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

                                    FORM 10-K

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

                      For the year ended December 31, 2002

                                       OR

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

                        For the transition period from to

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


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

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

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

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

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

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

         Yes  X   No  ____
              -

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

        The  aggregate  market  value  of  the  voting  common  equity  held  by
non-affiliates  of the  registrant  was  approximately  $16,283,000  computed by
reference  to the price at which  the  common  equity  was last sold on the last
business day of the registrant's most recently  completed second fiscal quarter,
June 30, 2002. As of February 28, 2003,  there were  9,035,482  shares of Common
Stock outstanding.

                                        Total number of pages in this report: 49

<PAGE>

This Annual Report on Form 10-K consists of 48 pages,  including  exhibits.  The
exhibit index is on page 40.



DOCUMENTS INCORPORATED BY REFERENCE

Definitive  Proxy  Statement   relating  to  the  Company's  Annual  Meeting  of
Shareholders to be held on May 21, 2003 is incorporated by reference in Part III
of this report.

<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

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

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

        The Company  seeks to  capitalize  on growth in demand for the  services
related to the  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 the
Company's  services are  entertainment  studios and  advertising  agencies  that
generally  choose to outsource such services due to the sporadic  demand and the
fixed costs of maintaining a high-volume physical plant.

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

        The  Company was  incorporated  in  California  in 1990.  The  Company's
executive offices are located at 7083 Hollywood Boulevard, Hollywood, California
90028, and its telephone number is (323) 957-7990. The Company's website address
is www.point360.com.

MARKETS

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

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

<PAGE>

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

VALUE-ADDED SERVICES

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

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

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

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

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

<PAGE>

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

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

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

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

        ARCHIVAL  SERVICES.  The  Company  currently  stores  approximately  1.5
million videotape and film elements in a protected environment.  The storage and
handling  of  videotape  and film  elements  require  specialized  security  and
environmental  control  procedures.   The  Company  performs  secure  management
archival  services  in all of its  operating  facilities  as well as four  vault
specific locations in Los Angeles. The Company offers on-line access to archival
information for advertising clients, and may offer this service to other clients
in the future.

DISTRIBUTION NETWORK

        The Company operates a full service  distribution  network providing its
customers  with reliable,  timely and high quality  distribution  services.  The
Company's   historical   customer   base  consists  of   advertising   agencies,
multinational   companies,   motion   picture   and   television   studios   and
post-production facilities.

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

<PAGE>

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

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

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

NEW MARKETS

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

INTERNATIONAL.   The  Company   currently   provides   electronic  and  physical
duplication and distribution services for rich media content providers. Further,
the Company  believes  that  electronic  distribution  methods  will  facilitate
further expansion into the international distribution arena as such technologies
become standardized and cost-effective.  In addition,  the Company believes that
the growth in the  distribution of domestic content into  international  markets
will create increased demand for value-added  services currently provided by the
Company such as standards conversion and audio and digital mastering.

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

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

SALES AND MARKETING

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

<PAGE>

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

CUSTOMERS

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

        The  Company  solicits  the motion  picture and  television  industries,
advertisers and their agencies to generate revenues.  In the year ended December
31, 2002, the seven major motion picture studios accounted for approximately 34%
of the Company's revenues. Metro-Goldwyn-Mayer accounted for greater than 10% of
the Company's revenues for the year ended December 31, 2002.

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

CUSTOMER SERVICE

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

        The Company has a sales and customer  service staff of  approximately 69
people,  at least one member of which is  available  24 hours a day.  This staff
serves  as a single  point  of  problem  resolution  and  supports  not only the
Company's customers, but also the television stations and cable systems to which
the Company delivers.

COMPETITION

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

<PAGE>

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

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

EMPLOYEES

        The Company had 441  full-time  employees as of December  31, 2002.  The
Company's   employees  are  not   represented  by  any   collective   bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good.

ITEM 2. PROPERTIES

        The Company  currently  leases all 14 of its  facilities.  Nine of these
facilities  have  production  capabilities  and/or  sales  activities,  four are
storage vaults, one is used as the Company's corporate offices.  The lease terms
expire at various dates from June 2002 to December  2009.  The  following  table
sets  forth  the  location  and  approximate  square  footage  of the  Company's
properties as of December 31, 2002:

                                                                    SQUARE
LOCATION                                                            FOOTAGE

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

ITEM 3. LEGAL PROCEEDINGS

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

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

        The Company's  Annual  Meeting of  Shareholders  was held on December 5,
2002.  At the meeting,  shareholders  voted on: (i) the election of directors to
hold office  until the next  annual  meeting of  shareholders  of the Company or
until their successors are duly elected and qualified,  and (ii) approval of the
appointment  of  Singer  Lewak  Greenbaum  &  Goldstein  LLP  as  the  Company's
independent  public accountants for the fiscal year ending December 31, 2002.

<PAGE>

1. ELECTION OF DIRECTORS

The  following  individuals  were elected as directors at the Annual  Meeting of
Shareholders:

              Name                      Votes For           Votes Withheld

         Haig S. Bagerdjian             5,783,936             2,411,768
         Robert A. Baker                5,957,281             2,238,423
         Greggory J. Hutchins           5,957,281             2,238,423
         Sam P. Bell                    5,957,281             2,238,423

2. The  appointment  by the Board of  Directors  of the Company of Singer  Lewak
Greenbaum & Goldstein LLP as the Company's  independent  auditors for the fiscal
year  ending  December  31,  2002 was  ratified  with  5,951,836  votes  for the
proposal,  11,600 votes against the proposal,  2,212,168 votes  abstaining and 0
broker nonvotes.


                                     PART II

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

MARKET INFORMATION

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

                                                          COMMON STOCK
                                                          ------------
                                                         LOW      HIGH
                                                         ---      ----
Year Ended December 31, 2001
   First Quarter .....................................  $1.25    $4.56
   Second Quarter.....................................    .66     3.75
   Third Quarter......................................    .64     3.35
   Fourth Quarter.....................................    .46     1.39
Year Ended December 31, 2002
   First Quarter .....................................  $1.12    $2.14
   Second Quarter.....................................   1.50     3.00
   Third Quarter......................................   1.25     2.15
   Fourth Quarter.....................................   0.83     3.25

On February 25, 2003,  the closing sale price of the Common Stock as reported on
the NNM was $2.16 per share.  As of February 25, 2003,  there were 1,066 holders
of record of the Common Stock.

DIVIDENDS

        The Company did not pay  dividends  on its Common Stock during the years
ended December 31, 2001 or 2002. 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."

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The following data,  insofar as they relate to each of the years 1998 to
2002, 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.
<PAGE>
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                                  -----------------------
                                                                     1998       1999       2000        2001        2002
                                                                     ----       ----       ----        ----        ----
<S>                                                              <C>         <C>         <C>         <C>         <C>
Statement of Income Data
Revenues........................................................ $  59,697   $  78,248   $  74,841   $  69,628   $  68,419
Cost of goods sold..............................................    36,902      47,685      45,894      46,864      42,172
                                                                 ---------   ---------   ---------   ---------   ---------
Gross profit....................................................    22,795      30,563      28,947      22,764      26,247
Selling, general and administrative expense.....................    13,201      18,473      21,994      20,872      18,977
                                                                 ---------   ---------   ---------   ---------   ---------
Operating income ...............................................     9,594      12,090       6,953       1,892       7,270
Interest expense, net...........................................       976       2,147       2,889       3,070       2,528
Derivative fair value change (5)................................         -           -           -         700         (82)
Provision for (benefit from) income tax ........................     3,577       4,340       1,814        (384)      2,007
                                                                 ---------   ---------   ---------   ---------   ---------
Income  (loss) before extraordinary item,
   adoption of SAB 101 (2)...................................... $   5,041   $   5,603   $   2,250   $  (1,494)  $   2,817
Extraordinary item (net of tax benefit of $168) (1).............         -           -        (232)          -           -
Cumulative effect of adopting SAB 101 (2).......................         -           -        (322)          -           -
                                                                 ---------   ---------   ---------   ---------   ---------
Net income (loss)............................................... $   5,041   $   5,603   $   1,696   $  (1,494)  $   2,817
                                                                 =========   =========   =========   =========   =========
Earnings (loss) per share:
Basic:
Income (loss) per share before extraordinary item,
   adoption of SAB 101 (2)...................................... $    0.52   $    0.60   $    0.24   $   (0.17)  $    0.31
Extraordinary item (1)..........................................         -           -       (0.03)          -           -
Cumulative effect of adopting SAB 101 (2).......................         -           -       (0.03)          -           -
                                                                 ---------   ---------   ---------   ---------   ---------
Net income (loss)............................................... $    0.52   $    0.60   $    0.18   $   (0.17)  $    0.31
                                                                 =========   =========   =========   =========   =========
Diluted:
Income (loss) per share before extraordinary item
   and adoption of SAB 101...................................... $    0.51   $    0.58   $    0.24   $   (0.17)  $    0.30
Extraordinary item (1)..........................................         -           -       (0.03)          -           -
Cumulative effect of adopting SAB 101 (2).......................         -           -       (0.03)          -           -
                                                                 ---------   ---------   ---------   ---------   ---------
Net income (loss)............................................... $    0.51   $    0.58   $    0.18   $   (0.17)  $    0.30
                                                                 =========   =========   =========   =========   =========
Weighted average common shares outstanding
Basic...........................................................     9,737       9,322       9,216       9,060       9,013
Diluted.........................................................     9,816       9,599       9,491       9,060       9,377
Pro forma net income and earnings per share data
  for the periods shown as if SAB 101 had been
  adopted at the beginning of each applicable year (4)
Previously reported net income.................................. $   5,041   $   5,603
Adjustment......................................................      (253)        (81)
                                                                 ---------   ---------
Pro forma net income............................................ $   4,788   $   5,522
                                                                 =========   =========
Pro forma earnings per share:
Basic -
Previously reported............................................. $    0.52   $    0.60
Adjustment......................................................     (0.03)          -
                                                                 ---------   ---------
Pro forma....................................................... $    0.49   $    0.60
                                                                 =========   =========
Diluted -
Previously reported............................................. $    0.51   $    0.58
Adjustment......................................................     (0.03)      (0.01)
                                                                 ---------   ---------
Pro forma....................................................... $    0.48   $    0.57
                                                                 =========   =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                                  -----------------------
                                                                     1998       1999       2000        2001        2002
                                                                     ----       ----       ----        ----        ----
<S>                                                              <C>         <C>         <C>         <C>         <C>
Other Data
EBITDA (3)...................................................... $  14,320   $  16,878   $  12,172   $   8,500   $  12,691
Cash flows provided by operating activities.....................     5,821      12,023      10,963       9,455      10,381
Cash flows used in investing activities.........................   (33,406)    (11,668)     (9,488)     (4,069)     (3,485)
Cash flows provided by (used in) financing activities...........    26,712      (1,553)     (1,556)     (2,397)     (5,282)
Capital expenditures............................................     6,199       6,181       9,717       3,082       1,949

Selected Balance Sheet Data
Cash and cash equivalents....................................... $   2,048   $   3,030   $     769    $  3,758    $  5,372
Working capital ................................................     8,863       1,195      12,701     (16,006)(6)   8,185
Property and equipment, net.....................................    16,723      19,564      25,236      23,232      19,965
Total assets....................................................    63,940      72,931      77,375      70,847      70,080
Borrowings under revolving credit agreements....................       233       5,888           -           -           -
Long-term debt, net of current portion..........................    22,448      16,501      31,054          78      18,065
Shareholders' equity............................................    28,351      30,941      32,919      30,778      34,512
--------------------
</TABLE>

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

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

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

            COMPUTATION OF EBITDA (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                        1998       1999       2000        2001        2002
                                                                        ----       ----       ----        ----        ----
<S>                                                                 <C>         <C>         <C>         <C>         <C>
                    Net income (loss).............................  $   5,041   $   5,603   $   1,696   $  (1,494)  $   2,817
                    Add back:
                       Interest...................................        976       2,147       2,889       3,070       2,528
                       Income taxes...............................      3,577       4,340       1,814        (384)      2,007
                       Depreciation & Amortization................      4,726       4,788       5,773       7,308       5,339
                                                                    ---------   ---------   ---------    --------   ---------
                    EBITDA........................................  $  14,320   $  16,878   $  12,172    $  8,500   $  12,691
                                                                    =========   =========   =========    ========   =========
</TABLE>
<PAGE>

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

   (5)  In  November  2000,  the  Company  entered  into an  interest  rate swap
        contract to economically  hedge its floating debt rate.  Under the terms
        of the contract, the notional amount is $15,000,000, whereby the Company
        receives  LIBOR and pays a fixed 6.50% rate of interest for three years.
        Statement of Financial  Accounting  Standards  No. 133,  Accounting  for
        Derivative Instruments and Hedging Activities ("FAS 133"), requires that
        the interest  rate swap contract be recorded at fair value upon adoption
        of FAS 133 by  recording  (i) a  cumulative-effect  type  adjustment  at
        January  1,  2001  equal to the fair  value of the  interest  rate  swap
        contract  on that  date,  (ii)  amortizing  the  cumulative-effect  type
        adjustment over the life of the derivative contract,  and (iii) a charge
        or credit to income in the  amount of the  difference  between  the fair
        value of the interest  rate swap  contract at the  beginning  and end of
        such year.  The effect of  adopting  FAS 133 was to record a  cumulative
        effect type  adjustment  by  charging  Accumulated  Other  Comprehensive
        Income (a component of shareholders' equity $247,000 (net of $62,000 tax
        benefit),  crediting  Derivative  Valuation  Liability by $309,000 gross
        cumulative effect adjustment and charging Deferred Income Taxes $62,000.
        The change in the  derivative  fair value during the year  ($579,000 and
        $(186,000) in 2001 and 2002,  respectively)  and the amortization of the
        cumulative  effect  adjustment  ($121,000 and $104,000 in 2001 and 2002,
        respectively) were recorded as a charge to Derivative Fair Value Change.

