Use these links to rapidly review the document
TABLE OF CONTENT
INDEX TO FINANCIAL STATEMENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

---

FORM 10-K

---

COMMISSION FILE NUMBER: 0-27644

---

DG FastChannel, Inc.
(Exact Name of Registrant as Specified in its Charter)

750 West John Carpenter Freeway, Suite 700
Irving, Texas 75039
(Address Of Principal Executive Offices, Including Zip Code)

(972) 581-2000
(Registrant's Telephone Number, Including Area Code)

         Securities registered pursuant to Section 12(b) of the Act:

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

---

         Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý

         Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

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

         Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

         Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         The aggregate market value of the Common Stock held by non-affiliates of the Registrant, computed by reference to the closing price and shares outstanding, was approximately $604 million as of December 31, 2009, and approximately $385 million as of June 30, 2009, the last business day of the Registrant's most recently completed second quarter. Shares of Common Stock held by each officer and director of the Registrant and by each person who may be deemed to be an affiliate have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

         As of March 1, 2010 the Registrant had 24,679,681 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         None

---

Table of Contents

DG FASTCHANNEL, INC.

        The discussion in this Report contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "anticipates," "believes," "plans," "expects," "future," "intends," "will" and similar expressions are used to identify forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and we assume no obligation to update any such forward-looking statements, except as required by law. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" as well as those discussed elsewhere in this Report, and the risks discussed in the Company's other filings with the United States Securities and Exchange Commission.

2

---

Table of Contents

3

---

Table of Contents

DG FASTCHANNEL, INC.

PART I

ITEM 1.    BUSINESS

General

        DG FastChannel, Inc. (the "Company" or "DGF") is a leading provider of digital technology services that enable the electronic delivery of advertisements, syndicated programs, and video news releases to traditional broadcasters, online publishers and other media outlets. We operate three nationwide digital networks out of our Network Operation Centers ("NOCs"), located in Irving, Texas ("Irving NOC"), Atlanta, Georgia ("Atlanta NOC") and Jersey City, New Jersey ("New Jersey NOC"), which link more than 5,000 advertisers, advertising agencies and content owners with more than 23,000 radio, television, cable, network and print publishing destinations and over 5,000 online publishers electronically throughout the United States, Canada, and Europe. Through our NOCs, we deliver video, audio, image and data content that comprise transactions among advertisers, content owners, and various media outlets, including those in the broadcast industries. We offer a variety of other ancillary products that serve the advertising industry.

        For the year ended December 31, 2009, we provided delivery services for 22 of the top 25 advertisers, as ranked by Ad Age. The majority of our revenue is derived from multiple services relating to electronic delivery of video and audio advertising content. Our primary source of revenue is the delivery of television and radio advertisements, or spots, which is typically performed digitally but sometimes physically. We offer a digital alternative to dub and ship delivery of spot advertising. We generally bill our services on a per transaction basis.

        Our services include online creative research, media production and duplication, distribution, management of existing advertisements and broadcast verification. This suite of innovative services addresses the needs of our customers at multiple stages along the value chain of advertisement creation and delivery in a cost-effective manner and helps simplify the overall process of content delivery. Information regarding the Company's business segments is presented in the Consolidated Financial Statements filed herewith.

        The Company was organized in 1991 and is incorporated in Delaware. Over the past five fiscal years, we have completed several strategic transactions including the following:

•

On April 15, 2005, we acquired substantially all the assets and assumed certain liabilities of privately-held Media DVX, Inc. ("MDX") for $10.0 million (excluding transaction costs) consisting of (i) $1.5 million in cash, (ii) a $6.5 promissory note, and (iii) 155,039 shares of the Company's common stock valued at $2.0 million. MDX distributed advertising content to radio and television stations utilizing conventional and electronic duplication technologies. The acquisition increased the Company's customer base and resulted in operating synergies.



•

On May 31, 2006, we completed a tax-free merger transaction with privately-held FastChannel Network, Inc. ("FastChannel") whereby FastChannel became a wholly-owned subsidiary of the Company. The $28.8 million purchase price consisted of (i) approximately 5.2 million shares of the Company's common stock valued at $27.4 million, and (ii) approximately $1.4 million of transaction costs. Similar to the Company, FastChannel operated a digital distribution network serving the advertising and broadcast industries. The merger with FastChannel expanded the Company's "footprint" (i.e., electronic network), increased our customer base, and resulted in operating synergies.



•

On June 4, 2007, we acquired privately-held Pathfire, Inc. ("Pathfire") for $29.7 million in cash. Pathfire distributes third-party long-form content, such as news and syndicated programming,

4

---

Table of Contents

through a proprietary server-based network via satellite and Internet channels. The acquisition increased the Company's customer base and resulted in operating synergies.

•

In December 2006 and early 2007, we acquired an approximate 16% interest in Point.360. On August 13, 2007, we completed the purchase of all of the issued and outstanding shares of common stock of Point.360 that we did not already own (approximately 84%) in exchange for 2.0 million shares of our common stock. In the aggregate, the total purchase price was valued at $49.7 million. The acquisition increased the Company's customer base and resulted in operating synergies. Immediately prior to the exchange, Point.360 spun off its post-production operations to its shareholders (other than the Company), such that on the closing date, Point.360 consisted solely of an advertising services operation.



•

On August 31, 2007, we acquired substantially all the assets of privately-held GTN, Inc. ("GTN") for $11.5 million in cash (including transaction costs). GTN provided media services in Detroit, Michigan and was focused on the automotive advertising market. GTN also had post production operations that the Company sold immediately following the closing of the acquisition for $3.0 million in cash. The acquisition increased the Company's customer base and resulted in operating synergies.



•

On March 13, 2008, we amended and restated our $85 million credit agreement with a new six-year, $145 million senior credit facility (the "Senior Credit Facility") with our existing and two additional lenders.



•

On June 5, 2008, we completed the acquisition of substantially all of the assets and certain liabilities of the Vyvx advertising services business ("Vyvx"), including its distribution, post-production and related operations, from Level 3 Communications, Inc. ("Level 3") for approximately $135.4 million in cash (including transaction costs). Vyvx operated an advertising services and distribution business similar to the Company's video and audio content distribution business. The purpose of the acquisition was to expand the Company's customer base and operations, and resulted in operating synergies.



•

In May 2007 we acquired 10.8 million shares, or 13% of the then outstanding shares, of Enliven Marketing Technologies Corporation's ("Enliven") common stock. On October 2, 2008, we completed a merger with Enliven. Pursuant to the merger agreement, as amended, we exchanged 0.033 of a share of our common stock for each of the approximately 88 million shares of Enliven common stock outstanding and not previously held by us. In the aggregate, we issued approximately 2.9 million shares of our common stock in the exchange. In the aggregate, including shares of Enliven previously held, the purchase price was $74.6 million. The purpose of the acquisition was to expand our customer base and expand our service offerings.

Available Information

        We file annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act").

        The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

        We also make available free of charge through our website (www.dgfastchannel.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if

5

---

Table of Contents

applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Industry Background

        There are approximately 11,000 commercial radio and 4,500 television, cable and network broadcast stations in the United States and Canada. These stations primarily generate revenue by selling airtime to advertisers. In addition, there are approximately 8,100 daily and weekly newspapers in circulation in the United States. Newspapers also primarily generate revenues from advertising. Advertising is most frequently produced under the direction of advertising agencies for large national or regional advertisers or by station personnel for local advertisers. Television advertising is characterized as network or spot, depending on how it is purchased and distributed. Network advertising typically is delivered to stations as part of a network feed (bundled with network programming), while spot advertising is delivered to stations independently of other programming content.

        Advertising agencies and advertisers use third-party service companies to ensure their media assets are delivered to multiple broadcast destinations on a time-sensitive basis. Certain advertising campaigns can be extremely complex and include dozens of commercial television and radio spots which may require delivery to hundreds of discrete media locations across the United States. Additionally, advertising agencies and advertisers require certain quality control standards, web-based order management capabilities and certain tagging/editing functions by the third party service provider. Finally, these service providers must offer immediate confirmation of the delivery of the commercial content to the media outlet and detailed billing services.

        Broadcast media time is typically purchased by advertising agencies or media buying firms on behalf of advertisers. Advertisers, their agencies and media buying firms select individual stations or groups of stations to support marketing objectives, which usually are based on the stations' geographic and demographic characteristics. The actual commercials or spots are typically produced at a digital production studio and recorded on digital tape. Variations of the spot intended for specific demographic groups are also produced at this time. The spots undergo a review of quality and content before being cleared for distribution to broadcast stations, and can be delivered physically, via the traditional dub and ship method, or electronically.

        While many radio and television broadcasters now embrace digital technology for much of their production processes and in-station media management, current methods for the distribution of audio and video advertising content still include manual duplication and physical delivery of analog tapes. Many companies, commonly known as dub and ship houses, duplicate audio and video tapes, assemble them according to agency specified bills of material and package them for air express delivery. Advertisers and their agencies can choose to have advertising content delivered electronically via the Internet and satellite transmissions. Electronic transmission has several advantages over dub and ship delivery, including: cost, transmission time, labor, materials, quality of content and control of distribution. The amount of advertising content transmitted electronically has steadily increased, and we estimate that approximately 95% of radio spots and approximately 60% of video spots are now electronically distributed. We believe that these figures will continue to grow as advertisers continue to take advantage of the benefits of electronic distribution.

        Radio and television continue to attract significant portions of the advertising dollars spent by advertisers and advertising agencies and represent powerful mediums for cost-effectively reaching large, targeted audiences and offer the accountability and returns that advertisers increasingly demand.

        The unique capabilities of online advertising, the growing number of Internet users and increased Internet traffic have contributed to rapid growth in online advertising spending over the last several years. According to eMarketer, an advertising trade journal, online advertising represented 13.7% of

6

---

Table of Contents

the total United States advertising market in 2009. ZenithOptimedia predicts worldwide online advertising spending will increase to 16.2% of the total worldwide advertising market by 2012. Additionally, according to the ZenithOptimedia, global online advertising expenditures are projected to grow from $54.1 billion in 2009 to $77.5 billion in 2012, representing a compound annual growth rate of 12.75%. eMarketer predicts online advertising expenditures in the United States are to grow from $22.4 billion in 2009 to $34.0 billion in 2014, representing a compound annual growth rate of 8.7%.

        While historically a large component of online advertising market growth was driven by Internet-centric publishers, retailers and direct marketing providers, traditional media advertisers, including consumer packaged goods and brand advertisers, are increasingly recognizing the significance and unique capabilities of the Internet and are allocating more of their marketing budgets to online advertising. The growth in online advertising is also being driven by strong increases in online brand marketing through display ads, rich media and video ads. While the majority of online advertising spending is still allocated to direct response campaigns, including paid search ads, classifieds, e-mail advertising and lead generation or referrals, advertisers are increasingly recognizing the potential offered by the unique branding capabilities of the Internet. As a result, many advertisers seek to utilize innovative media formats to create highly engaging brand experiences for their online customers. According to eMarketer, online video advertising and rich media advertising are expected to be the fastest growing advertising formats in the United States and spending is projected to increase from $1.0 billion and $1.5 billion in 2009 to over $5.2 billion and $2.1 billion, respectively, in 2014, representing a compound annual growth rate of 39% and 7%, respectively. Emerging media formats and channels, such as mobile devices, game consoles and on-demand television, provide significant opportunities for advertisers to expand audience reach and strengthen their relationship with their target audience in innovative ways. Forrester Research projects United States advertising spending in emerging media channels to grow from $1.0 billion in 2007 to $10.6 billion in 2012, representing a compound annual growth rate of 59%.

        In 2009, a shift began from digital marketing to an interactive approach with consumers. Interactive marketing creates a two-way interaction with consumers. Marketing dollars to interactive marketing such as social media via the Internet or mobile devices are increasing. Forrester Research projects United States advertising spending on interactive media to grow from $25.6 billion in 2009 to $55.0 billion in 2014, representing a compound annual growth rate of 17%.

Services

        Through our suite of innovative services, we seek to address the needs of advertisers at various stages along the value chain of advertisement creation and delivery. These include idea generation, production and duplication, content distribution, media asset management and broadcast verification products. By offering services that encompass multiple stages of content creation and delivery, we are able to simplify the workflow process for advertisers. We believe our solutions offer advertisers tools essential to the creation and strategic distribution of advertisements in a cost-effective manner. We continually upgrade our systems to meet our customer's needs. During the years ended December 31, 2009, 2008, and 2007 we spent $6.3 million, $4.3 million and $3.2 million, respectively, on research and development activities, none of which were sponsored by customers. Our services address our clients' needs for efficient, accurate and reliable solutions for the development and delivery of advertising content across a wide spectrum of media, and include the following offerings:

        Advertising Distribution.    We provide primarily electronic and, to a lesser extent, physical distribution of broadcast advertising content to broadcast stations throughout the United States and Canada. We operate a digital network, currently connecting more than 5,000 advertisers and advertising agencies with approximately 4,500 television, cable and network broadcast destinations, approximately 11,000 radio stations, and approximately 8,100 daily and weekly newspapers in circulation in the United States and Canada. Our network enables the rapid, cost-effective and reliable electronic transmission of

7

---

Table of Contents

video and audio spots and other content and provides a high level of quality, accountability and flexibility to both advertisers and broadcasters. Our technologically advanced digital network delivers near master quality video and audio to broadcasters, which is equal or superior to the content currently delivered on dub and ship analog tapes. Our network routes transmissions to stations through an automated online transaction and delivery system, enabling delivery in as little as one hour after an order is received.

