As filed with the Securities and Exchange Commission on February 4, 2008

Registration No. 333-147993

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

Digital Domain

(Exact Name of Registrant as Specified in Its Charter)


Delaware	7812	20-4728392
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code)	(IRS Employer Identification Number)

300 Rose Avenue
Venice, California 90291
(310) 314-2800

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

John C. Textor
Digital Domain
300 Rose Avenue
Venice, California 90291
(310) 314-2800

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

Copies of all communications to:


D. Thomas Triggs, Esq. Brian A. Sullivan, Esq. Owen M. Lewis, Esq. Sullivan & Triggs, LLP 1230 Montana Avenue, Suite 201 Santa Monica, California 90403-5987 (310) 451-8300		James J. Clark, Esq. John Papachristos, Esq. Cahill Gordon & Reindel LLP 80 Pine Street New York, New York 10005-1702 (212) 701-3000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the earlier offering. o

CALCULATION OF REGISTRATION FEE


Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price⁽¹⁾		Amount of Registration Fee
Common Stock, par value $0.0001 per share, to be sold by issuer in the offering⁽²⁾	$	100,000,000	$	3,070	⁽³⁾
Common Stock, par value $0.0001 per share, to be sold by selling stockholders in the offering⁽²⁾	$		$
Total	$		$

(1)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) of Regulation C promulgated under the Securities Act of 1933, as amended.

(2)

Including shares of common stock which may be purchased by the underwriters to cover over-allotments, if any. See “Underwriting”.

(3)

Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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The Information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2008


PRELIMINARY PROSPECTUS

Shares
Common Stock

Digital Domain is selling shares of our common stock, and the selling stockholders identified in this prospectus are selling shares of our common stock. We will not receive any of the proceeds from the sale of the shares by the selling stockholders. We and the selling stockholders have granted the underwriters a 30-day option to purchase up to an additional shares from us to cover over-allotments, if any.

This is an initial public offering of our common stock. We currently expect the initial public offering price to be between $ and $ per share. We have applied to have our common stock listed on The NASDAQ Global Market under the symbol “DTWO”.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE “RISK FACTORS” BEGINNING ON PAGE 11.


	Per Share	Total
Public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to us	$	$
Proceeds, before expenses, to the selling stockholders	$	$

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.


Thomas Weisel Partners LLC		Oppenheimer & Co.
William Blair & Company
Merriman Curhan Ford & Co.		GunnAllen Financial, Inc.

The date of this prospectus is , 2008

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	Page
Prospectus Summary		1
Summary Historical Consolidated and Pro Forma Financial Information		8
Risk Factors		11
Forward-Looking Statements		23
Use of Proceeds		24
Dividend Policy		24
Capitalization		25
Dilution		27
Unaudited Pro Forma Financial Information		29
Selected Historical Consolidated Financial Information		35
Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Business		74
Management		90
Compensation Discussion and Analysis		95
Compensation of Executive Officers		98
Certain Relationships and Related Transactions		106
Principal and Selling Stockholders		108
Description of Capital Stock		110
Shares Eligible for Future Sale		116
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders		118
Underwriting		120
Legal Matters		124
Experts		124
Change in Independent Registered Public Accounting Firm		124
Where You Can Find More Information		125
Index to Consolidated Financial Statements		F-1

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Prospectus Summary

This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock. You should read the entire prospectus carefully, including “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and the notes thereto and our unaudited condensed consolidated financial statements and the notes thereto, before making a decision to invest in shares of our common stock. Unless otherwise noted or the context otherwise requires, the terms “company”, “we”, “us” and “our” refer to Digital Domain, a Delaware corporation, and its consolidated subsidiaries.

Our Business

We are a leading visual effects and animation company based in Venice, California. We create state-of-the-art digital imagery for feature films, television advertising, interactive visual media and the video game industry. We also provide technical software solutions for the visual effects and animation industry. The foundation of our creative and technical work is our proprietary “Digital Studio”, the unique combination of our people, processes, and award-winning technology. Through our Digital Studio we have developed an expertise in digital imagery, gained a reputation for creative and technical talent, and built relationships with leading filmmakers and film studios. We intend to use the proprietary technology developed through our existing Digital Studio operations to produce animated and visual effects-driven feature films and video games. Within this strategy it is our intent to focus on entertainment properties that can be exploited through the convergence of feature films and video games, and we are currently in the initial stages of a co-development/production with a major film studio to simultaneously produce an animated feature film and a video game within the architecture of a video game engine.

Over our 14 year history, the creative and technical excellence of our company, our employees and the projects on which we have worked has been recognized with numerous awards, including:

•

2 Academy Awards®, and 3 additional nominations, for “Best Visual Effects” in a feature film from the Academy of Motion Picture Arts and Sciences®, or the Academy;

•

4 Scientific and Technical Achievement Awards®, from the Academy, for technological contributions to the motion picture industry, including an award for fluid simulation software to be presented by the Academy on February 9, 2008;

•

3 British Academy of Film and Television Arts, or BAFTA, awards for “Best Visual Effects” in a feature film;

•

12 Cannes Lion awards for advertising and advertising campaigns;

•

32 CLIO awards for creative excellence in advertising and 24 Association of Independent Commercial Producers, or AICP, awards for television commercials and related visual effects; and

•

1 Grammy award for “Best Music Video” and 1 MTV Music Video Award for “Best Visual Effects” in a music video.

Our experience in feature film work includes what we believe to be some of the most visually stunning films of all time, including Titanic, Apollo 13, The Fifth Element, I, Robot, Flags of our Fathers, Letters from Iwo Jima, and The Day After Tomorrow. We have worked with all of the major Hollywood studios and many of Hollywood’s leading directors and producers. Our largest recently completed projects consist of work for Pirates of the Caribbean: At World’s End (produced by Jerry Bruckheimer and directed by Gore Verbinski), Transformers (produced by Steven Spielberg and Ian Bryce and directed by Michael Bay), The Golden Compass (produced by Bill Carraro and Deborah Forte and directed by ChrisWeitz) and Meet the Robinsons (produced by Dorothy McKim and directed by Stephen J. Anderson). On January 22, 2008, the Academy announced that the first three of these films constitute the entire slate of films nominated in the category of “Best Visual Effects” for the 2008 Academy Awards®. Our feature film projects currently in production are The Mummy: Tomb of the Dragon Emperor (produced by Stephen Sommers and directed by Rob Cohen), The Curious Case of Benjamin Button (produced by Kathleen Kennedy and Frank Marshall and directed by David Fincher), and another high-profile feature film, each of which is slated for release in 2008.

We are also one of the leading creators of digital imagery for the advertising industry and have created television commercials and online interactive advertising for some of the most recognized directors, advertising agencies and

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corporate advertisers in the world. Our work includes hundreds of effects-laden television commercials, including those created for the following brands, all of which we have worked with on multiple and/or large-scale projects: Acura, Adidas, American Express, Anheuser-Busch, BMW, Burger King, Chrysler, Coca-Cola, Disney, Ford, Gatorade, General Motors, Heineken, Lexus, Mercedes, Microsoft, Mountain Dew, Nike, Pepsi, Saab, Sony, Toyota and Volkswagen.

In addition to utilizing our technology for the creation of digital imagery for our clients, we package our software into discrete end-user products that we license to the professional visual effects and animation industry. Our software product portfolio includes tools for image compositing and solving complex image processing problems, including advanced motion estimation technology. As of December 31, 2007, we license our software products to approximately 9,500 users worldwide.

Our existing business model represents an efficient alternative to traditional research and development efforts and reduces the capital required to strengthen our Digital Studio and expand into the production of video games and feature films. As an example, we have developed video game-related technologies in connection with visual effects projects that provide us with the opportunity to advance the convergence of films and games. Our leadership in this convergence is evidenced in our work on the Gears of War and Halo 3 commercials for Microsoft. Based in part on these experiences, we believe we have developed an alternative to the more costly and time-consuming approach of traditional animation and game development techniques. We now believe we are in position to generate new revenue opportunities through the development and production of full length animated feature films and associated video games within a common technology architecture. In furtherance of this goal, we are in the initial stages of developing a video game with two leading filmmakers.

Our Strengths

We believe our strengths include:

•

Reputation as an Industry Leader. Our history of innovation in the visual effects and animation industry and the role we have played in the production of many successful motion pictures and innovative television commercials have resulted in our reputation as an industry leader. We believe that our reputation consistently makes us one of the top choices for the most complex and challenging visual effects and animation projects.

•

Technology Platform. Utilizing proprietary and third-party technologies, we have developed a visual effects, animation and digital media production platform, which enables our artists to create some of the most stunning digital imagery on screen. We also license software products to the visual effects and animation community, which helps to establish us as one of the leaders in visual effects and animation software innovation.

•

Diversified Revenue and Complementary Lines of Business. We generate revenue from visual effects and animation work, live action production and licensing our software products. Our work for the advertising industry and our software licensing business provide a relatively stable revenue stream to partially offset the inherent cyclicality of the film industry.

•

Long-standing Relationships with Major Studios and Leading Filmmakers. We have worked with all of the major studios and we believe that our long-standing relationships with such studios will continue to provide us early access to large-scale, visual effects-driven and animated feature film projects. Additionally, we have established relationships with the entertainment industry’s leading directors and producers, and a significant number of our projects are with directors and producers with whom we have worked in the past.

•

Long-standing Advertiser and Advertising Agency Relationships. We have produced commercial campaigns for many Fortune 500 companies, and through this work, we have developed long-standing relationships with leading advertising agencies and corporate advertisers.

•

Digital and Live Action Production Infrastructure. We have developed a portfolio of in-house production processes for the advertising industry. This infrastructure provides creative solutions throughout the span of a project from its initial concept through all stages of production.

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•

Experienced Management Team. We have brought together a cohesive management team with extensive strategic, operating and financial expertise.

•

Attraction and Retention of Top Talent. We believe that our reputation for innovative, creative and technical work, our location in Venice, California, our experienced executive management, our entrepreneurial spirit and culture of excellence, and the high-profile nature of our feature film and commercial projects represent attractive conditions for recruiting talent in our industry.

Our Growth Strategy

Key elements of our growth strategy include:

•

Continue the Growth of Our Existing Digital Imagery Business. Visual effects and animation are becoming more widely used in filmed entertainment and advertising media (including television commercials) and are replacing live action footage in many of those projects due to the efficiency of state-of-the-art digital imagery production. We plan to continue to build our existing digital imagery business to take advantage of this trend.

•

Expand the Development and Commercialization of Our Technology. Through The Foundry Visionmongers Ltd., or The Foundry, which we acquired in March 2007, we have the opportunity to expand the market share of our currently licensed technology packages, to productize and commercialize other proprietary technologies we have already developed, and to accelerate the speed to market of our future technological innovations. We intend to continue to develop the capabilities of our compositing software product Nuke and our plug-in suites and to engage in a marketing and sales campaign in an effort to establish Nuke as the leading compositing software used by the visual effects and animation industry.

•

Expand Our Involvement in Feature Film Production. Through our Digital Studio and entertainment industry relationships, we intend to establish a content ownership business which will focus opportunistically on animated and visual effects-driven films. We intend to evaluate, and may invest capital and/or development and production work on terms deemed by us to be favorable in, major studio feature film projects that meet our budgetary, development and distribution criteria in alignment with our growth strategy.

•

Exploit Our Visual Effects and Animation Technology and Expertise in the Development of Video Games. We intend to use our Digital Studio to establish early technology leadership in the convergence of feature films and video games, primarily as it relates to video games developed in association with feature films. It is our goal to focus on developing video games for which we own the intellectual property associated with the games and, to a lesser extent, to develop video games for other publishers for which we own limited or no intellectual property rights. In furtherance of this goal, we are in the initial stages of developing a video game with two leading filmmakers.

•

Continue Our Development of Common Technology Architecture for Feature Films and Video Games. We believe we are in position to generate new revenue opportunities through the development and production of full length animated feature films and associated video games within the common technology architecture of a video game engine. We are currently in the initial stages of a co-development/production with a major film studio to simultaneously produce an animated feature film and a video game within the architecture of a video game engine.

•

Pursue Strategic Acquisitions. We evaluate acquisitions on an ongoing basis and intend to pursue acquisitions of businesses in our industry and related industries that will assist us in achieving our growth strategy. We approach acquisitions in a disciplined manner and intend to focus on acquisitions that strengthen our competitive position.

Industry Background

We provide digital imagery to the filmed entertainment, advertising and video game industries, while also providing technical software solutions for the visual effects and animation industry.

Filmed Entertainment Industry. According to an August 2007 report published by Veronis Suhler Stevenson, or VSS (all references to VSS in this prospectus are to the August 2007 report), box office and home video spending in

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the United States generated $35.4 billion in 2006, with an expectation to reach $44.3 billion by 2011, a 4.6% annually compounded growth rate. We believe the growth of the sector will be supported by online DVD rental services, online film streaming services, the popularity of high-definition DVDs, and an increase in the number of digital cinemas. Animated and visual effects-driven films have been a key driver of the growth of the filmed entertainment sector. For example, the top 20 grossing films of all time (as of December 31, 2007), the top 10 grossing films of 2006, and the top 10 grossing films of 2007, ranked by worldwide box office revenues, were made using significant high-end visual effects or computer-generated animation.

Commercials Visual Effects Industry. According to VSS, the aggregate size of the visual advertising industry (comprised of all segments of the $209.8 billion advertising industry, excluding broadcast and satellite radio) in the United States was approximately $188.9 billion in 2006. This market is expected to grow to approximately $245.2 billion in 2011, a 5.4% annually compounded growth rate. The visual advertising industry is quite broad and fragmented and consists of advertising in a variety of media, including, in 2006, broadcast and pay television advertising ($70.5 billion), online advertising ($15.1 billion), print advertising ($95.8 billion), out-of-home media advertising ($7.1 billion), mobile advertising ($0.5 billion) and advertising via other emerging technologies. Currently, the majority of our revenues derived from advertising-related projects is attributable to our work in the television commercials market.

Video Game Industry. In 2006, video games, including console, handheld, PC, online, mobile and interactive TV games, were a $10.0 billion market in the United States, according to VSS. Video games are also one of the fastest-growing media-related sectors, projected to grow to approximately $20.8 billion in 2011, a 15.6% annually compounded growth rate, according to VSS. Sales in this sector are being spurred by consumer adoption of next-generation game consoles, online games and distribution of wireless games.

Digital Imagery Software Industry. Digital content creation software provides users with the tools that enable visual effects and animation production, 2D and 3D modeling, digital video editing, graphics editing and imaging, and audio editing. According to an April 12, 2007 press release from Jon Peddie Research, the digital content creation software market was approximately $3.0 billion globally in 2006 (up 16% from 2005) and is projected to grow at an annually compounded growth rate of 10% to approximately $4.9 billion in 2012. The digital imagery software industry is a sub-sector of the digital content creation software market and caters to a wide range of end users, from consumers who use the software recreationally to high-end users such as professional animators and digital effects artists.

Risk Factors

In conjunction with your consideration of our strengths and growth strategy described above, you should also consider the following challenges we face:

•

We operate in competitive industries and may not be able to compete successfully;

•

We have a history of losses, including a net loss of $1,546,000, or $0.03 per share, for the Successor period May 13, 2006 to December 31, 2006, and a net loss of $15,035,000, or $0.21 per share, for the nine months ended September 30, 2007;

•

To be successful, we must continue to attract and retain qualified personnel;

•

We may not be able to implement our strategies of entering into the feature film production and video game development and production businesses effectively or at all; and

•

We intend to undertake acquisitions to expand our business, which may pose risks to our business and result in dilution to our stockholders.

For further discussion of these and other challenges we face, you should carefully consider the risks described under “Risk Factors” commencing on page 11. These risks could materially and adversely impact our business, financial condition, operating results and cash flow, which could cause the trading price of our common stock to decline and could result in a partial or total loss of your investment.

The fact that we have significant outstanding debt, primarily in the form of secured notes, may exacerbate these risks; we intend, however, to pay off our secured notes in full with the proceeds of this offering. As of September 30, 2007, we had (i) aggregate outstanding debt of $20.4 million, which included outstanding principal and accrued interest of $20.0 million under our secured notes, and $0.4 million in remaining payments under our outstanding

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capital leases, (ii) an accumulated deficit of $16,581,000, and (iii) stockholders’ equity of $14,596,000. Following the consummation of this offering and the planned prepayment in full of our secured notes, we would have approximately $0.4 million remaining in aggregate outstanding debt and stockholders’ equity of approximately $___________. For more information, see “Use of Proceeds” on page 24 and “Capitalization” on page 25.

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Corporate Information

We were incorporated in the State of Delaware on April 21, 2006, for the purpose of acquiring and holding 100% of the issued and outstanding capital stock of, and operating, Digital Domain Productions, Inc. (formerly, Digital Domain, Inc.), our wholly-owned subsidiary that has been operating since 1993. Our executive offices are located at 300 Rose Avenue, Venice, California 90291, and our telephone number is (310) 314-2800. Our Internet address is www.digitaldomain.com. Information contained on our website is not a part of this prospectus.

Digital Domain® is a registered trademark in the United States. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

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The Offering

Common stock offered by Digital Domain

Common stock offered by the selling stockholders

Common stock to be outstanding after the offering

Use of proceeds

We estimate that net proceeds to us from this offering will be approximately $ million, after deducting the underwriters’ discounts and commissions and other expenses of this offering, based on an assumed offering price of $ per share (the midpoint of the price range on the cover of this prospectus). If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds from this offering will be approximately $ million. We will use approximately $ million of the net proceeds from this offering to repay our existing secured notes. We intend to use the remaining proceeds to implement our growth strategy and for general corporate purposes. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds” on page 24.

Proposed NASDAQ Global Market symbol

“DTWO”

Risk factors

See “Risk Factors” beginning on page 11 and the other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in shares of our common stock.

The number of shares of our common stock that will be outstanding after this offering is based on shares of our common stock outstanding as of September 30, 2007 and excludes:

•

9,861,800 shares of our common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $1.15 per share;

•

13,179,370 shares of our common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.24 per share; and

•

4,435,370 shares of our common stock reserved for issuance in connection with potential future grants of options and restricted stock under our 2006 General Common Stock Equity Plan.

Except as otherwise indicated, all information in this prospectus assumes:

•

stock split of our common stock effected on , 2008;

•

the conversion of all our outstanding shares of convertible preferred stock into 1,000,000 shares of common stock upon the consummation of this offering;

•

the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the consummation of this offering; and

•

no exercise by the underwriters of their option to purchase shares of our common stock from us and the selling stockholders in this offering to cover over-allotments.

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Summary Historical Consolidated and Pro Forma Financial Information

The following table contains summary historical consolidated financial information regarding our business and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Selected Historical Consolidated Financial Information”, “Unaudited Pro Forma Financial Information”, our consolidated financial statements and related notes and our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus.

Our consolidated statements of operations information for the period from January 1, 2006 to May 12, 2006, the period from May 13, 2006 to December 31, 2006, and the years ended December 31, 2005 and 2004 and our consolidated statements of financial condition information as of December 31, 2006 and 2005 are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. We derived our consolidated statements of operations information for the period from May 13, 2006 to September 30, 2006 and the nine months ended September 30, 2007 and our consolidated statements of financial condition information as of September 30, 2007 from our unaudited condensed consolidated financial statements which are included elsewhere in this prospectus. We derived our consolidated statements of financial condition information as of December 31, 2004 from our audited consolidated financial statements which are not included in this prospectus. We derived our consolidated statements of financial condition information as of May 12, 2006 and September 30, 2006 from our unaudited condensed consolidated financial statements that are not included in this prospectus. The unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments that we consider necessary for a fair presentation of our consolidated financial position and results of operations for all periods presented.

The following table also presents summary pro forma statement of operations information for the year ended December 31, 2006 and for the nine months ended September 30, 2007. The pro forma statement of operations information gives effect to (i) the Acquisition and our acquisition of The Foundry Visionmongers Ltd., or The Foundry, as if those transactions occurred on January 1, 2006, and (ii) the issuance by Digital Domain Productions of notes payable in 2006 and 2007 as if those issuances occurred on, respectively, March 12, 2006 and February 23, 2006. The pro forma statement of operations information is not necessarily indicative of either future results of operations or the results that might have occurred if the Acquisition and our acquisition of The Foundry had been consummated on January 1, 2006, or if these notes payable had been issued on such respective dates. We cannot assure you that assumptions used in the preparation of the pro forma statement of operations information will prove to be correct.

The financial statements included in this prospectus may not reflect our results of operations, financial position and cash flows as if we had operated as a stand-alone company during all periods presented. Accordingly, our historical results should not be relied upon as an indicator of our future performance.

