SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2001

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-21917
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POINT.360
(Exact name of registrant as specified in its charter)

California 95-4272619
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

7083 Hollywood Boulevard, Suite 200, Hollywood, CA 90028
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (323) 957-7990

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

Securities registered pursuant to Section 12(g) of the Act
Common Stock, no par value.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $13,797,000 on March 14, 2002 based upon the
closing price of such stock on that date. As of March 14, 2002, there were
8,992,806 shares of Common Stock outstanding.

Total number of pages in this report: 42

This Annual Report on Form 10-K consists of 49 pages, including exhibits. The
exhibit index is on page 37.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement are incorporated by
reference in Part III of this report. The definitive proxy statement will be
filed no later than 120 days after the close of the Company's fiscal year.

PART I

ITEM 1. BUSINESS

GENERAL

Point.360 ("Point.360" or the "Company") is a leading integrated media
management services company providing film, video and audio post production,
archival, duplication and distribution services to motion picture studios,
television networks, advertising agencies, independent production companies and
global companies. The Company provides the services necessary to edit, master,
reformat, archive and ultimately distribute its clients' audio and video
content, including television programming, feature films, spot advertising and
movie trailers.

The Company provides worldwide electronic distribution, using fiber
optics, satellites and the Internet. The Company delivers commercials, movie
trailers, electronic press kits, infomercials and syndicated programming, by
both physical and electronic means, to thousands of broadcast outlets worldwide.

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

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

The Company was incorporated in California in 1990. The Company's
executive offices are located at 7083 Hollywood Boulevard, Hollywood, California
90028, and its telephone number is (323) 957-7990.

MARKETS

The Company derives revenues primarily from (i) the entertainment
industry, consisting of major and independent motion picture and television
studios, cable television program suppliers and television program syndicators,
and (ii) the advertising industry, consisting of advertising agencies and
corporate advertisers. On a more limited basis, the Company also services
national television networks, local television stations, corporate or
instructional video providers, infomercial advertisers and educational
institutions.

ENTERTAINMENT INDUSTRY. The entertainment industry creates motion pictures,
television programming, and interactive multimedia content for distribution
through theatrical exhibition, home video, pay and basic cable television,
direct-to-home, private cable, broadcast television, on-line services and video
games. Content is released into a "first-run" distribution channel, and later
into one or more additional channels or media. In addition to newly produced
content, film and television libraries may be released repeatedly into
distribution. Entertainment content produced in the United States is exported
and is in increasingly high demand internationally. The Company believes that
several trends in the entertainment industry have and will continue to have a
positive impact on the Company's business. These trends include growth in
worldwide demand for original entertainment content, the development of new
markets for existing content libraries, increased demand for innovation and
creative quality in domestic and foreign markets, and wider application of
digital technologies for content manipulation and distribution, including the
emergence of new distribution channels.

ADVERTISING INDUSTRY. The advertising industry distributes video and audio
commercials, or spots, to radio and television broadcast outlets worldwide.
Advertising content is developed either by the originating company or in
conjunction with an advertising agency. The Company receives orders with
specific routing and timing instructions provided by the customer. These orders
are then entered into the Company's computer system and scheduled for electronic
or physical delivery. When a video spot is received, the Company's quality
control personnel inspect the video to ensure that it meets customer
specifications and then initiate the sequence to distribute the video to the
designated television stations either electronically, over fiber optic lines
and/or satellite, or via the most suitable package carrier. The Company believes
that the growth in the number of video advertising outlets, driven by expansion
in the number of broadcast, cable, Internet and satellite channels worldwide,
will have a positive impact on the Company's businesses.

VALUE-ADDED SERVICES

The Company maintains video and audio post-production and editing
facilities as components of its full service, value-added approach to its
customers. The following summarizes the value-added post-production services
that the Company provides to its customers:

FILM-TO-TAPE TRANSFER. Substantially all film content ultimately is distributed
to the home video, broadcast, cable or pay-per-view television markets,
requiring that film images be transferred electronically to a video format. Each
frame must be color corrected and adapted to the size and aspect ratio of a
television screen in order to ensure the highest level of conformity to the
original film version. The Company transfers film to videotape using Spirit,
URSA and Cintel MK-3 telecine equipment and DaVinci(R) digital color correction
systems. In 2000, the Company added high definition television ("HDTV") services
to this product line. The remastering of studio film and television libraries to
this new broadcast standard has begun to contribute to the growth of the
Company's film transfer business, as well as affiliated services such as foreign
language mastering, duplication and distribution.

VIDEO EDITING. The Company provides digital editing services in Hollywood,
Burbank and West Los Angeles. The editing suites are equipped with (i)
state-of-the-art digital editing equipment, including the Avid(R) 9000, that
provides precise and repeatable electronic transfer of video and/or audio
information from one or more sources to a new master video and (ii) large
production switchers to effect complex transitions from source to source while
simultaneously inserting titles and/or digital effects over background video.
Video is edited into completed programs such as television shows, infomercials,
commercials, movie trailers, electronic press kits, specials, and corporate and
educational presentations.

STANDARDS CONVERSION. Throughout the world there are several different
broadcasting "standards" in use. To permit a program recorded in one standard to
be broadcast in another, it is necessary for the recorded program to be
converted to the applicable standard. This process involves changing the number
of video lines per frame, the number of frames per second, and the color system.
The Company is able to convert video between all international formats,
including NTSC, PAL and SECAM. The Company's competitive advantages in this
service line include its state-of-the-art systems and its detailed knowledge of
the international markets with respect to quality-control requirements and
technical specifications.

BROADCAST ENCODING. The Company provides encoding services for tracking
broadcast airplay of spots or television programming. Using a process called
VEIL encoding, a code is placed within the video portion of an advertisement or
an electronic press kit. Such codes can be monitored from standard television
broadcasts to determine which advertisements or portions of electronic press
kits are shown on or during specific television programs, providing customers
direct feedback on allotted air time. The Company provides VEIL encoding
services for a number of its motion picture studio clients to enable them to
customize their promotional material. The Company also provides ICE encoding
services which enable it to place codes within the audio portion of a video,
thereby enhancing the overall quality of the encoded video.

AUDIO POST-PRODUCTION. Through its facilities in Burbank, Hollywood and West Los
Angeles, the Company digitally edits and creates sound effects, assists in
replacing dialog and re-records audio elements for integration with film and
video elements. The Company designs sound effects to give life to the visual
images with a library of sound effects. Dialog replacement is sometimes required
to improve quality, replace lost dialog or eliminate extraneous noise from the
original recording. Re-recording combines sound effects, dialog, music and
laughter or applause to complete the final product. In addition, the
re-recording process allows the enhancement of the listening experience by
adding specialized sound treatments, such as stereo, Dolby Digital(R), SDDS(R),
THX(R) and Surround Sound(R).

AUDIO LAYBACK. Audio layback is the process of creating duplicate videotape
masters with sound tracks that are different from the original recorded master
sound track. Content owners selling their assets in foreign markets require the
replacement of dialog with voices speaking local languages. In some cases, all
of the audio elements, including dialog, sound effects, music and laughs, must
be recreated, remixed and synchronized with the original videotape. Audio
sources are premixed foreign language tracks or tracks that contain music and
effects only. The latter is used to make a final videotape product that will be
sent to a foreign country to permit addition of a foreign dialogue track to the
existing music and effects track.

FOREIGN LANGUAGE MASTERING. Programming designed for distribution in markets
other than those for which it was originally produced is prepared for export
through language translation and either subtitling or voice dubbing. The Company
provides dubbed language versioning with an audio layback and conform service
that supports various audio and videotape formats to create an international
language-specific master videotape. The Company's Burbank facility also creates
music and effects tracks from programming shot before an audience to prepare
television sitcoms for dialog recording and international distribution.

SYNDICATION. The Company offers a broad range of technical services to domestic
and international programmers. The Company services the basic and premium cable,
broadcast syndication and direct-to-home market segments by providing the
facilities and services necessary to assemble and distribute programming via
satellite to viewers in the United States, Canada and Europe. The Company
provides facilities and services for the delivery of syndicated television
programming in the United States and Canada. The Company's customer base
consists of the major studios and independent distributors offering network
programming, world-wide independent content owners offering niche market
programming, and pay-per-view services marketing movies and special events to
the cable industry and direct-to-home viewers. Broadcast and syndication
operations are conducted in Hollywood and West Los Angeles.

ARCHIVAL SERVICES. The Company currently stores approximately three million
videotape and film elements in a protected environment. The storage and handling
of videotape and film elements require specialized security and environmental
control procedures. The Company performs secure management archival systems in
its Burbank, Hollywood, West Los Angeles and other locations. The Company offers
on-line access to archival information for advertising clients, and may offer
this service to other clients in the future.

DISTRIBUTION NETWORK

The Company operates a full service distribution network providing its
customers with reliable, timely and high quality distribution services. The
Company's historical customer base consists of motion picture and television
studios and post-production facilities located primarily in the Los Angeles
area. In 1997, the Company acquired Woodholly Productions ("Woodholly"),
Multi-Media Services, Inc. ("Multi-Media"), Video-It, Inc. ("Video-It") and Fast
Forward, Inc. ("Fast Forward"), providing it with a more diversified customer
base and facilities in New York, Chicago, San Francisco and additional
facilities in Los Angeles. In 1998, the Company acquired The Dub House, Inc.
(the "Dub House"), All Post, Inc. ("All Post"), and Dubs, Inc. ("Dubs"), which
substantially expanded its market share in Los Angeles. In 2000, the Company
acquired Creative Digital, Inc. ("Creative Digital").

Commercials, trailers, electronic press kits and related distribution
instructions are typically collected at one of the Company's regional facilities
and are processed locally or transmitted to another regional facility for
processing. Orders are routinely received into the evening hours for delivery
the next morning. The Company has the ability to process customer orders from
receipt to transmission in less than one hour. Customer orders that require
immediate, multiple deliveries in remote markets are often delivered
electronically to and serviced by third parties with duplication and delivery
services in such markets. The Company provides the advantage of being able to
service customers from both of its primary markets (entertainment and
advertising) in all of its facilities to achieve the most efficient project
turnaround. The Company's network operates 24 hours a day.

For electronic distribution, a video master is digitized and delivered
by fiber optic, Internet, ISDN or satellite transmission to television stations
equipped to receive such transmissions. The Company currently derives a small
percentage of its revenues from electronic deliveries and anticipates that this
percentage will increase as such technologies become more widely adopted.

The Company intends to add new methods of distribution as technologies
become both standardized and cost-effective. The Company currently operates
facilities in Los Angeles (five locations), New York, Chicago, Dallas and San
Francisco. By capitalizing on electronic technologies to link instantaneously
all of the Company's facilities, the Company is able to optimize delivery, thus
extending the deadline for same- or next-day delivery of time-sensitive
material.

As the Company continues to develop and acquire facilities in new
markets, its network enables it to maximize the usage of its network-wide
capacity by instantaneously transmitting video content to facilities with
available capacity. The Company's network and facilities are designed to serve,
cost-effectively, the time-sensitive distribution needs of its clients.
Management believes that the Company's success is based on its strong customer
relationships that are maintained through the reliability, quality and
cost-effectiveness of its services, and its extended deadline for processing
customer orders.

NEW MARKETS

The Company believes that the development of its network and its array
of value-added services will provide the Company with the opportunity to enter
or significantly increase its presence in several new or expanding markets.

INTERNATIONAL. The Company currently provides video duplication services for
suppliers to international markets. Through the Woodholly acquisition, the
Company acquired and subsequently has leveraged this capability by offering
access to international markets to its entire customer base. Further, the
Company believes that electronic distribution methods will facilitate its
expansion into the international distribution arena as such technologies become
standardized and cost-effective. In addition, the Company believes that the
growth in the distribution of domestic content into international markets will
create increased demand for value-added services currently provided by the
Company such as standards conversion and audio and digital mastering.

HIGH DEFINITION TELEVISION (HDTV). The Company is focused on capitalizing on
opportunities created by emerging industry trends such as the emergence of
digital television and its more advanced variant, high-definition television.
HDTV has quickly become the mastering standard for domestic content providers.
The Company believes that the aggressive timetable associated with such
conversion, which has resulted both from mandates by the Federal Communications
Commission (the "FCC") for digital television and high-definition television as
well as competitive forces in the marketplace, is likely to accelerate the rate
of increase in the demand for these services. The Company opened a
state-of-the-art HDTV center at its Burbank, California, facility in 2000.