•

Video.  We receive video content electronically primarily via our proprietary file transfer software that is deployed in post production studios. Video content also can be ingested through our various regional operations facilities throughout the United States. When video content is received, our employees conduct a quality control of the content, digitize the material and upload the content to our NOC, where it is combined with the customer's electronic transaction to transmit the various combinations of video to designated television stations. Video transmissions are sent via a high-speed fiber link to the digital satellite uplink facility over which they are then delivered directly to Company-owned servers, called DG FastChannel HD Xtreme™ servers, that we have placed in television stations and cable interconnects.



•

Audio.  Audio content can be uploaded via the Internet electronically. In addition, audio can be received using our Upload Internet audio collection system. Audio transmissions are delivered over the Internet via our SpotCentral audio application that allows the radio stations to download the radio spots on demand.



•

Print.  Print content can be uploaded via the Internet electronically into our print media distribution system. Print transmissions are delivered over the Internet to various newspaper locations via proprietary web-based software applications. The print transmissions are modified to the specific format as required by the individual newspapers.

        Video and audio transmissions are received at designated television and radio stations on DG FastChannel Spot Boxes, Client Workstations and Digital Media Managers. The servers enable stations to receive and play back material delivered through our digital distribution network. The units are owned by us and typically installed in the master control or production area of the stations. Upon receipt, station personnel generally review the content and transfer the spot to a standardized internal station and format for subsequent broadcast. Through our NOCs, we monitor the spots stored in each of our servers and ensure that space is always available for new transmissions. We can quickly transmit video or audio at the request of a station or in response to a customer who wishes to alter an existing order, allowing us to effectively adapt to customer needs and to distribute to hundreds of locations in as little as one hour, which would be impossible for traditional physical dub and ship houses.

        We offer various levels of digital video and audio distribution services to advertisers distributing content to broadcasters. These include the following: DGFC Priority, a service which guarantees arrival of the first spot on an order within one hour; DGFC Express, which guarantees arrival within four hours; DGFC Standard, which guarantees arrival by noon the next day; and DGFC Economy, which guarantees arrival by noon on the second day. We also offer a set of premium services enabling advertisers to distribute video or audio spots provided after normal business hours. We generally charge a fee per delivery for our advertising distribution service, which varies based on the service level ordered by the customer.

        In addition to our standard services, we have developed unique products to service customers with particular time-sensitive delivery needs, including the delivery of political advertising during election campaigns, providing a rapid response mechanism for candidates and issue groups.

        Online Advertising Solutions.    We offer an online advertising campaign management and deployment product known as the "Unicast Advertising Platform" ("UAP"). UAP permits publishers, advertisers, and their agencies to manage the complex process of deploying online advertising

8

---

Table of Contents

campaigns. This process includes creating the advertising assets, selecting the sites on which the advertisements will be deployed, setting the campaign parameters (ad rotation, the frequency with which an ad may be deployed, and others), deployment, and tracking of campaign results.

        The UAP integrates creative assembly with campaign management and detailed performance analysis. In addition, UAP has the broad capabilities to deliver multiple ad formats and media types, including several different video formats, 3D content, and all major "rich media" formats.

        UAP is "technology agnostic," meaning it delivers advertisements that utilize all major technologies and formats. UAP offers a suite of products including Unicast Transitional (full screen and partial screen video and interactive ads that are shown to consumers as they navigate between pages), Unicast In-Page (video and interactive ads embedded within web pages including standard and expandable banners, pre-roll and post-roll ads), and Unicast Over-the-Page (video and interactive ads that "float"/play over the top of an Internet site page).

        We offer these advertising formats delivered through UAP to customers, charging them in the standard manner consistent with industry practices with fees based on the number of times an advertisement is deployed (i.e., on a "CPM", or cost per thousand impression basis). CPM fees vary by type of advertisement, with static ads realizing relatively low fees and rich media ads—particularly video ads—realizing higher fees. Rates charged for advertising ranged from $0.02 to $5.25 per thousand impressions in 2009.

        Long-form Programming Distribution.    The Company also delivers its digital video broadcast services through our Digital Media Gateway® ("DMG") owned and operated by Pathfire, our wholly-owned subsidiary. The DMG consists of hardware and a suite of software applications that enable content creators and distributors to ingest, digitize, transport, store and prepare digital video media assets for broadcast. The DMG incorporates a sophisticated IP multicast network of satellites and can deliver all forms of video content including news, Video News Releases ("VNR"s), syndicated programming, infomercials, and Electronic Press Kits ("EPK"s). Another feature of the DMG is a terrestrial-based return-path network, which automatically tracks and notifies the Atlanta NOC of transmission failures, system health problems and content usage data. When notified of a transmission failure, the system automatically resends lost data packets using the minimum bandwidth necessary to complete the transmission. The DMG also uses the terrestrial network to send notification that the complete digital video transmission has been received in the DMG server at the broadcast television station. This system is fully automated and involves only minimal intervention by station technicians and customer support staff.

        The DMG platform consists of both hardware and software applications. These applications are responsible for three main tasks: managing the flow of digital video content from its source to Pathfire-enabled digital uplinks; managing the transmission of digital video content using Pathfire's IP multicast store-and-forward software algorithms from the digital uplink system to DMG caching servers at the stations; and managing the workflows for video assets from the DMG caching servers through various station systems.

        The first group of applications, Pathfire DMG submission and associated tools, works with both analog and digital video. If post-production output is on videotape, Pathfire's software digitizes or encodes the video into the appropriate digital format and delivers it to the uplink system. If post-production output is in digital video format, the application checks the digital formatting, makes any necessary changes, extracts the video attributes as metadata and pulls the digital files into the uplink transmission system.

        The second group of applications stores the content in the uplink system, prepares it for the satellite uplink by managing the transmission scheduling based on bandwidth and Service Level Agreement ("SLA") requirements and then sends the video through the satellite network to the DMG

9

---

Table of Contents

server at the receiving station. The distribution system is capable of managing transmission over the multicast satellite network and the Internet simultaneously. The distribution system repairs any lost data either by employing a packet-based algorithm or by retransmitting missing data based on an intelligent retry scheme built into the multicast protocol, or a combination of both. The receiving system sends confirmation that the digital files have been received through the Internet-based return path network to the Atlanta NOC.

        The third group of applications provides asset management functionality and manages the flow of content once it is received at the station by the DMG server. These applications provide stations with metadata, which helps the stations organize and manage the video for preview and for moving high resolution content from the DMG server through the station's infrastructure to the station's on-air system. Pathfire's asset management products in the station allow content to be moved as analog video or as a digital file. Interfaces have also been designed to deliver content and frame accurate metadata to the station's edit systems, newsroom computer systems, traffic systems, automation systems and play-to-air servers.

        The Pathfire DMG platform includes several content-specific solutions such as DMG Syndication, DMG News and DMG EPKs.

        For syndicated television shows and movies, Pathfire created Pathfire DMG Syndication. The application suite enables syndicators to deliver, track, manage and verify both standard definition and high definition programming to broadcast stations more efficiently. By automating processes, providing tracking information and greatly reducing missed feeds, Pathfire Syndication facilitates content delivery between syndicators and stations. Automated content delivery to broadcast stations through the Pathfire network minimizes the need to schedule or monitor satellite feeds and eliminates the need for tape. Broadcast-quality content arrives on Pathfire servers at stations, where users can access and manage content and metadata through the DMG desktop application. Pathfire DMG Syndication also integrates with existing downstream gear and helps with automation tasks at the station reducing manual labor costs. Pathfire DMG Syndication delivers frame-accurate timing sheets and desktop control for program directors and traffic managers, significantly reducing show preparation labor because station personnel no longer have to manually time syndicated show segments.

        Online Creative Research.    We own and maintain an online database of content and credits of U.S. television commercials for the advertising and TV commercial production industry. We believe that this is the most comprehensive online television commercial information service available to advertising agencies and production companies. Our SourceEcreative (formerly known as "Source TV") database includes information relating to commercials, individuals and companies. Customers can use our robust search engine specifically designed for the advertising industry. SourceEcreative allows users to find out which director, post house, composer or other production resource worked on specific spots, enabling advertising agencies to identify creative and production resources, and to accelerate their creative development process. Information can be provided via fax, phone, e-mail or over the Internet. SourceEcreative services most of the major U.S. advertising agencies and production companies, as well as television networks, programs and industry associations.

        Creative and Digital Marketing Solutions    In 2008, as part of our Enliven acquisition, we acquired Springbox, Ltd. ("Springbox"), an Austin-based interactive marketing firm with expertise in digital web marketing and creative solutions that provides fee-based professional services for creating content and implementing visualization solutions. Springbox provides web based marketing solutions for numerous global clients. Springbox was acquired to align with our strategy to enhance our web based product offerings, in order to meet the escalating demand for creative digital and Internet solutions from our clients. Springbox provides creative solutions that can be leveraged across the UAP and integrated with our premium rich media ad delivery capabilities. This combined offering is the next step in the

10

---

Table of Contents

evolution of our business, and will better position us to take advantage of the market opportunity for integrated online marketing solutions.

        Springbox allows us to provide full service interactive marketing solutions for our clients. Additionally, the division supports the development of advanced advertising formats and advertising content making use of UAP more appealing to marketers. Finally these services keep us on the cutting-edge of the industry, giving us hands-on experience with the design, creation and deployment of rich media websites.

        Media Production and Duplication.    Our production and duplication capabilities allow us to provide customers with ancillary services, which are offered in addition to our primary distribution service. Our services include storage of client masters or storyboards, editing of materials, tagging content, dubbing, video duplication and copying of media onto various physical multimedia formats, such as CD, DVD or tape. We believe these add-on service offerings allow us to better service our customers by reducing the number of vendors necessary to create and distribute advertisements.

        Media Asset Management.    Our digital media asset management solution simplifies spot management, access, storage and collaboration for our customers. Our media asset management solution is integrated with our distribution system, enabling automatic archiving of trafficked spots, online search, send-for-review and review-and-approval capabilities, automated digital storyboarding, streaming previews, a comprehensive order and market data history for each spot, script attachment capability and online search, sort, retrieve and hardcopy fulfillment.

Markets and Customers

        A large portion of our revenue is derived from the delivery of spot television and radio advertising to broadcast stations, cable systems and networks. We derive revenue from brand advertisers and advertising agencies, and from our marketing partners, which are typically dub and ship houses that have signed agreements with us to consolidate and forward the deliveries of their advertising agency customers to broadcast stations, cable systems and networks via our electronic delivery service in exchange for price discounts from us. The relative volumes of advertisements distributed by us are representative of the five leading national advertising categories of automotive, retail, business and consumer services, food and related products and entertainment. The volume of advertising from these segments is subject to seasonal, quarterly, and cyclical variations. No single customer accounts for more than 10% of our annual revenue.

Sales, Marketing and Customer Service

        Brand Strategy.    Our brand strategy is to position our services as the standard transaction method for the radio, television, cable, and network broadcast industries. We focus our marketing messages and programs at multiple segments within the advertising and broadcast industries. Each of the segments interacts with us for a different reason. Agencies purchase services from us on behalf of their advertisers. Production studios facilitate the transmission of audio and video to either the Irving or Atlanta NOCs. Production studios and dub and ship houses resell delivery services to agencies. Stations join the network to receive the content from their customers: the agencies and advertisers.

        Internet/E-Commerce Strategy.    SpotCentral provides advertisers and agencies with an intuitive web portal to visualize and manage the distribution of their valuable advertising content. Users can upload spots, choose or create new destination groups, attach traffic instructions, view invoices, distribute media electronically to thousands of destinations across our massive digital network and confirm delivery at the station level through our powerful new media server, the DG FastChannel Spot Box. Users have immediate access to key statistics, order status and other data, while workflow automation tools help user groups save routing instructions and destination paths for repeat orders. Users can

11

---

Table of Contents

search billing history and view invoices from any web-connected location. Customized search features let users research order history by brand, service level or transmission date. In addition, spots can be previewed at any time of the day or point in the order process. This design introduces new levels of simplicity, transparency, accountability and customer satisfaction to the spot distribution process.

        Sales.    We employ a direct sales force that calls on various departments at advertising agencies to communicate the capabilities and comparative advantages of our electronic distribution system, ad serving platform, and related products and services. In addition, our sales force calls on corporate advertisers who are in a position to either direct or influence agencies in directing deliveries to us. A separate staff sells to and services audio and video dealers, who resell our distribution services. We currently have regional sales offices in New York, Los Angeles and Chicago. Our sales force includes regional sales, inside sales, and telemarketing personnel.

        Marketing.    Our marketing programs are directed to stimulate demand with an emphasis on popularizing the benefits of digital delivery, including fast turnaround (same day services), increased flexibility, higher quality, and greater reliability and accountability. These marketing programs include direct mail and telemarketing campaigns, newsletters, collateral material (including brochures, data sheets, etc.), application stories, and corporate briefings in major United States cities. We also engage in public relations activities including trade show participation, the stimulation of articles in the trade and business press, press tours and advertisements in advertising and broadcast oriented trade publications.

