UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-K

xT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended March 31, ~~2011~~2012

o£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Transition Period from…………To…………

Commission File Number 000-11071

________________

IMAGE ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

________________

Delaware		84-0685613
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification Number)

20525 Nordhoff Street, Suite 200, Chatsworth, California 91311

(Address of principal executive offices, including zip code)

(818) 407-9100

(Registrant’s telephone number, including area code)

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

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

Common Stock, par value $0.0001

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 þR

Indicate by check mark if the registrant is not required to file report pursuant to Section 13 or Section 15(d) of the Act. YES o£ NO þR

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

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

Large accelerated filer o £ Accelerated filer o £ Non- accelerated filer o £ Smaller reporting company þ R (Do not check if a smaller reporting company)

~~(Do~~Indicate ~~not~~by check ifmark awhether ~~smaller~~the ~~reporting~~registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES £ NO R

~~Indicate~~The aggregate market value of the common stock held by ~~check~~non-affiliates ~~mark~~of ~~whether~~the registrant, based upon the closing price of $0.11 for shares of the registrant’s iscommon astock ~~shell~~on ~~company~~September (30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter as ~~defined~~reported inby ~~Rule~~the ~~12b~~over-2the-counter market on the OTCQB marketplace, was approximately $3,982,210. In calculating such aggregate market value, shares of common stock owned of record or beneficially by officers, directors and persons known to the registrant to own more than five percent of the registrant’s voting securities (other than such persons of whom the registrant became aware only through the filing of a Schedule 13G filed with the Securities and Exchange ~~Act~~Commission)~~. YES~~ owere NOexcluded Rbecause such persons may be deemed to be affiliates.

The ~~aggregate~~number ~~market value~~ of ~~the~~shares ~~common~~outstanding ~~stock held by non-affiliates~~ of the registrant~~, based upon the closing price of $0.15 for shares of the registrant~~’s common stock onas ~~September 30, 2010, the last business day~~ of ~~the~~June ~~registrant’s most recently completed second fiscal quarter as reported by the over-the-counter market on the OTCQB marketplace~~1, ~~was approximately $4,130,743.~~2012: ~~In calculating such aggregate market value~~256, ~~shares of common stock owned of record or beneficially by officers~~402, directors and persons known to the registrant to own more than five percent of the registrant’s voting securities (other than such persons of whom the registrant became aware only through the filing of a Schedule 13G filed with the Securities and Exchange Commission) were excluded because such persons may be deemed to be affiliates.133

The number of shares outstanding of the registrant’s common stock as of June 15, 2011: 255,602,133

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its proxy statement for its 2011 Annual Meeting of Stockholders to be filed pursuant to Regulation 14ANone.

IMAGE ENTERTAINMENT, INC.

Form 10-K Annual Report

For The Fiscal Year Ended March 31, ~~2011~~2012

TABLE OF CONTENTS

PART I			4
	ITEM 1.	Business	4
	ITEM 1A.	Risk Factors	1314
	ITEM 1B.	Unresolved Staff Comments	2123
	ITEM 2.	Properties	2124
	ITEM 3.	Legal Proceedings	2124
	ITEM 4.	~~Removed~~Mine ~~and~~Safety ~~Reserved~~Disclosures	2124
PART II			2225
	ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2225
	ITEM 6.	Selected Financial Data	2225
	ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2326
	ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	3639
	ITEM 8.	Financial Statements and Supplementary Data	3740
	ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	7173
	ITEM 9A.	Controls and Procedures	7173
	ITEM 9B.	Other Information	7274
PART III			7375
	ITEM 10.	Directors, Executive Officers and Corporate Governance	7375
	ITEM 11.	Executive Compensation	7379
	ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	7385
	ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	7386
	ITEM 14.	Principal Accountant Fees and Services	7388
PART IV			7490
	ITEM 15.	Exhibits and Financial Statement Schedules	7490
SIGNATURES			8097

Table of Contents

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended March 31, ~~2011~~2012 (or Annual Report) includes forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Other than statements of historical fact, all statements made in this Annual Report are forward-looking, including, but not limited to, statements regarding industry prospects, future results of operations or financial position, and statements of our intent, belief and current expectations about our strategic direction, prospective and future results and condition. In some cases, forward-looking statements may be identified by words such as “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” “future,” “intend,” “project” or similar words. Forward-looking statements involve risks and uncertainties that are inherently difficult to predict, which could cause actual outcomes and results to differ materially from our expectations, forecasts and assumptions. Unless otherwise required by law, we undertake no obligation to release publicly any updates or revisions to any such forward-looking statements that may reflect events or circumstances occurring after the date of this Annual Report.

You should carefully consider and evaluate all of the information in this Annual Report, including the risk factors listed below. If any of these risks occur, our business, results of operations and financial condition could be harmed, the price of our common stock could decline and you may lose all or part of your investment, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements contained in this Annual Report.

Image Entertainment, Inc.

Table of Contents

PART I

ITEM 1.

BUSINESS

Overview

Image Entertainment, Inc. (or Image, ~~the Company,~~ we, us or our) was incorporated in Colorado as Key International Film Distributors, Inc. in April 1975. In 1983, we changed our name to Image Entertainment, Inc. We reincorporated in California in November 1989 and reincorporated again in Delaware in September 2005. Our principal executive offices are located at 20525 Nordhoff Street, Suite 200, Chatsworth, California 91311.

We are a leading independent licensee and distributor of entertainment programming in North America. We release our library of exclusive content on a variety of formats and platforms, including DVD, Blu-ray Disc® (or Blu-ray), digital (video-on-demand (or VOD), electronic sell-through (or EST) and streaming), broadcast television (cable or satellite, including VOD ~~and pay-per-view~~), theatrical and non-theatrical (airplanes, libraries, hotels and cruise ships) exploitation.

Our focus is on a diverse array of general and specialty content, including:

·● Feature films ·● Theatrical catalogue films ·● Comedy ·● Independent films ·● Music concerts ·● Foreign films ·● Urban (including stage plays) ·● Youth culture/lifestyle ·● Theatre/Broadway ·● Television ·● Documentaries ·● Sports ● Faith and family ● Fitness

We also acquire exclusive rights to audio content for distribution via digital platforms and on CD in ~~spread across~~ a variety of genres and configurations.

We strive to grow revenue by maintaining and building a library of titles that can be exploited in a variety of formats and distribution channels. Our library of exclusive rights contains approximately 4,000 titles that we are currently ~~contains~~exploiting in the following formats:

·● Approximately 3,~~200~~700 ~~exclusive~~DVD/Blu-ray titles/300 ·CD titles ● Digital rights to approximately: o ~~Approximately~~ 2,~~300~~600 video programs o ~~Approximately~~ 400 audio titles containing more than 5,~~800~~600 individual tracks ~~· Approximately 300 CD titles~~

Each month, we release an average of ~~15-~~20-25 exclusive ~~DVD~~ titles, ~~most~~for distribution in a variety of ~~which~~formats, ~~also~~including ~~include~~DVD, Blu-ray, digital, broadcast, and VOD ~~rights~~.

Strategy

We believe our current strategy, which we began implementing in fiscal 2010, continues to allow us to be more flexible and act upon opportunities at a more rapid pace.

The main components of our current strategy include:

·● Pursuing Exclusive Content Acquisition: ~~The~~Image ~~Company~~ has refocused its content acquisition efforts by focusing on:

Cast-driven feature films, which may result in fewer new titles, but have potentially higher consumer recognition and revenue on each release.

Well-known, talent-driven music and comedy selections.

Film, television and specialty libraries of all sizes.

Image Entertainment, Inc.

Table of Contents

o● ~~Film,~~Exercising ~~television~~Financial ~~and~~Discipline: ~~specialty~~Image ~~libraries~~has ofimplemented ~~all~~an ~~sizes~~improved ‘greenlight’ process that we believe allows Image to better evaluate the potential profit in a given content acquisition opportunity versus the financial investment and potential risks.

·● ~~Exercising~~Acquiring ~~Financial~~All ~~Discipline~~Rights: When appropriate, Image ~~has~~now ~~implemented~~acquires anthe ~~improved~~greatest ~~‘greenlight’~~variety ~~process~~of ~~that~~distribution werights ~~believe~~regarding ~~allows~~acquired ~~the~~content ~~Company~~in tothe ~~evaluate~~greatest ~~better~~variety ~~the~~of ~~potential~~formats, ~~profit~~including inDVD, aBlu-ray, ~~given~~broadcast, ~~acquisition~~VOD ~~opportunity~~and ~~versus~~digital, ~~the~~for ~~financial~~both ~~investment~~domestic and ~~potential~~international ~~risks~~use. This allows us to further diversify our revenue streams.

·● ~~Acquiring~~Pursuing ~~All~~Strategic ~~Rights~~Opportunities: ~~When~~Image ~~appropriate~~has, ~~the~~and ~~Company~~will ~~now~~continue ~~acquires~~to, ~~the~~actively ~~greatest~~pursue ~~variety~~accretive business acquisitions, joint ventures and other creative partnering arrangements. Our management team’s significant network of relationships and depth of expertise provide opportunities for us to grow in areas we know best. Image has either acquired or entered into exclusive distribution ~~rights~~relationships ~~regarding~~with and acquired ~~content~~rights into ~~the~~distribute ~~greatest~~films ~~variety~~and libraries of ~~formats,~~several ~~including~~companies ~~DVD,~~such ~~Blu-ray,~~as ~~broadcast~~Madacy Entertainment, ~~VOD~~Lakeshore ~~and digital~~Entertainment, ~~for~~Handmade ~~both~~Films, ~~domestic~~Amity Entertainment and ~~international~~Sony ~~use.~~Pictures ~~This~~Home ~~allows~~Entertainment ~~the~~adding ~~Company~~over 900 titles to ~~further~~Image’s ~~diversify~~library ~~its~~over ~~revenue~~the ~~streams~~past two years.

·● ~~Pursuing~~Maximizing ~~Strategic~~Cost ~~Opportunities~~Efficiencies: ~~The~~We ~~Company~~are ~~has,~~continuing ~~and~~our ~~will~~ongoing ~~continue~~evaluation ~~to, actively pursue accretive business acquisitions, joint ventures and other creative partnering arrangements. Our management team’s significant network~~ of ~~relationships~~all ~~and~~cost ~~depth~~categories ~~of expertise provide unique opportunities for us to grow~~ in ~~areas~~an weeffort ~~know best. From January 2010 through June 2011, Image has either acquired or entered into exclusive distribution relationships with and acquired rights~~ to ~~distribute~~effectively ~~films~~convert ~~and~~fixed ~~libraries~~costs ~~of several companies such as Madacy Entertainment, The Garr Group, Lakeshore Entertainment and Handmade Films, adding approximately 500 titles~~ to ~~the~~variable ~~Company’s library~~expenses.

·● ~~Ongoing~~Focusing ~~Expenses~~on ~~Reduction~~Core ~~Initiatives; Outsourcing~~Competencies: ~~Leveraging~~As a result of our ~~significant~~early-2011 ~~cost~~reorganization, ~~savings~~we ~~achieved~~believe ~~over~~that the ~~past~~most ~~year~~profitable byuse ~~right-sizing~~of ~~headcount~~management ~~relative~~and tostaff ~~our~~time ~~operational~~is ~~needs~~in ~~and~~the ~~ongoing~~acquisition, ~~evaluation~~sales and marketing of ~~all~~exclusive ~~cost~~content. ~~categories~~Image inhas anbeen ~~effort~~able to ~~effectively~~successfully ~~convert~~outsource ~~fixed~~other ~~costs~~time toand ~~variable~~resource ~~expenses~~intensive functions, such as distribution, merchandising, manufacturing and other logistical functions.

·● ~~Focusing~~Expanding onDistribution ~~Core~~Opportunities ~~Competencies:~~into ~~Subsequent~~New toChannels ~~our~~and ~~change~~Media: ofImage ~~management~~has inincreased ~~early~~its ~~2010~~focus ~~and~~on ~~the~~emerging ~~completion~~means of ~~our~~distribution ~~Sony~~that ~~Pictures~~have ~~Home~~opened ~~Entertainment~~significant ~~transaction~~new ~~in summer 2010~~opportunities, ~~the~~many ~~Company~~of ~~has~~which ~~reduced~~have ~~and~~not ~~refocused~~yet ~~headcount.~~realized ~~The~~their ~~Company~~full ~~believes~~potential. ~~that~~For ~~the most profitable use of management and staff time is in the acquisition~~example, ~~sales~~we ~~and~~have ~~marketing~~recently ~~of exclusive content. The Company has~~ been ~~able~~testing ~~to successfully outsource other time~~ day-and-date ~~resource~~VOD ~~intensive~~release ~~functions,~~to ~~such~~coincide aswith ~~distribution,~~theatrical ~~merchandising, manufacturing and other more logistical functions~~release.

·● ~~Expanding~~Building ~~Distribution~~Relationships ~~Opportunities~~with ~~into~~Existing ~~New~~and ~~Channels~~Potential ~~and~~Content ~~Mediums~~Suppliers: The ~~Company~~substantial ~~has~~business ~~increased~~relationships ~~its~~of ~~focus~~Image’s onmanagement ~~emerging~~team ~~means~~have ofallowed ~~distribution~~Image ~~that~~to ~~have~~substantially ~~opened~~expand ~~significant~~the ~~new~~depth ~~opportunities,~~and ~~many~~breadth of ~~which~~content ~~have~~suppliers ~~not~~willing ~~yet~~to ~~realized~~do ~~their~~business ~~full~~with ~~potential~~Image.

·Pending Building Relationships with Existing and Potential Content Suppliers: The substantial business relationships of Image’s management team have allowed the Company to substantially expand the depth and breadth of content suppliers willing to do business with the Company.Merger

On April 2, 2012, we entered into an agreement and plan of merger (that we call the merger agreement) with RLJ Acquisition, Inc., or RLJ. Concurrently with the execution of the merger agreement, RLJ, Acorn Media Group, Inc., and the shareholders of Acorn entered into a stock purchase agreement. After the completion of the proposed business combination contemplated by the merger agreement and the stock purchase agreement, the current stockholders of Image and Acorn will own approximately 11% and 5%, respectively, of a new combined company, RLJ Entertainment, Inc., and the current stockholders of RLJ will own approximately 84% of RLJ Entertainment, assuming that none of the RLJ stockholders exercises rights to redeem RLJ stock in the RLJ stock redemption described below. RLJ Entertainment is expected to list its shares on The Nasdaq Stock Market.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Subsequent Event – RLJ Transaction” below for further information.

Image Entertainment, Inc.

Table of Contents

Partial List of Titles Released in Fiscal 2012 Features/Other: The Way Back (starring Ed Harris, Jim Sturgess, Saoirse Ronan, Colin Farrell) The Perfect Game (starring Clifton Collins Jr., Cheech Marin) The Double (starring Richard Gere, Topher Grace, Martin Sheen) Passion Play (starring Mickey Rourke, Bill Murray, Megan Fox) A Little Help (starring Jenna Fischer, Chris O’Donnell) Beneath the Darkness (starring Dennis Quaid, Tony Oller, Aimee Teegarden) Division III: Football’s Finest (starring Andy Dick, Marshall Cook, Bryan Callen, Will Sasso, Adam Carolla) Decision (starring Natalie Grant, Billy Dean) Burning Palms (starring Dylan McDermott, Rosamund Pike, Shannen Doherty, Lake Bell, Zoe Saldana, and Nick Stahl) Mega Python vs. Gatoroid (starring Debbie Gibson, Tiffany) ‘MASTER HAROLD’…and the boys (starring Freddie Highmore, Ving Rhames) Summer Eleven The Reef The Inheritance The Violent Kind Wild Cherry Born to Ride Chillerama ChromeSkull: Laid to Rest 2 Just Peck The Clinic Born To Ride The Hills Have Eyes Hellraiser Dear Santa The River Why Alleged Freerunner Urban: All Things Fall Apart (starring Curtis "50 Cent" Jackson, Mario Van Peebles, Ray Liotta, Lynn Whitfield) He’s Mine Not Yours I Ain’t Scared of You: A Tribute to Bernie Mac Lord, All Men Can’t Be Dogs Trinity Goodheart David E. Talbert’s What Goes Around Comes Around Breaking Up is Hard to Do Love Me or Leave Me The Ideal Husband Soulja Boy Money Matters 35 and Ticking The Bachelor Party I Will Follow David E. Talbert's What My Husband Doesn’t Know Comedy: Nephew Tommy: Just My Thoughts Whitney Cummings: Money Shot Nick Cannon: Mr. Showbiz National Lampoon's The Legend of Awesomest Maximus Criterion Branded: Godzilla Tiny Furniture 12 Angry Men Rushmore Black Moon Three Colors: Blue, White and Red Identification of a Woman Island of Lost Souls Kuroneko Carlos Cul-De-Sac The Killing Kiss Me Deadly Insignificance The Makioka Sisters The Great Dictator Pale Flower Something Wild Blow Out Kes White Material TV: Ghost Hunters – Season 6: Volume 1 Ghost Hunters International Season 2: Part 1 Sledge Hammer! The Complete Series Crime Story: The Complete Series The Twilight Zone: Seasons 4 & 5 (Blu-ray version) The Dick Van Dyke Show: 50th Anniversary Edition: Fan Favorites Special Interest: 2011 NBA Champions: Dallas Mavericks When They Were Young (NBA) Sons of the City: New York (NBA) Highwater Foreigner: Live B.B. King: Live Legends of Flight (IMAX DVD and 3D Blu-ray) The Pee-Wee Herman Show on Broadway Bette Midler: The Showgirl Must Go On The Kennedys Betty White: Champion for Animals

Features/Other:		TV:
The Resident (starring Hilary Swank, Jeffrey Dean Morgan)		Tapout: The Complete Series
Every Day (starring Liev Schreiber, Helen Hunt, Carla Gugino)		Ghost Hunters: Season 5 Part 2
Gun (starring Curtis “50 Cent” Jackson, Val Kilmer)		Ghost Hunters: Military Investigations
$5 A Day (starring Christopher Walken, Sharon Stone, Amanda Peet)		Ghost Hunters International: Season 1 Part 2
Storm Seekers (starring Daryl Hannah)		Thriller: The Complete Series
Don McKay (starring Thomas Haden Church, Elisabeth Shue)		Twilight Zone: Seasons 1 & 2 (Blu-ray version)
Disgrace (starring John Malkovich)		Twilight Zone: Fan Favorites (special edition)
Middle of Nowhere (starring Susan Sarandon, Anton Yelchin, Eva Amurri)
44 Inch Chest (starring Ray Winstone, Ian McShane, John Hurt)
Crimes of Fashion (starring Megan Fox, Kaley Cuoco)		Criterion Branded:
16 Wishes (starring Debby Ryan, Jean-Luc Bilodeau)
Beauty and the Briefcase (starring Hilary Duff)		Paths of Glory
Accidents Happen (starring Geena Davis)		Summer Hours
Fallen (starring Paul Wesley, Tom Skerritt, Bryan Cranston)		Vivre Sa Vie
Tornado Valley (starring Meredith Monroe)		America Lost and Found: The BBS Story
Skellig: The Owl Man (starring Tim Roth)		Ride with the Devil
Multiple Sarcasms (starring Timothy Hutton, Mira Sorvino, Dana Delaney, Mario Van Peebles, Stockard Channing)		Walkabout
That Evening Sun (starring Hal Holbrook)		Mystery Train
The Lightkeepers (starring Richard Dreyfuss, Bruce Dern, Blythe Danner)		Red Desert
Chain Letter		Stagecoach
Eyeborgs		The Night of the Hunter
Bangkok Adrenaline		The Leopard
		The Magician
		Cronos
Urban:		House
		The Thin Red Line
Blood Done Sign My Name (starring Ricky Schroder, Nate Parker)		Modern Times
Fade to Black (starring Christopher Walken, Danny Huston, Paz Vega)		The Darjeeling Limited
Perfect Combination
Just Another Day
Don’t Let Me Drown		Special Interest:
Soul Kittens Caberet
David E. Talbert’s Love in the Nick of Tyme		Los Angeles Lakers: 2010 NBA Finals Series
David E. Talbert’s Mr. Right Now		Ultimate Jordan: Deluxe Limited Edition
Rain		UFC Presents WEC: Aldo vs. Faber
		UFC Presents: The Best of WEC
		Kenny Chesney: Summer in 3D
Comedy:		Legends of the Canyon: Classic Artists
		Sondheim: The Birthday Concert
Kathleen Madigan: Gone Madigan		Ronald Reagan: An American Journey
Donnell Rawlings: From Ashy to Classy		Ultimate Wave: Tahiti (IMAX)
Billy Gardell: Halftime
Colin and Brad: Two Man Group
Bill Burr: Let It Go
Jamie Kennedy: Uncomfortable
Danny Bhoy: Subject To Change
Bobby Slayton: Born To Be Bobby
Steve Byrne: Byrne Identity
Loni Love: America’s Sister
Janeane Garofalo: If You Will

Image Entertainment, Inc.

Table of Contents

Partial List of Projected Titles for Release in Fiscal 2013 Features/Other: The Tall Man (starring Jessica Biel, Jodelle Ferland, Stephen McHattie) Witches of Oz (starring Paulie Rojas, Billy Boyd, Sean Astin, Ethan Embry, Mia Sara, Lance Henriksen, Christopher Lloyd) Memorial Day (starring Jonathan Bennett, James Cromwell, John Cromwell) Teen Spirit (an ABC Family original movie) Bullhead (2012 Academy Award Nominee for Best Foreign Language Film) Freak Dance (starring Michael Cassady, Megan Heyn, Amy Poehler) Radio Rebel (starring Debby Ryan) Red Hook Summer (a film by Spike Lee) Goats (starring Vera Farmiga, David Duchovny and Keri Russell) Airborne (starring Mark Hamill, Craig Conway and Billy Murray) Lovely Molly (from the makers of The Blair Witch Project and The Lord of the Rings) Klown (an Alamo Drafthouse Film) The FP (an Alamo Drafthouse Film) Los Scavengers (starring Vincente Rodriguez) Gone Hollywood (starring Vincente Rodriguez) The Heart of Christmas (Slingshot Pictures; starring Candace Cameron Bure, George Newbern) The Holy Roller (Slingshot Pictures) God’s Country (Slingshot Pictures) Lukewarm (Slingshot Pictures) Midnight Son Madison County Robotropolis Episode 50 Dead Season The Theatre Bizarre Monster Brawl Home Run Showdown The Ambassador Urban: The American Dream (starring Jamil Walker Smith) Dysfunctional Friends (starring Stacey Dash, Hosea Chanchez) She’s Not Our Sister (starring Kellita Smith) David E. Talbert’s A Fool and His Money David E. Talbert’s Suddenly Single BMF: The Rise and Fall of a Hip-Hop Drug Empire Note to Self (starring Christian Keys, Letoya Luckett) Love Buddies (starring Tatyana Ali, Keith Robinson) The Love you Save (a GMC original production) Sugar Mommas (a GMC original production) Comedy: Paul Rodriguez: Just For the Record Ralphie May: Too Big to Ignore D.L. Hughley: Reset Brian Hooks: LMAO TV: Rags to Riches: The Complete Series The Dick Van Dyke Show: Carl Reiner's Favorites Ghost Hunters Season 7: Parts 1 & 2 Ghost Hunters International Season 2: Part 2 The Complete Adventures of Teddy Ruxpin (10-Pk) The Twilight Zone: The Complete Series (Blu-ray version) The Twilight Zone: More Fan Favorites Holliston: Season 1 Criterion Branded: Being John Malkovich (starring John Malkovich, Cameron Diaz, John Cusack, Catherine Keener) Quadrophenia (based on The Who’s epic album) Summer with Monika (an Ingmar Bergman film) Le Havre (2011 Fipresci Prize winner, Cannes) Certified Copy (starring Academy Award winners Juliette Binoche and Jean-Claude Carrière) Summer Interlude (an Ingmar Bergman film) Gold Rush (starring Charlie Chaplin) Harold & Maude (a Hal Ashby film) Shallow Grave (a Danny Boyle film) 39 Steps (an Alfred Hitchcock film) Gray’s Anatomy (a Stephen Soderbergh film starring Spalding Gray) And Everything is Going Fine (a Stephen Soderbergh film starring Spalding Gray) Special Interest: Clinton Documentary Route 66: Marathon Tour - Chicago to L.A. Chicago: Chicago in Chicago Chronos (IMAX)

Features/Other:		TV:
The Way Back (starring Ed Harris, Jim Sturgess, Saoirse Ronan, Colin Farrell)		Ghost Hunters: Season 6 Part 1
Burning Palms (starring Dylan McDermott, Rosamund Pike, Shannen Doherty, Lake Bell, Zoe Saldana, and Nick Stahl)		The Twilight Zone: Seasons 4 & 5 (Blu-ray version)
Passion Play (starring Mickey Rourke, Megan Fox, Bill Murray)		The Dick Van Dyke Show: 50th Anniversary Edition: Fan Favorites
Mega Python vs. Gatoroid (starring Debbie Gibson, Tiffany)
‘MASTER HAROLD’…and the boys (starring Freddie Highmore, Ving Rhames)
Summer Eleven		Criterion Branded:
The Reef
The Inheritance		Black Moon
The Violent Kind		Kiss Me Deadly
Wild Cherry		Insignificance
Born to Ride		The Makioka Sisters
Chillerama		Solaris
The Perfect Game		Pale Flower
ChromeSkull: Laid to Rest 2		Diabolique
Just Peck		Something Wild
The Clinic		Blow Out
		Kes
		White Material
Urban:
Lord, All Men Can’t Be Dogs		Special Interest:
Breaking Up is Hard to Do
Love Me or Leave Me		2011 NBA Champions: Dallas Mavericks
Ideal Husband		When They Were Young (NBA)
Soulja Boy		Sons of the City: New York (NBA)
Money Matters		Highwater
35 and Ticking		Foreigner: Live
The Bachelor Party		B.B. King: Live
I Will Follow		Legends of Flight (IMAX DVD and 3D Blu-ray)
David E. Talbert's What My Husband Doesn’t Know		The Pee-Wee Herman Show on Broadway
		Bette Midler: The Showgirl Must Go On
Comedy:
Nephew Tommy: Just My Thoughts
Whitney Cummings: Money Shot

Image Entertainment, Inc.

Table of Contents

General

~~During~~Based the ~~latter~~methods ~~part~~used ofby ~~fiscal~~management ~~2011~~to manage, asevaluate, aoperate ~~result~~and ofinternally ~~changes~~report inthe ~~management’s~~business ~~view~~activities of ~~the Company's operations~~Image, ~~the~~we ~~Company~~have ~~reorganized~~one ~~its~~ reporting ~~segments~~segment incalled ~~order~~Worldwide toEntertainment. Our ~~better~~Worldwide ~~align~~Entertainment ~~them~~business ~~with~~consists of the ~~methods used by management to manage~~acquisition, ~~evaluate,~~content ~~operate~~enhancement and ~~internally~~worldwide ~~report~~distribution ~~the business activities~~ of ~~the~~exclusive ~~Company. Based~~content onin ~~this~~various ~~reorganization~~formats, ~~the~~including ~~Company's three former reporting segments~~DVD, ~~Domestic~~Blu-ray, ~~Digital and International~~digital, ~~have~~broadcast ~~been~~(including ~~combined~~cable ~~into~~and ~~one~~satellite), ~~reporting~~VOD, ~~segment~~streaming video, ~~Worldwide~~downloading ~~Entertainment~~and sublicensing.

Our Worldwide Entertainment business consists of the acquisition, content enhancement and worldwide distribution of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), VOD, streaming video, downloading and sublicensing.

Net Revenue by Format:

	Fiscal Year Ended March 31,
	2011		2010		% Change
	2012		2011		% Change
	(in thousands)
DVD	$	57,533	$	71,248		(19.2	)%
Packaged Goods (DVD & Blu-ray)	$	75,000	$	74,924		0.1	%
Blu-ray		16,162		9,463		70.8
Digital		14,092		6,258		125.2
Digital		6,258		4,171		50.0
Broadcast		7,854		5,961		31.8
Broadcast		5,961		4,159		43.3
Sublicensing and Other		3,140		1,816		72.9
Other		3,045		4,029		(24.4	)
Net Revenues	$	100,086	$	88,959		12.5	%
Net Revenues	$	88,959	$	93,070		(4.4	)%

~~The Company~~Image’s total assets were $7375.7 million and $6773.47 million, as of March 31, ~~2011~~2012 and ~~2010~~2011, respectively.

