,
reformat,  archive  and  ultimately  distribute  its  clients'  audio  and video
content,  including television programming,  feature films, spot advertising and
movie trailers.

        The Company  provides  worldwide  electronic  distribution,  using fiber
optics,  satellites and the Internet.  The Company delivers  commercials,  movie
trailers,  electronic press kits,  infomercials and syndicated  programming,  by
both physical and electronic means, to thousands of broadcast outlets worldwide.

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

        Since  January 1, 1997,  the Company has  successfully  completed  eight
acquisitions of companies providing similar services.  The Company will continue
to  evaluate   acquisition   opportunities   to  enhance  its   operations   and
profitability.  As a result of these  acquisitions,  the  Company  is one of the
largest and most diversified providers of technical and distribution services in
its markets,  and therefore is able offer its customers a single source for such
services at prices that reflect the Company's scale economies.

        The  Company was  incorporated  in  California  in 1990.  The  Company's
executive offices are located at 7083 Hollywood Boulevard, Hollywood, California
90028, and its telephone number is (323) 957-7990.

MARKETS

        The  Company  derives  revenues  primarily  from  (i) the  entertainment
industry,  consisting of major and  independent  motion  picture and  television
studios,  cable television program suppliers and television program syndicators,
and (ii) the  advertising  industry,  consisting  of  advertising  agencies  and
corporate  advertisers.  On a more  limited  basis,  the Company  also  services
national  television   networks,   local  television   stations,   corporate  or
instructional   video   providers,   infomercial   advertisers  and  educational
institutions.

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

ADVERTISING  INDUSTRY.  The  advertising  industry  distributes  video and audio
commercials,  or spots,  to radio and television  broadcast  outlets  worldwide.
Advertising  content  is  developed  either  by the  originating  company  or in
conjunction  with an  advertising  agency.  The  Company  receives  orders  with
specific routing and timing instructions provided by the customer.  These orders
are then entered into the Company's computer system and scheduled for electronic
or physical  delivery.  When a video spot is  received,  the  Company's  quality
control   personnel   inspect  the  video  to  ensure  that  it  meets  customer
specifications  and then  initiate the sequence to  distribute  the video to the
designated  television  stations either  electronically,  over fiber optic lines
and/or satellite, or via the most suitable package carrier. The Company believes
that the growth in the number of video advertising outlets,  driven by expansion
in the number of broadcast,  cable,  Internet and satellite channels  worldwide,
will have a positive impact on the Company's businesses.

                                       1
<PAGE>

VALUE-ADDED SERVICES

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

FILM-TO-TAPE TRANSFER.  Substantially all film content ultimately is distributed
to  the  home  video,  broadcast,  cable  or  pay-per-view  television  markets,
requiring that film images be transferred electronically to a video format. Each
frame must be color  corrected  and  adapted  to the size and aspect  ratio of a
television  screen in order to ensure the  highest  level of  conformity  to the
original film version.  The Company  transfers  film to videotape  using Spirit,
URSA and Cintel MK-3 telecine  equipment and DaVinci(R) digital color correction
systems. In 2000, the Company added high definition television ("HDTV") services
to this product line. The remastering of studio film and television libraries to
this new  broadcast  standard  has  begun to  contribute  to the  growth  of the
Company's film transfer business, as well as affiliated services such as foreign
language mastering, duplication and distribution.

VIDEO  EDITING.  The Company  provides  digital  editing  services in Hollywood,
Burbank  and  West  Los  Angeles.  The  editing  suites  are  equipped  with (i)
state-of-the-art  digital  editing  equipment,  including the Avid(R) 9000, that
provides  precise  and  repeatable  electronic  transfer of video  and/or  audio
information  from one or more  sources  to a new  master  video  and (ii)  large
production  switchers to effect complex  transitions from source to source while
simultaneously  inserting  titles and/or digital effects over background  video.
Video is edited into completed programs such as television shows,  infomercials,
commercials,  movie trailers, electronic press kits, specials, and corporate and
educational presentations.

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

BROADCAST  ENCODING.   The  Company  provides  encoding  services  for  tracking
broadcast  airplay of spots or television  programming.  Using a process  called
VEIL encoding,  a code is placed within the video portion of an advertisement or
an electronic  press kit. Such codes can be monitored  from standard  television
broadcasts to determine  which  advertisements  or portions of electronic  press
kits are shown on or during specific  television  programs,  providing customers
direct  feedback  on  allotted  air time.  The Company  provides  VEIL  encoding
services  for a number of its motion  picture  studio  clients to enable them to
customize  their  promotional  material.  The Company also provides ICE encoding
services  which  enable it to place codes  within the audio  portion of a video,
thereby enhancing the overall quality of the encoded video.

AUDIO POST-PRODUCTION. Through its facilities in Burbank, Hollywood and West Los
Angeles,  the Company  digitally  edits and creates  sound  effects,  assists in
replacing  dialog and re-records  audio elements for  integration  with film and
video  elements.  The Company  designs  sound effects to give life to the visual
images with a library of sound effects. Dialog replacement is sometimes required
to improve quality,  replace lost dialog or eliminate  extraneous noise from the
original  recording.  Re-recording  combines  sound effects,  dialog,  music and
laughter  or  applause  to  complete  the  final  product.   In  addition,   the
re-recording  process  allows the  enhancement  of the  listening  experience by
adding specialized sound treatments, such as stereo, Dolby Digital(R),  SDDS(R),
THX(R) and Surround Sound(R).

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

FOREIGN  LANGUAGE  MASTERING.  Programming  designed for distribution in markets
other than those for which it was  originally  produced is  prepared  for export
through language translation and either subtitling or voice dubbing. The Company
provides  dubbed  language  versioning with an audio layback and conform service
that supports  various audio and  videotape  formats to create an  international
language-specific  master videotape. The Company's Burbank facility also creates
music and  effects  tracks from  programming  shot before an audience to prepare
television sitcoms for dialog recording and international distribution.

                                       2
<PAGE>

SYNDICATION.  The Company offers a broad range of technical services to domestic
and international programmers. The Company services the basic and premium cable,
broadcast  syndication  and  direct-to-home  market  segments by  providing  the
facilities  and services  necessary to assemble and distribute  programming  via
satellite  to viewers in the United  States,  Canada  and  Europe.  The  Company
provides  facilities  and  services for the  delivery of  syndicated  television
programming  in the United  States  and  Canada.  The  Company's  customer  base
consists of the major  studios and  independent  distributors  offering  network
programming,   world-wide  independent  content  owners  offering  niche  market
programming,  and pay-per-view  services  marketing movies and special events to
the  cable  industry  and  direct-to-home  viewers.  Broadcast  and  syndication
operations are conducted in Hollywood and West Los Angeles.

ARCHIVAL  SERVICES.  The Company  currently stores  approximately  three million
videotape and film elements in a protected environment. The storage and handling
of videotape and film elements require  specialized  security and  environmental
control  procedures.  The Company performs secure management archival systems in
its Burbank, Hollywood, West Los Angeles and other locations. The Company offers
on-line access to archival  information for advertising  clients,  and may offer
this service to other clients in the future.

DISTRIBUTION NETWORK

        The Company operates a full service  distribution  network providing its
customers  with reliable,  timely and high quality  distribution  services.  The
Company's  historical  customer base consists of motion  picture and  television
studios and  post-production  facilities  located  primarily  in the Los Angeles
area.  In  1997,  the  Company  acquired  Woodholly  Productions  ("Woodholly"),
Multi-Media Services, Inc. ("Multi-Media"), Video-It, Inc. ("Video-It") and Fast
Forward,  Inc. ("Fast Forward"),  providing it with a more diversified  customer
base  and  facilities  in  New  York,  Chicago,  San  Francisco  and  additional
facilities in Los Angeles.  In 1998,  the Company  acquired The Dub House,  Inc.
(the "Dub House"),  All Post, Inc. ("All Post"), and Dubs, Inc. ("Dubs"),  which
substantially  expanded its market share in Los  Angeles.  In 2000,  the Company
acquired Creative Digital, Inc. ("Creative Digital").

        Commercials,  trailers,  electronic press kits and related  distribution
instructions are typically collected at one of the Company's regional facilities
and are  processed  locally or  transmitted  to another  regional  facility  for
processing.  Orders are  routinely  received into the evening hours for delivery
the next morning.  The Company has the ability to process  customer  orders from
receipt to  transmission  in less than one hour.  Customer  orders that  require
immediate,   multiple   deliveries  in  remote   markets  are  often   delivered
electronically  to and serviced by third parties with  duplication  and delivery
services in such  markets.  The Company  provides the advantage of being able to
service  customers  from  both  of  its  primary  markets   (entertainment   and
advertising)  in all of its  facilities  to achieve the most  efficient  project
turnaround. The Company's network operates 24 hours a day.

        For electronic  distribution,  a video master is digitized and delivered
by fiber optic, Internet,  ISDN or satellite transmission to television stations
equipped to receive such  transmissions.  The Company  currently derives a small
percentage of its revenues from electronic  deliveries and anticipates that this
percentage will increase as such technologies become more widely adopted.

        The Company  intends to add new methods of  distribution as technologies
become both  standardized and  cost-effective.  The Company  currently  operates
facilities in Los Angeles (five locations),  New York,  Chicago,  Dallas and San
Francisco.  By capitalizing on electronic  technologies to link  instantaneously
all of the Company's facilities,  the Company is able to optimize delivery, thus
extending  the  deadline  for  same-  or  next-day  delivery  of  time-sensitive
material.

        As the  Company  continues  to develop  and  acquire  facilities  in new
markets,  its  network  enables  it to  maximize  the usage of its  network-wide
capacity  by  instantaneously  transmitting  video  content to  facilities  with
available capacity.  The Company's network and facilities are designed to serve,
cost-effectively,   the  time-sensitive   distribution  needs  of  its  clients.
Management  believes that the Company's  success is based on its strong customer
relationships  that  are  maintained   through  the  reliability,   quality  and
cost-effectiveness  of its services,  and its extended  deadline for  processing
customer orders.

NEW MARKETS

        The Company  believes that the  development of its network and its array
of value-added  services will provide the Company with the  opportunity to enter
or significantly increase its presence in several new or expanding markets.

                                       3
<PAGE>

INTERNATIONAL.  The Company currently  provides video  duplication  services for
suppliers to  international  markets.  Through the  Woodholly  acquisition,  the
Company  acquired and  subsequently  has leveraged  this  capability by offering
access to  international  markets  to its entire  customer  base.  Further,  the
Company  believes  that  electronic  distribution  methods will  facilitate  its
expansion into the international  distribution arena as such technologies become
standardized  and  cost-effective.  In addition,  the Company  believes that the
growth in the distribution of domestic content into  international  markets will
create  increased  demand for  value-added  services  currently  provided by the
Company such as standards conversion and audio and digital mastering.

HIGH  DEFINITION  TELEVISION  (HDTV).  The Company is focused on capitalizing on
opportunities  created by  emerging  industry  trends such as the  emergence  of
digital  television and its more advanced variant,  high-definition  television.
HDTV has quickly become the mastering  standard for domestic content  providers.
The  Company  believes  that  the  aggressive  timetable  associated  with  such
conversion,  which has resulted both from mandates by the Federal Communications
Commission (the "FCC") for digital television and high-definition  television as
well as competitive forces in the marketplace,  is likely to accelerate the rate
of  increase  in  the  demand  for  these   services.   The  Company   opened  a
state-of-the-art HDTV center at its Burbank, California, facility in 2000.

DVD AUTHORING.  Digital formats, such as DVD, have the potential to overtake VHS
videocassettes in the home video market.  Industry research shows that DVD sales
will surpass VHS  videocassettes  by 2003.  The Company  believes that there are
significant opportunities in this market. With the increasing rate of conversion
of existing analog  libraries,  as well as new content being mastered to digital
formats,  we believe  that the  Company  has  positioned  itself well to provide
value-added  services to new and existing clients.  The Company has made capital
investments  to expand and  upgrade  its  current  DVD and  digital  compression
operations in anticipation  of the increasing  demand for DVD and video encoding
services.

SALES AND MARKETING

        The  Company  markets its  services  through a  combination  of industry
referrals, formal advertising, trade show participation,  special client events,
and its Internet  website.  While the Company relies primarily on its reputation
and business contacts within the industry for the marketing of its services, the
Company also maintains a direct sales force to communicate the  capabilities and
competitive advantages of the Company's services to potential new customers.  In
addition, the Company's sales force solicits corporate advertisers who may be in
a position to influence  agencies in directing  deliveries  through the Company.
The Company currently has sales personnel located in Los Angeles, San Francisco,
Chicago and New York.  The  Company's  marketing  programs are  directed  toward
communicating its unique capabilities and establishing itself as the predominant
value-added   distribution  network  for  the  motion  picture  and  advertising
industries.

        In  addition  to  its  traditional   sales  efforts  directed  at  those
individuals  responsible for placing orders with the Company's  facilities,  the
Company also  strives to negotiate  "preferred  vendor"  relationships  with its
major customers.  Through this process, the Company negotiates  discounted rates
with  large  volume  clients in return for being  promoted  within the  client's
organization as an established and accepted vendor. This selection process tends
to favor  larger  service  providers  such as the  Company  that (i) offer lower
prices  through scale  economies;  (ii) have the capacity to handle large orders
without  outsourcing  to  other  vendors;   and  (iii)  can  offer  a  strategic
partnership on technological  and other  industry-specific  issues.  The Company
negotiates such agreements  periodically  with major  entertainment  studios and
national broadcast networks.

CUSTOMERS

        Since  its  inception  in 1990,  the  Company  has added  customers  and
increased  its sales through  acquisitions  and by delivering a favorable mix of
reliability,  timeliness,  quality and price.  The  integration of the Company's
regional  facilities  has given its customers a time advantage in the ability to
deliver broadcast  quality  material.  The Company markets its services to major
and independent motion picture and television production companies,  advertising
agencies,  television  program suppliers and, on a more limited basis,  national
television   networks,   infomercial   providers,   local  television  stations,
television program syndicators,  corporations and educational institutions.  The
Company's  motion picture clients include Disney,  Sony Pictures  Entertainment,
Twentieth Century Fox, Universal Studios, Warner Bros.,  Metro-Goldwyn-Mayer and
Paramount   Pictures.   The  Company's   advertising  agency  customers  include
TBWA/Chiat Day, Young & Rubicam and Saatchi & Saatchi.

        The  Company  solicits  the motion  picture and  television  industries,
advertisers and their agencies to generate revenues.  In the year ended December
31, 2001, the seven major motion picture studios accounted for approximately 34%
of the Company's revenues.  No single customer accounted for greater than 10% of
the Company's revenues for the year ended December 31, 2001.

                                       4
<PAGE>

        The Company  generally does not have exclusive  service  agreements with
its clients. Because clients generally do not make arrangements with the Company
until  shortly  before its  facilities  and services are  required,  the Company
usually does not have any significant  backlog of service orders.  The Company's
services are generally offered on an hourly or per unit basis based on volume.

CUSTOMER SERVICE

        The Company  believes it has built its strong  reputation  in the market
with a commitment to customer service.  The Company receives customer orders via
courier services,  telephone,  telecopier and the Internet. The customer service
staff  develops  strong  relationships  with  clients  within  the  studios  and
advertising  agencies  and is  trained to  emphasize  the  Company's  ability to
confirm delivery,  meet difficult  delivery time frames and provide reliable and
cost-effective  service.  Several studios are customers because of the Company's
ability to meet often changing or rush delivery schedules.

        The Company has a customer service staff of approximately 95 people,  at
least one member of which is  available  24 hours a day.  This staff serves as a
single  point  of  problem  resolution  and  supports  not  only  the  Company's
customers,  but also the  television  stations  and cable  systems  to which the
Company delivers.