        We market to broadcast stations to arrange for the placement of our DG FastChannel Spot Boxes for the receipt of video advertisements.

        Customer Service.    Our approach to customer service is based on a model designed to provide focused support from key market centered offices, located in Los Angeles, Dallas, Chicago, Detroit, New York and San Francisco. Clients work with specific, assigned account coordinators to place production service and distribution orders. National distribution orders are electronically routed to the NOCs for electronic distribution or, for off-line destinations, to our national duplication center in Louisville, Kentucky. Our distributed service approach provides direct support in key market cities enabling us to develop closer relationships with clients as well as the ability to support client needs for local production services. We also maintain a customer service team dedicated to supporting the needs of radio, television, and network stations. This support is available 7 days a week, 24 hours a day, to respond to station requests for information, traffic instructions or additional media. Providing direct support alleviates the need for client traffic departments to deal with individual stations or the challenges of staffing for off-hours support. Our customer service operation centers are linked to our order management and media storage systems, and national distribution network. These resources enable us to manage the distribution of client orders to the fulfillment location best suited to meet critical customer requirements as well as providing order status and fulfillment confirmation. This distribution model also provides us with significant redundancy and re-route capability, enabling us to meet customer needs when weather or other conditions prevent deliveries using traditional courier services.

12

---

Table of Contents

Competition

        Competition within the markets for media distribution is intense. In our advertising distribution business, numerous companies already distribute video and other content to a variety of destinations. Companies such as Google TV Ads, Comcast, and Ascent Media deliver television advertising spots to satellite TV systems, broadcast TV stations and/or cable head ends. At the same time, many companies, including Akamai and Limelight Networks are implementing technologies to distribute video to the established traditional channels and new media outlets. Additionally, numerous companies are offering technologies to distribute video content through a variety of means including software-only solutions at broadcast TV stations.

        We also compete with a variety of dub and ship houses and production studios that have traditionally distributed taped advertising spots via physical delivery. As local distributors, these entities have long-standing ties with advertising agencies that are often difficult for us to replace. In addition, these dub and ship houses and production studios often provide an array of ancillary video services, including archival storage and retrieval, closed captioning and format conversions, enabling them to deliver to their advertiser and agency customers a full range of customizable, media post-production, preparation, distribution and trafficking services. We plan to continue pursuing potential dub and ship house partners where such partnerships make strategic sense.

        In our advertising distribution business, we compete with dub and ship houses across the country but additionally with one or more satellite-based video distribution networks. We also anticipate that certain common and/or value-added telecommunications carriers may develop and deploy high bandwidth network services targeted at the advertising and broadcast industries, although we believe that no such carriers have yet begun spot advertising distribution.

        We compete with other companies that are focusing or may in the future focus significant resources on developing and marketing products and services that will compete with ours. We believe that our ability to compete successfully depends on a number of factors, both within and outside of our control, including: (1) the price, quality and performance of our products and those of our competitors; (2) the timing and success of new product introductions; (3) the emergence of new technologies; (4) the number and nature of our competitors in a given market; (5) the protection of intellectual property rights; and (6) general market and economic conditions.

        Competitors in our online advertising solution business include full service advertising delivery companies like Microsoft and Google. Additionally, certain companies specialize in delivering rich media and video advertisements like Pointroll (a division of Gannett), Eyewonder, Eyeblaster, and Flashtalking. Competitors in the services sector include advertising agencies, online agencies and independent creative talent that can build content in the Unicast format or in other rich media formats.

        We expect competition to continue to intensify as existing and new competitors begin to offer products, services, or systems that compete with our products. Our current or future competitors, many of whom, individually or together with their affiliates, have substantially greater financial resources, research, and development resources, distribution, marketing, and other capabilities than us, may apply these resources and capabilities to compete successfully against our products and service. A number of the markets in which we sell our products and services are also served by technologies that currently are more widely accepted than ours. Although we believe that our products and services are less expensive to use and more functional than competing products and services that rely on other technologies, it is uncertain whether our potential customers will be willing to make the initial capital investment that may be necessary to convert to our products and services. The success of our systems against these competing technologies depends in part upon whether our systems can offer significant improvements in productivity and sound and video quality in a cost-effective manner. It is uncertain whether our competitors will be able to develop systems compatible with, or that are alternatives to, our proprietary technology or systems. It is also not certain that we will be able to compete successfully

13

---

Table of Contents

against current or future competitors or that competitive pressures faced by us will not materially adversely affect our business, operating results, and financial condition.

Intellectual Property and Proprietary Rights

        We primarily rely upon a combination of copyright, trademark and trade secret laws and license agreements to establish and protect proprietary rights in our technologies. We currently have 55 patents issued with expiration dates ranging from March 2016 to May 2026 and 12 other patent applications pending. We also have 71 trademark registrations, 15 trademark applications and approximately 30 copyright registrations.

Employees

        As of December 31, 2009, we had a total of 739 employees, including 155 in research and development, 67 in sales and marketing, 438 in operations, and 79 in finance and administration; 724 of these employees are located in the United States and 15 are located in the United Kingdom. Our employees are not represented by a collective bargaining agreement and we have not experienced a work stoppage. We consider our relations with our employees to be good.

        Our business and prospects depend in significant part upon the continued service of our key management, sales and marketing and administrative personnel. The loss of key management or technical personnel could materially adversely affect our operating results and financial condition. We believe that our prospects depend in large part upon our ability to attract and retain highly skilled managerial, sales and marketing and administrative personnel. Competition for such personnel is intense, and we may not be successful in attracting and retaining such personnel. Failure to attract and retain key personnel could have a material adverse effect on our operating results and financial condition.

ITEM 1A.    RISK FACTORS

        In evaluating an investment in our Company, the following risk factors should be considered.

The media distribution products and services industry is divided into several distinct markets, some of which are relatively mature while others are growing rapidly. If the mature markets begin to decline at a time when the developing markets fail to grow as anticipated, it will be increasingly difficult to maintain profitability.

        To date, our design and marketing efforts for our products and services have involved the identification and characterization of the broadcast market segments within the media distribution products and services industry that will be the most receptive to our products and services. We may not have correctly identified and characterized such markets and our planned products and services may not address the needs of those markets. Furthermore, our current technologies may not be suitable for specific applications within a particular market and further design modifications, beyond anticipated changes to accommodate different markets, may be necessary.

        While the electronic distribution of media has been available for several years and growth of this market is modest, many of the products and services now on the market are relatively new. It is difficult to predict the rate at which the market for these new products and services will grow, if at all. Even if the market does grow, it will be necessary to quickly conform our products and services to customer needs and emerging industry standards in order to be a successful participant in those markets, such as the market for High Definition "HD" spots. If the market fails to grow, or grows more slowly than anticipated, it will be difficult for any market participant to succeed and it will be increasingly difficult for us to maintain profitability.

14

---

Table of Contents

        To sustain profitability and growth, we must expand our product and service offerings beyond the broadcast markets to include additional market segments within the media distribution products and services industry. Potential new applications for our existing products in new markets include distance learning and training, finance and retail. While our products and services could be among the first commercial products that may be able to serve the convergence of several industry segments, including digital networking, telecommunications, compression products and Internet services, our products and services may not be accepted by that market. In addition, it is possible that:

•

the convergence of several industry segments may not continue;



•

the markets may not develop as a result of such convergence; or



•

if markets develop, such markets may not develop either in a direction beneficial to our products or product positioning or within the time frame in which we expect to launch new products and product enhancements.

        Because the convergence of digital networking, telecommunications, compression products and Internet services is new and evolving, the growth rate, if any, and the size of the potential market for our products cannot be predicted. If markets for these products fail to develop, develop more slowly than expected or become served by numerous competitors, or if our products do not achieve the anticipated level of market acceptance, our future growth could be jeopardized. Broad adoption of our products and services will require us to overcome significant market development hurdles, many of which we cannot predict.

The industry is in a state of rapid technological change and we may not be able to keep up with that pace.

        The advertisement distribution and asset management industry is characterized by extremely rapid technological change, frequent new products, service introductions and evolving industry standards. The introduction of products with new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. Our future success will depend upon our ability to enhance existing products and services, develop and introduce new products and services that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of our customers, including the need for "HD" spots. We may not succeed in developing and marketing product enhancements or new products and services that respond to technological change or emerging industry standards. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these products and services. Our products and services may not adequately meet the requirements of the marketplace and achieve market acceptance. If we cannot, for technological or other reasons, develop and introduce products and services in a timely manner in response to changing market conditions, industry standards or other customer requirements, particularly if we have pre-announced the product and service releases, our business, financial condition, results of operations and cash flows will be harmed.

The marketing and sale of our products and services involve lengthy sales cycles. This makes business forecasting extremely difficult and can lead to significant fluctuations in quarterly results.

        Due to the complexity and substantial cost associated with providing integrated product and services to provide audio, video, data and other information across a variety of media and platforms, licensing and selling products and services to our potential customers typically involves a significant technical evaluation. In addition, there are frequently delays associated with educating customers as to the productive applications of our products and services, complying with customers' internal procedures for approving large expenditures and evaluating and accepting new technologies that affect key operations. In addition, certain customers have even longer purchasing cycles that can greatly extend the amount of time it takes to place our products and services with these customers. Because of the lengthy sales cycle and the large size of our potential customers' average orders, if revenues projected

15

---

Table of Contents

from a specific potential customer for a particular quarter are not realized in that quarter, product revenues and operating results for that quarter could be harmed. Revenues will also vary significantly as a result of the timing of product and service purchases and introductions, fluctuations in the rate of development of new markets and new applications, the degree of market acceptance of new and enhanced versions of our products and services, and the level of use of satellite networking and other transmission systems. In addition, increased competition and the general strength of domestic and international economic conditions also impact revenues.

        Because expense levels such as personnel and facilities costs are based, in part, on expectations of future revenue levels, if revenue levels are below expectations, our business, financial condition, results of operations and cash flows will be harmed.

We may be adversely affected by cyclicality or an extended downturn in the United States or worldwide economy in or related to the industries we serve.

        Our revenues are generated primarily from providing online campaign management solutions and services to advertising agencies and advertisers across digital media channels and a variety of formats. Demand for these services tends to be tied to economic cycles, reflecting overall economic conditions as well as budgeting and buying patterns. For example, in 1999, advertisers spent heavily on Internet advertising, which was followed by a downturn in advertising spending on the Internet in 2002. In addition, during a period of economic weakness in 2001, advertising spending online decreased at a faster rate than overall ad spending, although we believe this was because many of the companies advertising online were Internet companies experiencing significant financial distress. Following the recent negative developments in the world economy, several agency and analyst organizations now predict that the growth in online advertising may be slower than previously expected. We cannot assure you that advertising budgets and expenditures by advertising agencies and advertisers will not decline in any given period or that advertising spending will not be diverted to more traditional media or other online marketing products and services, which would lead to a decline in the demand for our campaign management solutions and services. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective customers' spending priorities. As a result, our revenues may not increase or may decline significantly in any given period.

Seasonality in buying patterns also makes forecasting difficult and can result in widely fluctuating quarterly results.

        Historically, the industry has experienced lower sales for services in the first quarter, which is somewhat offset with higher sales in the fourth quarter due to increased customer advertising volumes for the holiday selling season. In addition, product and service revenues are influenced by political advertising, which generally occurs every two years. Nevertheless, in any single period, product and service revenues and delivery costs are subject to variation based on changes in the volume and mix of deliveries performed during such period. In addition, we have historically operated with little or no backlog. The absence of backlog and fluctuations in revenues and costs due to seasonality increases the difficulty of predicting our operating results.

The markets in which we operate are highly competitive, and competition may increase further as new participants enter the market and more established companies with greater resources seek to expand their market share.

        Competition within the markets for media distribution is intense. In our advertising distribution business, numerous companies already distribute video and other content to a variety of destinations. Companies such as Google TV Ads, Comcast, and Ascent Media deliver television advertising spots to satellite TV systems, broadcast TV stations and/or cable head ends. At the same time, many companies, including Akamai and Limelight Networks are implementing technologies to distribute video to the

16

---

Table of Contents

established traditional channels and new media outlets. Additionally, numerous companies are offering technologies to distribute video content through a variety of means including software-only solutions at broadcast TV stations.

        While we offer products and services focused on the electronic distribution of media, we compete with dub and ship houses and production studios. Many dub and ship houses and production studios, such as Ascent Media, have long-standing ties to local distributors that can be difficult to replace. Many of these dub and ship houses and production studios also have greater financial, distribution and marketing resources than we and have achieved a higher level of brand recognition. Production studios, advertising agencies and media buying firms also could deliver directly through entities with package delivery expertise such as Federal Express, United Parcel Service and the United States Postal Service.

        In addition, we compete with one or more satellite-based video distribution networks. We also anticipate that certain common and/or value-added telecommunications carriers and other companies may develop and deploy high bandwidth network services targeted at the advertising and broadcast industries.

        In our online advertising solution business we face formidable competition from other companies that provide solutions and services similar to ours. Currently, the primary online video competitors are Google and Microsoft. In March 2008, Google acquired DoubleClick and in May 2007, Microsoft acquired aQuantive. DoubleClick and Atlas offer solutions and services similar to ours and compete directly with us. We expect that Google and Microsoft will use their substantial financial and engineering resources to expand the DoubleClick and Atlas businesses and increase their ability to compete with us.

