Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549



FORM 10-K



ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For The Fiscal Year Ended December 31, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period
From                                    to    
                                .


COMMISSION FILE NUMBER: 0-27644



DG FastChannel, Inc.(Exact Name of Registrant as Specified in its Charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

94-3140772(I.R.S. Employer
Identification Number)750 West John Carpenter Freeway, Suite 700
Irving, Texas 75039(Address Of Principal Executive Offices, Including Zip Code)(972) 581-2000(Registrant's Telephone Number, Including Area Code)


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

Title of Each Class

Name of each exchange on which registeredCommon Stock, $0.001 par value

Nasdaq Global Market


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



Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes o    No ý

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 and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The aggregate market value of the Common Stock held by non-affiliates of the Registrant, computed by reference to the closing price and shares
outstanding, was approximately $227 million as of December 31, 2008, and approximately $262 million as of June 30, 2008, the last business day of the Registrant's most recently completed
second quarter. Shares of Common Stock held by each officer and director of the Registrant and by each person who may be deemed to be an affiliate have been excluded. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

As
of March 5, 2009 the Registrant had 20,878,655 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None



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DG FASTCHANNEL, INC.

The discussion in this Report contains forward-looking statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipates," "believes," "plans," "expects," "future," "intends," "will" and similar expressions are used to identify forward-looking statements. All
forward-looking statements included in this document are based on information available to the Company on the date hereof, and we assume no obligation to update any such forward-looking statements,
except as required by law. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited
to, those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" as well as those discussed elsewhere in this Report, and the risks
discussed in the Company's other filings with the United States Securities and Exchange Commission.



PART IITEM 1.

BUSINESS


4General


4Available Information


5Industry Background


6Services


7Markets and Customers


11Sales, Marketing and Customer Service


12Competition


13Intellectual Property and Proprietary Rights


14Employees


14ITEM 1A.

RISK FACTORS


14ITEM 1B.

UNRESOLVED STAFF COMMENTS


31ITEM 2.

PROPERTIES


31ITEM 3.

LEGAL PROCEEDINGS


31ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


31PART IIITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


32ITEM 6.

SELECTED FINANCIAL DATA


34ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


36Introduction


36Cautionary Note Regarding Forward-Looking Statements


37Overview


37Results of Operations


40Financial Condition


44Liquidity and Capital Resources


45Critical Accounting Policies


48New Accounting Pronouncements


50Contractual Payment Obligations


51Off-Balance Sheet Arrangements


51ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK


51


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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


52ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


52ITEM 9A.

CONTROLS AND PROCEDURES


52ITEM 9B.

OTHER INFORMATION


55PART IIIITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


55ITEM 11.

EXECUTIVE COMPENSATION


61ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


82ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


84ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES


85PART IVITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


85SIGNATURES


86


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DG FASTCHANNEL, INC.

PART I

ITEM 1.    BUSINESS

General

DG FastChannel, Inc. (the "Company" or "DGF") is a leading provider of digital technology services that enable the electronic
delivery of advertisements, syndicated programs, and video news releases to traditional broadcasters, online publishers and other media outlets. We operate three nationwide digital networks out of our
Network Operation Centers, located in Irving, Texas ("Irving NOC"), Atlanta, Georgia ("Atlanta NOC") and New Jersey ("New Jersey NOC") which link more than 5,000 advertisers, advertising agencies and
content owners with more than 21,000 radio, television, cable, network and print publishing destinations and over 5,000 online publishers electronically throughout the United States, Canada, and
Europe. Through our NOCs, we deliver video, audio, image and data content that comprise transactions among advertisers, content owners, and various media outlets, including those in the broadcast
industries. We offer a variety of other ancillary products that serve the advertising industry.

For
the year ended December 31, 2008, we provided delivery services for 22 of the top 25 advertisers, as ranked by Ad Age. The majority of our revenue is derived from multiple
services relating to electronic delivery of video and audio advertising content. Our primary source of revenue is the delivery of television and radio advertisements, or spots, which is typically
performed digitally but sometimes physically. We offer a digital alternative to dub and ship delivery of spot advertising. We generally bill our services on a per transaction basis.

Our
services include online creative research, media production and duplication, distribution, management of existing advertisements and broadcast verification. This suite of innovative
services addresses the needs of our customers at multiple stages along the value chain of advertisement creation and delivery in a cost-effective manner and helps simplify the overall
process of content delivery. Information regarding the Company's business segments is presented in the Consolidated Financial Statements filed herewith.

The
Company was organized in 1991 and is incorporated in Delaware. Over the past five years, we have completed several strategic transactions including the
following:



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Available Information

We file annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934 (the "Exchange Act").

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The
public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains reports, proxy and information
statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

We
also make available free of charge through our website (www.dgfastchannel.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.

Industry Background

There are approximately 11,000 commercial radio and 4,500 television, cable and network broadcast stations in the United States. These
stations primarily generate revenue by selling airtime to advertisers. In addition, there are approximately 8,100 daily and weekly newspapers in circulation in the United States. Newspapers also
primarily generate revenues from advertising. Advertising is most frequently produced under the direction of advertising agencies for large national or regional advertisers or by station personnel for
local advertisers. Television advertising is characterized as network or spot, depending on how it is purchased and distributed. Network advertising typically is delivered to stations as part of a
network feed (bundled with network programming), while spot advertising is delivered to stations independently of other programming content.

Advertising
agencies and advertisers use third-party service companies to ensure their media assets are delivered to multiple broadcast destinations on a time-sensitive
basis. Certain advertising campaigns can be extremely complex and include dozens of commercial television and radio spots which may require delivery to hundreds of discrete media locations across the
United States. Additionally, advertising agencies and advertisers require certain quality control standards, web-based order management capabilities and certain tagging/editing functions
by the third party service provider. Finally, these service providers must offer immediate confirmation of the delivery of the commercial content to the media outlet and detailed billing services.

Spot
advertising airtime is typically purchased by advertising agencies or media buying firms on behalf of advertisers. Advertisers, their agencies and media buying firms select
individual stations or groups of stations to support marketing objectives, which usually are based on the stations' geographic and demographic characteristics. The actual commercials or spots are
typically produced at a digital production studio and recorded on digital tape. Variations of the spot intended for specific demographic groups are also produced at this time. The spots undergo a
review of quality and content before being cleared for distribution to broadcast stations, and can be delivered physically, via the traditional dub and ship method, or electronically.

While
many radio and television broadcasters now embrace digital technology for much of their production processes and in-station media management, current methods for the
distribution of audio and video advertising content still include manual duplication and physical delivery of analog tapes. Many companies, commonly known as dub and ship houses, duplicate audio and
video tapes, assemble them according to agency specified bills of material and package them for air express delivery. Advertisers and their agencies can choose to have advertising content delivered
electronically via the Internet and satellite transmissions. Electronic transmission has several advantages over dub and ship delivery, including: cost, transmission time, labor, materials, quality of
content and control of distribution. The amount of advertising content transmitted electronically has steadily increased, and we estimate that approximately 95% of radio spots and approximately 50% of
video spots are now electronically distributed. We believe that these figures will continue to grow as advertisers continue to take advantage of the benefits of electronic distribution.

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Radio
and television continue to attract significant portions of the advertising dollars spent by advertisers and advertising agencies and represent powerful mediums for
cost-effectively reaching large, targeted audiences and offer the accountability and returns that advertisers increasingly demand.

The
unique capabilities of online advertising, the growing number of Internet users and increased Internet traffic have contributed to rapid growth in online advertising spending over
the last several
years. According to eMarketer, an advertising trade journal, online advertising represented 11.3% of the total United States advertising market in 2008. International Data Corporation predicts United
States online advertising spending will increase to 14.6% by 2011 while worldwide online advertising spending will increase to 13.6% of the total worldwide advertising market by 2011. Additionally,
according to the Kelsey Group, global online advertising expenditures are projected to grow from $45 billion in 2007 to $147 billion in 2012, representing a compound annual growth rate
of 27%. eMarketer predicts online advertising expenditures in the United States are to grow from $23 billion in 2008 to $42 billion in 2013, representing a compound annual growth rate of
17%, while worldwide online advertising expenditures are projected to grow at a compound annual growth rate of 16.7% through 2012.

While
historically a large component of online advertising market growth was driven by Internet-centric publishers, retailers and direct marketing providers, traditional media
advertisers, including consumer packaged goods and brand advertisers, are increasingly recognizing the significance and unique capabilities of the Internet and are allocating more of their marketing
budgets to online advertising. The growth in online advertising is also being driven by strong increases in online brand marketing through display ads, rich media and video ads. While the majority of
online advertising spending is still allocated to direct response campaigns, including paid search ads, classifieds, e-mail advertising and lead generation or referrals, advertisers are
increasingly recognizing the potential offered by the unique branding capabilities of the Internet. As a result, many advertisers seek to utilize innovative media formats to create highly engaging
brand experiences for their online customers. According to eMarketer, online video advertising and rich media advertising are expected to be the fastest growing advertising formats in the United
States and spending is projected to increase from $0.5 billion and $1.8 billion in 2008 to over $4.5 billion and $3.3 billion, respectively, in 2013, representing a
compound annual growth rate of 51% and 12%, respectively.

Emerging
media formats and channels, such as mobile devices, game consoles and on-demand television, provide significant opportunities for advertisers to expand audience
reach and strengthen their relationship with their target audience in innovative ways. Forrester Research projects United States advertising spending in emerging media channels to grow from
$1.0 billion in 2007 to $10.6 billion in 2012, representing a compound annual growth rate of 59%.

Services

Through our suite of innovative services, we seek to address the needs of advertisers at various stages along the value chain of
advertisement creation and delivery. These include idea generation, production and duplication, content distribution, media asset management and broadcast verification products. By offering services
that encompass multiple stages of content creation and delivery, we are able to simplify the workflow process for advertisers. We believe our solutions offer advertisers tools essential to the
creation and strategic distribution of advertisements in a cost-effective manner. Our services address our clients' needs for efficient, accurate and
reliable solutions for the development and delivery of advertising content across a wide spectrum of media, and include the following offerings:

Advertising Distribution.We provide primarily electronic and, to a lesser extent, physical distribution of broadcast advertising
content to
broadcast stations throughout the United States and Canada. We operate a digital network, currently connecting more than 5,000 advertisers and advertising agencies with more than 4,000 television,
cable and network broadcast destinations, approximately 10,000 radio stations, and over 6,500 print publishing destinations across the United States and Canada.

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Our
network enables the rapid, cost-effective and reliable electronic transmission of audio and video spots and other content and provides a high level of quality, accountability and
flexibility to both advertisers and broadcasters. Our technologically advanced digital network delivers near master quality audio or video to broadcasters, which is equal or superior to the content
currently delivered on dub and ship analog tapes. Our network routes transmissions to stations through an automated online transaction and delivery system, enabling delivery in as little as one hour
after an order is received.



Video
and audio transmissions are received at designated television and radio stations on DG FastChannel Spot Boxes, Client Workstations and Digital Media Managers. The servers enable
stations to receive and play back material delivered through our digital distribution network. The units are owned by us and typically installed in the master control or production area of the
stations. Upon receipt, station personnel generally review the content and transfer the spot to a standardized internal station and format for subsequent broadcast. Through our Irving NOC, we monitor
the spots stored in each of our servers and ensure that space is always available for new transmissions. We can quickly transmit video or audio at the request of a station or in response to a customer
who wishes to alter an existing order, allowing us to effectively adapt to customer needs and to distribute to hundreds of locations in as little as one hour, which would be impossible for traditional
physical dub and ship houses.

We
offer various levels of digital video and audio distribution services to advertisers distributing content to broadcasters. These include the following: DGFC Priority, a service which
guarantees arrival of the first spot on an order within one hour; DGFC Express, which guarantees arrival within four hours; DGFC Standard, which guarantees arrival by noon the next day; and DGFC
Economy, which guarantees arrival by noon on the second day. We also offer a set of premium services enabling advertisers to distribute audio or video spots provided after normal business hours. We
generally charge a fee per delivery for our advertising distribution service, which varies based on the service level ordered by the customer.

In
addition to our standard services, we have developed unique products to service customers with particular time-sensitive delivery needs, including the delivery of
political advertising during election campaigns, providing a rapid response mechanism for candidates and issue groups.

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Online Advertising Solutions.We offer an online advertising campaign management and deployment product known as the "Unicast
Advertising Platform"
("UAP"). UAP permits publishers, advertisers, and their agencies to manage the complex process of deploying online advertising campaigns. This process includes creating the advertising assets,
selecting the sites on which the advertisements will be
deployed, setting the campaign parameters (ad rotation, the frequency with which an ad may be deployed, and others), deployment, and tracking of campaign results.

The
UAP integrates creative assembly with campaign management and detailed performance analysis. In addition, UAP has the broad capabilities to deliver multiple ad formats and media
types, including several different video formats, 3D content, and all major "rich media" formats.

UAP
is "technology agnostic", meaning it delivers advertisements that utilize all major technologies and formats, not just those exploiting the special capabilities of the Viewpoint
Media Player ("VMP"). Importantly, however, video and other "rich media" ads that typically involve large file sizes and, therefore, higher bandwidth costs, can be deployed at significantly lower
rates when utilizing the Unicast format by taking advantage of the VMP residing on the Internet consumer's computer.

UAP
offers a suite of products including Unicast Transitional (full screen and partial screen video and interactive ads that are shown to consumers as they navigate between pages),
Unicast In-Page (video and interactive ads embedded within web pages including standard and expandable banners, pre-roll and post-roll ads), and Unicast
Over-the-Page (video and interactive ads that "float"/play over the top of an Internet site page).

We
offer these advertising formats delivered through UAP to customers, charging them in the standard manner consistent with industry practices with fees based on the number of times an
advertisement is deployed (i.e., on a "CPM", or cost per thousand impression basis). CPM fees vary by type of advertisement, with static ads realizing
relatively low fees and rich media adsparticularly video adsrealizing higher fees. Rates charged for advertising ranged from $0.02 to $5.25 per thousand impressions in 2008.

Long-form Programming Distribution.The Company also delivers its digital video broadcast services through our Digital Media
Gateway® ("DMG") owned and operated by Pathfire, our wholly-owned subsidiary. The DMG consists of hardware and a suite of software applications that enable content creators and
distributors to ingest, digitize, transport, store and prepare digital video media assets for broadcast. The DMG incorporates a sophisticated IP multicast network of satellites and can deliver all
forms of video content including news, Video News Releases ("VNR"s), syndicated programming, infomercials, and Electronic Press Kits ("EPK"s). Another feature of the DMG is a terrestrial-based
return-path network, which automatically tracks and notifies the Atlanta NOC of transmission failures, system health problems and content usage data. When notified of a transmission
failure, the system automatically resends lost data packets using the minimum bandwidth necessary to complete the transmission. The DMG also uses the terrestrial network to send notification that the
complete digital video transmission has been received in the DMG server at the broadcast television station. This system is fully automated and involves only minimal intervention by station
technicians and customer support staff.

The
DMG platform consists of both hardware and software applications. These applications are responsible for three main tasks: managing the flow of digital video content from its source
to Pathfire-enabled digital uplinks; managing the transmission of digital video content using Pathfire's IP multicast store-and-forward software algorithms from the digital
uplink system to DMG caching servers at the stations; and managing the workflows for video assets from the DMG caching servers through various station systems.

The
first group of applications, Pathfire DMG submission and associated tools, works with both analog and digital video. If post-production output is on videotape, Pathfire's
software digitizes or encodes the video into the appropriate digital format and delivers it to the uplink system. If

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post-production
output is in digital video format, the application checks the digital formatting, makes any necessary changes, extracts the video attributes as metadata and pulls the
digital files into the uplink transmission system.

The
second group of applications stores the content in the uplink system, prepares it for the satellite uplink by managing the transmission scheduling based on bandwidth and Service
Level Agreement ("SLA") requirements and then sends the video through the satellite network to the DMG server at the receiving station. The distribution system is capable of managing transmission over
the multicast satellite network and the Internet simultaneously. The distribution system repairs any lost data either by employing a packet-based algorithm or by retransmitting missing data based on
an intelligent retry scheme built into the multicast protocol, or a combination of both. The receiving system sends confirmation that the digital files have been received through the Internet-based
return path network to the Atlanta NOC.

The
third group of applications provides asset management functionality and manages the flow of content once it is received at the station by the DMG server. These applications provide
stations with metadata, which helps the stations organize and manage the video for preview and for moving high resolution content from the DMG server through the station's infrastructure to the
station's on-air system. Pathfire's asset management products in the station allow content to be moved as analog video or as a digital file. Interfaces have also been designed to deliver
content and frame accurate metadata to the station's edit systems, newsroom computer systems, traffic systems, automation systems and play-to-air servers.

The
Pathfire DMG platform includes several content-specific solutions such as DMG Syndication, DMG News and DMG EPKs.

For
syndicated television shows and movies, Pathfire created Pathfire DMG Syndication. The application suite enables syndicators to deliver, track, manage and verify both standard
definition and
high definition programming to broadcast stations more efficiently. By automating processes, providing tracking information and greatly reducing missed feeds, Pathfire Syndication facilitates content
delivery between syndicators and stations. Automated content delivery to broadcast stations through the Pathfire network minimizes the need to schedule or monitor satellite feeds and eliminates the
need for tape. Broadcast-quality content arrives on Pathfire servers at stations, where users can access and manage content and metadata through the DMG desktop application. Pathfire DMG Syndication
also integrates with existing downstream gear and helps with automation tasks at the station reducing manual labor costs. Pathfire DMG Syndication delivers frame-accurate timing sheets and desktop
control for program directors and traffic managers, significantly reducing show preparation labor because station personnel no longer have to manually time syndicated show segments.

Online Creative Research.We own and maintain an online database of content and credits of U.S. television commercials for the
advertising and TV
commercial production industry. We believe that this is the most comprehensive online television commercial information service available to advertising agencies and production companies. Our
SourceEcreative (formerly known as "Source TV") database includes information relating to commercials, individuals and companies. Customers can use our robust search engine specifically designed for
the advertising industry. SourceEcreative allows users to find out which director, post house, composer or other production resource worked on specific spots, enabling advertising agencies to identify
creative and production resources, and to accelerate their creative development process. Information can be provided via fax, phone, e-mail or over the Internet. SourceEcreative services
most of the major U.S. advertising agencies and production companies, as well as television networks, programs and industry associations.

Creative and Digital Marketing SolutionsIn 2008, as part of our Enliven acquisition, we acquired Springbox, Ltd. ("Springbox") an
Austin-based interactive marketing firm with expertise in digital web marketing and creative solutions, and provides fee-based professional services for creating content and

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implementing
visualization solutions. Springbox provides web based marketing solutions for numerous global clients. Springbox was acquired to align with our strategy to enhance our web based product
offerings, in order to meet the escalating demand for creative digital and Internet solutions from our clients. Springbox provides creative solutions that can be leveraged across the UAP and
integrated with our premium rich media ad delivery capabilities. This combined offering is the next step in the evolution of our business, and will better position us to take advantage of the
tremendous market opportunity for integrated online marketing solutions.

The
Springbox division plays an integral role in our overall strategy. Springbox allows us to provide full service interactive marketing solutions for our clients. Aside from generating
significant revenues, the division can also increase the number of websites that use the Enliven platform and distribute VMP's to their customers. Additionally the division supports the development of
advanced advertising formats
and advertising content making use of UAP more appealing to marketers. Finally these services keep us on the cutting-edge of the industry, giving us hands-on experience with
the design, creation and deployment of rich media websites.

Media Production and Duplication.Our production and duplication capabilities allow us to provide customers with ancillary services,
which are
offered in addition to our primary distribution service. Our services include storage of client masters or storyboards, editing of materials, tagging content, dubbing, video duplication and copying of
media onto various physical multimedia formats, such as CD, DVD or tape. We believe these add-on service offerings allow us to better service our customers by reducing the number of
vendors necessary to create and distribute advertisements.

Media Asset Management.Our digital media asset management solution simplifies spot management, access, storage and collaboration for
our customers.
Our media asset management solution is integrated with our distribution system, enabling automatic archiving of trafficked spots, online search, send-for-review and
review-and-approval capabilities, automated digital storyboarding, streaming previews, a comprehensive order and market data history for each spot, script attachment capability
and online search, sort, retrieve and hardcopy fulfillment.

Broadcast Business Intelligence Products.Our broadcast verification solution, through various alternative detection networks, allows
our customers
to monitor and confirm accurate airplay of their broadcast commercials. This service offering relies on remotely controlled tuners and servers operated by others in secure locations to monitor the
stations in each market.

Markets and Customers

A large portion of our revenue is derived from the delivery of spot television and radio advertising to broadcast stations, cable
systems and networks. We derive revenue from brand advertisers and advertising agencies, and from our marketing partners, which are typically dub and ship houses that have signed agreements with us to
consolidate and forward the deliveries of their advertising agency customers to broadcast stations, cable systems and networks via our electronic delivery service in exchange for price discounts from
us. The relative volumes of advertisements distributed by us are representative of the five leading national advertising categories of automotive, retail, business and consumer services, food and
related products and entertainment. The volume of
advertising from these segments is subject to seasonal and cyclical variations. No single customer accounts for more than 10% of our annual revenue.

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Sales, Marketing and Customer Service

Brand Strategy.Our brand strategy is to position our services as the standard transaction method for the radio, television, cable, and
network
broadcast industries. We focus our marketing messages and programs at multiple segments within the advertising and broadcast industries. Each of the segments interacts with us for a different reason.
Agencies purchase services from us on behalf of their advertisers. Production studios facilitate the transmission of audio and video to either the Irving or Atlanta NOCs. Production studios and dub
and ship houses resell delivery services to agencies. Stations join the network to receive the content from their customers: the agencies and advertisers.

Internet/E-Commerce Strategy.The SpotCentral online order entry and management
system adds functionality to our online management tool that opens up our network so customers can see the status of their media asset as it moves from endpoint to endpointfrom the time
it leaves their possession until it arrives at the media outlet. With new system architecture and user-friendly applications, SpotCentral provides advertisers and agencies with an
intuitive web portal to visualize and manage the distribution of their valuable advertising content. Users can upload spots, choose or create new destination groups, attach traffic instructions, view
invoices, distribute media electronically to thousands of destinations across our massive digital network and confirm delivery at the station level through our powerful new media server, the DG
FastChannel Spot Box. Users have immediate access to key statistics, order status and other data, while workflow automation tools help user groups save routing instructions and destination paths for
repeat orders. Users can search billing history and view invoices from any web-connected location. Customized search features let users research order history by brand, service level or
transmission date. In addition, spots can be previewed at any time of the day or point in the order process. This design introduces new levels of simplicity, transparency, accountability and customer
satisfaction to the spot distribution process.

Sales.We employ a direct sales force that calls on various departments at advertising agencies to communicate the capabilities and
comparative
advantages of our electronic distribution system, ad serving platform, and related products and services. In addition, our sales force calls on corporate advertisers who are in a position to either
direct or influence agencies in directing deliveries to us. A separate staff sells to and services audio and video dealers, who resell our distribution services. We currently have regional sales
offices in New York, Los Angeles and Chicago. Our sales force includes regional sales, inside sales, and telemarketing personnel.

Marketing.Our marketing programs are directed to stimulate demand with an emphasis on popularizing the benefits of digital delivery,
including fast
turnaround (same day services), increased flexibility, higher quality, and greater reliability and accountability. These marketing programs include direct mail and telemarketing campaigns,
newsletters, collateral material (including brochures, data sheets, etc.), application stories, and corporate briefings in major United States cities. We also engage in public relations activities
including trade show participation, the stimulation of articles in the trade and business press, press tours and advertisements in advertising and broadcast oriented trade publications.

We
market to broadcast stations to arrange for the placement of our Digital Media Managers, and DG FastChannel Spot Boxes for the receipt of audio and video advertisements.

Customer Service.Our approach to customer service is based on a model designed to provide focused support from key market centered
offices, located
in Los Angeles, Dallas, Chicago, Detroit, New York and San Francisco. Clients work with specific, assigned account coordinators to place production service and distribution orders. National
distribution orders are electronically routed to the NOCs for electronic distribution or, for off-line destinations, to our national duplication center in Louisville, Kentucky. Our
distributed service approach provides direct support in key market cities enabling us to develop closer relationships with clients as well as the ability to support client needs for

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local
production services. We also maintain a customer service team dedicated to supporting the needs of radio, television, and network stations. This support is available 7 days a week,
24 hours a day, to respond to station requests for information, traffic instructions or additional media. Providing direct support alleviates the need for client traffic departments to deal
with individual stations or the challenges of staffing for off-hours support. Our customer service operation centers are linked to our order management and media storage systems, and
national distribution network. These resources enable us to manage the distribution of client orders to the fulfillment location best suited to meet critical customer requirements as well as providing
order status and fulfillment confirmation. This distribution model also provides us with significant redundancy and re-route capability, enabling us to meet customer needs when weather or
other conditions prevent deliveries using traditional courier services.

Competition

Competition within the markets for media distribution is intense. Numerous companies already distribute video and other content to a
variety of destinations. Companies such as Google TV Ads, Comcast ADN and TelAmerica deliver television advertising spots to satellite TV systems and/or cable head ends. Microsoft, Google, AOL, and
other large media companies have acquired or developed software platforms and technologies to participate in the media distribution marketplace. At the same time, many companies, including Akamai,
Limelight Networks, Eyeblaster, and Eyewonder are implementing technologies to distribute video to the established traditional channels and new media outlets. Numerous companies are offering
technologies to facilitate the distribution of video through a variety of means.

We
compete with other companies that are focusing or may in the future focus significant resources on developing and marketing products and services that will compete with ours. We
believe that our ability to compete successfully depends on a number of factors, both within and outside of our control, including: (1) the price, quality and performance of our products and
those of our competitors; (2) the timing and success of new product introductions; (3) the emergence of new technologies; (4) the number
and nature of our competitors in a given market; (5) the protection of intellectual property rights; and (6) general market and economic conditions.

We
also compete with a variety of dub and ship houses and production studios that have traditionally distributed taped advertising spots via physical delivery. As local distributors,
these entities have long-standing ties with advertising agencies that are often difficult for us to replace. In addition, these dub and ship houses and production studios often provide an
array of ancillary video services, including archival storage and retrieval, closed captioning and format conversions, enabling them to deliver to their advertiser and agency customers a full range of
customizable, media post-production, preparation, distribution and trafficking services. We plan to continue pursuing potential dub and ship house partners where such partnerships make
strategic sense.

In
the video marketplace, we compete with dub and ship houses across the country but additionally with one or more satellite-based video distribution networks. We also anticipate that
certain common and/or value-added telecommunications carriers may develop and deploy high bandwidth network services targeted at the advertising and broadcast industries, although we believe that no
such carriers have yet begun spot distribution.

We
expect competition to continue to intensify as existing and new competitors begin to offer products, services, or systems that compete with our products. Our current or future
competitors, many of whom, individually or together with their affiliates, have substantially greater financial resources, research, and development resources, distribution, marketing, and other
capabilities than us, may apply these resources and capabilities to compete successfully against our products and service. A number of the markets in which we sell our products and services are also
served by technologies that currently

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are
more widely accepted than ours. Although we believe that our products and services are less expensive to use and more functional than competing products and services that rely on other
technologies, it is uncertain whether our potential customers will be willing to make the initial capital investment that may be necessary to convert to our products and services. The success of our
systems against these competing technologies depends in part upon whether our systems can offer significant improvements in productivity and sound and video quality in a cost-effective
manner. It is uncertain whether our competitors will be able to develop systems compatible with, or that are alternatives to, our proprietary technology or systems. It is also not certain that we will
be able to compete successfully against current or future competitors or that competitive pressures faced by us will not materially adversely affect our business, operating results, and financial
condition.

Competitors
of our UAP product area include full service advertising delivery companies like aQuantive, DoubleClick, and 24/7 RealMedia. Additionally, certain companies specialize
in delivering rich media and video advertisements like Pointroll, Eyewonder and Eyeblaster. Competitors in the services sector include advertising agencies, online agencies and independent creative
talent that can build content in the Enliven format or in other rich media formats.

Competitors
in the search solutions business include Google Inc., Yahoo! (which offers its own search toolbar in addition to supplying search results for use with the Viewpoint
Toolbar, Fotomat Toolbars, and other custom toolbars that we create), MSN, AskJeeves, Inc. (a subsidiary of IAC), MIVA and InfoSpace. Although we compete with some of the search engine firms in
the toolbar space, we are not a search engine; but rather we have a marketing agreement with Yahoo! in distributing their search results.

Intellectual Property and Proprietary Rights

We primarily rely upon a combination of copyright, trademark and trade secret laws and license agreements to establish and protect
proprietary rights in our technologies. We currently have 53 patents issued with expiration dates ranging from March 2016 to May 2026 and 23 other patent applications pending. We also have 70
trademark registrations, 25 trademark applications and approximately 30 copyright registrations.

Employees

As of December 31, 2008, we had a total of 770 employees, including 154 in research and development, 46 in sales and marketing,
485 in operations, and 85 in finance and administration; 758 of these employees are located in the United States and 12 are located in the United Kingdom. Our employees are not represented by a
collective bargaining agreement and we have not experienced a work stoppage. We consider our relations with our employees to be good.

Our
business and prospects depend in significant part upon the continued service of our key management, sales and marketing and administrative personnel. The loss of key management or
technical personnel could materially adversely affect our operating results and financial condition. We believe that our prospects depend in large part upon our ability to attract and retain highly
skilled managerial, sales and marketing and administrative personnel. Competition for such personnel is intense, and we may not be successful in attracting and retaining such personnel. Failure to
attract and retain key personnel could have a material adverse effect on our operating results and financial condition.

ITEM 1A.    RISK FACTORS

In evaluating an investment in our Company, the following risk factors should be considered.

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The media distribution products and services industry is divided into several distinct markets, some of which are relatively mature while others are growing rapidly. If the
mature markets begin to decline at a time when the developing markets fail to grow as anticipated, it will be increasingly difficult to maintain profitability.

To date, our design and marketing efforts for our products and services have involved the identification and characterization of the
broadcast market segments within the media distribution products and services industry that will be the most receptive to our products and services. We may not have correctly identified and
characterized such markets and our planned products and services may not address the needs of those markets. Furthermore, our current technologies may not be suitable for specific applications within
a particular market and further design modifications, beyond anticipated changes to accommodate different markets, may be necessary.

While
the electronic distribution of media has been available for several years and growth of this market is modest, many of the products and services now on the market are relatively
new. It is difficult to predict the rate at which the market for these new products and services will grow, if at all. Even if the market does grow, it will be necessary to quickly conform our
products and services to customer needs and emerging industry standards in order to be a successful participant in those markets, such as the market for HD spots. If the market fails to grow, or grows
more slowly than anticipated, it will be difficult for any market participant to succeed and it will be increasingly difficult for us to maintain profitability.

To
sustain profitability and growth, we must expand our product and service offerings beyond the broadcast markets to include additional market segments within the media distribution
products and services industry. Potential new applications for our existing products in new markets include distance learning and training, finance and retail. While our products and services could be
among the first commercial products that may be able to serve the convergence of several industry segments, including digital networking, telecommunications, compression products and Internet
services, our products and
services may not be accepted by that market. In addition, it is possible that:



Because
the convergence of digital networking, telecommunications, compression products and Internet services is new and evolving, the growth rate, if any, and the size of the potential
market for our products cannot be predicted. If markets for these products fail to develop, develop more slowly than expected or become served by numerous competitors, or if our products do not
achieve the anticipated level of market acceptance, our future growth could be jeopardized. Broad adoption of our products and services will require us to overcome significant market development
hurdles, many of which we cannot predict.

The industry is in a state of rapid technological change and we may not be able to keep up with that pace.

The advertisement distribution and asset management industry is characterized by extremely rapid technological change, frequent new
products, service introductions and evolving industry standards. The introduction of products with new technologies and the emergence of new industry standards can render existing products obsolete
and unmarketable. Our future success will depend upon our ability to enhance existing products and services, develop and introduce new products and services that keep pace with technological
developments and emerging industry standards and address the increasingly sophisticated needs of our customers, including the need for HD spots. We may not succeed in developing and marketing product
enhancements or new products and services that respond to

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technological
change or emerging industry standards. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these products and services.
Our products and services may not adequately meet the requirements of the marketplace and achieve market acceptance. If we cannot, for technological or other reasons, develop and introduce products
and services in a timely manner in response to changing market conditions, industry standards or other customer requirements, particularly if we have pre-announced the product and service
releases, our business, financial condition, results of operations and cash flows will be harmed.

The marketing and sale of our products and services involve lengthy sales cycles. This makes business forecasting extremely difficult and can lead to significant
fluctuations in quarterly results.