DVD and Blu-ray. Most of the product we release is in the standard DVD format with an increasing number of titles released on Blu-ray as the format’s acceptance continues to grow. We are a leading independent supplier of content in the music, comedy, special interest, ~~episodic~~ television episodes and urban genres. The following table shows the aggregate number of titles we have in active release by content type, compared with the aggregate number of software titles released by the industry, ~~through~~in the week ended ~~June~~May 1731, ~~2011~~2012, excluding discontinued titles, using data compiled monthly in the DVD & Blu-ray Release Report.

Type of DVD Content	Total Number of DVD Titles		~~Number of Image Titles~~	~~Percentage of Total~~ Number of ~~Titles Released by~~ Image Titles		Percentage of Total Number of Titles Released by Image
Music	~~14,619~~	15,683	~~629~~	~~4.3%~~	650		4.1	%
Theatrical Catalog	~~15,122~~	15,957	~~562~~	~~3.7%~~	625		3.9	%
Direct to DVD	~~13,037~~	14,098	~~562~~	~~4.3%~~	598		4.2	%
Special Interest	~~27,186~~	24,508	~~393~~	~~1.4%~~	475		1.9	%
Foreign Language (including distributed lines)	12,118		335	2.8%
Foreign Language		13,108			338		2.6	%
Television Programming	~~7,662~~	8,702	~~275~~	~~3.6%~~	303		3.5	%
Performance: Comedy/Stand-up	~~932~~	1,040	~~146~~	~~15.7%~~	150		14.4	%
Sports on DVD	3,249		50	1.5%
All Other		48,859			561		1.1	%
All Other	32,836		248	0.8%
Total Releases – Cumulative through May 31, 2012		141,955			3,700		2.6	%
Total Releases – Cumulative through June 17, 2011	126,761		3,200	2.5%

Source: DVD & Blu-ray Release Report Revised ~~June~~May 1631, ~~2011~~2012.

~~We believe that the DVD format continues to be the preferred medium of home entertainment for consumers, although Blu-ray continues to gain industry acceptance.~~ Many of our DVD and Blu-ray titles include special features, enhancements and ancillary materials, such as multiple audio tracks, behind-the-scenes footage, director commentaries, interviews and discographies. As more consumers ~~continue to~~ purchase high-definition televisions and ~~become~~are ~~more~~ exposed to high-definition content through satellite and cable, we believe that they will expect the same level of quality from their video movie rentals and purchases. Additionally, high-definition video-on-demand continues to gain traction with consumers and we provide high-definition source materials for this format as well. In fiscal ~~2011~~2012, ~~the~~Image ~~Company~~ released ~~137~~625 titles on Blu-ray, an increase of ~~125~~356% over fiscal ~~2010~~2011.

Digital. We engage in the exclusive wholesale distribution of the digital rights to our library of audio and video content. The demand for the types of programming found in our library continues to increase as new ~~retailers~~distributors enter this primarily online marketplace. We seek to differentiate ourselves competitively by being a one-stop source for these ~~retailers~~distributors for the large and diverse collection of entertainment represented by our digital library.

We enter into non-exclusive distribution arrangements with retail and consumer-direct entities whose business models include the digital delivery of content.

We aggressively continue to add numerous video and audio titles to our growing library of exclusive digital rights each month. Our current digital video library contains approximately 2,600 individual video programs.

Image Entertainment, Inc.

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We ~~enter~~are ~~into~~actively ~~non~~participating in many digital business models, including sell-~~exclusive~~through, ~~distribution~~direct-to-own, ~~arrangements~~rental, ~~with~~subscription, ~~retail~~streaming and ~~consumer~~advertising-~~direct~~supported ~~entities~~streaming. As ~~whose~~consumers ~~business~~adopt these (or future) models, ~~include~~we ~~the~~believe we are well-positioned to grow along with our distribution partners. The near-term challenges faced by all digital ~~delivery~~distributors are to develop ways to increase consumer awareness and integrate this awareness into their buying and consumption habits. Additionally, we support several technology companies and original equipment manufacturer device manufacturers with programming in an effort to generate consumer interest in digital distribution and increase awareness and demand for our titles. Examples of ~~content~~our digital accounts are Netflix (video), iTunes (audio and video, ringtones), Amazon.com (audio and video), Hulu (video), Microsoft Xbox Live Marketplace (audio and video), Sony Playstation (video), YouTube/Google (video), Vudu (video), Vevo (video) and Samsung (video).

WeBroadcast. ~~aggressively~~Our ~~continue~~television todivision ~~add~~is ~~numerous~~responsible ~~video~~for ~~and~~all ~~audio~~forms ~~titles~~of totelevision ~~our~~distribution, ~~growing~~including ~~library~~the worldwide sales of ~~exclusive~~our ~~digital~~content ~~rights~~across ~~each~~broadcast ~~month~~television, VOD and non-theatrical platforms. ~~Our~~Buyers ~~current~~of ~~digital~~our ~~video~~standard ~~library~~and ~~contains~~high-definition ~~approximately~~content 2are typically cable or satellite broadcasters,~~300~~ ~~individual~~and ~~video~~sometimes ~~programs~~terrestrial (free) television broadcasters. ~~Our~~Examples ~~interaction~~of ~~with~~our ~~digital~~key ~~retail~~broadcast ~~outlets~~sublicensees isare ~~dynamic~~BET, ~~due~~Bounce, toComedy ~~the~~Partners, ~~overall~~Documentary ~~size~~Channel, ofFuse ~~our~~Networks, ~~library~~NBC ~~available~~Universal, toOxygen ~~each~~Media ~~retailer~~and Showtime.

We ~~are~~have ~~actively~~a ~~participating~~two-pronged inapproach ~~many~~to ~~digital business models~~VOD. First, ~~including~~we ~~sell-through,~~continue ~~direct-~~to~~-own,~~ ~~rental,~~expand ~~subscription,~~our ~~streaming~~direct ~~and~~relationships ~~advertising-supported~~with ~~streaming~~customers. AsIn ~~consumers~~North ~~adopt these (or future) models~~America, we ~~believe~~have wedirect ~~are~~relationships ~~well-positioned to grow along~~ with ~~our~~InDemand, ~~retail partners. The near~~Avail-~~term~~TVN, ~~challenges~~AT&T ~~faced by all digital distributors are to develop ways to increase consumer awareness and integrate this awareness into their buying and consumption habits. Additionally~~U-verse, weDirect ~~support~~TV ~~several technology companies~~ and ~~original~~Echostar ~~equipment~~(Dish ~~manufacturer~~Net) ~~device~~along ~~manufacturers~~ with ~~programming~~several inspecialty anlabels ~~effort~~such toas ~~generate~~Sky ~~consumer~~Angel, ~~interest~~Havoc inTV ~~digital distribution~~ and ~~increase awareness and demand for our titles~~Eurocinema. ~~Examples~~Revenue ofis ~~our~~typically ~~digital~~derived ~~retail~~on ~~accounts~~a ~~are~~revenue-sharing ~~iTunes (audio and video, ringtones), Amazon~~basis.~~com~~ These ~~(audio~~direct ~~and~~relationships ~~video),~~account ~~Hulu~~for ~~(video),~~the ~~Sony~~majority ~~Playstation~~of ~~(video),~~our ~~Microsoft~~VOD ~~Xbox (video), YouTube/Google (video) and Samsung (video)~~revenues.

Second, we entered into a North American sales agency agreement with Warner Digital Distribution, a division of Time-Warner, Inc., or Warner, which sublicenses a selection of our programs to cable, satellite and hotel/motel operators in the VOD businesses. Revenue is typically derived on a revenue-sharing basis. Internationally, we work with North American-based outlets that already have international operations in addition to opening discussions with a variety of internationally based entities.

Worldwide Hotel/Motel. In North America, we work directly with Lodgenet/OnCommand, Movie Beam, Warner and Avail-TVN and have direct relationships with several other entities providing entertainment to the hotel/motel arena. For exploitation of our music and stand-up comedy programs for hotels and motels, we have a non-exclusive output agreement with Instant Media Network, which is partially owned by Lodgenet/OnCommand – the largest distributor of entertainment product to the hotel/motel industry in North America. In addition, we entered into a non-exclusive output agreement with Video On Demand International Productions, Inc. for all types and genres of programming. As with broadcast (including VOD, as described above), internationally we work with North American-based outlets that have existing international operations as well as internationally based outlets.

Sublicensing. We hold international distribution rights to more than 550 video and audio programs currently exploited on all formats to countries outside of North America. Outside North America, we sublicense distribution in the areas of home entertainment, television and digital, through distribution partners such as Universal Music Group International, BET International, Warner Music Australia and Universal Pictures Australia, which pay us a royalty for their distribution of our products.

Theatrical Distribution. In some cases, a limited theatrical release (playing on between two to 200 screens, in two to 20 markets), which includes an outlay of prints and advertising costs, may be required of us by the licensor as part of the distribution rights acquisition deal. A modest theatrical release may also serve as a cost-effective marketing platform for the subsequent DVD/Blu-Ray, digital and broadcast releases.

Exclusive Acquisition. We acquire exclusive distribution rights to our content across multiple entertainment formats. We acquire our exclusive titles from a wide range of content holders and those who represent content holders, including:

·● independent content suppliers;

·● producers;

·● music artists and record labels;

·● artist management and talent agencies; and

·● foreign sales companies.

WeImage ~~market~~Entertainment, ~~and exploit our exclusive content according to exclusive royalty or distribution fee agreements~~Inc. ~~Our agreements provide for a specified distribution term typically ranging from five to 25 years.~~

The Criterion Collection Distribution Agreement. We have an exclusive home video distribution agreement with The Criterion Collection to distribute its product through mid-2013 on DVD, Blu-Ray and certain digital formats. We have been distributing The Criterion Collection for over 20 years. The Criterion Collection, including its related labels Eclipse, Janus Films and Essential Art House, currently contains approximately 500 active DVD titles. The Criterion Collection and its related labels release approximately 50 titles annually. Distribution of programming from The Criterion Collection contributed approximately 26% and 29% of our net revenue in fiscal 2011 and 2010, respectively.

New Library Acquisition Strategy. Since January 2010, we have broadened our content acquisition focus to include complete libraries from both studios and independents, such as the Handmade Films library (announced in March 2010) Lakeshore Entertainment library (announced in April 2011), and strategically aligned companies, such as our Madacy Home Video acquisition (announced in October 2010).

Mining of Image’s Library. We continue to create new and special editions of previously released content that will encourage consumers to repurchase the product in these technically superior versions. We also continue to expand on strategies that extend the life cycle of our titles, including “second bite” strategies that focus on repricing and/or remarketing and repromotion; increased focus on budget product and shippers; and product shipped with merchandising displays.

Marketing. Our in-house marketing department directs marketing efforts toward consumers as well as DVD, CD and digital retailers. Our marketing efforts involve:

· point-of-sale advertising;

· print advertising in trade and consumer publications;

· television and radio advertising campaigns;

· Internet advertising, including viral and social network marketing campaigns;

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·We ~~direct~~market ~~response~~and ~~campaigns;~~exploit our exclusive content according to royalty or distribution fee agreements that typically range from five to 25 years in duration.

·The ~~dealer~~Criterion ~~incentive~~Collection ~~programs;~~Distribution Agreement. We have been distributing The Criterion Collection for over 20 years. We have an exclusive home video distribution agreement with The Criterion Collection to distribute its product on DVD, Blu-Ray and certain digital formats. The Criterion Collection, including its related labels Eclipse, Janus Films and Essential Art House, currently contains approximately 600 active titles and releases approximately 60 titles annually. Distribution of programming from The Criterion Collection contributed approximately 23% and 26% of our net revenue in fiscal 2012 and 2011, respectively.

·New ~~trade~~Library ~~show~~Acquisition ~~exhibits;~~Strategy. Since January 2010, we have broadened our content acquisition focus to include complete libraries from both studios and independents, such as the Handmade Films library (announced in March 2010) Lakeshore Entertainment library (announced in April 2011), Amity Entertainment library (announced in May 2012) and strategically aligned companies, such as our Madacy Home Video acquisition (announced in October 2010).

·Mining ~~bulletins~~of ~~featuring~~Image’s Library. We continue to create new ~~releases~~and special editions of previously released content that will encourage consumers to repurchase the product in these technically superior versions. We also continue to expand on strategies that extend the life cycle of our titles, including “second bite” strategies that focus on repricing and/or ~~catalogue~~remarketing ~~promotions~~and repromotion; increased focus on budget product and shippers; and product shipped with merchandising displays.

~~Sales~~Marketing. ~~The~~Our ~~Company~~in-house ~~maintains~~marketing ~~its~~department ~~own~~directs ~~sales~~marketing ~~force,~~efforts ~~and~~toward ~~has~~consumers aas ~~direct~~well ~~selling~~as ~~relationship~~Theatrical ~~with the majority of our customers. We sell our products to traditional retailers~~exhibition, ~~specialty~~DVD/Blu-ray/digital retailers, ~~rental customers, Internet retailers, wholesale distributors~~ and ~~through alternative distribution, which includes direct-to-consumer print catalogs, direct response campaigns, subscription service~~cable/~~club~~VOD ~~sales,~~programmers. Our ~~home~~marketing ~~shopping~~efforts ~~television channels, other non-traditional sales channels, kiosks and sub-distributors.~~include:

~~Examples~~● point-of ~~our key sell~~-~~through~~sale customers are Amazon.com, Best Buy Co., Walmart and Target. Examples of our key distribution customers are Alliance Entertainment (or AEC), Entertainment One, and Video Products Distributors. Examples of our key rental customers are Redbox and Netflix. In fiscal 2011, Amazon.com and AEC each accounted for approximately 16% of our net revenues.advertising;

~~Additionally,~~● ~~effective~~print ~~with~~advertising the closing of our Distribution Services and License Agreement with Sony Pictures Home Entertainment (or SPHE), SPHE agreed to perform certain sales functions at Walmart and Best Buy on behalf of Image. This has allowed the Company the benefit of having a major studio present Image’s product in ~~conjunction~~trade with SPHE releases, including motion pictures. Approximately 42.1% of our gross accounts receivables is attributable to SPHE, as they are our vendor of record for shipments of physical product to North American retailers and ~~wholesalers. See~~consumer ~~“Managed Value-Added and Distribution Services” below.~~publications;

We● ~~allow retail customers to return unsold inventory. We reserve for estimated returns at the time the sale is recognized~~television, ~~based in part upon our historical returns experience and knowledge of specific product movement within distribution channels. Our inventory returns~~outdoor, ~~as a percentage of our gross distribution revenues, were 24.0%~~ in-theater ~~fiscal 2010~~ and ~~17.8%~~radio inadvertising ~~fiscal 2011. Returns of defective product have been minimal and are generally covered by manufacturers’ warranties.~~campaigns;

~~Special~~● ~~Markets. Our~~Internet ~~special~~advertising, ~~markets~~including ~~division~~viral ~~(or Special Markets) is designed to take advantage of our large~~ and ~~diverse~~social ~~catalog~~network ~~and~~marketing specifically targets niche sales opportunities. Special Markets encompasses all sales channels outside the traditional marketplace. Within Special Markets, examples of our key customers are Midwest Tapes and Waxworks.campaigns;

~~Sublicensing.~~● Wedirect ~~also~~response hold international distribution rights to more than 450 of our titles currently exploited on DVD and approximately 40 of our CD titles to countries outside of North America. Outside North America, we sublicense distribution in the areas of home entertainment, television and digital, primarily music and urban-related DVDs, through distribution partners such as Universal Music Group International, Digital Site and Warner Music Australia, who pay us a royalty for their distribution of our products.campaigns;

~~Broadcast.~~● Wedealer ~~have~~incentive a television division responsible for all forms of television distribution, including the worldwide sales of our content across broadcast television, pay-per-view (or PPV), VOD and non-theatrical platforms. Buyers of our standard and high-definition content are typically cable, PPV or satellite broadcasters, and sometimes terrestrial (free) television broadcasters. Examples of our key broadcast sublicensees are BET and BET International, PBS and Showtime.programs;

~~With~~● ~~respect~~trade toshow ~~PPV,~~exhibits; ~~VOD~~ and EST, we are proceeding under a two-pronged approach. First, we continue to expand our direct relationships as opposed to working through intermediaries. In North America, we have direct relationships with InDemand, Avail-TVN, Direct TV and Echostar (Dish Net) along with several specialty labels such as Sky Angel and Eurocinema. Revenue is typically derived on a revenue-sharing basis.

~~Second,~~● webulletins ~~entered~~featuring ~~into~~new areleases North American sales agency agreement with Warner Digital Distribution, a division of Time-Warner, Inc. (or Warner). Warner, on our behalf, sublicenses many of our premier, high-end programs to cable, satellite and ~~hotel/motel~~catalogue ~~operators who are in the VOD and EST businesses~~promotions. Revenue is typically derived on a revenue-sharing basis. Internationally, we work with North American-based outlets that already have international operations in addition to opening discussions with a variety of internationally based entities.

Sales. Image maintains its own sales force, and has a direct selling relationship with the majority of our customers. We sell our products to traditional retailers, specialty retailers, rental customers, Internet retailers, wholesale distributors and through alternative distribution, which includes direct-to-consumer print catalogs, direct response campaigns, subscription service/club sales, home shopping television channels, other non-traditional sales channels, kiosks and subdistributors.

Examples of our key sell-through customers are Walmart, Amazon.com, Best Buy Co., Target and Barnes & Noble. Examples of our key distribution customers are Alliance Entertainment (or AEC), Entertainment One, Video Products Distributors, and Ingram Entertainment. Examples of our key rental customers are Redbox and Netflix. In fiscal 2012, Walmart and AEC each accounted for approximately 11% of our net revenues.

Additionally, in connection with our August 2010 Distribution Services and License Agreement with Sony Pictures Home Entertainment (or SPHE), SPHE agreed to perform certain sales functions at Walmart, Best Buy and Target on behalf of Image. We now have the benefit of having a major studio present Image’s product in conjunction with SPHE releases, including motion pictures. SPHE is our primary vendor of record for shipments of physical product to North American retailers and wholesalers and, as vendor of record, responsible for collecting these receivables and remitting these proceeds to Image. See “Managed Value-Added and Distribution Services” below.

We allow retail customers to return unsold inventory. We reserve for estimated returns at the time the sale is recognized, based in part upon our historical returns experience and knowledge of specific product movement within distribution channels. Our inventory returns, as a percentage of our gross distribution revenues, were 26% in fiscal 2012 and 18% in fiscal 2011. The increase in returns was primarily attributable to the higher shipments to Walmart, and their specific new release business model. Returns from Walmart have been higher historically than other retail customers. Returns of defective product have been minimal and are generally covered by manufacturers’ warranties.

Image Entertainment, Inc.

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~~Worldwide~~We ~~Hotel/Motel~~also ~~For~~focus ~~Performance~~on ~~Properties. In~~special ~~North~~market ~~America~~sales channels, weoutside ~~work~~the ~~directly~~traditional ~~with Lodgenet/OnCommand~~marketplace, ~~Warner and Avail-TVN and have direct relationships with several other entities providing entertainment~~ to ~~the~~take ~~hotel/motel~~advantage ~~arena. For exploitation~~ of our ~~music~~large and ~~stand-up~~diverse ~~comedy~~catalog ~~programs for hotels~~ and ~~motels,~~specifically wetarget ~~have~~niche asales ~~non-exclusive~~opportunities. Within ~~output~~special ~~agreement with Instant Media Network~~markets, ~~which~~examples ~~is partially owned by Lodgenet/On Command – the largest distributor~~ of ~~entertainment~~our ~~product~~key tocustomers ~~the~~are ~~hotel/motel~~Midwest ~~industry~~Tapes inand ~~North America~~Waxworks. InAnother ~~addition,~~special wemarket ~~entered~~channel ~~into~~is ~~a non~~scanned-~~exclusive~~based ~~output~~trading ~~agreement~~in conjunction with ~~Video On Demand International Productions, Inc~~SPHE. ~~for all types and genres of programming.~~ ~~Like~~Through ~~with~~SPHE’s ~~broadcast~~scanned-based ~~(including~~trading ~~PPV and VOD~~system, asour ~~described~~products ~~above)~~are ~~internationally~~also weplaced ~~work~~in ~~with~~grocery ~~North~~and ~~American-based~~drug ~~outlets~~store ~~that~~retail ~~have~~chains such ~~existing~~as ~~international~~Albertsons, ~~operations~~Stater asBrothers, ~~well~~Hannaford, asCVS, ~~internationally~~Shopko, ~~based~~Kroger ~~outlets~~and Safeway.

~~Theatrical~~Managed Value-Added and Distribution Services. In ~~some~~February ~~cases~~2010, awe ~~limited~~outsourced ~~theatrical~~the ~~release~~post-production ~~(playing~~and oncreative ~~between~~services ~~two~~necessary to ~~200~~prepare ~~screens,~~a indisc ~~two~~master ~~to 20 markets), which includes an outlay of prints~~ and packaging/advertising ~~costs,~~materials ~~may~~for bemanufacturing ~~required~~and ofmarketing ~~us by the licensor as part~~ of ~~the~~our ~~distribution rights acquisition deal~~products. ASuch ~~modest~~services ~~theatrical release may also serve as a cost-effective marketing platform for the subsequent DVD/Blu-Ray, digital and broadcast releases.~~include:

~~Managed~~● ~~Value-Added and Distribution Services. In February 2010, we outsourced the post-production and creative services necessary to prepare a DVD master and~~ packaging~~/advertising~~ ~~materials for manufacturing and marketing of our products. Such services include:~~design;

·● ~~packaging~~DVD/Blu-ray ~~design~~authoring and compression;

·● ~~DVD/Blu-ray~~menu ~~authoring and compression~~design;

·● ~~menu~~video ~~design~~master quality control;

·● ~~video~~music ~~master quality control~~clearance; and

·● ~~music~~for ~~clearance;~~some ~~and~~titles, the addition of enhancements such as:

· for some titles, the addition of enhancements such as:

multiple audio tracks;

commentaries;

foreign language tracks;

behind-the-scenes footage; and

interviews.

These services now are performed by third-party vendors, managed by Company personnel.

Our manufacturing, warehousing and distribution services are currently provided by Sony Pictures Home Entertainment (or SPHE) under our Distribution Service and License Agreement. In addition to conventional manufacturing, we also have manufacturing-on-demand (or MOD). MOD services are provided for replication of slower moving titles, which helps avoid replicating larger minimum quantities of certain titles and can be used for direct -to -consumer sales as needed. Under our agreement, SPHE also provides certain operational services at ~~the Company~~Image’s direction, including credit and collections, merchandising, returns processing, and certain IT functions. For further information regarding our Distribution Services and License Agreement with SPHE, please see “Manufacturing and Distribution ~~with Sony Pictures Home Entertainment~~” ~~in Management’s Discussion and Analysis~~below.

Competition

We ~~face competition from other independent distribution companies, major motion picture studios and music labels in securing exclusive content distribution rights. Our DVD and Blu-ray products~~ compete for aboth ~~finite amount of retail and rental shelf space. Consumers can choose from a large supply of competing entertainment~~ content ~~from other suppliers. Digital downloading, streaming,~~ and ~~other~~for ~~broadcast~~customers ~~formats are also increasing competition~~ for the ~~delivery of~~ content~~. The~~ ~~digital~~we ~~and VOD sales are largely driven by what is visually available to the consumer, which is accomplished through additional placement fees or previous sales success~~distribute. Programming is available online (delivered to smart phones, tablets, laptops or personal computers), direct to the consumers’ TV set through multiple internet ready devices and cable or satellite VOD. The digital and VOD formats are growing as an influx of new delivery devices are introduced into the marketplace, such as the Apple iPad and the Microsoft Xbox. We face increasing competition as these formats continue to grow and programming providers enter into distribution agreements for a wider variety of formats.

11We face competition from other independent distribution companies, major motion picture studios and music labels in securing exclusive content distribution rights. Some of these competitors are larger than Image. Our DVD and Blu-ray products compete for a finite amount of retail and rental shelf space. Consumers can choose from a large supply of competing entertainment content from other suppliers. Sales of digital downloading, streaming, VOD and other broadcast formats are largely driven by what is visually available to the consumer, which is accomplished through additional placement fees or previous sales success. Programming is available online (delivered to smart phones, tablets, laptops or personal computers), direct to the consumers’ TV set through multiple internet ready devices and cable or satellite VOD. The digital and VOD formats are growing as an influx of new delivery devices are introduced into the marketplace, such as the Apple iPad and the Microsoft Xbox. We face increasing competition as these formats continue to grow and programming providers enter into distribution agreements for a wider variety of formats.

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We also face competition for consumers' time and money from alternate forms of entertainment and leisure activities. The success of any of our products depends upon consumer acceptance of a given product in relation to current events as well as the other products released into the marketplace at or around the same time.

Overall, our ability to continue to successfully compete in our markets is largely dependent upon our ability to anticipate and respond to various competitive and other factors affecting the industry, including new or changing product formats, changes in consumer preferences, regional and local economic conditions, discount pricing strategies and competitors’ promotional activities.

Image Entertainment, Inc.

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Industry Trends

According to The Digital Entertainment Group (or DEG), ~~Blu-ray~~consumer ~~continued~~home toentertainment ~~grow~~spending ~~during~~in calendar ~~2010 and~~2011 ~~proved~~declined ~~popular~~only ~~among~~2% ~~consumers~~from ~~spending~~calendar on2010 ~~software~~compared ~~sales~~to ~~and~~the ~~rental~~estimated ~~transactions,~~decrease ~~reaching~~of ~~$1.8~~9% ~~billion.~~for ~~According~~box tooffice ~~the~~receipts. Overall ~~DEG,~~consumer home entertainment spending onin ~~Blu-ray~~the ~~increased~~second ~~68%~~half inof calendar ~~2010~~2011 ~~versus~~increased ~~calendar~~approximately ~~2009~~1%, ~~and~~primarily ~~combined~~due ~~DVD~~to ~~and~~the ~~Blu-ray~~strong ~~sales~~third ~~remained~~quarter ~~resilient,~~in ~~with~~which consumer ~~rental and sell-through~~ spending onincreased ~~all~~5%, the ~~formats~~first ofquarterly ~~approximately~~consumer ~~$19~~spending ~~billion~~increase ~~for~~since ~~the year~~2008. ~~The~~ This ~~growth~~trend continued in ~~Blu-ray helped offset~~ the ~~maturing~~first ~~DVD~~quarter ~~market,~~of ~~bringing~~calendar ~~the~~2012 ~~overall~~with ~~category to~~ a ~~single-digit drop of 3~~2.35% inincrease ~~total~~over ~~consumer~~the ~~spending~~same ~~(both~~quarter ~~rental and sales for both DVD and Blu-ray)~~ in calendar ~~2010 versus 2009~~2011.

While combined spending on DVD and Blu-ray ~~remained~~was ~~largely~~down ~~unchanged~~slightly in calendar ~~2010~~2011 compared to ~~2009~~2010, digital spending, including ~~video on demand (or VOD) and broadband~~ electronic sell through (or EST), ~~increased~~video ~~19%~~on todemand ~~$2.5~~(or ~~billion. For~~VOD) ~~that~~and ~~period,~~subscription ~~VOD~~streaming increased ~~20.8~~51% to $13.84 billion. Similarly, while ~~broadband~~consumer ~~EST~~spending ~~increased~~on ~~15.7%~~packaged togoods ~~$683~~in ~~million from~~ the ~~prior~~first ~~year. VOD~~quarter ~~offset~~of ~~the~~calendar ~~decline~~2012 inwas ~~the~~essentially ~~entire~~flat ~~rental~~compared ~~category~~with ~~(across~~the ~~all~~first ~~formats)~~quarter byof ~~helping~~calendar ~~the~~2011, ~~rental~~spending ~~category~~on ~~increase~~digital, 2%specifically tosubscription ~~$7.8~~streaming, ~~billion~~more ~~(rather~~ than ~~decrease~~doubled ~~2%)~~according to DEG.

~~From~~Blu-ray ~~the~~continued ~~launch~~to ofgrow, ~~the~~increasing ~~DVD~~20% ~~format~~during incalendar ~~spring~~2011 ~~1997~~versus ~~through~~ calendar 2010, as consumers spending on new releases and catalog reached over $2 billion. In the first quarter of calendar 2012, consumer spending on Blu-ray increased 23% over the first quarter of calendar 2011. DEG ~~reports~~reported ~~approximately~~that ~~297~~the ~~million~~number ~~DVD~~of ~~players~~homes with Blu-ray playback devices, including set-top ~~and~~boxes, ~~portable~~game ~~DVD~~consoles ~~players,~~and ~~Home~~home-~~Theater~~theater-in-a-~~Box~~box systems, ~~TV/DVD~~continued ~~and~~to ~~DVD/VCR~~grow, ~~combination~~jumping ~~players~~38%, ~~have~~bringing ~~been~~the ~~sold~~total number of Blu-ray households to ~~consumers,~~nearly ~~bringing~~40 million. In the ~~number~~first quarter of ~~DVD~~calendar ~~households~~2012, toan ~~approximately~~additional 902.4 million ~~(adjusting~~players ~~for~~were sold, bringing the total number of Blu-ray households ~~with~~to more than ~~one player)~~40.8 million. The ~~DEG~~overall ~~estimates~~growth ~~that~~in ~~70%~~consumer ofspend ~~DVD~~on ~~owners~~Blu-ray ~~have~~is ~~more~~significant ~~than~~in ~~one~~light ~~player~~of the increasing number of households.

