**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K/T**




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




**For
      the fiscal year ended ________________________**





**OR**


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





**For
      the transition period from January 1, 2007 to June 30,
      2007**





**Commission
      File Number 001-33468**







**POINT.360**


(Exact
      name of registrant as specified in its charter)




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





Registrant's
      telephone number, including area code (818) 565-1400





Securities
      registered pursuant to Section 12(b) of the Act:


Common
      Stock, no par value.





Securities
      registered pursuant to Section 12(g) of the Act:


None







Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes o
      No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes o
      No x





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


Yes
x  No
o




Indicate
      by check mark 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/T or any amendment
      to
      this Form 10-K/T. X









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


Large
                  accelerated filer ̈
              Accelerated
                  filer ̈
              Non-accelerated
                  filerý




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


Yes
      [ ]
      No [X]





The
      aggregate market value of the voting common equity held by non-affiliates of
      the
      registrant as of the first business day that the registrant became a publicly
      traded entity (August 14, 2007) was approximately $15.0 million. As of November
      12, 2007, there were 10,553,410 shares of Common Stock outstanding.




DOCUMENTS
      INCORPORATED BY REFERENCE





The
      information required by Part III of this Report will be included in the
      Company’s Form 10-K/T/A which shall be filed with the Securities and Exchange
      Commission within 120 days after August 14, 2007, the first day of trading
      in
      the Company’s Common Stock.





**CAUTIONARY
      STATEMENT**




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




The
      words
      or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,”
“forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar
      expressions identify “forward-looking statements”. Such forward-looking
      statements are subject to certain risks and uncertainties that could cause
      actual results to differ materially from historical earnings and those presently
      anticipated or projected. We wish to caution you not to place undue reliance
      on
      any such forward-looking statements, which speak only as of the date made.
      We
      are calling to your attention important factors that could affect our financial
      performance and could cause actual results for future periods to differ
      materially from any opinions or statements expressed with respect to future
      periods in any current statements.




The
      following list of important factors may not be all-inclusive, and we
      specifically decline to undertake an obligation to publicly revise any
      forward-looking statements that have been made to reflect events or
      circumstances after the date of such statements or to reflect the occurrence
      of
      anticipated or unanticipated events. Among the factors that could have an impact
      on our ability to achieve expected operating results and growth plan goals
      and/or affect the market price of our stock are:




·
            our
                recent history of losses;


·
            Point.360’s
                prior breach of credit agreements;


·
            our
                highly competitive marketplace;


·
            the
                risks associated with dependence upon significant
                customers;


·
            our
                ability to execute our expansion
                strategy;


·
            the
                uncertain ability to manage in a changing
                environment;


·
            our
                dependence upon, and our ability to adapt to, technological
                developments;


·
            dependence
                on key personnel;


·
            our
                ability to maintain and improve service
                quality;


·
            fluctuation
                in quarterly operating results and seasonality in certain of our
                markets;


·
            possible
                significant influence over corporate affairs by significant
                shareholders;


·
            our
                ability to operate effectively as a stand-alone, publicly traded
                company;
                and


·
            the
                cost associated with becoming compliant with the Sarbanes-Oxley Act
                of
                2002 and the consequences of failing to implement effective internal
                controls over financial reporting as required by Section 404 of the
                Sarbanes-Oxley Act of 2002 by the date that we must comply with that
                section of the Sarbanes-Oxley Act.





Other
      factors not identified above, including the risk factors described in the “Risk
      Factors” section of this Form 10-K/T may also cause actual results to differ
      materially from those projected by our forward-looking statements. Most of
      these
      factors are difficult to anticipate and are generally beyond our
      control.




You
      should consider the areas of risk described above, as well as those set forth
      under the heading “Risk Factors” below, in connection with considering any
      forward-looking statements that may be made in this Form 10-K/T and elsewhere
      by
      us and our businesses generally. Except to the extent of obligation to disclose
      material information under the federal securities laws or the rules of the
      NASDAQ Global Market, we undertake no obligation to release publicly any
      revisions to any forward-looking statements, to report events or to report
      the
      occurrence of unanticipated events.




1




**PART
      1**




**ITEM
      1. BUSINESS**




The
      Company was formed as a wholly-owned subsidiary (named “New 360”) of Point.360 (
“Parent Company”) in April 2007. The post production assets of the Parent
      Company were contributed to New 360 on August 14, 2007, after which all New.360
      common stock was distributed to the Parent Company’s shareholders. New 360
      subsequently changed its name to Point.360 after the merger of the Parent with
      DG FastChannel, Inc. (“DG FastChannel”). The Parent Company is hereinafter
      referred to as Old Point.360.




Point.360
      (“Point.360” or the “Company”) is a leading integrated media management services
      company providing film, video and audio post-production, archival, duplication,
      computer graphics and distribution services to motion picture studios,
      television networks, independent production companies and multinational
      companies. We provide the services necessary to edit, master, reformat and
      archive our clients’ audio and video content, including television programming,
      feature films, and movie trailers.




The
      Company, previously part of Old Point.360, was spun off to Old Point.360’s
      shareholders on August 14, 2007. References to the activities of the Company
      prior to the spin-off refer to those of Old Point.360’s post production business
      which constitutes the operations of the Company.




We
      seek
      to capitalize on growth in demand for the services related to the manipulation
      and distribution of rich media content without assuming the production or
      ownership risk of any specific television program, feature film, advertising
      or
      other form of content. The primary users of our services are entertainment
      studios 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, Old Point.360 successfully completed acquisitions of companies
      providing similar services. We will continue to evaluate acquisition
      opportunities to enhance our operations and profitability. In 2004, Old
      Point.360 acquired International Video Conversions, Inc. (“IVC”), a leading
      digital intermediate and digital mastering facility. In 2005, Old Point.360
      acquired Visual Sound, a provider of captioning services. In 2007, Old Point.360
      purchased the business of Eden FX, a producer of sophisticated computer graphics
      for feature films, television programming and commercials. As a result of these
      acquisitions, we are one of the largest and most diversified providers of
      technical and distribution services in our markets, and therefore are able
      to
      offer our customers a single source for such services at prices that reflect
      our
      scale economies.




**Markets**




We
      derive
      revenues primarily from the entertainment industry, consisting of major and
      independent motion picture and television studios, cable television program
      suppliers and television program syndicators. On a more limited basis, we also
      service national television networks, local television stations, corporate
      or
      instructional video providers, infomercial advertisers and educational
      institutions.




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. We believe that several trends in the entertainment industry
      have and will continue to have a positive impact on our 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.




**Value-Added
      Services**




Point.360
      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 we provide to our
      customers:




2




*Film-To-Digital
      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 digital 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. We transfer film
      to digital formats using Spirit, URSA and Cintel MK-3 telecine equipment and
      DaVinci® digital color correction systems. The re-mastering of studio film and
      television libraries to the HDTV broadcast standard has become a growing portion
      of our film transfer business, as well as affiliated services such as foreign
      language mastering, duplication and distribution.




*Video
      Editing* .
      We
      provide digital editing services in Hollywood, Burbank and West Los Angeles,
      California. The editing suites are equipped with (1) state-of-the-art
      digital editing equipment, including the Avid® 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 (2) 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. We are able to convert
      video between all international formats, including NTSC, PAL and SECAM. Our
      competitive advantages in this service line include our state-of-the-art systems
      and our detailed knowledge of the international markets with respect to
      quality-control requirements and technical specifications.




*Broadcast
      Encoding.* We
      provide 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 airtime. We provide
      VEIL encoding services for a number of its motion picture studio clients to
      enable them to customize their promotional material. We also provide 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* .
      We
      digitally edit and create sound effects, assist in replacing dialog and
      re-record audio elements for integration with film and video elements. We design
      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®, SDDS®, THX® and Surround Sound®.




*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.




*Visual
      Effects.* We
      provide visual effects for feature films, television programs and commercial
      advertising content. Content creation across all media is in continual need
      of
      highly realistic, imaginative and intriguing visual effects. Due to the lower
      costs of digital content as compared to the cost of live production, more
      heightened ‘realism’ has been made possible by today’s highly skilled artists
      using sophisticated software. This offers producers of films, TV programs and
      commercials more production flexibility and time savings.




*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. We provide 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. We also
      create music and effects tracks from programming shot before an audience to
      prepare television sitcoms for dialog recording and international
      distribution.




3




*Syndication.* We offer
      a broad range of technical services to domestic and international programmers.
      We service 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. We provide facilities and services for the delivery of syndicated
      television programming in the United States and Canada. Our 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.




*Archival
      Services.* We
      currently store approximately one 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. We perform
      secure management archival services in all of our operating facilities as well
      as our state-of-the-art Media Center in Los Angeles. We offer on-line access
      to
      archival information for advertising clients, and may offer this service to
      other clients in the future.




**New
      Markets**




We
      believe that the development of value-added services will provide us with the
      opportunity to enter or increase our presence in several new or expanding
      markets.




*International.* Point.360 currently provides electronic and physical duplication and
      distribution services for rich media content providers. Furthermore, we believe
      that available electronic distribution methods will facilitate further expansion
      into the international distribution arena as such technologies become
      standardized and cost-effective. In addition, we believe that the growth in
      the
      distribution of domestic content into international markets will create
      increased demand for value-added services currently provided by us such as
      standards conversion and audio and digital mastering.




*High
      Definition Television (“HDTV”).* We are
      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. We believe that the aggressive timetable associated with such
      conversion, which has resulted both from mandates by the Federal Communications
      Commission 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. We maintain a state-of-the-art HDTV
      capability.




*DVD
      Authoring.* We
      believe that there are significant opportunities in the DVD authoring market.
      With the increasing rate of conversion of existing analog libraries, as well
      as
      new content being mastered to digital formats, we believe that Point.360 has
      positioned itself well to provide value-added services to new and existing
      clients. We have made capital investments to expand and upgrade our current
      DVD
      and digital compression operations in anticipation of the increasing demand
      for
      DVD and video encoding services.




**Sales
      and Marketing**




We
      market
      our services through a combination of industry referrals, formal advertising,
      trade show participation, special client events, and our Internet website.
      While
      we rely primarily on our reputation and business contacts within the industry
      for the marketing of our services, we also maintain a direct sales force to
      communicate the capabilities and competitive advantages of our services to
      potential new customers. Our marketing programs are directed toward
      communicating our unique capabilities and establishing us as the predominant
      value-added partner for entertainment, advertising and corporate
      customers.




In
      addition to our traditional sales efforts directed at those individuals
      responsible for placing orders with our facilities, we also strive to negotiate
      “preferred vendor” relationships with our major customers. Through this process,
      we negotiate 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 Point.360
      that (1) offer lower prices through scale economies, (2) have the capacity
      to
      handle large orders without outsourcing to other vendors, and (3) can offer
      a
      strategic partnership on technological and other industry-specific issues.
      We
      negotiate such agreements periodically with major entertainment studios and
      national broadcast networks.




**Customers**




Point.360
      has added customers through acquisitions and by delivering a favorable mix
      of
      reliability, timeliness, quality and price. The integration of our facilities
      has given our customers a time advantage in the ability to deliver broadcast
      quality material. We market our services to major and independent motion picture
      and television production companies, television program suppliers and, on a
      more
      limited basis, national television networks, infomercial providers, local
      television stations, television program syndicators, corporations and
      educational institutions. Our motion picture clients include Disney, Sony
      Pictures Entertainment, Twentieth Century Fox, Universal Studios, Warner Bros.,
      Metro-Goldwyn-Mayer and Paramount Pictures.




4




We
      solicit the motion picture and television industries to generate revenues.
      In
      the six months ended June 30, 2007 and year ended December 31, 2006, five
      major motion picture studios accounted for approximately 56% and 58% of
      Point.360’s revenues, respectively, while sales to Twentieth Century Fox and
      affiliates comprised 34% and 33% of revenues in those periods, respectively.
      Sales to Twentieth Century Fox and affiliates were made to approximately 50
      individual customers within the group.




We
      generally do not have exclusive service agreements with our clients. Because
      clients generally do not make arrangements with us until shortly before our
      facilities and services are required, we usually do not have any significant
      backlog of service orders. Our services are generally offered on an hourly
      or
      per unit basis based on volume.




**Customer
      Service**




We
      believe we have built a strong reputation in the market with a commitment to
      customer service. We receive customer orders via courier services, telephone,
      telecopier and the Internet. The sales and customer service staff develops
      strong relationships with clients within the studios and is trained to emphasize
      our ability to confirm delivery, meet difficult delivery time frames and provide
      reliable and cost-effective service. Several studios are customers because
      of
      our ability to meet often changing or rush delivery schedules.




We
      have a
      sales and customer service staff of approximately 55 people, and we provide
      services 24 hours per day. This staff serves as a single point of problem
      resolution and supports not only our customers but also the television stations
      and cable systems to which we deliver.




**Competition**




The
      manipulation, duplication and distribution of rich media assets 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 us, while others specialize in one or several of these services.
      Substantially all of our competitors have a presence in the Los Angeles area,
      which is currently the largest market for our services. Due to the current
      and
      anticipated future demand for video and distribution services in the Los Angeles
      area, we believe that both existing and new competitors may expand or establish
      video service facilities in this area.




**Employees**





The
      Company had 350 full-time employees as of June 30, 2007. 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
      1A. RISK FACTORS**





*You
      should carefully consider each of the following risk factors and all of the
      other information set forth in this prospectus. The risk factors have been
      separated into three groups: (1) risks relating to our business,
      (2) risks relating to the separation of New 360 from Point.360, and
      (3) risks relating to our common stock. Based on the information currently
      known to us, we believe that the following information identifies the most
      significant risk factors affecting our company in each of these categories
      of
      risks. Past financial performance may not be a reliable indicator of future
      performance, and historical trends should not be used to anticipate results
      or
      trends in future periods.*




*If
      any of the following risks and uncertainties develops into actual events, these
      events could have a material adverse effect on our business, financial condition
      or results of operations. In such case, the trading price of our common stock
      could decline.*




5




**Risks
      Relating to Point.360’s Business**





**We
      have a history of losses, and we may incur losses in the
      future.**




Point.360
      had losses in the six months ended June 30, 2007 and in each of the five fiscal
      years ended December 31, 2006 due, in part, to increased price competition,
      the
      cost of being a publicly traded company and a number of unusual charges. There
      is no assurance as to future profitability on a quarterly or annual
      basis.




**Old
      Point.360 previously breached its credit agreements, and we may do so in the
      future.**




Due
      to
      lower operating cash amounts resulting from reduced sales levels in prior years
      and the consequential net losses, Old Point.360 breached certain covenants
      of
      its credit facility. The breaches were temporarily cured based on amendments
      and
      forbearance agreements among Old Point.360 and the banks which called for,
      among
      other provisions, scheduled payments to reduce amounts owed to the banks to
      the
      permitted borrowing base.




Although
      we were in a cash positive position as of June 30, 2007 and expect to be for
      the
      foreseeable future, if we continue to incur losses in the future as a separate
      company, there is a risk that we will default under financial covenants
      contained in any new credit agreements and/or will not be able to pay off
      revolving or term loans when due. If a default condition exists in future
      banking arrangements, all amounts that may be outstanding under the new
      agreements will be due and payable which could materially and adversely affect
      our business.




**We
      may be unable to compete effectively in a highly competitive
      marketplace.**




The
      post-production 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 firms some of which have a national
      presence and, to a lesser extent, the in-house post-production operations of
      our
      major motion picture studio customers. Some of these firms, and all of the
      studios, have greater financial marketing resources and have achieved a higher
      level of brand recognition than we have. 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.




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




**We
      would be adversely affected by the loss of key customers.**




Although
      we have an active client list of approximately 2,400 customers, five motion
      picture studios and and/or their affiliates accounted for approximately 28%,
      52%, 58% and 56% of our revenues in 2004, 2005 and 2006 and the six months
      ended
      June 30, 2007, respectively. Twentieth Century Fox (and affiliates) was the
      only
      customer which accounted for more than 10% of sales in any of the periods since
      2004, or 26% and 33% in 2005 and 2006 and 34% in the six months ended June
      30,
      2007, respectively. 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 industry,
      our
      financial condition, results of operations and prospects could also be adversely
      affected by an adverse change in conditions which impact those
      industries.