        Google and Microsoft have significantly greater name recognition and greater financial, technical and marketing resources than we offer in our online advertising solution business. Microsoft also has a longer operating history and more established relationships with customers. In addition, we believe that both Google and Microsoft have a greater ability to attract and retain customers due to numerous competitive advantages, including their ability to offer and provide their marketing and advertising customers with a significantly broader range of related solutions and services than us. Google and Microsoft may also use their experience and resources to compete with us in a variety of ways, including through acquisitions of competitors or related businesses, research and development, and marketing for new customers more aggressively. Furthermore, Google or Microsoft could use campaign management solutions as a loss leader or may provide campaign management solutions or portions of such solutions without charge or below cost in order to encourage customers to use their other product offerings. If Google or Microsoft is successful in providing solutions or services that are better than ours, leverage platforms more effectively than ours or that are perceived by customers as being more cost-effective, we could experience a significant decline in our customer base and in their use of our solutions and services. Such a decline could have a material adverse effect on our business, financial condition and results of operations.

        In addition to Google and Microsoft, we face competition from other companies in our online advertising solutions business. Among our competitors are rich-media solutions companies (such as Pointroll, Eyeblaster, Eyewonder and Flashtalking) and ad serving companies (such as Zedo and CheckM8). In addition, we may experience competition from companies that provide web analytics or web intelligence. Our competitors may develop services that are equal or superior to our services or that achieve greater market acceptance than our services. Many of our competitors have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical and marketing resources than us.

        We believe that our ability to compete successfully with all of our service offerings depends on a number of factors, both within and outside of our control, including: (1) the price, quality and performance of our products and those of our competitors; (2) the timing and success of new product

17

---

Table of Contents

introductions; (3) the emergence of new technologies; (4) the number and nature of our competitors in a given market; (5) the protection of intellectual property rights; and (6) general market and economic conditions. In addition, the assertion of intellectual property rights by others factor into the ability to compete successfully. The competitive environment could result in price reductions that could result in lower profits and loss of our market share.

        With respect to new markets, such as the delivery of other forms of content to radio and television stations, competition is likely to come from companies in related communications markets and/or package delivery markets. Some of the companies capable of offering products and services with superior functionality include telecommunications providers, such as AT&T, Verizon and other fiber and telecommunication companies, each of which would enjoy materially lower electronic delivery transportation costs. Radio networks such as ABC Radio Networks or Westwood One could also become competitors by selling and transmitting advertisements as a complement to their content programming.

        Further, other companies may in the future focus significant resources on developing and marketing products and services that will compete with ours.

        In addition, many of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties and several of our competitors have combined or may combine in the future with larger companies with greater resources than ours. This growing trend of cooperative relationships and consolidation within our industry may create a great number of powerful and aggressive competitors that may engage in more extensive research and development, undertake more far-reaching marketing campaigns and make more attractive offers to existing and potential employees and customers than we are able to. They may also adopt more aggressive pricing policies and may even provide services similar to ours at no additional cost by bundling them with their other product and service offerings. Any increase in the level of competition from these, or any other competitors, is likely to result in price reductions, reduced margins, loss of market share and a potential decline in our revenues. We cannot assure you that we will be able to compete successfully with our existing or future competitors. If we fail to withstand competitive pressures and compete successfully, our business, financial condition and results of operations could be materially adversely affected.

We have a history of losses which must be considered in assessing our future prospects.

        2003 was the first year we reported net income after having been unprofitable since our inception. While we reported profit again in 2004, 2007, 2008, and 2009, we experienced a loss in 2005 and 2006. We could begin to generate net losses in the future, which could depress our stock price. Decreases in revenues could occur, which could impair our ability to operate profitably in the future. Future success also depends in part on obtaining reductions in delivery and service costs, particularly our ability to continue to automate order processing and to reduce telecommunications costs. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in new and rapidly evolving markets, such as risks that the market might fail to grow, expenses relating to modifying products and services to meet industry standards as they change over time, and difficulties in gaining and maintaining market share. To address these risks, we must, among other things, respond to competitive developments, attract, retain and motivate qualified persons, continually upgrade our technologies and begin to commercialize products incorporating such technologies. We may not be successful in addressing any or all of these risks and may not be able to sustain profitability.

We may not be able to obtain additional financing to satisfy our future capital needs.

        We intend to continue making capital expenditures to market, develop, produce and deploy at no cost to our customer, the various equipment required by the customers to receive our services and to

18

---

Table of Contents

introduce additional services. In addition, we will need to make the investments necessary to maintain and improve our network. We also expect to expend capital to consummate any mergers and acquisitions that we undertake in the future. We may require additional capital sooner than currently anticipated and may not be able to obtain additional funds adequate for our capital needs. We cannot predict any of the factors affecting the revenues and costs of these activities with any degree of certainty. Accordingly, we cannot predict the precise amount of future capital that we will require, particularly if we pursue one or more additional acquisitions.

        Furthermore, additional financing may not be available to us, or if it is available, it may not be available on acceptable terms. Our inability to obtain the necessary financing on acceptable terms may prevent us from deploying our products and services effectively, maintaining and improving our products and network and completing advantageous acquisitions. Our inability to obtain the necessary financing could seriously harm our business, financial condition, results of operations and prospects. Consequently, we could be required to:

•

significantly reduce or suspend certain of our operations;



•

seek an additional merger partner; or



•

sell additional securities on terms that are dilutive to our stockholders.

Our business is highly dependent upon radio and television advertising. If demand for, or margins from, our radio and television advertising delivery services decline, our business results could decline.

        We expect that a significant portion of our revenues will continue to be derived from the delivery of radio and television advertising spots from advertising agencies, production studios and dub and ship houses to radio and television stations in the United States. A decline in demand for, or average selling prices of, our radio and television advertising delivery services for any of the following reasons, or otherwise, would seriously harm our business, financial condition, results of operations and prospects:

•

competition from new advertising media;



•

new product introductions or price competition from competitors;



•

a shift in purchases by customers away from our premium services; and



•

a change in the technology used to deliver such services.

        Additionally, we are dependent on our relationship with the radio and television stations in which we have installed communications equipment. Should a substantial number of these stations go out of business, experience a change in ownership or discontinue the use of our equipment in any way, our business, financial condition, results of operations and prospects would be harmed.

If we are not able to maintain and improve service quality, our business and results of operations could decline.

        Our business will depend on making cost-effective deliveries to broadcast stations within the time periods requested by our customers. If we are unsuccessful in making these deliveries, for whatever reason, a station might be prevented from selling airtime that it otherwise could have sold. Our ability to make deliveries to stations within the time periods requested by customers depends on a number of factors, some of which will be outside of our control, including:

•

equipment failure;



•

interruption in services by telecommunications service providers; and



•

inability to maintain our installed base of audio and video units that will comprise our distribution network.

19

---

Table of Contents

        Stations may assert claims for lost air-time in these circumstances and dissatisfied advertisers may refuse to make further deliveries through us in the event of a significant occurrence of lost deliveries, which would result in a decrease in our revenues or an increase in our expenses, either of which could lead to a reduction in net income or an increase in net loss. Although we expect that we will maintain insurance against business interruption, such insurance may not be adequate to protect us from significant loss in these circumstances or from the effects of a major catastrophe (such as an earthquake or other natural disaster), which could result in a prolonged interruption of our business.

Our business is highly dependent on electronic video advertising delivery service deployment.

        Our inability to maintain units necessary for the receipt of electronically delivered video advertising content in an adequate number of television stations or to capture market share among content delivery customers, which may be the result of price competition, new product introductions from competitors or otherwise, would be detrimental to our business objectives and deter future growth. We have made a substantial investment in upgrading and expanding our Irving NOC and in populating television stations with the units necessary for the receipt of electronically delivered video advertising content. However, we cannot assure you that the maintenance of these units will cause this service to achieve adequate market acceptance among customers that require video advertising content delivery.

        In addition, to more fully address the needs of video delivery customers we have developed a set of ancillary services that typically are provided by dub and ship houses. These ancillary services include cataloging, physical archiving, closed-captioning, modification of slates and format conversions. We believe that we will need to provide these services on a localized basis in each of the major cities in which we provide services directly to agencies and advertisers. We currently provide certain of such services to a portion of our customers through our facilities in New York, Los Angeles, San Francisco, Detroit and Chicago. However, we may not be able to successfully provide these services to all customers in those markets or any other major metropolitan area at competitive prices. Additionally, we may not be able to provide competitive video distribution services in other U.S. markets because of the additional costs and expenses necessary to do so and because we may not be able to achieve adequate market acceptance among current and potential customers in those markets.

        While we are taking the steps we believe are required to achieve the network capacity and scalability necessary to deliver video content, such as HD content, reliably and cost effectively as video advertising delivery volume grows, we may not achieve such goals because they are highly dependent on the services provided by our telecommunication providers and the technological capabilities of both our customers and the destinations to which content is delivered. If our telecommunication providers are unable or unwilling to provide the services necessary at a rate we are willing to pay or if our customers and/or our delivery destinations do not have the technological capabilities necessary to send and/or receive video content, our goals of adequate network capacity and scalability could be jeopardized.

        In addition, we may be unable to retain current audio delivery customers or attract future audio delivery customers who may ultimately demand delivery of both media content unless we can successfully continue to develop and provide video transmission services. The failure to retain such customers could result in a reduction of revenues, thereby decreasing our ability to maintain profitability.

We rely on bandwidth providers and other third parties for key aspects of the process of providing products and services to our customers, and any failure or interruption in the services and products provided by these third parties could harm our ability to operate our business and damage our reputation.

        We rely on third-party vendors, including bandwidth providers. Any disruption in the network access services provided by these third-party providers or any failure of these third-party providers to

20

---

Table of Contents

handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We license technology from third parties to facilitate aspects of our connectivity operations. We have experienced and expect to continue to experience interruptions and delays in service and availability for such elements. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies could negatively impact our relationship with users and adversely affect our business and could expose us to liabilities to third parties.

If we were no longer able to rely on our existing providers of transmissions services, our business and results of operations could be harmed.

        We obtain our local access transmission services and long distance telephone access through contracts with Sprint and Verizon, both of which expire in November 2010. The agreement with Sprint provides for reduced pricing on various services provided in exchange for minimum purchases of $0.4 million each year and the Verizon contract provides reduced pricing in exchange for minimum purchases of $0.3 million each year. The agreements provide for certain achievement credits once specified purchase levels are met. Any interruption in the supply or a change in the price of either local access or long distance carrier service could increase costs or cause a significant decline in revenues, thereby decreasing our operating results.

We face various risks associated with purchasing satellite capacity.

        As part of our strategy of providing transmittal of audio, video, data and other information using satellite technology, we periodically purchase satellite capacity from third parties owning satellite systems. Although our management attempts to match these expenditures against anticipated revenues from sales of products or services to customers, they may not be successful at estimating anticipated revenues, and actual revenues from sales of products or services may fall below expenditures for satellite capacity. In addition, purchases of satellite capacity require a significant amount of capital. Any inability to purchase satellite capacity or to achieve revenues sufficient to offset the capital expended to purchase satellite capacity may make our business more vulnerable and significantly affect our financial condition, cash flows and results of operations.

If the existing relationship with Clear Channel Satellite Services or Intelsat is terminated, or if either Clear Channel Satellite Services or Intelsat fails to perform as required under its agreement with us, our business could be interrupted.

        We have designed and developed the necessary software to enable our current video delivery systems to receive digital satellite transmissions over the AMC-9 and Galaxy 18 satellite systems. However, the Clear Channel or Galaxy 18 satellite systems may not have the capacity to meet our future delivery commitments and broadcast quality requirements on a cost-effective basis, if at all. We have a non-exclusive agreement with Clear Channel that expires in June 2010 and Intelsat that expires in December 2013. We expect to renew and extend our agreement with Clear Channel before its expiration. The agreements provide for fixed pricing on dedicated bandwidth and give us access to satellite capacity for electronic delivery of digital audio and video transmissions by satellite. Clear Channel and Intelsat are required to meet performance specifications as outlined in the agreements, and we are given a credit allowance for future fees if Clear Channel or Intelsat do not meet these requirements. The agreements state that Clear Channel or Intelsat can terminate the agreement if we do not make timely payments or become insolvent.

21

---

Table of Contents

Certain of our products depend on satellites; any satellite failure could result in interruptions of our service that could negatively impact our business and reputation.

        A reduction in the number of operating satellites or an extended disruption of satellite transmissions would impair the current utility of the accessible satellite network and the growth of current and additional market opportunities. Satellites and their ground support systems are complex electronic systems subject to weather conditions, electronic and mechanical failures and possible sabotage. The satellites have limited design lives and are subject to damage by the hostile space environment in which they operate. The repair of damaged or malfunctioning satellites is nearly impossible. If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites. In addition, satellite transmission can be disrupted by natural phenomena causing atmospheric interference, such as sunspots.

        Certain of our products rely on signals from satellites, including, but not limited to, satellite receivers and head-end equipment. Any satellite failure could result in interruptions of our service, negatively impacting our business. We attempt to mitigate this risk by having our customers procure their own agreements with satellite providers.