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	Predecessor									Successor
	For the Year Ended December 31,						For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007⁽¹⁾			Pro Forma For the Year Ended December 31, 2006			Pro Forma For the Nine Months Ended September 30, 2007
	2004			2005			For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007⁽¹⁾			Pro Forma For the Year Ended December 31, 2006			Pro Forma For the Nine Months Ended September 30, 2007
	(Dollars in Thousands, Except Per Share Data)									(Dollars in Thousands, Except Per Share Data)
Consolidated Statements of Operations Information:
Revenues	$	60,046		$	49,506		$	25,381		$	23,757		$	41,652		$	56,565		$	70,462		$	57,555
Costs and expenses:
Cost of revenues⁽³⁾		48,846			43,626			20,131			18,942			33,753			45,136			54,255			45,148
Selling, general and administrative expenses⁽²⁾^,⁽³⁾		7,658			7,416			5,667			3,540			8,564			19,006			19,230			20,145
Total costs and expenses		56,504			51,042			25,798			22,482			42,317			64,142			73,485			65,293
Operating income (loss)		3,542			(1,536	)		(417	)		1,275			(665	)		(7,577	)		(3,023	)		(7,738	)
Other income (expense):
Interest and investment income		284			501			289			188			423			523			723			524
Interest expense:
Change in fair value of warrant liability		—			—			—			—			—			(4,906	)		—			(4,906	)
Amortization of discount and issuance costs on notes payable		—			—			—			(154	)		(371	)		(982	)		(371	)		(982	)
Interest expense on notes payable		—			—			—			(365	)		(836	)		(1,917	)		(2,776	)		(2,063	)
Interest expense, other		(2	)		(5	)		(2	)		—			(4	)		(2	)		(6	)		(2	)
Other income (expense)		104			145			8			(168	)		(87	)		(153	)		(170	)		(171	)
Income (loss) before income taxes		3,928			(895	)		(122	)		776			(1,540	)		(15,014	)		(5,623	)		(15,338	)
Income tax benefit (expense)		3,180			(3,282	)		(10	)		—			(6	)		(21	)		286			(21	)
Net income (loss)	$	7,108		$	(4,177	)	$	(132	)	$	776		$	(1,546	)	$	(15,035	)	$	(5,337	)	$	(15,359	)
Weighted average shares outstanding:
Basic⁽⁴⁾		2,304,350			2,304,350			2,304,350			65,288,066			66,898,327			71,198,032			69,537,929			71,198,032
Diluted⁽⁴⁾		2,304,350			2,304,350			2,304,350			69,055,217			66,898,327			71,198,032			69,537,929			71,198,032
Net income (loss) per share:
Basic⁽⁵⁾	$	0.06		$	(2.10	)	$	(0.06	)	$	0.01		$	(0.03	)	$	(0.21	)	$	(0.08	)	$	(0.22	)
Diluted⁽⁵⁾	$	0.06		$	(2.10	)	$	(0.06	)	$	0.01		$	(0.03	)	$	(0.21	)	$	(0.08	)	$	(0.22	)
Other Financial Data:
Depreciation and amortization⁽⁶⁾	$	3,224		$	3,526		$	1,444		$	1,739		$	2,859		$	2,925
Consolidated Statements of Financial Condition Information (as of period end):
Cash, cash equivalents and short-term investments	$	24,547		$	22,023		$	16,024		$	18,209		$	20,899		$	24,746
Working capital⁽⁷⁾	$	11,412		$	11,371		$	10,947		$	13,600		$	10,170		$	16,844
Total assets	$	36,053		$	29,971		$	24,978		$	43,148		$	45,266		$	54,557
Warrant liability	$	—		$	—		$	—		$	6,600		$	6,600		$	14,931
Notes payable	$	—		$	—		$	—		$	3,699		$	4,012		$	8,538
Preferred stock											426		$	426		$	426
Series A and Series B preferred stock	$	6,091		$	6,091		$	6,091		$	—		$	—		$	—
Series C mandatorily redeemable preferred stock	$	11,819		$	12,477		$	12,477		$	—		$	—		$	—
Total stockholders’ equity (deficit)	$	2,454		$	(2,421	)	$	(2,557	)	$	19,775		$	17,743		$	14,596

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(1)

Includes impact of the acquisition of The Foundry (see Note 15 of our Notes to Consolidated Financial Statements included elsewhere in this prospectus).

(2)

Includes acquisition costs in the amount of $2.5 million expensed by the Predecessor for the period January 1, 2006 to May 12, 2006. Also includes $0.4 million resulting from the recording of an allowance against a loan receivable made to a potential video game acquisition target for the period ended September 30, 2007. (See Note 14 of our Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this prospectus.) Additionally included in selling, general and administrative expenses for the nine months ended September 30, 2007 is $5.5 million of compensation expense related to the notes payable and shares of restricted stock issued to The Foundry’s former shareholders.

(3)

Includes an aggregate of stock-based compensation expense of $1.2 million for the nine months ended September 30, 2007 and $286,000 for the period May 13, 2006 to December 31, 2006. There was no stock-based compensation expense prior to these periods.

(4)

Basic and diluted net income (loss) per share was the same for each period, as the impact of all potentially dilutive securities outstanding was anti-dilutive.

(5)

The Predecessor’s and Successor’s preferred shares are participating securities due to their participation rights related to dividends (see Note 1 of our Notes to Consolidated Financial Statements included elsewhere in this prospectus). As a result, net income allocated to shares of our common stock for net income (loss) per share purposes is decreased due to accretion, deemed dividends, and income participation rights of the preferred stockholders as follows:



	Predecessor									Successor
	For the Year Ended December 31,						For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007			Pro Forma For the Year Ended December 31, 2006			Pro Forma For the Nine Months Ended September 30, 2007
	2004			2005			For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007			Pro Forma For the Year Ended December 31, 2006			Pro Forma For the Nine Months Ended September 30, 2007
	(In Thousands)									(In Thousands)
Net income (loss)	$	7,108		$	(4,177	)	$	(132	)	$	776		$	(1,546	)	$	(15,035	)	$	(5,337	)	$	(15,359	)
Preferred stockholders accretion, deemed dividends, and income participation		(6,960	)		(659	)		—			(227	)		(247	)		(60	)		(292	)		(60	)
Net income (loss) available to common stockholders	$	148		$	(4,836	)	$	(132	)	$	549		$	(1,793	)	$	(15,095	)	$	(5,629	)	$	(15,419	)

(6)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a description of depreciation and amortization included in cost of revenues and selling, general and administrative expenses.

(7)

Represents total current assets less total current liabilities.

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Risk Factors

This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before making a decision to invest in our common stock. If any of the following risks were to actually occur, our business, results of operations and financial condition could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or part of your investment.

The entertainment and commercial production industries are highly competitive and we may not be able to compete successfully.

The entertainment industry, generally, and the visual effects and animation, software and video game segments thereof, in particular, are highly competitive. Although most feature films require some element of visual effects and animation, there are many visual effects and animation companies competing to provide their services, certain of which are companies that have greater financial, creative and managerial resources than we do. The commercial production industry is also highly competitive. In addition, we believe foreign competitors and competitors with operations or subcontractors in countries such as South Korea, China and India may become an increasing source of competition, due largely to their access to low-cost, high-skilled labor. We may not be able to compete successfully against either current or future competitors. Increased competition could result in reduced revenues, lower margins, and/or loss of market share, any of which could significantly harm our business.

The software and video game segments of the entertainment industry have limited barriers to entry, which allows for vigorous competition both through the entry into the industry of competitors with innovative technologies and by consolidation of companies with complementary products and technologies. As the software and video game segments of the entertainment industry are highly competitive, it may be difficult for us to establish ourselves in these markets. We believe that our future results in these areas depend largely upon our ability to offer products that compete favorably with respect to reliability, performance, ease of use, range of useful features, continuing product enhancements and price. The failure to offer software and video game products meeting these criteria may have an adverse effect on the growth and profitability of our business.

Our operating results may fluctuate significantly, which may cause the market price of our common stock to decrease significantly.

Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Each of the risk factors described in this “— Risks Related to Our Business and Industry” section, and the following factors, may affect our operating results:

•

our ability to continue to attract clients for our services and products;

•

the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our businesses, operations and infrastructure;

•

our focus on long-term goals over short-term results;

•

the results of our investments in high risk projects, such as film production and video game development projects;

•

general economic conditions and those economic conditions specific to our business lines; and

•

geopolitical events such as war, threat of war or terrorist actions.

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In response to these fluctuations, the market price of our common stock could decrease significantly in spite of our operating performance. In addition, our business has historically been cyclical and seasonal in nature, reflecting overall economic conditions as well as client budgeting and buying patterns in the advertising and entertainment industries generally. The cyclicality and seasonality in our business could become more pronounced and may cause our operating results to fluctuate more widely.

We have a history of losses.

Since 2004, we have been unable to generate revenues sufficient to be profitable. We had a net loss of $1,546,000, or $0.03 per share, for the Successor period May 13, 2006 to December 31, 2006 and a net loss of $132,000, or $0.06 per share, for the Predecessor period January 1, 2006 to May 12, 2006, compared to a net loss of $4,177,000, or $2.10 per share, for the year ended December 31, 2005, and a net loss of $15,035,000, or $0.21 per share, for the nine months ended September 30, 2007. We will need to increase revenues to achieve profitability, and we may not be able to do so. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. We also may be unable to accurately estimate our increased operating expenses as we grow. If our operating expenses exceed our expectations, our financial performance will be adversely affected. For more information, see “Selected Historical Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Our success depends on certain key personnel.

Our success depends on the continued service and performance of our senior management and key technical personnel, particularly Mark Miller, our President and Chief Executive Officer, Cliff Plumer, our Chief Technology Officer, and Ed Ulbrich, our Executive Vice President and President of our Commercials Division, whom we rely on for management of our company, development of our business strategy and management of our strategic relationships. Our executive officers are bound by employment and noncompetition agreements. However, while it is customary in the entertainment industry to rely on employment agreements as a method of retaining the services of key personnel, these agreements do not guarantee us the continued services of such employees. The loss of any such key personnel, particularly with little or no notice, could cause delays on certain projects and may also have an adverse impact on our relationship with certain clients. Our employment agreements with our named executive officers are summarized under “Compensation of Executive Officers — Employment Agreements”.

To be successful, we must continue to attract and retain qualified personnel.

Our success depends to a significant extent on our ability to identify, attract, hire, train and retain qualified creative, technical and managerial personnel. Competition for the caliber of talent required to make our products and provide our services, particularly for creative and technical personnel, will continue to intensify as film studios build or expand in-house visual effects and animation capabilities, and as the markets for video games and visual effects software continue to develop. Often we hire individuals on a project-by-project basis, and individuals who work on one or more projects for us may not be available to work on future projects. We may not be successful in identifying, attracting, hiring, training and retaining such qualified personnel in the future and our failure to do so could have an adverse effect on our business.

Investment in feature film and video game projects involves substantial financial risk.

As part of our growth strategy, we may invest substantial capital in feature film and video game projects. We cannot predict the financial success of any such project because the revenue derived from the production and distribution of a feature film or video game depends primarily upon its acceptance by the public, which cannot be accurately forecast. The financial success of a feature film or video game also depends upon the public’s acceptance of competing feature films and video games, critical reviews, the availability of alternative forms of entertainment and leisure time activities, piracy and unauthorized copying and distribution of feature films and video games, general economic conditions, and other tangible and intangible factors, none of which can be predicted with certainty. We expect to invest in a limited number of such projects per year as part of our growth strategy. The commercial failure of just one of those projects could have a material adverse effect on our results of operations, both in the year of release and in future years.

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We may not be able to implement our strategies of entering into the film production and video game development businesses effectively or at all.

Our growth strategy depends on our ability to successfully develop visual effects-driven and animated feature films and video games by leveraging the talents of our key artistic personnel and their experience with visual effects and animation production and our proprietary software technology. As a company, however, we have no experience producing or releasing visual effects-driven or animated feature films and no recent experience developing video games. Entry into each of the film production and video game development and production businesses presents significant challenges and subjects our business to significant risks, including those risks set forth below, and the inability to successfully manage these challenges could adversely affect our successful entry into one or both of these markets. Such failures would significantly limit our ability to grow our business while at the same time diverting significant resources from our digital imagery and software services businesses.

Film Production

Our successful production, completion and distribution of visual effects-driven and animated feature films are subject to a number of risks and uncertainties, including:

•

the success of our film production business will be primarily dependent on audience acceptance of our films, which is extremely difficult to predict;

•

only a relatively few “hit” films account for a significant portion of total revenue in the film industry and any failure by us to produce “hit” films could cause revenue generated from our proposed film production business to fall below expectations;

•

the production and marketing of visual effects-driven and animated films is capital-intensive and our capacity to generate cash from our films may be insufficient to meet our anticipated capital requirements;

•

delays and increased expenditures due to creative problems, technical difficulties, talent availability, accidents, natural disasters or other events beyond the control of the production companies and distributors;

•

the entrance of additional film studios into the visual effects-driven and animated film market, which may result in increased competition for visual effects-driven and animated film audiences and for talented computer graphics animators and technical staff;

•

the costs of producing and marketing feature films have steadily increased and may increase in the future, which may make it more difficult for a film to generate a profit or compete against other films;

•

film production is subject to seasonal variations based on the timing of theatrical motion picture and home entertainment releases and a short-term negative impact on our business during a time of high seasonal demand (such as might result from a natural disaster or a terrorist attack during the time of one of our theatrical or home entertainment releases) could have a disproportionate effect on our results for the year;

•

a strike by one or more of the labor unions or similar groups that provide personnel essential to the production of feature films, including the current strike by Hollywood writers that began on November 5, 2007, or a strike by Hollywood actors which may potentially occur in the summer of 2008, could delay or halt our proposed film production activities;

•

we have no experience producing or releasing visual effects-driven and/or animated feature films and the strain on our personnel from the effort required to produce such feature films and the time required for creative development of future feature films may hinder our ability to consistently release visual effects-driven and animated feature films; and

•

the profitable distribution of a motion picture depends in large part on the availability of one or more capable distributors who are able to arrange for appropriate advertising and promotion, proper release dates and bookings in first-run and other theaters and any decision by those distributors not to distribute or promote one of the motion pictures which we may produce or to promote competitors’ motion pictures to a greater extent than they promote ours, or our inability to enter into profitable distribution arrangements with such distributors, could have an adverse effect on our proposed film production business.

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Video Game Development and Production

Our successful development, manufacture and distribution of video games are subject to a number of risks and uncertainties, including:

•

the life cycle of a video game title is relatively short, generally involving a relatively high level of sales during the first few months after production followed by a rapid decline in sales, making it important for us to be able to develop high quality new products that are popularly received and that have significant potential to become franchise brand properties;

•

the video game business is highly seasonal, with the highest levels of consumer demand occurring in the December quarter, and if we miss this key selling period, or other key selling periods such as the release of a game in conjunction with the release of the related movie, for any reason, including product delays or delayed introduction of a new platform for which we have developed products, our sales will suffer disproportionately;

•

only a relatively few “hit” titles account for a significant portion of total revenue in the video game industry, and hit titles offered by competitors in the video game industry may take a larger share of consumer spending than we anticipate, which could cause revenue generated from our proposed video game business to fall below expectations;

•

the video game industry is subject to increasing regulation of content, consumer privacy, distribution and online hosting and delivery in the key territories in which we conduct or plan to conduct business and such regulation could harm our business by limiting the size of the potential market for our products and by requiring additional differentiation between products for different territories to address varying regulations;

•

while we intend to implement preventative measures designed to reduce the possibility of hidden, objectionable content from appearing in the video games we propose to publish, these preventative measures will be subject to human error, circumvention, overriding, and reasonable resource constraints and if a video game we published were found to contain hidden, objectionable content, the Entertainment Software Ratings Board could demand that we recall a game and change its packaging to reflect a revised rating, retailers could refuse to sell it and demand we accept the return of any unsold copies or returns from customers and consumers could refuse to buy it or demand that we refund their money; and

•

video games are extremely complex software programs that are difficult to develop, manufacture and distribute and the quality controls and preventative measures we have in place may not be effective in detecting defects in our products before they have been reproduced and released into the marketplace, in which case we could be required to recall a product, or we may find it necessary to voluntarily recall a product and/or scrap defective inventory.

We intend to undertake acquisitions to expand our business, which may pose risks to our business and result in dilution to our stockholders.

A key component of our business strategy includes strengthening our competitive position through internal development and growth. However, we intend to selectively pursue strategic acquisitions of companies in our industry and contiguous industries. To finance any acquisition, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us, and, in the case of equity financings, would result in dilution to our stockholders. We may not be able to consummate any acquisitions, or if any such acquisitions are consummated, we may not be able to successfully integrate the operations and management of future acquired companies. If we are unable to attract and consummate acquisitions, our growth could be adversely impacted. Furthermore, any acquisition that is consummated presents several financial and operational risks that could have adverse effects on our operating results. These risks include:

•

costs associated with integrating the acquired businesses;

•

potential liabilities of the acquired businesses;

•

possible adverse tax and accounting effects of the acquisition;

•

diversion of our management’s attention from the day-to-day operation of our business to the integration of the acquired businesses;

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•

key employees of the acquired businesses leaving after the acquisition; and

•

the acquired businesses not performing at the level we projected when we determined the purchase price.

Interruption or failure of our information technology systems could impair our ability to effectively provide our services and products, which could damage our reputation.

Our continued success will depend on our ability to meet our clients’ tight schedules, and our provision of our services and products depends on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses or other attempts to harm our systems, and similar events. Our facility is located in an area with a high risk of major earthquakes and is also subject to break-ins, sabotage and intentional acts of vandalism. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster or other unanticipated problems at our Venice, California facility could result in lengthy interruptions in our projects and our ability to deliver services. Interruptions in our projects could hinder our ability to retain and attract clients and our brand could be damaged if clients believe we are unreliable, either of which, given our reliance on our core strategic client relationships, could result in a decrease in our revenues and otherwise adversely affect our business and operating results.

We depend on advanced technology and computer systems and we cannot predict the effect that rapid technological change or alternative forms of entertainment may have on us or our industry.

The entertainment industry in general, and the visual effects and animation, software and video game segments thereof in particular, continue to undergo significant changes, primarily due to technological developments. The rapid growth of technology and shifting consumer tastes prevent us from being able to accurately predict the overall effect that technological growth or the availability of alternative forms of entertainment may have on the potential revenue from and profitability of our operating units’ services and products. Furthermore, because we are required to provide advanced digital imagery products to continue to win business we must ensure that our production environment integrates the latest tools and techniques developed in the industry. This requires us to either develop these capabilities by upgrading our own proprietary software, which can result in substantial research and development costs and substantial capital expenditures for new equipment, or to purchase third-party licenses, which can result in significant expenditures. In the event we seek to obtain third-party licenses, we cannot guarantee that they will be available or, once obtained, will continue to be available on commercially reasonable terms, or at all. Furthermore, any error or defect in our software, a failure of our hardware or a failure of our backup facilities may result in a delay in delivery of products and services that could result in significantly increased production costs and may affect our ability to complete the work in a timely fashion. Such delays could have an adverse effect on our brand name and our relationship with our clients, which, given our reliance on our core strategic client relationships, could result in a decrease in our revenues and otherwise adversely affect our business and operating results.

Our revenue may be adversely affected if we fail to protect our proprietary technology or enhance or develop new technology.

We depend on our proprietary technology to develop and produce our products and provide our services. Although we have applied for six patents with the United States Patent and Trademark Office, we currently have not been issued any patents. We rely on a combination of copyright and trade secret protection and non-disclosure agreements to establish and protect our proprietary rights. In addition, we also rely on third-party software which is readily available to others. Failure of our copyrights and trade secret protection, non-disclosure agreements or other measures to provide protection of our technology, and the availability of third-party software, may make it easier for our competitors to obtain technology equivalent to or superior to our technology. Such failures may cause us to seek patents on our proprietary technology. No patents may issue from any patent applications we have filed or may file; if patents do so issue, any claims allowed may not be sufficiently broad to protect our technology, and any such patents may be challenged, invalidated or circumvented. Furthermore, if our competitors develop or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance our technology or acquire new technology so that our technology remains competitive. The incurring of such costs may have an adverse effect on our operating results.

We generally enter into non-disclosure or license agreements with our employees, consultants and vendors, and generally control access to and distribution of our software, documentation and other proprietary information.

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Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information, products or technology without authorization, or to develop similar or superior technology independently. Policing unauthorized use of our products is difficult. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. We generally rely on “electronically delivered” software licenses that include an electronic acceptance by the purchaser, which may be unenforceable under the laws of certain jurisdictions. The steps we take may not prevent misappropriation of our technology, and our non-disclosure and license agreements may not be enforceable.

In addition, we may be required to litigate in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have an adverse effect on our business and/or our operating results.

Third-party technology licenses may not continue to be available to us in the future.

We also rely on certain technology that we license from third parties, including software that is integrated and used with internally developed software. These third-party technology licenses may not in the future be available to us on commercially reasonable terms, or at all. The loss of or inability to maintain any of these technology licenses could result in delays in performance of work until such time as equivalent technology is identified, licensed and integrated, and we may not be able to identify, license or integrate any such equivalent technology timely or at all. Any such delays in performance of work could cause us reputational damage and result in a decrease in our revenues during the period of delay, either of which could materially adversely affect our business, operating results and/or financial condition.

Others may assert intellectual property infringement claims against us.

Companies in the visual effects and animation, software and video game segments of the entertainment industry are constantly subject to the possibility of claims that their products, services or techniques misappropriate or infringe the intellectual property rights of third parties. Infringement or misappropriation claims (or claims for indemnification resulting from such claims) may be asserted or prosecuted against us, and any such assertions or prosecutions may adversely affect our business and/or our operating results. Irrespective of the validity or the successful assertion of such claims, we would incur significant costs and diversion of resources with respect to the defense thereof, which could have an adverse effect on our business and/or our operating results. If any claims or actions are asserted against us, we may seek to obtain a license of a third-party’s intellectual property rights; however, under such circumstances a license may not be available on reasonable terms or at all.

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud and, as a result, current and potential stockholders could lose confidence in our financial reporting.

In connection with the audit of our financial statements for the year ended December 31, 2006, our independent registered public accounting firm identified certain material weaknesses in our internal controls over financial reporting, as defined by the standards established by the Public Company Accounting Oversight Board. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses identified by our independent registered public accounting firm in connection with their audit of our financial statements for the year ended December 31, 2006 are summarized below:

•

We did not have adequate controls and procedures with respect to the recording and analysis of our accounts relating to loss contracts as of December 31, 2006. As a result of this material weakness, we recorded a material post-closing adjustment to our financial statements for the year ended December 31, 2006. There were no loss contracts in prior years.

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•

We did not have adequate controls and procedures with respect to the recording and analysis of our accounts relating to amortization of the discount and issuance costs on notes payable at December 31, 2006. As a result of this material weakness, we recorded a material post-closing adjustment to our financial statements for the year ended December 31, 2006. This material weakness related specifically to the accounting for a financing transaction that occurred in 2006.

For a description of our remediation efforts with respect to these material weaknesses, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Control over Financial Reporting.” Additional deficiencies in our internal controls may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our prior period financial statements. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common stock.

Motion picture and software piracy may affect our ability to maximize our revenues.

Motion picture piracy is extensive in many parts of the world, including South America, Asia (including South Korea, China and Taiwan), the countries of the former Soviet Union and other former Eastern bloc countries. The Motion Picture Export Association, the American Motion Picture Marketing Association and the American Motion Picture Export Association monitor the progress and efforts made by various countries to limit or prevent piracy. In the past, these various trade associations have enacted voluntary embargoes on motion picture exports to certain countries in order to pressure the governments of those countries to become more aggressive in preventing motion picture piracy. In addition, the U.S. government has publicly considered implementing trade sanctions against specific countries which, in the opinion of the U.S. government, do not prevent copyright infringement of U.S.-produced motion pictures; however, future voluntary industry embargoes or U.S. government trade sanctions may not be enacted. If enacted, such actions could impact the amount of revenue that we realize from the international exploitation of motion pictures, depending upon the countries subject to such action and the duration of such action. If not enacted or if other measures are not taken, the motion picture industry (including us) may continue to lose an indeterminate amount of revenue as a result of motion picture piracy.

In addition, the proliferation of technology designed to circumvent the protection measures used in software products, the availability of broadband access to the Internet, the ability to download pirated copies of software from various Internet sites, and the widespread proliferation of Internet cafes using pirated copies of software, have all contributed to ongoing and expanding piracy. Though we plan to take steps to make the unauthorized copying and distribution of our products more difficult, these efforts may not be successful in controlling the piracy of our software and proposed video game products. This could have a negative effect on our growth and profitability in the future.

