UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549___________

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2004 or

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

For the transition period from _________ to _________

Commission file number 0-21917

Point.360
(Exact Name of Registrant as Specified in Its Charter)

|California                                         | 95-4272619                          
|-------------------------------------------------- | ------------------------------------
|(State of or other jurisdiction of                 | (I.R.S. Employer Identification No.)
|incorporation or organization)                     |                                     
|7083 Hollywood Boulevard, Suite 200, Hollywood, CA | 90028                               
|(Address of principal executive offices)           | (Zip Code)                          

(323) 957-7990
(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes
  ___    No  X

As of April 9, 2004,
there were 9,199,894 shares of the registrants common stock outstanding.

---

PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

POINT.360

CONSOLIDATED BALANCE SHEETS

|ASSETS                                                                       |  |                        |            |                            |            
|---------------------------------------------------------------------------- |  | ---------------------- | ---------- | -------------------------- | -----------
|                                                                             |  | December
      31,2003 |            | March
      31,
      2004 |            
|                                                                             |  |                        |            |                            |            
|                                                                             |  |                        |            |                            | (unaudited)
|Current
      assets:                                                        |  |                        |            |                            |            
|Cash
      and cash equivalents                                              |  | $                      | 7,206,000  |                            | $          
|Accounts
      receivable, net of allowances for doubtful                    |  |                        |            |                            |            
|accounts
      of $735,000 and $759,000 (unaudited), respectively            |  |                        | 9,490,000  |                            |            
|Income
      tax receivable                                                  |  |                        |           |                            |            
|Inventories                                                                  |  |                        | 794,000    |                            |            
|Prepaid
      expenses and other current assets                              |  |                        | 895,000    |                            |            
|Deferred
      income taxes                                                  |  |                        | 1,414,000  |                            |            
|                                                                             |  |                        |            |                            |            
|Total current
      assets                                                   |  |                        | 19,799,000 |                            |            
|                                                                             |  |                        |            |                            |            
|Property
      and equipment, net                                            |  |                        | 15,751,000 |                            |            
|Other
      assets, net                                                      |  |                        | 1,348,000  |                            |            
|Goodwill
      and other intangibles, net                                    |  |                        | 27,046,000 |                            |            
|Rights
      to purchase property and equipment                              |  |                        | 800,000    |                            |            
|                                                                             |  |                        |            |                            |            
|Total assets                                                                 |  | $                      | 64,744,000 |                            | $          
|                                                                             |  |                        |            |                            |            
|                                                                             |  |                        |            |                            |            
|LIABILITIES
      AND SHAREHOLDERS EQUITY                                   |  |                        |            |                            |            
|                                                                             |  |                        |            |                            |            
|Current
      liabilities:                                                   |  |                        |            |                            |            
|Accounts
      payable                                                       |  | $                      | 3,460,000  |                            | $          
|Accrued
      expenses                                                       |  |                        | 3,123,000  |                            |            
|Income
      taxes payable                                                   |  |                        | 296,000    |                            |            
|Current
      portion of borrowings under credit agreement                   |  |                        | 9,199,000  |                            |            
|Current
      portion of capital lease obligations                           |  |                        | 58,000     |                            |            
|                                                                             |  |                        |            |                            |            
|Total current
      liabilities                                              |  |                        | 16,136,000 |                            |            
|                                                                             |  |                        |            |                            |            
|                                                                             |  |                        |            |                            |            
|Deferred
      income taxes                                                  |  |                        | 3,678,000  |                            |            
|Notes
      payable, less current portion                                    |  |                        | 6,667,000  |                            |            
|Capital
      lease obligations, less current portion                        |  |                        | 95,000     |                            |            
|Obligation
      to purchase property and equipment                          |  |                        | 800,000    |                            |            
|                                                                             |  |                        |            |                            |            
|Total
      long-term liabilities                                            |  |                        | 11,240,000 |                            |            
|                                                                             |  |                        |            |                            |            
|                                                                             |  |                        |            |                            |            
|Total liabilities                                                            |  |                        | 27,376,000 |                            |            
|                                                                             |  |                        |            |                            |            
|                                                                             |  |                        |            |                            |            
|Contingencies
      (Note 4 and 8)                                           |  |                        |           |                            |            
|                                                                             |  |                        |            |                            |            
|Shareholders
      equity                                                   |  |                        |            |                            |            
|Preferred
      stock  no par value; 5,000,000 authorized; none outstanding |  |                        |           |                            |            
|Common
      stock  no par value; 50,000,000 authorized; 9,134,559          |  |                        |            |                            |            
|and
      9,199,894 (unaudited) shares issued and outstanding, respectively  |  |                        | 17,625,000 |                            |            
|Additional
      paid-in capital                                             |  |                        | 624,000    |                            |            
|Retained
      earnings                                                      |  |                        | 19,119,000 |                            |            
|                                                                             |  |                        |            |                            |            
|Total
      shareholders equity                                             |  |                        | 37,368,000 |                            |            
|                                                                             |  |                        |            |                            |            
|                                                                             |  |                        |            |                            |            
|Total
      liabilities and shareholders equity                             |  | $                      | 64,744,000 |                            | $          
|                                                                             |  |                        |            |                            |            
|                                                                             |  |                        |            |                            |            

See accompanying notes to consolidated financial statements.

