10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010 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       001-33468

Point.360

(Exact Name of Registrant as Specified in Its Charter)

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

(818) 565-1400

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year,

if Changed Since Last Report)

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

þYes                      ¨No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨Yes                         ¨No

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	þ

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

¨Yes                      þNo

As of September 30, 2010, there were 10,763,166 shares of the registrant’s common stock outstanding.

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

POINT.360

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

	June 30,			Sept. 30,
	2010*			2010
Assets
Current assets:
Cash and cash equivalents	$	249		$	185
Accounts receivable, net of allowances for doubtful accounts of  $393 and $399, respectively		7,581			7,626
Inventories, net		548			594
Prepaid expenses and other current assets                                                              .		437			456
Prepaid income taxes		1,565			66
Total current assets		10,380			8,927
Property and equipment, net		20,157			19,676
Other assets, net		607			1,102
Total assets	$	31,144		$	29,705
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of notes payable	$	1,038		$	564
Current portion of capital lease obligations		159			160
Line of credit		-			400
Accounts payable		2,828			3,406
Accrued wages and benefits		1,432			1,560
Other accrued expenses		2,300			1,777
Current portion of deferred gain on sale of real estate		178			178
Total current liabilities		7,935			8,045
Notes payable, less current portion		9,383			9,367
Capital lease obligations, less current portion		263			222
Deferred gain on sale of real estate, less current portion		1,733			1,688
Total long-term liabilities		11,379			11,277
Total liabilities		19,314			19,322
Commitments and contingencies		-			-
Shareholders’ equity
Preferred stock – no par value; 5,000,000 shares authorized; none outstanding		-			-
Common stock – no par value; 50,000,000 shares authorized; 10,513,166 and 10,763,166 shares issued and outstanding on June 30, 2010 and September 30, 2010, respectively		21,542			22,042
Additional paid-in capital		9,808			9,876
Retained (deficit)		(19,520	)		(21,535	)
Total shareholders’ equity		11,830			10,383
Total liabilities and shareholders’ equity	$	31,144		$	29,705

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

*Amounts derived from audited financial statements

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POINT.360

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,
	2009			2010
Revenues	$	9,419,000		$	8,272,000
Cost of services sold		(7,360,000	)		(6,406,000	)
Gross profit		2,059,000			1,866,000
Selling, general and administrative expense		(3,788,000	)		(3,641,000	)
Research and development expense		(109,000	)		(274,000	)
Operating (loss)		(1,838,000	)		(2,049,000	)
Interest expense		(222,000	)		(202,000	)
Interest income		9,000			61,000
Other income		79,000			176,000
Loss before income taxes		(1,972,000	)		(2,014,000	)
Benefit from income taxes		-			-
Net loss	$	(1,972,000	)	$	(2,014,000	)
Loss per share:
Basic:
Net loss	$	(0.19	)	$	(0.19	)
Weighted average number of shares		10,152,422			10,532,188
Diluted:
Net loss	$	(0.19	)	$	(0.19	)
Weighted average number of shares including the dilutive effect of stock options		10,152,422			10,532,188

See accompanying notes to condensed consolidated financial statements.

3

POINT.360

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended September 30,  (in thousands)
	2009			2010
Cash flows from operating activities:
Net loss	$	(1,972	)	$	(2,014	)
Adjustments to reconcile net loss to net cash provided by operating activities:
(Gain) on sale of fixed assets		-			(101	)
Depreciation and amortization		991			938
Amortization of deferred gain on real estate		(44	)		(44	)
Provision for doubtful accounts		-			6
Stock compensation expense		56			67
Changes in operating assets and liabilities (net of acquisitions):
(Increase) decrease in accounts receivable		894			(52	)
(Increase) in inventories		(19	)		(112	)
(Increase) decrease in prepaid expensesand other current assets		541			(19	)
Decrease in prepaid income taxes		312			1,499
(Increase) in other assets		(319	)		(495	)
(Decrease) increase in accounts payable		(389	)		578
Increase (decrease) in accrued wages and benefits		(126	)		128
Increase (decrease) in other accrued expenses		199			(23	)
Net cash and cash equivalents provided by operating activities		124			356
Cash flows from investing activities:
Capital expenditures		(471	)		(389	)
Proceeds from sale of equipment or real estate		-			101
Net cash and cash equivalents (used in) investing activities		(471	)		(288	)
Cash flows from financing activities:
Proceeds from line of credit, net		-			400
(Repayment) of notes payable		(475	)		(491	)
(Repayment) of capital lease obligations		(35	)		(41	)
Net cash (used in) financing activities		(510	)		(132	)
Net  (decrease) in cash and cash equivalents		(857	)		(64	)
Cash and cash equivalents at beginning of year		5,235			249
Cash and cash equivalents at end of year	$	4,378		$	185

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

	Three Months Ended
	September 30,
	2009			2010
Cash payments for income taxes (net of refunds)	$	(312	)	$	(1,499	)
Cash payments for interest	$	183		$	189
Settlement of a lawsuit for common stock	$	-		$	500
Fixed assets purchased for common stock	$	500		$	-

See accompanying notes to condensed consolidated financial statements.

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POINT.360

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2010

NOTE 1 - THE COMPANY

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

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

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts and transactions of the Company, including those of the Company’s subsidiaries.  The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  All intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements.

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

In fiscal 2010, the Company purchased assets and intellectual property for a research and development project to address the viability of the DVD and video game rental business being abandoned by the closure of Movie Gallery/Hollywood Video and Blockbuster stores.  The DVD rental market consists principally of online services (Netflix), vending machines (Redbox) and large video stores.

As of September 30, 2010, the Company had opened three Movie>Q “proof-of-concept” stores in Southern California.  The stores employ an automated inventory management (“AIM”) system in a 1,200-1,600 square foot facility.  By saving space and personnel costs which caused the big box stores to be uncompetitive with lower priced online and vending machine rental alternatives, Movie>Q can offer up to 10,000 unit selections to a customer at competitive rental rates.  Movie>Q provides online reservations, an in-store destination experience, first run movie and game titles and a large unit selection (as opposed to 400-700 for a Redbox vending machine).

Based on the success of the proof-of-concept, the Company may seek to rapidly expand the number of Movie>Q stores while further streamlining the design and production of the AIM system.  Movie>Q provides the Company with a content distribution capability complimentary to the Company’s post production business.

The accompanying unaudited Condensed Consolidated 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 September 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2011.  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 period ended June 30, 2010.  Certain immaterial reclassifications have been made to the prior period’s financial statements to conform to the current year presentation.

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Earnings Per Share

A reconciliation of the denominator of the basic EPS computation to the denominator of the diluted EPS computation is as follows (in thousands):

	Three Months Ended September 30,		Three Months Ended September 30,
	2009		2010
Pro forma weighted average of number of shares
Weighted average number of common shares outstanding used in computation of basic EPS		10,152		10,532
Dilutive effect of outstanding stock options		-		-
Weighted average number of common and potential Common shares outstanding used in computation of Diluted EPS		10,152		10,532
Effect of dilutive options excluded in the computation of diluted EPS due to net loss		22		98

The weighted average number of common shares outstanding was the same amount for both basic and diluted income or loss per share in each of the periods presented.  The effect of potentially dilutive securities at September 30, 2010 and 2009 were excluded from the computation of diluted earnings per share because the Company reported a net loss, and the effect of inclusion would be antidilutive (i.e., including such securities would result in a lower loss per share).  These potentially dilutive securities consist of stock options whose exercise price is less than the Company’s stock price at September 30, 2010.  The number of potentially dilutive shares at September 30, 2010 was 665,575.

Fair Value Measurements

As of September 30, 2010 and June 30, 2010, the carrying value of cash, accounts receivable, accounts payable, accrued expenses and interest payable approximates fair value due to the short-term nature of such instruments.  The carrying value of other long-term liabilities approximates fair value as the related interest rates approximate rates currently available to the Company.

Fair Value Measurement

The Company follows a framework for consistently measuring fair value under generally accepted accounting principles, and the disclosures of fair value measurements. The framework provides a fair value hierarchy to classify the source of the information.  

            The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value and include the following:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash, the only Level 1 input applicable to the Company (there are no Level 2 or 3 inputs), is stated on the Condensed Consolidated Balance Sheet at fair value.

The carrying amounts reported in the balance sheets for cash and cash equivalents, short-term marketable securities, accounts receivable and accounts payable approximate their fair values due to the short term nature of these financial instruments.

Recent Accounting Pronouncements

In October 2009, the FASB issued guidance for arrangements with multiple deliverables. Specifically, the updated accounting standard requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices.  The guidance also eliminates the residual method of allocation and requires use of the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables.  The guidance is effective as of January 2011 with early adoption permitted. We intend to adopt the provisions of the guidance as of January 1, 2011 which is not expected to have a material impact on our financial statements.

6

In January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.”  This guidance amends the disclosure requirements related to recurring and nonrecurring fair value measurements and requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the reporting period beginning January 1, 2011. Other than requiring additional disclosures, adoption of this new guidance will not have a material impact on our financial statements.

NOTE 2 - LONG TERM DEBT AND NOTES PAYABLE

In August 2009 the Company entered into a credit agreement which provides up to $5 million of revolving credit based on 80% of acceptable accounts receivables, as defined.  The 15 month agreement provides for interest of either (1) prime (3.25% at September 30, 2010)  minus .5% - plus .5% or (2) LIBOR plus 2.0% - 3.0% depending on the level of the Company’s ratio of outstanding debt to fixed charges (as defined), or 3.75% or 3.48%, respectively, on September  30, 2010.  The facility is secured by all of the Company’s accounts receivable and inventory.  As of September 30, 2010, the Company owed $400,000 under the credit agreement.  The amount outstanding under the credit agreement is the result of a draw made on a standby letter of credit by our Media Center landlord.  Under the lease, the Company is required to maintain a $500,000 lease deposit or standby letter of credit until April 1, 2011.  The $500,000 has been recorded as a deposit in “Other assets, net” in the Condensed Consolidated Balance Sheet as of September 30, 2010.

Our bank revolving credit agreement requires us to maintain a minimum “leverage ratio” and “fixed charge coverage ratio.” The leverage ratio compares tangible assets to total liabilities (excluding the deferred real estate gain).  Our fixed charge coverage ratio compares, on a rolling twelve-month basis, (i) EBITDA plus rent expense and non-cash charges less income tax payments, to (ii) interest expense plus rent expense, the current portion of long term debt and maintenance capital expenditures.  As of September 30, 2010, the leverage ratio was 1.70 compared to a minimum requirement of 1.75, and the fixed charge coverage ratio was 0.21 as compared to a minimum requirement of 1.10.  As of September 30, 2010, the Company was not in compliance with the leverage and fixed charge ratios, and received a forbearance from the bank.  The forbearance period extends to December 31, 2010, during which time the amount available under the credit agreement will be limited to the outstanding $400,000.  The entire balance is due on December 31, 2010.

In July 2008, the Company entered into a Promissory Note with a bank (the “note”) in order to purchase land and a building that had been occupied by the Company since 1998 (the total purchase price was approximately $8.1 million).  Pursuant to the note, the company borrowed $6,000,000 payable in monthly installments of principal and interest on a fully amortized base over 30 years at an initial five-year interest rate of 7.1% and thereafter at a variable rate equal to LIBOR plus 3.6% (6.4% as of the purchase date).  The mortgage debt is secured by the land and building.

 In June 2009, the Company entered into a $3,562,500 Purchase Money Promissory Note secured by a Deed of Trust for the purchase of land and a building.  The note bears interest at 7% fixed for ten years.  The principal amount of the note is payable on June 12, 2019.  The note is secured by the property.

On December 30, 2005, the Company entered into a $10 million term loan agreement.  The term loan provides for interest at LIBOR (0.48% as of September 30, 2010) plus 3.15%, or 3.63% on that date, and is secured by equipment.  The term loan will be repaid in 60 equal monthly principal payments plus interest.  In March 2006, $4 million of the term loan was prepaid.  Monthly principal payments were subsequently reduced pro rata.  On March 30, 2007, the Company entered into an additional $2.5 million term loan agreement.  The Loan provides for interest at 8.35% per annum and is secured by equipment.  The loan will be repaid in 45 equal monthly installments of principal and interest.  The term loans are scheduled to be repaid completely by December 31, 2010.

In November 2010, the Company converted approximately $1 million of accounts payable into a note secured by a lien of all the Company’s assets.  The note is due in 48 monthly installments of $20,000 plus interest at 3% per annum.  The total amount due under the note is subject to a 12.5% or 6% discount if completely paid within 12 months or 18 months, respectively.

NOTE 3- PROPERTY AND EQUIPMENT

In March 2006, the Company entered into a sale and leaseback transaction with respect to its Media Center vaulting real estate.  The real estate was sold for approximately $14.0 million resulting in a $1.3 million after tax gain.  Additionally, the Company received $0.5 million from the purchaser for improvements.  In accordance with the Accounting Standards Codification, the gain will be amortized over the initial 15-year lease term as reduced rent.  Net proceeds at the closing of the sale and improvement advance (approximately $13.8 million) were used to pay off the mortgage and other outstanding debt.

7

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

Property and equipment consist of the following as of September 30, 2010:

Land	$	3,985,000
Building		9,245,000
Machinery and equipment		36,644,000
Leasehold improvements		6,839,000
Computer equipment		7,316,000
Equipment under capital lease		671,000
Office equipment, CIP		1,241,000
Less accumulated depreciation and amortization		(46,265,000	)
Property and equipment, net	$	19,676,000

NOTE 4- CONTINGENCIES

In July 2008, the Company was served with a complaint filed in the Superior court of the State of California for the County of Los Angeles by Aryana Farshad and Aryana F. Productions, Inc.  (“Farshad”).  The complaint alleges that Point.360 and its janitorial cleaning company failed to exercise reasonable care for the protection and preservation of Farshad’s film footage which was lost.  As a result of the defendants’ negligence, Farshad claims to have suffered damages in excess of $2 million and additional unquantified general and special damages.  The lawsuit was settled in October 2010 for $120,000, which amount was recorded as a liability at September 30, 2010.

On October 6, 2009, DG FastChannel, Inc. (“DGFC”) filed a claim in the United States District Court Central District of California, alleging that the Company violated certain provisions of agreements governing transactions related to the August 13, 2007 sale of the Company’s advertising distribution business to DGFC.  DGFC alleges that (i) the Company did not fulfill its obligation to restrict a former employee from competing against DGFC subsequent to the transaction and, therefore, DGFC does not owe the Company $412,500 related to that portion of the transaction; (ii) the Company violated the noncompetition agreement between DGFC and the Company by distributing advertising content after the transaction; (iii) due to the violation of the noncompetition agreement, the post production services agreement that required DGFC to continue to vault its customers’ physical elements at the Company’s Media Center became null and void; and (iv) the Company must return all of DGFC’s vaulted material to DGFC.  DGFC also sought unspecified monetary damages.

In September 2010, a settlement between the parties included the following:  (1) The Company will be subject to a permanent injunction (until August 13, 2012) from competing in the commercial spot advertising  business (as defined), (2) the Company will deliver to DGFC vaulted elements which will result in an annual reduction of vaulting revenues of approximately $0.9 million, (3) the Company will not be entitled to $412,500 (relating to the working capital reconciliation), (4) the Company will issue 250,000 shares of common stock to DGFC and (5) the parties will enter into full mutual releases and will dismiss their respective claims with prejudice.  In connection with the settlement, the Company has indemnified a related party against possible losses should DGFC exercise its right to put the stock to the related party on a specified future date, and there is a negative difference between the stated $500,000 value of the stock ($2.00 per share) and the market value on the date of the put.  The put may be exercised on the six-month anniversary of the settlement agreement. As of September 30, 2010 the Company has issued the 250,000 shares of common stock to DGFC and accrued approximately $0.4 million of estimated legal, vault removal and other costs associated with the settlement.

In November 2010, DGFC filed an ex parte application for enforcement of the settlement agreement and related stipulated injunction alleging that the Company violated the terms thereof and seeking an order enforcing the settlement agreement, an order to assess civil contempt charges and other remedies, and an order referring criminal allegations against the Company to the U.S. Attorney’s Office.  The Company believes it has substantially performed its obligations under the settlement agreement and intends to defend its position.  Potential liability related to the outcome of the ex parte application cannot be determined at this time.  The Company has accrued estimated legal fees associated with this action.

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

8

NOTE 5- INCOME TAXES

The Company reviewed its ASC 740-10 documentation for the periods through September 30, 2010 to ascertain if any changes should be made with respect to tax positions previously taken. In addition, the Company reviewed its income tax reporting through September 30, 2010.  Based on Company’s review of its tax positions as of September 30, 2010, no new uncertain tax positions have resulted nor has new information become available that would change management’s judgment with respect to tax positions previously taken.

As of September 30, 2010, the Company's net deferred tax assets were nil.  No tax benefit was recorded during the three  month period ended September 30, 2010 because future realizability of such benefit was not considered to be more likely than not.  At September 30, 2010, the Company had a gross deferred tax asset of $9.6 million, and a corresponding valuation allowance of $9.6 million.  At June 30, 2010, the Company had a gross deferred tax asset of $7.6 million, and a corresponding valuation allowance of $7.6 million.

The Accounting Standards Codification prescribes a recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company files income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal state or local income tax examinations by tax authorities for years before 2002. The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns. The Company was last audited by New York taxing authorities for the years 2002 through 2004 resulting in no change.  The Company was previously notified by the U.S Internal Revenue Service of its intent to audit the calendar 2005 tax return.  The audit has since been cancelled by the IRS without change; however, the audit could be reopened at the IRS’ discretion.

The Company was notified by the IRS in September 2009 of its intent to audit federal tax returns for calendar year 2006 and the period from January 1 to August 13, 2007.

The Company was notified by the IRS in November 2009 of its intent to audit the federal tax return for the fiscal ended June 30, 2008.  The audit was subsequently withdrawn.

During fiscal 2010, the Company received a federal tax refund of approximately $0.4 million related to refunds due for tax year 2005.  In July 2010, the Company received a refund of $1.5 million related to tax year 2006.

NOTE 6- STOCK OPTION PLAN, STOCK-BASED COMPENSATION

In May 2007, the Board of Directors approved the 2007 Equity Incentive Plan (the “2007 Plan”).  The 2007 Plan provides for the award of options to purchase up to 2,000,000 shares of common stock, appreciation rights and restricted stock awards.