We could be adversely affected by strikes or other union job actions.

Our visual effects and animation projects generally utilize actors, directors, and writers who are members of the Screen Actors Guild, Directors Guild of America, and Writers Guild of America, respectively, pursuant to industry-wide collective bargaining agreements. Many projects also employ members of a number of other unions, including, without limitation, the International Alliance of Theatrical and Stage Employees. A strike by one or more of the unions that provide personnel essential to the production of our projects could delay or halt our ongoing production activities. A union-related halt or delay, including the current strike by Hollywood writers that began on November 5, 2007, or a strike by Hollywood actors which may potentially occur in the summer of 2008, could cause a delay or interruption in our work on visual effects and animation projects that could result in a decrease in our revenues and otherwise have a material adverse effect on our business, operating results or financial condition.

Film production incentives and subsidies offered by foreign countries and states where we do not have operations could affect our ability to secure work on visual effects and animation projects.

Production incentives and subsidies for feature film production are widely used throughout the industry and are important in helping film studios and production companies to offset production costs. Many countries and states have programs designed to attract feature film production. Incentives and subsidies are used to reduce feature film production costs and such incentives and subsidies take different forms, including direct government rebates, sale and

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leaseback transactions or transferable tax credits. Although we currently believe that being based in Venice, California puts us at a competitive advantage due to Venice’s proximity to Hollywood, film studios and production companies may send their visual effects and animation work to companies in foreign countries and states where we do not have operations in order to take advantage of the incentives and subsidies offered there. Any diminution in our ability to secure work on visual effects and animation projects due to such incentives and subsidies could have a material adverse effect on our business, operating results or financial condition.

We depend on revenues from a few significant relationships and any loss, cancellation, reduction, or delay in these relationships could harm our business.

We have historically derived a material portion of our revenues from a limited number of customers and large projects in our feature films segment. These large projects, which usually extend over six to 18 months, have generally been with major motion picture studios in the United States. Different studios have represented greater than 10 percent of our consolidated revenues in different years. Significant customers over the last few years have included Walt Disney Pictures, Columbia Pictures, Paramount Pictures, 20th Century Fox, Universal Pictures, New Regency Productions and Warner Bros. Pictures. We expect that in future periods we will continue to enter into contracts with customers which represent a significant concentration of our revenues. If such contracts were terminated, our revenues and net income could significantly decline. Our success will depend on our continued ability to develop and manage relationships with our significant customers. For example, during the Successor period May 13, 2006 through December 31, 2006, contracts with two major studios for work in connection with feature films accounted for approximately 47% of our revenues for that period.

Any adverse change in our relationship with any of the major motion picture studios or other of our principal customers could have an adverse effect on our business. Although we are attempting to expand our customer base, we expect that our customer concentration will not change significantly in the near future. The markets in which we sell our services and products are dominated by a relatively small number of customers. We may not be able to retain our largest customers, we may not be able to attract additional customers, and our customers may not continue to buy our products and services in the same amounts as in prior years. The loss of one or more of our largest customers, any reduction in revenues from these customers or our inability to successfully develop relationships with additional customers each could significantly harm our business.

We do not have an agreement with Michael Bay for the development or production of visual effects-driven and animated films or video games and he has no contractual obligation to direct business to us.

We do not have an agreement with Michael Bay, our Co-Chairman and a film director and producer who has directed such films as Transformers and Armageddon, for the development or production of visual effects-driven and animated films or video games. While Mr. Bay has indicated that he intends to work with us in developing projects in these areas in the future, he is under no contractual obligation to do so and he may decide to do so with one or more of our competitors. We also do not have an agreement with Mr. Bay to provide visual effects and animation on films he will direct in the future. While Mr. Bay may recommend that we provide the visual effects and animation to the studio producing a film he is directing, the studio will make the final decision on who provides the visual effects and animation for that film and such studio may not follow Mr. Bay’s recommendation. The failure to capitalize on our relationship with Mr. Bay through the development or production of visual-effects driven and animated feature films or video games, or through our engagement to provide visual effects and animation on films he is producing, could harm our reputation in the industries in which we operate and have an adverse impact on the growth of our business.

The inability to successfully manage the growth of our business may have an adverse effect on our operating results.

We expect to experience growth in the number of employees and the scope of our operations. Such growth will result in increased responsibilities for our management. Since our acquisition of Digital Domain Productions on May 12, 2006, we have begun to implement improvements to its financial, inventory, management and reporting controls and to hire additional numbers of technical, administrative and management personnel. While necessary, these improvements involve expenses that limit our management’s ability to pursue potential market opportunities. If our management is unable to successfully manage expenses in a manner that allows us to both improve operations and at the same time pursue potential market opportunities, the growth of our business could be adversely impacted, which may, in turn, negatively affect our operating results or financial condition.

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We may not be able to comply with certain financial covenants under our secured notes.

As of September 30, 2007, we had approximately $20.0 million in principal and accrued interest outstanding under our secured notes, which are secured by substantially all of our assets. Pursuant to the terms of these notes, we are subject to a number of financial covenants, including with respect to maintaining (i) a specified maximum ratio of our consolidated indebtedness to our trailing twelve-month consolidated earnings before interest, taxes, depreciation and amortization, and all other non-cash charges to consolidated net income, or consolidated EBITDA, and (ii) our specified minimum ratio of our trailing twelve-month consolidated EBITDA (less unfinanced capital expenditures) to interest expense and other fixed charges, such as payments on our indebtedness and income taxes, over the same twelve-month period, in each case on specified quarterly test dates commencing with September 30, 2008. We intend to use the proceeds of this offering to pay off in full our secured notes, whereupon these covenants will cease to have any effect. In the event that this offering were not consummated prior to September 30, 2008, we may be required to take other actions in order to be in compliance with these covenants as of September 30, 2008 and subsequent test dates. In such event, we would explore the full range of options available to us for avoiding a default with respect to these covenants, including attempting to do one or more of the following: (i) raising equity capital in a private financing; (ii) obtaining from the holder of these notes an amendment to or waiver of one or both of these covenants; and (iii) in combination with one or both of the foregoing actions, reconfiguring our business model to reduce the amount or timing of our expenditures. We may not be successful in any of these attempts. In the event that we fail to comply with either of these covenants on any applicable test date, and fail to cure the resulting default as permitted by the terms of our agreements with the lender, the holder of our secured notes would have the right to declare the secured notes and all amounts outstanding thereunder immediately due and payable. The holder would then have the right to enforce its security interest in our assets, which would have a material adverse effect on our business and financial condition. For more information, see Note 8 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”.

Changes in U.S., regional or global economic conditions could adversely affect our profitability.

Our services, and the products we plan to offer, are luxuries that are dependent on the amount of disposable income available to consumers. A decrease in economic activity in the United States or in other regions of the world in which we do business could adversely affect demand for films and video games. In addition, an increase in price levels generally, or in price levels in a particular sector such as the energy sector, could result in a shift in consumer demand away from entertainment products such as films and video games. Such events could cause a decrease in the demand for both the visual effects and animation services we offer as well as for the films and video games we propose to produce, either of which would have an adverse effect on our profitability and operating results.

Our common stock has not been publicly traded, and we expect that the price of our common stock will fluctuate substantially.

Before this offering, there has been no public market for shares of our common stock. An active public trading market may not develop after the consummation of this offering or, if developed, may not be sustained. The price of the shares of common stock sold in this offering will not necessarily reflect the market price of the common stock after this offering. The market price for the common stock after this offering will be affected by a number of factors, some of which are beyond our control, including those described above under “— Risk Related to Our Business and Industry” and the following:

•

announcements by us or our competitors of significant contracts, productions, projects, acquisitions or capital commitments;

•

changes in financial estimates by analysts;

•

variations in quarterly operating results;

•

general economic conditions;

•

terrorist acts;

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future sales of our common stock; and

•

investor perception of us and the industries in which we operate.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated to and disproportionate to the operating performance of companies in the visual effects and animation, software and video game segments of the entertainment industry. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.

Securities analysts may not initiate coverage of our common stock or may issue negative reports, either of which may have a negative impact on the market price of our common stock.

Securities analysts may elect not to provide research coverage of our common stock after the consummation of this offering. If securities analysts do not cover our common stock after the consummation of this offering, the lack of research coverage may adversely affect the market price of our common stock. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. If one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. In addition, rules mandated by the Sarbanes-Oxley Act of 2002 and a global settlement reached in 2003 between the Securities and Exchange Commission, or SEC, other regulatory agencies and a number of investment banks have led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms will be required to contract with independent financial analysts for their stock research. It may be difficult for companies such as ours, with smaller market capitalizations, to attract independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.

A limited number of our stockholders will continue to own a large percentage of our voting stock after this offering, which will allow them to exercise significant influence over matters subject to stockholder approval.

After this offering, our executive officers, directors and their affiliated entities will beneficially own or control approximately % of the outstanding shares of our common stock ( % if the underwriters exercise their over-allotment option in full). Accordingly, these executive officers, directors and their affiliated entities, acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other stockholders. This significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

We do not intend to pay dividends on our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general corporate purposes. Any payment of future cash dividends will be at the discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase shares of our common stock.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders.

Prior to the consummation of the offering, we will file an amended and restated certificate of incorporation and amended and restated bylaws with the Secretary of State of the State of Delaware. Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third-party to acquire us, even if doing so would benefit our stockholders. These provisions will:

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permit our board of directors to issue up to 25,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in our control;

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provide that all vacancies on our board of directors, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

•

not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose; and

•

provide that special meetings of our stockholders may be called only by the chairman or vice chairman of the board, our president, the board of directors or one or more stockholders holding shares of our common stock representing at least 50% of the combined voting power of our common stock.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with any stockholder who owns, or at any time in the prior three years owned, 15% or more of its outstanding voting stock for a period of three years following the date on which the stockholder became such an “interested stockholder”. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

Upon completion of this offering, there will be shares of our common stock outstanding assuming no exercise of the over-allotment option by the underwriters (or shares of our common stock if the underwriters exercise their over-allotment option in full). The shares being sold in this offering (or shares, if the underwriters exercise their over-allotment option in full) will be freely tradable immediately after this offering (except for shares purchased by our affiliates). Of the remaining shares not sold in this offering, shares are held by our directors, officers and certain of our stockholders who have entered into 180-day lock-up agreements. Those parties will be able to sell their respective shares in the public market upon termination of the lock-up period, subject to the applicable volume, manner of sale, holding period and limitations of Rule 144 under the Securities Act of 1933, as amended. The remaining shares outstanding are not subject to lock-up periods and will be tradable in the public market upon termination of this offering, subject to applicable Rule 144 limitations. In addition, as of , 2008, there are outstanding options to purchase shares of our common stock and outstanding warrants to purchase shares of our common stock, which, if exercised, will result in additional shares becoming available for sale upon expiration of the lock-up period. Thomas Weisel Partners LLC and Oppenheimer & Co. Inc. may consent to the release of some or all of the shares subject to lock-up agreements for sale prior to the expiration of the applicable lock-up agreement. A large portion of these shares and options are held by a small number of persons and investment funds. Sales by these stockholders, option holders or warrant holders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. Moreover, after this offering, holders of shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we may file for ourselves or other stockholders.

We also intend to register all shares of our common stock reserved for issuance under our 2006 General Common Stock Equity Plan. Upon the completion of this offering, an aggregate of shares of our common stock will be reserved for future issuance under this plan. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the Rule 144 volume limitations and other requirements applicable to our affiliates and the applicable lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

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You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.

If you purchase shares of our common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate and substantial dilution of $ per share, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to this offering and an assumed initial public offering price of $ , the mid-point of the price range on the cover page of this prospectus. Investors purchasing shares of our common stock in this offering will contribute approximately % of the total amount we have raised to fund our company, but will own only approximately % of the shares outstanding immediately following the consummation of this offering. In the past, we issued certain options to acquire our common stock at prices significantly below the assumed initial public offering price. As of , 2008, we had options outstanding with exercise prices ranging from $ to $ and with a weighted average exercise price of $ per share and a weighted average remaining contractual life of years. As of , 2008, we had warrants outstanding to purchase common stock with a weighted average exercise price of $ per share. In addition, as of , 2008, shares of our common stock are reserved for issuance in connection with potential future grants of stock options and restricted stock under our 2006 General Common Stock Equity Plan. To the extent the holders exercise those outstanding options and/or warrants, or we issue additional options that are then exercised or restricted stock under our 2006 General Common Stock Equity Plan, you will sustain further dilution. In addition, as of , 2008, there are outstanding options to purchase shares of common stock in Digital Domain Productions, Inc. under its 1995 Stock Option Plan, which, if exercised in full, would reduce our percentage ownership of this currently wholly-owned subsidiary by less than 1%. If we raise additional funding by issuing equity securities or convertible debt, or if we acquire other companies or technologies or finance strategic alliances by issuing equity, the newly issued or issuable shares will further dilute your percentage ownership and may also reduce the value of your investment.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and The NASDAQ Global Market, have imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. As a result of our required compliance with Section 404 of the Sarbanes-Oxley Act, we will incur substantial accounting expense and expend significant management efforts and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to ensure such compliance. Furthermore, if we identify any issues in complying with the requirements of the Sarbanes-Oxley Act (for example, if we or our independent registered public accounting firm identify a material weakness or significant deficiency in our internal controls over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation, investor perceptions of us and the trading price of our common stock.

We have broad discretion in the use of the net proceeds from this offering, and we may not use these proceeds effectively.

We have not determined the specific allocation for the majority of the net proceeds of this offering. Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not necessarily improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business or financial condition, cause the price of our common stock to decline and delay product development.

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Forward-Looking Statements

This prospectus contains forward-looking statements that involve risks and uncertainties relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to:

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the anticipated benefits and risks associated with our business strategy;

•

our ability to expand into the visual effects-driven and animated feature film production business and the video game development and production business;

•

our future operating results and the future value of our common stock;

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the anticipated size or trends of the markets in which we compete and the anticipated competition in those markets;

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our ability to attract customers in a cost-efficient manner;

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our ability to attract and retain qualified management and technical personnel;

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potential government regulation;

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our future capital requirements and our ability to satisfy our capital needs;

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the anticipated use of the proceeds realized from this offering;

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the potential for additional issuances of our securities;

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the possibility of future acquisitions of businesses or assets; and

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possible expansion into international markets.

Furthermore, in some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the “Risk Factors” section above. These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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Use of Proceeds

At an assumed initial public offering price of $ per share, which is the midpoint of the range set forth on the cover page of this prospectus, we will receive approximately $ million from our sale of shares of our common stock in this offering, after deducting estimated offering expenses of approximately $ and the underwriting discounts and commissions payable to the underwriters. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds from this offering will be approximately $ million.

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use approximately $ million of our net proceeds from this offering to prepay in full our existing secured notes; which notes (i) carry an interest rate of 15% per annum, (ii) require quarterly interest payments in arrears on March 30, June 30, September 30, and December 30, (iii) are due on July 21, 2011 and (iv) are reflected at $8,538,000 in our unaudited condensed consolidated financial statements at and for the nine months ended September 30, 2007 included elsewhere in this prospectus (the face amount is $20,033,000 due to the fact the notes are reflected net of discounts and issuance costs in such financial statements). In order to prepay these notes, we are required to pay the holders thereof, in addition to the face amount, a redemption premium equal to a declining percentage of the outstanding principal amount thereof as the maturity date of the notes approaches, as follows: from July 21, 2007 to July 20, 2008, 125.0% of the outstanding principal amount; from July 21, 2008 to July 20, 2009, 110.0% of the outstanding principal amount; from July 21, 2009 to July 20, 2010, 105.0% of the outstanding principal amount; and from July 21, 2010 to July 20, 2011, 102.5% of the outstanding principal amount.

We will use our remaining net proceeds from this offering to implement our growth strategy by, among other things, expanding our technology development and licensing program and attempting to enter into the production of animated and visual effects-driven feature films and the development and production of video games, as well as for general corporate purposes, including working capital and capital expenditures. We expect that the implementation of our growth strategy may also take place through the acquisition of, or investment in, complementary businesses, technologies or other assets, and through investment in joint ventures, although we have no present agreement to make any such acquisitions or investments. Pending use of the net proceeds of this offering, we intend to invest the funds in cash, cash equivalents (which may include Treasury Bills, certificates of deposit, money market accounts, money market mutual funds, and other liquid investments), or short-term investment grade securities. Management’s plans for the proceeds of this offering are subject to change due to unforeseen circumstances. We cannot specify with certainty the particular uses for the net proceeds to be received by us upon consummation of this offering. Accordingly, our management will have broad discretion in using the net proceeds of this offering.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends on such stock in the foreseeable future. Investors seeking cash dividends should not purchase shares of our common stock.

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Capitalization

The following table sets forth our capitalization as of September 30, 2007:

•

on an actual basis; and

•

on a pro forma basis to give effect to the conversion of all outstanding shares of our preferred stock into an aggregate of 1,000,000 shares of our common stock, and the removal of the put option feature of certain of the warrants issued by us, resulting in a reclassification of the related warrant liability to additional paid-in capital; and

•

on a pro forma as adjusted basis to give effect to the sale of shares of common stock by us in this offering at the offering price of $ per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions payable to the underwriters, the non-accountable expense allowance for the underwriters and the other estimated offering expenses payable by us.

You should read this table in conjunction with our unaudited condensed consolidated financial statements and the related notes as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. All share numbers reflect a for stock split of our common stock to be effected prior to the consummation of this offering.


	As of September 30, 2007
	Actual			Pro Forma			Pro Forma As Adjusted⁽¹⁾
	(In Thousands)
Notes payable⁽²⁾	$	8,538		$	8,538
Capital lease obligations (current and long term)		383			383
Warrant liability⁽³⁾		14,931			—
Preferred Stock, $0.0001 par value per share (1,000,000 shares authorized, issued and outstanding, actual; and no shares authorized, issued or outstanding, pro forma and pro forma as adjusted)		426			—
Stockholders’ equity
Common Stock, $0.0001 par value per share (180,000,000 shares authorized; 76,910,214 shares issued and outstanding, actual; 77,910,214 shares issued and outstanding, pro forma; and shares issued and outstanding, pro forma as adjusted)		8			8
Additional paid-in capital		31,010			46,367
Accumulated other comprehensive income		159			159
Accumulated deficit		(16,581	)		(16,581	)
Total stockholders’ equity		14,596			29,953
Total capitalization	$	38,874		$	38,874

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $____ per share would increase (decrease) by $___ million each of additional paid-in capital, total stockholders’ equity and total capitalization, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions payable to the underwriters, the non-accountable expense allowance for the underwriters and the other estimated offering expenses payable by us.

(2)

Notes payable is net of discount and issuance costs of $11,495,000 at September 30, 2007. The difference between the carrying amount and the principal amount of $20,033,000 is being recorded as interest expense from the date of issuance to the maturity date of July 21, 2011 using the effective interest method of accounting.

(3)

See Note 9 of our Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this prospectus.

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The number of shares shown as outstanding as of September 30, 2007 above excludes:

•

9,861,800 shares of our common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $1.15 per share;

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13,179,370 shares of our common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.24 per share; and

•

4,435,370 shares of our common stock reserved for issuance in connection with potential future grants of options and restricted stock under our 2006 General Common Stock Equity Plan.

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Dilution

Purchasers of shares of our common stock in this offering will experience an immediate and substantial dilution in net tangible book value per share. Dilution is the amount by which the initial public offering price paid by purchasers of shares of our common stock in this offering exceeds the net tangible book value per share immediately following the consummation of this offering. Net tangible book value represents our total tangible assets reduced by our total liabilities. Net tangible book value per share represents our net tangible book value divided by the number of shares of our common stock outstanding.

As of September 30, 2007 our net tangible book value was $2.2 million and our net tangible book value per share was $0.03. As of September 30, 2007, after giving effect to the conversion of all outstanding shares of our preferred stock and the reclassification of our warrant liability, the pro forma net tangible book value would have been $17.6 million and the pro forma net tangible book value per share would have been $0.23. As of , 2008 after giving effect to the sale of the shares of our common stock offered by this prospectus at an assumed initial public offering price of $ per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions, the non-accountable expense allowance for the underwriters and other estimated offering expenses payable by us, the pro forma as adjusted net tangible book value per share of our common stock would have been $ per share. Therefore, new investors in our common stock would have been diluted by approximately $ per share. At the same time, our existing stockholders would have realized an increase in pro forma as adjusted net tangible book value of $ per share after this offering. The following table illustrates this per share dilution:


Assumed initial public offering price per share			$
Net tangible book value per share as of September 30, 2007	$	0.03
Increase per share attributable to conversion of preferred stock and reclassification of warrant liability	$	0.20
Pro forma net tangible book value per share before this offering	$	0.23
Increase in pro forma net tangible book value per share attributable to this offering
Pro forma as adjusted net tangible book value per share
Dilution per share to new investors			$

A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value as of , 2008 by approximately $ million, the pro forma as adjusted net tangible book value per share after this offering by $ and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance for the underwriters and other estimated offering expenses payable by us.

The following table summarizes, as of September 30, 2007 as described above, the number of shares of our common stock purchased by our existing stockholders and estimated to be purchased by our new investors in this offering, and the total consideration paid and the average price per share paid by existing and new stockholders:


	Shares Purchased				Total Consideration				Average Price Per Share
	Number		%		Amount		%		Average Price Per Share
Existing stockholders⁽¹⁾		77,910,214		%	$	31,471,000		%	$	0.40
New investors
Total				%	$			%

(1)

Assumes conversion of 1,000,000 shares of our convertible preferred stock to 1,000,000 shares of our common stock.

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A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid to us by investors participating in this offering by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions, the non-accountable expense allowance for the underwriters and other estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option to purchase additional shares in this offering in full, our existing stockholders would own % and our new investors would own % of the total number of shares of our common stock outstanding after this offering.

The number of shares shown as outstanding as of September 30, 2007 above excludes:

•

9,861,800 shares of our common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $1.15 per share;

•

13,179,370 shares of our common stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $0.24 per share; and

•

4,435,370 shares of our common stock reserved for issuance in connection with potential future grants of options and restricted stock under our 2006 General Common Stock Equity Plan.

Because we expect the exercise prices of outstanding options and warrants to purchase shares of our common stock to be significantly below the initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, investors purchasing shares of our common stock in this offering will suffer additional dilution when and if these options or warrants are exercised, or if we issue additional options that are then exercised or restricted stock under our 2006 General Common Stock Equity Plan.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

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Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information has been derived by the application of pro forma adjustments to our historical consolidated financial statements and the historical consolidated financial statements of our predecessor company.

