**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**___________**





**FORM
      10-Q**








(Mark
      One)





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





For
      the
      quarterly period ended March 31, 2007 or





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





For
      the
      transition period from  ____________ to 
      __________





Commission
      file number 0-21917





Point.360


**(Exact
      Name of Registrant as Specified in Its Charter)**





**California**
              (State
                of or other jurisdiction of
              incorporation
                or organization)
            **95-4272619**
              (I.R.S.
                Employer Identification No.)**2777
                North Ontario Street, Burbank, CA**
              (Address
                of principal executive offices)
            **91504**
              (Zip
                Code)





(818)
      565-1400


**(Registrant’s
      Telephone Number, Including Area Code)**




**________________________________________________**


**(Former
      Name, Former Address and Former Fiscal Year,**


**if
      Changed Since Last Report)**








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





Yes  **X**   No
      __





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





Large
      accelerated filer __ Accelerated
      Filer __ Non-accelerated
      filer  **X**





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





Yes __  No **X**







As
      of
      March 31, 2007, there were 9,984,746 shares of the registrant’s common stock
      outstanding.





**PART
      I - FINANCIAL INFORMATION**




**ITEM
      1.**  **FINANCIAL
      STATEMENTS**


**POINT.360**


**CONSOLIDATED
      BALANCE SHEETS**







**December
                31,**
            
            **March
                31,****Assets**
            
            **2006**********
            
            **2007**Current
                assets:Cash
                and cash equivalents
            
            $
            -
            
            $
            251,000Accounts
                receivable, net of allowances for doubtful accounts of $783,000 and
                $772,000,respectively
            
            
            14,786,000
            
            
            12,080,000Inventories,
                net
            
            
            750,000
            
            
            730,000Prepaid
                expenses and other current assets
            
            
            570,000
            
            
            696,000Deferred
                income taxes
            
            
            683,000
            
            
            683,000Total
                current assets
            
            
            16,789,000
            
            
            14,440,000Property
                and equipment, net
            
            
            14,138,000
            
            
            13,140,000Other
                assets, net
            
            
            555,000
            
            
            548,000Goodwill
            
            
            31,474,000
            
            
            33,620,000Total
                assets
            
            $
            62,956,000
            
            $
            61,748,000**Liabilities
                and Shareholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            4,259,000
            
            $
            3,543,000Accrued
                wages and benefits
            
            
            1,861,000
            
            
            1,535,000Accrued
                earn-out payments
            
            
            2,000,000
            
            
            -Other
                accrued expenses
            
            
            466,000
            
            
            657,000Income
                tax payable
            
            
            123,000
            
            
            29,000Borrowings
                under revolving credit agreement
            
            
            3,007,000
            
            
            1,892,000Current
                portion of borrowings under notes payable
            
            
            1,158,000
            
            
            1,750,000Current
                portion of capital lease obligations
            
            
            16,000
            
            
            48,000Current
                portion of deferred gain on sale of real estate
            
            
            178,000
            
            
            178,000Total
                current liabilities
            
            
            13,068,000
            
            
            9,633,000Deferred
                income taxes
            
            
            4,030,000
            
            
            4,030,000Notes
                payable, less current portion
            
            
            3,474,000
            
            
            5,092,000Capital
                lease and other obligations, less current portion
            
            
            -
            
            
            -Deferred
                gain on sale of real estate, less current portion
            
            
            2,363,000
            
            
            2,318,000Total
                long-term liabilities
            
            
            9,867,000
            
            
            11,440,000Total
                liabilities
            
            
            22,935,000
            
            
            21,073,000Commitments
                and contingencies
            
            
            -
            
            
            -Shareholders’
                equityPreferred
                stock - no par value; 5,000,000 shares authorized; none
                outstanding
            
            
            -
            
            
            -Common
                stock - no par value; 50,000,000 shares authorized; 9,749,582 and
                9,984,746shares
                issued and outstanding, respectively
            
            
            18,488,000
            
            
            19,067,000Additional
                paid-in capital
            
            
            1,077,000
            
            
            1,098,000Retained
                earnings
            
            
            20,456,000
            
            
            20,510,000Total
                shareholders’ equity
            
            
            40,021,000
            
            
            40,675,000Total
                liabilities and shareholders’ equity
            
            $
            62,956,000
            
            $
            61,748,000





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





2





**POINT.360**





**CONSOLIDATED
      STATEMENTS OF INCOME (LOSS)**


**(Unaudited)**







**Three
                Months Ended**
              **March
                31,****2006**
            
            **2007**Revenues
            
            $
            16,039,000
            
            $
            15,482,000Cost
                of services sold
            
            
            (10,715,000
            )
            
            (10,424,000
            )Gross
                profit
            
            
            5,324,000
            
            
            5,058,000Selling,
                general and administrative expense
            
            
            (5,127,000
            )
            
            4,836,000Operating
                income
            
            
            197,000
            
            
            222,000Interest
                expense, net
            
            
            (350,000
            )
            
            (132,000
            )Income
                (loss) before income taxes
            
            
            (153,000
            )
            
            90,000(Provision
                for) benefit from income taxes
            
            
            61,000
            
            
            (36,000
            )Net
                income (loss)
            
            $
            (92,000
            )
            $
            54,000Earnings(loss)
                per share:Basic:Net
                income (loss)
            
            $
            (0.01
            )
            $
            0.01Weighted
                average number of shares
            
            
            9,370,724
            
            
            9,947,730Diluted:Net
                income (loss)
            
            $
            (0.01
            )
            $
            0.01Weighted
                average number of sharesincluding
                the dilutive effect of stockoptions
            
            
            9,537,361
            
            
            10,448,818











See
      accompanying notes to consolidated financial statements.