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


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

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

OVERVIEW

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Our  discussion  and analysis of our financial  condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States 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

<PAGE>

historical  experience  and on various other  assumptions  that we believe to be
reasonable  under the  circumstances,  the  results  of which form the basis for
making  judgments about the carrying  values of assets and liabilities  that are
not readily  apparent from other  sources.  Actual results may differ from these
estimates under  different  assumptions or conditions.  Management  believes the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.

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

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

        Valuation  of  long-lived  and  intangible  assets.  Long-lived  assets,
consisting primarily of property, plant and equipment and intangibles comprise a
significant portion of the Company's total assets.  Long-lived assets, including
goodwill and intangibles are reviewed for impairment  whenever events or changes
in  circumstances  have  indicated  that  their  carrying  amounts  may  not  be
recoverable.  Recoverability  of  assets  is  measured  by a  comparison  of the
carrying amount of an asset to future net cash flows expected to be generated by
that  asset.  The cash  flow  projections  are based on  historical  experience,
management's view of growth rates within the industry and the anticipated future
economic environment.

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

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

        When we determine  that the carrying  value of  intangibles,  long-lived
assets and related goodwill and enterprise level goodwill may not be recoverable
based upon the existence of one or more of the above  indicators of  impairment,
we measure any impairment based on a projected discounted cash flow method using
a discount rate  determined by our management to be  commensurate  with the risk
inherent  in our current  business  model.  Net  intangible  assets,  long-lived
assets, and goodwill amounted to $47.1 million as of December 31, 2002.

        In 2002,  Statement of Financial  Accounting Standards ("SFAS") No. 142,
"Goodwill and Other  Intangible  Assets" ("SFAS 142") became  effective and as a
result, we ceased to amortize  approximately $26.3 million of goodwill beginning
in 2002. We had recorded  approximately  $2.0 million of  amortization  on these
amounts  during the year ended  December 31, 2001. In lieu of  amortization,  we
were  required to perform an initial  impairment  review of our goodwill in 2002
and an annual impairment review thereafter.  The initial test on January 1, 2002
and the Fiscal 2002 test performed as of September 30, 2002 required no goodwill
impairment. The discounted cash flow method used to evaluate goodwill impairment
included cash flow estimates for 2003 and subsequent  years. If actual cash flow
performance  does not meet these  expectations  due to factors cited above,  any
resulting  potential  impairment could adversely affect reported  goodwill asset
values and earnings.

<PAGE>

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

        Significant management judgment is required in determining our provision
for income  taxes,  our deferred tax assets and  liabilities  and any  valuation
allowance  recorded  against our net deferred  tax assets.  The net deferred tax
liability as of December 31, 2002 was $2.5 million. The Company did not record a
valuation allowance against its deferred tax assets as of December 31, 2002.

RESULTS OF OPERATIONS

        The following table sets forth the amount and percentage relationship to
revenues of certain items included within the Company's  Consolidated  Statement
of Income for the years ended  December  31, 2000,  2001 and 2002,  after giving
effect  to the  above  adjustments.  The  commentary  below  is  based  on these
financial statements.
<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31
                                                                                ----------------------
                                                                                (DOLLARS IN THOUSANDS)
                                                                2000                    2001                    2002
                                                                ----                    ----                    ----
                                                                     PERCENT                 PERCENT                PERCENT
                                                                       OF                      OF                     OF
                                                           AMOUNT   REVENUES       AMOUNT   REVENUES      AMOUNT   REVENUES
                                                           ------   --------       ------   --------      ------   --------
<S>                                                     <C>           <C>       <C>           <C>       <C>          <C>
Revenues.............................................   $  74,841     100.0%    $  69,628     100.0%    $ 68,419     100.0%
Costs of goods sold..................................      45,894      61.3        46,864      67.3       42,172      61.6
                                                        ---------   --------    ---------    -------    --------    -------
Gross profit.........................................      28,947      38.7        22,764      32.7       26,247      38.4
Selling, general and administrative expense..........      21,994      29.4        20,872      30.0       18,977      27.7
                                                        ---------   --------    ---------    -------    --------    -------
   Operating income..................................       6,953       9.3         1,892       2.7        7,270      10.7
Interest expense, net................................       2,889       3.9         3,070       4.4        2,528       3.7
Derivative fair value change.........................           -         -           700       1.0          (82)     (0.1)
Provision for (benefit from) income taxes............       1,814       2.4          (384)     (0.6)       2,007       2.9
                                                        ---------   --------    ---------    -------    --------    -------
   Income (loss) before extraordinary item and
     adoption of SAB 101(2000).......................       2,250       3.0        (1,494)     (2.1)       2,817       4.2
Extraordinary item (net of tax benefit of $168)......        (232)     (0.3)            -         -            -         -
Cumulative effect of adopting SAB 101 (2000).........        (322)     (0.4)            -         -            -         -
                                                        ---------   --------    ---------    -------    --------    -------
Net income (loss)....................................   $   1,696       2.3%    $  (1,494)     (2.1)%   $  2,817       4.2%
                                                        =========   ========    =========    =======    ========    =======
</TABLE>

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

        The comments below compare results achieved in 2002 to 2001. In general,
revenues were slightly lower in 2002 while costs declined and profits  increased
significantly.  We anticipate that revenues will increase  somewhat in 2003 from
2002. We expect the relationships  between  revenues,  gross profit and selling,
general and administrative expenses in 2003 to be similar to 2002. Assuming that
we do not  restructure  our term loan in 2003 and  interest  rates do not change
(see Liquidity and Capital Resources below),  interest expense will decrease due
to $5.0 million of scheduled principal payments and resulting lower debt levels.

<PAGE>

The  derivative  fair value change in 2003 should  generate  approximately  $0.7
million of income as the  interest  rate swap  contract  will expire in November
2003 and the  theoretical  value of the swap  contract  previously  expensed  is
credited to income  (see Note 6 of Notes to  Consolidated  Financial  Statements
elsewhere in this Form 10-K).  Please refer to  Cautionary  Statements  and Risk
Factors below with respect to these forward-looking statements.

        REVENUES.  Revenues decreased by $1.2 million or 2% to $68.4 million for
the year ended  December 31, 2002,  compared to $69.6 million for the year ended
December 31, 2001 due to a decline in studio post production  sales as some work
was brought in-house.  Studios have traditionally  maintained  in-house capacity
and several customers utilized that capacity in 2002 to a greater extent thereby
affecting our sales.

        GROSS  PROFIT.  Gross  profit  increased  $3.5 million or 15.0% to $26.2
million for the year ended December 31, 2002,  compared to $22.8 million for the
year ended December 31, 2001. As a percent of revenues,  gross profit  increased
from 32.7% to 38.4%.  The increase in gross  profit as a percentage  of revenues
was  principally  due to lower wages and  benefits as  headcount  was reduced 7%
since December 31, 2001.

        SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSE.  Selling,  general  and
administrative expense decreased $1.9 million, or 10.0% to $19.0 million for the
year ended  December  31,  2002,  compared  to $20.9  million for the year ended
December  31,  2001.  As  a  percentage  of  revenues,   selling,   general  and
administrative  expense decreased to 27.7% for the year ended December 31, 2002,
compared to 30.0% for the year ended December 31, 2001.  Excluding  amortization
of  intangibles in 2001,  SG&A expenses were $18.9 million,  or 27% of sales for
the year ended December 31, 2001.

        Beginning in 2002, the  amortization  of goodwill  ceased as the Company
adopted  SFAS 142.  SFAS 142  changed  the  accounting  for  goodwill  and other
intangible assets with indefinite useful lives from an amortization method to an
impairment-only approach (the procedures going forward are described in Footnote
2 of Notes to Consolidated Financial Statements elsewhere in this Form 10-K). In
connection  with the adoption of SFAS 142, the Company  performed a transitional
goodwill  impairment  assessment as of January 1, 2002,  and a second test as of
September 30, 2002,  which indicated no impairment was required.  As of December
31, 2002,  goodwill,  net of accumulated  amortization,  was $27 million. To the
extent an  impairment  is  indicated in the future by  application  of SFAS 142,
results of operations will be adversely affected,  which effect may be material.
Any impairment will not affect cash flow.

        OPERATING  INCOME.  Operating  income  increased $5.4 million or 284% to
$7.3 million for 2002, compared to $1.9 million for 2001.

        INTEREST EXPENSE.  Interest expense decreased $0.5 million, or 18.0%, to
$2.6  million for 2002,  compared to $3.1 million for 2001 because of lower debt
levels due to principal payments made in 2002.

        ADOPTION OF SFAS 133 AND  DERIVATIVE  FAIR VALUE  CHANGE.  On January 1,
2001, the Company adopted Statement of Financial  Accounting  Standards No. 133,
"Disclosures  About  Fair  Value  of  Financial  Instruments"  ("SFAS  133")  by
recording a  cumulative  effect  adjustment  of $247,000  after tax benefit as a
charge to shareholders'  equity.  During 2001 and 2002, the Company recorded the
difference between the derivative fair value of the Company's interest rate swap
contract  at the  beginning  and end of the  periods,  and  amortization  of the
cumulative-effect  adjustment  during the years,  of $0.7 million of expense and
$0.1 million of income, respectively.

        INCOME TAXES. The Company's  effective tax rate was 42% for 2002 and 20%
for 2001.

        NET INCOME (LOSS). The net income for 2002 was $2.8 million, an increase
of $4.3 million compared to a loss of $1.5 million for 2001.


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

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

<PAGE>

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

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

        Beginning in 2002, the  amortization  of goodwill  ceased as the Company
adopted  SFAS 142.  SFAS 142  changes  the  accounting  for  goodwill  and other
intangible assets with indefinite useful lives from an amortization method to an
impairment-only approach (the procedures going forward are described in Footnote
2 of Notes to Consolidated Financial Statements elsewhere in this Form 10-K). In
connection  with the  adoption  of SFAS 142,  the  Company  will be  required to
perform a transitional goodwill impairment assessment in the first half of 2002,
which may result in a write off which would be treated as a change in accounting
principle.  As of December 31, 2001, goodwill, net of accumulated  amortization,
was $26 million.  To the extent an impairment is indicated in the application of
SFAS 142,  fiscal 2002 results of operations will be adversely  affected,  which
effect may be material. Any impairment will not affect cash flow.

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

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

        ADOPTION OF SFAS 133 AND  DERIVATIVE  FAIR VALUE  CHANGE.  On January 1,
2001, the Company adopted SFAS 133 by recording a cumulative  effect  adjustment
of $247,000 after tax benefit as a charge to shareholders'  equity. During 2001,
the Company  recorded the difference  between the  derivative  fair value of the
Company's  interest  rate swap  contract at the beginning and end of the period,
and amortization of the  cumulative-effect  adjustment  during the year, of $0.7
million ($0.6 million net of tax benefit).

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

        NET INCOME (LOSS). The net loss for 2001 was $1.5 million, a decrease of
$3.2 million compared to a profit of $1.7 million for 2000.

LIQUIDITY AND CAPITAL RESOURCES

        This  discussion  should  be read in  conjunction  with the notes to the
financial  statements and the corresponding  information more fully described in
the Company's Form 10-K for the year ended December 31, 2002.

        On December 31, 2002, the Company's cash and cash equivalents aggregated
$5.4 million.  The Company's operating activities provided cash of $10.4 million
for the year ended December 31, 2002.

<PAGE>

        The Company's investing activities used cash of $3.5 million in the year
ended  December 31, 2002. The Company spent  approximately  $1.9 million for the
addition and replacement of capital equipment and management information systems
which we believe is a  reasonable  capital  expenditure  level given the current
revenue volume.  In the prior years,  the Company's  capital  expenditures  were
greater  than a normal  recurring  amount  partially  due to the  investment  of
approximately  $6.0 million in high definition post  production  equipment.  The
Company's business is equipment  intensive,  requiring periodic  expenditures of
cash or the incurrence of additional debt to acquire  additional fixed assets in
order to  increase  capacity or replace  existing  equipment.  We estimate  that
capital expenditures will be $3.5 to $4.5 million in 2003.