Due to the complexity and substantial cost associated with providing integrated product and services to provide audio, video, data and
other information across a variety of media and platforms, licensing and selling products and services to our potential customers typically involves a significant technical evaluation. In addition,
there are frequently delays associated with educating customers as to the productive applications of our products and services, complying with customers' internal procedures for approving large
expenditures and evaluating and accepting new technologies that affect key operations. In addition, certain customers have even longer purchasing cycles that can greatly extend the amount of time it
takes to place our products and services with these customers. Because of the lengthy sales cycle and the large size of our potential customers' average orders, if revenues projected from a specific
potential customer for a particular quarter are not realized in that quarter, product revenues and operating results for that quarter could be harmed. Revenues will also vary significantly as a result
of the timing of product and service purchases and introductions, fluctuations in the rate of development of new markets and new applications, the degree of market acceptance of new and enhanced
versions of our products and services, and the level of use of satellite networking and other transmission systems. In addition, increased competition and the general strength of domestic and
international economic conditions also impact revenues.

Because
expense levels such as personnel and facilities costs are based, in part, on expectations of future revenue levels, if revenue levels are below expectations, our business,
financial condition, results of operations and cash flows will be harmed.

We may be adversely affected by cyclicality or an extended downturn in the United States or worldwide economy in or related to the industries we serve.

Our revenues are generated primarily from providing online campaign management solutions and services to advertising agencies and
advertisers across digital media channels and a variety of formats. Demand for these services tends to be tied to economic cycles, reflecting overall economic conditions as well as budgeting and
buying patterns. For example, in 1999, advertisers spent heavily on Internet advertising, which was followed by a downturn in advertising spending on the Internet in 2002. In addition, during a period
of economic weakness in 2001, advertising spending online decreased at a faster rate than overall ad spending, although we believe this was because many of the companies advertising online were
Internet companies experiencing significant financial distress. Following the recent negative developments in the world economy, several agency and analyst organizations now predict that the growth in
online advertising will be slower than previously expected. We cannot assure you that advertising budgets and expenditures by advertising agencies and advertisers will not decline in any given period
or that advertising spending will not be diverted to more traditional media or other online marketing products and services, which would lead to a decline in the demand for our campaign management
solutions and services. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective customers' spending priorities. As a result, our revenues may
not increase or may decline significantly in any given period.

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Seasonality in buying patterns also makes forecasting difficult and can result in widely fluctuating quarterly results.

On a historical basis, the industry has experienced lower sales for services in the first quarter, which is somewhat offset with higher
sales in the fourth quarter due to increased customer advertising volumes for the holiday selling season. In addition, product and service revenues are influenced by political advertising, which
generally occurs every two years. Nevertheless, in any single period, product and service revenues and delivery costs are subject to variation based on changes in the volume and mix of deliveries
performed during such period. In addition, we have historically operated with little or no backlog. The absence of backlog and fluctuations in revenues and costs due to seasonality increases the
difficulty of predicting our operating results.

The markets in which we operate are highly competitive, and competition may increase further as new participants enter the market and more established companies with greater
resources seek to expand their market share.

Competition within the markets for media distribution is intense. Numerous companies already distribute video and other content to a
variety of destinations. Companies such as Google TV Ads, Comcast ADN and TelAmerica deliver television advertising spots to satellite TV systems and/or cable head ends. Recently, Microsoft, Google,
AOL, and other large media companies have acquired or developed software platforms and technologies to participate in the media distribution marketplace. At the same time, many companies, including
Akamai, Limelight Networks, Eyeblaster, and Eyewonder are implementing technologies to distribute video to the established traditional channels and new media outlets. Numerous companies are offering
technologies to facilitate the distribution of video through a variety of means.

We
face formidable competition in every aspect of our business from other companies that provide solutions and services similar to ours. Currently, our primary online video competitors
are DoubleClick and Atlas, a technology and service division of aQuantive. In March 2008, Google acquired DoubleClick and in May 2007, Microsoft acquired aQuantive. DoubleClick and Atlas offer
solutions and services similar to ours and compete directly with us. We expect that Google and Microsoft will use their substantial financial and engineering resources to expand the DoubleClick and
Atlas businesses and increase their ability to compete with us.

Google
and Microsoft have significantly greater name recognition and greater financial, technical and marketing resources than we do. Microsoft also has a longer operating history and
more established relationships with customers. In addition, we believe that both Google and Microsoft have a greater ability to attract and retain customers due to numerous competitive advantages,
including their ability to offer and provide their marketing and advertising customers with a significantly broader range of related solutions and services than us. Google and Microsoft may also use
their experience and resources to compete with us in a variety of ways, including through acquisitions of competitors or related businesses, research and development, and marketing for new customers
more aggressively. Furthermore, Google or Microsoft could use campaign management solutions as a loss leader or may provide campaign management solutions or portions of such solutions without charge
or below cost in order to encourage customers to use their other product offerings. If Google or Microsoft is successful in providing solutions or services that are better than ours, leverage
platforms more effectively than ours or that are perceived by customers as being more cost-effective, we could experience a significant decline in our customer base and in their use of our
solutions and services. Such a decline could have a material adverse effect on our business, financial condition and results of operations.

In
addition to Google and Microsoft, we face competition from other companies. Among our competitors are rich-media solutions companies (such as Pointroll, Eyewonder and
Flashtalking) and ad serving companies (such as Zedo and CheckM8). In addition, we may experience competition from

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companies
that provide web analytics or web intelligence. Other companies, such as Yahoo!, are also developing campaign management solutions. Our competitors may develop services that are equal or
superior to our services or that achieve greater market acceptance than our services. Many of our competitors have longer operating histories, greater name recognition, larger client bases and
significantly greater financial, technical and marketing resources than us.

We
believe that our ability to compete successfully depends on a number of factors, both within and outside of our control, including: (1) the price, quality and performance of
our products and those of our competitors; (2) the timing and success of new product introductions; (3) the emergence of new technologies; (4) the number and nature of our
competitors in a given market; (5) the protection of intellectual property rights; and (6) general market and economic conditions. In addition, the assertion of intellectual property
rights by others factor into the ability to compete successfully. The competitive environment could result in price reductions that could result in lower profits and loss of our market share.

While
we offer products and services focused on the electronic distribution of media, we compete with dub and ship houses and production studios. Many dub and ship houses and production
studios, such as Ascent Media, have long-standing ties to local distributors that can be difficult to replace. Many of these dub and ship houses and production studios also have greater
financial, distribution and marketing resources than we and have achieved a higher level of brand recognition. Production studios, advertising agencies and media buying firms also could deliver
directly through entities with package delivery expertise such as Federal Express, United Parcel Service and the United States Postal Service.

In
addition, we compete with one or more satellite-based video distribution networks. We also anticipate that certain common and/or value-added telecommunications carriers and other
companies, such as TeleAmerica may develop and deploy high bandwidth network services targeted at the advertising and broadcast industries.

With
respect to new markets, such as the delivery of other forms of content to radio and television stations, competition is likely to come from companies in related communications
markets and/or package delivery markets. Some of the companies capable of offering products and services with superior functionality include telecommunications providers, such as AT&T, Verizon and
other fiber and telecommunication companies, each of which would enjoy materially lower electronic delivery transportation costs. Radio networks such as ABC Radio Networks or Westwood One could also
become competitors by selling and transmitting advertisements as a complement to their content programming.

Further,
other companies may in the future focus significant resources on developing and marketing products and services that will compete with ours.

In
addition, many of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties and several of our
competitors have combined or may combine in the future with larger companies with greater resources than ours. This growing trend of cooperative relationships and consolidation within our industry may
create a great number of powerful and aggressive competitors that may engage in more extensive research and development, undertake more far-reaching marketing campaigns and make more
attractive offers to existing and potential employees and customers than we are able to. They may also adopt more aggressive pricing policies and may even provide services similar to ours at no
additional cost by bundling them with their other product and service offerings. Any increase in the level of competition from these, or any other competitors, is likely to result in price reductions,
reduced margins, loss of market share and a potential decline in our revenues. We cannot assure you that we will be able to compete successfully with our existing or future competitors. If we fail to
withstand competitive pressures and compete successfully, our business, financial condition and results of operations could be materially adversely affected.

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We have a history of losses which must be considered in assessing our future prospects.

2003 was the first year we reported net income after having been unprofitable since our inception. While we reported profit again in
2004, 2007 and 2008, we experienced a loss in 2005 and 2006. We could begin to generate net losses in the future, which could depress our stock price. Decreases in revenues could occur, which could
impair our ability to operate profitably in the future. Future success also depends in part on obtaining reductions in delivery and service costs, particularly our ability to continue to automate
order processing and to reduce telecommunications costs. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in new and rapidly
evolving markets, such as risks that the market might fail to grow, expenses relating to modifying products and services to meet industry standards as they change over time, and difficulties in
gaining and maintaining market share. To address these risks, we must, among other things, respond to competitive developments, attract, retain and motivate qualified persons, continually upgrade our
technologies and begin to commercialize products incorporating such technologies. We may not be successful in addressing any or all of these risks and may not be able to sustain profitability.

We may not be able to obtain additional financing to satisfy our future capital needs.

We intend to continue making capital expenditures to market, develop, produce and deploy at no cost to our customer the various
equipment required by the customers to receive our services and to introduce additional services. In addition, we will need to make the investments necessary to maintain and improve our network. We
also expect to expend capital to consummate any mergers and acquisitions that we undertake in the future. We may require additional capital sooner than currently anticipated and may not be able to
obtain additional funds adequate for our capital needs. We cannot predict any of the factors affecting the revenues and costs of these activities with any degree of certainty. Accordingly, we cannot
predict the precise amount of future capital that we will require, particularly if we pursue one or more additional acquisitions.

Furthermore,
additional financing may not be available to us, or if it is available, it may not be available on acceptable terms. Our inability to obtain the necessary financing on
acceptable terms may prevent us from deploying our products and services effectively, maintaining and improving our products and network and completing advantageous acquisitions. Our inability to
obtain the necessary financing could seriously harm our business, financial condition, results of operations and prospects. Consequently, we could be required to:



Our business is highly dependent upon radio and television advertising. If demand for, or margins from, our radio and television advertising delivery services decline, our
business results will decline.

We expect that a significant portion of our revenues will continue to be derived from the delivery of radio and television advertising
spots from advertising agencies, production studios and dub and ship houses to radio and television stations in the United States. A decline in demand for, or average selling prices of, our radio and
television advertising delivery services for any of the following reasons, or otherwise, would seriously harm our business, financial condition, results of operations and
prospects:



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Additionally,
we are dependent on our relationship with the radio and television stations in which we have installed communications equipment. Should a substantial number of these
stations go out of business, experience a change in ownership or discontinue the use of our equipment in any way, our business, financial condition, results of operations and prospects would be
harmed.

If we are not able to maintain and improve service quality, our business and results of operations will be susceptible to decline.

Our business will depend on making cost-effective deliveries to broadcast stations within the time periods requested by our
customers. If we are unsuccessful in making these deliveries, for whatever reason, a station might be prevented from selling airtime that it otherwise could have sold. Our ability to make deliveries
to stations within the time periods requested by customers depends on a number of factors, some of which will be outside of our control, including:



Stations
may assert claims for lost air-time in these circumstances and dissatisfied advertisers may refuse to make further deliveries through us in the event of a
significant occurrence of lost deliveries, which would result in a decrease in our revenues or an increase in our expenses, either of which could lead to a reduction in net income or an increase in
net loss. Although we expect that we will maintain insurance against business interruption, such insurance may not be adequate to protect us from significant loss in these circumstances or from the
effects of a major catastrophe (such as an earthquake or other natural disaster), which could result in a prolonged interruption of our business.

Our business is highly dependent on electronic video advertising delivery service deployment.

Our inability to maintain units necessary for the receipt of electronically delivered video advertising content in an adequate number
of television stations or to capture market share among content delivery customers, which may be the result of price competition, new product introductions from competitors or otherwise, would be
detrimental to our business objectives and deter future growth. We have made a substantial investment in upgrading and expanding our Irving NOC and
in populating television stations with the units necessary for the receipt of electronically delivered video advertising content. However, we cannot assure you that the maintenance of these units will
cause this service to achieve adequate market acceptance among customers that require video advertising content delivery.

In
addition, to more fully address the needs of video delivery customers we have developed a set of ancillary services that typically are provided by dub and ship houses. These ancillary
services include cataloging, physical archiving, closed-captioning, modification of slates and format conversions. We believe that we will need to provide these services on a localized basis in each
of the major cities in which we provide services directly to agencies and advertisers. We currently provide certain of such services to a portion of our customers through our facilities in New York,
Los Angeles, San Francisco, Detroit and Chicago. However, we may not be able to successfully provide these services to all customers in those markets or any other major metropolitan area at
competitive prices. Additionally, we may not be able to provide competitive video distribution services in other U.S. markets because of

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the
additional costs and expenses necessary to do so and because we may not be able to achieve adequate market acceptance among current and potential customers in those markets.

While
we are taking the steps we believe are required to achieve the network capacity and scalability necessary to deliver video content, such as HDTV content, reliably and cost
effectively as video advertising delivery volume grows, we may not achieve such goals because they are highly dependent on the services provided by our telecommunication providers and the
technological capabilities of both our customers and the destinations to which content is delivered. If our telecommunication providers are unable or unwilling to provide the services necessary at a
rate we are willing to pay or if our customers and/or our delivery destinations do not have the technological capabilities necessary to send and/or receive video content, our goals of adequate network
capacity and scalability could be jeopardized.

In
addition, we may be unable to retain current audio delivery customers or attract future audio delivery customers who may ultimately demand delivery of both media content unless we can
successfully continue to develop and provide video transmission services. The failure to retain such customers could result in a reduction of revenues, thereby decreasing our ability to maintain
profitability.

We rely on bandwidth providers or other third parties for key aspects of the process of providing products and services to our customers, and any failure or interruption in
the services and products provided by these third parties could harm our ability to operate our business and damage our reputation.

We rely on third-party vendors, including bandwidth providers. Any disruption in the network access services provided by these
third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties our providers
face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to
problems with the services they provide. We license technology from third parties to facilitate aspects of our connectivity operations. We have experienced and expect to continue to experience
interruptions and delays in service and availability for such elements. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies could negatively
impact our relationship with users and adversely affect our business and could expose us to liabilities to third parties.

If we were no longer able to obtain transmissions services from our existing or alternative providers, on terms comparable to those upon which we currently obtain the
services, our business and results of operations could be harmed.

We obtain our local access transmission services and long distance telephone access through contracts with Sprint and Verizon, both of
which expire in November 2010. These agreements provide for reduced pricing in exchange for minimum purchases, as well as certain achievement credits once specified purchase levels are met. If we are
not able to obtain these services from our existing or alternative providers, we would not be able to provide our services on a timely basis. In addition, any material increase in the price of either
local access or long distance carrier service could increase costs or cause a significant decline in revenues. Either of these situations would harm our operating results.

We face various risks associated with purchasing satellite capacity.

As part of our strategy of providing transmittal of audio, video, data and other information using satellite technology, we
periodically purchase satellite capacity from third parties owning satellite systems. Although our management attempts to match these expenditures against anticipated revenues from sales of products
or services to customers, they may not be successful at estimating anticipated

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revenues,
and actual revenues from sales of products or services may fall below expenditures for satellite capacity. In addition, purchases of satellite capacity require a significant amount of
capital. Any inability to purchase satellite capacity or to achieve revenues sufficient to offset the capital expended to purchase satellite capacity may make our business more vulnerable and
significantly affect our financial condition, cash flows and results of operations.

If the existing relationship with Clear Channel Satellite Services or Intelsat is terminated, or if either Clear Channel Satellite Services or Intelsat fails to perform as
required under its agreement with us, our business could be interrupted.

We have designed and developed the necessary software to enable our current video delivery systems to receive digital satellite
transmissions over the AMC-9 and Galaxy 18 satellite systems. However, the Clear Channel or Galaxy 18 satellite systems may not have the capacity to meet our future delivery commitments
and broadcast quality requirements on a cost-effective basis, if at all. We have a non-exclusive agreement with Clear Channel that expires in June 2010 and Intelsat that
expires in December 2013. The agreements provide for fixed pricing on dedicated bandwidth and gives us access to satellite capacity for electronic delivery of digital audio and video transmissions by
satellite. The agreements state that Clear Channel or Intelsat can terminate the agreement if we do not make timely payments or become insolvent. If we are not able to obtain satellite capacity from
our existing or alternative providers, or if we were required to seek an alternative provider without adequate notice, we might not be able to provide our services without interruption. In addition
any material increase in the cost of satellite capacity would increase our costs. Either of these situations would harm our operating results.

Certain of our products depend on satellites; any satellite failure could result in interruptions of our service that could negatively impact our business and reputation.

A reduction in the number of operating satellites or an extended disruption of satellite transmissions would impair the current utility
of the accessible satellite network
and the growth of current and additional market opportunities. Satellites and their ground support systems are complex electronic systems subject to weather conditions, electronic and mechanical
failures and possible sabotage. The satellites have limited design lives and are subject to damage by the hostile space environment in which they operate. The repair of damaged or malfunctioning
satellites is nearly impossible. If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites. In addition,
satellite transmission can be disrupted by natural phenomena causing atmospheric interference, such as sunspots.

Certain
of our products rely on signals from satellites, including, but not limited to, satellite receivers and head-end equipment. Any satellite failure could result in
interruptions of our service, negatively impacting our business. We attempt to mitigate this risk by having our customers procure their own agreements with satellite providers.

Interruption or failure of our information technology and communications systems could impair our ability to effectively provide our services, which could damage our
reputation and harm our operating results.

Our provision of our services depends on the continuing operation of our information technology and communications systems. Any damage
to or failure of our systems could result in interruptions in our service. Interruptions in our service could reduce our revenues and profits, and our brand could be damaged if people believe our
system is unreliable. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer
denial of service attacks or other attempts to harm our systems, and similar events. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all
eventualities. The occurrence of a natural disaster, a decision to close a facility we are using

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without
adequate notice for financial reasons or other unanticipated problems at our Irving or Atlanta NOCs could result in lengthy interruptions in our service.

We
have experienced system failures in the past and may in the future. Any unscheduled interruption in our service puts a burden on our entire organization and may result in a loss of
revenue. If we experience frequent or persistent system failures in our Irving or Atlanta NOC or web-based management systems, our reputation and brand could be permanently harmed. The
steps we have taken to increase the reliability and redundancy of our systems are expensive, reduce our operating margin and may not be successful in reducing the frequency or duration of unscheduled
downtime.

The market price of our common stock is likely to continue to be volatile.

Some of the factors that may cause the market price of our common stock to fluctuate significantly include:



Sales of substantial amounts of our common stock in the public market could harm the market price of our common stock.

The sale of substantial amounts of our shares (including shares issuable upon exercise of outstanding options and warrants to purchase
our common stock) may cause substantial fluctuations in the price of our common stock. Because investors would be more reluctant to purchase shares of our common stock following substantial sales, the
sale of these shares also could impair our ability to raise capital through the sale of additional stock.

Our inability to enter into or develop strategic relationships in key market segments could harm our operating results.

Our strategy depends in part on the development of strategic relationships with leading companies in key market segments, including
media broadcasters and digital system providers. We may not be able to successfully form or enter into such relationships, which may jeopardize our ability to generate sales of our products or
services in those segments. Specific product lines are dependent to a significant degree on strategic alliances and joint ventures formed with other companies. Various factors could limit our ability
to enter into or develop strategic relationships, including, but not limited to, our relatively short operating history, history of losses and the resources available to our competitors. Moreover, the
terms of strategic alliances and joint ventures may vest control in a party other than us. Accordingly, the success of the strategic alliance or joint venture may depend upon the actions of that party
and not us.

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Insiders have significant influence over us which could limit others' ability to influence the outcome of key transactions, including changes in control.

As of December 31, 2008, our executive officers and directors and their respective affiliates owned approximately 18% of our
common stock. As a result, these stockholders may be able to significantly influence all matters requiring stockholder approval, including the election of directors and the approval of significant
corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of us even if a change of control is in the best interest of all stockholders.

Our business may be harmed if we are not able to protect our intellectual property rights from third-party challenges or if the intellectual property we use infringes upon
the proprietary rights of third parties.

The steps taken to protect our proprietary information may not prevent misappropriation of such information, and such protection may
not preclude competitors from developing confusingly similar brand names or promotional materials or developing products and services similar to ours. We consider our trademarks, copyrights,
advertising and promotion design and artwork to be of value and important to our businesses. We rely on a combination of trade secret, copyright and trademark laws and nondisclosure and other
arrangements to protect our proprietary rights. We generally enter into confidentiality or license agreements with our distributors and customers and limit access to and distribution of our software,
documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use information that we regard as
proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States.

We
cannot assure you that our intellectual property does not infringe on the proprietary rights of third parties. While we believe that our trademarks, copyrights, advertising and
promotion design and artwork do not infringe upon the proprietary rights of third parties, we may still receive future communications from third parties asserting that we are infringing, or may be
infringing, on the proprietary rights of third parties. Any such claims, with or without merit, could be time-consuming, require us to enter into royalty arrangements or result in costly
litigation and diversion of management attention. If such claims are successful, we may not be able to obtain licenses necessary for the operation of our business, or, if obtainable, such licenses may
not be available on commercially reasonable terms, either of which could prevent our ability to operate our business.

We may enter into or seek to enter into business combinations and acquisitions that may be difficult to integrate, disrupt our business, dilute stockholder value or divert
management attention.

We recently acquired Enliven, the Vyvx advertising services business of Level 3 Communications, LLC, Pathfire, Point.360,
GTN, and FastChannel Network Inc. Our business strategy might include the acquisition of additional complementary businesses and product lines. Any such acquisitions would be accompanied by the
risks commonly encountered in such acquisitions, including:



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We
may not be able to successfully complete any acquisition or, if completed, the acquired business or product line may not be successfully integrated with our operations, personnel or
technologies. Any inability to successfully integrate the operations, personnel and technologies associated with an acquired business and/or product line may negatively affect our business and results
of operation. We may dispose of any of our businesses or product lines in the event that we are unable to successfully integrate them, or in the event that management determines that any such business
or product line is no longer in our strategic interests.

Failure to manage future growth could hinder the future success of our business.

Our personnel, systems, procedures and controls may not be adequate to support our existing as well as future operations. We will need
to continue to implement and improve our operational, financial and management information systems, procedures and controls on a timely basis and to expand, train, motivate and manage our work force.
We must also continue to further develop our products and services while implementing effective planning and operating processes, such as continuing to implement and improve operational, financial and
management information systems; hiring and training additional qualified personnel; continuing to expand and upgrade our core technologies; and effectively managing multiple relationships with various
customers, joint venture and technological partners and other third parties.

We depend on key personnel to manage the business effectively, and if we are unable to retain our key employees or hire additional qualified personnel, our ability to
compete could be harmed.

Our future success will depend to a significant extent upon the services of Scott K. Ginsburg, Chairman of the Board and Chief
Executive Officer; Omar A. Choucair, Chief Financial Officer; and Neil H. Nguyen, Executive Vice President of Sales and Operations. Uncontrollable circumstances, such as the death or incapacity
of any key executive officer, could have a serious impact on our business.

Our
future success will also depend upon our ability to attract and retain highly qualified management, sales, operations, technical and marketing personnel. At the present time there
is, and will continue to be, intense competition for personnel with experience in the markets applicable to our products and services. Because of this intense competition, we may not be able to retain
key personnel or attract, assimilate or retain other highly qualified technical and management personnel in the future. The inability to retain or to attract additional qualified personnel as needed
could have a considerable impact on our business.

Certain provisions of our bylaws may have anti-takeover effects that could prevent a change in control even if the change would be beneficial to our
stockholders.

We have a classified board which might, under certain circumstances, discourage the acquisition of a controlling interest of our stock
because such acquirer would not have the ability to replace directors except as the term of each class expires. The directors are divided into three classes with respect to the time for which they
hold office. The term of office of one class of directors expires at each annual meeting of stockholders. At each annual meeting of stockholders, directors elected to succeed those directors whose
terms then expire are elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election.

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Our board of directors may issue, without stockholder approval, preferred stock with rights and preferences superior to those applicable to the common stock.

Our certificate of incorporation includes a provision for the issuance of "blank check" preferred stock. This preferred stock may be
issued in one or more series, with each series containing such rights and preferences as the board of directors may determine from time to time, without prior notice to or approval of stockholders.
Among others, such rights and preferences might include the rights to dividends, superior voting rights, liquidation preferences and rights to convert into common stock. The rights and preferences of
any such series of preferred stock, if issued, may be superior to the rights and preferences applicable to the common stock and might result in a decrease in the price of the common stock.

We depend upon a number of single or limited-source suppliers, and our ability to produce audio and video distribution equipment could be harmed if those relationships were
discontinued.

We rely on fewer than five single or limited-source suppliers for integral components used in the assembly of our audio and video
units. If a supplier were to experience financial or operational difficulties that resulted in a reduction or interruption in component supply to us, this would delay our deployment of audio and video
units. We rely on our suppliers to manufacture components for use in our products. Some of our suppliers also sell products to our competitors and may in the future become our competitors, possibly
entering into exclusive arrangements with our existing competitors. In addition, our suppliers may stop selling our products or components to us at commercially reasonable prices or completely stop
selling our products or components to us. If a reduction or interruption of supply were to occur, it could take a significant period of time for us to qualify an alternative subcontractor, redesign
our products as necessary and contract for the
manufacture of such products. This would have the effect of depressing our business until we were able to establish sufficient component supply through an alternative source. We believe that there are
currently alternative component manufacturers that could supply the components required to produce our products, but based on the financial condition and service levels of our current suppliers, we do
not feel the need to pursue agreements or understandings with such alternative sources or pursue long-term contracts with our current suppliers. We have experienced component shortages in
the past, and material component shortages or production or delivery delays may occur in the future.

We determined that there were material weaknesses in our disclosure controls and procedures such that those controls and procedures were not effective as of
December 31, 2007, December 31, 2006, and December 31, 2004. In the event a material weakness occurs again in the future, our financial statements and results of operations could
be harmed and you may not be justified in relying on those financial statements.

For the year ended December 31, 2007, we determined that our disclosure controls and procedures were not effective, and we
identified a material weakness in our internal controls over financial reporting related to certain deficiencies in the controls surrounding monitoring and oversight of accounting and financial
reporting related to derivative instruments. For the year ended December 31, 2006, we determined that our disclosure controls and procedures were not effective, and we identified a material
weakness in our internal controls over financial reporting for business combinations and stock compensation as of December 31, 2006. For the year ended December 31, 2004, we determined
that our disclosure controls and procedures were not effective, and we identified a material weakness in our internal controls over financial reporting for income taxes as of December 31, 2004.
In the event that these or any other material weakness occurs in the future, our financial statements and results of operations could be harmed and you may not be justified in relying on those
financial statements, either of which could result in a decrease in our stock price.

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Our software products may be wrongly labeled as spyware which might lead to its uninstallation causing a decrease in our revenues.

Our software products, including the Viewpoint Toolbar and the Media Player, have been wrongly characterized as spyware by certain
security software vendors. We monitor activity in this area and undertake efforts to educate vendors about the characteristics of our software, and thus far have been successful at getting the vast
majority of these vendors to change their characterization of our Viewpoint Toolbar. Should we fail to persuade such vendors about the functionality of our Viewpoint Toolbar, or not learn about a
false characterization on a timely basis, a substantial number of our Viewpoint Toolbars could be uninstalled leading to a decrease in our revenues and our business will be materially and adversely
affected.

Our business may not grow if the Internet advertising market does not continue to develop or if we are unable to successfully implement our business model.

A significant part of our business model is to generate revenue by providing interactive marketing solutions to advertisers, ad
agencies and web publishers. The profit potential for this business model is unproven. For our business to be successful, Internet advertising will need to achieve increasing market acceptance by
advertisers, ad agencies and web publishers. The intense competition among Internet advertising sellers has led to the creation of a number of pricing alternatives for Internet advertising. These
alternatives make it difficult for us to project future levels of advertising revenue and applicable gross margin that can be sustained by us or the Internet advertising industry in general.

Intensive
marketing and sales efforts may be necessary to educate prospective advertisers regarding the uses and benefits of, and to generate demand for, our products and services.
Advertisers may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems. Acceptance of our new solutions will depend on the continued emergence of
Internet commerce, communication, and advertising, and demand for its solutions. We cannot provide assurance that use of the Internet will continue to grow or that current uses of the Internet are
sustainable.

Our revenues are impacted by seasonal fluctuations and decreases or delays in advertising spending due to general economic conditions.

We believe that our revenues will be subject to seasonal fluctuations because advertisers generally place fewer advertisements during
the first and third calendar quarters of each year and direct marketers mail substantially more marketing materials in the third quarter of each year. Furthermore, Internet user traffic typically
drops during the summer months, which reduces the number of advertisements to sell and deliver and searches performed. Expenditures by advertisers and direct marketers tend to vary in cycles that
reflect overall economic conditions as well as budgeting and buying patterns. Our revenue could be materially reduced by a decline in the economic prospects of advertisers, direct marketers or the
economy in general, which could alter current or prospective advertisers' spending priorities or budget cycles or extend our sales cycle. In addition, any decreases in or delays in advertising
spending due to general economic conditions could reduce our revenues or negatively impact our ability to grow our revenues. Due to such risks, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indicator of our future results. Our staffing and other operating expenses are based in large part on
anticipated revenues. It may be difficult for us to adjust our spending to compensate for any unexpected shortfall. If we are unable to reduce our spending following any such shortfall, our results of
operations would be adversely affected.

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Providing full-service ad media management requires us to take on inventory risk, and could have a material impact on our working capital.

When we provide full-service media management, we must purchase the media inventory from various publishers, and assume
inventory risk on that media. Although customers are typically billed in advance for this type of service, these transactions tend to represent larger than normal cash outlays. As a result, if the
customer payment is late, it would temporarily reduce our working capital until the payment is received. In addition, there is risk that the customer may not pay at all, which will dramatically hinder
our cash position.

We plan to expand operations in international markets in which we have limited experience, which could harm our business, operating results and financial condition.

We opened a Unicast office in the United Kingdom in 2007 and plan to expand our product offering in the European and other
international markets. We have only limited experience in marketing and operating our products and services in international markets, and we may
not be able to successfully execute our business model in these markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets.

We
believe that as the international markets in which we operate continue to grow, competition in these markets will intensify. Local companies may have a competitive advantage because
of a greater understanding and focus on the local markets. In addition, certain international markets may be slower than domestic markets in adopting the Internet as an advertising and commerce medium
and so our operations in international markets may not develop at a rate that supports our level of investment.

Other
risks of doing business internationally include the following:



Consolidation in the industries in which we operate could lead to increased competition and loss of customers.

The Internet industry (and online advertising in particular) has experienced substantial consolidation. We expect this consolidation to
continue. This consolidation could adversely affect our business and results of operations in a number of ways, including the following:



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Our ad campaign management and deployment solution may not be successful and may cause business disruption.

UAP is our proprietary ad deployment technology. We must, among other things, ensure that this technology will function efficiently at
high volumes, interact properly with our database, offer the functionality demanded by our customers and assimilate our sales and reporting functions. Customers may become dissatisfied by any system
failure that interrupts our ability to provide our services to them, including failures affecting our ability to deploy advertisements without significant delay to the viewer. Sustained or repeated
system failures would reduce the attractiveness of our solutions to advertisers, ad agencies, and web publishers and could result in contract terminations, fee rebates and make-goods,
thereby reducing revenue. Slower response time or system failures may also result from straining the capacity of our deployed software or hardware due to an increase in the volume of advertising
deployed through our servers. To the extent that we do not effectively address any capacity constraints or system failures, our business, results of operations and financial condition could be
materially and adversely affected.

Privacy concerns could lead to legislative and other limitations on our ability to collect usage data from Internet users, including limitations on our use of cookie or
conversion tag technology and user profiling, which is crucial to our ability to provide our solutions and services to our customers.

Our ability to conduct targeted advertising campaigns and compile data that we use to formulate campaign strategies for our customers
depends on the use of "cookies" and "conversion tags" to track Internet users and their online behavior, which allows us to build anonymous user profiles and measure an advertising campaign's
effectiveness. A cookie is a small file of information stored on a user's computer that allows us to recognize that user's browser when we serve advertisements. A conversion tag functions similarly to
a banner advertisement, except that the conversion tag is not visible. Our conversion tags may be placed on specific pages of clients of our customers' or prospective customers' websites. Government
authorities inside the United States concerned with the privacy of Internet users have suggested limiting or eliminating the use of cookies, conversion tags or user profiling. Bills aimed at
regulating the collection and use of personal data from Internet users are currently pending in U.S. Congress and many state legislatures. Attempts to regulate spyware may be drafted in such a way as
to include technology like cookies and conversion tags in the definition of spyware, thereby creating restrictions that could reduce our ability to use them. In addition, the Federal Trade Commission
and the Department of Commerce have conducted hearings regarding user profiling, the collection of non-personally identifiable information and online privacy.