Under the 2007 Plan, the stock option price per share for options granted is determined by the Board of Directors and is based on the market price of the Company’s common stock on the date of grant, and each option is exercisable within the period and in the increments as determined by the Board, except that no option can be exercised later than ten years from the grant date.  The stock options generally vest in one to five years.

The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors based on estimated fair values.  We also estimate the fair value of the award that is ultimately expected to vest to be recognized as expense over the requisite service periods in our Condensed Consolidated Statements of Operations.

We estimate the fair value of share-based payment awards to employees and directors on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Condensed Consolidated Statements of Operations.  Stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three months ended September 30, 2010 included compensation expense for the share-based payment awards based on the grant date fair value.  For stock-based awards issued to employees and directors, stock-based compensation is attributed to expense using the straight-line single option method.  As stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the periods reported in this Form 10-Q is based on awards expected to vest, forfeitures are also estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the periods being reported in this Form 10-Q, expected forfeitures are immaterial. The Company will re-assess the impact of forfeitures if actual forfeitures increase in future quarters.  Stock-based compensation expense related to employee or director stock options recognized for the three month period ended September 30, 2010 was $67,000.

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

During the quarter ended September 30, 2010, the Company granted a stock option award of 15,000 shares at an exercise price of $1.27 per share.

As of September 30, 2010, there were options outstanding to acquire 1,633,250 shares at an average exercise price of $1.56 per share.  The estimated fair value of all awards granted during the three-month 2010 period was $10,000.  For the 2010 period, 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:

Risk-free interest rate	1.46	%
Expected term (years)	5.0
Volatility	64	%
Expected annual dividends	-

               The following table summarizes the status of the 2007 Plan as of September 30, 2010:

Options originally available	2,000,000
Stock options outstanding	1,633,250
Options available for grant	354,750

Transactions involving stock options are summarized as follows:

	Number of Shares			Weighted Average Exercise Price
Balance at June 30, 2010		1,631,075		$	1.58
Granted		15,000			1.27
Exercised		-			-
Cancelled		(12,825	)		2.06
Balance at September 30, 2010		1,633,250		$	1.56

As of September 30, 2010, the total compensation costs related to non-vested awards yet to be expensed was approximately $0.5 million to be amortized over the next four years.

The weighted average exercise prices for options granted and exercisable and the weighted average remaining contractual life for options outstanding as of September 30, 2010 were as follows:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Intrinsic Value
As of September 30,  2010
Employees – Outstanding		1,458,250	$	1.58		2.99	$	-
Employees – Expected to Vest		1,364,233	$	1.58		2.96	$	-
Employees – Exercisable		500,567	$	1.72		2.50	$	-
Non-Employees – Outstanding		175,000	$	1.55		3.03	$	5,000
Non-Employees – Vested		110,000	$	1.47		3.06	$	5,000
Non-Employees – Exercisable		110,000	$	1.47		3.06	$	5,000

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The aggregate intrinsic value in the table above is the sum of the amounts by which the quoted market price of our common stock exceeded the exercise price of the options at September 30, 2010, for those options for which the quoted market price was in excess of the exercise price.

Additional information with respect to outstanding options as of September 30, 2010 is as follows (shares in thousands):

Options Outstanding				Options Exercisable
Options Exercise Price Range	Number of Shares		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of  Shares		Weighted Average Exercise Price
$1.79		979	2.4 Years	$	1.79		488	$	1.79
$1.37		30	3.1 Years	$	1.37		30	$	1.37
$1.29		314	4.4 Years	$	1.29		-	$	1.29
$1.27		15	5.0 Years	$	1.27		-	$	1.27
$1.20		265	3.4 Years	$	1.20		60	$	1.20
$1.05		30	4.1 Years	$	1.05		30	$	1.05

In addition to the above option plan, the Company issued 10,000 shares of restricted stock during fiscal year ended June 30, 2010.

We use the detailed method provided in ASC 718 for calculating the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of ASC 718.

NOTE 7- STOCK RIGHTS PLAN

In July 2007, the Company implemented a stock rights program.  Pursuant to the program, stockholders of record on August 7, 2007, received a dividend of one right to purchase for $10 one one-hundredth of a share of a newly created Series A Junior Participating Preferred Stock.  The rights are attached to the Company’s Common Stock and will also become attached to shares issued subsequent to August 7, 2007.  The rights will not be traded separately and will not become exercisable until the occurrence of a triggering event, defined as an accumulation by a single person or group of 20% or more of the Company’s Common Stock.  The rights will expire on August 6, 2017 and are redeemable at $0.0001 per right.

After a triggering event, the rights will detach from the Common Stock.  If the Company is then merged into, or is acquired by, another corporation, the Company has the opportunity to either (i) redeem the rights or (ii) permit the rights holder to receive in the merger stock of the Company or the acquiring company equal to two times the exercise price of the right (i.e., $20).  In the latter instance, the rights attached to the acquirer’s stock become null and void.  The effect of the rights program is to make a potential acquisition of the Company more expensive for the acquirer if, in the opinion of the Company’s Board of Directors, the offer is inadequate.

No triggering events occurred in the three months ended September 30, 2010.

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NOTE 8- SHAREHOLDER’S EQUITY

The following table analyzes the components of shareholders’ equity from June 30, 2010 to September 30, 2010 (in thousands):

	Common Stock		Paid-in Capital		Retained (Deficit)			Shareholders’ Equity
Balance, June 30, 2010	$	21,542	$	9,809	$	(19,521	)	$	11,830
Stock-based compensation expense		-		67		-			67
Net income (loss)		-		-		(2,014	)		(2,014	)
Stock issuance		500		-		-			500
Balance, September 30, 2010	$	22,042	$	9,876	$	(21,535	)	$	10,383

NOTE 9- STOCK REPURCHASE PLAN

In February 2008, the Company’s Board of Directors authorized a stock repurchase program.  Under the stock repurchase program, the Company may purchase outstanding shares of its common stock on the open market at such times and prices determined in the sole discretion of management.   No shares were acquired pursuant to the repurchase program during the three months ended September 30, 2010 or 2009.

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

Except for the historical information contained herein, certain statements in this quarterly report are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involve certain risks and uncertainties, which could cause actual results to differ materially from those discussed herein, including but not limited to competition, customer and industry concentration, depending on technological developments, risks related to expansion, dependence on key personnel, fluctuating results and seasonality and control by management. See the relevant portions of  the Company's documents filed with the Securities and Exchange Commission, including the Risk Factors section of the Company’s most recent annual report on Form 10-K, and Risk Factors in Item 1A of Part II of this Form 10-Q, for a further discussion of these and other risks and uncertainties applicable to the Company's business.

Overview

Point.360 is one of the largest providers of video and film asset management services to owners, producers and distributors of entertainment content.  We provide the services necessary to edit, master, reformat and archive our clients’ film and video content, including television programming, feature films and movie trailers using electronic and physical means. Clients include major motion picture studios and independent producers.  The Company also rents and sells DVDs and video games directly to consumers through its Movie>Q retail stores.

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

The market for our services is primarily dependent on our customers’ desire and ability to monetize their entertainment content.  The major studios derive revenues from re-releases and/or syndication of motion pictures and television content.  While the size of this market is not quantifiable, we believe studios will continue to repurpose library content to augment uncertain revenues from new releases.  The current uncertain economic environment has negatively impacted the ability and willingness of independent producers to create new content.

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The demand for entertainment content should continue to expand through web-based applications.  We believe long and short form content will be sought by users of personal computers, hand-held devices and home entertainment technology.  Additionally, changing formats from standard definition, to high definition, to Blu-Ray and perhaps to 3D will continue to give us the opportunity to provide new services with respect to library content.  We also believe that a potentially large consumer market exists for the rental of DVDs and video games, which market is being abandoned by “big box” DVD rental stores.

To meet these needs, we must be prepared to invest in technology and equipment, and attract the talent needed to serve our client needs.  Labor, facility and depreciation expenses constitute approximately 80% of our revenues.  Our goals include maximizing facility and labor usage, and maintaining sufficient cash flow for capital expenditures and acquisitions of complementary businesses to enhance our service offerings.

We continue to look for opportunities to solidify and expand our businesses.  During the fiscal year ending June 30, 2010 and the three months ended September 30, 2010, we have completed the following:

· We consolidated our former Hollywood and Eden FX facilities into another  Company location.

· We purchased assets and intellectual property in conjunction with a research and development project to create three “proof-of-concept” Movie>Q stores.

· We developed the Movie>Q automated inventory system.

· We closed down our New York facility due to continuing economic uncertainty in that market.

We have an opportunity to expand our business by establishing closer relationships with our customers through excellent service at a competitive price and adding to our service offering.  Our success is also dependent on attracting and maintaining employees capable of maintaining such relationships.  Also, growth can be achieved by acquiring similar businesses (for example, the acquisitions of IVC in July 2004, Eden FX in March 2007 and others) that can increase revenues by adding new customers, or expanding current services to existing customers. Additionally, we are looking to capitalize on the Movie>Q retail opportunity.

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

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

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenues.  Revenues were $8.3 million for the three months ended June 30, 2010, compared to $9.4 million for the three months ended June 30, 2009.  Approximately $0.9 million of the decline in revenues in the current quarter were due to the move of the operations of one of our Hollywood facilities (“Highland”) to other Company locations.   We expect the negative effect on revenues to continue as we further consolidate post production facilities to maximize space utilization and reduce overhead.  Content storage revenues for the current quarter were reduced by $0.3 million due to the settlement of a lawsuit, which reduction will be ongoing.   As of June 30, 2010, we decided to close down our New York facility, which generated $0.2 million of revenue in the prior year quarter.  Although physical moves may adversely affect revenues in the short term, we will continue to search for operating efficiencies to increase income.  We are continuing to invest in high definition and digital capabilities where demand is expected to grow.   Our Point.360 Digital Film Lab (formerly IVC) revenues increased $0.4 million over the prior year quarter.  We believe our high definition and digital service platform will attract additional business in the future.

Cost of Services. Costs of services consist principally of wages and benefits, facility costs and depreciation of physical assets.  During the quarter ended September 30, 2010, total costs of services were 77.4% of sales compared to 78.1% in the prior year.   Our Hollywood operational costs were reduced by $0.3 million due to lower sales.  Additional cost reductions of $0.6 million were realized in the current quarter with the closure of our New York facility in June 2010.  Other costs remained consistent with the prior year period due to the fixed nature of our service infrastructure.

Gross Profit.  In the three months ended September 30, 2010, gross margin was 22.6% of sales, compared to 21.9% for the same period last year. The increase in gross profit percentage is due to the factors cited above.  From time to time, we will increase staff capabilities to satisfy potential customer demand. If the expected demand does not materialize, we will adjust personnel levels.  We expect gross margins to fluctuate in the future as the sales mix changes.

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Selling, General and Administrative Expense.  SG&A expense was $3.6 million (44.0% of sales) in the three months ended September 30, 2010 as compared to $3.8 million (40.2% of sales) in the same period last year.  In the current period, the Company incurred $0.1 million of expense associated with the settlement of a legal action.

Research and Development Expense.  During the fiscal year ended June 30, 2010, the Company undertook a research and development project to evaluate, develop and commercialize “automated” stores to rent and sell digital video discs (DVDs).  The Movie>Q stores will contain 10,000 DVDs for rent or sale via a software-controlled automated inventory management system  contained in 1,200 to 1,600 square feet of retail space for each store.  As of September 30, 2010, three Movie>Q stores were completed.  We will evaluate store performance during the coming holiday season to further test the operating model and validate our cost/revenue assumptions.Expenses associated with R&D activities were $0.3 million for the quarter ended September 30, 2010.

Operating Income (Loss). Operating loss was $2.0 million in the fiscal 2011 period compared to $1.8 million in the fiscal 2010 period.

Interest Expense.   Net interest expense was $0.2 million in both the 2011 and 2010 periods.

Other Income. Other income represents principally sublease income and gain on sale of fixed assets.

Net Loss. Net loss was $2.0 million in both the fiscal 2011 and 2010 periods.

LIQUIDITY AND CAPITAL RESOURCES

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

On December 30, 2005, the Company entered into a $10 million term loan agreement. The term loan provides for interest at LIBOR (0.48% at September 30, 2010) plus 3.15% (3.63% on that date) and is secured by the Company’s equipment. The term loan will be repaid in 60 equal principal payments plus interest.  On March 30, 2007, the Company entered into an additional $2.5 million term loan agreement. The loan provides for interest at 8.35% per annum and is secured by the Company’s equipment. The loan is being repaid in 45 equal monthly installments of principal and interest.  Both loans are scheduled to be repaid fully by December 31, 2010.

In March 2006, the Company entered into a sale and leaseback transaction with respect to its Media Center vaulting real estate. The real estate was sold for $13,946,000 resulting in a $1.3 million after tax gain. Additionally, Old Point.360 received $500,000 from the purchaser for improvements.  In accordance with the Accounting Standards Codification (ASC) 840 “Accounting for Leases”, the gain and the improvement allowance will be amortized over the initial 15-year lease term as reduced rent. The mortgage debt is secured by the land and building.

In July 2008, the Company entered into a Promissory Note with a bank (the “Note”) in order to purchase land and a building that has been occupied by the Company since 1998 (the total purchase price was approximately $8.1 million).  Pursuant to the Note, the Company borrowed $6,000,000 payable in monthly installments of principal and interest on a fully amortized basis over 30 years at an initial five-year interest rate of 7.1% and thereafter at a variable rate equal to LIBOR plus 3.6% (6.4% as of the purchase date). The mortgage debt is secured by the land and building.

In June 2009, the Company entered into a $3,562,500 million Purchase Money Promissory Note secured by a Deed of Trust for the purchase of land and a building (“Vine Property”).  The note bears interest at 7% fixed for ten years.  The principal amount of the note is payable on June 12, 2019.  The note is secured by the property.

In November 2010, the Company converted approximately $1 million of accounts payable into a note secured by a lien of all the Company’s assets.  The note is due in 48 monthly installments of $20,000 plus interest at 3% per annum.  The total amount due under the note is subject to a 12.5% or 6% discount if totally paid within 12 months or 18 months, respectively.

Monthly and annual principal and interest payments due under the term debt and mortgages are approximately $264,000 and $3.1 million, respectively, assuming no change in interest rates.

In August 2009 the Company entered into a credit agreement which provides up to $5 million of revolving credit based on 80% of acceptable accounts receivables, as defined.  The 15 month agreement provides for interest of either (1) prime (3.25% at September 30, 2010)  minus .5% - plus .5% or (2) LIBOR plus 2.0% - 3.0% depending on the level of the Company’s ratio of outstanding debt to fixed charges (as defined), or 3.75% or 3.48%, respectively, on September  30, 2010.  The facility is secured by all of the Company’s accounts receivable and inventory. As of September 30, 2010, the Company owed $400,000 under the credit agreement.

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Our bank revolving credit agreement requires us to maintain a minimum “leverage ratio” and “fixed charge coverage ratio.” The leverage ratio compares tangible assets to total liabilities (excluding the deferred real estate gain).  Our fixed charge coverage ratio compares, on a rolling twelve-month basis, (i) EBITDA plus rent expense and non-cash charges less income tax payments, to (ii) interest expense plus rent expense, the current portion of long term debt and maintenance capital expenditures.  As of September 30, 2010, the leverage ratio was 1.70 compared to a minimum requirement of 1.75, and the fixed charge coverage ratio was 0.21 as compared to a minimum requirement of 1.10.  As of September 30, 2010, the Company was not in compliance with the ratios and received a forbearance from the bank.  The forbearance period extends to December 31, 2010, during which time the amount available under the credit agreement will be limited to the outstanding $400,000.  The entire balance is due on December 31, 2010.

The following table summarizes the September 30, 2010 amounts outstanding under our revolving line of credit, and term (including capital lease obligations) and mortgage loans:

Revolving credit	$	400,000
Current portion of term loan and mortgages		724,000
Long-term portion of term loan and mortgages		9,589,000
Total	$	10,713,000

The Company’s cash balance decreased from $249,000 on July 1, 2010 to $185,000 at September 30, 2010, due to the following:

Balance July 1, 2010
Capital expenditures for equipment	$	249,000
Debt principal and interest payments		(389,000	)
Income tax refund (including interest)		(720,000	)
Research and development costs		1,553,000
Changes in other assets and liabilities		(274,000	)
Balance September 30, 2010		(234,000	)
	$	185,000

Cash generated by operating activities is directly dependent upon sales levels and gross margins achieved. We generally receive payments from customers in 60-120 days after services are performed. The larger payroll and facilities components of our cost structure must be paid currently.  Payment terms of other liabilities vary by vendor and type.   Fluctuations in sales levels will generally affect cash flow negatively or positively in early periods of growth or contraction, respectively, because of operating cash receipt/payment timing.  Other investing and financing cash flows also affect cash availability.

In the first quarter of fiscal 2011, the underlying drivers of operating cash flows (sales, receivable collections, the timing of vendor payments, facility costs and employment levels) have been consistent.  Sales outstanding in accounts receivable have increased from approximately 61 days to 71 days within the last 12 months, indicating major studios may delay payments in response to the general economic slowdown.  However, we do not expect days sales outstanding to materially fluctuate in the future.

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As of September 30, 2010, our facility costs consisted of building rent, maintenance and communication expenses.  In July 2008, rents were reduced by the purchase of our Hollywood Way facility in Burbank, CA, eliminating approximately $625,000 of annual rent expense.  The real estate purchase involved a down payment of $2.1 million and $6 million of mortgage debt.  The mortgage payments are approximately $489,000 per year.

In March 2009, the lease on one of our facilities in Hollywood, CA (“Highland”) expired and the Company became a holdover tenant.  The landlord issued a Notice to Quit which required us to move out of the facility.  The Highland operations have been housed at another Company facility.  Our Eden FX facility was moved to our West Los Angeles location in September 2010.  Rent will cease on our closed New York facility in March 2011.

The Company purchased the Vine Property in June 2009.  The purchase price of the Vine Property was $4.75 million, $1.2 million of which was paid in cash with the balance being financed by the seller over ten years, interest only at 7% for the entire term, with the principal amount being due at the end of the term.  Building renovations will cost about $1.5 million.  After renovation, we expect to move our Eden FX and Highland operations into the Vine Property in 2011.