**Our
      expansion strategy may fail.**




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 Point.360 completed a number of acquisitions
      in
      the past, the most recent of which was in March 2007, 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 without substantial costs, delays or other
      problems.




6




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 our 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 our customers may result in increased demand for
      services in certain regions where we currently do not have post-production
      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.




If
      we
      acquire any entities, we may have to finance a large portion of the anticipated
      purchase price and/or refinance then existing credit agreements. The cost of
      any
      new financing may be higher than our then-existing credit facilities. Future
      earnings and cash flow may be negatively impacted if any acquired entity does
      not generate sufficient earnings and cash flow to offset the increased
      costs.




**We
      are operating in a changing environment that may adversely affect our
      business.**




In
      prior
      years, we experienced industry consolidation, changing technologies and
      increased regulation, all of which 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 these circumstances, 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 our 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.




**We
      may be unable to adapt our business to changing technological
      requirements.**




Although
      we intend to utilize the most efficient and cost-effective technologies
      available for telecine, high definition formatting, editing, coloration and
      delivery of audio and video content 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. 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 our needs and the needs of our customers.




**The
      loss of key personnel would adversely affect our business.**




We
      are
      dependent on the efforts and abilities of certain senior management,
      particularly those of Haig S. Bagerdjian, Chairman, 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. Mr. Bagerdjian beneficially owns approximately 29% of Point.360’s
      outstanding stock. Although we have severance agreements with Mr. Bagerdjian
      and
      certain key executives, we cannot be sure that either Mr. Bagerdjian or other
      executives will remain with Point.360. 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.




7




**We
      may be unable to meet the demands of our customers.**




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 and dissatisfied
      customers may refuse to place further orders with the Company in the event
      of a
      significant occurrence of lost elements, either of which could have a 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 us from significant loss in these circumstances
      and
      there is no assurance 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 deliver services 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.




**Our
      quarterly operating results have fluctuated significantly in the past and may
      fluctuate in the future.**




Our
      operating results have varied in the past, and may vary in the future, depending
      on factors such as sales volume fluctuations due 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. 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. For example, the
      12,000-member Writer’s Guild of America began a strike on November 5, 2007 which
      may affect our business if the strike is prolonged. 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 a future quarter our
      operating results will be below the expectations of equity research analysts
      and
      investors. In such event, the price of our common stock would likely be
      materially adversely affected.




**Risks
      Relating to the Separation of the Company from** **Old
      Point.360**





**We
      may be unable to achieve some or all of the benefits that we expect to achieve
      from our separation from Old Point.360.**




As
      a
      stand-alone, independent public company, we believe that our business will
      benefit from, among other things, allowing our management to design and
      implement corporate policies and strategies that are based primarily on the
      characteristics of our business, allowing us to focus our financial resources
      wholly on our own operations and implement and maintain a capital structure
      designed to meet our own specific needs. However, by separating from Old
      Point.360, there is a risk that we may be more susceptible to market
      fluctuations and other adverse events than we would have been were we still
      a
      part of Old Point.360. As part of Old Point.360, we were able to enjoy certain
      benefits from Old Point.360’s operating diversity, purchasing and borrowing
      leverage; available capital for investments and opportunities to pursue
      integrated strategies with Old Point.360’s other businesses. As such, we may not
      be able to achieve some or all of the benefits that we expect to achieve as
      a
      stand alone, independent post-production company.




**We
      have no operating history as a separate public company and our historical and
      pro forma financial information is not necessarily representative of the results
      we would have achieved as a separate publicly traded company and may not be
      a
      reliable indicator of our future results.**




The
      historical and pro forma financial information included in this Form 10-K/T
      does
      not necessarily reflect the financial condition, results of operations or cash
      flows that we would have achieved as a separate publicly traded company during
      the periods presented or those that we will achieve in the future primarily
      as a
      result of the following factors:




·
            Prior
                to our separation from Old Point.360, our business has been operated
                by
                Old Point.360 as part of its broader corporate organization, rather
                than
                as an independent company. Old Point.360 performed various corporate
                functions for the post-production business, including, but not limited
                to,
                tax administration, certain governance functions (including compliance
                with the Sarbanes-Oxley Act of 2002) and external reporting. Our
                historical and pro forma financial results reflect allocations of
                corporate expenses from Old Point.360 for these and similar functions
                based on the relationship of our sales to sales of Old Point.360
                for
                certain administrative functions necessary to complete the sales
                cycle
                (sales, personnel, billing, accounting, etc.), specific balance sheet
                accounts comprising long-lived assets (term loan interest expense)
                and net
                working capital (revolving loan interest expense), and other measurements.
                We believe that these allocations are comparable to the expenses
                we would
                have incurred had we operated as a separate publicly traded company,
                although there is a risk that we may incur higher expenses as an
                independent company.




8




·
            Prior
                to our separation from Old Point.360, our business has been integrated
                with the other businesses of Point.360. Historically, we have shared
                economies of scope and scale in costs, employees, vendor relationships
                and
                customer relationships. The loss of these benefits could have an
                adverse
                effect on our business, results of operations and financial condition
                following the completion of the
                separation.




·
            Generally,
                our working capital requirements and capital for our general corporate
                purposes, including acquisitions and capital expenditures, have
                historically been satisfied as part of the corporate-wide cash management
                policies of Old Point.360. Without the opportunity to obtain financing
                from Old Point.360, we may need to obtain additional financing from
                banks,
                through public offerings or private placements of debt or equity
                securities, strategic relationships or other
                arrangements.




·
            Subsequent
                to the completion of our separation from Old Point.360, the cost
                of
                capital for our business may be higher than Old Point.360’s cost of
                capital prior to our separation because Old Point.360 operating results
                were higher than what ours are contemplated to be following the
                separation.




·
            Other
                significant changes may occur in our cost structure, management,
                financing
                and business operations as a result of our operating as a company
                separate
                from Old Point.360.




**We
      may be unable to make, on a timely or cost-effective basis, the changes
      necessary to operate as an independent company, and we may experience increased
      costs after our separation from Old Point.360 or as a result of the
      separation.**




Following
      the completion of our separation from Old Point.360, the costs of being a public
      entity will be spread over a lower revenue base, which may negatively affect
      operating results.




**If
      the distribution of our common stock to Old Point.360’s shareholders fails to
      meet the requirements of Section 355 of the Internal Revenue Code, then our
      shareholders might be required to pay U.S. federal income
      taxes.**




We
      believe that no gain or loss will be recognized by a shareholder for federal
      income tax purposes, pursuant to Section 355 of the Code, upon the receipt
      of
      shares of our common stock from Old Point.360. However, you should note that
      Old
      Point.360 did not seek a ruling from the Internal Revenue Service (“ **IRS** ”)
      as to
      the U.S. federal income tax treatment of the distribution of the New 360 shares.
      There is no assurance that the IRS will not challenge the validity of the
      distribution and such related transactions as failing to meet the requirements
      of Section 355 of the Code or that any such challenge ultimately will not
      prevail.




If
      the
      distribution were to fail to meet the requirements of Section 355 of the Code,
      an amount equal to the fair market value of our common stock received would
      be
      taxable as a dividend to the extent of the shareholder’s ratable share of Old
      Point.360’s current and accumulated earnings and profits (as increased to
      reflect any current income including any gain recognized by Old Point.360 on
      the
      distribution). The balance, if any, of the distribution would be treated as
      nontaxable return of capital to the extent of the Old Point.360 shareholder’s
      tax basis in its Old Point.360 stock, with any remaining amount being taxed
      as
      capital gain. The distribution will be taxable to Old Point 360 to the extent
      of
      the excess, if any, of (1) the fair market value of the common stock distributed
      to the Old Point.360 shareholders over (2) Old Point.360’s tax basis in such
      common stock. However, it is anticipated that little or no income will be
      recognized by Old Point.360 because the tax basis of the Company’s stock will be
      approximately equal to the value of the Company as determined by a valuation
      by
      independent appraisal.




9




**We
      will be responsible for paying certain liabilities incurred by Old Point.360
      prior to the date of our separation from Old Point.360.**




Pursuant
      to agreements between us and DG FastChannel, Inc. (“DG”), we assumed
      responsibility for the payment of various liabilities that were incurred by
      Old
      Point.360 prior to the date of our separation from Old Point.360, including
      accounts payable and other expenses not exclusively related to Old Point.360’s
      ads business, taxes for periods prior to the separation date and other
      liabilities of Old Point.360, including contingent liabilities whose amount
      is
      not yet known, arising out of the operation of Old Point.360’s business (other
      than the ads business) during the period prior to the separation. Although
      we do
      not currently have any knowledge that the IRS, other governmental agencies
      or
      third parties intend to file lawsuits or initiate proceedings with respect
      to
      the operation of Old Point.360’s business prior to the separation date, that
      possibility exists and the payment by us of any such contingent liabilities
      for
      which we are responsible could materially and adversely affect our financial
      condition.




**Risks
      Relating to the Company’s Common Stock**





**There
      is no existing market for our common stock, and a trading market that will
      provide you with adequate liquidity may not develop for our common stock. In
      addition, the market price of our shares may fluctuate
      widely.**




Our
      common stock began public trading on August 14, 2007. There is no assurance
      that
      an active trading market will be sustained in the future.




We
      cannot
      predict the prices at which our common stock may trade. The market price of
      our
      common stock may fluctuate widely, depending upon many factors, some of which
      may be beyond our control, including:




·
            our
                business profile and market capitalization may not fit the investment
                objectives of our shareholders and, as a result, our shareholders
                may sell
                our shares after the distribution;




·
            a
                shift in our investor base;




·
            our
                quarterly or annual earnings, or those of other companies in our
                industry;




·
            actual
                or anticipated fluctuations in our operating results due to the
                seasonality of our business and other factors related to our
                business;




·
            changes
                in accounting standards, policies, guidance, interpretations or
                principles;




·
            announcements
                by us or our competitors of significant acquisitions or
                dispositions;




·
            our
                ability to meet earnings estimates of
                shareholders;




·
            the
                operating and stock price performance of other comparable
                companies;




·
            overall
                market fluctuations; and




·
            general
                economic conditions.




Stock
      markets in general have experienced volatility that has often been unrelated
      to
      the operating performance of a particular company. These broad market
      fluctuations may adversely affect the trading price of our common stock.




**Investors
      may be unable to accurately value our common stock.**




Investors
      often value companies based on the stock prices and results of operations of
      other comparable companies. Currently, no public post-production company exists
      that is directly comparable to our size, scale and service offerings. As such,
      investors may find it difficult to accurately value our common stock, which
      may
      cause our common stock price to trade below our true value.




10




**Your
      percentage ownership in the Company may be diluted in the
      future.**




Your
      percentage ownership in the Company may be diluted in the future because of
      equity awards that we expect will be granted to our directors, officers and
      employees. We have adopted the 2007 Equity Incentive Plan, which provides for
      the grant of equity based awards, including restricted stock, restricted stock
      units, stock options, stock appreciation rights and other equity-based awards
      to
      our directors, officers and other employees, advisors and consultants.




**Our
      shareholder rights agreement and ability to issue preferred stock may
      discourage, delay or prevent a change in control of the Company that would
      benefit our shareholders.**




Our
      Board
      of Directors has the authority to issue up to 5,000,000 shares of 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 other 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 that
      would be beneficial to our shareholders.




On
      the
      date that the Company’s shares were distributed to Old Point.360 shareholders,
      each shareholder also received one preferred share purchase right for each
      share
      of our common stock received by the shareholder. The rights will be attached
      to
      the common stock and will trade separately and be exercisable only in the event
      that a person or group acquires or announces the intent to acquire 20% or more
      of our common stock. Each right will entitle shareholders to buy one
      one-hundredth of a share of a new series of junior participating preferred
      stock
      at an exercise price of $10. If we are acquired in a merger or other business
      combination transaction after a person has acquired 20% or more of our
      outstanding common stock, each right will entitle its holder to purchase, at
      the
      right’s then-current exercise price, a number of the acquiring company’s common
      shares having a market value of twice such price. In addition, if a person
      or
      group acquires 20% or more of our outstanding common stock, each right will
      entitle its holder (other than such person or members of such group) to
      purchase, at the right’s then-current exercise price, a number of Point.360
      common shares having a market value of twice such price. Before a person or
      group acquires beneficial ownership of 20% or more of our common stock, the
      rights are redeemable for $.0001 per right at the option of the Board of
      Directors.




Although
      our shareholder rights agreement is intended to encourage anyone seeking to
      acquire the Company to negotiate with the Board prior to attempting a takeover,
      the rights agreement may have the
      effect of discouraging, delaying or preventing a change in control of the
      Company that would be beneficial to our shareholders.




**We
      do not expect to pay dividends.**




We
      do not
      believe that we will have the financial strength to pay dividends for the
      foreseeable future. If we do not pay dividends, the price of our common stock
      that you receive in the distribution must appreciate for you to receive a gain
      on your investment in the Company. This appreciation may not occur.




**Our
      controlling shareholders may cause the Company to be operated in a manner that
      is not in the best interests of other shareholders.**




Our
      Chairman, President and Chief Executive Officer, Haig S. Bagerdjian,
      beneficially owns approximately 29% of our common stock. The ex-spouse of R.
      Luke Stefanko, Old Point.360’s former President and Chief Executive Officer,
      owns approximately 12% of the common stock. By virtue of their stock ownership,
      Ms. Stefanko and Mr. Bagerdjian individually or together may be able to
      significantly influence the outcome of matters required to be submitted to
      a
      vote of shareholders, including (1) the election of the Board of Directors,
      (2)
      amendments to our Articles of Incorporation and (3) 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.




11




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





Not
      applicable




**ITEM
      2. PROPERTIES**




The
      Company currently leases 7 facilities which all have production capabilities
      and/or sales activities. The terms of leases for leased facilities expire at
      various dates from 2008 to 2021. The following table sets forth the location
      and
      approximate square footage of the Company's properties:





**Square****Footage**Hollywood,
                CA.
            31,000Hollywood,
                CA.
            8,000Hollywood,
                CA.
            13,000Burbank,
                CA.
            32,000Burbank,
                CA.
            45,500Los
                Angeles, CA.
            64,600Los
                Angeles, CA
            13,400




**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 such material legal proceedings.




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




No
      matters were submitted to the Company’s shareholders for a vote during the
      transition period covered by this report.




12





**PART
      II**





**ITEM
      5. MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES**




**Market
      Information**




The
      Company's Common Stock is traded on the N ASDAQ
      Global Market under the symbol PTSX. The following table sets forth, for the
      periods since the separation on August 14, 2007 from Old Point.360, the high
      and
      low closing price per share for the Common Stock.





**Common
                Stock****Low**
            
            **High****Year
                Ended June 30, 2008**First
                Quarter
            
            $
            2.00
            
            $
            2.59





On
      October 31, 2007, the closing sale price of the Common Stock as reported on
      the
      NASDAQ Global Market $ 2.15
      per
      share. On that date, there were approximately 1,000 holders of record of the
      Common Stock.





**Dividends**




Neither
      the Company
      nor Old Point.360 have paid dividends on its Common Stock. 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."





**Stock
      Repurchases**





The
      Company did not repurchase any shares of its Common Stock during the six months
      ended June 30, 2007.




13


**ITEM
        6. SELECTED FINANCIAL DATA**
  The
        following data, insofar as they relate to each of the years 2002 to
        2006 and the
        six month periods ended June 30, 2006 and 2007, 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.
 