DVD AUTHORING. Digital formats, such as DVD, have the potential to overtake VHS
videocassettes in the home video market. Industry research shows that DVD sales
will surpass VHS videocassettes by 2003. The Company believes that there are
significant opportunities in this market. With the increasing rate of conversion
of existing analog libraries, as well as new content being mastered to digital
formats, we believe that the Company has positioned itself well to provide
value-added services to new and existing clients. The Company has made capital
investments to expand and upgrade its current DVD and digital compression
operations in anticipation of the increasing demand for DVD and video encoding
services.

SALES AND MARKETING

The Company markets its services through a combination of industry
referrals, formal advertising, trade show participation, special client events,
and its Internet website. While the Company relies primarily on its reputation
and business contacts within the industry for the marketing of its services, the
Company also maintains a direct sales force to communicate the capabilities and
competitive advantages of the Company's services to potential new customers. In
addition, the Company's sales force solicits corporate advertisers who may be in
a position to influence agencies in directing deliveries through the Company.
The Company currently has sales personnel located in Los Angeles, San Francisco,
Chicago and New York. The Company's marketing programs are directed toward
communicating its unique capabilities and establishing itself as the predominant
value-added distribution network for the motion picture and advertising
industries.

In addition to its traditional sales efforts directed at those
individuals responsible for placing orders with the Company's facilities, the
Company also strives to negotiate "preferred vendor" relationships with its
major customers. Through this process, the Company negotiates discounted rates
with large volume clients in return for being promoted within the client's
organization as an established and accepted vendor. This selection process tends
to favor larger service providers such as the Company that (i) offer lower
prices through scale economies; (ii) have the capacity to handle large orders
without outsourcing to other vendors; and (iii) can offer a strategic
partnership on technological and other industry-specific issues. The Company
negotiates such agreements periodically with major entertainment studios and
national broadcast networks.

CUSTOMERS

Since its inception in 1990, the Company has added customers and
increased its sales through acquisitions and by delivering a favorable mix of
reliability, timeliness, quality and price. The integration of the Company's
regional facilities has given its customers a time advantage in the ability to
deliver broadcast quality material. The Company markets its services to major
and independent motion picture and television production companies, advertising
agencies, television program suppliers and, on a more limited basis, national
television networks, infomercial providers, local television stations,
television program syndicators, corporations and educational institutions. The
Company's motion picture clients include Disney, Sony Pictures Entertainment,
Twentieth Century Fox, Universal Studios, Warner Bros., Metro-Goldwyn-Mayer and
Paramount Pictures. The Company's advertising agency customers include
TBWA/Chiat Day, Young & Rubicam and Saatchi & Saatchi.

The Company solicits the motion picture and television industries,
advertisers and their agencies to generate revenues. In the year ended December
31, 2001, the seven major motion picture studios accounted for approximately 34%
of the Company's revenues. No single customer accounted for greater than 10% of
the Company's revenues for the year ended December 31, 2001.

The Company generally does not have exclusive service agreements with
its clients. Because clients generally do not make arrangements with the Company
until shortly before its facilities and services are required, the Company
usually does not have any significant backlog of service orders. The Company's
services are generally offered on an hourly or per unit basis based on volume.

CUSTOMER SERVICE

The Company believes it has built its strong reputation in the market
with a commitment to customer service. The Company receives customer orders via
courier services, telephone, telecopier and the Internet. The customer service
staff develops strong relationships with clients within the studios and
advertising agencies and is trained to emphasize the Company's ability to
confirm delivery, meet difficult delivery time frames and provide reliable and
cost-effective service. Several studios are customers because of the Company's
ability to meet often changing or rush delivery schedules.

The Company has a customer service staff of approximately 95 people, at
least one member of which is available 24 hours a day. This staff serves as a
single point of problem resolution and supports not only the Company's
customers, but also the television stations and cable systems to which the
Company delivers.

COMPETITION

The video duplication and distribution industry is a highly competitive
service-oriented business. Certain competitors (both independent companies and
divisions of large companies) provide all or most of the services provided by
the Company, while others specialize in one or several of these services.
Substantially all of the Company's competitors have a presence in the Los
Angeles area, which is currently the largest market for the Company's services.
Due to the current and anticipated future demand for video duplication and
distribution services in the Los Angeles area, the Company believes that both
existing and new competitors may expand or establish video service facilities in
this area.

The Company believes that it maintains a competitive position in its
market by virtue of the quality and scope of the services it provides, and its
ability to provide timely and accurate delivery of these services. The Company
believes that prices for its services are competitive within its industry,
although some competitors may offer certain of their services at lower rates
than the Company.

The principal competitive factors affecting this market are reliability,
timeliness, quality and price. The Company competes with a variety of
duplication and distribution firms, certain post-production companies and, to a
lesser extent, the in-house operations of major motion picture studios and ad
agencies. Some of these competitors have long-standing ties to clients that will
be difficult for the Company to change. Several companies have systems for
delivering video content electronically. Moreover, some of these firms, such as
Vyvx (a subsidiary of the Williams Companies), Digital Generation Systems, Inc.,
Liberty Live Wire and other post-production companies may have greater
financial, operational and marketing resources, and may have achieved a higher
level of brand recognition than the Company. As a result, there is no assurance
that the Company will be able to compete effectively against these competitors
merely on the basis of reliability, timeliness, quality, price or otherwise.

EMPLOYEES

The Company had 479 full-time employees as of December 31, 2001. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good.

ITEM 2. PROPERTIES

The Company currently leases all 16 of its facilities. Eight of these
facilities have production capabilities and/or sales activities, five are
storage vaults, one is used as the Company's corporate offices and two smaller
facilities have been vacated. The lease terms expire at various dates from June
2002 to October 2008. The following table sets forth the location and
approximate square footage of the Company's properties as of December 31, 2001:

SQUARE
LOCATION FOOTAGE

Hollywood, CA................................................ 9,500
Hollywood, CA................................................ 45,000
Hollywood, CA................................................ 4,000
Hollywood, CA................................................ 7,200
Hollywood, CA................................................ 13,000
Hollywood, CA................................................ 27,000
Hollywood, CA................................................ 11,000
Burbank, CA.................................................. 32,000
Burbank, CA.................................................. 10,000
North Hollywood, CA.......................................... 27,000
Los Angeles, CA.............................................. 4,000
Santa Monica, CA............................................. 13,400
San Francisco, CA............................................ 10,200
Chicago, IL.................................................. 12,200
New York, NY................................................. 9,000
Dallas, TX................................................... 11,300

ITEM 3. LEGAL PROCEEDINGS

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

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

No matters were submitted to the Company's stockholders for a vote
during the fourth quarter of the fiscal year covered by this report.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's Common Stock is traded on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") National Market
("NNM") under the symbol PTSX. The following table sets forth, for the periods
indicated, the high and low closing bid price per share for the Common Stock.

COMMON STOCK
------------
LOW HIGH
--- ----

YEAR ENDED DECEMBER 31, 2001
First Quarter ......................... $1.25 $4.56
Second Quarter......................... .66 3.75
Third Quarter.......................... .64 3.35
Fourth Quarter......................... .46 1.39
YEAR ENDED DECEMBER 31, 2000
First Quarter ......................... $12.63 $14.50
Second Quarter......................... 6.19 14.08
Third Quarter.......................... 3.13 7.00
Fourth Quarter......................... 2.50 5.69

On March 14, 2002, the closing sale price of the Common Stock as reported on the
NNM was $1.95 per share. As of March 14, 2002, there were 1,017 holders of
record of the Common Stock.

DIVIDENDS

The Company did not pay dividends on its Common Stock during the years
ended December 31, 2000 or 2001. The Company's ability to pay dividends depends
upon limitations under applicable law and covenants under its bank agreements.
The Company currently does not intend to pay any dividends on its Common Stock
in the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following data, insofar as they relate to each of the years 1997 to
2001, have been derived from the Company's annual financial statements. This
information should be read in conjunction with the Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. All amounts are shown in
thousands, except per share data.

YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----

Statement of Income Data
Revenues........................................................ $ 40,772 $ 59,697 $ 78,248 $ 74,841 $ 69,628
Cost of goods sold.............................................. 25,381 36,902 47,685 45,894 46,864
--------- --------- --------- --------- ---------
Gross profit.................................................... 15,391 22,795 30,563 28,947 22,764
Selling, general and administrative expense..................... 9,253 13,201 18,473 21,994 20,872
--------- --------- --------- --------- ---------
Operating income ............................................... 6,138 9,594 12,090 6,953 1,892
Interest expense, net........................................... 68 976 2,147 2,889 3,070
Derivative fair value change (5) - - - - 508
Provision for (benefit from) income tax ........................ 2,379 3,577 4,340 1,814 (345)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item, adoption of
SAB 101 (2000) and FAS 133 (2001)(2)(5)....................... $ 3,691 $ 5,041 $ 5,603 $ 2,250 $ (1,341)
Extraordinary item (net of tax benefit of $168) (1)............. - - - (232)
Cumulative effect of adopting SAB 101 (2000)
and FAS 133 (2001)(2)(5)...................................... - - - (322) (247)
--------- --------- --------- --------- ---------
Net income (loss)............................................... $ 3,691 $ 5,041 $ 5,603 $ 1,696 $ (1,588)
========= ========= ========= ========= =========
Earnings (loss) per share:
Basic:
Income (loss) per share before extraordinary item,
adoption of SAB 101(2000) and FAS 133 (2001)(2)(5)............ $ 0.40 $ 0.52 $ 0.60 $ 0.24 $ (0.15)
Extraordinary item (1).......................................... - - - (0.03) -
Cumulative effect of adopting SAB 101 (2000)
and FAS 133 (2001)(2)(5)...................................... - - - (0.03) (0.03)
--------- --------- --------- --------- ---------
Net income (loss)............................................... $ 0.40 $ 0.52 $ 0.60 $ 0.18 $ (0.18)
========= ========= ========= ========= =========
Diluted:
Income (loss) per share before extraordinary item
and adoption of SAB 101....................................... $ 0.40 $ 0.51 $ 0.58 $ 0.24 $ (0.15)
Extraordinary item (1).......................................... - - - (0.03) -
Cumulative effect of adopting SAB 101 (2000)
and FAS 133 (2001)(2)(5)...................................... - - - (0.03) (0.03)
--------- --------- --------- --------- ---------
Net income (loss)............................................... $ 0.40 $ 0.51 $ 0.58 $ 0.18 $ (0.18)
========= ========= ========= ========= =========
Weighted average common shares outstanding
Basic........................................................... 9,123 9,737 9,322 9,216 9,060
Diluted......................................................... 9,208 9,816 9,599 9,491 9,060
Pro forma net income and earnings per share data
for the periods shown as if SAB 101 had been
adopted at the beginning of each applicable year (4)
Previously reported net income.............................. $ 5,041 $ 5,603
Adjustment.................................................. (253) (81)
--------- ---------
Pro forma net income........................................ $ 4,788 $ 5,522
========= =========
Pro forma earnings per share:
Basic -
Previously reported......................................... $ 0.52 $ 0.60
Adjustment.................................................. (0.03) -
--------- ---------
Pro forma................................................... $ 0.49 $ 0.60
========= =========
Diluted -
Previously reported......................................... $ 0.51 $ 0.58
Adjustment.................................................. (0.03) (0.01)
--------- ---------
Pro forma................................................... $ 0.48 $ 0.57
========= =========

YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----

Other Data
EBITDA (3)....................................................... $ 9,835 $ 14,320 $ 16,878 $ 12,171 $ 8,383
Cash flows provided by operating activities...................... 5,809 5,821 12,023 10,963 9,455
Cash flows used in investing activities.......................... (13,397) (33,406) (11,668) (9,488) (4,069)
Cash flows provided by (used in) financing activities............ 9,945 26,712 (1,553) (1,556) (2,397)
Capital expenditures............................................. 1,178 6,199 6,181 9,717 3,082

Selected Balance Sheet Data
Cash and cash equivalents........................................ $ 2,921 $ 2,048 $ 3,030 $ 769 $ 3,758
Working capital ................................................. 5,354 8,863 1,195 12,701 (16,006)(6)
Property and equipment, net...................................... 7,325 16,723 19,564 25,236 23,232
Total assets..................................................... 32,617 63,940 72,931 77,375 70,847
Borrowings under revolving credit agreements..................... 1,086 233 5,888 - -
Long-term debt, net of current portion........................... 1,279 22,448 16,501 31,054 78
Shareholders' equity............................................ 21,242 28,351 30,941 32,919 31,072
- -----------

(1) Amount represents the write off of deferred financing costs, net of tax
benefit, related to a bank credit agreement which was terminated in
Fiscal 2000.

