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 March 31, 2011

o 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.

þ Yes ¨ 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).

oYes þ No

As of March 31, 2011, 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,			March 31,
	2010*			2011
Assets
Current assets:
Cash and cash equivalents	$	249		$	256
Accounts receivable, net of allowances for doubtful accounts of $393 and $343, respectively		7,581			7,537
Inventories, net		548			476
Prepaid expenses and other current assets		437			1,365
Prepaid income taxes		1,565			68
Total current assets		10,380			9,702

Property and equipment, net		20,157			17,678
Other assets, net		607			1,001
Total assets	$	31,144		$	28,381

Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of notes payable	$	1,038		$	287
Current portion of capital lease obligations		159			213
Line of credit		-			1,200
Accounts payable		2,828			1,873
Accrued wages and benefits		1,432			1,380
Other accrued expenses		2,300			1,477
Current portion of deferred gain on sale of real estate		178			178

Total current liabilities		7,935			6,608

Notes payable, less current portion		9,383			9,978
Capital lease obligations, less current portion		263			210
Deferred gain on sale of real estate, less current portion		1,733			1,599

Total long-term liabilities		11,379			11,787

Total liabilities		19,314			18,395

Commitments and contingencies (Note 4)

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 March 31, 2011, respectively		21,542			21,857
Additional paid-in capital		9,808			10,040
Accumulated (deficit)		(19,520	)		(21,911	)
Total shareholders’ equity		11,830			9,986

Total liabilities and shareholders’ equity	$	31,144		$	28,381

See accompanying notes to condensed consolidated financial statements.

*Amounts derived from audited financial statements

POINT.360

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2011			2010			2011

Revenues	$	9,511,000		$	9,258,000		$	29,184,000		$	26,600,000
Cost of services sold		(7,014,000	)		(5,990,000	)		(21,355,000	)		(18,485,000	)

Gross profit		2,497,000			3,268,000			7,829,000			8,115,000
Selling, general and administrative expense		(3,353,000	)		(3,221,000	)		(10,846,000	)		(10,182,000	)
Research and development expense		(381,000	)		(18,000	)		(771,000	)		(352,000	)
Impairment of long lived assets		-			(684,000	)		-			(684,000	)

Operating (loss)		(1,237,000	)		(655,000	)		(3,788,000	)		(3,103,000	)
Interest expense		(219,000	)		(216,000	)		(668,000	)		(611,000	)
Interest income		-			-			9,000			62,000
Other income		74,000			1,083,000			340,000			1,261,000

Income (loss) before income taxes		(1,380,000	)		212,000			(4,105,000	)		(2,391,000	)
Provision for income taxes		-			-			-			-
Net income (loss)	$	(1,380,000	)	$	212,000		$	(4,105,000	)	$	(2,391,000	)

Income (loss) per share:
Basic:
Net income (loss)	$	(0.13	)	$	0.02		$	(0.40	)	$	(0.22	)
Weighted average number of shares		10,496,610			10,763,166			10,379,216			10,685,611
Diluted:
Net income (loss)	$	(0.13	)	$	0.02		$	(0.40	)	$	(0.22	)
Weighted average number of shares including the dilutive effect of stock options		10,496,610			10,763,166			10,379,216			10,685,611

See accompanying notes to condensed consolidated financial statements.

POINT.360

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended March 31, (in thousands)
	2010			2011

Cash flows from operating activities:
Net loss	$	(4,105	)	$	(2,391	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
(Gain) on sale of fixed assets		(112	)		(181	)
Depreciation and amortization		2,691			2,752
Amortization of deferred gain on real estate		(89	)		(134	)
Provision for (recovery of) doubtful accounts		-			(50	)
Stock compensation expense		188			232
Impairment of long lived assets		-			684
Amortization of non-compete agreement		9			5
Changes in operating assets and liabilities (net of acquisitions):
Decrease in accounts receivable		1,701			93
(Increase) decrease in inventories		(168	)		72
(Increase) in prepaid expenses and other current assets		(9	)		(925	)
Decrease in prepaid income taxes		-			1,497
(Increase) in other assets		(491	)		(400	)
(Decrease) increase in accounts payable		198			(955	)
(Decrease) in accrued wages and benefits		(306	)		(53	)
(Decrease) in other accrued expenses		-			(822	)
Net cash (used in) operating activities		(493	)		(576	)