        In September  2000,  the Company signed a $45 million  revolving  credit
facility  agented by Union Bank of California.  The amount of the commitment was
reduced to $30 million in July 2001.  The  facility  provided  the Company  with
funding  for capital  expenditures,  working  capital  needs and support for its
acquisition strategies.

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

        In May 2002, the Company and the banks entered into a restructured  loan
agreement  changing  the  revolving  credit  facility  to a term loan,  with all
existing  defaults  being waived.  The term loan has a maturity date of December
31, 2004. Pursuant to the agreement,  the Company made $5.5 million in scheduled
principal  payments in 2002 and will make additional  principal payments of $5.0
million and $18.0 million in 2003 and 2004, respectively. The agreement provides
for interest at the banks' reference rate plus 1.25% and requires the Company to
maintain  certain  financial  covenant  ratios.  The  term  loan is  secured  by
substantially all of the Company's assets.

        In July 2002, we entered into an arrangement regarding earn-out payments
related to the July 1997 acquisition of MultiMedia  Services,  Inc. The original
acquisition agreement would have required payments of approximately $1.5 million
during the next two years assuming minimum earnings levels are met, which levels
have been achieved in the past. In exchange for a one-time $1.1 million  payment
made in July 2002, we were relieved of all future earn-out obligations under the
purchase agreement.

        In  October  2002,  the  company  paid  the  banks  $20,000  and made an
additional  principal  payment of $500,000 in connection  with a waiver received
from the banks to allow  the  company's  former  President  and Chief  Executive
Officer  to reduce  his  percentage  ownership  in the  Company to below the 14%
required in the restructured loan agreement.

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

        The Company,  from time to time, considers the acquisition of businesses
complementary to its current operations. Consummation of any such acquisition or
other  expansion of the business  conducted by the Company may be subject to the
Company securing additional financing.  For example, on July 3, 2002, we entered
into an option  agreement to acquire  three  subsidiaries  of Alliance  Atlantis
Communications  Inc.  (""AACI").  If we  exercise  the  option and  acquire  the
entities,  we will  have  to  finance  a  large  portion  of the  $11.6  million
anticipated purchase price and refinance our existing $23 million term loan. The
cost of new  financing  is expected to be higher  than our  existing  term loan.
Future  earnings  and cash flow may be  negatively  impacted  to the  extent the
acquired  entities do not generate  sufficient  earnings and cash flow to offset
the increased costs.

<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

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

        Effective  January  1,  2001,  the  Company  adopted  SFAS  No.  133 The
standard,  as amended,  requires that all derivative  instruments be recorded on
the balance sheet at their fair value.  Changes in the fair value of derivatives
are recorded each period in other income.

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

        We ceased  amortization  of  approximately  $26.3  million  of  goodwill
beginning in 2002. We had recorded approximately $2.0 million of amortization on
these amounts during the year ended December 31, 2001.

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

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

        In  April  2002,  the FASB  issued  SFAS No.  145,  "Rescission  of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections."  SFAS  No.  145  updates,   clarifies,   and  simplifies  existing
accounting  pronouncements.  This statement  rescinds SFAS No. 4, which required
all gains and  losses  from  extinguishment  of debt to be  aggregated  and,  if
material, classified as an extraordinary item, net of related income tax effect.
As a result, the criteria in APB No. 30 will now be used to classify those gains
and losses.  SFAS No. 64 amended  SFAS No. 4 and is no longer  necessary as SFAS
No. 4 has been  rescinded.  SFAS No.  44 has been  rescinded  as it is no longer

<PAGE>

necessary.  SFAS No.  145  amends  SFAS No. 13 to  require  that  certain  lease
modifications that have economic effects similar to sale-leaseback  transactions
be accounted for in the same manner as sale-lease  transactions.  This statement
also  makes  technical  corrections  to  existing  pronouncements.  While  those
corrections  are not substantive in nature,  in some instances,  they may change
accounting  practice.  The Company  does not expect  adoption of SFAS No. 145 to
have a  material  impact,  if any,  on its  financial  position  or  results  of
operations.

        In June  2002,  the FASB  issued  SFAS No.  146,  "Accounting  for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs  associated with exit or disposal  activities
and nullifies  Emerging  Issues Task Force ("EITF")  Issue No. 94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."  This statement
requires  that a  liability  for a cost  associated  with an  exit  or  disposal
activity be recognized when the liability is incurred.  Under EITF Issue 94-3, a
liability  for an exit  cost,  as  defined,  was  recognized  at the  date of an
entity's  commitment  to an exit plan.  The  provisions  of this  statement  are
effective for exit or disposal  activities that are initiated after December 31,
2002 with earlier application  encouraged.  The Company does not expect adoption
of SFAS No.146 to have a material impact,  if any, on its financial  position or
results of operations, except as discussed in Note 8.

        In October 2002, the FASB issued SFAS No. 147,  "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of  liabilities  assumed  over  the  fair  value of  tangible  and  identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those  transactions  be accounted for in accordance  with SFAS No.
141,  "Business  Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition,  this statement  amends SFAS No. 144,  "Accounting for the
Impairment  or Disposal of  Long-Lived  Assets,"  to include  certain  financial
institution-related  intangible assets.  This statement is not applicable to the
Company.

        In  December  2002,  the FASB  issued  SFAS  No.  148,  "Accounting  for
Stock-Based  Compensation-Transition  and  Disclosure," an amendment of SFAS No.
123. SFAS No. 148 provides  alternative  methods of  transition  for a voluntary
change to the fair value based method of  accounting  for  stock-based  employee
compensation.  In addition,  SFAS No. 148 amends the disclosure  requirements of
SFAS No.  123 to  require  more  prominent  and  more  frequent  disclosures  in
financial  statements  about  the  effects  of  stock-based  compensation.  This
statement is effective  for financial  statements  for fiscal years ending after
December  15,  2002.  SFAS No.  148 will not have any  impact  on the  Company's
financial  statements as management does not have any intention to change to the
fair value method.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

        The words or phrases "will likely," "are expected to," "is anticipated,"
"is  predicted,"   "forecast,"   "estimate,"  "project,"  "plans  to  continue,"
"believes," or similar expressions identify "forward-looking  statements" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  Such
forward-looking  statements are subject to certain risks and uncertainties  that
could cause actual results to differ  materially  from  historical  earnings and
those  presently  anticipated or projected.  We wish to caution you not to place
undue reliance on any such  forward-looking  statements,  which speak only as of
the date made.  In connection  with the "Safe Harbor"  provisions of the Private
Securities  Litigation  Reform Act of 1995,  we are  calling  to your  attention
important  factors that could affect our financial  performance  and could cause
actual  results for future  periods to differ  materially  from any  opinions or
statements expressed with respect to future periods in any current statements.

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

<PAGE>

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

These risk factors are discussed further below.

RECENT HISTORY OF LOSSES.  The Company has reported  losses for each of the five
fiscal quarters ended December 31, 2001 due, in part, to lower gross margins and
lower  sales  levels  and a number of  unusual  charges.  Although  we  achieved
profitability  in Fiscal  2000 and prior  years,  as well as in the four  fiscal
quarters  ended  December  31,  2002,  there  can be no  assurance  as to future
profitability on a quarterly or annual basis.

PRIOR  BREACH  OF  CREDIT   AGREEMENT   COVENANTS  AND  NEW  PRINCIPAL   PAYMENT
REQUIREMENTS.  Due to lower operating cash amounts  resulting from reduced sales
levels in 2001 and the  consequential  net losses,  the Company breached certain
covenants of its credit facility.  The breaches were temporarily  cured based on
amendments  and  forbearance  agreements  among the  Company and the banks which
called for, among other provisions, scheduled payments to reduce amounts owed to
the banks to the permitted borrowing base. In August 2001, the Company failed to
meet the principal repayment schedule and was once again in breach of the credit
facility.  The banks ended their  formal  commitment  to the Company in December
2001.

In May 2002,  we entered into an  agreement  with the banks to  restructure  the
credit  facility to a term loan  maturing on December 31, 2004.  As part of this
restructuring,  the banks  waived all  existing  defaults  and the Company  made
principal  payments of $5.5 million in 2002, and will make principal payments of
$5.0 million and $18.5 million in 2003, and 2004,  respectively.  Based upon the
Company's financial forecast, the Company will have to refinance the facility by
2004 to satisfy the final payment requirement.

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

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

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

CUSTOMER AND INDUSTRY  CONCENTRATION.  Although we have an active client list of
over 2,500 customers,  seven motion picture studios  accounted for approximately
34% of the Company's revenues during the year ended December 31, 2002. If one or
more of these  companies were to stop using our services,  our business could be
adversely  affected.  Because we derive  substantially  all of our revenue  from
clients  in  the  entertainment  and  advertising   industries,   the  financial
condition,  results of  operations  and  prospects of the Company  could also be
adversely  affected  by an  adverse  change in  conditions  which  impact  those
industries.

<PAGE>

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

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

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

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

In July 2002,  the Company  issued a warrant to purchase  500,000  shares of the
Company's  common stock to AACI in  consideration of an option to purchase three
post production facilities owned by AACI. In connection  therewith,  the Company
capitalized  the fair value of the warrant  ($620,000,  determined  by using the
Black-Scholes  valuation  model).  In December  2002, the option was extended by
mutual agreement and we deposited  $300,000 toward the ultimate  purchase price,
which was  negotiated  downward.  In the event the Company does not exercise its
option by the option termination date (March 10, 2003) or any extension thereof,
these amounts will be written off.  Although such a write-off  would represent a
non cash charge to income,  we cannot predict the effect of such a charge on the
market price of our common stock, if any.

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

DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS. Although we intend to utilize the most
efficient  and  cost-effective   technologies   available  for  telecine,   high
definition  formatting,  editing,  coloration  and  delivery  of video  content,
including digital  satellite  transmission,  as they develop,  we cannot be sure
that we will be able to adapt to such  standards in a timely  fashion or at all.
We believe our future growth will depend in part, on our ability to add to these
services and to add customers in a timely and  cost-effective  manner. We cannot
be sure we will be successful in offering such services to existing customers or

<PAGE>

in  obtaining  new  customers  for  these  services,   including  the  Company's
significant investment in high definition technology in 2000 and 2001. We intend
to rely on third party vendors for the  development  of these  technologies  and
there  is  no  assurance  that  such  vendors  will  be  able  to  develop  such
technologies  in a manner that meets the needs of the Company and its customers.
Any material  interruption  in the supply of such services could  materially and
adversely affect the Company's  financial  condition,  results of operations and
prospects.

DEPENDENCE  ON KEY  PERSONNEL.  The  Company is  dependent  on the  efforts  and
abilities  of certain of its 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  owns
approximately  25% of the  Company's  outstanding  stock,  but  does not have an
employment contract.  Although we have employment agreements with certain of our
other key  executives,  we cannot be sure that  either Mr.  Bagerdjian  or other
executives will remain with the Company.  In addition,  our success depends to a
significant  degree upon the continuing  contributions of, and on our ability to
attract and retain,  qualified  management,  sales,  operations,  marketing  and
technical personnel.  The competition for qualified personnel is intense and the
loss of any such  persons,  as well as the  failure  to recruit  additional  key
personnel  in a timely  manner,  could  have a  material  adverse  effect on our
financial condition,  results of operations and prospects. There is no assurance
that we will be able to continue to attract and retain qualified  management and
other personnel for the development of our business.

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

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

CONTROL  BY  PRINCIPAL  SHAREHOLDER;  POTENTIAL  ISSUANCE  OF  PREFERRED  STOCK;
ANTI-TAKEOVER PROVISIONS. The Company's Chairman,  President and Chief Executive
Officer,  Haig  S.  Bagerdjian,  beneficially  owned  approximately  25%  of the
outstanding  common  stock as of February  28,  2003.  The  ex-spouse of R. Luke
Stefanko,  the Company's  former  President and Chief Executive  Officer,  owned
approximately  25% of the  common  stock  on that  date.  Together,  they  owned

<PAGE>

approximately  50%. 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
(i) the election of the board of  directors,  (ii)  amendments  to the Company's
Restated  Articles  of  Incorporation  and (iii)  approval  of mergers and other
significant  corporate  transactions.  The  foregoing  may  have the  effect  of
discouraging,  delaying or preventing certain types of transactions involving an
actual or potential change of control of the Company,  including transactions in
which the holders of common  stock might  otherwise  receive a premium for their
shares over current market prices. Our Board of Directors also has the authority
to issue up to  5,000,000  shares of  preferred  stock  without  par value  (the
"Preferred Stock") and to determine the price, rights,  preferences,  privileges
and restrictions thereof,  including voting rights,  without any further vote or
action by the Company's shareholders. Although we have no current plans to issue
any shares of Preferred  Stock,  the rights of the holders of common stock would
be subject to, and may be  adversely  affected  by, the rights of the holders of
any  Preferred  Stock that may be issued in the future.  Issuance  of  Preferred
Stock could have the effect of discouraging, delaying, or preventing a change in
control  of the  Company.  Furthermore,  certain  provisions  of  the  Company's
Restated  Articles of Incorporation and By-Laws and of California law also could
have the effect of  discouraging,  delaying or preventing a change in control of
the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        MARKET RISK.  The Company had  borrowings of $23,000,000 at December 31,
2002 under a credit  agreement.  Amounts  outstanding under the credit agreement
now bear interest at the bank's reference rate plus 1.25%.