 **Year
                  Ended December 31,**
              
              **Six
                  Months Ended**
                **June
                  30,**(in
                  thousands except per share amounts)
                **Statement
                  of Income (Loss) Data**
              
              **2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2006**
              
              **2007****(unaudited)**
              
              **(unaudited)**
              
              
              
              
              
              
              
              **(unaudited)**Revenues
              
              **$**
              43,183
              
              $
              37,542
              
              $
              38,588
              
              $
              43,059
              
              $
              43,533
              
              $
              21,692
              
              $
              20,850Cost
                  of Services Sold
              
              
              (28,843
              )
              
              (25,774
              )
              
              (27,958
              )
              
              (29,472
              )
              
              (29,976
              )
              
              (14,948
              )
              
              (15,760
              )Gross
                  Profit
              
              
              14,340
              
              
              11,768
              
              
              10,631
              
              
              13,587
              
              
              13,557
              
              
              6,744
              
              
              5,090Selling,
                  General and administrative expense
              
              
              (13,161
              )
              
              (11,627
              )
              
              (13,649
              )
              
              (14,972
              )
              
              (13,554
              )
              
              (6,995
              )
              
              (7,071
              )Operating
                  Income (loss)
              
              
              1,179
              
              
              141
              
              
              (3,018
              )
              
              (1,385
              )
              
              3
              
              
              (251
              )
              
              (1,981
              )Interest
                  Expense, net
              
              
              (1,956
              )
              
              (1,644
              )
              
              (654
              )
              
              (1,280
              )
              
              (659
              )
              
              (448
              )
              
              (263
              )Benefit
                  from income tax
              
              
              323
              
              
              604
              
              
              1,489
              
              
              1,045
              
              
              342
              
              
              280
              
              
              607Net
                  income (loss)
              
              $
              (454
              )
              $
              (899
              )
              $
              (2,183
              )
              $
              (1,620
              )
              $
              (314
              )
              $
              (419
              )
              $
              (1,637
              )Pro
                  forma earnings (loss) per share
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (0.03
              )
              $
              (0.04
              )
              $
              (0.16
              )Pro
                  forma weighted average common share outstanding
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,554
              
              
              10,554
              
              
              10,554
  
 **Year
                  Ended December 31,**
              
              **Six
                  Months Ended**
                **June
                  30,****Other
                  Data**
              
              **2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2006**
              
              **2007****(unaudited)**
              
              **(unaudited)**
              
              
              
              
              
              
              
              **(unaudited)**Capital
                  expenditures
              
              $
              1,228
              
              $
              1,981
              
              $
              4,014
              
              $
              2,317
              
              $
              2,064
              
              $
              1,400
              
              $
              839**Selected
                  Balance Sheet Data**Cash
                  and cash equivalents
              
              $
              5,372
              
              $
              8,006
              
              $
              668
              
              $
              595
              
              $
              --
              
              
              31
              
              $
              7,302Working
                  capital (deficit)
              
              
              5,154
              
              
              4,170
              
              
              1,565
              
              
              (234
              )
              
              1,325
              
              
              3,400
              
              
              9,814Property
                  and equipment, net
              
              
              17,370
              
              
              13,431
              
              
              29,437
              
              
              26,474
              
              
              12,850
              (1)
              
              13,791
              
              
              11,330Total
                  assets
              
              
              42,609
              
              
              37,935
              
              
              49,108
              
              
              47,229
              
              
              33,482
              (1)
              
              35,621
              
              
              38,103Due
                  to parent company
              
              
              20,162
              
              
              13,683
              
              
              17,126
              
              
              17,416
              
              
              5,690
              (1)
              
              5,563
              (1)
              
              5,871Invested
                  Equity (2)
              
              
              11,801
              
              
              14,554
              
              
              17,093
              
              
              16,309
              
              
              13,976
              
              
              14,993
              
              
              20,587
 (1)
                On
                    March 29, 2006, Old Point.360 sold and leased back its Media
                    Center
                    facility. Proceeds were used to repay debt. See Notes 4 and 5
                    of the notes
                    to consolidated financial statements included elsewhere
                    herein.
  (2)
                Represents
                    Old Point.360’s invested equity in the
                    Company.


14




In
      presenting the financial data above in conformity with general accepted
      accounting principles, we are required to make estimates and assumptions that
      affect the amounts reported. See “Critical Accounting Policies” included
      elsewhere herein for a detailed discussion of the accounting policies that
      we
      believe require subjective and complex judgments that could potentially affect
      reported results.




Between
      January 1, 2002 and June 30, 2007, Old Point.360 completed a number of
      acquisitions, the results of operations and financial position of which have
      been included from their acquisition dates forward. See Note 3 to our
      consolidated financial statements for a discussion of the acquisitions for
      the
      annual periods ended 2004, 2005 and 2006 and the first six months of 2007,
      respectively.




**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 portions of the Company's documents
      filed with the Securities and Exchange Commission and Risk Factors in Item
      1A of
      this Form 10-K/T, for a further discussion of these and other risks and
      uncertainties applicable to the Company's business* **.**




**Overview**




We
      are
      one of the largest providers of video and film asset management services to
      owners, producers and distributors of entertainment content. We provide the
      services necessary to edit, master, reformat and archive our clients’ film and
      video content, including television programming, feature films and movie
      trailers using electronic and physical means. Clients include major motion
      picture studios and independent producers.




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




We
      have
      an opportunity to expand our business by establishing closer relationships
      with
      our customers through excellent service at a competitive price and expanding
      our
      service offering. Our success is also dependent on attracting and maintaining
      employees capable of maintaining such relationships. Also, growth can be
      achieved by acquiring similar businesses (for example, the acquisition of IVC
      in
      July 2004) that can increase revenues by adding new customers, or expanding
      services provided to existing customers.




Our
      business generally involves the immediate servicing needs of our customers.
      Most
      orders are fulfilled within several days, with occasional larger orders spanning
      weeks or months. At any particular time, we have little firm
      backlog.




We
      believe that our interconnected facilities provide the ability to better service
      customers than single-location competitors. We will look to expand both our
      service offering and geographical presence through acquisition of other
      businesses or opening additional facilities.




15




The
      following table set forth the amount and percentage relationship to revenues
      of
      certain items included within our consolidated statement of income (loss) for
      the six month periods ended June 30, 2006 and 2007. The commentary below is
      based on these financial statements (in thousands).




**Six
                Months Ended June 30,****2006**
            
            **2007****Amount**
            
            **Percent
                of**
              **Revenues**
            
            **Amount**
            
            **Percent
                of**
              **Revenues**(dollars
                in thousands)
            
            **(unaudited****)**Revenues
            
            $
            21,692
            
            
            100.0
            
            $
            20,850
            
            
            100.00Costs
                of services sold
            
            
            (14,948
            )
            
            (68.9
            )
            
            (15,760
            )
            
            (75.6
            )Gross
                profit
            
            
            6,744
            
            
            31.1
            
            
            5,090
            
            
            24.4Selling,
                general and administrative expense
            
            
            (5,303
            )
            
            (24.4
            )
            
            (5,590
            )
            
            (26.8
            )Allocation
                of Old Point.360 corporate expenses
            
            
            (1,692
            
            
            (7.8
            )
            
            (1,481
            )
            
            (7.1
            )Operating
                income (loss)
            
            
            (251
            )
            
            (1.2
            )
            
            (1,981
            )
            
            (9.5
            )Interest
                expense, net
            
            
            (448
            )
            
            (2.0
            )
            
            (263
            )
            
            (1.2
            )Benefit
                from income taxes
            
            
            280
            
            
            1.3
            
            
            607
            
            
            3.8Net
                income (loss)
            
            $
            (419
            )
            
            (1.9
            )
            $
            (1,637
            )
            
            (7.0
            )




**Six
      Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
      (unaudited)**




*Revenues* .
      Revenues were $20.9 million for the six months ended June 30, 2007, compared
      to
      $21.7 million for the six months ended June 30, 2006 (unaudited). The addition
      of Eden FX in March 2007 contributed $0.6 million of revenues in the 2007
      period. Excluding the effect of Eden FX, revenues declined by $1.4 million
      or
      6.5% from the prior period due to lower ordering patterns of our major studio
      customers. We expect revenues to be under some downward pressure in the future
      due to lower prices being offered by some studio clients, offset by potential
      future increases as we continue to invest in high definition capabilities where
      demand is expected to grow. We believe our high definition service platform
      will
      attract additional business in the future.




*Gross
      Profit* .
      In
      2007, gross margin was 24.4% of sales, compared to 31.1% for the same period
      last year. The sale/leaseback of our Media Center facility penalized gross
      margin by 1% of sales (i.e., lease costs increased $0.2 million in the 2007
      period net of depreciation associated with the previously-owned facility).
      The
      impact of the sale/leaseback will be continuing. The remaining decrease in
      gross
      profit percentage is due to higher wages and benefits due to the addition of
      editors, graphic artists and others associated with Eden FX and to attract
      new
      business and general salary increases. From time to time, we will increase
      staff
      capabilities to satisfy potential customer demand. If the expected demand does
      not materialize, we will adjust personnel levels. We expect gross margins to
      fluctuate in the future as the sales mix changes.




*Selling,
      General and Administrative Expense.* SG&A
      expense was $5.6 million (26.8% of sales) in the 2007 period as compared to
      $5.3
      million (24.4% of sales) in 2006. The increase of $0.3 million was due
      principally to the addition of Eden FX.




*Allocation
      of Point.360 Corporate Expenses* .
      Corporate expense allocation in the 2007 period was $1.5 million, or 7.1% of
      sales, compared to $1.7 million, or 7.8% of sales in 2006.




O *perating
      Income (Loss).* Operating
      loss was $2.0 million in 2007 compared to a loss of $0.3 million in 2006. The
      operating loss associated with Eden FX was $0.5 million as Eden’s business is
      seasonally low as it participates largely in the television episodic market.




*Interest
      Expense.* Interest
      expense for 2007 was $0.3 million, a decrease of $0.1 million from 2006. The
      decrease was due to lower debt levels resulting from the sale/leaseback
      transaction and payment of revolving credit debt with the proceeds of employee
      stock option exercises, offset partially by higher rates on remaining variable
      interest debt.




16




*Net
      Loss.* Net
      loss
      for 2007 was $1.6 million compared to $0.4 million in 2006.




The
      following table sets forth the amount and percentage relationship to revenues
      of
      certain items included within Point.360’s consolidated statement of income
      (loss) for the years ended December 31, 2006, 2005 and 2004. The commentary
      below is based on these financial statements (in thousands).




**Year
                Ended December 31****2004**
            
            **2005**
            
            **2006****Amount**
            
            **Percent
                of**
              **Revenues**
            
            **Amount**
            
            **Percent
                of**
              **Revenues**
            
            **Amount**
            
            **Percent
                of**
              **Revenues**(dollars
                in thousands)Revenues
            
            $
            38,588
            
            
            100.00
            
            $
            43,059
            
            
            100.00
            
            $
            43,533
            
            
            100.00Costs
                of services sold
            
            
            (27,956
            )
            
            (72.4
            )
            
            (29,472
            )
            
            (68.4
            )
            
            (29,976
            )
            
            (
                68.9
            )Gross
                profit
            
            
            10,631
            
            
            27.6
            
            
            13,587
            
            
            31.6
            
            
            13,557
            
            
            31.1Selling,
                general and administrative expense
            
            
            (9,511
            )
            
            (24.6
            )
            
            (11,201
            )
            
            (26.0
            )
            
            (10,108
            )
            
            (23.2
            )Allocation
                of Old Point.360 corporate expenses
            
            
            (4,138
            )
            
            (10.7
            )
            
            (3,771
            )
            
            (8.8
            )
            
            (3,446
            )
            
            (7.9
            )Operating
                income (loss)
            
            
            (3,018
            )
            
            (7.8
            )
            
            (1,385
            )
            
            (3.2
            )
            
            3
            
            
            -Interest
              expense, net
            
            
            (654
            )
            
            (1.7
            )
            
            (1,280
            )
            
            (3.0
            )
            
            (659
            )
            
            (1.5
            )Benefit
                from income taxes
            
            
            1,489
            
            
            3.9
            
            
            1,045
            
            
            2.4
            
            
            342
            
            
            0.7Net
                income (loss)
            
            $
            (2,183
            )
            
            (5.7
            )
            $
            (1,620
            )
            
            (3.8
            )
            $
            (314
            )
            
            (0.1
            )




**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




*Revenues.* Revenues
      were $43.5 million for the year ended December 31, 2006, compared to $43.1
      million for the year ended December 31, 2005. There were no significant trends
      affecting 2006 sales when compared to 2005.




*Gross
      Profit* .
      In
      2006, gross margin was 31.1% of sales, compared to 31.6% for last year. The
      sale/leaseback of our Media Center facility penalized gross margin by 1% of
      sales (i.e., lease costs increased $0.6 million in the 2006 period net of
      depreciation associated with the previously-owned facility). The impact of
      the
      sale/leaseback will be continuing. The remaining increase in gross profit
      percentage is due to lower wages and benefits. We expect gross margins to
      fluctuate in the future as the sales mix changes.




*Selling,
      General and Administrative Expense.* SG&A
      expense was $10.1 million (23% of sales) in 2006 as compared to $11.2 million
      (26% of sales) in 2005. The reduction of $1.1 million was due principally to
      lower wages and benefits.




*Allocation
      of Old Point.360 Corporate Expenses* .
      Corporate expense allocation in 2006 was $3.4 million, or 7.9% of sales,
      compared to $3.8 million, or 8.8% of sales in 2005. The decline is due
      principally to lower Point.360 administrative personnel costs.




*Operating
      Income (Loss)* Operating
      income was $3,000 in 2006, compared to a loss of $1.4 million in
      2005.




*Interest
      Expense.* Interest
      expense for 2006 was $0.7 million, a decrease of $0.6 million from 2005. The
      decrease was due to lower debt levels resulting from the sale/leaseback
      transaction offset partially by higher rates on remaining variable interest
      debt.




*Net
      Loss.* Net
      loss
      for 2006 was $0.3 million compared to $1.6 million in 2005.




**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**




*Revenues* . **** Revenues
      increased $4.5 million to $43.1 million for the year ended December 31, 2005,
      compared to $38.6 million in 2004. A $5.8 million increase was due to the
      inclusion of IVC for the entire fiscal year as opposed to six months in 2004
      (IVC was acquired on July 1, 2004). Without IVC sales for the first six months
      of 2005, twelve month 2005 sales declined $1.3 million to $37.3 million as
      compared to 2004. The decline was due principally to price
      compression.




17




*Gross
      Profit* .
      In
      2005, gross profit increased by 4.0% of sales. Gross profit on sales was 31.6%
      in 2005 compared to 27.6% in 2004, the increase being due principally to lower
      wages and benefits and facility costs.




*Selling,
      General and Administrative Expense* .
      SG&A expense increased $1.7 million, or 18%, to $11.2 million in 2005,
      compared to $9.5 million in 2004 due principally to higher sales personnel
      costs. As a percentage of revenues, SG&A was 26.0% for 2005 and 24.6% in
      2004.




*Allocation
      of Old Point. 360 Corporate Expense.* Corporate
      expense allocation in 2005 was $3.8 million or 8.8% of sales compared to $4.1
      million or 10.7% of sales in 2004. The decline was due principally to
      Point.360’s 2004 write off of $1.1 million of deferred acquisition and financing
      and settlement costs related to the termination of a potential acquisition,
      a
      portion of which was allocated to the Company.




*Operating
      Loss* .
      Operating loss decreased $1.6 million to $1.4 million, compared to $3.0 million
      in 2004.




*Interest
      Expense* .  **** Interest
      expense for 2005 was $1.5 million compared to $0.7 million in 2004. The increase
      in 2005 was due principally to increasing interest rates Old Point.360’s
      variable rate debt and increased outstanding borrowings and a mortgage for
      all
      of 2005 due to the purchase of IVC in July 2004 and our Media Center land and
      building in August 2004, respectively.




*Income
      Taxes* .
      The
      effective tax rate was 39% for 2005 and 41% for 2004. The change in effective
      tax rate is the result of our periodic assessment of the relationship of
      book/tax timing differences to total expected annual pre-tax results and the
      elimination of goodwill expense for financial statement purposes. The effective
      tax rate percentage changes from period to period depending on the difference
      in
      the timing of the recognition of revenues and expenses for book and tax
      purposes.




*Net
      Loss* . **** The
      net
      loss for 2005 was $1.6 million, a decrease of $0.6 million compared to a
      loss of $2.2 million for 2004.




**LIQUIDITY
      AND CAPITAL RESOURCES**




Upon
      the
      separation of the Company from Old Point.360, we had approximately $7 million
      of
      cash, no revolving credit loans outstanding and no amounts owing to Old
      Point.360. In August 2007, we obtained a two-year, $8 million revolving credit
      facility from a bank, borrowings under which will be based on our eligible
      accounts receivable. Based on eligible accounts receivable balances as of June
      30, 2007, our available borrowings under the revolving credit facility were
      approximately $5 million. We also had approximately $6 million of term loans
      outstanding on that date.




As
      stated
      below, we are subject to certain facility lease obligations, including the
      lease
      obligation resulting from the sale and leaseback of the Media Center facility
      real estate described below.