Cash flows from investing activities:
Capital expenditures		(1,892	)		(957	)
Proceeds from sale of equipment or real estate		112			329
Investment in acquisitions		(200	)		-
Net cash (used in) investing activities		(1,980	)		(628	)

Cash flows from financing activities:
Proceeds from line of credit, net		-			1,200
Issuance of common stock		-			315
(Repayment) of notes payable		(1,442	)		(157	)
(Repayment) of capital lease obligations		(115	)		(147	)
Net cash (used in) provided by financing activities		(1,557	)		1,211
Net increase (decrease) in cash and cash equivalents		(4,030	)		7
Cash and cash equivalents at beginning of period		5,235			249
Cash and cash equivalents at end of period	$	1,205		$	256

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

	Nine Months Ended
	March 31,
	2010			2011
Cash payments for income taxes (net of refunds)	$	(312	)	$	(1,497	)
Cash payments for interest	$	603		$	542
Settlement of a lawsuit for common stock	$	-		$	315
Fixed assets purchased for common stock	$	500		$	-
Assets acquired through capital lease obligations	$	54		$	148

See accompanying notes to condensed consolidated financial statements.

POINT.360

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2011

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 and independent producers. The Company also rents and sells DVDs and video games directly to consumers through its Movie>Q retail stores.

The Company operates in two business segments from four post production and three Movie>Q locations. 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.

Typically, a feature film or television show or related material 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 March 31, 2011, 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 include the accounts and transactions of the Company, including those of the Company’s subsidiaries. The statements have been prepared in accordance with accepted accounting principles generally accepted in the United States of America and by 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. All intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements. Operating results for the three and nine month periods ended March 31, 2011 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.

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 March 31,		Three Months Ended March 31,		Nine Months Ended March 31,		Nine Months Ended March 31,
	2010		2011		2010		2011
Pro forma weighted average of number of shares
Weighted average number of common shares outstanding used in computation of basic EPS		10,497		10,763		10,379		10,686
Dilutive effect of outstanding stock options		-		-		-		-
Weighted average number of common and potential Common shares outstanding used in computation of Diluted EPS		10,497		10,763		10,379		10,686
Effect of dilutive options excluded in the computation of diluted EPS due to net loss		70		0		33		32

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 for the three months ended March 31, 2010 and the nine month periods ended March 31, 2011 and 2010 were excluded from the computation of diluted earnings per share because the Company reported a net loss, and the effect of inclusion would be anti-dilutive (i.e., including such securities would result in a lower loss per share). While the Company reported a profit in the three months ended March 31, 2011, there were no dilutive securities. Potentially dilutive securities in all periods (with the exception of the three months ended March 31, 2011) consist of stock options whose exercise price is less than the Company’s stock price at March 31, 2011. The number of potentially dilutive shares at March 31, 2011 was 651,675.

Fair Value Measurements

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 Sheets at fair value.

As of March 31, 2011 and June 30, 2010, the carrying value of cash and cash equivalents, 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.

Impairment of long lived assets

In fiscal 2010, the Company acquired assets and technology from Kiosk Concepts, LLC and DVDs on the Run, Inc. for use in developing the Movie>Q proof of concept. The assets included (i) vending machine type kiosks and related machinery, and (ii) an automated DVD management system. The Movie>Q R&D project evaluated the capabilities and potential economics of both models. In 2010, the Company opened three Movie>Q stores incorporating the automated inventory management (AIM) system while further investigating potential uses of the kiosk assets. On March 31, 2011, the Company determined that the AIM system would be used exclusively for Movie>Q, and that the kiosk assets of the Movie>Q business segment were impaired for accounting purposes.

For purposes of impairment testing under ASC 360, we considered potential cash flows from the kiosk assets. Since the decision was made to use the AIM system, and because the kiosk assets were easily separable from both the AIM assets and the chosen Movie>Q business model, separate kiosk cash flow evaluation was deemed appropriate. The kiosks are specialty retail machines that could conceivably be employed by the Company or another entity to compete with the Redbox-type business, but the kiosks were significantly larger than the Redbox version, required software development to become functional, and would require potentially large expenditures to ship them to a buyer. Because of these factors and our inability to attract a buyer, we deemed the potential cash flow from the kiosks to be negligible to zero, and that the salvage value is zero.