        The Company's market risk exposure with respect to financial instruments
is to changes in the London Interbank Offering Rate ("LIBOR"). In November 2000,
the Company  entered into an interest rate swap contract to  economically  hedge
its floating debt rate. Under the terms of the contract,  the notional amount is
$15,000,000,  whereby  the  Company  receives  LIBOR  and  pays a 6.50%  rate of
interest for the three years.

        On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial  Accounting  Standards No. 133, Accounting for Derivative
Instruments  and Hedging  Activities.  The standard,  as amended by Statement of
Financial  Accounting  Standards No. 137, Accounting for Derivative  Instruments
and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133,
an amendment of FASB  Statement No. 133, and  Statement of Financial  Accounting
Standards No. 138,  Accounting for Certain  Derivative  Instruments  and Certain
Hedging  Activities,  an  amendment  of FASB  Statement  No.  133  (referred  to
hereafter  as "FAS 133"),  is  effective  for all fiscal  quarters of all fiscal
years beginning  after June 15, 2000 (January 1, 2001 for the Company).  FAS 133
requires  that all  derivative  instruments  be recorded on the balance sheet at
their fair value.  Changes in the fair value of  derivatives  are recorded  each
period in  current  earnings  or in other  comprehensive  income,  depending  on
whether a derivative is designated as part of a hedging  relationship and, if it
is,  depending on the type of hedging  relationship.  During  2001,  the Company
recorded a cumulative  effect type  adjustment  of $247,000  (net of $62,000 tax
benefit) as a charge to Accumulated Other  Comprehensive  Income, a component of
Shareholders'  Equity,  and an expense of $700,000 ($560,000 net of tax benefit)
for the  derivative  fair value  change of an interest  rate swap  contract  and
amortization of the cumulative effect adjustment. During the twelve month period
ended December 31, 2002, the Company  recorded income of $82,000 ($48,000 net of
tax  provision),  for the derivative  fair value change and  amortization of the
cumulative effect type adjustment.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                                                                     PAGE

Reports of Independent Accountants...................................20-21

Financial Statements:

    Consolidated Balance Sheets -
    December 31, 2001 and 2002.......................................22

    Consolidated Statements of Income -
    Fiscal Years Ended December 31, 2000, 2001 and 2002..............23

    Consolidated Statements of Shareholders' Equity -
    Fiscal Years Ended December 31, 2000, 2001 and 2002..............24

    Consolidated Statements of Cash Flows -
    Fiscal Years Ended December 31, 2000, 2001 and 2002..............25

    Notes to Consolidated Financial Statements.......................26-37

Financial Statement Schedule:

    Schedule II - Valuation and Qualifying Accounts..................38

    Consent of Independent Accountants...............................45


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.

<PAGE>

                          Independent Auditor's Report


To the Board of Directors and
Shareholders of Point.360



We have audited the  accompanying  consolidated  balance  sheet of Point.360 and
subsidiaries as of December 31, 2002, and the related consolidated statements of
income and comprehensive  income,  shareholders'  equity, and cash flows for the
year then  ended.  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 audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  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  audit  provides  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
subsidiaries  as of December 31, 2002,  and the results of their  operations and
their  cash  flows  for the  year  then  ended  in  conformity  with  accounting
principles generally accepted in the United States of America.




Singer Lewak Greenbaum & Goldstein LLP (signed)
Los Angeles, California
February 14, 2003

<PAGE>

                        Report of Independent Accountants


To the Board of Directors and
Shareholders of Point.360



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

As discussed in Notes 2 and 6 to the consolidated  financial statements,  during
the year ended  December 31, 2000 the Company  changed its method of  accounting
for revenue to conform to the requirements of SEC Staff Accounting  Bulletin No.
101, and during the year ended December 31, 2001 the Company  changed its method
of  accounting  for  derivatives  to conform to the  requirements  of  Financial
Accounting Standard No. 133 ("SFAS 133").

As discussed in Notes 2 and 6 to the consolidated  financial statements,  during
the year ended  December 31, 2001 the Company  revised its financial  statements
with respect to an interest rate swap contract under SFAS 133.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial  statements,  the Company has breached its debt  covenants and amounts
outstanding  under its credit  facility are  immediately  due and payable  which
raises  substantial  doubt about its  ability to  continue  as a going  concern.
Management's  plans in regard to these matters are also described in Note 1. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.



PricewaterhouseCoopers LLP (signed)
Century City, California
February 25, 2002, except for Notes 2 and 6,
   as to which the date is October 28, 2002

<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                           CONSOLIDATED BALANCE SHEETS

                                                                              DECEMBER 31,
                                                                              ------------
                                                                         2001                 2002
                                                                         ----                 ----
                                     ASSETS
<S>                                                                  <C>                 <C>
Current assets:
Cash and cash equivalents.........................................   $ 3,758,000         $ 5,372,000
Accounts receivable, net of allowances for doubtful accounts of
   $681,000 and $801,000 respectively ............................    12,119,000          12,218,000
Notes receivable from officers (Note 11) .........................       928,000                   -
Income tax receivable.............................................     1,399,000             398,000
Inventories.......................................................       820,000             903,000
Prepaid expenses and other current assets.........................       554,000             857,000
Deferred income taxes.............................................       884,000           1,383,000
                                                                     -----------         -----------
   Total current assets...........................................    20,462,000          21,131,000

Property and equipment, net (Note 4)..............................    23,232,000          19,965,000
Other assets, net.................................................       833,000             843,000
Goodwill and other intangibles, net (Note 3)......................    26,320,000          27,212,000
Investment in acquisitions........................................             -             929,000
                                                                     -----------         -----------
                                                                     $70,847,000         $70,080,000
                                                                     ===========         ===========
                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable..................................................   $ 4,675,000         $ 3,974,000
Accrued expenses..................................................     2,715,000           3,885,000
Borrowings under revolving credit agreement (Note 6)..............    28,999,000           5,000,000
Current portion of capital lease obligations (Note 6).............        79,000              87,000
                                                                     -----------         -----------
   Total current liabilities......................................    36,468,000          12,946,000
                                                                     -----------         -----------
Deferred income taxes.............................................     2,635,000           3,857,000
Notes payable (Note 6)............................................             -          18,000,000
Capital lease obligations, less current portion (Note 6)..........        78,000              65,000
Derivative valuation liability....................................       888,000             701,000

Commitments and contingencies (Note 8)

Shareholders' equity
Preferred stock - no par value; 5,000,000 shares authorized;
   none outstanding...............................................             -                   -
Common stock - no par value; 50,000,000 shares authorized;
   8,992,806 and 9,014,232 shares issued and outstanding,
   respectively...................................................    17,336,000          17,359,000
Additional paid-in capital     ...................................       439,000           1,272,000
Accumulated other comprehensive income............................      (150,000)            (90,000)
Retained earnings.................................................    13,153,000          15,970,000
                                                                     -----------         -----------
   Total shareholders' equity.....................................    30,778,000          34,511,000
                                                                     -----------         -----------
                                                                     $70,847,000         $70,080,000
                                                                     ===========         ===========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                        CONSOLIDATED STATEMENTS OF INCOME

                                                                                YEAR ENDED DECEMBER 31,
                                                                                -----------------------
                                                                         1999              2000               2001
                                                                         ----              ----               ----
<S>                                                                  <C>               <C>                <C>
Revenues............................................................ $ 74,841,000      $ 69,628,000       $ 68,419,000
Cost of goods sold..................................................   45,894,000        46,864,000         42,172,000

   Gross profit.....................................................   28,947,000        22,764,000         26,247,000

Selling, general and administrative expense.........................   21,994,000        20,872,000         18,977,000
                                                                     ------------      ------------       ------------
Operating income....................................................    6,953,000         1,892,000          7,270,000
Interest expense (net)..............................................    2,889,000         3,070,000          2,528,000
Derivative fair value change........................................            -           700,000            (82,000)
Income (loss) before income taxes...................................    4,064,000        (1,878,000)         4,824,000
Provision for (benefit from) income taxes...........................    1,814,000          (384,000)         2,007,000
                                                                     ------------      ------------       ------------
Income (loss) before extraordinary item and
   cumulative effect of adopting SAB 101 (Note 2)...................    2,250,000        (1,494,000)         2,817,000
Extraordinary item (net of tax benefit of $168,000) (Note 6)........     (232,000)                -                  -
Cumulative effect of adopting SAB 101 (Note 2)......................     (322,000)                -                  -
                                                                     ------------      ------------       ------------
   Net income (loss)................................................ $  1,696,000      $ (1,494,000)      $  2,817,000
                                                                     ============      ============       ============
Earnings (loss) per share:
Basic:
Income (loss) per share before extraordinary item and adoption of
   SAB 101.......................................................... $       0.24      $      (0.17)      $       0.31
Extraordinary item..................................................        (0.03)                -                  -
Cumulative effect of adopting SAB 101...............................        (0.03)                -                  -
                                                                     ------------      ------------       ------------
Net income (loss)................................................... $       0.18      $      (0.17)      $       0.31

                                                                     ============      ============       ============
Weighted average number of shares...................................    9,216,163         9,060,487          9,013,224
Diluted:
Income (loss) per share before extraordinary item and
   adoption of SAB 101.............................................. $       0.24      $      (0.17)      $       0.30
Extraordinary item..................................................        (0.03)                -                  -
Cumulative effect of adopting SAB 101...............................        (0.03)                -                  -
                                                                     ------------      ------------       ------------
Net income (loss)................................................... $       0.18      $      (0.17)      $       0.30
                                                                     ============      ============       ============
Weighted average number of shares including the dilutive effect of
   stock options (Note 2)...........................................    9,491,424         9,060,487          9,376,707

</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                     (IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
                                                                                                        ACCUMULATED
                                                                                                        OTHER
                                                                ADDITIONAL   DEFERRED                   COMPRE-
                                                                PAID-IN      STOCK-BASED    RETAINED    HENSIVE        SHAREHOLDERS'
                                         SHARES      AMOUNT     CAPITAL      COMPENSATION   EARNINGS    INCOME         EQUITY
                                         ------      ------     ----------   ------------   --------    ------------   ------------
<S>                                     <C>         <C>        <C>          <C>            <C>         <C>            <C>
Balance at December 31, 1999............ 9,210,697   $17,935    $       -    $       -      $13,006     $        -     $30,941
Net income..............................         -         -            -            -        1,696                      1,696
Shares repurchased in connection with
  stock repurchase plan.................  (171,400)     (710)           -            -            -              -        (710)
Shares issued and tax benefit
  associated with exercise of
  stock options.........................    47,698       368            -            -            -              -         368
Shares issued in connection with
  company acquisition...................    75,675       350            -            -            -              -         350
Issuance of stock options to
  consultants...........................         -         -          329         (329)           -              -           -
Stock-based compensation................         -         -            -          329            -              -         329
Distribution to shareholder (Note 1)....         -         -            -            -          (55)             -         (55)
                                         ---------   -------    ---------    ---------      -------     ----------     -------
Balance at December 31, 2000............ 9,162,670    17,943          329            -       14,647              -      32,919
Net loss................................         -         -            -            -       (1,494)             -      (1,494)
Shares repurchased in connection with
  stock repurchase plan.................  (116,666)     (300)           -            -            -              -        (300)
Issuance of stock options to
  consultants...........................         -         -          110         (110)           -              -           -
Stock-based compensation................         -         -            -          110            -              -         110
Shares issued in settlement of a
  debt..................................    15,384        10            -            -            -              -          10
Adjustment of shares issued for
  an acquisition........................   (68,582)     (317)           -            -            -              -        (317)
Cumulative effect of adoption of
  FAS 133 net of amortization and tax...         -         -            -            -            -           (150)       (150)
                                         ---------   -------    ---------    ---------      -------     ----------     -------
Balance at December 31, 2001............ 8,992,806    17,336          439            -       13,153           (150)     30,778
Net income..............................         -         -            -            -        2,817              -       2,817
Shares issued in connection with
  exercise of  stock option.............    10,000        20            -            -            -              -          20
Issuance of stock options to
  consultants...........................         -         -          214            -            -              -         214
Issuance of stock purchase warrants.....         -         -          619            -            -              -         619
Shares issued in settlement of a debt...    18,518        20            -            -            -              -          20
Adjustment of shares issued for
  an acquisition........................    (7,092)      (17)           -            -            -              -         (17)
Change in Other Comprehensive
  Income................................         -         -            -            -            -             60          60
                                         ---------   -------    ---------    ---------      -------     ----------     -------
Balance on December 31, 2002...........  9,014,232   $17,359    $   1,272            0      $15,970     $      (90)    $34,511
                                         =========   =======    =========    =========      =======     ==========     =======

Comprehensive (loss) is as follows:
                                                        2001         2002
                                                        ----         ----