(3) EBITDA is defined herein as earnings before interest, taxes,
depreciation and amortization. EBITDA does not represent cash generated
from operating activities in accordance with Generally Accepted
Accounting Principles ("GAAP"), is not to be considered as an
alternative to net income or any other GAAP measurements as a measure of
operating performance and is not necessarily indicative of cash
available to fund all cash needs. While not all companies calculate
EBITDA in the same fashion and therefore EBITDA as presented may not be
comparable to other similarly titled measures of other companies,
management believes that EBITDA is a useful measure of cash flow
available to the Company to pay interest, repay debt, make acquisitions
or invest in new technologies. The Company is currently committed to use
a portion of its cash flows to service existing debt, if outstanding,
and, furthermore, anticipates making certain capital expenditures as
part of its business plan.

(4) Net income would not have been affected in 1997 had SAB 101 been adopted
at the beginning of that period.

(5) The Company entered into an interest rate swap transaction with a bank
on November 28, 2000. The swap transaction was for a notional amount of
$15,000,000 for three years and fixes the interest rate paid by the
Company on such amount at 6.50%, plus the applicable LIBOR margin, not
to exceed 2.75%. Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS
133"), requires that the hedge contract be "marked-to-market" at the
time of adoption of FAS 133 by recording (i) a cumulative-effect type
adjustment at January 1, 2001 equal to the fair value of the hedge
contract on that date, (ii) amortizing the cumulative-effect type
adjustment over the life of the derivative contract, and (iii) a charge
or credit to income in the amount of the difference between the
theoretical value of the hedge contract at the beginning and end of such
year. By the end of the hedge contract term, the initial
cumulative-effect type adjustment and any amounts recognized as income
or expense will reverse to zero as the contract will then have no
further theoretical value, provided that the contract is in place to the
end of the term. Other than the economic impact of fixing the interest
rate, the amount of income and expense required by application of FAS
133 does not impact the Company's cash flow. The effect of adopting FAS
133 was to record a cumulative effect type adjustment of $247,000 net of
$62,000 tax benefit.

(6) As of December 31, 2001, the Company had outstanding $28,999,000 under a
credit facility with a group of banks. The entire amount is classified
as a current liability due to existing covenant breaches. Excluding the
borrowed amount, working capital would have been $12,993,000.

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

Except for the historical information contained herein, certain
statements in this annual 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 discussions in the
Company's documents filed with the Securities and Exchange Commission, including
the Company's registration statement on Form S-1 as declared effective on
February 14, 1997, and Cautionary Statements and Risk Factors in this Item 7,
for a further discussion of these and other risks and uncertainties applicable
to the Company's business.

OVERVIEW

The Company generates revenues principally from duplication,
distribution and ancillary services. Duplication services are comprised of the
physical duplication of video materials from a source video or audiotape
"master" to a target tape "clone." Distribution services include the physical or
electronic distribution of video and audio materials to a customer-designated
location utilizing one or more of the Company's delivery methods. Distribution
services typically consist of deliveries of national television spot commercials
and electronic press kits and associated trafficking instructions to designated
stations and supplemental deliveries to non-broadcast destinations. Ancillary
services include video and audio editing, element storage, closed captioning,
transcription services, standards conversion, video encoding for air play
verification, audio post-production and layback and foreign language mastering.

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. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates and judgments,
including those related to allowance for doubtful accounts, valuation of
long-lived assets, and accounting for income taxes. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. 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 judgements. Critical
accounting policies cover accounting matters that are inherently uncertain
because the future resolution of such matters is unknown. We have made critical
estimates in the following areas:

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

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

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

o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets
or the strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.

When we determine that the carrying value of intangibles, long-lived
assets and related goodwill and enterprise level goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash flow method using
a discount rate determined by our management to be commensurate with the risk
inherent in our current business model. Net intangible assets, long-lived
assets, and goodwill amounted to $49.6 million as of December 31, 2001.

In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we will
cease to amortize approximately $26.3 million of goodwill beginning in 2002. We
had recorded approximately $2.0 million of amortization on these amounts during
the year ended December 31, 2001. In lieu of amortization, we are required to
perform an initial impairment review of our goodwill in 2002 and an annual
impairment review thereafter. We expect to complete our initial review during
the first quarter of 2002.

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

Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. The net deferred tax
liability as of December 31, 2001 was $1.8 million. The Company did not record a
valuation allowance against its deferred tax assets as of December 31, 2001.

RESULTS OF OPERATIONS

The following table sets forth the amount and percentage relationship to
revenues of certain items included within the Company's Consolidated Statement
of Income for the years ended December 31, 1999, 2000 and 2001. The commentary
below is based on these financial statements.

YEAR ENDED DECEMBER 31
----------------------
(DOLLARS IN THOUSANDS)

1999 2000 2001
---- ---- ----
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ -------- ------ -------- ------ --------

Revenues............................................. $ 78,248 100.0% $ 74,841 100.0% $ 69,628 100.0%
Costs of goods sold.................................. 47,685 60.9 45,894 61.3 46,864 67.3
--------- ------ --------- ------ -------- ------
Gross profit......................................... 30,563 39.1 28,947 38.7 22,764 32.7
Selling, general and administrative expense.......... 18,473 23.6 21,994 29.4 20,872 30.0
--------- ------ --------- ------ -------- ------
Operating income.................................. 12,090 15.5 6,953 9.3 1,892 2.7
Interest expense, net................................ 2,147 2.7 2,889 3.9 3,070 4.4
Derivative fair value change......................... - - - - 508 0.7
Provision for (benefit from) income taxes............ 4,340 5.5 1,814 2.4 (345) (0.5)
--------- ------ --------- ------ -------- ------
Income (loss) before extraordinary item and
adoptionof SAB 101(2000) and FAS 133 (2001)..... 5,603 7.2 2,250 3.0 (1,341) (1.9)
Extraordinary item (net of tax benefit of $168)...... - - (232) (0.3) - -
Cumulative effect of adopting SAB 101 (2000)
and FAS 133 (2001)................................ - - (322) (0.4) (247) (.4)
--------- ------ --------- ------ -------- ------
Net income (loss).................................... $ 5,603 7.2% $ 1,696 2.3% $ (1,588) (2.3)%
========= ====== ========= ====== ======== ======

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

REVENUES. Revenues decreased by $5.2 million or 7% to $69.6 million for
the year ended December 31, 2001, compared to $74.8 million for the year ended
December 31, 2000 due to a decline in studio post production sales as some work
was brought in-house. Studios have traditionally maintained in-house capacity
and several customers utilized that capacity in 2001 to a greater extent thereby
affecting our sales.

GROSS PROFIT. Gross profit decreased $6.2 million or 21.4% to $22.8
million for the year ended December 31, 2001, compared to $28.9 million for the
year ended December 31, 2000. As a percent of revenues, gross profit decreased
from 38.7% to 32.7%. The decrease in gross profit as a percentage of revenues
was due to increased depreciation associated with investments in high definition
equipment ($0.9 million) and higher delivery costs for distribution services
($0.7 million), all of which amounted to approximately 2% of reported revenues.
The remaining decline in gross margin is due to the Company's inability to cover
other fixed costs with lower sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased $1.1 million, or 5.1% to $20.9 million for the
year ended December 31, 2001, compared to $22.0 million for the year ended
December 31, 2000. As a percentage of revenues, selling, general and
administrative expense increased to 30% for the year ended December 31, 2001,
compared to 29.4% for the year ended December 31, 2000. The fiscal 2000 period
included $0.8 million of expenses associated with a terminated merger. The
fiscal 2001 period included $0.4 million of bank agreement restructuring
charges, $0.3 million of employee benefit plan one-time change expense, $0.3
million of severance accruals, and $0.3 million of consulting expense associated
with the Company's rebranding efforts. Excluding these items and amortization of
goodwill of $2.0 million in 2001 and $1.6 million in 2000, selling, general and
administrative expenses were $17.5 million, or 25% of sales in 2001 compared to
$19.6 million, or 26% of sales in 2000. The decrease was due principally to a
$1.7 million decrease in the provision for doubtful accounts.

Beginning in 2002, the amortization of goodwill will cease as the
Company adopts Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Tangible Assets" ("FAS 142"). FAS 142 changes the accounting for
goodwill and other intangible assets with indefinite useful lives from an
amortization method to an impairment-only approach (the procedures going forward
are described in Footnote 2 of Notes to Consolidated Financial Statements
elsewhere in this Form 10-K). In connection with the adoption of FAS 142, the
Company will be required to perform a transitional goodwill impairment
assessment in the first half of 2002, which may result in a write off which
would be treated as a change in accounting principle. As of December 31, 2001,
goodwill, net of accumulated amortization, was $26 million. To the extent an
impairment is indicated in the application of FAS 142, fiscal 2002 results of
operations will be adversely affected, which effect may be material. Any
impairment will not affect cash flow.

OPERATING INCOME. Operating income decreased $5.1 million or 73% to $1.9
million for 2001, compared to $7.0 million for 2000.

INTEREST EXPENSE. Interest expense increased $0.2 million, or 6.3%, to
$3.1 million for 2001, compared to $2.9 million for 2000 due to a 2% default
rate of interest premium charged by the Company's banks, commencing in July
2001.

ADOPTION OF FAS 133 AND DERIVATIVE FAIR VALUE CHANGE. On January 1,
2001, the Company adopted FAS 133 by recording a cumulative effect adjustment of
$247,000 after tax benefit. During 2001, the Company recorded the difference
between the derivative fair value of the Company's hedge contract at the
beginning and end of the period, offset by amortization of the cumulative-effect
adjustment during the year, of $0.5 million ($0.4 million net of tax benefit).

INCOME TAXES. The Company's effective tax rate was 20% for 2001 and 46%
for 2000. The lower tax rate is due to the effect of permanent differences on a
lower pre-tax income base.

NET INCOME (LOSS). The net loss for 2001 was $1.6 million, a decrease of
$3.3 million compared to a profit of $1.7 million for 2000.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

REVENUES. Revenues decreased by $3.4 million or 4.4% to $74.8 million
for the year ended December 31, 2000 compared to $78.2 million for the year
ended December 31, 1999. This decrease in revenue was due to a decrease in the
use of the Company's services in 2000 by certain customers resulting from
service failures that occurred during the integration of its two largest
facilities in 1999, and the loss of certain key sales personnel in 2000.
Revenues were also negatively impacted by an actors' strike in the advertising
industry.

GROSS PROFIT. Gross profit decreased $1.7 million or 5.3% to $28.9
million for the year ended December 31, 2000 compared to $30.6 million for the
year ended December 31, 1999. As a percentage of revenues, gross profit
decreased from 39.1% to 38.7%. The decrease in gross profit as a percentage of
revenues was due to increased depreciation associated with investments in high
definition equipment.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $3.5 million or 19.1% to $22.0 million for the
year ended December 31, 2000 compared to $18.5 million for the year ended
December 31, 1999. As a percentage of revenues, selling, general and
administrative expense increased to 29.4% for the year ended December 31, 2000
compared to 23.6% for the year ended December 31, 1999. This increase was due to
an increase in the provision for doubtful accounts of $1.4 million, $0.5 million
of severance costs, increased wages related to new management appointments and
increased depreciation related to investments in computer systems. Additionally,
in 2000, the Company recognized $0.8 million in expenses related to the proposed
merger with an affiliate of Bain Capital, which was terminated in April 2000,
compared to $0.4 million in 1999. The increase in the provision for doubtful
accounts resulted from numerous delinquent accounts which, in management's
judgment, were deemed to be no longer collectible in the fourth quarter due to
the age of the account, financial condition of the customer or the inability to
resolve disputes.

OPERATING INCOME. Operating income decreased $5.1 million or 42.5% to
$7.0 million for the year ended December 31, 2000 compared to $12.1 million for
the year ended December 31, 1999. As a percentage of revenue, operating income
decreased from 15.5% to 9.3%.

INTEREST EXPENSE. Interest expense, net, increased 34.6% from $2.1
million in 1999 to $2.9 million in 2000. This increase was due to increased
borrowings under the Company's debt agreements.

INCOME TAXES. The Company's effective income tax rate was 45.5% for 2000
and 43.7% for 1999 due to the effect of permanent differences on a lower pre-tax
income base.

EXTRAORDINARY ITEM. During 2000, the Company wrote off $0.4 million of
deferred financing costs related to prior credit facilities that were
terminated. This item was treated as an extraordinary item in Fiscal 2000 and is
reported net of income taxes.

CUMULATIVE EFFECT OF ADOPTING SAB 101. During Fiscal 2000, the Company
adopted SAB 101. The effect of applying this change in accounting principle is a
cumulative charge, after tax, of $322,000, or $0.03 per share. Previously, the
Company had recognized revenues from certain post production processes as work
was performed. Under SAB 101, the Company will now recognize these revenues when
the entire project is completed.