Due to the specialized nature of the assets, management’s decision not to use the kiosk assets in Movie>Q, no perceived alternative use for the assets, and no indicated market value for the assets, management determined that $684,000 of kiosk assets were fully impaired as of March 31, 2011.

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update 2009-13, “Multiple – Deliverable Revenue Arrangements.” 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 for revenue arrangement entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. We adopted the provisions of the guidance as of July 1, 2010 which did not have a material impact on our financial statements.

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 July 1, 2011, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the reporting period beginning July 1, 2012. 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 January 2011, the Company entered into a credit agreement which provides $1 million of credit based on 85% of acceptable accounts receivable, as defined. The loan and security agreement provides for interest at prime rate plus 2% (currently 5.25%), with an interest floor of 5.25%. In addition, the Company will pay a monthly “maintenance” fee of 0.6% of the outstanding daily loan balance (an equivalent annual fee of 7.2%), and an annual commitment fee of 1% of the amount of the credit facility. Amounts outstanding under the agreement will be secured by all of the Company’s assets other than real estate. In March 2011, the credit limit was increased to $3 million based on 80% of acceptable accounts receivable, as defined. As of March 31, 2011, the Company owed $1.2 million under the credit agreement.

In August 2009 the Company entered into a 15 month credit agreement which provided up to $5 million of revolving credit based on 80% of acceptable accounts receivables, as defined. The remaining $225,000 outstanding balance at December 31, 2010 was paid in January 2011 and the agreement was terminated.

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 which was 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. On March 30, 2007, the Company entered into an additional $2.5 million term loan agreement. The term loans were repaid in full in January 2011.

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, which security interest was subordinate to that of the $3 million credit agreement and other term and mortgage debt. The note is due in 48 monthly installments of $20,000 (including interest at 3% per annum) and can be prepaid at any time. 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. As of March 31, 2011, $0.9 million remained outstanding under the note.

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. A $500,000 security deposit related to the lease has been recorded as a deposit in “other assets, net” in the Condensed Consolidated Balance Sheet as of March 31, 2011.

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 March 31, 2011:

Land	$	3,985,000
Buildings		9,247,000
Machinery and equipment		36,760,000
Leasehold improvements		6,843,000
Computer equipment		7,370,000
Equipment under capital lease		819,000
Office equipment, CIP		613,000
Less accumulated depreciation and amortization		(47,959,000	)
Property and equipment, net	$	17,678,000

NOTE 4- COMMITMENTS AND 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 alleged 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 claimed 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 alleged 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 did 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. DGFC also received the right to sell the shares to the Company’s Chief Executive Officer for $500,000 on the six-month anniversary date of the agreement. As of March 31, 2011 the Company had issued the 250,000 shares of common stock to DGFC and accrued approximately $0.2 million of estimated legal and other costs associated with the settlement.

In connection with the settlement, the Company indemnified its Chief Executive Officer against possible losses should DGFC exercise its right to put the stock to the Chief Executive Officer, 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. Alternatively, the Chief Executive Officer had the right to sell the 250,000 shares to the Company for $500,000. The fair value of the Chief Executive Officer’s put option recorded in other accrued expenses in December 2010 was $280,000, with $95,000 expensed in the quarter ended December 31, 2010, $57,500 recorded in the quarter ended March 31, 2011, and $152,500 recorded in the nine months ended March 31, 2011, as a component of other income (loss) in the Condensed Consolidated Statement of Operations.

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.

In April 2011, the Chief Executive Officer purchased from DGFC the put shares for $500,000, and the Company purchased from the Chief Executive Officer the 250,000 shares for $500,000 and immediately canceled the shares. In the quarter ended March 31, 2011, the fair value of the put option recorded in accrued expenses was increased from $280,000 to $338,000, with the $58,000 difference being expensed in the quarter as a component of other income (loss). The total put option expense for the nine months ended March 31, 2011 was $153,000.

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

NOTE 5- INCOME TAXES

The Company reviewed its ASC 740-10 documentation for the periods through March 31, 2011 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 March 31, 2011. Based on Company’s review of its tax positions as of March 31, 2011, 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 March 31, 2011, the Company's net deferred tax assets were nil. No tax benefit was recorded during the three and nine month periods ended March 31, 2011 because future realizability of such benefit was not considered to be more likely than not. At March 31, 2011, the Company had a gross deferred tax asset of $10.0 million, and a corresponding valuation allowance of $10.0 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.