2

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POINT.360

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

|                                                                                             |  |                          |             |      |             |            |  
|-------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | ---- | ----------- | ---------- | -
|                                                                                             |  | Three
      Months Ended |            
|                                                                                             |  | March
      31,          |            
|                                                                                             |  |                          |             |      |            
|                                                                                             |  | 2003                     |             | 2004 |            
|                                                                                             |  |                          |             |      |            
|                                                                                             |  |                          |             |      | (unaudited) |           
|                                                                                             |  |                          |             |      |             |            |  
|Revenues                                                                                     |  | $                        | 17,293,000  |      | $           | 15,468,000 |  
|Cost of
      goods sold                                                                     |  |                          | (10,854,000 | )    |             | (9,819,000 | )
|                                                                                             |  |                          |             |      |            
|                                                                                             |  |                          |             |      |             |            |  
|Gross
      profit                                                                           |  |                          | 6,439,000   |      |             | 5,649,000  |  
|Selling,
      general and administrative expense                                            |  |                          | (4,382,000  | )    |             | (4,595,000 | )
|                                                                                             |  |                          |             |      |            
|                                                                                             |  |                          |             |      |             |            |  
|Operating
      income                                                                       |  |                          | 2,057,000   |      |             | 1,054,000  |  
|Interest
      expense, net                                                                  |  |                          | (521,000    | )    |             | (223,000   | )
|Derivative
      fair value change                                                           |  |                          | 145,000     |      |             |           |  
|Other
      income                                                                           |  |                          |            |      |             | 6,000      |  
|                                                                                             |  |                          |             |      |            
|Income
      (loss) before income taxes                                                      |  |                          | 1,681,000   |      |             | 837,000    |  
|(Provision
      for) benefit from income taxes                                              |  |                          | (689,000    | )    |             | (344,000   | )
|                                                                                             |  |                          |             |      |            
|Net income
      (loss)                                                                      |  | $                        | 992,000     |      | $           | 493,000    |  
|                                                                                             |  |                          |             |      |            
|                                                                                             |  |                          |             |      |             |            |  
|Other
      comprehensive income:                                                            |  |                          |             |      |             |            |  
|Derivative
      fair value change                                                           |  | $                        | (15,000     | )    | $           |           |  
|                                                                                             |  |                          |             |      |            
|Comprehensive
      income (loss)                                                            |  | $                        | 977,000     |      | $           | 493,000    |  
|                                                                                             |  |                          |             |      |            
|                                                                                             |  |                          |             |      |             |            |  
|Earnings
      (loss) per share:                                                             |  |                          |             |      |             |            |  
|Basic:                                                                                       |  |                          |             |      |             |            |  
|Net
      income (loss)                                                                      |  | $                        | 0.11        |      | $           | 0.05       |  
|Weighted
      average number of shares                                                      |  |                          | 9,023,440   |      |             | 9,152,497  |  
|                                                                                             |  |                          |             |      |            
|Diluted:                                                                                     |  |                          |             |      |             |            |  
|Net
      income (loss)                                                                      |  | $                        | 0.11        |      | $           | 0.05       |  
|Weighted
      average number of shares including the dilutive
      effect of stock options |  |                          | 9,289,476   |      |             | 9,890,447  |  
|                                                                                             |  |                          |             |      |            

See accompanying notes to consolidated financial statements.

3

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POINT.360

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                                                                     |  | Three Months Ended |           
|---------------------------------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                                                     |  | March 31,          |           
|                                                                                                     |  | 2003               |           
|                                                                                                     |  |                    |           
|                                                                                                     |  |                    |           
|Cash flows
      from operating activities:                                                          |  |                    |           
|Net
      income (loss)                                                                              |  | $                  | 992,000   
|Adjustments
      to reconcile net income (loss) to net
      cash provided by operating activities: |  |                    |           
|Depreciation
      and amortization                                                                  |  |                    | 1,286,000 
|Provision
      for doubtful accounts                                                                |  |                    | 92,000    
|Deferred
      income taxes                                                                          |  |                    | 154,000   
|Other
      non cash item                                                                            |  |                    | (41,000   
|Changes
      in assets and liabilities:                                                             |  |                    |           
|Decrease
      (increase) in accounts receivable                                                     |  |                    | 577,000   
|Decrease
      in inventories                                                                        |  |                    | 87,000    
|(Increase)
      decrease in prepaid expenses and other current
      assets                         |  |                    | (174,000  
|(Increase)
      decrease in other assets                                                            |  |                    | (95,000   
|Increase
      in accounts payable                                                                   |  |                    | 355,000   
|Increase
      (decrease) in accrued expenses                                                        |  |                    | 390,000   
|(Decrease)
      increase in income taxes                                                            |  |                    | (233,000  
|                                                                                                     |  |                    |           
|Net cash
      provided by operating activities                                                      |  |                    | 3,390,000 
|                                                                                                     |  |                    |           
|                                                                                                     |  |                    |           
|Cash used
      in investing activities:                                                             |  |                    |           
|Capital
      expenditures                                                                           |  |                    | (466,000  
|Proceeds
      from sale of equipment                                                                |  |                    |          
|Net
      cash paid for acquisitions                                                                 |  |                    | (282,000  
|                                                                                                     |  |                    |           
|Net cash
      used in investing activities                                                          |  |                    | (748,000  
|                                                                                                     |  |                    |           
|                                                                                                     |  |                    |           
|Cash flows
      used in financing activities:                                                       |  |                    |           
|Exercise
      of stock options                                                                      |  |                    | 26,000    
|Proceeds
      from bank note                                                                        |  |                    |           
|Repayment
      of notes payable                                                                     |  |                    | (1,251,000
|Repayment
      of capital lease obligations                                                         |  |                    | (19,000   
|Contract
      settlement                                                                            |  |                    | (90,000   
|                                                                                                     |  |                    |           
|Net cash
      used in financing activities                                                          |  |                    | (1,334,000
|                                                                                                     |  |                    |           
|                                                                                                     |  |                    |           
|Net increase
      (decrease) in cash                                                                |  |                    | 1,308,000 
|Cash and
      cash equivalents at beginning of period                                               |  |                    | 5,372,000 
|                                                                                                     |  |                    |           
|                                                                                                     |  |                    |           
|Cash and
      cash equivalents at end of period                                                     |  |                    | 6,680,000 
|                                                                                                     |  |                    |           
|Supplemental
      disclosure of cash flow information -                                             |  |                    |           
|Cash
      paid for:                                                                                 |  |                    |           
|Interest                                                                                             |  |                    | 512,000   
|                                                                                                     |  |                    |           
|Income
      tax                                                                                     |  | $                  | 917,000   
|                                                                                                     |  |                    |           
|                                                                                                     |  |                    |           