NET INCOME. Net income for the year ended December 31, 2000 decreased
$3.9 million or 69.7% to $1.7 million compared to $5.6 million for the year
ended December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

On December 31, 2001, the Company's cash and cash equivalents aggregated
$3.8 million. The Company's operating activities provided cash of $9.5 million
for the year ended December 31, 2001.

The Company's investing activities used cash of $4.1 million in the year
ended December 31, 2001. The Company spent approximately $3.1 million for the
addition and replacement of capital equipment and management information systems
which we believe is a reasonable capital expenditure level given the current
revenue volume. In the prior year, the Company's capital expenditures were
greater than a normal recurring amount due to the investment of approximately
$6.0 million in high definition television equipment. The Company's business is
equipment intensive, requiring periodic expenditures of cash or the incurrence
of additional debt to acquire additional fixed assets in order to increase
capacity or replace existing equipment. The Company also made $1.0 million in
acquisition earn-out payments in the year ended December 31, 2001.

In September 2000, the Company signed a $45 million revolving credit
facility agented by Union Bank of California. Due to lower sales levels in the
second and third quarters of Fiscal 2001, the borrowing base (eligible accounts
receivable, inventory and machinery and equipment) securing the Company's bank
line of credit was less than the amount borrowed under the line. Consequently,
the Company was in breach of certain covenants. On June 11 and on July 20, 2001,
the Company entered into amendment and forbearance agreements with the banks and
agreed to repay the overdraft amount in weekly increments. In August 2001, the
Company failed to meet the repayment schedule and again entered discussions with

the banks. In December 2001, the banks terminated their formal commitment. As of
December 31, 2001, there was $29 million outstanding under the facility which
was classified as a current liability. The Company is currently negotiating a
restructured credit agreement with the banks. If the Company is not successful
in completing a final contract with the banks, the Company's liquidity would be
materially and adversely affected.

The Company, from time to time, considers the acquisition of businesses
complementary to its current operations. Consummation of any such acquisition or
other expansion of the business conducted by the Company may be subject to the
Company securing additional financing.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the U.S. Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. SAB 101 summarizes the SEC's views in applying generally
accepted accounting principles to selected revenue recognition issues in
financial statements. In June 2000, the SEC issued SAB 101B, an amendment to SAB
101, which delays the implementation of SAB 101. The Company adopted SAB 101
effective January 1, 2000.

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("FAS 133"). The standard, as amended, requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in other income.

In June 2001, the Financial Accounting Standards Board ("FASB") issued
FAS Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible
Assets," respectively. FAS No. 141 replaces Accounting Principles Board ("APB")
Opinion No. 16. It also provides guidance on purchase accounting related to the
recognition of intangible assets and accounting for negative goodwill. FAS No.
142 changes the accounting for goodwill and other intangible assets with
indefinite useful lives ("goodwill") from an amortization method to an
impairment-only approach. Under FAS No. 142, goodwill will be tested annually
and whenever events or circumstances occur indicating that goodwill might be
impaired. FAS No. 141 and FAS No. 142 are effective for all business
combinations completed after June 30, 2001. Upon adoption of FAS No. 142,
amortization of goodwill recorded for business combinations consummated prior to
July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001
that do not meet the criteria for recognition under FAS No. 141 will be
reclassified to goodwill. The Company will be required to implement FAS No. 142
in the first quarter of fiscal 2002. In connection with the adoption of FAS No.
142, the Company will be required to perform a transitional goodwill impairment
assessment. The Company is in the process of evaluating the impact of adoption
of FAS 141 and 142.

In August 2001, the FASB issued FAS No. 143, "Accounting for Asset
Retirement Obligations," which requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. FAS No. 143 is effective for fiscal years beginning after June 15, 2002.
The Company does not have asset retirement obligations and, therefore, believes
there will be no impact upon adoption of FAS No. 143.

In October 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede FAS No. 121, "Account for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and portions
of APB Opinion No. 30, "Reporting the Results of Operations." FAS No. 144
provides a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. FAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The Company is in the process of evaluating the impact of
adopting FAS No. 144.

CAUTIONARY STATEMENTS AND RISK FACTORS

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

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

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

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

These risk factors are discussed further below.

RECENT HISTORY OF LOSSES. The Company has reported losses for each of the four
fiscal quarters ended September 30, 2001 due, in part, to lower gross margins
and lower sales levels and a number of unusual charges. Although we achieved
profitability in Fiscal 2000 and prior years, there can be no assurance as to
future profitability on a quarterly or annual basis.

BREACH OF CREDIT AGREEMENT COVENANTS. Due to lower operating cash amounts
resulting from reduced sales levels in 2001 and the consequential net losses,
the Company breached certain covenants of its credit facility. The breaches were
temporarily cured based on amendments and forbearance agreements among the
Company and the banks which called for, among other provisions, scheduled
payments to reduce amounts owed to the banks to the permitted borrowing base. In
August 2001, the Company failed to meet the principal repayment schedule and was
once again in breach of the credit facility, even though we remain current on
interest payments. The banks ended their formal commitment to the Company in
December 2001. We are currently negotiating for a restructured credit with the
banks. We cannot be sure that the final contract will be successfully negotiated
or, if successful, that the Company will not again breach established covenants.

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

We compete with a variety of post production, duplication and distribution
firms, some of which have a national presence, and to a lesser extent, the
in-house post production and distribution operations of our major motion picture
studio and advertising agency customers. Some of these firms, and all of the
studios, have greater financial, distribution and marketing resources and have
achieved a higher level of brand recognition than the Company. In the future, we
may not be able to compete effectively against these competitors merely on the
basis of reliability, timeliness, quality and price or otherwise.

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

CUSTOMER AND INDUSTRY CONCENTRATION. Although we have an active client list of
over 2,500 customers, seven motion picture studios accounted for approximately
34% of the Company's revenues during the year ended December 31, 2001. If one or
more of these companies were to stop using our services, our business could be
adversely affected. Because we derive substantially all of our revenue from
clients in the entertainment and advertising industries, the financial
condition, results of operations and prospects of the Company could also be
adversely affected by an adverse change in conditions which impact those
industries.

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

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

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

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

MANAGEMENT OF GROWTH. During the three years ended December 31, 1999, we
experienced rapid growth that resulted in new and increased responsibilities for
management personnel and placed and continues to place increased demands on our
management, operational and financial systems and resources. To accommodate this
growth, compete effectively and manage future growth, we will be required to
continue to implement and improve our operational, financial and management
information systems, and to expand, train, motivate and manage our work force.
We cannot be sure that the Company's personnel, systems, procedures and controls
will be adequate to support our future operations. Any failure to do so could
have a material adverse effect on our financial condition, results of operations
and prospects.

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

DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts and
abilities of certain of its senior management, particularly those of R. Luke
Stefanko, President and Chief Executive Officer. The loss or interruption of the
services of key members of management could have a material adverse effect on
our financial condition, results of operations and prospects if a suitable
replacement is not promptly obtained. Although we have employment agreements
with Mr. Stefanko and certain of our other key executives and technical
personnel, we cannot be sure that such executives will remain with the Company
during or after the term of their employment agreements. In addition, our
success depends to a significant degree upon the continuing contributions of,
and on our ability to attract and retain, qualified management, sales,
operations, marketing and technical personnel. The competition for qualified
personnel is intense and the loss of any such persons, as well as the failure to
recruit additional key personnel in a timely manner, could have a material
adverse effect on our financial condition, results of operations and prospects.
There is no assurance that we will be able to continue to attract and retain
qualified management and other personnel for the development of our business.

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

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

CONTROL BY PRINCIPAL SHAREHOLDER; POTENTIAL ISSUANCE OF PREFERRED STOCK;
ANTI-TAKEOVER PROVISIONS. The Company's President and Chief Executive Officer,
R. Luke Stefanko, beneficially owned approximately 18.4% of the outstanding
common stock as of February 28, 2002. Mr. Stefanko's ex-spouse owned
approximately 25.2% of the common stock on that date. Together, they owned
approximately 43.6%. In August 2000 and May 2001, Mr. Stefanko was granted
one-time proxies to vote his ex-spouse's shares in connection with the election
of directors at the Company's annual meetings. The Company's Chairman of the
Board, Haig Bagerdjian, beneficially owned approximately 6.7% of the common
stock on February 28, 2002. By virtue of their stock ownership, Messrs. Stefanko
and Bagerdjian individually or together may be able to significantly influence
the outcome of matters required to be submitted to a vote of shareholders,
including (i) the election of the board of directors, (ii) amendments to the
Company's Restated Articles of Incorporation and (iii) approval of mergers and
other significant corporate transactions. The foregoing may have the effect of
discouraging, delaying or preventing certain types of transactions involving an
actual or potential change of control of the Company, including transactions in
which the holders of common stock might otherwise receive a premium for their
shares over current market prices. Our Board of Directors also has the authority

to issue up to 5,000,000 shares of preferred stock without par value (the
"Preferred Stock") and to determine the price, rights, preferences, privileges
and restrictions thereof, including voting rights, without any further vote or
action by the Company's shareholders. Although we have no current plans to issue
any shares of Preferred Stock, the rights of the holders of common stock would
be subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. Issuance of Preferred
Stock could have the effect of discouraging, delaying, or preventing a change in
control of the Company. Furthermore, certain provisions of the Company's
Restated Articles of Incorporation and By-Laws and of California law also could
have the effect of discouraging, delaying or preventing a change in control of
the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK. The Company's market risk exposure with respect to
financial instruments is to changes in the London Interbank Offering Rate
("LIBOR"). The Company had borrowings of $28,999,000 at December 31, 2001 under
a credit agreement. Amounts outstanding under the credit agreement bear interest
at the bank's reference rate plus a base rate margin not to exceed 1.00%, or, at
the Company's election, at LIBOR plus a LIBOR margin not to exceed 2.75%.

On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The standard, as amended by Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133,
an amendment of FASB Statement No. 133, and Statement of Financial Accounting
Standards No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of FASB Statement No. 133 (referred to
hereafter as "FAS 133"), is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (January 1, 2001 for the Company). FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or in other comprehensive income, depending on
whether a derivative is designated as part of a hedging relationship and, if it
is, depending on the type of hedging relationship. During 2001, the Company
recorded a cumulative effect type adjustment of $247,000 (net of $62,000 tax
benefit), and an expense of $508,000 ($406,000 net of tax benefit) for the
derivative fair value change of an interest rate hedging contract.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page

Report of Independent Accountants..................................... 18

Financial Statements:

Consolidated Balance Sheets -
December 31, 2000 and 2001......................................... 19

Consolidated Statements of Income -
Fiscal Years Ended December 31, 1999, 2000 and 2001................ 20

Consolidated Statements of Shareholders' Equity -
Fiscal Years Ended December 31, 1999, 2000 and 2001................ 21

Consolidated Statements of Cash Flows -
Fiscal Years Ended December 31, 1999, 2000 and 2001................ 22

Notes to Consolidated Financial Statements......................... 23-34

Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts.................... 35

Consent of Independent Accountants................................. 40

Schedules other than those listed above have been omitted since they are
either not required, are not applicable or the required information is shown
in the financial statements or the related notes.

Report of Independent Accountants

To the Board of Directors and
Shareholders of Point.360

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows
presentirly, in all material respects, the financial position of Point.360 ("the
Company") and its subsidiaries at December 31, 2001 and December 31, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, during the year
ended December 31, 2000 the Company changed its method of accounting for revenue
to conform to the requirements of SEC Staff Accounting Bulletin No. 101.

As discussed in Note 1, the Company has breached its debt covenants and amounts
outstanding under its credit facility are immediately due and payable.
Accordingly, there is substantial doubt about the Company's ability to continue
as a going concern beyond December 31, 2001. See Note 1 for management's plans.