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




On
      December 30, 2005, we entered into a new $10 million term loan agreement. The
      term loan provides for interest at LIBOR (5.38% at June 30, 2007) plus 3.15%
      or
      8.53% and is secured by our equipment. The term loan was to be repaid in 60
      equal principal payments plus interest.




In
      August
      2007, we entered into a new credit agreement which provides up to $8 million
      of
      revolving credit based on 80% of acceptable accounts receivables, as defined.
      The two-year agreement provides for interest of either (1) prime (7.75% at
      August 14, 2007) minus 0% - 1.00% or (2) LIBOR plus 1.50% - 2.50% depending
      on
      the level of Point.360’s ratio of outstanding debt to fixed charges (as
      defined), or 6.75% or 6.75%, respectively on August 14, 2007, the effective
      date
      of the new agreement. The facility is secured by all of our assets, except
      for
      equipment securing a new term loan as described above.




In
      March
      2006, we entered into a sale and leaseback transaction with respect to its
      Media
      Center vaulting real estate. The real estate was sold for $13,946,000 resulting
      in a $1.2 million after-tax gain. Additionally, we received $500,000 from the
      purchaser for improvements. In accordance with Statement of Financial Accounting
      Standards No.28. “ *Accounting
      for Sales with Leasebacks”* (“ **SFAS
      28** ”),
      the
      gain and the improvement allowance will be amortized over the initial 15-year
      lease term as reduced rent.




18




On
      March
      30, 2007, we entered into an additional $2.5 million term loan agreement. The
      loan provides for interest at 8.35% per annum and is secured by our equipment.
      The loan will be repaid in 45 equal monthly installments of principal and
      interest.




The
      following table summarizes the June 30, 2007 debt obligation allocable to the
      Company:




Revolving
                credit
            
            $
            -Current
                portion of term loan
            
            
            1,614,000Long-term
                portion of term loan
            
            
            4,257,000TOTAL
            
            $
            5,871,000




Monthly
      and annual principal and interest payments due under the term debt are
      approximately $161,000 and $1.9 million, respectively, assuming no change in
      interest rates.




Cash
      generated by operating activities is directly dependent upon sales levels and
      gross margins achieved. We generally receive payments from customers in 50-90
      days after services are performed. The larger payroll component of cost of
      sales
      must be paid currently and most vendors within 30 days. Payment terms of other
      liabilities vary by vendor and type. Income taxes must be paid quarterly.
      Fluctuations in sales levels will generally affect cash flow negatively or
      positively in early periods of growth or contraction, respectively, because
      of
      operating cash receipt/payment timing. Other investing and financing cash flows
      also affect cash availability.




The
      bank
      revolving credit agreement requires us to maintain a minimum “fixed charge
      coverage ratio”. Our fixed charge coverage ratio compares, on a rolling
      twelve-month basis, EBITDA plus rent expense and non-cash charges less income
      tax payments, to interest expense plus rent expense, the current portion of
      long
      term debt and maintenance capital expenditures. If we fail to meet minimum
      covenant levels, amounts outstanding under the credit agreement and, by cross
      default provisions, the term loan will become due and payable.




Cash
      on
      hand, our $8 million line of credit and the availability of bank or
      institutional credit from new sources and cash generated from operations should
      be sufficient to fund our operating needs and approximately $2.5 million of
      capital expenditures for the next twelve months.




Our
      acquisition of Eden FX was completed in March 2007 for $2.2 million in cash.
      The
      Eden FX purchase agreement also requires payments of $0.7 million, $0.9 million
      and $1.2 million in 2008, 2009 and 2010, respectively, if certain target
      earnings levels (as defined) are met.




The
      following table summarizes our contractual obligations as of June 30, 2007
      due
      in the future (in thousands) :




**Payment
                due by Period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1****Year**
            
            **Years**
              **2
                and 3**
            
            **Years**
              **4
                and 5**
            
            **Thereafter**Long
                Term Debt Obligations
            
            $
            6,409
            
            $
            1,763
            
            $
            3,687
            
            $
            959
            
            $
            -Capital
                Lease Obligations
            
            
            9
            
            
            9
            
            
            -
            
            
            -
            
            
            -Operating
                Lease Obligations
            
            
            23,120
            
            
            3,532
            
            
            5,218
            
            
            4,178
            
            
            10,192Total
            
            $
            29,538
            
            $
            5,304
            
            $
            8,905
            
            $
            5,137
            
            $
            10,192




During
      the past twelve months, our business has generated sufficient cash to meet
      operating, capital expenditure and debt service needs and obligations, as well
      as to provide sufficient cash reserves to address contingencies. When preparing
      estimates of future cash flows, we consider historical performance,
      technological changes, market factors, industry trends and other criteria.
      In
      our opinion, we will continue to be able to fund our needs for the foreseeable
      future.




19




We
      will
      continue to consider the acquisition of businesses complementary to our current
      operations. Consummation of any such acquisition or other expansion of our
      business may be subject to our securing additional financing, perhaps at a
      cost
      higher than our existing term loans. Future earnings and cash flow may be
      negatively impacted to the extent that any acquired entities do not generate
      sufficient earnings and cash flow to offset the increased financing
      costs.




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these financial statements requires us to make
      estimates and judgments that affect the reported amounts of assets, liabilities,
      revenues and expenses, and related disclosure of contingent assets and
      liabilities. On an on-going basis, we evaluate our estimates and judgments,
      including those related to allowance for doubtful accounts, valuation of
      long-lived assets, and accounting for income taxes. We base our estimates on
      historical experience and on various other assumptions that we believe to be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying values of assets and liabilities that are
      not readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions and conditions. We believe the following
      critical accounting policies affect our more significant judgments and estimates
      used in the preparation of our consolidated financial statements.




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




*Revenues.* We
      perform a multitude of services for our clients, including film-to-tape
      transfer, video and audio editing, standards conversions, adding effects,
      duplication, distribution, etc. A customer orders one or more of these services
      with respect to an element (movie trailer, electronic press kit, etc.) The
      total
      of services performed on a particular element (a “package”) becomes the
      deliverable (i.e., the customer will pay for the services ordered in total
      when
      the entire job is completed). Occasionally, a major studio will request that
      package services be performed on multiple elements. Each element creates a
      separate revenue stream which is recognized only when all requested services
      have been performed on that element.




*Allowance
      for doubtful accounts.* We
      are
      required to make judgments, based on historical experience and future
      expectations, as to the collectibility of accounts receivable. The allowances
      for doubtful accounts and sales returns represent allowances for customer trade
      accounts receivable that are estimated to be partially or entirely
      uncollectible. These allowances are used to reduce gross trade receivables
      to
      their net realizable value. We record these allowances as a charge to selling,
      general and administrative expenses based on estimates related to the following
      factors: (1) customer specific allowance; (2) amounts based upon an aging
      schedule and (3) an estimated amount, based on our historical experience, for
      issues not yet identified.




*Valuation
      of long-lived and intangible assets.* Long-lived assets, consisting primarily of property, plant and equipment and
      intangibles (consisting only of goodwill), comprise a significant portion of
      our
      total assets. Long-lived assets, including goodwill are reviewed for impairment
      whenever events or changes in circumstances have indicated that their carrying
      amounts may not be recoverable. Prior to our separation from Old Point.360,
      Old
      Point.360 was treated as a single business for purposes of evaluating goodwill
      due to common customers, vendors, services and interconnectivity of its twelve
      facilities. Recorded goodwill was the result of numerous previous acquisitions
      being merged together under common management. As a result of our separation,
      Old Point.360 allocated goodwill to us and the remainder of Old Point.360 based
      on an independent appraisal of the value of the Company and the market value
      of
      consideration to be paid by DG for the advertising distribution
      business.




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




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


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


·
            Significant
                negative industry or economic
                trends;


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


·
            Our
                market capitalization relative to net book
                value.





20




When
      we
      determine that the carrying value of intangibles, long-lived assets and related
      goodwill and enterprise level goodwill may not be recoverable based upon the
      existence of one or more of the above indicators of impairment, we measure
      any
      impairment based on comparing the carrying amount of the asset to its fair
      value
      in a current transaction between willing parties or, in the absence of such
      measurement, on a projected discounted cash flow method using a discount rate
      determined by our management to be commensurate with the risk inherent in our
      current business model. Any amount of impairment so determined would be written
      off as a charge to the income statement, together with an equal reduction of
      the
      related asset. Net intangible assets, long-lived assets and goodwill amounted
      to
      approximately $21.2 million as of June 30, 2007.




In
      2002,
      Statement of Financial Accounting Standards No.142, *“Goodwill
      and Other Intangible Assets”* (“ **SFAS
      142** ”)
      became
      effective and, as a result, we ceased to amortize goodwill in 2002 and conducted
      an annual impairment review thereafter. In the 2007 test performed as of April
      2007, fair value was determined using an independent appraisal, which was then
      compared to the carrying amount of Point.360, including goodwill. If future
      appraisals or future performances are affected by the factors cited above,
      resulting potential impairment could adversely affect the reported goodwill
      asset value and earnings.




*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 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 June
      30, 2007 was $2.2 million. We did not record a valuation allowance against
      the
      deferred tax assets as of June 30, 2007.




**RECENT
      ACCOUNTING PRONOUNCEMENTS**




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




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




In
      July
      2006, the FASB released FASB Interpretation No. 48, *“Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
      109”* (“ **FIN
      48** ”).
      FIN
      48 clarifies the accounting and reporting for uncertainties in income tax law.
      This interpretation prescribes a comprehensive model for the financial statement
      recognition, measurement, presentation and disclosure of uncertain tax positions
      taken or expected to be taken in income tax returns. This statement is effective
      for fiscal years beginning after December 15, 2006. If there are changes in
      net
      assets as a result of application of FIN 48, these will be accounted for as
      an
      adjustment to retained earnings. As a result of the implementation of FIN 48,
      the Company did not recognize any increase in the liability for unrecognized
      tax
      benefits. In addition, the Company did not record a cumulative effect adjustment
      related to the adoption of FIN 48.




In
      September 2006, the FASB issued SFAS No. 157, *“Fair
      Value Measurement.”* SFAS 157
      establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      SFAS 157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007. Point.360 is required to adopt the provision of SFAS
      157, as applicable, beginning in fiscal year 2008. We do not believe the
      adoption of SFAS 157 will have a material impact on Point.360’s financial
      position or results of operations.




21




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




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




*Market
      Risk.* The
      Company had borrowings of $5.9 million at June 30, 2007 under term loan
      agreements, a portion of which was subject to a variable interest rate. The
      weighted average interest rate paid during six months ended June 30, 2007 was
      8.4%. For variable rate debt outstanding at June 30, 2007, a .25% increase
      in
      interest rates will increase annual interest expense by approximately $15,000.
      The Company’s market risk exposure with respect to financial instruments is to
      changes in prime or LIBOR rates.




22




**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**




**Page**Report
                  of Independent Registered Public Accounting Firm
              24Financial
                  Statements:Consolidated
                  Balance Sheets -December
                  31, 2005 and 2006 and June 30, 2007
              25Consolidated
                  Statements of Income (Loss) -Fiscal
                  Years Ended December 31, 2004, 2005 and 2006 and six months ended
                  June 30,
                  2006 (unaudited) and 2007
              26Consolidated
                  Statements of Invested Equity -Fiscal
                  Years Ended December 31, 2004, 2005 and 2006 and six months ended
                  June 30,
                  2007
              27Consolidated
                  Statements of Cash Flows -Fiscal
                  Years Ended December 31, 2004, 2005 and 2006 and six months ended
                  June 30,
                  2006 (unaudited) and 2007
              28Notes
                  to Consolidated Financial Statements
              29Financial
                  Statement Schedule:Schedule
                  II - Valuation and Qualifying Accounts
              44


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.




23





**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors and


Shareholders
      of Point.360


Burbank,
      California




We
      have
      audited the accompanying consolidated balance sheets of Point.360 (formerly
      New
      360) and subsidiary (collectively, the “Company”) as of June 30, 2007, December
      31, 2006 and 2005, and the
      related consolidated statements of income (loss), invested equity, and cash
      flows for the
      six months ended June 30, 2007 and for each of the three years in the period
      ended December 31, 2006. 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 in accordance with auditing standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits 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. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provided a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Point.360 and subsidiary
      as
      of June 30, 2007 and December 31, 2006 and 2005, and the results of their
      operations and their cash flows for the six months ended June 30, 2007 and
      each
      of the three years in the period ended December 31, 2006 in conformity with
      accounting principles generally accepted in the United States of
      America.




Singer
      Lewak Greenbaum & Goldstein LLP (signed)


Los
      Angeles, California


November
      9, 2007




24




**Point.360**
 **Consolidated
        Balance Sheets**
 **(in
        thousands)**
 
 **Year
                  Ended December 31,**
              
              **Six
                  Months Ended****2005**
              
              **2006**
              
              **June
                  30, 2007****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              595
              
              $
              ---
              
              $
              7,302Accounts
                  receivable, net of allowances for doubtful accounts of $424, $513
                  and
                  $490, respectively
              
              
              7,452
              
              
              9,522
              
              
              6,253Inventories,
                  net
              
              
              575
              
              
              539
              
              
              555Prepaid
                  expenses and other current assets
              
              
              2,358
              
              
              533
              
              
              868Deferred
                  income taxes
              
              
              718
              
              
              439
              
              
              2,067Total
                  current assets
              
              
              11,698
              
              
              11,033
              
              
              17,045Property
                  and equipment, net (Note 4)
              
              
              26,474
              
              
              12,850
              
              
              11,330Other
                  assets, net
              
              
              392
              
              
              346
              
              
              322Goodwill
                  (Note 3)
              
              
              8,665
              
              
              9,253
              
              
              9,868Total
                  assets
              
              $
              47,229
              
              $
              33,482
              
              $
              38,565**Liabilities
                  and Invested Equity**Current
                  liabilities:Accounts
                  payable
              
              $
              2,369
              
              $
              3,045
              
              $
              2,497Accrued
                  wages and benefits
              
              
              1,890
              
              
              1,592
              
              
              2,216Accrued
                  earn-out payments
              
              
              2,000
              
              
              2,000
              
              
              ----Other
                  accrued expenses
              
              
              ---
              
              
              237
              
              
              726Income
                  tax payable
              
              
              1,231
              
              
              123
              
              
              ----Due
                  to parent company
              
              
              4,442
              
              
              2,533
              
              
              1,614Current
                  portion of deferred gain on sale of real estate
              
              
              ----
              
              
              178
              
              
              178Total
                  current liabilities
              
              
              11,932
              
              
              9,708
              
              
              7,231Deferred
                  income taxes
              
              
              6,014
              
              
              4,278
              
              
              4,216Due
                  to parent company, less current portion (Note 6)
              
              
              12,974
              
              
              3,157
              
              
              4,257Deferred
                  gain on sale of real estate, less current portion
              
              
              ---
              
              
              2,363
              
              
              2,274Total
                  long-term liabilities
              
              
              18,988
              
              
              9,978
              
              
              10,747Total
                  liabilities
              
              
              30,920
              
              
              19,506
              
              
              17,978Commitments
                  and contingencies (Note 8)
              
              
              ----
              
              
              ----
              
              
              ----Invested
                  equity
              
              
              16,309
              
              
              13,976
              
              
              20,587Total
                  liabilities and invested equity
              
              $
              47,229
              
              $
              33,482
              
              $
              38,565
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.