The mortgage payments are approximately $738,000 per year.  We believe our current cash position and a difficult economy may provide us with the opportunity to invest in facility assets that will not only help fix our operating costs, but give us the potential to own appreciating real estate assets.  We will continue to evaluate opportunities to reduce facility costs.

The following table summarizes contractual obligations as of September 30, 2010 due in the future:

	Payment due by Period
Contractual Obligations	Total		Less than 1 Year		Years 2 and 3		Years  4 and 5		Thereafter
Long Term Debt  Principal
Obligations	$	10,731,000	$	1,364,000	$	151,000	$	195,000	$	9,021,000
Long Term Debt Interest
Obligations (1)		9,189,000		673,000		1,326,000		1,219,000		5,971,000
Capital Lease Obligations		382,000		160,000		222,000		-		-
Capital Lease Interest
Obligations		32,000		21,000		11,000		-		-
Operating Lease Obligations		17,909,000		2,980,000		3,697,000		3,111,000		8,121,000
Total	$	38,243,000	$	5,198,000	$	5,407,000	$	4,525,000	$	23,113,000

(1) Interest on variable rate debt has been computed using the rate on the latest balance sheet date.

As described in the Notes to Consolidated Financial Statements in this Form 10-Q, the Company began a research and development project in Fiscal 2010 to create “proof of concept” stores to distribute digital video discs (DVDs) to consumers.  The Company hopes to capture a portion of the DVD rental market being vacated by the closure of many larger distribution vendors (e.g., Blockbuster and Hollywood Video) locations.  The Company has initially issued stock (valued at $500,000) and cash for assets and intellectual property, and has spent $3.7 million in Fiscal 2010 and $0.7 million in Fiscal 2011 to test the concept.  We expect to spend up to an additional $1.0 million in Fiscal 2011 to finalize the proof-of-concept.

During the past year, the Company has generated sufficient cash to meet operating, capital expenditure and debt service needs and most of its other obligations.  The Company also received in July 2010, a refund of $1.5 million in federal income taxes for the tax year 2006.  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.

We will continue to consider the acquisition of businesses which compliment our current operations and possible real estate transactions.  Consummation of any acquisition, real estate or other expansion transaction by the Company may be subject to the Company securing additional financing, perhaps at a cost higher than our existing term loans.  In the current economic climate, additional financing may not be available.  Currently, we do not have cash availability under a bank line of credit but believe similar financing is available.   Future earnings and cash flow may be negatively impacted to the extent that any acquired entities do not generate sufficient earnings and cash flow to offset the increased financing costs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

Certain jobs specify that many discrete tasks must be performed which require up to four months to complete.  In such cases, we use the proportional performance method for recognizing revenue.  Under the proportional performance method, revenue is recognized based on the value of each stand-alone service completed.

In some instances, a client will request that we store (or “vault”) an element for a period ranging from a day to indefinitely.  The Company attempts to bill customers a nominal amount for storage, but some customers, especially major movie studios, will not pay for this service.  In the latter instance, storage is an accommodation to foster additional business with respect to the related element.  It is impossible to estimate (i) the length of time we may house the element, or (ii) the amount of additional services we may be called upon to perform on an element.   Because these variables are not reasonably estimable and revenues from vaulting are not material, we do not treat vaulting as a separate deliverable in those instances in which the customer does not pay.

The Company records all revenues when all of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or the services have been rendered; (iii) the Company’s price to the customer is fixed or determinable; and (iv) collectability is reasonably assured.  Additionally, in instances where package services are performed on multiple elements or where the proportional performance method is applied, revenue is recognized based on the value of each stand-alone service completed.

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

Valuation of long-lived and intangible assets.   Long-lived assets, consisting primarily of property, plant and equipment and intangibles, comprise a significant portion of the Company’s total assets. Long-lived assets, including goodwill are reviewed for impairment whenever events or changes in circumstances have indicated that their carrying amounts may not be recoverable.  Recoverability of assets is measured by comparing the carrying amount of an asset to its fair value in a current transaction between willing parties, other than in a forced liquidation sale.

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

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

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

· Significant negative industry or economic trends;

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

· Our market capitalization relative to net book value.

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When we determine that the carrying value of  intangibles, long-lived assets and related goodwill and enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on comparing the carrying amount of the asset to its fair value in a current transaction between willing parties or, in the absence of such measurement, on a projected discounted cash flow method using a discount rate determined by our management to be  commensurate  with the risk inherent in our current business model. Any amount of impairment so determined would be written off as a charge to the statement of operations, together with an equal reduction of the related asset. Net long-lived assets amounted to approximately $19.7 million as of September 30, 2010.

Research and Development.  Research and development costs include expenditures for planned search and investigation aimed at discovery of new knowledge to be used to develop new services or processes or significantly enhance existing processes.  Research and development costs also include the implementation of the new knowledge through design, testing of service alternatives, or construction of prototypes. The cost of materials and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses are capitalized as tangible assets when acquired or constructed.  All other research and development costs are expensed as incurred.

 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.

 At September 30, 2010, the Company has no uncertain tax positions.  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 assets as of September 30, 2010 were $0.0 million.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk.   The Company had borrowings of $10.7 million on September 30, 2010 under term loan and mortgage agreements.  One term loan was subject to variable interest rates.  The weighted average interest rate paid during the first three months of fiscal 2011 was 6.8%.  For variable rate debt outstanding at September 30, 2010, a ..25% increase in interest rates will increase annual interest expense by approximately $1,000.  Amounts that may become outstanding under the revolving credit facility provide for interest at the banks’ prime rate minus ..5% to plus .5% or LIBOR plus 2.0% to 3.0% and LIBOR plus 3.15% for the variable rate term loan.  The Company’s market risk exposure with respect to financial instruments is to changes in prime or LIBOR rates.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure 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 were effective as of September 30, 2010.

Changes in Internal Control over Financial Reporting

The Chief Executive Officer and President and the Chief Financial Officer conducted an evaluation of our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) to determine whether any changes in internal control over financial reporting occurred during the quarter ended September 30, 2010 that have materially affected or which are reasonably likely to materially affect internal control over financial reporting.  Based on the evaluation, no such change occurred during such period.

Internal control over financial reporting refers to a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

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· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

· Provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and

· Provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

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PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

In July 2008, the Company was served with a complaint filed in the Superior court of the State of California for the County of Los Angeles by Aryana Farshad and Aryana F. Productions, Inc.  (“Farshad”).  The complaint alleges that Point.360 and its janitorial cleaning company failed to exercise reasonable care for the protection and preservation of Farshad’s film footage which was lost.  As a result of the defendants’ negligence, Farshad claims to have suffered damages in excess of $2 million and additional unquantified general and special damages.  The lawsuit was settled in October 2010 for $120,000.

On October 6, 2009, DG FastChannel, Inc. (“DGFC”) filed a claim in the United States District Court Central District of California, alleging that the Company violated certain provisions of agreements governing transactions related to the August 13, 2007 sale of the Company’s advertising distribution business to DGFC.  DGFC alleges that (i) the Company did not fulfill its obligation to restrict a former employee from competing against DGFC subsequent to the transaction and, therefore, DGFC does not owe the Company $412,500 related to that portion of the transaction; (ii) the Company violated the noncompetition agreement between DGFC and the Company by distributing advertising content after the transaction; (iii) due to the violation of the noncompetition agreement, the post production services agreement that required DGFC to continue to vault its customers’ physical elements at the Company’s Media Center became null and void; and (iv) the Company must return all of DGFC’s vaulted material to DGFC.  DGFC also sought unspecified monetary damages.

In September 2010, a settlement between the parties included the following:  (1) The Company will be subject to a permanent injunction (until August 13, 2012) from competing in the commercial spot advertising  business (as defined), (2) the Company will deliver to DGFC vaulted elements which will result in an annual reduction of vaulting revenues of approximately $0.9 million, (3) the Company will not be entitled to $412,500 (relating to the working capital reconciliation), (4) the Company will issue 250,000 shares of common stock to DGFC and (5) the parties will enter into full mutual releases and will dismiss their respective claims with prejudice.  In connection with the settlement, the Company has indemnified a related party against possible losses should DGFC exercise its right to put the stock to the related party on a specified future date, and there is a negative difference between the stated $500,000 value of the stock ($2.00 per share) and the market value on the date of the put.  The put may be exercised on the six-month anniversary of the settlement agreement. As of September 30, 2010 the Company has issued the 250,000 shares of common stock to DGFC and accrued approximately $0.4 million of estimated legal, vault removal and other costs associated with the settlement.

In November 2010, DGFC filed an ex parte application for enforcement of the settlement agreement and related stipulated injunction alleging that the Company violated the terms thereof and seeking an order enforcing the settlement agreement, an order to assess civil contempt charges and other remedies, and an order referring criminal allegations against the Company to the U.S. Attorney’s Office.  The Company believes it has substantially performed its obligations under the settlement agreement and intends to defend its position.  Potential liability related to the outcome of the ex parte application cannot be determined at this time.  The Company has accrued estimated legal fees associated with this action.

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

ITEM 1A.  RISK FACTORS

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

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

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

· Recent history of losses.

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· Prior breaches and changes in credit agreements and ongoing liquidity.

· Our highly competitive marketplace.

· The risks associated with dependence upon significant customers.

· Our ability to execute our expansion strategy.

· The uncertain ability to manage in a changing environment.

· Our dependence upon and our ability to adapt to technological developments.

· Dependence on key personnel.

· Our ability to maintain and improve service quality.

· Fluctuation in quarterly operating results and seasonality in certain of our markets.

· Possible significant influence over corporate affairs by significant shareholders.

· Our ability to operate effectively as a stand-alone, publicly traded company.

· The cost associated with becoming compliant with the Sarbanes-Oxley Act of 2002, and the consequences of failing to implement effective internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002.

Other factors not identified above, including the risk factors described in the “Risk Factors” section of the Company’s June 30, 2010, Form 10-K filed with the Securities and Exchange Commission, may also cause actual results to differ materially from those projected by our forward-looking statements.  Most of these factors are difficult to anticipate and are generally beyond our control.  You should consider these areas of risk in connection with considering any forward-looking statements that may be made in this Form 10-Q and elsewhere by us and our business generally.  Except to the extent of any obligation to disclose material information under the federal securities laws or the rules of the NASDAQ Global Market, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.

ITEM  6.  EXHIBITS

(a)	Exhibits
	10.1	Secured Promissory Note dated November 1, 2010 between the Registrant and TroyGould PC.
	10.2	Security Agreement dated November 1, 2010 between the Registrant and TroyGould PC.
	10.3	Deed of Trust, Fixture Filing, Assignment of Rents, and Security Agreement dated November 1, 2010 between the Registrant and TroyGould PC.
	31.1	Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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:  November 12,  2010	BY:	/s/  Alan R. Steel
		Alan R. Steel
		Executive Vice President,
		Finance and Administration
		(duly authorized officer and principal financial officer)

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EX-10.1

POINT.360

SECURED PROMISSORY NOTE

$934,063.73.	November 1, 2010
	Burbank, California

FOR VALUE RECEIVED, POINT.360, a California corporation (“Company”), promises to pay to the order of TROYGOULD PC, a California Professional corporation (the “Holder”), the principal sum of Nine Hundred Thirty-Four Thousand Sixty-Three and 73/100 Dollars ($ 934,063.73), plus interest thereon from the date hereof, at the rate of 3% per annum.    This Note represents the outstanding balance of all unpaid invoices for litigation work performed by Holder for Company through September 30, 2010, which have not been paid in full (“Accrued Invoices”).

The payment of this Note, including interest accrued thereon, is secured pursuant to the terms of that certain (i) security agreement, dated as of the date hereof, by and between the Company and Holder covering all of the assets of the Company (the “Security Agreement”) and (ii) a deed of trust, dated as of the date hereof, by the Company as trustor in favor of the Holder as beneficiary covering two separate parcels of improved real property located in Los Angeles County, California.  ADDITIONAL RIGHTS OF THE HOLDER ARE SET FORTH IN THE SECURITY AGREEMENT AND THE DEED OF TRUST.

The following sets forth the rights of the Holder and the terms to which this Note is subject, and to which the Holder, by the acceptance of this Note, agrees:

1.           Definitions.  As used in this Note, the following capitalized terms have the following meanings:

1.1           “Cash Proceeds Event” shall mean any divestiture, financing, recapitalization, sale of securities of the Company or other transaction not in the ordinary course of business that results in cash proceeds to the Company.  Notwithstanding for foregoing, any financing or other transaction pursuant to which Haig S. Bagerdjian acts in the capacity as a principal or a guarantor of all or any portion of the cash proceeds to the Company, shall be expressly excluded from the definition of a Cash Proceeds Event.

1.2           “Company Sale” means any transaction whereby (a) the Company merges or consolidates with any Person or Persons in a transaction in which the Company is not the surviving entity; or (b) the Company sells substantially all of it assets.

1.3           “Contingent Assets” shall mean the Holthouse Claim and the IVC/Burbank Lease Renegotiation.

1.4           “Deed of Trust” shall mean the deed of trust described in the introductory paragraph of this Note.

1.5           “Event of Default” has the meaning given in Section 4 hereof.

1.6           “Holder” shall mean the Person specified in the introductory paragraph of this Note or any Person to whom this Note is endorsed or assigned.

1.7           “Holthouse Claim” shall mean a claim that the Company has asserted against Holthouse Carlin & Van Trigt LLP on account of a tax matter alleged to have been improperly handled by the Holthouse Firm.

1.8           “IVC/Burbank Lease Renegotiation” shall mean current renegotiation by Company with its landlord over its IVC building lease wherein Company expects to recoup a significant portion of prior rent and/or other payments from its landlord.

1.9           “Note” shall mean this Note.

1.10           “Person” means an individual, a sole proprietorship, a partnership, a corporation, a limited liability company, a limited liability partnership, an association, an institution, a joint stock company, a trust, a joint venture, an unincorporated organization, other entity or a governmental entity.

1.11           “Security Agreement” shall mean the agreement described in the introductory paragraph of this Note.

1.12           “Security Interest” has the meaning given in Section 3.1.

2.           Payments.

2.1           Interest.Interest shall accrue on this Note at the rate of three percent (3.0%) per annum and shall be computed on the basis of a 365-day year for the actual number of days elapsed.

2.2           Minimum Payments.  Company shall make an initial payment of principal and interest to Holder in the amount of Forty Thousand Dollars ($40,000.00) concurrently with execution of this Note.  Thereafter, Company shall make monthly payments of principal and interest to Holder in the minimum amount of Twenty Thousand Dollars ($20,000.00) on the first day of each and every month, commencing December 1, 2010, and continuing until all accrued but unpaid interest and the unpaid principal balance of this Note have been paid in full.  The Company shall, commencing with the end of the fourth calendar quarter of 2010, and each calendar quarter thereafter review in good faith with Holder its projected cash flow for the next calendar quarter to determine if it can reasonably increase the amount of the minimum monthly payments required under this Paragraph 2.2.  Any such increased minimum monthly payments shall then be applicable for the ensuing calendar quarter.  The projected cash flow shall be determined in good faith by Company and in accordance with its usual and customary budgeting standards.

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2.3           Contingent Payments.  Immediately upon the receipt of cash by Company from any of the Contingent Assets, Company shall make a payment on the outstanding principal balance of this Note equal to (i) 20% of the unrestricted cash received by the Company from the IVC/Burbank Lease Renegotiation and (ii) 33-1/3% of any settlement amounts received in cash on the Holthouse Claim.  These payments of principal will be applied against the last amounts due under this Note and shall not satisfy the minimum monthly payments required under Paragraph 2.2 above.  In the event of a Cash Proceeds Event (other than a financing from Haig Bagerdjian) in which the Holder does not receive at least 20% of the proceeds as a prepayment of this Note due to a good faith determination by Company that its financial condition does not enable it to make such payment to Holder, the cash portion from the Contingent Assets payable to Holder in each case shall increase to 50%.  Payments pursuant to this Paragraph 2.3 shall in no event exceed the then remaining unpaid balance of principal and accrued interest on this Note.

2.4           Voluntary Prepayment.  Company may prepay this Note in whole or in part at any time without penalty or premium.

2.4.1                      One Year Payoff.  If Company is able to pay this Note in full (including any additional amounts owing to Holder pursuant to the terms of the Security Agreement or Deed of Trust for subsequently Accrued Invoices), on or before October 1, 2011, all interest accrued for the year will be forgiven and waived and the original principal amount will be reduced by 12-1/2%.

2.4.2                      Eighteen Month Payoff.  If Company is able to pay this Note in full (including any additional amounts owing to Holder pursuant to the terms of the Security Agreement or Deed of Trust for subsequently Accrued Invoices), after October 1, 2011, but on or before April 1, 2012, all interest for the eighteen months will be forgiven and waived and the original principal amount will be reduced by 6.0%

2.5           Priority of Payments.All payments made by Company hereunder (including, without limitation, any prepayments) shall be applied first to the payment of expenses due under this Note, if any, second to interest accrued on this Note, and third to the payment of principal on this Note.

2.6           Company Sale.  Upon completion of any Company Sale the entire remaining unpaid principal balance of this Note and all accrued but unpaid interest thereon shall become immediately due and payable in full.

2.7           Financial Documentation.  Company will provide the Holder with detailed documentation to support its determinations described in Paragraphs 2.2 and 2.3 above

3.           Security Interest and Deed of Trust.

3.1           Security Interest. To secure the prompt and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of any and all of the obligations owed to the Holder under this Note, Company grants to the Holder a lien on, and security interest on all of the assets of Company (the “Security Interest”) pursuant to the terms of the Security Agreement.  Such Security Agreement shall be subject to the terms and potential seniority of any and all liens or security interests that predate it and which Security Interest shall be subject to and junior in position to any Company financings for working capital or the purchase of real property or equipment from an institutional source or any similar financing from or guaranteed by Haig S. Bagerdjian.

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3.2           Deed of Trust. To secure the prompt and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of any and all of the obligations owed to the Holder under this Note, Company grants to the Holder a lien on, two separate and distinct improved parcels or real property as evidenced by the Deed of Trust that will be recorded in the real property records in Los Angeles, California.  Such Deed of Trust shall be subject to the terms and potential seniority of any and all liens or encumbrances that predate it and which Deed of Trust shall be subject to and junior in position to any Company financings for working capital or the purchase of real property or equipment from an institutional source or any similar financing from or guaranteed by Haig S. Bagerdjian.