COMPETITION

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

        The Company  believes  that it maintains a  competitive  position in its
market by virtue of the quality and scope of the services it  provides,  and its
ability to provide timely and accurate  delivery of these services.  The Company
believes  that prices for its  services  are  competitive  within its  industry,
although some  competitors  may offer  certain of their  services at lower rates
than the Company.

        The principal competitive factors affecting this market are reliability,
timeliness,   quality  and  price.  The  Company  competes  with  a  variety  of
duplication and distribution firms, certain post-production  companies and, to a
lesser extent,  the in-house  operations of major motion picture  studios and ad
agencies. Some of these competitors have long-standing ties to clients that will
be  difficult  for the Company to change.  Several  companies  have  systems for
delivering video content electronically.  Moreover, some of these firms, such as
Vyvx (a subsidiary of the Williams Companies), Digital Generation Systems, Inc.,
Liberty  Live  Wire  and  other  post-production   companies  may  have  greater
financial,  operational and marketing resources,  and may have achieved a higher
level of brand recognition than the Company. As a result,  there is no assurance
that the Company will be able to compete  effectively  against these competitors
merely on the basis of reliability, timeliness, quality, price or otherwise.

EMPLOYEES

        The Company had 479  full-time  employees as of December  31, 2001.  The
Company's   employees  are  not   represented  by  any   collective   bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good.

ITEM 2. PROPERTIES

        The Company  currently  leases all 16 of its facilities.  Eight of these
facilities  have  production  capabilities  and/or  sales  activities,  five are
storage vaults,  one is used as the Company's  corporate offices and two smaller
facilities have been vacated.  The lease terms expire at various dates from June
2002  to  October  2008.  The  following  table  sets  forth  the  location  and
approximate square footage of the Company's properties as of December 31, 2001:

                                       5
<PAGE>

                                                                 SQUARE
LOCATION                                                        FOOTAGE

Hollywood, CA................................................     9,500
Hollywood, CA................................................    45,000
Hollywood, CA................................................     4,000
Hollywood, CA................................................     7,200
Hollywood, CA................................................    13,000
Hollywood, CA................................................    27,000
Hollywood, CA................................................    11,000
Burbank, CA..................................................    32,000
Burbank, CA..................................................    10,000
North Hollywood, CA..........................................    27,000
Los Angeles, CA..............................................     4,000
Santa Monica, CA.............................................    13,400
San Francisco, CA............................................    10,200
Chicago, IL..................................................    12,200
New York, NY.................................................     9,000
Dallas, TX...................................................    11,300

ITEM 3. LEGAL PROCEEDINGS

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

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

        No matters  were  submitted  to the  Company's  stockholders  for a vote
during the fourth quarter of the fiscal year covered by this report.



                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

        The  Company's  Common  Stock is traded on the National  Association  of
Securities  Dealers,  Inc. Automated Quotation System ("NASDAQ") National Market
("NNM") under the symbol PTSX. The following  table sets forth,  for the periods
indicated, the high and low closing bid price per share for the Common Stock.

                                                 COMMON STOCK
                                                 ------------
                                                LOW        HIGH
                                                ---        ----

YEAR ENDED DECEMBER 31, 2001
   First Quarter .........................     $1.25      $4.56
   Second Quarter.........................       .66       3.75
   Third Quarter..........................       .64       3.35
   Fourth Quarter.........................       .46       1.39
YEAR ENDED DECEMBER 31, 2000
   First Quarter .........................    $12.63     $14.50
   Second Quarter.........................      6.19      14.08
   Third Quarter..........................      3.13       7.00
   Fourth Quarter.........................      2.50       5.69

On March 14, 2002, the closing sale price of the Common Stock as reported on the
NNM was $1.95 per share.  As of March 14,  2002,  there  were  1,017  holders of
record of the Common Stock.

DIVIDENDS

        The Company did not pay  dividends  on its Common Stock during the years
ended December 31, 2000 or 2001. The Company's  ability to pay dividends depends
upon  limitations  under applicable law and covenants under its bank agreements.
The Company  currently  does not intend to pay any dividends on its Common Stock
in  the  foreseeable  future.  See  "Management's  Discussion  and  Analysis  of
Financial   Condition  and  Results  of  Operations  --  Liquidity  and  Capital
Resources."

                                       6
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The following data,  insofar as they relate to each of the years 1997 to
2001, have been derived from the Company's  annual  financial  statements.  This
information  should be read in  conjunction  with the Financial  Statements  and
Notes thereto and "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations"  included  elsewhere herein. All amounts are shown in
thousands, except per share data.

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                                  -----------------------
                                                                     1997       1998       1999        2000        2001
                                                                     ----       ----       ----        ----        ----
<S>                                                              <C>         <C>         <C>         <C>         <C>
Statement of Income Data
Revenues........................................................ $  40,772   $  59,697   $  78,248   $  74,841   $  69,628
Cost of goods sold..............................................    25,381      36,902      47,685      45,894      46,864
                                                                 ---------   ---------   ---------   ---------   ---------
Gross profit....................................................    15,391      22,795      30,563      28,947      22,764
Selling, general and administrative expense.....................     9,253      13,201      18,473      21,994      20,872
                                                                 ---------   ---------   ---------   ---------   ---------
Operating income ...............................................     6,138       9,594      12,090       6,953       1,892
Interest expense, net...........................................        68         976       2,147       2,889       3,070
Derivative fair value change (5)                                         -           -           -           -         508
Provision for (benefit from) income tax ........................     2,379       3,577       4,340       1,814        (345)
                                                                 ---------   ---------   ---------   ---------   ---------
Income (loss) before extraordinary item, adoption of
  SAB 101 (2000) and FAS 133 (2001)(2)(5)....................... $   3,691   $   5,041   $   5,603   $   2,250   $  (1,341)
Extraordinary item (net of tax benefit of $168) (1).............         -           -           -        (232)
Cumulative effect of adopting SAB 101 (2000)
  and FAS 133 (2001)(2)(5)......................................         -           -           -        (322)       (247)
                                                                 ---------   ---------   ---------   ---------   ---------
Net income (loss)............................................... $   3,691   $   5,041   $   5,603   $   1,696   $  (1,588)
                                                                 =========   =========   =========   =========   =========
Earnings (loss) per share:
Basic:
Income (loss) per share before extraordinary item,
  adoption of SAB 101(2000) and FAS 133 (2001)(2)(5)............ $    0.40   $    0.52   $    0.60   $    0.24   $   (0.15)
Extraordinary item (1)..........................................         -           -           -       (0.03)          -
Cumulative effect of adopting SAB 101 (2000)
  and FAS 133 (2001)(2)(5)......................................         -           -           -       (0.03)      (0.03)
                                                                 ---------   ---------   ---------   ---------   ---------
Net income (loss)............................................... $    0.40   $    0.52   $    0.60   $    0.18   $   (0.18)
                                                                 =========   =========   =========   =========   =========
Diluted:
Income (loss) per share before extraordinary item
  and adoption of SAB 101....................................... $    0.40   $    0.51   $    0.58   $    0.24   $   (0.15)
Extraordinary item (1)..........................................         -           -           -       (0.03)          -
Cumulative effect of adopting SAB 101 (2000)
  and FAS 133 (2001)(2)(5)......................................         -           -           -       (0.03)      (0.03)
                                                                 ---------   ---------   ---------   ---------   ---------
Net income (loss)............................................... $    0.40   $    0.51   $    0.58   $    0.18   $   (0.18)
                                                                 =========   =========   =========   =========   =========
Weighted average common shares outstanding
Basic...........................................................     9,123       9,737       9,322       9,216     9,060
Diluted.........................................................     9,208       9,816       9,599       9,491     9,060
Pro forma net income and earnings per share data
  for the periods shown as if SAB 101 had been
  adopted at the beginning of each applicable year (4)
    Previously reported net income..............................             $   5,041   $   5,603
    Adjustment..................................................                  (253)        (81)
                                                                             ---------   ---------
    Pro forma net income........................................             $   4,788   $   5,522
                                                                             =========   =========
    Pro forma earnings per share:
    Basic -
    Previously reported.........................................             $    0.52   $    0.60
    Adjustment..................................................                 (0.03)          -
                                                                             ---------   ---------
    Pro forma...................................................             $    0.49   $    0.60
                                                                             =========   =========
    Diluted -
    Previously reported.........................................             $    0.51   $    0.58
    Adjustment..................................................                 (0.03)      (0.01)
                                                                             ---------   ---------
    Pro forma...................................................             $    0.48   $    0.57
                                                                             =========   =========
</TABLE>
                                       7
<PAGE>
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                       -----------------------
                                                                         1997        1998        1999        2000        2001
                                                                         ----        ----        ----        ----        ----
<S>                                                                <C>          <C>         <C>         <C>         <C>
Other Data
EBITDA (3).......................................................  $    9,835   $  14,320   $  16,878   $  12,171   $   8,383
Cash flows provided by operating activities......................       5,809       5,821      12,023      10,963       9,455
Cash flows used in investing activities..........................     (13,397)    (33,406)    (11,668)     (9,488)     (4,069)
Cash flows provided by (used in) financing activities............       9,945      26,712      (1,553)     (1,556)     (2,397)
Capital expenditures.............................................       1,178       6,199       6,181       9,717       3,082

Selected Balance Sheet Data
Cash and cash equivalents........................................  $    2,921   $   2,048   $   3,030   $     769   $   3,758
Working capital .................................................       5,354       8,863       1,195      12,701     (16,006)(6)
Property and equipment, net......................................       7,325      16,723      19,564      25,236      23,232
Total assets.....................................................      32,617      63,940      72,931      77,375      70,847
Borrowings under revolving credit agreements.....................       1,086         233       5,888           -           -
Long-term debt, net of current portion...........................       1,279      22,448      16,501      31,054          78
Shareholders' equity............................................       21,242      28,351      30,941      32,919      31,072
-----------
</TABLE>

   (1)  Amount represents the write off of deferred  financing costs, net of tax
        benefit,  related to a bank credit  agreement  which was  terminated  in
        Fiscal 2000.

   (2)  Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
        No. 101 ("SAB 101"),  Revenue Recognition in Financial  Statements.  The
        amount represents the cumulative  effect, net of tax, on January 1, 2000
        retained  earnings as if SAB 101 had been adopted  prior to Fiscal 2000.
        See Note 2 of Notes to Consolidated  Financial  Statements  elsewhere in
        this Form 10-K.

   (3)  EBITDA  is  defined   herein  as  earnings   before   interest,   taxes,
        depreciation and amortization.  EBITDA does not represent cash generated
        from  operating   activities  in  accordance  with  Generally   Accepted
        Accounting   Principles  ("GAAP"),   is  not  to  be  considered  as  an
        alternative to net income or any other GAAP measurements as a measure of
        operating  performance  and  is  not  necessarily   indicative  of  cash
        available  to fund all cash  needs.  While not all  companies  calculate
        EBITDA in the same fashion and therefore  EBITDA as presented may not be
        comparable  to other  similarly  titled  measures  of  other  companies,
        management  believes  that  EBITDA  is a  useful  measure  of cash  flow
        available to the Company to pay interest,  repay debt, make acquisitions
        or invest in new technologies. The Company is currently committed to use
        a portion of its cash flows to service  existing  debt, if  outstanding,
        and,  furthermore,  anticipates  making certain capital  expenditures as
        part of its business plan.

   (4)  Net income would not have been affected in 1997 had SAB 101 been adopted
        at the beginning of that period.

   (5)  The Company entered into an interest rate swap  transaction  with a bank
        on November 28, 2000. The swap  transaction was for a notional amount of
        $15,000,000  for three  years and  fixes the  interest  rate paid by the
        Company on such amount at 6.50%,  plus the applicable LIBOR margin,  not
        to exceed 2.75%.  Statement of Financial  Accounting  Standards No. 133,
        Accounting  for  Derivative  Instruments  and Hedging  Activities  ("FAS
        133"),  requires that the hedge  contract be  "marked-to-market"  at the
        time of adoption of FAS 133 by recording  (i) a  cumulative-effect  type
        adjustment  at  January  1,  2001  equal to the fair  value of the hedge
        contract  on that  date,  (ii)  amortizing  the  cumulative-effect  type
        adjustment over the life of the derivative contract,  and (iii) a charge
        or  credit  to  income  in the  amount  of the  difference  between  the
        theoretical value of the hedge contract at the beginning and end of such
        year.   By  the  end  of  the   hedge   contract   term,   the   initial
        cumulative-effect  type adjustment and any amounts  recognized as income
        or  expense  will  reverse  to zero as the  contract  will  then have no
        further theoretical value, provided that the contract is in place to the
        end of the term.  Other than the economic  impact of fixing the interest
        rate,  the amount of income and expense  required by  application of FAS
        133 does not impact the Company's  cash flow. The effect of adopting FAS
        133 was to record a cumulative effect type adjustment of $247,000 net of
        $62,000 tax benefit.

   (6)  As of December 31, 2001, the Company had outstanding $28,999,000 under a
        credit  facility with a group of banks.  The entire amount is classified
        as a current liability due to existing covenant breaches.  Excluding the
        borrowed amount, working capital would have been $12,993,000.


                                       8
<PAGE>

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

        Except  for  the  historical   information  contained  herein,   certain
statements in this annual report are "forward-looking  statements" as defined in
the Private  Securities  Litigation  Reform Act of 1995,  which involve  certain
risks and  uncertainties,  which could cause actual results to differ materially
from those discussed herein, including but not limited to competition,  customer
and industry  concentration,  depending  on  technological  developments,  risks
related to  expansion,  dependence  on key  personnel,  fluctuating  results and
seasonality  and control by  management.  See the  relevant  discussions  in the
Company's documents filed with the Securities and Exchange Commission, including
the  Company's  registration  statement  on Form S-1 as  declared  effective  on
February 14, 1997,  and  Cautionary  Statements and Risk Factors in this Item 7,
for a further  discussion of these and other risks and uncertainties  applicable
to the Company's business.

OVERVIEW

        The   Company   generates   revenues   principally   from   duplication,
distribution and ancillary services.  Duplication  services are comprised of the
physical  duplication  of  video  materials  from a source  video  or  audiotape
"master" to a target tape "clone." Distribution services include the physical or
electronic  distribution of video and audio  materials to a  customer-designated
location utilizing one or more of the Company's  delivery methods.  Distribution
services typically consist of deliveries of national television spot commercials
and electronic press kits and associated trafficking  instructions to designated
stations and supplemental  deliveries to non-broadcast  destinations.  Ancillary
services include video and audio editing,  element storage,  closed  captioning,
transcription  services,  standards  conversion,  video  encoding  for air  play
verification, audio post-production and layback and foreign language mastering.

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. 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 or conditions.  We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.

        Critical  accounting  policies  are  those  that  are  important  to the
portrayal of the Company's  financial  condition and results,  and which require
management to make difficult,  subjective  and/or complex  judgements.  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:

        ALLOWANCE  FOR DOUBTFUL  ACCOUNTS.  We are  required to make  judgments,
based on historical experience and future expectations, as to the collectibility
of accounts  receivable.  The allowances for doubtful accounts and sales returns
represent  allowances for customer trade accounts  receivable that are estimated
to be partially or entirely  uncollectible.  These allowances are used to reduce
gross trade receivables to their net realizable value. The Company records these
allowances  based on estimates  related to the  following  factors:  i) customer
specific  allowances;  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 and intangibles 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 a  comparison  of the
carrying amount of an asset to future net cash flows expected to be generated by
that  asset.  The cash  flow  projections  are based on  historical  experience,
managements view of growth rates within the industry and the anticipated  future
economic environment.