See accompanying notes to consolidated financial statements.

4

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POINT.360

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2004

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 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 eight acquisitions of companies providing similar services. The Company will continue to evaluate acquisition opportunities to
enhance its operations and profitability. As a result of these acquisitions, the Company 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, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003.

NOTE 2 - ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) Nos. 141 and 142, Business
Combinations and Goodwill and Other Intangible Assets, respectively.  SFAS No. 141 replaces Accounting Principles Board
(APB) Opinion No. 16. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill and other intangible assets
with indefinite useful lives (goodwill) from an amortization method to an impairment-only approach.  Under SFAS No. 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be
impaired.  The Company also tested goodwill as of September 30, 2003 with no impairment indicated.

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

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.  SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities.  SFAS No. 149 is effective for derivative instruments and hedging activities entered into or modified after June 30, 2003, except for certain forward purchase and sale securities. For these
forward purchase and sale securities, SFAS No. 149 is effective for both new and existing securities after June 30, 2003.  Management does not expect adoption of SFAS No. 149 to have a material impact on the Companys statements of earnings,
financial position, or cash flows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial

5

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position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 will be effective for financial instruments entered into or modified after May 31, 2003 and otherwise will be effective at the beginning of the first interim period beginning after June 15, 2003. This statement does not
affect the Company at this time.

NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE

In May 2002, the Company and its banks entered into a term loan agreement having a maturity date of December 31, 2004. Pursuant to the agreement, the Company made a $2 million principal payment
and made additional principal payments of $3.5 million and $7.0 million in 2002 and 2003, respectively. The agreement provided for interest at the banks reference rate plus 1.25% and required the Company to maintain certain financial covenant
ratios.  The term loan was secured by substantially all of the Companys assets.  In connection with the term loan, the Company wrote off $265,000 of deferred financing costs related to the previous bank agreement in the second quarter of 2002.
Certain legal and other costs associated with the new term loan, including fees of $50,000 and $250,000 paid in May 2002 and June 2003, respectively, were capitalized to be amortized over the remaining life of the loan.

As of March 31, 2003, the Company believed that the acquisition described in Note 4 below would be completed, as well as a complete refinancing of the term loan. In accordance with SFAS No. 5,
Accounting for Contingencies, the Company expensed the then-remaining deferred costs associated with the term loan, $114,000. In June 2003, acquisition and
refinancing discussions were terminated, the $114,000 write-off was reversed and the $250,000 fee was paid June 30, 2003. The Company simultaneously resumed amortization of the deferred costs based on the December 31, 2004 due date of the term loan.
As a result of the first quarter write-off and the second quarter reversal, income for the first quarter of calendar 2003 was reduced $114,000 ($66,000 net of tax) and income for the second quarter was increased $114,000 ($66,000 net of tax).

On March 12, 2004, the Company entered into a new credit agreement which provides up to $10 million of revolving credit availability for two years and a five-year $8 million term loan. For the
first two years of the term loan, the Company can re-borrow all principal payments to finance up to 80% of capital equipment purchases. The agreement provides for interest at the banks prime rate or LIBOR plus 2.25% for the revolver, prime
rate plus 0.25% or LIBOR plus 2.50% for the term loan, and requires the Company to maintain certain financial covenant ratios. The facilities are secured by all of the Companys assets. The term loan requires principal payments of $1.6 million
annually. The $15,866,000 outstanding term loan as of December 31, 2003 was repaid by $1,000,000 of scheduled principal payments made in January and February 2004 and, on March 12, 2004, by new term loan borrowings of $8,000,000 and cash payment of
$6,866,000. For financial statement purposes, as of December 31, 2003, an amount representing the portion of the new term loan due after December 31, 2004 ($6,667,000) was classified as long-term.