The unaudited pro forma condensed consolidated statement of operations information gives effect to (i) the acquisition on May 12, 2006 of Digital Domain Productions, Inc. (formerly Digital Domain, Inc.), or Digital Domain Productions, by Digital Domain and the acquisition on March 23, 2007 by Digital Domain of The Foundry Visionmongers Ltd., or The Foundry, as if those transactions occurred on January 1, 2006, and (ii) the issuance by Digital Domain Productions of notes payable on July 21, 2006 (the proceeds from which partially financed our acquisition of Digital Domain Productions) and on May 16, 2007 (the proceeds from which partially financed our acquisition of The Foundry) as if those issuances occurred on, respectively, March 12, 2006 and February 23, 2006. In the case of each of these notes payable issuances, the number of days by which the pro forma related acquisition date of January 1, 2006 precedes the pro forma notes payable issuance date is equal to the number of days by which the actual related acquisition date precedes the actual notes payable issuance date (70 days, in the case of our acquisition of Digital Domain Productions, corresponding to the period commencing with the actual related acquisition date of May 12, 2006 and ending with the actual notes payable issuance date of July 21, 2006; and 54 days, in the case of our acquisition of The Foundry, corresponding to the period commencing with the actual related acquisition date of March 23, 2007 and ending with the actual notes payable issuance date of May 16, 2007). All financial effects resulting from those acquisition transactions and the issuance of those notes payable are already reflected in our unaudited condensed consolidated balance sheet as of September 30, 2007 included elsewhere in this prospectus, and accordingly no pro forma condensed consolidated balance sheet is presented.

The Acquisition

On May 12, 2006, DD Acquisition Subsidiary, Inc., a wholly-owned subsidiary of Digital Domain, merged with and into Digital Domain Productions, which we refer to as the Acquisition. As a result of the Acquisition, DD Acquisition Subsidiary, Inc. ceased to exist and Digital Domain Productions continued the operation of its business as a wholly-owned subsidiary of Digital Domain. The merger has been accounted for using the purchase method of accounting. The consideration consisted of (i) cash in the aggregate amount of $4,500,000 paid on May 12, 2006 and (ii) an aggregate amount of $30,000,000 in original principal amount of promissory notes, which we refer to as the Sellers’ Notes. The notes had a maturity date of December 31, 2006, accrued interest at a rate of 10% per annum, were secured by the shares of Digital Domain Productions common stock owned by Digital Domain and were guaranteed by certain of our officers and directors, who are also stockholders, in the aggregate amount of $9,000,000. Pursuant to the terms of the Sellers’ Notes, we made a mandatory prepayment on such notes in the amount of $4,500,000 on May 13, 2006, the first business day following the date the merger was effective. There were certain optional prepayment provisions under the terms of these notes that allowed the notes to be deemed paid-in-full and automatically cancelled if we paid the holders of the notes a total amount equal to (i) 80% of the original principal amount, without interest, on or before the 60th day from the date the notes were issued or (ii) 90% of the original principal amount, with interest, after the 60th day and on or before the 90th day from the date the notes were issued. We received an extension of time to pay off the notes at 80% of the original principal amount, without interest. On July 21, 2006, the notes were subsequently paid off in full for a total amount of $24,000,000 (80% of the original principal amount, without interest). The fair value of the purchase consideration was determined to be $28,500,000, consisting of $4,500,000 in cash and $24,000,000 in notes. The total purchase price, including acquisition costs of $500,000, was $29,000,000. The purchase price was allocated as follows: $13,827,000 to net tangible assets acquired, $1,430,000 to identified intangibles with definite lives, $1,870,000 to internally developed software, $4,300,000 to Digital Domain Productions trademarks with indefinite lives and $7,573,000 to goodwill. The weighted average amortization period for the identifiable intangible assets with definite lives is estimated to be 3.8 years. Goodwill is not expected to be deductible for income tax purposes.

The estimated fair value of the guarantees was $180,000 and was recorded as other expense and an increase in additional paid-in-capital in the consolidated financial statements for the Successor period from May 13, 2006 through December 31, 2006.

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The Foundry Acquisition

On March 23, 2007, we acquired the entire outstanding capital stock of The Foundry, a company incorporated and registered in England and Wales and whose principal office is located in London, England. We refer to this transaction as the Foundry Acquisition. The Foundry is a visual effects software developer with expertise in image vision and optical flow and specializing in sophisticated plug-ins that are compatible with compositing software packages. The consideration for the transaction consisted of (i) cash in the amount of approximately £550,000 ($1,084,000) which was paid on March 28, 2007, (ii) promissory notes, which we refer to as the Foundry Notes, payable in the aggregate initial principal amount of £2,500,000 ($4,908,000) due upon the earlier of: (a) January 25, 2008 or (b) the completion of an equity offering by us in excess of $10,000,000, and (iii) restricted shares of our common stock having an aggregate value of £2,000,000 ($3,922,000). As of August 3, 2007, as a result of our 2007 private placement of common stock (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — 2007 Private Placement of Common Stock”), we paid in full all amounts owing under the Foundry Notes, as required by the terms thereof.

The cash and expenses related to the Foundry Acquisition, aggregating $1,453,000, plus a note payable of $58,000 and restricted stock valued at $47,000 that were issued to a former shareholder of The Foundry who was not subject to continuing employment, have been accounted for as the purchase price of the acquisition. The purchase price of $1,558,000 was allocated to the assets acquired, with $157,000 allocated to acquired software, $27,000 allocated to amortizable intangibles and $64,000 allocated to indefinite life intangibles. In addition, the original principal amount of the Foundry Notes (excluding the Foundry Note issued to the former shareholder of The Foundry not subject to continuing employment), in the amount of $4,850,000, and $3,875,000, the value of the restricted shares of our common stock issued in the transaction (other than to the former shareholder of The Foundry not subject to continuing employment), computed in relation to the portion of the vesting period falling in 2007, will be included in our expenses as compensation expense in 2007.

Falcon Financing Transactions

On July 21, 2006, we entered into a Purchase Agreement with Falcon Mezzanine Partners II, LP, or Falcon, whereby we sold to Falcon $12,500,000 in principal amount of senior secured notes, or the senior secured notes. On May 16, 2007, we entered into an Amended and Restated Purchase Agreement with Falcon, amending and restating this Purchase Agreement, whereby we sold to Falcon $7,000,000 in principal amount of Series B Senior Secured Notes due in 2011, or the Series B Notes. The senior secured notes and the Series B Notes (i) have an interest rate of 15.0% per annum; (ii) require quarterly interest payments in arrears on March 30, June 30, September 30, and December 30, commencing September 2006 and June 2007, respectively; and (iii) are due on July 21, 2011. On each interest payment date, we may, at our option, in lieu of the payment in whole or in part of interest due on the senior secured notes and the Series B Notes which is in excess of 12.0% per annum, pay such amount in excess of 12.0% per annum on such notes by adding such amount to the outstanding principal amount thereof. In order to prepay these notes, we are required to pay the holders, in addition to the repayment amount, a redemption premium equal to a declining percentage of the outstanding principal amount thereof as the maturity date of the notes approaches, as follows: from July 21, 2007 to July 20, 2008, 125.0% of the outstanding principal amount; from July 21, 2008 to July 20, 2009, 110.0% of the outstanding principal amount; from July 21, 2009 to July 20, 2010, 105.0% of the outstanding principal amount; and from July 21, 2010 to July 20, 2011, 102.5% of the outstanding principal amount.

In connection with the sale to Falcon of the senior secured notes and the Series B Notes, we issued to Falcon warrants for the purchase of, respectively, 7,323,077 and 2,500,000, shares of our common stock (see “Description of Capital Stock–Warrants” for additional details). All of these warrants have a put option feature that becomes exercisable on July 21, 2011, whereby we are required to purchase the warrants at the then current fair market value of the underlying common stock, less the exercise price ($0.0001 per warrant share) thereof. This put option feature expires on the earlier of (x) July 21, 2016 and (y) the consummation of a qualified initial public offering, or QIPO, that raises gross proceeds to the company of not less than $25 million. Due to the put option feature of the warrants, the warrants have been recorded as a liability on our balance sheet and are adjusted to the current fair value at each reporting date. The adjustments are recorded as increases or decreases to interest expense. This offering of shares of our common stock, when consummated, constitutes a QIPO for purposes of these warrants. Due to the expiration of the put

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feature of the warrants upon the consummation of this offering, we will no longer record these warrants as a liability or make any further related adjustments to interest expense following this offering.

The Adjustments

The pro forma adjustments reflect the acquisitions described above and include increased interest expense for the issuance and adjustment of the senior secured notes and the Series B Notes, and increased depreciation and amortization due to the additional periods included in the calculations for purposes of the pro forma analysis.

The unaudited pro forma condensed consolidated statements of operations are for informational purposes only and are not necessarily indicative of the results of operations that would have been achieved had the acquisitions and related transactions for which we are giving pro forma effect actually occurred on the dates indicated as described above and in the accompanying notes, nor are such unaudited pro forma condensed consolidated statements of operations necessarily indicative of the results to be expected for the full year or any future period.

The pro forma adjustments are based on currently available information and assumptions that our management believes are reasonable. The notes to the unaudited pro forma condensed consolidated statements of operations provide a detailed discussion of how such adjustments were derived and presented in the unaudited pro forma condensed consolidated statements of operations. The unaudited pro forma condensed consolidated statements of operations should be read in conjunction with “Selected Historical Consolidated Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and related notes thereto and our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this prospectus.

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Unaudited Pro Forma Condensed Consolidated Statements of Operations
Year Ended December 31, 2006



	Predecessor			Successor			Combined			Adjustments						Pro Forma
	For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to December 31, 2006			For the Year Ended December 31, 2006			For the Foundry for the Year Ended December 31, 2006⁽¹⁾			For the Year Ended December 31, 2006			For the Year Ended December 31, 2006
	(Dollars in Thousands, Except Per Share Data)
Consolidated Statements of Operations Data:
Revenues	$	25,381		$	41,652		$	67,033		$	3,429		$	—		$	70,462
Costs and expenses:
Cost of revenues		20,131			33,753			53,884			108			263	⁽²⁾		54,255
Selling, general and administrative expenses		5,667			8,564			14,231			3,092			1,907	⁽²⁾		19,230
Total costs and expenses		25,798			42,317			68,115			3,200			2,170			73,485
Operating income (loss)		(417	)		(665	)		(1,082	)		229			(2,170	)		(3,023	)
Other income (expense):
Interest and investment income		289			423			712			11			—			723
Interest expense:
Amortization of discount and issuance costs on notes payable		—			(371	)		(371	)		—			—			(371	)
Interest expense on notes payable		—			(836	)		(836	)		—			(1,940	)⁽³⁾		(2,776	)
Interest expense, other		(2	)		(4	)		(6	)		—			—			(6	)
Other income (expense)		8			(87	)		(79	)		(91	)		—			(170	)
Income (loss) before income taxes		(122	)		(1,540	)		(1,662	)		149			(4,110	)		(5,623	)
Income tax benefit (expense)		(10	)		(6	)		(16	)		302			—			286
Net income (loss)	$	(132	)	$	(1,546	)	$	(1,678	)	$	451		$	(4,110	)	$	(5,337	)
Weighted average shares outstanding:⁽⁴⁾
Basic and Diluted																	69,537,929
Net income (loss) per share:
Basic and Diluted																$	(0.08	)
Weighted average exchange rate											1.8434

(1)

Represents the historical results of The Foundry adjusted to conform to U.S. GAAP. Weighted average exchange rate obtained from the website of the Federal Reserve Bank of New York.

(2)

Adjustments to costs of revenues and selling, general and administrative expenses consist of: (i) additional consulting expenses to John C. Textor, Co-Chairman of our board of directors, and Jonathan Teaford, Vice President of Digital Domain, of $94,000 and $34,000, respectively, pursuant to consulting agreements; (ii) additional compensation expense to Carl Stork, Vice Chairman of our board of directors and our former Chief Executive Officer, including assumed fringe benefits, of $122,000 pursuant to an employment agreement; (iii) estimated additional staff expenses for travel, entertainment, office expenses and miscellaneous costs of $25,000; (iv) additional compensation expense of $1,357,000 for stock options and restricted stock grants to The Foundry employees related to the Foundry Acquisition determined to be compensation expense rather than purchase price (these adjustments do not include the effects of exchange rate fluctuations between the actual and pro forma periods); and (v) additional compensation expense of $245,000 for the increased salaries of The Foundry’s key employees dated back to January 1, 2006. Additional pro forma expense adjustments include additional amortization of intangible assets valued at the time of the Acquisition for the additional pro forma period. Our management has assumed that the $1,870,000 valuation attached to the acquired software, $400,000 for Titanic rights, and $130,000 for customer lists at the date of the consummation of the Acquisition remained unchanged for purposes of this pro forma analysis. Our management has not included an adjustment for the $900,000 of project backlog as that amount was fully amortized at December 31, 2006. Similarly for the Foundry Acquisition, our management has calculated increased amortization expense for the additional pro forma periods assuming that the $185,000 valuation attached to the acquired software and customer list at the date of the consummation of the Foundry Acquisition remained unchanged for purposes of this pro forma analysis. Our management has assumed the same estimated useful life of these items in its amortization calculation as used in our historical consolidated financial statements. Our management determined additional compensation expense of $4,850,000 for the Foundry Notes related to the Foundry Acquisition to be allocable to compensation expense rather than purchase price (these adjustments do not include the effects of exchange rate fluctuations between the actual and pro forma periods), and such amount has not been included in the 2006 adjustments, as these non-recurring charges will be reflected in 2007.

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A summary of the above adjustments is as follows:


Cost of revenues
Pro forma additional amortization expense on acquired software (Digital Domain Productions)	$	232,000
Pro forma additional amortization expense on acquired software (The Foundry)		31,000
Total cost of revenues adjustments	$	263,000
Selling, general and administrative expenses
Pro forma additional amortization expense on intangible assets acquired		30,000
Pro forma additional consulting fees to John C. Textor		94,000
Pro forma additional consulting fees to Jonathan Teaford		34,000
Pro forma additional compensation expense to Carl Stork		122,000
Estimated assumed travel and entertainment expenses for new executive team		25,000
Stock option and restricted stock compensation expense to employees of The Foundry		1,357,000
Additional salaries paid to key employees of The Foundry		245,000
Total selling, general and administrative expenses adjustments	$	1,907,000

(3)

Adjustment consists of additional interest expense on the $12,500,000 in principal amount of senior secured notes issued in July 2006, or the senior secured notes, and on the $7,000,000 in principal amount of Series B Notes issued in May 2007, or the Series B Notes, as if such notes were issued on, respectively, March 12, 2006 and February 23, 2006. The original $30,000,000 in principal amount of Sellers’ Notes is reflected as outstanding for the same number of days (70) in the pro forma analysis as in the actual financial statements, albeit beginning on January 1, 2006 rather than May 12, 2006. Therefore, our management has not included additional interest expense related to the Sellers’ Notes. Our management calculated interest expense attributable to the senior secured notes, assuming the same terms as the original senior secured notes and for an additional 131 days of interest (calculated as the same number of days between the pro forma senior secured notes issue date, March 12, 2006, and the actual senior secured notes issue date of July 21, 2006). Our management also calculated interest expense attributable to the Series B Notes, assuming the same terms as the original Series B Notes and for an additional 311 days of interest (calculated as one year less the same number of days between the actual Series B Notes issue date, May 16, 2007 and the Foundry Acquisition date, March 23, 2007). Additional pro forma expense adjustments include additional amortization of the discount on the senior secured notes and the Series B Notes and certain deferred issuance costs associated with such notes. Our management has assumed that the estimated fair values of the financial instruments issued in connection with the 2006 financing transaction described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Falcon Financing Transaction” remain unchanged.

A summary of the above adjustments is as follows:


Additional amortization expense on deferred issuance costs on notes payable	$	209,000
Pro forma additional amortization expense on discount on notes payable		469,000
Additional interest expense on senior secured notes		553,000
Additional interest expense on Series B Notes		619,000
Interest expense incurred to pay off Foundry Notes		90,000
Total interest expense adjustments	$	1,940,000

(4)

The weighted average shares outstanding represents the shares outstanding for the Successor and all shares issued in connection with the financing of the Acquisition as if they were issued on January 1, 2006. Basic and diluted net income (loss) per share are the same for the period, as including the effect of any potentially dilutive securities (options, warrants and preferred stock) was anti-dilutive.

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Unaudited Pro Forma Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2007



	Successor			The Foundry			Combined			Adjustments			Pro Forma
	For the Nine Months Ended September 30, 2007			For the Period January 1, 2007 to March 23, 2007⁽¹⁾			For the Nine Months Ended September 30, 2007			For the Nine Months Ended September 30, 2007			For the Nine Months Ended September 30, 2007
	(Dollars in Thousands, Except Per Share Data)
Consolidated Statements of Operations Data:
Revenues	$	56,565		$	990		$	57,555		$	—		$	57,555
Costs and expenses:
Cost of revenues		45,136			4			45,140			8	⁽²⁾		45,148
Selling, general and administrative expenses		19,006			762			19,768			377	⁽²⁾		20,145
Total costs and expenses		64,142			766			64,908			385			65,293
Operating income (loss)		(7,577	)		224			(7,353	)		(385	)		(7,738	)
Other income (expense):
Interest and investment income		523			1			524						524
Interest expense:
Change in fair value of warrant liability		(4,906	)		—			(4,906	)					(4,906	)
Amortization of discount and issuance costs on notes payable		(982	)		—			(982	)					(982	)
Interest expense on notes payable		(1,917	)		—			(1,917	)		(146	)⁽³⁾		(2,063	)
Interest expense, other		(2	)		—			(2	)					(2	)
Other income (expense)		(153	)		(18	)		(171	)					(171	)
Income (loss) before income taxes		(15,014	)		207			(14,807	)		(531	)		(15,338	)
Income tax benefit (expense)		(21	)		—			(21	)		—			(21	)
Net income (loss)	$	(15,035	)	$	207		$	(14,828	)	$	(531	)	$	(15,359	)
Weighted average shares outstanding:⁽⁴⁾
Basic and Diluted														71,198,032
Net income (loss) per share:
Basic and Diluted													$	(0.22	)
Weighted average exchange rate					1.9588

(1)

Represents the historical results of The Foundry adjusted to conform to U.S. GAAP. Weighted average exchange rate obtained from the website of the Federal Reserve Bank of New York.

(2)

Adjustments to cost of revenues and selling, general and administrative expenses consist of: (i) an additional $65,000 of compensation expense for increased salaries paid to key employees of The Foundry as incentive to remain with us after the consummation of the Foundry Acquisition, and $311,000 in compensation expense for stock option and restricted stock amortization for the pro forma period; and (ii) a net $9,000 in increased amortization expense on intangible assets utilizing the same valuations as at the transaction date for software ($157,000) and customer list ($28,000), amortized using the same estimated useful life for the additional pro forma period as in our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

A summary of the above adjustments is as follows:


Cost of revenues
Pro forma additional amortization expense on acquired software	$	8,000
Selling, general and administrative expenses
Pro forma additional amortization expense on acquired customers	$	1,000
Additional salaries paid to key employees of The Foundry		65,000
Stock option and restricted stock compensation expense to employees of The Foundry		311,000
Total selling, general and administrative expenses adjustments	$	377,000

(3)

Management has included no additional interest expense incurred with respect to the Foundry Notes, assuming the notes remained outstanding for the same number of days in the pro forma period as in the unaudited condensed consolidated financial statements included elsewhere in this prospectus, as the penalty terms applicable to a breach of the principal payment terms of such notes motivate a decision to pay off the notes as soon as practicable. Additional interest expense of $146,000 has been assumed for the additional days of interest on the $7,000,000 in principal amount of Series B Notes that we issued in part to pay down the Foundry Notes (assuming such Series B Notes have the same terms as the senior secured notes).

(4)

The weighted average shares outstanding represents the weighted average shares outstanding for the Successor. Basic and diluted net income (loss) are the same for the period, as including the effect of any potentially dilutive securities (options, warrants and preferred stock) was anti-dilutive.

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Selected Historical Consolidated Financial Information

The following table contains selected historical consolidated financial information regarding our business and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Unaudited Pro Forma Financial Information”, and our consolidated financial statements and related notes and our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus.

We refer to ourselves as the Predecessor for all periods prior to our acquisition of Digital Domain Productions on May 12, 2006. We refer to ourselves as the Successor for all periods following our acquisition of Digital Domain Productions.

Our consolidated statements of operations information for the period from January 1, 2006 to May 12, 2006, the period from May 13, 2006 to December 31, 2006, and the years ended December 31, 2005 and 2004 and our consolidated statements of financial condition information as of December 31, 2006 and 2005 are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. We derived our consolidated statements of operations information for the period from May 13, 2006 to September 30, 2006 and the nine months ended September 30, 2007 and our consolidated statements of financial condition information as of September 30, 2007 from our unaudited condensed consolidated financial statements which are included elsewhere in this prospectus. We derived our consolidated statements of operations information for the years ended December 31, 2002 and 2003 (excluding net income (loss) per share data) and our consolidated statements of financial condition information as of December 31, 2002, 2003 and 2004 from our audited consolidated financial statements which are not included in this prospectus. The net income (loss) per share data for the years ended December 31, 2002 and 2003 has been derived from our financial accounting records. We derived our consolidated statements of financial condition information as of May 12, 2006 and September 30, 2006 from our unaudited condensed consolidated financial statements that are not included in this prospectus. The unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments that we consider necessary for a fair presentation of our consolidated financial position and results of operations for all periods presented.