                                       9
<PAGE>

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

        o  significant  underperformance  relative  to  expected  historical  or
           projected future operating results;
        o  significant  changes in the manner of our use of the acquired  assets
           or the strategy for our overall business;
        o  significant negative industry or economic trends;
        o  significant decline in our stock price for a sustained period; and
        o  our market capitalization relative to net book value.

        When we determine  that the carrying  value of  intangibles,  long-lived
assets and related goodwill and enterprise level goodwill may not be recoverable
based upon the existence of one or more of the above  indicators of  impairment,
we measure any impairment based on 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.  Net  intangible  assets,  long-lived
assets, and goodwill amounted to $49.6 million as of December 31, 2001.

        In 2002,  Statement of Financial  Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we will
cease to amortize  approximately $26.3 million of goodwill beginning in 2002. We
had recorded  approximately $2.0 million of amortization on these amounts during
the year ended  December 31, 2001. In lieu of  amortization,  we are required to
perform  an  initial  impairment  review of our  goodwill  in 2002 and an annual
impairment  review  thereafter.  We expect to complete our initial review during
the first quarter of 2002.

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

        Significant management judgment is required in determining our provision
for income  taxes,  our deferred tax assets and  liabilities  and any  valuation
allowance  recorded  against our net deferred  tax assets.  The net deferred tax
liability as of December 31, 2001 was $1.8 million. The Company did not record a
valuation allowance against its deferred tax assets as of December 31, 2001.

RESULTS OF OPERATIONS

        The following table sets forth the amount and percentage relationship to
revenues of certain items included within the Company's  Consolidated  Statement
of Income for the years ended  December 31, 1999,  2000 and 2001. The commentary
below is based on these financial statements.
<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31
                                                                                ----------------------
                                                                                (DOLLARS IN THOUSANDS)

                                                                1999                    2000                    2001
                                                                ----                    ----                    ----
                                                                     PERCENT                 PERCENT                PERCENT
                                                                       OF                      OF                     OF
                                                           AMOUNT   REVENUES       AMOUNT   REVENUES      AMOUNT   REVENUES
                                                           ------   --------       ------   --------      ------   --------

<S>                                                     <C>           <C>       <C>           <C>       <C>          <C>
Revenues.............................................   $  78,248     100.0%    $  74,841     100.0%    $ 69,628     100.0%
Costs of goods sold..................................      47,685      60.9        45,894      61.3       46,864      67.3
                                                        ---------     ------    ---------     ------    --------     ------
Gross profit.........................................      30,563      39.1        28,947      38.7       22,764      32.7
Selling, general and administrative expense..........      18,473      23.6        21,994      29.4       20,872      30.0
                                                        ---------     ------    ---------     ------    --------     ------
   Operating income..................................      12,090      15.5         6,953       9.3        1,892       2.7
Interest expense, net................................       2,147       2.7         2,889       3.9        3,070       4.4
Derivative fair value change.........................           -         -             -         -          508       0.7
Provision for (benefit from) income taxes............       4,340       5.5         1,814       2.4         (345)     (0.5)
                                                        ---------     ------    ---------     ------    --------     ------
   Income (loss) before extraordinary item and
     adoptionof SAB 101(2000) and FAS 133 (2001).....       5,603       7.2         2,250       3.0       (1,341)     (1.9)
Extraordinary item (net of tax benefit of $168)......           -         -          (232)     (0.3)           -         -
Cumulative effect of adopting SAB 101 (2000)
   and FAS 133 (2001)................................           -         -          (322)     (0.4)        (247)      (.4)
                                                        ---------     ------    ---------     ------    --------     ------
Net income (loss)....................................   $   5,603       7.2%    $   1,696       2.3%    $ (1,588)     (2.3)%
                                                        =========     ======    =========     ======    ========     ======
</TABLE>
                                       10
<PAGE>

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

        REVENUES.  Revenues decreased by $5.2 million or 7% to $69.6 million for
the year ended  December 31, 2001,  compared to $74.8 million for the year ended
December 31, 2000 due to a decline in studio post production  sales as some work
was brought in-house.  Studios have traditionally  maintained  in-house capacity
and several customers utilized that capacity in 2001 to a greater extent thereby
affecting our sales.

        GROSS  PROFIT.  Gross  profit  decreased  $6.2 million or 21.4% to $22.8
million for the year ended December 31, 2001,  compared to $28.9 million for the
year ended December 31, 2000. As a percent of revenues,  gross profit  decreased
from 38.7% to 32.7%.  The decrease in gross  profit as a percentage  of revenues
was due to increased depreciation associated with investments in high definition
equipment  ($0.9 million) and higher  delivery costs for  distribution  services
($0.7 million),  all of which amounted to approximately 2% of reported revenues.
The remaining decline in gross margin is due to the Company's inability to cover
other fixed costs with lower sales.

        SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSE.  Selling,  general  and
administrative  expense decreased $1.1 million, or 5.1% to $20.9 million for the
year ended  December  31,  2001,  compared  to $22.0  million for the year ended
December  31,  2000.  As  a  percentage  of  revenues,   selling,   general  and
administrative  expense  increased to 30% for the year ended  December 31, 2001,
compared to 29.4% for the year ended  December 31, 2000.  The fiscal 2000 period
included  $0.8  million of expenses  associated  with a terminated  merger.  The
fiscal  2001  period  included  $0.4  million  of bank  agreement  restructuring
charges,  $0.3 million of employee  benefit plan one-time change  expense,  $0.3
million of severance accruals, and $0.3 million of consulting expense associated
with the Company's rebranding efforts. Excluding these items and amortization of
goodwill of $2.0 million in 2001 and $1.6 million in 2000, selling,  general and
administrative  expenses were $17.5 million, or 25% of sales in 2001 compared to
$19.6 million,  or 26% of sales in 2000.  The decrease was due  principally to a
$1.7 million decrease in the provision for doubtful accounts.

        Beginning  in 2002,  the  amortization  of  goodwill  will  cease as the
Company adopts Statement of Financial  Accounting  Standards No. 142,  "Goodwill
and Other  Tangible  Assets"  ("FAS 142").  FAS 142 changes the  accounting  for
goodwill  and other  intangible  assets  with  indefinite  useful  lives from an
amortization method to an impairment-only approach (the procedures going forward
are  described  in  Footnote  2 of Notes to  Consolidated  Financial  Statements
elsewhere in this Form 10-K).  In  connection  with the adoption of FAS 142, the
Company  will  be  required  to  perform  a  transitional   goodwill  impairment
assessment  in the first  half of 2002,  which  may  result in a write off which
would be treated as a change in accounting  principle.  As of December 31, 2001,
goodwill,  net of accumulated  amortization,  was $26 million.  To the extent an
impairment is indicated in the  application  of FAS 142,  fiscal 2002 results of
operations  will be  adversely  affected,  which  effect  may be  material.  Any
impairment will not affect cash flow.

        OPERATING INCOME. Operating income decreased $5.1 million or 73% to $1.9
million for 2001, compared to $7.0 million for 2000.

        INTEREST EXPENSE.  Interest expense increased $0.2 million,  or 6.3%, to
$3.1  million for 2001,  compared  to $2.9  million for 2000 due to a 2% default
rate of interest  premium  charged by the  Company's  banks,  commencing in July
2001.

        ADOPTION  OF FAS 133 AND  DERIVATIVE  FAIR VALUE  CHANGE.  On January 1,
2001, the Company adopted FAS 133 by recording a cumulative effect adjustment of
$247,000  after tax benefit.  During 2001,  the Company  recorded the difference
between  the  derivative  fair  value of the  Company's  hedge  contract  at the
beginning and end of the period, offset by amortization of the cumulative-effect
adjustment during the year, of $0.5 million ($0.4 million net of tax benefit).

        INCOME TAXES. The Company's  effective tax rate was 20% for 2001 and 46%
for 2000. The lower tax rate is due to the effect of permanent  differences on a
lower pre-tax income base.

        NET INCOME (LOSS). The net loss for 2001 was $1.6 million, a decrease of
$3.3 million compared to a profit of $1.7 million for 2000.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

        REVENUES.  Revenues  decreased by $3.4 million or 4.4% to $74.8  million
for the year ended  December  31, 2000  compared  to $78.2  million for the year
ended  December 31, 1999.  This decrease in revenue was due to a decrease in the
use of the  Company's  services  in 2000 by  certain  customers  resulting  from
service  failures  that  occurred  during  the  integration  of its two  largest
facilities  in 1999,  and the  loss of  certain  key  sales  personnel  in 2000.
Revenues were also  negatively  impacted by an actors' strike in the advertising
industry.

                                       11
<PAGE>

        GROSS  PROFIT.  Gross  profit  decreased  $1.7  million or 5.3% to $28.9
million for the year ended  December 31, 2000  compared to $30.6 million for the
year ended  December  31,  1999.  As a  percentage  of  revenues,  gross  profit
decreased  from 39.1% to 38.7%.  The decrease in gross profit as a percentage of
revenues was due to increased  depreciation  associated with investments in high
definition equipment.

        SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSE.  Selling,  general  and
administrative  expense increased $3.5 million or 19.1% to $22.0 million for the
year ended  December  31,  2000  compared  to $18.5  million  for the year ended
December  31,  1999.  As  a  percentage  of  revenues,   selling,   general  and
administrative  expense  increased to 29.4% for the year ended December 31, 2000
compared to 23.6% for the year ended December 31, 1999. This increase was due to
an increase in the provision for doubtful accounts of $1.4 million, $0.5 million
of severance costs,  increased wages related to new management  appointments and
increased depreciation related to investments in computer systems. Additionally,
in 2000, the Company recognized $0.8 million in expenses related to the proposed
merger with an affiliate of Bain  Capital,  which was  terminated in April 2000,
compared to $0.4  million in 1999.  The increase in the  provision  for doubtful
accounts  resulted from numerous  delinquent  accounts  which,  in  management's
judgment,  were deemed to be no longer  collectible in the fourth quarter due to
the age of the account,  financial condition of the customer or the inability to
resolve disputes.

        OPERATING  INCOME.  Operating  income decreased $5.1 million or 42.5% to
$7.0 million for the year ended  December 31, 2000 compared to $12.1 million for
the year ended December 31, 1999. As a percentage of revenue,  operating  income
decreased from 15.5% to 9.3%.

        INTEREST  EXPENSE.  Interest  expense,  net,  increased  34.6% from $2.1
million in 1999 to $2.9  million in 2000.  This  increase  was due to  increased
borrowings under the Company's debt agreements.

        INCOME TAXES. The Company's effective income tax rate was 45.5% for 2000
and 43.7% for 1999 due to the effect of permanent differences on a lower pre-tax
income base.

        EXTRAORDINARY  ITEM.  During 2000, the Company wrote off $0.4 million of
deferred   financing  costs  related  to  prior  credit   facilities  that  were
terminated. This item was treated as an extraordinary item in Fiscal 2000 and is
reported net of income taxes.

        CUMULATIVE  EFFECT OF ADOPTING SAB 101.  During Fiscal 2000, the Company
adopted SAB 101. The effect of applying this change in accounting principle is a
cumulative charge, after tax, of $322,000, or $0.03 per share.  Previously,  the
Company had recognized  revenues from certain post production  processes as work
was performed. Under SAB 101, the Company will now recognize these revenues when
the entire project is completed.

        NET INCOME.  Net income for the year ended  December 31, 2000  decreased
$3.9  million or 69.7% to $1.7  million  compared  to $5.6  million for the year
ended December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

        On December 31, 2001, the Company's cash and cash equivalents aggregated
$3.8 million.  The Company's operating  activities provided cash of $9.5 million
for the year ended December 31, 2001.

        The Company's investing activities used cash of $4.1 million in the year
ended  December 31, 2001. The Company spent  approximately  $3.1 million for the
addition and replacement of capital equipment and management information systems
which we believe is a  reasonable  capital  expenditure  level given the current
revenue  volume.  In the prior year,  the Company's  capital  expenditures  were
greater than a normal  recurring  amount due to the investment of  approximately
$6.0 million in high definition television equipment.  The Company's business is
equipment intensive,  requiring periodic  expenditures of cash or the incurrence
of  additional  debt to acquire  additional  fixed  assets in order to  increase
capacity or replace  existing  equipment.  The Company also made $1.0 million in
acquisition earn-out payments in the year ended December 31, 2001.

        In September  2000,  the Company signed a $45 million  revolving  credit
facility  agented by Union Bank of California.  Due to lower sales levels in the
second and third quarters of Fiscal 2001, the borrowing base (eligible  accounts
receivable,  inventory and machinery and equipment)  securing the Company's bank
line of credit was less than the amount  borrowed under the line.  Consequently,
the Company was in breach of certain covenants. On June 11 and on July 20, 2001,
the Company entered into amendment and forbearance agreements with the banks and
agreed to repay the overdraft amount in weekly  increments.  In August 2001, the
Company failed to meet the repayment schedule and again entered discussions with

                                       12
<PAGE>

the banks. In December 2001, the banks terminated their formal commitment. As of
December 31, 2001,  there was $29 million  outstanding  under the facility which
was classified as a current  liability.  The Company is currently  negotiating a
restructured  credit  agreement with the banks. If the Company is not successful
in completing a final contract with the banks, the Company's  liquidity would be
materially and adversely affected.

        The Company,  from time to time, considers the acquisition of businesses
complementary to its current operations. Consummation of any such acquisition or
other  expansion of the business  conducted by the Company may be subject to the
Company securing additional financing.

RECENT ACCOUNTING PRONOUNCEMENTS

        In December 1999, the U.S.  Securities and Exchange  Commission  ("SEC")
issued Staff  Accounting  Bulletin No. 101 ("SAB 101"),  Revenue  Recognition in
Financial  Statements.  SAB 101 summarizes the SEC's views in applying generally
accepted  accounting  principles  to  selected  revenue  recognition  issues  in
financial statements. In June 2000, the SEC issued SAB 101B, an amendment to SAB
101,  which delays the  implementation  of SAB 101. The Company  adopted SAB 101
effective January 1, 2000.

        Effective  January 1, 2001, the Company  adopted  Statement of Financial
Accounting Standards No. 133, Accounting for Derivative  Instruments and Hedging
Activities ("FAS 133"). The standard,  as amended,  requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in other income.

        In June 2001, the Financial  Accounting  Standards Board ("FASB") issued
FAS Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible
Assets," respectively.  FAS No. 141 replaces Accounting Principles Board ("APB")
Opinion No. 16. It also provides guidance on purchase  accounting related to the
recognition of intangible assets and accounting for negative  goodwill.  FAS No.
142  changes  the  accounting  for  goodwill  and other  intangible  assets with
indefinite  useful  lives  ("goodwill")  from  an  amortization   method  to  an
impairment-only  approach.  Under FAS No. 142,  goodwill will be tested annually
and whenever  events or  circumstances  occur  indicating that goodwill might be
impaired.  FAS  No.  141  and  FAS  No.  142  are  effective  for  all  business
combinations  completed  after June 30,  2001.  Upon  adoption  of FAS No.  142,
amortization of goodwill recorded for business combinations consummated prior to
July 1, 2001 will cease,  and intangible  assets  acquired prior to July 1, 2001
that do not  meet  the  criteria  for  recognition  under  FAS No.  141  will be
reclassified to goodwill.  The Company will be required to implement FAS No. 142
in the first quarter of fiscal 2002. In connection  with the adoption of FAS No.
142, the Company will be required to perform a transitional  goodwill impairment
assessment.  The Company is in the process of evaluating  the impact of adoption
of FAS 141 and 142.

        In August  2001,  the FASB  issued FAS No.  143,  "Accounting  for Asset
Retirement  Obligations,"  which requires entities to record the fair value of a
liability  for an  asset  retirement  obligation  in the  period  in  which  the
obligation  is incurred.  When the liability is initially  recorded,  the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset.  FAS No. 143 is effective for fiscal years beginning after June 15, 2002.
The Company does not have asset retirement obligations and, therefore,  believes
there will be no impact upon adoption of FAS No. 143.