~~The~~ DEG ~~reports~~also reported that ~~approximately~~consumers ~~28.5~~purchased more than 27 million ~~Blu~~high-~~ray~~definition ~~playback~~television ~~devices,~~(or ~~including~~HDTV) ~~set-top~~sets ~~boxes~~during ~~and~~2011, ~~game~~bringing ~~consoles,~~the ~~have~~number ~~been~~of ~~sold~~HDTV ~~since~~households ~~launch~~to inmore ~~2006~~than 74. ~~There~~5 ~~were~~million. ~~six~~An ~~million~~additional ~~Blu-ray~~6.5 ~~playback~~million ~~devices~~HDTVs were sold in the ~~fourth~~first quarter of ~~2010~~calendar ~~alone~~2012, bringing ~~total~~the ~~units~~number ~~sold~~of toHDTV ~~11.25~~households ~~million~~to inmore ~~calendar~~than ~~2010~~77.6 million.

The ~~DEG~~IHS ~~estimates~~Screen ~~that~~Digest, ~~more~~incorporating ~~than~~Adams 91Media ~~million~~Research, ~~high-definition~~reported ~~television~~that ~~(or~~consumer ~~HDTV)~~spending ~~sets~~to ~~have~~purchase ~~been~~and ~~sold~~rent todiscs ~~consumers,~~was ~~bringing~~approximately ~~the~~84% ~~number~~ of ~~HDTV~~total ~~households~~home toentertainment ~~nearly~~consumer 56spending ~~million.~~in ~~The~~2011 ~~DEG~~and ~~further~~projects ~~estimates~~ that 39consumer spending will only decline to 70% of ~~these~~total ~~households~~home ~~have~~entertainment ~~more~~consumer ~~than~~spending ~~one~~by ~~set~~2015. AnFurther, ~~HDTV~~IHS ~~set~~mentioned ~~provides~~that ~~the~~consumer ~~optimal~~spending ~~medium~~on ~~for~~discs is ~~playback~~beginning to stabilize and estimates an approximate drop of ~~Blu-ray~~2.6% in 2012 before leveling out.

According to PricewaterhouseCoopers LLP’s Global Entertainment and Media Outlook: 2012-2016 issued June 2012, consumer spending for the overall home video segment in the U.S. is projected to decline at a 1.2% compound annual rate over the 2012-2016 period to approximately $18 billion in 2016. While the decline in consumer spending on physical home video continues, although at a lower percentage than in past years, it is substantially offset by the increase in consumer spending on electronic home video. Consumer spending on electronic distribution, primarily from downloading and streaming, is projected to increase at a compound annual rate of 12.1% over the 2012-2016 period as a result of growth in existing services (e.g. Netflix, Apple, Microsoft, etc.), augmented with new download service providers, growth in video-friendly hardware (e.g. tablets) and growing consumer acceptance of digital lockers.

Manufacturing and Distribution

Image has a Distribution Services and License Agreement with SPHE that expires in August 2013 to act as exclusive manufacturer to meet Image’s DVD requirements, including Blu-ray Disc high-definition format, and to provide related distribution and other logistics services in exchange for certain fees. SPHE acts as Image’s vendor of record for shipments of physical product to North American retailers and wholesalers. Image is responsible for the credit risk from the end customer with respect to accounts receivable. In September 2010, SPHE made an interest-free $2.5 million advance against future replication from SPHE, to be repaid at $0.15 per disc manufactured until the advance is repaid, and a $750,000 non-recoupable advance. The advances were used to reduce the then-outstanding borrowings under Image’s credit facility, and specifically, the non-recoupable advance was used to pay the fee incurred for terminating Image’s arrangement with its former replicator. Until the advance was repaid, SPHE had a security interest in all Image’s assets in second position behind PNC. In November 2011, the $2.5 million advance was repaid in full.

Image Entertainment, Inc.

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The SPHE agreement provides Image several significant advantages over the arrangement with its former replicator, including:

●

a significant reduction in replication costs, particularly as related to Blu-ray manufacturing;

●

the ability to sell directly to key accounts such as Walmart, Best Buy and Costco, which eliminates other third-party distributor fees, provides incremental revenues, higher gross margin and the ability to better manage retail inventories;

●

the ability to access SPHE’s point of sale reporting systems to better manage replenishment of store inventories on a daily basis; and

●

the ability to access SPHE’s extensive Scan-Based Trading network that features product placement in over 20,000 drug and grocery outlets.

Sublicense Agreement with SPHE

Concurrent with entering into the Distribution Services and License Agreement, Image also entered into a sublicense agreement that provides us the ability to market and distribute 60 titles previously distributed by SPHE, including releases such as Sydney Pollack’s Absence of Malice (starring Paul Newman and Sally Field), ...And Justice For All (directed by Norman Jewison and starring Al Pacino), and Adaptation (directed by Spike Jonze, starring Nicolas Cage, Meryl Streep and Chris Cooper).

Trademarks

We have U.S. federal registrations for the following trademarks: Image, Image Entertainment, the Image Entertainment logo (two trademarks), Image Music Group, the Egami Media logo, ~~Image Entertainment Japan,~~ Home Vision HVE Entertainment, the HVE logo, and One Village Entertainment. We have a registered trademark in Japan for Image Entertainment Japan and a registered trademark in Canada for the HVE logo. In ~~February~~August 2011, ~~our~~we ~~majority-owned~~filed ~~subsidiary,~~a ~~Image/Madacy~~U.S. ~~Home~~federal ~~Entertainment~~trademark application for the mark “Midnight Madness Series.” In September 2011, ~~LLC~~we filed a U.S. federal trademark application for the mark, “~~Image~~Slingshot ~~Madacy~~Pictures.” In ~~Entertainment~~February 2012, we filed a trademark application in Canada for the marks “Midnight Madness Series” and “Slingshot Pictures.”

Our majority-owned subsidiary, Image/Madacy Home Entertainment, LLC (or IMHE) has a U.S. federal registration and a CTM registration in Europe for the Image Madacy Entertainment logo. In February 2012, IMHE filed trademark applications in Canada and Australia for the Image Madacy Entertainment logo.

In general, trademarks remain valid and enforceable as long as the marks are used in connection with the related products and services and the required registration renewals are filed. We believe our trademarks have value in the marketing of our products. It is our policy to protect and defend our trademark rights.

Employees

As of June 151, ~~2011~~2012, we had 7669 employees, 6966 of whom are full-time and ~~seven~~three of whom are part-time.

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Available Information

Under the menu “Investors—SEC Filings” on our Web site at www.image-entertainment.com, we provide free access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information contained on our Web site is not incorporated herein by reference and should not be considered part of this Annual Report.

Image Entertainment, Inc.

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ITEM 1A.

RISK FACTORS

Risks Relating to Our Business

We have a history of (and may continue to incur) losses, limited working capital and limited access to financing. We had a net loss applicable to common shareholders and sustained operating and net losses in fiscal ~~2010~~2012 and in prior years. We had an accumulated deficit of $5558.79 million and a working capital deficit of $6.94 million at March 31, ~~2011~~2012. Our cash requirements continue to exceed the level of cash generated by operations. Accordingly, we have limited working capital. We may need to raise additional funds to acquire the rights to content we find desirable, particularly with respect to our competition for home entertainment rights to feature films. Therefore, maximizing available working capital is critical to our business operations.

Because of our history of losses and negative cash flows, our ability to obtain adequate additional financing on satisfactory terms may be limited. Our ability to raise financing through sales of equity securities depends on general market conditions, including the demand for our common stock. We may be unable to raise adequate capital through the sale of equity securities, and if we ~~are~~were able to sell equity, our existing stockholders could experience substantial dilution. If adequate financing is not available or unavailable on acceptable terms, we may find we are unable to fund expansion, continue offering products and services, take advantage of acquisition opportunities, develop or enhance services or products, or respond to competitive pressures in the industry.

We generate significant amounts of net revenue for programming from one content supplier, the loss of which would adversely ~~impact~~affect our business. We depend on the exclusive distribution of programming from The Criterion Collection, which contributed approximately 2623% and 2926% of our net revenues from programming in fiscal ~~2011~~2012 and fiscal ~~2010~~2011, respectively. Should liquidity issues cause us to default on our payment obligations under our exclusive distribution agreement, The Criterion Collection may terminate our distribution rights, which would adversely ~~impact~~affect our business, results of operations and financial condition.

Economic weakness may continue to adversely ~~impact~~affect our business, results of operations and financial condition. The global economic downturn has had a significant negative ~~impact~~effect on our revenues and may continue to do so. As consumers reduced spending and scaled back purchases of our programming, our retail customers returned product and reduced ~~future~~ purchases of our programming, which adversely ~~impacted~~affected our revenues and results of operations during the ~~2011~~2012 fiscal year, as well as in fiscal ~~2010~~2011. Although improved in fiscal ~~2011~~2012, weak consumer demand for our product may continue in the future and may adversely ~~impact~~affect our business, results of operations and financial condition.

We have a high concentration of sales to relatively few customers, the loss of which may adversely ~~impact~~affect our liquidity, business, results of operations and financial condition. In fiscal ~~2011~~2012, ~~Amazon.com~~Walmart and AEC each accounted for approximately 1611% of our net revenues, respectively. In fiscal ~~2010~~2011, Amazon.com and AEC each accounted for approximately 1716% ~~and 14%~~ of our net revenues~~, respectively~~. ~~Additionally,~~Our ~~our~~ top five customers accounted for over 45% of our fiscal ~~2011~~2012 net revenues.

We may be unable to maintain favorable relationships with our retailers and distributors, including SPHE (see below). Further, our retailers and distributors may be adversely affected by economic conditions. If we lose any of our top customers or if any of these customers reduces or cancels a significant order, it could have an adverse effect on our liquidity, business, results of operations and financial condition.

13Our high concentration of sales to relatively few customers (and use of a third-party to manage collection of substantially all packaged goods receivables) may result in significant uncollectible accounts receivable exposure, which may adversely affect our liquidity, business, results of operations and financial condition. At March 31, 2012, Walmart and AEC accounted for 8.1% and 7.9%, respectively, of our gross accounts receivable. At March 31, 2011, Amazon.com and AEC accounted for 15% and 11%, respectively, of our gross accounts receivable.

~~Table~~We face credit exposure from our retail customers and may experience uncollectible receivables from these customers should they face financial difficulties. If these customers fail to pay their accounts receivable, file for bankruptcy or significantly reduce their purchases of ~~Contents~~our programming, it would have an adverse effect on our business, financial condition, results of operations, and liquidity. For example, we reserved approximately $408,000 for Borders Group’s bankruptcy filing in fiscal 2011. There were no similar events in fiscal 2012.

~~Our~~Image ~~high concentration of sales to relatively few customers (and use of a third-party to manage certain sales collections) may result in significant uncollectible accounts receivable exposure~~Entertainment, ~~which may adversely impact our liquidity, business, results of operations and financial condition~~Inc. At March 31, 2011, Amazon.com and AEC accounted for 15% and 11%, respectively, of our gross accounts receivable. At March 31, 2010, Amazon.com and AEC accounted for 18% and 13%, respectively, of our gross accounts receivable.

Due to the concentration of sales to relatively few customers, we face credit exposure from our retail customers and may experience uncollectible receivables from these customers should they face financial difficulties. If these customers fail to pay their accounts receivable, file for bankruptcy or significantly reduce their purchases of our programming, it would have an adverse effect on our business, financial condition, results of operations, and liquidity. For example, we reserved approximately $408,000 when Borders Group, Inc. filed for bankruptcy in fiscal 2011 and approximately $948,000 for Movie Gallery’s bankruptcy filing in fiscal 2010.

Further, a high concentration of our gross accounts receivables is attributable to Sony Pictures Home Entertainment (or SPHE), as they are our vendor of record for shipments of physical product to North American retailers and wholesalers. As part of our arrangement with SPHE, SPHE collects the receivables from our end customers, provides us with monthly advance payments on such receivables (less a reserve), then trues up the accounts receivables accounting quarterly. While we remain responsible for the credit risk from the end customer, if SPHE should fail to adequately collect and pay us the accounts receivable they collect on our behalf, whether due to inadequate processes and procedures, inability to pay, bankruptcy or otherwise, our business financial condition, results of operations and liquidity would be adversely affected.

We have a high concentration of sales from relatively few titles, which may impact future net revenues if we do not acquire additional titles. Our top five fiscal 2011 new release exclusive titles accounted for approximately 5.6% of our fiscal 2011 net revenues. Our top ten fiscal 2011 new release exclusive titles accounted for approximately 9.4% of our fiscal 2011 net revenues. Sales for these catalogue titles have decreased over time and will probably continue to do so until our rights expire. If we are unable to acquire titles of equal or greater strength and popularity to replace the revenue provided by our existing titles, our future net revenues will be negatively impacted.

Our strategy to acquire cast-driven finished feature film content may not be successful, which could adversely impact our business, results of operations and financial condition. We are primarily known as an aggregator of exclusive distribution rights for eclectic, non-feature film entertainment programming. In our effort to acquire more cast-driven finished feature films, we face competition from other distribution entities that are well known for acquiring and distributing this genre of programming. We face competition from better-capitalized entities, including the major motion picture and independent studios, and may be unable to offer the same upfront money required to secure the rights for certain available programming. While we have key members of management and staff with feature film acquisition, sales and marketing talent and experience, we may not be ultimately successful in acquiring or selling feature film content competitively or to the extent of our current plans. With the maturation of the general DVD market, our inability to successfully acquire or sell cast-driven feature film content could adversely impact our business, results of operations and financial condition.

We are subject to risks associated with our strategy of pursuing acquisitions, joint ventures and partnering arrangements. A key element of our business strategy is acquiring accretive businesses and entering into joint ventures and other creative partnering arrangements, which pose unique risks. For example, regardless of whether we complete any such transaction, its negotiation, as well as the integration of any acquired business, could require us to incur significant costs and cause diversion of management’s time and resources. We may not realize the anticipated benefit from any of the transactions we pursue. Further, any such transaction could also potentially result in the future impairment of goodwill and other intangibles, development write-offs and other related expenses. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

Our inability to gauge and predict the commercial success of our programming could adversely impact our business, results of operations and financial condition. Operating in the entertainment industry involves a substantial degree of risk. Each music performance, feature film or other programming title is an individual artistic work, and unpredictable audience reactions primarily determine commercial success. The commercial success of a title also depends upon the quality and acceptance of other competing programs or titles released into the marketplace, critical reviews, the availability of alternative forms of entertainment and leisure activities, general economic conditions and other tangible and intangible factors, all of which are subject to change and cannot be predicted with certainty. Timing is also sometimes relevant to a program’s success, especially when the program concerns a recent event or historically relevant material (e.g., an anniversary of a historical event which focuses media attention on the event and accordingly spurs interest in related content). Our success will depend in part on the popularity of our content which, in turn, depends on our ability to gauge and predict expected popularity. Even if a film achieves success during its theatrical release, the popularity of a particular program and its ratings may diminish over time. Our inability to gauge and predict the commercial success of our programming could adversely impact our business, results of operations and financial condition.

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~~Our~~A ~~current~~high ~~genre~~concentration ~~revenue~~of ~~concentrations~~our ~~may~~gross ~~become~~accounts ~~unpopular~~receivables ~~with~~is ~~our~~attributable ~~retail~~to ~~customers~~Sony ~~and~~Pictures ~~end-consumers,~~Home ~~which~~Entertainment ~~may~~(or ~~adversely~~SPHE), ~~impact~~as they are our ~~business. During~~vendor ~~fiscal~~of ~~2011~~record ~~and~~for ~~2010,~~shipments ~~the~~of ~~majority~~physical product to North American retailers and wholesalers. As part of our ~~revenues~~arrangement ~~were~~with SPHE, SPHE collects the receivables from our ~~DVD~~end ~~sales~~customers, ~~which~~provides ~~were~~us ~~heavily~~with ~~weighted~~monthly ~~toward~~advance ~~comedy,~~payments ~~music~~on ~~and~~such ~~television-related~~receivables ~~DVD~~(less ~~programming~~a ~~and~~reserve), ~~feature~~then ~~film~~trues ~~programming. We~~up ~~may~~the ~~not~~accounts bereceivables ~~able~~accounting toquarterly. While ~~successfully~~we ~~continue~~remain ~~producing~~responsible orfor ~~acquiring~~the ~~content~~credit inrisk from the ~~same~~end ~~genres~~customer, orif ~~achieve~~SPHE should fail to adequately collect and pay us the ~~same~~accounts ~~strength~~receivable ~~within~~they ~~these~~collect ~~genres. If~~on weour ~~are~~behalf, ~~unable~~whether due to ~~compete~~inadequate ~~successfully~~processes inand ~~the~~procedures, ~~home~~inability ~~entertainment~~to ~~market~~pay, ~~for~~bankruptcy ~~higher-profile~~or ~~content~~otherwise, our business ~~may~~financial condition, results of operations and liquidity would be adversely ~~impacted~~affected.

~~Failure~~We toare ~~satisfy~~highly ~~terms~~dependent ~~and~~on ~~conditions~~SPHE of. We ~~the~~entered ~~Madacy~~into ~~transaction~~the ~~agreements~~agreement ~~may~~with ~~adversely~~SPHE ~~impact~~in ~~our~~2011 ~~business, results of operations~~ and ~~financial~~realized ~~condition. We~~significant ~~may~~cost besavings ~~unable~~compared towith ~~satisfy~~our ~~all~~prior ofreplicator ~~the~~agreements, ~~terms~~ and ~~conditions~~also ofenhanced ~~the~~distribution ~~Madacy transaction, including, without limitation, the future repurchase~~ of ~~Madacy’s 30% interest in~~ our ~~subsidiary, Image/Madacy Home Entertainment, LLC~~content. IfSPHE weprovides ~~are~~distribution ~~unable to satisfy the terms~~ and ~~conditions~~replicator ofservices ~~the~~under ~~Madacy transaction and Madacy declares~~ a ~~material~~contract ~~default~~ that weexpires ~~are~~in ~~unable~~August ~~to timely rectify~~2013, and we may ~~lose~~not ~~the~~be ~~right~~able to ~~distribute~~renew ~~content~~that ~~obtained~~contract ~~under~~on ~~the~~favorable ~~Madacy transaction, which could adversely affect our business, results of operations and financial condition~~terms. ~~For~~SPHE ~~more~~provides ~~information~~us ~~regarding~~with ~~the~~access ~~Madacy~~to ~~transaction,~~significant ~~please~~customers ~~see~~that ~~“Purchase~~might ofnot ~~Madacy~~otherwise ~~Home~~do ~~Video”~~business inwith ~~Management’s Discussion and Analysis below~~Image.

We ~~may~~have bea ~~unable~~high toconcentration ~~recoup~~of ~~advances~~sales ~~paid~~from torelatively ~~secure~~few ~~exclusive~~titles, ~~distribution~~which ~~rights. Our~~may ~~most~~affect ~~significant~~future ~~costs~~net ~~and~~revenues ~~cash~~if ~~expenditures~~we ~~relate~~do tonot ~~acquiring~~acquire ~~content~~additional ~~for exclusive distribution~~titles. ~~Most~~Our ~~agreements~~top tofive ~~acquire~~fiscal ~~content~~2012 ~~require~~new ~~upfront~~release ~~advances~~exclusive ~~against~~titles accounted ~~royalties~~for orapproximately ~~net~~12.8% ~~profits~~of ~~expected~~our tofiscal be2012 ~~earned~~net ~~from future distribution~~revenues. ~~The~~Our ~~advance~~top ~~amounts~~ten ~~are~~fiscal ~~derived~~2012 ~~from~~new ~~our~~release ~~estimate~~exclusive oftitles ~~net~~accounted ~~revenues~~for ~~that~~approximately ~~will~~16.5% beof ~~realized from~~ our ~~distribution~~fiscal of2012 ~~the~~net ~~title~~revenues. ~~Although~~Generally, ~~these~~new ~~estimates~~releases ~~are~~become ~~based~~part ~~on management’s knowledge~~ of ~~current~~our ~~events~~catalogue ~~and~~after ~~actions~~six ~~management~~months. Sales ~~may~~for catalogue ~~undertake~~titles inhave ~~the~~historically decreased ~~future,~~over ~~actual~~time ~~results~~and will ~~differ~~probably ~~from~~continue ~~those~~to ~~estimates. If sales~~ do ~~not~~so ~~meet~~until our ~~original~~rights ~~estimates,~~expire. If we ~~may~~are ~~(i)~~unable ~~not~~to ~~recognize~~acquire ~~the~~titles ~~expected~~of ~~gross~~equal ~~margin~~ or ~~net~~greater ~~profit,~~strength ~~(ii) not recoup our advances or (iii) record accelerated amortization~~ and~~/or~~ ~~fair~~popularity ~~value~~to ~~write-downs~~replace ~~of film costs, including~~ the ~~advances~~revenue ~~paid. We~~provided ~~recorded~~by ~~accelerated~~our ~~amortization~~existing ~~and fair value write-downs of film costs in the amounts of $3.8 million and $5.5 million in fiscal 2011 and fiscal 2010~~titles, ~~respectively. Any of these events may adversely impact~~ our ~~business,~~future ~~results~~net ofrevenues ~~operations~~will ~~and~~be ~~financial~~negatively ~~condition~~affected.

~~Inability~~Our strategy to ~~maintain~~acquire ~~relationships~~cast-driven ~~with~~finished ~~our~~feature ~~program~~film ~~suppliers~~content ~~and~~may ~~vendors~~not ~~may~~be successful, which could adversely ~~impact~~affect our business, results of operations and financial condition. We ~~receive~~are aprimarily ~~significant~~known ~~amount~~as an aggregator of exclusive distribution rights for eclectic, non-feature film entertainment programming. In our ~~revenue~~effort to acquire more cast-driven finished feature films, we face competition from ~~the~~other distribution ofentities ~~content~~that ~~for~~are ~~which~~well weknown ~~already~~for ~~have~~acquiring ~~exclusive~~and ~~agreements~~distributing ~~with~~this ~~program~~genre ~~suppliers~~of programming. ~~However,~~We ~~those~~face ~~titles~~competition infrom ~~production~~better-capitalized ~~which~~entities, ~~have~~including ~~been~~the ~~financed~~major bymotion uspicture ~~may~~and ~~not~~independent studios, and may be ~~timely~~unable ~~delivered~~to asoffer ~~agreed~~the orsame beupfront ofmoney ~~expected~~required ~~quality~~to secure the rights for certain available programming. ~~Delays~~While orwe ~~inadequacies~~have inkey ~~delivery~~members of ~~titles~~management and staff with feature film acquisition, ~~including~~sales ~~rights~~and ~~clearances~~marketing talent and experience, ~~could~~we ~~negatively~~may ~~impact~~not be ultimately successful in acquiring or selling feature film content competitively or to the ~~performance~~extent of ~~any~~our ~~given~~current ~~quarter~~plans orwhich ~~fiscal~~could ~~year. In~~adversely ~~addition,~~affect our business, results of operations and financial condition ~~may be adversely impacted if:~~.

·We we are ~~unable~~subject to ~~renew~~risks associated with our ~~existing~~strategy ~~agreements~~of pursuing acquisitions, joint ventures and partnering arrangements. A key element of our business strategy is acquiring accretive businesses and entering into joint ventures and other creative partnering arrangements, which pose unique risks. For example, regardless of whether we complete any such transaction, its negotiation, as ~~they~~well ~~expire;~~as the integration of any acquired business, could require us to incur significant costs and cause diversion of management’s time and resources. We may not realize the anticipated benefit from any of the transactions we pursue. Further, any such transaction could also potentially result in the future impairment of goodwill and other intangibles, development write-offs and other related expenses. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

·Our inability to gauge and predict the commercial success of our ~~current~~programming ~~program~~could ~~suppliers~~adversely doaffect ~~not~~our ~~continue~~business, toresults ~~support~~of operations and financial condition. Operating in the ~~DVD~~entertainment industry involves a substantial degree of risk. Each music performance, feature film or other ~~applicable~~programming ~~format~~title is an individual artistic work, and unpredictable audience reactions primarily determine commercial success. The commercial success of a title also depends upon the quality and acceptance of other competing programs or titles released into the marketplace, critical reviews, the availability of alternative forms of entertainment and leisure activities, general economic conditions and other tangible and intangible factors, all of which are subject to change and cannot be predicted. Timing is also sometimes relevant to a program’s success, especially when the program concerns a recent event or historically relevant material (e.g., an anniversary of a historical event which focuses media attention on the event and accordingly spurs interest in ~~accordance~~related ~~with~~content). Our success depends in part on the popularity of our ~~exclusive~~content ~~agreements;~~which, in turn, depends on our ability to gauge and predict expected popularity. Even if a film achieves success during its theatrical release, the popularity of a particular program and its ratings may diminish over time. Our inability to gauge and predict the commercial success of our programming could adversely affect our business, results of operations and financial condition.

·Image ~~our~~Entertainment, ~~current content suppliers do not continue to license titles to us on terms favorable to us; or~~Inc.

· we are unable to establish new beneficial supplier relationships to ensure acquisition of exclusive or high-profile titles in a timely and efficient manner.

We may not be able to keep pace with technological advances, which may adversely impact our business, results of operations and financial condition. The entertainment industry in general, and the music and motion picture industries in particular, are continuing to undergo significant changes, primarily due to technological developments, including Blu-ray and digital delivery. Because of the rapid growth of technology, shifting consumer tastes and the popularity and availability of other forms of entertainment, it is impossible to predict the overall effect these factors could have on potential revenue from, and profitability of, distributing entertainment programming. If we are unable to keep pace with accepted technological advances in delivering entertainment programming, our business, results of operations and financial condition may be adversely impacted.

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~~Failure~~Our bycurrent ~~third~~genre ~~parties~~revenue toconcentrations ~~promote~~may become unpopular with our ~~programming~~retail customers and end-consumers, which may adversely ~~impact~~affect our business. ~~Decisions~~During ~~regarding~~fiscal ~~the~~2012 ~~timing of release~~ and ~~promotional~~2011, ~~support of~~ the ~~programming~~majority weof ~~license~~our ~~and~~revenues ~~distribute~~were ~~are~~from ~~important~~sales, inwhich ~~determining~~were ~~the~~heavily ~~success~~weighted oftoward acomedy, ~~particular~~music ~~feature~~and ~~film, stand~~television-uprelated ~~comedy~~programming ~~performance,~~and ~~music~~feature ~~concert~~film ~~or other product~~programming. We may not ~~control~~be ~~the~~able ~~manner~~to insuccessfully ~~which~~continue aproducing ~~particular~~or ~~product~~acquiring iscontent ~~marketed~~in ~~and~~the ~~promoted~~same genres, ~~and~~or weachieve ~~may~~the ~~not~~same bestrength ~~able~~within tothese ~~fully control our corresponding releases~~genres. ~~Although~~If ~~actors,~~we ~~producers,~~are ~~artists,~~unable ~~record~~to ~~companies~~compete ~~and~~successfully ~~studios have a financial interest~~ in the ~~success~~home ofentertainment ~~any~~market ~~films,~~for ~~concerts~~higher-profile ~~or other product we distribute~~content, ~~any~~our ~~marketing~~business ~~or promotional decision or restriction by such persons~~ may ~~negatively~~be ~~affect~~adversely ~~the success of our titles~~affected.