4.           Events of Default.  The occurrence of any of the following shall constitute a “Event of Default” under this Note:

4.1           Failure to Pay. Company shall fail to (i) pay when due any monthly payment on the due date hereunder or (ii) any other payment required under the terms of this Note on the date due and such payment shall not have been made within 10 days of Company’s receipt of Holder’s written notice to Company of such failure to pay.

4.2           Breaches of Covenants to the Note.  Company shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Note, the Security Agreement or the Deed of Trust and such failure shall continue for 20 days after the Company’s receipt of Holder’s written notice to Company of such breach; or

4.3           Voluntary Bankruptcy or Insolvency Proceedings.  Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) admit in writing its inability to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vi) take any action for the purpose of effecting any of the foregoing; or

4.4           Involuntary Bankruptcy or Insolvency Proceedings.  Proceedings for the appointment of a receiver, trustee, liquidator or custodian of Company or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 30 days of commencement.

5.           Rights of the Holder upon Default.

5.1           Acceleration. Upon any Event of Default, but subject to any applicable cure period, all outstanding obligations payable by Company under this Note shall automatically become immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein to the contrary notwithstanding; provided that upon the occurrence or existence of any Event of Default all outstanding obligations payable by Company under this Note shall automatically become immediately due and payable.

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5.2           Default Rate of Interest.  During any period in which an Event of Default has occurred and is continuing, Company shall pay interest on the unpaid principal balance hereof at a rate per annum equal to the rate 10%.

6.           Remedies on Default.  In case any one or more Events of Default shall occur and be continuing, the Holder may proceed to protect and enforce its rights by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in the Security Agreement of the Deed of Trust or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.  No course of dealing and no delay on the part of the Holder in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice the Holder’s rights, powers or remedies.  

7.           Notice of Events.  Company agrees to give prompt written notice to the Holder of:

7.1           The occurrence of any Event of Default or event that may, with notice or lapse of time or both, result in an Event of Default; or

7.2           Any Cash Proceeds Event or proposed working capital or other financings that may require the Holder to subordinate its Security Interest or encumbrance upon the Company’s assets; or

7.3           Any proposed Company Sale.

8.           Waiver and Amendment.  This Note may not be amended, supplemented, modified or waived except in a writing executed by Company and the Holder. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event.  No delay or omission of the Holder to exercise any right, whether before or after a default hereunder, shall impair any such right or shall be construed to be a waiver of any right or default, and the acceptance at any time by the Holder of any past-due amount shall not be deemed to be a waiver of the right to require prompt payment when due of any other amounts then or thereafter due and payable.

9.           Notices.  All notices, requests, demands and other communications provided for hereunder shall be in writing and mailed (by first class registered or certified mail, postage prepaid), sent by express overnight courier service or electronic facsimile transmission with a copy by mail, or delivered to the applicable party at the addresses indicated below:

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If to Company:

Point.360

2777 North Ontario Street

Burbank, CA 91504

Attention:  Alan R. Steel

Fax: 818-847-2503

Email: Asteel@point360.com

If to the Holder:

TroyGould, PC

1801 Century Park East

Los Angeles CA 90067

Attention: Sanford J. Hillsberg

Fax: 310-201-4746

Email: sjhillsberg@troygould.com

or, as to each of the foregoing, at such other address as shall be designated by such person in a written notice to the other party complying as to delivery with the terms of this Paragraph 9.  All such notices, requests, demands and other communications shall, when mailed or sent, respectively, be effective (i) three days after being deposited in the mails or (ii) one business day after being deposited with the express overnight courier service or sent by electronic facsimile transmission or by email (with receipt confirmed), respectively, addressed as aforesaid.

10.           Attorney’s Fees.  Company agrees to reimburse the Holder for all reasonable costs, including, without limitation, reasonable attorneys’ fees, incurred to collect this Note if this Note is not paid when due.

11.           Governing Law.  This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of’ the State of California, or of any other state.

12.           Payment on Non-Business Days.  Whenever any payment to be made on this Note shall be stated to be due on a day that is not a business day, such payment may be made on the next succeeding business day.

13.           Preparation of this Note.  TroyGould PC has not represented or advised Company in connection with Company’s execution of this Note. In interpreting the provisions of this Note, there shall be no presumption against the party primarily responsible for the drafting of this Note, the Security Agreement or the Deed of Trust.

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14.           Company’s Right to Independent Counsel.  The Company is advised hereby that the Company may seek the advise of an independent lawyer of the Company’s choice and is given a reasonable opportunity to seek that advice before signing this Note.

IN WITNESS WHEREOF, Company has caused this Note to be issued as of the date first written above.

COMPANY:
POINT.360, a California corporation
By:
	Alan R. Steel, Executive Vice-President

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EX-10.2

SECURITY AGREEMENT

SECURITY AGREEMENT, dated as of November 1, 2010 (this “Agreement”), between Point.360, a California corporation (“Debtor”) and TroyGould PC, a California professional corporation, its endorsees, transferees and assigns (collectively, “Secured Party”) with reference to the following:

RECITALS:

WHEREAS, pursuant to that certain understanding between Debtor and Secured Party,  Debtor has (a) acknowledged an accrued indebtedness to Secured Party in the amount of Nine Hundred Thirty-Four Thousand Sixty-Three and 73/100 Dollars ($934,063.73) representing the outstanding balance of all unpaid invoices for litigation work performed by Secured Party to Debtor through September 30, 2010, which have not been paid in full (“Accrued Invoices”) and which are evidenced by that certain promissory note from Debtor to Secured Party of even date herewith and any notes issued in addition to or in replacement of any note (collectively, the “Note”) and (b) agreed that the security interest granted by this Agreement shall also cover any subsequently issued invoices for litigation work performed by Secured Party for Debtor after the date of this Agreement which are not paid in full within 30 days of issuance;

WHEREAS, pursuant to the Note, Debtor has agreed to grant Secured Party a security interest in all of the Debtor’s assets which security interest shall be subject to the terms and potential seniority of any and all liens or security interests which predate it and which security interest shall be subject to and junior in position to any and all future security interests which may be necessary to facilitate future financings for working capital, equipment and real property acquisitions or for general corporate purposes for the Debtor or any similar financing from or guaranteed by Haig S. Bagerdjian;

WHEREAS, in order to induce the Secured Party to accept the Note, Debtor has agreed to execute and deliver to the Secured Party this Agreement and to grant the Secured Party a perfected security interest in the Debtor’s assets in order to secure the prompt payment, performance and discharge in full of all of the Debtor’s obligations under the Note.

AGREEMENT

NOW, THEREFORE, in consideration of the above-referenced Recitals, the covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows:

1.           Certain Definitions.  As used in this Agreement, the following terms shall have the meanings set forth in this Section 1.  Terms used but not otherwise defined in this Agreement, have the meaning given to them in the Note and the Deed of Trust or if the terms are defined in Article 9 of the UCC (such as “account”, “chattel paper”, “commercial tort claim”, “deposit account”, “document”, “equipment”, “fixtures”, “general intangibles”, “goods”, “instruments”, “inventory”, “investment property”, “letter-of-credit rights”, “proceeds” and “supporting obligations”) shall have the respective meanings given such terms in Article 9 of the UCC.

(a)           “Collateral” means the collateral in which the Secured Party is granted a security interest by this Agreement and which shall include the following personal property of the Debtor, whether presently owned or existing or hereafter acquired or coming into existence, wherever situated, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith, and all dividends, interest, cash, notes, securities, equity interest or other property at any time and from time to time acquired:

(i)           All goods, including, without limitations, (A) all machinery, equipment, computers, motor vehicles, trucks, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with Debtor’s business and all improvements thereto; and (B) all inventory;

(ii)           All contract rights and other general intangibles, including, without limitation, all partnership or joint venture interests, membership interests, stock or other securities, licenses, distribution and other agreements, computer software (whether “off-the-shelf”, licensed from any third party or developed by Debtor or its predecessor), computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, and income tax refunds;

(iii)         All accounts, together with all instruments, all documents of title representing any of the foregoing (but not trade accounts receivable generated in the ordinary course of Debtor’s business), all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each account, including any right of stoppage in transit;

(iv)         All documents, letter-of-credit rights, instruments and chattel paper;

(v)          All commercial tort claims;

(vi)         All investment property;

(vii)        All supporting obligations; and

(viii)       All files, records, books of account, business papers, and computer programs; and

(ix)         the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(viii) above.

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Notwithstanding the foregoing, nothing herein shall be deemed to constitute an assignment of any asset which, in the event of an assignment, becomes void by operation of applicable law or the assignment of which is otherwise prohibited by applicable law (in each case to the extent that such applicable law is not overridden by Sections 9-406, 9-407 and/or 9-408 of the UCC or other similar applicable law); provided, however, that to the extent permitted by applicable law, this Agreement shall create a valid security interest in such asset and, to the extent permitted by applicable law, this Agreement shall create a valid security interest in the proceeds of such asset.

(b)           “Intellectual Property” means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, (ii) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof, and all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, (iii) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade dress, service marks, logos, domain names and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common law rights related thereto, (iv) all trade secrets arising under the laws of the United States, any other country or any political subdivision thereof, (v) all rights to obtain any reissues, renewals or extensions of the foregoing, (vi) all licenses for any of the foregoing, and (vii) all causes of action for infringement of the foregoing.

(c)           “Necessary Endorsement” shall mean undated stock powers endorsed in blank or other proper instruments of assignment duly executed and such other instruments or documents as the Agent (as that term is defined below) may reasonably request.

(d)           “Obligations” means all of the liabilities and obligations (primary, secondary, direct, contingent, sole, joint or several) due or to become due, or that are now or may be hereafter contracted or acquired, or owing by Debtor to the Secured Party, including, without limitation, all obligations under this Agreement, the Note, the Deed of Trust and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from any of the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time.  Without limiting the generality of the foregoing, the term “Obligations” shall include, without limitation: (i) principal of, and interest on the Note (which may take the form of additional notes from Debtor to Secured Party); (ii) any and all other fees, indemnities, costs, obligations and liabilities of the Debtor from time to time under or in connection with this Agreement, the Note, the Deed of Trust and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith; and (iii) all amounts (including but not limited to post-petition interest) in respect of the foregoing that would be payable but for the fact that the obligations to pay such amounts are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Debtor.

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(e)           “Organizational Documents” means with respect to the Debtor, the documents by which Debtor was organized (such as a certificate of incorporation, certificate of limited partnership or articles of organization, and including, without limitation, any certificates of designation for preferred stock or other forms of preferred equity) and which relate to the internal governance of the Debtor (such as bylaws, a partnership agreement or an operating, limited liability or members agreement).

(f)           “UCC” means the Uniform Commercial Code of the State of California and or any other applicable law of any state or states that has jurisdiction with respect to all, or any portion of, the Collateral or this Agreement, from time to time.  It is the intent of the parties that defined terms in the UCC should be construed in their broadest sense so that the term “Collateral” will be construed in its broadest sense.  Accordingly if there are, from time to time, changes to defined terms in the UCC that broaden the definitions, they are incorporated herein and if existing definitions in the UCC are broader than the amended definitions, the existing ones shall be controlling.

(g)           “Cash Proceeds Event” shall have the meaning set forth in the Note.

(h)           “Company Sale” shall have the meaning set forth in the Note.

(i)           “Debt” shall have the meaning given to it in accordance with GAAP.

(j)            “Fiscal Quarter” means any of the three (3) month periods ending on March 31, June 30, September 30, or December 31.

2.           Grant of Security Interest.  As an inducement for the Secured Party to accept the Note from Debtor and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Debtor hereby unconditionally and irrevocably pledges, grants and hypothecates to the Secured Party a security interest in and to, a lien upon all of its respective right, title and interest of whatsoever kind and nature in and to, the Collateral (the “Security Interest”).  It is expressly acknowledged and agreed that the Security Interest shall be subject to and junior in position to any and all liens or security interest, whether perfected or not, which predate it and which Security Interest shall be subject to and junior in position to any and all future security interests which may be necessary to facilitate future financings for working capital, equipment or real property acquisitions or for general corporate purposes for the Debtor or any similar financing from or guaranteed by Haig S. Bagerdjian

3.           Representations, Warranties, Covenants and Agreements of Debtor.  Debtor represents and warrants to, and covenants and agrees with, Secured Party as follows:

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(a)           Debtor has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations hereunder. The execution, delivery and performance by Debtor of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of Debtor and no further action is required by Debtor.  This Agreement has been duly executed by Debtor.  This Agreement constitutes the legal, valid and binding obligation of Debtor, enforceable against Debtor in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization and similar laws of general application relating to or affecting the rights and remedies of creditors and by general principles of equity.  Debtor’s execution, delivery, and performance of this Agreement does not conflict with, result in a violation of, or constitute a default under (i) any provision of any agreement or other instrument binding upon Debtor or any of the Collateral, or (ii) any laws or orders applicable to Debtor or to Debtor’s properties.

(b)           [Intentionally Omitted]

(c)           [Intentionally Omitted]

(d)           [Intentionally Omitted]

(e)           [Intentionally Omitted]

(f)           [Intentionally Omitted]

(g)           Debtor hereby authorizes the Secured Party to file one or more financing statements under the UCC, with respect to the Security Interest with the proper filing and recording agencies in any jurisdiction deemed proper by them.

(h)           The execution, delivery and performance of this Agreement by the Debtor does not (i) violate any of the provisions of the Organizational Documents of Debtor or any judgment, decree, order or award of any court, governmental body or arbitrator or any applicable law, rule or regulation applicable to Debtor or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing Debtor's debt or otherwise) or other understanding to which Debtor is a party or by which any property or asset of Debtor is bound or affected.

(i)           [Intentionally Omitted]

(j)           [Intentionally Omitted].

(k)           [Intentionally Omitted]

(l)           [Intentionally Omitted]

(m)           [Intentionally Omitted]

(n)           [Intentionally Omitted]

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(o)           [Intentionally Omitted]

(p)            Debtor shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party’s security interest therein.

(q)           Debtor shall promptly execute and deliver to the Secured Party such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Secured Party may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce its security interest in the Collateral.

4.           Defaults.  The following events shall be “Events of Default”:

(a)           The occurrence of an Event of Default (as defined in the Note) under the Note;

(b)           Any representation or warranty of Debtor in this Agreement or Note or the Deed of Trust shall prove to have been incorrect in any material respect when made;

(c)           The failure by Debtor to observe or perform any of its material obligations hereunder for ten (10) days after delivery to Debtor of notice of such failure by or on behalf of Secured Party unless such default is capable of cure but cannot be cured within such time frame and Debtor is using best efforts to cure same in a timely fashion; or

(d)           If any provision of this Agreement shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by Debtor, or a proceeding shall be commenced by Debtor, or by any governmental authority having jurisdiction over Debtor, seeking to establish the invalidity or unenforceability thereof, or Debtor shall deny that Debtor has any liability or obligation purported to be created under this Agreement.

5.           Duty To Hold In Trust.

(a)           Upon the occurrence of any Event of Default and at any time thereafter, Debtor shall, upon receipt of any revenue, income, dividend, interest or other sums subject to the Security Interest, whether payable pursuant to the Note or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party for application to the satisfaction of the Obligations.

(b)           If Debtor shall become entitled to receive or shall receive any securities or other property Debtor agrees to (i) accept the same as the agent of the Secured Party; (ii) hold the same in trust on behalf of and for the benefit of the Secured Party; and (iii) to deliver any and all certificates or instruments evidencing the same to Secured Party on or before the close of business on the fifth business day following the receipt thereof by Debtor, in the exact form received together with the Necessary Endorsements, to be held by Secured Party subject to the terms of this Agreement as Collateral.

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6.           Rights and Remedies Upon Default.

(a)           Upon the occurrence of any Event of Default and at any time thereafter, the Secured Party, acting through any agent appointed by it for such purpose, shall have the right to exercise all of the remedies conferred hereunder and under the Note and the Deed of Trust, and the Secured Party shall have all the rights and remedies of a secured party under the UCC.  Without limitation, the Secured Parties shall have the following rights and powers:

(i)           The Secured Party shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and Debtor shall assemble the Collateral and make it available to the Secured Party at places which the Secured Party shall reasonably select, whether at Debtor's premises or elsewhere, and make available to the Secured Party, without rent, all of Debtor’s respective premises and facilities for the purpose of the Secured Party taking possession of, removing or putting the Collateral in saleable or disposable form.

(ii)          Upon notice to the Debtor by Secured Party, all rights of Debtor to exercise the voting and other consensual rights that it would otherwise be entitled to exercise and all rights of each Debtor to receive the dividends and interest which it would otherwise be authorized to receive and retain, shall cease.  Upon such notice, Secured Party shall have the right to receive any interest, cash dividends or other payments on the Collateral and, at the option of secured Party, to exercise in Secured Party’s discretion all voting rights pertaining thereto.  Without limiting the generality of the foregoing, Secured Party shall have the right (but not the obligation) to exercise all rights with respect to the Collateral as it were the sole and absolute owners thereof, including, without limitation, to vote and/or to exchange, at its sole discretion, any or all of the Collateral in connection with a merger, reorganization, consolidation, recapitalization or other readjustment concerning or involving the Collateral of Debtor.

(iii)         The Secured Party shall have the right to operate the business of Debtor using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to Debtor or right of redemption of  Debtor, which are hereby expressly waived.  Upon each such sale, lease, assignment or other transfer of Collateral, the Secured Party may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of Debtor, which are hereby waived and released.

(iv)         The Secured Party shall have the right (but not the obligation) to notify any account debtors and any obligors under instruments or accounts to make payments directly to the Secured Party and to enforce the Debtor’s rights against such account debtors and obligors.

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(v)          The Secured Party may (but is not obligated to) direct any financial intermediary or any other person or entity holding any investment property to transfer the same to the Secured Party or its designee.

(b)           The Secured Party may comply with any applicable law in connection with a disposition of Collateral and such compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.  The Secured Party may sell the Collateral without giving any warranties and may specifically disclaim such warranties.  If the Secured Party sells any of the Collateral on credit, the Debtor will only be credited with payments actually made by the purchaser.  In addition, Debtor waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the secured Party’s rights and remedies hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies with respect thereto.

(c)           For the purpose of enabling the Secured Party to further exercise rights and remedies under this Section 6 or elsewhere provided by agreement or applicable law, Debtor hereby grants to the secured Party, for the benefit of the Secured Party, an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to Debtor) to use, license or sublicense following an Event of Default, any Intellectual Property now owned or hereafter acquired by Debtor, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.