        In October  2001,  the FASB  issued  FAS No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets,"  which is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede FAS No. 121, "Account for the Impairment
of Long-Lived  Assets and for Long-Lived Assets to be Disposed of," and portions
of APB  Opinion  No. 30,  "Reporting  the  Results of  Operations."  FAS No. 144
provides a single  accounting model for long-lived  assets to be disposed of and
significantly  changes  the  criteria  that would have to be met to  classify an
asset  as  held-for-sale.   Classification  as  held-for-sale  is  an  important
distinction since such assets are not depreciated and are stated at the lower of
fair value and  carrying  amount.  FAS No.  144 also  requires  expected  future
operating losses from  discontinued  operations to be displayed in the period(s)
in which the losses are  incurred,  rather  than as of the  measurement  date as
presently  required.  The Company is in the process of evaluating  the impact of
adopting FAS No. 144.

CAUTIONARY STATEMENTS AND 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,  reports to  stockholders  and  information
provided in our web site.

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<PAGE>

        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" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  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.  In connection  with the "Safe Harbor"  provisions of the Private
Securities  Litigation  Reform Act of 1995,  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:

     o  Recent history of losses
     o  Prior breach of credit  agreement  covenants and new  principal  payment
        requirements.
     o  Our highly competitive marketplace.
     o  The risks associated with dependence upon significant customers.
     o  Our ability to execute our expansion strategy.
     o  The uncertain ability to manage growth.
     o  Our  dependence   upon  and  our  ability  to  adapt  to   technological
        developments.
     o  Dependence on key personnel.
     o  Our ability to maintain and improve service quality.
     o  Fluctuation in quarterly operating results and seasonality in certain of
        our markets.
     o  Possible  significant  influence over  corporate  affairs by significant
        shareholders.

These risk factors are discussed further below.

RECENT HISTORY OF LOSSES.  The Company has reported  losses for each of the four
fiscal  quarters  ended  September 30, 2001 due, in part, to lower gross margins
and lower  sales  levels and a number of unusual  charges.  Although we achieved
profitability  in Fiscal 2000 and prior  years,  there can be no assurance as to
future profitability on a quarterly or annual basis.

BREACH  OF CREDIT  AGREEMENT  COVENANTS.  Due to lower  operating  cash  amounts
resulting  from reduced sales levels in 2001 and the  consequential  net losses,
the Company breached certain covenants of its credit facility. The breaches were
temporarily  cured based on  amendments  and  forbearance  agreements  among the
Company  and the banks  which  called for,  among  other  provisions,  scheduled
payments to reduce amounts owed to the banks to the permitted borrowing base. In
August 2001, the Company failed to meet the principal repayment schedule and was
once again in breach of the credit  facility,  even though we remain  current on
interest  payments.  The banks ended their formal  commitment  to the Company in
December 2001. We are currently  negotiating for a restructured  credit with the
banks. We cannot be sure that the final contract will be successfully negotiated
or, if successful, that the Company will not again breach established covenants.

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

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

                                       14
<PAGE>

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

CUSTOMER AND INDUSTRY  CONCENTRATION.  Although we have an active client list of
over 2,500 customers,  seven motion picture studios  accounted for approximately
34% of the Company's revenues during the year ended December 31, 2001. If one or
more of these  companies were to stop using our services,  our business could be
adversely  affected.  Because we derive  substantially  all of our revenue  from
clients  in  the  entertainment  and  advertising   industries,   the  financial
condition,  results of  operations  and  prospects of the Company  could also be
adversely  affected  by an  adverse  change in  conditions  which  impact  those
industries.

EXPANSION STRATEGY.  Our growth strategy involves both internal  development and
expansion through  acquisitions.  We currently have no agreements or commitments
to  acquire  any  company  or  business.  Even  though we have  completed  eight
acquisitions  in the last  four  fiscal  years,  we  cannot  be sure  additional
acceptable  acquisitions  will be  available  or  that we will be able to  reach
mutually  agreeable terms to purchase  acquisition  targets,  or that we will be
able to profitably manage additional  businesses or successfully  integrate such
additional  businesses into the Company  without  substantial  costs,  delays or
other problems.

Certain of the businesses previously acquired by the Company reported net losses
for their most  recent  fiscal  years  prior to being  acquired,  and our future
financial  performance  will be in part  dependent  on our ability to  implement
operational improvements in, or exploit potential synergies with, these acquired
businesses.

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

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

MANAGEMENT  OF GROWTH.  During the three  years  ended  December  31,  1999,  we
experienced rapid growth that resulted in new and increased responsibilities for
management  personnel and placed and continues to place increased demands on our
management, operational and financial systems and resources. To accommodate this
growth,  compete  effectively  and manage future growth,  we will be required to
continue to implement  and improve our  operational,  financial  and  management
information systems, and to expand,  train,  motivate and manage our work force.
We cannot be sure that the Company's personnel, systems, procedures and controls
will be adequate to support  our future  operations.  Any failure to do so could
have a material adverse effect on our financial condition, results of operations
and prospects.

DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS. Although we intend to utilize the most
efficient  and  cost-effective   technologies   available  for  telecine,   high
definition  formatting,  editing,  coloration  and  delivery  of video  content,
including digital  satellite  transmission,  as they develop,  we cannot be sure
that we will be able to adapt to such  standards in a timely  fashion or at all.
We believe our future growth will depend in part, on our ability to add to these
services and to add customers in a timely and  cost-effective  manner. We cannot
be sure we will be successful in offering such services to existing customers or
in  obtaining  new  customers  for  these  services,   including  the  Company's
significant investment in high definition technology in 2000 and 2001. We intend
to rely on third party vendors for the  development  of these  technologies  and
there  is  no  assurance  that  such  vendors  will  be  able  to  develop  such
technologies  in a manner that meets the needs of the Company and its customers.
Any material  interruption  in the supply of such services could  materially and
adversely affect the Company's  financial  condition,  results of operations and
prospects.

                                       15
<PAGE>

DEPENDENCE  ON KEY  PERSONNEL.  The  Company is  dependent  on the  efforts  and
abilities  of certain of its senior  management,  particularly  those of R. Luke
Stefanko, President and Chief Executive Officer. The loss or interruption of the
services of key members of management  could have a material  adverse  effect on
our  financial  condition,  results of  operations  and  prospects if a suitable
replacement is not promptly  obtained.  Although we have  employment  agreements
with Mr.  Stefanko  and  certain  of our  other  key  executives  and  technical
personnel,  we cannot be sure that such  executives will remain with the Company
during  or after  the term of their  employment  agreements.  In  addition,  our
success depends to a significant  degree upon the continuing  contributions  of,
and  on  our  ability  to  attract  and  retain,  qualified  management,  sales,
operations,  marketing and technical  personnel.  The  competition for qualified
personnel is intense and the loss of any such persons, as well as the failure to
recruit  additional  key  personnel  in a timely  manner,  could have a material
adverse effect on our financial condition,  results of operations and prospects.
There is no  assurance  that we will be able to  continue  to attract and retain
qualified management and other personnel for the development of our business.

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

FLUCTUATING RESULTS, SEASONALITY. Our operating results have varied in the past,
and may  vary  in the  future,  depending  on  factors  such  as the  volume  of
advertising in response to seasonal buying  patterns,  the timing of new product
and service introductions, the timing of revenue recognition upon the completion
of longer term projects, increased competition, timing of acquisitions,  general
economic   factors   and  other   factors.   As  a  result,   we  believe   that
period-to-period  comparisons of our results of operations  are not  necessarily
meaningful and should not be relied upon as an indication of future performance.
For  example,   our  operating  results  have  historically  been  significantly
influenced by the volume of business from the motion picture industry,  which is
an  industry  that  is  subject  to  seasonal  and  cyclical   downturns,   and,
occasionally,  work stoppages by actors, writers and others. In addition, as our
business from advertising  agencies tends to be seasonal,  our operating results
may be subject to  increased  seasonality  as the  percentage  of business  from
advertising  agencies  increases.  In any period  our  revenues  are  subject to
variation  based on changes in the volume and mix of services  performed  during
the period.  It is possible that in some future quarter the Company's  operating
results  will  be  below  the  expectations  of  equity  research  analysts  and
investors.  In such event,  the price of the Company's Common Stock would likely
be materially  adversely affected.  Fluctuations in sales due to seasonality may
become more pronounced if the growth rate of the Company's sales slows.

CONTROL  BY  PRINCIPAL  SHAREHOLDER;  POTENTIAL  ISSUANCE  OF  PREFERRED  STOCK;
ANTI-TAKEOVER  PROVISIONS.  The Company's President and Chief Executive Officer,
R. Luke Stefanko,  beneficially  owned  approximately  18.4% of the  outstanding
common  stock  as  of  February  28,  2002.  Mr.   Stefanko's   ex-spouse  owned
approximately  25.2% of the  common  stock on that  date.  Together,  they owned
approximately  43.6%.  In August  2000 and May 2001,  Mr.  Stefanko  was granted
one-time proxies to vote his ex-spouse's  shares in connection with the election
of directors at the Company's  annual  meetings.  The Company's  Chairman of the
Board,  Haig Bagerdjian,  beneficially  owned  approximately  6.7% of the common
stock on February 28, 2002. By virtue of their stock ownership, Messrs. Stefanko
and Bagerdjian  individually or together may be able to significantly  influence
the  outcome of matters  required  to be  submitted  to a vote of  shareholders,
including  (i) the election of the board of  directors,  (ii)  amendments to the
Company's  Restated  Articles of Incorporation and (iii) approval of mergers and
other significant corporate  transactions.  The foregoing may have the effect of
discouraging,  delaying or preventing certain types of transactions involving an
actual or potential change of control of the Company,  including transactions in
which the holders of common  stock might  otherwise  receive a premium for their
shares over current market prices. Our Board of Directors also has the authority

                                       16
<PAGE>

to issue up to  5,000,000  shares of  preferred  stock  without  par value  (the
"Preferred Stock") and to determine the price, rights,  preferences,  privileges
and restrictions thereof,  including voting rights,  without any further vote or
action by the Company's shareholders. Although we have no current plans to issue
any shares of Preferred  Stock,  the rights of the holders of common stock would
be subject to, and may be  adversely  affected  by, the rights of the holders of
any  Preferred  Stock that may be issued in the future.  Issuance  of  Preferred
Stock could have the effect of discouraging, delaying, or preventing a change in
control  of the  Company.  Furthermore,  certain  provisions  of  the  Company's
Restated  Articles of Incorporation and By-Laws and of California law also could
have the effect of  discouraging,  delaying or preventing a change in control of
the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        MARKET  RISK.  The  Company's  market  risk  exposure  with  respect  to
financial  instruments  is to  changes  in the London  Interbank  Offering  Rate
("LIBOR").  The Company had borrowings of $28,999,000 at December 31, 2001 under
a credit agreement. Amounts outstanding under the credit agreement bear interest
at the bank's reference rate plus a base rate margin not to exceed 1.00%, or, at
the Company's election, at LIBOR plus a LIBOR margin not to exceed 2.75%.

        The Company entered into an interest rate swap  transaction  with a bank
on  November  28,  2000.  The swap  transaction  was for a  notional  amount  of
$15,000,000  for three years and fixes the interest  rate paid by the Company on
such amount at 6.50%, plus the applicable LIBOR margin, not to exceed 2.75%.

        On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial  Accounting  Standards No. 133, Accounting for Derivative
Instruments  and Hedging  Activities.  The standard,  as amended by Statement of
Financial  Accounting  Standards No. 137, Accounting for Derivative  Instruments
and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133,
an amendment of FASB  Statement No. 133, and  Statement of Financial  Accounting
Standards No. 138,  Accounting for Certain  Derivative  Instruments  and Certain
Hedging  Activities,  an  amendment  of FASB  Statement  No.  133  (referred  to
hereafter  as "FAS 133"),  is  effective  for all fiscal  quarters of all fiscal
years beginning  after June 15, 2000 (January 1, 2001 for the Company).  FAS 133
requires  that all  derivative  instruments  be recorded on the balance sheet at
their fair value.  Changes in the fair value of  derivatives  are recorded  each
period in  current  earnings  or in other  comprehensive  income,  depending  on
whether a derivative is designated as part of a hedging  relationship and, if it
is,  depending on the type of hedging  relationship.  During  2001,  the Company
recorded a cumulative  effect type  adjustment  of $247,000  (net of $62,000 tax
benefit),  and an expense of  $508,000  ($406,000  net of tax  benefit)  for the
derivative fair value change of an interest rate hedging contract.

                                       17
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page

Report of Independent Accountants..................................... 18

Financial Statements:

   Consolidated Balance Sheets -
   December 31, 2000 and 2001......................................... 19

   Consolidated Statements of Income -
   Fiscal Years Ended December 31, 1999, 2000 and 2001................ 20

   Consolidated Statements of Shareholders' Equity -
   Fiscal Years Ended December 31, 1999, 2000 and 2001................ 21

   Consolidated Statements of Cash Flows -
   Fiscal Years Ended December 31, 1999, 2000 and 2001................ 22

   Notes to Consolidated Financial Statements......................... 23-34

   Financial Statement Schedule:

   Schedule II - Valuation and Qualifying Accounts.................... 35

   Consent of Independent Accountants................................. 40


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





                                       18
<PAGE>

                        Report of Independent Accountants


To the Board of Directors and
Shareholders of Point.360



In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated   statements  of  income,   shareholders'  equity  and  cash  flows
presentirly, in all material respects, the financial position of Point.360 ("the
Company") and its  subsidiaries  at December 31, 2001 and December 31, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with  accounting  principles
generally accepted in the United States of America.  These financial  statements
are the  responsibility of the Company's  management;  our  responsibility is to
express  an  opinion  on these  financial  statements  based on our  audits.  We
conducted our audits of these  statements in accordance with auditing  standards
generally  accepted in the United States of America,  which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, during the year
ended December 31, 2000 the Company changed its method of accounting for revenue
to conform to the requirements of SEC Staff Accounting Bulletin No. 101.

As discussed in Note 1, the Company has breached its debt  covenants and amounts
outstanding   under  its  credit  facility  are  immediately  due  and  payable.
Accordingly,  there is substantial doubt about the Company's ability to continue
as a going concern beyond December 31, 2001. See Note 1 for management's plans.