Our
foreign operations may also be adversely affected by regulatory action outside the United States. For example, the European Union has adopted a directive addressing data privacy that
limits the collection, disclosure and use of information regarding European Internet users. In addition, the European Union has enacted an electronic communications directive that imposes certain
restrictions on the use of cookies and conversion tags and also places restrictions on the sending of unsolicited communications. Each European Union member country was required to enact legislation
to comply
with the provisions of the electronic communications directive by October 31, 2003 (though not all have done so). Germany has also enacted additional laws limiting the use of user profiling,
and other countries, both in and out of the European Union, may impose similar limitations.

Internet
users may also directly limit or eliminate the placement of cookies on their computers by using third-party software that blocks cookies, or by disabling or restricting the
cookie functions of their Internet browser software. Internet browser software upgrades may also result in limitations on the use of cookies or conversion tags. Technologies like the Platform for
Privacy Preferences (P3P) Project may limit collection of cookie and conversion tag information. Individuals have also brought class action suits against companies related to the use of cookies and
several companies, including companies in the Internet advertising industry, have had claims brought against them before the Federal Trade

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Commission
regarding the collection and use of Internet user information. We may be subject to such suits in the future, which could limit or eliminate our ability to collect such information.

If
our ability to use cookies or conversion tags or to build user profiles were substantially restricted due to the foregoing, or for any other reason, we would have to generate and use
other technology or methods that allow the gathering of user profile data in order to provide our services to our customers. This change in technology or methods could require significant
reengineering time and resources, and may not be complete in time to avoid negative consequences to our business. In addition, alternative technology or methods might not be available on commercially
reasonable terms, if at all. If the use of cookies and conversion tags are prohibited and we are not able to efficiently and cost effectively create new technology, our business, financial condition
and results of operations would be materially adversely affected.

In
addition, any compromise of our security that results in the release of Internet users' and/or our customers' data could seriously limit the adoption of our solutions and services as
well as harm our reputation and brand, expose us to liability and subject us to reporting obligations under various state laws, which could have an adverse effect on our business. The risk that these
types of events could seriously harm our business is likely to increase as the amount of data we store for our customers on our servers (including personal information) and the number of countries
where we operate has been increasing, and we may need to expend significant resources to protect against security breaches, which could have an adverse effect on our business, financial condition or
results of operations.

If we fail to detect click-through fraud or other invalid clicks, we could lose the confidence of our advertisers, thereby causing our business to suffer.

We are exposed to the risk of fraudulent clicks and other invalid clicks on advertisements delivered by us from a variety of potential
sources. Invalid clicks are clicks that we have
determined are not intended by the user to link to the underlying content, such as inadvertent clicks on the same ad twice and clicks resulting from click fraud. Click fraud occurs when a user
intentionally clicks on an ad displayed on a web site for a reason other than to view the underlying content. These types of fraudulent activities could harm our business and our brand. If fraudulent
clicks are not detected, the data that our solutions provide to our customers is inaccurate and the affected advertisers may lose confidence in our solutions to deliver a return on their investment.
If advertisers become dissatisfied with our solutions, they may choose to do business with our competitors or reduce their Internet advertising spending, which would have a material adverse effect on
our business, financial condition and results of operations.

Internet security poses risks to our entire business.

The process of e-commerce aggregation by means of our hardware and software infrastructure involves the transmission and
analysis of confidential and proprietary information of the advertiser, as well as our own confidential and proprietary information. The compromise of our security or misappropriation of proprietary
information could have a material adverse effect on our business, prospects, financial condition and results of operations. We rely on encryption and authentication technology licensed from other
companies to provide the security and authentication necessary to effect secure Internet transmission of confidential information, such as credit and other proprietary information. Advances in
computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the technology used by us to protect client transaction
data. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause material interruptions in our operations. We may be required to expend significant
capital and other resources to protect against security breaches or to minimize problems caused by security breaches. To the extent that our activities or the activities of others involve the storage
and transmission of proprietary information, security breaches could damage our reputation

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and
expose us to a risk of loss or litigation and possible liability. Our security measures may not prevent security breaches. Our failure to prevent these security breaches may have a material
adverse effect on our business, prospects, financial condition and results of operations.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None

ITEM 2.    PROPERTIES

Company's principal executive offices are at 750 West John Carpenter Freeway in Irving, Texas. The Company's material properties are
listed below:

Location

Type

Segment

Lease
Expiration

Square
Footage

Square
Footage
SubletIrving, TX

U. S. Headquarters Corporate Office


Ads


2011


28,750Detroit, MI

Sales and Operations


Ads


2012


76,488


35,417Wilmington, DE

Sales and Operations


Ads


2010


54,800Roswell, GA

Sales and Operations


Ads


2010


32,900New York, NY

Sales and Operations


Ads


2016


26,200Burbank, CA

Sales and Operations


Ads


2011


24,500Chicago, IL

Sales and Operations


Ads


2011


18,500Los Angeles, CA

Sales and Operations


Ads


2011


17,700New York, NY

Sales and Operations


Ads


2011


15,600Chicago, IL

Sales and Operations


Ads


2016


13,580New York, NY

Sales and Operations


Ads


2017


12,500San Francisco, CA

Sales and Operations


Ads


2009


9,500Louisville, KY

Dub and Ship Facility


Ads


2010


9,100Dallas, TX

Production


Ads


2013


6,400Austin, TX

Sales and Operations


Ads


2011


5,600Boca Raton, FL

Administrative, Sales and Operations


Other


2011


3,816London

Sales and Production


Other


2009


775Austin, TX

Sales and Operations


Other


2011


12,400Culver City, CA

Sales and Operations


Other


2009


11,520


ITEM 3.    LEGAL PROCEEDINGS

The Company is subject, from time to time, to various legal proceedings and claims, either asserted or unasserted, which arise in the
ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters asserted to date will have
a material effect on the financial condition or results of operations of the Company.

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

Not applicable.

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PART II

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

The common stock of the Company has been traded on the Nasdaq Global Market (formerly known as the Nasdaq National Market) under the
symbol DGIT since the Company's initial public offering on February 6, 1996. On May 26, 2006 the Company's common stock was reverse split on a 1-for-10 basis.

The
following table sets forth the high and low closing sales prices of our common stock from January 1, 2007 to December 31, 2008. Such prices represent prices between
dealers, do not include retail mark-ups, markdowns or commissions and may not represent actual transactions.

Fiscal Year Ended
2008

Fiscal Year Ended
2007High

Low

High

LowFirst Quarter

$
25.29

$
17.71

$
16.75

$
12.55Second Quarter


20.64


16.65


22.70


15.96Third Quarter


24.06


16.26


24.95


17.10Fourth Quarter


21.05


11.87


26.10


17.09


On
November 30, 2004, the Board of Directors authorized the purchase of up to $3.5 million of the Company's common stock. No expiration date of the purchase program was
specified. During 2004 and 2005, the Company purchaed 56,371 shares of its common stock at an average price of $13.35, for a total of $752,173. No purchases have been made since 2005. As of
December 31, 2008, $2,747,827 remains available for future purchases.

As
of February 28, 2009, the Company had issued 21,302,000 and outstanding 21,245,000 shares of its common stock. As of February 28, 2009, the Company's common stock
was held by approximately 221 stockholders of record. The Company estimates that there are approximately 9,980 beneficial stockholders.

The
Company has never declared or paid cash dividends on its capital stock. The Company currently expects to retain any future earnings for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable future.

Stock Performance Table

The table set forth below compares the cumulative total stockholder return on the Common Stock between December 31, 2003 and
December 31, 2008 with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the Nasdaq Computer and Data Processing Index, over the same period. This table
assumes the investment of $100.00 on December 31, 2003 in the common stock, the Nasdaq Composite Index and the Nasdaq Computer and Data Processing Index, and assumes the reinvestment of
dividends, if any.

The
comparisons shown in the table below are based upon historical data. The Company cautions that the stock price performance shown in the table below is not indicative of, nor intended
to forecast, the potential future performance of the Common Stock. Information used in the graph was obtained from information published by Nasdaq and Research Data Group, Inc., sources
believed to be reliable, but the Company is not responsible for any errors or omissions in such information.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*  Among DG Fastchannel, Inc., The NASDAQ Composite Index  And The NASDAQ Computer & Data Processing Index

GRAPHIC

12/04

12/05

12/06

12/07

12/08DG FASTCHANNEL, INC.


55.80


24.11


60.18


114.46


55.71NASDAQ COMPOSITE


110.08


112.88


126.51


138.13


80.47NASDAQ COMPUTER & DATA PROCESSING


115.62


118.29


133.40


158.91


90.83


Notwithstanding anything to the contrary set forth in any of the Company's previous or future filings under the Securities Act or the Exchange Act
that might incorporate this report or future filings made by the Company under those statutes, this Stock Performance Table shall not be deemed filed with the SEC and shall not be deemed incorporated
by reference into any of those prior filings or into any future filings made by the Company under those statutes.

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Table of Contents

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about the securities authorized for issuance under the Company's equity compensation plans as
of December 31, 2008:

(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

(b)
Weighted average
exercise price of
outstanding options,
warrants and rights

(c)
Number of securities
remaining available for
future issuance
(excluding securities
reflected in column(a))(1)Equity compensation plans approved by security holders


1,936,161

$
14.50


38,177


---

ITEM 6.    SELECTED FINANCIAL DATA

The financial data set forth below was derived from the audited consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements and related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere
herein. The data below includes the results of acquired operations from the respective dates of closing as detailed below:

Acquired Operations

Date of ClosingApplied Graphics Technologies, Inc. ("AGT")


June 1, 2004SourceEcreative, Inc. ("SourceEcreative")


August 31, 2004Media DVX, Inc. ("MDX")


April 15, 2005FastChannel Network, Inc. ("FastChannel")


May 31, 2006Pathfire, Inc. ("Pathfire")


June 4, 2007Point.360 ("Point 360")


August 13, 2007GTN, Inc. ("GTN")


August 31, 2007Vyvx ("Vyvx")


June 5, 2008Enliven Marketing Technologies Corporation ("Enliven")


October 2, 2008


See
Note 3 to the Company's consolidated financial statements for further information on acquisitions. As a result of the Company's decision to sell the assets of StarGuide
Digital Networks, Inc. ("StarGuide") in 2006 and Corporate Computer Systems, Inc. ("CCS") in 2006 their operating results for all periods presented have been reflected in discontinued
operations in the Company's consolidated financial statements and the selected financial data below. See Note 5 to the

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Table of Contents

Company's
consolidated financial statements for further information on dispositions. Amounts are shown in thousands (except per share amounts):

Statements of Operations Data:

For the Years Ended December 31,2008

2007

2006

2005

2004Revenues

$
157,081

$
97,687

$
68,667

$
51,824

$
53,570Costs and operating expenses excluding depreciation and amortization


97,999


65,770


49,803


45,227


42,101Depreciation and amortization


21,351


12,865


8,563


6,348


5,143Income from operations


37,731


19,052


10,301


249


6,326Other (income) expense:Unrealized loss (gain) on derivative warrant investment


1,544


(1,707
)







Reduction in fair value of long-term investment








4,758





Interest expense and other, net


11,536


2,388


2,786


2,990


1,284Income (loss) before income taxes from continuing operations


24,651


18,371


2,757


(2,741
)

5,042Provision (benefit) for income taxes


9,572


7,501


2,378


(768
)

(4,995
)Income (loss) from continuing operations


15,079


10,870


379


(1,973
)

10,037Income (loss) from discontinued operations





(457
)

(1,028
)

883


(6,833
)Net income (loss)

$
15,079

$
10,413

$
(649
)
$
(1,090
)
$
3,204Basic income (loss) per share:Continuing operations

$
0.81

$
0.65

$
0.04

$
(0.27
)
$
1.38Discontinued operations





(0.02
)

(0.10
)

0.12


(0.94
)Total

$
0.81

$
0.63

$
(0.06
)
$
(0.15
)
$
0.44Diluted income (loss) per share:Continuing operations

$
0.79

$
0.64

$
0.04

$
(0.27
)
$
1.37Discontinued operations





(0.03
)

(0.10
)

0.12


(0.93
)Total

$
0.79

$
0.61

$
(0.06
)
$
(0.15
)
$
0.44Weighted average shares outstanding:Basic


18,642


16,631


10,568


7,378


7,277Diluted


19,073


17,096


10,568


7,378


7,330




December 31,2008

2007

2006

2005

2004Balance Sheet Data:Cash and cash equivalents

$
17,180

$
10,101

$
24,474

$
1,886

$
8,059Working capital


20,856


25,601


25,106


1,722


9,054Property and equipment, net


37,980


27,466


18,074


15,951


13,640Total assets


473,800


252,495


172,997


110,065


102,027Long-term debt, net of current portion


154,985


44,325


15,650


20,834


8,447Net assets of discontinued operations








2,441


3,242


1,928Stockholders' equity


269,518


192,129


141,886


80,207


79,432


35

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Table of Contents

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

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with
our Consolidated Financial Statements and Notes thereto contained elsewhere in this Annual Report on Form 10-K.

Introduction

Management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the
accompanying consolidated financial statements and notes to help provide an understanding of DG FastChannel Inc.'s ("DG" or the "Company") financial condition, changes in financial condition
and results of operations. MD&A is organized as follows:



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Cautionary Note Regarding Forward-Looking Statements

The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can
better understand a company's future prospects and make informed investment decisions. Certain statements contained herein may be deemed to constitute "forward-looking statements."

Words
such as "may," "anticipate," "estimate," "expects," "projects," "future," "intends," "will," "plans," "believes" and words and terms of similar substance used in connection with
any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management's present expectations of future events and are subject
to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, among other
things:



In
light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained herein might not occur. You are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the date of this filing. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any
forward-looking statements, whether as a result of new information, future events or otherwise, except as may be
required by applicable law. All subsequent forward-looking statements attributable to management or to any person authorized to act on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section.

Overview

We are a leading provider of digital technology services that enable the electronic delivery of advertisements and other media content
from advertising agencies and other content providers to traditional broadcasters and other media outlets. Our business can be impacted by several factors including the financial stability of our
customers, the overall advertising market, new emerging digital technologies, and the continued transition from analog to digital broadcast signal transmission. We face several factors which impacts
the growth of digital advertising delivery, including the following:

Increased demand for reliable and rapid means of content delivery.In recent years, technological innovations in digital media
have driven increasing
demand for reliable and rapid means of information transfer, particularly in the broadcast and telecommunications industries. Digital distribution technologies are increasingly used for distributing
media in forms such as video, audio, text and data. Digitized information has many advantages over analog or hard copy formats including ease and efficiency of storage, manipulation, transmission and
reproduction, with less degradation and in greater volumes.

Government mandate for digital broadcasting.The U.S. Congress passed legislation requiring broadcasters to transition from
analog to digital
broadcasting by June 12, 2009 when all analog

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broadcasting
must cease. The shift to digital has provided improved picture quality and preserves network capacity by using various compression technologies. This government mandate has created strong
momentum in the shift to high definition television ("HDTV") broadcasting because of the complementary aspects between digital-only and HDTV broadcasting, which we believe will encourage
the broadcast industry to move to an entirely digital work stream, including the electronic delivery of digital advertising.

Increase in adoption and popularity of High Definition Television.Consumer demand for superior quality, declining HDTV set
prices and increasing
availability of HDTV content are driving the rapid growth in HDTV adoption, with the United States leading the charge. Currently, all major broadcasters are delivering prime time content via HD
broadcasting and, with the broadcast industry shifting towards HD, we believe that advertising will soon follow. As local television stations work towards upgrading their infrastructure to enable HDTV
signals, advertisers are increasing the number of HDTV commercials, which we believe will likely require digital distribution.

Emergence of video advertising content on the Internet.The confluence of a successful online advertising industry and the
penetration of personal
broadband connections create a strong platform for the Internet to become a significant medium with respect to video advertisements. The increase in broadband subscribers is fueling the accelerating
growth in streaming media. Largely due to this growth in broadband usage, the Internet has become a widely used medium for distributing and receiving video and audio content. As the volume and quality
of dynamic content progresses, we believe there will be significant growth in video advertising over the Internet and advertisers will look to existing digital content distributors to provide the
necessary capabilities to successfully leverage this emerging medium.

Dependence on Third Parties.We depend on several third party vendors to operate our digital distribution network. Accordingly,
we are highly
dependent on satellite and high-speed connectivity vendors to properly operate our digital network. Additionally, we are highly dependent on the video advertising aired on TV and cable
networks, cable systems, and other broadcast media outlets.

Significant Transactions.Part of our business strategy is to merge with, acquire, or make investments in, businesses in the
media services industry.
The strategy in acquiring these businesses is to expand our digital distribution network, customer base and/or product offerings. Over the last three fiscal years we have completed the following
transactions:



38

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39

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Results of Operations

2008 vs. 2007

The following table sets forth certain historical financial data from continuing operations (in thousands).

% Change

As a % of RevenueYear Ended
December 31,



Year Ended
December 31,2008
vs.
20072008

2007

2008

2007Revenues

$
157,081

$
97,687


61
%

100.0
%

100.0
%Costs and expenses:Cost of revenues(a)


64,443


41,589


55


41.0


42.6Sales and marketing


8,257


7,046


17


5.3


7.2Research and development


4,268


3,233


32


2.7


3.3General and administrative


21,031


13,902


51


13.4


14.2Depreciation and amortization


21,351


12,865


66


13.6


13.2Total costs and expenses


119,350


78,635


52


76.0


80.5Income from operations


37,731


19,052


98


24.0


19.5Other (income) expense:Interest expense


12,122


3,101


291


7.7


3.2Unrealized (gain) loss on warrant


1,544


(1,707
)

(191
)

1.0


(1.8
)Interest and other income


(586
)

(713
)

(18
)

(0.4
)

(0.7
)Income before income taxes


24,651


18,371


34


15.7


18.8Provision for income taxes


9,572


7,501


28


6.1


7.7Income from continuing operations

$
15,079

$
10,870


39
%

9.6
%

11.1
%


---

Revenues.For 2008, revenues increased $59.4 million, or 61%. The increases were $56.6 million and $2.8 million from the
Video
and Audio Content Distribution and the Other segments, respectively. The increase in the Video and Audio Content Distribution segment was primarily due to (i) $28.7 million in revenues
from the additional customers acquired in the 2008 Enliven and Vyvx transactions, (ii) 12 months of revenue associated with the Pathfire, Point.360 and GTN acquisitions during 2008 as
compared to seven months, five months and four months in 2007, respectively, (iii) a $25.5 million increase in HD revenue (including $7.7 million HD revenue from Vyvx included in
(i) above) and (iv) approximately $7.2 million of additional political advertising revenue in connection with the 2008 national, state and local elections. The $2.8 million
increase in the Other segment primarily relates to the addition of Springbox (acquired with Enliven) of $2.3 million, as well as an increase in demand for our SourceEcreative service,
particularly in the international market.

Cost of Revenues.For 2008, cost of revenues increased $22.9 million, or 55%. The 55% increase in cost of revenues compares to a
61% increase
in revenues. As a percentage of revenues, cost of revenues decreased to 41.0% in 2008 as compared to 42.6% in 2007. The decrease, on a percentage basis, was primarily attributable to the elimination
of duplicative personnel, facilities, telecommunications and other expenses following the 2008 acquisition of Vyvx and the 2007 acquisitions of Pathfire, Point.360 and GTN.

Sales and Marketing.For 2008, sales and marketing expense increased $1.2 million, or 17%. The increase was primarily attributable
to higher
commissions, benefits and trade show costs associated with a larger customer base. As a percentage of revenues, sales and marketing expenses decreased to 5.3%

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in
2008 as compared to 7.2% in 2007. The decrease, on a percentage basis, was primarily attributable to efficiencies gained as a result of having a consolidated sales force following our recent
acquisitions.

Research and Development.For 2008, research and development costs increased $1.0 million, or 32%. The increase was primarily
attributable to
increased spending for payroll, benefits and consulting necessary to develop new technologies after the acquisitions of Enliven, Vyvx, Pathfire, Point.360 and GTN.

General and Administrative.For 2008, general and administrative expense increased $7.1 million, or 51%. The increase was
primarily
attributable to higher (i) personnel costs ($3.5 million) to support the Company's larger customer base and to reward employees for the improved operating results, (ii) audit and
tax fees ($0.8 million) partly associated with the timing of audit work and partly associated with the increased complexity of the Company as a result of its recent acquisitions and related
financings, (iii) rent and utilities ($0.7 million) associated with the increased number and size of office facilities following the recent acquisitions, (iv) insurance and
investor relations costs ($0.4 million), and (v) bank fees ($0.3 million).

Depreciation and Amortization.For 2008, depreciation and amortization expense increased $8.5 million, or 66%. The increase was
primarily
attributable to depreciation of certain tangible assets and amortization of certain intangible assets acquired in the Enliven, Vyvx, Pathfire, Point.360 and GTN transactions, as well as increases in
network equipment associated with the larger customer base. In addition, depreciation and amortization increased by $2.3 million as a result of a decision to replace our existing Spot Boxes
(and thereby accelerate the remaining depreciation over the shortened useful life) with next generation Spot Boxes, which have greater storage capacity, faster processing speeds, and can accommodate
multiple, simultaneous satellite feeds.

Interest Expense.For 2008, interest expense increased $9.0 million or 291%. The increase was due to (i) increased borrowings
in
connection with the acquisitions of Vyvx, Pathfire, Point.360 and GTN and (ii) an increase in the weighted average interest rate during the period. Our weighted average interest
rate increased as a result of borrowing $65 million under the Bridge Loan facility in connection with funding the Vyvx acquisition in June 2008. Based on the expected term of the Bridge Loan
facility we accrued interest at an annual effective rate of 13.3% (excluding the amortization of fees and expenses).

Unrealized Gain / Loss on Warrant.For 2008, the fair value of the Company's Enliven warrant decreased by $1.5 million as compared
to a
$1.7 million increase in 2007. Prior to the merger with Enliven, the warrant met the definition of a derivative instrument which required changes in the fair value of the warrant to be recorded
in the statement of operations. This investment was eliminated upon the acquisition of Enliven.

Interest and Other Income.For 2008, interest and other income of $0.6 million is very similar to the 2007 amount of
$0.7 million.

Provision for Income Taxes.For 2008 and 2007, the provision for income taxes was 38.8% and 40.8% of income before income taxes,
respectively. The
provisions for both periods differ from the expected federal statutory rate of 35% for 2008 and 34% for 2007, as a result of state and foreign income taxes and certain non-deductible
expenses (See Note 11 to the Consolidated Financial Statements).

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2007 vs. 2006

The following table sets forth certain historical financial data from continuing operations (in thousands):

As a % of RevenueYear Ended
December 31,

% Change

Year Ended
December 31,2007
vs.
20062007

2006

2007

2006Revenues

$
97,687

$
68,667


42
%

100.0
%

100.0
%Costs and expenses:Cost of revenues(a)


41,589


33,322


25


42.6


48.5Sales and marketing


7,046


4,240


66


7.2


6.2Research and development


3,233


1,779


82


3.3


2.6General and administrative


13,902


10,462


33


14.2


15.2Depreciation and amortization


12,865


8,563


50


13.2


12.5Total costs and expenses


78,635


58,366


35


80.5


85.0Income from operations


19,052


10,301


85


19.5


15.0Other (income) expense:Interest expense


3,101


2,844


9


3.2


4.2Unrealized (gain) loss on warrant


(1,707
)







(1.8)


Interest and other income


(713
)

(58
)

1,129


(0.7)


(0.1)Reduction in fair value of investment





4,758








6.9Income before income taxes


18,371


2,757


566


18.8


4.0Provision for income taxes


7,501


2,378


215


7.7


3.5Income from continuing operations

$
10,870

$
379


2,768
%

11.1
%

0.5
%


---

Revenues.For 2007, revenues increased $29.0 million, or 42%. The increases were $27.4 million and $1.6 million from the
Video
and Audio Content Distribution and the Other segments, respectively. The increase in the Video and Audio Content Distribution segment was primarily due to the additional customers acquired in the
Pathfire, Point.360, GTN and FastChannel transactions. FastChannel was included in our results for twelve months in 2007 compared to seven months in 2006. Pathfire, Point.360 and GTN were included in
our results for seven, five and four months, respectively, in 2007 as compared to none of the months in 2006. The increase in the Other segment was due to the additional customers acquired in the
FastChannel acquisition as well as an increase in the number of customers utilizing the service.

Cost of Revenues.For 2007, cost of revenues increased $8.3 million, or 25%. The 25% increase in cost of revenues compares to a
42% increase
in revenues. As a percentage of revenues, cost of revenues
decreased to 42.6% in 2007 as compared to 48.5% in 2006. The decrease, on a percentage basis, was primarily attributable to the elimination of duplicative personnel and other expenses following the
acquisitions of FastChannel, Pathfire, Point.360 and GTN.

Sales and Marketing.For 2007, sales and marketing expense increased $2.8 million, or 66%. The increase was primarily attributable
to
increased salary, commission and related expenses associated with a larger sales force in support of the broadened customer base subsequent to the acquisitions of Pathfire, Point.360, GTN and
FastChannel.

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Table of Contents

Research and Development.For 2007, research and development expense increased $1.5 million, or 82%. The increase was due to
increased
spending for payroll, recruiting and consulting necessary to develop new technologies following the acquisitions of Point.360, GTN and FastChannel. Further, $0.7 million of the increase relates
to the addition of Pathfire, which has been included in our results since June 2007. Pathfire operates a network separate from the DG FastChannel network. The Pathfire network can be used as a
back-up to the DG FastChannel network.

General and Administrative.For 2007, general and administrative expense increased $3.4 million, or 33%. The increase was
primarily due to
increased (i) personnel costs to support the Company's larger customer base, (ii) incentive compensation associated with the Company's improved operating results, and (iii) audit
and tax fees, partially offset by lower bad debt expense and legal fees.

Depreciation and Amortization.For 2007, depreciation and amortization expense increased $4.3 million, or 50%. The increase was
primarily due
to $1.5 million of depreciation of certain network equipment with shortened useful lives, and amortization of certain intangible assets acquired in the Pathfire, Point.360, GTN and FastChannel
transactions, as well as increases in network equipment associated with the larger customer base.

Interest Expense.For 2007, interest expense was virtually unchanged from 2006 after considering the write-off of $0.3 million of
costs related to a prior credit facility.

Unrealized Gain / Loss on Warrant.In 2007, the Company recorded an unrealized gain of $1.7 million due to the increase in value of
warrants
purchased from Enliven. The warrants met the definition of derivative instruments which required changes in value attributable to the warrants to be recorded in the statement of operations. Since the
purchase of the Enliven warrants occurred in 2007, there was no unrealized gain or loss in 2006.

Interest and Other Income.For 2007, interest and other income increased $0.7 million. The increase was due to interest earned on
cash
received in the December 2006 equity offering and excess cash on-hand.

Provision for Income Taxes.For 2007, the provision for income taxes was approximately 41% of income before income taxes as compared to
86% in 2006.
The 2006 effective tax rate includes the write-down of our investment in Verance. A valuation allowance was deemed necessary since we do not have an adequate history of generating capital
gains to offset capital losses when they occur for tax purposes, and therefore, ultimate realization of the benefit did not meet the "more likely than not" threshold.

Provision
for income taxes differs from the amounts that would have resulted from applying the federal statutory rate of 34% to our income before income taxes from continuing operations
as follows (in thousands):

2007

2006Expected tax expense at 34%

$
6,246

$
937State and foreign income taxes, net


911


207Other non-deductible items


198


358Other


146


Change in valuation allowance





876Provision for income taxes

$
7,501

$
2,378Effective tax rate


41
%

86
%


Discontinued Operations.For 2007 and 2006, discontinued operations represent the results of our StarGuide Digital Networks, Inc.
("StarGuide") and Corporate Computer Systems, Inc. ("CCS")

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Table of Contents

subsidiaries
prior to the sale of their assets in 2007. The loss from discontinued operations, net of tax, was $0.5 million and $1.0 million for 2007 and 2006, respectively. The 2006
loss includes a write-down of the CCS assets to their estimated net realizable value.

Financial Condition

The following table sets forth certain major balance sheet accounts of the Company as of December 31, 2008 and 2007 (in
thousands):

December 31,2008

2007Assets:Cash and cash equivalents

$
17,180

$
10,101Accounts receivable, net


42,971


26,516Property and equipment, net


37,980


27,466Long-term investments





15,001Deferred income taxes, net


7,777


4,667Goodwill and intangible assets, net


361,769


163,318Liabilities:Accounts payable and accrued liabilities


22,398


12,240Debt


173,137


44,775Stockholders' equity


269,518


192,129


Cash
and cash equivalents fluctuate with operating, investing and financing activities. In particular, cash and cash equivalents fluctuate with (i) operating results,
(ii) the timing of payments, (iii) capital expenditures, (iv) acquisition and investment activity, (v) borrowings and repayments of debt, and (vi) capital raising
activity.

Accounts
receivable generally fluctuate with the level of revenues. As revenues increase, accounts receivable tend to increase. Days' sales outstanding were 76 days,
79 days and 65 days as of December 31, 2008, 2007 and 2006, respectively. The decrease in 2008 in days' sales outstanding relates to improved collection efforts during the year.
As we acquire other businesses and their related accounts receivable portfolios, it takes us a period of time to transfer the new customer accounts over to our platform.
Once an account is on our platform we have a greater opportunity to reduce the length of the collection cycle.

Property
and equipment purchases tend to increase with the level of revenues and as a result of acquisition activity. Excluding acquisition activity, purchases of property and equipment
have typically been approximately $5 million to $7 million per year including capitalized costs of developing software. However, in 2008 these purchases have increased to
$18 million, largely as a result of a decision to pursue two non-recurring capital projects. The projects relate to (i) upgrading our Atlanta NOC to enable us to load balance
the distribution of our short form advertising content and (ii) upgrading our existing Spot Boxes with next generation Spot Boxes, which have greater storage capacity, faster processing speeds
and can accommodate multiple, simultaneous satellite feeds.

Long-term
investments consisted of an investment in Enliven common stock and warrants of $15.0 million at December 31, 2007 and an investment in Point.360
common stock of $5.2 million at December 31, 2006. During 2008 and 2007, the Company acquired the balance of Enliven and Point.360, respectively, it did not previously own which resulted
in Enliven and Point.360 becoming wholly-owned subsidiaries of the Company.

Deferred
income taxes, net relates primarily to Federal and state net operating loss carryforwards, partially offset by the excess book basis over the tax basis of certain identifiable
intangibles.

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Goodwill
and intangible assets, net increased as a result of the acquisitions of Enliven and Vyvx in 2008 and Pathfire, Point.360 and GTN in 2007, less amounts amortized. In connection
with these acquisitions, the purchase price was allocated among the assets acquired (including identifiable intangibles) and the liabilities assumed based upon their estimated fair values, with any
excess purchase price allocated to goodwill.

Accounts
payable and accrued liabilities increased $10.2 million in 2008 and were relatively flat in 2007. The 2008 increase relates primarily to (i) the timing of when
certain payments are made and (ii) liabilities incurred in connection with the acquisitions of Enliven and Vyvx.

Debt
increased in 2008 primarily as a result of the acquisition of Vyvx. In 2007 debt increased primarily as a result of the acquisitions of Pathfire, Point.360 and GTN.

Stockholders'
equity increased in 2008 primarily as a result of (i) issuing $68.1 million of our common stock in connection with the acquisition of Enliven and
(ii) reporting $15.1 million of net income, offset by a decrease in accumulated other comprehensive income of $7.2 million related to the reversal of unrealized appreciation, net
of tax, of our investment in Enliven and an unrealized loss in value of our interest rate swaps. Stockholders' equity increased in 2007 primarily as a result of (i) issuing $33.7 million
of our common stock in connection with the acquisition of Point.360, (ii) recording unrealized appreciation, net of tax, of $5.4 million related to our investment in Enliven, and
(iii) reporting $10.4 million of net income.