3


**POINT.360**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**








**Three
                Months Ended**
              **March
                31,****2006**
            
            **2007**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (92,000
            )
            $
            54,000Adjustments
                to reconcile net income
              to
                net cash provided by operating activities:Depreciation
                and amortization
            
            
            1,405,000
            
            
            1,430,000Provision
                for doubtful accounts
            
            
            24,000
            
            
            (11,000
            )Changes
                in assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            (2,384,000
            )
            
            2,717,000Decrease
                in inventories
            
            
            65,000
            
            
            20,000(Increase)
                decrease in prepaid expenses and
              other
                current assets
            
            
            (360,000
            )
            
            (126,000
            )(Increase)
                in goodwill and other tangibles
            
            
            -
            
            
            -(Increase)
                decrease in other assets
              (Increase)
                decrease in deferred tax asset
            
            
            (33,000
              (870,000
            )
              )
            
            27,000
              -Increase
                (decrease) in accounts payable
            
            
            1,103,000
            
            
            (716,000
            )(Decrease)
                in accrued expenses
            
            
            (735,000
            )
            
            (2,135,000
            )Increase
                in income taxes
              Increase
                in other current liabilities
            
            
            855,000
              33,000
            
            
            (94,000
              (145,000
            )
              )Net
                cash provided by (used in) operating activities
            
            
            (989,000
            )
            
            1,021,000Cash
                used in investing activities:Capital
                expenditures
            
            
            (359,000
            )
            
            (431,000
            )Amount
                paid for acquisitions
            
            
            -
            
            
            (2,167,000
            )Net
                cash used in investing activities
            
            
            (359,000
            )
            
            (2,598,000
            )Cash
                flows provided by (used in) financing activities:Proceeds
                from sale of equipment
            
            
            13,883,000
            
            
            100,000Exercise
                of stock options
            
            
            4,000
            
            
            599,000Change
                in revolving credit agreement
            
            
            169,000
            
            
            (1,114,000
            )Proceeds
                from bank note
            
            
            (310,000
            )
            
            2,500,000Shares
                issued for an acquisition
            
            
            -
            
            
            -Repayment
                of notes payable
            
            
            (10,244,000
            )
            
            (289,000
            )Repayment
                of capital lease and other obligations
            
            
            (23,000
            )
            
            32,000Net
                cash provided by (used in) financing activities
            
            
            3,479,000
            
            
            1,828,000Net
                increase (decrease) in cash
            
            
            2,131,000
            
            
            251,000Cash
                and cash equivalents at beginning of period
            
            
            595,000
            
            
            -Cash
                and cash equivalents at end of period
            
            $
            2,726,000
            
            $
            251,000Supplemental
                disclosure of cash flow information -
              Cash
                paid for:Interest
            
            $
            330,000
            
            $
            95,000Income
                tax
            
            $
            -
            
            $
            19,000






See
      accompanying notes to consolidated financial statements.


4


**POINT.360**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





**March
      31, 2007**





**NOTE
      1**  **-
      THE COMPANY**




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




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




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




The
      accompanying unaudited financial statements have been prepared in accordance
      with generally accepted accounting principles and the Securities and Exchange
      Commission’s rules and regulations for reporting interim financial statements
      and footnotes. In the opinion of management, all adjustments (consisting of
      normal recurring adjustments) considered necessary for a fair presentation
      have
      been included. Operating results for the three-month period ended March 31,
      2007
      are not necessarily indicative of the results that may be expected for the
      year
      ending December 31, 2007. These financial statements should be read in
      conjunction with the financial statements and related notes contained in the
      Company’s Form 10-K for the year ended December 31, 2006.




**NOTE
      2**  **-
      LONG TERM DEBT AND NOTES PAYABLE**




On
      December 30, 2005, the Company entered into a new $10 million term loan
      agreement. The term loan provides for interest at LIBOR (5.32% as of March
      31,
      2007) plus 3.15% and is secured by the Company’s equipment. The term loan will
      be repaid in 60 equal monthly principal payments plus interest. Proceeds of
      the
      term loan were used to repay a previously existing term loan. In March 2006,
      the
      Company prepaid $4 million of the term loan with proceeds from the sale of
      real
      estate (see Note 3). Monthly principal payments were subsequently reduced pro
      rata.




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




In
      January 2006, the due date of the then existing credit facility was extended
      to
      March 31, 2006. As of December 30, 2005, the Company did not meet certain
      financial covenants contained in the credit facility and received a compliance
      waiver from the bank.




In
      March
      2006, the Company entered into a new credit agreement which provides up to
      $10
      million of revolving credit. The two-year agreement provides for interest at
      either (i) prime (8.25% as of March 31, 2007) minus 0% - 1.00% or (ii) LIBOR
      plus 1.50% - 2.5%, depending on the level of the Company’s ratio of outstanding
      debt to fixed charges (as defined). The facility is secured by all of the
      Company’s assets, except for equipment securing the term loan. The revolving
      credit agreement requires the Company to comply with various financial and
      business covenants. There are cross default provisions contained in both the
      revolving and term loan agreements. As of March 31, 2007, the Company was in
      compliance with revolving and term loan agreement covenants.





**NOTE
      3**  **-
      SALE OF REAL ESTATE**




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




5


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




**NOTE
      4**  **-
      STOCK-BASED COMPENSATION**




On
      January 1, 2006, the Company adopted SFAS 123(R) which requires the measurement
      and recognition of compensation expense for all share-based payment awards
      made
      to employees and directors based on estimated fair values. SFAS 123(R) requires
      companies to estimate the fair value of the award that is ultimately expected
      to
      vest is recognized as expense over the requisite service periods in our
      Consolidated Statements of Income. Prior to the adoption of SFAS 123(R), the
      Company accounted for stock-based awards to employees and directors using the
      intrinsic value method in accordance with APB 25 as allowed under SFAS
      123. ** Under
      the
      intrinsic value method, no stock-based compensation expense had been recognized
      in our Consolidated Statements of Income for awards to employees and directors
      because the exercise price of our stock options equaled the fair market value
      of
      the underlying stock at the date of grant.





SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards to employees and directors on the date of grant using an option-pricing
      model. The value of the portion of the award that is ultimately expected to
      vest
      is recognized as expense over the requisite service periods in the Company’s
      Consolidated Statements of Income (loss). Stock-based compensation expense
      recognized in the Consolidated Statements of Income (Loss) for the quarters
      ended March 31, 2006 and 2007 included compensation expense for the share-based
      payment awards granted subsequent to January 1, 2006 based on the grant date
      fair value estimated in accordance with the provisions of SFAS 123(R). There
      were no outstanding uninvested share-based payment awards as of January 1,
      2006.
      For stock-based awards issued to employees and directors, stock-based
      compensation is attributed to expense using the straight-line single option
      method, which is consistent with how the prior-priced pro formas were provided
      were provided. As stock-based compensation expense recognized in the Statements
      of Consolidated Income (Loss) for 2006 and 2007 is based on awards expected
      to
      vest, SFAS 123(R) requires forfeitures to be estimated at the time of grant
      and
      revised, if necessary, in subsequent periods if actual forfeitures differ from
      those estimates.