PricewaterhouseCoopers LLP (signed)
Century City, California
February 25, 2002





                                       19
<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                           CONSOLIDATED BALANCE SHEETS

                                                                              DECEMBER 31,
                                                                              ------------
                                                                         2000                 2001
                                                                         ----                 ----
                                            ASSETS
<S>                                                                  <C>                 <C>
Current assets:
Cash and cash equivalents.........................................   $   769,000         $ 3,758,000
Accounts receivable, net of allowances for doubtful accounts
   of $1,473,000 and $681,000, respectively ......................    16,315,000          12,119,000
Notes receivable from officers (Note 11) .........................     1,001,000             928,000
Income tax receivable.............................................     1,362,000           1,399,000
Inventories.......................................................     1,031,000             820,000
Prepaid expenses and other current assets.........................     1,780,000             554,000
Deferred income taxes.............................................     1,574,000             884,000
                                                                     -----------         -----------
   Total current assets...........................................    23,832,000          20,462,000

Property and equipment, net (Note 4)..............................    25,236,000          23,232,000
Other assets, net.................................................       920,000             833,000
Goodwill and other intangibles, net (Note 3)......................    27,387,000          26,320,000
                                                                     -----------         -----------
                                                                     $77,375,000         $70,847,000
                                                                     ===========         ===========

                             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................   $ 8,564,000         $ 4,675,000
Accrued expenses..................................................     2,513,000           2,715,000
Borrowings under revolving credit agreement (Note 5)..............             -          28,999,000
Current portion of capital lease obligations (Note 6).............        54,000              79,000
                                                                     -----------         -----------
   Total current liabilities......................................    11,131,000          36,468,000
                                                                     -----------         -----------
Deferred income taxes.............................................     2,271,000           2,650,000
Notes payable (Note 6)............................................    31,024,000                   -
Capital lease obligations, less current portion (Note 6)..........        30,000              78,000
Derivative valuation liability....................................             -             579,000

Commitments and contingencies (Note 8)

Shareholders' equity
Preferred stock - no par value; 5,000,000 shares authorized;
   none outstanding..............................................              -                   -
Common stock - no par value; 50,000,000 shares authorized;
   9,162,670 and 8,992,806 shares issued and outstanding,
   respectively..................................................     17,943,000          17,336,000
Additional paid-in capital     ..................................        329,000             439,000
Accumulated other comprehensive income...........................              -             238,000
Retained earnings................................................     14,647,000          13,059,000
                                                                     -----------         -----------
   Total shareholders' equity....................................     32,919,000          31,072,000
                                                                     -----------         -----------
                                                                     $77,375,000         $70,847,000
                                                                     ===========         ===========
</TABLE>

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


                                       20
<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                        CONSOLIDATED STATEMENTS OF INCOME


                                                                                YEAR ENDED DECEMBER 31,
                                                                                -----------------------
                                                                         1999              2000               2001
                                                                         ----              ----               ----
<S>                                                                  <C>               <C>                <C>
Revenues............................................................ $ 78,248,000      $ 74,841,000       $ 69,628,000
Cost of goods sold..................................................   47,685,000        45,894,000         46,864,000
                                                                     ------------      ------------       ------------
  Gross profit......................................................   30,563,000        28,947,000         22,764,000

Selling, general and administrative expense.........................   18,473,000        21,994,000         20,872,000
                                                                     ------------      ------------       ------------
Operating income....................................................   12,090,000         6,953,000          1,892,000
Interest expense (net)..............................................    2,147,000         2,889,000          3,070,000
Derivative fair value change........................................            -                 -            508,000
                                                                     ------------      ------------       ------------
Income (loss) before income taxes...................................    9,943,000         4,064,000         (1,686,000)
Provision for (benefit from) income taxes ..........................    4,340,000         1,814,000           (345,000)
                                                                     ------------      ------------       ------------
Income (loss) before extraordinary item and cumulative effect of
  adopting SAB 101 (2000) and FAS 133 (2001) (Note 2)...............    5,603,000         2,250,000         (1,341,000)
Extraordinary item (net of tax benefit of $168,000) (Note 6)........            -          (232,000)                 -
Cumulative effect of adopting SAB 101 (2000) and
  FAS 133 (2001) (Note 2)...........................................            -          (322,000)          (247,000)
                                                                     ------------      ------------       ------------
Net income (loss)................................................... $  5,603,000      $  1,696,000       $ (1,588,000)
                                                                     ============      ============       ============
Other comprehensive income:
  Derivative fair value change...................................... $          -      $          -       $    238,000
                                                                     ------------      ------------       ------------
Comprehensive loss.................................................. $          -      $          -       $ (1,350,000)
                                                                     ============      ============       ============

Earnings (loss) per share:
Basic:
Income (loss) per share before extraordinary item and adoption of
  SAB 101 (2000) and FAS 133 (2001)................................. $       0.60      $       0.24       $      (0.15)
Extraordinary item..................................................            -             (0.03)                 -
Cumulative effect of adopting SAB 101 (2000) and FAS 133 (2001) ....            -             (0.03)             (0.03)
                                                                     ------------      ------------       ------------
Net income (loss)................................................... $       0.60      $       0.18       $      (0.18)
                                                                     ============      ============       ============
Weighted average number of shares...................................    9,322,249         9,216,163          9,060,487
Diluted:
Income (loss) per share before extraordinary item and adoption of
  SAB 101 (2000) and FAS 133 (2001)................................. $       0.58      $       0.24              (0.15)
Extraordinary item..................................................            -             (0.03)                 -
Cumulative effect of adopting SAB 101 (2000) and FAS 133 (2001).....            -             (0.03)             (0.03)
                                                                     ------------      ------------       ------------
Net income (loss)................................................... $       0.58      $       0.18       $      (0.18)
                                                                     ============      ============       ============
Weighted average number of shares including the dilutive effect of
  stock options (Note 2)............................................    9,598,554         9,491,424          9,060,487

</TABLE>

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


                                       21
<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                                                        ADDITIONAL     DEFERRED
                                                                        PAID-IN        STOCK-BASED    RETAINED      SHAREHOLDERS'
                                            SHARES       AMOUNT         CAPITAL        COMPENSATION   EARNINGS      EQUITY
                                            ------       ------         ----------     ------------   --------      ------------
<S>                                        <C>          <C>            <C>            <C>            <C>            <C>
Balance at December 31, 1998............    9,776,094    $20,948,000    $         -    $         -    $ 7,403,000    $28,351,000
Net income..............................            -              -              -              -      5,603,000      5,603,000
Shares repurchased in connection with
  stock repurchase plan.................     (572,700)    (3,064,000)             -              -              -     (3,064,000)
Shares issued in connection with
  exercise of stock options.............        7,303         51,000              -              -              -         51,000
                                          -----------    -----------    -----------    -----------    -----------    -----------
Balance at December 31, 1999............    9,210,697     17,935,000              -              -     13,006,000     30,941,000
Net income..............................            -              -              -              -      1,696,000      1,696,000
Shares repurchased in connection with
  stock repurchase plan.................     (171,400)      (710,000)             -              -              -       (710,000)
Shares issued and tax benefit
  associated with exercise of
  stock options.........................       47,698        368,000              -              -              -        368,000
Shares issued in connection with
  company acquisition...................       75,675        350,000              -              -              -        350,000
Issuance of stock options to
  consultants...........................            -              -        329,000       (329,000)             -              -
Stock-based compensation................            -              -              -        329,000              -        329,000
Distribution to shareholder (Note 1)....            -              -              -              -        (55,000)       (55,000)
                                          -----------    -----------    -----------    -----------    -----------    -----------
Balance at December 31, 2000............    9,162,670    $17,943,000    $   329,000    $         -    $14,647,000    $32,919,000
Net loss................................            -              -              -              -     (1,588,000)    (1,588,000)
Shares repurchased in connection with
  stock repurchase plan.................     (116,666)      (300,000)             -              -              -       (300,000)
Issuance of stock options to
  consultants...........................            -              -        110,000       (110,000)             -              -
Stock-based compensation................            -              -              -        110,000              -        110,000
Shares issued in settlement of a
  debt..................................       15,384         10,000              -              -              -         10,000
Adjustment of shares issued for
  an acquisition........................      (68,582)      (317,000)             -              -              -       (317,000)
Comprehensive income -
  FAS 133...............................            -              -              -              -        238,000        238,000
                                          -----------    -----------    -----------    -----------    -----------    -----------
Balance at December 31, 2001............    8,992,806    $17,336,000    $   439,000    $         -    $13,297,000    $31,072,000
                                          ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>


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


                                       22
<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                    Year Ended December 31,
                                                                                    -----------------------
                                                                           1999               2000               2001
                                                                           ----               ----               ----
<S>                                                                    <C>               <C>                 <C>
Cash flows from operating activities:
Net income (loss)...................................................   $   5,603,000     $   1,696,000       $  (1,588,000)
Adjustments to reconcile net income (loss) to net cash and
    cash equivalents provided by operating activities:
Depreciation and amortization.......................................       4,788,000         5,773,000           7,308,000
Provision for doubtful accounts.....................................         790,000         2,195,000             529,000
Abandonment of leasehold improvements...............................         190,000                 -                   -
Deferred income taxes ..............................................         170,000           476,000             822,000
Other noncash items.................................................               -           329,000             937,000
Cumulative effect of adopting SAB 101...............................               -           322,000                   -
Cumulative effect of adopting FAS 133...............................               -                 -             247,000
Extraordinary item..................................................               -           232,000                   -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable..........................      (3,297,000)        1,359,000           3,667,000
(Increase) decrease in inventories..................................        (388,000)           91,000             211,000
Decrease (increase) in prepaid expenses and other current assets....          28,000          (822,000)          1,229,000
Decrease (increase) in other assets.................................         109,000            (5,000)             87,000
Increase (decrease) in accounts payable.............................       2,518,000         1,397,000          (3,889,000)
Increase (decrease) in accrued expenses.............................       1,461,000          (668,000)            (68,000)
Increase in income taxes payable (receivable), net..................          51,000        (1,412,000)            (37,000)
                                                                        ------------     -------------        ------------
Net cash and cash equivalents provided by operating activities......      12,023,000        10,963,000           9,455,000
                                                                        ------------     -------------        ------------
Cash flows from investing activities:
Capital expenditures................................................      (6,181,000)       (9,717,000)         (3,082,000)
Net cash paid for acquisitions......................................      (3,307,000)       (1,951,000)           (987,000)
                                                                        ------------     -------------        ------------
Net cash and cash equivalents used in investing activities..........      (9,488,000)      (11,668,000)         (4,069,000)
                                                                        ------------     -------------        ------------
Cash flows from financing activities:
S Corporation distributions to shareholders.........................               -           (55,000)                  -
Issuance of notes receivable........................................               -        (1,001,000)                  -
Repurchase of common stock..........................................      (3,064,000)         (710,000)           (300,000)
Proceeds from exercise of stock options.............................          51,000           256,000                   -
Change in revolving credit agreement................................       5,655,000        (5,888,000)                  -
Deferred financing costs............................................        (365,000)         (239,000)                  -
Proceeds from bank note.............................................       2,500,000        32,174,000                   -
Repayment of notes payable..........................................      (5,819,000)      (25,892,000)         (2,025,000)
Repayment of capital lease obligations..............................        (511,000)         (201,000)            (72,000)
                                                                        ------------     -------------        ------------
Net cash and cash equivalents used in financing activities..........      (1,553,000)       (1,556,000)         (2,397,000)
                                                                        ------------     -------------        ------------
Net increase (decrease) in cash and cash equivalents................         982,000        (2,261,000)          2,989,000
Cash and cash equivalents at beginning of year......................       2,048,000         3,030,000             769,000
                                                                        ------------     -------------        ------------
Cash and cash equivalents at end of year............................    $  3,030,000     $     769,000        $  3,758,000
                                                                        ============     =============        ============
</TABLE>

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


                                       23
<PAGE>

                                    POINT.360
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY:

        Point.360  ("Point.360" or the "Company")  provides video and film asset
management  services to owners,  producers and distributors of entertainment and
advertising  content.  The Company  provides  the  services  necessary  to edit,
master, reformat,  archive and distribute its clients' video content,  including
television  programming,  spot  advertising  and  movie  trailers.  The  Company
provides worldwide electronic  distribution,  using fiber optics and satellites.
The  Company  delivers  commercials,  movie  trailers,  electronic  press  kits,
infomercials and syndicated programming,  by both physical and electronic means,
to  thousands  of  broadcast  outlets  worldwide.  The  Company  operates in one
reportable segment.

        In February  1997,  the Company  completed  the sale of a portion of its
common shares in an initial public offering ("IPO").  Prior to the offering, the
Company  had  elected  S-Corporation  status for  federal  and state  income tax
purposes.  As a result of the offering,  the  S-Corporation  status  terminated.
Thereafter,   the  Company  has  paid  federal  and  state  income  taxes  as  a
C-Corporation.  In connection with the termination of S-Corporation  status, the
Company made a final $55,000 distribution to a shareholder in Fiscal 2000, which
has been recorded as a reduction of retained earnings.

        As of April 30, May 31 and June 30, 2001,  outstanding amounts under the
Company's  line of credit with a group of banks exceeded the borrowing base (see
Note 6). On June 11 and July 20, 2001,  the Company  entered into  amendment and
forbearance  agreements  with the banks which  required the Company to repay the
amount of excess  borrowings.  In August 2001, the Company did not make required
debt  payments  which  created  a  breach  of  the  amendment  and   forbearance
agreements.  As a consequence of the breach,  the amount  outstanding  under the
credit facility is immediately due and payable and,  therefore,  is reclassified
as a current  liability  as of December  31,  2001.

        These  circumstances raise substantial doubt about the Company's ability
to continue  as a going  concern  beyond  December  31,  2001.  These  financial
statements do not include any adjustments  that might result from the outcome of
this  uncertainty.  Management is also pursuing other financing  sources to meet
its capital and operating requirements, including new equity and debt financing.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION

        The  consolidated  financial  statements  include  the  accounts  of the
Company and its two  non-operating  wholly owned  subsidiaries,  VDI Multimedia,
Inc. and Multimedia  Services,  Inc. All significant  intercompany  accounts and
transactions have been eliminated in consolidation.

RECLASSIFICATIONS

        Certain previously reported amounts have been reclassified to conform to
classifications adopted in 2001.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

CASH AND CASH EQUIVALENTS

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

REVENUES AND RECEIVABLES

        The Company  records  revenues  when the services  have been  completed.
Although  sales  and  receivables  are  concentrated  in the  entertainment  and
advertising  industries,  credit  risk due to  financial  insolvency  is limited
because of the financial stability of the customer base (i.e., large studios and
advertising  agencies).  However, in 2000, the Company's  evaluation of accounts
receivable balances resulted in an increase in the reserve for doubtful accounts
of approximately  $2.2 million which was related  primarily to smaller entities.
No sales to a single  customer  were more  than 10% of sales  for 1999,  2000 or
2001.

                                       24
<PAGE>

        Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101 ("SAB 101"), Revenue Recognition in Financial Statements.  The effect of
applying this Staff  Accounting  Bulletin has been  accounted for as a change in
accounting principle,  with a cumulative charge of $322,000, or $0.03 per share,
net of tax benefit of $233,000.  Previously, the Company had recognized revenues
from certain post production services as work was performed.  Under SAB 101, the
Company now recognizes these revenues when all services have been completed.  As
a result of adopting SAB 101,  revenues of $555,000 were  recognized in the year
ended  December 31, 2000 which were also  recognized in the year ended  December
31, 1999.

        The table below sets forth pro forma net income and  earnings  per share
data for the  periods  shown as if the  change  in  accounting  policy  had been
adopted at the beginning of 1999.

                                              1999
                                              ----

        Previously reported                $ 5,603,000
        Adjustment                             (81,000)
                                           -----------
        Pro forma                          $ 5,522,000
                                           ===========

        Pro forma  earnings per share:
        Basic -
        Previously reported                $      0.60
        Adjustment                                   -
                                           -----------
        Pro forma                          $      0.60
                                           ===========
        Diluted -
        Previously reported                $      0.58
        Adjustment                               (0.01)
                                           -----------
        Pro forma                          $      0.57
                                           ===========

CONCENTRATION OF CREDIT RISK

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

        Credit risk with respect to trade receivables is concentrated due to the
large  number of orders  with  major  entertainment  studios  in any  particular
reporting period. The seven major studios represented 37% of accounts receivable
at December 31, 2000 and 40% of accounts  receivable  at December 31, 2001.  The
Company  reviews  credit  evaluations  of its  customers  but does  not  require
collateral or other security to support customer receivables.

        The seven major  studios  accounted for 37% and 34% of net sales for the
years ended  December 31, 2000 and 2001,  respectively.  No single  customer had
outstanding  balances of greater  than 10% of total  accounts  receivable  as of
December 31, 2000 or 2001.