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	Predecessor															Successor
	For the Year Ended December 31,												For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007⁽¹⁾
	2002			2003			2004			2005			For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007⁽¹⁾
	(Dollars in Thousands, Except Per Share Data)															(Dollars in Thousands, Except Per Share Data)
Consolidated Statements of Operations Information:
Revenues	$	33,084		$	61,085		$	60,046		$	49,506		$	25,381		$	23,757		$	41,652		$	56,565
Costs and expenses:
Cost of revenues⁽³⁾		31,408			49,578			48,846			43,626			20,131			18,942			33,753			45,136
Selling, general and administrative expenses⁽²⁾^,⁽³⁾		6,664			7,497			7,658			7,416			5,667			3,540			8,564			19,006
Total costs and expenses		38,072			57,075			56,504			51,042			25,798			22,482			42,317			64,142
Operating income (loss)		(4,988	)		4,010			3,542			(1,536	)		(417	)		1,275			(665	)		(7,577	)
Other income (expense):
Interest and investment income		294			309			284			501			289			188			423			523
Interest expense:
Change in fair value of warrant liability		—			—			—			—			—			—			—			(4,906	)
Amortization of discount and issuance costs on notes payable		—			—			—			—			—			(154	)		(371	)		(982	)
Interest expense on notes payable		—			—			—			—			—			(365	)		(836	)		(1,917	)
Interest expense, other		(6	)		(3	)		(2	)		(5	)		(2	)		—			(4	)		(2	)
Other income (expense)		84			139			104			145			8			(168	)		(87	)		(153	)
Income (loss) before income taxes		(4,616	)		4,455			3,928			(895	)		(122	)		776			(1,540	)		(15,014	)
Income tax benefit (expense)		252			(575	)		3,180			(3,282	)		(10	)		—			(6	)		(21	)
Net income (loss)	$	(4,364	)	$	3,880		$	7,108		$	(4,177	)	$	(132	)	$	776		$	(1,546	)	$	(15,035	)
Weighted average shares outstanding:
Basic⁽⁴⁾		2,304,300			2,304,300			2,304,350			2,304,350			2,304,350			65,288,066			66,898,327			71,198,032
Diluted⁽⁴⁾		2,304,300			2,304,300			2,304,350			2,304,350			2,304,350			69,055,217			66,898,327			71,198,032
Net income (loss) per share:
Basic⁽⁵⁾	$	(3.33	)	$	0.04		$	0.06		$	(2.10	)	$	(0.06	)	$	0.01		$	(0.03	)	$	(0.21	)
Diluted⁽⁵⁾	$	(3.33	)	$	0.04		$	0.06		$	(2.10	)	$	(0.06	)	$	0.01		$	(0.03	)	$	(0.21	)
Other Financial Data:
Depreciation and amortization⁽⁶⁾	$	3,539		$	3,049		$	3,224		$	3,526		$	1,444		$	1,739		$	2,859		$	2,925
Consolidated Statements of Financial Condition Information (as of period end):
Cash, cash equivalents and short-term investments	$	15,225		$	26,137		$	24,547		$	22,023		$	16,024		$	18,209		$	20,899		$	24,746
Working capital⁽⁷⁾	$	5,477		$	7,156		$	11,412		$	11,371		$	10,947		$	13,600		$	10,170		$	16,844
Total assets	$	21,817		$	33,252		$	36,053		$	29,971		$	24,978		$	43,148		$	45,266		$	54,557
Warrant liability	$	—		$	—		$	—		$	—		$	—		$	6,600		$	6,600		$	14,931
Notes payable	$	—		$	—		$	—		$	—		$	—		$	3,699		$	4,012		$	8,538
Preferred stock																	426		$	426		$	426
Series A and Series B preferred stock	$	6,091		$	6,091		$	6,091		$	6,091		$	6,091		$	—		$	—		$	—
Series C mandatorily redeemable preferred stock	$	32,249		$	11,264		$	11,819		$	12,477		$	12,477		$	—		$	—		$	—
Total stockholders’ equity (deficit)	$	(28,963	)	$	(4,099	)	$	2,454		$	(2,421	)	$	(2,557	)	$	19,775		$	17,743		$	14,596

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(1)

Includes impact of the acquisition of The Foundry (see Note 15 of our Notes to Consolidated Financial Statements included elsewhere in this prospectus).

(2)

(3)

(4)

Basic and diluted net income (loss) per share was the same for each period, as the impact of all potentially dilutive securities outstanding was anti-dilutive.

(5)


	Predecessor															Successor
	For the Year Ended December 31,												For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007
	2002			2003			2004			2005			For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007
	(In Thousands)															(In Thousands)
Net income (loss)	$	(4,364	)	$	3,880		$	7,108		$	(4,177	)	$	(132	)	$	776		$	(1,546	)	$	(15,035	)
Preferred stockholders accretion, deemed dividends, and income participation		(3,308	)		(3,796	)		(6,960	)		(659	)		—			(227	)		(247	)		(60	)
Net income (loss) available to common stockholders	$	(7,672	)	$	84		$	148		$	(4,836	)	$	(132	)	$	549		$	(1,793	)	$	(15,095	)

(6)

(7)

Represents total current assets less total current liabilities.

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Management’s Discussion and Analysis of Financial Condition
and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and related notes and our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the headings “Forward-Looking Statements” and “Risk Factors.”

Overview

While we plan to continue to build our existing digital imagery business, we also intend to establish a content ownership business which will focus opportunistically on animated and visual effects-driven films. We are at times approached by leading filmmakers to help conceptualize and develop new and unique ideas that push the envelope for visual effects-driven and animated film content. We intend to evaluate, and may invest capital and/or development and production work on terms deemed by us to be favorable in, major studio feature film projects that meet our budgetary, development and distribution criteria in alignment with our growth strategy. Within this strategy it is our intent to focus on entertainment properties that can be exploited through the convergence of films and video games.

We have historically derived substantially all of our revenues from contracts to provide digital effects to third parties for feature films and commercials, regardless of the commercial success of such projects. We expect the implementation of our business strategy will involve the investment of our capital in projects, with the result that we will have an interest in their underlying commercial success. Therefore, our ability to recoup our capital and realize a return on those investments will be dependent on the commercial success of these projects. Entry into the film production and video game development and production businesses will present us with significant challenges and subject our business to significant risks, which are described in the “Risk Factors” section of this prospectus.

We operate in four reportable segments: feature films, commercials, software and animation/video games. The feature films and commercials segments have historically been the dominant part of our operations; however, with the acquisition of The Foundry Visionmongers Ltd. (see “ — Recent Developments — The Foundry Acquisition”), software has become a more significant portion of our operations. In 2007, the Company launched its animation/video games segment with a goal to develop animated feature films and video games for which it owns the intellectual property. This segment is in the start-up phase.

Recent Developments

On November 1, 2007, the television industry’s collective bargaining agreement with the Writers Guild of America (East and West) covering freelance writers expired. On November 5, 2007, the Writers Guild of America commenced a strike against the members of the Alliance of Motion Picture and Television Producers, a trade organization representing many of the entertainment industry’s largest film and television production companies, including companies with whom we have worked in the past and continue to work. We have not yet experienced any material impact on our revenues or operations as a result of the strike and do not expect to experience any such material impact through the end of the first quarter of 2008. If, however, the strike is prolonged, or if a strike by Hollywood actors were also to occur, it could result in the postponement or cancellation of the visual effects and animation projects on which we are currently working, as well as contracted future projects, and could adversely affect prospects for future projects and negatively impact our ability to effect our growth strategy, any of which could have a material adverse effect on our business, operating results or financial condition.

2007 Private Placement of Common Stock

In July and August, 2007, we conducted a private placement sale of an aggregate of 7,372,285 shares of our common stock, at a purchase price of $1.40 per share, solely to “accredited investors” (as defined in Rule 501(a) of

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Regulation D promulgated under the Securities Act of 1933, as amended), including affiliates of Janus Capital Group, LLC and other institutional investors, for gross cash proceeds of $10,321,000, or $10,281,000 net of estimated issuance cost of $40,000. The shares of our common stock purchased by these investors are subject to the right to participate in “piggyback” registrations, and, for each investor that invested $1,000,000 or more in the purchase of such shares, such investor, together with similarly qualifying investors, is entitled to a single demand registration with respect to all such purchased shares at any time following six months after the date that the registration statement of which this prospectus is a part is declared effective.

Series B Senior Secured Notes

On May 16, 2007, we entered into an Amended and Restated Purchase Agreement with Falcon Mezzanine Partners II, LP, or Falcon, amending and restating the Purchase Agreement described below in “ — Recent Developments — Falcon Financing Transaction”, whereby we sold to Falcon $7,000,000 in principal amount of Series B Senior Secured Notes due in 2011, or the Series B Notes. In addition, we agreed to issue to Falcon stock purchase warrants for the purchase of an aggregate of an additional 2,500,000 shares of our common stock (see “Description of Capital Stock — Warrants” for additional details). The Series B Notes (i) carry an interest rate of 15.0% per annum; (ii) require quarterly interest payments in arrears due on March 30, June 30, September 30, and December 30, commencing June 2007; and (iii) are due on July 21, 2011. On each interest payment due date, we may, at our discretion, in lieu of the payment in whole or in part of interest due on the Series B Notes which is in excess of 12.0% per annum, pay such amount in excess of 12.0% per annum on the Series B Notes by adding such amounts to the outstanding principal amount of the Series B Notes. In order to prepay these notes, we are required to pay the holders, in addition to the repayment amount, a redemption premium equal to a declining percentage of the outstanding principal amount thereof as the maturity date of the notes approaches, as follows: from July 21, 2007 to July 20, 2008, 125.0% of the outstanding principal amount; from July 21, 2008 to July 20, 2009, 110.0% of the outstanding principal amount; from July 21, 2009 to July 20, 2010, 105.0% of the outstanding principal amount; and from July 21, 2010 to July 20, 2011, 102.5% of the outstanding principal amount. The Series B Notes issued to Falcon are subject to the same financial covenants as the senior secured notes issued to Falcon (see “ — Recent Developments — Falcon Financing Transaction” below).

The warrants to purchase an additional 2,500,000 shares of our common stock have a put option feature that becomes exercisable on July 21, 2011, whereby we are required to purchase the warrant at the then current fair market value of the underlying common stock, less the exercise price ($0.0001 per warrant share) thereof. This put option feature expires on the earlier of (x) July 21, 2016 and (y) the consummation of a qualified initial public offering, or QIPO, that raises gross proceeds to the company of not less than $25 million. Due to the put option feature of the warrants, the warrants have been recorded as a liability on our balance sheet and will be adjusted to the current fair value at each reporting date. The adjustments are recorded as increases or decreases to interest expense. This offering of shares of our common stock constitutes, when consummated, a QIPO for purposes of these warrants. Due to the expiration of the put feature of the warrants upon the consummation of this offering, we will no longer record these warrants as a liability or make any further related adjustments to interest expense following this offering.

The Foundry Acquisition

On March 23, 2007, we acquired the entire outstanding capital stock in The Foundry Visionmongers Ltd., or The Foundry, a company incorporated and registered in England and Wales and whose principal office is located in London, England. The Foundry is a visual effects software developer with expertise in image vision and optical flow and specializing in sophisticated plug-ins that are compatible with compositing software packages. The consideration for the transaction consisted of (i) cash in the amount of approximately £550,000 ($1,084,000) which was paid on March 28, 2007, (ii) notes payable in the aggregate initial principal amount of £2,500,000 ($4,908,000) due upon the earlier of: (a) January 25, 2008 or (b) the completion of an equity offering by us in excess of $10,000,000 (which equity offering was completed on August 2, 2007 (see “ — Recent Developments — 2007 Private Placement of Common Stock”)), and (iii) restricted shares of our common stock having an aggregate value of £2,000,000 ($3,922,000). On August 3, 2007, we paid in full all amounts owing under the notes payable issued in connection with our acquisition of The Foundry.

In order to retain the members of The Foundry’s management team to whom notes and restricted stock were issued, the notes and restricted stock were structured such that receipt of payment on the notes and receipt of the restricted stock upon vesting are contingent on each such member’s continued employment with The Foundry. Due

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to this employment contingency, the notes and the restricted stock are recorded as compensation expense rather than as a part of the purchase price. Approximately $4,850,000 of the notes were charged to expense in the nine months ended September 30, 2007, (with the remaining $58,000 charged to purchase price), and the restricted stock is being charged to expense over the three-year vesting period for the restricted stock.

Falcon Financing Transaction

On July 21, 2006, we entered into a Purchase Agreement with Falcon whereby we sold to Falcon $12,500,000 in principal amount of senior secured notes, or the senior secured notes. The senior secured notes (i) have an interest rate of 15.0% per annum; (ii) require quarterly interest payments in arrears on March 30, June 30, September 30, and December 30, commencing September 2006; and (iii) are due on July 21, 2011. On each interest payment date, we may, at our option, in lieu of the payment in whole or in part of interest due on the senior secured notes which is in excess of 12.0% per annum, pay such amount in excess of 12.0% per annum on the senior secured notes by adding such amount to the outstanding principal amount of the senior secured notes. In order to prepay these notes, we are required to pay the holders, in addition to the repayment amount, a redemption premium equal to a declining percentage of the outstanding principal amount thereof as the maturity date of the notes approaches, as follows: from July 21, 2007 to July 20, 2008, 125.0% of the outstanding principal amount; from July 21, 2008 to July 20, 2009, 110.0% of the outstanding principal amount; from July 21, 2009 to July 20, 2010, 105.0% of the outstanding principal amount; and from July 21, 2010 to July 20, 2011, 102.5% of the outstanding principal amount. In addition, on July 21, 2006, we sold to Falcon (i) 1,000,000 shares of our 8% senior cumulative convertible participating preferred stock, at a purchase price of $1.00 per share (see “Description of Capital Stock — Preferred Stock” for additional details), and (ii) stock purchase warrants for the purchase of an aggregate of 7,323,077 shares of our common stock (see “Description of Capital Stock — Warrants” for additional details). The gross cash proceeds from this transaction, or the 2006 Falcon Financing Transaction, amounted to $13,500,000. The senior secured notes are subject to a number of financial covenants which must be observed by us during the term of the senior secured notes, relating to minimum qualified cash, limitations on capital expenditures, maximum ratios of consolidated indebtedness to consolidated earnings before interest, taxes, depreciation and amortization, and all other non-cash charges to consolidated net income, or consolidated EBITDA, and minimum ratios of consolidated EBITDA to interest expense and other fixed charges, such as payments on our debt and income taxes.

The warrants to purchase 7,323,077 shares of our common stock have a put option feature that becomes exercisable on July 21, 2011, whereby we are required to purchase the warrant at the then current fair market value of the underlying common stock, less the exercise price ($0.0001 per warrant share) thereof. This put option feature expires on the earlier of (x) July 21, 2016 and (y) the consummation of a qualified initial public offering, or QIPO, that raises gross proceeds to the company of not less than $25 million. Due to the put option feature of the warrants, the warrants have been recorded as a liability on our balance sheet and will be adjusted to the current fair value at each reporting date. The adjustments are recorded as increases or decreases to interest expense. This offering of shares of our common stock, when consummated, constitutes a QIPO for purposes of these warrants. Due to the expiration of the put feature of the warrants upon the consummation of this offering, we will no longer record these warrants as a liability or make any further related adjustments to interest expense following this offering.

2006 Private Placement of Common Stock

On June 27, 2006, we completed a private placement sale of an aggregate of 17,437,929 shares of our common stock, at a purchase price of $1.00 per share, solely to “accredited investors” (as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended) for gross cash proceeds of $17,438,000. Expenses for this private placement transaction amounted to $3,445,000, $939,000 of which was non-cash consideration issued to the placement agent for this transaction in the form of warrants to purchase our common stock. The shares of our common stock issued to these investors were subject to an anti-dilution adjustment with respect to any issuances by us of shares of our common stock (and securities exercisable or convertible into such shares) at less than $1.00 per share through June 2007. In addition, the holders of these shares of common stock have “tag along” rights entitling them to sell any or all of their shares upon the same terms as, and along with, the sale of our securities by certain of our other stockholders, subject to customary terms and conditions incident to such rights. The “tag along” rights terminate upon an initial public offering of our common stock. The shares of common stock purchased by these investors are also subject to the right to participate in one “piggyback” registration during the two-year period following the issuance of these shares.

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2006 Acquisition

On May 12, 2006, DD Acquisition Subsidiary, Inc., a wholly-owned subsidiary of Digital Domain, merged with and into Digital Domain Productions, Inc. (formerly Digital Domain, Inc.), or Digital Domain Productions, which we refer to as the Acquisition. DD Acquisition Subsidiary, Inc. ceased to exist and Digital Domain Productions continued the operation of its business as a wholly-owned subsidiary of Digital Domain. The purchase consideration consisted of (i) cash in the aggregate amount of $4,500,000 paid on May 12, 2006 and (ii) an aggregate amount of $30,000,000 in original principal amount of promissory notes, which we refer to as the Sellers’ Notes. The Sellers’ Notes had a maturity date of December 31, 2006, accrued interest at a rate of 10% per annum, were secured by the shares of Digital Domain Productions common stock owned by Digital Domain, and were guaranteed by certain of our officers and directors who are also stockholders in the aggregate amount of $9,000,000. Pursuant to the terms of the Sellers’ Notes, we made a mandatory prepayment on the notes in the amount of $4,500,000 on May 13, 2006, the first business day following the date the merger was effective. The Sellers’ Notes contained certain optional prepayment provisions that allowed the notes to be deemed paid-in-full and automatically cancelled if we paid the holders of the notes a total amount equal to (i) 80% of the original principal amount, without interest, on or before the 60th day from the date the notes were issued or (ii) 90% of the original principal amount, with interest, after the 60th day and on or before the 90th day from the date the notes were issued. We received an extension of time to pay off the notes at 80% of the original principal amount. On July 21, 2006 the notes were paid off in full in a total amount of $24,000,000 (80% of the original principal amount, without interest).

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. However, estimates inherently relate to matters that are uncertain at the time the estimates are made, and are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

Revenue Recognition

We primarily derive revenue from contracts to provide digital imagery work for feature films and commercials and the licensing of software.

Digital Imagery Revenue. Our digital imagery revenue results from fixed-price contracts for the development of digital effects and image creation for the entertainment and advertising industries. We utilize the cost-to-cost measures of the percentage-of-completion method of accounting in accordance with American Institute of Certified Public Accountants, or AICPA, Statement of Position, or SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Under this method, revenues, including estimated earned fees or profits, are recorded as costs are incurred. For all contracts, revenues are calculated based on the percentage of total costs incurred compared to total estimated costs at completion. Contract costs include direct materials, direct labor costs, and indirect costs related to contract performance, such as indirect labor, supplies, and tools. These costs are included in cost of revenues for digital effects.

The customer contracts in our digital imagery business represent binding agreements to provide digital effects to the customers’ specifications. The contracts contain subjective standards applicable to the delivered digital effects and objective specifications that relate to the technical format for the digital effects that we deliver to our customers. In all instances, the customer receives complete ownership rights in and to the digital effects as the effort progresses. In the event of a termination of a contract, ownership in the digital effects transfers to the customer, and we as the contractor are entitled to receive reimbursement of costs incurred up to that point and a reasonable profit. The contracts contain production schedules setting forth a time line for production and a final delivery date for the completed digital effects.

Payments for our services are received over the term of the contract, including payments required to be delivered in advance of our work to fund a portion of the costs to produce the digital effects. Cash received from customers in excess of costs incurred and gross profit recognized on the related projects is recorded as advanced payments. Unbilled

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receivables represent revenues recognized in excess of amounts billed. The digital effects produced are delivered to the customer at the end of the contract and the customer is not required to deliver the final scheduled payment until receipt and acceptance of the digital effects.

We perform a monthly review of uncompleted contracts. Amounts representing contract change orders or claims are included in revenues only when they meet the criteria of SOP 81-1. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated ultimate loss is charged against operations. Changes in estimates of contract sales, costs and profits are recognized in the current period based on the cumulative effect of the changes on current and prior periods. Hence, the effect of the changes on future periods of contract performance is recognized as if the revised estimates had been the original estimates. A significant change in one or more projects could have a material adverse effect on our consolidated financial position or results of operations.

Software Revenue. Our software products consist of the compositing software product Nuke and plug-in applications that work with Nuke and various other third party software products used by visual effects professionals to solve image processing problems.

Our software revenue is derived from perpetual software licenses and, for Nuke, related maintenance arrangements consisting of technical support and software updates on a when-and-if available basis. We apply the provisions of SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.

Revenue is recognized when all four of the following criteria are met:

•

Evidence of an arrangement. We either enter into a license contract or receive a written purchase order issued by our customer as evidence of an arrangement.

•

Delivery. Delivery is considered to occur for licensed software when it is downloaded by the customer and the risk of loss and rewards of ownership have been transferred to the customer. Maintenance revenue is considered delivered ratably over the applicable maintenance period.

•

Fixed or determinable fee. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment and the payment terms are within our normal established practices (net 30 days).

•

Collection is deemed probable. Collection is deemed probable if we have a reasonable basis to expect that the customer will pay amounts under the arrangement as payments become due.

All of our licenses for Nuke are bundled with one year of maintenance. We apply the residual method of SOP 98-9 to these arrangements whereby the estimated fair value of maintenance is initially deferred with the residual value of the arrangement being recognized upon delivery as long as the other recognition criteria specified above have been met. The fair value of maintenance is determined based on vendor specific objective evidence (VSOE) which is established based on an analysis of the price paid for maintenance when it is sold separately from the related software licenses. We recognize all maintenance revenue for Nuke ratably over the applicable maintenance period, which is typically one year. We do not currently enter into explicit maintenance arrangements with the customers of our plug-in applications; however, technical support and software updates are provided on a limited basis. Maintenance related to plug-in applications is recognized upon delivery, subject to the recognition criteria specified above, because the maintenance related to plug-in applications is provided over periods less than a year, has historically been and is expected to be minimal and infrequent, and the estimated costs of providing the maintenance is insignificant.

A significant portion of our software licenses are sold through resellers. Selling prices are fixed and determinable at time of shipment as the resellers are not “stocking dealers”, meaning that the software is shipped electronically only to the ultimate customer and not to the dealer. Amounts billed are generally due within 30 days and we do not have arrangements that include allowances or other credits to resellers.

Capitalized Software Costs

Under the provisions of AICPA SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, we capitalize costs associated with customized internal use software that have reached the application development stage and meet recoverability tests. Such capitalized costs include external direct costs utilized in developing or obtaining the applications, internally developed code, and purchased software licenses, and the costs of

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implementation, programmed enhancements and new releases for certain projects that qualify for capitalization. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point at which the project is substantially complete and ready for its intended purpose. Capitalized costs related to internally developed software costs are included in computer software within property and equipment.

We classify the difference between the purchase price and the fair market value of net assets as goodwill. We classify intangible assets apart from goodwill if the assets have contractual or other legal rights or if the assets can be separated and sold, transferred, licensed, rented or exchanged. Depending on the nature of the assets, the amortization period may range from two to ten years for those assets subject to amortization.

We evaluate the carrying value of goodwill and intangible assets, including the related amortization period, in the fourth quarter of each year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In the evaluation of goodwill and intangible assets not subject to amortization, we complete the two-step process as required by the Financial Accounting Standards Board’s, or FASB’s, Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets.

Based on our annual impairment test performed on the first day of the fourth quarter of each calendar year, we determined that goodwill was not impaired pertaining to the Successor period from May 13, 2006 through December 31, 2006.

Impairment of Long-Lived Assets

We evaluate long-lived assets, other than goodwill and identifiable intangible assets with indefinite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future cash flows is less than the carrying amount of the asset, in which case a write-down is recorded to reduce the related asset to its estimated fair value.