Liquidity and Capital Resources

Cash Flows

The following table sets forth a summary of our statements of cash flows (in thousands):

For the Years Ended December 31,2008

2007

2006Operating activities:Net income (loss)

$
15,079

$
10,413

$
(649
)Depreciation and amortization


21,351


12,865


9,146Deferred income taxes and other


11,720


6,486


7,867Changes in operating assets and liabilities, net


(6,770
)

(10,731
)

(4,899
)Total


41,380


19,033


11,465Investing activities:Purchases of property and equipment


(12,384
)

(4,143
)

(3,054
)Capitalized costs of developing software


(5,661
)

(3,282
)

(1,820
)Purchases of investments and other


7


(824
)

(4,752
)Acquisitions, net of cash acquired


(136,692
)

(48,655
)

(257
)Total


(154,730
)

(56,904
)

(9,883
)Financing activities:Borrowings (repayments) of debt, net


120,218


23,304


(10,745
)Proceeds from issuances of common stock, net


206


191


31,753Total


120,424


23,495


21,008Effect of exchange rate changes on cash


5


3


(2
)Net increase (decrease) in cash and cash equivalents


7,079


(14,373
)

22,588Cash and cash equivalents at beginning of year


10,101


24,474


1,886Cash and cash equivalents at end of year

$
17,180

$
10,101

$
24,474


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We
generate cash from operating activities principally from net income and from adding back certain non cash expenses such as (i) depreciation and amortization and
(ii) deferred income taxes. In 2008 we generated $41.4 million in cash from operating activities.

We
invest our cash in (i) property and equipment, (ii) the development of software, (iii) strategic investments and (iv) the acquisition of complementary
businesses. In 2008 we completed two acquisitions. We acquired the assets and certain liabilities of the Vyvx advertising services business for $135.4 million in cash and, we exchanged
2.9 million shares of our common stock for all of Enliven's common stock not previously held by us.

Cash
is obtained from financing activities principally as a result of issuing debt and equity instruments. In 2008 we obtained $120.2 million of cash by issuing debt, net of
repayments.

Sources of Liquidity

Our sources of liquidity include:



At
December 31, 2008 we had $17.2 million of cash on hand. Historically, we have generated significant amounts of cash from operating activities. We expect this trend will
continue.

We
currently have two credit facilities, a six-year, $145 million credit facility with a group of eight lenders (the "Senior Credit Facility") and a
two-year, $65 million subordinated unsecured term loan (the "Bridge Loan") with Bank of Montreal ("BMO").

The
Senior Credit Facility contains (i) $65 million of Term Loans, (ii) $50 million of Acquisition Loans, and (iii) $30 million of Revolving
Loans. Borrowings under the Senior Credit Facility bear interest at the base rate or LIBOR, plus the applicable margin for each that fluctuates with the total leverage ratio (as defined). At
December 31, 2008, borrowings under the Senior Credit Facility bore interest at a weighted average interest rate of 6.3% (excluding the amortization of fees and expenses). The Term Loans are
scheduled to mature in March 2013; however, we presently expect that between (i) scheduled quarterly principal payments of $3.25 million and (ii) excess cash flow ("ECF")
principal payment provisions, the Term Loans will be fully retired in 2012. The Acquisition Loans mature in March 2014 and have (i) scheduled quarterly principal payments of $0.1 million
and (ii) ECF principal payment provisions. The Revolving Loans mature in March 2013 and permit reborrowings, whereas the Term Loans and the Acquisition Loans do not. At December 31,
2008, we had $30 million of borrowings available to us under the Revolving Loans.

The
Bridge Loan was issued in June 2008 and initially bore interest at 11.0% per annum, with increases of 50 basis points per month beginning in August 2008 up to a maximum annual rate
of 15.0%. In addition, the Bridge Loan required us to pay funding fees totaling $1.0 million, and will require us to pay an anniversary fee of $3.9 million in the event the Bridge Loan
remains outstanding in June 2009. In accordance with EITF 86-15 relating to increasing rate debt, we have determined the periodic interest cost based upon the estimated term of the
debt. We presently expect we will repay or refinance the Bridge Loan shortly prior to its first anniversary date resulting in a periodic interest cost of 13.3% per annum (excluding the amortization of
fees and expenses). At December 31, 2008, borrowings under the Bridge Loan bore interest at 13.5% per annum (excluding the amortization of fees and expenses). The Bridge Loan matures in June
2010 and does not contain any scheduled principal payments prior to its maturity.

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The
Senior Credit Facility provides for future acquisitions and contains financial covenants pertaining to (i) the maximum total leverage ratio, (ii) the maximum senior
leverage ratio, (iii) the minimum fixed charge coverage ratio, and (iv) maintaining a minimum net worth. The Bridge Loan Agreement provides for future acquisitions and contains financial
covenants pertaining to (i) the maximum total leverage ratio and (ii) the minimum fixed charge coverage ratio. The Senior Credit Facility and the Bridge Loan Agreement also contain a
variety of restrictive covenants, such as limitations on borrowings,
investments and dividends, and provide for customary events of default. The Senior Credit Facility and the Bridge Loan Agreement are guaranteed by all of our subsidiaries and are secured by
substantially all of our assets. As of December 31, 2008, we were in compliance with all financial and restrictive covenants under the Senior Credit Facility and the Bridge Loan Agreement.

We
also have the ability to issue equity instruments. As discussed above, we issued 2.9 million shares of our common stock in connection with the purchase of Enliven. Previously,
we filed a shelf registration statement with the SEC for the issuance of (i) up to 3.5 million shares of our common stock and (ii) up to $25 million of preferred stock. The
SEC has reviewed the shelf registration statement and has notified us it had no further comments at the time, but would have the opportunity to issue additional comments prior to declaring the
registration statement effective.

We
believe our sources of liquidity, including our cash on hand and cash generated from operating and financing activities, will satisfy our capital needs for the next 12 months.

Cash Requirements

We expect to use cash in connection with:



During
2009, we expect we will:



We
expect to use cash to further expand and develop our business. While we presently have no definitive plans, we may seek to acquire or merge with another company that we believe would
be in the best interest of our shareholders.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America
requires us to make estimates and assumptions in determining 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 our estimates. Our significant accounting policies and methods used in the preparation
of our Consolidated Financial Statements are discussed in Note 2 of the Notes to Consolidated Financial Statements. Following is a discussion of our critical accounting policies.

Business Combinations.We account for business combinations under the purchase method of accounting. The total cost of an
acquisition is allocated to
the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the

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net
assets acquired is recorded as goodwill. Determining the nature of identifiable intangible assets and the fair value of assets acquired and liabilities assumed requires management's judgment and
often involves the use of significant estimates and assumptions. The value assigned to a specific asset or liability, and the period over which an asset is depreciated or amortized can impact future
earnings. Some of the more significant estimates made in business combinations relate to the values assigned to identifiable intangible assets, such as customer relationships and trade names, and the
period over which these assets are amortized.

Goodwill.On an annual basis, goodwill is tested for impairment using a two-step process. The first step is to identify a
potential
impairment by comparing the fair value of a reporting unit with its carrying amount. The estimated fair value of a reporting unit is determined based on a discounted cash flow analysis or other
methods of valuation including market capitalization. A discounted cash flow analysis requires us to make various assumptions, including assumptions about future cash flows, growth rates and discount
rates. The assumptions about future cash flows and growth rates are based on our long-term projections for each reporting unit. The discount rate used reflects our average cost of funds.
If necessary, the second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. To the extent the carrying
amount of goodwill exceeds the implied fair value a write-down of goodwill would be necessary. Both tests require the Company to identify the reporting units to which goodwill is
associated, a process which involves management judgment.

Impairment of Long-Lived Assets.Long-lived assets principally relate to identifiable intangible assets, such as customer
relationships and trade names, and property and equipment including capitalized internally-developed software and network equipment. In determining whether long-lived assets are impaired,
the accounting rules do not provide for an annual impairment test. Instead they require that a triggering event occur before testing an asset for impairment. Triggering events include poor operating
performance, significant negative trends and significant changes in the use of such assets. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold
the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, first a comparison of undiscounted future cash flows against the carrying value of the
asset is performed. If the carrying value exceeds the undiscounted future cash flows, the asset would be written down to its fair value. If the intent is to hold the asset for sale, then to the extent
the asset's carrying value is greater than its fair value less selling costs, an impairment loss is recognized for the difference. The most significant assumption relates to the projection of future
cash flows.

Income Taxes.Deferred taxes arise as a result of temporary differences between amounts recognized in accordance with generally
accepted accounting
principles and amounts recognized for federal income tax purposes. The Company has both deferred tax assets and deferred tax liabilities, which are shown on a net current and net
non-current basis on the accompanying consolidated balance sheets. Deferred tax assets relate primarily to net operating loss ("NOL") carryforwards. Deferred tax liabilities
relate primarily to intangible assets, such as customer relationships and trade names, some of which have little or no tax basis.

Valuation
allowances are provided against deferred tax assets if a determination is made that their ultimate realization is not likely. Significant judgment is required in making these
assessments, which generally relate to an acquired operation generating future taxable income. At December 31, 2008, we had established a valuation allowance of approximately
$86 million, the vast majority of which relates to NOL carryforwards acquired in the acquisition of Enliven. We will maintain a full valuation allowance on these acquired NOL carryforwards
until a determination is made as to the extent these acquired NOL carryforwards are limited under Section 382 of the Internal Revenue Code. Any future reduction in the valuation allowance of
the acquired NOL's will result in a decrease to goodwill.

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Revenue Recognition.We derive revenue from services which consist primarily of (i) the distribution of digital and analog
video and audio
media content, (ii) media research resources, and (iii) support and other services.

Our
services revenue from the digital distribution of video and audio advertising content generally is billed based on a rate per transmission, and we recognize revenue for these
services upon notification of a successful transmission of the content at the broadcast destination. Revenue for the distribution of analog video and audio content by tape is recognized when delivery
has occurred, which is at the time the tapes are delivered to a common carrier. Costs of shipping tapes and other products are included in cost of revenues.

Our
services revenue also includes access rights. For an agreed upon fee, we provide certain of our customers with access to our digital distribution network for a stated period. Using
our network, these customers are able to deliver a variety of programming content to their intended destinations. Access rights revenue is recognized ratably over the access period. We also charge
fees to monitor our network on behalf of our customers. The monitoring fees are recognized ratably over the monitoring period.

We
sell hardware and software to broadcast television stations to assist them in integrating the programming content they receive over our network throughout their workflow. Revenue from
the sale of hardware and software is recognized when delivery has occurred, which is at the time the hardware and software are delivered to a common carrier. We typically provide support agreements in
connection with these hardware and software sales. The support revenue is collected at the inception of the agreement, is deferred based on its fair value, and is recognized ratably over the support
period.

Our
online creative research revenue is generated on a subscription basis, where customers pay either monthly, quarterly, semi-annually, or annually in order to access our
database. We recognize revenue ratably over the subscription period.

Media
production and duplication includes a variety of ancillary services such as storage of client masters or other physical material, for which revenue is recognized monthly, after the
storage service has been performed. Revenue related to our other services is recognized on a per transaction basis after the service has been performed. If the service results in a tape or other
deliverable, revenue is recognized when delivery has occurred, which is at the time the tape or other deliverable is delivered to a common carrier.

Customers
pay a fixed fee per month for our media asset management and broadcast verification services. We recognize revenue ratably over the service period.

We
offer an online advertising system campaign management and deployment product. This system permits publishers, advertisers, and their agencies to manage the process of deploying
online advertising campaigns. We charge customers on a cost per thousand ("CPM") impressions basis, and recognizes revenue when the impressions are served.

We
have a creative services group that builds content in a specified format for customers. We charge fees for these services based on the time incurred and materials used to complete a
project. Revenue related to retainers is recognized ratably over the term of the retainer contract. Certain project revenue is recognized on a completed-contract basis. For projects in which we
believe we can reasonably estimate the total project costs and the portion of the entire project complete at any point, we use the proportional performance method for recognizing revenue. Under the
proportional performance method, revenue is recognized based on the level of effort incurred to date compared to the total estimated level of effort required for the entire project.

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New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." The statement defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Company adopted SFAS 157 as of January 1, 2008. In February 2008, the FASB issued
FASB Staff Position No. FAS 157-2, which partially defers the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. The Company does not expect SFAS No. 157-2 to have any impact on
its financial statements.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51." The statement
clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of
equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, and earlier adoption is prohibited. The Company is currently evaluating the impact of the adoption
of SFAS 160; however, it is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations," ("SFAS 141(R)"). SFAS 141(R) requires that upon initially obtaining control,
an acquirer will recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100% of its
target. Additionally, contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration and transaction costs will be
expensed as incurred. SFAS 141(R) also modifies the recognition for preacquisition contingencies, such as environmental or legal issues, restructuring plans and acquired research and
development value in purchase accounting. SFAS 141(R) amends SFAS No. 109, "Accounting for Income Taxes," to require the acquirer to recognize changes in the amount of its deferred tax
benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the
circumstances. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted. The adoption of
SFAS 141(R) is expected to have an impact on any business combination completed by the Company beginning in 2009.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133." The
statement amends and expands the disclosure requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." It requires qualitative disclosures about objectives
and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The principal impact of this statement will be
to require the Company to expand its disclosure regarding its derivative instruments, and will not have a material impact on the Company's consolidated financial position, results of operations or
cash flows.

In
May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." The statement identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements for nongovernmental entities that are presented in conformity with GAAP. SFAS 162 will be effective
60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles." The Company does not expect the adoption of SFAS 162 to have a material impact on its consolidated financial position, results of operations or cash flows.

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In
October 2008, the FASB issued FASB Staff Position (FSP) No. 157-3, "Determining the Fair Value of a Financial Asset When The Market For That Asset Is Not Active."
The staff position clarifies the application of SFAS No. 157, "Fair Value Measurements" in a market that is not
active. FSP 157-3 became effective upon issuance, including prior periods for which financial statements have not been issued. The Company adopted this FSP in 2008, and it did not have a
material impact on the Company's consolidated financial position, results of operation or cash flows.

Contractual Payment Obligations

The table below summarizes the Company's contractual obligations, including estimated interest, at December 31, 2008 (in
thousands):

Payments Expected by PeriodContractual Obligations

Total

Less Than
1 Year

1-3
Years

3-5
Years

After 5
YearsDebt (includes estimated interest)

$
210,077

$
36,971

$
112,615

$
19,422

$
41,069Operating leases


26,187


7,671


11,193


3,798


3,525Employment contracts


9,460


5,213


4,247





Unconditional purchase obligations


12,902


3,876


5,425


3,601


Total contractual obligations

$
258,626

$
53,731

$
133,480

$
26,821

$
44,594


Off-Balance Sheet Arrangements

The Company has entered into operating leases for all of its office facilities and certain equipment rentals. Generally these leases
are for periods of three to five years and usually contain one or more renewal options. The Company uses leasing arrangements to preserve capital. The Company expects to continue to lease the majority
of its office facilities under arrangements substantially consistent with the past. For the years ended December 31, 2008, 2007 and 2006 rent expense, net of sublease rentals, for all operating
leases amounted to approximately $5.0 million, $3.2 million and $3.4 million, respectively.

Other
than its operating leases, the Company is not a party to any off-balance sheet arrangement that management believes is reasonably likely to have a current or future
effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and changes in the
market value of financial instruments.

Foreign Currency Exchange Risk

The Company provides very limited services to entities located outside of the United States and, therefore, believes that the risk that
changes in exchange rates will adversely impact its results of operations is remote. Historically, our foreign currency exchange gains and losses have been immaterial.

Interest Rate Risk

The Company issued variable-rate debt that, as of December 31, 2008, had an outstanding balance of
$108.1 million. Of that amount, the Company entered into three-year interest rate swap agreements with certain financial institutions for $57.5 million. With respect to the
portion of the Company's variable-rate obligations outstanding at December 31, 2008 that is not subject to an interest rate swap agreement (i.e., $50.6 million), each 25
basis point increase or decrease in the level of interest rates

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would,
respectively, increase or decrease the Company's annual interest expense and related cash payments by approximately $0.1 million. These potential increases or decreases are based on
certain simplifying assumptions, including a constant level of variable-rate debt for all maturities and an immediate, across-the-board increase or decrease in the
level of interest rates with no other subsequent changes for the remainder of the year. Conversely, since almost all of the Company's cash balances ($17.2 million at December 31, 2008)
are invested in variable-rate interest earning assets, the Company would also earn more (less) interest income due to such an increase (decrease) in interest rates.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is set forth in the Company's Consolidated Financial Statements and the Notes thereto beginning
at Page F-1 of this report.

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

None

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the
period covered by thisAnnual Report on Form 10-K,the Company's management evaluated, with the participation of the Company's
principal executive officer and principal financial officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act). Based on their evaluation of these disclosure controls and procedures, the Company's chief executive officer and the Company's chief
financial officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation.

Management's Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Management
is using the framework set forth in the report entitled "Internal Control-Integrated Framework" published by the Committee of Sponsoring Organizations of the Treadway
Commission (referred to as "COSO") to evaluate the effectiveness of the Company's internal control over financial reporting. As permitted under the guidance of the SEC released October 16,
2004, in Question 3 of its "Frequently Asked Questions" regarding Securities Exchange Act Release No. 34-47986,Management's Report on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the scope of management's evaluation excluded two media content distribution businesses
acquired by the Company during 2008 namely (i) Vyvx, which was acquired on June 5, 2008, and (ii) Enliven, which was acquired on October 2, 2008. Accordingly, management's
assessment of the Company's internal control over financial reporting does not include the internal control over financial reporting of these two acquired businesses. As of December 31, 2008,
these two
businesses represented approximately 52% of our total assets and generated 18% of our total revenues during the year ended December 31, 2008. Based on our assessment, management has concluded
the Company's internal control over financial reporting was effective as of December 31, 2008.

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The
Company's internal control over financial reporting as of December 31, 2008, has been audited by Ernst & Young LLP, an independent registered public accounting
firm. Ernst & Young's report on the Company's internal control over financial reporting appears below.

Changes in Internal Controls over Financial Reporting

During the three months ended December 31, 2008, there have been no changes in the Company's internal control over financial
reporting that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders of
DG FastChannel, Inc.

We
have audited DG FastChannel, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying "Management's Report on
Internal Control over Financial Reporting." Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based upon the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As
indicated in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, management's assessment of and conclusions on the effectiveness of internal control over
financial reporting did not include the internal controls of Vyvx and Enliven Marketing Technologies, Inc., which are included in the 2008 consolidated financial statements of
DG FastChannel, Inc. and subsidiaries and constituted 52% total assets as of December 31, 2008 and generated 18% of total revenues for the year then ended. Our audit of internal
control over financial reporting of DG FastChannel, Inc. and subsidiaries also did not include an evaluation of the internal control over financial reporting of Vyvx and Enliven
Marketing Technologies, Inc.

In
our opinion, DG FastChannel, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO
criteria.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of DG FastChannel, Inc. and subsidiaries
as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended of DG FastChannel, Inc. and
subsidiaries and our report dated March 9, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


Dallas,
Texas
March 9, 2009

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ITEM 9B.    OTHER INFORMATION

Not applicable.

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers and Directors

The following table sets forth certain information concerning our executive officers and directors as of February 28, 2009:

Name

Age

Title(s)

Expiration of Term as DirectorScott K. Ginsburg(1)


56

Chief Executive Officer and Chairman of the Board


2010Omar A. Choucair(1)


47

Chief Financial Officer and Director


2009William Donner(2)


56

Director


2011Lisa C. Gallagher(3)


52

Director


2009Kevin C. Howe(2),(3)


60

Director


2011David M. Kantor(3)


52

Director


2009Anthony J. LeVecchio(2)


62

Director


2011Neil H. Nguyen


35

Executive Vice President of Sales and Operations


N/APamela Maythenyi


53

Senior Vice President of SourceEcreative


N/A


---

Scott K. Ginsburgjoined the Company in December 1998 as Chief Executive Officer and Chairman of the Board. In July 1999, Matthew E.
Devine assumed the responsibilities as Chief Executive Officer, but Mr. Ginsburg remained the Company's Chairman. Mr. Ginsburg reassumed the responsibilities as Chief Executive Officer
of the Company in November 2003 following Mr. Devine's resignation. Mr. Ginsburg founded the Boardwalk Auto Group in 1998, which consists of several car dealerships located in the Dallas
area. From 1997 to 1998, Mr. Ginsburg served as Chief Executive Officer and Director of Chancellor Media Corporation (now part of Clear Channel Communications, Inc.). Mr. Ginsburg
founded Evergreen Media Corporation in 1988, and was the co-founder of Statewide Broadcasting, Inc. and H&G Communications, Inc. Mr. Ginsburg earned a B.A. from George
Washington University in 1974 and a J.D. from Georgetown University in 1978.

Omar A. Choucairjoined the Company as Chief Financial Officer in July 1999 and has been a member of the Board of Directors of the Company
since November 2000. Prior to joining the Company, Mr. Choucair served as Vice President of Finance for AMFM, Inc. (formerly Chancellor Media Corporation) and served as Vice President of
Finance for Evergreen Media Corporation before it was acquired by Chancellor Media Corporation in 1997. Prior to entering the media industry, Mr. Choucair was a Senior Manager at
KPMG LLP, where he specialized in media and telecommunications clients. Mr. Choucair received a B.B.A. from Baylor University.

William Donnerhas been a member of the Board of Directors of the Company since May 2006 after having served as a director of FastChannel
Network, Inc. Since 2004, Mr. Donner has served as CEO of MedCommons, a personal health record storage and transport company. In the early 1980s, Mr. Donner built and ran
Precision Business Systems, a Wall Street based systems integrator. Precision Business Systems was sold to Bank of America in 1988 and subsequently, a division was sold to

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Reuters, PLC,
where Mr. Donner ran the Reuters Dealing 2001 and 2002 Trading Services. In 1994, Mr. Donner was named Chief Architect of Reuters where he ran the central research
group. Mr. Donner joined the Greenhouse Group, Reuters' corporate venture capital arm, in 1996. In 1999, Mr. Donner joined Fenway Partners, a private equity fund, where he led the
technology investment group. Mr. Donner holds a B.S.E.E. from Massachusetts Institute of Technology.

Lisa C. Gallagherhas been a member of the Board of Directors of the Company since May 2006 after having served first as a director, and
most recently as Chairman of the Board of Directors, of FastChannel Network, Inc. since 2002. Since 2003, Ms. Gallagher has served as the Senior Vice President and Chief Operating
Officer of Hawtan Leathers, a privately held international manufacturer of specialty leathers for the garment industry. She previously spent over 20 years as both a commercial as well as
investment banker specializing in media transactions. She started her banking career in the early 1980s at the Bank of Boston and in 1997 moved to its investment bank, BancBoston Securities as
Managing Director to run their Media & Communications Group. In 1998 she became Managing Director and Group head of the Internet/Media Convergence Group of Robertson Stephens, a leading high
technology investment banking firm, upon the BancBoston Securities acquisition of Robertson Stephens. After leaving Robertson Stephens in 2001, she worked for Remy Capital Partners, a small investment
banking boutique, before joining Hawtan Leathers. Ms. Gallagher holds a B.A. from Mount Holyoke College and an M.B.A. from the Simmons Graduate School of Management in Boston.

Kevin C. Howehas been a member of the Board of Directors of the Company since February 2001. Since 1999, he has been the Managing Partner
of Mercury Ventures. Mercury Ventures manages seven different funds that invest in emerging technology companies that focus on Internet applications. Mr. Howe served on the board of The Sage
Group, plc. which is traded on the London Stock Exchange from 1991 to 2005. Mr. Howe also sits on the boards of two privately held technology firms. In 1985, he co-founded
DacEasy, an early leader in packaged application software. In 1987, Mr. Howe led the sale of DacEasy to Insilco (a Fortune 500 company). In 1991, Mr. Howe led the carve-out
of DacEasy from Insilco and subsequent sale to The Sage Group, plc. which had market capitalization of over $7 billion. He was Chief Executive Officer of the US operations of The Sage
Group, plc. responsible for operations and acquisitions until 1999. In 1993, Mr. Howe also co-founded Martin Howe Associates, which was an early leader in the merchant credit
card processing industry and a pioneer in wireless solutions. The company was sold in 1997 to PMT Services, Inc., a Nasdaq listed company. Mr. Howe received his MBA from Southern
Methodist University in 1976.

David M. Kantorhas been a member of the Board of Directors of the Company since August 1999. Since 2003, Mr. Kantor has been Vice
Chairperson and Chief Executive Officer of Reach Media, a company that develops, acquires and partners in quality media and marketing opportunities targeting the African-American population. Formerly,
he was Senior Vice President for Network Operations of AMFM, Inc. (formerly Chancellor Media Corporation) and President of ABC Radio Network, having previously served as Executive Vice
President. Prior to joining ABC Radio Network, he held executive positions with Cox Cable and Satellite Music Network. Mr. Kantor holds a B.S. from the University of Massachusetts and an MBA
from Harvard Business School.

Anthony J. LeVecchiohas been a member of the Board of Directors of the Company since August 2004. Since its formation in 1988, he has
been the President of The James Group, a general business consulting firm that has advised clients across a range of high-tech industries. Prior to forming The James Group in 1988,
Mr. LeVecchio was the Senior Vice President and Chief Financial Officer for VHA Southwest, Inc., a regional healthcare system. He currently serves on the Board of Directors of
Microtune, Inc., a company that is listed on the Nasdaq Global Market, and serves as the Chairman of its Audit Committee. He currently serves on the Board of Directors of Ascendent
Solutions, Inc., a company that is tracked on the OTC Bulletin Board and serves as the Chairman of its Audit Committee. He also serves on the Board of Directors of Viewpoint Financial Group, a
Plano, Texas

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based
bank holding group traded on the Nasdaq Global Select Market and is on their audit and compensation committees.

Neil H. Nguyenjoined the Company as Executive Vice President of Sales and Operations in March 2005. Prior to joining the Company, from
1998 to 2002, Mr. Nguyen served as President of Point.360's MultiMedia Group and also served in various senior management roles at FastChannel Network including Executive Vice President,
Strategic Planning and Vice President Global Sales and Business Development from 2003 to 2005. Mr. Nguyen received a B.S. from California State University, Northridge.

Pamela Maythenyijoined the Company as Senior Vice President of SourceEcreative in August 2004. Prior to joining the Company,
Ms. Maythenyi owned The Source Maythenyi (also known as Source TV), which she formed in 1988 and sold to the Company in 2004, at which time she was hired by the Company to oversee that division
now known as SourceEcreative. Formerly, she was a producer for BBDO and executive producer for J. Walter Thomson. Ms. Maythenyi received a B.A. from the University of Florida.

Corporate Governance



The Board of Directors has determined, after considering all of the relevant facts and circumstances, that each of Mr. Howe,
Mr. Kantor, Mr. LeVecchio, Mr. Donner and Ms. Gallagher is independent from our management, and is an "independent director" as defined under the Nasdaq Marketplace Rules.
This means that none of those directors (1) is an officer or employee of the Company or its subsidiaries or (2) has any direct or indirect relationship with the Company that would
interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director. As a result, the Company has a majority of independent directors as required by the
Nasdaq Marketplace Rules.



The Company has adopted a Code of Business Conduct and Ethics that applies to its directors, officers and employees. A copy of the
Company's Code of Business Conduct and Ethics is available on its website atwww.dgfastchannel.comby clicking first on "Who We Are," then on
"Careers & Ethics." The Company will also provide a copy of its Code of Business Conduct and Ethics, without charge, to any stockholder who so requests in writing.



Stockholders may communicate with the Board of Directors by writing to the Board in care of the Company's Secretary, DG
FastChannel, Inc., 750 West John Carpenter Freeway, Suite 700, Irving, Texas 75039. The Board of Directors has delegated responsibility for initial review of stockholder communications
to the Company's Secretary. In accordance with the Board's instructions, the Secretary will forward the communication to the director or directors to whom it is addressed, except for communications
that are (1) advertisements or promotional communications, (2) solely related to complaints by users with respect to ordinary course of business customer service and satisfaction issues
or (3) clearly unrelated to our business, industry, management or Board or committee matters. In addition, the Secretary will make all communications available to each member of the Board, at
the Board's next regularly scheduled meeting.

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Board Committees

The Board of Directors of the Company has three standing committees: the Audit Committee, the Compensation Committee and the Executive
Committee. None of the directors who serve as members of the Audit Committee or the Compensation Committee are employees of the Company or any of its subsidiaries. The Company has no nominating
committee or committee that recommends qualified candidates to the Board of Directors for nomination or election as directors.



The Audit Committee operates under an Amended and Restated Charter of the Audit Committee adopted by the Company's Board of Directors,
a copy of which was attached asAppendix Ato the Company's 2007 Proxy Statement.

The
Audit Committee's functions include:



The
Audit Committee is composed solely of directors who are not officers or employees of the Company and who, the Company believes, have the requisite financial literacy to serve on the
Audit Committee, have no relationship to the Company that might interfere with the exercise of their independent judgment, and meet the standards of independence for members of an audit committee
under the rules of the Securities and Exchange Commission (the "SEC") and under the Nasdaq Marketplace Rules.

In
accordance with the rules and regulations of the SEC, the preceding paragraph regarding the independence of the members of the Audit Committee shall not be deemed to be "soliciting
material" or to be "filed" with the SEC or subject to Regulations 14A or 14C of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or to the liabilities of Section 18
of the Exchange Act and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, notwithstanding
any general incorporation by reference of this section into any other filed document.

Messrs. LeVecchio
(Chairman), Donner and Howe are the current members of the Audit Committee. The Board of Directors, after reviewing all of the relevant facts, circumstances and
attributes, has determined that Mr. LeVecchio, the Chairman of the Audit Committee, is the sole "audit committee financial expert" on the Audit Committee.

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The Compensation Committee's functions include:



See
"Executive CompensationCompensation Committee Report" below. Messrs. Howe (Chairman) and Kantor and Ms. Gallagher are the current members of the
Compensation Committee. All current members of the Compensation Committee are "independent directors" as defined under the Nasdaq Marketplace Rules.



The Executive Committee was established in January 2001. The Executive Committee has the authority, between meetings of the Board of
Directors, to take all actions with respect to the management of the Company's business that require action by the Board of Directors, except with respect to certain specified matters that by law must
be approved by the entire Board of Directors. Messrs. Ginsburg and Choucair are the current members of the Executive Committee.

Attendance at Meetings of the Board of Directors and Committees

During 2008, the Board of Directors held eleven meetings. The Audit Committee held five meetings during 2008, and the Compensation
Committee held 3 meetings during 2008. All persons who were directors during 2008 attended at least 75% of the total of the Board meetings and the meetings of committees on which they served
that were held while such person served as a director.

Nominations to the Board of Directors

The Board of Directors does not have a nominating committee or other committee that recommends qualified candidates to the Board for
nomination or election as directors. The Board of Directors believes that, because of its relatively small size, it is sufficient for the independent directors to select or recommend director
nominees. The Board of Directors has adopted a nominations process that provides that the Company's independent directors (as defined under the Nasdaq Marketplace Rules), acting by a majority, are
authorized to recommend individuals to the Board of Directors for the Board's selection as director nominees. Under the rules promulgated by the SEC, the independent directors are, therefore, treated
as a "nominating committee" for the purpose of the disclosures in this section.

With
respect to the nominations process, the independent directors do not operate under a written charter, but under resolutions adopted by the Board of Directors.

The
independent directors are responsible for reviewing and interviewing qualified candidates to serve on the Board of Directors, for making recommendations to the full Board for
nominations to fill vacancies on the Board, and for selecting the management nominees for the directors to be elected by the Company's stockholders at each annual meeting. The independent directors
have not established specific minimum age, education, experience or skill requirements for potential directors. The independent directors have, however, been authorized by the Board of Directors to
take into account all factors they consider appropriate in fulfilling their responsibilities to identify and recommend

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individuals
to the Board as director nominees. Those factors may include, without limitation, the following:



The
independent directors may use multiple sources for identifying and evaluating nominees for directors, including referrals from the Company's current directors and management as well
as input from third parties, including executive search firms retained by the Board. The independent directors will obtain background information about candidates, which may include information from
directors' and officers' questionnaires and background and reference checks, and will then interview qualified candidates. The Company's other directors will also have an opportunity to meet and
interview qualified candidates. The independent directors will then determine, based on the background information and the information obtained in the interviews, whether to recommend to the Board of
Directors that a candidate be nominated to the Board.

The
independent directors will consider qualified nominees recommended by stockholders, who may submit recommendations to the independent directors in care of the Company's Board of
Directors through a written notice as described under "Corporate GovernanceCommunications with the Board of Directors" above. To be considered by the independent directors, a
stockholder nomination for election at the 2010 annual meeting (1) must be submitted by December 4, 2009, (2) must contain a statement by the stockholder that such stockholder
holds, and has continuously held for at least a year before the nomination, at least $2,000 in market value or 1% of the shares of Common Stock and that such stockholder will continue to hold at least
that number of shares through the date of the annual meeting of stockholders, and (3) must be accompanied by a description of the qualifications of the proposed candidate and a written
statement from the proposed candidate that he or she is willing to be nominated and desires to serve, if elected. Nominees for director who are recommended by the Company's stockholders will be
evaluated in the same manner as any other nominee for director.