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

                                       25
<PAGE>

GOODWILL AND OTHER INTANGIBLES

        Goodwill is amortized on a  straight-line  basis over 5-20 years.  Other
intangibles consist primarily of covenants not to compete and are amortized on a
straight-line basis over 3-5 years.

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

        If events and  circumstances  indicate  that the  carrying  amount of an
asset may not be  recoverable  and the  expected  undiscounted  future cash flow
attributable  to the asset is less than the  carrying  amount of the  asset,  an
impairment loss equal to the excess of the asset's  carrying value over its fair
value is  recorded.  Fair  value is  determined  based on the  present  value of
estimated expected future cash flows using a discount rate commensurate with the
risk involved, quoted market prices or appraised values, depending on the nature
of the assets. To date, no such impairment has been recorded.

INCOME TAXES

        The Company  accounts for income taxes in accordance  with  Statement of
Financial  Accounting  Standards  No. 109,  "Accounting  for Income Taxes" ("FAS
109").  FAS 109 requires the  recognition of deferred tax assets and liabilities
for the expected future tax  consequences of temporary  differences  between the
carrying  amounts for financial  reporting  purposes and the tax basis of assets
and liabilities.  A valuation allowance is recorded for that portion of deferred
tax assets  for which it is more  likely  than not that the  assets  will not be
realized.

ADVERTISING COSTS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

        The accrual  method of  accounting  is used for the  interest  rate swap
agreement  entered into by the Company  which  converts the interest rate on $15
million of the Company's  variable-rate debt to a fixed rate (see Note 6). Under
the accrual method, each net payment or receipt due or owed under the derivative
is recognized  in income in the period to which the payment or receipt  relates.
Amounts  to  be  paid/received  under  these  agreements  are  recognized  as an
adjustment to interest  expense.  The related amounts payable to counter parties
is  included  in other  accrued  liabilities.  The  estimated  fair value of the
interest rate swap agreement is a net payable of $579,000 at December 31, 2001.

ACCOUNTING FOR STOCK-BASED COMPENSATION

        As permitted by Statement  of Financial  Accounting  Standards  No. 123,
Accounting  for  Stock-Based  Compensation  ("FAS  123"),  the Company  measures
compensation  costs in accordance with Accounting  Principles  Board Opinion No.
25, Accounting for Stock Issued to Employees, but provides pro forma disclosures
of net income and earnings per share using the fair value method  defined by FAS
123.  Under APB No. 25,  compensation  expense is  recognized  over the  vesting
period based on the difference,  if any, on the date of grant between the deemed
fair value for accounting purposes of the Company's stock and the exercise price
on the date of grant.  The Company accounts for stock issued to non-employees in
accordance  with the  provisions of SFAS No. 123 and Emerging  Issues Task Force
("EITF") 96-18,  Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods and Services.

EARNINGS PER SHARE

        The Company follows Statement of Financial Accounting Standards No. 128,
Earnings  per  Share  ("FAS  128") and  related  interpretations  for  reporting
Earnings per Share.  FAS 128 requires dual  presentation  of Basic  Earnings per
Share ("Basic EPS") and Diluted  Earnings per Share ("Diluted  EPS").  Basic EPS
excludes  dilution and is computed by dividing net income (loss) by the weighted

                                       26
<PAGE>

average number of common shares outstanding during the reported period.  Diluted
EPS  reflects  the  potential  dilution  that could occur if stock  options were
exercised using the treasury stock method.

        In accordance with Statement of Financial  Accounting Standards No. 128,
"Earnings Per Share", basic earnings (loss) per share is calculated based on the
weighted  average  number  of  shares of common  stock  outstanding  during  the
reporting period.  Diluted earnings per share is calculated giving effect to all
potentially dilutive common shares, assuming such shares were outstanding during
the reporting  period.  Stock options for the purchase of 386,245  shares with a
weighted  average  exercise  price of $1.40 for the year ended December 31, 2001
were not included in the computation of diluted EPS as they are anti-dilutive as
a result of net loss during the year.

        A reconciliation  of the denominator of the basic EPS computation to the
denominator of the diluted EPS computation is as follows:

<TABLE>
<CAPTION>
                                                                         1999          2000          2001
                                                                         ----          ----          ----
<S>                                                                    <C>           <C>           <C>
Weighted average number of common shares outstanding
  used in computation of basic EPS................................     9,322,249     9,216,163     9,060,487
Dilutive effect of outstanding stock options .....................       276,305       275,261             -
                                                                       ---------     ---------     ---------
Weighted average number of common and potential
  common shares outstanding used in computation of diluted EPS.....    9,598,554     9,491,424     9,060,487
                                                                       =========     =========     =========
</TABLE>

COMPREHENSIVE INCOME

        In 1998,  the Company  adopted  Statement  of SFAS No.  130,  "Reporting
Comprehensive  Income." This Statement  establishes  standards for the reporting
and  display  of  comprehensive  income  and  its  components  in a full  set of
general-purpose financial statements. Comprehensive income, as defined, includes
all changes in equity during a period from non-owner sources.

SUPPLEMENTAL CASH FLOW INFORMATION

        Selected cash payments and noncash activities were as follows:
<TABLE>
<CAPTION>
                                                              1999             2000              2001
                                                              ----             ----              ----
<S>                                                     <C>              <C>               <C>

Cash payments for income taxes........................  $  4,154,000     $  2,447,000      $    121,000
Cash payments for interest............................     2,151,000        2,920,000         2,830,000

Noncash investing and financing activities:
Capitalized lease obligations incurred................        57,000                -           145,000
Tax benefits related to stock options.................             -          112,000                 -
Adjustment of acquisition holdback shares.............             -                -          (317,000)
Acquisition of equipment in exchange for
  reduction of note receivable from shareholder.......             -                -            68,000
Accrual for earn-out payments.........................             -                -           270,000
Detail of acquisitions:
Fair value of assets, net of cash acquired............             -          147,000                 -
Goodwill (1)..........................................     3,307,000        2,515,000         1,257,000
Liabilities (2).......................................             -         (711,000)                -
                                                        ------------     ------------      ------------
Net cash paid for acquisitions........................  $  3,307,000     $  1,951,000      $  1,257,000
                                                        ============     ============      ============
</TABLE>

   (1)  Includes  additional  purchase  price  payments made to former owners in
        periods subsequent to various acquisitions of $3,307,000, $1,353,000 and
        $965,000 in 1999, 2000 and 2001, respectively,  and accrual for earn-out
        payments  of $270,000  in 2001.

   (2)  Includes common stock issued to sellers totaling $350,000 in 2000.


RECENT ACCOUNTING PRONOUNCEMENTS

        Effective  January 1, 2001, the Company  adopted  Statement of Financial
Accounting Standards No. 133, Accounting for Derivative  Instruments and Hedging
Activities ("FAS 133"). The standard,  as amended,  requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in other income.

                                       27
<PAGE>

        In June 2001, the Financial  Accounting  Standards Board ("FASB") issued
FAS Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible
Assets," respectively.  FAS No. 141 replaces Accounting Principles Board ("APB")
Opinion No. 16. It also provides guidance on purchase  accounting related to the
recognition of intangible assets and accounting for negative  goodwill.  FAS No.
142  changes  the  accounting  for  goodwill  and other  intangible  assets with
indefinite  useful  lives  ("goodwill")  from  an  amortization   method  to  an
impairment-only  approach.  Under FAS No. 142,  goodwill will be tested annually
and whenever  events or  circumstances  occur  indicating that goodwill might be
impaired.  FAS  No.  141  and  FAS  No.  142  are  effective  for  all  business
combinations  completed  after June 30,  2001.  Upon  adoption  of FAS No.  142,
amortization of goodwill recorded for business combinations consummated prior to
July 1, 2001 will cease,  and intangible  assets  acquired prior to July 1, 2001
that do not  meet  the  criteria  for  recognition  under  FAS No.  141  will be
reclassified to goodwill.  The Company will be required to implement FAS No. 142
in the first quarter of fiscal 2002. In connection  with the adoption of FAS No.
142, the Company will be required to perform a transitional  goodwill impairment
assessment.  The Company is in the process of evaluating  the impact of adoption
of FAS 141 and 142.

        In August  2001,  the FASB  issued FAS No.  143,  "Accounting  for Asset
Retirement  Obligations,"  which requires entities to record the fair value of a
liability  for an  asset  retirement  obligation  in the  period  in  which  the
obligation  is incurred.  When the liability is initially  recorded,  the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset.  FAS No. 143 is effective for fiscal years beginning after June 15, 2002.
The Company does not have asset retirement obligations and, therefore,  believes
there will be no impact upon adoption of FAS No. 143.

        In October  2001,  the FASB  issued  FAS No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets,"  which is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede FAS No. 121, "Account for the Impairment
of Long-Lived  Assets and for Long-Lived  Assets to be Disposed of,"and portions
of APB  Opinion  No. 30,  "Reporting  the  Results of  Operations."  FAS No. 144
provides a single  accounting model for long-lived  assets to be disposed of and
significantly  changes  the  criteria  that would have to be met to  classify an
asset  as  held-for-sale.   Classification  as  held-for-sale  is  an  important
distinction since such assets are not depreciated and are stated at the lower of
fair value and  carrying  amount.  FAS No.  144 also  requires  expected  future
operating losses from  discontinued  operations to be displayed in the period(s)
in which the losses are  incurred,  rather  than as of the  measurement  date as
presently  required.  The Company is in the process of evaluating  the impact of
adopting FAS No. 144.

3. ACQUISITIONS

        On November 3, 2000, the Company acquired the assets and assumed certain
liabilities of Creative Digital, Inc. ("Creative  Digital").  The purchase price
of the transaction was approximately  $1,309,000.  This amount included $500,000
paid in cash,  $98,000  in  estimated  transaction  costs and  75,675  shares of
Point.360  common stock valued at $350,000.  The  acquisition  was accounted for
using the purchase method of accounting. The purchase price was allocated to the
fair  value of net  assets of  $147,000  and  intangible  assets of  $1,162,000.
Creative  Digital  provides  colorization,  editing,  and other post  production
services to major motion picture studios and television  producers.  The Company
may also pay up to an  additional  $3,000,000  in earn-out  payments if Creative
Digital  achieves  certain  performance  goals through 2005. No earn-out amounts
have been paid as of December 31, 2001. In November  2001,  68,582 of the 75,675
shares of  Point.360  stock valued at $317,000  were  returned to the Company as
certain conditions outlined in the acquisition agreement were not met.

        On  November  9, 1998,  the Company  acquired  substantially  all of the
assets  of  Dubs,  Inc.  ("Dubs").   Dubs  provides  full  service  duplication,
distribution,  video  content  storage and  ancillary  services to major  motion
picture  studios and  independent  production  companies  for both  domestic and
international use. As consideration, the Company paid Dubs $11,312,000, of which
$10,437,000 was paid in 1998 and $875,000 was paid in 1999.

        On June 12, 1998, the Company acquired  substantially  all of the assets
of All Post,  Inc.  ("All Post).  All Post  provides  full service  duplication,
distribution,  video  content  storage and  ancillary  services to major  motion
picture  studios and  independent  production  companies  for both  domestic and
international  use. As  consideration,  the Company paid All Post $13,000,000 in
1998.

        On November 21, 1997, the Company acquired all of the outstanding shares
of Fast Forward,  Inc.  ("Fast  Forward"),  a provider of video  duplication and
distribution  services  primarily to  advertising  agencies and post  production
companies.  The  purchase  price  consisted  of  $1,400,000  of  cash,  of which
$1,150,000 was paid during 1998, 30,770 shares of common stock which were issued
in December  31, 1997 and  earn-out  payments of up to $600,000  based upon Fast
Forward attaining certain performance goals through December 2000.

                                       28
<PAGE>

        In August  1997,  the Company  acquired all of the  outstanding  capital
stock of Multi-Media Services,  Inc.  ("Multi-Media").  Multi-Media  principally
provides  video  duplication,   distribution,   and  content  storage  to  major
advertising  agencies.  Through  the  acquisition  of  Multi-Media,  the Company
acquired  facilities in Los Angeles,  Chicago and New York.  The purchase  price
paid by the Company for  Multi-Media  was  $6,867,000  (including  the immediate
repayment  of  $1,545,000  of  indebtedness).  In  addition,  the Company may be
required to pay, as an earn-out, up to an aggregate of $2,000,000, plus interest
from the closing date, in the event that Multi-Media,  as a separate  subsidiary
of the Company,  achieves  certain  financial  goals through  December  2002. If
Multi-Media fails to achieve the targeted results in any particular quarter, the
related  earn-out payment will be deferred up to two years until the results are
achieved.  No earn-out  payments  will be made after  December 31,  2004.  As of
December  31,  2001,  the  Company  has paid or accrued  $1,289,000  in earn-out
payments.

        On January 1, 1997,  the Company  acquired all of the assets and certain
liabilities  of Woodholly  Productions  ("Woodholly").  Woodholly  provides full
service video duplication,  distribution, content storage and ancillary services
to major motion picture studios, advertising agencies and independent production
companies for both domestic and international use. As consideration, the Company
will pay the partners of Woodholly a maximum of $8,000,000,  of which $4,000,000
was  paid in  January  1997.  The  remaining  balance  is  subject  to  earn-out
provisions that are predicated upon Woodholly attaining certain operating income
goals, as set forth in the purchase  agreement in each quarter through  December
31, 2001. If Woodholly  fails to achieve the targeted  results in any particular
quarter, the related earn-out payment will be deferred until the next quarter in
which the quarterly minimum results are achieved as long as such minimum results
are achieved  before December 31, 2003. As of December 31, 2001, the Company has
paid or accrued $3,415,000 in earn-out payments.

        The above acquisitions were accounted for as purchases,  with the excess
of the purchase price over the fair value of the net assets  acquired  allocated
to goodwill.  The  contingent  purchase  price,  to the extent  earned,  will be
recorded as an increase to goodwill  and will be  amortized  over the  remaining
useful life of the goodwill. As of December 31, 2001, based on prior performance
of the applicable  acquired entities,  there can be no assurance that additional
earn-out amounts will be paid. The consolidated financial statements reflect the
operations of the acquired companies since their respective acquisition dates.

        Goodwill and other intangibles, net consist of the following:

                                                      DECEMBER 31,
                                                2000                 2001
                                                ----                 ----
Goodwill.................................  $  30,889,000        $  31,807,000
Covenant not to compete..................        962,000              983,000
                                           -------------        -------------
                                           $  31,851,000        $  32,790,000
Less accumulated amortization............     (4,464,000)          (6,470,000)
                                           -------------        -------------
                                           $  27,387,000        $  26,320,000
                                           =============        =============

        Amortization  expense totaled $1,581,000,  $1,638,000 and $2,007,000 for
the years ended December 31, 1999, 2000 and 2001, respectively.

4. PROPERTY AND EQUIPMENT:

        Property and equipment consist of the following:

                                                      DECEMBER 31,
                                                2000                 2001
                                                ----                 ----

Machinery and equipment                   $  34,600,000         $  36,769,000
Leasehold improvements                        7,304,000             7,634,000
Computer equipment                            2,990,000             3,707,000
Equipment under capital lease                   410,000               251,000
                                          -------------         -------------
                                             45,304,000            48,361,000
Less accumulated depreciation and
amortization                                (20,068,000)          (25,129,000)
                                          -------------         -------------
                                          $  25,236,000         $  23,232,000
                                          =============         =============

        Depreciation  expense totaled $3,207,000,  $4,135,000 and $5,301,000 for
the years ended  December 31,  1999,  2000 and 2001,  respectively.  Accumulated
amortization on capital leases amounted to $219,000 and $73,000,  as of December
31, 2000 and 2001, respectively.