Stock-Based Compensation

For the Successor period from May 13, 2006 through December 31, 2006, we had two active stock-based compensation plans, which are described more fully in Note 11 of our Notes to Consolidated Financial Statements included elsewhere in this prospectus. Our stock-based compensation awards consist primarily of options granted to employees for the purchase of our common stock or the common stock of our subsidiary, Digital Domain Productions. Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and elected to provide the pro forma disclosure requirements of SFAS No. 123, Share-Based Payment, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Under the intrinsic value method, we recognized share-based compensation equal to the award’s intrinsic value, if any, at the time of grant over the requisite service periods using the straight-line method.

Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS No. 123R, which requires that compensation costs related to share-based payment transactions be recognized in financial statements based on the fair value of the share-based payments. We also adopted SFAS No. 123R using the prospective method. Under this method, we will continue to apply APB Opinion No. 25 to awards outstanding at December 31, 2005 (provided that such awards are not modified after the date we adopted SFAS No. 123R). The adoption of SFAS No. 123R did not have a material effect on our consolidated financial statements. Compensation costs for all awards granted after the date of adoption and modifications of any previously granted awards outstanding at the date of adoption are measured at their estimated fair value using the Black-Scholes option-pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the remaining requisite service period of the award, which is generally the option vesting term. The amount of expense recognized in the consolidated financial statements represents the expense associated with the stock options expected to ultimately vest based upon an estimated rate of forfeitures. This rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of options that actually vest or are forfeited are recorded. The Black-Scholes option-pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions, including the expected volatility of our common stock and an option’s expected life. As a result, the financial statements include amounts that are based upon our best estimates and judgments relating to the expense recognized for stock-based compensation.

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In connection with our acquisition of Digital Domain Productions in May 2006, a value for Digital Domain Productions was established as the result of an arm’s-length transaction between independent parties. Because of the liquidation preferences of the preferred stockholders of Digital Domain Productions at the time of the Acquisition, there was no value remaining to allocate to the common stockholders. Subsequent to the Acquisition, we (as the Successor) sold shares of common stock and preferred stock in various financings through August 2007.

We also performed valuations of our common stock as of March 31, 2007 and September 30, 2007 using a probability-weighted combination of the market comparable approach and the income approach to estimate the aggregate enterprise value of our company at each valuation date. The market comparable approach estimates the fair value of a company by applying to that company market multiples of publicly traded firms in similar lines of business. The income approach involves applying appropriate risk-adjusted discount rates to estimated debt-free cash flows, based on forecasted revenue and costs. The projections used in connection with this valuation were based on our expected operating performance over the forecast period. There is inherent uncertainty in these estimates. If different discount rates or other assumptions had been used, the valuation would have been different.

During 2007, we granted options to purchase our common stock at dates that generally fell between the date of one of the financings and the valuations referenced above. In those instances, we granted options with an exercise price equal to the per-share fair value determined by the most recent such financing or valuation. The weighted average exercise price of options issued from May 13, 2006 to September 30, 2007 is $1.15 per share, with the lowest price being $1.00 per share and the highest being $1.40 per share.

Warrants to purchase shares of common stock granted to non-employee service providers are accounted for as compensation for the services rendered in accordance with Emerging Issues Task Force, or EITF, No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Connection with Selling Goods or Services, and as equity in accordance with the provisions of EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. The fair value of these warrants is determined using the Black-Scholes option pricing model.

We have accounted for put warrants under the provisions of FASB Staff Position, or FSP, No. 150-5, Issuer’s Accounting under Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable, an Interpretation of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. Pursuant to FSP No. 150-5, freestanding warrants for shares that are either put-able or warrants for shares that are redeemable are classified as liabilities on the balance sheet at fair value. The warrant is classified as noncurrent according to when the put can be exercised. Subsequent changes in fair value are recognized as interest expense or income in the consolidated statement of operations for each reporting period.

Income Taxes

In accordance with SFAS No. 109, Accounting for Income Taxes, deferred income tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is recorded to reduce net deferred income tax assets to amounts that are more likely than not to be realized.

On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which supplements SFAS No. 109, Accounting for Income Taxes. As a result of our adoption of FIN 48, we made a comprehensive review of our portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents our expected tax treatment of a tax position taken in a filed tax return, or planned to be taken in a future return, that has not been reflected in measuring income tax expense for financial reporting purposes. FIN 48 requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle. As a result of our adoption of FIN 48, there was no impact on our consolidated financial position or results of operations for the nine months ended September 30, 2007.

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We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The U.S. Internal Revenue Service, or IRS, has examined and substantially concluded all tax matters for the years through 2003. In addition, open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material.

Effect of Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for consistently measuring fair value for accounting purposes, and expands disclosures about fair value measurements. SFAS No. 157 is effective for us beginning January 1, 2008, and the provisions of SFAS No. 157 will be applied prospectively as of that date. We are evaluating the impact, if any, that the adoption of this statement will have on our results of operations, financial position and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities — Including an Amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for us beginning January 1, 2008, and the provisions of SFAS No. 159 will be applied prospectively as of that date. We are evaluating the impact, if any, that the adoption of this statement will have on our results of operations, financial position and cash flows.

Internal Control over Financial Reporting

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our operating results could be misstated and our reputation may be harmed. In connection with the audit of our financial statements for the year ended December 31, 2006, which occured during 2007, our independent registered public accounting firm identified certain material weaknesses in our internal controls over financial reporting, as defined by the standards established by the Public Company Accounting Oversight Board. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

•

As of December 31, 2006, we did not have adequate controls and procedures with respect to the recording and analysis of our accounts relating to loss contracts. As a result of this material weakness, we recorded a material post-closing adjustment to our financial statements for the year ended December 31, 2006. There were no loss contracts in prior years.

•

The following actions, among others, have been taken in remediation of such material weaknesses:

•

We have revised our procedures so as to require a quarterly review of all uncompleted contracts to properly record forward losses on such contracts, if any. The review is performed by our internal accounting staff, and their work and computations are reviewed in detail by our principal financial and accounting officer.

•

We have revised our procedures so that the computation of amortization of debt discount and issuance costs on notes payable is reviewed and approved by both a senior member of our internal accounting staff who does not participate in the original computation, and by our principal financial and accounting officer.

We have completed our remediation efforts with respect to these material weaknesses, and we believe that our actions in this regard have strengthened our internal controls over financial reporting. Our management will continue to evaluate the effectiveness of the control environment and will continue to refine existing controls. For a description of risks associated with our internal controls, please see “Risk Factors — If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud and, as a

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result, current and potential stockholders could lose confidence in our financial reporting.” and “ — We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.”

Operating Segments

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. This standard requires segmentation based on our internal organization and reporting of revenues and operating income based upon internal accounting methods. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Our chief operating decision maker is our Chief Executive Officer. Our four segments are Feature Films, Commercials, Software and Animation/Video Games. Our reporting systems present various data for management to operate the business. The chief operating decision maker reviews profit and loss statements prepared in accordance with U.S. GAAP. However, certain expenses are not allocated to the various segments (primarily consisting of support staff salaries and benefits, fees for outside professional services, insurance costs, and utilities costs, all of which are included in selling, general and administrative expenses). Interest and other income are not allocated to the various segments, as the chief decision maker does not evaluate segment operations beyond the income from operations level.

Our Feature Films and Commercials segments have historically dominated our operations; however, since our acquisition of The Foundry in 2007, we recognize Software as a separate segment and include the Software segment’s information for prior periods even though it was not significant for those periods. In addition, in 2007, we also launched our Animation/Video Games group and now also recognize Animation/Video Games as a separate segment. As of September 30, 2007, no revenues have been generated by, and no assets have been allocated to, our Animation/Video Games segment.

Results of Operations

The following table sets forth certain information regarding our consolidated results of operations for the years ended December 31, 2004 and December 31, 2005, the period from January 1, 2006 to May 12, 2006, the period May 13, 2006 to September 30, 2006, the period from May 13, 2006 to December 31, 2006, and the nine months ended September 30, 2007.

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Results of Operations



	Predecessor									Successor
	For the Year Ended December 31,						For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007
	2004			2005			For the Period January 1, 2006 to May 12, 2006			For the Period May 13, 2006 to September 30, 2006			For the Period May 13, 2006 to December 31, 2006			For the Nine Months Ended September 30, 2007
	(In Thousands)									(In Thousands)

Revenues	$	60,046		$	49,506		$	25,381		$	23,757		$	41,652		$	56,565
Costs and expenses:
Cost of revenues		48,846			43,626			20,131			18,942			33,753			45,136
Selling, general and administrative expenses		7,658			7,416			5,667			3,540			8,564			19,006
Total costs and expenses		56,504			51,042			25,798			22,482			42,317			64,142
Operating income (loss)		3,542			(1,536	)		(417	)		1,275			(665	)		(7,577	)
Other income (expense):
Interest and investment income		284			501			289			188			423			523
Interest expense:
Change in fair value of warrant liability		—			—			—			—			—			(4,906	)
Amortization of discount and issuance costs on notes payable		—			—			—			(154	)		(371	)		(982	)
Interest expense on notes payable		—			—			—			(365	)		(836	)		(1,917	)
Interest expense, other		(2	)		(5	)		(2	)		—			(4	)		(2	)
Other income (expense)		104			145			8			(168	)		(87	)		(153	)
Income (loss) before income taxes		3,928			(895	)		(122	)		776			(1,540	)		(15,014	)
Income tax benefit (expense)		3,180			(3,282	)		(10	)		—			(6	)		(21	)
Net income (loss)	$	7,108		$	(4,177	)	$	(132	)	$	776		$	(1,546	)	$	(15,035	)

The following describes certain line items set forth in our consolidated results of operations:

Revenues. We derive a substantial amount of our revenue from a limited number of customers and projects in our feature films segment, which are usually large projects that extend over six to 18 months. There are a number of factors that can influence timing of our revenues and cash flows, including film budgets, the expected release date of completed works in our feature films segment as dictated by senior management of our customers and the perceived attractiveness to the public of various types of feature films and commercials. As a result, we have little control over the timing and mix of individual projects in our feature films segment. For example, our customers can elect to accelerate or delay their production schedules based on their perception of the market receptivity for their completed product. Such decisions have historically caused volatility in our reported revenues and expenses as we seek to meet the production schedules of our customers. In addition, revenue generation in our feature films segment has tended historically to be cyclical as a result of the film studios’ traditional release cycles. The number of our feature films projects generally reaches its highest level during the first six months of the year, corresponding to the studios’ summer release slate, with the result that the revenue generated in this segment tends to be higher in the first two fiscal quarters of the year than in the last two. During the third fiscal quarter of the year, revenue generation in this segment typically decreases, but increases through the fourth fiscal quarter as we work on films scheduled for release during the year-end holiday season.

We also derive a substantial amount of our revenue from our commercials segment. We typically execute a contract with an advertising agency that calls for a significant portion of the contract amount to be paid in the early stages of the project. A typical television commercial project will range in size from a few hundred thousand dollars to over a million dollars and will typically take four to 12 weeks to complete. Revenue generation in our commercials segment also tends to be cyclical, increasing shortly before major live television events such as the Super Bowl, the Academy Awards® telecast, the NBA playoffs and the Summer Olympics. Since many of these live events take place early in the calendar year, the revenue generated in this segment is generally higher during the first two fiscal quarters than in the last two.

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A majority of our revenue is derived from fixed-price contracts, which are recognized using the percentage of completion method of accounting. Under the percentage of completion method, revenue is recognized based on the percentage of the total costs incurred compared to the total estimated costs at completion. Delays in production due to customer-imposed factors or our internal resource requirements, as well as unforeseen accelerations in our customer’s timing, will change how costs are incurred and accordingly will result in revenue being recorded in a period other than as originally anticipated. Since many of our costs are of a fixed nature, incremental changes in revenue can have a significant effect on our reported gross and operating margins and net income or loss.

The recent trend in both our feature films and commercials segments has been in the direction of a lower number of total contracts, but having a higher average fixed price. As our management has made a conscious decision to focus increasingly on bidding for larger-scale projects in both our feature films and commercials segments, we expect this trend to continue.

Included in feature films revenues are royalties that we receive related to our work on the feature film Titanic in the amounts of $0.9 million, $0.2 million and $0.1 million for the years ended December 31, 2004, 2005 and 2006, respectively. We expect this revenue stream to continue, although we are unable to predict the amount or remaining term of these royalties.

Our software products consist of the compositing software product Nuke and plug-in applications that work with Nuke and various other third party software products used by visual effects professionals to solve image processing problems. Most of our software revenue is derived from perpetual software licenses of these products. The standard perpetual licensing fee for Nuke is currently $3,500 per license, and the licensing fees for the plug-in applications are up to $10,950 per license depending on the application. The licenses for Nuke and the plug-in applications, which are set forth in end user license agreements, are non-transferable and subject to certain enumerated restrictions on use. Each end user license agreement provides for a 90-day limited warranty and remains in effect perpetually unless and until terminated by us in response to a licensee’s breach of the terms thereof. We also derive revenue from maintenance, consisting of technical support and software updates on a when-and-if available basis. All of our licenses for Nuke are bundled with one year of maintenance which we recognize as revenue ratably over the applicable maintenance period, which is typically one year. We do not currently enter into explicit maintenance arrangements with the customers of our plug-in applications; however, technical support and software updates are provided on a limited basis. Revenue for maintenance related to our plug-in applications is recognized upon delivery of our software licenses.

Cost of revenues. Cost of revenues includes direct compensation, travel, lodging, and employee benefits for project-related personnel and related stock-based compensation expenses, payments to third-party contractors, and other direct project-related expenses. Also included in cost of revenues is an allocation based on a computational percentage of corporate overhead, which includes support salaries and employee benefits and related stock-based compensation expenses, occupancy costs, depreciation and amortization expenses, utilities and other selling, general and administrative expenses. We review and adjust these standards and computational percentages periodically so as to align them with comparable actual costs incurred.

Selling, general and administrative expenses. Selling, general and administrative expenses include compensation and benefits for corporate service employees and software engineers, expendable computer software and equipment, facilities expenses and other operating expenses not directly related and/or allocable to projects. Additionally, our sales personnel receive, as part of their compensation packages, periodic and annual bonus/commission incentives.

We expect to incur significant additional expenses as a result of being a public company, including costs to comply with the Sarbanes-Oxley Act of 2002 and other rules and regulations applicable to public companies. In addition, we expect to increase our research and development staff as our operations grow, as we become more involved in the production of video games and feature films and as we integrate potential future acquisitions. We intend to invest appropriate resources to properly manage and control our business, and this investment will likely result in future increases in selling, general and administrative expenses.

With our acquisition of The Foundry in 2007, we have increased our investment in our software business to provide technical software solutions for the visual effects and animation industry. The research and development relating to these technical software solutions is a complicated process that does not always produce a marketable product. Projects can be abandoned before they reach technological feasibility or after marketing efforts do not

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produce sufficient revenue. Our decision to develop new software solutions will require additional investments in personnel and equipment and will result in additional charges to operations before revenue is generated from these products. Additional expenses will also be incurred related to new product introductions and future product enhancements.

Interest and investment income. Our interest and investment income consists of interest earned on our cash, cash equivalents and short-term investments.

Interest expense. Our interest expense consists of interest incurred on our outstanding notes payable and capital leases, increases or decreases in the fair value of our warrant liability, and amortization of the discount and issuance costs on our senior secured notes payable. Our warrant liability, which relates to the put option feature of the warrants issued to Falcon in connection with the secured notes financings in July 2006 and May 2007, is adjusted to fair value at the end of each reporting period.

Other income (expense). Our other income (expense) includes other minor miscellaneous income (expense) items. Certain of our officers and directors, who are also holders of our common stock, guaranteed the Sellers’ Notes issued in connection with our acquisition of Digital Domain Productions on May 12, 2006. The estimated fair value of the guarantees was $180,000 and was recorded as other expense and an increase in additional paid-in-capital for the Successor period from May 13, 2006 through December 31, 2006.

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Nine Months Ended September 30, 2007 (Successor)

The table below sets forth certain information regarding our consolidated results of operations for the nine months ended September 30, 2007 (Successor).


	Successor Nine Months Ended September 30, 2007			% of Revenues
	(In Thousands)
Revenues	$	56,565			100.0	%
Costs and expenses:
Cost of revenues		45,136			79.8	%
Selling, general and administrative expenses		19,006			33.6	%
Total costs and expenses		64,142			113.4	%
Operating loss		(7,577	)		-13.4	%
Other income (expense):
Interest and investment income		523			0.9	%
Interest expense:
Change in fair value of warrant liability		(4,906	)		-8.7	%
Amortization of discount and issuance costs on notes payable		(982	)		-1.7	%
Interest expense on notes payable		(1,917	)		-3.4	%
Other interest expense		(2	)		0.0	%
Other expense		(153	)		-0.3	%
Loss before income taxes		(15,014	)		-26.5	%
Income tax expense		(21	)		0.0	%
Net loss	$	(15,035	)		-26.6	%

Revenues. Total revenues for the nine months ended September 30, 2007 were $56.6 million. Both the feature films and commercials segments benefited in the nine months ended September 30, 2007 from the number of large projects that were in production during this period. The software segment had an increase in revenues principally related to the inclusion of revenues attributable to The Foundry, which we acquired on March 23, 2007.

Cost of revenues. Total cost of revenues was $45.1 million for the nine months ended September 30, 2007. The cost of revenues as a percentage of total revenue was 79.8% for the period. Cost of revenues is directly related to the volume of contracts in progress during the period. Additionally, the cost of revenues as a percentage of revenues can vary greatly depending on the mix, timing and pricing of projects and our ability to effectively utilize our personnel and equipment. For the nine months ended September 30, 2007, we increased our personnel and personnel-related costs, resulting in increased fixed costs that had to be absorbed by these projects. During the nine months ended September 30, 2007, we benefited from the acquisition of The Foundry. During the nine months ended September 30, 2007, The Foundry contributed approximately $2.5 million in revenues and only $0.1 million in direct costs, which helped reduce our percentage of cost of revenues to revenues for this period.

Selling, general and administrative expenses. Total selling, general and administrative expenses were $19.0 million for the nine months ended September 30, 2007, as set forth in the following table. Included in the amount is approximately $5.5 million related to our notes payable and restricted stock issued as compensation to The Foundry’s former shareholders in connection with the acquisition of The Foundry. The $2.4 million related to The Foundry’s operating expenses consist of the salaries and benefits of administrative employees and software engineers, research and development costs and costs to operate The Foundry’s facility. The $9.2 million of general corporate expenses consist of $7.0 million related to salaries and benefits, research and development costs of $0.4 million, trade show costs of $0.2 million, professional fees of $1.0 million, occupancy related costs of $0.2 and marketing costs in the amount of $0.4 million. The allowance against loans in the amount of $0.4 million resulted from the recording of an allowance against loans made to a video game company that was a potential acquisition target. For more information, see Note 14 of our Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this prospectus. In addition, during the nine months ended September 30, 2007, we launched our animation/video games

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group and incurred $1.0 million of related staff expenses. Stock-based compensation was $0.3 million for the nine months ended September 30, 2007. We expect stock-based compensation to increase in future periods as we grant additional options and recognize as compensation the $8.5 million of unrecognized compensation costs related to nonvested options at September 30, 2007.


	Successor Nine Months Ended September 30, 2007
	(In Millions)
Depreciation and amortization	$	0.2
Foundry Acquisition-related expenses		5.5
Stock-based compensation		0.3
The Foundry operating expenses		2.4
Allowance against loan to potential acquisition target		0.4
Animation/video games group		1.0
General corporate expenses		9.2
Total	$	19.0

Interest and investment income. Interest and investment income was $0.5 million for the nine months ended September 30, 2007. Interest and investment income result from the investment of excess cash into interest-bearing instruments.

Interest expense. As summarized in the table below, interest expense was $7.8 million for the nine months ended September 30, 2007. For the nine months ended September 30, 2007, we recognized interest expense of $1.9 million on the notes payable issued to Falcon and interest expense related to the amortization of the discount on these notes and issuance costs related to these notes in the aggregate amount of $1.0 million. In addition, for the nine months ended September 30, 2007, there was an adjustment of approximately $4.9 million related to the increase in the fair value of our related warrant liability. The warrant liability is adjusted to the current fair value and the adjustments are recorded as increases or decreases to interest expense.


	Successor Nine Months Ended September 30, 2007
	(In Millions)
Amortization of discount and issuance costs on notes payable	$	1.0
Interest expense on notes payable		1.9
Increase in warrant liability		4.9
Total	$	7.8

Other expense. Other expense was $0.2 million for the nine months ended September 30, 2007 and is primarily related to the exchange rate loss related to the pay-off of notes issued to the former shareholders of The Foundry.

Income tax expense. Due to uncertainties related to the realization of deferred tax assets, a valuation allowance has been established against gross deferred tax assets. Accordingly, no income tax benefit has been provided for the operating loss incurred during the nine months ended September 30, 2007.

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Results by Segment — Nine Months Ended September 30, 2007 (Successor)

The table below sets forth certain information regarding our results of operations on a consolidated basis and by segment for the nine months ended September 30, 2007 (Successor).


Successor Nine Months Ended September 30, 2007	Feature Films		Commercials		Software			Animation/ Video Games			Corporate and Other			Total
	(In Thousands)
Revenues	$	36,488	$	17,146	$	2,931		$	—		$	—		$	56,565
Costs and expenses:
Cost of revenues		31,200		13,841		95			—			—			45,136
Selling, general and administrative expenses		85		930		8,253			980			8,758			19,006
Total costs and expenses		31,285		14,771		8,348			980			8,758			64,142
Operating income (loss)	$	5,203	$	2,375	$	(5,417	)	$	(980	)	$	(8,758	)	$	(7,577	)

Feature Films Segment

The table below sets forth certain information regarding our results of operations for our Feature Films Segment for the nine months ended September 30, 2007 (Successor).


	Successor Nine Months Ended September 30, 2007		% of Revenues
	(In Thousands)
Revenues	$	36,488		100.0	%
Costs and expenses:
Cost of revenues		31,200		85.5	%
Selling, general and administrative expenses		85		0.2	%
Total costs and expenses		31,285		85.7	%
Operating income	$	5,203		14.3	%

Revenues. Revenues generated by this segment were $36.5 million or 64.5% of our total revenues for the period. During the nine months ended September 30, 2007, we had five large feature film projects in production that each contributed at least $3.0 million of revenues. Revenues from these projects comprised 79% of the total revenues generated by this segment for this period.

Cost of revenues. Cost of revenues was $31.2 million for the nine months ended September 30, 2007. The cost of revenues as a percentage of the related revenues was 85.5% for the period. The cost of revenues is directly impacted by the timing and mix of projects and changes in personnel and personnel-related expenses. During the nine months ended September 30, 2007, we did not perform services on feature films with holiday release dates. Therefore, our facility was underutilized during this period and the feature films in production had to absorb a greater percentage of the facility costs that we incurred during this period. Included in the cost of revenues is depreciation expense in the amount of $2.0 million that has been allocated to the projects we worked on during this period.