25





**Point.360**


**Consolidated
      Statements of Income (Loss)**


**(in
      thousands, except per share amounts)**





**Year
                Ended December 31,**
            
            **Six
                Months Ended June 30,****2004**
            
            **2005**
            
            **2006**
            
            **2006**
            
            **2007****(unaudited)**Revenues
            
            $
            38,588
            
            $
            43,059
            
            $
            43,533
            
            $
            21,692
            
            $
            20,850Cost
                of services sold
            
            
            (27,957
            )
            
            (29,472
            )
            
            (29,976
            )
            
            (14,948
            )
            
            (15,760
            )Gross
                profit
            
            
            10,631
            
            
            13,587
            
            
            13,557
            
            
            6,744
            
            
            5,090Selling,
                general and administrative expense
            
            
            (9,511
            )
            
            (11,201
            )
            
            (10,108
            )
            
            (5,303
            )
            
            (5,590
            )Allocation
                of Point.360 corporate expenses (Note 1)
            
            
            (4,138
            )
            
            (3,771
            )
            
            (3,446
            )
            
            (1,692
            )
            
            (1,481
            )Operating
                income (loss)
            
            
            (3,018
            )
            
            (1,385
            )
            
            3
            
            
            (251
            )
            
            (1,981
            )Interest
                expense (net)
            
            
            (654
            )
            
            (1,280
            )
            
            (659
            )
            
            (448
            )
            
            (263
            )Income
                (loss) before income taxes
            
            
            (3,672
            )
            
            (2,665
            )
            
            (656
            )
            
            (699
            )
            
            (2,244
            )Benefit
                from income taxes
            
            
            1,489
            
            
            1,045
            
            
            342
            
            
            280
            
            
            607Net
                income (loss)
            
            $
            (2,183
            )
            $
            (1,620
            )
            $
            (314
            )
            $
            (419
            )
            $
            (1,637
            )Pro
                forma basic and diluted earnings (loss) per share
            
            
            
            
            
            
            
            $
            (0.03
            )
            
            (0.04
            )
            $
            (0.16
            )Pro
                forma weighted average number of shares
            
            
            
            
            
            
            
            $
            10,554
            
            $
            10,554
            
            $
            10,554





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





26




**Point.360**


**Consolidated
      Statements of Invested Equity**


**(in
      thousands)**





Balance
                on December 31, 2003
            
            $
            14,554Changes
                in investment account due to allocation of operating activities (Note
                1)
            
            
            4,722Net
                income (loss)
            
            
            (2,183
            )Balance
                on December 31, 2004
            
            
            17,093Changes
                in investment account due to allocation of operating activities (Note
                1)
            
            
            836Net
                income (loss)
            
            
            (1,620
            )Balance
                on December 31, 2005
            
            
            16,309Changes
                in investment account due to allocation of operating activities (Note
                1)
            
            
            (2,019
            )Net
                income (loss)
            
            
            (314
            )Balance
                on December 31, 2006
            
            
            13,976Changes
                in investment account due to allocation ofoperating
                activities (Note 1)
            
            
            8,248Net
                income (loss)
            
            
            (1,637
            )Balance
                June 30, 2007
            
            $
            20,587





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





27


**Point.360**
 **Consolidated
        Statements of Cash Flows**
 (in
        thousands)
 **Year
                  Ended December 31,**
              
              **Six
                  Months Ended**
                **June
                  30,****2004**
              
              **2005**
              
              **2006**
              
              **2006**
              
              **2007****(unaudited)**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (2,183
              )
              $
              (1,620
              )
              $
              (314
              )
              $
              (419
              )
              $
              (1,637
              )Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              4,636
              
              
              5,096
              
              
              4,653
              
              
              2,303
              
              
              2,359Provision
                  for (recovery of) doubtful accounts
              
              
              (143
              )
              
              43
              
              
              89
              
              
              51
              
              
              (23
              )Deferred
                  income taxes
              
              
              2,026
              
              
              310
              
              
              (1,735
              )
              
              -
              
              
              -Changes
                  in operating assets and liabilities (net of acquisitions):(Increase)
                  decrease in accounts receivable
              
              
              (2,208
              )
              
              (544
              )
              
              (2,159
              )
              
              (1,254
              )
              
              3,292(Increase)
                  decrease in inventories
              
              
              (143
              )
              
              163
              
              
              36
              
              
              114
              
              
              (16
              )(Increase)
                  decrease in prepaid expenses
                and
                  other current assets
              
              
              (796
              )
              
              (740
              )
              
              1,826
              
              
              327
              
              
              (1,870
              )(Increase)
                  decrease in other assets
              
              
              570
              
              
              153
              
              
              45
              
              
              (7
              )
              
              44(Decrease)
                  increase in accounts payable
              
              
              1,227
              
              
              (1,024
              )
              
              676
              
              
              (371
              )
              
              (549
              )Increase
                  (decrease) in accrued expenses
              
              
              (98
              )
              
              430
              
              
              (27
              )
              
              (1,593
              )
              
              (1,033
              )Increase
                  (decrease) in income taxes pay-
                able/receivable,
                  net
              
              
              852
              
              
              83
              
              
              (1,108
              )
              
              895
              
              
              (186
              )(Increase)
                  decrease in deferred tax asset
              
              
              286
              
              
              410
              
              
              279
              
              
              (870
              )
              
              (93
              )Net
                  cash and cash equivalents provided by (used in) operating
                  activities
              
              
              4,026
              
              
              2,760
              
              
              2,261
              
              
              (824
              )
              
              288Cash
                  flows from investing activities:Capital
                  expenditures
              
              
              (4,014
              )
              
              (2,317
              )
              
              (2,064
              )
              
              (1,400
              )
              
              (839
              )Proceeds
                  from sale of equipment or real
                estate
              
              
              40
              
              
              --
              
              
              13,543
              
              
              14,410
              
              
              56Net
                  cash paid for acquisitions
              
              
              (1,094
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  cash paid for acquisition of building
              
              
              (2,065
              )
              
              --
              
              
              -
              
              
              -
              
              
              --Increase
                  in goodwill
              
              
              (71
              )
              
              (642
              )
              
              (588
              )
              
              --
              
              
              (635
              )Net
                  cash and cash equivalents
                provided
                  by (used in) investing
                activities
              
              
              (7,204
              )
              
              (2,959
              )
              
              10,891
              
              
              13,010
              
              
              (1,418
              )Cash
                  flows from financing activities:Change
                  in revolving credit
              
              
              1,751
              
              
              450
              
              
              (737
              )
              
              (1,394
              )
              
              (1,464
              )(Increase)
                  decrease in invested equity
              
              
              4,722
              
              
              836
              
              
              (2,020
              )
              
              (897
              )
              
              8,248(Repayment)
                  proceeds from of notes
                payable
              
              
              (10,623
              )
              
              (1,096
              )
              
              (10,926
              )
              
              (10,443
              )
              
              1,658Repayment
                  proceeds from of capital lease obligations
              
              
              (10
              )
              
              (64
              )
              
              (64
              )
              
              (16
              )
              
              (10
              )Net
                  cash (used in) provided by
                financing
                  activities
              
              
              (4,160
              )
              
              126
              
              
              (13,747
              )
              
              (12,750
              )
              
              8,432Net
                  increase (decrease) in cash and cash
                equivalents
              
              
              (7,338
              )
              
              (73
              )
              
              (595
              )
              
              564
              
              
              7,302Cash
                  and cash equivalents at beginning of year
              
              
              8,006
              
              
              668
              
              
              595
              
              
              (564
              )
              
              --Cash
                  and cash equivalents at end of year
              
              $
              668
              
              $
              595
              
              $
              __
                  -
              
              $
              _-
              
              $
              7,302
 The
        accompanying notes are an integral part of these consolidated financial
        statements.


28




**Point.** **360**


**Notes
      to Consolidated Financial Statements**





**1.** **BASIS
      OF PRESENTATION:**




Point.360’s
      (“Point.360” or the “Company”) business represents the assets and liabilities
      used in managing and operating the business of Point.360’s predecessor (“Old
      Point.360”) other than Old Point.360’s advertising distribution business. On
      April 13, 2007, Old Point.360.’s Board of Directors approved a plan to
      contribute such assets and liabilities to the Company, and to subsequently
      distribute the common stock of the Company to Old Point.360 shareholders on
      a
      share-for-share basis to form an independent, publicly traded entity. On April
      16, 2007, Old Point.360, the Company and DG FastChannel, Inc. (“DG FastChannel”)
      entered into an Agreement and Plan of Merger and Reorganization and ancillary
      documents (the “Agreements”) which establish the basis of the distribution. The
      net assets contributed to the Company by Old Point.360 are shown as Invested
      Equity in the Consolidated Balance Sheets. The actions contemplated by the
      Agreements were completed on August 14, 2007. The Company adopted a June 30
      fiscal year end. See Note 10.




The
      accompanying Consolidated Financial Statements include the accounts and
      transactions of the Company , including those of Old Point.360’s only
      subsidiary, International Video Conversions, Inc. (“IVC”). The financial
      statements are presented as “consolidated” since IVC’s stock was contributed to
      the Company pursuant to the Agreements. The accompanying Consolidated Financial
      Statements have been prepared in accordance with accounting principles generally
      accepted in the United States of America. All intercompany balances and
      transactions have been eliminated in the Consolidated Financial
      Statements.




The
      Company’s consolidated results of operations, financial position and cash flows
      may not be indicative of its future performance and do not necessarily reflect
      what the combined results of operations, financial position and cash flows
      would
      have been had the Company operated as a separate, stand-alone entity during
      the
      periods presented, including changes in its operations and capitalization as
      a
      result of the separation and distribution from Old Point.360.




Certain
      corporate and general and administrative expenses, including those related
      to
      executive management, tax, accounting, legal and treasury services, have been
      allocated by Old Point.360 to the Company based on the ratio of the Company’s
      revenues to Old Point.360’s total revenues. Additionally, balance sheet amounts
      shown as “Due to Parent Company” and “Due to Parent Company, less current
      portion” have been allocated by Old Point.360 to the Company based on the ratio
      of the Company’s working capital and net fixed assets to total Old Point.360
      working capital and net fixed assets, respectively. Management believes such
      allocations represent a reasonable estimate of such expenses that would have
      been incurred by the Company on a stand-alone basis. However, the associated
      balance sheet amounts and expenses recorded by the Company in the accompanying
      Consolidated Financial Statements may not be indicative of the actual balance
      or
      expenses that would have been recorded or incurred had the Company been
      operating as a separate, stand-alone public company for the periods presented.
      Following the separation and distribution from Old Point.360, the Company will
      perform administrative functions using internal resources or purchased
      services.




The
      process of segregating the post production business and the ads business
      required the following:




·
            Separation
                of sales, cost of sales, facility rents, personnel and other costs
                specifically related to each
                business.




·
            Allocation
                of costs shared by all Old Point.360 businesses such as accounting,
                sales
                and information technology, based on either specific criteria or
                an
                allocation based on sales, asset levels or another appropriate means.
                For
                example, interest expense related to Old Point.360 term and revolving
                credit loans was allocated based on property and equipment and accounts
                receivable balances of the post production and ads businesses,
                respectively. Accounting (billing, credit and collection, etc.) was
                allocated based on sales.




·
            Assets
                and liabilities related to each business were identified and assigned
                to
                post or ads businesses.




·
            Virtually
                all of the ads business was performed in five isolated facilities.




29




Invested
      equity at December 31, 2004, 2005 and 2006 and June 30, 2007 reflects the
      application of estimating techniques described above on those dates. Changes
      in
      invested equity from year to year are due to the income or loss of the Company
      and the net effect of the changes in balance sheet accounts determined by such
      estimating techniques.




In
      presenting the Consolidated Financial Statements, management makes estimates
      and
      assumptions that affect the amounts reported and related disclosures. Estimates,
      by their nature, are based on judgment and available information. Accordingly,
      actual results could differ from those estimates.




*Business
      Description*




The
      Company provides high definition and standard definition digital mastering,
      data
      conversion, video and film asset management and sophisticated computer graphics
      services to owners, producers and distributors of entertainment and advertising
      content. The Company provides the services necessary to edit, master, reformat,
      convert, archive and ultimately distribute its clients’ film and video content,
      including television programming feature films and movie trailers. The Company’s
      interconnected facilities provide service coverage to all major U.S. media
      centers. Clients include major motion picture studios, advertising agencies
      and
      corporations.




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




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




The
      Company does not have the systems to adequately segregate revenues for each
      product and service as orders can be for multiple services performed at several
      facilities. Providing information contemplated by paragraph 37 of FAS 131 is
      impracticable.




**2.** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES:**




*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 industry, credit risk
      due
      to financial insolvency is limited because of the financial stability of the
      customer base (i.e., large studios).




30




*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.
      Our five largest studio customers represented 57%; 72% and 55% of accounts
      receivable at December 31, 2005, December 31, 2006 and June 30, 2007,
      respectively. The Company reviews credit evaluations of its customers but does
      not require collateral or other security to support customer
      receivables.




The five
      largest studio customers **** accounted
      for 28%, 52%, 58% and 56% of net sales for the years ended December 31, 2004,
      2005 and 2006 and the six months ended June 30, 2007, respectively. Twentieth
      Century Fox (and affiliates) was the only customer, which accounted for more
      than 10% of net sales in any of these periods, or 26%, 33% and 34%, in 2005,
      2006 and the six months ended June 30, 2007, respectively.




*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.




*Goodwill*




Prior
      to
      the January 1, 2002 implementation of Statement of Financial Accounting
      Standards (“SFAS”) No. 142, “ *Goodwill
      and Other Intangible Assets* ”
(“SFAS
      142”), goodwill was amortized on a straight-line basis over 5 - 20 years. Since
      that date, goodwill has been subject to periodic impairment tests in accordance
      with SFAS 142.




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.




The
      Company evaluates its goodwill on an annual basis and when events and
      circumstances indicate that the carrying


amount
      of
      an asset may not be recoverable. If the independent appraisal or other indicator
      of value of the asset or 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. In 2007, fair value was determined using an independent appraisal,
      which was then compared to the carrying amount of the Company including
      goodwill. To date, no such impairment has been recorded.





Amounts
      shown as Goodwill in the accompanying balance sheets represent the amounts
      of
      Old Point.360’s goodwill allocable to the Company (see Note 3 for the allocation
      method). Certain disclosures in the footnotes include a discussion of Old
      Point.360’s goodwill (as opposed to only that allocable to the Company) to
      provide an explanation of the total goodwill to be allocated.




*Income
      Taxes*




The
      Company accounts for income taxes in accordance with SFAS No. 109, “ *Accounting*  *for
      Income Taxes”* (“SFAS
      109”). SFAS 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.




31




*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 SFAS No. 107, “ *Disclosures
      About Fair Value of Financial Instruments* ”
(“SFAS
      107”), 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 .




*Pro
      Forma Earnings (Loss) Per Share*




Old
      Point.360 has historically followed SFAS No. 128, “Earnings per Share” (“SFAS
      128”), and related interpretations for reporting Earnings per Share. SFAS 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 average number of common shares
      outstanding during the reported period. Diluted EPS reflects the potential
      dilution that could occur if a company had a stock option plan and stock options
      were exercised using the treasury stock method. While the Company will be
      subject to FAS 128, pro forma earnings per share in the accompanying
      Consolidated Statements of Income (Loss) have been calculated based on the
      actual number of the Company’s shares outstanding upon separation.




*Supplemental
      Cash Flow Information*




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




**Year
                Ended December 31,**
            
            **Six
                Months Ended June 30,****2004**
            
            **2005**
            
            **2006**
            
            **2006**
            
            **2007****(unaudited)**
            
            **(unaudited)**Cash
                payments for income taxes (net of refunds)
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            42
            
            $
            129Cash
                payments for interest
            
            
            568
            
            
            1,121
            
            
            605
            
            
            326
            
            
            197Non-cash
                investing and financing activities:Accrual
                for earn-out payments
            
            
            1,000
            
            
            2,000
            
            
            2,000
            
            
            -
            
            
            -Detail
                of acquisitions:Goodwill
                (1)
            
            
            242
            
            
            2,186
            
            
            2,000
            
            
            -
            
            
            2,091





(1)
            Includes
                additional purchase price payments made or accrued to former owners
                in
                periods subsequent to various acquisitions of $1,000,000, $2,000,000
                and
                $2,000,000 in 2004, 2005 and 2006,
                respectively.





*Recent
      Accounting Pronouncements*




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




32




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




In
      July
      2006, the FASB released FASB Interpretation No. 48, *“Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
      109”* (“FIN
      48”). FIN 48 clarifies the accounting and reporting for uncertainties in income
      tax law. This interpretation prescribes a comprehensive model for the financial
      statement recognition, measurement, presentation and disclosure of uncertain
      tax
      positions taken or expected to be taken in income tax returns. This statement
      is
      effective for fiscal years beginning after December 15, 2006. If there are
      changes in net assets as a result of application of FIN 48, these will be
      accounted for as an adjustment to retained earnings. As a result of the
      Company’s investigation, the Company did not recognize any increase in the
      liability for unrecognized tax benefit and did not record a cumulative effect
      adjustment related to the adoption of FIN 48.