NOTE 4 - ISSUANCE OF WARRANT, POSSIBLE ACQUISITION AND WRITE-OFF OF DEFERRED COSTS AND RELATED LEGAL ACTIONS

In July 2002, the Company acquired an option to purchase three subsidiaries (the Subsidiaries) of Alliance Atlantis Communications Inc. (Alliance) engaged in businesses
directly related to those of the Company. In consideration for the option, the Company issued to Alliance a warrant to acquire 500,000 shares of the Companys common stock at $2.00 per share. The warrant was to expire five years from the
closing date of the transaction, or July 3, 2005 if the Company did not purchase the Subsidiaries. In connection therewith, the Company capitalized the fair value of the warrant ($619,000 determined by using the Black-Scholes valuation model) as an
other asset on the balance sheet.

In December 2002, the option was extended to March 10, 2003. In connection with the extension, the Company made a $300,000 deposit toward the purchase price of the Subsidiaries, which deposit
was nonrefundable except in very limited circumstances. The deposit was capitalized as an other asset. Additionally, the Company capitalized approximately $700,000 of due diligence and other expenses associated with the proposed acquisition during
the six months ended June 30, 2003.

The Company did not exercise its option to purchase the Subsidiaries by the March 10, 2003 termination date; however, Alliance agreed to continue negotiations with the Company to complete the
transaction.

In connection with the possible acquisition of the Subsidiaries, the Company entered discussions with several possible lenders to provide financing for the purchase of the Subsidiaries and to
pay off the Companys existing term loan with a group of banks. A provision in the Companys term loan agreement prohibited acquisitions unless approved by the banks, which permission had been denied.

In June 2003, discussions with Alliance and the new lenders were terminated. As a result, the Company wrote off the above mentioned deposit, due diligence costs and approximately $400,000 of
legal and other costs associated with the proposed new financing. The $619,000 value of the warrant was reversed against Additional Paid-in Capital because, in managements opinion, Alliance had breached certain provisions of the option
agreement resulting in a termination event according to the provisions of the warrant. In July 2003, Alliance filed a complaint in the United States District Court, Central District of California, seeking a judicial determination that

6

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Alliance has full right of legal ownership to the warrant as well as the $300,000 deposit. In managements opinion, it is too early to determine the outcome of the claims. If the Company is not successful in this
defense, the warrant value will have to be expensed.

On July 18, 2003, Alliance filed a complaint against the Company in the Superior Court of Justice, Ontario, Canada.  The complaint alleges that the Company breached a non-disclosure agreement
between Alliance and the Company by issuing a press release with respect to termination of negotiations to purchase the Subsidiaries without obtaining the required prior written consent of Alliance. Alliance maintains that the press release impaired
its ability to extract value from the Subsidiaries and negatively affected its ability to sell the Subsidiaries to a third party. The complaint seeks breach of contract and punitive damages of approximately $4.4 million, expenses and a permanent
order enjoining further such statements by the Company. In managements opinion, it is too early to determine the outcome of the claims.

On August 11, 2003, the Company filed a counterclaim in the United States District Court, Central District of California against Alliance for, among other things, misrepresentation and breach
of contract seeking cancellation of the warrant and general damages of at least $1.2 million. The outcome of the counterclaim cannot be estimated at this time.

NOTE 5 - DERIVATIVE AND HEDGING ACTIVITIES

In November 2000, the Company entered into an interest rate swap contract to economically hedge its floating debt rate. Under the terms of the contract, the notional amount was $15,000,000,
whereby the Company received LIBOR and paid a fixed 6.5% rate of interest for three years. SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
required that the swap contract be recorded at fair value upon adoption of SFAS 133 and quarterly by recording (i) a cumulative-effect type adjustment at January 1, 2001 equal to the fair value of the swap contract on that date, (ii) amortizing the
cumulative-effect type adjustment quarterly over the life of the derivative contract, and (iii) a charge or credit to income in the amount of the difference between the fair value of the swap contract at the beginning and end of such quarter. The
interest rate swap contract terminated in November 2003. The following adjustments were recorded to reflect changes during the three -month period ended March 31, 2003:

|                                                                                           |  | Increase
      (Decrease) Income        
|------------------------------------------------------------------------------------------ |  | ----------------------------------------
|                                                                                           | 
|                                                                                           |  | Derivative
      Fair
      Value Change
|                                                                                           |  |                                         
|For the three months
      ended March 31, 2003:                                           |  |                                         
|                                                                                           |  |                                         
|Amortization
      of cumulative-effect type adjustment                                    |  | $                                       
|                                                                                           |  |                                         
|Difference
      in the derivative fair value between the beginning and end of the quarter |  |                                         
|                                                                                           |  |                                         
|                                                                                           |  | $                                       
|                                                                                           |  |                                         