7.           Application of Proceeds.  The proceeds of any such sale, lease or other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys’ fees and expenses incurred by the Secured Party in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations pro rata among the Secured Party (based on then-outstanding principal amount of the Note at the time of any such determination), and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the Debtor any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party are legally entitled, the Debtor will be liable for the deficiency, together with interest thereon, at the rate of 10% per annum or the lesser amount permitted by applicable law (the “Default Rate”), and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency.  To the extent permitted by applicable law, Debtor waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral, unless due solely to the gross negligence or willful misconduct of the Secured Party as determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction.

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8.           Costs and Expenses.  The Debtor will, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Note. Until so paid, any fees payable hereunder shall be added to the principal amount of the Note and shall bear interest at the Default Rate.

9.           Responsibility for Collateral.  The Debtor assumes all liabilities and responsibility in connection with all Collateral, and the Obligations shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason.  Without limiting the generality of the foregoing, (a) the Secured Party (i) has no duty (either before or after an Event of Default) to collect any amounts in respect of the Collateral or to preserve any rights relating to the Collateral, or (ii) has no obligation to clean-up or otherwise prepare the Collateral for sale, and (b) Debtor shall remain obligated and liable under each contract or agreement included in the Collateral to be observed or performed by Debtor thereunder.  Secured Party shall not have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by Secured Party of any payment relating to any of the Collateral, nor shall the Secured Party be obligated in any manner to perform any of the obligations of Debtor under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by Secured Party in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which Secured Party may be entitled at any time or times.

10.         [Intentionally Omitted]

11.         Term of Agreement.  This Agreement and the Security Interest shall terminate on the date on which all payments under the Note have been indefeasibly paid in full and all other material Obligations have been paid or discharged; provided, however, that all indemnities of the Debtor contained in this Agreement shall survive and remain operative and in full force and effect regardless of the termination of this Agreement.

12.         Further Assurances.   On a continuing basis, Debtor will make, execute, acknowledge, deliver, file and record, as the case may be, with the proper filing and recording agencies in any jurisdiction, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interest granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a perfected security interest in all the Collateral under the UCC.

13.         Notices.  All notices, requests, demands and other communications hereunder shall be subject to the notice provision contained in the Note.

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14.         Other Security.  To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party’s rights and remedies hereunder.

15.         [Intentionally Omitted]

16.         Miscellaneous.

(a)           No course of dealing between the Debtor and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

(b)           All of the rights and remedies of the Secured Party with respect to the Collateral, whether established hereby or by the Note or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently.

(c)           This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement specifically referring to this Agreement and signed by the parties hereto.

(d)           In the event any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable.  If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction.

(e)           No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise.

(f)           This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns.

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(g)           Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.

(h)           All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof.  Debtor agrees that all proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and the Note (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of Los Angeles, State of California.  Debtor hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of Los Angeles for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If any party shall commence a proceeding to enforce any provisions of this Agreement, then the prevailing party in such proceeding shall be reimbursed by the other party for its reasonable attorney’s fees and other costs and expenses incurred with the investigation, preparation and prosecution of such proceeding.

(i)           This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

(j)           Debtor shall indemnify, reimburse and hold harmless the Secured Party and their respective partners, members, shareholders, officers, directors, employees and agents (collectively, “Indemnitees”) from and against any and all losses, claims, liabilities, damages, penalties, suits, costs and expenses, of any kind or nature, (including fees relating to the cost of investigating and defending any of the foregoing) imposed on, incurred by or asserted against such Indemnitee in any way related to or arising from or alleged to arise from this Agreement or the Collateral, except any such losses, claims, liabilities, damages, penalties, suits, costs and expenses which result from the negligence or willful misconduct of the Indemnitee as determined by a final, nonappealable decision of a court of competent jurisdiction.  This indemnification provision is in addition to, and not in limitation of, any other indemnification provision in the Note, the Deed of Trust or any other agreement, instrument or other document executed or delivered in connection herewith or therewith.

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(k)           Nothing in this Agreement shall be construed to subject Secured Party to liability as a partner of Debtor or any if its direct or indirect subsidiaries that is a partnership or as a member of Debtor or any of its direct or indirect subsidiaries that is a limited liability company, nor shall Secured Party be deemed to have assumed any obligations under any partnership agreement or limited liability company agreement, as applicable, of Debtor or any if its direct or indirect subsidiaries or otherwise, unless and until any such Secured Party exercises its right to be substituted for such Debtor as a partner or member, as applicable, pursuant hereto.

(l)           To the extent that the grant of the security interest in the Collateral and the enforcement of the terms hereof require the consent, approval or action of any partner or member, as applicable, of Debtor or any direct or indirect subsidiary of Debtor or compliance with any provisions of any of the Organizational Documents, the Debtor hereby grants such consent and approval and waives any such noncompliance with the terms of said documents.

IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written.

POINT.360,
a California corporation
By:
	Name:    Alan R. Steel
	Title:      Executive Vice President
“DEBTOR”
TROYGOULD PC
a California professional corporation
By:
	Name:
	Title:
“SECURED PARTY”

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EX-10.3

RECORDING REQUESTED BY

AND WHEN RECORDED MAIL TO:

TROYGOULD PC

1801 Century Park East, 16th Floor

Los Angeles, CA 90067

Attn:    Sanford J. Hillsberg

INSTRUCTIONS TO RECORDER:

Index this document as (1) a deed of trust;

(2) an assignment of rents;

(3) a security agreement; and

(4) a fixture filing

(Space above this line for Recorder’s use)

DEED OF TRUST, FIXTURE FILING, ASSIGNMENT OF

RENTS, AND SECURITY AGREEMENT

THIS DEED OF TRUST, FIXTURE FILING, ASSIGNMENT OF RENTS, AND SECURITY AGREEMENT (the “Deed of Trust”) is made on November 1, 2010 by POINT.360, a California corporation (“Trustor”), whose address is 2777 North Ontario Street, Burbank, CA 91504, in favor of CHICAGO TITLE COMPANY (“Trustee”), for the benefit of TROYGOULD PC, a California professional corporation (“Beneficiary”), whose principal office is located at 1801 Century Park East, Suite 1600, Los Angeles, CA 90067.

TRUSTOR IRREVOCABLY GRANTS, CONVEYS, TRANSFERS AND ASSIGNS TO TRUSTEE, IN TRUST, WITH POWER OF SALE and right of entry and possession, all of Trustor’s present and future estate, right, title and interest in and to the following described property (collectively, the “Property”), subject to any and all existing liens, mortgages, deeds of trust and other encumbrances or record.  In addition, Beneficiary agrees to subordinate the lien of this Deed of Trust to all future encumbrances which may be necessary to facilitate future financings for working capital or to acquire real property or equipment by Trustor or for general corporate purposes in accordance with the terms hereinafter described:

(A)           The following described parcels of real property located in the County of Los Angeles, State of California (the “Land”):

See Exhibit “A” attached hereto and incorporated herein by this reference.

(B)           All easements, rights of way, licenses, covenants, agreements and other appurtenances and rights used in connection with the Land or as a means of access thereto, whether now or hereafter created (“Appurtenances”);

(C)           All buildings, structures, improvements, fixtures, pipes, wires and equipment now and hereafter owned, constructed, located, erected or installed by or on behalf of Trustor upon or appurtenant to the Land and all replacements and substitutions therefor (“Improvements”), together with all maps, plans and specifications, design, engineering and construction contracts, bonds, warranties and other contract rights and other general intangibles relating to the construction of any existing or additional Improvements upon the Land, as well as all contract rights relating to sales of all or portions of the Land and Improvements (“Contracts”);

(D)           All machinery, equipment and other personal property of Trustor if the same is now or hereafter located at or used in connection with the Improvements, and all replacements and substitutions therefor (“Equipment”);

(E)           All leases, subleases, licenses and other occupancy agreements with respect to the Land, Improvements, Appurtenances and Equipment (“Leases”);

(F)           All rentals or other payments which may now or hereafter accrue or otherwise become payable under the Leases to or for the benefit of Trustor together with all other income, rents, revenues, sale proceeds, issues and profits produced by the Land, Improvements, Appurtenances and Equipment (collectively the “Rents”); and

(G)           All earnings, accounts, products, inventory, damages, indemnifications, insurance proceeds and any other proceeds from any and all of such Land, Improvements, Appurtenances, Equipment, Leases and Rents including specifically, but without limitation, all deposits made with or other security given to utility companies and claims or demands relating to insurance or condemnation awards which Trustor now has or may hereafter acquire, including all advance payments of insurance premiums made by Trustor with respect thereto, as well as all deposits made by purchasers of portions of the Land (“Proceeds”);

(H)           All of the above referenced Land, Improvements, Contracts, Appurtenances, Equipment, Leases, Rents and Proceeds are collectively referred to herein as the “Property.”

THIS DEED OF TRUST SECURES THE FOLLOWING INDEBTEDNESS AND OBLIGATIONS (collectively, the “Obligations”) in such order of priority as Beneficiary may from time to time elect:

(1)           Payment and performance of Trustor’s indebtedness and obligations under that certain promissory note of even date herewith in the original face principal amount of Nine Hundred Thirty-Four Thousand Sixty-Three and 73/100 Dollars ($934,063.73) executed by Trustor and payable to Beneficiary, or order, and all extensions, renewals, modifications, and replacements thereof (collectively, the “Note”);

(2)           Payment and performance of any additional notes made by Trustor and payable to Beneficiary, or order, and all extension, renewals, modifications and replacements thereof and that refer to being secured by this Deed of Trust (“Additional Notes”);

(3)           Payment and performance of any other indebtedness and obligations under this Deed of Trust and all extensions, renewals, and modifications of this Deed of Trust; and

2

(4)           Payment of all sums of money which may be advanced by, or otherwise due to, Trustee or Beneficiary under any provision of this Deed of Trust or to protect the security of this Deed of Trust, with interest thereon at the rate provided in this Deed of Trust;

FOR VALUABLE CONSIDERATION, Trustor agrees as follows:

ARTICLE 1

DEFINITIONS

For purposes of this Deed of Trust, the following terms shall have the following definitions:

1.1           Books and Records.  “Books and Records” means all books and records relating to the design, construction, improvement, development, use, ownership, operation, maintenance, repair, or marketing of the Property.

1.2           Buildings.   “Buildings” means all buildings, structures and other improvements now existing or hereafter located on the Land.

1.3           [Intentionally Omitted]

1.4           Condemnation Claims.   “Condemnation Claims” means all claims, actions, causes of action, demands, liens, rights, judgments, settlements, awards, compensation, and damages of every kind and nature which Trustor now has or which may hereafter accrue against any Person, whether arising in tort, by contract or statute, or in any other manner, which in any way directly or indirectly relate to or arise out of any condemnation of the Property or other taking of the Property for public or quasi-public use by eminent domain or to the transfer of the Property in lieu of condemnation or any such taking.

1.5           Condemnation Proceeds.   “Condemnation Proceeds” means all proceeds of the Condemnation Claims, including all money, deposit accounts, accounts, notes, drafts, instruments, documents, and all other tangible and intangible property resulting from the payment, collection of, recovery on, or other disposition of any or all of the Condemnation Claims.

1.6           Covenants and Restrictions.   “Covenants and Restrictions” means all covenants, conditions, restrictions, equitable servitudes, and all other similar matters now or hereafter affecting the Property, including any condominium, planned unit development, or cooperative apartment declaration of covenants, conditions and restrictions, by-laws, articles, rules, and regulations to which Trustor or the Property is subject or bound.

1.7           [Intentionally Omitted]

1.8           Development Rights.   “Development Rights” means all existing and future development rights, development credits, air rights, and options of any kind relating to the Property.

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1.9           Easements.   “Easements” means all existing and future easements, rights of way, licenses, and similar rights relating or appurtenant to the Property and all existing and future rights in or to streets, roads, sidewalks, alleys, strips and gores adjoining or used in connection with the Property.

1.10         Event of Default.   “Event of Default” means any of the events described in Article 3 of this Deed of Trust.

1.11         Fixtures.   “Fixtures” means all fixtures, machinery, equipment, building materials, and appliances now or hereafter located in, on, attached or affixed to, or used in connection with the Land or the Buildings, including all systems for the supply or distribution of heat, air conditioning, electricity, gas, water, air or light; elevators, escalators and related machinery and equipment; fire prevention and extinguishing equipment and water sprinkler systems; security and access control equipment; water heaters, showers, bathtubs, tanks, pumps, toilets, sinks, pipes, and other plumbing fixtures and equipment; stoves, ranges, refrigerators, dishwashers, and disposals; laundry equipment; engines, motors, generators, boilers, furnaces, and incinerators; wall, window, and floor coverings, including screens, shades, drapes, and awnings; partitions, doors, windows, cabinets, bookcases, and hardware; janitorial, maintenance, and waste and rubbish removal equipment; recreational equipment; signs; switchboards, telephone systems, and other communication equipment; television, radio, and computer cables, antennae, and other equipment; chandeliers and other light fixtures; trees, plants and other landscaping; and all attachments, substitutions, accessories, accessions, replacements, improvements, and additions to any or all of the foregoing, all of which shall conclusively be deemed to be part of the Land and Buildings and conveyed by this Deed of Trust, whether or not affixed or attached to the Land.

1.12         Governmental Authorities.   “Governmental Authorities” means (a) the United States; (b) the state, county, city, or other political subdivision in which the Land is located; (c) all other governmental or quasi-governmental authorities, boards, bureaus, agencies, commissions, departments, administrative tribunals, and other instrumentalities or authorities; and (d) all judicial authorities and public utilities having or exercising jurisdiction over Trustor or the Property.

1.13         Governmental Permits.   “Governmental Permits” means all permits, approvals, and authorizations now or hereafter issued by all Governmental Authorities for or in connection with the design, construction, improvement, development, use, ownership, operation, maintenance, repair, or marketing of the Property, including grading permits, foundation permits, building permits, tentative subdivision map approvals, zone changes, zone variances, conditional use permits, temporary certificates of occupancy, and final certificates of occupancy.

1.14         Governmental Requirements.   “Governmental Requirements” means all existing and future laws, ordinances, rules, regulations, orders, and requirements of all Governmental Authorities applicable to Trustor or the Property, including those respecting the design, construction, improvement, development, use, ownership, operation, maintenance, repair, or marketing of the Property.

1.15         [Intentionally Omitted]

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1.16         [Intentionally Omitted]

1.17         [Intentionally Omitted].

1.18         Impositions.   “Impositions” means all (a) Taxes; (b) Insurance Premiums; (c) gas, electricity, water, sewer, and other utility charges which are incurred for the benefit of the Property or which may become a lien against the Property; (d) assessments, charges, and fees imposed pursuant to any Covenants and Restrictions; (e) assessments, charges and fees payable with respect to any Easements, Water Rights or Development Rights; (f) principal, interest, and other amounts payable in connection with any Liens; (g) rents and other amounts payable under any Ground Lease; and (h) such other taxes, charges, premiums, assessments and impositions relating to the Property, the payment of which Beneficiary determines to be necessary to protect Beneficiary’s security for the Obligations.

1.19         Improvements.   “Improvements” means the Buildings and Fixtures, collectively.

1.20         Insurance Claims.   “Insurance Claims” means all claims, actions, causes of action, demands, liens, rights, judgments, settlements, awards, compensation, and damages of every kind and nature which Trustor now has or which may hereafter accrue against any Person, whether arising in tort, by contract or statute, or in any other manner, which in any way directly or indirectly relate to or arise under any policy of insurance which Trustor maintains with respect to the Property or which Trustor is required to maintain under this Deed of Trust (collectively, the “Insurance Policies”).

1.21         Insurance Proceeds.   “Insurance Proceeds” means all proceeds of the Insurance Claims, including all money, deposit accounts, accounts, notes, drafts, instruments, documents, and all other tangible and intangible property resulting from the payment, collection of, recovery on, or other disposition of any or all of the Insurance Claims.

1.22         Insurance Premiums.   “Insurance Premiums” means all premiums and other amounts payable in connection with procuring or maintaining the Insurance Policies.

1.23         Leases.   “Leases” means all existing and future rental agreements, leases, licenses, concessions, occupancy agreements, and other similar agreements affecting the Property, including all subleases at any level.

1.24         Liens.   “Liens” means all mortgages, deeds of trust, mechanics’ liens, and other liens and encumbrances of every kind and nature, other than this Deed of Trust, now or hereafter affecting the Property.

1.25         Intentionally Omitted.

1.26         Mineral Rights.   “Mineral Rights” means all existing and future right, title, and interest in and to all minerals, oil, gas and other hydrocarbon substances in or on the Property.

1.27         Person.   “Person” means any natural person or any entity, including any corporation, partnership, joint venture, trust, unincorporated organization, trustee, or Governmental Authority.

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1.28         Property Claims.   “Property Claims” means all claims, actions, causes of action, demands, liens, rights, judgments, settlements, awards, compensation, and damages of every kind and nature (other than the Insurance Claims and Condemnation Claims) which Trustor now has or which may hereafter accrue against any Person, whether arising in tort, by contract or statute, or in any other manner, which in any way directly or indirectly relate to or arise out of any or all of the following:  (a) the Property; (b) any existing or future fact, matter, occurrence, or transaction relating to the Property; or (c) the design, construction, improvement, development, use, ownership, operation, maintenance, repair or marketing of the Property.

1.29         Property Proceeds.   “Property Proceeds” means all proceeds of the Property Claims, including all money, deposit accounts, accounts, notes, drafts, instruments, documents, and all other tangible and intangible property resulting from the payment, collection of, recovery on, or other disposition of any or all of the Property Claims.

1.30         Rents and Profits.   “Rents and Profits” means all existing and future rents, royalties, issues, profits, proceeds, revenues, income and other benefits of the Property and all Leases, including all security deposits and prepaid rent.

1.31         Taxes.   “Taxes” means (a) all taxes, bonds, levies and assessments now or hereafter affecting the Property, including all general and special real and personal property taxes, bonds, and assessments affecting the Property; (b) all other taxes, bonds, levies and assessments which now are or hereafter may become a lien on the Property, including all income, profits, franchise, withholding, and gross receipt taxes; (c) all other charges now or hereafter imposed on or assessed against the Property by any Governmental Authority or arising with respect to the design, construction, improvement, development, use, ownership, operation, maintenance, repair or marketing of the Property; and (d) all taxes, bonds, levies, and assessments now or hereafter imposed by any Governmental Authorities on Trustee or Beneficiary by reason of their respective interests in this Deed of Trust, the Note, or any promissory note evidencing a Future Advance, excluding any franchise, estate, inheritance, income, or similar tax imposed on Beneficiary or Trustee.