Director Compensation

Directors of the Company receive compensation for services provided as a director as well as reimbursement for documented reasonable
expenses incurred in connection with attendance at meetings of the Board and the committees thereof. The Company pays its directors an annual cash retainer of $12,000 plus $1,500 per meeting attended.
Mr. LeVecchio is paid $13,000 as an additional retainer, as Chairman of the Audit Committee. Directors of the Company are also eligible to receive stock-based compensation.

Section 16(a) Beneficial Ownership Reporting Compliance

The members of the Board of Directors, the officers of the Company and persons who hold more than 10% of the Company's outstanding
common stock are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, which require them to file reports with respect to their ownership of
the Company's common stock and their transactions in such common

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stock.
Based upon (i) the copies of Section 16(a) reports that the Company received from such persons for their 2008 fiscal year transactions in the common stock and their common stock
holdings and (ii) the written representation received from one or more of such persons that no annual Form 5 reports were required to be filed by them for the 2008 fiscal year, the
Company believes that all reporting requirements under Section 16(a) for such fiscal year were met in a timely manner by its officers, Board members and greater than 10% shareholders at all
times during the 2008 fiscal year.

Other Information

In September 1999, a civil lawsuit was filed by the SEC in the United States District Court for the Southern District of Florida
against Scott K. Ginsburg, the Chairman of the Board of the Company, his brother and his father. The lawsuit alleged that Mr. Ginsburg had violated the insider trading provisions of the federal
securities laws by communicating material, non-public information to his brother in 1996 regarding the securities of EZ Communications, Inc. ("EZ") and in 1997 regarding the
securities of Katz Media, Inc. ("Katz"). The lawsuit further alleged that Mr. Ginsburg's father and brother, relying upon the information allegedly
furnished by Mr. Ginsburg, purchased securities in EZ and Katz, and subsequently profited from the sale of such securities.

In
April 2002, a jury found that Mr. Ginsburg did make these communications, known as "tipping," and therefore concluded that he had violated Sections 10(b) and 14(e) of
the Exchange Act and Rules 10b-5 and 14e-3 thereunder. In July 2002, the United States District Court imposed a $1,000,000 civil penalty against Mr. Ginsburg.

Mr. Ginsburg
filed a motion asking the Court to set aside its ruling and the verdict of the jury. On December 19, 2002, the United States District Court granted
Mr. Ginsburg's motion for judgment notwithstanding the verdict. The Court overturned the jury verdict in its entirety and set aside the civil penalty.

On
February 13, 2003, the SEC filed a Notice of Appeal, seeking to reverse the Court's decision and challenging the Court's earlier refusal to impose an injunction against
Mr. Ginsburg. In March 19, 2004 a decision of a three-judge panel of the Eleventh Circuit U.S. Court of Appeals reversed the decision by the U.S. District Court for the Southern District
of Florida on December 19, 2002. The Court of Appeals (i) reinstated the jury verdict that Mr. Ginsburg had, in matters unrelated to the Company, violated Sections 10(b)
and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder, (ii) reinstated a $1 million civil penalty against Mr. Ginsburg and
(iii) remanded the case to the District Court with instructions to enjoin Mr. Ginsburg from violations of the federal securities laws and regulations. The Court of Appeals did not bar
Mr. Ginsburg from serving as an officer or director of a public company and the Company's Board immediately and unanimously moved to affirm Mr. Ginsburg in his capacity as Chairman of
the Board of Directors.

ITEM 11.    EXECUTIVE COMPENSATION

Compensation Discussion and Analysis



The Compensation Committee believes that the most effective executive compensation program is one that is designed to reward the
achievement of specific annual, long-term and strategic goals by the Company, and which aligns executives' interests with those of the stockholders by rewarding performance at or above
established goals, with the ultimate objective of improving stockholder value. The philosophy of the Compensation Committee is to evaluate both performance and compensation to ensure that we maintain
our ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated
executives of our peer companies. Additionally, the Compensation Committee

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maintains
flexibility, enabling management and the Board to make decisions based on the needs of the business and to recognize different levels of individual contribution and value creation. To that
end, the Compensation Committee believes executive compensation packages should include both cash and equity-based compensation that reward performance as measured against established goals.



The Compensation Committee reviews our compensation plans which were developed in conjunction with Company management who utilized
publicly available compensation data in the media services and technology industries. We believe that the practices of these groups of companies provide us with appropriate compensation benchmarks,
because these groups of companies are in similar businesses and tend to compete with us for executives and other employees. For benchmarking executive compensation, we typically review the
compensation data we have collected from these groups of companies, as well as a subset of the data from those companies that have a similar number of employees as the Company. For purposes of
determining executive compensation, we engaged consultants to help us analyze this data and to compare our compensation programs with the practices of the companies represented in the compensation
data we review.

As
the basis for its 2008 comparative review, the Compensation Committee determined the appropriate companies to include in the executive compensation peer group. The Compensation
Committee believes that the Company's most direct competitors for executive talent include a broader range of large capitalization companies than those firms with which the Company might be compared
for stock performance purposes. As a result, the Compensation Committee included companies in the compensation comparison group beyond those included in the Company's peer group index that appears in
the stock performance graph contained in Item 5. For 2008, the Committee compared the Company's executive compensation levels with available information for similar executive positions at
companies in a broad industry group of technology, media, and telecommunications companies comparable in size to the Company (the "industry group"). The companies included in the industry group were
MediaLink, Avid, LodgeNet, ValueClick, Akamai, Limelight, Omniture, Cinedigm, and National Cinemedia. With respect to the Company's executive officers, because information for each position being
reviewed was not available for comparable positions at each company in the industry group, the companies included in the market competitive data used by the Committee in its review varied for each
position.

Based
on management's analyses and recommendations, the Compensation Committee has approved a pay-for-performance compensation philosophy, which is intended to
establish base salaries and total executive compensation (taking into consideration the executive's experience and abilities) that are competitive with those companies with a similar number of
employees represented in the compensation data we review.

We
work within the framework of this pay-for-performance compensation philosophy to determine each component of an executive's initial compensation package based
on numerous factors, including:



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Employment Agreements

We have entered into employment agreements with all executive officers, the key terms of which are described in the narrative following
the Summary Compensation Table. We believe that having employment agreements with our executives is often beneficial to us because it provides retentive value and generally gives us a competitive
advantage in the recruiting process over a company that does not offer an employment agreement. Our employment agreements set forth the terms and conditions of employment and establish the components
of an executive's compensation, which generally include the following:



Our
employment agreements, also contain key provisions in the event of an executive's termination or resignation, setting forth the circumstances under which an executive may resign for
"good reason" or that we may terminate the agreement "for cause," and formalizing restrictive covenants such as commitments not to join a competitor within a set time frame, not to solicit our
employees to leave our Company, and to protect our confidential information, among others. The events that constitute a termination for "good reason" are negotiated in connection with the employment
agreement and generally include such events as substantial changes in the executive's duties or reporting structure, relocation requirements, reductions in compensation and any breach by us of the
agreement. There are change-in-control provisions in certain of our employment agreements.

Key Considerations in Determining Executive Compensation

In general, the terms of our executive employment agreements are initially negotiated by our CEO and CFO, as appropriate, and legal
counsel. The agreements for our executives over whose compensation the Compensation Committee has authority are presented to the Compensation Committee for consideration. When appropriate, such as in
the case of the agreements for Messrs. Ginsburg, Choucair, and Nguyen, the Compensation Committee takes an active role in the negotiation process. The Compensation Committee also establishes
from time to time the general compensation principles set forth in our executive employment agreements.

During
the review and approval process for the employment agreements for executives under its purview, the Compensation Committee considers the appropriate amounts for each component of
compensation and the compensation design appropriate for the individual executive. In its analysis, the Compensation Committee considers the individual's credentials, and if applicable, performance at
the Company, the compensation history of the executive, data on the compensation of individuals in comparable positions at our Company and the total projected value of the compensation package to the
executive.

The
Compensation Committee does exercise the discretion to increase or decrease awards or payouts, except for base salary, which has an established minimum set forth in the respective
employment agreements.

The
Compensation Committee does not use rigid guidelines in determining the mix of compensation elements (i.e., long-term versus currently paid out compensation and
cash versus non-cash compensation) for each senior executive.

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For the fiscal year ended December 31, 2008, the principal components of compensation that our named executive officers were
eligible to receive were:



The
Company determines the total target compensation for its executive officers based, upon (i) publicly available compensation data within the industry group selected by the
Compensation Committee, set forth above (ii) experience, and (iii) internal equity. The companies included within the Company's survey for 2008 comprise an industry group which change
over time for various reasons, including the acquisition by the Company of certain of such companies, and other companies of similar size entering the segment of the technology, media and
telecommunications industry in which the Company competes.

Utilizing
this industry data, together with information relating to the individual executive officer's credentials, performance and compensation history at the Company, and the
compensation history of that executive officer and the other executive officers at the Company, the Compensation Committee establishes a target range of total compensation that it believes is
appropriate for each executive officer. The Compensation Committee then seeks to establish each element of compensation in an amount that will optimally motivate the executive officer, but keeping
within the target compensation range. The Compensation Committee does not utilize formulas in establishing the amounts for each element of pay, because the Committee believes that the appropriate mix
among the various elements of compensation differs for the various executive officers based on various factors, including but not limited to their need for current income as opposed to
long-term compensation. The Company believes that it is better able to achieve the appropriate mix among the various elements of compensation for each executive officer through
negotiations directly with that officer, rather than by applying formulas. However, the Compensation Committee believes that all executive officers should have a significant amount of their total
compensation package in the form of performance-based incentive compensation (annual cash bonus) and long-term equity incentive compensation. The amounts reflected in the Summary
Compensation Table and their individual employment agreements reflect this process.



Base salaries for our executives are established based on the scope of their responsibilities and their prior relevant background,
track record, training and experience, taking into account competitive market compensation paid by the companies represented in the compensation data we review for similar positions and the overall
market demand for such executives at the time the
respective employment agreements are negotiated. As with total executive compensation, we believe that executive base salaries should be competitive with the range of salaries for executives in
similar positions and with similar responsibilities in the companies of similar size to us represented in the compensation data we review. An executive's base salary is also evaluated together with
components of the executive's other compensation to ensure that the executive's total compensation is consistent with our overall compensation philosophy.

The
base salaries were established in arms-length negotiations between the executive and the Company, taking into account their extensive experience, knowledge of the
industry, track record, and achievements on behalf of the Company. Although the Company considered the same factors in

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establishing
the base salaries of each of the executives, due to the different levels of satisfaction of such factors by each executive, the base salaries are, in certain cases, substantially
different. Specifically, due to his extensive experience, responsibilities and significant market demand, the Company believes that it is appropriate that Mr. Ginsburg's base salary is
substantially higher than the Company's other executives.

Base
salaries are adjusted annually in accordance with the terms of the executive's employment agreement.

With
respect to the Chairman and our other executive officers, the Compensation Committee believes that using the industry group provides comparative data on the companies that are most
likely to compete directly with the Company for senior executive talent.

Consistent
with the Company's financial performance expectations, its size and complexity, and each executive's position relative to similarly situated executives in each of the peer
groups noted above, the Committee generally targets total direct compensation, which is composed of base salary, target annual cash bonus, and the estimated value of stock-based awards.



Our compensation program includes eligibility for an annual performance-based cash bonus. The amount of the cash bonus is generally
consistent with the targeted bonus established in the executive's employment contract and may be adjusted on a discretionary basis, based on performance, in accordance with the employment contract.
All executives are eligible for annual
performance-based cash bonuses as set forth in their employment agreements and in accordance with Company policies. As provided in their employment agreements, our Chief Executive Officer and Chief
Financial Officer are eligible for annual performance-based cash bonuses of up to $337,500 and $140,000 respectively (which amounts are adjusted upward during the term of the agreement). In its
discretion, the Compensation Committee and Board of Directors may, however, award a bonus payment above or below this target amount.

In
the Compensation Committee's view, the use of annual cash bonuses that are based on performance creates a direct link between executive compensation and individual and business
performance.

The
Compensation Committee establishes specific criteria to assist it in determining the annual bonuses for the Chief Executive Officer and other executives. The Compensation Committee
established bonuses pursuant to the target contractual bonuses detailed in the executive's employment agreement, which represent the amount the Company would expect to pay the executive each year for
satisfactory performance. Thus, if the Company achieves its financial objectives and the executive achieves his or her individual goals, receipt of at least the target bonus amount by each executive
is likely. While these goals are used as a guide by the Compensation Committee in determining the bonuses to be paid to the executives, the Compensation Committee has the discretion in making its
bonus determinations and it has done so in individual bonus determinations.

In
evaluating the Company's performance and each individual executive's 2008 performance, the Compensation Committee determined that the Company and its executives generally met or
exceeded the financial and individual goals that were established for 2008.

These
metrics are used because they encourage executives to achieve superior operating results using appropriate levels of capital. In its assessment of whether the goals are met, the
Committee may consider the nature of unusual expenses or contributors to financial results, and authorize adjustments in its sole discretion.

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The
individual goals established for Mr. Ginsburg and the other named executives at the beginning of 2008 included strategic and leadership goals tailored to the individual's
position, and focused on the Company's strategic initiatives. The following is a summary of the individual goals for Mr. Ginsburg, all of which were completed during
2008:



The
Committee established these goals with the objective that they would help to enhance stockholder value. The Compensation Committee did not establish specific quantitative targets for
the financial goals described above. These accomplishments, in addition to the Company's financial performance as a whole, served as a basis for the Committee's determination of the bonus to approve
for Mr. Ginsburg and the other executive officers.

Mr. Ginsburg's Annual Bonus.As discussed above, the Compensation Committee believes that Mr. Ginsburg's annual cash bonus
should be
clearly linked to the Company's financial performance and his individual performance to further the compensation philosophy regarding accountability. In determining and approving Mr. Ginsburg's
bonus, the Committee evaluated the Company's financial performance against Mr. Ginsburg's individual performance covering his roles as both the Chairman of the Board and the Chief Executive
Officer of the Company, which focused on major business initiatives and objectives of the Company. The Committee also retained the discretion to consider other factors in setting Mr. Ginsburg's
bonus. As a result, in recognition of Mr. Ginsburg's and the Company's significant accomplishments in 2008, the Compensation Committee approved and paid a 2008 bonus for him of $538,750 which
included $337,500 for his contractual target bonus plus an additional $201,250 as a discretionary bonus. In addition, the 2007 bonus in the amount of $262,500 was paid earlier in 2008.

In
considering the individual performance of Mr. Ginsburg, the Compensation Committee noted, among other things, Mr. Ginsburg's outstanding financial, strategic and
leadership accomplishments. To strengthen the portfolio of businesses, Mr. Ginsburg oversaw the acquisitions of Vyvx and Enliven. Mr. Ginsburg also pursued several initiatives to
streamline and grow the Company's business. Based on these accomplishments the Compensation Committee approved the discretionary bonus of $201,250
because the Compensation Committee believed that Mr. Ginsburg's efforts would not be adequately rewarded with a bonus equal to his contractual target bonus.

Annual Bonuses for Executives Other than the Chief Executive Officer.The Compensation Committee established the 2008 cash bonuses for
other
executives in a similar manner as for Mr. Ginsburg. In establishing the 2008 bonuses, the Committee reviewed the Company's financial performance and the individual performance of each
executive. In light of their and the Company's achievements, the Company's executives were awarded 2008 annual cash bonuses (set forth in the Summary Compensation Table).

In
determining and approving Mr. Choucair's bonus, the Committee evaluated the Company's financial performance against Mr. Choucair's individual performance covering his
role as the Chief Financial Officer of the Company, which focused on major business initiatives and objectives of the Company. The Committee also retained the discretion to consider other factors in
setting Mr. Choucair's bonus. Mr. Choucair was awarded and paid a cash bonus of $300,500 which included $140,000 for his contractual target bonus plus an additional $160,500 as a
discretionary bonus. In addition, the 2007 bonus in the amount of $120,000 was also paid earlier in 2008.

The
individual goals for Mr. Choucair, all of which were completed during 2008, were substantially the same as those goals indicated for Mr. Ginsburg. The individual
accomplishments for Mr. Ginsburg

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and
Mr. Choucair included both the completion of certain projects led by those officers (i.e., completion of the Vyvx Ads and Enliven transactions and an enhanced senior credit facility), as
well as achievement by the Company of certain financial objectives under the supervision of those officers. The Company's financial objectives under the supervision of Mr. Ginsburg and
Mr. Choucair included achieving revenue and margin improvements throughout the Company, achieving cost reductions through streamlined organizational structures and achieving operating cost
synergies relating to the Vyvx Ads and Enliven transactions and the transactions completed during 2007. The Compensation Committee did not establish any formula with respect to any of the foregoing
financial objectives because the Compensation Committee believed that it would be in better position to evaluate the satisfaction of these financial objectives throughout the year, in light of the
performance of the Company relative to the industry and the economy in general.

In
addition, the Compensation Committee approved for Mr. Nguyen a cash bonus of $250,000 which included $140,000 for his contractual target bonus plus an additional $110,000 as a
discretionary bonus. Ms. Maythenyi received a bonus totaling $30,000 for 2008, in accordance with the terms of her employment agreement.

The
following is a summary of the individual goals for Mr. Nguyen, all of which were achieved during 2008:



The
following is a summary of the individual goal for Ms. Maythenyi, which was achieved during 2008:





We believe that long-term performance is achieved through an ownership culture that encourages long-term
participation by our executives in equity-based awards. Our 2006 Long-term Stock Incentive Plan (the "2006 Plan") allows us to grant stock options to employees. We currently make initial
equity awards of stock options to new executive and certain non-executive employees in connection with their employment with the Company. Annual grants of options, if any, are approved by
the Compensation Committee.

All
of the stock option grants to executive officers have been made with the exercise prices equal to the fair market value of our Common Stock on the dates of grant, and our officers
are able to profit from their stock options only if the stock price appreciates from the value on the date the stock options were
granted. The use of stock options and restricted stock units is intended to focus executives on the enhancement of shareholder value over the long-term, to encourage equity ownership in
the Company and to retain key executive talent.

Initial Equity Incentives.Executives and certain non-executive employees who join us are awarded initial stock option grants. These
grants have an exercise price equal to the fair market value of our common stock on the later of the grant date or the date the employee joins us, and they typically vest ratably over four years. The
initial stock option awards are intended to provide the executive with incentive to build value in the organization over an extended period of time. The size of the initial stock option award is also
reviewed in light of the executive's track record, base salary, other compensation and other factors to ensure that the executive's total compensation is in line with our overall compensation
philosophy.

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Subsequent Equity Incentives.We may make annual stock option awards as part of our overall annual review process. The Compensation
Committee
believes that stock options provide management with a strong link to long-term corporate performance and the creation of stockholder value. We expect that the annual aggregate value of
these awards would be set near the competitive median levels for companies represented in the compensation data we review. As is the case when the amounts of base salary and initial equity awards are
determined, a review of all components of compensation is conducted when determining equity awards to ensure that total compensation conforms to our overall philosophy and objectives.

Occasionally,
the Compensation Committee approves a stock-based award made to an executive officer outside the annual compensation review process. The most common instances for such an
award are in connection with the review of the executive compensation of an individual at the time of the individual's initial hiring or promotion to an executive position, in connection with the
renewal of an employment agreement, or for other retention purposes. In those circumstances, the equity award generally would be made at the time approved by the Compensation Committee. First, On
October 3, 2008, the Company announced that Mr. Ginsburg had agreed to continue to serve as Chief Executive Officer and would enter into a new three-year employment agreement
effective as of August 1, 2008. In connection with Mr. Ginsburg's new employment agreement and consistent with the practice described above, the Committee approved a grant of 350,000
restricted shares that was awarded on October 9, 2008 following the execution of Mr. Ginsburg's new employment agreement. Additionally, on December 31, 2008, the Company announced
that Mr. Choucair had agreed to continue to serve as Chief Financial Officer and would enter into a new three-year employment agreement effective as of January 1, 2009. In
connection with Mr. Choucair's new employment agreement and consistent with the practice described above, the Committee approved a grant of
250,000 stock options that was awarded on December 31, 2008 following the execution of Mr. Choucair's new employment agreement. Finally, on December 31, 2008, the Company
announced that Mr. Nguyen had agreed to continue to serve as Executive Vice PresidentSales and Operations and would enter into a new three-year employment agreement
effective as of January 1, 2009. In connection with Mr. Nguyen's new employment agreement and consistent with the practice described above, the Committee approved a grant of 200,000
stock options that was awarded on December 31, 2008 following the execution of Mr. Nguyen's new employment agreement.



We provide named executive officers with perquisites and other personal benefits that we and the Compensation Committee believe are
reasonable and consistent with our overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Compensation Committee periodically reviews
the levels of perquisites and other personal benefits provided to executive officers.

We
maintain benefits and perquisites that are offered to all employees, including health insurance, life and disability insurance, dental insurance and a 401(k) plan, including Company
matching contributions.



Upon termination of employment, all executive officers are entitled to receive severance payments under their employment agreements. In
determining whether to approve and as part of the process of setting the terms of such severance arrangements, the Compensation Committee recognizes that executives and officers often face challenges
securing new employment following termination. Our Chief Executive Officer's employment agreement provides, if his employment is terminated (i) by the Company without cause,
(ii) voluntarily for good reason, or (iii) voluntarily following a change in control, he is entitled to all remaining salary in lump sum payments to the end of the employment

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term,
plus salary in lump sum payments from the end of the employment term through the end of the second anniversary of the Date of Termination. Our Chief Financial Officer's employment agreement
provides, if his employment is terminated (i) by the Company, without cause, (ii) voluntarily for good reason, or (iii) voluntarily following a change in control, he is entitled
to all remaining salary in lump sum payments to the end of the employment term, plus salary in lump sum payments from the end of
the employment term through the end of the second anniversary of the Date of Termination. Following the end of the employment term, upon termination for any reason other than cause, our Chief
Executive Officer and Chief Financial Officer each are entitled to continuation of their salary in effect at that time for a period of six months.

Tax and Accounting Implications



As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under
Section 162(m) of the Internal Revenue Code, which provides that we may not deduct compensation of more than $1,000,000 that is paid to certain individuals. We believe that compensation paid
under the management incentive plans are generally fully deductible for federal income tax purposes.



Beginning on January 1, 2006, we began accounting for stock-based payments, including awards under the 2006 Plan, in accordance
with the requirements of SFAS No. 123 (revised 2004),Share-Based Payment,or SFAS 123(R).

Compensation Committee Report

The Compensation Committee of the Board of Directors of the Company has reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors of the
Company that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

THE COMPENSATION COMMITTEEKevin C. Howe, ChairmanLisa C. GallagherDavid M. Kantor


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Summary Compensation Table

The following table shows the compensation for the three fiscal years ended December 31, 2008 earned by our Chairman and Chief
Executive Officer, our Chief Financial Officer who is our Principal Financial and Accounting Officer, and others considered to be executive officers of the Company.

Name and Principal Position

Year

Salary
($)

Bonus
($)

Stock
-based
Awards
($)(1)

All Other
Compensation
($)

Total
($)Scott K. Ginsburg
Chairman and Chief Executive Officer


2008
2007
2006


405,577
375,000
323,077


538,750
262,500
175,000


594,164
94,668
42,482
(2)(10)(18)

34,001
361,965
230,085
(3)(11)(19)

1,572,492
1,094,133
770,644Omar A. Choucair
Chief Financial Officer


2008
2007
2006


265,769
255,769
229,230


300,500
120,000
105,000


50,584
37,867
22,942
(4)(12)(20)

26,705
23,843
20,660
(5)(13)(21)

643,558
437,479
337,832Neil H. Nguyen
Executive Vice President of Sales and Operations


2008
2007
2006


233,846
220,000
192,500


250,000
100,000
115,000


48,148
43,176
22,558
(6)(14)(22)

106,515
101,105
58,051
(7)(15)(23)

638,509
464,281
388,109Pamela Maythenyi
Sr. Vice President of SourceEcreative


2008
2007
2006


199,904
185,192
173,308


30,000
30,000
60,000


25,535
28,780
16,902
(8)(16)(24)

15,423
10,120
7,647
(9)(17)(25)

270,862
254,092
257,857


---

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Grants of Plan-Based Awards

During the fiscal year ended December 31, 2008, the following individuals named in the Summary Compensation Table received stock
option awards:

Grant Date

Restricted
Stock Awards

Option
Awards

Exercise
Price

Fair Value of
Award at
Grant DateScott Ginsburg


10/09/2008


350,000


n/a


n/a

$
5,922,000Omar Choucair


12/23/2008





250,000

$
14.14

$
2,023,275Neil Nguyen


12/23/2008





200,000

$
14.14

$
1,618,620


Discussion of Summary Compensation Table and Grants of Plan-Based Awards

The terms of our executive officers' compensation are derived from our employment agreement with them and the annual performance review
by our Compensation Committee or the entire Board. The terms of Mr. Ginsburg's employment agreement with us were the result of negotiations between us and Mr. Ginsburg and were approved
by our Board of Directors. The terms of Mr. Choucair's and Mr. Nguyen's employment agreements with us were the result of negotiations between our Chief Executive Officer and
Mr. Choucair and were approved by our Board of Directors. The terms of Ms. Maythenyi's employment agreement with us were the result of negotiations between our Chief Executive Officer
and Ms. Maythenyi and were approved by our Compensation Committee.

Employment Agreement with Scott K. Ginsburg

On October 3, 2008, the Company entered into an Employment Agreement with our Chief Executive Officer, Scott K. Ginsburg.
Pursuant to the Employment Agreement between Mr. Ginsburg and the Company (the "CEO Agreement"), the Company agreed to employ Mr. Ginsburg as its Chief Executive Officer from
August 1, 2008 (the "Effective Date") through July 31, 2011. Under the CEO Agreement, Mr. Ginsburg is entitled to an annualized base salary of $450,000 for the twelve month period
ending July 31, 2009, which amount is scheduled to increase to $468,000 for the twelve month period ending July 31, 2010 and to $486,720 for the twelve month period ending
July 31, 2011. In addition, Mr. Ginsburg is eligible for an annual bonus of up to 75% of the then-applicable annual salary, with the criteria upon which any bonus would be
awarded to be determined in the sole discretion of the Compensation Committee. Pursuant to the CEO Agreement, Mr. Ginsburg received a restricted stock grant of 350,000 shares of Company
Common Stock, with the forfeiture provisions applicable to such shares terminating in equal annual installments on the first three anniversaries of the Effective Date. The Company retained the right
to increase the base compensation and bonus, and grant additional equity incentive awards, as it deems appropriate. Mr. Ginsburg is entitled to participate in the Company's stock option plans,
is entitled to four weeks of paid vacation per calendar

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year
and is to receive a car allowance totaling $1,000 per month for the term of the Agreement. Finally, during the term of the Agreement, the Company shall pay the amount of premiums or other costs
incurred for the coverage of Mr. Ginsburg and his spouse and dependent family members under the Company's health plan.

The
CEO Agreement also includes provisions respecting severance, non-solicitation, non-competition and confidentiality obligations. Pursuant to the CEO Agreement,
if Mr. Ginsburg terminates his employment for Good Reason (as described below) or following a change of control, or, is terminated prior to the end of the Employment Term by the Company other
than for Cause (as described below) or death, he shall be entitled to the greater of all remaining salary to the end of the employment term, or salary from the date of termination through the second
anniversary of the date of termination, at the rate of salary in effect on the date of termination in a lump sum payment. He shall have no obligation to seek other employment and any income so earned
shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), he shall not be entitled to further compensation. Following the end of the employment term,
upon termination of his employment with the Company for any reason other than Cause, but upon ninety days prior written notice if such termination is by him, the Company shall pay to
Mr. Ginsburg his salary as then in effect for a period of six months in a lump sum payment. Under the CEO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a
material reduction in salary and perquisites, the relocation of the Company's principal office by 20 miles, the transfer to an office other than the principal office or a material breach of the CEO
Agreement by the Company. Under the CEO Agreement, Cause includes conviction of or a plea of guilty ornolo contendreby Mr. Ginsburg to a felony
or certain criminal conduct against the Company, habitual neglect of or failure to perform his duties to the Company or any material breach of the CEO Agreement by Mr. Ginsburg.

The
above summary of the CEO Agreement is qualified in its entirety by reference to the full text of the CEO Agreement, a copy of which was filed as an exhibit to the Current Report on
Form 8-K filed by the Company on October 3, 2008.

Employment Agreement with Omar A. Choucair

Effective as of December 31, 2008, the Company entered into an Amended and Restated Employment Agreement with our Chief
Financial Officer, Omar A. Choucair. Pursuant to the Amended and Restated Employment Agreement between Mr. Choucair and the Company (the "CFO Agreement"), the Company agreed to employ
Mr. Choucair as its Chief Financial Officer from the effective date of the CFO Agreement through December 31, 2011. Under the CFO Agreement, Mr. Choucair is entitled to an
annualized base salary of $335,000 for the year ending December 31, 2009 (increasing to $345,000 for the year ending December 31, 2010 and $355,000 for the year ending
December 31, 2011). Mr. Choucair is eligible for an annual bonus of up to $140,000 during the term of the CFO Agreement, with the criteria upon which any bonus would be awarded to be
determined in the sole discretion of the Compensation Committee. Pursuant to the CFO Agreement, Mr. Choucair received a restricted stock grant of 250,000 shares of Company Common Stock,
with the forfeiture provisions applicable to such shares terminating in equal annual installments on the first four anniversaries of the effective date of the grant. The Company retained the right to
increase the base compensation and bonus, and grant additional equity incentive awards, as it deems appropriate. Mr. Choucair is entitled to participate in the Company's stock option plans, is
entitled to four weeks of paid vacation per calendar year and is to receive a car allowance totaling $500 per month for the term of the CFO Agreement. Finally, during the term of the CFO Agreement,
the Company shall pay the amount of premiums or other costs incurred for the coverage of Mr. Choucair and his spouse and dependent family members under the Company's health plan.

The
CFO Agreement also includes provisions respecting severance, non-solicitation, non-competition and confidentiality obligations. Pursuant to the CFO Agreement,
if Mr. Choucair terminates his employment for Good Reason (as described below) or following a change of control, or,

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is
terminated prior to the end of the employment term by the Company other than for Cause (as described below) or death, he shall be entitled to the greater of all remaining salary to the end of the
employment term, or salary from the date of termination through the second anniversary of the date of termination, at the rate of salary in effect on the date of termination in a lump sum payment. He
shall have no obligation to seek other employment and any income so earned shall not reduce the foregoing amounts. If he is terminated by the Company for Cause (as described below), or at the end of
the employment term, he shall not be entitled to further compensation. Following the end of the employment term, upon termination of his employment with the Company for any reason other than Cause,
but upon ninety days prior written notice if such termination is by him, the Company shall pay to Mr. Choucair his salary as then in effect for a period of six months in a lump sum payment.
Under
the CFO Agreement, Good Reason includes the assignment of duties inconsistent with his title, a material reduction in salary and perquisites, the relocation of the Company's principal office by 20
miles, the transfer to an office other than the principal office or a material breach of the CFO Agreement by the Company. Under the CFO Agreement, Cause includes conviction of or a plea of guilty or nolo
contendreby Mr. Choucair to a felony or certain criminal conduct against the Company, habitual neglect of or failure to perform his duties
to the Company or any material breach of the CFO Agreement by Mr. Choucair.

The
above summary of the CFO Agreement is qualified in its entirety by reference to the full text of the CFO Agreement, a copy of which was filed as an exhibit to the Current Report on
Form 8-K filed by the Company on January 8, 2009.

Employment Agreement with Neil H. Nguyen

On December 31, 2008, the Company entered into an Amended and Restated Employment Agreement with our Executive Vice
President-Sales and Operations, Neil H. Nguyen. Pursuant to the Amended and Restated Employment Agreement between Mr. Nguyen and the Company (the "EVP Agreement"), the Company agreed to employ
Mr. Nguyen as its Executive Vice President-Sales and Operations from the date of the Agreement through December 31, 2011. Under the EVP Agreement, Mr. Nguyen is entitled to an
annualized base salary of $335,000 for the year ending December 31, 2009 (increasing to $345,000 for the year ending December 31, 2010 and $355,000 for the year ending
December 31, 2011). Mr. Nguyen is eligible for an annual bonus of up to $140,000 during the term of the EVP Agreement, with the criteria upon which any bonus would be awarded to be
determined in the sole discretion of the Compensation Committee. Pursuant to the EVP Agreement, Mr. Nguyen received stock option covering 200,000 shares of Company Common Stock, which
options vest in equal annual installments on the first four anniversaries of the effective date of the grant. The Company retained the right to increase the base compensation and bonus, and grant
additional equity incentive awards, as it deems appropriate. Mr. Nguyen is entitled to participate in the Company's stock option plans, is entitled to four weeks of paid vacation per calendar
year and is to receive a car allowance totaling $500 per month for the term of the EVP Agreement. Finally, during the term of the EVP Agreement, the Company shall pay the amount of premiums or other
costs incurred for the coverage of Mr. Nguyen under the Company's health plan.