NOTE 6 - STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, in accounting for its stock option plans. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.  SFAS No. 123 established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123.  Pro forma net income and earnings per share disclosures, as if the Company recorded compensation expense
based on the fair value for stock-based awards, have been presented in accordance with the provisions of SFAS No. 148 and are as follows for the three-month periods ended March 31, 2004 and 2003 (in thousands, except per share amounts).

|                                            | Threemonths
      ended |        
|------------------------------------------- | ----------------------- | -------
|                                            | March 31                |        
|                                            |                         |        
|                                            | 2003                    |        
|                                            |                         |        
|Net income:                                 |                         |        
|As reported                                 | $                       | 992,000
|Pro forma                                   | $                       | 888,000
|                                            |                         |        
|Basic earnings per share of common stock:   |                         |        
|As reported                                 | $                       | 0.11   
|Pro forma                                   | $                       | 0.10   
|                                            |                         |        
|Diluted earnings per share of common stock: |                         |        
|As reported                                 | $                       | 0.11   
|Pro forma                                   | $                       | 0.10   

7

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The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

|                          | Three months
      ended | 
|------------------------- | ------------------------ | 
|                          | March 31                 | 
|                          |                          | 
|                          | 2003                     | 
|                          |                          | 
|Risk-free interest rate   | 1.25%                    | 
|Expected term (years)     | 5.0                      | 
|Volatility                | 101%                     | 
|Expected annual dividends | 0%                       | 

NOTE 7 - CONSOLIDATION OF CERTAIN FACILITIES

In November 2003, the Company leased a new 64,600 square foot building in Los Angeles, California, for the purpose of consolidating four vault locations then occupying approximately 71, 000
square feet. After the initial build-out of the new facility and termination of the existing leases during 2004, the resulting annual lease and operating expense levels are expected to be favorable to the Company.

As part of the transaction, the Company paid $600,000 for an option to purchase the building for approximately $8,600,000. Additionally, the landlord, General Electric Capital Business Asset
Funding Corporation (General Electric), has committed to finance approximately $6,500,000 of the purchase price at a fixed interest rate of 7.75% over 15 years. The Company is not obligated to purchase the building or, if the option is
exercised, borrow any portion of the purchase price from General Electric. During the period between November 2004 and the May 2005 purchase option date, the Company will decide whether or not to purchase the building. The cost of the option is
included in other assets on the balance sheet, to be capitalized as a cost of the building or written off if the Company exercises the purchase option or does not exercise the option, respectively. Until a purchase decision has been reached, the
minimum lease obligations have been included in above.

Pursuant to the lease, General Electric also advanced the Company $800,000 to pay for improvements to the building.  Any portion of the $800,000 not spent by November 25, 2004 will have to be
returned to General Electric. As of December 31, 2003, the $800,000 was reflected as an obligation to purchase property and equipment as a long-term asset with an offsetting obligation on the balance sheet. As of March 31, 2004, the Company reduced
the right and the obligation to purchase property and equipment by $36,000 expended for improvements to the building.

NOTE 8 - CONTINGENCIES

In addition to the legal proceedings the Company has with Alliance (see Note 4) from time to time the Company may become a party to various legal actions and complaints arising in the ordinary
course of business, although it is not currently involved in any such material legal proceedings.

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POINT.360

MANAGEMENTS DISCUSSION AND ANALYSIS

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

Three Months Ended March 31, 2004 Compared To Three Months Ended March 31, 2003.

Revenues.Revenues decreased by $1.8 million to $15.5 million for
the three-month period ended March 31, 2004, compared to $17.3 million for the three-month period ended March 31, 2003.

Gross Profit. In the first quarter of 2004, gross margin was 37%, the same as the first quarter of 2003.

Selling, General And Administrative Expense. Selling, general and administrative (SG&A) expense increased $0.2 million, or
5% to $4.6 million for the three-month period ended March 31, 2004, compared to $4.4 million for the three-month period ended March 31, 2003. As a percentage of revenues, SG&A increased to 30% for the three-month period ended March 31, 2004,
compared to 25% for the three-month period ended March 31, 2003.

Operating Income.Operating income decreased $1.0 million to $1.1
million for the three-month period ended March 31, 2004, compared to a $2.1 million for the three-month period ended March 31, 2003.

Interest Expense.Interest expense for the three-month period
ended March 31, 2004 was $0.2 million, a decrease of $0.3 million from the three-month period ended March 31, 2003 because of lower debt levels due to principal payments made during the last twelve months.

Derivative Fair Value Change. The Company adopted SFAS 133 on January 1, 2001. During the quarter ended March 31, 2003, the Company recorded the
difference between the derivative fair value of the Companys interest rate hedge contract at the beginning and end of the period, or $171,000 income ($101,000 net of tax provision), and amortization of the cumulative-effect adjustment.

Income Taxes. The Companys effective tax rate was 41% for the first quarter of 2004 and 2003. The effective tax rate percentage may
change from period to period depending on the difference in the timing of the recognition of revenues and expenses for book and tax purposes.

Net Income. The net income for the three-month period ended March 31, 2004 was $0.5 million, a decrease of $0.5 million compared to net income of
$1.0 million for the three-month period ended March 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

This discussion should be read in conjunction with the notes to the financial statements and the corresponding information more fully described in the Companys Form 10-K for the year
ended December 31, 2003.