1.32         Tenants.   “Tenants” means all tenants and occupants of the Property under the Leases.

1.33         Water Rights.   “Water Rights” means all existing and future water, water rights (whether riparian, appropriative, or otherwise, and whether or not appurtenant), and all water stock relating to the Property.

ARTICLE 2

COVENANTS OF TRUSTOR

2.1           Performance of Secured Obligations.   Trustor shall pay and perform each and all of the Obligations in accordance with their respective terms.

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2.2           Preservation of the Property.   Trustor (a) shall maintain the Property in good condition and repair; provided, however, Trustor may demolish the existing Improvements thereon for the purpose of preparing the Property for redevelopment; (b) shall comply and cause the Property to comply with the provisions of all Insurance Policies; (c) shall comply and cause the Property to comply with all Governmental Requirements; (d) shall comply and cause the Property to comply with all Covenants and Restrictions; (e) shall maintain in effect all Governmental Permits; (f) except for matters in the ordinary course of Trustor’s business, shall not remove, demolish, improve, add to, or alter the Improvements (excluding alterations which preserve or increase the value of the Property); (g) shall not commit or permit any waste respecting the Property or impairment of the Property; (h) shall not abandon the Property; (i) shall not commit or permit any act upon the Property in violation of any Governmental Requirements; and (k)  shall maintain and do all other acts, in a timely and proper manner, which from the character or use of the Property may be necessary or appropriate to preserve, protect and maintain the value of the Property.

2.3           Insurance.   Trustor shall at all times maintain in full force and effect all currently existing insurance coverage regarding the Property.

2.4           Insurance Policies.   Upon an Event of Default, Trustor shall deliver to Beneficiary the originals of all Insurance Policies together with receipts for the full payment of all Insurance Premiums, and Beneficiary shall have the right to hold such policies as long as any Obligations are outstanding.

2.5           Assignment of Insurance Claims and Proceeds.   Upon an Event of Default, Trustor grants, transfers, and assigns to Beneficiary the Insurance Claims and Insurance Proceeds.

2.6           Assignment of Condemnation Claims and Proceeds and Other Claims.   Upon an Event of Default, Trustor grants, transfers, and assigns to Beneficiary the Condemnation Claims, Condemnation Proceeds, Property Claims, and Property Proceeds.

2.7           Intentionally Omitted.

2.8           Prosecution and Settlement of Claims.  Prior to the occurrence of any Event of Default, Trustor shall have the right to prosecute and enforce the Insurance Claims, Condemnation Claims, and Property Claims (collectively, the “Claims”). Upon an Event of Default, Beneficiary shall have the right to appear in, defend, and prosecute any action or proceeding arising out of or relating to any or all of the Claims if Beneficiary determines that such action is necessary or appropriate to protect Beneficiary’s interest in connection with the Obligations.  Upon the occurrence of an Event of Default, Trustor’s right to prosecute and enforce the Claims shall be revoked upon, and to the extent provided in, notice by Beneficiary to Trustor.  Following such revocation, Beneficiary, at its option, shall have the exclusive right to prosecute and enforce any or all of the Claims to the extent provided in Beneficiary’s notice of revocation and to compromise, adjust, settle or dismiss any or all of the Claims, whether or not Beneficiary has taken possession of the Property.  Without Beneficiary’s prior written consent, Trustor shall not (a) sell, transfer, pledge, hypothecate or otherwise dispose of or abandon any or all of the Claims; or (b) compromise, adjust, settle, or dismiss any or all of the Claims.

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2.9           No Liability by Beneficiary.     Prior to an Event of Default, nothing contained in this Deed of Trust shall be deemed to obligate Beneficiary to prosecute or enforce any or all of the Claims nor shall Beneficiary have any liability or responsibility for any failure or delay by Beneficiary in prosecuting or enforcing any or all of the Claims or to collect any or all of the Proceeds.  Trustor shall at all times have the right to determine and follow its own policies and practices in the conduct of its business. Prior to an Event of Default, nothing contained in this Deed of Trust nor Beneficiary’s receipt of any Proceeds shall result in any obligation or liability by Beneficiary for the performance or observance of any of the terms of any document or Insurance Policies relating to any or all of the Claims or the Proceeds.

2.10         [Intentionally Omitted]

2.11         [Intentionally Omitted]

2.12         Taxes and Impositions.   Trustor (a) shall pay all Taxes at least ten (10) days before delinquency; and (b) shall pay all other Impositions when due.  Upon Beneficiary’s request, Trustor shall deliver to Beneficiary receipts and such other substantiating documentation as may be required by Beneficiary to evidence payment of all Impositions by Trustor in accordance with this Section.

2.13         [Intentionally Omitted]

2.14         Assignment of Rents and Profits.

(a)           Assignment.   Upon the occurrence of an Event of Default, as additional security, Trustor, shall irrevocably and unconditionally grant, transfer and assign to Beneficiary all Rents and Profits.  Prior to the occurrence of an Event of Default, Trustor shall have the right to collect and retain on the terms of this Section 2.14 all Rents and Profits as they become due and payable.  Upon the occurrence of an Event of Default, Trustor’s right to collect the Rents and Profits shall automatically be revoked and shall be transferred without further notice to Trustor.  Following such revocation, Beneficiary shall be entitled to collect and retain all Rents and Profits, whether or not Beneficiary has taken possession of the Property, and Trustor shall immediately pay or deliver to Beneficiary any Rents and Profits then held or thereafter collected by Trustor.  All Rents and Profits collected by or on behalf of Beneficiary shall be applied by Beneficiary to the Obligations in such order as Beneficiary may determine.  If Beneficiary elects to seek the appointment of a receiver following the occurrence of an Event of Default, Trustor irrevocably and unconditionally consents to the appointment of a receiver without regard to the adequacy of the security for any of the Obligations.

(b)           Applications of Rents and Profits Prior to Assignment.   Trustor shall apply the Rents and Profits to the payment of all reasonable and necessary operating costs and expenses of the Property, installment payments due in connection with the Note and any Additional Notes, payment of Impositions, and a reasonable reserve for future reasonable and necessary expenses, repairs and replacements relating to the Property before using the Rents and Profits for any other purpose which does not directly benefit the Property.

(c)           Notices to Tenants.   Upon assignment as described in Section 2.14(a) above, Trustor irrevocably authorizes and directs all Tenants under the Leases to comply with any notice or demand by Beneficiary for payment to Beneficiary of any Rents and Profits or for the performance of any of the Tenant’s other respective obligations under the Leases, regardless of any conflicting demand by Trustor or notice by Trustor to any Tenant that Beneficiary’s demand is invalid or wrongful.  No Tenant shall have any duty to inquire as to whether any default by Trustor has occurred under the Deed of Trust in connection with any notice or demand by Beneficiary under this Section.

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2.15         [Intentionally Omitted]

2.16         [Intentionally Omitted]

2.17         [Intentionally Omitted]

2.18         [Intentionally Omitted]

2.19         [Intentionally Omitted]

2.20         Leases.   Upon an Event of Default, and at upon Beneficiary’s request, Trustor shall execute, acknowledge and deliver to Beneficiary an absolute and unconditional assignment acceptable to Beneficiary of all of Trustor’s interests in all Leases and all guaranties of and security for the Tenants’ respective obligations under the Leases.

2.21         Attornment at Beneficiary.  Each Tenant who enters into a Lease for the Property after the date of recordation of this Deed of Trust (each such Lease is referred to as a “Subordinate Lease”) shall be deemed to be have agreed to attorn to Beneficiary and accept Beneficiary as the landlord under its Lease on the terms of this Section.  Such attornment shall be effective and self-operative as of the date of acquisition of the Property without the execution of any further documents on the part of the Tenant, Beneficiary, or any other party, and the Tenant under the Subordinate Lease shall be bound to Beneficiary under all of the terms, covenants, and conditions of the Subordinate Lease for the remaining balance of the term thereof, with the same force and effect as if Beneficiary were the landlord under such Lease. However, Beneficiary (a) shall not be liable for any act or omission of any prior landlord under any Subordinate Lease, including Trustor; (b) shall not be subject to any offset, defense, or claim which any Tenant may have against any prior landlord under any Subordinate Lease, including Trustor; (c) shall not be obligated (i) to return any security deposit now or hereafter paid by any Tenant; (ii) to return any prepaid rent or other amounts prepaid by any Tenant; or (iii) to grant any Tenant a credit for any such security deposit, prepaid rent or other prepaid amounts (excluding monthly rent and other charges which have not been prepaid for more than one month in advance), except to the extent, if any, that Beneficiary has actually and unconditionally received such security deposit, prepaid rent or other prepaid amounts; and (d) shall not be obligated to complete the construction of any or all Improvements.  Without limiting the terms of this Section, upon Beneficiary’s request, each Tenant under a Subordinate Lease shall execute and deliver to Beneficiary any document which Beneficiary determines to be necessary or appropriate to evidence such Tenant’s attornment to Beneficiary on the terms of this Section, including a new lease with Beneficiary on the same terms and conditions as the Subordinate Lease for a term equal to the unexpired term of the Subordinate Lease.

2.22         Compliance with Leases.   Trustor (a) shall perform all obligations of the landlord under the Leases and shall not permit or suffer any default by Trustor under the terms of any of the Leases; and (b) shall diligently enforce all remedies available to Trustor in the event of a default by any Tenant under any of the Leases.

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2.23         [Intentionally Omitted].

2.24         Notice of Certain Matters.   Trustor shall promptly notify Beneficiary in writing of (a) any claim, demand, right, or Lien relating to the Property which may be adverse to the lien of this Deed of Trust; (b) any material loss, depreciation, or adverse change in the value of the Property and any other occurrence which may materially and adversely affect Beneficiary’s lien on the Property; (c) any adverse change in Trustor’s ability to perform any or all of the Obligations; (d) any event or condition which constitutes an Event of Default; and (e) any dispute between Trustor and any Governmental Authority relating to the Property which may have a material adverse effect on the Property.

2.25         [Intentionally Omitted]

2.26         Defense of Actions and Protection of Security by Trustor.   Trustor shall appear in and defend any action or proceeding commenced by any Person other than Beneficiary which affects or which Beneficiary determines may affect any or all of the following:  (a) the Property; (b) the Insurance Claims, Condemnation Claims, or Property Claims; (c) Beneficiary’s, Trustee’s or Trustor’s respective rights and obligations under the Note, any Additional Notes or this Deed of Trust; (d) the Obligations; or (e) any other transaction or matter which affects Beneficiary by reason of its interest in the Property.  Trustor shall promptly commence and diligently prosecute all actions and proceedings which are necessary or appropriate or which Beneficiary determines may be necessary or appropriate to do any or all of the following:  (i) prevent any damage, destruction, or injury to the Property; (ii) enforce or recover upon the Insurance Claims, Condemnation Claims or Property Claims or collect the Insurance Proceeds, Condemnation Proceeds, or Property Proceeds; or (iii) to preserve, protect, maintain, and defend the Property and Beneficiary’s lien thereon.

2.27         Further Assurances.   Upon Beneficiary’s request, Trustor shall execute, acknowledge and deliver to Beneficiary such further documents and agreements and take such further actions as Beneficiary may reasonably require from time to time to effectuate or carry out the purposes of the Deed of Trust or to evidence, perfect, maintain, preserve or protect Beneficiary’s lien on the Property, including Trustor’s execution of security agreements, assignments, financing statements, and continuation financing statements.

ARTICLE 3

EVENTS OF DEFAULT

Beneficiary, at its option, shall have the right to declare Trustor to be in default under this Deed of Trust upon the occurrence of any or all of the following events:

3.1           Payment of Note.   If Trustor fails to pay any of its indebtedness or perform any of its obligations under the Note or Additional Notes when due and after notice and cure period stated therein;

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3.2           Performance Under Other Documents.   If Trustor fails to pay any of its indebtedness or to perform any of its material obligations to Beneficiary under this Deed of Trust or any of the other documents in connection therewith when due and after notice and cure period stated herein or therein;

3.3           [Intentionally Omitted]

3.4           Misrepresentation.   If any request, statement, information, certification, or representation, whether written or oral, submitted or made by Trustor to Beneficiary in connection with the Note or any other extension of credit by Beneficiary to Trustor is materially false or misleading;

3.5           Insolvency of Trustor.   If (a) a petition is filed by or against Trustor under the federal bankruptcy laws or any other applicable federal or state bankruptcy, insolvency or similar law; (b) a receiver, liquidator, trustee, custodian, sequestrator, or other similar official is appointed to take possession of Trustor or the Property, or Trustor consents to such appointment; (c) Trustor makes an assignment for the benefit of creditors or fails generally to pay its debts as they become due; or (d) Trustor takes any action in furtherance of any of the foregoing and such matters continue for 90 ninety days without being dismissed;

3.6           [Intentionally Omitted]

3.7           [Intentionally Omitted]

3.8           [Intentionally Omitted]

3.9           [Intentionally Omitted]

3.10         Dissolution.   If Trustor is a corporation, the dissolution, liquidation, or termination of existence of such Person;

3.11         [Intentionally Omitted]

3.12         Sales, Transfers, and Further Encumbrances.  Beneficiary shall have the right, at its option and without notice to or demand on Trustor, to declare any or all Obligations to be immediately due and payable if any of the following events occurs without Beneficiary’s prior written consent:  (a) the sale, conveyance, transfer of all or any part of the Property or any interest in the Property, whether voluntary or involuntary, or Trustor’s grant of any option or agreement to effect any such transaction; and (b) the dissolution or liquidation of Trustor.  Beneficiary’s consent to any event described in this Section may be withheld in Beneficiary’s sole and absolute discretion.  Beneficiary’s consent to any event described in this Section shall not be deemed to be a consent to, or a waiver of the right to require such consent for, any other event.

3.13         [Intentionally Omitted]

3.14         Condemnation.   If any condemnation proceeding or action is pending or commenced by any Governmental Authority with respect to more than 10% of the Property;

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3.15         [Intentionally Omitted]

ARTICLE 4

REMEDIES

Upon Beneficiary’s election to declare Trustor to be in default under this Deed of Trust pursuant to Article 3 above, Trustor shall be deemed to be in default under this Deed of Trust, and Beneficiary shall have the following rights and remedies:

4.1           Acceleration.   Beneficiary shall have the right to declare any or all of the Obligations to be immediately due and payable, including the entire principal amount and all accrued but unpaid interest under the Note, any Additional Notes and any Future Advances by Beneficiary, and notwithstanding the stated maturity of the Note or any Future Advances, such Obligations shall thereupon be immediately due and payable.

4.2           Entry by Beneficiary.   Whether or not Beneficiary elects to accelerate any or all of the Obligations under Section 4.1 above, Beneficiary shall have the right (a) to enter, take possession of, and manage, operate and lease the Property; (b) to take possession of any or all Books and Records; (c) to collect any or all Rents and Profits, whether or not Beneficiary has taken possession of the Property; and (d) to take any or all actions which Beneficiary determines to be necessary or appropriate in connection therewith or to preserve, protect, maintain and defend the Property and Beneficiary’s lien thereon, including (i) the exercise and enforcement of all of Trustor’s rights under any or all of the Leases; (ii) the termination, acceptance of a surrender, modification or amendment of any or all of the Leases; (iii) the execution of new Leases on such terms and conditions as Beneficiary determines to be appropriate; and (iv) the repair, alteration, improvement or completion of the Property in such manner and to such extent as Beneficiary determines to be necessary or appropriate.  If Beneficiary elects to take possession of the Property or to take any or all of the other actions described in this Section by court process, Trustor irrevocably and unconditionally agrees that a receiver may be appointed by a court for such purpose pursuant to Section 4.6 below.

4.3           Judicial Action.   Beneficiary shall have the right to commence an action or proceeding to foreclose this Deed of Trust and to enforce any or all of the terms of the Note or Security Agreement, including specific performance of the covenants of Trustor under this Deed of Trust.

4.4           Foreclosure by Power of Sale.

(a)           Declaration and Notice of Default.   Beneficiary shall have the right (i) to cause the Property to be sold under the power of sale contained in this Deed of Trust in any manner permitted by applicable law; and (ii) to deliver to Trustee a written declaration of default and demand for sale and a written notice of default and election to cause the Property to be sold, which notice the Trustee or Beneficiary shall cause to be recorded as required by law.  Upon the expiration of such period of time after the recordation of such notice of default and election to sell and the giving of such notice of sale as may then be required by law, and without the necessity of any demand on Trustor, Trustee, at the time and place specified in the notice of sale, shall sell the Property at public auction to the highest bidder for cash in lawful money of the United States payable at the time of sale.

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(b)           Postponements; Multiple Parcels.   To the extent permitted by law, Trustee may, and upon request of Beneficiary shall, from time to time, postpone any sale hereunder by public announcement at the time and place noticed for such sale or may, in its discretion, give a new notice of sale.  If the Property consists of several lots, parcels or items of property, Beneficiary shall have the exclusive right (i) to designate the order in which such lots, parcels or items shall be offered for sale or sold; and (ii) to elect to sell such lots, parcels or items through a single sale, through two or more successive sales, or in any other manner Beneficiary determines to be in its best interest.  Any Person, including Trustor, Trustee and Beneficiary, may purchase at any sale under this Deed of Trust, and Beneficiary shall have the right to purchase at any such sale by crediting upon the bid price the amount of all or any part of the Obligations.  If Beneficiary determines to sell the Property in more than one sale, Beneficiary may, at its option, cause such sales of the Property to be conducted simultaneously or successively, on the same day or on such different days or times and in such order as Beneficiary may determine, and no such sale shall terminate or otherwise affect the lien of this Deed of Trust on any part of the Property that has not been sold until all Obligations have been paid in full.