The
EVP Agreement also includes provisions respecting severance and confidentiality obligations. Pursuant to the EVP Agreement, if Mr. Nguyen terminates his employment for Good
Reason (as described below), or, is terminated prior to the end of the employment term by the Company other than for Cause (as described below), he shall be entitled to the greater of (i) all
remaining salary to the end of the employment term or (ii) one year of salary. If he is terminated by the Company for Just Cause (as described below), or at the end of the employment term, he
shall not be entitled to further compensation. Under the EVP Agreement, Good Reason includes the assignment of duties inconsistent with his title or a material reduction in his authority, duties or
responsibility, a reduction in title below "Executive Vice President," the relocation of the Company's principal office by 20 miles, the transfer to an office other than the principal office or a
material breach of the EVP Agreement by the Company.

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Under
the EVP Agreement, Just Cause includes commission of an act of fraud, theft or embezzlement or conviction of a felony or other crime involving moral turpitude, failure or refusal to follow the
lawful directives of the Board, habitual neglect of or failure to perform his material duties to the Company or any material breach of the EVP Agreement by Mr. Nguyen.

The
above summary of the EVP Agreement is qualified in its entirety by reference to the full text of the EVP Agreement, a copy of which was filed as an exhibit to our current Report on
Form 10-Q filed by the Company on January 8, 2009.

Employment Agreement with Pamela Maythenyi

As of December 23, 2008, the Company entered into an Amended and Restated Employment Agreement with our Senior Vice President of
SourceEcreative, Pamela Maythenyi, with a term through August 31, 2010. Pursuant to the Employment Agreement between Ms. Maythenyi and the Company (the "SVP Agreement"),
Ms. Maythenyi is entitled to an annualized base salary of $195,000 for the period September 1, 2007 through August 31, 2008 (increasing to $210,000 for the year ending
August 31, 2009 and $220,000 for the year ending August 31, 2010). She is eligible for an annual bonus of $30,000 each year for the term of the SVP Agreement, multiplied by the
percentage of budgeted revenues that her business unit actually obtains,provided, however, that the annual bonus is not paid if her business unit fails
to achieve a specified percentage of budgeted revenues. Ms. Maythenyi also shall be eligible for an additional bonus of $15,000 each year, if her business unit exceeds budgeted revenues for
such year. In addition, Ms. Maythenyi is entitled to participate in the Company's stock option plans. Furthermore, she is entitled to four weeks of paid vacation per calendar year and is to
receive a car allowance totaling $500 per month for the term of the SVP Agreement. The SVP Agreement also includes provisions respecting severance, non-solicitation,
non-competition and confidentiality obligations. Pursuant to the SVP Agreement, if she is terminated prior to the end of the term by the Company other than for Just Cause (as described
below), she shall be entitled to all remaining salary to the end of the employment term. If she is terminated by the Company for Just Cause, or at the end of the employment term, she shall not be
entitled to further compensation. Under the SVP Agreement, Just
Cause includes conviction of or a plea of guilty ornolo contendreby Ms. Maythenyi to a felony or certain criminal conduct, habitual neglect of
or failure to perform her duties to the Company or any material breach of the SVP Agreement by Ms. Maythenyi.

The
above summary of the SVP Agreement is qualified in its entirety by reference to the full text of the SVP Agreement, a copy of which was filed as an exhibit to the Current Report on
Form 8-K filed by the Company on January 8, 2009.

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Outstanding Equity Awards at Fiscal Year-End

The following table shows grants of stock options and grants of unvested stock awards outstanding on December 31, 2008, the last
day of our fiscal year, to each of the individuals named in the Summary Compensation Table.

Name

Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable

Number of
Securities
Underlying
Unexercised
Options
(#)(1)
Unexercisable

Option
Exercise
Price
($)

Option Expiration Date

Number of
Shares of Stock
Awards That
Have Not
Vested
(#)

Market Value
of Shares of
Stock Awards
that Have Not
Vested
($)Scott K. Ginsburg


43,330
2,500
60,415





39,585



21.60
12.90
5.88



November 29, 2009
February 20, 2012
July 12, 2013
              





350,000
(2)
$



4,368,000
(3)Omar A. Choucair


17,332
25,000
2,500
24,166






158,342
250,000


21.60
12.90
26.00
5.88
14.14


November 29, 2009
February 20, 2012
May 16, 2013
July 12, 2013
December 23, 2018













Neil H. Nguyen


2,063
14,167



937
25,833
200,000


12.60
5.88
14.14


March 30, 2012
July 12, 2013
December 23, 2018









Pamela Maythenyi


2,500
2,083
12,083
1,458



417
7,917
1,042


13.00
6.50
5.88
8.14


August 31, 2011
August 31, 2012
July 12, 2013
August 31, 2016












---

Option Exercises and Stock Vested

None of the individuals named in the Summary Compensation Table have ever exercised stock options. During 2008, the Company granted
Mr. Ginsburg 350,000 shares of restricted stock, none of which has vested as of December 31, 2008.

Pension Benefits

We do not have any qualified or non-qualified defined benefit plans.

Potential Payments upon Termination or Change of Control

Generally, regardless of the manner in which a named executive officer's employment terminates, such officer is entitled to receive
amounts earned during their term of employment. Such amounts include:



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In
addition, we are required to make the additional payments and/or provide additional benefits to the individuals named in the Summary Compensation Table in the event of a termination of employment
or a change of control, as set forth below.

2006 Long-Term Stock Incentive Plan

The 2006 Plan replaced the Company's 1992 Stock Option Plan. In addition, because the Director Plan has expired, the 2006 Plan was
prepared in a manner to enable stock awards to be granted to members of our Board of Directors. When the 2006 Plan was approved by our stockholders, the 1992 Plan terminated and the shares identified
above as remaining for future grants under the 1992 Plan ceased to be available for grants under the 1992 Plan. The number of shares subject to the 2006 Plan is 1,100,000 shares.

Termination or Change-in-Control Payments

Set forth below is a discussion of the payments and benefits payable to our executive officers upon their respective terminations under
various circumstances. The multiples of compensation that are payable under these circumstances were determined by the Compensation Committee to be appropriate and consistent with arrangements for
executives in similar positions in the industry group. The potential payments and benefits under these arrangements were considered by the Compensation Committee in connection with the other elements
of compensation in order to achieve a package of benefits that is appropriate for each executive officer.



Pursuant to terms of the 1992 Plan, under which Mr. Ginsburg's options are issued, in the event of a change of control, 50% of
the unvested portion of stock options held by
Mr. Ginsburg which have not previously vested shall immediately and fully vest and shall remain exercisable for at least 15 days. If Mr. Ginsburg's employment is terminated by us
or by Mr. Ginsburg for any reason, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof shall remain exercisable by Mr. Ginsburg for a
period of up to three months from the date of termination. If Mr. Ginsburg's employment is terminated as a result of his death or disability, then immediately upon the date of
Mr. Ginsburg's termination, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof shall remain exercisable by Mr. Ginsburg for a period
of six months from the date of termination.

Pursuant
to the terms of Mr. Ginsburg's Restricted Stock Agreement dated October 9, 2008, he was granted 350,000 shares of restricted stock, one third of which vests
on August 1, 2009, and each of the remaining two-thirds vests on August 1, 2010 and 2011. In the event of a change in control, any remaining forfeiture provisions shall
terminate.

The
following table summarizes the potential payments to Mr. Ginsburg assuming his employment with us was terminated or a change of control occurred on December 31, 2008,
the last day of our most recently completed fiscal year.

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Benefits and Payments

Change of
Control

Termination
upon Death
or
Disability

Termination by us
without Cause or
by Mr. Ginsburg
for Good ReasonBase Salary

$
1,217,220

$


$
1,217,220Bonus

$


$


$
Acceleration of Vesting of Options:Number of Stock Options and Value(1)


19,793





$
130,631

$


$
Acceleration of Vesting of Restricted Stock:Number of Shares and Value(2)


350,000





$
4,368,000

$


$
Total

$
5,715,851

$


$
1,217,220


---



Pursuant to terms of the 1992 Plan and 2006 Plan, under which Mr. Choucair's options are issued, in the event of a change of
control, 50% of the unvested portion of stock options held by Mr. Choucair which have not previously vested shall immediately and fully vest and shall remain exercisable for at least
15 days. If Mr. Choucair's employment is terminated by us or by Mr. Choucair for any reason, any unvested portion of his stock options will be immediately cancelled, and any
vested portion thereof shall remain exercisable by Mr. Choucair for a period of up to three months from the date of termination. If Mr. Choucair's employment is terminated as a result of
his death or disability, then immediately upon the date of Mr. Choucair's termination, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof
shall remain exercisable by Mr. Choucair for a period of six months from the date of termination.

The
following table summarizes the potential payments to Mr. Choucair assuming his employment with us was terminated or a change of control occurred on December 31, 2007,
the last day of our most recently completed fiscal year.

Benefits and Payments

Change of
Control

Termination
upon Death
or
Disability

Termination by us
without Cause or
by Mr. Choucair
for Good ReasonBase Salary

$
1,035,000

$


$
1,035,000Bonus

$


$


$
Acceleration of Vesting of Options:Number of Stock Options and Value(1)


132,917





$
52,252

$


$
Total

$
1,087,252

$


$
1,035,000


---

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Neil H. Nguyen, Executive Vice President of Sales and Operations

Pursuant to terms of the 1992 Plan and 2006 Plan, under which Mr. Nguyen's options are issued, in the event of a change of
control, 50% of the unvested portion of stock options held by Mr. Nguyen which have not previously vested shall immediately and fully vest and shall remain exercisable for at least
15 days. If Mr. Nguyen's employment is terminated by us or by him for any reason, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof
shall remain exercisable by Mr. Nguyen for a period of up to three months from the date of termination. If his employment is terminated as a result of his death or disability, then immediately
upon the date of Mr. Nguyen's termination, any unvested portion of his stock options will be immediately cancelled, and any vested portion thereof shall remain exercisable by Mr. Nguyen
for a period of six months from the date of termination.

The
following table summarizes the potential payments to Mr. Nguyen assuming his employment with us was terminated or a change of control occurred on December 31, 2008, the
last day of our most recently completed fiscal year.

Benefits and Payments

Change of
Control

Termination
upon Death
or
Disability

Termination by us
without Cause or
by Mr. Nguyen
for Good ReasonBase Salary

$


$


$
1,035,000Bonus

$


$


$
Acceleration of Vesting of Options:Number of Stock Options and Value(1)


108,011





$
52,252

$


$
Total

$
52,252

$


$
1,035,000


---

Pamela Maythenyi, Senior Vice President, SourceEcreative

Pursuant to terms of the 1992 Plan and 2006 Plan, under which Ms. Maythenyi's options are issued, in the event of a change of
control, 50% of the unvested portion of stock options held by Ms. Maythenyi which have not previously vested shall immediately and fully vest and shall remain exercisable for at least
15 days. If Ms. Maythenyi's employment is terminated by us or by her for any reason, any unvested portion of her stock options will be immediately cancelled, and any vested portion
thereof shall remain exercisable by Ms. Maythenyi for a period of three months from the
date of termination. If her employment is terminated as a result of her death or disability, then immediately upon the date of Ms. Maythenyi's termination, any unvested portion of her stock
options will be immediately cancelled, and any vested portion thereof shall remain exercisable by her for a period of six months from the date of termination.

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The following table summarizes the potential payments to Ms. Maythenyi assuming her employment with us was terminated or a change of control occurred on
December 31, 2008, the last day of our most recently completed fiscal year.

Benefits and Payments

Change of Control

Termination upon Death or Disability

Termination by us without Just Cause or by Ms. Maythenyi for Good ReasonBase Salary

$


$


$
360,000Bonus

$


$


$
Acceleration of Vesting of Options:Number of Stock Options and Value(1)


9,376





$
29,634

$


$
Total

$
29,634

$


$
360,000


---

Director Compensation



The following table sets forth a summary of the compensation earned by our Directors and/or paid to certain of our Directors pursuant
to the Company's compensation policies
for the fiscal year ended December 31, 2008, other than Scott K. Ginsburg, our Chairman and Chief Executive Officer, and Omar A. Choucair, our Chief Financial Officer and
Director.

Name

Fees Earned ($)

Option Awards ($)(1)

Total ($)William Donner

$
51,000


22,505
(2)

73,505Lisa Gallagher


38,006


22,505
(2)

60,511Kevin C. Howe


43,500


36,395
(2)(3)

79,895David M. Kantor


31,500


36,395
(2)(3)

70,895Anthony J. LeVecchio


59,500


36,395
(2)(3)

95,895


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Messrs. Ginsburg and Choucair, our Chairman and Chief Executive Officer, and Chief Financial Officer and Director, respectively,
are not paid any fees or other compensation for services as a member of our Board of Directors or of any committee of our Board of Directors.

The
non-employee members of our Board of Directors receive compensation for services provided as a director as well as reimbursement for documented reasonable expenses
incurred in connection with attendance at meetings of our Board of Directors and the committees thereof. The Company pays its directors an annual cash retainer of $12,000 plus $1,500 per Board of
Directors meeting attended, plus $1,500 per meeting of each committee or special assignments of the Board of Directors. Mr. LeVecchio is paid an additional $13,000 annual cash retainer as
Chairman of the Audit Committee.

Members
of our Board of Directors are also eligible to receive stock option grants both upon joining the Board of Directors and on an annual basis in line with recommendations by the
Compensation Committee. Grants of restricted stock in 2008 and 2007 were granted under our 2006 Plan, and vest ratably over three years.

Guarantor Agreement with Scott K. Ginsburg

In connection with the Company's acquisition of Media DVX, a $6.5 million promissory note was issued to the seller of Media DVX,
payable over three years with an interest rate of the one month LIBOR rate for the applicable period with principal and then accrued interest due as follows: $1.5 million due on
April 15, 2006, $2.0 million due on April 15, 2007, and
$3.0 million due on April 15, 2008. However, during the fourth quarter of 2006, the Company retired the entire remaining balance of this obligation through a combination of issuing
common stock and cash. The Company paid accrued interest on the promissory note on a quarterly basis. The promissory note was personally guaranteed by Scott K. Ginsburg, the Company's Chief Executive
Officer and Chairman of the Board. Mr. Ginsburg's personal guarantee of the Company's debt was evaluated for the purpose of determining an amount to compensate him for such guarantee. The
Company completed its valuation which determined that the improved interest rate obtained by the Company as a direct result of the personal guarantee was worth approximately $0.6 million over
the term of the loan. For the years ended December 31, 2007 and 2006 respectively, the Company has recognized additional interest expense of $0 and $0.3 million associated with the
guarantee. Amounts paid to Mr. Ginsburg associated with this guarantee were $0.3 million and $0.2 million, for the years ended December 31, 2007 and 2006, respectively.

Employee Benefit Plans

We sponsor a 401(k) plan covering employees who meet certain defined requirements. Under the terms of our 401(k) plan, participants may
elect to make contributions on a pre-tax and after-tax basis, subject to certain limitations under the Internal Revenue Code and we may match a percentage of employee
contributions, on a discretionary basis, as determined by our Board of Directors. We currently match 25% of the amount contributed by employees, up to a maximum of employee contributions of 6%. We may
make other discretionary contributions to the 401(k) plan pursuant to a determination by our Board of Directors, although, to date, no such other discretionary contributions have been made.

Compensation Committee Interlocks and Insider Participation

The current members of the Compensation Committee are Messrs. Howe (Chairman) and Kantor, and Ms. Gallagher. There were
no other members of the committee during 2008. All current members of the Compensation Committee are "independent directors" as defined under the Nasdaq

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Marketplace
Rules. None of these individuals were at any time during 2008, or at any other time, an officer or employee of the Company.

No
executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of
the Company's Board of Directors or Compensation Committee.

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

Security Ownership of Directors and Executive Officers

The following table sets forth the beneficial ownership of our common stock as of February 28, 2009, except as noted, for
(a) each stockholder known by us to own beneficially more than 5% of our common stock; (b) each of our Directors; (c) each executive officer named in the Summary Compensation
Table; (d) and all of our current Directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and
includes voting or investment power with respect to the securities.

Shares Beneficially Owned
as of February 28, 2009 (1) (2)Beneficial Owner

Number of Shares

Percentage of ClassScott K. Ginsburg(3)
Moon Doggie Family Partnership


3,430,664

15.6%Omar A. Choucair(4)


83,550

*Pamela Maythenyi(5)


19,686

*Neil H. Nguyen(6)


29,666

*David M Kantor(7)


28,222

*Kevin C. Howe(8)


39,422

*Anthony J. LeVecchio(9)


22,222

*Lisa C. Gallagher


16,000

*William Donner


5,745

*Kinderhook Partners, LP
    1 Executive Dr., Suite 160
    Fort Lee, NJ 07024


1,736,466

7.3%William Blair & Company, L.L.C.
    222 West Adam Street
    Chicago, IL 60606


1,409,672

6.6%Manulife Financial Corporation
    200 Bloor Street East
    Toronto, Ontario, Canada M4W1E5


1,132,816

5.3%All directors and executive officers as a group (9 persons)(10)


3,675,177

16.6%


---

82

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Table of Contents

Equity Compensation Plan Information

The following table provides certain aggregate information with respect to all of the Company's equity compensation plans in effect as
of December 31, 2008.

Plan category

Number of Securities
to be issued upon
exercise of
outstanding options,
warrants and rights

Weighted-average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in first column)Common stock options approved by security holders


1,246,959

$
16.76


38,177Common stock warrants approved by security holders


689,202

$
10.42


Total


1,936,161

$
14.50


38,177


83

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Table of Contents

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

Certain Relationships and Related Transactions

Our Audit Committee reviews and approves in advance all related party transactions in accordance with its written charter in order to
determine whether or not the proposed transaction is fair to, and in the best interests of the Company. None of the Company's directors or executive officers (1) has entered into any
transaction or series of similar transactions with the Company except as described below, (2) has any relationship, or has had any relationship with the Company except as described below, or
(3) has outstanding indebtedness to the Company, which (in any case) requires disclosure under Item 404 of the SEC's Regulation S-K.

Prior
to its execution and delivery, the Board of Directors and the Audit Committee reviewed the Media DVX transaction in detail and determined it was in the best interest of the Company
to move forward with the acquisition of the Media DVX assets.

However,
the Company did not have the borrowing capacity to fully finance the $10 million purchase price through the Company's existing credit facility in April 2005. Accordingly,
the Board of Directors, Audit Committee and the Media DVX selling shareholder negotiated a $6.5 million promissory note as part of the purchase price. The Media DVX selling shareholder demanded
a personal guarantee from Mr. Ginsburg as security on the three year $6.5 million promissory note.

Consistent
with its written charter, the Audit Committee and the Board of Directors approved and ratified the asset purchase agreement, the promissory note and the personal guarantor
agreement in connection with the purchase of the Media DVX assets. Mr. Ginsburg's personal guarantee of the Company's debt was evaluated for the purpose of determining an amount to compensate
him for such guarantee. The Company completed its valuation which determined that the improved interest rate obtained by the Company as a direct result of the personal guarantee was worth
approximately $0.6 million over the term of the loan. The Audit Committee and the Board of Directors each determined that the compensation payable to Mr. Ginsburg was fair to, and in the
best interests of the Company and its stockholders.

In
connection with the Company's acquisition of Media DVX, the $6.5 million promissory note was issued to the seller of Media DVX and was payable over three years with an interest
rate of the one month LIBOR rate for the applicable period with principal and then accrued interest due as follows: $1.5 million due on April 15, 2006, $2.0 million due on
April 15, 2007, and $3.0 million due on April 15, 2008. However, during the fourth quarter of 2006, the Company retired the entire remaining balance of this obligation through a
combination of issuing common stock and cash. The Company paid accrued interest on the promissory note on a quarterly basis. For the years ended December 31, 2006 and 2005 respectively, the
Company has recognized additional interest expense of $0.3 million and $0.1 million associated with the guarantee. Amounts paid to Mr. Ginsburg associated with this guarantee were
$0.3 million and $0.2 million, for the years ended December 31, 2007 and 2006, respectively.

Director Independence

The Board of Directors has determined, after considering all of the relevant facts and circumstances, that each of Mr. Howe,
Mr. Kantor, Mr. LeVecchio, Mr. Donner and Ms. Gallagher are independent from our management, as an "independent director" as defined under the Nasdaq Marketplace Rules.
This means that none of those directors (1) is an officer or employee of the Company or its subsidiaries or (2) has any direct or indirect relationship with the Company that would
interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a

84

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Table of Contents

director.
As a result, the Company has a majority of independent directors as required by the Nasdaq Marketplace Rules.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following is a summary of the fees billed to the Company by the principal accountant for professional services rendered for the
fiscal years ended December 31, 2008 and December 31, 2007:

Years Ended December 31,2008

2007Audit Fees

$
1,494,471

$
1,216,950Audit Related Fees


166,499


1,624Tax Fees





All Other Fees





Total

$
1,660,970

$
1,218,574




These are fees for professional services for the audit of the Company's annual financial statements, and for the review of the
financial statements included in the Company's filings on Form 10-Q, and for services that are normally provided in connection with statutory and regulatory filings or engagements,
including fees relating to compliance with the provisions of the Sarbanes-Oxley Act, Section 404, and audits of acquired entities. The amount for 2008 includes $78,381 for Registration
Statements on Forms S-4.



We paid Ernst & Young $166,499 in 2008 for due diligence services related to 2008 acquisitions.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting
Firm

Consistent
with the policies of the Securities and Exchange Commission regarding auditor independence, the Audit Committee has the responsibility, pursuant to its written charter, for
appointing, setting compensation and overseeing the work of our independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to
pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm. The Audit Committee's policy is to approve all audit and
non-audit services provided by our independent registered public accounting firm prior to the commencement of the services using a combination of pre-approvals for certain
engagements up to predetermined dollar thresholds in accordance with the
pre-approval policy and specific approvals for certain engagements on a case-by-case basis. The Audit Committee has delegated authority to the committee chair to
pre-approve between committee meetings those services that have not already been pre-approved by the committee. The chair is required to report any such
pre-approval decisions to the full committee at its next scheduled meeting.

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)

See Index to Financial Statements on page F-1 for a list of financial statements filed herewith.(a)(2)

See Schedule II-Valuation and Qualifying Accounts on page S-1.(a)(3)

See Exhibit Index following page S-1 for a list of exhibits filed as part of this Form 10-K.


85

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Table of Contents

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.

|                     |  |                      |  |                                                                                                       
|-------------------- |  | -------------------- |  | ------------------------------------------------------------------------------------------------------
|                     |  | DG FASTCHANNEL, INC.
|Date: March 10, 2009 |  | By:                  |  | /s/ SCOTT K. GINSBURG Scott K. Ginsburg Chairman of the Board of Directors and Chief Executive Officer

KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott K. Ginsburg and Omar A. Choucair, and each of them, his true
and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Form 10-K and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any
of them, or its or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

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

|                                              |  |                                                                                   |  |               
|--------------------------------------------- |  | --------------------------------------------------------------------------------- |  | --------------
|
|                                              |  |                                                                                   |  |               
|/s/ SCOTT K. GINSBURG Scott K. Ginsburg       |  | Chairman of the Board of Directors and Chief Executive Officer                    |  | March 10, 2009
|/s/ OMAR A. CHOUCAIR Omar A. Choucair         |  | Chief Financial Officer and Director (Principal Financial and Accounting Officer) |  | March 10, 2009
|/s/ WILLIAM DONNER William Donner             |  | Director                                                                          |  | March 10, 2009
|/s/ DAVID M. KANTOR David M. Kantor           |  | Director                                                                          |  | March 10, 2009
|/s/ LISA C. GALLAGHER Lisa C. Gallagher       |  | Director                                                                          |  | March 10, 2009
|/s/ KEVIN C. HOWE Kevin C. Howe               |  | Director                                                                          |  | March 10, 2009
|/s/ ANTHONY J. LEVECCHIO Anthony J. LeVecchio |  | Director                                                                          |  | March 10, 2009

86

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Table of Contents

INDEX TO FINANCIAL STATEMENTS



PageReports of Independent Registered Public Accounting Firms

F-2Consolidated Balance Sheets as of December 31, 2008 and 2007

F-4Consolidated Statements of Operations for the Three Years Ended December 31, 2008

F-5Consolidated Statements of Stockholders' Equity for the Three Years Ended December 31, 2008

F-6Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2008

F-7Notes to Consolidated Financial Statements

F-8


F-1

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Table of Contents



DG FASTCHANNEL, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders of
DG FastChannel, Inc.

We
have audited the accompanying consolidated balance sheets of DG FastChannel, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then ended. Our audits also included the 2008 and 2007 information in the financial statement schedule listed in the Index
at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of DG FastChannel, Inc. and subsidiaries at
December 31, 2008 and 2007 and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Also,
in our opinion, the 2008 and 2007 information included in the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

As
discussed in Note 11 to the consolidated financial statements, the Company changed its method of accounting for income tax uncertainties effective January 1, 2007.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) DG FastChannel, Inc. and subsidiaries' internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 9, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


Dallas,
Texas
March 9, 2009

F-2

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
DG FastChannel, Inc. f/k/a Digital Generation Systems, Inc.:

We
have audited the consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows of DG FastChannel, Inc. and subsidiaries (f/k/a Digital
Generation Systems, Inc.) for the year ended December 31, 2006. In connection with our audit of the consolidated financial statements, we also have audited financial statement schedule
II for the year ended December 31, 2006. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 also 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 results of operations and cash flows of DG FastChannel, Inc. and
subsidiaries (f/k/a Digital Generation Systems, Inc.) for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the
related financial statement schedule for the year ended December 31, 2006, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As
discussed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted the provision of Securities and Exchange Commission Staff Accounting
Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.

|                             |  |             
|---------------------------- |  | ------------
|                             |  | /s/ KPMG LLP
|Dallas, Texas
March 30, 2007 |  |             

F-3

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Table of Contents



DG FASTCHANNEL, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In thousands, except par value amounts)

December 31,
2008

December 31,
2007AssetsCURRENT ASSETS:Cash and cash equivalents

$
17,180

$
10,101Accounts receivable (less allowance for doubtful accounts of $2,329 in 2008 and $1,716 in 2007)


42,971


26,516Deferred income taxes


1,530


1,707Other current assets


1,849


2,160Total current assets


63,530


40,484Property and equipment, net


37,980


27,466Long-term investments





15,001Goodwill


246,734


111,955Deferred income taxes, net


6,247


2,960Intangible assets, net


115,035


51,363Other noncurrent assets


4,274


3,266$
473,800

$
252,495Liabilities and Stockholders' EquityCURRENT LIABILITIES:Accounts payable

$
13,005

$
5,464Accrued liabilities


9,393


6,776Deferred revenue


2,124


2,193Current portion of long-term debt


18,152


450Total current liabilities


42,674


14,883Deferred revenue, net of current portion


360


628Long-term debt, net of current portion


154,985


44,325Other non-current liabilities


6,263


530TOTAL LIABILITIES


204,282


60,366Commitments and contingencies (note 15)STOCKHOLDERS' EQUITY:Preferred stock, $0.001 par valueAuthorized 15,000 shares; issued and outstandingnone





Common stock, $0.001 par valueAuthorized 200,000 shares; 20,930 issued and 20,874 outstanding at December 31, 2008; 17,963 issued and 17,907
outstanding at December 31, 2007


21


18Additional capital


437,979


368,488Accumulated deficit


(165,866
)

(180,945
)Accumulated other comprehensive income (loss)


(1,763
)

5,421Treasury stock, at cost


(853
)

(853
)TOTAL STOCKHOLDERS' EQUITY


269,518


192,129$
473,800

$
252,495


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

F-4

---





Table of Contents



DG FASTCHANNEL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share amounts)

For the years ended
December 31,2008

2007

2006Revenues:Video and audio content distribution

$
148,891

$
92,343

$
64,911Other


8,190


5,344


3,756Total revenues


157,081


97,687


68,667Cost of revenues (exclusive of depreciation and amortization shown below):Video and audio content distribution


61,726


41,055


32,919Other


2,717


534


403Total cost of revenues


64,443


41,589


33,322Operating expenses:Sales and marketing


8,257


7,046


4,240Research and development


4,268


3,233


1,779General and administrative


21,031


13,902


10,462Depreciation and amortization


21,351


12,865


8,563Total operating expenses


54,907


37,046


25,044Income from operations


37,731


19,052


10,301Other (income) expense:Interest expense


12,122


3,101


2,844Unrealized loss (gain) on derivative warrant investment


1,544


(1,707
)

Interest and other income, net


(586
)

(713
)

(58
)Reduction in fair value of long-term investment








4,758Income before income taxes from continuing operations


24,651


18,371


2,757Provision for income taxes


9,572


7,501


2,378Income from continuing operations


15,079


10,870


379Discontinued operations:Loss from discontinued operations, net of taxes





(225
)

(330
)Loss on disposal of discontinued operations, net of taxes





(232
)

(698
)Loss from discontinued operations





(457
)

(1,028
)Net income (loss)

$
15,079

$
10,413

$
(649
)Basic net income (loss) per common share:Continuing operations

$
0.81

$
0.65

$
0.04Discontinued operations





(0.02
)

(0.10
)Total

$
0.81

$
0.63

$
(0.06
)Diluted net income (loss) per common share:Continuing operations

$
0.79

$
0.64

$
0.04Discontinued operations





(0.03
)

(0.10
)Total

$
0.79

$
0.61

$
(0.06
)Weighted average common shares outstanding:Basic


18,642


16,631


10,568Diluted


19,073


17,096


10,568


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

F-5

---





Table of Contents



DG FASTCHANNEL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands)

Common Stock

Treasury Stock

Additional
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Accumulated
Deficit

Total
Stockholders'
EquityBalance at December 31, 2005


7,479

$
8


(56
)
$
(853
)
$
271,320

$


$
(190,268
)
$
80,207SAB 108 adoption




















(441
)

(441
)Common stock issued on exercise of stock options


2











23








23Common stock issued to acquire FastChannel Network, Inc.