(Net loss) net income.............................  $ (1,494)     $  2,817
Cumulative effect of adoption of FAS 133
  net of amortization and tax ($62)...............      (247)            -
Amortization of cumulative effect
  adjustment, net of tax..........................        97            60
                                                    --------      --------
Comprehensive (loss) income.......................  $ (1,644)     $  2,877
                                                    ========      ========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>

                                    POINT.360
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                    Year Ended December 31,
                                                                                    -----------------------
                                                                           2000               2001               2002
                                                                           ----               ----               ----
<S>                                                                    <C>               <C>                 <C>
Cash flows from operating activities:
Net income (loss)...................................................   $   1,696,000     $  (1,494,000)      $   2,817,000
Adjustments to reconcile net income (loss) to net cash and
   cash equivalents provided by operating activities:
Depreciation and amortization.......................................       5,773,000         7,308,000           5,338,000
Provision for doubtful accounts.....................................       2,195,000           529,000             301,000
Deferred income taxes ..............................................         476,000         1,054,000             723,000
Other noncash items.................................................         329,000           858,000             (41,000)
Cumulative effect of adopting SAB 101...............................         322,000                 -                   -
Extraordinary item..................................................         232,000                 -                   -
Write-off of note receivable........................................               -                 -             148,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable..........................       1,359,000         3,667,000            (400,000)
Decrease (increase) in inventories..................................          91,000           211,000             (83,000)
(Increase) decrease in prepaid expenses and other current assets....        (822,000)        1,229,000            (303,000)
(Increase) decrease in other assets.................................          (5,000)           87,000             (10,000)
Increase (decrease) in accounts payable.............................       1,397,000        (3,889,000)           (559,000)
(Decrease) increase in accrued expenses.............................        (668,000)          (68,000)          1,449,000
(Decrease) increase in income taxes payable (receivable), net.......      (1,412,000)          (37,000)          1,001,000
                                                                       -------------      ------------      --------------
Net cash and cash equivalents provided by operating activities......      10,963,000         9,455,000          10,381,000
                                                                       -------------      ------------      --------------
Cash flows from investing activities:
Capital expenditures................................................      (9,717,000)       (3,082,000)         (1,949,000)
Proceeds from sale of equipment.....................................               -                 -              27,000
Net cash paid for acquisitions......................................      (1,951,000)         (987,000)         (1,563,000)
                                                                       -------------      ------------      --------------
Net cash and cash equivalents used in investing activities..........     (11,668,000)       (4,069,000)         (3,485,000)
                                                                       -------------      ------------      --------------
Cash flows from financing activities:
S Corporation distributions to shareholders.........................         (55,000)                -                   -
Issuance (repayment) of notes receivable............................      (1,001,000)                -             780,000
Repurchase of common stock..........................................        (710,000)         (300,000)                  -
Proceeds from exercise of stock options.............................         256,000                 -              12,000
Change in revolving credit agreement................................      (5,888,000)                -                   -
Deferred financing costs............................................        (239,000)                -                   -
Proceeds from bank note.............................................      32,174,000                 -                   -
Repayment of notes payable..........................................     (25,892,000)       (2,025,000)         (5,999,000)
Repayment of capital lease obligations..............................        (201,000)          (72,000)            (75,000)
Net cash and cash equivalents used in financing activities..........      (1,556,000)       (2,397,000)         (5,282,000)
                                                                       -------------     -------------      --------------
Net increase (decrease) in cash and cash equivalents................      (2,261,000)        2,989,000           1,614,000
Cash and cash equivalents at beginning of year......................       3,030,000           769,000           3,758,000
                                                                       -------------     -------------      --------------
Cash and cash equivalents at end of year............................   $     769,000     $   3,758,000      $    5,372,000
                                                                       =============     =============      ==============
</TABLE>

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

                                    POINT.360
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY:

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

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

        As of April 30, May 31 and June 30, 2001,  outstanding amounts under the
Company's  line of credit with a group of banks exceeded the borrowing base (see
Note 6). On June 11 and July 20, 2001,  the Company  entered into  amendment and
forbearance  agreements  with the banks which  required the Company to repay the
amount of excess  borrowings.  In August 2001, the Company did not make required
debt  payments  which  created  a  breach  of  the  amendment  and   forbearance
agreements.  As a consequence of the breach,  the amount  outstanding  under the
credit facility was reclassified as a current liability as of December 31, 2001.
On May 2, 2002,  the  Company and the banks  entered  into a  restructured  loan
agreement  eliminating  all  breaches  (see Note 6). 2.  SUMMARY OF  SIGNIFICANT
ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION

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

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

CASH AND CASH EQUIVALENTS

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

REVENUES AND RECEIVABLES

        The Company  records  revenues  when the services  have been  completed.
Although  sales  and  receivables  are  concentrated  in the  entertainment  and
advertising  industries,  credit  risk due to  financial  insolvency  is limited
because of the financial stability of the customer base (i.e., large studios and
advertising  agencies).  However, in 2000, the Company's  evaluation of accounts
receivable balances resulted in an increase in the reserve for doubtful accounts
of approximately $2.2 million which was related primarily to smaller entities.

<PAGE>

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

CONCENTRATION OF CREDIT RISK

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

        Credit risk with respect to trade receivables is concentrated due to the
large  number of orders  with  major  entertainment  studios  in any  particular
reporting period. The seven major studios represented 40% of accounts receivable
at December 31, 2001 and 44% of accounts  receivable  at December 31, 2002.  The
Company  reviews  credit  evaluations  of its  customers  but does  not  require
collateral or other security to support customer receivables.

        The seven  major  studios  accounted  for 34% of net sales for the years
ended December 31, 2001 and 2002, 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.  The  estimated  useful life of property and equipment is
seven years and leasehold improvements are ten years.

GOODWILL AND OTHER INTANGIBLES

        Prior to the January 1, 2002  implementation  of  Statement of Financial
Accounting  Standards 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. Other  intangibles  consist primarily of covenants not to compete
and are amortized on a straight-line basis over 3-5 years.

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

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

<PAGE>

INCOME TAXES

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

ADVERTISING COSTS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

        To meet the reporting  requirements of Statement of Financial Accounting
Standards  No.  107,  "Disclosures  About Fair Value of  Financial  Instruments"
("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.

        The accrual  method of  accounting  is used for the  interest  rate swap
agreement  entered into by the Company  which  converts the interest rate on $15
million of the Company's  variable-rate debt to a fixed rate (see Note 6). Under
the accrual method, each net payment or receipt due or owed under the derivative
is recognized  in income in the period to which the payment or receipt  relates.
Amounts  to  be  paid/received  under  these  agreements  are  recognized  as an
adjustment to interest  expense.  The related amounts payable to counter parties
is  included  in other  accrued  liabilities.  The  estimated  fair value of the
interest rate swap agreement is a net payable of $701,000 at December 31, 2002.

ACCOUNTING FOR STOCK-BASED COMPENSATION

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

EARNINGS PER SHARE

        The Company follows Statement of Financial Accounting Standards No. 128,
"Earnings  per Share" ("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 stock  options were
exercised using the treasury stock method.

        In  accordance  with  SFAS  128,  basic  earnings  (loss)  per  share is
calculated  based on the  weighted  average  number of  shares  of common  stock
outstanding  during  the  reporting  period.   Diluted  earnings  per  share  is
calculated  giving effect to all potentially  dilutive  common shares,  assuming
such shares were outstanding during the reporting period.  Stock options for the
purchase of 386,245 shares with a weighted  average  exercise price of $1.40 for
the year ended December 31, 2001 were not included in the computation of diluted
EPS as they are anti-dilutive as a result of net loss during the year.

<PAGE>

        A reconciliation  of the denominator of the basic EPS computation to the
denominator of the diluted EPS computation is as follows:
<TABLE>
<CAPTION>
                                                                         2000          2001          2002
                                                                         ----          ----          ----
<S>                                                                    <C>           <C>           <C>
Weighted average number of common shares outstanding
  used in computation of basic EPS................................     9,216,163     9,060,487     9,013,224
Dilutive effect of outstanding stock options .....................       275,261             -       363,483
                                                                       ---------     ---------     ---------
Weighted average number of common and potential
  common shares outstanding used in computation of diluted EPS....     9,491,424     9,060,487     9,376,707
                                                                       =========     =========     =========
</TABLE>

COMPREHENSIVE INCOME

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

SUPPLEMENTAL CASH FLOW INFORMATION

         Selected cash payments and noncash activities were as follows:
<TABLE>
<CAPTION>
                                                              2000             2001              2002
                                                              ----             ----              ----
<S>                                                     <C>              <C>               <C>
Cash payments for income taxes........................  $  2,447,000     $    121,000      $  1,364,000
Cash payments for interest............................     2,920,000        2,830,000         2,453,000

Noncash investing and financing activities:
Capitalized lease obligations incurred................             -          145,000            69,000
Tax benefits related to stock options.................       112,000                -             7,000
Adjustment of acquisition holdback shares.............             -         (317,000)          (17,000)
Acquisition of equipment in exchange for
  reduction of note receivable from shareholder.......             -           68,000                 -
Accrual for earn-out payments.........................             -          270,000                 -

Detail of acquisitions:
Fair value of assets, net of cash acquired............       147,000                -                 -
Goodwill (1)..........................................     2,515,000        1,257,000         1,563,000
Liabilities (2).......................................      (711,000)               -                 -
                                                        ------------      -----------       -----------
Net cash paid for acquisitions........................  $ 1,951,000       $ 1,257,000       $ 1,563,000
                                                        ===========       ===========       ===========
</TABLE>

   (1)  Includes  additional  purchase  price  payments made to former owners in
        periods subsequent to various  acquisitions of $1,353,000,  $965,000 and
        $1,253,000  in 2000,  2001  and  2002,  respectively,  and  accrual  for
        earn-out payments of $270,000 in 2001.

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


RECENT ACCOUNTING PRONOUNCEMENTS

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

<PAGE>

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

        The  Company  ceased  amortization  of  approximately  $26.3  million of
goodwill beginning in 2002. We had recorded  approximately $2.0 and $1.7 million
of  amortization  on these amounts  during the years ended December 31, 2001 and
2000, respectively.

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

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

        In  April  2002,  the FASB  issued  SFAS No.  145,  "Rescission  of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections."  SFAS  No.  145  updates,   clarifies,   and  simplifies  existing
accounting  pronouncements.  This statement  rescinds SFAS No. 4, which required
all gains and  losses  from  extinguishment  of debt to be  aggregated  and,  if
material, classified as an extraordinary item, net of related income tax effect.
As a result, the criteria in APB No. 30 will now be used to classify those gains
and losses.  SFAS No. 64 amended  SFAS No. 4 and is no longer  necessary as SFAS
No. 4 has been  rescinded.  SFAS No.  44 has been  rescinded  as it is no longer
necessary.  SFAS No.  145  amends  SFAS No. 13 to  require  that  certain  lease
modifications that have economic effects similar to sale-leaseback  transactions
be accounted for in the same manner as sale-lease  transactions.  This statement
also  makes  technical  corrections  to  existing  pronouncements.  While  those
corrections  are not substantive in nature,  in some instances,  they may change
accounting  practice.  The Company  does not expect  adoption of SFAS No. 145 to
have a  material  impact,  if any,  on its  financial  position  or  results  of
operations.

        In June  2002,  the FASB  issued  SFAS No.  146,  "Accounting  for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs  associated with exit or disposal  activities
and nullifies  Emerging  Issues Task Force ("EITF")  Issue No. 94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."  This statement
requires  that a  liability  for a cost  associated  with an  exit  or  disposal

<PAGE>

activity be recognized when the liability is incurred.  Under EITF Issue 94-3, a
liability  for an exit  cost,  as  defined,  was  recognized  at the  date of an
entity's  commitment  to an exit plan.  The  provisions  of this  statement  are
effective for exit or disposal  activities that are initiated after December 31,
2002 with earlier application  encouraged.  The Company does not expect adoption
of SFAS No.146 to have a material impact,  if any, on its financial  position or
results of operations, except as discussed in Note 8.

        In October 2002, the FASB issued SFAS No. 147,  "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of  liabilities  assumed  over  the  fair  value of  tangible  and  identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those  transactions  be accounted for in accordance  with SFAS No.
141,  "Business  Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition,  this statement  amends SFAS No. 144,  "Accounting for the
Impairment  or Disposal of  Long-Lived  Assets,"  to include  certain  financial
institution-related  intangible assets.  This statement is not applicable to the
Company.

3. ACQUISITIONS

        On November 3, 2000, the Company acquired the assets and assumed certain
liabilities of Creative Digital, Inc. ("Creative  Digital").  The purchase price
of the transaction was approximately  $1,309,000.  This amount included $500,000
paid in cash,  $98,000  in  estimated  transaction  costs and  75,675  shares of
Point.360  common stock valued at $350,000.  The  acquisition  was accounted for
using the purchase method of accounting. The purchase price was allocated to the
fair  value of net  assets of  $147,000  and  intangible  assets of  $1,162,000.
Creative  Digital  provides  colorization,  editing,  and other post  production
services to major motion picture studios and television  producers.  No earn-out
amounts  have been  paid.  In  November  2001,  68,582 of the  75,675  shares of
Point.360  stock  valued at  $317,000  were  returned  to the Company as certain
conditions  outlined in the  acquisition  agreement were not met. In April 2002,
7092 shares were returned to the Company as part of a separate agreement.