(c)           Costs of Sale; Deed to Purchaser.   Trustor shall pay all costs, fees, and expenses of all sales of the Property under this Deed of Trust, including the costs, fees, and expenses (including reasonable attorneys’ fees) of Trustee and Beneficiary, together with interest thereon at the interest rate applicable to principal under the Note.  Upon any sale under the power of sale contained in this Deed of Trust, Trustee shall execute and deliver to the purchaser or purchasers a deed or deeds conveying the property so sold, but without any covenant or warranty whatsoever, express or implied.  The recitals in any such deed or deeds of any matter or facts, including the existence of any default by Trustor, the giving of notice of default and notice of sale, and other facts affecting the regularity or validity of such sale or sales, shall be conclusive proof of the truth of such facts and matters, and any such deed or deeds shall be conclusive against all Persons as to such facts and matters recited therein.  A sale of less than all of the Property or any defective or irregular sale under this Deed of Trust shall not exhaust, impair or otherwise affect the power of sale contained in this Deed of Trust, and subsequent sales of the Property may be made under this Deed of Trust until all Obligations have been satisfied or until the entire Property has been sold without defect or irregularity.  If Beneficiary elects to cause the Property to be sold under the power of sale contained in this Deed of Trust, Beneficiary shall deposit with the Trustee this Deed of Trust, the Note, and such receipts and evidence of such other Obligations as Trustee may reasonably require.

4.5           Application of Sale Proceeds.   Trustee shall apply the proceeds of the sale or sales conducted by Trustee in the following order of priority:  (a) first, to payment of all expenses of such sale or sales and all costs, expenses, fees, and liabilities of Trustee and this trust, including attorneys’ fees, costs of a trustee’s sale guaranty, costs of other evidence of title, and Trustee’s fees in connection with such sale or sales; (b) second, to all amounts advanced by Trustee or Beneficiary under any of the terms of this Deed of Trust which have not then been repaid, together with interest thereon at the rate applicable to principal under the Note or, with respect to Trustee, the maximum rate permitted by law to be charged by Trustee; (c) third, to the payment of all other Obligations in such order and amounts as Beneficiary determines; and (d) the remainder, if any, to the Trustor.

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4.6           Appointment of a Receiver.   Beneficiary shall have the absolute and unconditional right to apply to any court having jurisdiction and obtain the appointment of a receiver or receivers of the Property, and Trustor irrevocably and unconditionally consents to such appointment and agrees that Beneficiary shall have the right to obtain such appointment (a) without notice to Trustor or any other Person; (b) without regard to the value of the Property or any other collateral securing the Obligations; and (c) without acceleration of the Obligations or commencement of foreclosure proceedings under this Deed of Trust.  Any such receiver or receivers shall have the usual powers and duties of receivers in similar cases and all powers and duties necessary or appropriate to exercise the rights of Beneficiary as provided in this Deed of Trust.

4.7           Protection of Beneficiary’s Security.   Beneficiary or Trustee, without obligation to do so and without notice to or demand on Trustor, and without releasing Trustor from any of its Obligations or waiving Beneficiary’s rights under the Deed of Trust, shall have the right to perform any Obligation which Trustor has breached in such manner, at such time, and to such extent as Beneficiary or Trustee determines to be necessary or appropriate to preserve, protect, maintain and defend the Property and Beneficiary’s lien thereon.

4.8           Assembly of Property.   Upon Beneficiary’s request, Trustor shall assemble and make available to Beneficiary at the location of the Land all Property which has been removed from or which is not located on the Land.

4.9           [Intentionally Omitted]

4.10         Rescission of Notice of Default.   Prior to the conduct of any sale under the power of sale contained in this Deed of Trust, Beneficiary, at its option, shall have the right to rescind any notice of default and election to sell the Property by delivering to Trustee a written notice of rescission executed by Beneficiary which, when recorded, shall cancel the foreclosure proceedings which have been commenced by the recordation of such notice of default and election to sell.  Beneficiary’s rescission of any notice of default and election to sell pursuant to this Section or under applicable law shall not constitute or be construed as a waiver of any Event of Default or impair, prejudice or otherwise affect (a) Beneficiary’s right to record a new notice of default and election to sell the Property based on the same or any other Event of Default; or (b) Beneficiary’s rights and remedies in connection with the Obligations.

ARTICLE 5

WARRANTIES AND REPRESENTATIONS

5.1           Warranties and Representations.   As a material inducement to Beneficiary in accepting this Deed of Trust as collateral for Trustor’s Obligations to Beneficiary, Trustor warrants and represents to the Beneficiary as follows:

(a)           Corporate Existence.   If Trustor is a corporation, Trustor is duly organized, validly existing and in good standing under the laws of the state of its incorporation, and Trustor is qualified to do business and is in good standing under the laws of the state in which the Property is located.

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(b)           Authority.   Trustor has the full power and authority to carry on its business and to enter into and perform all of its obligations under this Deed of Trust, and when executed by the Persons signing this Deed of Trust on behalf of Trustor, shall constitute legal, valid and binding obligations of Trustor enforceable in accordance with their respective terms.  The Persons executing this Deed of Trust on behalf of Trustor are duly authorized to execute the Note, any Additional Notes and all other documents required by Beneficiary in connection with the this Deed of Trust on behalf of Trustor.  No consent of any other Person and no consent, approval, authorization or other action by or filing with any Governmental Authorities is required in connection with the execution, delivery and performance of Trustor’s obligations under this Deed of Trust.

5.2           [Intentionally Omitted]

ARTICLE 6

MISCELLANEOUS

6.1           Beneficiary Statement; Certain Charges.   With respect to (a) any statement, accounting, or similar information requested by Trustor or any other Person pursuant to California Civil Code Section 2943 or 2954 or any other provision of applicable law; or (b) any other document furnished to Trustor or any other Person by Beneficiary at Trustor’s request, Beneficiary shall have the right to charge the maximum amount then permitted by law or, if there is no such maximum, $250 for providing such statement, accounting, or other information.  Trustor shall pay Beneficiary a reasonable charge for any other service rendered by Beneficiary in connection with the Obligations or the Property, including the issuance of a request for full or partial reconveyance of this Deed of Trust, transmitting proceeds to an escrow holder and changing Beneficiary’s records relating to the Obligations.

6.2           Reconveyance.

(a)           Upon (i) Beneficiary’s written request stating that all Obligations secured by this Deed of Trust have been paid or performed in full; (ii) surrender to Trustee of this Deed of Trust, the Note and all other documents evidencing the indebtedness secured by this Deed of Trust; and (iii) payment of Trustee’s fees and expenses of this trust, Trustee shall reconvey the Property then held under this Deed of Trust without warranty of any kind.  The recitals in the reconveyance of any matters or facts shall be conclusive proof of their truthfulness.  The grantee in such reconveyance may be described as the “person or persons legally entitled thereto”.  Such reconveyance shall operate as a reassignment of the Rents and Profits assigned to Beneficiary under this Deed of Trust. Trustee shall deliver this Deed of Trust and the Note after full reconveyance to the Person or Persons legally entitled thereto.

(b)           [Intentionally Omitted].

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6.3           Substitution of Trustee.   Beneficiary, at its option, shall have the right from time to time to appoint a successor trustee to any trustee appointed under this Deed of Trust by Beneficiary’s execution and acknowledgement of a written instrument which is recorded in the office of the recorder of each county in which the Property is located.  The recordation of such an instrument in accordance with this Section shall constitute conclusive proof of the proper substitution of a successor trustee under this Deed of Trust.  Upon recordation of such an instrument, the successor trustee shall succeed to all the title, power and duties granted to the Trustee under this Deed of Trust and by applicable law without conveyance of the Property.  Such instrument shall contain the name of the original Beneficiary, Trustee and Trustor named in this Deed of Trust, the book and page or other recording information for this Deed of Trust, and the name and address of the successor trustee.  If a notice of default has been recorded prior to the recordation of a substitution of trustee, the power of substitution shall not be exercised by Beneficiary until the costs, fees and expenses of the acting trustee have been paid in full and the acting trustee has endorsed acknowledgement of receipt of such amounts on the instrument substituting the successor trustee.  Without limiting the terms of this Section, Beneficiary shall have the right from time to time to substitute a successor to any trustee appointed under this Deed of Trust in accordance with any statutory or other procedure allowed by law for such substitution.

6.4           Execution of Instruments by Beneficiary and Trustee.   Without notice to or affecting the liability of Trustor or any other Person for the payment or performance of the Obligations, without affecting the lien or priority of this Deed of Trust or Beneficiary’s rights and remedies under the Deed of Trust, and without liability to Trustor or any other Person, Beneficiary and Trustee (if Trustee is so requested in writing by Beneficiary) shall have the right, at any time and from time to time, to do any one or more of the following:  (a) reconvey any part of the Property; (b) consent in writing to the making of any map or plat relating to the Property; (c) join in or consent to the granting of any Easement affecting the Property; and (d) execute any extension agreement relating to any or all of the Obligations, any document subordinating the lien of this Deed of Trust to any other Lien or document, or any other document relating to the Property, Obligations, or Deed of Trust.

6.5           Trust Irrevocable; Acceptance by Trustee.   The trust created by this Deed of Trust is irrevocable by Trustor.  Trustee accepts this trust when this Deed of Trust, duly executed and acknowledged, is recorded in the county in which the Property is located as provided by law.  Trustee is not obligated to notify any party of a pending sale under any other deed of trust or of any action or proceeding in which Trustor, Beneficiary or the Trustee shall be a party unless brought by the Trustee.

6.6           [Intentionally Omitted]

6.7           [ Intentionally Omitted]

6.8           [Intentionally Omitted].

6.9           Beneficiary’s Agreement to Subordinate.   Beneficiary agrees to subordinate the lien of this Deed of Trust to any bank or other institutional financing for the Trustor’ operations obtained by the Trustor or to loans made to Trustor by Haig Bagerdjian which are to be secured by the Trustor’s real property.

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6.10         Taxes Imposed on Beneficiary.   If, after the date of this Deed of Trust, any Governmental Requirements are enacted for the purpose of taxing any lien on the Property or changing in any way the laws for the taxation of deeds of trust or debts secured by deeds of trust, so as to impose on Beneficiary payment of all or part of any Taxes assessed against the Property, then prior to the due date of such Taxes, Trustor shall pay all such Taxes and agree to pay such Taxes when levied or assessed against the Property or Beneficiary; provided, however, that if such payment or agreement by Trustor shall not be permitted by law, Beneficiary, at its option, shall have the right to declare any or all of the Obligations to be immediately due and payable upon notice to Trustor.  Nothing contained in this Section shall be deemed to require Trustor to pay any franchise, estate, inheritance, income or similar tax imposed on Beneficiary.

6.11         [Intentionally Omitted]

6.12         Defense of Actions and Protection of Security by Beneficiary.   Whether or not an Event of Default has occurred, Beneficiary and Trustee shall each have the right, but not the obligation, at their own expense, to appear in and defend any action or proceeding, whether commenced by or against Trustor, any of the Guarantors, or any other Person, which affects or which Beneficiary or Trustee reasonably determines is likely to materially adversely affect any or all of the following:  (a) the Property; (b) the Insurance Claims, Condemnation Claims, or Property Claims; (c) Beneficiary’s or Trustor’s respective rights and obligations under the Note or this Deed of Trust; or (d) the Obligations.  Beneficiary and Trustee shall each have the right, but not the obligation, to commence and prosecute any action or proceeding which Beneficiary or Trustee determines to be reasonably necessary or appropriate to do any or all of the following:  (i) prevent any damage, destruction, or injury to the Property; (ii) enforce or recover upon the Insurance Claims, Condemnation Claims, or Property Claims or collect the Insurance Proceeds, Condemnation Proceeds, or Property Proceeds pursuant to this Deed of Trust; (iii) preserve, protect, maintain, and defend the Property and Beneficiary’s lien thereon; or (iv) enforce or exercise any right, remedy or power available to or conferred on Beneficiary or Trustee under the This Deed of Trust or applicable law.  Beneficiary and Trustee shall each have the right to discontinue, suspend or dismiss any such action or proceeding which has been commenced by Beneficiary or Trustee at any time.

6.13         [Intentionally Omitted]

6.14         Payment of Advances by Trustor.   All Reimbursable Costs and all other costs, fees, expenses and liabilities incurred or paid by Beneficiary under any other provision of the This Deed of Trust or under applicable law in connection with the Obligations or the Property (a) shall be payable by Trustor to Beneficiary on Beneficiary’s demand; (b) shall constitute additional indebtedness of Trustor to Beneficiary; (c) shall be secured by this Deed of Trust; and (d) shall bear interest from the date of expenditure at the rate of interest applicable to principal under the Note.  All Reimbursable Costs and all other costs, fees, expenses and liabilities incurred or paid by Trustee under this Deed of Trust or under applicable law in connection with this Deed of Trust shall be payable by Trustor to Trustee on Trustee’s demand and shall bear interest at the maximum rate permitted to be charged by Trustee under applicable law.  Nothing contained in this Deed of Trust shall be deemed to obligate Beneficiary or Trustee (i) to incur any costs, fees, expenses, or liabilities; (ii) to make any appearances in or defend any action or proceeding; or (iii) to commence or prosecute any action or proceeding relating to any matter.

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6.15         No Third Party Beneficiaries.   This Deed of Trust is entered into for the sole protection and benefit of Beneficiary and Trustor and their respective permitted successors and assigns.  No other Person shall have any rights or causes of action under this Deed of Trust.

6.16         Notices.   All notices and demands by Beneficiary to Trustor under this Deed of Trust shall be in writing and shall be effective on the earlier of personal delivery to Trustor or two (2) days after deposit in first-class or certified United States mail, postage prepaid, addressed to Trustor at the address set forth in this Deed of Trust, except that service of any notice of default or notice of sale provided or required by law shall, if mailed, be deemed effective on the date of mailing.  All notices and demands by Trustor to Beneficiary under this Deed of Trust shall be in writing and shall be effective on actual receipt by Beneficiary at Beneficiary’s address set forth in this Deed of Trust; provided, however, that nonreceipt of any such notice or demand by Beneficiary as a result of Beneficiary’s refusal to accept delivery or Beneficiary’s failure to notify Trustor of Beneficiary’s change of address shall be deemed receipt by Beneficiary.  Trustor’s and Beneficiary’s respective addresses set forth in this Deed of Trust may be changed by written notice given to the other party in accordance with this Section.  If Trustor consists of more than one Person, service of any notice or demand on any one of such Persons by Beneficiary shall be effective service on Trustor for all purposes.

6.17         Performance of Covenants.   Trustor shall perform and comply with all of its obligations under this Deed of Trust at Trustor’s sole cost and expense.

6.18         Severability.   If any provision of the Note, any Additional Notes or this Deed of Trust shall be held by any court of competent jurisdiction to be unlawful, voidable, void, or unenforceable for any reason, such provision shall be deemed to be severable from and shall in no way affect the validity or enforceability of the remaining provisions of the Note, any Additional Notes or this Deed of Trust.

6.19         Interpretation.   Whenever the context of the Note, any Additional Notes or this Deed of Trust reasonably requires, all words used in the singular shall be deemed to have been used in the plural, and the neuter gender shall be deemed to include the masculine and feminine gender, and vice versa.  For purposes of this Deed of Trust, all references to the Property or Improvements shall be deemed to refer to all or any part of the Property or Improvements, respectively.  The headings to sections of this Deed of Trust are for convenient reference only, and they do not in any way define or limit any of the terms of this Deed of Trust and shall not be used in interpreting this Deed of Trust.  For purposes of this Deed of Trust, the term “including” shall be deemed to mean “including without limitation,” and the term “document” shall include all written contracts, commitments, restrictions, agreements, mortgages, and instruments.

6.20         Time of the Essence.   Time is of the essence in the performance of each provision of the Note, any Additional Notes or this Deed of Trust by Trustor.

6.21         Amendments.   The Note and this Deed of Trust may be modified only by written agreement signed by Beneficiary and Trustor.

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6.22         Entire Agreement.   The Note, the Security Agreement and this Deed of Trust contain the entire agreement concerning the subject matter of the Obligations and supersede all prior and contemporaneous negotiations, agreements, statements, understandings, terms, conditions, representations and warranties, whether oral or written, between Beneficiary and Trustor concerning the Obligations.

6.23         No Waiver by Beneficiary.  No waiver by Beneficiary of any of its rights or remedies in connection with the Obligations or of any of the terms or conditions of the Note, Additional Notes or this Deed of Trust shall be effective unless such waiver is in writing and signed by Beneficiary.  Without limiting the generality of this Section, (a) no delay or omission by Beneficiary in exercising any of its rights or remedies in connection with the Obligations shall constitute or be construed as a waiver of such rights or remedies; (b) no waiver by Beneficiary of any default by Trustor under the Note, Additional Notes or this Deed of Trust  or consent by Beneficiary to any act or omission by Trustor shall constitute or be construed as a waiver of or consent to any other or subsequent default, act or omission by Trustor; (c) no acceptance by Beneficiary of any late payment or late or defective performance of any of the Obligations by Trustor shall constitute a waiver by Beneficiary of the right to require prompt payment and performance strictly in accordance with the Note, Additional Notes or this Deed of Trust with respect to any other payment or performance of any of the Obligations; (d) no acceptance by Beneficiary of any payment or performance following any notice of default which has been given or recorded by Beneficiary shall constitute a waiver of Beneficiary’s right to proceed with the exercise of its remedies with respect to any Obligations which have not been paid or performed in full; (e) no acceptance by Beneficiary of any partial payment or performance shall constitute a waiver by Beneficiary of any of its rights or remedies relating to any Obligations which have not been paid or performed in full; and (f) no application of Rents and Profits, Insurance Proceeds, Condemnation Proceeds or Property Proceeds to any of the Obligations shall constitute or be construed as a waiver by Beneficiary or cure of any Event of Default or impair, prejudice, invalidate or otherwise affect any action by Beneficiary or Trustee in response to such default.

6.24         Waivers by Trustor.   Trustor waives presentment, demand for payment, protest, notice of demand, dishonor, protest and non-payment, and all other notices and demands in connection with the delivery, acceptance, performance, default under, and enforcement of the Deed of Trust.  Trustor waives the right to assert any statute of limitations as a defense to the enforcement of any or all of the Note, Additional Notes or this Deed of Trust to the fullest extent permitted by law.

6.25         Waiver of Marshalling.   Trustor and all Persons holding a Lien affecting the Property who have actual or constructive notice of this Deed of Trust waive (a) all rights to require marshalling of assets or liens in the event of Beneficiary’s exercise of any of its rights and remedies under this Deed or Trust, including any judicial or nonjudicial foreclosure sale of the Property; (b) all rights to require Beneficiary to exhaust its rights and remedies against any other collateral securing any or all of the Obligations before pursuing its rights and remedies under this Deed of Trust; and (c) all rights to require Beneficiary to exercise any other right or power or to pursue any other remedy which Beneficiary may have under any document or applicable law before pursuing its rights and remedies under this Deed of Trust.