PricewaterhouseCoopers LLP (signed)
Century City, California
February 25, 2002

POINT.360
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
------------
2000 2001
---- ----
ASSETS

Current assets:
Cash and cash equivalents......................................... $ 769,000 $ 3,758,000
Accounts receivable, net of allowances for doubtful accounts
of $1,473,000 and $681,000, respectively ...................... 16,315,000 12,119,000
Notes receivable from officers (Note 11) ......................... 1,001,000 928,000
Income tax receivable............................................. 1,362,000 1,399,000
Inventories....................................................... 1,031,000 820,000
Prepaid expenses and other current assets......................... 1,780,000 554,000
Deferred income taxes............................................. 1,574,000 884,000
----------- -----------
Total current assets........................................... 23,832,000 20,462,000

Property and equipment, net (Note 4).............................. 25,236,000 23,232,000
Other assets, net................................................. 920,000 833,000
Goodwill and other intangibles, net (Note 3)...................... 27,387,000 26,320,000
----------- -----------
$77,375,000 $70,847,000
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 8,564,000 $ 4,675,000
Accrued expenses.................................................. 2,513,000 2,715,000
Borrowings under revolving credit agreement (Note 5).............. - 28,999,000
Current portion of capital lease obligations (Note 6)............. 54,000 79,000
----------- -----------
Total current liabilities...................................... 11,131,000 36,468,000
----------- -----------
Deferred income taxes............................................. 2,271,000 2,650,000
Notes payable (Note 6)............................................ 31,024,000 -
Capital lease obligations, less current portion (Note 6).......... 30,000 78,000
Derivative valuation liability.................................... - 579,000

Commitments and contingencies (Note 8)

Shareholders' equity
Preferred stock - no par value; 5,000,000 shares authorized;
none outstanding.............................................. - -
Common stock - no par value; 50,000,000 shares authorized;
9,162,670 and 8,992,806 shares issued and outstanding,
respectively.................................................. 17,943,000 17,336,000
Additional paid-in capital .................................. 329,000 439,000
Accumulated other comprehensive income........................... - 238,000
Retained earnings................................................ 14,647,000 13,059,000
----------- -----------
Total shareholders' equity.................................... 32,919,000 31,072,000
----------- -----------
$77,375,000 $70,847,000
=========== ===========

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

POINT.360
CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31,
-----------------------
1999 2000 2001
---- ---- ----

Revenues............................................................ $ 78,248,000 $ 74,841,000 $ 69,628,000
Cost of goods sold.................................................. 47,685,000 45,894,000 46,864,000
------------ ------------ ------------
Gross profit...................................................... 30,563,000 28,947,000 22,764,000

Selling, general and administrative expense......................... 18,473,000 21,994,000 20,872,000
------------ ------------ ------------
Operating income.................................................... 12,090,000 6,953,000 1,892,000
Interest expense (net).............................................. 2,147,000 2,889,000 3,070,000
Derivative fair value change........................................ - - 508,000
------------ ------------ ------------
Income (loss) before income taxes................................... 9,943,000 4,064,000 (1,686,000)
Provision for (benefit from) income taxes .......................... 4,340,000 1,814,000 (345,000)
------------ ------------ ------------
Income (loss) before extraordinary item and cumulative effect of
adopting SAB 101 (2000) and FAS 133 (2001) (Note 2)............... 5,603,000 2,250,000 (1,341,000)
Extraordinary item (net of tax benefit of $168,000) (Note 6)........ - (232,000) -
Cumulative effect of adopting SAB 101 (2000) and
FAS 133 (2001) (Note 2)........................................... - (322,000) (247,000)
------------ ------------ ------------
Net income (loss)................................................... $ 5,603,000 $ 1,696,000 $ (1,588,000)
============ ============ ============
Other comprehensive income:
Derivative fair value change...................................... $ - $ - $ 238,000
------------ ------------ ------------
Comprehensive loss.................................................. $ - $ - $ (1,350,000)
============ ============ ============

Earnings (loss) per share:
Basic:
Income (loss) per share before extraordinary item and adoption of
SAB 101 (2000) and FAS 133 (2001)................................. $ 0.60 $ 0.24 $ (0.15)
Extraordinary item.................................................. - (0.03) -
Cumulative effect of adopting SAB 101 (2000) and FAS 133 (2001) .... - (0.03) (0.03)
------------ ------------ ------------
Net income (loss)................................................... $ 0.60 $ 0.18 $ (0.18)
============ ============ ============
Weighted average number of shares................................... 9,322,249 9,216,163 9,060,487
Diluted:
Income (loss) per share before extraordinary item and adoption of
SAB 101 (2000) and FAS 133 (2001)................................. $ 0.58 $ 0.24 (0.15)
Extraordinary item.................................................. - (0.03) -
Cumulative effect of adopting SAB 101 (2000) and FAS 133 (2001)..... - (0.03) (0.03)
------------ ------------ ------------
Net income (loss)................................................... $ 0.58 $ 0.18 $ (0.18)
============ ============ ============
Weighted average number of shares including the dilutive effect of
stock options (Note 2)............................................ 9,598,554 9,491,424 9,060,487

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

POINT.360
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

ADDITIONAL DEFERRED
PAID-IN STOCK-BASED RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
------ ------ ---------- ------------ -------- ------------

Balance at December 31, 1998............ 9,776,094 $20,948,000 $ - $ - $ 7,403,000 $28,351,000
Net income.............................. - - - - 5,603,000 5,603,000
Shares repurchased in connection with
stock repurchase plan................. (572,700) (3,064,000) - - - (3,064,000)
Shares issued in connection with
exercise of stock options............. 7,303 51,000 - - - 51,000
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999............ 9,210,697 17,935,000 - - 13,006,000 30,941,000
Net income.............................. - - - - 1,696,000 1,696,000
Shares repurchased in connection with
stock repurchase plan................. (171,400) (710,000) - - - (710,000)
Shares issued and tax benefit
associated with exercise of
stock options......................... 47,698 368,000 - - - 368,000
Shares issued in connection with
company acquisition................... 75,675 350,000 - - - 350,000
Issuance of stock options to
consultants........................... - - 329,000 (329,000) - -
Stock-based compensation................ - - - 329,000 - 329,000
Distribution to shareholder (Note 1).... - - - - (55,000) (55,000)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000............ 9,162,670 $17,943,000 $ 329,000 $ - $14,647,000 $32,919,000
Net loss................................ - - - - (1,588,000) (1,588,000)
Shares repurchased in connection with
stock repurchase plan................. (116,666) (300,000) - - - (300,000)
Issuance of stock options to
consultants........................... - - 110,000 (110,000) - -
Stock-based compensation................ - - - 110,000 - 110,000
Shares issued in settlement of a
debt.................................. 15,384 10,000 - - - 10,000
Adjustment of shares issued for
an acquisition........................ (68,582) (317,000) - - - (317,000)
Comprehensive income -
FAS 133............................... - - - - 238,000 238,000
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001............ 8,992,806 $17,336,000 $ 439,000 $ - $13,297,000 $31,072,000
=========== =========== =========== =========== =========== ===========

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

POINT.360
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1999 2000 2001
---- ---- ----

Cash flows from operating activities:
Net income (loss)................................................... $ 5,603,000 $ 1,696,000 $ (1,588,000)
Adjustments to reconcile net income (loss) to net cash and
cash equivalents provided by operating activities:
Depreciation and amortization....................................... 4,788,000 5,773,000 7,308,000
Provision for doubtful accounts..................................... 790,000 2,195,000 529,000
Abandonment of leasehold improvements............................... 190,000 - -
Deferred income taxes .............................................. 170,000 476,000 822,000
Other noncash items................................................. - 329,000 937,000
Cumulative effect of adopting SAB 101............................... - 322,000 -
Cumulative effect of adopting FAS 133............................... - - 247,000
Extraordinary item.................................................. - 232,000 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.......................... (3,297,000) 1,359,000 3,667,000
(Increase) decrease in inventories.................................. (388,000) 91,000 211,000
Decrease (increase) in prepaid expenses and other current assets.... 28,000 (822,000) 1,229,000
Decrease (increase) in other assets................................. 109,000 (5,000) 87,000
Increase (decrease) in accounts payable............................. 2,518,000 1,397,000 (3,889,000)
Increase (decrease) in accrued expenses............................. 1,461,000 (668,000) (68,000)
Increase in income taxes payable (receivable), net.................. 51,000 (1,412,000) (37,000)
------------ ------------- ------------
Net cash and cash equivalents provided by operating activities...... 12,023,000 10,963,000 9,455,000
------------ ------------- ------------
Cash flows from investing activities:
Capital expenditures................................................ (6,181,000) (9,717,000) (3,082,000)
Net cash paid for acquisitions...................................... (3,307,000) (1,951,000) (987,000)
------------ ------------- ------------
Net cash and cash equivalents used in investing activities.......... (9,488,000) (11,668,000) (4,069,000)
------------ ------------- ------------
Cash flows from financing activities:
S Corporation distributions to shareholders......................... - (55,000) -
Issuance of notes receivable........................................ - (1,001,000) -
Repurchase of common stock.......................................... (3,064,000) (710,000) (300,000)
Proceeds from exercise of stock options............................. 51,000 256,000 -
Change in revolving credit agreement................................ 5,655,000 (5,888,000) -
Deferred financing costs............................................ (365,000) (239,000) -
Proceeds from bank note............................................. 2,500,000 32,174,000 -
Repayment of notes payable.......................................... (5,819,000) (25,892,000) (2,025,000)
Repayment of capital lease obligations.............................. (511,000) (201,000) (72,000)
------------ ------------- ------------
Net cash and cash equivalents used in financing activities.......... (1,553,000) (1,556,000) (2,397,000)
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents................ 982,000 (2,261,000) 2,989,000
Cash and cash equivalents at beginning of year...................... 2,048,000 3,030,000 769,000
------------ ------------- ------------
Cash and cash equivalents at end of year............................ $ 3,030,000 $ 769,000 $ 3,758,000
============ ============= ============

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

POINT.360
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY:

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

In February 1997, the Company completed the sale of a portion of its
common shares in an initial public offering ("IPO"). Prior to the offering, the
Company had elected S-Corporation status for federal and state income tax
purposes. As a result of the offering, the S-Corporation status terminated.
Thereafter, the Company has paid federal and state income taxes as a
C-Corporation. In connection with the termination of S-Corporation status, the
Company made a final $55,000 distribution to a shareholder in Fiscal 2000, which
has been recorded as a reduction of retained earnings.

As of April 30, May 31 and June 30, 2001, outstanding amounts under the
Company's line of credit with a group of banks exceeded the borrowing base (see
Note 6). On June 11 and July 20, 2001, the Company entered into amendment and
forbearance agreements with the banks which required the Company to repay the
amount of excess borrowings. In August 2001, the Company did not make required
debt payments which created a breach of the amendment and forbearance
agreements. As a consequence of the breach, the amount outstanding under the
credit facility is immediately due and payable and, therefore, is reclassified
as a current liability as of December 31, 2001.

These circumstances raise substantial doubt about the Company's ability
to continue as a going concern beyond December 31, 2001. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Management is also pursuing other financing sources to meet
its capital and operating requirements, including new equity and debt financing.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of the
Company and its two non-operating wholly owned subsidiaries, VDI Multimedia,
Inc. and Multimedia Services, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.

RECLASSIFICATIONS

Certain previously reported amounts have been reclassified to conform to
classifications adopted in 2001.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash equivalents represent highly liquid short-term investments with
original maturities of less than three months.

REVENUES AND RECEIVABLES

The Company records revenues when the services have been completed.
Although sales and receivables are concentrated in the entertainment and
advertising industries, credit risk due to financial insolvency is limited
because of the financial stability of the customer base (i.e., large studios and
advertising agencies). However, in 2000, the Company's evaluation of accounts
receivable balances resulted in an increase in the reserve for doubtful accounts
of approximately $2.2 million which was related primarily to smaller entities.
No sales to a single customer were more than 10% of sales for 1999, 2000 or
2001.

Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. The effect of
applying this Staff Accounting Bulletin has been accounted for as a change in
accounting principle, with a cumulative charge of $322,000, or $0.03 per share,
net of tax benefit of $233,000. Previously, the Company had recognized revenues
from certain post production services as work was performed. Under SAB 101, the
Company now recognizes these revenues when all services have been completed. As
a result of adopting SAB 101, revenues of $555,000 were recognized in the year
ended December 31, 2000 which were also recognized in the year ended December
31, 1999.

The table below sets forth pro forma net income and earnings per share
data for the periods shown as if the change in accounting policy had been
adopted at the beginning of 1999.

1999
----

Previously reported $ 5,603,000
Adjustment (81,000)
-----------
Pro forma $ 5,522,000
===========

Pro forma earnings per share:
Basic -
Previously reported $ 0.60
Adjustment -
-----------
Pro forma $ 0.60
===========
Diluted -
Previously reported $ 0.58
Adjustment (0.01)
-----------
Pro forma $ 0.57
===========

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
and accounts receivable. The Company maintains its cash and cash equivalents
with high credit quality financial institutions; at times, such balances with
any one financial institution may exceed FDIC insured limits.

Credit risk with respect to trade receivables is concentrated due to the
large number of orders with major entertainment studios in any particular
reporting period. The seven major studios represented 37% of accounts receivable
at December 31, 2000 and 40% of accounts receivable at December 31, 2001. The
Company reviews credit evaluations of its customers but does not require
collateral or other security to support customer receivables.

The seven major studios accounted for 37% and 34% of net sales for the
years ended December 31, 2000 and 2001, respectively. No single customer had
outstanding balances of greater than 10% of total accounts receivable as of
December 31, 2000 or 2001.