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.1 million for the nine months ended September 30, 2007 and consist of marketing costs and compensation and benefits of the sales staff.

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Commercials Segment

The table below sets forth certain information regarding our results of operations for our Commercials Segment for the nine months ended September 30, 2007 (Successor).


	Successor Nine Months Ended September 30, 2007		% of Revenues
	(In Thousands)
Revenues	$	17,146		100.0	%
Costs and expenses:
Cost of revenues		13,841		80.7	%
Selling, general and administrative expenses		930		5.4	%
Total costs and expenses		14,771		86.1	%
Operating income	$	2,375		13.9	%

Revenues. Revenues generated by this segment were $17.1 million or 30.3% of our total revenues for the period. Our commercials segment recognized at least $0.5 million of revenue from each of nine large commercials projects during this period. Revenues from these nine projects represent 57% of our total revenues generated by this segment for this period.

Cost of revenues. Cost of revenues totaled $13.8 million or 80.7% of the revenues generated by this segment for the nine months ended September 30, 2007. Cost of revenues as a percentage of the related revenues can vary greatly depending on the mix, timing and pricing of projects and our ability to effectively utilize our personnel and equipment. Utilization of personnel and equipment can change significantly from period to period. Because a portion of our costs are of a fixed nature, increases or decreases in the number and/or size of projects during the period impact utilization rates and cost of revenues. Included in cost of revenues is depreciation expense in the amount of $0.8 million that has been allocated to the projects we worked on during this period.

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.9 million or 5.4% of the revenues generated by this segment for the nine months ended September 30, 2007 and consist of marketing costs and compensation and benefits of sales staff.

Software Segment

The table below sets forth certain information regarding our results of operations for our Software Segment for the nine months ended September 30, 2007 (Successor).


	Successor Nine Months Ended September 30, 2007			% of Revenues
	(In Thousands)
Revenues	$	2,931			100.0	%
Costs and expenses:
Cost of revenues		95			3.2	%
Selling, general and administrative expenses		8,253			281.6	%
Total costs and expenses		8,348			284.8	%
Operating loss	$	(5,417	)		-184.8	%

Revenues. Revenues generated by this segment were $2.9 million for the nine months ended September 30, 2007. The Foundry, which we acquired on March 23, 2007, contributed $2.5 million of revenues during this period. Included in The Foundry’s revenues is $0.5 million related to the sales of Nuke. As a result of our acquisition of The Foundry, The Foundry began selling and marketing Nuke in April 2007.

Cost of revenues. Cost of revenues was $0.1 million or 3.2% of the revenues generated by this segment for the nine months ended September 30, 2007. The cost of revenues consists of royalties that are due to third parties.

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Selling, general and administrative expenses. Selling, general and administrative expenses were $8.3 million or 281.6% of the revenues generated by this segment for the nine months ended September 30, 2007. Included in the nine months ended September 30, 2007 was a compensation charge in the amount of $5.5 million related to the notes payable and shares of restricted stock issued to The Foundry’s former shareholders. In addition, $1.7 million is related to The Foundry’s operating expenses, which consist of the salaries and benefits of administrative employees and software engineers, depreciation and the costs to operate the Foundry’s facility and $0.9 million of research and development.

Animation/Video Games Segment

The table below sets forth certain information regarding our results of operations for our Animation/Video Games Segment for the nine months ended September 30, 2007 (Successor).


	Successor Nine Months Ended September 30, 2007			% of Revenues
	(In Thousands)
Revenues	$	—			0.0	%
Costs and expenses:
Cost of revenues		—			0.0	%
Selling, general and administrative expenses		980			0.0	%
Total costs and expenses		980			0.0	%
Operating loss	$	(980	)		0.0	%

We launched our animation/video games group in 2007. For the nine months ended September 30, 2007, there was no revenue recognized for this segment and $1.0 million of start-up costs, primarily staff related expenses, were incurred.

Corporate and Other

The table below sets forth certain information regarding our corporate and other expenses for the nine months ended September 30, 2007 (Successor).


	Successor Nine Months Ended September 30, 2007
	(In Thousands)
Depreciation and amortization	$	182
Allowance against loan to a potential acquisition target		375
Stock-based compensation		356
General corporate expenses		7,845
Total	$	8,758

This category reflects administrative costs and expenses management has not allocated to our reportable segments. These costs and expenses include compensation and benefits for executive officers and support staff, professional fees for audit and legal services, travel and entertainment expenses and depreciation and amortization.

Corporate and other expenses were $8.8 million for the nine months ended September 30, 2007. Included in general corporate expenses is compensation and benefits in the amount of $6.1 million, professional fees of $1.0 million, research and development costs of $0.4 million, trade show costs of $0.2 million and occupancy and general expenses in the amount of $0.1 million. The allowance against loans in the amount of $0.4 million resulted from the recording of an allowance against loans made to a video game company that was a potential acquisition target. For more information, see Note 14 of our Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this prospectus.

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January 1, 2006 to May 12, 2006 (Predecessor)

The table below sets forth certain information regarding our consolidated results of operations for the period January 1, 2006 to May 12, 2006 (Predecessor).


	Predecessor Period January 1, 2006 to May 12, 2006			% of Revenues
	(In Thousands)
Revenues	$	25,381			100.0	%
Costs and expenses:
Cost of revenues		20,131			79.3	%
Selling, general and administrative expenses		5,667			22.3	%
Total costs and expenses		25,798			101.6	%
Operating loss		(417	)		-1.6	%
Other income (expense):
Interest and investment income		289			1.1	%
Interest expense		(2	)		0.0	%
Other income		8			0.0	%
Loss before income taxes		(122	)		-0.5	%
Income tax expense		(10	)		0.0	%
Net loss		($132	)		-0.5	%

Revenues. Total revenues for the period January 1, 2006 to May 12, 2006 were $25.4 million. Both the feature films and commercials segments benefited from the number of large projects in production during this period.

Cost of revenues. Total cost of revenues was $20.1 million for the period January 1, 2006 to May 12, 2006. The cost of revenues as a percentage of revenues was 79.3% for the period. Cost of revenues is directly related to the volume of projects in progress during the period. Additionally, the cost of revenues as a percentage of revenues can vary greatly depending on the mix, timing and pricing of projects and our ability to effectively utilize our personnel and equipment.

Selling, general and administrative expenses. Total selling, general and administrative expenses were $5.7 million for the period January 1, 2006 to May 12, 2006, as set forth in the following table. Included in selling, general and administrative expenses for this period are charges in the amount of $2.5 million related to our acquisition of Digital Domain Productions. Included in general corporate expenses are employee compensation and benefits in the amount of $1.9 million, research and development costs in the amount of $0.1 million, marketing costs in the amount of $0.4 million, professional fees in the amount of $0.1 million, losses recognized on the disposal of assets in the amount of $0.2 million, and occupancy and general expenses, including taxes, insurance, rent and utilities, in the amount of $0.3 million.


	Predecessor Period January 1, 2006 to May 12, 2006
	(In Millions)
Depreciation and amortization	$	0.2
Acquisition-related expenses		2.5
General corporate expenses		3.0
Total	$	5.7

Interest and investment income. Interest and investment income was $0.3 million for the period January 1, 2006 to May 12, 2006. Interest and investment income resulted from the investment of excess cash into interest-bearing instruments.

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Interest expense. Interest expense was $2,000 for the period January 1, 2006 to May 12, 2006 and represents interest expense on capital leases.

Other income. Other income was $8,000 for the period January 1, 2006 to May 12, 2006 and represents miscellaneous fees, such as from short-term rentals of equipment or facilities.

Income tax expense. Due to uncertainties related to the realization of deferred tax assets, a valuation allowance has been established against gross deferred tax assets. Accordingly, no income tax benefit has been provided for the operating loss incurred during the period January 1, 2006 to May 12, 2006.

Results by Segment — January 1, 2006 to May 12, 2006 (Predecessor)

The table below sets forth certain information regarding our results of operations on a consolidated basis and by segment for the period January 1, 2006 to May 12, 2006 (Predecessor).


Predecessor Period January 1 to May 12, 2006	Feature Films		Commercials		Software		Corporate and Other			Total
	(In Thousands)
Revenues	$	16,593	$	8,580	$	208	$	—		$	25,381
Costs and expenses:
Cost of revenues		13,873		6,254		4		—			20,131
Selling, general and administrative expenses		235		420		138		4,874			5,667
Total costs and expenses		14,108		6,674		142		4,874			25,798
Operating income (loss)	$	2,485	$	1,906	$	66	$	(4,874	)	$	(417	)

Feature Films Segment

The table below sets forth certain information regarding our results of operations for our Feature Films Segment for the period January 1, 2006 to May 12, 2006 (Predecessor).


	Predecessor Period January 1, 2006 to May 12, 2006		% of Revenues
	(In Thousands)
Revenues	$	16,593		100.0	%
Costs and expenses:
Cost of revenues		13,873		83.6	%
Selling, general and administrative expenses		235		1.4	%
Total costs and expenses		14,108		85.0	%
Operating income	$	2,485		15.0	%

Revenues. Revenues generated by this segment were $16.6 million or 65.4% of our total revenues for the period January 1, 2006 to May 12, 2006. During this period, we had three large feature film projects in production that each contributed at least $3.0 million of revenues. These projects comprised 99% of the revenues generated by this segment for this period.

Cost of revenues. Cost of revenues was $13.9 million for the period January 1, 2006 to May 12, 2006. The cost of revenues as a percentage of the related revenues was 83.6% for the period. The cost of revenues is directly impacted by the timing and mix of projects and changes in personnel and personnel-related expenses. Included in the cost of revenues is depreciation expense in the amount of $0.9 million that has been allocated to the projects we worked on during this period.

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.2 million or 1.4% of the revenues generated by this segment for the period January 1, 2006 to May 12, 2006 and consist of marketing costs and compensation and benefits of sales staff.

TABLE OF CONTENTS

Commercials Segment

The table below sets forth certain information regarding our results of operations for our Commercials Segment for the period January 1, 2006 to May 12, 2006 (Predecessor).


	Predecessor Period January 1, 2006 to May 12, 2006		% of Revenues
	(In Thousands)
Revenues	$	8,580		100.0	%
Costs and expenses:
Cost of revenues		6,254		72.9	%
Selling, general and administrative expenses		420		4.9	%
Total costs and expenses		6,674		77.8	%
Operating income	$	1,906		22.2	%

Revenues. Revenues generated by this segment were $8.6 million or 33.8% of our total revenues for the period January 1, 2006 to May 12, 2006. The commercials segment recognized at least $0.5 million of revenue from each of six large commercials projects during this period. Revenues from these nine projects represent 48% of the total revenues generated by this segment during this period.

Cost of revenues. Cost of revenues were $6.3 million or 72.9% of the related revenues for the period January 1, 2006 to May 12, 2006. Cost of revenues as a percentage of the related revenues can vary greatly depending on the mix, timing and pricing of projects and our ability to effectively utilize our personnel and equipment. Utilization of personnel and equipment can change significantly from period to period. Because a portion of our costs are of a fixed nature, increases or decreases in the number of projects during the period impact utilization rates and cost of revenues. Included in cost of revenues during this period is depreciation expense in the amount of $0.4 million that has been allocated to the projects we worked on during this period.

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.4 million or 4.9% of the revenues generated by this segment for the period January 1, 2006 to May 12, 2006 and consist of marketing costs and compensation and benefits of the sales staff.

Software Segment

The table below sets forth certain information regarding our results of operations for our Software Segment for the period January 1, 2006 to May 12, 2006 (Predecessor).


	Predecessor Period January 1, 2006 to May 12, 2006		% of Revenues
	(In Thousands)
Revenues	$	208		100.0	%
Costs and expenses:
Cost of revenues		4		1.9	%
Selling, general and administrative expenses		138		66.3	%
Total costs and expenses		142		68.3	%
Operating income	$	66		31.7	%

Revenues. Revenues generated by this segment were $0.2 million for the period January 1, 2006 to May 12, 2006. Nuke was the only software product that we sold during this period.

Cost of revenues. Cost of revenues, consisting of royalties due to third parties, was $4,000 or 1.9% of the revenues generated by this segment during this period.

TABLE OF CONTENTS

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.1 million or 66.3% of the revenues generated by this segment for the period January 1, 2006 to May 12, 2006 and represent marketing costs and compensation and benefits of sales staff.

Corporate and Other

The table below sets forth certain information regarding corporate and other expenses for the period January 1, 2006 to May 12, 2006 (Predecessor).


	Predecessor Period January 1, 2006 to May 12, 2006
	(In Thousands)
Depreciation and amortization	$	175
Acquisition-related expenses		2,500
General corporate expenses		2,199
Total	$	4,874

Corporate and other expenses. Corporate and other expenses were $4.9 million for the period January 1, 2006 to May 12, 2006. Included in corporate and other expenses for this period are charges in the amount of $2.5 million related to our acquisition of Digital Domain Productions. Included in general corporate expenses are employee compensation and benefits in the amount $1.6 million, research and development costs in the amount of $0.1 million, professional fees in the amount of $0.1 million, losses recognized on the disposal of assets in the amount of $0.2 million, and occupancy and general expenses, including taxes, insurance, rent and utilities, in the amount of $0.2 million.

May 13, 2006 to September 30, 2006 (Successor)

The table below sets forth certain information regarding our consolidated results of operations for the period May 13, 2006 to September 30, 2006 (Successor).


	Successor Period May 13, 2006 to September 30, 2006			% of Revenues
	(In Thousands)
Revenues	$	23,757			100.0	%
Costs and expenses:
Cost of revenues		18,942			79.7	%
Selling, general and administrative expenses		3,540			14.9	%
Total costs and expenses		22,482			94.6	%
Operating income		1,275			5.4	%
Other income (expense):
Interest and investment income		188			0.8	%
Interest expense:
Amortization of discount and issuance costs on notes payable		(154	)		-0.6	%
Interest expense on notes payable		(365	)		-1.5	%
Other interest expense		—			0.0	%
Other expense		(168	)		-0.7	%
Income before income taxes		776			3.3	%
Income tax benefit		—			0.0	%
Net income	$	776			3.3	%

TABLE OF CONTENTS

Revenues. Total revenues for the period May 13, 2006 to September 30, 2006 were $23.8 million. Both the feature films and commercials segments benefited from large projects in production during this period.

Cost of revenues. Total cost of revenues was $18.9 million for the period May 13, 2006 to September 30, 2006. The cost of revenues as a percentage of total revenues was 79.7% for the period. Cost of revenues is directly related to the volume of contracts in progress during the period. Additionally, the cost of revenues as a percentage of revenues can vary greatly depending on the mix, timing and pricing of projects and our ability to effectively utilize our personnel and equipment.

Selling, general and administrative expenses. Total selling, general and administrative expenses were $3.5 million for the period May 13, 2006 to September 30, 2006, as set forth in the following table. Included in general corporate expenses are compensation and benefits in the amount of $2.8 million, marketing costs in the amount of $0.1 million and trade show costs in the amount of $0.1 million.


	Successor Period May 13, 2006 to September 30, 2006
	(In Millions)
Depreciation and amortization	$	0.5
General corporate expenses		3.0
Total	$	3.5

Interest and investment income. Interest and investment income was $0.2 million for the period May 13, 2006 to September 30, 2006. Interest and investment income result from the investment of excess cash into interest-bearing instruments.

Interest expense. As summarized in the table below, interest expense was $0.6 million for the period May 13, 2006 to September 30, 2006. We recognized interest expense of $0.4 million on the notes payable issued to Falcon, and interest expense related to the amortization of the discount on these notes and issuance costs related to these notes in the aggregate amount of $0.2 million.


	Successor Period May 13, 2006 to September 30, 2006
	(In Millions)
Amortization of discount and issuance costs on notes payable	$	0.2
Interest expense on notes payable		0.4
Total	$	0.6

Other expense. Other expense was $0.2 million for the period May 13, 2006 to September 30, 2006. Other expense is principally attributable to non-cash charges of $0.2 million related to guarantees issued in connection with the Sellers’ Notes and in effect during the period May 13, 2006 to September 30, 2006.

Income tax benefit (expense). Due to uncertainties related to the realization of deferred tax assets, a valuation allowance has been established against gross deferred tax assets. Accordingly, no income tax benefit has been provided for the period May 13, 2006 to September 30, 2006.

TABLE OF CONTENTS

Results by Segment — May 13, 2006 to September 30, 2006 (Successor)

The table below sets forth certain information regarding our results of operations on a consolidated basis and by segment for the period May 13, 2006 to September 30, 2006 (Successor).


Successor Period May 13, 2006 to September 30, 2006	Feature Films		Commercials		Software		Corporate and Other			Total
	(In Thousands)
Revenues	$	15,460	$	8,013	$	284	$	—		$	23,757
Costs and expenses:
Cost of revenues		12,222		6,714		6		—			18,942
Selling, general and administrative expenses		266		695		239		2,340			3,540
Total costs and expenses		12,488		7,409		245		2,340			22,482
Operating income (loss)	$	2,972	$	604	$	39	$	(2,340	)	$	1,275

Feature Films Segment

The table below sets forth certain information regarding our results of operations for our Feature Films Segment for the period May 13, 2006 to September 30, 2006 (Successor).


	Successor Period May 13, 2006 to September 30, 2006		% of Revenues
	(In Thousands)
Revenues	$	15,460		100.0	%
Costs and expenses:
Cost of revenues		12,222		79.1	%
Selling, general and administrative expenses		266		1.7	%
Total costs and expenses		12,488		80.8	%
Operating income	$	2,972		19.2	%

Revenues. Revenues generated by this segment were $15.5 million or 65.1% of our total revenues for the period May 13, 2006 to September 30, 2006. During this period, we had one large feature film project that contributed more than $3.0 million of revenues. This project comprised 48% of the total revenues generated by this segment for this period.

Cost of revenues. Cost of revenues was $12.2 million for the period May 13, 2006 to September 30, 2006. The cost of revenues as a percentage of the related revenues was 79.1% for the period. The cost of revenues is directly impacted by the timing and mix of projects and changes in personnel and personnel-related expenses. Included in the cost of revenues is depreciation expense in the amount of $0.7 million that has been allocated to the projects we worked on during this period.

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.3 million or 1.7% of the revenues generated by this segment for the period May 13, 2006 to September 30, 2006 and consist of marketing costs and compensation and benefits of sales staff.

TABLE OF CONTENTS

Commercials Segment

The table below sets forth certain information regarding our results of operations for our Commercials Segment for the period May 13, 2006 to September 30, 2006 (Successor).


	Successor Period May 13, 2006 to September 30, 2006		% of Revenues
	(In Thousands)
Revenues	$	8,013		100.0	%
Costs and expenses:
Cost of revenues		6,714		83.8	%
Selling, general and administrative expenses		695		8.7	%
Total costs and expenses		7,409		92.5	%
Operating income	$	604		7.5	%

Revenues. Revenues generated by this segment were $8.0 million or 33.7% of our total revenues for the period May 13, 2006 to September 30, 2006. The commercials segment recognized at least $0.5 million of revenues from each of six large commercials projects during this period. Revenues from these nine projects represent 57% of the total revenues generated by this segment for this period.

Cost of revenues. Cost of revenues was $6.7 million or 83.8% of the revenues generated by this segment for the period May 13, 2006 to September 30, 2006. Cost of revenues as a percentage of the related revenues can vary greatly depending on the mix, timing and pricing of projects and our ability to effectively utilize our personnel and equipment. Utilization of personnel and equipment can change significantly from period to period. Because a portion of our costs are of a fixed nature, increases or decreases in the number of projects during the period impact the utilization rates and the cost of revenues. Included in cost of revenues is depreciation expense in the amount of $0.3 million that has been allocated to the projects we worked on during this period.

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.7 million or 8.7% of the revenues generated by this segment for the period May 13, 2006 to September 30, 2006 and consist of marketing costs and compensation and benefits of sales staff.

Software Segment

The table below sets forth certain information regarding our results of operations for our Software Segment for the period May 13, 2006 to September 30, 2006 (Successor).


	Successor Period May 13, 2006 to September 30, 2006		% of Revenues
	(In Thousands)
Revenues	$	284		100.0	%
Costs and expenses:
Cost of revenues		6		2.1	%
Selling, general and administrative expenses		239		84.2	%
Total costs and expenses		245		86.3	%
Operating income	$	39		13.7	%

Revenues. Revenues generated by this segment were $0.3 million for the period May 13, 2006 to September 30, 2006. Nuke was the only software product that we sold during this period.

Cost of revenues. Cost of revenues, consisting of royalties due to third parties, was $6,000 or 2.1% of the revenues generated by this segment during this period.

TABLE OF CONTENTS

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.2 million or 84.2% of the revenues generated by this segment for the period May 13, 2006 to September 30, 2006 and represent marketing costs and compensation and benefits of sales staff.

Corporate and Other

The table below sets forth certain information regarding our corporate and other expenses for the period May 13, 2006 to September 30, 2006 (Successor).


	Successor Period May 13, 2006 to September 30, 2006
	(In Thousands)
Depreciation and amortization	$	552
General corporate expenses		1,788
Total	$	2,340

General corporate expenses. General corporate expenses were $1.8 million for the period May 13, 2006 to September 30, 2006. Included in general corporate expenses are compensation and benefits in the amount of $1.7 million, and trade show costs in the amount of $0.1 million.

May 13, 2006 to December 31, 2006 (Successor)

The table below sets forth certain information regarding our consolidated results of operations for the period May 13, 2006 to December 31, 2006 (Successor).


	Successor Period May 13, 2006 to December 31, 2006			% of Revenues
	(In Thousands)
Revenues	$	41,652			100.0	%
Costs and expenses:
Cost of revenues		33,753			81.0	%
Selling, general and administrative expenses		8,564			20.6	%
Total costs and expenses		42,317			101.6	%
Operating loss		(665	)		-1.6	%
Other income (expense):
Interest and investment income		423			1.0	%
Interest expense:
Amortization of discount and issuance costs on notes payable		(371	)		-0.9	%
Interest expense on notes payable		(836	)		-2.0	%
Other interest expense		(4	)		0.0	%
Other expense		(87	)		-0.2	%
Loss before income taxes		(1,540	)		-3.7	%
Income tax expense		(6	)		0.0	%
Net loss		($1,546	)		-3.7	%

Revenues. Total revenues for the period May 13, 2006 to December 31, 2006 were $41.7 million. Both the feature films and commercials segments benefited from the number of large projects in production during this period.