AFailure ~~continued~~to ~~high~~satisfy ~~rate~~terms and conditions of ~~product~~the ~~returns~~transaction agreements for the purchase of Madacy Home Video may adversely ~~impact~~affect our business, results of operations and financial condition. AsWe ~~with~~may ~~the~~be ~~major~~unable ~~studios~~to ~~and~~satisfy ~~other~~all ~~independent~~of ~~companies~~the interms ~~this~~and ~~industry,~~conditions werelated ~~experience~~to athe ~~relatively~~purchase ~~high level~~ of Madacy ~~product~~Home ~~returns~~Video as(or aMadacy ~~percentage~~transaction), ofincluding, ~~our~~without ~~revenues.~~limitation, ~~Our~~the ~~allowances~~future ~~for~~repurchase ~~sales~~of ~~returns~~Madacy ~~may~~Entertainment ~~not~~US, beInc.’s ~~adequate~~(or toMadacy ~~cover~~US) ~~potential~~30% ~~returns~~interest in ~~the~~our ~~future~~subsidiary, ~~particularly~~Image/Madacy inHome ~~the case of consolidation within the home video retail marketplace which~~Entertainment, ~~when~~LLC. If itwe ~~occurs,~~are ~~tends~~unable to ~~result~~satisfy inthe ~~inventory~~terms ~~consolidation~~ and ~~increased~~conditions ~~returns. We~~of ~~have~~the ~~experienced~~Madacy atransaction ~~high~~and ~~rate~~Madacy ofUS ~~product~~declares ~~returns~~a ~~over~~material ~~the~~default ~~past~~that ~~three years. Although~~ we ~~experienced~~are ~~lower~~unable ~~product~~to ~~returns~~timely ~~in fiscal 2011 than fiscal 2010~~rectify, we ~~expect~~may alose ~~relatively~~the ~~high~~right ~~rate~~to ofdistribute ~~product~~content ~~returns~~obtained tounder ~~continue~~the Madacy transaction, which ~~may~~could adversely ~~impact~~affect our business, results of operations and financial condition.

We ~~depend~~may onbe ~~key~~unable ~~and~~to ~~highly~~recoup ~~skilled~~advances ~~personnel~~paid to ~~operate~~secure ~~our~~exclusive ~~business,~~distribution ~~and~~rights. Our ifmost wesignificant ~~are~~costs ~~unable~~and tocash ~~retain~~expenditures ~~our~~relate ~~current~~to ~~personnel~~acquiring orcontent ~~hire~~for ~~additional~~exclusive ~~personnel,~~distribution. Most ~~our~~agreements ~~ability~~ to ~~develop~~acquire ~~and~~content ~~successfully~~require ~~market~~upfront ~~our~~advances ~~business~~against ~~could~~royalties beor ~~harmed. Our~~net ~~success~~profits ~~continues~~expected to ~~depend~~be toearned afrom ~~significant~~future ~~extent~~distribution. The onadvance ~~our~~amounts ~~ability~~are toderived ~~identify,~~from ~~attract,~~our ~~hire,~~estimate ~~train~~of ~~and~~net ~~retain~~revenues ~~qualified~~that ~~professional,~~will ~~creative,~~be ~~technical~~realized ~~and~~from ~~managerial~~our ~~personnel. Moreover,~~distribution weof ~~believe~~the ~~that~~title. Although ~~our~~these ~~success~~estimates ~~greatly~~are ~~depends~~based on ~~the~~management’s ~~contributions~~knowledge of ~~our~~current ~~executive~~events ~~officers,~~and ~~including~~actions ~~Chief~~management ~~Executive~~may ~~Officer~~undertake ~~Theodore~~in S.the ~~Green~~future, ~~Chief~~actual ~~Operating~~results ~~Officer~~will ~~and~~differ ~~Chief~~from ~~Financial~~those ~~Officer John P~~estimates. ~~Avagliano, and Vice Chairman John W. Hyde.~~ ~~Although~~If wesales ~~have~~do ~~employment~~not ~~agreements~~meet ~~with certain of~~ our ~~executive~~original ~~management~~estimates, ~~any~~we ~~of our employees~~ may ~~terminate~~(i) ~~their~~not ~~employment~~recognize ~~relationship~~the ~~with~~expected usgross atmargin ~~any~~or ~~time~~net profit, ~~and~~(ii) ~~their~~not ~~knowledge~~recoup of our ~~business~~advances ~~and~~or ~~industry~~(iii) ~~would~~record beaccelerated ~~extremely~~amortization ~~difficult~~and/or tofair ~~replace. The~~value ~~loss~~write-downs of ~~any~~advances ~~key~~paid. We ~~employees~~recorded oraccelerated ~~the~~amortization ~~inability~~and tofair ~~attract~~value orwrite-downs ~~retain qualified personnel could delay the acquisition~~ of ~~content~~film ~~and~~costs ~~harm~~in the ~~market's~~amounts ~~perception~~ of us$1. ~~Competition~~1 ~~for~~million ~~the~~and ~~caliber~~$4.1 ofmillion ~~talent~~in ~~required~~fiscal to2012 ~~acquire~~ and ~~distribute~~fiscal ~~content~~2011, ~~continues to increase~~respectively. IfAny weof ~~are~~these ~~unable~~events tomay ~~attract~~adversely ~~and~~affect ~~retain the qualified personnel we need to succeed,~~ our business, results of operations and financial condition ~~will suffer~~.

WeInability ~~depend~~to onmaintain ~~third-party~~relationships ~~shipping~~with ~~and fulfillment companies for the delivery of~~ our ~~products. If~~program ~~these~~suppliers ~~companies~~and ~~experience~~vendors ~~operational~~may ~~difficulties~~adversely oraffect ~~disruptions,~~ our business ~~could be adversely impacted~~. We ~~rely~~receive ona ~~SPHE,~~significant ~~our~~amount ~~distribution~~of ~~and~~our ~~manufacturing~~revenue ~~partner,~~from ~~to determine~~ the ~~best~~distribution ~~delivery~~of ~~method~~content for ~~our~~which ~~products. SPHE~~we ~~relies~~already ~~entirely~~have onexclusive ~~arrangements~~agreements with ~~third-party~~program ~~shipping companies~~suppliers. However, ~~principally~~those ~~Federal~~titles ~~Express,~~in ~~for~~production ~~small~~which ~~package~~have ~~deliveries~~been ~~and~~financed ~~less-than-truckload~~by ~~service~~us ~~carriers~~may ~~for~~not ~~larger~~be ~~deliveries,~~timely ~~for~~delivered ~~the~~as ~~delivery~~agreed ofor ~~our~~be ~~products. The termination~~ of ~~arrangements~~expected ~~between~~quality. Delays ~~SPHE~~or ~~and~~inadequacies ~~one~~in ordelivery ~~more~~ of ~~these~~titles, ~~third-party~~including ~~shipping~~rights ~~companies~~clearances, orcould ~~the~~negatively ~~failure~~affect orthe ~~inability~~performance of ~~one~~any orgiven ~~more~~quarter ~~of these third-party shipping companies to deliver products on a timely~~ or ~~cost-efficient~~fiscal ~~basis~~year. In ~~from SPHE to our customers~~addition, ~~could disrupt~~ our business, ~~reduce~~results ~~net~~of ~~sales~~operations and ~~harm~~financial ~~our~~condition ~~reputation. Furthermore,~~may anbe ~~increase~~adversely inaffected ~~the amount charged by these shipping companies could negatively affect our gross margins and earnings.~~if:

~~Risks~~● ~~Relating~~we are unable to ~~Our~~renew ~~Industry~~our existing agreements as they expire;

~~The~~● ~~standard~~our ~~DVD~~current ~~format~~program ~~has~~suppliers ~~matured. During~~do ~~calendar~~not ~~2010,~~continue ~~the~~to ~~DVD~~support ~~marketplace experienced~~ the ~~fourth~~DVD ~~straight~~or ~~year-over-year~~other ~~decline~~applicable ~~for the category since the~~ format ~~debuted~~ in ~~1997. The~~accordance ~~Digital~~with ~~Entertainment Group reported a noticeable decline in sales of packaged media units (including DVD and Blu-ray) in the fourth quarter of~~ our ~~fiscal~~exclusive 2011. We generated approximately 64.7% and 76.6% of our net revenue in fiscal 2011 and 2010, respectively, from the sale of standard DVDs. The continued maturation of the standard DVD format may adversely impact our business, results of operations and financial condition. For more information regarding the trend of the DVD format maturation, see “Business – Industry Trends” above.agreements;

~~Decreasing~~● ~~retail prices for DVDs may negatively impact~~ our ~~revenues~~current ~~and~~content ~~gross~~suppliers ~~profit~~do ~~margins. The~~not ~~home~~continue ~~entertainment~~to ~~programming~~license ~~market~~titles in which we compete is rapidly evolving and intensely competitive. Many of our competitors, including major studios, are increasingly offering programming, particularly DVD programming, at lower prices. They may be able to ~~produce~~us ~~or secure content~~ on ~~more~~terms favorable ~~terms and may be able~~ to ~~adopt~~us; more aggressive pricing policies than we can. While we strive to improve our operating efficiencies and leverage our fixed costs so that we can afford to pass along these savings to our customers in the form of lower prices, the industry trend of lowering prices may, over time, lead to higher levels of competition and, therefore, lost sales, decreased profit margins or ~~decreased overall revenues.~~

●

we are unable to establish new beneficial supplier relationships to ensure acquisition of exclusive or high-profile titles in a timely and efficient manner.

We may not be able to keep pace with technological advances, which may adversely affect our business, results of operations and financial condition. The entertainment industry in general, and the music and motion picture industries in particular, are continuing to undergo significant changes, primarily due to technological developments, including Blu-ray and digital delivery. Because of the rapid growth of technology, shifting consumer tastes and the popularity and availability of other forms of entertainment, it is impossible to predict the overall effect these factors could have on potential revenue from, and profitability of, distributing entertainment programming. If we are unable to keep pace with accepted technological advances in delivering entertainment programming, our business, results of operations and financial condition may be adversely affected.

Image relies on its information technology infrastructure, which includes third party and internally developed software, and purchased or leased hardware that support Image's information technology and various business processes. Image's business, reputation and brand image could suffer if its infrastructure fails to perform as intended. Image relies on purchased or leased hardware and software licensed from third parties or internally developed in order to manage its business. Image's ability to maintain and upgrade its information technology infrastructure is critical to the success of its business. This hardware and software may not continue to be available on commercially reasonable terms or at all. Any disruptions to Image's infrastructure or loss of the right to use any of this hardware or software could affect Image's operations, which could negatively affect Image's business until corrected or until equivalent technology is either developed by Image or, if available, is identified, obtained and integrated. In addition, the software underlying Image's operations can contain undetected errors. Image may be forced to modify its operations until such problems are corrected and, in some cases, may need to implement enhancements to correct errors that it does not detect. Problems with the software underlying Image's operations could result in loss of revenue, unexpected expenses and capital costs, diversion of resources, loss of market share and damage to Image's reputation which could adversely affect Image's business, financial condition and results of operations.

Image Entertainment, Inc.

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~~Decreasing~~Image ~~retail~~and ~~shelf~~third ~~space~~parties ~~for~~that ~~our~~manage ~~industry~~portions ~~may limit sales~~ of ~~our~~Image's ~~programming,~~secure ~~which~~data ~~may~~are ~~adversely~~subject ~~impact~~to ~~our~~cybersecurity ~~business,~~risks ~~results of operations~~ and ~~financial condition~~incidents. We ~~face~~Image's ~~increasing~~business ~~competition~~involves ~~from~~the ~~major~~storage ~~motion picture studios, music labels~~ and ~~other~~transmission ~~independent~~of ~~content~~customers' ~~suppliers~~personal ~~for limited retail shelf space~~information, ~~which~~shopping ~~space~~preferences ~~has~~and ~~been~~credit ~~shrinking~~card information, in ~~absolute~~addition ~~terms~~to asemployee ~~“brick~~information and ~~mortar”~~Image's ~~retailers~~financial ~~have fewer stores,~~ and ~~for~~strategic ~~retailer open-to-buy dollars~~data. ~~Our~~ ~~exclusive~~The ~~content~~protection ~~competes for a finite amount~~ of ~~shelf~~Image's ~~space~~customer, ~~against~~employee ~~a large supply~~ and ~~diversity~~Company ofdata ~~entertainment~~is ~~content~~vitally ~~from~~important ~~other~~to ~~suppliers~~Image. ~~New~~ ~~DVD~~While ~~releases~~Image ~~generally~~has ~~exceed~~implemented ~~several~~measures ~~hundred~~to ~~titles~~prevent asecurity ~~week. We~~breaches ~~believe~~and ~~this~~cyber ~~competition~~incidents, ~~can~~any befailure ~~especially~~of ~~challenging~~these ~~for~~measures ~~independent~~and ~~labels~~any ~~like~~failure ~~us, because the new DVD releases~~ of ~~major~~third ~~studios~~parties ~~often~~that ~~have~~assist ~~extremely~~Image ~~high~~in ~~visibility~~managing ~~and~~its ~~sales~~secure ~~rates~~data incould ~~the~~adversely ~~millions~~affect ofImage's ~~units~~business, ~~and~~financial ~~typically~~condition ~~require~~and ~~much~~results ~~more~~of ~~shelf space to support~~operations.

~~Shelf~~Failure ~~space~~by ~~limitations~~third atparties ~~our~~to ~~“brick~~promote ~~and~~our ~~mortar”~~programming ~~retail~~may ~~customers~~adversely ~~are~~affect ~~exacerbated~~our bybusiness. Decisions regarding the ~~increasing~~timing ~~popularity~~ of ~~the~~release ~~high-definition~~and ~~DVD~~promotional ~~format,~~support ~~Blu-ray. The combination~~ of ~~standard~~the ~~discs,~~programming ~~premium~~we ~~discs~~license and ~~special-edition~~distribute ~~boxed~~are ~~sets~~important ~~across~~in updetermining tothe ~~two~~success ~~formats~~of ~~means~~a ~~that~~particular afeature ~~release~~film, ~~can~~stand-up ~~come~~comedy inperformance, asmusic ~~many~~concert ~~six~~or ~~different~~other ~~configurations~~product. ~~With~~We ~~the~~may ~~possible~~not ~~exception~~control ofthe ~~our~~manner ~~most~~in ~~popular~~which ~~new release titles and top-selling catalogue titles, it can be~~ a ~~challenge~~particular ~~to obtain the~~ product ~~placement~~is ~~necessary~~marketed toand ~~maximize sales~~promoted, ~~particularly~~and ~~among~~we ~~the~~may ~~limited~~not ~~number~~be ofable ~~major~~to ~~retailers~~fully ~~who~~control ~~comprise~~ our ~~core~~corresponding ~~“brick~~releases. Although ~~and~~actors, ~~mortar”~~producers, ~~customers. The~~artists, ~~continued~~record ~~retailer~~companies ~~trend~~and ~~toward~~studios ~~greater~~have ~~visibility~~a ~~for~~financial ~~titles~~interest atin the ~~expense~~success of ~~quantity~~any ~~(i.e.~~films, ~~“face~~concerts ~~out”~~or ~~rather~~other ~~than~~product ~~“spine~~we ~~out”~~distribute, ~~DVD~~any ~~placement)~~marketing ~~has~~or ~~the~~promotional ~~effect~~decision ofor ~~reducing~~restriction ~~the~~by ~~total~~such ~~number~~persons ofmay ~~titles~~negatively ~~actually~~affect ~~carried~~the bysuccess aof ~~retailer~~our titles.

~~For~~A ~~retailers,~~continued ~~reconciling~~high ~~the~~rate ~~expanding~~of ~~DVD~~product ~~catalog~~returns ~~with~~may ~~limited~~adversely ~~shelf~~affect ~~space~~our isbusiness, ~~becoming~~results ~~increasingly~~of ~~urgent~~operations and financial condition. ~~Meanwhile,~~As ~~rights~~with ~~holders~~the ~~like~~major ~~Image~~studios and other ~~non-studio~~independent ~~content~~companies ~~providers~~in ~~have~~this industry, we experience a ~~growing~~relatively ~~concern~~high ~~that~~level ~~many~~of ~~titles~~product ~~are~~returns ~~simply~~as a percentage of our revenues. Our allowances for sales returns may not ~~strong~~be ~~enough~~adequate to ~~secure~~cover ~~shelf~~potential ~~space~~returns in the future, particularly in the case of consolidation within the home video retail marketplace which, when it occurs, tends to result in inventory consolidation and increased returns. IfWe wehave ~~are~~experienced ~~unable~~a tohigh ~~secure~~rate ~~sufficient~~of ~~shelf~~product ~~space~~returns ~~for~~over ~~our~~the ~~programming~~past three years. We expect a relatively high rate of product returns to continue, which may adversely affect our business, results of operations and financial condition ~~may be adversely impacted~~.

~~Piracy~~We ~~may~~depend ~~reduce~~on ~~our~~key ~~revenues~~ and ~~adversely~~highly ~~impact~~skilled ~~our~~personnel ~~results~~to ofoperate ~~operation. The~~our ~~music~~business, ~~industry~~and isif ~~facing~~we aare ~~major~~unable ~~challenge~~to inretain ~~the~~our ~~form~~current ofpersonnel ~~piracy~~or ~~resulting~~hire ~~from~~additional ~~Internet~~personnel, ~~downloading~~our ~~and~~ability ~~recording~~to ~~devices. This~~develop ~~piracy~~and ~~has~~successfully ~~negatively~~market ~~affected~~our ~~industry~~business ~~revenues~~could ~~and~~be ~~profits~~harmed. AsOur ~~DVD~~success ~~recorders,~~continues ~~DVRs~~to ~~and~~depend ~~high-speed~~to ~~Internet~~a ~~connections~~significant ~~become~~extent ~~more~~on ~~popular~~our ability to identify, attract, hire, train and ~~the~~retain ~~storage~~qualified ~~capacity~~professional, ofcreative, ~~personal~~technical ~~computers~~and ~~increases~~managerial personnel. Moreover, we ~~may~~believe ~~face~~that ~~greater~~our ~~piracy~~success ~~concerns~~greatly ~~with~~depends ~~respect~~on tothe ~~our~~contributions ~~core~~of ~~DVD~~our ~~business. Motion~~executive ~~picture~~officers, ~~piracy~~including isChief ~~already~~Executive ~~extensive~~Officer, inTheodore ~~many~~S. ~~parts~~Green, ofChief ~~the~~Operating ~~world~~Officer and isChief ~~made~~Financial ~~easier~~Officer, ~~because~~John ofP. ~~technological~~Avagliano, ~~advances~~ and ~~the~~Vice ~~conversion~~Chairman, ofJohn ~~motion~~W. ~~pictures~~Hyde. Although ~~into~~we ~~digital~~have ~~formats. The~~employment ~~proliferation~~agreements with certain of ~~unauthorized~~our ~~copies~~executive management, any of ~~these~~our ~~products~~employees may ~~reduce~~terminate ~~the~~their ~~revenue~~employment werelationship ~~receive~~with ~~from~~us ~~our~~at ~~products~~any time, ~~which~~and ~~may~~their ~~cause~~knowledge anof ~~adverse~~our ~~material~~business ~~impact~~and onindustry ~~our~~would ~~business. In~~be ~~order~~extremely difficult to ~~contain~~replace. The ~~this~~loss ~~problem,~~of weany ~~require~~key ~~our~~employees ~~retail~~or ~~distribution~~the ~~partners~~inability to ~~implement~~attract ~~elaborate~~or ~~and~~retain ~~costly~~qualified ~~security~~personnel could delay the acquisition of content and ~~anti-piracy~~harm ~~measures~~the ~~such~~market's asperception ~~geo-filtering,~~of ~~which~~us. Competition ~~could~~for ~~result~~the incaliber ~~significant~~of ~~expenses~~talent required to acquire and ~~loss~~distribute ofcontent ~~revenue~~continues to increase. ~~Even~~If ~~with~~we ~~such~~are ~~security~~unable to attract and ~~anti-piracy~~retain ~~measures,~~the wequalified ~~may~~personnel bewe ~~unable~~need to ~~prevent~~succeed, ~~piracy~~our business, results of operations and financial condition will suffer.

~~The~~We ~~entertainment~~depend on third-party shipping and ~~motion~~fulfillment ~~picture~~companies ~~industries~~for ~~are~~the ~~rapidly~~delivery ~~evolving,~~of ~~and~~our ~~recent~~products. If ~~trends~~these ~~have~~companies ~~shown~~experience ~~that~~operational ~~audience~~difficulties ~~response~~or todisruptions, ~~both~~our ~~traditional~~business ~~and~~could ~~emerging~~be ~~distribution~~adversely ~~channels~~affected. We isrely ~~volatile~~on SPHE, our distribution and ~~difficult~~manufacturing partner, to ~~predict.~~determine ~~The~~the ~~entertainment~~best ~~industry~~delivery inmethod ~~general~~for ~~and~~our ~~the~~products. SPHE ~~motion~~relies ~~picture~~entirely ~~industry~~on inarrangements ~~particular~~with ~~continue~~third-party toshipping ~~undergo~~companies, ~~significant~~principally ~~changes~~Federal Express, ~~due~~for ~~both~~small topackage ~~shifting~~deliveries ~~consumer~~and ~~tastes~~less-than-truckload ~~and~~service tocarriers ~~technological~~for ~~developments. For~~larger ~~example~~deliveries, ~~new~~for ~~technologies,~~the ~~such~~delivery asof ~~video-on-demand~~our products. The termination of arrangements between SPHE and ~~Internet~~one ~~distribution~~or more of ~~films~~these third-party shipping companies, ~~have~~or ~~provided~~the ~~motion~~failure ~~picture~~or inability of one or more of these third-party shipping companies ~~with~~to ~~new~~deliver ~~channels~~products ~~through~~on ~~which~~a timely or cost-efficient basis from SPHE to ~~distribute~~our ~~their~~customers, ~~films~~could disrupt our business, reduce net sales and harm our reputation. ~~Accurately~~Furthermore, ~~forecasting~~an ~~both~~increase in the ~~changing~~amount ~~expectations~~charged ofby ~~movie~~these ~~audiences~~shipping ~~and~~companies ~~market~~could ~~demand~~negatively ~~within~~affect ~~these~~our ~~new~~gross ~~channels~~margins ~~has~~and ~~proven challenging~~earnings.

WeImage ~~cannot accurately predict the overall effect shifting audience tastes~~Entertainment, ~~technological change or the availability of alternative forms of entertainment may have on the distributor~~Inc. In addition to uncertainty regarding the DVD market, there is uncertainty as to whether other developing distribution channels and formats, including video-on-demand, Internet distribution of films and high-definition, will attain expected levels of public acceptance or, if such channels or formats are accepted by the public, whether we will be successful in exploiting the business opportunities they provide. Moreover, to the extent that these emerging distribution channels and formats gain popular acceptance, the demand for delivery through DVDs may decrease.

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We incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could affect our operating results. We have incurred, and will continue to incur, significant legal, accounting and other expenses associated with corporate governance and public company reporting requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC. As long as the SEC requires the current level of compliance for public companies, we expect these rules and regulations to require significant legal and financial compliance costs and to make some activities time-consuming and costly. These rules and regulations may make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than was previously available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as our executive officers.

Risks Relating to Our Industry

Revenues from the standard DVD format are declining. During calendar 2011, the DVD marketplace experienced the fifth straight year-over-year decline for the category since the format debuted in 1997. The Digital Entertainment Group reported a slight decline in sales of packaged media units (including DVD and Blu-ray) in the fourth quarter of our fiscal 2012. We estimate approximately 53% and 65% of our net revenue in fiscal 2012 and 2011, respectively, was generated from the sale of standard DVDs. The continued maturation of the standard DVD format may adversely affect our business, results of operations and financial condition.

Decreasing retail prices for DVDs may negatively affect our revenues and gross profit margins. The home entertainment programming market in which we compete is rapidly evolving and intensely competitive. Many of our competitors, including major studios, are increasingly offering programming, particularly DVD programming, at lower prices. They may be able to produce or secure content on more favorable terms and may be able to adopt more aggressive pricing policies than we can. While we strive to improve our operating efficiencies and leverage our fixed costs so that we can afford to pass along these savings to our customers in the form of lower prices, the industry trend of lowering prices may, over time, lead to higher levels of competition and, therefore, lost sales, decreased profit margins or decreased overall revenues.

Decreasing retail shelf space for our industry may limit sales of our programming, which may adversely affect our business, results of operations and financial condition. We face increasing competition from major motion picture studios, music labels and other independent content suppliers for limited retail shelf space, which space has been shrinking in absolute terms as “brick and mortar” retailers have fewer stores, and for retailer open-to-buy dollars. Our exclusive content competes for a finite amount of shelf space against a large and diverse supply of entertainment content from other suppliers. New releases generally exceed several hundred titles a week. We believe this competition can be especially challenging for independent labels like us, because the new releases of major studios often have extremely high visibility and sales rates in the millions of units, and typically require much more shelf space to support.

Shelf space limitations at our “brick and mortar” retail customers are exacerbated by the increasing popularity of the high-definition format, Blu-ray. The combination of standard discs, premium discs and special-edition boxed sets across up to two formats means that a release can come in as many six different configurations. With the possible exception of our most popular new release titles and top-selling catalogue titles, it can be a challenge to obtain the product placement necessary to maximize sales, particularly among the limited number of major retailers who comprise our core “brick and mortar” customers. The continued retailer trend toward greater visibility for titles at the expense of quantity (i.e., “face out” rather than “spine out” placement) has the effect of reducing the total number of titles actually carried by a retailer.

For retailers, reconciling the expanding catalog with limited shelf space is becoming increasingly urgent. Meanwhile, rights holders like Image and other non-studio content providers have a growing concern that many titles are simply not strong enough to secure shelf space. If we are unable to secure sufficient shelf space for our programming, our business, results of operations and financial condition may be adversely affected.

Piracy may reduce our revenues and adversely affect our results of operation. The music industry has faced a major challenge in the form of piracy resulting from Internet downloading and recording devices. This piracy has negatively affected industry revenues and profits. As digital video recorders, or DVRs, and high-speed Internet connections become more popular and the storage capacity of personal computers increases, we may face greater piracy concerns with respect to our core business. Motion picture piracy is already extensive in many parts of the world and is made easier because of technological advances and the conversion of motion pictures into digital formats. The proliferation of unauthorized copies of these products may reduce the revenue we receive from our products, which may cause an adverse material effect on our business. In order to contain this problem, we require our retail distribution partners to implement elaborate and costly security and anti-piracy measures such as geo-filtering, which could result in significant expenses and loss of revenue. Even with such security and anti-piracy measures, we may be unable to prevent piracy.

Image Entertainment, Inc.

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The entertainment and motion picture industries are rapidly evolving, and recent trends have shown that audience response to both traditional and emerging distribution channels is volatile and difficult to predict. The entertainment industry in general and the motion picture industry in particular continue to undergo significant changes, due both to shifting consumer tastes and to technological developments. For example, new technologies, such as video-on-demand and Internet distribution of films, have provided motion picture companies with new channels through which to distribute their films. Accurately forecasting both the changing expectations of movie audiences and market demand within these new channels has proven challenging.

We cannot accurately predict the overall effect shifting audience tastes, technological change or the availability of alternative forms of entertainment may have on the distributor. In addition to uncertainty regarding the DVD market, there is uncertainty as to whether other developing distribution channels and formats, including video-on-demand, Internet distribution of films and high-definition, will attain expected levels of public acceptance or, if such channels or formats are accepted by the public, whether we will be successful in exploiting the business opportunities they provide. Moreover, to the extent that these emerging distribution channels and formats gain popular acceptance, the demand for delivery through DVDs may decrease.

Risks Relating to Our Stock and Credit Facility

Our issuance of preferred stock resulted in substantial dilution to our stockholders and stockholdings concentration, and the rights of the holders of preferred stock could render future financings and merger and acquisition transactions more difficult. On January 8, 2010, we raised gross proceeds of $22.0 million through the sale and issuance to affiliates of JH Partners, LLC (or JH Partners) of 22,000 shares of Series B Cumulative Preferred Stock (or Series B Preferred) and 196,702 shares of Series C Junior Participating Preferred Stock (or Series C Preferred), some of which were subsequently sold to our executive management team. The Series C Preferred subsequently converted into 196,702,000 shares of our common stock. While this private placement provided us with additional working capital required to repay outstanding indebtedness and fund continuing operations, the transaction was extremely dilutive to our existing stockholders and concentrated our stockholdings.

Further, in the event of any merger or acquisition of Image, each share of Series B Preferred ~~will~~would be entitled to receive an amount in cash equal to the sum of (i) a liquidation preference of $1,000 per share (subject to adjustment upon any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred) and (ii) the amount per share equal to accrued but unpaid dividends, which accrue on a cumulative compounding basis at a rate of 12% per annum on the liquidation preference of $1,000 per share. This could have the effect of making future equity financing and merger and acquisition transactions, other than the RLJ transaction, more difficult.