The
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which requires the application of the accounting standard as of January 1,
      2006,
      the first day of the Company’s fiscal year 2006. The consolidated financial
      statements as of and for the quarters ended March 31, 2006 and 2007 reflect
      the
      impact of SFAS 123(R). Stock-based compensation expense related to employee
      or
      director stock options recognized for the quarters ended March 31, 2006 and
      2007
      was $1,000 ($1,000 net of tax benefit) and $21,000 ($13,000 net of tax benefit)
      respectively.





The
      Company’s determination of fair value of share-based payment awards to employees
      and directors on the date of grant uses the Black-Sholes model, which is
      affected by the Company’s stock price as well as assumptions regarding a number
      of complex and subjective variables. These variables include, but are not
      limited to, the expected stock price volatility over the expected volatility
      over the expected term of the awards, and actual and projected employee stock
      options exercise behaviors. The Company estimates expected volatility using
      historical data. The expected term is estimated using the “safe harbor”
provisions under SAB 107.














6




During
      the quarter ended March 31, 2007, the Company granted no awards of stock
      options. At March 31, 2007, there were options outstanding to acquire 2,182,420
      shares at an average exercise price of $2.93 per share. The fair value of each
      option was estimated on the date of grant using the Black-Sholes option-pricing
      model with the following weighted average assumptions:




**Quarter
                Ended**
              **March
                31,****2006**
            
            **2007**Risk-free
                interest rate
            
            
            2.50
            %
            
            -Expected
                term (years)
            
            
            5.0
            
            
            -Volatility
            
            
            48
            %
            
            -Expected
                annual dividends
            
            
            -
            
            
            -


The
      following table summarizes the status of these plans as of March 31,
      2007:





**1996
                Plan**
            **2000
                Plan**
            **2005
                Plan**Options
                originally available
            3,800,000
            1,500,000
            2,000,000Stock
                options outstanding
            1,057,070
            622,500
            502,850Options
                available for grant
            -
            -
            1,485,150





Transactions
      involving stock options are summarized as follows:


**Number**
              **of
                Shares**
            
            **Weighted
                Average**
              **Exercise
                Price**Balance
                at December 31, 2006
            
            
            2,443,004
            
            $
            2.89


Granted
            
            
            -
            
            
            -Exercised
            
            
            235,075
            
            
            2.76Cancelled
            
            
            25,509
            
            
            3.14Balance
              at March 31, 2007
            
            
            2,182,420
            
            $
            2.93





As
      of
      March 31, 2007, the total compensation costs related to non-vested awards yet
      to
      be expensed was approximately $0.3 million to be amortized over the next four
      years.





7


The
      weighted average exercise prices for options granted and exercisable and the
      weighted average remaining contractual life for options outstanding as of March
      31, 2006 and 2007 was as follows:


**As
                of December 31, 2006**
            
            **Number
                of**
              **Shares**
            
            **Weighted
                Average**
              **Exercise
                Price**
            
            **Weighted
                Average Remaining Contractual Life**
              ******(Years****)**
            
            **Intrinsic**
              **Value**Employees
                - Outstanding
            
            
            2,078,004
            
            $
            2.80
            
            
            3.09
            
            $
            1,802,000Employees-
                Expected to Vest
            
            
            2,041,009
            
            $
            2.81
            
            
            3.04
            
            $
            1,752,000Employees
                - Exercisable
            
            
            1,726,854
            
            $
            2.91
            
            
            2.79
            
            $
            1,331,000Non-Employees-
                Outstanding
            
            
            365,000
            
            $
            3.42
            
            
            3.26
            
            $
            114,000Non-Employees
                -Expected to Vest
            
            
            365,000
            
            $
            3.42
            
            
            3.26
            
            $
            114,000Non-Employees-
                Exercisable
            
            
            365,000
            
            $
            3.42
            
            
            3.26
            
            $
            114,000**As
                of****March
                31, 2007**Employees
                - Outstanding
            
            
            1,817,420
            
            $
            2.83
            
            
            2.92
            
            $
            1,363,000Employees
                - Expected to Vest
            
            
            1,783,635
            
            $
            2.84
            
            
            2.90
            
            $
            1,320,000Employees
                - Exercisable
            
            
            1,479,570
            
            $
            2.96
            
            
            2.63
            
            $
            917,000Non-Employees
                - Outstanding
            
            
            365,000
            
            $
            3.42
            
            
            3.01
            
            $
            58,000Non-Employees
                - Expected to Vest
            
            
            365,000
            
            $
            3.42
            
            
            3.01
            
            $
            58,000Non-Employees
                - Exercisable
            
            
            365,000
            
            $
            3.42
            
            
            3.01
            
            $
            58,000





Additional
      information with respect to outstanding options as of March 31, 2007 is as
      follows (shares in thousands):




**Options
              Outstanding**
            
            **Options
              Exercisable****Options
                Exercise**
              **Price
                Range**
            **Number
                of**
              **Shares**
            **Weighted
                Average**
              **Remaining**
              **Contractual
                Life**
            **Weighted
                Average**
              **Exercise
                Price**
            **Number
                of**
              **Shares**
            **Weighted
                Average**
              **Exercise
                Price**$1.75
                - 4.79
            2,182
            3.0
                Years
            $2.93
            1,845
            $3.05





We
      have
      elected to adopt the detailed method provided in SFAS 123(R) for calculating
      the
      beginning balance of the additional paid-in capital pool (APIC pool) related
      to
      the tax effects of employee stock-based compensation, and to determine the
      subsequent impact on the APIC pool and Consolidated Statements of Cash Flows
      of
      the tax effects of employee stock-based compensation awards that are outstanding
      upon adoption of SFAS 123(R).