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6.26         Waiver of Subrogation.   Trustor waives all rights to recover against Beneficiary for any loss or damage incurred by Trustor from any cause which is insured under any of the Insurance Policies, except that the foregoing waiver of subrogation shall not be effective with respect to any Insurance Policy if the coverage under such policy would be materially reduced or impaired as a result of such waiver.  Trustor shall use its best efforts to obtain Insurance Policies which permit the waiver of subrogation contained in this Section.

6.27         Cumulative Remedies.   No right or remedy of Beneficiary or Trustee under this Deed of Trust or the Note, or any Additional Notes shall be exclusive of any other right or remedy to which Beneficiary or Trustee may be entitled.  Beneficiary’s rights and remedies under the Note, Additional Notes or this Deed of Trust are cumulative and in addition to all other rights and remedies which Beneficiary may have under any other document with Trustor and under applicable law.  Beneficiary shall have the right to exercise any one or more of its rights and remedies in connection with the Obligations at Beneficiary’s option and in its sole and absolute discretion, without notice to Trustor or any other Person (except as otherwise expressly required by law or under the Note, Additional Notes or this Deed of Trust), and in such order as Beneficiary may determine in its sole and absolute discretion.  If Beneficiary holds any collateral in addition to the Property for any of the Obligations, Beneficiary, at its option, shall have the right to pursue its rights or remedies with respect to such other collateral either before, contemporaneously with, or after Beneficiary’s exercise of its rights or remedies with respect to the Property.  Upon the occurrence of an Event of Default, Beneficiary, at its option, shall have the right to offset against any debt or monies due from Beneficiary to Trustor against all or part of the Obligations.

6.28         [Intentionally Omitted]

6.29         Applicable Law; Jurisdiction.   The  Deed of Trust shall be governed by and construed in accordance with the laws of the State of California.  Trustor consents to personal jurisdiction over Trustor by the courts of the State of California and agrees that service of process on Trustor may be effected by certified or registered mail, return receipt requested, directed to Trustor at its address shown in this Deed of Trust.

6.30         Successors.   Subject to the restrictions contained in this Deed of Trust shall be binding upon and inure to the benefit of Beneficiary and Trustor and their respective permitted successors and assigns.

6.31         Power of Attorney.   Trustor irrevocably appoints Beneficiary, with full power of substitution, as Trustor’s attorney-in-fact, coupled with an interest, with full power, in Beneficiary’s own name or in the name of Trustor (a) to take any or all of the actions specified in Article 4 above with respect to the Property; and (b) to sign and record notices of completion, notices of cessation of labor, and any other similar notice or document which Beneficiary reasonably determines to be necessary or appropriate to protect its interests in connection with the Obligations.  Beneficiary shall have the right to exercise the power of attorney granted in this Section directly or to delegate all or part of such power to one or more agents of Beneficiary.  Nothing contained in this Deed of Trust shall be construed to obligate Beneficiary to act on behalf of Trustor as attorney-in-fact.

6.32         No Merger.   There shall be no merger of any estate in the Property which Trustor acquires after the date of this Deed of Trust with all or any portion of the estate in the Property which Trustor holds as of the date of this Deed of Trust, unless Beneficiary shall expressly agree otherwise in writing.

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6.33         Request for Notices.   Trustor hereby requests that a copy of any notice of default and notice of sale as may be required by law be mailed to Trustor at its address stated above.

ARTICLE 7

UNIFORM COMMERCIAL CODE SECURITY AGREEMENT

7.1           Uniform Commercial Code Security Agreement.  Article 7 of this Deed of Trust constitutes a security agreement pursuant to the California Uniform Commercial Code (the “Code”).  To secure payment and performance of the Obligations, Trustor grants Beneficiary a security interest in all now owned and hereafter acquired personal property of Trustor obtained for or in connection with the design, planning, construction, development, use, operation, maintenance, or marketing and sale of the Property (collectively, the “Collateral”), including the following:  (a) all fixtures, machinery, machines, motor vehicles, tools, parts, equipment, pumps, engines, motors, boilers, incinerators, building materials, inventory, supplies, goods, systems for the supply or distribution of heat, air conditioning, electricity, gas, water, air or light, elevators and related machinery and equipment, fire prevention and extinguishing equipment, security and access control equipment, plumbing, showers, bath tubs, water heaters, toilets, sinks, stoves, ranges, refrigerators, dishwashers, disposals, laundry equipment, wall, window and floor coverings, partitions, doors, windows, hardware, waste and rubbish removal equipment, recreational equipment, signs, furniture, furnishings, appliances, telephone equipment, computer systems, office equipment and supplies, plants, carpets, rugs, sculptures, art work, mirrors, tables, lamps, beds, television sets, light fixtures, chandeliers, desks, cabinets, bookcases, chairs, sofas, benches, and janitorial and maintenance equipment and supplies, and all substitutions, accessories, accessions, replacements, improvements, and additions to any or all of the foregoing; (b) all deposits, advance payments, security deposits, and rental payments made by or on behalf of Trustor to others in connection with the Property and relating to any or all of the following: (i) management or operational services; (ii) marketing services; (iii) architectural, engineering, or design services; (iv) utility services; (v) cleaning, maintenance, security, or repair services; (vi) rubbish or refuse removal services; (vii) sewer services; (viii) rental of furnishings, fixtures or equipment; (ix) parking; or (x) any service similar to any or all of the foregoing; (c) all reports, appraisals, drawings, plans, blueprints, studies, specifications, certificates of occupancy, building permits, grading permits, and surveys relating to all or part of the Property, and all amendments, modifications, supplements, general conditions and addenda thereto; (d) all trade names, trademarks, trade styles, service marks, logos, letterheads, advertising symbols, goodwill, telephone numbers, advertising rights, negatives, prints, brochures, flyers, pamphlets and other media items used or intended to be used in connection with the Property; (e) all warranties and guaranties, whether written or oral, from any third Person which directly or indirectly relate to all or part of the Property or personal property described in parts (a) through (d) of this Section 7.1; (f) all legal and equitable claims, causes of action, and rights against architects, engineers, designers, contractors, subcontractors, suppliers, materialmen and any other Persons supplying labor, services, materials or equipment, directly or indirectly, in connection with the design, planning, construction, development, use, operation, maintenance, or marketing of all or part of the Property; (g) all real property tax refund claims, general intangibles, accounts, deposit accounts, documents, instruments, chattel paper, and accounts receivable relating to the design, planning, construction, development, use, operation, maintenance or marketing of all or part of the Property, including any right to payment for goods sold or leased or to be sold or leased or for services rendered or to be rendered, however evidenced, including purchase orders, negotiable documents, notes, drafts, acceptances, claims, instruments, insurance policies, and all other forms of obligations and receivables; (h) all contracts and agreements for the sale of all or any portion of the Property and all deposits, advance payments, or other things of value given by buyers on account of purchase, and (i) all products and proceeds of any or all of the foregoing personal property, including all money, deposit accounts, accounts, chattel paper, documents, notes, drafts, instruments, insurance proceeds, and all other tangible and intangible property resulting from the sale, lease, or other disposition of any or all of the foregoing personal property whether in the hands of Trustor, an escrow company or other third party.

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7.2           Filing.  Trustor agrees that Beneficiary may file this Deed of Trust, or a reproduction thereof, in the real estate records or other appropriate index, as a financing statement for any of the items of Collateral specified in Section 7.1 above which is or may be part of the Property.  Any reproduction of this Deed of Trust or of any other security agreement or financing statement shall be sufficient as a financing statement.  Trustor agrees to execute and deliver to Beneficiary, upon Beneficiary’s request, any financing statements, as well as extensions, renewals and amendments thereof, and reproductions to this Deed of Trust in such form as Beneficiary may require to perfect a security interest with respect to all or part of the Collateral.  Trustor shall pay all costs of filing of such financing statements and any extensions, renewals, amendments and releases thereof, and shall pay all costs and expenses of any record searches for financing statements Beneficiary may reasonably require.

7.3           Additional Covenants of Trustor.  Trustor, at its sole cost and expense, (a) shall give Beneficiary at least thirty (30) days prior written notice of any change in Trustor’s principal place of business and the acquisition or use of a trade name or style by Trustor; (b) shall promptly notify Beneficiary in writing of any claim, lien, security interest, right, encumbrance or any other occurrence which may be adverse to Beneficiary’s security interest in the Collateral; (c) shall defend the Collateral from all claims, liens, security interests, rights, encumbrances and other matters which are adverse to Beneficiary’s security interest in the Collateral; (d) shall promptly pay all costs and expenses relating to the purchase, ownership, or use of the Collateral, including all liens, taxes, assessments and charges of Governmental Authorities levied, assessed or imposed on all or part of the Collateral; (e) except for matters in the ordinary course of Trustor’s business, shall not sell, transfer, pledge, hypothecate, lease or otherwise dispose of or abandon all or part of the Collateral without Beneficiary’s prior written consent,; (f) except for matters in the ordinary course of Trustor’s business, shall not remove any of the Collateral which consists of tangible personal property from its location on the Property without Beneficiary’s prior written consent; (g) shall, upon Beneficiary’s request, give notice, in form and substance acceptable to Beneficiary, to any or all account debtors designated by Beneficiary of Trustor’s grant of a security interest in any Collateral which consists of accounts, contract rights, instruments, documents, or general intangibles (referred to collectively as the “Accounts” and individually as an “Account”); (h) following the occurrence of any Event of Default, shall not compromise, settle, adjust, or grant any discount, credit, or allowance to any Account debtor without Beneficiary’s prior written consent; (i) shall undertake any and all other acts necessary or appropriate to maintain, preserve and protect the Collateral and Beneficiary’s security interest therein, including any actions requested by Beneficiary; and (j) shall execute and deliver to Beneficiary such other documents as Beneficiary may request in order to evidence, effectuate, perfect, maintain, preserve or protect Beneficiary’s security interest in the Collateral, including financing statements, continuation financing statements, financing statement amendments, security agreements, and assignments.  If Trustor fails to execute and deliver to Beneficiary any document requested by Beneficiary pursuant Section 7.3(j) within ten (10) days after such request, then Trustor irrevocably appoints Beneficiary, with full power of substitution, as Trustor’s attorney-in-fact, coupled with an interest, with full power, in its own name or in the name of Trustor, to execute such document on behalf of Trustor.  Nothing contained in this Article 7 shall be construed to obligate Beneficiary to act on behalf of Trustor as attorney-in-fact.

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7.4           Rights and Additional Remedies of Beneficiary under Uniform Commercial Code.  Without limiting Article 4 above, upon the occurrence of an Event of Default, Beneficiary shall have the following additional rights and remedies with respect to the Collateral: (a) Beneficiary shall have all the rights and remedies of a secured party under the Code and under any other applicable law, and, at Beneficiary’s option, shall also have the right to invoke any or all of the remedies provided in Article 4 of this Deed of Trust with respect to the Collateral, and in exercising any of such remedies, Beneficiary may proceed against the items of real property and any items of Collateral separately or together and in any order whatsoever, without in any way affecting the availability of Beneficiary’s remedies under the Code or of the remedies provided in Article 4 of this Deed of Trust; (b) Beneficiary, at its option, shall have the right (i) to direct any or all Account Debtors to make payment directly to Beneficiary; (ii) to demand, collect, receive and give receipts for any and all money and other property due or to become due in connection with all or part of the Collateral, including any of the Accounts; (iii) to take possession of and endorse and collect any or all notes, checks, drafts, money orders, or other instruments of payment relating to all or part of the Collateral or proceeds of the Collateral, including any of the Accounts; and (iv) to file any claim and take any other action which Beneficiary determines to be appropriate for the purpose of collecting any or all of the Accounts and to compromise, adjust or settle Accounts for less than face value thereof, and to execute all releases and other documents in connection therewith; provided, however, that Beneficiary shall not be obligated in any manner to make any demand for or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or take any action to collect or enforce the payment of any or all of the Accounts; (c) should Beneficiary seek to take possession of any or all of the Collateral by court process, Trustor irrevocably and unconditionally agrees that a receiver may be appointed by a court for such purpose without regard to the adequacy of the security for the Obligations; and (d) Trustor irrevocably appoints Beneficiary, with full power of substitution, as Trustor’s attorney-in-fact, coupled with an interest, with full power, in its own name or in the name of Trustor to take any or all of the actions described Section 7.4(b) after the occurrence of an Event of Default.  Beneficiary, at its option, and whether or not an Event of Default exists, shall at all times have the right (a) to take such actions as Beneficiary determines to be necessary or appropriate to maintain, preserve and protect the Collateral and Beneficiary’s security interest therein; and (b) to give notice to any Account debtor containing such information and instructions concerning the existence of Beneficiary’s security interest and rights in the Collateral under this Deed of Trust as Beneficiary determines to be necessary or appropriate to protect its interest.

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7.5           Fixtures.  The Collateral in which Beneficiary has a security interest under this Article 7 includes goods that are or may become Fixtures on the Property.  This Deed of Trust constitutes a fixture filing pursuant to the terms of Sections 9313 and 9402 of the Code that shall be recorded in the real estate records of the county in which the Property is located.  In that regard, the following information is provided:

Name of Debtor:	POINT.360, a California corporation
Address of Debtor:	2777 North Ontario Street Burbank, California 91504
Name of Secured Party:	TROYGOULD PC, a California professional corporation
Address of Secured Party:	1801 Century Park East Suite 1600 Los Angeles, CA 90067

7.6           Indemnification.  Trustor shall indemnify, defend and hold Beneficiary harmless from any and all claims, demands (including demands by any governmental agency), liabilities, costs, expenses, penalties, damages, losses and liens, including without limitation reasonable attorneys’ fees (collectively, “Indemnified Claims”), arising out of or with respect to (i) Hazardous Material on or under the Property, or migrating to or from the Property or released on or under the Property subsequent to the date hereof, and (ii) any clean-up required by law or court order or order of any governmental authority having jurisdiction over the Property, of any and all Hazardous Material which might remain or subsequently be placed on or under the Property.  Without limiting the generality of the foregoing, but subject to the exclusions described in Paragraph (b) below, Indemnified Claims shall include liabilities and costs arising out of the existence, migration, encapsulation, removal or non-removal of:  asbestos-containing materials, lead paint, or other Hazardous Material located on the Property or on adjacent or nearby property, whether discovered before or after the date hereof, and including matters discovered during construction by Trustor or Trustor’s successors in interest or assignees; claims by any governmental or quasi-governmental divisions or agencies related to Hazardous Material located on the Property; and claims arising out of contaminated groundwater, whether located on the Property or off-site.  The indemnity provided for herein shall survive the full payment of the Obligations and the reconveyance of this Deed of Trust.

[Signatures Continued on Next Page]

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TRUSTOR:
POINT.360, a California corporation
By:
	Name: Alan R. Steel
	Title: Executive Vice-President

25

STATE OF CALIFORNIA	)
	) ss
COUNTY OF LOS ANGELES	)

On _________________________, before me,_________________________________ a Notary Public, personally appeared ______________________________________________ who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies) and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature

Print Name:  

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REQUEST FOR FULL RECONVEYANCE

(To be used only when the Note and all other indebtedness

secured by this Deed of Trust have been paid in full)

TO:  _________________________, TRUSTEE

The undersigned is the legal owner and holder of all indebtedness secured by this Deed of Trust.   All sums secured by this Deed of Trust have been fully paid and satisfied, and you are hereby requested and directed, on payment to you of all sums owing to you under the terms of this Deed of Trust, to cancel all evidences of indebtedness delivered to you and secured by this Deed of Trust and to reconvey, without warranty, the estate now held by you hereunder to the parties designated by the terms of this Deed of Trust.

MAIL RECONVEYANCE TO:

By:

Title:

Dated:  

DEED OF TRUST

EXHIBIT “A”

LEGAL DESCRIPTION

The Parcels of land referred to herein is situated in the State of California, County of Los Angeles, and is described as follows:

In the City of Burbank, the following two Parcels:

PARCEL 1

LOTS 185, 187, 189, 191 AND THE NORTH ONE-HALF OF LOT 193 OF TRACT 7383, IN THE CITY OF BURBNK, AS PER MAP RECORDED IN BOOK 84, PAGES 20 AND 21 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDED OR SAID COUNTY.

PARCEL 2

THE NORTHWESTERLY 28.71 FEET OF LOT 39 OF TRACT 8273, IN THE CITY OF BURBANK, COUNT OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 91, PAGE 45 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDED OF SAID COUNTY.

APN 2477-015-045

          2477-016-010

In the City of Los Angeles, the following two Parcels:

PARCEL 1:

THE SOUTH 70 FEET OF THE EAST 135 FEET OF LOT1, IN BLOCK 18 OF COLEGROVE, IN THE CITY OF LOS ANGELES, COUNT OF LOS ANGELES, STGATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 53 PAGE 10 OF MISCELLANEOUS RECORDS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.

PARCEL 2:

THE NORTH 55 FEET OF ETHE EAST 135 FEET OF LOT 2, IN BLOCK 18 OF COLEGROVE, IN THE CITY OF LOS ANGELES, COUNT OF LOS ANGELES, STGATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 53 PAGE 10 OF MISCELLANEOUS RECORDS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.

APN: 5533-07-033, 002

A

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

15 U.S.C. § 7241

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Haig S. Bagerdjian, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;

(d ) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 12, 2010	/s/  Haig S. Bagerdjian
	Haig S. Bagerdjian
	Chairman of the Board of Directors,
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

15 U.S.C. § 7241

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Alan R. Steel, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;

(d ) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 12, 2010	/s/  Alan R. Steel
	Alan R. Steel
	Executive Vice President, Finance and Administration, and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Report of Point.360 (the “Company”) on Form 10-Q for the period ended September 30, 2010, as filed with the Securities and Exchange Commission (the “Report”), I, Haig S. Bagerdjian, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

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

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

/s/ Haig S. Bagerdjian

Haig S. Bagerdjian

Chief Executive Officer

November 12, 2010

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Report of Point.360 (the “Company”) on Form 10-Q for the period ended September 30, 2010, as filed with the Securities and Exchange Commission (the “Report”), I, Alan R. Steel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

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

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

/s/  Alan R. Steel

Alan R. Steel

Chief Financial Officer

November 12, 2010