INVENTORIES

Inventories comprise raw materials, principally tape stock, and are
stated at the lower of cost or market. Cost is determined using the average cost
method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Expenditures for additions
and major improvements are capitalized. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the estimated useful lives of the improvements or the
remaining lease term. The estimated useful life of property and equipment is
seven years and leasehold improvements are ten years.

GOODWILL AND OTHER INTANGIBLES

Goodwill is amortized on a straight-line basis over 5-20 years. Other
intangibles consist primarily of covenants not to compete and are amortized on a
straight-line basis over 3-5 years.

The Company identifies and records impairment losses on long-lived
assets, including goodwill that is not identified with an impaired asset, when
events and circumstances indicate that such assets might be impaired. Events and
circumstances that may indicate that an asset is impaired include significant
decreases in the market value of an asset, a change in the operating model or
strategy and competitive forces.

If events and circumstances indicate that the carrying amount of an
asset may not be recoverable and the expected undiscounted future cash flow
attributable to the asset is less than the carrying amount of the asset, an
impairment loss equal to the excess of the asset's carrying value over its fair
value is recorded. Fair value is determined based on the present value of
estimated expected future cash flows using a discount rate commensurate with the
risk involved, quoted market prices or appraised values, depending on the nature
of the assets. To date, no such impairment has been recorded.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
carrying amounts for financial reporting purposes and the tax basis of assets
and liabilities. A valuation allowance is recorded for that portion of deferred
tax assets for which it is more likely than not that the assets will not be
realized.

ADVERTISING COSTS

Advertising costs are not significant to the Company's operations and
are expensed as incurred.

FAIR VALUE OF FINANCIAL INSTRUMENTS

To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments," the
Company calculates the fair value of financial instruments and includes this
additional information in the notes to financial statements when the fair value
is different than the book value of those financial instruments. When the fair
value is equal to the book value, no additional disclosure is made. The Company
uses quoted market prices whenever available to calculate these fair values.

The accrual method of accounting is used for the interest rate swap
agreement entered into by the Company which converts the interest rate on $15
million of the Company's variable-rate debt to a fixed rate (see Note 6). Under
the accrual method, each net payment or receipt due or owed under the derivative
is recognized in income in the period to which the payment or receipt relates.
Amounts to be paid/received under these agreements are recognized as an
adjustment to interest expense. The related amounts payable to counter parties
is included in other accrued liabilities. The estimated fair value of the
interest rate swap agreement is a net payable of $579,000 at December 31, 2001.

ACCOUNTING FOR STOCK-BASED COMPENSATION

As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("FAS 123"), the Company measures
compensation costs in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, but provides pro forma disclosures
of net income and earnings per share using the fair value method defined by FAS
123. Under APB No. 25, compensation expense is recognized over the vesting
period based on the difference, if any, on the date of grant between the deemed
fair value for accounting purposes of the Company's stock and the exercise price
on the date of grant. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods and Services.

EARNINGS PER SHARE

The Company follows Statement of Financial Accounting Standards No. 128,
Earnings per Share ("FAS 128") and related interpretations for reporting
Earnings per Share. FAS 128 requires dual presentation of Basic Earnings per
Share ("Basic EPS") and Diluted Earnings per Share ("Diluted EPS"). Basic EPS
excludes dilution and is computed by dividing net income (loss) by the weighted

average number of common shares outstanding during the reported period. Diluted
EPS reflects the potential dilution that could occur if stock options were
exercised using the treasury stock method.

In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", basic earnings (loss) per share is calculated based on the
weighted average number of shares of common stock outstanding during the
reporting period. Diluted earnings per share is calculated giving effect to all
potentially dilutive common shares, assuming such shares were outstanding during
the reporting period. Stock options for the purchase of 386,245 shares with a
weighted average exercise price of $1.40 for the year ended December 31, 2001
were not included in the computation of diluted EPS as they are anti-dilutive as
a result of net loss during the year.

A reconciliation of the denominator of the basic EPS computation to the
denominator of the diluted EPS computation is as follows:

1999 2000 2001
---- ---- ----

Weighted average number of common shares outstanding
used in computation of basic EPS................................ 9,322,249 9,216,163 9,060,487
Dilutive effect of outstanding stock options ..................... 276,305 275,261 -
--------- --------- ---------
Weighted average number of common and potential
common shares outstanding used in computation of diluted EPS..... 9,598,554 9,491,424 9,060,487
========= ========= =========

COMPREHENSIVE INCOME

In 1998, the Company adopted Statement of SFAS No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income, as defined, includes
all changes in equity during a period from non-owner sources.

SUPPLEMENTAL CASH FLOW INFORMATION

Selected cash payments and noncash activities were as follows:

1999 2000 2001
---- ---- ----

Cash payments for income taxes........................ $ 4,154,000 $ 2,447,000 $ 121,000
Cash payments for interest............................ 2,151,000 2,920,000 2,830,000

Noncash investing and financing activities:
Capitalized lease obligations incurred................ 57,000 - 145,000
Tax benefits related to stock options................. - 112,000 -
Adjustment of acquisition holdback shares............. - - (317,000)
Acquisition of equipment in exchange for
reduction of note receivable from shareholder....... - - 68,000
Accrual for earn-out payments......................... - - 270,000
Detail of acquisitions:
Fair value of assets, net of cash acquired............ - 147,000 -
Goodwill (1).......................................... 3,307,000 2,515,000 1,257,000
Liabilities (2)....................................... - (711,000) -
------------ ------------ ------------
Net cash paid for acquisitions........................ $ 3,307,000 $ 1,951,000 $ 1,257,000
============ ============ ============

(1) Includes additional purchase price payments made to former owners in
periods subsequent to various acquisitions of $3,307,000, $1,353,000 and
$965,000 in 1999, 2000 and 2001, respectively, and accrual for earn-out
payments of $270,000 in 2001.

(2) Includes common stock issued to sellers totaling $350,000 in 2000.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede FAS No. 121, "Account for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"and portions
of APB Opinion No. 30, "Reporting the Results of Operations." FAS No. 144
provides a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. FAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The Company is in the process of evaluating the impact of
adopting FAS No. 144.

3. ACQUISITIONS

On November 3, 2000, the Company acquired the assets and assumed certain
liabilities of Creative Digital, Inc. ("Creative Digital"). The purchase price
of the transaction was approximately $1,309,000. This amount included $500,000
paid in cash, $98,000 in estimated transaction costs and 75,675 shares of
Point.360 common stock valued at $350,000. The acquisition was accounted for
using the purchase method of accounting. The purchase price was allocated to the
fair value of net assets of $147,000 and intangible assets of $1,162,000.
Creative Digital provides colorization, editing, and other post production
services to major motion picture studios and television producers. The Company
may also pay up to an additional $3,000,000 in earn-out payments if Creative
Digital achieves certain performance goals through 2005. No earn-out amounts
have been paid as of December 31, 2001. In November 2001, 68,582 of the 75,675
shares of Point.360 stock valued at $317,000 were returned to the Company as
certain conditions outlined in the acquisition agreement were not met.

On November 9, 1998, the Company acquired substantially all of the
assets of Dubs, Inc. ("Dubs"). Dubs provides full service duplication,
distribution, video content storage and ancillary services to major motion
picture studios and independent production companies for both domestic and
international use. As consideration, the Company paid Dubs $11,312,000, of which
$10,437,000 was paid in 1998 and $875,000 was paid in 1999.

On June 12, 1998, the Company acquired substantially all of the assets
of All Post, Inc. ("All Post). All Post provides full service duplication,
distribution, video content storage and ancillary services to major motion
picture studios and independent production companies for both domestic and
international use. As consideration, the Company paid All Post $13,000,000 in
1998.

On November 21, 1997, the Company acquired all of the outstanding shares
of Fast Forward, Inc. ("Fast Forward"), a provider of video duplication and
distribution services primarily to advertising agencies and post production
companies. The purchase price consisted of $1,400,000 of cash, of which
$1,150,000 was paid during 1998, 30,770 shares of common stock which were issued
in December 31, 1997 and earn-out payments of up to $600,000 based upon Fast
Forward attaining certain performance goals through December 2000.

In August 1997, the Company acquired all of the outstanding capital
stock of Multi-Media Services, Inc. ("Multi-Media"). Multi-Media principally
provides video duplication, distribution, and content storage to major
advertising agencies. Through the acquisition of Multi-Media, the Company
acquired facilities in Los Angeles, Chicago and New York. The purchase price
paid by the Company for Multi-Media was $6,867,000 (including the immediate
repayment of $1,545,000 of indebtedness). In addition, the Company may be
required to pay, as an earn-out, up to an aggregate of $2,000,000, plus interest
from the closing date, in the event that Multi-Media, as a separate subsidiary
of the Company, achieves certain financial goals through December 2002. If
Multi-Media fails to achieve the targeted results in any particular quarter, the
related earn-out payment will be deferred up to two years until the results are
achieved. No earn-out payments will be made after December 31, 2004. As of
December 31, 2001, the Company has paid or accrued $1,289,000 in earn-out
payments.

On January 1, 1997, the Company acquired all of the assets and certain
liabilities of Woodholly Productions ("Woodholly"). Woodholly provides full
service video duplication, distribution, content storage and ancillary services
to major motion picture studios, advertising agencies and independent production
companies for both domestic and international use. As consideration, the Company
will pay the partners of Woodholly a maximum of $8,000,000, of which $4,000,000
was paid in January 1997. The remaining balance is subject to earn-out
provisions that are predicated upon Woodholly attaining certain operating income
goals, as set forth in the purchase agreement in each quarter through December
31, 2001. If Woodholly fails to achieve the targeted results in any particular
quarter, the related earn-out payment will be deferred until the next quarter in
which the quarterly minimum results are achieved as long as such minimum results
are achieved before December 31, 2003. As of December 31, 2001, the Company has
paid or accrued $3,415,000 in earn-out payments.

The above acquisitions were accounted for as purchases, with the excess
of the purchase price over the fair value of the net assets acquired allocated
to goodwill. The contingent purchase price, to the extent earned, will be
recorded as an increase to goodwill and will be amortized over the remaining
useful life of the goodwill. As of December 31, 2001, based on prior performance
of the applicable acquired entities, there can be no assurance that additional
earn-out amounts will be paid. The consolidated financial statements reflect the
operations of the acquired companies since their respective acquisition dates.

Goodwill and other intangibles, net consist of the following:

DECEMBER 31,
2000 2001
---- ----
Goodwill................................. $ 30,889,000 $ 31,807,000
Covenant not to compete.................. 962,000 983,000
------------- -------------
$ 31,851,000 $ 32,790,000
Less accumulated amortization............ (4,464,000) (6,470,000)
------------- -------------
$ 27,387,000 $ 26,320,000
============= =============

Amortization expense totaled $1,581,000, $1,638,000 and $2,007,000 for
the years ended December 31, 1999, 2000 and 2001, respectively.

4. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

DECEMBER 31,
2000 2001
---- ----

Machinery and equipment $ 34,600,000 $ 36,769,000
Leasehold improvements 7,304,000 7,634,000
Computer equipment 2,990,000 3,707,000
Equipment under capital lease 410,000 251,000
------------- -------------
45,304,000 48,361,000
Less accumulated depreciation and
amortization (20,068,000) (25,129,000)
------------- -------------
$ 25,236,000 $ 23,232,000
============= =============

Depreciation expense totaled $3,207,000, $4,135,000 and $5,301,000 for
the years ended December 31, 1999, 2000 and 2001, respectively. Accumulated
amortization on capital leases amounted to $219,000 and $73,000, as of December
31, 2000 and 2001, respectively.

5. REVOLVING CREDIT AGREEMENT:

On December 31, 1999, the Company had a $6,000,000 revolving credit
agreement with a bank. The outstanding borrowing on this line of credit was
$5,888,000 at December 31, 1999. The Company repaid all amounts outstanding
under the agreement in 2000.

6. LONG TERM DEBT AND NOTES PAYABLE:

TERM LOANS AND REVOLVING CREDIT

In November 1998, the Company borrowed $29,000,000 on a term loan with a
bank, payable in 60 monthly installments of $483,000 plus interest. The term
loan was repaid in 2000 with the proceeds of a new borrowing arrangement with a
group of banks. Deferred financing costs related to the term loan of
approximately $232,000, net of $168,000 tax benefit, were concurrently written
off and treated as an extraordinary item during the year ended December 31,
2000.