The Company was notified by the Franchise Tax Board in April 2011 of its intent to audit California tax returns for the fiscal years ended June 30, 2008 and 2009.

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.

In November 2010, the shareholders approved the 2010 Incentive Plan (the “2010 Plan”). The 2010 Plan provides for the award of options to purchase up to 4,000,000 shares of common stock, appreciation rights and restricted stock and performance awards.

Under the 2010 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 and nine month periods ended March 31, 2011 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 and nine month periods ended March 31, 2011 was $76,000 and $232,000, respectively.

The Company’s determination of fair value of share-based payment awards to employees and directors on the date of grant uses the Black-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 each of the quarter and nine month periods ended March 31, 2010 and 2011, the Company granted awards of stock options as follows:

	2007 Plan				2010 Plan
	Options		Exercise		Options		Exercise
	Granted		Price per Share		Granted		Price per Share
Quarter ended March 31, 2010		316,500	$	1.29		-		-
Quarter ended March 31, 2011		329,800	$	0.86		222,200	$	0.86
Nine months ended March 31, 2010		346,500	$	1.27		-		-
Nine months ended March 31, 2011		374,800	$	0.89		222,200	$	0.86

The estimated fair value of all awards granted during the nine-month 2011 period was $0.3 million. For the 2011 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	2.33	%
Expected term (years)	5.0
Volatility	67	%
Expected annual dividends	-

The following table summarizes the status of the 2007 and 2010 Plan as of March 31, 2011:

	2007 Plan		2010 Plan		Total
Options originally available		2,000,000		4,000,000		6,000,000
Stock options outstanding		1,964,800		222,200		2,187,000
Options available for grant		23,200		3,777,800		3,801,000

Transactions involving stock options are summarized as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Balance at June 30, 2010		1,631,075		$	1.58	$	0.71

Granted		15,000			1.27		0.66
Exercised		-			-		-
Cancelled		(12,825	)		2.06		1.06

Balance at September 30, 2010		1,633,250		$	1.56	$	0.71
Granted		30,000			1.15		0.65
Exercised		-			-		-
Cancelled		(5,125	)		1.54		0.68

Balance at December 31, 2010		1,658,125		$	1.56	$	0.71
Granted		552,000			0.86		0.49
Exercised		-			-		-
Cancelled		(23,125	)		1.40		0.62

Balance at March 31, 2011		2,187,000			1.39		0.66

As of March 31, 2011, the total compensation costs related to non-vested awards yet to be expensed was approximately $0.6 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 March 31, 2011 were as follows:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Intrinsic Value
As of March 31, 2011

Employees – Outstanding		1,982,000	$	1.38		3.14	$	-
Employees – Expected to Vest		1,860,755	$	1.38		3.12	$	-
Employees – Exercisable		858,250	$	1.66		2.26	$	-

Non-Employees – Outstanding		205,000	$	1.49		2.84	$	-
Non-Employees – Expected to vest		205,000	$	1.49		2.84	$	-
Non-Employees – Exercisable		165,000	$	1.46		2.84	$	-

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 March 31, 2011, 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 March 31, 2011 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	968	1.9 Years	$	1.79	729	$	1.79
$	1.37	30	2.6 Years	$	1.37	30	$	1.37
$	1.29	308	3.9 Years	$	1.29	78	$	1.29
$	1.27	15	4.5 Years	$	1.27	-	$	1.27
$	1.20	257	2.9 Years	$	1.20	126	$	1.20
$	1.15	30	4.6 Years	$	1.15	30	$	1.15
$	1.05	30	3.6 Years	$	1.05	30	$	1.05
$	0.86	549	4.8 Years	$	0.86	-	$	0.86

In addition to the above 2007 Plan, the Company issued 10,000 shares of restricted stock during fiscal year ended June 30, 2010 with a weighted average fair value of $0.58 per share.

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 nine months ended March 31, 2011.

NOTE 8- SHAREHOLDER’S EQUITY

The following table analyzes the components of shareholders’ equity from June 30, 2010 to March 31, 2011 (in thousands):

	Common Stock			Paid-in Capital		Retained (Deficit)			Shareholders’ Equity

Balance, June 30, 2010	$	21,542		$	9,808	$	(19,520	)	$	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			9,875		(21,534	)		10,383

Stock issuance reclassification		(185	)							(185	)
Stock-based compensation expense					89					89
Net income (loss)		-			-		(589	)		(589	)
Balance, December 31, 2010		21,857			9,964		(22,123	)		9,698

Stock-based compensation expense		-			76		-			76
Net income (loss)		-			-		212			212
Balance, March 31, 2011	$	21,857		$	10,040	$	(21,911	)	$	9,986

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 and nine month periods ended March 31, 2011 or 2010.