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




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




**3.
      ACQU** **ISITIONS**




During
      1997 to 2007, Old Point.360 acquired eleven businesses. These 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 portion
      of the purchase prices, to the extent earned was recorded as an increase to
      goodwill. As of June 30, 2007, additional purchase price earn-out payments
      are
      as described below. The consolidated financial statements of the Company reflect
      the operations of the acquired post production companies since their respective
      acquisition dates.




Old
      Point.360’s goodwill and other intangibles, net, as of December 31, 2005 and
      2006 and June 30, 2007 consist of the following:




**December
                31,**
            
            **June
                30,****2005**
            
            **2006**
            
            **2007****(unaudited)**Goodwill
            
            $
            35,050,000
            
            $
            37,050,000
            
            $
            39,140,000Covenant
                not to compete
            
            
            1,000,000
            
            
            1,000,000
            
            
            1,020,00036,050,000
            
            
            38,050,000
            
            
            40,160,000Less
                accumulated amortization
            
            
            (6,576,000
            )
            
            (6,576,000
            )
            
            (6,576,000
            )$
            29,474,000
            
            $
            31,474,000
            
            $
            33,584,000




Old
      Point.360 ceased amortizing goodwill on January 1, 2002 with the adoption of
      SFAS 142. The covenant not to compete was fully amortized in 2003.




Old
      Point.360 operated in a single business segment due to the combination of
      facility assets, sales forces and management subsequent to the acquisitions,
      and
      the integration of branding and communications efforts. The goodwill acquired,
      therefore, is common to all Old Point.360 facilities. As of December 31, 2005
      and 2006 and June 30, 2007, the goodwill assignable to the Company was
      $8,665,000, $9,253,000 and $9,868,000, respectively, determined by comparing
      the
      value of the Company determined by an independent appraiser to the value of
      the
      advertising distribution business of Old Point.360 as evidenced by the market
      value of consideration to be paid by DG FastChannel for the advertising
      distribution business.




33




In
      order
      to expand relationships with our studio customers and gain new customers, on
      July 1, 2004, Old Point.360 acquired all of the outstanding stock of IVC for
      $7
      million in cash. The purchase agreement required possible additional payments
      of
      $1 million, $2 million and $2 million in 2005, 2006 and 2007, respectively,
      if
      earnings before interest, taxes, depreciation and amortization during the 30
      months after the acquisition reached certain predetermined levels (the second
      two increments of $2 million each were earned and are reflected as accrued
      liabilities on the balance sheets as of December 31, 2005 and 2006,
      respectively). As part of the transaction, Old Point.360 entered into employment
      and/or non competition agreements with four senior officers of IVC which fixed
      responsibilities, salaries and other benefits and set forth limitations on
      the
      individuals’ ability to compete with Old Point.360 for the term of the earn-out
      period (30 months). IVC is a high definition and standard definition digital
      mastering and data conversion entity serving the motion picture/television
      production industry. To pay for the acquisition, Old Point.360 used $2.3 million
      of cash on hand and borrowed $4.7 million under the term loan portion of Old
      Point.360’s bank facility.




The
      total
      purchase consideration ($12 million paid as of June 30, 2007) has been allocated
      to the assets and liabilities acquired based on their respective estimated
      fair
      values as summarized below.




Cash
                and cash equivalents
            
            $
            1,205,000Inventories
            
            
            120,000Other
                current assets
            
            
            1,000Accounts
                receivable
            
            
            2,036,000Goodwill
            
            
            5,242,000Property,
                plant and equipment
            
            
            6,009,000Total
                assets acquired
            
            $
            14,613,000Accounts
                payable
            
            
            (442,000
            )Accrued
            
            
            (417,000
            )Income
                tax payable
            
            
            (72,000
            )Deferred
                tax liabilities
            
            
            (1,682,000
            )Current
                and other liabilities assumed
            
            
            (2,613,000
            )Net
                assets acquired over liabilities, and purchase price
            
            $
            12,000,000





As
      stated
      above, the Company’s portion of Old Point.360’s goodwill was based on an
      allocation formula.




The
      following table presents unaudited pro forma results of the combined operations
      for the year ended December 31, 2004, as if the IVC acquisition had occurred
      as
      of the beginning of 2004 rather than as of the acquisition date. The pro forma
      information presented below is for illustrative purposes only and is not
      indicative of results that would have been achieved or results which may be
      achieved in the future:




**2004**Revenue
            
            $
            44,276,000Operating
                income (loss)
            
            
            (2,554,000
            )Net
                income (loss)
            
            
            (1,974,000
            )





In
      2005,
      Old Point.360 issued 105,000 shares in connection with a purchase of assets.
      The
      shares were recorded at fair value on the issue date. In connection with the
      transition, $186,000 was recorded as goodwill




34




On
      March
      7, 2007, Old Point.360 acquired substantially all of the assets and business
      of
      Eden FX, Inc. (“Eden”) for $2.2 million cash. The purchase agreement requires
      possible additional payments of $0.7 million, $0.9 million and $1.2 million
      in
      2008, 2009 and 2010, respectively, if earnings before interest, taxes,
      depreciation and amortization during the three years after the acquisition
      reach
      certain predetermined levels. As part of the transaction, Old Point.360 entered
      into employment and non competition agreements with three senior officers of
      Eden which fix responsibilities, salaries and other benefits and set forth
      limitations on the individual’s ability to compete with the Company for the term
      of the earn-out period (three years). Eden is a producer computer generated
      visual effects for feature films, television program and commercial advertising
      content.




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




**2007**Goodwill
            
            $
            2,071,000Property,
                plant and equipment
            
            
            107,000Intangible
                assets
            
            
            20,000Total
                assets acquired
            
            
            2,198,000Liabilities
                assumed
            
            
            (39,000
            )Net
                assets acquired over liabilities, andpurchase
                price
            
            $
            2,159,000




The
      operating results of Eden FX for the period from the March 7, 2007 acquisition
      date to June 30, 2007 were as follows:




Revenues
            
            $
            615,000Cost
                of services
            
            
            (817,000
            )Gross
                margin (deficit)
            
            
            (202,000
            )Selling,
                general andAdministrative
                expense
            
            
            (308,000
            )Operating
                loss
            
            $
            (510,000
            )




During
      2005, the amount of Point.360’s goodwill, net, increased from $27,288,000 to
      $29,474,000 due to the $2,000,000 earn-out payment accrued for the IVC
      acquisition and $186,000 of excess of fair value of stock issued over the fair
      value of purchased assets, as noted above. During 2006, the amount of goodwill,
      net, increased from $29,474,000 to $31,474,000 due to the $2,000,000 earn-out
      payment accrued for the IVC acquisition. During the six months ended June 30,
      2007, the amount of goodwill, net, increased from $31,474,000 to $33,568,000
      due
      to the acquisition of Eden. As described above, a portion of Old Point.360’s
      goodwill, including goodwill from the IVC transaction has been allocated to
      the
      Company.




**4.** **PROPERTY
      AND EQUIPMENT:**




In
      November 2003, Old Point.360 leased a new 64,600 square foot building in Los
      Angeles, California (which building is used by the Company) for the purpose
      of
      consolidating four vault locations then occupying approximately 71,000 square
      feet. This and the subsequent transactions related to the building have been
      treated as Point.360 transactions in the accompanying financial statements.
      Therefore the Company is treated as the owner.




As
      part
      of the transaction, Old Point.360 paid $600,000 for an option to purchase the
      facility for $8,571,500. Additionally, the landlord, General Electric Capital
      Business Asset Funding Corporation (“General Electric”), committed to finance
      approximately $6,500,000 of the purchase price at a fixed interest rate of
      7.75%
      over 15 years. Old Point.360 was not obligated to purchase the building or,
      if
      the option was exercised, borrow any portion of the purchase price from General
      Electric. The cost of the option was included in other assets on the balance
      sheet as of December 31, 2003, to be capitalized as a cost of the building
      or
      written off when the Company exercised the purchase option or did not exercise
      the option, respectively.




35




Pursuant
      to the lease, General Electric also advanced Old Point.360 $800,000 to pay
      for
      improvements to the building. As of December 31, 2003, the $800,000 was
      reflected as an obligation to purchase property and equipment with an offsetting
      liability on the balance sheet. In 2004, Old Point.360 reduced the right and
      the
      obligation to purchase property and equipment by $800,000 expended for
      improvements to the building. In August 2004, Point.360 purchased the facility
      for $8.6 million ($2.2 in cash and a $6.4 million mortgage).




In
      March
      2006, Old Point.360 entered into a sale and leaseback transaction with respect
      to its Media Center vaulting real estate. The real estate was sold for
      approximately $14.0 million resulting in a $1.3 million after tax gain.
      Additionally, Old Point.360 received $0.5 million from the purchaser for
      improvements. In accordance with SFAS No. 28, “ *Accounting
      for Sales with Leasebacks* ,”
the
      gain will be amortized over the initial 15-year lease term as reduced rent.
      Net
      proceeds at the closing of the sale and the improvement advance (approximately
      $13.8 million) were used to pay off the mortgage and other outstanding
      debt.




The
      lease
      is treated as an operating lease for financial reporting purposes. After the
      initial lease term, the Company has four five-year options to extend the lease.
      Minimum annual rent payments for the initial five years of the lease are
      $1,111,000, increasing annually thereafter based on the consumer price index
      change from year to year.




The
      following table presents the Company’s unaudited pro forma results the year
      ended December 31, 2005, as if the sale and leaseback transaction had occurred
      as of the beginning of the year. The pro forma information presented below
      is
      for illustrative purposes only and is not indicative of results that would
      have
      been achieved or results which may be achieved in the future (in thousands):




**As
                Reported**
            
            **Adjustments**
            
            **Pro
                Forma**Revenue
            
            $
            43,059
            
            
            
            
            $
            43,059Cost
                of services
            
            
            (29,472
            )
            
            (837)
                (1
            )
            
            (30,309
            )Gross
                profit
            
            
            13,587
            
            
            
            
            
            12,750Selling,
                general and administrative expense
            
            
            (14,972
            )
            
            
            
            
            (14,972
            )Operating
                income
            
            
            (1,385
            )
            
            
            
            
            (2,222
            )Interest
                income (expense)
            
            
            (1,280
            )
            
            881
                (2
            )
            
            (399
            )Income
                (loss) before income taxes
            
            
            (2,665
            )
            
            
            
            
            (2,621
            )Benefit
                from income taxes
            
            
            1,045
            
            
            (17)
                (3
            )
            
            1,028Net
                income (loss)
            
            $
            (1,620
            )
            
            
            
            $
            (1,593
            )






(1)
            First
                year rent expense net of amortization of the deferred gain on the
                sale,
                partially offset by the elimination of depreciation expense associated
                with the building.


(2)
            Pro
                forma interest saved on the amount of mortgage, term and revolving
                credit
                debt paid off with net sales
                proceeds.


(3)
            Tax
                effect at 40%.




36




The
      following table presents an unaudited pro forma summary balance sheet as of
      December 31, 2005 as if the sale and leaseback had occurred on that date (in
      thousands):





**As
                Reported**
            
            **Adjustments**
            
            **Pro
                Forma**Current
                assets
            
            $
            11,698
            
            
            
            
            $
            11,698Property
                and equipment, net
            
            
            26,474
            
            
            (11,261)
                (1
            )
            
            15,213Goodwill
                and other assets
            
            
            9,057
            
            
            
            
            
            9,057Total
                assets
            
            $
            47,229
            
            
            
            
            $
            35,968Accounts
                payable and accrued expenses
            
            $
            6,259
            
            
            
            
            $
            6,259Deferred
                income taxes
            
            
            1,231
            
            
            879
                (2
            )
            
            2,110Due
                to parent company
            
            
            4,442
            
            
            (4,442)
                (4
            )
            
            --Current
                liabilities
            
            
            11,932
            
            
            
            
            
            8,369Deferred
                gain on sale
            
            
            -
            
            
            1,318
                (3
            )
            
            1,318Deferred
                income taxes and other
            
            
            6,014
            
            
            500
                (5
            )
            
            6,514Due
                to parent company, net if current portion
            
            
            12,974
            
            
            (9,516)
                (4
            )
            
            3,458Invested
                equity
            
            
            16,309
            
            
            
            
            
            16,309Total
                liabilities and invested equity
            
            $
            47,229
            
            
            
            
            $
            35,968






(1)
            Net
                book value of assets sold.


(2)
            Tax
                on gain on sale at 40%.


(3)
            Deferred
                gain on sale to be amortized over life of
                lease.


(4)
            Pay-down
                of debt with net proceeds.


(5)
            Non-refundable
                advance from purchaser for
                improvements.




Property
      and equipment consist of the
      following:




**December
                31,**
            
            ******June
                30,****2005**
            
            **2006**
            
            **2007**Land
            
            $
            4,500,000
            
            $
            -
            
            $
            -Building
            
            
            6,230,000
            
            
            16,000
            
            
            19,000Machinery
                and equipment
            
            
            31,338,000
            
            
            32,426,000
            
            
            32,855,000Leasehold
                improvements
            
            
            6,495,000
            
            
            6,736,000
            
            
            6,847,000Computer
                equipment
            
            
            4,207,000
            
            
            4,717,000
            
            
            5,189,000Equipment
                under capital lease
            
            
            285,000
            
            
            290,000
            
            
            285,000Office
                equipment. CIP
            
            
            437,000
            
            
            413,000
            
            
            416,000Less
                accumulated depreciation and amortization
            
            
            (27,018,000
            )
            
            (31,748,000
            )
            
            (34,281,000
            )Property
                and equipment, net
            
            $
            26,474,000
            
            $
            12,850,000
            
            $
            11,330,000




Depreciation
      is expensed over the estimated lives of machinery and equipment (7 years),
      computer equipment (5 years) and leasehold improvements (2 to 10 years depending
      on the remaining term of the respective leases or estimated useful life of
      the
      improvement). Depreciation expense totaled $ 4,636,000, $ 5,096,000, $ 4,653,000
      and $2,359,000 for the years ended December 31, 2004, 2005 and 2006 and the
      six
      months ended June 30, 2007, respectively. Accumulated amortization on capital
      leases amounted to $ 211,000 and $ 254,000 and $264,000 as of December 31,
      2005
      and 2006 and June 30, 2007, respectively.


37


**5.** **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. Contributions to the plan related
      to
      employees of the Company were $60,000, $92,000, $84,000 and $53,000 in 2004,
      2005, 2006, and 2007 respectively.




**6.** **LONG
      TERM DEBT AND NOTES PAYABLE:**




On
      December 30, 2005, Old Point.360 entered into a $10 million term loan agreement.
      The term loan provides for interest at LIBOR (5.38% as of June 30, 2007) plus
      3.15% and is secured by Old Point.360’s equipment. In March 2006, Old Point.360
      prepaid $4 million of the principal with proceeds of a sale/leaseback
      transaction. The term loan will be repaid in 60 equal monthly principal payments
      plus interest. Proceeds of the term loan were used to repay the previously
      existing term loan.




In
      March
      2006, Point.360 entered into a revolving credit agreement, which provided up
      to
      $10 million of revolving credit. The two-year agreement provided for interest
      of
      LIBOR (5.38% as of June 30, 2007) plus 1.85% for the first six months of the
      agreement, and thereafter at either (i) prime minus 0% - 1.00% or (ii) LIBOR
      plus 1.50% - 2.5%, depending on the level of Old Point.360’s ratio of
      outstanding debt to fixed charges (as defined). The facility was secured by
      all
      of Old Point.360’s assets, except for equipment securing the new term loan as
      described in Note 6. The revolving credit agreement required Old Point.360
      to
      comply with various financial and business covenants. As of December 31, 2006
      and June 30, 2007, Point.360 was in compliance with revolving and term loan
      agreement covenants.




On
      March
      30, 2007, Old Point.360 entered into an additional $2.5 million term loan
      agreement. The loan provides for interest at 8.35% per annum and is secured
      by
      the Company’s equipment. The loan will be repaid in 45 equal monthly
      installments of principal and interest.