**NOTE
      5**  **-
      CONTINGENCIES**




On
      July
      10, 2006, Digital Generation Systems, Inc. (“DG”) filed a claim in the District
      Court of Dallas County, Texas, alleging that the Company interfered with a
      contract between DG and Pathfire, Inc. (Pathfire), which contract provided
      that
      DG was granted exclusive use of Pathfire’s network for the distribution of
      advertising content. The DG/Pathfire exclusivity excluded the distribution
      of
      certain other types of content (other than advertising content) to be
      distributed by Pathfire for CBS/Viacom. The claim alleges that the Company
      was
      aware of the exclusivity provision during its negotiations with CBS Worldwide
      Distribution, CBS Broadcasting, Inc. (“CBS”), which resulted in a January 2006
      contract between the Company and CBS (“CBS Contract”). Under the CBS Contract,
      the Company licensed advertising content distribution services from CBS, which
      services were to be performed utilizing Pathfire’s IP-Multicast Format Store
& Forward technology. DG alleges that the Company’s knowledge of the
      exclusivity provision during the Company’s negotiations with CBS and the
      resulting use of Pathfire’s technology for distribution of ads caused damage to
      DG. The claim seeks unspecified actual and punitive damages and other costs
      of
      prosecution.




If
      DG is
      successful in its claim, the possibility exists that the Pathfire distribution
      technology will become unavailable to the Company, through which the Company
      currently distributes a portion of its commercial spots. If that occurs, the
      Company believes it has alternative means to fulfill customer
      needs.




8


The
      Company believes the complaint is without merit and will not have a material
      effect on the Company’s financial position. Regardless, CBS has agreed to
      indemnify the Company pursuant to the CBS Contract to the extent permitted
      by
      law or otherwise.





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





**NOTE
      6**  **-
      SHAREHOLDERS’ EQUITY**





During
      the three-month period ended March 31, 2007, the number of outstanding shares
      of
      the Company’s common stock increased by 235,164 shares due to the exercise of
      employee stock options for $581,000 in cash.








**NOTE
      7- ACQUISITION**





On
      March
      7, 2007, Point.360 acquired substantially all of the assets and business of
      Eden
      FX, Inc. (“Eden”) for $1.9 million in cash. The purchase agreement requires
      possible additional payments of $0.7 million, $0.9 million and $1.2 million
      in
      2008, 2009 and 2010, respectively, if earnings before interest, taxes,
      depreciation and amortization during the three years after the acquisition
      reach
      certain predetermined levels. As part of the transaction, the Point.360 entered
      into employment and non competition agreements with three senior officers of
      Eden which fix responsibilities, salaries and other benefits and set forth
      limitations on the individual’s ability to compete with the Company for the term
      of the earn-out period (three years). Eden is a producer computer generated
      visual effects for feature films, television program and commercial advertising
      content.





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





Goodwill
            
            $
            2,071,000Property,
                plant and equipment
            
            
            127,000Total
                assets acquired
            
            
            2,198,000Liabilities
                assumed
            
            
            (39,000
            )Net
                assets acquired over liabilities,and
                purchase price
            
            $
            2,159,000








The
      operating results of Eden FX for the quarter ended March 31, 2007 were not
      material.





**NOTE
      8- INCOME TAXES**





In
      June
      2006, the Financial Accounting Standards Board (FASB) issued Interpretation
      No.48, “ *Accounting
      for Uncertainty in Income Taxes” (“FIN 48”)* .
      FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with Statement of Financial
      Accounting Standards No. 109, *“Accounting
      for Income Taxes” (“FAS 109”* ).
      This
      interpretation prescribes a recognition and measurement of a tax position taken
      or expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition of tax benefits, classification on the balance sheet, interest
      and
      penalties, accounting in interim periods, disclosure, and transition. The
      Company adopted FIN 48 effective January 1, 2007. The Company or one of its
      subsidiaries files income tax returns in the U.S. federal jurisdiction, and
      various state jurisdictions. With few exceptions, the Company is no longer
      subject to U.S. federal state or local income tax examinations by tax
      authorities for years before 2002. The Company has analyzed its filing positions
      in all of the federal and state jurisdictions where it is required to file
      income tax returns. The Company was last audited by New York taxing authorities
      for the years 2002 through 2004 resulting in no change. The Company is currently
      not under audit by income taxing authorities. If audited, the Company believes
      that its income tax filing positions and deductions will be sustained and does
      not anticipate any adjustments that will result in a material change to its
      financial position. As a result, upon the implementation of FIN 48, the Company
      did not recognize any increase in the liability for unrecognized tax benefits.
      In addition, the Company did not record a cumulative effect adjustment related
      to the adoption of FIN 48.








9




**NOTE
      9- SUBSEQUENT EVENT**




On
      April
      16, 2007, Point.360, New 360, a newly formed California corporation and wholly
      owned subsidiary of Point.360 (“New 360”), and DG FastChannel, Inc. (“DG
      FastChannel”), entered into an Agreement and Plan of Merger and Reorganization
      (the “Merger Agreement”).




Under
      the
      terms of the Merger Agreement, DG FastChannel has agreed to make an exchange
      offer (the “Exchange Offer”) for all outstanding shares of Point.360 common
      stock, no par value per share, including the associated preferred stock purchase
      rights (collectively, the “Point.360 Shares”), in which Exchange Offer each
      Point.360 Share tendered and accepted by DG FastChannel will be exchanged for
      a
      number of shares of common stock, par value $0.001 per share, of DG FastChannel
      (the “DG Common Stock”) equal to the quotient obtained by dividing (x) 2,000,000
      by (y) the number of Point.360 Shares (excluding Point.360 Shares owned by
      DG or
      Point.360) issued and outstanding immediately prior to the completion of the
      Exchange Offer (such amount of shares of DG Common Stock paid per Point.360
      Share pursuant to the Exchange Offer is referred to herein as the “Exchange
      Offer Consideration”). The completion of the Exchange Offer is subject to
      customary conditions, including a minimum condition that not less than a
      majority of the outstanding Point.360 Shares on a fully diluted basis are
      validly tendered and not withdrawn prior to the expiration of the Exchange
      Offer.




In
      addition, on April 16, 2007, Point.360, DG FastChannel, and New 360 entered
      into
      a Contribution Agreement (the “Contribution Agreement”). Pursuant to the
      Contribution Agreement, prior to the completion of the Exchange Offer, Point.360
      will contribute (the “Contribution”) to New 360 all of the assets owned,
      licensed, or leased by Point.360 that are not used exclusively in connection
      with the
      business of Point.360 representing advertising agencies, advertisers, brands,
      and other media companies which require services for short-form media content
      (the “ADS Business”), and New 360 will assume certain liabilities of Point.360. Immediately
      following the Contribution but prior to the completion of the Exchange Offer,
      Point.360 will distribute (the “Spin-Off”) to its shareholders (other than DG
      FastChannel) on a pro rata basis all of the capital stock then outstanding
      of
      New 360.