The Companys operating activities provided cash of $1.5 million for the three months ended March 31, 2004. The Companys investing activities used cash of $0.2 million in the twelve
months ended December 31, 2003. The Company spent approximately $0.2 million for the addition and replacement of capital equipment and management information systems which we believe is a reasonable capital expenditure level given the current
revenue volume.  In the prior year, the Companys capital expenditures were $0.5 million.  The Companys business is equipment intensive, requiring periodic expenditures of cash or the incurrence of additional debt to acquire additional
fixed assets in order to increase capacity or replace existing equipment.

In May 2002, the Company and its banks entered into a term loan agreement with a maturity date of December 31, 2004. In January and February 2004, the Company made $1 million of scheduled
principal payments under the term loan. In March 2004, the Company paid off the remaining $14.9 million prior term loan principal balance with $6.9 of cash and proceeds from the new $8 million term loan pursuant to a new credit agreement. The new
agreement provides up to $10 million of revolving credit availability for two years and a five-year $8 million five-year term loan. For the first two years of the term loan, the Company can re-borrow all principal payments to finance up to 80% of
capital equipment purchases. The agreement provides for interest at the banks prime rate or LIBOR plus 2.25% for the revolver, prime rate plus 0.25% or LIBOR plus 2.50% for the term loan, and requires the Company to maintain certain financial
covenant ratios. The term loan requires principal payments of $1.6 million annually. As of March 31, 2004, the Companys cash and revolving credit availability was approximately $10.5 million.

In November 2003, the Company leased a new 64,600 square foot building in Los Angeles, California, for the purpose of consolidating four vault locations then occupying approximately 71, 000
square feet in four locations. After the initial build-out of the new facility and termination of the existing leases during 2004, the resulting annual lease and operating expense levels are expected to be favorable to the Company. A provision of
the lease provides that in May 2005, the Company has an option to purchase the building for approximately $8,600,000. Additionally, the landlord, General Electric Capital Business Asset Funding Corporation (General Electric), has
committed to finance approximately $6,500,000 of the purchase price at a fixed interest rate of 7.75% over 15 years. The Company is not obligated to purchase the building or, if the option is exercised, borrow any portion of the purchase price from
General Electric. Prior

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to the purchase option date, we will decide whether or not to purchase the building and may seek to exercise the purchase option in advance of the May 2005 option date. An exercise of the purchase option will require a cash
expenditure of $2.0-$2.5 million for the down payment.

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

The Company, from time to time, considers the acquisition of businesses complementary to its current operations. Consummation of any such acquisition or other expansion of the business
conducted by the Company may be subject to the Company securing additional financing, perhaps at a cost higher than our existing term loan. 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 or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated
financial statements.

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

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

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

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

- 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 for 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 a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Net intangible
assets, long-lived assets, and goodwill amounted to $41.7 million as of March 31, 2004.



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In 2002, Statement of Financial Accounting Standards (SFAS) No. 142,  Goodwill and Other Intangible Assets  (SFAS 142) became effective and as a result, we ceased to amortize approximately $26.3 million of goodwill beginning in 2002. We had
recorded approximately $2.0 million of amortization on these amounts during the year ended December 31, 2001.  In lieu of amortization, we were required to perform an initial impairment review of our goodwill in 2002 and an
annual impairment review thereafter. The initial test on January 1, 2002, and the Fiscal 2002 and 2003 tests performed as of September 30, 2002 and 2003, respectively, required no goodwill impairment. The discounted cash flow method used to evaluate
goodwill impairment included cash flow estimates for 2004 and subsequent years. If actual cash flow performance does not meet these expectations due to factors cited above, any resulting potential impairment could adversely affect reported goodwill
asset values and earnings.

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, 2004 was $2.3 million. The Company did not record a valuation allowance against its deferred tax assets as of March 31, 2004.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued SFAS Nos. 141 and 142, Business Combinations
and Goodwill and Other Intangible Assets, respectively. SFAS No. 141 replaces Accounting Principles Board (APB) Opinion No. 16.  It also provides
guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill and other intangible assets with indefinite useful lives (goodwill)
from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. The Company implemented SFAS No. 142 in the first
quarter of fiscal 2002 which required no goodwill impairment. The Company also tested goodwill as of September 30, 2003 with no impairment indicated.

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

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.  SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities.  SFAS No. 149 is effective for derivative instruments and hedging activities entered into or modified after June 30, 2003, except for certain forward purchase and sale securities. For these
forward purchase and sale securities, SFAS No. 149 is effective for both new and existing securities after June 30, 2003. SFAS No. 149 does not have a material impact on the Companys statements of earnings, financial position, or cash flows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity.
In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 will be effective for financial instruments entered into or modified after May 31, 2003 and
otherwise will be effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 does not have a material impact on the Companys financial statements.

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CAUTIONARY STATEMENTS AND RISK FACTORS

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

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:

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

These risk factors are discussed further below.

Recent History of Losses. The Company reported losses for each of the five fiscal quarters ended December 31, 2001 due, in part, to lower gross margins and lower sales levels
and a number of unusual charges. Although we achieved profitability in Fiscal 2000 and prior years, as well as in the nine fiscal quarters ended March 31, 2004, there can be no assurance as to future profitability on a quarterly or annual
basis.