In
      August
      2007 the Company entered into a new credit agreement which provides up to $8
      million of revolving credit based on 80% of acceptable accounts receivables,
      as
      defined. The two-year agreement provides for interest of either (1) prime (7.75%
      at August 14, 2007) minus 0%-1.00% or (2) LIBOR plus 1.50% - 2.50% depending
      on
      the level of the Company’s ratio of outstanding debt to fixed charges (as
      defined), or 6.75% or 6.75%, respectively, on August 14, 2007, the effective
      date of the new agreement. The facility is secured by all of the Company’s
      assets, except for equipment securing new term loans as described above.




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




Annual
      maturities for debt under bank term note obligations as of June 30, 2007, are
      as
      follows:




2008
            
            $
            1,772,0002009
            
            
            1,815,0002010
            
            
            1,873,0002011
            
            
            959,000$
            6,409,000




In
      the
      accompanying Consolidated Balance Sheets, the current and long-term “Due to
      Parent Company” amounts reflect the portion of Old Point.360’s revolving credit
      and term loan debt assigned to the Company based on the proportion of the
      Company’s net working capital and property and equipment, net, to Old
      Point.360’s total net working capital and property and equipment, net,
      respectively.




38




Debt
        obligations allocable to the Company are included as amounts “Due to Parent
        Company” in the accompanying balance sheet as follows:
 **December
                    31,**
                
                ******June
                    30,****2005**
                
                **2006**
                
                **2007**Line
                    of credit debt
                
                $
                2,201,000
                
                $
                1,464,000
                
                $
                --Current
                    portion of term loan
                
                
                2,241,000
                
                
                1,069,000
                
                
                1,614,000Total
                    current liability
                
                
                4,442,000
                
                
                2,533,000
                
                
                1,614,000Long-term
                    debt
                
                
                12,974,000
                
                
                3,157,000
                
                
                4,257,000Total
                
                $
                17,416,000
                
                $
                5,690,000
                
                $
                5,871.000
  The
        differences in the amounts in the preceding table are shown as negative cash
        flows from financing activities in the Consolidated Statements of Cash
        Flows.
  **7.
        INCOME TAXES:**
  The
        Company’s provision for, or benefit from, income taxes has been determined as if
        the Company filed income tax returns on a stand-alone basis.
  The
        Company’s provision for (benefit from) income taxes for the three years ended
        December 31, 2006 and the six months ended June 30, 2007 consists of the
        following (in thousands):
  **Year
                  Ended December 31,**
              
              **Six
                  Months Ended**
                **June
                  30,****2004**
              
              **2005**
              
              **2006**
              
              **2006**
              
              **2007****(unaudited****)**Current
                  tax (benefit) expense:Federal
              
              $
              (1,224
              )
              $
              (1,467
              )
              $
              954
              
              $
              1,142
              
              $
              (452
              )State
              
              
              (271
              )
              
              (310
              )
              
              157
              
              
              258
              
              
              -Total
                  current
              
              
              (1,
                  495
              )
              
              (1,777
              )
              
              1,111
              
              
              1,400
              
              
              (452
              )Deferredtax (benefit) expense:Federal
              
              
              25
              
              
              616
              
              
              (1,283
              )
              
              (1,364
              )
              
              (132
              )State
              
              
              (19
              )
              
              116
              
              
              (170
              )
              
              (315
              )
              
              (23
              )Total
                  deferred
              
              
              6
              
              
              732
              
              
              (1,453
              )
              
              (1,655
              )
              
              (155
              )Total
                  provision for (benefit from)
                for
                  income taxes
              
              $
              (1,489
              )
              $
              (1,045
              )
              $
              (342
              )
              $
              (280
              )
              $
              (
                  607
              )
   39
 The
          composition of the deferred tax assets (liabilities) at December 31, 2005
          and
          December 31, 2006 and June 30, 2007
 are
          listed below:
 
 **December
                    31,**
                
                **June
                    30,****2005**
                
                **2006**
                
                **2007**Accrued
                    liabilities
                
                $
                345,000
                
                $
                197,000
                
                $
                273,000Allowance
                    for doubtful accounts
                
                
                181,000
                
                
                220,000
                
                
                209,000Other
                
                
                192,000
                
                
                22,000
                
                
                49,000Total
                    current deferred tax assets
                
                
                718,000
                
                
                439,000
                
                
                531,
                    000Property
                    and equipment
                
                
                (3,869,000
                )
                
                (2,350,000
                )
                
                (1,814,000
                )Goodwill
                    and other intangibles
                
                
                (2,649,000
                )
                
                (3,799,000
                )
                
                (4,132,000
                )State
                    net operating loss carry forward
                
                
                -
                
                
                -
                
                
                406,000Other
                
                
                498,000
                
                
                1,870,000
                
                
                1,758,000Valuation
                    allowance
                
                
                -
                
                
                -
                
                
                (434,000
                )Total
                    non-current deferred tax liabilities
                
                
                (6,014,000
                )
                
                (4,279,000
                )
                
                (4,216,000
                )Net
                    deferred tax liability
                
                $
                (5,296,000
                )
                $
                (3,840,000
                )
                $
                (3,685,000
                )
  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:
 
 **Year
                    Ended December 31,**
                
                **Six
                    Months Ended June 30,****2004**
                
                **2005**
                
                **2006**
                
                **2006**
                
                **2007****(unaudited)**Federal
                    tax computed at statutory rate
                
                
                34
                %
                
                34
                %
                
                34
                %
                
                34
                %
                
                34
                %State
                    taxes, net of federal benefit and net operating
                  loss
                    limitation
                
                
                6
                %
                
                6
                %
                
                6
                %
                
                6
                %
                
                6
                %Valuation
                    allowance
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (12
                %)Other
                    (meals and entertainment)
                
                
                1
                %
                
                1
                %
                
                (6
                %)
                
                (3
                %)
                
                (1
                %)41
                %
                
                41
                %
                
                34
                %
                
                37
                %
                
                27
                %
  **8.
          COMMITMENTS AND CONTINGENCIES** **:**         ****
  *Operating
          Leases*
  The
          Company leases the Company’s office and production facilities in California
          under various operating leases, which leases will be assumed by the Company
          upon
          separation from Old Point.360. Approximate minimum rental payments under
          these
          non-cancelable operating leases as of June 30, 2007 are as follows for
          the
          indicated fiscal years ended June 30:
  2008
                
                $
                3,532,0002009
                
                
                2,996,0002010
                
                
                2,222,0002011
                
                
                2,258,0002012
                
                
                1,920,000Thereafter
                
                
                10,192,000
 
 Total
          rental expense was approximately $2,995,000, $2,470,000, $3,176,000 and
          $1,842,000 for the three years ended December 31, 2004, 2005 and 2006 and
          six
          months ended June 30, 2007 respectively.
 40
  *Severance
        Agreements*
  On
        September 30, 2003 Old Point.360 entered into severance agreements with its
        Chief Executive Officer and Chief Financial Officer which continue in effect
        through December 31, 2008, and are renewed automatically on an annual basis
        after that unless notice is received terminating the agreement by September
        30
        of the preceding year. The severance agreements contain a “Golden Parachute”
provision. The Company assumed these severance agreements.
  *Contingencies*
  From
        time
        to time the Company may become a party to other legal actions and complaints
        arising in the ordinary course of business, although it is not currently
        involved in any such material legal proceedings .
  **9.
        STOCK OPTION PLAN:**
  In
        2007,
        the Board of Directors approved the 2007 Equity Incentive Plan (the “2007
        Plan”). The 2007 Plan provides for the award of options to purchase up to
        2,000,000 shares of common stock, appreciation rights and restricted stock
        awards. There were no options outstanding under the 2007 Plan as of June
        30,
        2007.
  Under
        the
        2007 Plan, the stock option price per share for options granted is determined
        by
        the Board of Directors and is based on the market price of the Company’s common
        stock on the date of grant, and each option is exercisable within the period
        and
        in the increments as determined by the Board, except that no option can be
        exercised later than ten years from the grant date. The stock options generally
        vest over one to five years.
  The
        Company has adopted SFAS 123(R) which requires the measurement and recognition
        of compensation expense for all share-based payment awards made to employees
        and
        directors based on estimated fair values. SFAS 123(R) requires companies
        to
        estimate the fair value of the award that is ultimately expected to vest
        to be
        recognized as expense over the requisite service periods in our Consolidated
        Statements of Income (Loss).
 
 **10.** **SUPPLEMENTAL
        DATA (unaudited):**
 
 The
        following tables set forth quarterly supplementary data for each of the years
        in
        the two-year and six-month period ended June 30, 2007 (in thousands except
        per
        share data).
  **2005****Quarter
                  Ended**
              
              **Year
                  Ended****March
                  31**
              
              **June
                  30**
              
              **Sept
                  30**
              
              **Dec
                  31**
              
              **Dec
                  31**Revenues
              
              $
              10,750
              
              $
              10,748
              
              $
              10,441
              
              $
              11,119
              
              $
              43,059Gross
                  profit
              
              $
              2,906
              
              $
              3,220
              
              $
              3,345
              
              $
              4,115
              
              $
              13,587Net
                  income (loss)
              
              $
              (712
              )
              $
              (532
              )
              $
              (405
              )
              $
              29
              
              $
              (1,620
              )
 
 **2006****Quarter
                  Ended**
              
              **Year
                  Ended****March
                  31**
              
              **June
                  30**
              
              **Sept
                  30**
              
              **Dec
                  31**
              
              **Dec
                  31**Revenues
              
              $
              10,693
              
              $
              11,442
              
              $
              10,626
              
              $
              10,772
              
              $
              43,533Gross
                  profit
              
              $
              3,311
              
              $
              3,430
              
              $
              3,080
              
              $
              3,736
              
              $
              13,557Net
                  income (loss)
              
              $
              (144
              )
              $
              12
              
              $
              (99
              )
              $
              (83
              )
              $
              (314
              )
   
 41
 
 **2007****Quarter
                  Ended**
              
              **Six
                  months ended June 30, 2007****March
                  31**
              
              **June
                  30**Revenues
              
              $
              10,307
              
              $
              10,543
              
              $
              20,850Gross
                  profit
              
              $
              2,800
              
              $
              2,290
              
              $
              5,090Net
                  income (loss)
              
              $
              (456
              )
              $
              (1,181
              )
              $
              (1,637
              )
  **11.
        SUBSEQUENT EVENT:**
 
 On
        April
        16, 2007, Old Point.360, the Company, a newly formed California corporation
        and
        wholly owned subsidiary of Old Point.360 and DG FastChannel, Inc. (“DG
        FastChannel”), entered into an Agreement and Plan of Merger and Reorganization
        (the “Merger Agreement”), as amended by an instrument executed by the parties as
        of June 19, 2007.
  Under
        the
        terms of the Merger Agreement, DG FastChannel agreed to make an exchange
        offer
        (the “Exchange Offer”) for all outstanding shares of Old Point.360 common stock,
        no par value per share, including the associated preferred stock purchase
        rights
        (collectively, the “Old Point.360 Shares”), in which Exchange Offer each Old
        Point.360 Share tendered and accepted by DG FastChannel will be exchanged
        for a
        number of shares of common stock, par value $0.001 per share, of DG FastChannel
        (the “DG Common Stock”) equal to the quotient obtained by dividing (x) 2,000,000
        by (y) the number of Old Point.360 Shares (excluding Old Point.360 Shares
        owned
        by DG or Point.360) issued and outstanding immediately prior to the completion
        of the Exchange Offer (such amount of shares of DG Common Stock paid per
        Old
        Point.360 Share pursuant to the Exchange Offer is referred to herein as the
        “Exchange Offer Consideration”).
  In
        addition, on April 16, 2007, Old Point.360, DG FastChannel, and the Company
        entered into a Contribution Agreement (the “Contribution Agreement”), as amended
        by an instrument executed by the parties as of June 19, 2007. Pursuant to
        the
        Contribution Agreement, prior to the completion of the Exchange Offer, Old
        Point.360 contributed (the “Contribution”) to the Company all of the assets
        owned, licensed, or leased by Old Point.360 that were not used exclusively
        in
        connection with the
        business of Old Point.360 representing advertising agencies, advertisers,
        brands, and other media companies which require services for short-form media
        content (the “ADS Business”), and the Company assumed certain liabilities of Old
        Point.360. Immediately
        following the Contribution but prior to the completion of the Exchange Offer,
        Old Point.360 distributed (the “Spin-Off”) to its shareholders on a pro rata
        basis all of the capital stock then outstanding of the Company.
  On
        July
        13, 2007, the Company filed a Registration Statement on Form S-1 (the “Form
        S-1”) with the Securities and Exchange Commission for the purpose of registering
        the Spin-Off under the Securities Act of 1933, as amended. Among other things,
        the Form S-1 contained: (1) a detailed description of the Contribution and
        the
        Spin-Off; (2) a description of Old Point.360’s post-production business that was
        to be transferred to the Company pursuant to the Contribution; (3) risk factors
        relating to the Company business, the Contribution and Spin-Off and the
        Company’s common stock; (4) a valuation of the Company by Old Point.360’s
        financial advisor; (5) management’s discussion and analysis of the Company’s
        financial condition and results of operations for each of the three years
        in the
        period ended December 31, 2006; (6) unaudited pro forma financial statements
        of
        the Company as of December 31, 2006, and for the year then ended, giving
        effect
        to the Contribution and Spin-Off; (7) audited financial statements for New
        360
        as of December 31, 2006 and 2005 and for each of the three years in the period
        ended December 31, 2006; and (8) a description of New 360’s proposed management
        and executive compensation policies. The contribution and Spin-off were
        completed on August 14, 2007.
  The
        Company’s common stock was approved for listing on the Nasdaq Global Market. As
        a result of the Contribution and the Spin-Off, at the completion of the Exchange
        Offer, the assets and liabilities of Old Point.360 consisted only of those
        assets and liabilities exclusively related to the ADS Business.
  Following
        the completion of the Exchange Offer, DG FastChannel effected the merger
        of Old
        Point.360 with and into DG FastChannel (the “Merger”), with DG FastChannel
        continuing as the surviving corporation. Upon the completion of the Merger,
        each
        Old Point.360 Share not purchased in the Exchange Offer was converted into
        the
        right to receive the Exchange Offer Consideration, without interest. DG
        FastChannel also paid to the Company as part of the merger consideration
        cash of
        (i) $7 million in lieu of prepayment of the Company’s outstanding debt, (ii)
        $0.3 million for reimbursement of merger expenses and (iii) a $0.4 million
        prepayment for working capital of the ADS Business. The Company expects to
        receive approximately $1.9 million additional cash from DG FastChannel pursuant
        to the Working Capital Reconciliation Agreement among Old Point.360, DG
        FastChannel and the Company.
   
 42
 
 The
        following table sets forth the Company’s cash and cash equivalents and
        shareholders’ equity as of June 30, 2007 on an historical basis and on a pro
        forma basis after giving effect to the following separation
        transactions:
  ·
              the
                  formation of the Company and the contribution by Old Point.360
                  to the
                  Company of all the assets and liabilities of Old Point.360 (including
                  Old
                  Point.360’s post-production business) other than assets and liabilities
                  relating to the ADS Business;
  ·
              the
                  distribution of Company common stock to Old Point.360 shareholders
                  by Old
                  Point.360;
  ·
              the
                  payment by DG FastChannel of $7 million to the Company;
                  and
  ·
              the
                  payment of the estimated amount of $2.3 million to the Company
                  by DG
                  FastChannel to compensate the Company for working capital transferred
                  by
                  Old Point.360 to DG FastChannel in the merger of Old Point.360
                  into DG
                  FastChannel.
  **June
                  30, 2007****(in
                  thousands)**
              
              **Historical**
              
              **Separation
                  Adjustments**
              
              **Separation**
                **Pro
                  Forma**Cash
                  and cash equivalents
              
              $
              7,302
              
              $
              2,300
              (a)
              $
              16,6027,000
              (b)Invested
                  equity
              
              $
              20,587
              
              $
              (20,587)
              (c)
              $
              ----Common
                  stock
              
              
              ---
              
              
              20,587
              (c)
              $
              20,587Additional
                  paid-in capital
              
              
              ---
              
              
              7,000
              (b)
              
              9,3002,300
              (a)Total
                  invested/shareholder’s equity
              
              $
              20,587
              
              $
              9,300
              
              $
              29,887
 _____________
 (a)
                Represents
                    the receipt of the estimated amount of $2.3 million from DG FastChannel
                    in
                    payment for Old Point.360’s working capital (other than the Company’s
                    working capital).
 (b)
                Represents
                    the payment of $7 million to the Company as provided in the Merger
                    Agreement.
 (c)
                Represents
                    the reclassification of invested equity to common stock upon
                    the
                    contribution of Old Point.360’s post-production net assets to the Company
                    and the distribution of the Company’s common stock to Old Point.360’s
                    shareholders.