On
      May
      14, 2007, New 360 filed a Registration Statement on Form 10 (the “Form 10”) with
      the Securities and Exchange Commission for the purpose of registering New 360’s
      common stock under Section 12(b) of the Securities Exchange Act of 1934, as
      amended. Among other things, the Form 10 contains: (1) a detailed description
      of
      the Contribution and the Spin-Off; (2) a description of Point.360’s
      post-production business that will be transferred to New 360 pursuant to the
      Contribution; (3) risk factors relating to New 360’s business, the Contribution
      and Spin-Off and New 360’s common stock; (4) a valuation of New 360 by
      Point.360’s financial advisor; (5) management’s discussion and analysis of New
      360’s financial condition and results of operations for each of the three years
      in the period ended December 31, 2006; (6) unaudited pro forma financial
      statements of New 360 as of December 31, 2006, and for the year then ended,
      giving effect to the Contribution and Spin-Off; (7) audited financial statements
      for New 360 as of December 31, 2006 and 2005 and for each of the three years
      in
      the period ended December 31, 2006; and (8) a description of New 360’s proposed
      management and executive compensation policies.




It
      is
      anticipated that New 360’s common stock will be approved for listing on the
      Nasdaq Global Market. As a result of the Contribution and the Spin-Off, at
      the
      completion of the Exchange Offer, the assets and liabilities of Point.360 will
      consist only of those assets and liabilities exclusively related to the ADS
      Business.




As
      soon
      as practicable following the completion of the Exchange Offer, DG FastChannel
      has agreed to effect the merger of Point.360 with and into DG FastChannel (the
      “Merger”), with DG FastChannel continuing as the surviving corporation. Upon the
      completion of the Merger, each Point.360 Share not purchased in the Exchange
      Offer will be converted into the right to receive the Exchange Offer
      Consideration, without interest. The Merger Agreement contains customary
      representations and warranties, covenants, and conditions. Completion of the
      Contribution, the Spin-Off, and the Exchange Offer is a condition of DG
      FastChannel’s obligation to effect the Merger.




Copies
      of
      the Merger Agreement and the Contribution Agreement have been filed as Exhibits
      2.1 and 2.2, respectively, to the Company’s Current Report on Form 8-K dated
      April 17, 2007 and are incorporated herein by reference.  The preceding
      description of the Merger Agreement and the Contribution Agreement does not
      purport to be complete and is qualified in its entirety by reference to such
      exhibits.






10




This
      description and that provided in the Form 8-K does not constitute an offer
      to
      sell or the solicitation of an offer to buy any securities of Point.360, New
      360
      or DG FastChannel, nor shall there be any sale of securities in any jurisdiction
      in which such offer, solicitation, or sale would be unlawful prior to
      registration or qualification under the securities laws of any such
      jurisdiction. The exchange offer described above has not commenced, and any
      offer will be made only through a prospectus that is part of a registration
      statement on Form S-4 to be filed with the U.S. Securities and Exchange
      Commission (the “SEC”) by DG FastChannel. DG FastChannel will also file with the
      SEC a Schedule TO, and Point.360 will file a solicitation/recommendation
      statement on Schedule 14D-9, in each case with respect to the Exchange Offer.
      DG
      FastChannel and Point.360 expect to mail a prospectus of DG FastChannel and
      related exchange offer materials, as well as the Schedule 14D-9, to Point.360
      shareholders. In addition, in connection with the Spin-Off, New 360 expects
      to
      file a registration statement on Form 10 with the SEC and to mail an information
      statement regarding New 360 to Point.360 shareholders. Investors and security
      holders are urged to carefully read these documents and the other documents
      relating to the transactions contemplated by the Merger Agreement and the
      Contribution Agreement when they become available because these documents will
      contain important information relating to such transactions. Investors and
      security holders may obtain a free copy of these documents after they have
      been
      filed with the SEC, and other annual, quarterly, and special reports and other
      information filed with the SEC by Point.360 or DG FastChannel, at the SEC’s
      website at www.sec.gov .





11


**POINT.360**




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**




**ITEM
      2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**




*Except
      for the historical information contained herein, certain statements in this
      quarterly report are "forward-looking statements" as defined in the Private
      Securities Litigation Reform Act of 1995, which involve certain risks and
      uncertainties, which could cause actual results to differ materially from those
      discussed herein, including but not limited to competition, customer and
      industry concentration, dependence on technological developments, risks related
      to expansion, dependence on key personnel, fluctuating results and seasonality
      and control by management.*




*Statements
      in this Form 10-Q may contain certain forward-looking statements relating to
      Point.360, New 360, and/or DG FastChannel. All statements included in this
      Current Report on Form 8-K concerning activities, events, or developments that
      Point.360 expects, believes, or anticipates will or may occur in the future
      are
      forward-looking statements. Actual results could differ materially from the
      results discussed in the forward-looking statements. Forward-looking statements
      are based on current expectations and projections about future events and
      involve known and unknown risks, uncertainties, and other factors that may
      cause
      actual results and performance to be materially different from any future
      results or performance expressed or implied by forward-looking statements,
      including the following: the risk that the Exchange Offer and the Merger will
      not close because of a failure to satisfy one or more of the closing conditions;
      the risk that Point.360’s or DG FastChannel’s business will have been adversely
      impacted during the pendency of the Exchange Offer and the Merger; the risk
      that
      the operations of the ADS Business and DG FastChannel will not be integrated
      successfully; and the risk that the expected cost savings and other synergies
      from the transactions contemplated by the Merger Agreement and the Contribution
      Agreement may not be fully realized, realized at all, or take longer to realize
      than anticipated. Additional information on these and other risks,
      uncertainties, and factors is included in Point.360’s and DG FastChannel’s
      Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
      on
      Form 8-K, and other documents filed with the SEC.*




*See
      the relevant portions of the Company's documents filed with the Securities
      and
      Exchange Commission and Risk Factors in Item 1A of Part II of this Form 10-Q,
      for a further discussion of these and other risks and uncertainties applicable
      to the Company's business.*




**Overview**




We
      are
      one of the largest providers of video and film asset management services to
      owners, producers and distributors of entertainment and advertising content.
      We
      provide the services necessary to edit, master, reformat, archive and ultimately
      distribute our clients’ film and video content, including television
      programming, spot advertising, feature films and movie trailers using electronic
      and physical means. We deliver commercials, movie trailers, electronic press
      kits, infomercials and syndicated programming to hundreds of broadcast outlets
      worldwide. Our interconnected facilities in Los Angeles, New York, Chicago,
      Dallas and San Francisco provide service coverage in each of the major U.S.
      media centers. Clients include major motion picture studios, advertising
      agencies and corporations.