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

        Our provision of our products and services depends on the continuing operation of our information technology and communications systems. Any damage to or failure of our systems could result in interruptions in our service. Interruptions in our service could reduce our revenues and profits, and our brand could be damaged if people believe our system is unreliable. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems, and similar events. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at our Irving or Atlanta NOCs could result in lengthy interruptions in our service.

        We have experienced system failures in the past and may in the future. Any unscheduled interruption in our service puts a burden on our entire organization and may result in a loss of revenue. If we experience frequent or persistent system failures in our Irving or Atlanta NOC or web-based management systems, our reputation and brand could be permanently harmed. The steps we have taken to increase the reliability and redundancy of our systems are expensive, reduce our operating margin and may not be successful in reducing the frequency or duration of unscheduled downtime.

The market price of our common stock is likely to continue to be volatile.

        Some of the factors that may cause the market price of our common stock to fluctuate significantly include:

•

the addition or departure of key personnel;



•

variations in our quarterly operating results;



•

announcements by us or our competitors of significant contracts, new or enhanced products or service offerings, acquisitions, distribution partnerships, joint ventures or capital commitments;



•

changes in coverage and financial estimates by securities analysts;



•

changes in market valuations of networking, Internet and telecommunications companies;

22

---

Table of Contents

•

fluctuations in stock market prices and trading volumes, particularly fluctuations of stock prices quoted on the Nasdaq Global Market; and



•

sale of a significant number of shares of our common stock by us or our significant holders.

Sales of substantial amounts of our common stock in the public market could harm the market price of our common stock.

        The sale of substantial amounts of our shares (including shares issuable upon exercise of outstanding options and warrants to purchase our common stock) may cause substantial fluctuations in the price of our common stock. Because investors would be more reluctant to purchase shares of our common stock following substantial sales, the sale of these shares also could impair our ability to raise capital through the sale of additional stock.

Our inability to enter into or develop strategic relationships in key market segments could harm our operating results.

        Our strategy depends in part on the development of strategic relationships with leading companies in key market segments, including media broadcasters and digital system providers. We may not be able to successfully form or enter into such relationships, which may jeopardize our ability to generate sales of our products or services in those segments. Specific product lines are dependent to a significant degree on strategic alliances and joint ventures formed with other companies. Various factors could limit our ability to enter into or develop strategic relationships, including, but not limited to, our relatively short operating history, history of losses and the resources available to our competitors. Moreover, the terms of strategic alliances and joint ventures may vest control in a party other than us. Accordingly, the success of the strategic alliance or joint venture may depend upon the actions of that party and not us.

Our business may not grow if the Internet advertising market does not continue to develop or if we are unable to successfully implement our business model.

        An emerging part of our service offering is to generate revenue by providing interactive marketing solutions to advertisers, ad agencies and web publishers. The profit potential for this business model is unproven. For a portion of our business to be successful, Internet advertising will need to achieve increasing market acceptance by advertisers, ad agencies and web publishers. The intense competition among Internet advertising sellers has led to the creation of a number of pricing alternatives for Internet advertising. These alternatives make it difficult for us to project future levels of advertising revenue and applicable gross margin that can be sustained by us or the Internet advertising industry in general.

        Intensive marketing and sales efforts are necessary to educate prospective advertisers regarding the uses and benefits of, and to generate demand for, our products and services. Advertisers could be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems. Acceptance of our Internet advertising solutions will depend on the continued emergence of Internet commerce, communication, and advertising, and demand for our solutions. We cannot assure you that use of the Internet will continue to grow or that current uses of the Internet are sustainable.

Insiders have substantial control over us which could limit others' ability to influence the outcome of key transactions, including changes in control.

        As of December 31, 2009, our executive officers and directors and their respective affiliates owned approximately 10% of our common stock. As a result, these stockholders may be able to control or significantly influence all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions. This concentration of ownership may have the effect

23

---

Table of Contents

of delaying or preventing a change in control of us even if a change of control is in the best interest of all stockholders.

Our business may be harmed if we are not able to protect our intellectual property rights from third-party challenges or if the intellectual property we use infringes upon the proprietary rights of third parties.

        The steps taken to protect our proprietary information may not prevent misappropriation of such information, and such protection may not preclude competitors from developing confusingly similar brand names or promotional materials or developing products and services similar to ours. We consider our trademarks, copyrights, advertising and promotion design and artwork to be of value and important to our businesses. We rely on a combination of trade secret, copyright and trademark laws and nondisclosure and other arrangements to protect our proprietary rights. We generally enter into confidentiality or license agreements with our distributors and customers and limit access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States.

        We cannot assure you that our intellectual property does not infringe on the proprietary rights of third parties. While we believe that our trademarks, copyrights, advertising and promotion design and artwork do not infringe upon the proprietary rights of third parties, we may still receive future communications from third parties asserting that we are infringing, or may be infringing, on the proprietary rights of third parties. Any such claims, with or without merit, could be time-consuming, require us to enter into royalty arrangements or result in costly litigation and diversion of management attention. If such claims are successful, we may not be able to obtain licenses necessary for the operation of our business, or, if obtainable, such licenses may not be available on commercially reasonable terms, either of which could prevent our ability to operate our business.

We may enter into or seek to enter into business combinations and acquisitions that may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

        We acquired Enliven, the Vyvx advertising services business of Level 3 Communications, LLC, Pathfire, Point.360, GTN, and FastChannel Network Inc. Our business strategy might include the acquisition of additional complementary businesses and product lines. Any such acquisitions would be accompanied by the risks commonly encountered in such acquisitions, including:

•

the difficulty of assimilating the operations and personnel of the acquired companies;



•

the potential disruption of our business;



•

the inability of our management to maximize our financial and strategic position by the successful incorporation of acquired technology and rights into our product and service offerings;



•

difficulty maintaining uniform standards, controls, procedures and policies, with respect to accounting matters and otherwise;



•

the potential loss of key employees of acquired companies; and



•

the impairment of relationships with employees and customers as a result of changes in management and operational structure.

        We may not be able to successfully complete any acquisition or, if completed, the acquired business or product line may not be successfully integrated with our operations, personnel or technologies. Any inability to successfully integrate the operations, personnel and technologies associated with an acquired business and/or product line may negatively affect our business and results of operation. We may dispose of any of our businesses or product lines in the event that we are unable

24

---

Table of Contents

to successfully integrate them, or in the event that management determines that any such business or product line is no longer in our strategic interests.

Failure to manage future growth could hinder the future success of our business.

        Our personnel, systems, procedures and controls may not be adequate to support our existing as well as future operations. We will need to continue to implement and improve our operational, financial and management information systems, procedures and controls on a timely basis and to expand, train, motivate and manage our work force. We must also continue to further develop our products and services while implementing effective planning and operating processes, such as continuing to implement and improve operational, financial and management information systems; hiring and training additional qualified personnel; continuing to expand and upgrade our core technologies; and effectively managing multiple relationships with various customers, joint venture and technological partners and other third parties.

We depend on key personnel to manage the business effectively, and if we are unable to retain our key employees or hire additional qualified personnel, our ability to compete could be harmed.

        Our future success will depend to a significant extent upon the services of Scott K. Ginsburg, Chairman of the Board and Chief Executive Officer, Neil Nguyen, President and Chief Operating Officer, and Omar A. Choucair, Chief Financial Officer. Uncontrollable circumstances, such as the death or incapacity of any key executive officer, could have a serious impact on our business.

        Our future success will also depend upon our ability to attract and retain highly qualified management, sales, operations, technical and marketing personnel. At the present time there is, and will continue to be, intense competition for personnel with experience in the markets applicable to our products and services. Because of this intense competition, we may not be able to retain key personnel or attract, assimilate or retain other highly qualified technical and management personnel in the future. The inability to retain or to attract additional qualified personnel as needed could have a considerable impact on our business.

Certain provisions of our bylaws may have anti-takeover effects that could prevent a change in control even if the change would be beneficial to our stockholders.

        We have a classified board which might, under certain circumstances, discourage the acquisition of a controlling interest of our stock because such acquirer would not have the ability to replace directors except as the term of each class expires. The directors are divided into three classes with respect to the time for which they hold office. The term of office of one class of directors expires at each annual meeting of stockholders. At each annual meeting of stockholders, directors elected to succeed those directors whose terms then expire are elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election.

Our board of directors may issue, without stockholder approval, preferred stock with rights and preferences superior to those applicable to the common stock.

        Our certificate of incorporation includes a provision for the issuance of "blank check" preferred stock. This preferred stock may be issued in one or more series, with each series containing such rights and preferences as the board of directors may determine from time to time, without prior notice to or approval of stockholders. Among others, such rights and preferences might include the rights to dividends, superior voting rights, liquidation preferences and rights to convert into common stock. The rights and preferences of any such series of preferred stock, if issued, may be superior to the rights and preferences applicable to the common stock and might result in a decrease in the price of the common stock.

25

---

Table of Contents

We depend upon a number of single or limited-source suppliers, and our ability to produce audio and video distribution equipment could be harmed if those relationships were discontinued.

        We rely on fewer than five single or limited-source suppliers for integral components used in the assembly of our audio and video units. If a supplier were to experience financial or operational difficulties that resulted in a reduction or interruption in component supply to us, this would delay our deployment of audio and video units. We rely on our suppliers to manufacture components for use in our products. Some of our suppliers also sell products to our competitors and may in the future become our competitors, possibly entering into exclusive arrangements with our existing competitors. In addition, our suppliers may stop selling our products or components to us at commercially reasonable prices or completely stop selling our products or components to us. If a reduction or interruption of supply were to occur, it could take a significant period of time for us to qualify an alternative subcontractor, redesign our products as necessary and contract for the manufacture of such products. This would have the effect of depressing our business until we were able to establish sufficient component supply through an alternative source. We believe that there are currently alternative component manufacturers that could supply the components required to produce our products, but based on the financial condition and service levels of our current suppliers, we do not feel the need to pursue agreements or understandings with such alternative sources or pursue long-term contracts with our current suppliers. We have experienced component shortages in the past, and material component shortages or production or delivery delays may occur in the future.

We determined that there were material weaknesses in our disclosure controls and procedures such that those controls and procedures were not effective as of December 31, 2007, December 31, 2006, and December 31, 2004. In the event a material weakness occurs again in the future, our financial statements and results of operations could be harmed and you may not be justified in relying on those financial statements.

        For the year ended December 31, 2007, we determined that our disclosure controls and procedures were not effective, and we identified a material weakness in our internal controls over financial reporting related to certain deficiencies in the controls surrounding monitoring and oversight of accounting and financial reporting related to derivative instruments. For the year ended December 31, 2006, we determined that our disclosure controls and procedures were not effective, and we identified a material weakness in our internal controls over financial reporting for business combinations and stock compensation as of December 31, 2006. For the year ended December 31, 2004, we determined that our disclosure controls and procedures were not effective, and we identified a material weakness in our internal controls over financial reporting for income taxes as of December 31, 2004. In the event that these or any other material weakness occurs in the future, our financial statements and results of operations could be harmed and you may not be justified in relying on those financial statements, either of which could result in a decrease in our stock price.

Our software products may be wrongly labeled as spyware which might lead to its uninstallation causing a decrease in our revenues.

        Our software products, including the Viewpoint Toolbar and the Media Player, have been wrongly characterized as spyware by certain security software vendors. We monitor activity in this area and undertake efforts to educate vendors about the characteristics of our software, and thus far have been successful at getting the vast majority of these vendors to change their characterization of our Viewpoint Toolbar. Should we fail to persuade such vendors about the functionality of our Viewpoint Toolbar, or not learn about a false characterization on a timely basis, a substantial number of our Viewpoint Toolbars could be uninstalled leading to a decrease in our revenues and our business will be materially and adversely affected.

26

---

Table of Contents

Our revenues will be impacted by seasonal fluctuations and decreases or delays in advertising spending due to general economic conditions.

        We believe that our revenues will be subject to seasonal fluctuations because advertisers generally place fewer advertisements during the first and third calendar quarters of each year and direct marketers mail substantially more marketing materials in the third quarter of each year. Furthermore, Internet user traffic typically drops during the summer months, which reduces the number of advertisements to sell and deliver and searches performed. Expenditures by advertisers and direct marketers tend to vary in cycles that reflect overall economic conditions as well as budgeting and buying patterns. Our revenue could be materially reduced by a decline in the economic prospects of advertisers, direct marketers or the economy in general, which could alter current or prospective advertisers' spending priorities or budget cycles or extend our sales cycle. In addition, any decreases in or delays in advertising spending due to general economic conditions could reduce our revenues or negatively impact our ability to grow our revenues. Due to such risks, you should not rely on quarter-to-quarter comparisons of our results of operations as an indicator of our future results. Our staffing and other operating expenses are based in large part on anticipated revenues. It may be difficult for us to adjust our spending to compensate for any unexpected shortfall. If we are unable to reduce our spending following any such shortfall, our results of operations would be adversely affected.

We plan to expand operations in international markets in which we have limited experience, which could harm our business, operating results and financial condition.

        We opened a Unicast office in the United Kingdom in 2007 and plan to expand our product offering in the European and other international markets. We have only limited experience in marketing and operating our products and services in international markets, and we may not be able to successfully execute our business model in these markets. In other instances, we may rely on the efforts and abilities of foreign business partners in such markets.