5,160


5








27,444








27,449Issuance of common stock to retire debt


259











3,000








3,000Issuance of common stock under employee stock purchase plan


1











9








9Proceeds from issuance of common stock


2,999


3








31,717








31,720Share-based compensation














308








308Comprehensive income:Currency translation adjustment

















(2
)




(2
)Unrealized gain on long-term investment in Point.360 (net of tax expense of $166)

















262





262Net loss




















(649
)

(649
)Total comprehensive loss























(389
)Balance at December 31, 2006


15,900


16


(56
)

(853
)

333,821


260


(191,358
)

141,886Common stock issued on exercise of stock options


60











539








539Common stock issued to acquire Point.360, net of costs


2,000


2








33,683








33,685Issuance of common stock under employee stock purchase plan


1











22








22Share-based compensation


2











423








423Comprehensive income:Currency translation adjustment

















3





3Unrealized gain on long-term investment in Enliven (net of tax expense of $3,409)

















5,420





5,420Reverse unrealized gain on long-term investment in Point.360 upon acquisition (net of tax benefit of $166)

















(262
)




(262
)Net income




















10,413


10,413Total comprehensive income























15,574Balance at December 31, 2007


17,963


18


(56
)

(853
)

368,488


5,421


(180,945
)

192,129Common stock issued on exercise of stock options


11











128








128Common stock issued to acquire Enliven, including stock options, warrants and an estimated earnout, net of costs


2,951


3








68,099








68,102Issuance of common stock under employee stock purchase plan


5











87








87Share-based compensation














1,177








1,177Comprehensive income:Currency translation adjustment

















5





5Unrealized loss on interest rate swaps (net of tax benefit of $1,179)

















(1,769
)




(1,769
)Reverse unrealized gain on long-term investment in Enliven upon acquisition (net of tax benefit of $3,409)

















(5,420
)




(5,420
)Net income




















15,079


15,079Total comprehensive income























7,895Balance at December 31, 2008


20,930

$
21


(56
)
$
(853
)
$
437,979

$
(1,763
)
$
(165,866
)
$
269,518


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

F-6

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Table of Contents



DG FASTCHANNEL, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

For the years ended
December 31,2008

2007

2006Cash flows from operating activities:Net income (loss)

$
15,079

$
10,413

$
(649
)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation of property and equipment


12,744


8,581


6,100Amortization of intangibles


8,607


4,284


3,046Unrealized loss (gain) on warrants


1,544


(1,707
)

Deferred income taxes


8,108


6,841


1,297Loss on disposal of discontinued operations, net of tax





232


698Reduction in fair value of long-term investment








4,758Provision for doubtful accounts


886


644


806Loss on disposal of property and equipment


5


53


Share-based compensation


1,177


423


308Changes in operating assets and liabilities, net of acquisitions:Accounts receivable


(10,343
)

(4,886
)

(1,769
)Other assets


4,129


(1,245
)

1,996Accounts payable and accrued liabilities


118


(3,711
)

(4,188
)Deferred revenue


(674
)

(889
)

(938
)Net cash provided by operating activities


41,380


19,033


11,465Cash flows from investing activities:Purchases of property and equipment


(12,384
)

(4,143
)

(3,054
)Capitalized costs of developing software


(5,661
)

(3,282
)

(1,820
)Purchases of long-term investments





(4,465
)

(4,752
)Proceeds from sale of property and equipment


7


516


Proceeds from sale of discontinued operations





3,125


Acquisitions, net of cash acquired


(136,692
)

(48,655
)

(257
)Net cash used in investing activities


(154,730
)

(56,904
)

(9,883
)Cash flows from financing activities:Proceeds from issuance of common stock, net


206


191


31,753Borrowings under long-term debt, net of costs of financing


177,274


67,369


51,509Repayments of long-term debt


(57,056
)

(44,065
)

(62,254
)Net cash provided by financing activities


120,424


23,495


21,008Effect of exchange rate changes on cash and cash equivalents


5


3


(2
)Net increase (decrease) in cash and cash equivalents


7,079


(14,373
)

22,588Cash and cash equivalents at beginning of year


10,101


24,474


1,886Cash and cash equivalents at end of year

$
17,180

$
10,101

$
24,474Supplemental disclosures of cash flow information:Cash paid for interest

$
9,295

$
2,973

$
2,349Cash paid for income taxes

$
837

$
1,597

$
264Noncash financing activities:Non-cash component of purchase price to acquire a business

$
68,102

$
34,055

$
49,048Debt extinguished with the issuance of common stock

$


$


$
3,000


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

F-7

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Table of Contents



DG FASTCHANNEL, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

DG FastChannel, Inc. and subsidiaries (the "Company") is a provider of digital technology services that enable the electronic
delivery of advertisements, syndicated programs, and video news releases to traditional broadcasters, online publishers and other media outlets. The Company operates three nationwide digital networks
out of its Network Operation Centers ("NOCs") located in Irving, Texas, Atlanta, Georgia and New Jersey, which link more than 5,000 advertisers, advertising agencies and content owners with more than
21,000 television, radio, cable, network and print publishing destinations and over 5,000 online publishers electronically throughout the United States, Canada, and Europe. We also offer a variety of
other ancillary products and services to the advertising industry.

2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

Use of Estimates

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. On an ongoing basis, the Company evaluates its estimates,
including those related to the allowance for doubtful accounts, intangible assets, office closure exit costs and income taxes. The Company bases its estimates on historical experience and on other
relevant assumptions that are believed 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 could differ from those estimates.

On
or about June 1, 2008, the Company made the decision to upgrade its existing Spot Boxes with next generation Spot Boxes, which have greater storage capacity, faster processing
speeds, and can accommodate multiple, simultaneous satellite feeds. The replacement was substantially complete as of October 31, 2008. As a result, the Company shortened the estimated remaining
useful life of its existing Spot Boxes and recorded additional depreciation expense of $2.3 million from June 1 through October 31, 2008, which reduced income from continuing
operations and diluted net income per common share by $1.4 million and $0.07, respectively. During 2007, the Company made the decision to replace certain equipment with a remaining net book
value of $1.5 million with newer equipment. As a result, the Company recorded additional 2007 depreciation expense of $1.5 million, which reduced income from continuing operations and
diluted net income per common share by $0.9 million and $0.05, respectively.

As
discussed below under Property and Equipment, effective October 1, 2008, the Company changed its assumptions relating to the estimated useful lives for existing and newly
purchased capital assets. As a result, the Company recorded additional depreciation expense of $0.4 million in the fourth quarter of 2008, which reduced income from continuing operations and
diluted net income per common share by $0.2 million and $0.01, respectively.

Cash and Cash Equivalents

Cash and cash equivalents consist of liquid investments with original maturities of three months or less. The Company maintains
substantially all of its cash and cash equivalents with a few major financial institutions in the United States. As of December 31, 2008 and 2007, cash equivalents consisted primarily of U.S.
money market funds and overnight investments in U.S. money market funds.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the amount invoiced, provided the revenue recognition criteria have been met, less an allowance for
doubtful accounts. The Company maintains an allowance for doubtful accounts on an aggregate basis at a level it considers sufficient to cover estimated losses in the collection of its trade accounts
receivable. The allowance is based primarily upon historical credit loss experience by aging category, with consideration given to current economic conditions and trends, the collectability of
specific customer accounts and customer concentrations. The Company writes off accounts deemed uncollectible after exhausting all reasonable collection efforts.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining lease term plus expected renewals or the estimated useful
life of the asset. Based on management's ongoing review of its estimates, effective October 1, 2008, the Company changed its assumptions relating to the estimated useful lives for existing and
newly purchased capital assets, but excluding capital assets obtained in the purchase of a business. The revised estimated useful lives are as follows:

Category

Useful LifeSoftware

3-4 yearsComputer equipment

4 yearsFurniture and fixtures

5 yearsNetwork equipment

5 yearsMachinery and equipment

7 years


For
capital assets obtained as a result of an acquisition, the estimated useful lives were determined in the purchase accounting valuation process. Prior to 2008,
estimated useful lives generally ranged from 2 to 7 years for network equipment, 3 to 5 years for office furniture and equipment, and 3 to 6 years for leasehold improvements.

Leases

The Company leases certain properties under operating leases. For lease agreements that provide for escalating rent payments or
free-rent occupancy periods, the Company recognizes rent expense on a straight-line basis over the non-cancelable lease term and option renewal periods where
failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably assured. Deferred rent is included in both
current accrued liabilities and other non-current liabilities in the consolidated balance sheets.

Software Development Costs

Costs incurred to create internal use software are capitalized when the preliminary project stage is complete and only costs incurred
during the application development stage are capitalized. Upon placing the completed project in service, capitalized software development costs are amortized over the estimated useful life, which is
generally three years.

Derivative Financial Instruments

The Company utilizes derivative financial instruments to manage certain business risks. Specifically, the Company has entered into
interest rate swaps to eliminate the variability in interest payment cash flows associated with variable interest rates. The swaps, in effect, convert variable rates of interest into fixed rates of
interest on a portion of the Company's borrowings. The swaps qualify as cash flow hedging instruments. At each balance sheet date, the fair values of the swaps are recorded on the balance sheet with
the offsetting entry recorded in "accumulated other comprehensive income," to the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

extent
the hedges are considered highly effective. Any ineffectiveness is recorded in the consolidated statements of operations.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired. The Company tests
goodwill for potential impairment on an annual basis, or more frequently if an event occurs or circumstances change indicating goodwill may not be recoverable. In analyzing goodwill for potential
impairment, SFAS 142 prescribes a two-step process that begins with the estimation of the fair value of each reporting unit. The Company uses a variety of methods, such as
discounted cash flow models and market capitalization, to determine fair value. In the event a reporting unit's carrying value exceeds its estimated fair value, evidence of a potential impairment
exists. In such a case, the second step of the impairment test is required, which involves allocating the fair value of the reporting unit to all of the assets and liabilities of that reporting unit,
with the excess of fair value over allocated net assets representing the fair value of its goodwill. An impairment loss is measured as the amount, if any, by which the carrying value of the reporting
unit's goodwill exceeds the estimated fair value of that goodwill.

Long-Lived and Identifiable Intangible Assets

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that the Company considers important which could trigger an impairment review include the following:



If
the Company determines that the carrying value of long-lived or intangible assets may not be recoverable based upon the existence of one or more of the above indicators of
impairment, the Company assesses the recoverability of the long-lived or intangible asset by determining whether amortization of the asset balance over its remaining life can be recovered
through undiscounted future operating cash flows. Any impairment is measured based on a projected discounted cash flow method using a discount rate reflecting the Company's weighted average cost of
capital.

The
Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors considered when
determining useful lives include the contractual term of any agreement, the history of the asset, the Company's long-term strategy for the use of the asset, any laws or other local
regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have finite lives
are generally amortized on a straight-line basis over their useful lives which range from one to twenty years. See Note 7.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Revenue

Deferred revenue represents payments by customers for (i) network access, (ii) maintenance or subscription contracts and
(iii) membership fees, in advance of when the related revenue is recognized. Deferred revenue consists of the following (in thousands):

December 31,2008

2007Deferred network access and maintenance fees

$
1,704

$
2,209Deferred subscription and membership fees


943


1,225Progress billings not yet recognized as revenue


388


3,035


3,434Less amounts not yet collected


(551
)

(613
)Net deferred revenue


2,484


2,821Less current portion


(2,124
)

(2,193
)Deferred revenue, net of current portion

$
360

$
628


Revenue Recognition

The Company derives revenue from services which consist primarily of (i) the distribution of digital and analog video and audio
media content, (ii) media research resources, and (iii) support and other services.

Services
revenue from the digital distribution of video and audio advertising content generally is billed based on a rate per transmission, and revenue is recognize for these services
upon notification of a successful transmission of the content at the broadcast destination. Revenue for the distribution of analog video and audio content by tape is recognized when delivery has
occurred, which is at the time the tapes are delivered to a common carrier. Costs of shipping tapes and other products are included in cost of revenues.

Services
revenue also includes access rights. For an agreed upon fee, certain customers are provided with access to the Company's digital distribution network for a stated period. Using
the Company's network, these customers are able to deliver a variety of programming content to their intended destinations. Access rights revenue is recognized ratably over the access period. The
Company charges fees to monitor the network on behalf of customers. The monitoring fees are recognized ratably over the monitoring period.

We
sell hardware and software to broadcast television stations to assist them in integrating the programming content they receive over the network and provide related support services.
Such transactions are considered multiple element arrangements and as such, each element is accounted for
separately over its respective service period, provided that there is vendor-specific objective evidence ("VSOE") of fair value for the separate elements. For arrangements where VSOE is not available
for a delivered element, we first allocate the arrangement fee to the undelivered elements based on the total fair value of those undelivered elements, based on their VSOE. This portion of the
arrangement fee is deferred, and recognized ratably over the service period. Then the difference (residual) between the total arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements. We attribute any discount offered in a multiple-element arrangement entirely to the delivered elements of the transaction, which are typically
hardware or software licenses. Fair values for the future maintenance and support services are generally established based on the price charged for the element when sold separately.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Online
creative research revenue is generated on a subscription basis, where customers pay either monthly, quarterly, semi-annually, or annually in order to access the
Company's database. Revenues are recognized ratably over the subscription period.

Media
production and duplication includes a variety of ancillary services such as storage of client masters or other physical material, for which revenue is recognized monthly, after the
storage service has been performed. Revenue related to other services is recognized on a per transaction basis after the service has been performed. If the service results in a tape or other
deliverable, revenue is recognized when delivery has occurred, which is at the time the tape or other deliverable is delivered to a common carrier.

Customers
pay a fixed fee per month for media asset management and broadcast verification services. Revenue for these services is recognized ratably over the service period.

The
Company offers an online advertising system campaign management and deployment product. This system permits publishers, advertisers, and their agencies to manage the process of
deploying online advertising campaigns. The Company charges customers on a cost per thousand ("CPM") impressions basis, and recognizes revenue when the impressions are served.

The
Company has a creative services group that builds content in a specified format for customers. The majority of revenue is recognized pursuant to retainer contracts. Retainer related
revenue is recognized ratably over the term of the retainer contract which approximates the proportional performance method. Project type revenue is recognized on the proportional performance method
unless language in the contract requires customer acceptance, in which case revenue is recognized upon customer acceptance. Under the proportional performance method, revenue is recognized based on
the level of effort incurred to date compared to the total estimated level of effort required for the entire project.

Income Taxes

The provision for income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are
recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In
determining the future tax consequences of events that have been recognized in the Company's financial statements or tax returns, judgment is required. The Company provides valuation reserves for
deferred tax assets whenever it is more likely than not, based on available evidence, that the assets will not be realized. Differences between the anticipated and actual outcomes of these future tax
consequences could have a material impact on the Company's consolidated results of operations or financial position. See Note 11.

Share-Based Payments

Effective January 1, 2006, the Company adopted SFAS 123(R), "Share-Based Payment," which is a revision to
SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based
payments. Under SFAS 123(R), share-based awards that do not require future service (i.e. vested awards) are expensed immediately. Share-based employee awards that require future service
are amortized over the relevant service period. The Company adopted SFAS 123(R) under the modified prospective adoption method. Accordingly, beginning January 1, 2006, the Company
recognizes compensation cost from share-based payment arrangements based on the grant date fair value of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

award.
Under the modified prospective transition method, compensation cost recognized includes: (i) compensation cost for all share-based payments granted prior to, but not vested as of,
January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (ii) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company recognized approximately
$1.2 million, $0.4 million and $0.3 million in share-based compensation expense related to employee stock options and grants of restricted shares in the years ended
December 31, 2008, 2007, and 2006, respectively.

Financial Instruments and Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company performs ongoing credit evaluations of its customers, generally does not require collateral from its customers and maintains a reserve for potential
credit losses. The Company believes that a concentration of credit risk with respect to accounts receivable related to video and audio content distribution (the primary source of revenues and related
accounts receivable) is limited because its customers are geographically dispersed and the end users (the customers' clients) are diversified across several industries. The Company's receivables are
principally from advertising agencies, direct advertisers, and syndicated programmers. The Company's revenues are not contingent on its customers' sales or collections.

The
carrying values of accounts receivable and accounts payable approximate fair value due to their short maturities. The carrying value of the debt pursuant to the senior credit
facility approximates fair value due to the variable rates of interest charged. The Company believes the carrying value of its debt pursuant to the bridge loan approximates fair value based on the
recentness of entering into the bridge loan agreement. The carrying value of its interest rate swaps are recorded at fair value based on quoted LIBOR interest rates. See Notes 9 and 10.

During
the years ended December 31, 2008, 2007 and 2006, the Company did not have any customer that accounted for more than 10% of its total revenues.

Adoption of SAB 108

On September 13, 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108"). SAB 108 expresses the
SEC Staff's views regarding the process of evaluating materiality of financial statement misstatements. SAB 108 addresses the diversity in evaluating materiality of financial statement
misstatements and the potential for the buildup of improper amounts on the balance sheet. SAB 108 became effective for the Company for the year ended December 31, 2006. As allowed by
SAB 108, the cumulative effect of the initial application of SAB 108 has been reported in the carrying amounts of assets and liabilities as of the beginning of fiscal 2006, with the
offsetting balance to retained earnings. Upon adoption, the Company recorded an increase to accrued liabilities of $0.1 million, originally related to 2005, and an increase in deferred tax
liabilities of approximately $0.3 million, originally related to 2001 or earlier, to record liabilities not previously identified and a decrease in retained earnings of approximately
$0.4 million to correct errors in previous years that were considered immaterial under the Company's previous method of evaluating materiality.

Reclassifications

Certain prior year accrued liability amounts and related deferred taxes have been reclassified from current to noncurrent to conform to
the current year presentation. Further, the Company changed the categories within property and equipment to provide more details of its components. See Note 6.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Acquisitions

During the three years ended December 31, 2008, the Company has acquired or merged with six businesses in the media services
industries. The objective of each transaction was to expand the Company's digital distribution network, customer base and/or product offerings. The acquisitions are summarized as follows:

Business Acquired

Date of Closing

Net Assets Acquired (in millions)

Primary Form of ConsiderationEnliven


October 2, 2008

$
74.8

StockVyvx


June 5, 2008


135.4

CashGTN


August 31, 2007


8.5

CashPoint.360


August 13, 2007


49.7

StockPathfire


June 4, 2007


29.7

CashFastChannel


May 31,2006


28.8

Stock


Each
of the transactions has been included in the Company's results of operations since the date of closing. In each acquisition the excess of the purchase price over the fair value of
net assets acquired has been allocated to goodwill. A brief description of each transaction is as follows:



On October 2, 2008, the Company acquired all of the issued and outstanding shares of Enliven Marketing Technologies
Corporation's ("Enliven") common stock it did not previously own (see Note 4) in exchange for 2.9 million shares of its common stock. In the aggregate, including shares of Enliven
previously held and an estimated 0.1 million shares that will be issued related to a preacquisition earnout, the total purchase price was $74.8 million. Enliven has two principal
operating units, Unicast Communications Corp. ("Unicast") and Springbox Ltd. ("Springbox"). Unicast offers an online advertising campaign management product and Springbox is an Internet based
marketing firm. The purchase price has been preliminarily allocated based on the estimated fair values of the tangible and intangible assets acquired and liabilities assumed at the date of
acquisition. Presently, the Company has allocated $14.6 million to customer relationships, $1.5 million to trade names, and $1.4 million to developed technology. The intangible
assets are being amortized over a weighted average term of 16 years, 10 years and 10 years, respectively. The Company is in the process of determining the final valuation of the
assets acquired, including the valuation of certain identifiable intangibles, and liabilities assumed. The goodwill and intangible assets created in the acquisition are not
deductible for tax purposes. The goodwill created in the acquisition has been allocated to the video and audio content distribution segment.



On June 5, 2008, the Company completed the acquisition of substantially all the assets and certain liabilities of the Vyvx
advertising services business ("Vyvx"), including its distribution, post-production and related operations, from Level 3 Communications, Inc. ("Level 3"). Vyvx
operated an advertising services and distribution business similar to the Company's video and audio content distribution business. The acquisition was completed pursuant to an asset purchase agreement
among the Company, Level 3 and certain affiliates of Level 3 for a purchase price of approximately $135.4 million in cash. The purchase price has been preliminarily allocated
based on the estimated fair values of the tangible and intangible assets acquired and liabilities assumed at the date of acquisition. Presently, the Company

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DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

has
allocated $54.7 million to customer relationships, which is being amortized over 12.5 years. The Company is in the process of determining the final valuation of the assets acquired
and quantifying the cost to close certain offices. The goodwill and intangible assets created in the acquisition are deductible for tax purposes. The goodwill created in the acquisition has been
allocated to the video and audio content distribution segment.



On August 31, 2007, the Company acquired substantially all the assets of privately-held GTN, Inc. ("GTN") for
$8.5 million in cash, net of selling GTN's post-production business immediately after closing to an officer of GTN for $3.0 million in cash. GTN, based in Detroit, provides media
services primarily on behalf of the automotive industry. The purchase price allocation below presents the purchase of GTN's net assets and the subsequent sale of its post-production
business on a net basis. The Company has allocated $1.7 million to customer relationships, which is being amortized over 10 years. The goodwill and intangible assets created in the
acquisition are deductible for tax purposes.



On August 13, 2007, the Company acquired all of the issued and outstanding shares of Point.360's common stock it did not
previously own in exchange for 2.0 million shares of its common stock. Immediately prior to closing, Point.360 spun off its post-production business to its shareholders other than
the Company. As a result, at closing, Point.360's business consisted solely of its advertising distribution operation. In the aggregate, including (i) shares of Point.360 previously held,
(ii) a requirement to retire $7.0 million of Point.360's debt immediately prior to closing, and (iii) working capital adjustments and transaction costs, the total purchase price
was $49.7 million. The Company has allocated $15.4 million to customer relationships, which is being amortized over 10 years, and $0.3 million to a
non-competition agreement, which is being amortized over 5 years. Neither the acquired goodwill nor the intangible assets created in the acquisition are deductible for tax purposes.



On June 4, 2007, the Company acquired all of the issued and outstanding shares of privately-held
Pathfire, Inc.'s ("Pathfire") common and preferred stock for $29.7 million in cash. The amount paid is net of the Company reversing a previously existing liability of $0.9 million
related to a dispute between a subsidiary of the Company and Pathfire that had an estimated fair value of zero. Pathfire distributes third-party long-form content, primarily news and
syndicated programming, through a proprietary server-based network via satellite and Internet channels. The Company has allocated $5.8 million to customer relationships, $2.3 million to
trade name, $0.2 million to developed technology and less than $0.1 million to a non-competition agreement. The intangible assets are being amortized over 20 years,
10 years, 7 years and 1 year, respectively. Neither the acquired goodwill nor the intangible assets are deductible for tax purposes.



On May 31, 2006, the Company acquired all of the issued and outstanding shares of privately-held FastChannel
Network, Inc.'s ("FastChannel") common and preferred stock in exchange for 5.2 million shares of its common stock. In the aggregate the purchase price was $28.8 million.
FastChannel operated a digital distribution network serving the advertising and broadcast industries similar to the Company. The Company has allocated $14.6 million to customer relationships
and $4.4 million to trade name, both of which are being amortized over 10 years. Neither the acquired goodwill nor the intangible assets are deductible for tax purposes.

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DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Purchase Price Allocations

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the respective dates of
acquisition for the above referenced transactions. The purchase price allocations are as follows (in millions):

Category

Enliven

Vyvx

GTN

Point.360

Pathfire

FastChannelCurrent assets

$
6.2

$
2.9

$
0.8

$
3.7

$
3.7

$
5.3Property and equipment


2.8


2.5


1.1


1.9


8.1


3.0Other non-current assets


0.4


0.3





0.4


9.7


13.3Customer relationships


14.6


54.7


1.7


15.4


5.8


14.6Trade names


1.5











2.3


4.4Other intangibles


1.4


0.1





0.3


0.3


Goodwill


65.8


78.4


5.1


36.7


7.3


9.5Total assets acquired


92.7


138.9


8.7


58.4


37.2


50.1Less liabilities assumed


(17.9
)

(3.5
)

(0.2
)

(8.7
)

(7.5
)

(21.3
)Net assets acquired

$
74.8

$
135.4

$
8.5

$
49.7

$
29.7

$
28.8


Exit Costs Related to Acquisitions

In connection with the Vyvx, Enliven and Point.360 acquisitions, the Company recorded exit costs related to discontinuing certain
activities and personnel of the acquired
operations. Below is a rollforward of exit costs from December 31, 2006 to December 31, 2008 (in millions):

Balance at
December 31,
2006

New
Charges

Plus Interest
Accretion
and/or Less
Cash
Payments

Balance at
December 31,
2007

New
Charges

Plus Interest
Accretion
and/or Less
Cash
Payments

Balance at
December 31,
2008Point.360:Office closures

$


$
1.4

$
0.7

$
0.7

$
0.1

$
0.8

$
Employee severance





0.2


0.2











VyvxOffice closures














3.3


0.1


3.2Employee severance














0.1





0.1Enliven:Employee severance














1.4


1.3


0.1Unfavorable contract














0.5





0.5Total

$


$
1.6

$
0.9

$
0.7

$
5.4

$
2.2

$
3.9


The
Company is currently seeking to negotiate lease buyouts or enter into a sublease arrangement with respect to certain office leases it plans to vacate. The Company expects to finalize
its estimate of exit costs for Enliven and Vyvx within the purchase price allocation period, which ends in June 2009 and September 2009 for Vyvx and Enliven, respectively. Exit costs
related to the GTN and Pathfire acquisitions were not material. The $0.1 million adjustment to the Point.360 office closure accrual was aggregated as an adjustment to the cost of acquiring
Point.360.

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DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pro Forma Information

The following pro forma information presents the results from continuing operations as if the above referenced transactions (Enliven,
Vyvx, GTN, Point.360, and Pathfire) had occurred as of January 1, 2007 (in thousands, except per share amounts). A table of actual amounts is provided for reference.

As Reported

Pro FormaYears Ended
December 31,

Years Ended
December 31,2008

2007

2008

2007Revenue

$
157,081

$
97,687

$
187,335

$
174,271Income (loss) from continuing operations


15,079


10,870


7,608


(1,817
)Basic income (loss) per sharecontinuing operations


0.81


0.65


0.37


(0.09
)Diluted income (loss) per sharecontinuing operations


0.79


0.64


0.36


(0.09
)


4. Investments



In May 2007, the Company purchased (i) 10.8 million shares of Enliven common stock (or about 13% of Enliven's then
outstanding shares) and (ii) warrants to purchase an additional 2.7 million shares at $0.45 per share, for an aggregate purchase price of $4.5 million including transaction costs.
The warrants were scheduled to expire in November 2010. The following summarizes the Company's investment in Enliven as of December 31, 2007 (in thousands):

Common Stock

Warrants

TotalFair value

$
12,685

$
2,316

$
15,001Cost basis


3,856


609


4,465Unrealized gain

$
8,829

$
1,707

$
10,536Unrealized gain, recorded in other income




$
1,707

$
1,707Unrealized gain, net of tax, recorded in accumulated other comprehensive income

$
5,420




$
5,420


Prior
to the purchase of Enliven in October 2008 (see Note 3), the Company had accounted for its Enliven stock as "available for sale securities" pursuant to
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," and recorded the change in market value of the Enliven common stock on the balance sheet in long-term
investments and in accumulated other comprehensive income. The Company determined the warrant component of the investment met the definition of a derivative instrument in accordance with
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which requires changes in value attributable to the warrant to be recorded in the statement of operations. The warrant
value was calculated using the Black-Scholes pricing model. The variables used in the model were as follows: stock price at December 31, 2007 of $1.18, volatility of 87%, expected life of
2.9 years, dividend rate of none, and risk free interest rate of 3.1%.

In
October 2008, the Company acquired all the issued and outstanding shares of Enliven common stock. As a result, Enliven became a wholly-owned subsidiary of the Company. The Company's
previously recorded investment in Enliven common stock and warrants was included as part of the purchase price. The common stock was included in the purchase price at its historical cost, whereas the
warrants were included at their estimated fair value as of the acquisition date.

F-17

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



In 2005, the Company (i) purchased 12.6 million shares of Series B Convertible Preferred Stock (the
"Series B Preferred Stock") from Verance Corporation ("Verance") and (ii) entered into a licensing agreement with Verance, for an aggregate purchase price of $5.1 million. During
2006, the Company determined that its investment in the Verance Series B Preferred Stock had experienced an other-than-temporary decline in value and reduced the
$4.8 million carrying value to zero. Similarly, the license agreement was also deemed to have no further
value and the Company recorded additional amortization expense of $0.3 million to reduce the carrying value to zero. The reduction in fair value of the Verance investment and the additional
amortization expense are included in the video and audio content distribution segment.

5. Discontinued Operations

Discontinued operations represent the results of our StarGuide Digital Networks, Inc. ("StarGuide") and Corporate Computer
Systems, Inc. ("CCS") subsidiaries prior to the sale of their assets in 2007. The StarGuide and CCS assets were sold for gross proceeds of $3.1 million resulting in a pretax gain of
$0.8 million, principally due to the StarGuide sale. Due to the lack of tax basis in substantially all the StarGuide assets sold, the provision for income taxes on the assets sold was
approximately $1.0 million resulting in an after tax loss of $0.2 million. For the year ended December 31, 2006, the $0.7 million loss on disposal of discontinued
operations represents the write-down of CCS assets to their estimated net realizable value. In accordance with the provisions of SFAS 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets," the financial data for these businesses has been presented as discontinued operations.

Operating
results of the discontinued operations for the years ended December 31, 2007 and 2006 are as follows (in thousands):

2007

2006Revenues

$
431

$
3,983Cost of revenues


(265
)

(2,448
)Depreciation and amortization





(583
)Other operating expenses


(488
)

(1,491
)Loss from discontinued operations


(322
)

(539
)Income tax benefit


97


209Loss on disposal of discontinued operations, net of tax


(232
)

(698
)Loss from discontinued operations

$
(457
)
$
(1,028
)


6. Property and Equipment

Property and equipment as of December 31, 2008 and 2007 was as follows (in thousands):

2008

2007Network equipment

$
26,494

$
21,816Software development costs


17,317


11,540Machinery and equipment


12,493


11,087Computer equipment


4,213


3,118Software


3,381


1,991Leasehold improvements


3,180


1,352Furniture and fixtures


1,357


1,24068,435


52,144Less accumulated depreciation and amortization


(30,455
)

(24,678
)$
37,980

$
27,466


In
2008, the Company began classifying its property and equipment using the above categories. The 2007 amounts shown have been reclassified to conform to this new
presentation.

F-18

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Intangible Assets

The Company has identified three reporting units as defined in SFAS 142 "Goodwill and Other Intangible Assets;" (i) video
and audio content distribution, (ii) SourceEcreative and (iii) Springbox, of which only two have goodwill as shown below.

Changes
in the carrying value of goodwill by reporting unit for the years ended December 31, 2008 and 2007 are as follows (in thousands):

Video and
Audio Content
Distribution

SourceEcreative

TotalBalance at December 31, 2006

$
63,547

$
1,998

$
65,545Finalize FastChannel acquisition and other


(12,318
)




(12,318
)Goodwill created in acquisition of Pathfire


17,083





17,083Goodwill created in acquisition of Point.360


36,567





36,567Goodwill created in acquisition of GTN


5,078





5,078Balance at December 31, 2007


109,957


1,998


111,955Finalize Pathfire acquisition


(9,796
)




(9,796
)Finalize Point.360 acquisition


393





393Finalize GTN acquisition


21





21Goodwill created in acquisition of Vyvx


78,411





78,411Goodwill created in acquisition of Enliven


65,750





65,750Balance at December 31, 2008

$
244,736

$
1,998

$
246,734


Intangible
assets are as follows (in thousands):

Amortization Period

Gross Assets

Accumulated Amortization

Net AssetsDecember 31, 2008Customer relationships

3-20 years

$
114,083

$
(12,806
)
$
101,277Trade name

10-20 years


17,194


(5,157
)

12,037Developed technology

3-7 years


1,610


(121
)

1,489Non-compete agreements

1-5 years


350


(118
)

232Total intangible assets



$
133,237

$
(18,202
)
$
115,035December 31, 2007Customer relationships

8-20 years

$
44,784

$
(5,630
)
$
39,154Trade name

10-20 years


15,634


(3,934
)

11,700On-line resource and database

3 years


724


(724
)

Developed technology

7 years


220


(18
)

202Non-compete agreements

1-5 years


350


(43
)

307Total intangible assets



$
61,712

$
(10,349
)
$
51,363


Intangible
assets are amortized using the straight-line method over the periods shown above. Amortization expense related to intangible assets totaled $8.6 million,
$4.3 million, and $3.0 million during the years ended December 31, 2008, 2007 and 2006, respectively. The estimated aggregate future

F-19

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

amortization
expense for intangible assets remaining as of December 31, 2008 is as follows (in thousands):

2009

$
11,8352010


11,8082011


11,2562012


11,0012013


10,792Thereafter


58,343$
115,035


8. Accrued Liabilities

Accrued liabilities consist of the following as of December 31, 2008 and 2007 (in thousands):

2008

2007Employee compensation

$
1,930

$
1,920Interest payable


1,669


400Merger liabilities related to exit costs


1,099


675State and local taxes payable


581


374Professional fees


454


782Royalty obligations


450


416Deferred rent


269


151Other


2,941


2,058$
9,393

$
6,776


9. Long-Term Debt

Long-term debt as of December 31, 2008 and 2007 is summarized as follows (in thousands):

2008

2007Term loans

$
58,387

$
44,775Acquisition loans


49,750


Bridge loan


65,000


Subtotal


173,137


44,775Less current portion


(18,152
)

(450
)Long-term portion

$
154,985

$
44,325




In March 2008, the Company replaced its $85 million credit agreement with a six-year, $145 million credit
facility with its existing and two additional lenders (the "Senior Credit Facility"). The Senior Credit Facility contains (i) $65 million of Term Loans, (ii) $50 million of
Acquisition Loans, and (iii) $30 million of Revolving Loans. The Term Loans were fully drawn at closing and the Acquisition Loans were fully drawn in connection with closing the Vyvx
acquisition in June 2008 (see Note 3). The full amount of the Revolving Loans is available to be drawn upon. Borrowings under the

F-20

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Senior
Credit Facility bear interest at the base rate or LIBOR, plus the applicable margin for each that fluctuates with the total leverage ratio (as defined). At December 31, 2008, borrowings
under the Senior Credit Facility bore interest at a weighted average interest rate of 6.3% (excluding the amortization of fees and expenses).