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

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

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

        In August  1997,  the Company  acquired all of the  outstanding  capital
stock of Multi-Media Services,  Inc.  ("Multi-Media").  Multi-Media  principally
provides  video  duplication,   distribution,   and  content  storage  to  major
advertising  agencies.  Through  the  acquisition  of  Multi-Media,  the Company
acquired  facilities in Los Angeles,  Chicago and New York.  The purchase  price
paid by the Company for  Multi-Media  was  $6,867,000  (including  the immediate
repayment of $1,545,000 of indebtedness).  In addition, the Company was required
to pay, as an earn-out, up to an aggregate of $2,000,000, plus interest from the
closing  date,  in the event that  Multi-Media,  as a separate  operation of the
Company,  achieved  certain  financial  goals. In July 2002, the Company entered
into an  arrangement  regarding  earn-out  payments  related  to the  July  1997
acquisition  of MultiMedia  Services,  Inc. The original  acquisition  agreement
would have required  payments of approximately  $1.5 million during the next two
years assuming  minimum earnings levels are met, which levels have been achieved
in the past. In exchange for a one-time $1.1 million  payment made in July 2002,
the Company was relieved of all future earn-out  obligations  under the purchase
agreement.

<PAGE>

        On January 1, 1997,  the Company  acquired all of the assets and certain
liabilities  of Woodholly  Productions  ("Woodholly").  Woodholly  provides full
service video duplication,  distribution, content storage and ancillary services
to major motion picture studios, advertising agencies and independent production
companies for both domestic and international use. As consideration, the Company
will pay the partners of Woodholly a maximum of $8,000,000,  of which $4,000,000
was  paid in  January  1997.  The  remaining  balance  is  subject  to  earn-out
provisions that are predicated upon Woodholly attaining certain operating income
goals, as set forth in the purchase  agreement in each quarter through  December
31, 2001. If Woodholly  fails to achieve the targeted  results in any particular
quarter, the related earn-out payment will be deferred until the next quarter in
which the quarterly minimum results are achieved as long as such minimum results
are achieved  before December 31, 2003. As of December 31, 2002, the Company has
paid or accrued $3,415,000 in earn-out payments.

        The above acquisitions were accounted for as purchases,  with the excess
of the purchase price over the fair value of the net assets  acquired  allocated
to goodwill.  The  contingent  purchase  price,  to the extent  earned,  will be
recorded as an increase to goodwill.  As of December  31,  2002,  based on prior
performance of the applicable acquired entities,  there can be no assurance that
additional earn-out amounts will be paid. The consolidated  financial statements
reflect  the  operations  of  the  acquired  companies  since  their  respective
acquisition dates.

        Goodwill  and other  intangibles,  net as of December 31, 2001 and 2002,
consist of the following:
                                                         ACTUAL
                                                -------------------------
                                                2000                 2001
                                                ----                 ----
Goodwill.................................  $  31,807,000        $  32,762,000
Covenant not to compete..................        983,000              992,000
                                           -------------        -------------
                                           $  32,790,000           33,754,000
Less accumulated amortization............     (6,470,000)          (6,541,000)
                                           -------------        -------------
                                           $  26,320,000        $  27,213,000
                                           =============        =============

        Amortization expense totaled $1,638,000,  $2,007,000 and $80,000 for the
years ended December 31, 2000, 2001 and 2002,  respectively.  The Company ceased
amortizing  goodwill  on  January  1,  2002  with  the  adoption  of  SFAS  142.
Amortization  of the  covenant  not to compete  will be $35,000 in 2003 at which
time the covenant will be fully amortized.

4. PROPERTY AND EQUIPMENT:

        Property and equipment consist of the following:

                                                      DECEMBER 31,
                                                2001                 2002
                                                ----                 ----
Machinery and equipment..................  $  36,769,000        $  38,156,000
Leasehold improvements...................      7,634,000            7,673,000
Computer equipment.......................      3,707,000            4,232,000
Equipment under capital lease............        251,000              291,000
                                           -------------        -------------
                                              48,361,000           50,352,000
Less accumulated depreciation and
  amortization...........................    (25,129,000)         (30,387,000)
                                           -------------        -------------
                                           $  23,232,000        $  19,965,000
                                           =============        =============

        Depreciation  expense totaled $4,135,000,  $5,301,000 and $5,258,000 for
the years ended  December 31,  2000,  2001 and 2002,  respectively.  Accumulated
amortization on capital leases  amounted to $73,000 and $99,000,  as of December
31, 2001 and 2002, respectively.

<PAGE>

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. Company contributions to the plan were
$93,000, $102,000 and $99,000 in 2000, 2001 and 2002, respectively.

6. LONG TERM DEBT AND NOTES PAYABLE:

TERM LOANS AND REVOLVING CREDIT

        In November 1998, the Company borrowed $29,000,000 on a term loan with a
bank.  The term loan was  repaid in 2000 with the  proceeds  of a new  borrowing
arrangement with a group of banks.

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

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

        As of April 30, May 31 and June 30, 2001,  outstanding amounts under the
line of credit  exceeded the borrowing  base. On June 11 and July 20, 2001,  the
Company entered into amendment and  forbearance  agreements with the banks which
required  the Company to repay the amount of excess  borrowings  and amended the
Agreement to reduce the aggregate  commitment  from  $45,000,000  to $30,050,000
until the expiration of the commitment on December 31, 2005. In August 2001, the
Company  did not make  required  debt  payments  which  created  a breach of the
amendment and forbearance agreements. As a consequence of the breach, the amount
outstanding under the credit facility became immediately due and payable.

        In May 2002, the Company and the banks entered into a restructured  loan
agreement  changing  the  revolving  credit  facility  to a term loan,  with all
existing  defaults  being waived.  The term loan has a maturity date of December
31, 2004. Pursuant to the agreement, the Company made principal payments of $5.5
million in 2002, and will make additional principal payments of $5.0 million and
$18.0  million  in 2003 and  2004,  respectively.  The  agreement  provides  for
interest at the banks'  reference  rate plus 1.25% and  requires  the Company to
maintain  certain  financial  covenant  ratios.  The  term  loan is  secured  by
substantially all of the Company's assets. In connection with the restructuring,
the  Company  wrote off  $265,000  of deferred  financing  costs  related to the
original  Agreement in the second quarter of 2002. Certain legal and other costs
associated  with the new term loan were  capitalized  and will be amortized over
the life of the loan.  Furthermore,  as of December 31, 2002,  $174,000 had been
accrued toward a total of $250,000 of additional fees that will be due the banks
if the restructured loan has not been paid off by June 30, 2003.

        In  October  2002,  the  company  paid  the  banks  $20,000  and made an
additional  principal  payment of $500,000 in connection  with a waiver received
from the banks to allow  the  company's  former  President  and Chief  Executive
Officer to reduce his percentage ownership in the Company to below 14%.

<PAGE>

INTEREST RATE SWAP

        In  November  2000,  the  Company  entered  into an  interest  rate swap
contract to  economically  hedge its floating debt rate.  Under the terms of the
contract, the notional amount is $15,000,000, whereby the Company receives LIBOR
and pays a fixed 6.5% rate of interest for three  years.  Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities"  ("SFAS  133")  requires  that the  interest  rate swap  contract be
recorded at fair value upon  adoption of SFAS 133 and quarterly by recording (i)
a  cumulative-effect  type adjustment at January 1, 2001 equal to the fair value
of  the  interest  rate  swap  contract  on  that  date,   (ii)  amortizing  the
cumulative-effect  type  adjustment  quarterly  over the life of the  derivative
contract, and (iii) a charge or credit to income in the amount of the difference
between the fair value of the interest  rate swap  contract at the beginning and
end of such  quarter.  The effect of adopting  SFAS 133 was to record an initial
cumulative-effect   balance  sheet  adjustment  by  charging  Accumulated  Other
Comprehensive  Income (a component of  shareholders'  equity)  $247,000  (net of
$62,000 tax benefit),  crediting  Derivative Valuation Liability by the $309,000
gross  cumulative-effect  adjustment and charging Deferred Income Taxes $62,000.
The  following  adjustments  were recorded to reflect  changes  during the years
ended December 31, 2001 and 2002:
<TABLE>
<CAPTION>
                                                                      INCREASE (DECREASE) INCOME
                                                                      --------------------------
                                                                                                         NET
                                                     DERIVATIVE FAIR   (PROVISION FOR) BENEFIT        DERIVATIVE
                                                      VALUE CHANGE        FROM INCOME TAXES        FAIR VALUE CHANGE
                                                      ------------        -----------------        -----------------
<S>                                                  <C>                    <C>                       <C>
For the year ended December 31, 2001:
------------------------------------
   Amortization of cumulative-effect type
   adjustment                                        $  (121,000)           $    24,000               $   (97,000)

   Difference in the derivative fair value
   between the beginning and end of the year            (579,000)               116,000                  (463,000)
                                                     -----------            -----------               -----------
                                                     $  (700,000)           $   140,000               $  (560,000)
                                                     ===========            ===========               ===========
For the year ended December 31, 2002:
------------------------------------
   Amortization of cumulative-effect type
   adjustment                                        $  (104,000)           $    44,000               $   (60,000)

   Difference in the derivative fair value
   between the beginning and end of the year             186,000                (77,000)                  109,000
                                                     -----------            -----------               -----------
                                                     $    82,000            $   (33,000)              $    49,000
                                                     ===========            ===========               ===========
</TABLE>


EQUIPMENT FINANCING AND CAPITAL LEASES

        The Company has financed the purchase of certain  equipment  through the
issuance of notes payable and under capital leasing arrangements. The notes bear
interest at rates ranging from 9.3% to 12.9%.  Such  obligations  are payable in
monthly installments through May 2005.

        Annual maturities for debt, under both the restructured credit agreement
and capital lease obligations as of December 31, 2002, are as follows:

        2003......................................   $   5,087,000
        2004......................................      18,057,000
        2005......................................           8,000
        Thereafter................................               -
                                                     -------------
                                                     $  23,152,000
                                                     =============

<PAGE>

7. INCOME TAXES:

        The Company's  provision  for (benefit  from) income taxes for the three
years ended December 31, 2002 consists of the following:
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                     --------------------------------------------------
                                                          2000              2001              2002
                                                          ----              ----              ----
<S>                                                  <C>               <C>               <C>
Current tax (benefit) expense:
Federal...........................................   $     683,000     $ (1,229,000)     $  1,280,000
State.............................................         254,000                -           333,000
                                                     -------------     ------------      ------------
Total current.....................................         937,000       (1,229,000)        1,613,000
                                                     -------------     ------------      ------------
Deferred tax expense:
Federal...........................................         416,000          844,000           281,000
State.............................................          60,000            1,000           113,000
                                                     -------------     ------------      ------------
Total deferred....................................         476,000          845,000           394,000
                                                     -------------     ------------      ------------
Total provision for (benefit from)
  for income taxes................................   $   1,413,000     $   (384,000)     $  2,007,000
                                                     =============     ============      ============
</TABLE>

        The following is a reconciliation of the components of the provision for
(benefit from) income taxes:
<TABLE>
<CAPTION>
                                                          2000              2001              2002
                                                          ----              ----              ----
<S>                                                  <C>               <C>               <C>
Provision for (benefit from) income taxes
  per the income statement........................   $   1,814,000     $   (384,000)     $ 2,007,000
Extraordinary item tax benefit....................        (168,000)               -                -
Cumulative effect tax benefit of
  adopting SAB 101................................        (233,000)               -                -
                                                     -------------     ------------      -----------
Provision for (benefit from) income taxes.........   $   1,413,000     $   (384,000)     $ 2,007,000
                                                     =============     ============      ===========
</TABLE>


        The composition of the deferred tax assets (liabilities) at December 31,
2001 and December 31, 2002 are listed below:
<TABLE>
<CAPTION>
                                                          2001              2002
                                                          ----              ----
<S>                                                  <C>               <C>
Accrued liabilities...............................   $     474,000     $    670,000
Allowance for doubtful accounts...................         143,000          272,000
Other.............................................         267,000          206,000
                                                     -------------     ------------
Total current deferred tax assets.................         884,000        1,148,000
                                                     -------------     ------------
Property and equipment............................      (2,915,000)      (2,799,000)
Goodwill and other intangibles....................        (236,000)        (624,000)
State net operating loss carry forward............         173,000                -
Other.............................................         343,000          231,000
Total non-current deferred tax liabilities........      (2,635,000)      (3,192,000)
                                                     -------------     ------------
Net deferred tax liability........................   $  (1,751,000)    $ (2,044,000)
                                                     =============     ============
</TABLE>
<PAGE>

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

                                                          2000     2001     2002
                                                          ----     ----     ----

Federal tax computed at statutory rate............         34%     (34)%     34%
State taxes, net of federal benefit and
  net operating loss limitation...................          6%       2%       6%
Non-deductible goodwill...........................          5%       9%       -
Other.............................................          1%       3%       2%
                                                          ----     ----     ----
                                                           46%     (20)%     42%
                                                          ====     ====     ====

8. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

        The Company  leases  office and  production  facilities  in  California,
Illinois, Texas and New York under various operating leases. Approximate minimum
rental payments under these  non-cancelable  operating leases as of December 31,
2002 are as follows:

        2003........................................  $  3,094,000
        2004........................................     2,521,000
        2005........................................     2,063,000
        2006........................................     2,006,000
        2007........................................     2,071,000
        Thereafter..................................     1,888,000
                                                      ------------
                                                      $ 13,643,000

        Total  rental  expense  was  approximately  $3,206,000,  $3,482,000  and
$3,106,000  for  the  three  years  in  the  period  ended  December  31,  2002,
respectively.