        We believe that as the international markets in which we operate continue to grow, competition in these markets will intensify. Local companies may have a competitive advantage because of a greater understanding and focus on the local markets. In addition, certain international markets may be slower than domestic markets in adopting the Internet as an advertising and commerce medium and so our operations in international markets may not develop at a rate that supports our level of investment.

        Other risks of doing business internationally include the following:

•

difficulties in developing, managing and staffing foreign operations;



•

stringent local labor laws or regulations;



•

currency exchange rate fluctuations;



•

trade barriers and regulations;



•

difficulty enforcing contracts in foreign jurisdictions;



•

potentially adverse tax consequences;



•

import or export restrictions; and



•

difficulties in complying with local government regulation or local laws.

27

---

Table of Contents

Consolidation in the industries in which we operate could lead to increased competition and loss of customers.

        The Internet industry (and online advertising in particular) has experienced substantial consolidation. We expect this consolidation to continue. This consolidation could adversely affect our business and results of operations in a number of ways, including the following:

•

our customers could acquire or be acquired by our competitors and terminate their relationship with us;



•

our customers could merge with each other, which could reduce our ability to negotiate favorable terms; and



•

competitors could improve their competitive position through strategic acquisitions.

Our ad campaign management and deployment solution may not be successful and may cause business disruption.

        Unicast Advertising Platform (UAP) is our proprietary ad deployment technology. We must, among other things, ensure that this technology will function efficiently at high volumes, interact properly with our database, offer the functionality demanded by our customers and assimilate our sales and reporting functions. Customers may become dissatisfied by any system failure that interrupts our ability to provide our services to them, including failures affecting our ability to deploy advertisements without significant delay to the viewer. Sustained or repeated system failures would reduce the attractiveness of our solutions to advertisers, ad agencies, and web publishers and could result in contract terminations, fee rebates and make-goods, thereby reducing revenue. Slower response time or system failures may also result from straining the capacity of our deployed software or hardware due to an increase in the volume of advertising deployed through our servers. To the extent that we do not effectively address any capacity constraints or system failures, our business, results of operations and financial condition could be materially and adversely affected.

Privacy concerns could lead to legislative and other limitations on our ability to collect usage data from Internet users, including limitations on our use of cookie or conversion tag technology and user profiling, which is crucial to our ability to provide our solutions and services to our customers.

        Our ability to conduct targeted advertising campaigns and compile data that we use to formulate campaign strategies for our customers depends on the use of "cookies" and "conversion tags" to track Internet users and their online behavior, which allows us to build anonymous user profiles and measure an advertising campaign's effectiveness. A cookie is a small file of information stored on a user's computer that allows us to recognize that user's browser when we serve advertisements. A conversion tag functions similarly to a banner advertisement, except that the conversion tag is not visible. Our conversion tags may be placed on specific pages of clients of our customers' or prospective customers' websites. Government authorities inside the United States concerned with the privacy of Internet users have suggested limiting or eliminating the use of cookies, conversion tags or user profiling. Bills aimed at regulating the collection and use of personal data from Internet users are currently pending in U.S. Congress and many state legislatures. Attempts to regulate spyware may be drafted in such a way as to include technology like cookies and conversion tags in the definition of spyware, thereby creating restrictions that could reduce our ability to use them. In addition, the Federal Trade Commission and the Department of Commerce have conducted hearings regarding user profiling, the collection of non-personally identifiable information and online privacy.

        Our foreign operations may also be adversely affected by regulatory action outside the United States. For example, the European Union has adopted a directive addressing data privacy that limits the collection, disclosure and use of information regarding European Internet users. In addition, the European Union has enacted an electronic communications directive that imposes certain restrictions

28

---

Table of Contents

on the use of cookies and conversion tags and also places restrictions on the sending of unsolicited communications. Each European Union member country was required to enact legislation to comply with the provisions of the electronic communications directive by October 31, 2003 (though not all have done so). Germany has also enacted additional laws limiting the use of user profiling, and other countries, both in and out of the European Union, may impose similar limitations.

        Internet users may also directly limit or eliminate the placement of cookies on their computers by using third-party software that blocks cookies, or by disabling or restricting the cookie functions of their Internet browser software. Internet browser software upgrades may also result in limitations on the use of cookies or conversion tags. Technologies like the Platform for Privacy Preferences (P3P) Project may limit collection of cookie and conversion tag information. Individuals have also brought class action suits against companies related to the use of cookies and several companies, including companies in the Internet advertising industry, have had claims brought against them before the Federal Trade Commission regarding the collection and use of Internet user information. We may be subject to such suits in the future, which could limit or eliminate our ability to collect such information.

        If our ability to use cookies or conversion tags or to build user profiles were substantially restricted due to the foregoing, or for any other reason, we would have to generate and use other technology or methods that allow the gathering of user profile data in order to provide our services to our customers. This change in technology or methods could require significant reengineering time and resources, and may not be complete in time to avoid negative consequences to our business. In addition, alternative technology or methods might not be available on commercially reasonable terms, if at all. If the use of cookies and conversion tags are prohibited and we are not able to efficiently and cost effectively create new technology, our business, financial condition and results of operations would be materially adversely affected.

        In addition, any compromise of our security that results in the release of Internet users' and/or our customers' data could seriously limit the adoption of our solutions and services as well as harm our reputation and brand, expose us to liability and subject us to reporting obligations under various state laws, which could have an adverse effect on our business. The risk that these types of events could seriously harm our business is likely to increase as the amount of data we store for our customers on our servers (including personal information) and the number of countries where we operate has been increasing, and we may need to expend significant resources to protect against security breaches, which could have an adverse effect on our business, financial condition or results of operations.

If we fail to detect click-through fraud or other invalid clicks, we could lose the confidence of our advertisers, thereby causing our business to suffer.

        We are exposed to the risk of fraudulent clicks and other invalid clicks on advertisements delivered by us from a variety of potential sources. Invalid clicks are clicks that we have determined are not intended by the user to link to the underlying content, such as inadvertent clicks on the same ad twice and clicks resulting from click fraud. Click fraud occurs when a user intentionally clicks on an ad displayed on a web site for a reason other than to view the underlying content. These types of fraudulent activities could harm our business and our brand. If fraudulent clicks are not detected, the data that our solutions provide to our customers is inaccurate and the affected advertisers may lose confidence in our solutions to deliver a return on their investment. If advertisers become dissatisfied with our solutions, they may choose to do business with our competitors or reduce their Internet advertising spending, which would have a material adverse effect on our business, financial condition and results of operations.

29

---

Table of Contents

Internet security poses risks to our entire business.

        The process of e-commerce aggregation by means of our hardware and software infrastructure involves the transmission and analysis of confidential and proprietary information of the advertiser, as well as our own confidential and proprietary information. The compromise of our security or misappropriation of proprietary information could have a material adverse effect on our business, prospects, financial condition and results of operations. We rely on encryption and authentication technology licensed from other companies to provide the security and authentication necessary to effect secure Internet transmission of confidential information, such as credit and other proprietary information. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the technology used by us to protect client transaction data. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause material interruptions in our operations. We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. To the extent that our activities or the activities of others involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our security measures may not prevent security breaches. Our failure to prevent these security breaches may have a material adverse effect on our business, prospects, financial condition and results of operations.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None

ITEM 2.    PROPERTIES

        Company's principal executive offices are at 750 West John Carpenter Freeway in Irving, Texas. The Company's material properties are listed below:

30

---

Table of Contents

ITEM 3.    LEGAL PROCEEDINGS

        The Company is subject, from time to time, to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters asserted to date will have a material effect on the financial condition or results of operations of the Company.

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The common stock of the Company has been traded on the Nasdaq Global Market (formerly known as the Nasdaq National Market) under the symbol DGIT since the Company's initial public offering on February 6, 1996. On May 26, 2006, the Company's common stock was reverse split on a 1-for-10 basis.

        The following table sets forth the high and low closing sales prices of our common stock from January 1, 2008 to December 31, 2009. Such prices represent prices between dealers, do not include retail mark-ups, markdowns or commissions and may not represent actual transactions.

        On November 30, 2004, the Board of Directors authorized the purchase of up to $3.5 million of the Company's common stock. No expiration date of the purchase program was specified. During 2004 and 2005, the Company purchased 56,371 shares of its common stock at an average price of $13.35, for a total of $752,173. No purchases have been made since 2005. As of December 31, 2009, $2,747,827 remains available for future purchases.

        As of February 28, 2010, the Company had issued 24,736,051 and outstanding 24,679,681 shares of its common stock. As of February 28, 2010, the Company's common stock was held by approximately 240 stockholders of record. The Company estimates that there are approximately 10,000 beneficial stockholders.

        The Company has never declared or paid cash dividends on its capital stock. The Company currently expects to retain any future earnings for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. Further, the Company's Senior Credit Facility prohibits the payment of cash dividends. There are no restrictions on accumulated deficit or net income other than the declaration or payment of cash dividends.

31

---

Table of Contents

Stock Performance Table

        The table set forth below compares the cumulative total stockholder return on the Common Stock between December 31, 2004 and December 31, 2009 with the cumulative total return of (i) the Nasdaq Composite Index and (ii) the Nasdaq Computer and Data Processing Index, over the same period. This table assumes the investment of $100.00 on December 31, 2003 in the common stock, the Nasdaq Composite Index and the Nasdaq Computer and Data Processing Index, and assumes the reinvestment of dividends, if any.

        The comparisons shown in the table below are based upon historical data. The Company cautions that the stock price performance shown in the table below is not indicative of, nor intended to forecast, the potential future performance of the Common Stock. Information used in the graph was obtained from information published by Nasdaq and Research Data Group, Inc., sources believed to be reliable, but the Company is not responsible for any errors or omissions in such information.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among DG Fastchannel, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Date Processing Index

---

*

$100 invested on 12/31/04 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

        Notwithstanding anything to the contrary set forth in any of the Company's previous or future filings under the Securities Act or the Exchange Act that might incorporate this report or future filings made by the Company under those statutes, this Stock Performance Table shall not be deemed filed

32

---

Table of Contents

with the SEC and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by the Company under those statutes.

ITEM 6.    SELECTED FINANCIAL DATA

        The financial data set forth below was derived from the audited consolidated financial statements of the Company and should be read in conjunction with the consolidated financial statements and related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere herein. The data below includes the results of acquired operations from the respective dates of closing as detailed below:

        See Note 3 to the Company's consolidated financial statements for further information on acquisitions. As a result of the Company's decision to sell the assets of StarGuide Digital Networks, Inc. ("StarGuide") in 2006 and Corporate Computer Systems, Inc. ("CCS") in 2006 their operating results for all periods presented have been reflected in discontinued operations in the

33

---

Table of Contents

Company's consolidated financial statements and the selected financial data below. Amounts are shown in thousands (except per share amounts):

Statements of Operations Data:

 

34

---

Table of Contents

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

        The following management's discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with our consolidated financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K.

Introduction

        MD&A is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of DG FastChannel Inc.'s (the "Company" or "us") financial condition, changes in financial condition and results of operations. MD&A is organized as follows:

•

Cautionary Note Regarding Forward-Looking Statements.  This section provides a description of the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on our current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances. Refer to "Risk Factors" above, for a discussion of the risk factors applicable to us.



•

Overview.  This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.



•

Results of Operations.  This section provides an analysis of our results of operations for three years in the period ended December 31, 2009.



•

Financial Condition.  This section provides a summary of certain major balance sheet accounts and a discussion of the factors that tend to cause these accounts to change, or the reasons for the change.



•

Liquidity and Capital Resources.  This section provides an analysis of our cash flows for three years in the period ended December 31, 2009, as well as a discussion of our outstanding debt and commitments that existed as of December 31, 2009. Included in the analysis of outstanding debt is a discussion of the amount of financial capacity available to fund our future commitments, as well as a discussion of other financing arrangements.



•

Critical Accounting Policies.  This section discusses accounting policies that are considered important to our results of operations and financial condition, require significant judgment and require estimates on the part of management. Our significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 2 to the accompanying consolidated financial statements.



•

Recently Adopted and Recently Issued Accounting Guidance.  This section provides a discussion of recently issued accounting guidance that has been adopted or will be adopted in the near future, including a discussion of the impact or potential impact of such guidance on our consolidated financial statements when applicable.



•

Contractual Payment Obligations.  This section provides a summary of our contractual payment obligations by major category and in total, and a breakdown by period.



•

Off-Balance Sheet Arrangements.  This section provides a summary of our off-balance sheet arrangements and the purpose of these arrangements.

35

---

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

        The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. Certain statements contained herein may be deemed to constitute "forward-looking statements."

        Words such as "may," "anticipate," "estimate," "expects," "projects," "future," "intends," "will," "plans," "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management's present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, among other things:

•

our potential inability to further identify, develop and achieve commercial success for new products;



•

the possibility of delays in product development;



•

the development of competing distribution products;



•

our ability to protect our proprietary technologies;



•

patent-infringement claims;



•

risks of new, changing and competitive technologies;



•

our need for additional capital to fund our technology development programs; and



•

other factors discussed elsewhere herein under the heading "Risk Factors."