NOTE 10- SEGMENT INFORMATION

In its operation of the business, management reviews certain financial information, including segmented internal profit and loss statements prepared on a basis consistent with U.S. generally accepted accounting principles. Our two segments are Point.360 and Movie>Q. The two segments discussed in this analysis are presented in the way we internally managed and monitored performance for the nine months ended March 31, 2011 and 2010. Allocations for internal resources were made for the nine months ended March 31, 2011 and 2010. The Movie>Q segment tracks certain assets separately, and all others are recorded in the Point.360 segment for internal reporting presentations. Cash was not segregated between the two segments but retained in the Point.360 segment.

The types of services provided by each segment are summarized below:

Point.360 - The Point.360 segment 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. Point.360 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 segment’s interconnected facilities provide service coverage to all major U.S. media centers. Clients include major motion picture studios and independent producers.

Movie>Q - The Movie>Q segment rents and sells DVDs and video games directly to consumers though its retail stores. 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.

Segment revenues, operating loss and total assets were as follows (in thousands):

Revenue	Three Months Ended March 31,				Nine Months Ended March 31,
	2011		2010		2011		2010
Point.360	$	9,109	$	9,511	$	26,178	$	29,184
Movie>Q		148		-		421		-
Consolidated revenue	$	9,257	$	9,511	$	26,599	$	29,184

Operating loss(1)	Three Months Ended March 31,						Nine Months Ended March 31,
	2011			2010			2011			2010
Point.360	$	187		$	(1,237	)	$	(1,501	)	$	(3,788	)
Movie>Q		(842	)		-			(1,602	)		-
Operating loss	$	(655	)	$	(1,237	)	$	(3,103	)	$	(3,788	)

	June 30,		March 31,
Total Assets	2010		2011
Point.360	$	28,413	$	26,211
Movie>Q		2,731		2,170
Consolidated assets	$	31,144	$	28,381

(1) Includes R&D expenses related to the Movie>Q project

NOTE 11- SETTLEMENT

In March 2011, the Company and HCVT, the Company’s tax advisors, entered into a Release and Settlement Agreement, pursuant to which the Company would receive $1 million for the Company’s complete release of any claim against HCVT concerning HCVT’s representation relating to a litigation matter. The settlement amount is included in Prepaid Expenses and Other Current Assets in the Condensed Consolidated Balance Sheet and in Other Income in the Condensed Consolidated Statements of Operations as of, and for the quarter ended, March 31, 2011. The $1 million was received in April 2011.

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.

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 85% 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 nine months ended March 31, 2011, 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 established a new $3 million credit facility.

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 March 31, 2011 Compared to Three Months Ended March 31, 2010

Revenues. Revenues were $9.3 million for the three months ended March 31, 2011, compared to $9.5 million for the three months ended March 31, 2010. Approximately $0.7 million of the decline in revenues in the current quarter was due to the move of the operations of one of our Hollywood facilities (“Highland”) to another Company location. We expect to sustain the current revenue levels at the combined West Los Angeles location. Content storage revenues for the current quarter were reduced by $0.2 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 $0.3 million of revenue in the prior year quarter. These revenue shortfalls were offset by increased sales of $0.7 million at our Burbank operations. Although physical moves adversely affected revenues, 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. 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 March 31, 2011, total costs of services were 65% of sales compared to 74% in the prior year. Our combined West Los Angeles operational costs were reduced by $0.6 million due to lower sales. Additional cost reductions of $0.5 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. In the foreseeable future, the cost of tape stock used in our operations is expected to increase due to the March 2011 Japan earthquake. The resulting damage to our tape suppliers’ production facilities has caused a disruption in the supply of some tape types. We cannot predict how long the interruption will continue, or the impact on pricing or customer ordering patterns resulting from the disaster.

Gross Profit. In the three months ended March 31, 2011, gross margin was 35% of sales, compared to 26% 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.

Selling, General and Administrative Expense. SG&A expense was $3.2 million (35% of sales) in the three months ended March 31, 2011 as compared to $3.4 million (35% of sales) in the same period last year. SG&A personnel costs decreased $0.3 million in the current period when compared to last year’s period.