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




In
      recent
      years, electronic delivery services have grown while physical duplication and
      delivery have been declining. We expect this trend to continue for the
      foreseeable future. All of our electronic, fiber optics, satellite and Internet
      deliveries are made using third party vendors, which eliminates our need to
      invest in such capability. However, the use of others to deliver our services
      poses the risk that costs may rise in certain situations that cannot be passed
      on to customers, thereby lowering gross margins. There is also the risk that
      third party vendors who directly compete with us will succeed in taking away
      business or refuse to allow us to use their distribution channels. In fact,
      in
      June 2005, one such vendor/competitor notified us that its electronic
      distribution channel would not be available to us except in very limited
      circumstances, or unless we entered certain “preferred vendor” arrangements that
      we believed would not be in the best long-term interests of Point.360. While
      curtailment of these services has not materially affected our ability to deliver
      commercial spots, we have not been able to pass on increased alternative
      delivery costs to our customers since June 2005. While we are exploring other
      lower cost alternatives, gross margins related to spot delivery revenues will
      be
      lower until such alternatives become available. Please also refer to Note 8
      of
      Notes to Consolidated Financial Statements.




The
      Company has an opportunity to expand its business by establishing closer
      relationships with our customers through excellent service at a competitive
      price and maintaining adequate third party distribution channels. Our success
      is
      also dependent on attracting and maintaining employees capable of maintaining
      such relationships. Also, growth can be achieved by acquiring similar businesses
      (for example, the acquisition of International Video Conversions, Inc. (“IVC”)
      in July 2004 and Eden FX in March 2007) which can increase revenues by adding
      new customers, or expanding services provided to existing
      customers.




12


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




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




**Three
      Months Ended March 31, 2007 Compared To Three Months Ended March 31,
      2006.**




*Revenues* .
      Revenues were $15.5 million for the three-month period ended March 31, 2007,
      compared to $16.0 million for the three-month period ended March 31,2006.
      Revenues declined in 2006 due to a number of factors including: (i) price
      compression due to competition in post production and spot advertising
      distribution, (ii) consolidation among some customers that has resulted in
      less
      business being available to Point.360, and (iii) the continuing trend toward
      electronic distribution of commercial spots as opposed to physical duplication
      and distribution which results in lower revenues. Billings to customers for
      sending commercial spots physically, has declined to about 4.9% of sales in
      the
      first quarter of 2007 from 5.3% in the prior year period. These factors have
      been somewhat offset by acquiring new customers and adding new service
      offerings. We expect the negative trends to continue at a slower pace in the
      future, and we will continue to invest in high definition capabilities where
      demand is expected to grow. We believe our high definition service platform
      will
      attract additional business in the future.




*Gross
      Profit* .
      In the
      first quarter of 2007, gross margin was 33 % of sales, compared to 33% for
      the
      quarter ended March 31, 2006. The sale/leaseback penalized first quarter 2007
      gross margin by 1% of sales (i.e., lease costs increased $0.2 million in the
      2007 quarter net of depreciation associated with the previously-owned facility).
      The impact of the sale/leaseback will be continuing. Gross margins have been
      historically higher as a percentage of sales for advertising related revenue
      as
      compared to post production, the latter requiring a larger investment in
      equipment (greater depreciation) and higher personnel costs when compared to
      duplication and distribution of advertising content. We expect gross margins
      to
      fluctuate in the future as the sales mix changes.




*Selling,
      General and Administrative Expense* .  SG&A
      expense was $4.8 million (31% of sales) in the first quarter of 2007 as compared
      to $5.1 million (32% of sales) in the same period of 2006.




*Interest
      Expense* .  **** Interest
      expense for the three-month period ended March 31, 2007 was $0.1 million, a
      decrease of $0.2 million over the three-month period ended March 31, 2006.
      The
      decrease was due to lower debt levels resulting from the sale/leaseback
      transaction offset partially by higher rates on remaining variable interest
      debt.




**LIQUIDITY
      AND CAPITAL RESOURCES**




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




On
      December 30, 2006, the Company entered a new $10 million term loan agreement.
      The term loan provides for interest at LIBOR (5.32% at March 31, 2007) plus
      3.15%, or 8.47% at March 31, 2007, and is secured by the Company’s equipment.
      The term loan was to be repaid in 60 equal principal payments plus interest.
      Proceeds of the loans were used to pay off our previously existing term
      loan.




In
      March
      2006, the Company entered into a new credit agreement which provides up to
      $10
      million of revolving credit based on 80% of acceptable accounts receivables,
      as
      defined. The two-year agreement provides for interest of either (i) prime (8.25%
      at March 31, 2007) minus 0% - 1.00% or (ii) LIBOR plus 1.50% - 2.50% depending
      on the level of the Company’s ratio of outstanding debt to fixed charges (as
      defined), or 7.25% or 6.8%, respectively, at March 31, 2007. The facility is
      secured by all of the Company’s assets, except for equipment securing a new term
      loan as described above.




In
      March
      2006, the Company entered into a sale and leaseback transaction with respect
      to
      its Media Center vaulting real estate. The real estate was sold for $13,946,000
      resulting in a $1.2 million after tax gain. Additionally, we received $500,000
      from the purchaser for improvements. In accordance with SFAS No.28.
“ *Accounting
      for Sales with Leasebacks”* (“SFAS28”),
      the gain and the improvement allowance will be amortized over the initial
      15-year lease term as reduced rent. Net proceeds at the closing of the sale
      and
      the improvement advance (approximately $13.9 million) were used to pay off
      the
      mortgage and other outstanding debt. In accordance with our agreement with
      the
      revolving credit lender, we prepaid $4 million of the term loan. As a result
      of
      the prepayment, monthly principal payments on the term loan were reduced by
      approximately $70,000 per month (840,000 per year).