In September 2000, the Company entered into a credit agreement
("Agreement") with a group of banks providing a revolving credit facility of up
to $45,000,000. The purpose of the facility was to repay previously outstanding
amounts under a prior agreement with a bank, fund working capital and capital
expenditures and for general corporate purposes including up to $5,000,000 of
stock repurchases under the Company's repurchase program. The Agreement provides
for interest at the banks' adjusted reference rate, an adjusted federal funds
effective rate plus 0.5%, or a LIBOR adjusted rate. Loans made under the
Agreement are collateralized by substantially all of the Company's assets. The
borrowing base under the Agreement is limited to 90% of eligible accounts
receivable, 50% of inventory and 100% of operating machinery and equipment with
such percentages decreasing in years subsequent to 2001. The Agreement provided
that the aggregate commitment will decline by $5,000,000 on each December 31
beginning in 2002 until expiration of the entire commitment on December 31,
2005.

The Agreement also contained covenants requiring certain levels of
annual earnings before interest, taxes, depreciation and amortization (EBITDA)
and net worth, and limits the amount of capital expenditures. By December 31,
2000, the Company had borrowed $31,024,000 under the Agreement and was not in
compliance with certain financial covenants due to adjustments recorded to prior
years' and 2000 results. The bank waived compliance with the covenants and
amended the Agreement in April 2001 (the "Amendment'). In connection with the
Amendment, the Company paid the banks a restructuring fee of $225,000 which was
expensed in fiscal 2001.

As of April 30, May 31 and June 30, 2001, outstanding amounts under the
line of credit exceeded the borrowing base. On June 11 and July 20, 2001, the
Company entered into amendment and forbearance agreements with the banks which
required the Company to repay the amount of excess borrowings. In August 2001,
the Company did not make required debt payments which created a breach of the
amendment and forbearance agreements. As a consequence of the breach, the amount
outstanding under the credit facility is immediately due and payable and,
therefore, is reclassified as a current liability as of December 31, 2001. In
December 2001, the banks terminated the commitment. The Company remains current
in its interest payments to the banks and is actively engaged in renegotiating
its relationship with the banks. During the year ended December 31, 2001, the
Company made principal payments of $2,025,000. See Note 1.

INTEREST RATE SWAP

The Company entered into an interest rate swap transaction with a bank
on November 28, 2000. The swap transaction was for a notional amount of
$15,000,000 for three years and fixes the interest rate paid by the Company on
such amount at 6.50%, plus the applicable LIBOR margin, not to exceed 2.75%.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133") requires that the hedge contract
be "marked-to-market" at the time of adoption of FAS 133 and quarterly by
recording (i) a cumulative-effect type adjustment at January 1, 2001 equal to
the fair value of the hedge contract on that date, (ii) amortizing the
cumulative-effect type adjustment quarterly over the life of the derivative
contract, and (iii) a charge or credit to income in the amount of the difference
between the theoretical value of the hedge contract at the beginning and end of
such quarter. By the end of the hedge contract term, the initial
cumulative-effect type adjustment and any amounts recognized as income or
expense will reverse to zero as the contract will then have no further
theoretical value, provided that the contract is in place to the end of the
term. Other than the economic impact of fixing the interest rate, the amount of
income and expense required by application of FAS 133 does not impact the
Company's cash flow. The effect of adopting FAS 133 was as follows in 2001:

Increase (Decrease) Income
--------------------------
Net
Derivative Fair (Provision for) Benefit Derivative
Value Change from Income Taxes Fair Value Change
------------ ----------------- -----------------

Initial cumulative-effect type adjustment $ (309,000) $ 62,000 $ (247,000)

Amortization of cumulative-effect type
adjustment 71,000 (14,000) 57,000

Difference in the derivative fair value
between the beginning and end of the year (579,000) 116,000 (463,000)
---------- --------- ----------
$ (817,000) $ 164,000 $ (653,000)
========== ========== ==========

EQUIPMENT FINANCING AND CAPITAL LEASES

The Company has financed the purchase of certain equipment through the
issuance of notes payable and under capital leasing arrangements. The notes bear
interest at rates ranging from 9.3% to 12.9%. Such obligations are payable in
monthly installments through September 2004.

Annual maturities for debt, under both the New Agreement and capital
lease obligations as of December 31, 2001, are as follows:

2002.........................................$ 29,078,000
2003......................................... 47,000
2004......................................... 31,000
Thereafter................................... -
------------
$ 29,156,000

7. INCOME TAXES:

The Company's provision for (benefit from) income taxes for the three
years ended December 31, 2001 consists of the following:

Year Ended December 31,
--------------------------------------------------
1999 2000 2001
---- ---- ----

Current tax (benefit) expense:
Federal......................................... $ 3,201,000 $ 683,000 $ (1,229,000)
State........................................... 969,000 254,000 -
------------- ------------- -------------
Total current................................... 4,170,000 937,000 (1,229,000)
------------- ------------- -------------
Deferred tax expense:
Federal......................................... 107,000 416,000 821,000
State........................................... 63,000 60,000 1,000
------------- ------------- -------------
Total deferred.................................. 170,000 476,000 822,000
Total provision for (benefit from)
for income taxes.............................. $ 4,340,000 $ 1,413,000 $ (407,000)
============= ============= =============

The following is a reconciliation of the components of the provision for
(benefit from) income taxes:

2000 2001
---- ----

Provision for (benefit from) income taxes per
the income statement.................................... $ 1,814,000 $ (345,000)
Extraordinary item tax benefit............................ (168,000) -
Cumulative effect tax benefit of adopting SAB 101 (2000)
and FAS 133 (2001)...................................... (233,000) (62,000)
------------ -------------
Provision for (benefit from) income taxes................. $ 1,413,000 $ (407,000)
============ =============

The composition of the deferred tax assets (liabilities) at December 31,
2000 and December 31, 2001 are listed below:

2000 2001
---- ----

Accrued liabilities....................................... $ 617,000 $ 474,000
Allowance for doubtful accounts........................... 631,000 143,000
Other..................................................... 326,000 267,000
------------ --------------
Total current deferred tax assets......................... 1,574,000 884,000
------------ --------------
Property and equipment.................................... (2,212,000) (2,915,000)
Goodwill and other intangibles ........................... (138,000) (236,000)
State net operating loss carry forward.................... - 173,000
Other..................................................... 79,000 328,000
------------ --------------
Total non-current deferred tax liabilities................ (2,271,000) (2,650,000)
------------ --------------
Net deferred tax liability................................ $ (697,000) $ (1,766,000)
============ ==============

The provision for (benefit from) income taxes differs from the amount of
income tax determined by applying the applicable U.S. Statutory income taxes
rates to income before taxes as a result of the following differences:

2000 2001
---- ----

Federal tax computed at statutory rate.................... 34% (34)%
State taxes, net of federal benefit and
net operating loss limitation........................... 6% 2%
Non-deductible goodwill................................... 5% 9%
Other..................................................... 1% 3%
----- -----
46% (20)%
===== =====

8. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company leases office and production facilities in California,
Illinois, Texas and New York under various operating leases. Approximate minimum
rental payments under these noncancellable operating leases as of December 31,
2001 are as follows:

2002.................... $ 3,119,000
2003.................... 2,560,000
2004.................... 2,136,000
2005.................... 1,557,000
2006.................... 1,404,000
Thereafter.............. 1,771,000
--------------
$ 12,547,000

Total rental expense was approximately $3,251,000, $3,206,000 and
$3,482,000 for the three years in the period ended December 31, 2001,
respectively.

9. STOCK REPURCHASE PLAN:

In February 1999, the Company announced that it would commence a stock
repurchase program approved by the Board. The Company did not set a target
number of shares to be repurchased. Under the stock repurchase program, the
Company was to purchase outstanding shares in such amounts and at such times and
prices determined at the sole discretion of management.

The funds for the stock repurchases were provided by the Company's
credit facility with a bank which permitted repurchases up to $5,000,000. During
1999, 2000 and 2001, the Company repurchased $3,064,000, $710,000 and $617,000
of common stock, respectively. The Company was then restricted from further
repurchases by the Amendment.

10. STOCK OPTION PLANS:

STOCK OPTION PLANS

In May 1996, the Board of Directors, approved the 1996 Stock Incentive
Plan (the "1996 Plan"). The 1996 Plan provides for the award of options to
purchase up to 900,000 shares of common stock, as well as stock appreciation
rights, performance share awards and restricted stock awards. In July 1999, the
Company's shareholders approved an amendment to the 1996 Plan increasing the
number of shares reserved for grant to 2,000,000 and providing for automatic
increases of 300,000 shares on each August 1 thereafter to a maximum of
4,000,000 shares. As of December 31, 2001, there were 2,397,000 options
outstanding under the 1996 Plan and 283,000 options were available for grant.

In December 2000, the Company's Board of Directors adopted the 2000
Nonqualified Stock Option Plan (the "2000 Plan"). As amended, the 2000 Plan
provides for the award of options to purchase up to 1,500,000 shares of common
stock. Options may be granted under the 2000 Plan solely to attract people who
have not previously been employed by the Company as a substantial inducement to
join the Company. As of December 31, 2001, there were 890,000 options
outstanding under the plan and 610,000 options were available for grant.

Under both plans, 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 date it was granted.
The stock options generally vest over one to five years and for some options,
earlier if the market price of the Company's common stock exceeds certain
levels.

In accounting for its plans, the Company, in accordance with the
provisions of FAS 123, applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." As a result of this election, the
Company does not recognize compensation expense for its stock option plans since
the exercise price of the options granted equals the fair value of the stock on
the date of grant. Had the Company determined compensation cost based on the
fair value for its stock options at grant date, as set forth under FAS 123, the
Company's net income and earning per share would have been reduced to the pro
forma amounts indicated below:

1999 2000 2001
---- ---- ----

Net income (loss):
As reported................................ $ 5,603,000 $ 1,696,000 $ (1,588,000)
Pro forma.................................. 4,993,000 731,000 (3,360,000)
Earnings (loss) per share:
As reported:
Basic...................................... 0.60 0.18 (0.18)
Diluted.................................... 0.58 0.18 (0.18)
Pro forma:
Basic...................................... 0.54 0.08 (0.37)
Diluted.................................... 0.52 0.08 (0.37)

The fair value for these options was estimated at the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 2000 and 2001, respectively: expected
volatility of 63%, 70% and 88% and risk-free interest rates of 5.28%, 5.59% and
4.53%. A dividend yield of 0% and expected life of five years was assumed for
1999, 2000 an 2001 grants. The weighted average fair value of options granted at
the fair market price on the grant date in 1999, 2000 and 2001 were $4.37, $2.35
and $1.64, respectively. In 2001, the weighted average fair value of options
granted at an exercise price in excess of the fair market price on the grant
date was $0.48. All options granted in 1999 and 2000 were at fair market price.

Transactions involving stock options are summarized as follows:

Number Weighted Average
of Shares Exercise Price
--------- --------------
Balance at December 31, 1998................ 159,231 $ 7.24

Granted during 1999......................... 1,295,437 7.51
Exercised during 1999....................... (7,303) 7.00
Cancelled during 1999....................... (39,044) 7.00
--------- --------
Balance at December 31, 1999................ 1,408,321 $ 7.50
--------- --------
Granted during 2000......................... 1,779,100 3.76
Exercised during 2000....................... (47,698) 5.37
Cancelled during 2000....................... (242,716) 6.12
--------- --------
Balance at December 31, 2000................ 2,897,007 $ 5.43

Granted during 2001......................... 1,176,350 2.06
Cancelled during 2001....................... (786,729) 3.88
--------- --------
Balance at December 31, 2001................ 3,286,628 $ 4.55
========= =======

The Company granted 212,500 and 30,000 stock options to consultants in
2000 and 2001, respectively, of which 100,000 were vested as of December 31,
2000 and 230,000 were vested as of December 31, 2001. The fair value of the
vested options estimated at the grant date using the Black-Scholes option
pricing model following the assumptions mentioned above and expensed during 2000
and 2001 were $329,000 and $110,000, respectively. During fiscal 2000, $151,000
was attributable to services related to the revolving credit agreement,
accordingly, such amount was capitalized as a deferred financing cost to be
amortized over the five-year life of a new credit agreement (see Note 6), and
$178,000 was expensed as a consulting cost. In 2001, $110,000 was expensed as a
consulting cost.

Additional information with respect to the outstanding options as of
December 31, 2001 is as follows (shares in thousands):

Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------

Average Weighted
Option Exercise Remaining Average Number of Average
Price Range . Number of Shares Contractual Life Exercise Price Shares Exercise Price
- --------------------- ---------------- ---------------- --------------- ----------- --------------
$ 1.20 to 5.38 2,625 7.4 $ 3.15 792 $ 3.84
7.00 to 10.00 485 7.3 8.48 480 8.48
10.75 to 15.00 177 7.5 14.68 176 14.68
------ ------
3,287 1,448
===== =====

11. RELATED PARTY TRANSACTIONS

At December 31, 2001, the Company had a loan outstanding to its Chief
Executive Officer totaling $766,000, including accrued interest of $64,000. The
loan is collateralized by a trust deed and bears interest at a rate of 6.19%.
The loan is due on or before December 31, 2002.