        In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained herein might not occur. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this filing. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law. All subsequent forward-looking statements attributable to management or to any person authorized to act on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

Overview

        We are a leading provider of digital technology services that enable the electronic delivery of advertisements and other media content from advertising agencies and other content providers to traditional broadcasters and other media outlets. Our business can be impacted by several factors including the financial stability of our customers, the overall advertising market, new emerging digital technologies, and the continued transition from analog to digital broadcast signal transmission. We face several factors that impact the growth of digital advertising delivery, including the following:

        Increased demand for reliable and rapid means of content delivery.    In recent years, technological innovations in digital media have driven increasing demand for reliable and rapid means of information transfer, particularly in the broadcast and telecommunications industries. Digital distribution technologies are increasingly used for distributing media in forms such as video, audio, text and data. Digitized information has many advantages over analog or hard copy formats including ease and efficiency of storage, manipulation, transmission and reproduction, with less degradation and in greater volumes.

36

---

Table of Contents

        Increase in adoption and popularity of High Definition Television.    Consumer demand for superior quality, declining high definition television ("HDTV") set prices and increasing availability of HDTV content are driving the rapid growth in HDTV adoption, with the United States leading the charge. Currently, all major broadcasters are delivering prime time content via HD broadcasting and with the broadcast industry shifting toward HD, we believe that HDTV advertising will follow. As local television stations have completed the upgrade to their infrastructure to enable HDTV signals, advertisers are increasing the number of HDTV commercials, which we believe will likely require digital distribution.

        Emergence of video advertising content on the Internet.    The confluence of a successful online advertising industry and the penetration of personal broadband connections create a strong platform for the Internet to become a significant medium with respect to video advertisements. The increase in broadband subscribers is fueling the accelerating growth in streaming media. Largely due to this growth in broadband usage, the Internet has become a widely used medium for distributing and receiving video and audio content. As the volume and quality of dynamic content progresses, we believe there will be significant growth in video advertising over the Internet and advertisers will look to existing digital content distributors to provide the necessary capabilities to successfully leverage this emerging medium.

        Dependence on Third Parties.    We depend on several third party vendors to operate our digital distribution network. Accordingly, we are highly dependent on satellite and high-speed connectivity vendors to properly operate our digital network. Further, we are highly dependent on the video advertising aired on TV and cable networks, cable systems, and other broadcast media outlets.

        Significant Transactions.    Part of our business strategy is to merge with, acquire, or make investments in, businesses in the media services industry. The strategy in acquiring these businesses is to expand our digital distribution network, customer base and/or product offerings. Over the last three fiscal years we have completed the following transactions:

•

Merger with Enliven
On October 2, 2008, we acquired all of the issued and outstanding shares of Enliven Marketing Technologies Corporation's ("Enliven") common stock we did not previously own in exchange for 2.9 million shares of our common stock. In the aggregate, including shares of Enliven previously held, the purchase price was $74.6 million. Enliven has two principal operating units, Unicast Communications Corp. ("Unicast") and Springbox Ltd. ("Springbox"). Unicast offers an online advertising campaign management product and Springbox is an Internet based marketing firm.



•

Purchase of Vyvx
On June 5, 2008, we completed the acquisition of substantially all the assets and certain liabilities of the Vyvx advertising services business ("Vyvx"), including its distribution, post-production and related operations, from Level 3 Communications, Inc. ("Level 3"). Vyvx operated an advertising services and distribution business similar to our video and audio content distribution business. The acquisition was completed pursuant to an asset purchase agreement among Level 3, certain affiliates of Level 3 and us for a purchase price of $135.4 million in cash.



•

Purchase of GTN
On August 31, 2007, we acquired substantially all the assets of privately-held GTN, Inc. ("GTN") for $8.5 million in cash, net of selling GTN's post-production business immediately after closing to an officer of GTN for $3.0 million in cash. GTN, based in Detroit, provides media services primarily on behalf of the automotive industry.



•

Merger with Point.360
On August 13, 2007, we acquired all of the issued and outstanding shares of Point.360's common stock we did not previously own in exchange for 2.0 million shares of our common stock.

37

---

Table of Contents

Immediately prior to closing, Point.360 spun off its post-production business to its shareholders other than us. As a result, at closing, Point.360's business consisted solely of its advertising distribution operation. In the aggregate, including (i) shares of Point.360 previously held, (ii) a requirement to retire $7.0 million of Point.360's debt immediately prior to closing, and (iii) working capital adjustments and transaction costs, the total purchase price was $49.7 million.

•

Purchase of Pathfire
On June 4, 2007, we acquired all of the issued and outstanding shares of privately-held Pathfire, Inc.'s ("Pathfire") common and preferred stock for $29.7 million in cash. Pathfire distributes third-party long-form content, primarily news and syndicated programming, through a proprietary server-based network via satellite and Internet channels.

Results of Operations

2009 vs. 2008

        The following table sets forth certain historical financial data from continuing operations (dollars in thousands).

---

(a) Excludes depreciation and amortization.

        Revenues.    For 2009, revenues increased $33.8 million, or 22%, as compared to the same period in the prior year. The increases were $28.4 million and $5.4 million from the video and audio content distribution and the other segments, respectively. The increase in the video and audio content distribution segment was primarily due to (i) a $28.2 million increase in HD revenue ($59.9 million in 2009 vs. $31.7 million in 2008) driven by an increase in HD deliveries and (ii) a $10.1 million increase in revenue from the October 2008 acquisition of Unicast, partially offset by (iii) a decrease in the number of standard definition ("SD") deliveries and (iv) a $7.2 million decrease in political advertising in 2009 that had occurred in connection with the 2008 national, state and local elections. The

38

---

Table of Contents

$5.4 million increase in the other segment relates to the addition of Springbox (acquired with Unicast in October 2008), partially offset by a slight decrease in SourceEcreative's ("SourceE") revenues.

        Cost of Revenues.    For 2009, cost of revenues increased $7.3 million, or 11%, as compared to the same period in the prior year. As a percentage of revenues, cost of revenues decreased to 37.6% in 2009 as compared to 41.0% in 2008. The decrease, on a percentage basis, was primarily attributable to (i) the elimination of substantially all duplicative infrastructure and personnel costs in the second quarter of 2009 associated with the June 2008 acquisition of Vyvx, (ii) a larger percentage of HD revenue, which has a higher profit margin than SD revenue, and (iii) lower delivery costs as a higher percentage of orders were delivered electronically. Prior to the second quarter of 2009, Vyvx had substantial duplicative infrastructure costs. In March 2009, we successfully completed the transition of all the former Vyvx customers over to our Irving NOC, and eliminated the costs associated with the former Vyvx NOC in Tulsa, Oklahoma.

        Sales and Marketing.    For 2009, sales and marketing expense increased $4.4 million, or 54%, as compared to the same period in the prior year. Substantially all the increase was attributable to the addition of Unicast. Unicast has been included in our operating results for twelve months in 2009 versus three months in 2008. Further, since acquiring Unicast in October 2008, we have added more resources to their sales and marketing efforts. Sales and marketing efficiencies gained, on a percentage basis, from the acquisition of Vyvx were offset by increases in costs associated with Unicast.

        Research and Development.    For 2009, research and development costs increased $2.0 million, or 47%, as compared to the same period in the prior year. The increase in research and development costs relates to the addition of Unicast ($2.5 million), partially offset by shifting some employees to software development initiatives that are capitalizable.

        General and Administrative.    For 2009, general and administrative expense increased $5.4 million, or 26%, as compared to the same period in the prior year. The increase was primarily attributable to (i) higher stock-based compensation ($2.8 million), (ii) including Unicast and Springbox in our results for 12 months in 2009 versus three months in 2008 ($2.3 million), (iii) higher facilities costs ($0.6 million) and (iv) higher salary expense ($0.6 million), partially offset by lower incentive compensation ($0.5 million) and audit and tax expense ($0.4 million).

        Depreciation and Amortization.    For 2009, depreciation and amortization expense increased $5.2 million, or 24%, as compared to the same period in the prior year. The increase was primarily attributable to (i) a full year of amortization of the Vyvx and Enliven intangible assets acquired during 2008 versus a partial year of amortization in 2008 ($3.2 million), (ii) more amortization associated with the increase in capitalized software ($1.4 million) and (iii) a full year of depreciation associated with fixed assets acquired in the acquisition of Enliven versus a partial year of depreciation in 2008 ($0.7 million).

        Interest Expense.    For 2009, interest expense decreased $0.3 million, or 3%, as compared to the same period in the prior year. The decrease was due to a lower average interest rate partially offset by an increase in the average amount of debt outstanding during the year. The increase in debt was principally associated with $115 million of borrowings in connection with the purchase of Vyvx in June 2008, a portion of which has been repaid in connection with scheduled quarterly principal payments and the proceeds from our June 2009 public equity offering. Excluding the amortization of fees and expenses, the weighted-average annual interest rate on our debt was 5.8% at December 31, 2009 versus 9.0% at December 31, 2008.

39

---

Table of Contents

        Unrealized Loss on Derivative Warrant.    For 2008, the fair value of our Enliven warrant decreased by $1.5 million. The warrant met the definition of a derivative instrument which required changes in its fair value to be recorded in the statement of income. In connection with the October 2008 acquisition of Enliven, our Enliven warrant was effectively canceled.

        Interest Income and Other, net.    For 2009, interest income and other decreased $0.7 million as compared to the same period in the prior year. The decrease was the result of a decrease in the average interest rate on invested cash, lower amounts of cash on hand and an increase in other expense.

        Provision for Income Taxes.    For 2009 and 2008 the provision for income taxes was 42% and 39%, respectively, of income before income taxes. The provisions for both periods differ from the expected federal statutory rate of 35% as a result of state and foreign income taxes and certain non-deductible expenses. The majority of the increase in the effective rate for 2009 relates to executive compensation which is not expected to be deductible. In 2009, we received a tax benefit for certain foreign losses which are not expected to occur in the future. Accordingly, we expect our effective tax rate will increase to about 44% of income before income taxes in the future.

2008 vs. 2007

        The following table sets forth certain historical financial data from continuing operations (in thousands).

        Revenues.    For 2008, revenues increased $59.4 million, or 61%. The increases were $56.6 million and $2.8 million from the video and audio content distribution and the other segments, respectively. The increase in the video and audio content distribution segment was primarily due to (i) $28.7 million in revenues from the additional customers acquired in the 2008 Enliven and Vyvx transactions,

40

---

Table of Contents

(ii) 12 months of revenue associated with the Pathfire, Point.360 and GTN acquisitions during 2008 as compared to seven months, five months and four months in 2007, respectively, (iii) a $25.5 million increase in HD revenue (including $7.7 million HD revenue from Vyvx included in (i) above) and (iv) approximately $7.2 million of additional political advertising revenue in connection with the 2008 national, state and local elections. The $2.8 million increase in the other segment primarily relates to the addition of Springbox ($2.3 million), as well as an increase in demand for the services SourceE provides, particularly in the international market.

        Cost of Revenues.    For 2008, cost of revenues increased $22.9 million, or 55%. The 55% increase in cost of revenues compares to a 61% increase in revenues. As a percentage of revenues, cost of revenues decreased to 41.0% in 2008 as compared to 42.6% in 2007. The decrease, on a percentage basis, was primarily attributable to the elimination of duplicative personnel, facilities, telecommunications and other expenses following the 2008 acquisition of Vyvx and the 2007 acquisitions of Pathfire, Point.360 and GTN.

        Sales and Marketing.    For 2008, sales and marketing expense increased $1.2 million, or 17%. The increase was primarily attributable to higher commissions, benefits and trade show costs associated with a larger customer base. As a percentage of revenues, sales and marketing expenses decreased to 5.3% in 2008 as compared to 7.2% in 2007. The decrease, on a percentage basis, was primarily attributable to efficiencies gained as a result of having a consolidated sales force following our recent acquisitions.

        Research and Development.    For 2008, research and development costs increased $1.0 million, or 32%. The increase was primarily attributable to increased spending for payroll, benefits and consulting necessary to develop new technologies after the acquisitions of Enliven, Vyvx, GTN, Point.360 and Pathfire.

        General and Administrative.    For 2008, general and administrative expense increased $7.1 million, or 51%. The increase was primarily attributable to higher (i) personnel costs ($3.5 million) to support our larger customer base and to reward employees for the improved operating results, (ii) audit and tax fees ($0.8 million) partly associated with the timing of audit work and partly associated with our increased complexity as a result of our recent acquisitions and related financings, (iii) rent and utilities ($0.7 million) associated with the increased number and size of office facilities following the recent acquisitions, (iv) insurance and investor relations costs ($0.4 million), and (v) bank fees ($0.3 million).

        Depreciation and Amortization.    For 2008, depreciation and amortization expense increased $8.5 million, or 66%. The increase was primarily attributable to depreciation of certain tangible assets and amortization of certain intangible assets acquired in the Enliven, Vyvx, GTN, Point.360 and Pathfire transactions, as well as increases in network equipment associated with the larger customer base. In addition, depreciation and amortization increased by $2.3 million as a result of a decision to replace our existing spot boxes (and thereby accelerate the remaining depreciation over the shortened useful life) with next generation spot boxes, which have greater storage capacity, faster processing speeds, and can accommodate multiple, simultaneous satellite feeds.