43





**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Shareholders of Point.360


Burbank,
      California





Our
      audits of the consolidated financial statements referred to in our report dated
      May 14, 2007 and November 9, 2007, also included the financial statement
      schedule of Point.360 (formerly New 360) below. This schedule is the
      responsibility of Point.360’s management. Our responsibility is to express an
      opinion based on our audits of the consolidated financial
      statements.




In
      our
      opinion, the financial statement schedule, when considered in relation to the
      basic consolidated financial statements taken as a whole, presents fairly in
      all
      material respects the information set forth therein.




Singer
      Lewak Greenbaum & Goldstein LLP (signed)


Los
      Angeles, California


November
      9, 2007











**Point.360**


**Schedule
      II- Valuation and Qualifying Accounts**








**Allowance
                for Doubtful Accounts**
            
            **Balance
                at**
              **Beginning
                of**
              **Year**
            
            **Charged
                to**
              **Costs
                and**
              **Expenses**
            
            **Other**
            
            **Deductions/**
              **Write-Offs**
            
            **Balance
                at**
              **End
                of**
              **Year**Year
                ended December 31, 2004
            
            $
            524,000
            
            $
            60,000
            
            $
            (153,000
            )
            $
            (50,000
            )
            $
            381,000Year
                ended December 31, 2005
            
            $
            381,000
            
            $
            67,000
            
            $
            --
            
            $
            (24,000
            )
            $
            424,000Year
                ended December 31, 2006
            
            $
            424,000
            
            $
            159,000
            
            $
            --
            
            $
            (70,000
            )
            $
            513,000Six
                months endedJune 30, 2007
            
            $
            513,000
            
            $
            46,000
            
            $
            --
            
            $
            (69,000
            )
            $
            490,000




44




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




None.




**ITEM
      9A.** **CONTROLS
      AND PROCEDURES**




Pursuant
      to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange
      Act”), the Company’s management, with the participation of the Chief Executive
      Officer and Chief Financial Officer, evaluated the effectiveness of the
      Company’s disclosure controls and procedures, as of the end of the period
      covered by this report. Based on that evaluation, the Chief Executive Officer
      and Chief Financial Officer concluded that the Company’s disclosure controls and
      procedures are effective in ensuring that information required to be disclosed
      in reports that the Company files or submits under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      SEC’s rules and forms. No change in the Company’s internal control over
      financial reporting occurred during the Company’s most recent fiscal quarter
      that materially affected, or is reasonably likely to materially affect, the
      Company’s internal control over financial reporting.




**ITEM
      9B.** **OTHER
      INFORMATION**




None.




45




**PART
      III**





The
      Company was incorporated as a subsidiary of Old Point.360 in April 2007 and
      became subject to the Securities and Exchange
      Commission’s financial reporting requirements on August 14, 2007 effective with
      Old Point.360’s distribution of Point.360 stock to its shareholders. In its
      registration statement on Form S-1 filed with the SEC on July 26, 2007, the
      Company’s financial statements were carved out of Old Point.360 based on Old
      Point.360’s fiscal years ended December 31, 2004, 2005 and 2006. On August 14,
      2007, the Company began operating as an independent public entity with the
      fiscal year ending on June 30.




The
          consolidated statements of income (loss) and cash flows in this Form 10-K/T
          include the years ended December 31, 2004, 2005
          and
          2006 and the six months ended June 30, 2007. The Company will begin reporting
          on
          Form 10-Q beginning with the first fiscal
          quarter of fiscal year ending June 30, 2008 (the quarter ended September
          30,
          2007). The information required to be set forth in Items
          11,
          12, 13 and 14 will be filed within 120 days after June 30,
          2008.




**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**





On
      July
      3, 2003 and May 30, 2007, Old Point.360 and the Company adopted a Code of Ethics
      (the “Code”) applicable to the Company’s Chief Executive Officer, Chief
      Financial Officer and all other employees. Among other provisions, the Code
      sets
      forth standards for honest and ethical conduct, full and fair disclosure in
      public filings and shareholder communications, compliance with laws, rules
      and
      regulations, reporting of code violations and accountability for adherence
      to
      the Code. The text of the Code has been posted on the Company’s website
      ( www.point360.com ).
      A copy
      of the Code can be obtained free-of-charge upon written request to:





Corporate
      Secretary


Point.360


2777
      North Ontario Street


Burbank,
      CA 91504





If
      the
      Company makes any amendment to, or grant any waivers of, a provision of the
      Code
      that applies to our principal executive officer or principal financial officer
      and that requires disclosure under applicable SEC rules, we intend to disclose
      such amendment or waiver and the reasons for the amendment or waiver on our
      website.





Other
      information called for by Item 10 of Form 10-K will be set forth in the
      Company’s Form 10-K/T/A to be filed by December 11, 2007.




**ITEM
      11. EXECUTIVE COMPENSATION**





Information
      called for by Item 11 of Form 10-K will be set forth in the Company’s Form
      10-K/T/A to be filed by December 11, 2007.




**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**




Information
      called for by Item 12 of Form 10-K will be set forth in the Company’s Form
      10-K/T/A to be filed by December 11, 2007.




**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





Information
      called for by Item 13 of Form 10-K will be set forth in the Company’s Form
      10-K/T/A to be filed by December 11, 2007.




46




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Information
      called for by Item 14 of Form 10-K will be set forth in the Company’s Form
      10-K/T/A to be filed by December 11, 2007.




**PART
      IV**





**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**





(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, 2005, 2006 and June 30, 2007


Consolidated
      Statements of Income (Loss) - Fiscal Years Ended December 31, 2004, 2005 and
      2006 and the Six Months Ended June 30, 2006 (unaudited) and 2007


Consolidated
      Statements of Shareholders’ Equity - Fiscal Years Ended December 31, 2004, 2005
      and 2006 and the Six Months Ended June 30, 2007


Consolidated
      Statements of Cash Flows - Fiscal Years Ended December 31, 2004, 2005, 2006
      and
      the Six Months Ended June 30, 2006 (unaudited) and 2007


Notes
      to
      Consolidated Financial Statements


Schedule
      II - Valuation and Qualifying Accounts





(3)
      Exhibits:




Exhibit
                No.
            
            Exhibit
                Description*2.1
            
            Agreement
                and Plan of Merger and Reorganization, dated as of April 16, 2007,
                among
                the Registrant, Old Point.360 and DG FastChannel, Inc. (incorporated
                by
                reference to Exhibit 2.1 to the Registration Statement on Form 10
                filed by
                the Registrant on May 14, 2007)2.2
            
            Contribution
                Agreement, dated as of April 16, 2007, among the Registrant, Old
                Point.360
                and DG FastChannel, Inc. (incorporated by reference to Exhibit 2.2
                to the
                Registration Statement on Form 10 filed by the Registrant on May
                14,
                2007)2.3
            
            First
                Amendment to Agreement and Plan of Merger and Reorganization, dated
                as of
                June 22, 2007, among the Registrant, Old Point.360, and DG FastChannel,
                Inc. (incorporated by reference to Exhibit 2.3 to Amendment No. 1
                to the
                Registration Statement on Form 10 filed by the Registrant on June
                22,
                2007)2.4
            
            First
                Amendment to Contribution Agreement, dated as of June 22, 2007, among
                the
                Registrant, Old Point.360, and DG FastChannel, Inc. (incorporated
                by
                reference to Exhibit 2.4 to Amendment No. 1 to the Registration Statement
                on Form 10 filed by the Registrant on June 22, 2007)3.1
            
            Articles
                of Incorporation of the Registrant




47




Exhibit
                No.
            
            Exhibit
                Description*


3.2
            
            Certificate
                of Amendment to the Registrant’s Articles of Incorporation (incorporated
                by reference to Exhibit 3.1 to the Current Report on Form 8-K filed
                by the
                Registrant on August 22, 2007.3.3
            
            Bylaws
                of the Registrant (incorporated by reference to Exhibit 2.1 to the
                Registration Statement on Form 10 filed by the Registrant on May
                14,
                2007)4.1
            
            Form
                of the Registrant’s Common Stock Certificate (incorporated by reference to
                Exhibit 4.1 to the Registration Statement on Form S-1, Registration
                No.
                333-144547, filed by the Registrant on July 13, 2007)4.2
            
            Form
                of Rights Agreement between the Registrant and American Stock Transfer
                & Trust Company (incorporated by reference to Exhibit 4.2 to Amendment
                No. 1 to the Registration Statement on Form S-1 filed by the Registrant
                on
                July 26, 2007)4.3
            
            Form
                of Certificate of Determination of Series A Junior Participating
                Preferred
                Stock of the Registrant (incorporated by reference to Exhibit 4.2
                to
                Amendment No. 1 to the Registration Statement on Form S-1 filed by
                the
                Registrant on July 26, 2007)4.4
            
            Form
                of Right Certificate (incorporated by reference to Exhibit 4.2 to
                Amendment No. 1 to the Registration Statement on Form S-1 filed by
                the
                Registrant on July 26, 2007)10.1
            
            Form
                of Noncompetition Agreement between the Registrant and DG FastChannel,
                Inc. (incorporated by reference to Exhibit 10.1 to the Registration
                Statement on Form 10 filed by the Registrant on May 14,
                2007)10.2
            
            Form
                of Post Production Services Agreement between the Registrant and
                DG
                FastChannel, Inc. (incorporated by reference to Exhibit 10.2 to the
                Registration Statement on Form 10 filed by the Registrant on May
                14,
                2007)10.3
            
            Form
                of Working Capital Reconciliation Agreement among the Registrant,
                Old
                Point.360 and DG FastChannel, Inc. (incorporated by reference to
                Exhibit
                10.3 to the Registration Statement on Form 10 filed by the Registrant
                on
                May 14, 2007)10.4
            
            Form
                of Indemnification and Tax Matters Agreement between the Registrant
                and DG
                FastChannel, Inc. (incorporated by reference to Exhibit 10.4 to the
                Registration Statement on Form 10 filed by the Registrant on May
                14,
                2007)10.5
            
            Severance
                Agreement, dated September 30, 2003 (assumed by the Registrant),
                between
                Old Point.360 and Haig S. Bagerdjian (incorporated by reference to
                Exhibit
                10.5 to the Registration Statement on Form 10 filed by the Registrant
                on
                May 14, 2007)10.6
            
            Severance
                Agreement, dated September 30, 2003 (assumed by the Registrant),
                between
                Old Point.360 and Alan R. Steel (incorporated by reference to Exhibit
                10.6
                to the Registration Statement on Form 10 filed by the Registrant
                on May
                14, 2007)10.7
            
            2007
                Equity Incentive Plan of the Registrant (incorporated by reference
                to
                Exhibit 10.7 to Amendment No. 1 to the Registration Statement on
                Form 10
                filed by the Registrant on June 22,
                2007)




48




Exhibit
                No.
            
            Exhibit
                Description*


10.8
            
            Building
                Lease (1133 Hollywood Way, Burbank Facility), dated June 11, 1998
                (assumed
                by the Registrant), between Old Point.360 and Hollywood Way Office
                Ventures LLC (incorporated by reference to Exhibit 10.8 to the
                Registration Statement on Form 10 filed by the Registrant on May
                14,
                2007)10.9
            
            Standard
                Industrial / Commercial Single - Tenant Lease - Net (712 N. Seward
                St.,
                Los Angeles facility), dated January 24, 1997 (assumed by the Registrant),
                between Old Point.360 and Richard Hourizadeh, as amended in July
                2002
                (incorporated by reference to Exhibit 10.9 to the Registration Statement
                on Form 10 filed by the Registrant on May 14, 2007)10.10
            
            Standard
                Industrial / Commercial Multi-Tenant Lease-Net (West Los Angeles
                facility), dated March 17, 2004 (assumed by the Registrant), between
                Old
                Point.360 and Martin Shephard, as co-Trustee of the Shephard Family
                Trust
                of 1988 (incorporated by reference to Exhibit 10.10 to Amendment
                No. 1 to
                the Registration Statement on Form 10 filed by the Registrant on
                June 22,
                2007)10.11
            
            Standard
                Industrial Lease - Net (Highland facility), dated April 3, 1989 (assumed
                by the Registrant), between Old Point.360 and Leon Vahn FBO for Leon
                Vahn
                Living Trust, as amended (incorporated by reference to Exhibit 10.11
                to
                Amendment No. 1 to the Registration Statement on Form 10 filed by
                the
                Registrant on June 22, 2007)10.12
            
            Standard
                Industrial / Commercial Multi-Tenant Lease -Net (IVC facility), dated
                March 1, 2002 (assumed by the Registrant), between Old Point.360
                and 2777
                LLC, as amended (incorporated by reference to Exhibit 10.12 to Amendment
                No. 1 to the Registration Statement on Form 10 filed by the Registrant
                on
                June 22, 2007)10.13
            
            Lease
                Agreement (Media Center) dated March 29, 2006 (assumed by the Registrant),
                between Old Point.360 and LEAFS Properties, LP (incorporated by reference
                to Exhibit 10.13 to Amendment No. 1 to the Registration Statement
                on Form
                10 filed by the Registrant on June 22, 2007)10.14
            
            Asset
                Purchase Agreement, dated as of March 7, 2007 (assumed by the
                Registrant), among Old Point.360, Eden FX, Mark Miller, and John
                Gross
                (incorporated by reference to Exhibit 10.14 to the Registration Statement
                on Form 10 filed by the Registrant on May 14, 2007)10.15
            
            Standard
                Loan Agreement dated August 7, 2007 between the Registrant and Bank
                of
                America N.A.10.16
            
            Promissory
                Note dated December 30, 2005 (assumed by the Registrant), between
                General
                Electric Capital Corporation and Old Point.36010.17
            
            Promissory
                Note dated March 30, 2007 (assumed by the Registrant), between General
                Electric Capital Corporation and Old Point.36010.18
            
            Transfer
                and Assumption Agreement dated August 8, 2007 between the Registrant
                and
                Old Point.36021.1
            
            Subsidiaries
                of the Registrant (incorporated by reference to Exhibit 21.1 to the
                Registration Statement on Form 10 filed by the Registrant on May
                14,
                2007)23.1
            
            Consent
                of Singer Lewak Greenbaum & Goldstein
                LLP




49




Exhibit
                No.
            
            Exhibit
                Description*


31.1
            
            Certification
                of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            
            Certification
                of Chief Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1
            
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.







*
            Prior
                to August 21, 2007, Point.360 was named New 360. On August 21, 2007,
                New
                360 changed its name to Point.360. In this Exhibit Index, Point.360
                (including New 360 for the period prior to August 21, 2007) is referred
                to
                as the “**Registrant**.”





References
                in this Exhibit Index to “**Old
                Point.360**”
                are intended to refer to the Registrant’s former parent corporation, named
                Point.360, which was merged into DG FastChannel, Inc. on August 14,
                2007,
                with DG FastChannel, Inc. continuing in existence as the surviving
                corporation.





50





**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:
      November 9, 2007


Point.360By:
            /s/
                Haig S. Bagerdjian
              Haig S. Bagerdjian
              Chairman
                of the Board of Directors,
              President
                and Chief Executive Officer





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





/s/
                Haig S. Bagerdjian
              
              Haig
                S. Bagerdjian
            
            Chairman
                of the Board of Directors,
              President
                and Chief Executive Officer
            November
                9, 2007/s/
                Alan R. Steel
              
              
              Alan
                R. Steel
            
            Executive
                Vice President,
              Finance
                and Administration, Chief Financial Officer
              (Principal
                Accounting and Financial Officer)
            November
                9, 2007/s/
                Robert A. Baker
              
              Robert
                A. Baker
            
            Director
            November
                9, 2007/s/
                Greggory J. Hutchins
              
              Greggory
                J. Hutchins
            
            Director
            November
                9, 2007/s/
                Sam P. Bell
              
              Sam
                P. Bell
            
            Director
            November
                9, 2007/s/
                G. Samuel Oki
              
              G.
                Samuel Oki
            
            Director
            November
                9, 2007





51