Because of their significant stock ownership, our largest stockholders ~~can~~ exert significant influence over our future direction. Our largest stockholders, JH Partners and its affiliates hold approximately 19,670 shares of Series B Preferred and 175,868,700 shares of our common stock ~~(subject to adjustment upon the occurrence of certain events)~~, representing approximately 68.81% of our outstanding voting securities as of June 1, ~~2011~~2012. InJH ~~connection~~Partners ~~with~~and ~~the~~its ~~sale~~affiliates ofhave the ~~Series~~ability ~~B and C Preferred~~ to JHelect ~~Partners in January 2010, JH Partners designated~~ the ~~majority of the initial post-transaction members of our~~ board of directors, ~~two~~irrespective of ~~whom~~the ~~work~~vote ~~for JH Partners (Messrs. Patrick Collins and Michael John). Since that time, two directors joined our board~~ of ~~directors,~~any ~~bringing the number up to five board members. (Our~~ other ~~two directors are our Chief Executive Officer Theodore Green and our Vice Chairman John Hyde (who replaced Mr~~stockholders. ~~John from JH Partners), both of whom also hold substantial amounts of our equity and were recommended by JH Partners).~~ Accordingly, JH Partners is able to significantly influence all matters requiring approval by our stockholders, including the election of directors, the approval of mergers or other business combination transactions or a sale of all or substantially all of our assets. The interests of JH Partners (or those of our other significant stockholders) may not coincide with the interests of other holders of our common stock.

We are not currently subject to ~~The~~stock ~~Nasdaq~~exchange ~~Global Market~~ corporate governance requirements and ~~you~~our stockholders may not have the same benefits or protections afforded to stockholders of exchange listed companies. Effective as of February 3, 2010, ~~trading in~~ our common stock was suspended from trading on The Nasdaq Global Market ~~due to, among things, failure to satisfy certain corporate governance requirements for continued listing~~. The Nasdaq Stock Market imposes certain corporate governance requirements on listed companies. For example, listed companies must, among other things, have a majority of independent board members and fully independent audit, nominating and compensation committees, which we do not meet. Accordingly, ~~you~~our stockholders may not have the same protections afforded to stockholders of companies that are subject to, and in full compliance with, the corporate governance requirements of a securities exchange.

~~Our~~Image ~~stock price may be subject to substantial volatility~~Entertainment, ~~and you may lose all or a substantial part of your investment~~Inc. Our common stock currently trades in the over-the-counter market on the OTCQB marketplace. There is a limited public float, and trading volume historically has been limited and sporadic. From June 1, 2010 through June 1, 2011, the closing price of our common stock ranged between $0.13 and $0.25 per share on volume ranging from none to over 500,000 shares per day. As a result, the market price for our common stock may not necessarily be a reliable indicator of our fair market value. The price at which our common stock will trade may be highly volatile and may fluctuate as a result of a number of factors, including the number of shares available for sale in the market, quarterly variations in our operating results, actual or anticipated announcements of new releases by us or competitors, the gain or loss of significant customers, changes in the estimates of our operating performance, and market conditions in our industry and the economy as a whole.

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~~You~~Our ~~may~~stock ~~find~~price itmay ~~difficult~~be subject to ~~dispose~~substantial ofvolatility, ~~your~~and ~~shares. There~~stockholders ismay ~~currently~~lose all or a ~~limited~~substantial ~~trading~~part ~~market~~of ~~for~~their ~~our~~investment. Our common stock oncurrently ~~the~~trades ~~OTCQB~~in ~~marketplace.~~the ~~The~~over-the-counter ~~ability~~market ~~to trade our common stock~~ on the OTCQB marketplace. There ~~depends~~is ona ~~the~~limited ~~presence~~public float, and ~~investment~~trading ~~decisions~~volume ofhistorically ~~willing~~has ~~buyers~~been limited and ~~sellers~~sporadic. From ~~Therefore~~June 1, ~~the~~2011 ~~market~~through ofJune ~~investors~~1, ~~who~~2012, ~~are~~the ~~willing~~closing toprice ~~purchase~~of our common stock isranged ~~limited,~~between ~~the~~$0.03 ~~volume~~and of$0.18 ~~our~~per ~~common~~share ~~stock~~on ~~traded~~volume onranging afrom ~~daily~~none ~~basis~~to isover ~~low~~400,000 ~~and~~shares per day. As a result, the ~~liquidity~~market ofprice for our common stock ismay ~~constrained.~~not ~~Prices~~necessarily ~~for~~be ~~securities~~a ~~traded~~reliable ~~solely~~indicator onof ~~the~~our ~~OTCQB~~fair ~~marketplace~~market ~~may~~value. The beprice ~~difficult~~at towhich ~~obtain. This~~our ~~very~~common ~~limited~~stock ~~liquidity,~~trades ~~marketability,~~may ~~the~~fluctuate ~~reduced~~as ~~public~~a ~~access~~result toof ~~price~~a ~~quotations~~number ~~and~~of ~~lack~~factors, ofincluding athe ~~regular~~number ~~trading~~of ~~market~~shares ~~may~~available ~~depress~~for sale in the market, ~~price~~quarterly ofvariations in our ~~common~~operating ~~stock. As a result~~results, anactual ~~investor~~or ~~might~~anticipated ~~find~~announcements itof ~~more~~new ~~difficult~~releases toby ~~dispose~~us ofor competitors, the gain or ~~obtain~~loss ~~accurate~~of ~~quotations~~significant ~~for~~customers, changes in the ~~price~~estimates of our operating performance, and market conditions in our ~~common~~industry ~~stock~~and the economy as a whole.

~~Trading~~Investors inmay ~~our~~find ~~common~~it ~~stock~~difficult ~~might also become subject~~ to ~~the~~dispose ~~requirements~~ of ~~certain~~their ~~rules~~shares. There ~~promulgated~~is ~~under~~currently ~~the~~a ~~Securities~~limited ~~Exchange~~trading ~~Act~~market offor ~~1934,~~our ~~which~~common ~~require~~stock ~~additional~~on ~~disclosure~~the byOTCQB ~~broker-dealers~~marketplace. inThe ~~connection~~ability ~~with~~to ~~any~~ trade ~~involving~~our acommon stock ~~defined~~on asthe aOTCQB ~~“penny~~marketplace ~~stock”~~depends ~~(generally, any equity security not listed~~ on athe ~~national~~presence ~~securities~~and ~~exchange~~investment ~~that~~decisions ~~has a market price~~ of ~~less~~willing ~~than~~buyers $5and sellers.00 ~~per share~~Therefore, ~~subject~~the tomarket ~~certain~~of ~~exceptions). Many~~investors ~~brokerage~~who ~~firms~~ are ~~reluctant~~willing to ~~recommend~~purchase ~~low-priced~~our ~~stocks~~common tostock ~~their~~is ~~clients. Moreover~~limited, ~~various~~the ~~regulations~~volume ~~and~~of ~~policies~~our ~~restrict~~common ~~the~~stock ~~ability~~traded ofon ~~shareholders~~a todaily ~~borrow~~basis ~~against~~is ~~or “margin”~~ low~~-priced stocks~~, and ~~declines in~~ the ~~stock~~liquidity ~~price~~of ~~below~~our ~~certain~~common ~~levels~~stock ~~may~~is ~~trigger~~constrained. ~~unexpected~~Prices ~~margin~~for ~~calls. Additionally,~~securities ~~because~~traded ~~brokers’~~solely ~~commissions~~ on ~~low-priced~~the ~~stocks~~OTCQB ~~generally~~marketplace ~~represent~~may abe ~~higher~~difficult ~~percentage~~to ofobtain. This ~~the~~very ~~stock~~limited ~~price~~liquidity, ~~than commissions on higher-priced stocks~~marketability, the ~~current~~reduced ~~price~~public ofaccess ~~the~~to ~~common~~price ~~stock~~quotations ~~can~~and ~~result~~lack inof ~~an individual shareholder paying transaction costs that represent~~ a ~~higher~~regular ~~percentage~~trading ofmarket ~~total~~may ~~share~~depress ~~value than would be~~ the ~~case~~market ~~if our share~~ price ~~were higher. This factor may also limit the willingness~~ of ~~institutions to purchase~~ our common stock. ~~Finally,~~As ~~the~~a ~~additional~~result, ~~burdens~~an ~~imposed~~investor ~~upon~~might ~~broker-dealers~~find byit ~~these~~more ~~requirements~~difficult ~~could~~to ~~discourage~~dispose ~~broker-dealers from facilitating trades in our common stock~~of, ~~which~~or ~~could~~obtain ~~severely~~accurate ~~limit~~quotations ~~the~~for ~~market liquidity of~~ the ~~stock~~price ~~and the ability~~ of, ~~investors to trade~~ our common stock.

~~Failure~~Trading toin ~~have~~ our common stock ~~listed~~might onalso anbecome ~~exchange~~subject ~~could~~to ~~have~~the ~~resulted~~requirements ~~and~~of ~~still~~certain ~~could~~rules ~~result~~promulgated inunder ~~loss~~the Securities Exchange Act of ~~investors~~1934, ~~increased~~which ~~obligations~~require ~~under~~additional ~~state~~disclosure ~~securities~~by ~~laws~~broker-dealers in connection with any trade involving a stock defined as a “penny stock” (generally, ~~decreased~~any ~~coverage~~equity bysecurity not listed on a national securities ~~analysts~~exchange ~~and~~that has a ~~higher~~market ~~cost~~price of ~~capital~~less than $5.00 ~~Effective~~per asshare). Many ofbrokerage ~~February~~firms 3are reluctant to recommend low-priced stocks to their clients. Moreover, ~~2010~~various regulations and policies restrict the ability of shareholders to borrow against or “margin” low-priced stocks, ~~trading~~and declines in ~~our~~the ~~common~~ stock ~~was~~price ~~suspended~~below ~~from~~certain ~~trading~~levels onmay ~~The~~trigger ~~Nasdaq~~unexpected ~~Global~~margin ~~Market~~calls. Additionally, ~~The~~because ~~quotations~~brokers’ ~~for~~commissions ~~our~~on ~~common~~low-priced stocks generally represent a higher percentage of the stock ~~now~~price ~~appear~~than commissions on higher-priced stocks, the ~~OTCQB~~current ~~marketplace~~price of ~~Pink~~the ~~OTC~~common ~~Markets~~stock ~~Inc~~can result in an individual shareholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. ~~Delisting~~This ~~from~~factor ~~The~~may ~~Nasdaq~~also ~~Global~~limit ~~Market~~the ~~and~~willingness ~~failure~~of institutions to ~~have~~purchase our common stock. Finally, ~~listed~~the onadditional anburdens ~~exchange~~imposed ~~have~~upon ~~subjected~~broker-dealers usby tothese ~~numerous~~requirements ~~consequences~~could ~~that~~discourage ~~may~~broker-dealers ~~adversely~~from ~~affect~~facilitating trades in our ~~business~~common stock, ~~including~~which could severely limit the ~~loss~~market liquidity of ~~investors.~~the ~~Further,~~stock ~~delisting~~and ~~may~~the ~~result~~ability inof ~~decreased~~investors ~~coverage~~to bytrade ~~securities~~our ~~analysts~~common stock.

InFailure ~~addition,~~to have our ~~ability~~common tostock ~~raise~~listed ~~additional~~on ~~capital~~an ~~through~~exchange ~~equity~~could ~~financing,~~result ~~and~~in ~~attract~~loss ~~and~~of ~~retain~~investors, ~~personnel~~increased byobligations ~~means~~under ofstate ~~equity~~securities ~~compensation~~laws, ~~may~~decreased becoverage ~~impaired.~~by ~~Furthermore,~~securities weanalysts ~~may~~and ~~experience~~a ~~decreases~~higher incost ~~institutional~~of ~~and~~capital. ~~other~~Effective ~~investor~~as ~~demand,~~of ~~analyst~~February ~~coverage~~3, ~~market-making activity~~2010, ~~and~~trading ~~information~~in ~~available~~our ~~concerning~~common stock was suspended from trading ~~prices~~on ~~and~~The ~~volume,~~Nasdaq ~~and~~Global ~~fewer~~Market. ~~broker-dealers~~The ~~may~~quotations befor ~~willing~~our tocommon ~~execute~~stock ~~trades~~now ~~with~~appear ~~respect~~on tothe ~~our~~OTCQB ~~common~~marketplace ~~stock~~of Pink OTC Markets Inc. Delisting from The ~~delisting~~Nasdaq ~~may~~Global ~~decrease~~Market ~~the~~and ~~attractiveness~~failure ofto have our common stock ~~and~~listed ~~cause~~on ~~the~~an ~~trading~~exchange ~~volume~~have ofsubjected ~~our~~us ~~common~~to ~~stock~~numerous toconsequences ~~decline~~that ~~significantly~~may adversely affect our business, ~~which~~including ~~could~~the ~~result~~loss inof ainvestors. ~~significant~~Further, ~~decline~~delisting inmay ~~the~~result ~~market~~in ~~price~~decreased ofcoverage ~~our~~by ~~common~~securities ~~stock~~analysts.

Our ability to raise additional capital through equity financing, and attract and retain personnel by means of equity compensation, may be impaired. Furthermore, we may experience decreases in institutional and other investor demand, analyst coverage, market-making activity, and information available concerning trading prices and volume, and fewer broker-dealers may be willing to execute trades with respect to our common stock. The delisting may decrease the attractiveness of our common stock and cause the trading volume of our common stock to decline significantly, which could result in a significant decline in the market price of our common stock.

We intend to seek to be relisted on a securities exchange at some point in the future; however, we may not be able to satisfy the standards for listing on an exchange, an exchange may not approve our listing and the timing of any relisting is uncertain.

~~Any~~Image ~~future sales of equity may significantly impact the market price of our common stock. Future sales of substantial amounts of our common stock~~Entertainment, ~~including shares that we may issue upon exercise of outstanding options, warrants or other convertible securities could adversely impact the market price of our common stock~~Inc. Further, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock, the percentage ownership of our stockholders will or could be reduced and the price of our common stock may fall.

If we are unable to conclude that our internal control over financial reporting is effective, our stock price may be negatively impacted. Section 404 of the Sarbanes-Oxley Act of 2002 and the accompanying rules and regulations promulgated by the SEC to implement it require us to include in our Form 10-K an annual report by our management regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting that cannot be remediated in a timely manner, we will be unable to assert such internal control is effective. While we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate because of changes in conditions, and, as a result, the degree of compliance of our internal control over financial reporting with the applicable policies or procedures may deteriorate. If we are unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which may have an adverse impact on our stock price.20

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~~Certain~~Any ~~provisions~~future insales ~~our~~of ~~charter~~equity ~~documents~~may ~~and~~significantly ~~Delaware~~affect ~~law,~~the asmarket ~~well~~price asof our ~~stockholder~~common ~~rights~~stock. Future ~~plan,~~sales ~~could~~of ~~discourage~~substantial ~~takeover~~amounts ~~attempts~~of ~~and~~our ~~lead~~common tostock, ~~management~~including ~~entrenchment. Our~~shares ~~certificate~~that we may issue upon exercise of ~~incorporation~~outstanding ~~and~~options, ~~bylaws~~warrants ~~contain~~or ~~provisions~~other ~~that~~convertible securities could ~~have~~adversely affect the ~~effect~~market price of ~~delaying~~our orcommon ~~preventing~~stock. Further, ~~changes~~if inwe ~~control~~raise additional funds through the issuance of common stock or ~~changes~~securities inconvertible ~~our~~into ~~management~~or ~~without~~exercisable for common stock, the ~~consent~~percentage ownership of our ~~board~~stockholders will or could be reduced and the price of ~~directors. These~~our ~~provisions~~common ~~include:~~stock may fall.

·If nowe ~~cumulative~~are ~~voting~~unable to conclude that our internal control over financial reporting is effective, our stock price may be negatively affected. Section 404 of the Sarbanes-Oxley Act of 2002 and the accompanying rules and regulations promulgated by the SEC to implement it require us to include in our Form 10-K an annual report by our management regarding the ~~election~~effectiveness of ~~directors~~our internal control over financial reporting. The report includes, ~~which~~among ~~limits~~other things, management’s assessment of the ~~ability~~effectiveness of ~~minority~~our ~~stockholders~~internal control over financial reporting as of the end of our fiscal year. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting that cannot be remediated in a timely manner, we will be unable to ~~elect~~assert ~~director~~such ~~candidates;~~internal control is effective. While we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate because of changes in conditions, and, as a result, the degree of compliance of our internal control over financial reporting with the applicable policies or procedures may deteriorate. If we are unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which may have an adverse effect on our stock price.

·Certain aprovisions ~~classified~~in ~~board~~our ofcharter ~~directors~~documents ~~with~~and ~~three-year~~Delaware ~~staggered~~law ~~terms,~~could ~~which~~discourage ~~may~~takeover ~~delay~~attempts ~~the~~and ~~ability~~lead to management entrenchment. Our certificate of ~~stockholders~~incorporation toand ~~change~~bylaws contain provisions that could have the ~~membership~~effect of adelaying ~~majority~~or preventing changes in control or changes in our management without the consent of our board of directors;. These provisions include:

·● ~~the~~no ~~exclusive~~cumulative ~~right~~voting ofin ~~our~~the ~~board~~election of directors ~~to elect a director to fill any vacancies~~, which ~~prevents~~limits ~~stockholders~~the ~~from~~ability ~~being~~of ~~able~~minority stockholders to ~~fill~~elect ~~vacancies~~director ~~on our board of directors~~candidates;

·● ~~the~~a ~~ability~~classified ~~of our~~ board of directors towith ~~determine~~three-year tostaggered ~~issue~~terms, ~~shares~~which ofmay ~~preferred~~delay ~~stock and to determine~~ the ~~price~~ability ~~and other terms~~ of ~~those~~stockholders ~~shares,~~to ~~including~~change ~~preferences~~the ~~and~~membership ~~voting~~of ~~rights,~~a ~~without~~majority ~~stockholder~~of ~~approval,~~our ~~which~~board ~~could be used to significantly dilute the ownership~~ of ~~a hostile acquirer~~directors;

·● athe ~~prohibition~~exclusive onright ~~stockholder~~of ~~action~~our byboard ~~written~~of ~~consent~~directors orto ~~electronic~~elect ~~transmission,~~a ~~which~~director ~~forces~~to ~~stockholder~~fill ~~action~~any tovacancies, bewhich ~~taken~~prevents atstockholders anfrom ~~annual~~being orable ~~special~~to ~~meeting~~fill ofvacancies on our ~~stockholders~~board of directors;

·● the ~~requirement~~ability ~~that,~~of ~~except~~our asboard ~~required~~of bydirectors ~~law~~to ~~and~~determine ~~subject~~ to ~~any~~issue ~~rights~~shares of ~~holders of~~ preferred stock, aand ~~special~~to ~~meeting~~determine ~~of stockholders may be called only by~~ the ~~chairman~~price ofand ~~the~~other ~~board~~terms of ~~directors,~~those ~~the chief executive officer~~shares, ~~the~~including ~~president~~preferences and ~~the~~voting ~~secretary~~rights, inwithout ~~each~~stockholder ~~case pursuant to a resolution of the board of directors~~approval, which ~~may~~could ~~delay~~be ~~the~~used ~~ability~~to ofsignificantly ~~our~~dilute ~~stockholders~~the toownership ~~force consideration~~ of a ~~proposal~~hostile ~~or to take action, including the removal of directors~~acquirer; ~~and~~

·● ~~advance~~a ~~notice~~prohibition ~~procedures~~on ~~that~~stockholder ~~stockholders~~action ~~must~~by ~~comply~~written ~~with~~consent ~~in order to nominate candidates to our board of directors~~ or toelectronic ~~propose matters to be acted upon at a stockholders' meeting~~transmission, which ~~may~~forces ~~discourage~~stockholder oraction ~~deter a potential acquirer from conducting a solicitation of proxies~~ to ~~elect~~be ~~the~~taken ~~acquirer’s~~at ~~own~~an ~~slate~~annual ~~of directors~~ or ~~otherwise~~special ~~attempting~~meeting ~~to obtain control~~ of ~~us.~~our stockholders;

●

the requirement that, except as required by law and subject to any rights of holders of preferred stock, a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, the president and the secretary, in each case pursuant to a resolution of the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and

●

advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders' meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction.

~~Our~~Image ~~liquidity substantially depends on our ability to borrow against our revolving credit facility. Our cash collections are deposited into a lockbox with PNC~~Entertainment, ~~the lender under our revolving credit facility effective June 23, 2011~~Inc. The deposited cash receipts are automatically swept to reduce our outstanding loan balance. Currently, all of our operating working capital needs are financed through borrowings under our revolving credit facility. If PNC does not provide funding under our revolving credit facility due to (i) the occurrence of an event of default, as defined in the loan agreement, (ii) non-compliance with our covenants, or (iii) our borrowing to the fullest extent of the line, our liquidity, business, results of operations and financial condition would be materially adversely affected. Additionally, delays or any failure to collect our trade accounts receivable, upon which our borrowing availability is substantially based, would have a negative impact on our borrowing availability and liquidity. If we are unable to obtain funding under our revolving credit facility, we will have to seek additional sources of financing, which may not be available on acceptable terms or at all.

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Our liquidity substantially depends on our ability to borrow against our revolving credit facility. Our cash collections are deposited into a lockbox with PNC Bank N.A., the lender under our revolving credit facility effective June 23, 2011. The deposited cash receipts are automatically swept to reduce our outstanding loan balance. Currently, all of our operating working capital needs are financed through borrowings under our revolving credit facility. If PNC does not provide funding under our revolving credit facility due to (i) the occurrence of an event of default, as defined in the loan agreement, (ii) non-compliance with our covenants, or (iii) our borrowing to the fullest extent of the line, our liquidity, business, results of operations and financial condition would be materially adversely affected. Additionally, delays or any failure to collect our trade accounts receivable, upon which our borrowing availability is substantially based, would have a negative effect on our borrowing availability and liquidity. If we are unable to obtain funding under our revolving credit facility, we would have to seek additional sources of financing, which may not be available on acceptable terms or at all.

Our credit facility contains covenants that may limit the way we conduct business. Our $17.5 million credit facility with PNC contains various covenants limiting our ability to:

·● incur or guarantee additional indebtedness;

·● pay dividends and make other distributions;

·● pre-pay any subordinated indebtedness;

·● make investments and other restricted payments;

·● make capital expenditures;

·● enter into merger or acquisition transactions; and

·● sell assets.

These covenants may prevent us from raising additional debt or equity financing, competing effectively or taking advantage of new business opportunities.

Additionally, our credit facility includes language that states that a material adverse change in our business, assets or prospects would be considered an “event of default.” If we are unable to comply with the covenants, or satisfy the financial ratio and other tests, or should an event of default occur, as determined and invoked by PNC, a default may occur under our credit facility. In the event of default, unless we are able to negotiate an amendment, forbearance or waiver with PNC, we could be required to repay all amounts then outstanding, which could have a material adverse effect on our liquidity, business, results of operations and financial condition, depending upon our outstanding balance at the time.

Risks Related to the Merger Agreement

As discussed below in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Subsequent Event – RLJ Transaction,” on April 2, 2012 we entered into an Agreement and Plan of Merger with RLJ Acquisition, Inc. (or RLJ). The negotiating execution and performance of that agreement subjects Image to additional risks including:

●

Diminution of management focus on our business.

●

Creation of uncertainty for our suppliers, customers and employees.

●

Significant transaction expenses.

Image will be subject to business uncertainties and contractual restrictions while the business combination is pending. Uncertainty about the effect of the business combination on employees and customers may have an adverse effect on RLJ, Image or Acorn Media Group, Inc. (or Acorn) and consequently on the combined company. These uncertainties may impair Image’s ability to retain and motivate key personnel and could cause suppliers, customers and others that deal with Image to defer entering into contracts with Image or making other decisions concerning Image or seek to change existing business relationships with Image. Certain of Image’s agreements with customers have provisions that may allow such customers to terminate the agreements if the business combination is completed. If key employees depart because of uncertainty about their future roles and the potential complexities of the business combination, Image’s business could be harmed. In addition, the Image merger agreement restricts Image from making certain acquisitions and taking other specified actions until the business combination occurs without the consent of the other party. These restrictions may prevent Image from pursuing attractive business opportunities that may arise prior to the completion of the business combination.

Image Entertainment, Inc.

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The Image merger agreement limits Image’s ability to pursue alternatives to the business combination. Image has agreed that it will not solicit, initiate, knowingly encourage or facilitate inquiries or proposals or engage in discussions or negotiations regarding takeover proposals, subject to limited exceptions, including that Image may take certain actions in the event it receives an unsolicited takeover proposal that constitutes a superior proposal or is reasonably expected to lead to a superior proposal, and the Image board determines in good faith, after consultation with its outside legal counsel, that a failure to take action with respect to such takeover proposal would be inconsistent with its fiduciary duties. Image has also agreed that the Image board will not change its recommendation to its stockholders or approve any alternative agreement, subject to limited exceptions, including that, at any time prior to the Image business combination approval, the Image board may make a change in recommendation in response to a superior proposal, if the Image board concludes in good faith that a failure to change its recommendation would be inconsistent with the exercise of its fiduciary duties to its stockholders under applicable laws and, if RLJ shall not have, within five (5) business days of its receipt of notice of such superior proposal, made an offer that the Image board shall determine, in good faith, to be at least as favorable to Image’s stockholders as such superior proposal. The Image merger agreement also requires each party to call, give notice of and hold a meeting of its stockholders for the purposes of obtaining the applicable stockholder approval. This special meeting requirement does not apply to a party in the event that the Image merger agreement is terminated in accordance with its terms. In addition, under specified circumstances, Image may be required to pay to RLJ an amount equal to RLJ’s aggregate expenses and a $1.62 million termination fee (depending on the specific circumstances) if the merger is not consummated and, if RLJ is required to pay a termination fee to Acorn under the Acorn purchase agreement, Image must pay one-half of such termination fee actually paid by RLJ to Acorn pursuant to the Acorn Purchase Agreement, not to exceed $500,000. These expenses would likely aggregate substantially more than the termination fee. These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of Image from considering or proposing an acquisition, even if it were prepared to pay consideration with a higher price per share than that proposed in the business combination, or might result in a potential competing acquiror proposing to pay a lower price per share to acquire Image than it might otherwise have been willing to pay.

In addition, if the business combination is not completed, RLJ and/or Image may experience negative reactions from the financial markets and from Image’s customers and employees. RLJ and Image also could be subject to litigation related to a failure to complete the mergers or to enforce their respective obligations under the Image merger agreement. If the mergers are not consummated, RLJ and Image cannot assure their respective stockholders that the risks described will not materially affect the business, financial results and stock prices of RLJ and/or Image.

Image has incurred and will continue to incur significant transaction costs in connection with the business combination. Image expects that it will continue to incur significant, transaction-related costs in connection with consummating the business combination. Image will also incur significant fees and expenses relating to financing arrangements and legal, accounting and other transaction fees and costs associated with the business combination. Some of these costs are payable regardless of whether the business combination is completed. Moreover, under specified circumstances, Image may be required to pay to RLJ a termination fee of $1.62 million (depending on the specific circumstances) if the Image merger is not consummated. Image may also be required, under certain circumstances, to pay the out of pocket expenses of RLJ under the Image merger agreement. These expenses would likely aggregate substantially more than the termination fee.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

Image Entertainment, Inc.

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ITEM 2.

PROPERTIES

Our headquarters are located in Chatsworth, California and consist of approximately 30,000 square feet leased on one floor of a multi-tenant building. The monthly rent is approximately $46,000 per month, on a gross basis. The office lease, as amended, has an initial 10-year term expiring June 30, 2014 with two five-year options. ~~Although~~In aaddition, ~~base~~we ~~level~~lease ofstorage ~~operating~~space ~~expenses is included~~ in the ~~rent~~building ~~payment,~~at ~~we are responsible for~~ a ~~percentage~~rate of ~~actual~~approximately ~~annual operating expense increases~~$4,600 ~~capped~~per ~~at 5% annually~~month.

We believe that our current office is adequate to meet our needs, and that additional facilities will be available for lease, if necessary, to meet our future needs.

ITEM 3.

LEGAL PROCEEDINGS

In the normal course of business, we are subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations relating to employment and tax matters. While it is not possible to predict the outcome of these matters, it is the opinion of management, based on consultations with legal counsel, that the ultimate disposition of known proceedings will not have a material adverse ~~impact~~effect on our financial condition, results of operations or liquidity.

ITEM 4. ~~REMOVED~~ ~~AND~~MINE ~~RESERVED~~SAFETY DISCLOSURES

21Not applicable.

Image Entertainment, Inc.