9. STOCK REPURCHASE PLAN:

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

        The funds for the  stock  repurchases  were  provided  by the  Company's
credit facility with a bank which permitted repurchases up to $5,000,000. During
the three years ended December 31, 2001, the Company  repurchased  $4,391,000 of
common stock.  The Company was then restricted  from further  repurchases by the
amended credit agreement.

10. STOCK OPTION PLANS:

STOCK OPTION PLANS

        In May 1996, the Board of Directors,  approved the 1996 Stock  Incentive
Plan (the  "1996  Plan").  The 1996 Plan  provides  for the award of  options to
purchase up to 900,000  shares of common  stock,  as well as stock  appreciation
rights,  performance share awards and restricted stock awards. In July 1999, the
Company's  shareholders  approved an amendment to the 1996 Plan  increasing  the
number of shares  reserved for grant to 2,000,000  and  providing  for automatic
increases  of  300,000  shares  on each  August 1  thereafter  to a  maximum  of
4,000,000  shares.  As of  December  31,  2002,  there  were  1,798,000  options
outstanding under the 1996 Plan and 1,171,000 options were available for grant.

<PAGE>

        In December  2000,  the  Company's  Board of Directors  adopted the 2000
Nonqualified  Stock  Option Plan (the "2000  Plan").  As amended,  the 2000 Plan
provides for the award of options to purchase up to  1,500,000  shares of common
stock.  Options may be granted under the 2000 Plan solely to attract  people who
have not previously been employed by the Company as a substantial  inducement to
join the  Company.  As of  December  31,  2002,  there  were  1,000,000  options
outstanding under the plan and 500,000 options were available for grant.

        Under both plans,  the stock option price per share for options  granted
is  determined by the Board of Directors and is based on the market price of the
Company's  common  stock on the date of grant,  and each  option is  exercisable
within the period and in the increments as determined by the Board,  except that
no option can be  exercised  later than ten years from the date it was  granted.
The stock  options  generally  vest over one to five years and for some options,
earlier  if the market  price of the  Company's  common  stock  exceeds  certain
levels.

        In  accounting  for its  plans,  the  Company,  in  accordance  with the
provisions  of SFAS 123,  "Accounting  for  Stock-Based  Compensation,"  applies
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees."  As a result  of this  election,  the  Company  does  not  recognize
compensation  expense for its stock option plans since the exercise price of the
options granted equals the fair value of the stock on the date of grant. Had the
Company  determined  compensation  cost  based on the fair  value  for its stock
options at grant date, as set forth under SFAS 123, the Company's net income and
earning per share  would have been  reduced to the pro forma  amounts  indicated
below:
<TABLE>
<CAPTION>
                                                  2000                 2001                2002
                                                  ----                 ----                ----
<S>                                          <C>                  <C>                 <C>
Net income (loss):
As reported................................  $   1,696,000        $  (1,494,000)      $   2,817,000
Pro forma..................................        731,000           (3,266,000)          2,301,000
Earnings (loss) per share:
As reported:
Basic......................................           0.18                (0.17)               0.31
Diluted....................................           0.18                (0.17)               0.30
Pro forma:
Basic......................................           0.08                (0.36)               0.26
Diluted....................................           0.08                (0.36)               0.25

</TABLE>

        The fair value for these  options was  estimated at the grant date using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions  used for  grants  in 2000,  2001 and 2002,  respectively:  expected
volatility of 70%, 88% and 94% and risk-free  interest rates of 5.59%, 4.53% and
4.00%.  A dividend  yield of 0% and expected  life of five years was assumed for
2000, 2001 and 2002 grants.  The weighted  average fair value of options granted
at the fair  market  price on the grant date in 2000,  2001 and 2002 were $2.35,
$1.64 and $1.76,  respectively.  In 2001,  the  weighted  average  fair value of
options  granted at an exercise  price in excess of the fair market price on the
grant date was $0.48.  All other options  granted in 2000, 2001 and 2002 were at
fair market price.

        Transactions involving stock options are summarized as follows:

                                                NUMBER          WEIGHTED AVERAGE
                                               OF SHARES         EXERCISE PRICE
                                               ---------         --------------
Balance at December 31, 1999................   1,408,321           $  7.50
                                               ---------           -------
Granted during 2000.........................   1,779,100              3.76
Exercised during 2000.......................     (47,698)             5.37
Cancelled during 2000.......................    (242,716)             6.12
                                               ---------           -------
Balance at December 31, 2000................   2,897,007           $  5.43
Granted during 2001.........................   1,176,350              2.06
Cancelled during 2001.......................    (786,729)             3.88
                                               ---------           -------
Balance at December 31, 2001................   3,286,628           $  4.55
Granted during 2002.........................     529,100              1.76
Exercised during 2002.......................     (10,000)             1.20
Cancelled during 2002.......................  (1,007,069)             7.26
                                               ---------           -------
Balance at December 31, 2002................   2,798,569           $  3.06
                                               =========           =======

<PAGE>

        The Company  granted  212,500 and 30,000 stock options to consultants in
2000 and 2001,  respectively,  of which  100,000  were vested as of December 31,
2000,  230,000  were  vested  as of  December  31,  2001 and all were  vested at
December 31, 2002. The fair value of the vested  options  estimated at the grant
date using the  Black-Scholes  option  pricing model  following the  assumptions
mentioned  above and expensed  during 2000 and 2001 were  $329,000 and $110,000,
respectively.  During fiscal 2000, $151,000 was attributable to services related
to the revolving credit agreement, accordingly, such amount was capitalized as a
deferred  financing cost to be amortized over the five-year life of a new credit
agreement (see Note 6), and $178,000 was expensed as a consulting cost. In 2001,
the amount expensed as a consulting cost was $110,000.

        Additional  information  with respect to the  outstanding  options as of
December 31, 2002 is as follows (shares in thousands):
<TABLE>
<CAPTION>

                                           OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
                         -------------------------------------------------------   ----------------------------
<S>                       <C>                <C>                 <C>               <C>           <C>
                                                 AVERAGE           WEIGHTED
    OPTION EXERCISE                             REMAINING           AVERAGE         NUMBER OF        AVERAGE
     PRICE RANGE   .      NUMBER OF SHARES   CONTRACTUAL LIFE    EXERCISE PRICE      SHARES      EXERCISE PRICE
---------------------     ----------------   ----------------    ---------------   -----------   --------------
 $  1.01 to 5.38                2,669              5.0              $  2.77          1,440          $  3.20
    7.00 to 10.00                 103              5.0                 6.08            103             7.45
   10.75 to 15.00                  27              6.9                12.87             27            12.87
                               -------                                              -------
                                2,799                                                1,270
                                =====                                                =====
</TABLE>

11. RELATED PARTY TRANSACTIONS

        At December 31,  2001,  the Company had a loan  outstanding  to its then
President and Chief  Executive  Officer,  R. Luke Stefanko,  totaling  $766,000,
including  accrued interest of $64,000.  The loan was  collateralized by a trust
deed and bears interest at a rate of 3%. The loan was due on or before  December
31, 2002. On October 2, 2002, Mr. Stefanko resigned as Chief Executive  Officer.
Haig S.  Bagerdjian,  the Company's  Chairman of the Board,  was appointed Chief
Executive Officer.  Concurrently,  Mr. Bagerdjian  purchased 1,435,243 shares of
the Company's common stock from Mr. Stefanko,  assuming the payment  obligations
for Mr.  Stefanko's  loan as part of the  transaction.  The  fair  value  of the
options as of the  resignation  date  ($214,000  valued using the  Black-Scholes
model) was recorded as severance  expense during 2002. The loan was paid in full
on December 30, 2002.

12. SUPPLEMENTAL DATA (unaudited)

        The following tables set forth quarterly  supplementary data for each of
the years in the two-year  period ended  December 31, 2002 (in thousands  except
per share data).
<TABLE>
<CAPTION>
                                                                                        2001
                                                           --------------------------------------------------------------
                                                                             Quarter Ended                        Year
                                                           ----------------------------------------------------   Ended
                                                            March 31      June 30      Sept 30       Dec 31       Dec 31
                                                            --------      -------      -------       ------       ------
<S>                                                        <C>          <C>          <C>          <C>          <C>
Revenues.................................................. $  19,108    $  16,446    $  16,905    $  17,169    $  69,628
Gross profit.............................................. $   6,501    $   5,185    $   5,659    $   5,419    $  22,764
Net loss.................................................. $     (62)   $    (654)   $    (720)   $     (58)   $  (1,494)
                                                           =========    =========    =========    =========    =========
Loss per share:
Basic..................................................... $   (0.01)   $   (0.07)   $   (0.08)   $   (0.01)   $   (0.17)
Diluted................................................... $   (0.01)   $   (0.07)   $   (0.08)   $   (0.01)   $   (0.17)
                                                           =========    =========    =========    =========    =========

                                                                                        2002
                                                           --------------------------------------------------------------
                                                                             Quarter Ended                        Year
                                                           ----------------------------------------------------   Ended
                                                            March 31      June 30      Sept 30       Dec 31       Dec 31
                                                            --------      -------      -------       ------       ------
Revenues.................................................. $  16,846    $  16,710    $  16,959    $  17,903    $  68,419
Gross profit.............................................. $   6,252    $   6,076    $   6,778    $   7,140    $  26,247
Net income................................................ $     651    $     449    $     796    $     920    $   2,817
                                                           =========    =========    =========    =========    =========
Income per share:
Basic..................................................... $    0.07    $    0.05    $    0.09    $    0.10    $    0.31
Diluted................................................... $    0.07    $    0.05    $    0.08    $    0.10    $    0.30
                                                           =========    =========    =========    =========    =========
</TABLE>
<PAGE>

To the Board of Directors
and Shareholders of Point.360


Our  audit  was  made  for the  purpose  of  forming  an  opinion  on the  basic
consolidated   financial   statements   taken  as  a  whole.   The  consolidated
supplemental  schedule  listed  in Item 8 of this  Form  10-K is  presented  for
purposes of complying with the Securities and Exchange Commission's rules and is
not a part of the basic  consolidated  financial  statements.  This schedule has
been  subjected  to the  auditing  procedures  applied in our audit of the basic
consolidated  financial  statements and, in our opinion, is fairly stated in all
material  respects in relation to the basic  consolidated  financial  statements
taken as a whole.

Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, CA
February 14, 2003

---------------------------------------


To the Board of Directors
and Shareholders of Point.360


Our audits of the consolidated  financial  statements  referred to in our report
dated  February  25,  2002,  except  for  Notes 2 and 6, as to which the date is
October 28, 2002, which is qualified as to the Company's  ability to continue as
a going  concern,  appearing in this Annual Report on Form 10-K also included an
audit of the financial statement schedule listed in Item 8 of this Form 10-K. In
our opinion,  this financial statement schedule presents fairly, in all material
respects,  the information  set forth therein when read in conjunction  with the
related consolidated financial statements.

PricewaterhouseCoopers LLP
Century City, California
February 25, 2002 , except for Notes 2 and 6,
   as to which the date is October 28, 2002


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


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

<S>                                 <C>            <C>             <C>       <C>              <C>
Year ended December 31, 2000        $   971,000    $  2,195,000    $  --     $(1,693,000)     $ 1,473,000

Year ended December 31, 2001          1,473,000         529,000       --      (1,321,000)         681,000

Year ended December 31, 2002        $   681,000    $    301,000    $  --     $  (181,000)     $   801,000

</TABLE>
<PAGE>

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

        Information  regarding the Company's  change in independent  accountants
was previously reported in its Form 8-K reports dated June 12, 2002 and July 26,
2002.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Information  called  for by Item 10 of Form 10-K is set forth  under the
heading  "Election of Directors" in the Company's Proxy Statement for its annual
meeting of shareholders  relating to fiscal 2002 (the "Proxy Statement"),  which
is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

        Information  called  for by Item 11 of Form 10-K is set forth  under the
heading "Executive  Compensation" in the Proxy Statement,  which is incorporated
herein by reference.