TABLE OF CONTENTS

Cost of revenues. Total cost of revenues was $33.8 million for the period May 13, 2006 to December 31, 2006. The cost of revenues as a percentage of total revenues was 81.0% for this period. Cost of revenues is directly related to the volume of projects in progress during the period. Additionally, the cost of revenues as a percentage of revenues can vary greatly depending on the mix, timing and pricing of projects and our ability to effectively utilize our personnel and equipment. Included in cost of revenues for the period May 13, 2006 to December 31, 2006 is a $0.8 million charge related to the ultimate estimated loss that was projected to result from the performance of one contract relating to a feature film project. The impact of this charge was to cause the total cost of revenues as a percentage of revenues to be 1.8% higher during this period than it would have been in the absence of this charge (i.e., 81.0% vs. 79.2%).

Selling, general and administrative expenses. Total selling, general and administrative expenses were $8.6 million for the period May 13, 2006 to December 31, 2006, as set forth in the following table. Included in general corporate expenses are compensation and benefits in the amount of $4.4 million, marketing costs in the amount of $0.9 million, research and development costs in the amount of $0.1 million, trade show costs in the amount of $0.2 million, professional fees in the amount of $1.0 million and occupancy and other general costs, which include rent and utilities, in the amount of $0.7 million.


	Succesor Period May 13, 2006 to December 31, 2006
	(In Millions)
Depreciation and amortization	$	1.0
Stock-based compensation		0.3
General corporate expenses		7.3
Total	$	8.6

Interest and investment income. Interest and investment income was $0.4 million for the period May 13, 2006 to December 31, 2006. Interest and investment income result from the investment of excess cash into interest-bearing instruments.

Interest expense. As summarized in the table below, interest expense was $1.2 million for the period May 13, 2006 to December 31, 2006. For this period, we recognized interest expense of $0.8 million on the notes payable issued to Falcon and interest expense related to the amortization of the discount on these notes and issuance costs related to these notes in the aggregate amount of $0.4 million.


	Succesor Period May 13, 2006 to December 31, 2006
	(In Millions)
Amortization of discount and issuance costs on notes payable	$	0.4
Interest expense on notes payable		0.8
Total	$	1.2

Other expense. Other expense was $0.1 million for the period May 13, 2006 to December 31, 2006. Other expense is principally attributable to non-cash charges of $0.2 million related to guarantees issued in connection with the Sellers’ Notes and in effect during the period May 13, 2006 to December 31, 2006.

TABLE OF CONTENTS

Results by Segment — May 13, 2006 to December 31, 2006 (Successor)

The table below sets forth certain information regarding our results of operations on a consolidated basis and by segment for the period May 13, 2006 to December 31, 2006 (Successor).


Successor Period May 13, 2006 to December 31, 2006	Feature Films		Commercials			Software		Corporate and Other			Total
	(In Thousands)
Revenues	$	26,757	$	14,387		$	508	$	—		$	41,652
Costs and expenses:
Cost of revenues		20,166		13,577			10		—			33,753
Selling, general and administrative expenses		903		1,238			313		6,110			8,564
Total costs and expenses		21,069		14,815			323		6,110			42,317
Operating income (loss)	$	5,688	$	(428	)	$	185	$	(6,110	)	$	(665	)

Feature Films Segment

The table below sets forth certain information regarding the results of operations for our Feature Films Segment for the period May 13, 2006 to December 31, 2006 (Successor).


	Successor Period May 13, 2006 to December 31, 2006		% of Revenues
	(In Thousands)
Revenues	$	26,757		100.0	%
Costs and expenses:
Cost of revenues		20,166		75.4	%
Selling, general and administrative expenses		903		3.4	%
Total costs and expenses		21,069		78.7	%
Operating income	$	5,688		21.3	%

Revenues. Revenues generated by this segment were $26.8 million or 64.2% of our total revenues for this period. During the period May 13, 2006 to December 31, 2006, we had three large feature film projects that each contributed at least $3.0 million of revenues. These projects comprised 61% of the total revenues generated by this segment for this period.

Cost of revenues. Cost of revenues was $20.2 million for the period May 13, 2006 to December 31, 2006. The cost of revenues as a percentage of the related revenues was 75.4% for the period. The cost of revenues is directly impacted by the timing and mix of projects and changes in personnel and personnel-related expenses. Included in cost of revenues for the period May 13, 2006 to December 31, 2006 is a $0.8 million charge related to the ultimate estimated loss that was projected to result from the performance of one contract relating to a feature film project. The impact of this charge was to cause the cost of feature films revenues as a percentage of revenues generated by this segment to be 3.0% higher during this period than it would have been in the absence of this charge (i.e., 75.4% vs. 72.4%). Additionally, included in the cost of revenues is depreciation expense in the amount of $1.2 million that has been allocated to the projects we worked on during this period.

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.9 million or 3.4% of the revenues generated by this segment for the period May 13, 2006 to December 31, 2006 and consist of marketing costs and compensation and benefits of sales staff.

TABLE OF CONTENTS

Commercials Segment

The table below sets forth certain information regarding our results of operations for our Commercials Segment for the period May 13, 2006 to December 31, 2006 (Successor).


	Successor Period May 13, 2006 to December 31, 2006			% of Revenues
	(In Thousands)
Revenues	$	14,387			100.0	%
Costs and expenses:
Cost of revenues		13,577			94.4	%
Selling, general and administrative expenses		1,238			8.6	%
Total costs and expenses		14,815			103.0	%
Operating loss	$	(428	)		-3.0	%

Revenues. Revenues generated by this segment were $14.4 million or 34.5% of our total revenues for the period May 13, 2006 to December 31, 2006. The commercials segment recognized at least $0.5 million of revenues from each of eight large commercials projects during this period. The revenues from these eight projects represent 57% of the total revenues generated by this segment for this period.

Cost of revenues. Cost of revenues were $13.6 million or 94.4% of the revenues generated by this segment for the period May 13, 2006 to December 31, 2006. Cost of revenues as a percentage of revenues can vary greatly depending on the mix, timing and pricing of projects and our ability to effectively utilize our personnel and equipment. Utilization of personnel and equipment can change significantly from period to period. Because a portion of our costs are of a fixed nature, increases or decreases in the number of projects during the period impact the utilization rates and the cost of revenues. Included in cost of revenues is depreciation expense in the amount of $0.7 million that has been allocated to the projects we worked on during this period.

Selling, general and administrative expenses. Selling, general and administrative expenses were $1.2 million or 8.6% of the revenues generated by this segment for the period May 13, 2006 to December 31, 2006 and consist of marketing costs and compensation and benefits of sales staff.

Software Segment

The table below sets forth certain information regarding our results of operations for our Software Segment for the period May 13, 2006 to December 31, 2006 (Successor).


	Successor Period May 13, 2006 to December 31, 2006		% of Revenue
	(In Thousands)
Revenues	$	508		100.0	%
Costs and expenses:
Cost of revenues		10		2.0	%
Selling, general and administrative expenses		313		61.6	%
Total costs and expenses		323		63.6	%
Operating income	$	185		36.4	%

Revenues. Revenues generated by this segment were $0.5 million for the period May 13, 2006 to December 31, 2006. Nuke was the only software product that we sold during this period.

Cost of revenues. Cost of revenues, consisting of royalties due to third parties, was $10,000 or 2.0% of the revenues generated by this segment for this period.

TABLE OF CONTENTS

Selling, general and administrative expenses. Selling, general and administrative expenses were $0.3 million or 61.6% of the revenues generated by this segment for the period May 13, 2006 to December 31, 2006 and represent marketing costs and compensation and benefits of sales staff.

Corporate and Other

The table below sets forth certain information regarding our corporate and other expenses for the period May 13, 2006 to December 31, 2006 (Successor)


	Successor Period May 13, 2006 to December 31, 2006
	(In Thousands)
Depreciation and amortization	$	978
Stock-based compensation		286
General corporate expenses		4,846
Total	$	6,110

Corporate and other expenses. Corporate and other expenses were $6.1 million for the period May 13, 2006 to December 31, 2006. Included in general corporate expenses are compensation and benefits in the amount of $3.1 million, professional fees in the amount of $1.0 million, trade show costs in the amount of $0.5 million and other corporate expenses in the amount of $0.8 million

Year Ended December 31, 2005 (Predecessor) Compared to Year Ended December 31, 2004 (Predecessor)

The table below sets forth certain information regarding our consolidated results of operations for the years ended December 31, 2005 (Predecessor) and December 31, 2004 (Predecessor).


	Predecessor
	Year Ended December 31, 2004			% of Revenues			Year Ended December 31, 2005			% of Revenues
	(Dollars in Thousands)
Revenues	$	60,046			100.0	%	$	49,506			100.0	%
Costs and expenses:
Cost of revenues		48,846			81.3	%		43,626			88.1	%
Selling, general and administrative expenses		7,658			12.8	%		7,416			15.0	%
Total costs and expenses		56,504			94.1	%		51,042			103.1	%
Operating income (loss)		3,542			5.9	%		(1,536	)		-3.1	%
Other income (expense):
Interest and investment income		284			0.5	%		501			1.0	%
Interest expense:
Other interest expense		(2	)		0.0	%		(5	)		0.0	%
Other income		104			0.2	%		145			0.3	%
Income (loss) before income taxes		3,928			6.5	%		(895	)		-1.8	%
Income tax benefit (expense)		3,180			5.3	%		(3,282	)		-6.6	%
Net income (loss)	$	7,108			11.8	%	$	(4,177	)		-8.4	%

TABLE OF CONTENTS

Revenues. Total revenues decreased 17.5% from $60.0 million for the year ended December 31, 2004 to $49.5 million for the year ended December 31, 2005. Revenues decreased by $10.5 million primarily due to the less favorable timing and mix of feature film projects. As discussed above, we rely on a limited number of feature film and commercials projects for a significant portion of our revenues. Although the number of feature film projects remained consistent for the year ended December 31, 2004 as compared to the year ended December 31, 2005, the size of two large feature film projects in the year ended December 31, 2004 were significantly larger than any of the projects in the year ended December 31, 2005. The commercials segment had an increase in revenues for the year ended December 31, 2005 as compared to the year ended December 31, 2004; however, it was not sufficient to offset the decline over the same period in feature film revenues.

Cost of revenues. Total cost of revenues decreased 10.7% from $48.8 million for the year ended December 31, 2004 to $43.6 million for the year ended December 31, 2005. The decrease was principally attributable to a decrease in the cost of feature films revenues directly tied to the lower volume of feature films revenues for the year ended December 31, 2005. The volume of revenue directly impacts the costs of revenues. Included in the cost of revenues is $3.1 million for the year ended December 31, 2004 and $3.4 million for the year ended December 31, 2005 of depreciation expense that has been allocated to the projects that we worked on during those periods.

Selling, general and administrative expenses. Total selling, general and administrative expenses, as set forth in the following table, decreased 3.9% from $7.7 million for the year ended December 31, 2004 to $7.4 million for the year ended December 31, 2005. The $0.3 million decrease was principally attributable to a reduction in the amount of employee bonuses paid for the year ended December 31, 2005 as compared to the prior year.


	Predecessor Year Ended December 31,
	2004		2005		Change
	(In Millions)
Depreciation and amortization	$	0.2	$	0.2	$	—
Corporate expenses		7.5		7.2		(0.3	)
Total	$	7.7	$	7.4	$	(0.3	)

Interest and investment income. Interest and investment income increased 66.7% from $0.3 million for the year ended December 31, 2004 to $0.5 million for the year ended December 31, 2005. The $0.2 million increase was principally attributable to higher average cash balances throughout the year ended December 31, 2005.

Interest expense. Interest expense was $2,000 for the year ended December 31, 2004 compared to $5,000 for the year ended December 31, 2005. This increase reflects increased interest expense on capital leases entered into during the year ended December 31, 2005.

Other income. Other income increased 39.4% from $104,000 for the year ended December 31, 2004 to $145,000 for the year ended December 31, 2005. The increase was primarily attributable to additional income related to miscellaneous fees, such as fees from short-term rental of equipment or facilities.

Income tax benefit (expense). Income tax benefit was $3.2 million for the year ended December 31, 2004, compared to an income tax expense of $3.3 million for the year ended December 31, 2005. For the year ended December 31, 2004, the valuation allowance in the amount of $3.2 million related to deferred tax assets was removed. Based on our three-year historical cumulative income and our trend of profitable operations it was determined that we would more likely than not realize the remaining deferred tax assets. For the year ended December 31, 2005, a valuation allowance in the amount of $3.6 million related to deferred tax assets was re-established because of uncertainty with respect to the realization of these deferred tax assets.

TABLE OF CONTENTS

Results by Segment — Year Ended December 31, 2005 (Predecessor) Compared to Year Ended December 31, 2004 (Predecessor)

The tables below set forth certain information regarding our results of operations on a consolidated basis and by segment for the year ended December 31, 2005 (Predecessor) and December 31, 2004 (Predecessor).


Predecessor Year Ended December 31, 2005	Feature Films		Commercials		Software		Corporate and Other			Total
	(In Thousands)
Revenues	$	27,426	$	21,555	$	525	$	—		$	49,506
Costs and expenses:
Cost of revenues		25,299		18,317		10		—			43,626
Selling, general and administrative expenses		766		1,482		318		4,850			7,416
Total costs and expenses		26,065		19,799		328		4,850			51,042
Operating income (loss)	$	1,361	$	1,756	$	197	$	(4,850	)	$	(1,536	)


Predecessor Year Ended December 31, 2004	Feature Films		Commercials		Software		Corporate and Other			Total
	(In Thousands)
Revenues	$	41,810	$	17,675	$	561	$	—		$	60,046
Costs and expenses:
Cost of revenues		34,905		13,923		18		—			48,846
Selling, general and administrative expenses		751		852		160		5,895			7,658
Total costs and expenses		35,656		14,775		178		5,895			56,504
Operating income (loss)	$	6,154	$	2,900	$	383	$	(5,895	)	$	3,542

Feature Films Segment

The table below sets forth certain information regarding our results of operations for our Feature Films Segment for the years ended December 31, 2005 (Predecessor) and December 31, 2004 (Predecessor).


	Predecessor Year Ended December 31, 2004		% of Revenues			Predecessor Year Ended December 31, 2005		% of Revenues
	(Dollars in Thousands)
Revenues	$	41,810		100.0	%	$	27,426		100.0	%
Costs and expenses:
Cost of revenues		34,905		83.5	%		25,299		92.2	%
Selling, general and administrative expenses		751		1.8	%		766		2.8	%
Total costs and expenses		35,656		85.3	%		26,065		95.0	%
Operating income	$	6,154		14.7	%	$	1,361		5.0	%

Revenues. Revenues generated by this segment decreased 34.4% from $41.8 million for the year ended December 31, 2004 to $27.4 million for the year ended December 31, 2005. Revenues decreased by $14.4 million primarily due to the less favorable timing and mix of feature film projects in the year ended December 31, 2005 as compared to the prior year, and a royalty payment of $0.5 million related to royalties from prior periods for the feature film Titanic settled in the year ended December 31, 2004. As discussed above, we rely on a limited number of feature film and commercials projects for a significant portion of our revenues. In the year ended December 31, 2004, our revenues included two large feature films projects. In the year ended December 31, 2005, we had a similar number of feature

TABLE OF CONTENTS

films projects, but none as significant as the two in the year ended December 31, 2004. The two large projects in the year ended December 31, 2004 accounted for most of the differential in revenues between the two years.

Cost of revenues. Cost of revenues decreased 27.5% from $34.9 million for the year ended December 31, 2004 to $25.3 million for the year ended December 31, 2005. The decrease was principally attributable to a $9.6 million decrease in the cost of revenues directly tied to the lower volume of feature films revenues for the year ended December 31, 2005. The cost of revenues described above as a percentage of the related revenues increased from 83.5% for the year ended December 31, 2004 to 92.2% for the year ended December 31, 2005, primarily due to the less favorable timing and mix of feature films revenues and less effective use of personnel and facilities resulting in less production activity in the year ended December 31, 2005 as compared to the prior year. Included in the cost of revenues is $2.2 million for the year ended December 31, 2004 and $2.0 million for the year ended December 31, 2005 of depreciation expense that has been allocated to the projects that we worked on during those periods.

Selling, general and administrative expenses. Selling, general and administrative expenses remained constant at $0.8 million for both the year ended December 31, 2004 and the year ended December 31, 2005. These expenses primarily consist of compensation and benefits for non-utilized employees and marketing costs.

Commercials Segment

The table below sets forth certain information regarding the results of operations for our Commercials Segment for the years ended December 31, 2005 (Predecessor) and December 31, 2004 (Predecessor).


	Predecessor Year Ended December 31, 2004		% of Revenues			Predecessor Year Ended December 31, 2005		% of Revenues
	(Dollars in Thousands)
Revenues	$	17,675		100.0	%	$	21,555		100.0	%
Costs and expenses:
Cost of revenues		13,923		78.8	%		18,317		85.0	%
Selling, general and administrative expenses		852		4.8	%		1,482		6.9	%
Total costs and expenses		14,775		83.6	%		19,799		91.9	%
Operating income	$	2,900		16.4	%	$	1,756		8.1	%

Revenues. Revenues generated by this segment increased 22.0% from $17.7 million for the year ended December 31, 2004 to $21.6 million for the year ended December 31, 2005. The $3.9 million increase is primarily due to 12 large projects during the year ended December 31, 2005, compared to 10 such projects in the year ended December 31, 2004.

Cost of revenues. Cost of revenues increased 31.6% from $13.9 million for the year ended December 31, 2004 to $18.3 million for the year ended December 31, 2005. The cost of revenues increased by $4.4 million due to the increase in the related revenues. The cost of revenues as a percentage of the related revenues increased from 78.8% for the year ended December 31, 2004 to 85.0% for the year ended December 31, 2005. This increase is primarily attributable to the production of more complex projects at a higher cost during the year ended December 31, 2005 as compared to the prior year. Included in the cost of revenues is $0.9 million for the year ended December 31, 2004 and $1.4 million for the year ended December 31, 2005 of depreciation expense that has been allocated to the projects that we worked on during those periods.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 66.7% from $0.9 million for the year ended December 31, 2004 to $1.5 million for the year ended December 31, 2005. The $0.6 million increase was principally attributable to an increase in marketing costs and compensation and benefits.

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Software Segment

The table below presents the results of operations for our Software Segment for the years ended December 31, 2005 (Predecessor) and December 31, 2004 (Predecessor).


	Predecessor Year Ended December 31, 2004		% of Revenues			Predecessor Year Ended December 31, 2005		% of Revenues
	(Dollars in Thousands)
Revenues	$	561		100.0	%	$	525		100.0	%
Costs and expenses:
Cost of revenues		18		3.2	%		10		1.9	%
Selling, general and administrative expenses		160		28.5	%		318		60.6	%
Total costs and expenses		178		31.7	%		328		62.5	%
Operating income

Registration No. 333-147993

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

AMENDMENT NO. 1 TOFORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Digital Domain

300 Rose Avenue Venice, California 90291 (310) 314-2800

John C. Textor Digital Domain 300 Rose Avenue Venice, California 90291 (310) 314-2800

CALCULATION OF REGISTRATION FEE

SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2008

Shares Common Stock

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE “RISK FACTORS” BEGINNING ON PAGE 11.

The date of this prospectus is , 2008

Table of Contents

Prospectus Summary

Our Business

Our Strengths

Our Growth Strategy

Industry Background

Risk Factors

Corporate Information

The Offering

Summary Historical Consolidated and Pro Forma Financial Information

Risk Factors

Risks Related to Our Business and Industry

The entertainment and commercial production industries are highly competitive and we may not be able to compete successfully.

Our operating results may fluctuate significantly, which may cause the market price of our common stock to decrease significantly.

We have a history of losses.

Our success depends on certain key personnel.

To be successful, we must continue to attract and retain qualified personnel.

Investment in feature film and video game projects involves substantial financial risk.

We may not be able to implement our strategies of entering into the film production and video game development businesses effectively or at all.

Film Production

Video Game Development and Production

We intend to undertake acquisitions to expand our business, which may pose risks to our business and result in dilution to our stockholders.

Interruption or failure of our information technology systems could impair our ability to effectively provide our services and products, which could damage our reputation.

We depend on advanced technology and computer systems and we cannot predict the effect that rapid technological change or alternative forms of entertainment may have on us or our industry.

Our revenue may be adversely affected if we fail to protect our proprietary technology or enhance or develop new technology.

Third-party technology licenses may not continue to be available to us in the future.

Others may assert intellectual property infringement claims against us.

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud and, as a result, current and potential stockholders could lose confidence in our financial reporting.

Motion picture and software piracy may affect our ability to maximize our revenues.

We could be adversely affected by strikes or other union job actions.

Film production incentives and subsidies offered by foreign countries and states where we do not have operations could affect our ability to secure work on visual effects and animation projects.

We depend on revenues from a few significant relationships and any loss, cancellation, reduction, or delay in these relationships could harm our business.

We do not have an agreement with Michael Bay for the development or production of visual effects-driven and animated films or video games and he has no contractual obligation to direct business to us.

The inability to successfully manage the growth of our business may have an adverse effect on our operating results.

We may not be able to comply with certain financial covenants under our secured notes.

Changes in U.S., regional or global economic conditions could adversely affect our profitability.

Risks Related to this Offering and Ownership of Our Common Stock

Our common stock has not been publicly traded, and we expect that the price of our common stock will fluctuate substantially.

Securities analysts may not initiate coverage of our common stock or may issue negative reports, either of which may have a negative impact on the market price of our common stock.

A limited number of our stockholders will continue to own a large percentage of our voting stock after this offering, which will allow them to exercise significant influence over matters subject to stockholder approval.

We do not intend to pay dividends on our common stock.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders.

Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

We have broad discretion in the use of the net proceeds from this offering, and we may not use these proceeds effectively.

Forward-Looking Statements

Use of Proceeds

Dividend Policy

Capitalization

Dilution

Unaudited Pro Forma Financial Information

The Acquisition

The Foundry Acquisition

Falcon Financing Transactions

The Adjustments

Selected Historical Consolidated Financial Information

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Recent Developments

2007 Private Placement of Common Stock

Series B Senior Secured Notes

The Foundry Acquisition

Falcon Financing Transaction

2006 Private Placement of Common Stock

2006 Acquisition

Critical Accounting Policies and Estimates

Revenue Recognition

Capitalized Software Costs

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

300 Rose Avenue
Venice, California 90291
(310) 314-2800

John C. Textor
Digital Domain
300 Rose Avenue
Venice, California 90291
(310) 314-2800

Shares
Common Stock

Management’s Discussion and Analysis of Financial Condition
and Results of Operations

DIGITAL DOMAIN S-1/A