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PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock began trading on the OTCQB Marketplace of the Pink OTC Markets Inc. beginning on February 3, 2010. Prior to that date, we traded on The NASDAQ Global Market® under the symbol “DISK.” The table below presents the quarterly high and low sales prices as reported by Pink OTC Markets Inc. ~~and The NASDAQ Global Market, as applicable~~ for the relevant period, during the past two fiscal years. Quotations from Pink OTC Markets Inc. reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

Fiscal Year Ended March 31, 2011		High			Low
Fiscal Year Ended March 31, 2012	High			Low
Quarter ended June 30, 2010		$	0.240		$	0.170
Quarter ended June 30, 2011	$	0.180		$	0.160
Quarter ended September 30, 2010		$	0.250		$	0.150
Quarter ended September 30, 2011	$	0.180		$	0.071
Quarter ended December 31, 2010		$	0.200		$	0.130
Quarter ended December 31, 2011	$	0.125		$	0.030
Quarter ended March 31, 2011		$	0.220		$	0.130
Quarter ended March 31, 2012	$	0.120		$	0.040
Fiscal Year Ended March 31, 2010		High			Low
Fiscal Year Ended March 31, 2011	High			Low
Quarter ended June 30, 2009		$	1.630		$	0.810
Quarter ended June 30, 2010	$	0.240		$	0.170
Quarter ended September 30, 2009		$	0.930		$	0.625
Quarter ended September 30, 2010	$	0.250		$	0.150
Quarter ended December 31, 2009		$	0.860		$	0.210
Quarter ended December 31, 2010	$	0.200		$	0.130
Quarter ended March 31, 2010		$	0.354		$	0.170
Quarter ended March 31, 2011	$	0.220		$	0.130

Stockholders

As of June 151, ~~2011~~2012, there were approximately ~~255~~256,~~602~~402,133 shares of our common stock issued and outstanding, which were held by ~~952~~795 holders of record. The number of holders of record does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.

Dividend Policy

Except as described below, our loan agreement with PNC prohibits the payment of dividends. For more information on these restrictions, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have never paid a cash dividend on our common stock, and we ~~presently~~currently intend to retain all future earnings, if any, to fund development and growth of our business.

Under the terms of our Series B Cumulative Preferred Stock (or Series B Preferred), we are required to accrue dividends at a rate of 12% per year. These dividends are accrued, but may not be declared and paid without PNC’s approval. So long as any shares of Series B Preferred are outstanding and until all dividends on the Series B Preferred have been paid or declared and set aside for payment, we are prohibited from, among other things, declaring or paying any dividend (whether in cash or property) and from making any other distribution on any shares of our preferred stock or common stock. Our ability to satisfy our dividend obligations, including making the payments described above, will depend upon our future operating performance and on economic, financial, competitive, and other factors, many of which may be beyond our control.

ITEM 6.

SELECTED FINANCIAL DATA

Not applicable.

22Image Entertainment, Inc.

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. As described under the heading "Forward-Looking Statements" of this Annual Report our actual results could differ materially from those anticipated in our forward-looking statements. Factors that could contribute to such differences include those discussed elsewhere in this Annual Report, including in Item 1A of this Annual Report under the heading “Risk Factors.” You should not place undue reliance on our forward-looking statements, which apply only as of the date of this Annual Report. Except as may be required under federal law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur.

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related footnotes included in Item 8 of this Annual Report.

Overview

General

We are a leading independent licensee and distributor of home entertainment programming in North America. During the latter part of fiscal 2011, as a result of changes in management’s view of the Company's operations, the Company reorganized its reporting segments in order to better align them with the methods used by management to manage, evaluate, operate and internally report the business activities of the Company. Based on this reorganization, the Company's three former reporting segments, Domestic, Digital and International, have been combined into and restated in one reporting segment, Worldwide Entertainment. Our discussion and analysis of our financial condition and results of operations is based on our single reporting segment, Worldwide Entertainment.

Our Worldwide Entertainment business consists of the acquisition, content enhancement and worldwide distribution of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast (including cable and satellite), video-on-demand (or VOD), streaming video, downloading and sublicensing.

Revenue Sources

~~Our primary source of revenues continues to be from the acquisition and distribution of exclusive~~ DVD ~~content, including Blu-ray, which accounted for approximately 83%~~ and ~~87% of our consolidated net revenues in fiscal 2011 and 2010, respectively. The acquisition and distribution of exclusive~~ Blu-ray ~~content accounted for approximately 18% and 10% of our consolidated net revenue in fiscal 2011 and 2010, respectively.~~

~~Revenues~~Our ~~derived~~primary ~~from~~source ~~the digital distribution~~ of ~~our~~revenues ~~exclusive~~continues ~~content~~to ~~rights~~be ~~continue~~from tothe ~~grow~~acquisition asand adistribution ~~percentage~~ of ~~revenues. Net~~exclusive ~~revenues~~content ~~derived~~on ~~from~~DVD ~~digital~~and ~~distribution~~Blu-ray, which accounted for approximately 774.09% and 484.52% of our consolidated net ~~revenue~~revenues in fiscal ~~2011~~2012 and ~~2010~~2011, respectively.

~~We are a valued provider of digital content in several key categories, including stand-up comedy, long-form music, titles filmed for the IMAX format and feature films.~~ Digital rental, a type of VOD, has been particularly strong due to the higher profile features. Many of our titles have consistently made top rental charts on key retail sites. We have also experienced increased revenue streams from advertising-supported models like Hulu and ~~YouTube, which have been promising, especially for catalogue product.~~Broadcast

~~Domestic~~Revenues ~~consumption~~derived offrom ~~mobile~~the ~~video~~digital ~~has~~distribution ~~been~~of ~~concentrated~~our inexclusive ~~more channel-oriented~~ content ~~like Sprint Movies~~rights, ~~FloTV,~~while ~~ESPN~~still ~~and~~relatively ~~CNN. While some genre-based subscription channels exist~~modest, ~~the~~continue ~~mobile network has not yet been able~~ to ~~provide~~grow as a ~~true~~percentage ~~broadband~~of ~~experience,~~revenues. Net ~~and~~revenues inderived ~~turn~~from ~~mobile~~digital ~~video~~distribution ~~growth~~accounted ~~has~~for ~~not~~approximately ~~yet met industry projections~~14.1% Weand ~~currently provide programming to two mobile aggregators who manage channels on all four major mobile carriers~~7.0% of ~~Certain~~our ~~programs~~consolidated ~~have~~net ~~had~~revenue ~~success,~~in ~~but~~fiscal ~~the~~2012 ~~overall number of available programs is relatively small~~ and ~~current~~2011, ~~growth is modest~~respectively.

23In general, we have seen the strongest growth on the VOD and Subscription VOD (or SVOD) side, with steady growth on the electronic sell-through (or EST) side. This is consistent with consumer adoption trends. As retailers continue to offer consumer-friendly devices that make access to these on-demand services easier, including allowing consumption in the consumer’s home, we believe we are well-positioned to capture business in that growing distribution channel. Broadcast sales includes all forms of television distribution, including the sales of our content across broadcast television, VOD and non-theatrical platforms.

We are a valued provider of digital content in several key content categories, including stand-up comedy, long-form music, titles filmed for the IMAX format and feature films. Many of our titles have consistently made top rental charts on key retail sites. We have also experienced increased revenue streams from advertising-supported models like Hulu and YouTube, which have been promising, especially for catalogue product.

Domestic consumption of mobile video has been concentrated in more channel-oriented content like Sprint Movies, FloTV, ESPN and CNN. While some genre-based subscription channels exist, the mobile network has not yet been able to provide a true broadband experience, and in turn mobile video growth has not yet met industry projections. We currently provide programming to two mobile aggregators who manage channels on all four major mobile carriers. Certain programs have had success, but the overall number of available programs is relatively small and our revenue expectations are modest.

Image Entertainment, Inc.

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~~Broadcast~~Sublicensing ~~sales includes all forms of television distribution, including the sales of our content across broadcast television, pay-per-view (or PPV), VOD~~ and ~~non-theatrical platforms.~~Other

InWe ~~general,~~continue weour ~~have~~efforts ~~seen~~to ~~the~~acquire ~~strongest~~more ~~growth~~programming onwith international rights. Revenues derived outside the ~~VOD~~U.S. and ~~Subscription~~Canada ~~VOD~~primarily ~~(or~~represent ~~SVOD)~~proceeds ~~side~~from sublicenses with ~~steady~~Universal ~~growth~~Music onGroup ~~the~~International, ~~electronic~~BET ~~sell-through~~International, ~~(or~~Warner ~~EST)~~Music ~~side~~Australia and Universal Pictures Australia for their distribution of our exclusive content. Music-related ~~This~~DVDs ishave ~~consistent~~performed ~~with~~well ~~consumer~~for ~~adoption~~us ~~trends~~internationally. To Asdate, ~~retailers~~most ~~continue~~of tothe ~~offer~~feature ~~consumer-friendly~~films ~~devices~~we ~~that~~have ~~make~~acquired ~~access~~do not include international rights. However, we continue our efforts to ~~these~~acquire ~~on-demand~~more ~~services~~programming ~~easier~~with international rights. When appropriate, ~~including~~we ~~allowing~~now ~~consumption~~seek the greatest variety of distribution rights regarding acquired content in the ~~consumer’s~~greatest ~~home,~~variety weof ~~believe~~formats, weincluding ~~are~~DVD, ~~well~~Blu-~~positioned~~ray, tobroadcast, ~~capture~~VOD ~~business~~and indigital, ~~that~~for ~~growing~~both ~~distribution~~domestic ~~channel~~and international use. This will allow us to further diversify revenue streams.

We ~~continue~~also ~~our~~derive ~~efforts~~modest torevenues ~~acquire~~from ~~more~~theatrical ~~programming~~and ~~with international rights. When appropriate, the Company now seeks the greatest variety of distribution rights regarding acquired content in the greatest variety of formats, including DVD, Blu~~non-~~ray,~~theatrical ~~broadcast, VOD and digital, for both domestic and international use. This allows the Company to further diversify its~~ revenue streams.

Revenues derived outside the U.S. and Canada primarily represent proceeds from sublicenses with Universal Music Group International, Warner Music Australia and Digital Site for their distribution of our exclusive DVD content. Music-related DVDs have performed well for us internationally. To date, most of the feature films we have acquired do not include international rights.

We also derive other revenues from distribution of CDs as well as rental, theatrical and non-theatrical revenue streams.

Cost Structure

Our most significant costs and cash expenditures relate to acquiring content for exclusive distribution ~~and, to a lesser extent recently, the funding of content production or co-production for exclusive distribution~~. Additionally, we incurred substantial legal, investment banking and other expenses during fiscal ~~2011~~2012 related to the ~~Madacy~~RLJ ~~and~~Acquisition, ~~SPHE~~Inc. ~~transactions~~(or RLJ) transaction and during fiscal ~~2010~~2011 related to the JHMadacy ~~Partners~~Entertainment ~~investment~~US, Inc. (or Madacy) and Sony Pictures Home Entertainment Inc. (or SPHE) transactions described below.

We ~~are~~acquire ~~acquiring~~ primarily North American distribution rights to completed feature films while maintaining our focus on acquiring distribution rights to genres that have been successful in the past. We continue to seek early trend opportunities in advance of mainstream acceptance in an effort to keep acquisition costs lower by bringing titles to market before spikes in demand drive up acquisition costs.

We generally acquire programming through exclusive license/distribution agreements, ~~whereby~~under which we either pay royalties or receive distribution fees and pay net profits after recoupment of our upfront costs. Upon entering into a typical license (royalty) agreement, we pay, as an advance, royalties which normally become due to the content supplier 45 days following the quarter in which the sale of the title to our retail customers has occurred. Under a typical exclusive distribution agreement, we may pay upfront fees, which are expressed as advances against future net profits, or we may pay for the cost of the content’s production in advance.

In addition to advances, upfront fees and production costs, the other significant costs we incur are:

·● DVD/Blu-ray replication;

·● packaging;

·● advertising, promotion, and market development funds provided to retail customers;

·● domestic shipping costs from self-distribution of exclusive content;

·● personnel; and

·● music publishing on exclusive music-related DVD/Blu-ray and CD titles.

We focus on achieving long-term, sustainable growth and profitability. We also seek to improve our cash flow position in order to continue funding operations and licensing, or entering into exclusive distribution agreements, for high-quality entertainment content.

24Fiscal 2012 Financial Highlights and Subsequent Event

~~Table~~● Consolidated net revenues increased 12.5% to $100,086,000 for fiscal 2012, from $88,959,000 for fiscal 2011, primarily due to the performance of ~~Contents~~high-profile new releases The Double, The Way Back and Beneath the Darkness as well as the Blu-ray release of many of The Criterion Collection titles.

~~Fiscal~~o ~~2011~~Packaged ~~Financial~~goods ~~Highlights~~(DVD and ~~Subsequent~~Blu-ray) ~~Event~~net revenues increased slightly to $75,000,000, from $74,924,000.

·o ~~Consolidated~~Digital distribution net revenues ~~decreased~~increased 4125.42% to $8814,~~959~~092,000 ~~for fiscal 2011~~, from $936,~~070~~258,000 ~~for fiscal 2010~~.

oImage ~~DVD (not including Blu-ray) net revenues decreased 19.2% to $57~~Entertainment,~~533,000,~~ ~~from $71,248,000~~Inc.

o Blu-ray net revenues increased 70.8% to $16,162,000, from $9,463,000.

o Digital distribution net revenues increased 50.0% to $6,258,000, from $4,171,000.

o Broadcast net revenues increased 43.3% to $5,961,000, from $4,159,000.

o Other net revenues, including CD, rental, scanned-based trading, decreased 24.4% to $3,045,000, from $4,029,000, primarily due to lower rental revenue sharing activity as a result of the Hollywood/Movie Gallery bankruptcy and Blockbuster reorganization.

· Consolidated gross profit margin increased to 23.0% for fiscal 2011, compared to 20.1% for fiscal 2010, primarily as a result of the lower manufacturing costs with Sony Pictures Home Entertainment (or SPHE) as well as higher margin on sales of Madacy product. See “2011 Events” below.

· Consolidated selling expenses were $6,326,000 for fiscal 2011 compared to $11,272,000 for fiscal 2010 and, as a percentage of revenues, decreased to 7.1% from 12.1% for fiscal 2010 primarily due to lower advertising and promotional expenses. See “Results of Operations—Selling Expense” below.

· Consolidated general and administrative expenses were $13,482,000 for fiscal 2011, down 27.6% from $18,614,000 for fiscal 2010, primarily due to lower personnel costs. See “Results of Operations—General and Administrative Expense” below.

· Noncash interest expense related to amortization of debt discount and deferred financing costs totaled $391,000, for fiscal 2011, down 42.1% from $675,000 for fiscal 2010.

· Our net loss applicable to common shareholders for fiscal 2011 was $1,575,000 ($0.01 per diluted share), compared to a net loss applicable to common shareholders of $6,950,000 ($0.31 per diluted share) for fiscal 2010.

· We completed the purchase of the home video business from Madacy Entertainment in the second quarter of fiscal 2011.

· We transitioned our distribution to SPHE during the second half of fiscal 2011.

· Subsequent to March 31, 2011 on June 23, 2011, we entered into a three-year Revolving Credit and Security Agreement with PNC Bank, which provides us with a revolving credit facility of up to $17.5 million based upon eligible receivables and inventory.

The highlights above and the discussion under “2011 Events” below are intended to identify some of our more significant results and transactions during our fiscal year ended March 31, 2011 and subsequent, and should be read in conjunction with the related discussions in this Annual Report, including below under “Liquidity and Capital Resources” and “Results of Operations” and our consolidated financial statements and footnotes included in Item 8.

2011 Events

New Revolving Credit Facility

On June 23, 2011, we entered into a three-year Revolving Credit and Security Agreement (or PNC Credit Facility) with PNC Bank, National Association (or PNC).

Our previous credit facility, which provided a revolving line of credit of up to $15 million and was set to expire on July 31, 2011, was repaid in full with proceeds from the PNC Credit Facility and terminated. The PNC Credit Facility provides for up to a $17.5 million revolving line of credit commitment, including a letter of credit subfacility with a $1.5 million sublimit. Advances under the PNC Credit Facility generally are limited to the total of: (i) 85% of eligible accounts receivable; (ii) 60% of eligible inventory (with an inventory sublimit of 25% of the borrowing base); and (iii) the lesser of $3 million or the amount of certain letters of credit provided by one or more affiliates of JH Partners, LLC (or JH Parties). Reserves against the borrowing base and eligibility determinations generally are made at PNC's discretion. The amount of outstanding credit under the PNC Credit Facility is capped at $5 million during a 30-day clean-up period annually between January 1 and April 30, with such period to commence each year on a date we select.

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At our option, subject to certain limitations (including, most notably, on eurodollar rate advances), interest rates under the PNC Credit Facility are equal to either (a) the sum of the alternate base rate plus 1.75% or (b) the sum of the eurodollar rate plus 3.25%. For purposes of the PNC Credit Facility: the "alternate base rate" means a rate equal to the higher of (i) PNC's base commercial lending rate, (ii) the average rate on overnight federal funds plus 0.5% and (iii) the applicable daily LIBOR rate plus 1%; and the "eurodollar rate" means the interest rate determined by PNC by dividing (i) the rate which appears on the Bloomberg Page BBAM1 or another eligible source selected by PNC, by (ii) a number equal to 1.00 minus the applicable Federal Reserve percentage.

As of June 28, 2011, we had a maximum borrowing availability of $8.7 million ($11.3 million based upon eligible accounts receivable and inventory less the $2.6 million minimum block), of which $3.7 million was used, and our borrowing rates were 5.00% (based on the alternative base rate, which is Prime Rate of 3.25% plus 1.75%) and 3.56% (based on the eurodollar rate, which is three-month LIBOR of 0.31% plus 3.25%).

The obligations under the PNC Credit Facility are secured by a lien on substantially all of our assets. Our obligations under the PNC Credit Facility, up to a maximum of $10.5 million, are guaranteed by JH Parties.

The PNC Credit Facility provides for certain loan covenants, including financial covenants providing for a minimum senior fixed charge coverage ratio of not less than 1.20 to 1.00 and a minimum fixed charge coverage ratio of not less than 1.10 to 1.00 (i.e., consolidated EBITDA (minus unfinanced capital expenditures and income taxes) to consolidated total debt (plus certain management fees, and, in the case of the fixed charge coverage ratio, certain dividend payments) over a rolling prior four fiscal quarter period), and limitations on our ability with regard to the incurrence of debt, the disposition and preservation of collateralized assets, transactions with affiliates (other than payment of certain management fees), the existence of liens, capital expenditures, stock repurchases and dividends, investments, amendments of certain business arrangements with SPHE and Sony DADC (collectively Sony parties) and of the Image/Madacy Home Entertainment LLC (or IMHE) management agreement) and mergers, dispositions and acquisitions (with certain limited exceptions for the purchase of third-party equity interests in IMHE). The PNC Credit Facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to certain other contracts (including, for example, business arrangements with Sony parties and other material contracts) and indebtedness and events constituting a change of control or a material adverse effect in any of our results of operations or condition (financial or otherwise). The occurrence of an event of default will increase the applicable rate of interest and could result in the acceleration of our obligations under the PNC Credit Facility and JH Parties being required to pay certain of our obligations under the PNC Credit Facility.

Purchase of Madacy Home Video

On September 7, 2010 (the Closing), we and our then wholly-owned subsidiary Image/Madacy Home Entertainment, LLC (IMHE) executed an Asset Purchase Agreement with the effective date of August 31, 2010 (Purchase Agreement) with Madacy Entertainment, LP (Seller) and Madacy Entertainment US, Inc. (Madacy US). Pursuant to the Purchase Agreement, IMHE purchased Seller’s home video division, consisting of certain DVD inventory, content advances and certain other assets, including the trade name “Madacy Home Video” (collectively, the Home Video Division). Pursuant to a Sublicense Agreement also executed on September 7, 2010 with an effective date of August 31, 2010 (Sublicense Agreement), IMHE exclusively sublicensed all of Madacy US’ rights to content for distribution (the Rights).

The Madacy transaction provides us a well-established, retail-supported platform for distribution of promotional, budget priced products in the United States and Canada. In addition, we are able to further mine our substantial content library in developing new multi-disc product releases utilizing Madacy's unique packaging design and its dedicated retail shelf space.

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The purchase price for the Madacy transactions included: (i) fair value of cash payments of approximately $1,213,000, of which $139,000 was included in accrued liabilities at March 31, 2011; (ii) the issuance of 940,070 shares of unregistered Image common stock valued at $200,000 (contractually based on the average closing price for 20 trading days ending immediately before the third trading day before the effective date of the Purchase Agreement, which approximates fair value); (iii) a 30% limited liability membership interest in IMHE (IMHE Noncontrolling Interest); (iv) the assumption of Seller’s obligations by IMHE under (1) the Replication Services Agreement (Replication Services Agreement) dated July 28, 2010 with the effective date of July 1, 2010 between Sony DADC US Inc. (Sony DADC) and Seller; (2) the Security Agreement (Security Agreement) dated June 1, 2010 between Sony DADC and Seller; and (v) the execution of a Guarantee Agreement (Guarantee Agreement) dated August 31, 2010 by Image in favor of Sony DADC, guarantying all of the obligations of IMHE to Sony DADC pursuant to the Replication Services Agreement and Security Agreement. The obligations under the Replication Services Agreement include, without limitation, the repayment of a $2 million advance ($1,826,000 net of a discount of $174,000) to Sony DADC pursuant to the terms and conditions of such agreement. The $2 million advance is to be repaid at $0.10 per IMHE disc manufactured until the advance is repaid.

The IMHE Noncontrolling Interest is subject to a right of repurchase by us on August 31, 2013 at a repurchase price calculated as the product of 2.25 times the operating income for four consecutive fiscal quarters ending on or prior to the repurchase date, as determined in accordance with the terms of the Operating Agreement executed on September 7, 2010 with an effective date of August 31, 2010 (Operating Agreement), multiplied by the IMHE Noncontrolling Interest. If we do not repurchase the IMHE Noncontrolling Interest on August 31, 2013, then we are required to repurchase such interest on August 31, 2014 at a repurchase price calculated as the product of 2.75 times the operating income for four consecutive fiscal quarters ending on or prior to the repurchase date, as determined in accordance with the terms of the Operating Agreement. If we undergo a change of control on or prior to August 31, 2013, Seller may opt to have Image repurchase the IMHE Noncontrolling Interest substantially based on the formula for a repurchase at August 31, 2013. In connection with the repurchase of the IMHE Noncontrolling Interest, the Sublicense Agreement will terminate and Madacy US will transfer all of its ownership right, title and interest in and to the Rights to IMHE, as such Rights are added to or terminated (with IMHE’s consent) during the period between August 31, 2010 and the date of our repurchase of the IMHE Noncontrolling Interest.

In connection with the purchase of the Home Video Division, on September 7, 2010, we entered into a three year Management Services Agreement with Madacy Entertainment Management LP, and IMHE entered into an Employee Services Agreement with Sonoma Entertainment LP, each of which was effective August 31, 2010. Pursuant to the Management Services Agreement, we will pay fees for management services provided by certain employees who oversaw the Seller’s Home Video Division prior to the Closing. The management fee is $400,000 per year for each of the three years of the term, subject to adjustment based on IMHE’s operating income as calculated in accordance with the terms and conditions of the Operating Agreement (which has a $200,000 floor and an $800,000 ceiling annually), to be paid quarterly. Pursuant to the Employee Services Agreement, IMHE agreed to pay approximately CDN$29,000 per month for the services of certain people employed in connection with the Seller’s Home Video Division prior to the Closing who will continue to assist IMHE with the Home Video Division. The Employee Services Agreement will remain in effect until Image’s repurchase of the IMHE Noncontrolling Interest.

In connection with the purchase of Madacy Home Video, Madacy’s distribution agreement with MMS-Millennium Media Services was assigned to IMHE for distribution of the IMHE products.

Manufacturing and Distribution with Sony Pictures Home Entertainment

On August 23, 2010, we signed a three-year Distribution Services and License Agreement with Sony Pictures Home Entertainment Inc. (SPHE), to act as exclusive manufacturer to meet the Company’s DVD requirements, including Blu-ray Disc high-definition format, and to provide related distribution and other logistics services in exchange for certain fees. SPHE acts as our vendor of record for shipments of physical product to North American retailers and wholesalers. However, under our relationship with SPHE, we are responsible for the credit risk from the end customer with respect to accounts receivable. On September 8, 2010, an interest-free $2.5 million advance against future replication from SPHE, to be repaid at $0.15 per disc manufactured until the advance is repaid, and a $750,000 non-recoupable advance were received from SPHE and were used to reduce the then-outstanding borrowings under our previous revolving credit facility with Wells Fargo Capital Finance. The non-recoupable advance was used to pay the fee incurred for terminating our arrangement with our former replicator. Both advances (non-recoupable for the first year only and recoupable) are subordinated to all obligations outstanding to PNC Bank, N.A. under our new revolving credit facility. Until the advance is repaid, SPHE will have a security interest in all our assets in second position behind PNC. Given the progress we have made with the transition, it is likely that none of the termination conditions will be triggered within the first year and, therefore the termination fee was offset by the non-recoupable advance resulting in a net zero impact to cost of sales. After the first year, the unrecouped portion of the recoupable advance is refundable, the nonrecoupable advance is not refundable.

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~~The~~o ~~SPHE~~Broadcast ~~agreement~~net ~~provides~~revenues usincreased ~~several~~31.8% ~~significant~~to ~~advantages~~$7,854,000, ~~including:~~from $5,961,000.

o ~~significant~~Other ~~reduction~~net inrevenues, ~~replication~~including ~~costs,~~theatrical ~~particularly~~and asnon-theatrical, ~~related~~increased 72.9% to ~~Blu-ray~~$3,140,000, ~~manufacturing;~~from $1,816,000.

o● ~~ability~~Consolidated togross ~~sell~~profit ~~directly~~margin todecreased ~~key~~slightly ~~accounts~~to ~~such~~22.8% asfor ~~Walmart~~fiscal 2012, ~~Best~~compared ~~Buy~~to ~~and~~23.0% ~~Costco~~for fiscal 2011, ~~which~~primarily ~~eliminated~~as ~~other~~a ~~third-party~~result ~~distributor~~of ~~fees,~~higher ~~providing~~levels ~~incremental~~of ~~revenues,~~budget ~~higher~~line ~~gross~~product ~~margin~~in Walmart and ~~ability~~Target, towhich ~~better~~generally ~~manage~~carry ~~retail~~a ~~inventories;~~lower margin.

o● ~~ability~~Consolidated toselling ~~access~~expenses ~~SPHE’s~~were ~~point~~$8,195,000 offor ~~sale~~fiscal ~~reporting~~2012 ~~systems~~compared to ~~better~~$6,326,000 ~~manage~~for ~~replenishment~~fiscal of2011, ~~store~~primarily ~~inventories~~due onto ahigher ~~daily~~advertising ~~basis~~and topromotional ~~maximize~~expenses ~~revenues~~associated ~~and~~with ~~minimize~~our ~~product~~high-profile ~~returns;~~new ~~and~~releases. See “Results of Operations—Selling Expense” below.

o● ~~ability~~Consolidated general and administrative expenses were $15,733,000 for fiscal 2012, up from $13,482,000 for fiscal 2011, primarily due to ~~access~~higher ~~Sony's~~legal ~~extensive~~and ~~Scan-Based~~consulting ~~Trading~~fees ~~network~~associated with the pending RLJ transaction that ~~features~~were ~~product~~partially ~~placement~~offset inby ~~over~~lower ~~20,000~~depreciation ~~drug~~and bad debt expense. See “Results of Operations—General and ~~grocery~~Administrative ~~outlets~~Expense” below.

~~Sublicense~~● ~~Agreement~~Noncash ~~with~~interest ~~SPHE~~expense related to amortization of debt discount and deferred financing costs totaled $597,000, for fiscal 2012, up 52.3% from $392,000 for fiscal 2011.

~~Concurrent~~● ~~with~~Our ~~entering~~net ~~into~~loss ~~the~~applicable ~~Distribution~~to ~~Services~~common ~~and~~shareholders ~~License~~for ~~Agreement~~fiscal ~~with~~2012 ~~SPHE~~was $3,184,000 we($0.01 ~~also~~per ~~entered~~diluted ~~into~~share), acompared ~~Sublicense~~to ~~Agreement~~a ~~that~~net ~~provides~~loss usapplicable ~~the ability~~ to ~~market~~common ~~and~~shareholders ~~distribute 60 titles previously distributed by SPHE. The list~~ of ~~titles includes releases such as Sydney Pollack's Absence of Malice (starring Paul Newman and Sally Field)~~$1,575,000 ($0.~~..And~~01 ~~Justice~~per ~~For~~diluted ~~All (directed by Norman Jewison and starring Al Pacino~~share), ~~and~~for ~~Adaptation~~fiscal ~~(directed by Spike Jonze~~2011, ~~starring~~primarily ~~Nicolas~~because ~~Cage,~~of ~~Meryl~~costs ~~Streep~~attributable ~~and~~to ~~Chris~~the ~~Cooper)~~RLJ transaction.