                                       29
<PAGE>

5. REVOLVING CREDIT AGREEMENT:

        On December 31,  1999,  the Company had a  $6,000,000  revolving  credit
agreement  with a bank.  The  outstanding  borrowing  on this line of credit was
$5,888,000  at December 31,  1999.  The Company  repaid all amounts  outstanding
under the agreement in 2000.

6. LONG TERM DEBT AND NOTES PAYABLE:

TERM LOANS AND REVOLVING CREDIT

        In November 1998, the Company borrowed $29,000,000 on a term loan with a
bank,  payable in 60 monthly  installments  of $483,000 plus interest.  The term
loan was repaid in 2000 with the proceeds of a new borrowing  arrangement with a
group  of  banks.   Deferred  financing  costs  related  to  the  term  loan  of
approximately  $232,000,  net of $168,000 tax benefit, were concurrently written
off and  treated as an  extraordinary  item during the year ended  December  31,
2000.

        In  September  2000,  the  Company  entered  into  a  credit   agreement
("Agreement")  with a group of banks providing a revolving credit facility of up
to $45,000,000.  The purpose of the facility was to repay previously outstanding
amounts under a prior  agreement with a bank,  fund working  capital and capital
expenditures and for general  corporate  purposes  including up to $5,000,000 of
stock repurchases under the Company's repurchase program. The Agreement provides
for interest at the banks' adjusted  reference  rate, an adjusted  federal funds
effective  rate plus  0.5%,  or a LIBOR  adjusted  rate.  Loans  made  under the
Agreement are  collateralized by substantially all of the Company's assets.  The
borrowing  base  under the  Agreement  is limited  to 90% of  eligible  accounts
receivable,  50% of inventory and 100% of operating machinery and equipment with
such percentages  decreasing in years subsequent to 2001. The Agreement provided
that the  aggregate  commitment  will decline by  $5,000,000 on each December 31
beginning  in 2002 until  expiration  of the entire  commitment  on December 31,
2005.

        The Agreement  also  contained  covenants  requiring  certain  levels of
annual earnings before interest,  taxes,  depreciation and amortization (EBITDA)
and net worth,  and limits the amount of capital  expenditures.  By December 31,
2000,  the Company had borrowed  $31,024,000  under the Agreement and was not in
compliance with certain financial covenants due to adjustments recorded to prior
years' and 2000  results.  The bank waived  compliance  with the  covenants  and
amended the Agreement in April 2001 (the  "Amendment').  In connection  with the
Amendment,  the Company paid the banks a restructuring fee of $225,000 which was
expensed in fiscal 2001.

     As of April 30, May 31 and June 30,  2001,  outstanding  amounts  under the
line of credit  exceeded the borrowing  base. On June 11 and July 20, 2001,  the
Company entered into amendment and  forbearance  agreements with the banks which
required the Company to repay the amount of excess  borrowings.  In August 2001,
the Company did not make required  debt  payments  which created a breach of the
amendment and forbearance agreements. As a consequence of the breach, the amount
outstanding  under the credit  facility  is  immediately  due and  payable  and,
therefore,  is reclassified  as a current  liability as of December 31, 2001. In
December 2001, the banks terminated the commitment.  The Company remains current
in its interest  payments to the banks and is actively  engaged in renegotiating
its  relationship  with the banks.  During the year ended December 31, 2001, the
Company made principal payments of $2,025,000.  See Note 1.

INTEREST RATE SWAP

        The Company entered into an interest rate swap  transaction  with a bank
on  November  28,  2000.  The swap  transaction  was for a  notional  amount  of
$15,000,000  for three years and fixes the interest  rate paid by the Company on
such amount at 6.50%,  plus the  applicable  LIBOR margin,  not to exceed 2.75%.
Statement of Financial  Accounting  Standards No. 133, Accounting for Derivative
Instruments and Hedging  Activities ("FAS 133") requires that the hedge contract
be  "marked-to-market"  at the  time of  adoption  of FAS 133 and  quarterly  by
recording (i) a  cumulative-effect  type  adjustment at January 1, 2001 equal to
the  fair  value  of the  hedge  contract  on that  date,  (ii)  amortizing  the
cumulative-effect  type  adjustment  quarterly  over the life of the  derivative
contract, and (iii) a charge or credit to income in the amount of the difference
between the theoretical  value of the hedge contract at the beginning and end of
such   quarter.   By  the  end  of  the  hedge   contract   term,   the  initial
cumulative-effect  type  adjustment  and any  amounts  recognized  as  income or
expense  will  reverse  to zero  as the  contract  will  then  have  no  further
theoretical  value,  provided  that the  contract  is in place to the end of the
term.  Other than the economic impact of fixing the interest rate, the amount of
income  and  expense  required  by  application  of FAS 133 does not  impact the
Company's cash flow. The effect of adopting FAS 133 was as follows in 2001:

                                       30
<PAGE>
<TABLE>
<CAPTION>
                                                                      Increase (Decrease) Income
                                                                      --------------------------
                                                                                                         Net
                                                     Derivative Fair   (Provision for) Benefit        Derivative
                                                      Value Change        from Income Taxes        Fair Value Change
                                                      ------------        -----------------        -----------------
<S>                                                  <C>                    <C>                       <C>
Initial cumulative-effect type adjustment            $ (309,000)            $  62,000                 $ (247,000)

Amortization of cumulative-effect type
  adjustment                                             71,000                (14,000)                   57,000

Difference in the derivative fair value
  between the beginning and end of the year            (579,000)               116,000                  (463,000)
                                                     ----------              ---------                ----------
                                                     $ (817,000)             $ 164,000                $ (653,000)
                                                     ==========              ==========               ==========
</TABLE>

EQUIPMENT FINANCING AND CAPITAL LEASES

        The Company has financed the purchase of certain  equipment  through the
issuance of notes payable and under capital leasing arrangements. The notes bear
interest at rates ranging from 9.3% to 12.9%.  Such  obligations  are payable in
monthly installments through September 2004.

        Annual  maturities  for debt,  under both the New  Agreement and capital
lease obligations as of December 31, 2001, are as follows:

        2002.........................................$ 29,078,000
        2003.........................................      47,000
        2004.........................................      31,000
        Thereafter...................................           -
                                                     ------------
                                                     $ 29,156,000

7. INCOME TAXES:

        The Company's  provision  for (benefit  from) income taxes for the three
years ended December 31, 2001 consists of the following:
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                     --------------------------------------------------
                                                          1999              2000              2001
                                                          ----              ----              ----
<S>                                                  <C>               <C>               <C>
Current tax (benefit) expense:
Federal.........................................     $   3,201,000     $     683,000     $  (1,229,000)
State...........................................           969,000           254,000                 -
                                                     -------------     -------------     -------------
Total current...................................         4,170,000           937,000        (1,229,000)
                                                     -------------     -------------     -------------
Deferred tax expense:
Federal.........................................           107,000           416,000           821,000
State...........................................            63,000            60,000             1,000
                                                     -------------     -------------     -------------
Total deferred..................................           170,000           476,000           822,000
Total provision for (benefit from)
  for income taxes..............................     $   4,340,000     $   1,413,000     $    (407,000)
                                                     =============     =============     =============
</TABLE>

        The following is a reconciliation of the components of the provision for
(benefit from) income taxes:
<TABLE>
<CAPTION>
                                                                  2000                2001
                                                                  ----                ----

<S>                                                           <C>               <C>
Provision for (benefit from) income taxes per
  the income statement....................................    $  1,814,000      $    (345,000)
Extraordinary item tax benefit............................        (168,000)                 -
Cumulative effect tax benefit of adopting SAB 101 (2000)
  and FAS 133 (2001)......................................        (233,000)           (62,000)
                                                              ------------      -------------
Provision for (benefit from) income taxes.................    $  1,413,000      $    (407,000)
                                                              ============      =============
</TABLE>

                                       31
<PAGE>

        The composition of the deferred tax assets (liabilities) at December 31,
2000 and December 31, 2001 are listed below:

<TABLE>
<CAPTION>
                                                                   2000                2001
                                                                   ----                ----

<S>                                                           <C>               <C>
Accrued liabilities.......................................    $    617,000      $      474,000
Allowance for doubtful accounts...........................         631,000             143,000
Other.....................................................         326,000             267,000
                                                              ------------      --------------
Total current deferred tax assets.........................       1,574,000             884,000
                                                              ------------      --------------
Property and equipment....................................      (2,212,000)         (2,915,000)
Goodwill and other intangibles ...........................        (138,000)           (236,000)
State net operating loss carry forward....................               -             173,000
Other.....................................................          79,000             328,000
                                                              ------------      --------------
Total non-current deferred tax liabilities................      (2,271,000)         (2,650,000)
                                                              ------------      --------------
Net deferred tax liability................................    $   (697,000)     $   (1,766,000)
                                                              ============      ==============
</TABLE>

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

                                                           2000         2001
                                                           ----         ----

Federal tax computed at statutory rate....................  34%         (34)%
State taxes, net of federal benefit and
  net operating loss limitation...........................   6%           2%
Non-deductible goodwill...................................   5%           9%
Other.....................................................   1%           3%
                                                           -----        -----
                                                            46%         (20)%
                                                           =====        =====

8. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

        The Company  leases  office and  production  facilities  in  California,
Illinois, Texas and New York under various operating leases. Approximate minimum
rental payments under these  noncancellable  operating leases as of December 31,
2001 are as follows:

         2002.................... $    3,119,000
         2003....................      2,560,000
         2004....................      2,136,000
         2005....................      1,557,000
         2006....................      1,404,000
         Thereafter..............      1,771,000
                                  --------------
                                  $   12,547,000

        Total  rental  expense  was  approximately  $3,251,000,  $3,206,000  and
$3,482,000  for  the  three  years  in  the  period  ended  December  31,  2001,
respectively.

9. STOCK REPURCHASE PLAN:

        In February 1999,  the Company  announced that it would commence a stock
repurchase  program  approved  by the Board.  The  Company  did not set a target
number of shares to be  repurchased.  Under the stock  repurchase  program,  the
Company was to purchase outstanding shares in such amounts and at such times and
prices determined at the sole discretion of management.

        The funds for the  stock  repurchases  were  provided  by the  Company's
credit facility with a bank which permitted repurchases up to $5,000,000. During
1999, 2000 and 2001, the Company repurchased  $3,064,000,  $710,000 and $617,000
of common  stock,  respectively.  The Company was then  restricted  from further
repurchases by the Amendment.

                                       32
<PAGE>

10. STOCK OPTION PLANS:

STOCK OPTION PLANS

        In May 1996, the Board of Directors,  approved the 1996 Stock  Incentive
Plan (the  "1996  Plan").  The 1996 Plan  provides  for the award of  options to
purchase up to 900,000  shares of common  stock,  as well as stock  appreciation
rights,  performance share awards and restricted stock awards. In July 1999, the
Company's  shareholders  approved an amendment to the 1996 Plan  increasing  the
number of shares  reserved for grant to 2,000,000  and  providing  for automatic
increases  of  300,000  shares  on each  August 1  thereafter  to a  maximum  of
4,000,000  shares.  As of  December  31,  2001,  there  were  2,397,000  options
outstanding under the 1996 Plan and 283,000 options were available for grant.

        In December  2000,  the  Company's  Board of Directors  adopted the 2000
Nonqualified  Stock  Option Plan (the "2000  Plan").  As amended,  the 2000 Plan
provides for the award of options to purchase up to  1,500,000  shares of common
stock.  Options may be granted under the 2000 Plan solely to attract  people who
have not previously been employed by the Company as a substantial  inducement to
join  the  Company.  As  of  December  31,  2001,  there  were  890,000  options
outstanding under the plan and 610,000 options were available for grant.

        Under both plans,  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 date it was  granted.
The stock  options  generally  vest over one to five years and for some options,
earlier  if the market  price of the  Company's  common  stock  exceeds  certain
levels.

        In  accounting  for its  plans,  the  Company,  in  accordance  with the
provisions  of FAS 123,  applies  Accounting  Principles  Board  Opinion No. 25,
"Accounting  for Stock Issued to Employees."  As a result of this election,  the
Company does not recognize compensation expense for its stock option plans since
the exercise price of the options  granted equals the fair value of the stock on
the date of grant.  Had the Company  determined  compensation  cost based on the
fair value for its stock  options at grant date, as set forth under FAS 123, the
Company's  net income and earning  per share would have been  reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>

                                                  1999                 2000                2001
                                                  ----                 ----                ----
<S>                                          <C>                  <C>                 <C>
Net income (loss):
As reported................................  $   5,603,000        $   1,696,000       $  (1,588,000)
Pro forma..................................      4,993,000              731,000          (3,360,000)
Earnings (loss) per share:
As reported:
Basic......................................           0.60                 0.18               (0.18)
Diluted....................................           0.58                 0.18               (0.18)
Pro forma:
Basic......................................           0.54                 0.08               (0.37)
Diluted....................................           0.52                 0.08               (0.37)
</TABLE>

        The fair value for these  options was  estimated at the grant date using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions  used for  grants  in 1999,  2000 and 2001,  respectively:  expected
volatility of 63%, 70% and 88% and risk-free  interest rates of 5.28%, 5.59% and
4.53%.  A dividend  yield of 0% and expected  life of five years was assumed for
1999, 2000 an 2001 grants. The weighted average fair value of options granted at
the fair market price on the grant date in 1999, 2000 and 2001 were $4.37, $2.35
and $1.64,  respectively.  In 2001,  the weighted  average fair value of options
granted at an  exercise  price in excess of the fair  market  price on the grant
date was $0.48. All options granted in 1999 and 2000 were at fair market price.

                                       33
<PAGE>

        Transactions involving stock options are summarized as follows:

                                                Number          Weighted Average
                                               of Shares         Exercise Price
                                               ---------         --------------
Balance at December 31, 1998................     159,231           $  7.24

Granted during 1999.........................   1,295,437              7.51
Exercised during 1999.......................      (7,303)             7.00
Cancelled during 1999.......................     (39,044)             7.00
                                               ---------           --------
Balance at December 31, 1999................   1,408,321           $  7.50
                                               ---------           --------
Granted during 2000.........................   1,779,100              3.76
Exercised during 2000.......................     (47,698)             5.37
Cancelled during 2000.......................    (242,716)             6.12
                                               ---------           --------
Balance at December 31, 2000................   2,897,007           $  5.43

Granted during 2001.........................   1,176,350              2.06
Cancelled during 2001.......................    (786,729)             3.88
                                               ---------           --------
Balance at December 31, 2001................   3,286,628           $  4.55
                                               =========           =======

        The Company  granted  212,500 and 30,000 stock options to consultants in
2000 and 2001,  respectively,  of which  100,000  were vested as of December 31,
2000 and  230,000  were vested as of December  31,  2001.  The fair value of the
vested  options  estimated  at the grant  date  using the  Black-Scholes  option
pricing model following the assumptions mentioned above and expensed during 2000
and 2001 were $329,000 and $110,000, respectively.  During fiscal 2000, $151,000
was  attributable  to  services  related  to  the  revolving  credit  agreement,
accordingly,  such amount was  capitalized  as a deferred  financing  cost to be
amortized  over the five-year  life of a new credit  agreement (see Note 6), and
$178,000 was expensed as a consulting cost. In 2001,  $110,000 was expensed as a
consulting cost.