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




13




The
      following table summarizes the March 31, 2007 status of our revolving line
      of
      credit and term loans:




Revolving
                credit
            
            $
            1,893,000Current
                portion of term loan
            
            
            1,798,000Long-term
                portion of term loan
            
            
            5,092,000Total
            
            $
            8,783,000





Monthly
      and annual principal and interest payments due under the term debt are
      approximately $193,000 and $2.3 million, respectively, assuming no change in
      interest rates.





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





The
      bank
      revolving credit agreement requires us to maintain a minimum “quick ratio” and a
      minimum “fixed charge coverage ratio.” Our quick ratio (current assets less
      current liabilities) was 1.28 as of March 31, 2007 as compared to a minimum
      requirement of 0.80. Our fixed charge coverage ratio compares, on a rolling
      twelve-month basis, EBITDA plus rent expense and non-cash charges less income
      tax payments, to (ii) interest expense plus rent expense, the current portion
      of
      long term debt and maintenance capital expenditures. As of March 31, 2007,
      the
      fixed charge coverage ratio was 1.41 as compared to a minimum requirement of
      1.10. If we fail to meet minimum covenant levels, amounts outstanding under
      the
      credit agreement and, by cross default provisions; the term loan will become
      due
      and payable.





We
      expect
      that remaining amounts available under the revolving credit arrangement
      (approximately $6,300,000 at March 31, 2007), the availability of bank or
      institutional credit from new sources and cash generated from operations will
      be
      sufficient to fund debt service, operating needs and about $2.5 - $3.5 million
      of capital expenditures for the next twelve months.





The
      acquisition of IVC was completed in July 2004 for $2.3 million in cash and
      $4.7
      million in borrowings. The IVC purchase agreement also required payments of
      $1
      million, $2 million and $2 million in 2005, 2006 and 2007, respectively, if
      certain predetermined earnings levels (as defined) are met. In April 2005,
      $1
      million was paid. $2 million was paid in 2006 and in 2007.




In
      March
      2007, we acquired substantially all the assets of Eden FX for approximately
      $1.9
      million in cash. The purchase agreement requires additional payments of $0.7
      million, $0.9 million and $ 1.2 million in March of 2008, 2009 and 2010,
      respectively, if earnings during the three years after acquisition meet certain
      predetermined levels.




In
      April
      2007, we received a $0.9 million tax refund for excess use taxes paid in prior
      years.





Due
      to an
      increase in the market price of our stock in the first quarter and after the
      execution of the Merger Agreement, many employees have exercised “in-the-money”
stock options generating approximately $5.5 million in cash proceeds to the
      Company. If all remaining “in-the-money” options are exercised before the
      Effective Date, we will receive additional cash of approximately $1
      million.





The
      following table summarizes contractual obligations as of March 31, 2007 due
      in
      the future:





**Payment
                due by Period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1 Year**
            
            **Years**
              **2
                and 3**
            
            **Years**
              **4
                and 5**
            
            **Thereafter**Long
                Term Debt Obligations
            
            $
            6,903,000
            
            $
            1,937,000
            
            $
            3,095,000
            
            $
            1,872,000
            
            $
            -Capital
                Lease Obligations
            
            
            48,000
            
            
            48,000
            
            
            -
            
            
            -
            
            
            -Operating
                Lease Obligations
            
            
            31,600,000
            
            
            5,038,000
            
            
            8,177,000
            
            
            5,329,000
            
            
            13,055,000Total
            
            $
            38,551,000
            
            $
            7,023,000
            
            $
            11,272,000
            
            $
            7,201,000
            
            $
            13,055,000




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




14


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




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




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




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




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




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




*Valuation
      of long-lived and intangible assets.* Long-lived assets, consisting primarily of property, plant and equipment and
      intangibles (consisting only of goodwill), comprise a significant portion of
      the
      Company’s total assets. Long-lived assets, including goodwill are reviewed for
      impairment whenever events or changes in circumstances have indicated that
      their
      carrying amounts may be recoverable. Recoverability of assets is measured by
      comparing the carrying amount of an asset to its fair value in a current
      transaction between willing parties, other than in a forced liquidation sale.
      Fair value was estimated by independent appraisals and other valuation
      techniques.




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




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



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



|· | Significant
              negative industry or economic trends
|- | --------------------------------------------------------------



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



|· | Our
              market capitalization relative to net book
              value.
|- | ---------------------------------------------------------------------------------



When
      we
      determine that the carrying value of intangibles, long-lived assets and related
      goodwill and enterprise level goodwill may not be recoverable based upon the
      existence of one or more of the above indicators of impairment, we measure
      any
      impairment based on comparing the carrying amount of the asset to its fair
      value
      in a current transaction between willing parties or, in the absence of such
      measurement, on a projected discounted cash flow method using a discount rate
      determined by our management to be commensurate with the risk inherent in our
      current business model. Any amount of impairment so determined would be written
      off as a charge to the income statement, together with an equal reduction of
      the
      related asset. Net intangible assets, long-lived assets and goodwill amounted
      to
      approximately $46.8 million as of March 31, 2007.




15


In
      2002,
      Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill and Other
      Intangible Assets” (“SFAS 142”) became effective and as a result, we ceased to
      amortize approximately $26.3 million of goodwill in 2002 and an annual
      impairment review thereafter. The initial test on January 1, 2002 and the Fiscal
      2002 to 2006 tests performed as of September 30 of each year required no
      goodwill impairment. In the 2006 test performed as of September 30, 2006, we
      determined the fair value of the enterprise using independent appraisals and
      other valuation techniques. If future appraisals or future performances are
      affected by the factors cited above, resulting potential impairment could
      adversely affect the reported goodwill asset value and earnings.




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




Significant
      management judgment is required in determining our provision for income taxes,
      our deferred tax assets and liabilities and any valuation allowance recorded
      against our net deferred tax assets. The net deferred tax liability as of March
      31, 2007 was $3.3 million. The Company did not record a valuation allowance
      against its deferred tax assets as of March 31, 2007.