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

        Information  called  for by Item 12 of Form 10-K is set forth  under the
headings  "Security  Ownership of Certain  Beneficial Owners and Management" and
"Equity  Compensation  Plan  Information"  in  the  Proxy  Statement,  which  is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Information  called  for by Item 13 of Form 10-K is set forth  under the
heading "Certain Relationships and Related Transactions" in the Proxy Statement,
which is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

        Within the 90-day  period  prior to the filing date of this  report,  an
evaluation was conducted under the supervision and with the participation of the
Company's management,  including our Chief Executive Officer and Chief Financial
Officer,  of the  effectiveness  of the design and  operation  of the  Company's
disclosure  controls and procedures,  as such term is defined in Rules 13a-14(c)
and 15d-14(c)  under the Securities  Exchange Act of 1934 (the "Exchange  Act").
Based on that  evaluation,  the Chief  Executive  Officer  and  Chief  Financial
Officer  concluded  that the Company's  disclosure  controls and  procedures are
effective in bringing to their attention on a timely basis material  information
relating  to the  Company  that is required  to be  disclosed  in the  Company's
reports that are filed under the Exchange  Act.  Subsequent to the date that the
Chief Executive  Officer and Chief Financial Officer completed their evaluation,
there have not been any significant  changes in the Company's  internal controls
or in other factors that could significantly affect such internal controls.

<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

   (a)  Documents Filed as Part of this Report:

   (1,2) Financial Statements and Schedules.

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

        Consolidated Balance Sheets - December 31, 2001 and 2002

        Consolidated  Statements  of Income - Fiscal  Years Ended  December  31,
        2000, 2001 and 2002

        Consolidated  Statements  of  Shareholders'  Equity - Fiscal Years Ended
        December 31, 2000, 2001 and 2002

        Consolidated  Statements of Cash Flows - Fiscal Years Ended December 31,
        2000, 2001 and 2002

        Notes to Consolidated Financial Statements

   (3)  Exhibit
        Number    Description
        -------   -----------

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

        3.2       By-laws of the Company. (3)

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

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

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

        10.4      2000 Stock Incentive Plan of the Company. (9)

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

        10.19     Third  Amendment and Restated  Credit  Agreement  dated May 2,
                  2002,  among the  Company,  Union  Bank of  California,  N.A.,
                  United  California  Bank, and U.S. Bank National  Association.
                  (10)

        10.20     Option  Agreement  dated July 3, 2002  between the Company and
                  Alliance Atlantis Communications Inc. (11)

        10.21     First  Amendment to Credit  Agreement  dated  October 2, 2002,
                  among the Company, Union Bank of California,  Bank of the West
                  and U.S. National Bank Association. (13)

        10.22     Resignation  and General  Release  Agreement  dated October 2,
                  2002 between R. Luke Stefanko and the Company. (12)

        10.23     Consulting  Agreement  dated  October 2, 2002  between R. Luke
                  Stefanko and the Company. (12)

        10.24     Non-competition  Agreement  dated  October 2, 2002  between R.
                  Luke Stefanko and the Company. (12)

        10.25     Amended and Restated Option  Agreement dated December 30, 2002
                  between the Company and Alliance Atlantis  Communications Inc.
                  (14)

        23.1      Consent of Independent Accountants.

        99.1      Certification  of  Chief  Executive  Officer  Pursuant  to  18
                  U.S.C.ss.  1350,  as Adopted  Pursuant  to Section  906 of the
                  Sarbanes-Oxley Act of 2002.

        99.2      Certification  of  Chief  Financial  Officer  Pursuant  to  18
                  U.S.C.ss.1350,  as  Adopted  Pursuant  to  Section  906 of the
                  Sarbanes-Oxley Act of 2002.

<PAGE>
       -------------------------------------

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

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

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

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

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

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

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

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

        (9)       Filed with the SEC on  September  7, 2001 as an exhibit to the
                  Company's Form S-8 and incorporated herein by reference.

        (10)      Filed  with the  Commission  on May 14,  2002 as an exhibit to
                  Form 10-Q for the period ended March 31, 2002.

        (11)      Filed as an  exhibit to Form 8-K with the  Commission  on July
                  15, 2002.

        (12)      Filed as an exhibit to Form 8-K with the Commission on October
                  7, 2002.

        (13)      Filed with the  Commission  on November 14, 2002 as an exhibit
                  to Form 10-Q for the period ended September 30, 2002.

        (14)      Filed as exhibit to Form 8-K with the Commission on January 8,
                  2003.


   (b)  Reports on 8-K:

        The Company  filed a Form 8-K dated June 12, 2002 related to a change in
        its independent public accountants.

        The  Company  filed  a Form  8-K  dated  July  3,  2002  related  to the
        acquisition of an option to purchase three entities in consideration for
        issuance  of a warrant to the seller to purchase  500,000  shares of the
        Company's common stock.

        The  Company  filed a Form  8-K  dated  July  26,  2002  related  to the
        appointment of new independent public accountants.

        The  Company  filed a Form 8-K  dated  October  2, 2002  related  to the
        resignation of R. Luke Stefanko as President and Chief Executive Officer
        of the  Company  and the  appointment  of Haig S.  Bagerdjian  to  those
        positions.

        The  Company  filed a Form 8-K dated  November  1, 2002  related  to the
        filing of amended Forms 10-Q for 2001 and 2002 and Form 10-K for 2001.

        The  Company  filed a Form 8-K dated  December  30,  2002  related to an
        extension of the period in which the Company could exercise an option to
        purchase three entities.

<PAGE>

                                   SIGNATURES

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

Dated:  March 7, 2003

                                       POINT.360

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


        Pursuant to the  requirements  of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>

<S>                           <C>                                       <C>
 /s/ Haig S. Bagerdjian
 ------------------------
 Haig S. Bagerdjian           Chairman of the Board of Directors        March 7, 2003
                              President and Chief Executive Officer

/s/ Alan R. Steel
-------------------------
Alan R. Steel                 Executive Vice President,
                              Finance and Administration,
                              Chief Financial Officer                   March 3, 2003
                              (Principal Accounting and
                               Financial Officer)

/s/ Robert A. Baker
-------------------------
Robert A. Baker               Director                                 February 20, 2003

/s/ Greggory J. Hutchins
-------------------------
Greggory J. Hutchins          Director                                 February 20, 2003

/s/ Sam P. Bell
-------------------------
Sam P. Bell                   Director                                 February 20, 2003

</TABLE>
<PAGE>

                                 CERTIFICATIONS

I, Haig S. Bagerdjian, certify that:

   1.   I have reviewed this annual report on Form 10-K of Point.360;

   2.   Based on my  knowledge,  this annual  report does not contain any untrue
        statement of a material fact or omit to state a material fact  necessary
        to make the statements made, in light of the  circumstances  under which
        such  statements  were made, not  misleading  with respect to the period
        covered by this annual report;

   3.   Based on my knowledge,  the financial  statements,  and other  financial
        information  included  in this  annual  report,  fairly  present  in all
        material  respects the financial  condition,  results of operations  and
        cash flows of the  registrant  as of, and for, the periods  presented in
        this annual report;

   4.   The  registrant's  other  certifying  officer and I are  responsible for
        establishing  and  maintaining  disclosure  controls and  procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and
        we have:

        (a)  designed  such  disclosure  controls and  procedures to ensure that
             material  information  relating to the  registrant,  including  its
             consolidated  subsidiaries,  is made  known to us by others  within
             those entities, particularly during the period in which this annual
             report is being prepared;

        (b)  evaluated the effectiveness of the registrant's disclosure controls
             and procedures as of a date within 90 days prior to the filing date
             of this annual report (the "Evaluation Date"); and

        (c)  presented  in  this  annual  report  our   conclusions   about  the
             effectiveness  of the disclosure  controls and procedures  based on
             our evaluation as of the Evaluation Date;

   5.   The registrant's other certifying officer and I have disclosed, based on
        our most recent evaluation,  to the registrant's  auditors and the audit
        committee of the registrant's board of directors:

        (a)  all significant deficiencies in the design or operation of internal
             controls which could adversely affect the  registrant's  ability to
             record,  process,  summarize  and  report  financial  data and have
             identified for the registrant's auditors any material weaknesses in
             internal controls; and

        (b)  any fraud,  whether or not material,  that  involves  management or
             other  employees  who have a significant  role in the  registrant's
             internal controls; and

   6.   The registrant's  other certifying  officer and I have indicated in this
        annual  report  whether  there  were  significant  changes  in  internal
        controls or in other factors that could  significantly  affect  internal
        controls subsequent to the date of our most recent evaluation, including
        any  corrective  actions  with regard to  significant  deficiencies  and
        material weaknesses.



Date:  March 7, 2003                       /s/ Haig S. Bagerdjian
                                           ----------------------
                                           Haig S. Bagerdjian
                                           Chairman of the Board of Directors,
                                           President and Chief Executive Officer

<PAGE>

I, Alan R. Steel, certify that:

   1.   I have reviewed this annual report on Form 10-K of Point.360;

   2.   Based on my  knowledge,  this annual  report does not contain any untrue
        statement of a material fact or omit to state a material fact  necessary
        to make the statements made, in light of the  circumstances  under which
        such  statements  were made, not  misleading  with respect to the period
        covered by this annual report;

   3.   Based on my knowledge,  the financial  statements,  and other  financial
        information  included  in this  annual  report,  fairly  present  in all
        material  respects the financial  condition,  results of operations  and
        cash flows of the  registrant  as of, and for, the periods  presented in
        this annual report;

   4.   The  registrant's  other  certifying  officer and I are  responsible for
        establishing  and  maintaining  disclosure  controls and  procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and
        we have:

        (a)  designed  such  disclosure  controls and  procedures to ensure that
             material  information  relating to the  registrant,  including  its
             consolidated  subsidiaries,  is made  known to us by others  within
             those entities, particularly during the period in which this annual
             report is being prepared;

        (b)  evaluated the effectiveness of the registrant's disclosure controls
             and procedures as of a date within 90 days prior to the filing date
             of this annual report (the "Evaluation Date"); and

        (c)  presented  in  this  annual  report  our   conclusions   about  the
             effectiveness  of the disclosure  controls and procedures  based on
             our evaluation as of the Evaluation Date;

   5.   The registrant's other certifying officer and I have disclosed, based on
        our most recent evaluation,  to the registrant's  auditors and the audit
        committee of the registrant's board of directors:

        (a)  all significant deficiencies in the design or operation of internal
             controls which could adversely affect the  registrant's  ability to
             record,  process,  summarize  and  report  financial  data and have
             identified for the registrant's auditors any material weaknesses in
             internal controls; and

        (b)  any fraud,  whether or not material,  that  involves  management or
             other  employees  who have a significant  role in the  registrant's
             internal controls; and

   6.   The registrant's  other certifying  officer and I have indicated in this
        annual  report  whether  there  were  significant  changes  in  internal
        controls or in other factors that could  significantly  affect  internal
        controls subsequent to the date of our most recent evaluation, including
        any  corrective  actions  with regard to  significant  deficiencies  and
        material weaknesses.



Date:  March 3, 2003                       /s/  Alan R. Steel
                                           ----------------------
                                           Alan R. Steel
                                           Executive Vice President,
                                           Finance and Administration, and
                                           Chief Financial Officer

<PAGE>

                                                                    EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS



We consent to the incorporation by reference in Registration  Statement on Forms
S-8 (Nos.  333-69174 and 333-69168) of Point.360 and  subsidiaries of our report
dated  February  14,  2003,  appearing  in this  Annual  Report  on Form 10-K of
Point.360 and subsidiaries for the year ended December 31, 2002.



Singer Lewak Greenbaum & Goldstein LLP (signed)
February 27, 2003


<PAGE>
                                                                    EXHIBIT 99.1

                            CERTIFICATION PURSUANT TO
                               18 U.S.C. ss. 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection  with the Annual Report of Point.360 ( the "Company") on Form 10-K
for the  period  ended  December  31,  2002,  as filed with the  Securities  and
Exchange  Commission  (the  "Report"),  I, Haig S.  Bagerdjian,  Chief Executive
Officer of the Company,  certify,  pursuant to 18 U.S.C.  ss.  1350,  as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:


   (1)  The Report fully complies with the  requirements of Section 13 (a) or 15
        (d) of the Securities Exchange Act of 1934; and

   (2)  The information contained in the Report fairly presents, in all material
        respects,  the  financial  condition  and results of  operations  of the
        Company.



/s/  Haig S. Bagerdjian
-----------------------
Haig S. Bagerdjian
Chief Executive Officer
March 7, 2003

<PAGE>
                                                                    EXHIBIT 99.2

                            CERTIFICATION PURSUANT TO
                               18 U.S.C. ss. 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection  with the Annual Report of Point.360 ( the "Company") on Form 10-K
for the  period  ended  December  31,  2002,  as filed with the  Securities  and
Exchange Commission (the "Report"), I, Alan R. Steel, Chief Financial Officer of
the Company,  certify,  pursuant to 18 U.S.C.  ss. 1350, as adopted  pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:


   (1)  The Report fully complies with the  requirements of Section 13 (a) or 15
        (d) of the Securities Exchange Act of 1934; and

   (2)  The information contained in the Report fairly presents, in all material
        respects,  the  financial  condition  and results of  operations  of the
        Company.




/s/  Alan R. Steel
-----------------------
Alan R. Steel
Chief Financial Officer
March 3, 2003