~~Customers’~~● ~~Bankruptcy~~On ~~Filings~~April 2, 2012, we entered into an agreement and plan of merger with RLJ Acquisition, Inc.

OnThe ~~February~~highlights ~~16,~~above ~~2011,~~and ~~Borders~~the ~~Group,~~discussion ~~Inc.,~~below ~~filed~~are ~~for~~intended ~~Chapter~~to 11identify ~~bankruptcy~~some ~~protection. Net~~of ~~revenues~~our ~~from~~more ~~Borders~~significant ~~for~~results ~~fiscal~~and ~~2011~~transactions ~~was~~during ~~$742,000. As~~our offiscal year ended March 31, ~~2011,~~2012 weand ~~recorded an aggregate reserve of $408~~subsequent,~~000~~ ~~for~~and ~~potential~~should ~~uncollectible~~be ~~receivables~~read ~~from~~in ~~Borders,~~conjunction ~~which~~with ~~was~~ the ~~net~~related ~~amount~~discussions ~~due~~in atthis ~~March~~Annual 31Report, ~~2011~~including ~~less~~below ~~payments~~under ~~received~~“Liquidity ~~prior~~and toCapital ~~the~~Resources” ~~bankruptcy~~and ~~filing. It~~“Results isof ~~unclear~~Operations” asand toour ~~whether~~consolidated wefinancial ~~will~~statements ~~recover~~and ~~any~~footnotes ofincluded ~~the~~in ~~monies~~Item ~~owed to us by Borders~~8.

On September 23, 2010, Blockbuster Inc. filed for Chapter 11 bankruptcy protection. Net revenues from Blockbuster for fiscal 2011 was $1,079,000. As of March 31, 2011, we recorded an aggregate reserve of $273,000 for potential uncollectible receivables from Blockbuster, which was the net amount due at March 31, 2011 less payments received prior to the bankruptcy filing. It is unclear as to whether we will recover any of the monies owed to us by Blockbuster.

On February 2, 2010, Movie Gallery Inc., owner of rental chain Hollywood Video, filed for Chapter 11 bankruptcy protection. Both Movie Gallery and Hollywood Video were customers of Image. It is unclear as to whether we will recover any of the monies owed to us by Movie Gallery or Hollywood Video. As of March 31, 2011, we had reserved 100% of the remaining receivables of $815,000, which represents our receivables from them prior to the bankruptcy filing.

Liquidity and Capital Resources

Working Capital

At March 31, ~~2011~~2012, we had a working capital deficit of $6.94 million, which isunfavorably ~~improved~~compares ~~from~~to a working capital deficit of $73.84 million at March 31, ~~2010~~2011. Operational improvements from lower infrastructure costs and the execution of the SPHE distribution agreement were offset by the assumption of liabilities as a part of the purchase of Madacy Home Video and accrual of dividends related to the Series B Cumulative Preferred Stock (or Series B Preferred).

Our working capital has historically been generated from the following sources:

●

operating cash flows;

●

availability under our revolving credit facility;

●

private placement of debt and equity instruments;

●

advances from our disc manufacturer, sublicensors, subdistributors; and

●

trade credit.

The more significant factors affecting cash used in our operating and financing activities during fiscal 2012 were:

●

increased royalties and distribution fee advances for exclusive content of $5.6 million;

●

increased production cost expenditures of $3.5 million;

●

repayment of manufacturing advance of $2.5 million;

●

decreased deferred revenue of $1.9 million;

●

increased inventories of $1.8 million; and

●

increased accounts receivable of $1.3 million.

Image Entertainment, Inc.

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~~Our~~The ~~working~~more ~~capital~~significant ~~has~~factors ~~historically~~affecting ~~been~~cash ~~generated~~provided ~~from~~by ~~the~~our ~~following~~operating ~~sources~~and financing activities during fiscal 2012 were:

·● ~~operating~~increase ~~cash~~in ~~flows~~borrowings under our revolving credit facility of $6.8 million; and

·● ~~availability~~increased ~~under~~accounts ~~our~~payable ~~revolving~~of ~~credit~~approximately ~~facility;~~$1.3 million.

·During ~~private~~fiscal ~~placement~~2012, we maintained our overall liquidity and financial condition because, among other things, we continued to work with SPHE to reduce our outstanding accounts receivable and we improved our borrowing availability as a result of ~~debt~~amending our revolving credit facility with PNC Bank, N.A., which specifically (i) decreased the availability block, (ii) increased the availability from broadcast and ~~equity~~digital ~~instruments;~~receivables, and (iii) increased the credit support provided to PNC by JH Partners. We also continue to benefit from the cost reduction plan initiated in the latter half of fiscal 2010. These improvements in liquidity enabled Image to increase its investment in high-profile content (including Radio Rebel (starring Debby Ryan), Paul Rodriguez: Just for the Record, Note to Self (starring Christian Keys, Letoya Luckett), Love Buddies (starring Tatyana Ali, Keith Robinson), The Heart of Christmas (starring Candace Cameron Bure, George Newbern) and a program by David E. Talbert, You Can’t Choose Family) not released in fiscal 2012. Should the transaction contemplated with RLJ Acquisition, Inc. not be consummated, Image will continue to focus on exploiting the value of our 4,000 title catalog, continue to make strategic acquisition of new products and remain committed to pursuing business combinations to maximize shareholder value. Image has several options to improve liquidity for product acquisition, which include (i) seek new cash infusion/added credit enhancements from our major shareholder, JH Partners, (ii) renegotiate terms with key suppliers/distributors, and (iii) further outsource non-core activities. Management cannot provide any assurance that we will be able to execute the options described above.

· advances from our disc manufacturer, sublicensors, subdistributors; and

· trade credit.

The more significant factors affecting cash provided by our operating and financing activities during fiscal 2011 were:

· $2.5 million advance on future manufacturing received under the Distribution Services and License Agreement with SPHE; and

· $1.75 million advance on future Canadian distribution activities received from Entertainment One; and

· overall savings from implementation of cost reduction plan implemented in January 2010.

The more significant factors affecting cash used in our operating, investing and financing activities during fiscal 2011 were:

· increased production costs of $3.1 million;

· increased royalties and distribution fee advances for exclusive content of $2.9 million;

· purchase of the video business from Madacy Entertainment; and

· net repayments of $264,000 under our revolving credit facility as a result of receipt of working capital.

During fiscal 2011, we believe we improved our overall liquidity and financial condition due to, among other things, the replication advance received from SPHE (as discussed above) as well as the continued effects of cost reduction plan although we continued to have constrained liquidity. In fiscal 2010, we executed a cost reduction plan which included reducing personnel, benefit costs, advertising and other marketing expenditures, travel and trade show expenditures and third-party commissions. The effects of these cost reductions carried into fiscal 2011. These improvements in liquidity enabled the Company to increase its investment in high-profile content (including The Way Back) not released in fiscal 2011.

Capital Resources

Cash. As of March 31, ~~2011~~2012, we had cash of $~~333~~368,000, as compared to $~~460~~333,000 as of March 31, ~~2010~~2011.

Borrowing Availability. At March 31, ~~2011~~2012, our borrowing availability was $72.17 million ($84.61 million based upon eligible accounts receivable less the $1.535 million ~~minimum~~availability ~~requirement~~block).

~~Wells~~Revolving Credit Facility. During a portion of the fiscal year ended March 31, 2012 (until June 23, 2011), we had a revolving credit facility with Wells Fargo ~~that~~Capital ~~provided~~Finance, usLLC, ~~with~~as asuccessor ~~revolving~~by ~~credit~~merger ~~facility~~to ofWachovia Capital Finance Corporation (Western), (or Wells Fargo) for up to $15 million (reduced from $20 million on February 1, 2011), ~~(or~~and ~~Wells~~since ~~Credit~~June ~~Facility).~~23, ~~Actual~~2011, ~~borrowing~~we ~~availability~~have ~~under~~replaced the ~~line~~Wells ~~was~~Fargo ~~based~~credit ~~upon~~facility ~~our~~with ~~level~~a ofrevolving ~~eligible~~credit ~~accounts~~facility ~~receivable~~with ~~and~~PNC ~~eligible~~Bank, ~~inventories~~N.A. The term of our Wells ~~Credit~~credit ~~Facility~~facility would have matured on July 31, 2011; however, on June 23, 2011, we entered into our three-year PNC ~~Credit~~credit ~~Facility~~facility and repaid and terminated our Wells ~~Credit~~credit ~~Facility~~facility. ~~See~~The PNC credit facility provides for up to a $17.5 million revolving line of credit commitment including a letter of credit subfacility with a $1.5 million sublimit. ~~“2011~~Advances ~~Events~~under –the ~~New~~PNC ~~Revolving~~credit ~~Credit~~facility ~~Facility”~~generally ~~above~~are ~~for~~limited ~~additional~~to ~~information~~the ~~related~~total of: (i) 85% of eligible accounts receivable; (ii) 60% of eligible inventory (with an inventory sublimit of 25% of the borrowing base); and (iii) the lesser of $3 million or the amount of certain letters of credit provided by one or more affiliates of JH Partners, LLC. The reserve against the borrowing base, or availability block, may be reduced upon meeting certain terms and conditions at PNC’s discretion. In addition, the amount of outstanding credit under the PNC credit facility is capped at $5 million during a 30-day clean-up period annually between January 1 and April 30, with such period to ~~our~~commence each year on a date we select. This clean-up period was waived by PNC ~~Credit~~for ~~Facility~~calendar year 2012.

We were in compliance with all financial and operating covenants under the Wells ~~Credit~~credit ~~Facility~~facility at ~~March~~June 3123, 2011 and are in compliance with all financial and operating covenants under our PNC ~~Credit~~credit ~~Facility~~facility at ~~June~~March 2831, ~~2011~~2012. ~~However,~~These ~~given~~covenants ~~our~~are ~~current~~measured ~~liquidity~~at ~~constraints,~~various ittimes isthrough-out ~~not~~the ~~possible~~year, toand ~~determine~~while ~~whether~~we believe we will be in compliance with all financial and operating covenants inat ~~the~~those ~~future~~dates, given our current liquidity constraints there can be no assurance that we will continue to be in compliance.

Disc Replication Advance. SPHE manufactures our tangible goods, including DVDs and Blu-ray discs. On September 8, 2010, we received an interest-free $2.5 million advance against future manufacturing from SPHE, to be repaid at $0.15 per disc manufactured until the advance is repaid. ~~See~~In “November 2011, ~~Events~~the –advance ~~Manufacturing~~was ~~and~~repaid ~~Distribution~~in ~~with Sony Pictures Home Entertainment” above~~full.

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Results of Operations

During the latter part of fiscal 2011, as a result of changes in management’s view of the Company's operations, the Company reorganized its reporting segments in order to better align them with the methods used by management to manage, evaluate, operate and internally report the business activities of the Company. Based on this reorganization, the Company's three former reporting segments, Domestic, Digital and International, have been combined into and restated in one reporting segment, Worldwide Entertainment.

Our Worldwide Entertainment business consists of the acquisition, content enhancement and worldwide distribution of exclusive content in various formats, including DVD, Blu-ray, digital, broadcast, including cable and satellite, video-on-demand, streaming video, downloading and sublicensing.

Net Revenues

Net revenues for fiscal ~~2011~~2012 were $88100,~~959~~086,000, compared with $9388,~~070~~959,000 for fiscal ~~2010~~2011. The ~~decrease~~increase in net revenues for fiscal ~~2011~~2012 as compared to fiscal ~~2010~~2011 was primarily due to ~~fewer~~the performance of high-profile, ~~cast-driven~~ new releases inThe ~~fiscal~~Double, ~~2011~~The asWay aBack ~~result~~and ofBeneath the ~~fewer~~Darkness ~~acquisitions~~as ~~made~~well ~~prior~~as tothe ~~January 2010 which were released in fiscal 2011. Although DVD revenues were down by 19.2%,~~ Blu-ray ~~revenues~~release ~~were up 70.8% as a result~~ of ~~consumers’~~many ~~continued acceptance~~ of ~~the~~The ~~Blu-ray~~Criterion ~~format~~Collection titles. ~~Both~~Sublicensing ~~digital~~ and ~~broadcast~~other ~~formats were up as these formats continue to grow. Other~~ revenues in the table below ~~include~~includes ~~distribution of CDs as well as rental~~sublicensing, theatrical and non-theatrical revenue streams.

Image Entertainment, Inc.

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Net Revenue by Format:

	Fiscal Year Ended March 31,
	2011			2010			% Change
	2012			2011			% Change
	(in thousands)
DVD	$	57,533		$	71,248			(19.2	)%
Packaged Goods (DVD & Blu-ray)	$	75,000		$	74,924			0.1	%
Blu-ray		16,162			9,463			70.8
Digital		14,092			6,258			125.2
Digital		6,258			4,171			50.0
Broadcast		7,854			5,961			31.8
Broadcast		5,961			4,159			43.3
Sublicensing and Other		3,140			1,816			72.9
Other		3,045			4,029			(24.4	)
Net Revenues	$	100,086		$	88,959			12.5	%
Net Revenues	$	88,959		$	93,070			(4.4	)%
As a percentage of net revenues:
DVD		64.7	%		76.6	%
Packaged Goods (DVD & Blu-ray)		74.9			84.2	%
Blu-ray		18.2			10.2
Digital		14.1			7.0
Digital		7.0			4.5
Broadcast		7.8			6.7
Broadcast		6.7			4.5
Sublicensing and Other		3.1			2.1
Other		3.4			4.2
		100.0	%		100.0	%

In fiscal ~~2011~~2012, ~~Amazon.com~~Walmart and AEC each accounted for approximately 1611% of our net revenues. In fiscal ~~2010~~2011, Amazon.com and AEC each accounted for approximately 1716% ~~and 14%~~ of our net revenues~~, respectively~~. ~~Additionally,~~Our ~~our~~ top five customers accounted for over 45% of our fiscal ~~2011~~2012 net revenues. Our top performing 30 new release titles for fiscal ~~2011~~2012 and fiscal ~~2010~~2011 generated net revenues of $1724.5 million and $2517.25 million, respectively. Our 30 top performing titles, whether initially released ~~new~~ in the fiscal year or in prior fiscal years, generated net revenues of $~~21.8~~28 million and $3321.28 million in fiscal ~~2011~~2012 and fiscal ~~2010~~2011, respectively.

Cost of Sales

Our consolidated cost of sales for fiscal ~~2011~~2012 was $6877,~~480~~234,000, or 77.02% of net revenues, compared to $7468,~~337~~480,000, or 7977.90% of net revenues, for fiscal ~~2010~~2011. The minimal fluctuation in consolidated cost of sales as percentage of consolidated net revenue between the two years is discussed in Gross Profit ~~Margin~~ below.

Gross Profit ~~Margin~~

Our consolidated gross profit ~~margin~~ for fiscal ~~2011~~2012 was $2022,~~479~~852,000, or 2322.08% of consolidated net revenues, compared to $1820,~~733~~479,000, or 2023.10% of consolidated net revenues, for fiscal ~~2010~~2011, primarily as a result of ~~the lower manufacturing costs with SPHE as well as~~ higher ~~margin~~pricing ondiscounts ~~sales~~and ofmarket ~~Madacy~~development ~~product. The~~funds ~~gross~~provided ~~profit~~to ~~margin~~customers inas ~~fiscal~~well ~~2011~~as ~~included~~higher afreight ~~$2.5 million fourth quarter charge representing accelerated amortization~~ and ~~fair~~fulfillment ~~value~~costs ~~write-downs, down~~ from abudget ~~fourth~~line ~~quarter~~product, ~~fiscal~~partially ~~2010~~offset ~~charge~~by ~~for~~changes ~~accelerated~~in ~~amortization~~product ~~and~~mix ~~fair value write-downs of $2.8 million. The fourth quarter fiscal 2011 charge negatively impacted fiscal 2011 gross margin~~ by ~~2.9%,~~format ~~down~~and ~~from~~lower ~~3.0%~~manufacturing ~~for~~and ~~the~~production ~~fourth quarter fiscal 2010 charge~~costs.

Items affecting our gross profit included:

●

the sales mix of individual titles (because each of our exclusive agreements has differing terms);

●

the strength of a title’s sales performance;

●

the selling price of a title;

●

the costs that we are responsible for, including disc manufacturing and distribution costs; and

●

third-party net profit participations, specifically the royalty rates, distribution fees retained and profit splits inherent in the agreements.

A reconciliation of the factors contributing to the decrease in gross profit percentage for fiscal 2012 of 22.8% from fiscal 2011 of 23.0% follows:

3.2%		Lower manufacturing costs and changes in product and format mix
0.7		Lower production costs
(1.7)		Higher freight and fulfillment expenses
(2.4)		Higher pricing discounts and market development funds provided to customers
(0.2)%		Change in gross profit

Image Entertainment, Inc.

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Items affecting our gross margin included:

· the sales mix of individual titles (because each of our exclusive agreements has differing terms);

· the strength of a title’s sales performance;

· the selling price of a title;

· the costs that we are responsible for, including disc manufacturing and distribution costs; and

· third-party net profit participations, specifically the royalty rates, distribution fees retained and profit splits inherent in the agreements.

A reconciliation of the factors contributing to the increase in gross margin percentage for fiscal 2011 of 23.0% from fiscal 2010 of 20.1% follows:

0.4%		Lower pricing discounts and market development funds provided to customers
6.2		Changes in product and format mix and manufacturing savings
(3.7)		Higher freight and fulfillment expenses
2.9%		Increase in gross profit margin

Selling Expenses

Selling expenses for fiscal ~~2011~~2012 were $68,~~326~~195,000 compared to $116,~~272~~326,000 for fiscal ~~2010~~2011 and, as a percentage of consolidated net revenues, ~~decreased~~increased to 78.12% from 127.1% for fiscal ~~2010~~2011. This ~~decrease~~increase was primarily due to ~~the continued effects of the cost reduction plan which we began in fiscal 2010 and resulted in lower costs for~~ advertising and promotional expenses associated with ~~theatrical~~our ~~releases~~high-profile ofnew $3releases.3 million in fiscal 2011. A substantial portion of the higher selling expenses in fiscal 2010 was due to higher advertising and promotional expenses related to the theatrical release of one title, Management, which had associated advertising and promotional expense of $1.9 million in fiscal 2010.

Personnel costs and rent expense related to selling expenses were lower by $1.3 million and $180,000, respectively, for fiscal 2011 as compared to the prior year as a result of our cost reduction plan.

General and Administrative Expenses

General and administrative expenses for fiscal ~~2011~~2012 were $1315,~~482~~733,000 compared to $1813,~~614~~482,000 for fiscal ~~2010~~2011 and, as a percentage of consolidated net revenues, ~~decreased~~increased slightly to 15.27% from 2015.02% for fiscal ~~2010~~2011, primarily due to ~~lower~~legal ~~costs~~and asconsulting afees ~~result~~associated ofwith ~~our~~merger ~~cost~~and ~~reduction~~acquisition ~~plan~~activity, including the pending RLJ transaction.

More specifically, the ~~decrease~~increase in general and administrative expenses was due to the following:

·● ~~lower~~$1.4 ~~personnel~~million ~~and~~higher ~~related~~external ~~costs~~legal byfees ~~$3.5~~associated ~~million~~with merger activities with Acorn Media and RLJ;

·● ~~lower~~$682,000 ~~bad~~higher ~~debt~~stock ~~expense~~compensation ~~by $600,000~~expense;

·● ~~lower depreciation costs by~~ $~~515~~279,000 higher personnel costs;

·● ~~lower~~$275,000 ~~insurance~~higher ~~premiums~~amortization byof ~~$480,000~~intangibles;

·● ~~lower~~$199,000 higher consulting fees ~~by $452,000~~; and

·● ~~lower investment banking fees by~~ $~~304~~152,000; ~~and~~higher external management fees.

·Offsetting ~~lower~~the ~~rent~~above expense byincreases ~~$148,000.~~were:

~~Offsetting~~● ~~the~~$572,000 ~~above~~lower ~~expense~~bad ~~decreases~~debt ~~were:~~expense; and

·● ~~higher external management fees by~~ $~~458~~257,000; lower depreciation costs.

· higher external legal fees by $390,000 associated with the SPHE and Madacy transactions; and

· higher amortization of intangibles by $379,000.

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Other Expenses/Income

Other Expenses/Income consisted of interest expense, ~~loss~~change onin ~~extinguishment~~fair value of ~~debt~~noncontrolling interest and other income.

Interest Expense

	2011			2010			% Change
	2012			2011			% Change
	(in thousands)
Noncash amortization of debt discount	$	~~123~~227		$	~~321~~123			~~(61~~84.76	)%
Noncash amortization of deferred financing costs		~~268~~370			~~354~~268			~~(24~~38.31	)
Change in fair value of noncontrolling interest		526			—			100.0
Interest expense, net of interest income		480			400			20.0
Interest expense, net of interest income		400			1,470			(72.8	)
Interest expense, net	$	1,077		$	791			36.2	%
Interest expense, net	$	1,317		$	2,145			(38.6	)%
As a percentage of net revenues		1.1	%		0.9	%		0.2	%
As a percentage of net revenues		1.5	%		2.3	%		(0.8	%)

Interest expense, net, for fiscal ~~2011~~2012 ~~decreased~~increased as compared to fiscal ~~2010~~2011 primarily as a result of ~~reduced~~increased interest-bearing debt levels. Net noncash charges to interest expense, representing amortization of the SPHE manufacturing advance debt discount and deferred financing costs, for fiscal ~~2011~~2012 and ~~2010~~2011, totaled $~~391~~597,000 and $~~675~~392,000, respectively. The change in fair value of noncontrolling interest relating to the Madacy transaction is included in interest expense due to the mandatorily redeemable right to purchase the IMHE Noncontrolling Interest. See “Note 76—Long-Term Debt” for more information on the amortization and deferred financing costs.

~~Loss~~Change onin ~~Extinguishment~~Fair Value of ~~Debt~~Noncontrolling Interest

The ~~net~~change ~~loss~~in onfair ~~extinguishment~~value of ~~debt~~noncontrolling ~~for~~interest ~~fiscal~~due ~~2010~~to ~~was~~the ~~$277,000,~~valuation ~~related~~of the mandatorily redeemable right to purchase the ~~amendment~~Image/Madacy ofHome ~~our~~Entertainment, ~~senior~~LLC ~~secured~~(or ~~convertible~~IMHE) ~~note~~Noncontrolling Interest resulted in ~~July~~income ~~2009~~of on$2,103,000 ~~substantially~~in ~~different~~fiscal ~~terms~~2012 and ~~the~~expense ~~subsequent~~of ~~note~~$526,000 ~~retirement~~ in ~~January~~fiscal ~~2010~~2011. WeThe ~~had~~decrease noin ~~similar~~value ~~event~~is ~~for~~primarily ~~fiscal~~attributable ~~2011~~to lower projected revenues as a result of changes in the business environment.

Image Entertainment, Inc.

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Other Income

~~The~~Other ~~more significant components of other~~ income of $272,~~386,~~000 for fiscal ~~2011~~2012 ~~included:~~resulted from the change in fair value of the stock warrant liability.

·Other income of $2,~~370~~386,000 infor ~~noncash~~fiscal ~~income~~2011 primarily consisted of $2,370,000 resulting from the change in fair values of the stock warrant liability and purchase rights.

~~The~~Summary ~~more significant components~~ of ~~other~~Significant ~~income~~Costs ofRelated ~~$7,751,000~~to ~~for~~Proposed ~~fiscal~~RLJ ~~2010 included:~~Transaction

·During $5the three months and fiscal year ended March 31,~~218,000~~ ~~forgiveness~~2012 significant costs were incurred as a result of ~~debt~~the ~~from~~proposed ~~various~~RLJ ~~vendors;~~Transaction. A summary of these costs, by category, is outlined as follows:

· $1,469,000 in business interruption fees in accordance with a merger transaction that was terminated in April 2009;

(In thousands)	Three Months Ended March 31, 2012		Fiscal Year Ended March 31, 2012
Legal related costs	$	777	$	1,952
Financial due diligence costs		91		187
Fairness opinion fees		193		193
Bank related fees		—		50
Library valuation fees		—		100
Other costs		48		118
Total costs related to proposed RLJ Transaction	$	1,109	$	2,600

· $334,000 of deferred rent written-off as a result of the renegotiation of a long-term lease, which does not include a rent escalation clause; and

· $571,000 in noncash income resulting from the change in fair values of the stock warrant, purchase rights and embedded derivatives.

Income Taxes

We have recorded state income and franchise taxes for fiscal ~~2011~~2012 and ~~2010~~2011.

Even though we have fully reserved our net deferred tax assets, such tax assets may be available to reduce future income taxes payable should we have future earnings. To the extent such deferred tax assets relate to net operating losses (or NOL) carryforwards, the ability to use such NOL carryforwards against future earnings will be subject to applicable carryforward periods and limitations subsequent to a change in ownership.

As of March 31, ~~2011~~2012, we had NOL carryforwards for federal and state income tax purposes of $3040.8 million and $2629.93 million, respectively; however, due to the limitations on the utilization of the federal and state NOL carryforwards as a result of the change in ownership that occurred during 2010, the maximum NOL carryforwards that may be available to offset future taxable income through 2031 were reduced to $1216.43 million and $1820.02 million, respectively.

Subsequent Event

RLJ Transaction

On April 2, 2012, RLJ Acquisition, Inc., which we refer to as RLJ, and Image entered into an Agreement and Plan of Merger, which we refer to as the merger agreement. Concurrently with the execution of the merger agreement, RLJ, Acorn Media Group, Inc. (or Acorn), and the shareholders of Acorn entered into a stock purchase agreement, which we refer as the Acorn purchase agreement. At the closing of the transactions contemplated by the merger agreement and the Acorn purchase agreement, each of Image and Acorn will be wholly owned subsidiaries of RLJ Entertainment, Inc. After the completion of the proposed business combination contemplated by the merger agreement and the Acorn purchase agreement, the current stockholders of Image and Acorn will own approximately 11% and 5%, respectively, of a new combined company, RLJ Entertainment, Inc., which we refer to as RLJ Entertainment, and the current stockholders of RLJ will own approximately 84% of RLJ Entertainment, assuming that none of the RLJ stockholders exercise rights to redeem the RLJ stock they hold (as described below). RLJ Entertainment is expected to apply to list its shares on The Nasdaq Stock Market. The purchase consideration for Image shareholders is valued at approximately $44.0 million. The purchase consideration includes $22.6 million in cash and notes to purchase the Series B Preferred Stock of Image and RLJ Entertainment common stock valued at approximately $21.4 million in exchange for the outstanding common shares of Image.

Image Entertainment, Inc.

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Merger Agreement

At the closing of the merger transaction, the outstanding shares of Image common stock (excluding dissenting shares) will be automatically converted, into the right to receive a total of 2,289,000 shares of common stock of RLJ Entertainment, subject to reduction by up to 150,000 shares depending on the amount of transaction costs incurred by Image.

Pursuant to the preferred stock purchase agreement described below, all shares of the Series B Preferred Stock of Image will be purchased by RLJ immediately prior to the consummation of the merger transaction. The aggregate purchase price for the preferred stock is $22,600,000. As a result of the merger transaction, each share of the Series B Preferred Stock of Image will be canceled, without conversion, payment, or distribution.

At the closing of the merger transaction, each share of RLJ common stock will be automatically converted into one share of common stock of RLJ Entertainment. Each warrant held by RLJ stockholders to purchase shares of RLJ common stock will convert into a right to acquire an equal number of shares of common stock of RLJ Entertainment on the same contractual terms and conditions as were in effect immediately prior to the closing of the merger transaction.

In connection with the merger transactions, the holders of 13,622,664 shares of common stock of RLJ may effect redemption of their shares of common stock of RLJ for cash in an amount equal to their pro rata share of the aggregate amount on deposit in a trust account holding the proceeds of RLJ’s initial public offering. RLJ has no specified maximum redemption threshold; however, RLJ will not redeem its shares in an amount that would cause its stockholders’ equity to be less than $5,000,001.

Representations and Warranties

Image has made customary representations and warranties in the Merger Agreement relating to, among other things, its organization, capitalization, financial statements, absence of certain changes, and Image’s public filings with the SEC. Similarly, RLJ has made customary representations and warranties in the Merger Agreement relating to, among other things, its organization, capitalization, financial statements, absence of certain changes, and RLJ’s public filings with the SEC.

Conditions to Completion of the Merger Transaction

Consummation of the merger transaction is subject to customary conditions, including receipt of any necessary governmental or third party consents. Consummation of the merger transaction is also subject to other conditions, including (i) the registration statement of RLJ Entertainment on Form S-4, which will include a joint proxy statement of Image and RLJ, having been declared effective by the SEC, (ii) the stockholders of Image and RLJ having approved and adopted the merger agreement, (iii) absence of a governmental order that would make the merger transaction illegal, (iv) the Acorn purchase agreement having not been terminated and the conditions to the consummation of the Acorn Transaction having been satisfied, and (v) RLJ having an aggregate of at least $92,000,000 available in cash.