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 up to 10,000 DVDs for rent or sale via a software-controlled automated inventory management (AIM) system contained in 1,200 to 1,600 square feet of retail space for each store. As of March 31, 2011, three Movie>Q stores were completed. Expenses associated with R&D activities were $18,000 for the quarter ended March 31, 2011.

Impairment of Long Lived Assets. During the period ended March 31, 2011, the Movie>Q R&D proof of concept was completed. With the selection of the AIM system as the operative DVD distribution method, we determined that the kiosk assets were impaired for accounting purposes, resulting in an impairment charge of $684,000.

Operating (Loss). Operating losses were $0.7 million in the fiscal 2011 period compared to $1.2 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, a one-time $1.0 million claim settlement, and a gain on sale of fixed assets, offset by the change in fair value relating to the put option agreement.

Net Loss. Net income was $0.2 million in the fiscal 2011 period, compared to a net loss of $1.4 million in the 2010 period.

Nine Months Ended March 31, 2011 Compared to Nine Months Ended March 31, 2010

Revenues. Revenues were $26.6 million for the nine months ended March 31, 2011, compared to $29.2 million for the nine months ended March 31, 2010. Approximately $2.7 million of the decline in revenues in the current period were due to the move of the operations of one of our Hollywood facilities (“Highland”) to another Company location. We expect to sustain recent revenue levels at the combined West Los Angeles facility. Content storage revenues for the current period were reduced by $0.8 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 $0.8 million of revenue in the prior year period. Although physical moves adversely affected revenues, 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 Burbank locations’ revenues increased $1.5 million over the prior year period. 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 nine months ended March 31, 2011, total costs of services were 69% of sales compared to 79% in the prior year. Our combined West Los Angeles operational costs were reduced by $1.7 million due to lower sales. Additional cost reductions of $1.4 million were realized in the current period 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. In the foreseeable future, the cost of tape stock used in our operations is expected to increase due to the March 2011 Japan earthquake. The resulting damage to our tape suppliers’ production facilities has caused a disruption in the supply of some tape types. We cannot predict how long the interruption will continue, or the impact on pricing or customer ordering patterns resulting from the disaster.

Gross Profit. In the nine months ended March 31, 2011, gross margin was 31% of sales, compared to 27% 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.

Selling, General and Administrative Expense. SG&A expense was $10.2 million (38% of sales) in the nine months ended March 31, 2011 as compared to $10.8 million (37% of sales) in the same period last year. SG&A personnel costs decreased $0.6 million in the current period when compared to last year’s period.

Operating (Loss). Operating losses were $3.1 million in the fiscal 2011 period compared to $3.8 million in the fiscal 2010 period.

Interest Expense. Net interest expense was $0.6 million in the 2011 and $0.7 million in the 2010 period.

Other Income. Other income represents principally sublease income, a one-time $1.0 million lawsuit settlement, and a gain on sale of fixed assets, offset by the change in fair value relating to the put option agreement.

Net Loss. Net losses were $2.4 million and $4.1 million in 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. On March 30, 2007, the Company entered into an additional $2.5 million term loan agreement. Both loans were repaid in full in January 2011.

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, which security interest was subordinated to that of the $3 million credit agreement and other term and mortgage debt. The note is due in 48 monthly installments of $20,000 plus interest at 3% per annum and can be prepaid at any time. 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. As of March 31, 2011, $0.9 million remained outstanding under the note.

In March 2011, the Company received $1 million in settlement of a claim, and prepaid $333,000 of the above $1 million note.

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 15 month credit agreement which provided up to $5 million of revolving credit based on 80% of acceptable accounts receivables, as defined. The remaining $225,000 outstanding balance at December 31, 2010 under the credit agreement was paid in January 2011, and the agreement was terminated.

The following table summarizes the March 31, 2011 amounts outstanding under our line of credit, note payable, and term (including capital lease obligations) and mortgage loans:

Line of credit	$	1,200,000
Current portion of notes payable, capital leases and mortgages		500,000
Long-term portion of notes payable, capital leases and mortgages		10,188,000

Total	$	11,888,000

The Company’s cash balance increased from $249,000 on July 1, 2010 to $256,000 on March 31, 2011, due to the following:

Balance July 1, 2010	$	249,000
Line of credit borrowings		1,200,000
Increase in notes payable		957,000
Capital expenditures for equipment		(957,000	)
Debt principal and interest payments		(1,113,000	)
Income tax refund (including interest)		1,553,000
Research and development costs		(352,000	)
Repayment of current liabilities		(1,829,000	)
Changes in other assets and liabilities		548,000
Balance March 31, 2011	$	256,000

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 nine months 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 69 days to 77 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.