        Interest Expense.    For 2008, interest expense increased $9.0 million or 291%. The increase was due to (i) increased borrowings in connection with the acquisitions of Vyvx, GTN, Point.360 and Pathfire and (ii) an increase in the weighted-average interest rate during the period. Our weighted-average interest rate increased as a result of borrowing $65 million under the Bridge Loan facility in connection with funding the Vyvx acquisition in June 2008. Based on the expected term of the Bridge Loan facility we accrued interest at an annual effective rate of 13.3% (excluding the amortization of fees and expenses).

        Unrealized Gain / Loss on Warrant.    For 2008, the fair value of our Enliven warrant decreased by $1.5 million as compared to a $1.7 million increase in 2007. Prior to our merger with Enliven, the

41

---

Table of Contents

warrant had met the definition of a derivative instrument which required changes in its fair value to be recorded in the statement of income. This investment was effectively canceled in connection with the acquisition of Enliven.

        Interest Income and Other, Net.    For 2008, interest income and other of $0.6 million was very similar to the 2007 amount of $0.7 million.

        Provision for Income Taxes.    For 2008 and 2007, the provision for income taxes was 39% and 41% of income before income taxes, respectively. The provisions for both periods differ from the expected federal statutory rate of 35% for 2008 and 34% for 2007, as a result of state and foreign income taxes and certain non-deductible expenses (see Note 10 to the consolidated financial statements).

        Discontinued Operations.    For 2007, discontinued operations represent the results of our StarGuide Digital Networks, Inc. ("StarGuide") and Corporate Computer Systems, Inc. ("CCS") subsidiaries prior to the sale of their assets in 2007. The loss from discontinued operations, net of tax, was $0.5 million for 2007.

Financial Condition

        The following table sets forth certain of our major balance sheet accounts as of December 31, 2009 and 2008 (in thousands):

        Cash and cash equivalents fluctuate with operating, investing and financing activities. In particular, cash and cash equivalents fluctuate with (i) operating results, (ii) the timing of payments, (iii) capital expenditures, (iv) acquisition and investment activity, (v) borrowings and repayments of debt, and (vi) capital raising activity. The increase in cash and cash equivalents primarily relates to the excess of operating and capital raising activity over the repayment of debt.

        Accounts receivable generally fluctuate with the level of revenues. As revenues increase, accounts receivable tend to increase. Days' sales outstanding were 82 days and 76 days at December 31, 2009 and 2008, respectively.

        Property and equipment purchases tend to increase with the level of revenues and as a result of acquisition activity. Further, the balance of property and equipment is affected by recording depreciation expense. For 2009, purchases of property and equipment were $7.0 million in cash and $4.4 million of vendor financed purchases (total of $11.4 million), as compared to purchases of $12.4 million in 2008. For 2009 and 2008, capitalized costs of developing software were $6.9 million and $5.7 million, respectively.

42

---

Table of Contents

        Goodwill and intangible assets decreased during 2009 primarily as a result of recognizing $32.6 million of net operating loss carrryforwards ("NOLs") in connection with the acquisition of Enliven and amortization of intangible assets. The NOLs were initially fully reserved in the purchase price allocation until an Internal Revenue Code Section 382 study could be completed. Such study was completed during 2009 and the valuation allowance was removed.

        Accounts payable and accrued liabilities decreased $0.5 million during 2009. The decrease relates primarily to (i) the timing of when certain payments are made and (ii) paying certain liabilities incurred in connection with the purchase of Vyvx.

        Debt decreased $70.7 million during 2009 as a result of (i) using the proceeds from our June 2009 public equity offering to reduce our debt and (ii) scheduled principal payments.

        Stockholders' equity increased $77.6 million during 2009. The increase relates primarily to (i) issuing $52.5 million of equity in the June 2009 public equity offering, (ii) reporting net income of $20.5 million and (iii) recording stock compensation of $4.0 million.

Liquidity and Capital Resources

Cash Flows

        The following table sets forth a summary of our statements of cash flows (in thousands):

        We generate cash from operating activities principally from net income and from adding back certain non cash expenses such as (i) depreciation and amortization and (ii) deferred income taxes. In 2009 we generated $50.4 million in cash from operating activities.

43

---

Table of Contents

        We invest our cash in (i) property and equipment, (ii) the development of software, (iii) strategic investments and (iv) the acquisition of complementary businesses. In 2008 we completed two acquisitions. We acquired the assets and certain liabilities of the Vyvx advertising services business for $135.4 million in cash and, we exchanged 2.9 million shares of our common stock for all of Enliven's common stock not previously held by us.

        Cash is obtained from financing activities principally as a result of issuing debt and equity instruments. In 2008 we obtained $120.2 million of cash by issuing debt, net of repayments. In 2009, we repaid a portion of this debt primarily from the proceeds of a public equity offering.

Sources of Liquidity

        Our sources of liquidity include:

•

cash on hand,



•

cash generated from operating activities,



•

borrowings from our existing credit facility,



•

borrowings from any new credit facility, and



•

the issuance of equity.

        At December 31, 2009, we had $33.9 million of cash on hand. Historically, we have generated significant amounts of cash from operating activities. We expect this trend will continue.

        At December 31, 2009, we had a credit facility (the "Senior Credit Facility") with a group of lenders that had a balance of $102.5 million. In addition, the Senior Credit Facility allows us to borrow $30 million under a revolving loan feature, all of which was available to us at December 31, 2009. In 2010 our scheduled principal payments under the Senior Credit Facility are $21.5 million. A portion of the Senior Credit Facility matures in 2013 with the balance maturing in 2014. See a full description of the Senior Credit Facility in Note 8 of our consolidated financial statements.

        We also have the ability to issue equity instruments. As discussed above, we issued 2.9 million shares of our common stock in connection with our merger with Enliven. We currently have an effective shelf registration statement on file with the SEC for the issuance of (i) up to 4.5 million shares of our common stock and (ii) up to $75 million of preferred stock.

        We believe our sources of liquidity, including our cash on hand and cash generated from operating and financing activities, will satisfy our capital needs for the next 12 months.

Cash Requirements

        We expect to use cash in connection with:

•

the retirement of our existing debt obligations,



•

the purchase of capital assets,



•

the organic growth of our business, and



•

the acquisition of similar and/or ancillary businesses.

        During 2010, we expect we will:

•

make required principal payments under our Senior Credit Facility of $21.5 million, and



•

purchase property and equipment and incur capitalized software development costs ranging from $14 to $16 million.

44

---

Table of Contents

        We expect to use cash to further expand and develop our business. While we presently have no definitive plans, we may seek to acquire or merge with another company that we believe would be in the best interest of our shareholders.

Critical Accounting Policies

        The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Our significant accounting policies and methods used in the preparation of our consolidated financial statements are discussed in Note 2 of the notes to consolidated financial statements. Following is a discussion of our critical accounting policies.

        Business Combinations.    We account for business combinations under the purchase method of accounting. The total cost of an acquisition is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the nature of identifiable intangible assets and the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions. The value assigned to a specific asset or liability, and the period over which an asset is depreciated or amortized can impact future earnings. Some of the more significant estimates made in business combinations relate to the values assigned to identifiable intangible assets, such as customer relationships and trade names, and the period over which these assets are amortized.

        Goodwill.    We have three reporting units; video and audio content distribution ("ADS"), SourceE and Springbox. These reporting units were determined by operating segments and quantitative thresholds. Only the ADS and SourceE reporting units have goodwill. On an annual basis, or more frequently upon the occurrence of certain events, we test for goodwill impairment using a two-step process. The first step is to identify a potential impairment by comparing the fair value of a reporting unit with its carrying amount. The fair value of a reporting unit is determined based on a discounted cash flow analysis or other methods of valuation including market capitalization. A discounted cash flow analysis requires us to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our long-term projections by reporting unit. The discount rate used reflects our weighted-average cost of capital. If necessary, the second step of the goodwill impairment test compares the fair value of the reporting unit's goodwill with its carrying amount. To the extent the carrying amount of the reporting unit's goodwill exceeds its fair value a write-down of the reporting unit's goodwill would be necessary.

        We did not recognize a goodwill impairment loss for 2009, 2008 or 2007. At December 31, 2009, the fair value of goodwill in the ADS and SourceE reporting units exceeded the carrying value by approximately $500 million and $20 million, respectively. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit. Had the estimated fair value of each of these reporting units been hypothetically lower by 10% as of December 31, 2009, the fair value of goodwill would have exceeded the carrying value by approximately $408 million for ADS and $18 million for SourceE.

        Future impairment charges, while not presently anticipated or foreseen, could occur if future cash flows from these reporting units were to decline significantly. Future cash flows are impacted by a variety of factors including revenues, operating margins, income taxes and discount rates.

45

---

Table of Contents

        Impairment of Long-Lived Assets.    Long-lived assets principally relate to identifiable intangible assets, such as customer relationships and trade names, and property and equipment including capitalized internally-developed software and network equipment. In determining whether long-lived assets are impaired, the accounting rules do not provide for an annual impairment test. Instead they require that a triggering event occur before testing an asset for impairment. Triggering events include poor operating performance, significant negative trends and significant changes in the use of such assets. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, first a comparison of undiscounted future cash flows against the carrying value of the asset is performed. If the carrying value exceeds the undiscounted future cash flows, the asset would be written down to its fair value. If the intent is to hold the asset for sale, then to the extent the asset's carrying value is greater than its fair value less selling costs, an impairment loss is recognized for the difference. The most significant assumption relates to the projection of future cash flows. We did not recognize any impairment losses related to long-lived assets for the years ended December 31, 2009, 2008 or 2007, nor do we presently foresee any such impairment losses.

        Income Taxes.    Deferred taxes arise as a result of temporary differences between amounts recognized in accordance with generally accepted accounting principles and amounts recognized for federal income tax purposes. We have both deferred tax assets and deferred tax liabilities, which are shown on a net current and net non-current basis on the accompanying consolidated balance sheets. Deferred tax assets relate primarily to NOL carryforwards. Deferred tax liabilities relate primarily to intangible assets, such as customer relationships and trade names, some of which have little or no tax basis.

        Valuation allowances are provided against deferred tax assets if a determination is made that their ultimate realization is not likely. Significant judgment is required in making these assessments, which generally relate to an acquired operation generating future taxable income. We did not recognize any write-offs of deferred tax assets for the years ended December 31, 2009, 2008 or 2007, nor do we presently foresee any such write-offs.

        Revenue Recognition.    We derive revenue from services which consist primarily of (i) the distribution of digital and analog video and audio media content, (ii) media research resources, and (iii) support and other services. We recognize revenue only when all of the following criteria have been met:

•

Persuasive evidence of an arrangement exists,



•

Delivery has occurred or services have been rendered,



•

Our price to the customer is fixed or determinable, and



•

Collectability is reasonably assured.

        Below are descriptions of our services and other offerings, and generally the triggering point of revenue recognition, provided all other revenue recognition criteria have been met.

        Our services revenue from the digital distribution of video and audio advertising content generally is billed based on a rate per transmission, and we recognize revenue for these services upon notification the advertising content was received at the broadcast destination. Revenue for the distribution of analog video and audio content by tape is recognized when delivery has occurred, which is at the time the tapes are delivered to a common carrier. Costs of shipping tapes and other products are included in the cost of revenues.

46

---

Table of Contents

        We offer an online advertising campaign management and deployment product. This product allows publishers, advertisers, and their agencies to manage the process of deploying online advertising campaigns. We charge our customers on a cost per thousand ("CPM") impressions basis, and recognize revenue when the impressions are served.

        Our services revenue also includes access rights. For an agreed upon fee, we provide certain of our customers with access to our digital distribution network for a stated period. Using our network, these customers are able to deliver a variety of programming content to their intended destinations. Access rights revenue is recognized ratably over the access period. We also charge fees to monitor our network on behalf of our customers. The monitoring fees are recognized ratably over the monitoring period.

        We sell monthly, quarterly, semi-annual and annual subscriptions to access our online creative research database. We recognize revenue ratably over the subscription period.

        Media production and duplication includes a variety of ancillary services such as storage of client masters or other physical material. Revenue for these services is recognized in the month the storage service has been performed. Revenue related to our other services is recognized on a per transaction basis once the service has been performed. If the service results in a tape or other deliverable, revenue is recognized when delivery has occurred, which is at the time the tape or other deliverable is delivered to a common carrier.

        Customers pay a fixed fee per month for our media asset management and broadcast verification services. Revenue for these services is recognized ratably over the service period.

        We have a creative services group that builds content to a format specified by our customers. We charge fees for these services based on the time incurred and materials used to complete the project. Revenue related to retainers is recognized ratably over the term of the retainer contract. Certain project revenue is recognized on a completed-contract basis. For projects where we can reasonably estimate the total project costs and the portion of the entire project complete at any point, we use the proportional performance method for recognizing revenue. Under the proportional performance method, revenue is recognized based on the level of effort incurred to date compared to the total estimated level of effort required for the entire project.

Recently Adopted and Recently Issued Accounting Guidance

        See Recently Adopted and Recently Issued Accounting Guidance in Note 2 to our consolidated financial statements.

Contractual Payment Obligations

        The table below summarizes our contractual obligations, including estimated interest, at December 31, 2009 (in thousands):

47

---

Table of Contents