In connection with the Senior Credit Facility, the Company also obtained a financing commitment from Bank of Montreal ("BMO") for a
two-year, $65 million subordinated unsecured term loan (the "Bridge Loan"). In June 2008, the Company entered into the Bridge Loan Agreement with BMO and the Bridge Loan was fully
drawn to fund a portion of the Vyvx acquisition. The Bridge Loan initially bore interest at 11.0% per annum, and increases 50 basis points per month beginning in the third month to a maximum annual
rate of 15.0%. In addition, the Bridge Loan requires the Company to pay (i) funding fees totaling $1.0 million in the event the Bridge Loan remains outstanding after four months, and
(ii) an anniversary fee of $3.9 million in the event the Bridge Loan remains outstanding after one year. In accordance with EITF 86-15 "Increasing-Rate
Debt," the Company has determined its periodic interest cost based upon the estimated outstanding term of the debt. The Company presently expects it will repay or refinance the Bridge Loan shortly
prior to its first anniversary date resulting in a periodic interest cost of 13.3% per annum (excluding the amortization of fees and expenses). At December 31, 2008, borrowings under the Bridge
Loan bore interest at 13.5% per annum (excluding the amortization of fees and expenses).



The Term Loans are scheduled to mature in March 2013; however, the Company presently expects that between (i) scheduled
quarterly principal payments of $3.25 million and (ii) excess cash flow ("ECF") principal payment provisions estimated to be $4.7 million and $9.0 million in 2009 and 2010,
respectively, the Term Loans will be fully retired in 2012. The Acquisition Loans mature in March 2014 and have (i) scheduled quarterly principal payments of $0.1 million and
(ii) ECF principal payment provisions. The Revolving Loans mature in March 2013 and permit reborrowings, whereas the Term Loans and the Acquisition Loans do not. The Bridge Loan matures in June
2010 and does not contain any scheduled principal payments prior to its maturity. The Senior Credit Facility provides for future acquisitions and contains financial covenants pertaining to
(i) the maximum total leverage ratio, (ii) the maximum senior leverage ratio, (iii) the minimum fixed charge coverage ratio, and (iv) maintaining a minimum net worth. The
Bridge Loan Agreement provides for future acquisitions and contains financial covenants pertaining to (i) the maximum total leverage ratio and (ii) the minimum fixed charge coverage
ratio, which are defined consistent with the Senior Credit Facility. The Senior Credit Facility and the Bridge Loan Agreement also contain a variety of restrictive covenants, such as limitations on
borrowings, investments and dividends, and provide for customary events of default. The Senior Credit Facility and the Bridge Loan Agreement are guaranteed by all of the Company's subsidiaries and are
collateralized by substantially all of the Company's assets. As of December 31, 2008, the Company was in compliance with all financial and restrictive covenants under the Senior Credit Facility
and the Bridge Loan Agreement.

F-21

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Principal
payments (scheduled and estimated ECF) required under the Company's debt obligations for the next five years and thereafter are as follows as of December 31, 2008 (in
thousands):

Year

Amount2009

$
18,1522010


87,4752011


13,5002012


13,0992013


500Thereafter


40,411




Prior to entering into the Senior Credit Facility in March 2008, the Company had an $85 million credit agreement with a
syndicate of financial institutions led by BMO. That credit agreement consisted of a $45 million term loan and a $40 million revolving credit facility. Borrowings under that credit
agreement bore interest at the base rate or LIBOR, plus the applicable margin for each that fluctuated with the total leverage ratio (as defined). At December 31, 2007, borrowings under that
credit facility bore interest at a weighted average interest rate of 6.9%.

Prior
to entering into the $85 million credit agreement with BMO in August 2007, the Company had a $35 million credit facility with Wachovia Bank, N.A. That facility
consisted of a $20 million term loan and a $15 million revolving credit facility. Borrowings under that facility bore interest at the base rate or LIBOR, plus the applicable margin for
each that fluctuated with the consolidated leverage ratio (as defined).



In May and July 2008, the Company entered into three-year interest rate swap agreements ("Swaps") with certain of its
lenders for an aggregate notional amount of $57.5 million. As of December 31, 2008 the Swaps were determined to be highly effective and the change in the fair value of the swaps was
recorded in "accumulated other comprehensive income." Presently, the Company expects $0.9 million recorded in accumulated other comprehensive income as of December 31, 2008 related to
the Swaps to be reclassified into earnings in the next 12 months. The fair values of the Swaps are recorded in "other non-current liabilities" in the consolidated balance sheet at
December 31, 2008.

The
Company's Swaps are summarized as follows (dollars in thousands):

December 31, 2008Notional amounts

$
57,500Weighted average pay rates


6.37
%Weighted average receive rates


5.47
%Weighted average maturity (in years)


2.42Fair values of interest rate swaps (liability)

$
(2,948
)


The
Company's objective of entering into the Swaps was to reduce the risk associated with variable interest rates. Borrowings under the Senior Credit Facility bear interest at variable
rates. The Swaps, in effect, convert variable rates of interest into fixed rates of interest on $57.5 million of the Senior Credit Facility. The Swaps qualify as cash flow hedging instruments.
At each balance sheet date, the fair values

F-22

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

of
the Swaps are recorded on the balance sheet with the offsetting entry recorded in "accumulated other comprehensive income," to the extent the hedges are highly effective. Any ineffectiveness is
recorded in the statement of operations. During 2008 no amounts have been recorded in the statement of operations as a result of ineffectiveness.

10. Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS 157 "Fair Value Measurements" ("SFAS 157"), which defines fair
value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. SFAS 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy
requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:



The
Company's adoption of SFAS 157 did not have a material impact on our consolidated financial statements. The Company has segregated all financial assets and liabilities that
are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the
measurement date in the table below.

As
of December 31, 2008, the Company had the following assets and liabilities that were measured at fair value on a recurring basis (in thousands):

Fair Value Measurements at December 31, 2008Quoted Prices
in Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total
Fair Value
MeasurementsAssets:Cash equivalents

$
14,036

$


$


$
14,036Liabilities:Interest rate swaps

$


$
(2,948
)
$


$
(2,948
)


The
interest rate swap liability has been included in "other non-current assets" on the consolidated balance sheet at December 31, 2008.

F-23

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Income Taxes

The components of income before income taxes from continuing operations are as follows (in thousands):

2008

2007

2006United States

$
23,699

$
18,175

$
2,040Foreign


952


196


717Total

$
24,651

$
18,371

$
2,757


Components
of deferred tax assets at December 31, are as follows (in thousands):

2008

2007Deferred Tax Assets:Allowance for doubtful accounts

$
795

$
665Unearned revenue


858


660Accrued liabilities not yet deductible


790


431Federal and State net operating loss carryforwards


115,833


40,131Tax credit carryforwards


3,220


784Impairment of Verance investment


1,890


1,845Basis differences of property and equipment





450Unrealized loss on interest rate swap


1,179


Other


565


673Total deferred tax assets


125,130


45,639Less valuation allowance


(86,094
)

(14,643
)Deferred tax assets after valuation allowance


39,036


30,996Deferred Tax Liabilities:Basis differences of purchased intangibles


(24,509
)

(19,434
)Basis differences of property and equipment


(1,162
)

Capitalized software basis difference


(5,588
)

(2,809
)Unrealized gain on long-term investments





(4,086
)Total deferred tax liabilities


(31,259
)

(26,329
)Net deferred tax assets


7,777


4,667Less net current deferred tax assets


(1,530
)

(1,707
)Net noncurrent deferred tax assets

$
6,247

$
2,960


F-24

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
change in the net deferred tax assets between 2008 and 2007 did not entirely impact deferred income tax expense as shown below (in thousands):

(Charged) or Credited ThroughContinuing Operations

Other
Comprehensive
Income

TotalNet deferred tax assets (liabilities), December 31, 2007

$
8,076

$
(3,409
)
$
4,667Purchase accounting items that (increase) decrease goodwill:Recognition of Pathfire NOL carryfowards


9,627





9,627Deferred tax liabilities created with acquisitions


(3,190
)




(3,190
)Deferred income tax benefit (expense)


(8,108
)

4,588


(3,520
)Other


193





193Net deferred tax assets, December 31, 2008

$
6,598

$
1,179

$
7,777


Components
of the provision for income taxes are as follows (in thousands):

2008

2007

2006Current:US Federal

$
343

$
377

$
92State


1,051


303


197Foreign


70


172


821,464


852


371Deferred:US Federal


7,518


5,801


1,063State


590


848


688,108


6,649


1,131Valuation allowance








876Provision for income taxes

$
9,572

$
7,501

$
2,378


Income
tax expense differs from the amounts that would result from applying the federal statutory rate to the Company's income before income taxes from continuing operations as follows
(in thousands):

2008

2007

2006Federal statutory tax rate


35
%

34
%

34
%Expected tax expense

$
8,628

$
6,246

$
937State and foreign income taxes, net of federal benefit


1,113


911


207Other non-deductible items


283


198


358Valuation allowance








876Change in effective tax rate


(278
)




Other


(174
)

146


Provision for income taxes

$
9,572

$
7,501

$
2,378


F-25

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In
2008, the Company revalued its deferred tax assets and liabilities using a 35% federal statutory rate. Prior to 2008, the Company had assumed a 34% federal statutory rate. The Company
expects its taxable income (before utilization of federal net operating loss ("NOL") carryforwards) to remain at levels which will result in an overall 35% rate.

NOL
carryforwards of $90.0 million and state NOL carryforwards of $2.8 million (exclusive of Enliven) will expire on various dates ranging from 2011 to 2026. Utilization of
these carryforwards will be limited on an annual basis to a maximum of approximately $24 million in 2008, and $18 million in 2009
through 2010, approximately $12 million in 2011, and approximately $2 million in 2012 and each year thereafter until 2026 as a result of previous business combinations, pursuant to
Section 382 of the Internal Revenue Code.

The
Company has $3.2 million in tax credit carryforwards, $1.8 million of which were acquired from Enliven. The Company is maintaining a full valuation allowance on the
acquired tax credit carryforwards as of December 31, 2008. The remaining $1.4 million in tax credit carryforwards relate primarily to Alternative Minimum Tax credits generated by the
Company which do not expire.

In
2008, the Company completed its assessment of the acquired Pathfire NOL carryforwards and concluded that the realization of the NOL carryforwards was more likely than not. Therefore,
$9.6 million of the valuation allowance related to these NOL carryforwards was reversed as a reduction to goodwill.

In
2007, the Company completed its assessment of the acquired Fastchannel NOL carryforwards and concluded that the realization of the NOL carryforwards was more likely than not.
Therefore, $12.3 million of the valuation allowance related to these NOL carryforwards was reversed as a reduction to goodwill.

In
addition, during 2008 the Company acquired Enliven which had historical federal NOL carryforwards of approximately $235 million. The Company is currently performing an analysis
to determine all other changes in control that occurred prior to the acquisition and quantify the annual utilization limit of the Enliven federal NOL carryforwards. As such, the Company will maintain
a full valuation allowance on the Enliven NOL carryforwards until Enliven's tax position can be completely assessed. In accordance with SFAS 109 "Accounting for Income Taxes," any future
reduction in the valuation allowance related to acquired deferred tax assets will be recorded as a reduction to goodwill.

Management
believes that the results of future operations will generate sufficient taxable income to realize the benefits of all of its net deferred tax assets.

On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxesan
interpretation of SFAS 109("FIN 48"). Under FIN 48, the Company recognizes the financial statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the
adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. No adjustments were required in connection with adopting FIN 48.

At
December 31, 2008 and 2007 the Company had approximately $0.9 million of gross state tax credit carryforwards which were not recognized due to transfer pricing
considerations. In the event that such credit carryforwards are recognized, a corresponding liability pursuant to FIN 48 will be recorded, resulting in no net tax benefit or expense.

F-26

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Interest
and penalties related to uncertain tax positions are recognized in income tax expense. As of and for the three years ended December 31, 2008, the Company recognized no
penalties or interest related to unrecognized tax benefits in its financial statements.

The
Company is subject to US federal income tax, United Kingdom income tax, as well as income tax of multiple state jurisdictions. Federal income tax returns for 2004 through 2007 remain
open to examination, while state, local, and UK income tax returns for 2003 through 2007 remain open to examination.

12. Employee Benefit Plan

The Company has a 401(k) retirement plan for all US based employees. Employees may contribute up to a maximum dollar amount of $15,500
for 2008. In 2006, the Company began matching 1% of gross pay for those employees contributing at least 3% of their gross pay into the plan. During 2008, the Company changed its policy to match 25% of
amounts contributed by employees, up to a maximum employee contribution of 6% of gross earnings. Employees vest in the matched contribution after two years of employment. Employer matching
contributions are funded concurrent with the employee contributions. The Company made approximately $254,000, $158,500, and $27,500 in matching contributions to the plan in 2008, 2007 and 2006,
respectively.

13. Stockholders' Equity

On May 30, 2006 the Company's Common Stock was reverse split on a 1-for-10 basis. All references to
share and per share data in these consolidated financial statements have been adjusted to reflect the reverse stock split.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) as of December 31, 2008 and 2007 was as follows (in thousands):

2008

2007Unrealized gain on long-term investment, net of taxes

$


$
5,420Currency translation adjustment


6


1Unrealized loss on interest rate swaps, net of taxes


(1,769
)

Accumulated other comprehensive income (loss)

$
(1,763
)
$
5,421


Restricted Stock

In each of 2008 and 2007, the Company granted a total of 10,000 shares of Common Stock to its non-employee directors
under restricted stock agreements. The fair value of each restricted stock grant was $0.2 million, of which $0.1 million and $0.0 million was recognized as compensation expense in
2008 and 2007, respectively. The restricted stock agreements provide for vesting over 36 months. As of December 31, 2008, the restriction on 3,333 of the restricted shares had lapsed.
The fair value of restricted stock that vested during 2008, 2007 and 2006 was $0.1 million, $0.0 million and $0.0 million, respectively. As of December 31, 2008, none of
the shares had been forfeited. Stock compensation expense related to those shares is recognized monthly as 1/36th of their grant date fair value. As of December 31,
2008 and 2007, there were 3,333 and zero shares of restricted stock vested and outstanding, respectively.

F-27

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In October, 2008, the Company granted 350,000 shares of Common Stock to Scott K. Ginsburg, its Chairman and Chief Executive Officer, under a restricted stock
agreement. The restricted stock agreement provides for vesting over the following periods: (i) 116,667 shares on August 1, 2009, (ii) 116,667 shares on August 1, 2010, and
(iii) 116,666 shares on August 1, 2011. Any remaining forfeiture provisions immediately terminate upon the occurrence of a change in control of the Company (as defined in the restricted
stock agreement). The fair value of the restricted stock on the date of grant was $5.9 million, of which $0.5 million was recognized as compensation expense in 2008.

A
summary of the Company's restricted stock activity for 2008 is presented below:

2008Shares

Weighted-Average
Grant-Date
Fair Value
per ShareNonvested at January 1, 2008


10,000

$
16.27Granted


360,000


16.92Vested


(3,333
)

16.27Canceled or forfeited





Nonvested at December 31, 2008


366,667

$
16.91


Warrants

The Company has issued warrants to purchase common stock in connection with certain financing transactions, common stock offerings and
in connection with the acquisition of Enliven. The warrants outstanding at December 31, 2008 are exercisable and expire in December 2010. A summary of outstanding warrants at
December 31, 2008, 2007 and 2006 and changes during the years then ended are as follows (in thousands, except exercise price amounts):

2008

2007

2006Warrants

Wtd. Avg.
Exercise Price

Warrants

Wtd. Avg.
Exercise Price

Warrants

Wtd. Avg.
Exercise PriceOutstanding at beginning of the year


661

$
10.00


661

$
10.00


708

$
11.56Canceled














(47
)
$
33.45Issued in conjunction with Enliven merger


29

$
20.04











Outstanding at end of the year


690

$
10.42


661

$
10.00


661

$
10.00


14. Stock Plans

The Company has several stock incentive plans outstanding, including the 2006 Long-Term Stock Incentive Plan (the "2006
Plan") and plans assumed of certain acquired companies. While several stock incentive plans remain outstanding, awards may only be granted under the 2006 Plan. Awards can take the form of
(i) stock options, (ii) stock appreciation rights, (iii) restricted stock awards and (iv) performance awards, and can be granted to employees, officers, directors and
consultants. The 2006 Plan provides that the maximum number of shares of common stock with respect to which awards may be granted shall not exceed 1,100,000 shares. Grants of awards are determined by
a committee of the Board of Directors (the "Committee"). Generally, the terms of stock options, including the number of shares of common stock subject to the option, and the vesting schedule, are
determined by the

F-28

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Committee.
However, the exercise price shall not be less than the fair market value of the Company's common stock on the date of grant. Stock option grants typically have terms of ten years and vest
over four years, which is recognized on a straight-line basis over the requisite service period of the entire award. At December 31, 2008, there were a total of 38,177 shares of
common stock available for future grant under the 2006 Plan.

A
summary of the Company's stock option activity for 2008 is presented below:

2008Shares

Weighted Average
Exercise PriceOutstanding at beginning of the year


502,402

$
12.94Granted


641,823


14.39Granted to replace options assumed in acquisition


220,904


40.12Exercised


(11,348
)

11.27Canceled


(106,822
)

33.41Outstanding at end of the year


1,246,959

$
16.76Exercisable at end of the year (vested)


456,121

$
20.74


The
following table summarizes information about stock options outstanding at December 31, 2008:

Options Outstanding

Options ExercisableRange of Exercise Prices

Number Outstanding

Weighted-
Average Remaining Contractual Life

Weighted-
Average Exercise Price

Number Exercisable

Weighted-
Average Exercise Price$5.00$12.49


280,071

4.6 years

$
6.46


191,316

$
6.73$12.50$14.99


638,735

9.4 years


14.06


43,368


12.97$15.00$19.99


48,396

9.3 years


17.48


230


19.22$20.00$29.99


167,508

3.8 years


22.54


123,298


22.46$30.00$500.00


112,249

3.1 years


48.92


97,909


49.39$5.00$500.00


1,246,959

7.0 years

$
16.76


456,121

$
20.74


The
weighted average grant-date fair value per share of options granted during the year (excluding options issued to replace options assumed in connection with an acquisition) was $8.28,
$14.27, and
$4.03 for the years ended December 31, 2008, 2007 and 2006, respectively. The weighted average remaining contractual life of vested stock options at December 31, 2008 was
3.3 years.

The
total intrinsic value of options exercised was approximately $93,000, $624,000, and $7,000 during the years ended December 31, 2008, 2007 and 2006, respectively. The Company's
practice has been to issue new shares (as opposed to treasury shares) upon exercise of stock options.

The
aggregate intrinsic value of options outstanding at December 31, 2008 was approximately $1.5 million. The aggregate intrinsic value of options vested at
December 31, 2008 was approximately $1.0 million.

Compensation
costs related to options issued, but not yet vested, and therefore not yet recognized in expense at December 31, 2008 was $6.3 million, which will be
recognized over the weighted-average remaining vesting period of 3.5 years.

F-29

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions (excludes options issued to replace options
assumed in connection with an acquisition):

2008

2007

2006Number of options granted


641,823


53,500


306,000Weighted average exercise price of options granted

$
14.39

$
21.67

$
5.82Volatility(1)


60
%

68
%

86
%Risk free interest rate(2)


1.8
%

5.1
%

4.4
%Expected term (years)(3)(4)


6.2


6.1


4.8Expected annual dividends


None


None


None


---

15. Commitments and Contingencies

The Company leases facilities and equipment under non-cancelable operating leases.

The
table below summarizes the Company's contractual obligations, including estimated interest and amounts of escalating operating lease rental payments, at December 31, 2008 (in
thousands):

Contractual Obligations

Debt
Service

Office
Leases

Other
Obligations

Total2009

$
36,971

$
7,671

$
9,089

$
53,7312010


95,090


6,643


6,383


108,1162011


17,525


4,550


3,289


25,3642012


16,271


2,440


1,801


20,5122013


3,151


1,358


1,800


6,309Thereafter


41,069


3,525





44,594$
210,077

$
26,187

$
22,362

$
258,626


Rent
expense, net of sublease rentals, totaled $5.0 million, $3.2 million and $3.4 million in 2008, 2007 and 2006, respectively. Sublease rentals were approximately
$0.4 million, $0.1 million, and $0.0 million in 2008, 2007 and 2006, respectively.

As
of December 31, 2008, the Company had non-cancelable future minimum purchase commitments with its telephone and satellite service providers of approximately
$3.9 million for 2009, $3.4 million for 2010, $2.0 million for 2011, $1.8 million for 2012 and $1.8 million for 2013.

F-30

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The
Company is involved in various legal actions arising from the ordinary course of business. Management does not believe the ultimate resolution of these matters will have a material
effect on the Company's financial statements.

16. Net Income (Loss) Per Share:

Under SFAS No. 128, "Earnings per Share," the Company is required to compute its income (loss) per share under two different
methods (basic and diluted). Basic income (loss) per share is calculated by dividing income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss)
per share is calculated by dividing income (loss) by the weighted average number of common shares outstanding as adjusted for the potential effect of dilutive securities such as stock options and
warrants.

A
reconciliation of net income (loss) per basic and diluted share for the years ended December 31, 2008, 2007 and 2006 is as follows (in thousands, except per share amounts):

2008

2007

2006Basic:Income from continuing operations

$
15,079

$
10,870

$
379Loss from discontinued operations





(457
)

(1,028
)Net income (loss)

$
15,079

$
10,413

$
(649
)Weighted average shares outstanding


18,642


16,631


10,568Basic income (loss) per common share:Continuing operations

$
0.81

$
0.65

$
0.04Discontinued operations





(0.02
)

(0.10
)Total basic net income per share

$
0.81

$
0.63

$
(0.06
)Diluted:Weighted average shares outstanding


18,642


16,631


10,568Add net effect of potentially dilutive shares


431


465


Total diluted shares


19,073


17,096


10,568Diluted income (loss) per common share:Continuing operations

$
0.79

$
0.64

$
0.04Discontinued operations





(0.03
)

(0.10
)Total diluted net income per share

$
0.79

$
0.61

$
(0.06
)Antidilutive securities not included:Options, warrants and restricted stock


651


242


1,176


17. Segment Information

The Company's two segments consist of (i) digital and physical distribution of video and audio content and broadcast business
intelligence and (ii) all other. The all other segment includes creative research services (i.e., SourceEcreative) and internet marketing services (i.e., Springbox). The Company
has defined its reportable segments based on internal financial reporting used for corporate management and decision-making purposes. The information in the following tables is derived directly

F-31

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

from
the segments' internal financial reporting used for corporate management purposes (in thousands).

Year Ended December 31, 2008Video and Audio
Content
Distribution

All Other

ConsolidatedRevenues

$
148,891

$
8,190

$
157,081Depreciation and amortization


21,024


327


21,351Income from operations


35,071


2,660


37,731Total assets(a)

$
455,929

$
17,871

$
473,800




Year Ended December 31, 2007Video and Audio
Content
Distribution

All Other

ConsolidatedRevenues

$
92,343

$
5,344

$
97,687Depreciation and amortization


12,518


347


12,865Income from operations


16,732


2,320


19,052Total assets(a)

$
243,165

$
9,330

$
252,495




Year Ended December 31, 2006Video and Audio
Content
Distribution

All Other

ConsolidatedRevenues

$
64,911

$
3,756

$
68,667Depreciation and amortization


8,162


401


8,563Income from operations


8,624


1,677


10,301Total assets(a)

$
171,091

$
4,492

$
175,583


---

18. New Accounting Pronouncements

In September 2006, the FASB issued SFAS 157, "Fair Value Measurements." The statement defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Company adopted SFAS 157 as of January 1, 2008. In February 2008, the FASB issued
FASB Staff Position No. FAS 157-2, which partially defers the effective date of SFAS 157 for nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. The Company does not expect SFAS 157-2 to have any impact on its
financial statements.

In
December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51." The statement clarifies
the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity.
SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, and earlier adoption is prohibited. The Company is currently evaluating the impact of the adoption of
SFAS 160; however, it is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

F-32

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In
December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations," ("SFAS 141(R)"). SFAS 141(R) requires that upon initially obtaining control, an
acquirer will recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100% of its target.
Additionally, contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration, and transaction costs will be expensed
as incurred. SFAS 141(R) also modifies the recognition for preacquisition contingencies, such as environmental or legal issues, restructuring plans and acquired research and development value
in purchase accounting. SFAS 141(R) amends SFAS 109, "Accounting for Income Taxes," to require the acquirer to recognize changes in the
amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed
capital, depending on the circumstances. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted. The
adoption of SFAS 141(R) is expected to have an impact on any business combination completed by the Company beginning in 2009.

In
March 2008, the FASB issued SFAS 161, "Disclosures About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133"
("SFAS 161"). The statement amends and expands the disclosure requirements of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." It requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008.
The principal impact of this statement will be to require the Company to expand its disclosure regarding its derivative instruments, and will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.

In
May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." The statement identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements for nongovernmental entities that are presented in conformity with GAAP. SFAS No. 162 will be
effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles." The Company does not expect the adoption of SFAS No. 162 to have a material impact on its consolidated financial position, results of operations or cash flows.

In
October 2008, the FASB issued FASB Staff Position (FSP) No. 157-3, "Determining the Fair Value of a Financial Asset When The Market For That Asset Is Not Active."
The staff position clarifies the application of SFAS No. 157, "Fair Value Measurements" in a market that is not active. FSP 157-3 became effective upon issuance, including prior
periods for which
financial statements have not been issued. The Company adopted this FSP in 2008, and it did not have a material impact on the Company's consolidated financial position, results of operation or cash
flows.

19. Related Party Transaction

In connection with the Company's acquisition of Media DVX in April 2005, a $6.5 million promissory note was issued to the seller
of Media DVX. The promissory note was personally guaranteed by Scott K. Ginsburg, the Company's Chief Executive Officer and Chairman of the Board. Mr. Ginsburg's personal guarantee of the
Company's debt was evaluated for the purpose of determining an amount to compensate him for such guarantee. The Company determined that the improved interest rate obtained as a direct result of the
personal guarantee was worth approximately

F-33

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

$0.6 million
over the term of the loan. For the year ended December 31, 2006 the Company recognized additional interest expense of $0.3 million associated with the guarantee.
During the fourth quarter of 2006, the Company retired the entire remaining balance of the Media DVX obligation.

20. Unaudited Quarterly Financial Information (in thousands, except per share amounts)

Quarter EndedMarch 31,
2008

June 30,
2008(1)

September 30,
2008

December 31,
2008(2)Revenues

$
29,217

$
34,452

$
41,428

$
51,984Gross profit


17,552


20,309


24,238


30,539Income from continuing operations


3,167


4,148


2,279


5,485Net income

$
3,167

$
4,148

$
2,279

$
5,485Basic income per share

$
0.18

$
0.23

$
0.13

$
0.27Diluted income per share

$
0.17

$
0.23

$
0.12

$
0.27




Quarter EndedMarch 31,
2007

June 30,
2007(3)

September 30,
2007(4)

December 31,
2007Revenues

$
19,894

$
21,689

$
25,137

$
30,967Gross profit


11,024


12,941


13,947


18,186Income from continuing operations


2,332


3,796


1,053


3,689Income (loss) from discontinued operations


(133
)

(4
)

417


(737
)Net income

$
2,199

$
3,792

$
1,470

$
2,952Basic income (loss) per share:Continuing operations

$
0.15

$
0.24

$
0.06

$
0.21Discontinued operations


(0.01
)




0.03


(0.04
)Total

$
0.14

$
0.24

$
0.09

$
0.17Diluted income (loss) per share:Continuing operations

$
0.15

$
0.23

$
0.06

$
0.20Discontinued operations


(0.01
)




0.02


(0.04
)Total

$
0.14

$
0.23

$
0.08

$
0.16


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F-34

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Table of Contents

DG FASTCHANNEL, INC. AND SUBSIDIARIES    SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS    (in thousands)

Classification

Balance at Beginning of Period

Additions Charged to Operations(1)

Acquired

Write-offs (net)

Balance at End of PeriodAllowance for Doubful AccountsYear Ended:December 31, 2006

$
491


789


199


(433
)
$
1,046December 31, 2007

$
1,046


607


465


(402
)
$
1,716December 31, 2008

$
1,716


886


434


(707
)
$
2,329


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S-1

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Table of Contents

EXHIBIT INDEX

Exhibit Number

Exhibit Title3.1(a)

Certificate of Incorporation of Registrant.3.2(b)

Certificate of Amendment to the Certificate of Incorporation of Registrant.3.3(b)

Certificate of Amendment to the Certificate of Incorporation of Registrant3.4(c)

Bylaws of registrant, as amended to date.4.1(d)

Form of Common Stock Certificate.10.1(d)

1992 Stock Option Plan (as amended) and forms of Incentive Stock Option Agreement and Non-statutory Stock Option Agreement.*10.2(d)

Form of Directors' and Officers' Indemnification Agreement.10.3(d)

1995 Director Option Plan and form of Incentive Stock Option Agreement thereto.*10.4(d)

Form of Restricted Stock Agreement.*10.5(e)

Common Stock and Warrant Purchase Agreement dated December 9, 1998 by and among the Registrant and investors listed in Schedule A thereto.10.6(e)

Common Stock Subscription Agreement dated December 9, 1998 by and among the Registrant and Scott K. Ginsburg.10.7(e)

Warrant Purchase Agreement dated December 9, 1998 by and among the Registrant and Scott K. Ginsburg.10.8(e)

Warrant No. 1 to Purchase Common Stock dated December 9, 1998 by and among Registrant and Scott K. Ginsburg.10.9(e)

Warrant No. 2 to Purchase Common Stock dated December 9, 1998 by and among Registrant and Scott K. Ginsburg10.10(f)

Employment Agreement, dated December 30, 2008, between DG FastChannel, Inc. and Omar A. Choucair, Chief Financial Officer.*10.11(f)

Employment Agreement, dated December 20, 2008, between DG FastChannel, Inc. and Neil Nguyen.*10.12(f)

Employment Agreement, dated December 23, 2008, between DG FastChannel, Inc. and Pamela Maythenyi.*10.13(g)

Employment Agreement, dated October 3, 2008, between DG FastChannel, Inc. and Scott K. Ginsburg.*10.14(h)

Amendment No. 1 to Common Stock Purchase Warrant by and among Registrant and Scott K. Ginsburg.*10.15(h)

Amendment No. 2 to Warrant No. 1 by and among Registrant and Scott K. Ginsburg.*10.16(h)

Amendment No. 2 to Warrant No. 2 by and among Registrant and Scott K. Ginsburg.*10.17(h)

Amendment No. 1 to Common Stock Purchase Warrant by and among Registrant and Omar A. Choucair.*10.18(h)

Amendment No. 2 to Warrant by and among Registrant and Omar A. Choucair.*10.19(i)

Form of DG FastChannel, Inc. 2006 Employee Stock Purchase Plan.*10.20(i)

Form of DG FastChannel, Inc. 2006 Long-term Stock Incentive Plan.*


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Table of Contents

Exhibit Number

Exhibit Title10.21(j)

Agreement and Plan of Merger and Reorganization by and among DG FastChannel, Inc., Point.360 and New360 dated April 16, 2007.10.22(k)

Agreement and Plan of Merger among DG FastChannel, Inc., DG Acquisition Corp. V, Pathfire, Inc. and PFire Escrow, Inc. dated April 24, 2007.10.23(l)

Asset Purchase Agreement by and among DG FastChannel, Inc., DGFC Acquisition Corp. V, GTN, Inc. and Douglas M. Cheek dated June 13, 2007.10.24(m)

Credit Agreement among DG FastChannel, Inc., Bank of Montreal, as administrative agent, guarantors and lenders dated August 9, 2007.10.25(n)

Asset Purchase Agreement among Level 3 Communications, LLC, Vyvx, LLC, Wiltel Communications, LLC and DG FastChannel, Inc. dated December 18, 2007.10.26(0)

Agreement and Plan of Merger by and among DG FastChannel, Inc., DG Acquisition Corp. V.I., and Enliven Marketing Technologies Corporation dated May 7, 2008.10.27(p)

Amendment No. 1 to Agreement and Plan of Merger by and among DG FastChannel, Inc., DG Acquisition Corp. V.I., and Enliven Marketing Technologies Corporation dated September 4, 2008.21.1**

Subsidiaries of the Registrant.23.1**

Consent of Independent Registered Public Accounting Firm.23.2**

Consent of Independent Registered Public Accounting Firm.24.1**

Power of Attorney (included on the Signature Page).31.1**

Rule 13a-14(a)/15d-14(a) Certifications.31.2**

Rule 13a-14(a)/15d-14(a) Certifications.32.1**

Section 1350 Certifications.


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Table of Contents

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