As of March 31, 2011, 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. No further rent was due on the closed New York facility after December 2010.

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. Renovations have been postponed for the foreseeable future.

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 March 31, 2011 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	$	10,265,000	$	287,000	$	616,000	$	394,000	$	8,968,000
Long Term Debt Interest Obligations (1)		8,901,000		691,000		1,323,000		1,216,000		5,671,000
Capital Lease Obligations		422,000		213,000		209,000		-		-
Capital Lease Interest Obligations		38,000		27,000		11,000		-		-
Operating Lease Obligations		16,664,000		2,564,000		3,174,000		3,138,000		7,788,000
Line of Credit Obligations		1,200,000		1,200,000		-		-		-
Total	$	37,490,000	$	4,982,000	$	5,333,000	$	4,748,000	$	22,427,000

(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 $1.0 million in Fiscal 2011 to test the concept. We finalized the proof-of-concept in March 2011. Further expansion of Movie>Q will require additional funding, the amount of which will depend on the number of stores to be opened.

In September 2010, the Company entered into a settlement agreement with respect to a lawsuit (see Note 4 of Notes to Condensed Consolidated Financial Statements (Unaudited) in this Form 10-Q). In April 2011, the Company made a $500,000 cash payment pursuant to a put agreement associated with the settlement.

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, and a $1 million settlement of a claim in April 2011. 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 line of credit and term loans. In the current economic climate, additional financing may not be 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.

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.

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 $17.7 million as of March 31, 2011.

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 March 31, 2011, 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 deferred tax assets are fully reserved at March 31, 2011.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk. The Company had borrowings of $11.9 million on March 31, 2011 under line of credit, note payable and mortgage agreements. The line of credit and one mortgage loan were subject to variable interest rates. The weighted average interest rate paid during the first nine months of fiscal 2011 was 7.0%. For variable rate debt outstanding at March 31, 2011, a .25% increase in interest rates will increase annual interest expense by approximately $3,000. Amounts outstanding or that may become outstanding under the revolving credit facility provide for interest at the banks’ prime rate plus 9.2% (12.45% as of March 31, 2011). The Company’s market risk exposure with respect to financial instruments is to changes in the prime rate.

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 March 31, 2011.

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 March 31, 2011 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:

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.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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. After several hearings, the Court did not find Point.360 to be in contempt or refer the matter to the U.S. Attorney’s Office, but instead appointed a special master to further investigate certain of DGFC’s allegations. The Company believes it has substantially performed its obligations under the settlement agreement and is fully cooperating with the special master’s investigation. Potential liability related to the outcome of the investigation cannot be determined at this time. The Company has accrued estimated legal fees associated with this action.

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.

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

2010 Incentive Plan of Point.360 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on November 18, 2010).

10.2

Loan and Security Agreement dated January 14, 2011 between the Company and Crestmark Bank (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on January 14, 2011).

10.3

Promissory Note dated January 14, 2011 of the Company to Crestmark Bank (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Company on January 14, 2011).

10.4

Amended and Restated Promissory Note dated March 7, 2011 of the Company to Crestmark Bank (incorporated by refrence to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on March 8, 2011).

10.5

Amendment No. 1 to Schedule to Loan and Security Agreement dated March 7, 2011 between the Company and Crestmark Bank (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on March 8, 2011).

10.6

Release and Settlement Agreement dated March 8, 2011 between the Company and Holthouse, Carlin & Van Trigt LLP.

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: May 13, 2011	BY:	/s/ Alan R. Steel
		Alan R. Steel
		Executive Vice President,
		Finance and Administration
		(duly authorized officer and principal financial officer)

Date: May 13, 2011	/s/ Haig S. Bagerdjian
	Haig S. Bagerdjian
	Chairman of the Board of Directors,
	President and Chief Executive Officer

/s/ Haig S. Bagerdjian
Haig S. Bagerdjian
Chief Executive Officer
May 13, 2011

/s/ Alan R. Steel
Alan R. Steel
Chief Financial Officer
May 13, 2011