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

In May 2002, we entered into an agreement with the banks to restructure the credit facility to a term loan maturing on December 31, 2004. As part of this restructuring, the banks waived all existing defaults and the Company
was required to make principal payments of $5.5 million, $5.0 million and $18.5 million in 2002, 2003, and 2004, respectively.

In March 2004, we entered into a revised agreement with the banks providing revolving and term loan facilities. Annual principal payments for the term loan are $1.6 million each for five years. Any principal outstanding
under the revolver will be due in March 2006.

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

We compete with a variety of post production, duplication and distribution firms, some of which have a national presence, and to a lesser extent, the in-house post production and distribution operations of our major motion
picture studio and advertising agency customers.

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Some of these firms, and all of the studios, have greater financial, distribution and marketing resources and have achieved a higher level of brand recognition than the Company. In the future, we may not be able to compete effectively against these competitors merely on the basis of reliability, timeliness, quality and price or otherwise.

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

Customer and Industry Concentration.Although we have an active client list of over 2,500 customers, seven motion picture studios accounted for approximately 29% of the
Companys revenues during the year ended December 31, 2003.  If one or more of these companies were to stop using our services, our business could be adversely affected. Because we derive substantially all of our revenue from clients in the
entertainment and advertising industries, the financial condition, results of operations and prospects of the Company could also be adversely affected by an adverse change in conditions which impact those industries.

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

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

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

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

In July 2002, the Company issued a warrant to purchase 500,000 shares of the Companys common stock to Alliance Atlantis Communications, Inc. (Alliance) in consideration of an option to purchase three
post-production facilities (the Subsidiaries) owned by Alliance. In connection therewith, the Company capitalized the fair value of the warrant ($619,000, determined by using the Black-Scholes valuation model).  In December 2002, the
option was extended by mutual agreement and we deposited $300,000 toward the ultimate purchase price, which was negotiated downward. Additionally, the Company capitalized approximately $360,000 of due diligence costs associated with the proposed
acquisition and approximately $342,000 of costs associated with a new financing arrangement.

In June 2003, discussions with Alliance and the new lenders were terminated. As a result, the Company wrote off the above-mentioned deposit, due diligence costs and costs associated with the proposed new financing. The
$619,000 value of the warrant was charged to Additional Paid-in Capital because, in managements opinion, Alliance had breached certain provisions of the option agreement resulting in a termination event according to the provisions of the
warrant. In July 2003, Alliance filed a complaint seeking a judicial determination that Alliance has full right of legal ownership to the warrant as well as the $300,000 deposit. The Company intends to vigorously defend its position. If the Company
is not successful in this defense, the warrant value will have to be expensed. Although such a write-off and possible expense of the warrant represent non-cash charges to income, we cannot predict the effect of the charge on the future market price
of our common stock, if any.

On July 18, 2003, Alliance filed a complaint against the Company in the Superior Court of Justice, Ontario, Canada. The complaint alleges that the Company breached a non-disclosure agreement between Alliance and the Company
by issuing a press release with respect to termination of negotiations to purchase the Subsidiaries without obtaining the required prior written consent of Alliance. Alliance maintains that the press release impaired its ability to extract value
from the Subsidiaries and negatively affected its ability to sell the

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Subsidiaries to a third party. The complaint seeks breach of contract and punitive damages of approximately $4.4 million, expenses and a permanent order enjoining further such
statements by the Company. The outcome of the complaint cannot be estimated at this time. On August 11, 2003, the Company filed a counterclaim in the United States District Court, Central District of California against Alliance for, among other things, misrepresentation and breach of contract seeking
cancellation of the warrant and general damages of at least $1.2 million. The outcome of the counterclaim cannot be estimated at this time.

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

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

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

Dependence on Key Personnel.The Company is dependent on the efforts and abilities of certain of its senior management, particularly those of Haig S. Bagerdjian, Chairman,
President and Chief Executive Officer. The loss or interruption of the services of key members of management could have a material adverse effect on our financial condition, results of operations and prospects if a suitable replacement is not
promptly obtained. Mr. Bagerdjian beneficially owns approximately 25% of the Companys outstanding stock. Although we have severance agreements with Mr. Bagerdjian and certain key executives, we cannot be sure that either Mr. Bagerdjian or
other executives will remain with the Company. In addition, our success depends to a significant degree upon the continuing contributions of, and on our ability to attract and retain, qualified management, sales, operations, marketing and technical
personnel. The competition for qualified personnel is intense and the loss of any such persons, as well as the failure to recruit additional key personnel in a timely manner, could have a material adverse effect on our financial condition, results
of operations and prospects. There is no assurance that we will be able to continue to attract and retain qualified management and other personnel for the development of our business.

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

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

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investors. In such event, the price
of the Companys Common Stock would likely be materially adversely affected. Fluctuations in sales due to seasonality may become more pronounced if the growth rate of the Companys sales slows.