At December 31, 2001, the Company also had a $162,000 loan outstanding
to one of its Division Presidents, including accrued interest of $12,000. This
loan is collateralized by 7,093 shares of the Company's common stock owned by
the Division President and bears interest at a rate of 7%. The loan is due on or
before November 15, 2002.

12. 401(K) PLAN

The Company has a 401(K) plan which covers substantially all employees.
Each participant is permitted to make voluntary contributions not to exceed the
lesser of 20% of his or her respective compensation or the applicable statutory
limitation, and is immediately 100% vested. The Company matches one-fourth of
the first 4% contributed by the employee. Company contributions to the plan were
$125,000, $93,000 and $102,000 in 1999, 2000 and 2001, respectively.

13. SUPPLEMENTAL DATA (unaudited)

The following tables set forth quarterly supplementary data for each of
the years in the two-year period ended December 31, 2001 (in thousands except
per share data).

2000
--------------------------------------------------------------
Quarter Ended Year
---------------------------------------------------- Ended
March 31 June 30 Sept 30 Dec 31 Dec 31
-------- ------- ------- ------ ------

Revenues.................................................. $ 19,090 $ 18,480 $ 18,121 $ 19,150 $ 74,841
Gross profit.............................................. 8,205 7,159 6,708 6,875 28,947
Income (loss) before extraordinary item and
adoption of SAB 101..................................... 1,287 786 812 (635) 2,250
Extraordinary item, net of $168 tax benefit (1) .......... - - (232) - (232)
Cumulative effect of adopting SAB 101 (2)................. (322) - - - (322)
--------- --------- --------- --------- ---------
Net income (loss)......................................... $ 965 $ 786 $ 580 $ (635) $ 1,696
========= ========= ========= ========= =========
Earnings per share:
Basic -
Income (loss) per share before extraordinary item
and adoption of SAB 101................................. $ 0.14 $ 0.09 $ 0.09 $ (0.07) $ 0.24
Extraordinary item (1).................................... - - (0.03) - (0.03)
Cumulative effect of adopting SAB 101 (2)................. (0.04) - - - (0.03)
--------- --------- --------- --------- ----------
Net income (loss)......................................... $ 0.10 $ 0.09 $ 0.06 $ (0.07) $ 0.18
========= ========= ========= ========= ==========
Diluted -
Income (loss) per share before extraordinary item
and adoption of SAB 101................................. $ 0.13 $ 0.08 $ 0.09 $ (0.07) $ 0.24
Extraordinary item (1).................................... - - (0.03) - (0.03)
Cumulative effect of adopting SAB 101 (2)................. (0.03) - - - (0.03)
--------- --------- --------- --------- ----------
Net income (loss)......................................... $ 0.10 $ 0.08 $ 0.06 $ (0.07) $ 0.18
========= ========= ========= ========= ==========
- ----------------------------

(1) Amount represents the write off of deferred financing costs, net of tax
benefit, related to a bank credit agreement which was terminated in
Fiscal 2000.

(2) Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. The
amount represents the cumulative effect, net of tax, on January 1, 2000
retained earnings as if SAB 101 had been adopted prior to Fiscal 2000.
The pro forma effect on Fiscal 1999 of adopting SAB 101 would have been
to reduce net income by approximately $81,000, or $0.00 per basic $0.01
per diluted share. The pro forma impact of adopting SAB 101 on the
fourth quarter of 1999 would have been to reduce net income by $122,000,
or $0.01 per basic and diluted share.

2001
--------------------------------------------------------------
Quarter Ended Year
---------------------------------------------------- Ended
March 31 June 30 Sept 30 Dec 31 Dec 31
-------- ------- ------- ------ ------

Revenues................................................. $ 19,108 $ 16,446 $ 16,905 $ 17,169 $ 69,628
Gross profit............................................. 6,465 4,959 5,486 5,854 22,764
Income (loss) before adoption of FAS 133 (3)............. (32) (676) (671) 38 (1,341)
Cumulative effect of adopting FAS 133 (3)................ (139) - (73)(4) (35)(4) (247)
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ (171) $ (676) $ (744) 3 (1,588)
========= ========= ========= ========= =========
Earnings per share:
Basic
Loss per share before adoption of FAS 133 (3)............ $ - $ (0.07) $ (0.08) $ - $ (0.15)
Cumulative effect of adopting FAS 133 (3)................ (0.02) - - - (0.03)
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ (0.02) $ (0.07) $ (0.08) $ - $ (0.18)
========= ========= ========= ========= =========
Diluted
Loss per share before adoption of FAS 133 (3)............ $ - $ (0.07) $ (0.08) $ - $ (0.15)
Cumulative effect of adopting FAS 133 (3)................ (0.02) - - - (0.03)
--------- --------- --------- --------- ---------
Net (loss) income........................................ $ (0.02) $ (0.07) $ (0.08) $ - $ (0.18)
========= ========= ========= ========= =========
- ---------------------------

(3) See Note 6 for a description of the adoption of FAS 133.

(4) Reflects the adjustment each quarter of the effective income tax benefit
rate on the $309,000 gross FAS 133 adjustment.

To the Board of Directors
and Shareholders of Point.360

Our audits of the consolidated financial statements referred to in our report
dated February 25, 2002, which is qualified as to the Company's ability to
continue as a going concern, appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 8 of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP
Century City, California
February 25, 2002

POINT.360
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS

Balance at Charged to Balance at
Beginning of Costs and Deductions/ End of
Allowance for Doubtful Accounts Year Expenses Other Write-Offs Year
- ------------------------------- ------------ ---------- ----- ---------- ----------

Year ended December 31, 2001 $ 1,473,000 $ 529,000 $ -- $(1,321,000) $ 681,000

Year ended December 31, 2000 971,000 2,195,000 -- (1,693,000) 1,473,000

Year ended December 31, 1999 878,000 790,000 -- (697,000) 971,000

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information under the captions "Election of Directors," "Management"
and "Section 16 (a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for the annual meeting of shareholders to be held on
June 5, 2002 (the "Proxy Statement") is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information under the caption "Management" in the Proxy Statement is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents Filed as Part of this Report:

1,2. Financial Statements and Schedules.

The following financial documents of Point.360 are filed as part of this
report under Item 8:

Consolidated Balance Sheets - December 31, 2000 and 2001 Consolidated
Statements of Income - Fiscal Years Ended December 31, 1999, 2000 and
2001 Consolidated Statements of Shareholders' Equity - Fiscal Years
Ended December 31, 1999, 2000 and 2001 Consolidated Statements of Cash
Flows - Fiscal Years Ended December 31, 1999, 2000 and 2001 Notes to
Consolidated Financial Statements

(3) Exhibit
Number Description

3.1 Restated Articles of Incorporation of the Company . (3)

3.2 By-laws of the Company. (3)

10.1 Agreement and Plan of Merger, dated as of December 24, 1999,
among VDI MultiMedia, VDI MultiMedia, Inc. and VMM Merger
Corp. (1)

10.2 Shareholders Agreement, dated as of December 24, 1999, among
VMM Merger Corp., R. Luke Stefanko and Julia Stefanko. (2)

10.3 1996 Stock Incentive Plan of the Company. (3)

10.4 2000 Stock Incentive Plan of the Company.

10.5 Business Loan Agreement (Revolving Credit) between the Company
and Union Bank dated July 1, 1995, as amended on April 1,
1996, and June 1996. (3)

10.6 Joint Operating Agreement effective as of March 1, 1994,
between the Company and Vyvx, Inc. (3)

10.7 Lease Agreement between the Company and 6920 Sunset Boulevard
Associates dated May 17, 1994 (Hollywood facility). (3)

10.8 Lease Agreement between the Company and 3767 Overland
Associates, Ltd. dated April 25, 1996 (West Los Angeles
facility). (3)

10.9 Asset Purchase Agreement, dated as of December 28, 1996 by and
among VDI Media, Woodholly Productions, Yvonne Parker, Rodger
Parker, Jim Watt and Kim Watt. (3)

10.10 Asset Purchase Agreement, dated as of June 12, 1998 by and
between VDI Media and All Post, Inc. (4)

10.11 Asset Purchase Agreement, dated as of November 9, 1998 by and
among VDI Media, Dubs Incorporated, Vincent Lyons and Barbara
Lyons. (5)

10.12 Second Amended and Restated Credit Agreement dated September
28, 2000 between the Company and Union Bank of California,
N.A. (6)

10.13 Secured Promissory Note dated December 28, 2000 between R.
Luke Stefanko and the Company. (7)

10.14 Asset Purchase Agreement dated November 3, 2000 by and among
the Company, Creative Digital, Inc. and Larry Hester. (7)

10.15 First Amendment to Second Amended and Restated Credit
Agreement and Waiver dated March 30, 2001 among the Company,
the Lenders party to the Credit Agreement and Union Bank of
California, N.A. as administrative agent for such Lenders. (7)

10.16 Second Amendment to Second Amended and Restated Credit
Agreement and Forbearance dated June 11, 2001 among the
Company, the Lenders party to the Credit Agreement and Union
Bank of California, N.A. as administrative agent for such
Lenders. (8)

10.17 Third Amendment to Second Amended and Restated Credit
Agreement and Forbearance dated July 20, 2001 among the
Company, the Lenders party to the Credit Agreement and Union
Bank of California, N.A. as administrative agent for such
Lenders. (8)

10.18 Employment Agreement dated June 7, 2001 between the Company
and R. Luke Stefanko. (8)

10.19 Employment Agreement dated June 7, 2001 between the Company
and Alan R. Steel. (8)

10.20 Employment Agreement dated June 7, 2001 between the Company
and Neil Nguyen. (8)

23.1 Consent of Independent Accountants.
------------------------------------

(1) Filed with the Securities and Exchange Commission ("SEC") on
January 11, 2000 as an exhibit to the Company's Form 8-K and
incorporated herein by reference.

(2) Filed with the SEC on January 3, 2000 at part of the Schedule
13D of VMM Corp, Bain Capital Fund VI, L.P., Bain Capital
Partners VI, L.P. and Bain Capital Investors VI, Inc. and
incorporated herein by reference.

(3) Filed with the SEC as an exhibit to the Company's Registration
Statement on Form S-1 filed with the SEC on May 17, 1996 or as
an exhibit to Amendment No. 1 to the Form S-1 filed with the
SEC on December 31, 1996 and incorporated herein by reference.

(4) Filed with the SEC on June 29, 1998 as an exhibit to the
Company's Form 8-K and incorporated herein by reference

(5) Filed with SEC on December 2, 1998 as an exhibit to the
Company's Form 8-K and incorporated herein by reference.

(6) Filed with the SEC on November 14, 2000 as an exhibit to the
Company's Form 10-Q and incorporated herein by reference.

(7) Filed with the SEC on April 11, 2001 as an exhibit to the
Company's Form 10-K and incorporated herein by reference.

(8) Filed with the SEC on August 14, 2001 as an exhibit to the
Company's Form 10-Q and incorporated herein by reference.

(b) Reports on 8-K:

No reports on Form 8-K were filed during the quarter ended December 31,
2001.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: April 9, 2002

POINT.360

By: /s/ R. Luke Stefanko
---------------------
R. Luke Stefanko
President and Chief Executive Officer

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

/s/ R. Luke Stefanko
------------------------
R. Luke Stefanko President and Chief Executive Officer April 9, 2002
(Principal Executive Officer), Director

/s/ Haig S. Bagerdjian
------------------------
Haig S. Bagerdjian Chairman of the Board of Directors April 9, 2002

/s/ Alan R. Steel
------------------------
Alan R. Steel Executive Vice President, April 9, 2002
Finance and Administration,
Chief Financial Officer
(Principal Accounting and
Financial Officer)

/s/ Robert A. Baker
------------------------
Robert A. Baker Director March 18, 2002

/s/ Greggory J. Hutchins
------------------------
Greggory J. Hutchins Director March 28, 2002

/s/ Robert M. Loeffler
------------------------
Robert M. Loeffler Director April 9, 2002

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 333-69174 and 333-69168) of Point.360 of our
report dated February 25, 2002, which is qualified as to the Company's ability
to continue as a going concern, relating to the financial statements, which
appears in this Annual Report on Form 10-K. We also consent to the incorporation
by reference of our report dated February 25, 2002 relating to the financial
statement schedule, which appears in this Form 10-K.

PricewaterhouseCoopers LLP
Century City, California
April 16, 2002