In
      June
      2006, the FASB issued “FIN 48”. FIN 48 clarifies the accounting for uncertainty
      in income taxes recognized in an enterprise’s financial statements in accordance
      with Statement FAS 109. This interpretation prescribes a recognition and
      measurement of a tax position taken or expected to be taken in a tax return.
      FIN
      48 also provides guidance on derecognition of tax benefits, classification
      on
      the balance sheet, interest and penalties, accounting in interim periods,
      disclosure, and transition. The Company adopted FIN 48 effective January 1,
      2007. The Company or one of its subsidiaries files income tax returns in the
      U.S. federal jurisdiction, and various state jurisdictions. With few exceptions,
      the Company is no longer subject to U.S. federal state or local income tax
      examinations by tax authorities for years before 2002. The Company has analyzed
      its filing positions in all of the federal and state jurisdictions where it
      is
      required to file income tax returns. The Company was last audited by New York
      taxing authorities for the years 2002 through 2004 resulting in no change.
      The
      Company is currently not under audit by income taxing authorities. If audited,
      the Company believes that its income tax filing positions and deductions will
      be
      sustained and does not anticipate any adjustments that will result in a material
      change to its financial position. As a result, upon the implementation of FIN
      48, the Company did not recognize any increase in the liability for unrecognized
      tax benefits. In addition, the Company did not record a cumulative effect
      adjustment related to the adoption of FIN 48.




**RECENT
      ACCOUNTING PRONOUNCEMENTS**




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




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




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




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




16





**ITEM
      3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




**** *Market
      Risk.* The
      Company had borrowings of $8.8 million at March 31, 2007 under term loan and
      revolving credit agreements. Revolving credit advances and one term loan were
      subject to variable interest rates. The weighted average interest rate paid
      during the first quarter of 2007 was 8.1%. For variable rate debt outstanding
      at
      March 31, 2007, a .25% increase in interest rates will increase annual interest
      expense by approximately $19,000. Amounts outstanding under the revolving credit
      facility provide for interest at the banks’ prime rate minus 0%-1.00% assuming
      the same amount of outstanding debt or LIBOR plus 1.5% to 2.5% and LIBOR plus
      3.15% for the term loan. The Company’s market risk exposure with respect to
      financial instruments is to changes in prime or LIBOR rates.




**ITEM
      4.**  **CONTROLS AND PROCEDURES**




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








**PART
      II - OTHER INFORMATION**








**ITEM
      1. LEGAL PROCEEDINGS**




On
      July
      10, 2006, Digital Generation Systems, Inc. (“DG”) filed a claim in the District
      Court of Dallas County, Texas, alleging that the Company interfered with a
      contract between DG and Pathfire, Inc. (Pathfire), which contract provided
      that
      DG was granted exclusive use of Pathfire’s network for the distribution of
      advertising content. The DG/Pathfire exclusivity excluded the distribution
      of
      certain other types of content (other than advertising content) to be
      distributed by Pathfire for CBS/Viacom. The claim alleges that the Company
      was
      aware of the exclusivity provision during its negotiations with CBS Worldwide
      Distribution, CBS Broadcasting, Inc. (“CBS”), which resulted in a January 2006
      contract between the Company and CBS (“CBS Contract”). Under the CBS Contract,
      the Company licensed advertising content distribution services from CBS, which
      services were to be performed utilizing Pathfire’s IP-Multicast Format Store
& Forward technology. DG alleges that the Company’s knowledge of the
      exclusivity provision during the Company’s negotiations with CBS and the
      resulting use of Pathfire’s technology for distribution of ads caused damage to
      DG. The claim seeks unspecified actual and punitive damages and other costs
      of
      prosecution.




If
      DG is
      successful in its claim, the possibility exists that the Pathfire distribution
      technology will become unavailable to the Company, through which the Company
      currently distributes a portion of its commercial spots. If that occurs, the
      Company believes it has alternative means to fulfill customer
      needs.




The
      Company believes the complaint is without merit and will not have a material
      effect on the Company’s financial position. Regardless, CBS has agreed to
      indemnify the Company pursuant to the CBS Contract to the extent permitted
      by
      law or otherwise.




In
      April
      2007, the Company entered the Merger Agreement with DG. Upon completion of
      the
      transaction contemplated in the Merger Agreement, the DG actions will be
      dismissed.




**ITEM
      1A. RISK FACTORS**




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




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




17


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




|l | Recent
              history of losses.
|- | ---------------------------------------

|l | Prior
              breach and changes in credit agreements and ongoing
              liquidity.
|- | ------------------------------------------------------------------------------------------------

|l | Our
              highly competitive marketplace.
|- | -------------------------------------------------

|l | The
              risks associated with dependence upon significant
              customers.
|- | --------------------------------------------------------------------------------------------

|l | Our
              ability to execute our expansion
              strategy.
|- | --------------------------------------------------------------------------

|l | The
              uncertain ability to manage in a changing
              environment.
|- | --------------------------------------------------------------------------------------

|l | Our
              dependence upon and our ability to adapt to technological
              developments.
|- | -------------------------------------------------------------------------------------------------------

|l | Dependence
              on key personnel.
|- | ------------------------------------------

|l | Our
              ability to maintain and improve service
              quality.
|- | --------------------------------------------------------------------------------

|l | Fluctuation
              in quarterly operating results and seasonality in certain of our
              markets.
|- | -----------------------------------------------------------------------------------------------------------------

|l | Possible
              significant influence over corporate affairs by significant
              shareholders.
|- | --------------------------------------------------------------------------------------------------------------




There
      is
      also the risk that the transaction contemplated by the Merger Agreement will
      not
      be completed. Between now and the Effective Date, we will begin to utilize
      DG as
      an electronic vendor. We will also be sharing with DG confidential information
      about the ad distribution business. If the merger is not completed, there are
      risks that our competitive advantage will erode, that key ads employees will
      depart due to perceived uncertainties and that customers will choose other
      vendors to handle their spot advertising distribution needs.





Investors
      are encouraged to examine the Company’s 2006 Form 10-K, which more fully
      describes the risks and uncertainties associated with the Company’s
      business.




**ITEM
      6. EXHIBITS**




|**(a)** | **Exhibits**
|------- | ------------






10.1
            First
                Amendment to Standard Loan Agreement dated March 15, 2007 between
                Bank of
                America and the Company.





10.2
            Second
                Amendment to Standard Loan Agreement dated April 9, 2007 between
                Bank of
                America and the Company.





10.3
            Promissory
                Note dated March 30, 2007 between General Electric Capital Corporation
                and
                the Company.





31.1
            Certification
                of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.





31.2
            Certification
                of Chief Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.





32.1
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





32.2
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.








18




**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.






POINT.360DATE:
                  May 15, 2007
              BY:
              /s/
                  Alan R.
                  SteelAlan
                  R. SteelExecutive
                  Vice President,Finance
                  and Administration(duly
                  authorized officer and principal financial
                  officer)




19