Control by Principal Shareholder; Potential Issuance of Preferred Stock; Anti-Takeover Provisions.The Companys Chairman,
President and Chief Executive Officer, Haig S. Bagerdjian, beneficially owned approximately 25% of the outstanding common stock as of December 31, 2003.  The ex-spouse of R. Luke Stefanko, the Companys former President and Chief Executive
Officer, owned approximately 20% of the common stock on that date. Together, they owned approximately 45%. By virtue of their stock ownership, Ms. Stefanko and Mr. Bagerdjian individually or together may be able to significantly influence the
outcome of matters required to be submitted to a vote of shareholders, including (i) the election of the board of directors, (ii) amendments to the Companys Restated Articles of Incorporation and (iii) approval of mergers and other significant
corporate transactions. The foregoing may have the effect of discouraging, delaying or preventing certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of common
stock might otherwise receive a premium for their shares over current market prices. Our Board of Directors also has the authority to issue up to 5,000,000 shares of preferred stock without par value (the Preferred Stock) and to
determine the price, rights, preferences, privileges and restrictions thereof, including voting rights, without any further vote or action by the Companys shareholders. Although we have no current plans to issue any shares of Preferred Stock,
the rights of the holders of common stock would be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. Issuance of Preferred Stock could have the effect of discouraging,
delaying, or preventing a change in control of the Company. Furthermore, certain provisions of the Companys Restated Articles of Incorporation and By-Laws and of California law also could have the effect of discouraging, delaying or preventing
a change in control of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk. The Company had borrowings of $8,000,000 at March 31, 2004 under a term loan and revolving credit agreement. Amounts outstanding under the
loan and revolving credit facility provide for interest at the banks prime rate or LIBOR plus 2.25% for the revolver, and prime plus 0.25% or LIBOR plus 2.50% for the term loan. The Companys market risk exposure with respect to financial
instruments is to changes in prime or LIBOR rates.

On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities.  The standard, as amended by Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and
Hedging Activities  Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133, and Statement of Financial Accounting Standards No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133(referred to hereafter as FAS 133), is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company).  FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. During 2001, the Company
recorded a cumulative effect type adjustment of $247,000 (net of $62,000 tax benefit) as a charge to Accumulated Other Comprehensive Income, a component of Shareholders Equity, and an expense of $700,000 ($560,000 net of tax benefit) for the
derivative fair value change of an interest rate swap contract and amortization of the cumulative effect adjustment. During the quarter ended March 31, 2003, the Company recorded income of $171,000 ($101,000 net of tax provision), for the derivative
fair value change and amortization of the cumulative effect type adjustment. The interest rate swap contract terminated in November 2003.

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.

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PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On July 7, 2003, Alliance filed a complaint against the Company in the United States District Court, Central District of California. The complaint seeks a declaration of the court that Alliance
has full right of legal ownership of (i) the warrant issued by the Company in July 2003 in consideration of an option to purchase the Subsidiaries and (ii) the $300,000 paid to Alliance in December 2002 to extend the option. The complaint alleges
that the Company made false and misleading statements in its press release announcing the termination of negotiations with Alliance, asking for undetermined damages. The outcome of the complaint cannot be determined at this time.

On July 18, 2003, Alliance filed a complaint against the Company in the Superior Court of Justice, Ontario, Canada.  The complaint alleges that the Company breached a non-disclosure agreement
between Alliance and the Company by issuing a press release with respect to termination of negotiations to purchase the Subsidiaries without obtaining the required prior written consent of Alliance. Alliance maintains that the press release impaired
its ability to extract value from the Subsidiaries and negatively affected its ability to sell the Subsidiaries to a third party. The complaint seeks breach of contract and punitive damages of approximately $4.4 million, expenses and a permanent
order enjoining further such statements by the Company. The outcome of the complaint cannot be determined at this time.

On August 11, 2003, the Company filed a counterclaim in the United States District Court, Central District of California against Alliance for, among other things, misrepresentation and breach
of contract seeking cancellation of the warrant and general damages of at least $1.2 million. The outcome of the counterclaim cannot be estimated at this time.

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

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|(a) | Exhibits
|--- | --------
|    |         
|    | 10.1    
|    |         
|    | 10.2    
|    |         
|    | 10.3    
|    |         
|    | 10.4    
|    |         
|    | 31.1    
|    |         
|    | 31.2    
|    |         
|    | 32.1    
|    |         
|    | 32.2    

---

|(1) | Filed as an exhibit to Form 8-K with the Commission on July 15, 2002. 
|--- | ----------------------------------------------------------------------
|(2) | Filed as exhibit to Form 8-K with the Commission on January 8, 2003.  
|(3) | Filed as an exhibit to Form 8-K with the Commission on March 16, 2004.



|(b) | Reports On Form 8-K                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                              
|    | The Company filed a Form 8-K dated February 26, 2004 related to its earnings release for the quarter ended December 31, 2003.
|    |                                                                                                                              
|    | The Company filed a Form 8-K dated March 16, 2004, related to new lease and credit agreements.                               
|    |                                                                                                                              
|    | The Company filed a Form 8-K dated May 13, 2004 related to its earnings release for the quarter ended March 31, 2004.        



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.360
|------------------ | ---------
|                   |          
|DATE: May 13, 2004 | BY:      
|                   |          
|                   |          
|                   |          
|                   |          
|                   |          

17

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