        Additional  information  with respect to the  outstanding  options as of
December 31, 2001 is as follows (shares in thousands):
<TABLE>
<CAPTION>

                                           Options Outstanding                         Options Exercisable
                         -------------------------------------------------------   ----------------------------
<S>                       <C>                <C>                 <C>               <C>           <C>
                                                 Average           Weighted
    Option Exercise                             Remaining           Average         Number of        Average
     Price Range   .      Number of Shares   Contractual Life    Exercise Price      Shares      Exercise Price
---------------------     ----------------   ----------------    ---------------   -----------   --------------
 $  1.20 to 5.38                2,625              7.4              $  3.15           792           $  3.84
    7.00 to 10.00                 485              7.3                 8.48           480              8.48
   10.75 to 15.00                 177              7.5                14.68           176              14.68
                                ------                                              ------
                                3,287                                               1,448
                                =====                                               =====
</TABLE>

11. RELATED PARTY TRANSACTIONS

        At December 31, 2001,  the Company had a loan  outstanding  to its Chief
Executive Officer totaling $766,000,  including accrued interest of $64,000. The
loan is  collateralized  by a trust deed and bears  interest at a rate of 6.19%.
The loan is due on or before December 31, 2002.

        At December 31, 2001,  the Company also had a $162,000 loan  outstanding
to one of its Division Presidents,  including accrued interest of $12,000.  This
loan is  collateralized  by 7,093 shares of the Company's  common stock owned by
the Division President and bears interest at a rate of 7%. The loan is due on or
before November 15, 2002.

12. 401(K) PLAN

        The Company has a 401(K) plan which covers  substantially all employees.
Each participant is permitted to make voluntary  contributions not to exceed the
lesser of 20% of his or her respective  compensation or the applicable statutory
limitation,  and is immediately 100% vested.  The Company matches  one-fourth of
the first 4% contributed by the employee. Company contributions to the plan were
$125,000, $93,000 and $102,000 in 1999, 2000 and 2001, respectively.

                                       34
<PAGE>

13. SUPPLEMENTAL DATA (unaudited)

        The following tables set forth quarterly  supplementary data for each of
the years in the two-year  period ended  December 31, 2001 (in thousands  except
per share data).
<TABLE>
<CAPTION>
                                                                                        2000
                                                           --------------------------------------------------------------
                                                                             Quarter Ended                        Year
                                                           ----------------------------------------------------   Ended
                                                            March 31      June 30      Sept 30       Dec 31       Dec 31
                                                            --------      -------      -------       ------       ------
<S>                                                        <C>          <C>          <C>          <C>          <C>
Revenues.................................................. $  19,090    $  18,480    $  18,121    $  19,150    $  74,841
Gross profit..............................................     8,205        7,159        6,708        6,875       28,947
Income (loss) before extraordinary item and
  adoption of SAB 101.....................................     1,287          786          812         (635)       2,250
Extraordinary item, net of $168 tax benefit (1) ..........         -            -         (232)           -         (232)
Cumulative effect of adopting SAB 101 (2).................      (322)           -            -            -         (322)
                                                           ---------    ---------    ---------    ---------    ---------
Net income (loss)......................................... $     965    $     786    $     580    $    (635)   $   1,696
                                                           =========    =========    =========    =========    =========
Earnings per share:
Basic -
Income (loss) per share before extraordinary item
  and adoption of SAB 101................................. $    0.14    $    0.09    $    0.09    $   (0.07)   $     0.24
Extraordinary item (1)....................................         -            -        (0.03)           -         (0.03)
Cumulative effect of adopting SAB 101 (2).................     (0.04)           -            -            -         (0.03)
                                                           ---------    ---------    ---------    ---------    ----------
Net income (loss)......................................... $    0.10    $    0.09    $    0.06    $   (0.07)   $     0.18
                                                           =========    =========    =========    =========    ==========
Diluted -
Income (loss) per share before extraordinary item
  and adoption of SAB 101................................. $    0.13    $    0.08    $    0.09    $   (0.07)   $     0.24
Extraordinary item (1)....................................         -            -        (0.03)           -         (0.03)
Cumulative effect of adopting SAB 101 (2).................     (0.03)           -            -            -         (0.03)
                                                           ---------    ---------    ---------    ---------    ----------
Net income (loss)......................................... $    0.10    $    0.08    $    0.06    $   (0.07)   $     0.18
                                                           =========    =========    =========    =========    ==========
----------------------------
</TABLE>

   (1)  Amount represents the write off of deferred  financing costs, net of tax
        benefit,  related to a bank credit  agreement  which was  terminated  in
        Fiscal 2000.

   (2)  Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
        No. 101 ("SAB 101"),  Revenue Recognition in Financial  Statements.  The
        amount represents the cumulative  effect, net of tax, on January 1, 2000
        retained  earnings as if SAB 101 had been adopted  prior to Fiscal 2000.
        The pro forma  effect on Fiscal 1999 of adopting SAB 101 would have been
        to reduce net income by approximately  $81,000, or $0.00 per basic $0.01
        per  diluted  share.  The pro forma  impact of  adopting  SAB 101 on the
        fourth quarter of 1999 would have been to reduce net income by $122,000,
        or $0.01 per basic and diluted share.
<TABLE>
<CAPTION>
                                       35
<PAGE>
                                                                                        2001
                                                           --------------------------------------------------------------
                                                                             Quarter Ended                        Year
                                                           ----------------------------------------------------   Ended
                                                            March 31      June 30      Sept 30       Dec 31       Dec 31
                                                            --------      -------      -------       ------       ------
<S>                                                        <C>          <C>          <C>          <C>          <C>
Revenues.................................................  $  19,108    $  16,446    $  16,905    $  17,169    $  69,628
Gross profit.............................................      6,465        4,959        5,486        5,854       22,764
Income (loss) before adoption of FAS 133 (3).............        (32)        (676)        (671)          38       (1,341)
Cumulative effect of adopting FAS 133 (3)................       (139)           -          (73)(4)      (35)(4)     (247)
                                                           ---------    ---------    ---------    ---------    ---------
Net income (loss)........................................  $    (171)   $    (676)   $    (744)           3       (1,588)
                                                           =========    =========    =========    =========    =========
Earnings per share:
Basic
Loss per share before adoption of FAS 133 (3)............  $       -    $   (0.07)   $   (0.08)   $       -    $   (0.15)
Cumulative effect of adopting FAS 133 (3)................      (0.02)           -            -            -        (0.03)
                                                           ---------    ---------    ---------    ---------    ---------
Net income (loss)........................................  $   (0.02)   $   (0.07)   $   (0.08)   $       -    $   (0.18)
                                                           =========    =========    =========    =========    =========
Diluted
Loss per share before adoption of FAS 133 (3)............  $       -    $   (0.07)   $   (0.08)   $       -    $   (0.15)
Cumulative effect of adopting FAS 133 (3)................      (0.02)           -            -            -        (0.03)
                                                           ---------    ---------    ---------    ---------    ---------
Net (loss) income........................................  $   (0.02)   $   (0.07)   $   (0.08)   $       -    $   (0.18)
                                                           =========    =========    =========    =========    =========
---------------------------
</TABLE>

   (3)  See Note 6 for a description of the adoption of FAS 133.

   (4)  Reflects the adjustment each quarter of the effective income tax benefit
        rate on the $309,000 gross FAS 133 adjustment.


                                       36
<PAGE>



To the Board of Directors
and Shareholders of Point.360



Our audits of the consolidated  financial  statements  referred to in our report
dated  February 25, 2002,  which is  qualified  as to the  Company's  ability to
continue as a going  concern,  appearing in this Annual Report on Form 10-K also
included an audit of the financial  statement  schedule listed in Item 8 of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all  material  respects,   the  information  set  forth  therein  when  read  in
conjunction with the related consolidated financial statements.


PricewaterhouseCoopers LLP
Century City, California
February 25, 2002




<TABLE>
<CAPTION>
                                    POINT.360
                 SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS


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

<S>                                 <C>            <C>             <C>       <C>              <C>
Year ended December 31, 2001        $ 1,473,000    $    529,000    $  --     $(1,321,000)     $   681,000

Year ended December 31, 2000            971,000       2,195,000       --      (1,693,000)       1,473,000

Year ended December 31, 1999            878,000         790,000       --        (697,000)         971,000

</TABLE>

                                       37
<PAGE>

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information under the captions "Election of Directors," "Management"
and "Section 16 (a) Beneficial Ownership Reporting  Compliance" in the Company's
definitive  proxy statement for the annual meeting of shareholders to be held on
June 5, 2002 (the "Proxy Statement") is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

        The information under the caption "Management" in the Proxy Statement is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The  information  under  the  caption  "Security  Ownership  of  Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated  herein
by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information  under the caption  "Certain  Transactions" in the Proxy
Statement is incorporated herein by reference.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

   (a)  Documents Filed as Part of this Report:

   1,2. Financial Statements and Schedules.

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

        Consolidated  Balance  Sheets - December 31, 2000 and 2001  Consolidated
        Statements  of Income - Fiscal Years Ended  December 31, 1999,  2000 and
        2001  Consolidated  Statements  of  Shareholders'  Equity - Fiscal Years
        Ended December 31, 1999, 2000 and 2001  Consolidated  Statements of Cash
        Flows - Fiscal Years Ended  December  31,  1999,  2000 and 2001 Notes to
        Consolidated Financial Statements

   (3)  Exhibit
        Number    Description

        3.1       Restated Articles of Incorporation of the Company . (3)

        3.2       By-laws of the Company. (3)

        10.1      Agreement  and Plan of Merger,  dated as of December 24, 1999,
                  among VDI  MultiMedia,  VDI  MultiMedia,  Inc.  and VMM Merger
                  Corp. (1)

        10.2      Shareholders  Agreement,  dated as of December 24, 1999, among
                  VMM Merger Corp., R. Luke Stefanko and Julia Stefanko. (2)

        10.3      1996 Stock Incentive Plan of the Company. (3)

        10.4      2000 Stock Incentive Plan of the Company.

        10.5      Business Loan Agreement (Revolving Credit) between the Company
                  and Union  Bank  dated  July 1,  1995,  as amended on April 1,
                  1996, and June 1996. (3)

        10.6      Joint  Operating  Agreement  effective  as of March  1,  1994,
                  between the Company and Vyvx, Inc. (3)

        10.7      Lease Agreement  between the Company and 6920 Sunset Boulevard
                  Associates dated May 17, 1994 (Hollywood facility). (3)

        10.8      Lease   Agreement   between  the  Company  and  3767  Overland
                  Associates,  Ltd.  dated  April 25,  1996  (West  Los  Angeles
                  facility). (3)

                                       38
<PAGE>

        10.9      Asset Purchase Agreement, dated as of December 28, 1996 by and
                  among VDI Media, Woodholly Productions,  Yvonne Parker, Rodger
                  Parker, Jim Watt and Kim Watt. (3)

        10.10     Asset  Purchase  Agreement,  dated as of June 12,  1998 by and
                  between VDI Media and All Post, Inc. (4)

        10.11     Asset Purchase Agreement,  dated as of November 9, 1998 by and
                  among VDI Media, Dubs Incorporated,  Vincent Lyons and Barbara
                  Lyons.  (5)

        10.12     Second Amended and Restated  Credit  Agreement dated September
                  28, 2000  between  the  Company and Union Bank of  California,
                  N.A. (6)

        10.13     Secured  Promissory  Note dated  December  28, 2000 between R.
                  Luke Stefanko and the Company. (7)

        10.14     Asset Purchase  Agreement  dated November 3, 2000 by and among
                  the Company, Creative Digital, Inc. and Larry Hester. (7)

        10.15     First   Amendment  to  Second  Amended  and  Restated   Credit
                  Agreement  and Waiver  dated March 30, 2001 among the Company,
                  the Lenders  party to the Credit  Agreement  and Union Bank of
                  California, N.A. as administrative agent for such Lenders. (7)

        10.16     Second   Amendment  to  Second  Amended  and  Restated  Credit
                  Agreement  and  Forbearance  dated  June 11,  2001  among  the
                  Company,  the Lenders party to the Credit  Agreement and Union
                  Bank of  California,  N.A.  as  administrative  agent for such
                  Lenders. (8)

        10.17     Third   Amendment  to  Second  Amended  and  Restated   Credit
                  Agreement  and  Forbearance  dated  July 20,  2001  among  the
                  Company,  the Lenders party to the Credit  Agreement and Union
                  Bank of  California,  N.A.  as  administrative  agent for such
                  Lenders. (8)

        10.18     Employment  Agreement  dated June 7, 2001  between the Company
                  and R. Luke Stefanko. (8)

        10.19     Employment  Agreement  dated June 7, 2001  between the Company
                  and Alan R. Steel. (8)

        10.20     Employment  Agreement  dated June 7, 2001  between the Company
                  and Neil Nguyen. (8)

        23.1      Consent of Independent Accountants.
        ------------------------------------

        (1)       Filed with the Securities and Exchange  Commission  ("SEC") on
                  January 11, 2000 as an exhibit to the  Company's  Form 8-K and
                  incorporated  herein by  reference.

        (2)       Filed with the SEC on January 3, 2000 at part of the  Schedule
                  13D of VMM Corp,  Bain  Capital  Fund VI,  L.P.,  Bain Capital
                  Partners  VI, L.P.  and Bain  Capital  Investors  VI, Inc. and
                  incorporated herein by reference.

        (3)       Filed with the SEC as an exhibit to the Company's Registration
                  Statement on Form S-1 filed with the SEC on May 17, 1996 or as
                  an exhibit to  Amendment  No. 1 to the Form S-1 filed with the
                  SEC on December 31, 1996 and incorporated herein by reference.

        (4)       Filed  with  the SEC on June  29,  1998 as an  exhibit  to the
                  Company's Form 8-K and incorporated herein by reference

        (5)       Filed  with  SEC on  December  2,  1998 as an  exhibit  to the
                  Company's Form 8-K and incorporated herein by reference.

        (6)       Filed with the SEC on  November  14, 2000 as an exhibit to the
                  Company's Form 10-Q and incorporated herein by reference.

        (7)       Filed  with the SEC on April  11,  2001 as an  exhibit  to the
                  Company's Form 10-K and incorporated herein by reference.

        (8)       Filed  with the SEC on August  14,  2001 as an  exhibit to the
                  Company's Form 10-Q and incorporated herein by reference.

   (b)  Reports on 8-K:

        No reports on Form 8-K were filed during the quarter ended  December 31,
2001.

                                       39
<PAGE>

                                   SIGNATURES

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

Dated: April 9, 2002

                                     POINT.360

                                     By: /s/ R. Luke Stefanko
                                         ---------------------
                                         R. Luke Stefanko
                                         President and Chief Executive Officer

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

<TABLE>
<CAPTION>

<S>                           <C>                                       <C>
 /s/ R. Luke Stefanko
 ------------------------
 R. Luke Stefanko             President and Chief Executive Officer     April 9, 2002
                              (Principal Executive Officer), Director

 /s/ Haig S. Bagerdjian
 ------------------------
 Haig S. Bagerdjian           Chairman of the Board of Directors        April 9, 2002


 /s/ Alan R. Steel
 ------------------------
 Alan R. Steel                Executive Vice President,                 April 9, 2002
                              Finance and Administration,
                              Chief Financial Officer
                              (Principal Accounting and
                                Financial Officer)

 /s/ Robert A. Baker
 ------------------------
 Robert A. Baker              Director                                  March 18, 2002

 /s/ Greggory J. Hutchins
 ------------------------
 Greggory J. Hutchins         Director                                  March 28, 2002

 /s/ Robert M. Loeffler
 ------------------------
 Robert M. Loeffler           Director                                  April 9, 2002

</TABLE>


                                       40
<PAGE>


                       CONSENT OF INDEPENDENT ACCOUNTANTS


We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statements  on Forms S-8 (Nos.  333-69174  and  333-69168)  of  Point.360 of our
report dated February 25, 2002,  which is qualified as to the Company's  ability
to continue as a going  concern,  relating to the  financial  statements,  which
appears in this Annual Report on Form 10-K. We also consent to the incorporation
by  reference of our report dated  February 25, 2002  relating to the  financial
statement schedule, which appears in this Form 10-K.


PricewaterhouseCoopers LLP
Century City, California
April 16, 2002










                                       41