Additionally, closing of the merger transaction is conditioned upon, among other things, (i) no material adverse change of Image or RLJ, (ii) certain stockholders of Image having contributed an aggregate of up to 35,401,977 shares of Image common stock to Image, (iii) the consummation of the Preferred Stock purchase, and (iv) RLJ SPAC Acquisition, LLC having contributed 792,739 shares of common stock of RLJ and warrants to purchase 1,000,000 shares of common stock of RLJ to RLJ.

Stockholder Meetings

Pursuant to the terms of the Merger Agreement, each of RLJ and Image is required to promptly call a meeting of its stockholders for the purpose of voting upon the merger agreement. Pursuant to the support agreement described below, JH Partners Evergreen Fund, LP, JH Investment Partners III, LP and JH Investment Partners GP Fund III, LLC (which we refer to as the JH Entities), the controlling stockholders of Image, have agreed to vote the Image shares they control, directly or indirectly, in favor of the merger. In connection with the initial public offering of RLJ, the RLJ initial stockholders agreed to vote all of their shares of RLJ common stock, which shares constitute approximately 20% of RLJ’s outstanding shares of common stock, for the Merger Transaction.

Image Entertainment, Inc.

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Registration Statement

The Merger Agreement provides that RLJ Entertainment will prepare and file with the SEC a registration statement on Form S-4 in connection with the registration of the shares and warrants of RLJ Entertainment to be issued pursuant to the Merger Agreement and the Acorn Purchase Agreement, which registration statement will include a proxy statement of each of Image and RLJ to be sent to the stockholders of RLJ and Image. RLJ, Image and RLJ Entertainment are required to use their reasonable efforts to have such registration statement declared effective as promptly as practicable thereafter.

Termination of the Merger Agreement

The Merger Agreement may be terminated prior to consummation of the merger transaction by mutual consent of the parties. In addition, the Merger Agreement may be terminated: (i) by either party (A) if the merger has not closed by November 22, 2012; (B) if the consummation of the merger becomes illegal or otherwise prohibited by law, (C) in the event of a breach of a representation, warranty, covenant or agreement by the other party, if such breach is not cured within thirty days after notice of such breach by the non-breaching party; (D) if the merger is not approved and adopted by the stockholders of either RLJ or Image; (ii) by RLJ upon certain “triggering events”, which include, among other things, withdrawal, modification and changes by the board of directors of Image of the recommendation to the stockholders of Image in a manner adverse to RLJ or recommendation by the board of directors of Image of a competing transaction to the stockholders of Image; and (iii) upon written notice by Image, at any time prior to approval by the Image stockholders of the Merger Agreement, to enter into a definitive agreement with respect to a superior proposal.

Expenses and Termination Fee

The merger agreement provides that each party will be responsible for its own costs in connection with the Merger, except that Image and RLJ will each pay half of the expenses relating to certain enumerated costs, including the preparation, filing and mailing of the registration statement and joint proxy statement.

Image must pay a termination fee of $1,620,000 plus RLJ’s expenses, if:

●

RLJ terminates the merger agreement pursuant to a “triggering event” as described above;

●

either party terminates the merger agreement pursuant to a failure by the stockholders of Image to approve the merger agreement, and prior to such failure to approve, a competing transaction with respect to Image was publicly announced; or

●

Image terminates the merger agreement pursuant to a provision allowing termination in order for Image to accept a superior proposal.

In addition, if RLJ is required to pay a termination fee to Acorn under the Acorn purchase agreement, Image must pay one-half of such termination fee actually paid by RLJ to Acorn pursuant to the Acorn Purchase Agreement, not to exceed $500,000.

If the merger agreement is terminated, Image will have virtually no recourse against RLJ because under the terms of the merger agreement, Image waived any right to any amount held in the trust account established pursuant to the Investment Management Trust Agreement, dated as of February 22, 2011, by and between RLJ and Continental Stock Transfer & Trust Co., and it has agreed not to make any claim against any funds in the Trust Account. RLJ does not have any material assets that are not part of the trust account.

The merger agreement and other related transaction documents provide information regarding their terms. They are not intended to provide any other factual information about Image or the other parties thereto. The assertions embodied in representations and warranties by Image and RLJ contained in the merger agreement or the parties to other agreements are qualified by information in the disclosure schedules provided by Image and RLJ in connection with the signing of the merger agreement. These disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the merger agreement. Moreover, certain representations and warranties in the merger agreement and other agreements were used for the purpose of allocating risk between the parties thereto, rather than establishing matters as facts. Accordingly, investors and security holders should not rely on the representations and warranties in the merger agreement and other agreements as characterizations of the actual state of facts about Image or RLJ.

Image Entertainment, Inc.

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Series B Preferred Stock Purchase Agreement

In connection with the merger, RLJ entered into a preferred stock purchase agreement with the holders of the shares of Series B Preferred Stock of Image pursuant to which those holders will sell all of the outstanding shares of preferred stock to RLJ at an aggregate purchase price of $22,600,000. Certain preferred holders will receive only cash in the aggregate amount of $600,000 allocated pro rata among such preferred holders. The remaining preferred holders will receive $22,000,000, comprised of cash and subordinated promissory notes of RLJ Entertainment in amounts to be determined by the amount of cash available to RLJ at the closing of the Merger Agreement. The holders of preferred stock waived all rights to accrued but unpaid dividends on the preferred stock. In connection with the closing of the merger, the preferred stock will be canceled and cease to be outstanding.

The Preferred Holders and RLJ have made customary representations and warranties in the Preferred Stock purchase agreement.

RLJ has agreed to provide registration rights to certain of the preferred stockholders. Each such stockholder is entitled to demand registration on Form S-3 of the shares of common stock of RLJ Entertainment being receiving by them pursuant to the merger transactions, no more than twice, commencing nine months after the closing of the merger agreement and otherwise pursuant to the terms of a registration rights agreement to be entered into by RLJ Entertainment and the applicable stockholders at the closing of the Merger Agreement.

Subordinated Promissory Notes

The subordinated promissory notes of RLJ Entertainment issued pursuant to the Preferred Stock purchase agreement will be unsecured, bear interest at the rate of 12% per annum (increasing to 14% per annum during the continuance of an event of default), and accrued interest for each calendar year will be due and payable on May 15 of the following calendar year, and at maturity. A minimum of 5.4% per annum of interest will be payable in cash on each interest payment date, and additional cash interest may be paid, at RLJ Entertainment’s discretion, under certain circumstances. Any interest which is not paid in cash will be payable through the issuance of additional subordinated promissory notes, or, at the holder’s option, in shares of common stock of RLJ Entertainment valued at their market price at or about the time of issuance of such common stock of RLJ Entertainment. The principal of the subordinated promissory notes will be due and payable in a single payment on the earlier of the sixth anniversary of issuance, one year from the original stated maturity date of RLJ Entertainment’s senior secured debt, or upon a change of control of RLJ Entertainment. The subordinated promissory notes will be subordinated to the prior payment in full of RLJ Entertainment’s senior secured debt and may be further subordinated to additional indebtedness which RLJ Entertainment may incur from time to time, subject to satisfaction of certain financial tests.

Support Agreement

In connection with the Merger, RLJ also entered into a stockholder support agreement with affiliates of JH Partners which collectively own approximately 70% of the outstanding shares of Image common stock. Pursuant to the terms of the Support Agreement, these stockholders agreed to vote all Image shares they hold (i) in favor of the approval and adoption of the merger agreement and approval of the merger transaction, (ii) against any action, agreement or transaction or proposal (including any competing transaction) that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of Image under the merger agreement or that could result in any of the conditions to Image’s obligations under the merger agreement not being fulfilled, and (iii) in favor of any other matter necessary to the consummation of the merger transaction considered and voted upon by the stockholders of Image.

Share Contribution Agreement

In connection with the merger agreement, Image entered into a share contribution agreement with specified Image stockholders, pursuant to which they agreed to contribute to Image up to an aggregate 35,401,977 shares of Image common stock to be cancelled immediately prior to the effective time of the Merger Transaction.

Management Escrow

In connection with the Merger Transaction, on the date of the Merger Agreement, three members of Image management, Messrs. Green, Hyde and Avagliano, entered into an escrow agreement with the affiliates of JH Partners, pursuant to which the individuals will contribute an aggregate 100,000 shares of common stock of RLJ Entertainment received in the Image merger to an escrow fund. At the completion of the 18-month escrow period, if specified conditions have been satisfied, the escrow shares will remain with the individuals in the same proportions as the escrow shares were contributed. If the conditions are not satisfied, the Escrow Shares will be forfeited to the JH Entities.

Image Entertainment, Inc.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Generally accepted accounting principles require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Our actual results may differ from those estimates.

We consider our critical accounting policies to be those that involve significant uncertainties, require judgments or estimates that are more difficult for management to determine, or that may produce materially different results when using different assumptions. We consider the following accounting policies to be critical:

Revenue Recognition. InWe ~~accordance with applicable Financial Accounting Standards Board (or FASB) guidance, we~~ recognize revenues from home video distribution net of an allowance for estimated returns, as well as related costs, in the period in which the product is available for sale by our customers (at the point that title and risk of loss transfer to the customer, which is generally upon receipt by the customer, and in the case of new releases, after “street date” restrictions lapse). Rental revenue under revenue sharing arrangements are recognized when we are entitled to receipts and such receipts are determinable. We recognize revenues from domestic and international broadcast licensing and home video sublicensing, as well as associated costs, when the titles are available to the licensee and other ~~FASB~~ recognition requirements are met. We defer fees received in advance of availability, usually in the case of advances received from Universal Music Group International, ~~Digital Site,~~ Warner Music Australia and other international home video sublicensees, and for broadcast, until other revenue recognition requirements have been satisfied. Provisions for uncollectible accounts receivable are provided at the time of sale. As of March 31, ~~2011~~2012, deferred revenue totaled $53,~~331~~468,000, down ~~18.9~~35% from March 31, ~~2010~~2011.

Royalty and Distribution Fees (including Recoupable Production Costs). For each reporting period, we estimate the ultimate total revenues to be received throughout a title’s exclusive distribution term from exploitation of that title in multiple home entertainment formats. While we charge royalty and distribution fee advances to operations as related revenues are earned, estimates of ultimate revenues are important in determining whether we should record additional royalty and distribution fee expense as cost of sales in any given reporting period. We amortize royalty and distribution fee advances to expense in the same ratio that the current period revenues for a title or group of titles bear to the estimated remaining unrecognized ultimate revenues for that title. Additionally, in circumstances required by FASB Accounting Standards Codification (or ASC) 926, Entertainment—Films, we recognize additional amortization to the extent that capitalized advance royalty and distribution fees exceed their estimated fair value in the period when estimated.

We base our estimates of ultimate revenue for each title on the historical performance of that title, similar titles and specific genre performance. We attempt to reflect in our estimates the most current available information on the title. We update such estimates based upon the actual results of each format’s revenue performance. Estimates of ultimate revenues on a title-by-title basis are subject to substantial uncertainty. Factors affecting future actual performance include focus from the sales and marketing department (including advertising, promotions and price reductions), availability of retail shelf space, retail customer product placement and advertising, maintenance of adequate inventory levels, concert touring by the artist in the case of music-related ~~DVDs and CDs~~titles, retail sell-through, and ultimately continued end-user consumer demand. Any of the above factors can contribute to a title’s actual performance exceeding or failing to meet our pre-release expectations of ultimate revenues. Overestimation of ultimate revenues would cause unamortized costs to be amortized at a slower rate or a delay in adjusting costs to their fair value until such time estimates are reduced, causing unamortized costs to be overstated and increased amortization of costs in a later period. Underestimation of ultimate revenues would cause unamortized costs to be amortized more quickly until ultimate revenue estimates are increased, causing unamortized costs to be understated and decreased amortization of costs in a later period.

33Image Entertainment, Inc.

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Inventory Valuation. ~~For~~We ~~each reporting period, we~~ evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of historical sales levels by title, format and genre, and projections of future demand. In addition, we write down inventories that are considered obsolete or overstocked. Remaining inventory balances are adjusted to approximate the lower-of-cost or market value, and result in a new basis in such inventory until sold. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required, and would be reflected in cost of sales in the period the revision is made. Future demand will be dependent upon the continued retail customer acceptance of our content, future demand by end-user consumers, advertising, promotions and price reductions, market conditions (either favorable or unfavorable) and future warehouse storage limitations. Should projections of future inventory demand be overstated, the value of inventory would be overstated and current cost of sales understated, with future cost of sales overstated. Conversely, should projections of future demand be understated, the value of inventory would be understated and the current cost of sales overstated, with future cost of sales understated.

Allowance for Sales Returns and Doubtful Accounts Receivable. ~~For~~We ~~each reporting period, we~~ evaluate product sales and accounts receivable to estimate their effect on revenues due to product returns, sales allowances and other credits given, and delinquent accounts. Our estimates of product sales that will be returned and the amount of receivables that will ultimately be collected require the exercise of judgment and affect reported revenues and net earnings. In determining the estimate of product sales that will be returned, we analyze historical returns (quantity of returns and time to receive returned product), historical pricing and other credit memo data, current economic trends, and changes in customer demand and acceptance of our products, including reorder activity. Based on this information, we reserve a percentage of each dollar of product sales where the customer has the right to return such product and receive a credit memo. Actual returns could be different from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings. Estimates of future sales returns and other credits are subject to substantial uncertainty. Factors affecting actual returns include retailer financial difficulties, the perception of comparatively poor retail performance in one or several retailer locations, limited retail shelf space at various times of the year, inadequate advertising or promotions, retail prices being too high for the perceived quality of the content or other comparable content, the near-term release of similar titles, and poor responses to package designs. Underestimation of product sales returns and other credits would result in an overstatement of current revenues and lower revenues in future periods. Conversely, overestimation of product sales returns would result in an understatement of current revenues and higher revenues in future periods.

Similarly, we evaluate accounts receivable to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for our larger customers and an analysis of the length of time receivables have been past due. Based on this information, we reserve an amount that we believe to be doubtful of collection. If the financial condition of our customers were to deteriorate or if economic conditions were to worsen, additional allowances might be required in the future. Underestimation of this allowance would cause accounts receivable to be overstated and current period expenses to be understated. Overestimation of this allowance would cause accounts receivable to be understated and current period expenses to be overstated.

Valuation of Deferred Income ~~Taxes~~Tax Assets. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent that it is more likely than not that such deferred tax assets will not be realized, we must establish a valuation allowance. The establishment, or increase, of a valuation allowance increases income tax expense for such year. We have a valuation allowance against 100% of our net deferred tax assets, which are comprised primarily of NOL carryforwards. Even though we have fully reserved these net deferred tax assets for book purposes, we would still be able to utilize them to reduce future income taxes payable should we have future earnings. To the extent such deferred tax assets relate to NOL carryforwards, the ability to use such NOLs against future earnings will be subject to applicable carryforward periods. As of March 31, ~~2011~~2012, we had NOL carryforwards for federal and state tax purposes of $1213.4 million and $1817.06 million, respectively, which may be available to offset taxable income through 2031. These amounts available reflect the limitations in the utilization of our NOL carryforwards as a result of a change in ownership that occurred during the year ended March 31, 2010.

34Image Entertainment, Inc.

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Derivatives. ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

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

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

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

Recently Issued Accounting Standards.

In ~~April~~May ~~2010~~2011, the FASB issued ASU ~~2010~~No. 2011-1304, ~~Compensation-Stock~~Fair ~~Compensation~~Value Measurement (Topic ~~718~~820): ~~Effect~~Amendments ofto ~~Denominating~~Achieve ~~the~~Common ~~Exercise~~Fair ~~Price~~Value ofMeasurement aand ~~Share-Based~~Disclosure ~~Payment~~Requirements ~~Award~~ in ~~the~~U.S. ~~Currency~~GAAP ofand ~~the~~IFRSs. ~~Market~~This inUpdate ~~Which~~resulted ~~the~~in ~~Underlying~~common ~~Equity~~requirements ~~Security~~for ~~Trades~~measuring -fair avalue ~~consensus~~and offor ~~the~~disclosing ~~FASB~~information ~~Emerging~~about ~~Issues~~fair ~~Task~~value ~~Force. The~~measurements, ~~amendments~~including ina ~~this~~consistent ~~Update~~meaning ~~are~~of ~~effective~~the ~~for~~term ~~fiscal~~“fair ~~years,~~value.” ASU ~~and~~2011-04 ~~interim~~is ~~periods~~effective ~~within~~for ~~those~~interim ~~fiscal~~and ~~years,~~annual periods beginning ~~on or~~ after December 15, ~~2010~~2011. The adoption of ASC No. ~~2010~~2011-1304 is not expected to have a material ~~impact~~effect on ~~the Company~~Image’s financial statements.

In ~~August~~June ~~2010~~2011, the FASB issued ASU No. ~~2010~~2011-2105, ~~Accounting~~Comprehensive ~~for~~Income ~~Technical~~(Topic ~~Amendments~~220): toPresentation ~~Various~~of ~~SEC~~Comprehensive ~~Rules and Schedules~~Income. This Update ~~amends~~requires ~~various~~that ~~SEC~~all ~~paragraphs~~nonowner ~~pursuant~~changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present the ~~issuance~~components of ~~Release~~other comprehensive income as part of the statement of changes in shareholders’ equity. ASU No. 332011-~~9026:~~05 ~~Technical~~is ~~Amendments~~effective tofor ~~Rules,~~interim ~~Forms, Schedules~~ and ~~Codification~~annual ofperiods ~~Financial~~beginning ~~Reporting~~after ~~Policies~~December ~~and~~15, ~~became~~2011, ~~effective~~on ~~upon~~a ~~issuance~~retrospective basis. ~~The~~ ~~adoption~~Image is currently evaluating the effect of ASC No. ~~2010~~2011-2105, ~~did~~however, the adoption is not expected to have a material ~~impact~~effect on ~~the~~its ~~Company’s~~ financial ~~position or results of operations~~statements.

In ~~August~~September ~~2010~~2011, the FASB issued ASU No. ~~2010~~2011-2208, ~~Accounting~~Intangibles - Goodwill and Other (Topic 350), Testing Goodwill for ~~Various~~Impairment, ~~Topics—Technical~~which ~~Corrections~~permits an entity to ~~SEC~~make ~~Paragraphs~~a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the two-step goodwill impairment model that is currently in place. ~~This~~ ~~Update~~If ~~amends~~it ~~various~~is ~~SEC~~determined ~~paragraphs~~through ~~and~~the ~~became~~qualitative assessment that a reporting unit's fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU No. 2011-08 is effective ~~upon~~for ~~issuance~~annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, however, early adoption is permitted. The adoption of ASC No. ~~2010~~2011-2208 ~~did~~is not expected to have a material ~~impact~~effect on ~~the Company~~Image’s financial ~~position or results of operations~~statements.

In December ~~2010~~2011, the FASB issued ASU No., ~~2010~~2011-2811, ~~Intangibles—Goodwill~~Balance ~~and~~Sheet ~~Other~~ (Topic ~~350~~210): ~~When~~Disclosures toabout ~~Perform~~Offsetting ~~Step~~Assets 2and ofLiabilities, which reconciles the ~~Goodwill~~differences ~~Impairment~~in ~~Test~~the requirements for ~~Reporting~~offsetting ~~Units~~assets ~~with~~and ~~Zero~~liabilities orin ~~Negative~~the ~~Carrying~~presentation ~~Amounts~~of -financial astatements ~~consensus~~prepared ofin ~~the~~accordance ~~FASB~~with ~~Emerging~~U.S. ~~Issues~~GAAP ~~Task~~and ~~Force. This~~financial ~~Update~~statements ~~amends~~prepared ~~the~~in ~~criteria~~accordance ~~for~~with ~~performing~~International ~~Step~~Financial 1Reporting ofStandards ~~the~~(IFRS) ~~goodwill~~that ~~impairment~~made ~~test~~comparability ~~for~~of ~~reporting~~those ~~units~~statements ~~with~~difficult. The ~~zero~~objective orof ~~negative~~ASU ~~carrying~~No. ~~amounts~~2011-11 ~~and~~is ~~requires~~to ~~performing~~facilitate ~~Step~~comparison 2between ifthose ~~qualitative~~financial ~~factors~~statements, ~~indicate~~specifically ~~that~~within itthe isscope ~~more~~instruments ~~likely~~and ~~than~~transaction ~~not~~eligible ~~that~~for aoffset ~~goodwill~~in ~~impairment~~the ~~exists. The~~form ~~amendments~~of inderivatives, ~~this~~sale ~~Update~~and ~~are~~repurchase ~~effective~~agreements ~~for~~and ~~fiscal~~reverse ~~years~~sale and repurchase agreements, and ~~interim~~securities ~~periods~~borrowing ~~within~~and ~~those~~securities ~~fiscal~~lending ~~years,~~arrangements. This update is effective for annual reporting periods beginning on or after ~~December~~January 151, ~~2010~~2013 and interim periods within that fiscal year. The adoption of ASC No. ~~2010~~2011-2811 is not expected to have a material ~~impact~~effect on ~~the Company~~Image’s financial statements as Image does not currently enter into any right of offset arrangements.

InImage ~~December 2010~~Entertainment, ~~the FASB issued ASU No~~Inc. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This Update clarifies that, when presenting comparative financial statements, SEC registrants should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the period only. The Update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of ASC No. 2010-29 is not expected to have a material impact on the Company’s financial statements.

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In ~~May~~December 2011, the FASB issued ASU No. 2011-04 12, ~~Fair~~Comprehensive ~~Value~~Income ~~Measurement~~– ~~(Topic~~Deferral ~~820):~~of the Effective Date for Amendments to ~~Achieve~~the ~~Common~~Presentation ~~Fair~~of ~~Value~~Reclassifications ~~Measurement~~of ~~and~~Items ~~Disclosure~~out ~~Requirements~~of inAccumulated ~~U.S.~~Out ~~GAAP~~of ~~and~~Accumulated ~~IFRSs.~~Other ~~This~~Comprehensive ~~Update~~Income ~~resulted~~ in ~~common~~Accounting ~~requirements~~Standards ~~for~~Update ~~measuring~~No. ~~fair~~2011-05, ~~value~~which ~~and~~defers ~~for~~changes ~~disclosing~~in ~~information~~ASC ~~about~~No. ~~fair~~2011-05 ~~value~~that ~~measurements,~~relate ~~including~~to athe ~~consistent~~presentation ~~meaning~~ of ~~the~~reclassification ~~term~~adjustments. ~~“fair~~ASU ~~value~~No.~~” ASU~~ 2011-0412 is effective for ~~interim~~fiscal years, and ~~annual~~interim periods within those years, beginning after December 15, 2011. The adoption of ~~ASC~~ASU No. 2011-0412 is not expected to have a material ~~impact~~effect on ~~the Company~~Image’s financial statements.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. We are exposed to market risk in the ordinary course of our business, including interest rates and foreign currency exchange rates.

Interest Rate Fluctuation Risk

At March 31, ~~2011~~2012 and ~~2010~~2011, approximately $612.19 million and $6.41 million, respectively, of our outstanding borrowings were subject to changes in interest rates. We do not use derivatives to manage this risk. This exposure is primarily linked to the Prime Rate and LIBOR.

Management believes that moderate changes in the Prime Rate or LIBOR would not materially ~~impact~~affect our operating results or financial condition. For example, a 10.0% increase in fiscal year end interest rates would have resulted in (i) an approximate $2965,000 annual increase in pre-tax loss based upon our outstanding borrowings at March 31, ~~2011~~2012 and (ii) an approximate $3029,000 annual ~~impact~~effect on pre-tax loss based upon our outstanding borrowings at March 31, ~~2010~~2011.

Foreign Exchange Rate Fluctuation Risk

At March 31, ~~2011~~2012 and ~~2010~~2011, our accounts receivable related to international distribution and denominated in foreign currencies were minimal. These receivables are subject to future foreign exchange rate risk and could become significant in the future. We distribute some of our ~~licensed~~exclusive ~~DVD~~content ~~programming~~ (for which we hold international distribution rights) internationally through ~~sub-licensees~~sublicensees. Additionally, we exploit international broadcast rights to some of our exclusive entertainment programming (for which we hold international broadcast rights). Management believes that moderate changes in foreign exchange rates will not materially affect our operating results or financial condition. To date, we have not entered into foreign currency exchange contracts.

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS	Page
Report of Independent Registered Public Accounting Firm	3841
Consolidated Balance Sheets as of March 31, 2011 and 2010	39
Consolidated Balance Sheets as of March 31, 2012 and 2011	42
Consolidated Statements of Operations for the years ended March 31, 2011 and 2010	41
Consolidated Statements of Operations for the years ended March 31, 2012 and 2011	44
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended March 31, 2011 and 2010	42
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2012 and 2011	45
Consolidated Statements of Cash Flows for the years ended March 31, 2011 and 2010	43
Consolidated Statements of Cash Flows for the years ended March 31, 2012 and 2011	46
Notes to Consolidated Financial Statements	4649

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IMAGE ENTERTAINMENT, INC. AND SUBSIDIARIES

Report of Independent Registered Public Accounting Firm

Board of Directors and ~~Shareholders~~Stockholders

Image Entertainment, Inc.

Chatsworth, California

We have audited the consolidated balance sheets of Image Entertainment, Inc. and Subsidiaries (the Company) as of March 31, ~~2011~~2012 and ~~2010~~2011, and the related consolidated statements of operations, stockholders’ equity ~~(deficit)~~, and cash flows for each of the two years in the period ended March 31, ~~2011~~2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Image Entertainment, Inc. and Subsidiaries as of March 31, ~~2011~~2012 and ~~2010~~2011, and the results of ~~their~~its operations and ~~their~~its cash flows for each of the two years in the period ~~then~~ ended March 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

BDO USA, LLP

Los Angeles, California

June 2914, ~~2011~~2012

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IMAGE ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

March 31, ~~2011~~2012 and ~~2010~~ 2011

ASSETS

(In thousands)	~~2011~~2012		~~2010~~2011
Current assets:
Cash	$	~~333~~368	$	~~460~~333
Accounts receivable, net of allowances of
Accounts receivable, net of reserve for returns, allowances and provision for doubtful accounts of $6,405 – 2012 $8,462 – 2011		18,945		20,268
$8,462 – 2011
Inventories		14,202		13,709
$8,688 – 2010		20,268		17,676
Royalty and distribution fee advances		13,567		12,665
Inventories		13,709		12,659
Prepaid expenses and other current assets		1,303		607
Royalty and distribution fee advances		12,665		10,979
Total current assets		48,385		47,582
Other current assets		607		847
Noncurrent inventories, principally production costs		555		1,053
Total current assets		47,582		42,621
Noncurrent royalty and distribution fee advances		17,766		15,480
Noncurrent inventories, principally production costs		1,053		2,201
Property, equipment and improvements, net		726		605
Noncurrent royalty and distribution advances		15,480		15,669
Intangible assets		1,462		2,144
Property, equipment and improvements, net		605		1,105
Goodwill		6,762		6,762
Intangible assets		2,144		—
Goodwill		6,762		5,715
Other assets		86		86
Total assets	$	7375,~~712~~742	$	6773,~~397~~712

See accompanying notes to consolidated financial statements.

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IMAGE ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS, CONTINUED

March 31, ~~2011~~2012 and ~~2010~~2011

LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY ~~(DEFICIT)~~

(In thousands, except share data)	~~2011~~2012			~~2010~~2011
Current liabilities:
Accounts payable	$	611,~~781~~954		$	6,~~803~~781
Accrued liabilities		74,~~828~~164			87,~~638~~828
Accrued royalties and distribution fees		1821,~~328~~624			1423,~~048~~055
Accrued music publishing fees		4,727			5,846
Deferred revenue		3,468			5,331
Deferred revenue		5,331			6,571
Revolving credit facility		12,919			6,116
Revolving credit facility		6,116			6,380
Current portion of long-term debt, less debt discount		664			1,795
Current portion of long-term debt, less debt discount		1,795			—
Stock warrant liability		—			72
Series B cumulative preferred stock dividends payable		3,546			616
Total current liabilities		54,793			50,978
Stock warrant and purchase rights		72			1,538
Noncontrolling interest liability		500			2,603
Total current liabilities		54,524			50,440
Series B cumulative preferred stock dividends accrued		6,818			3,546
Noncontrolling interest liability		2,603			—
Long-term debt, less current portion, less debt discount		349			1,443
Long-term debt, less current portion, less debt discount		1,443			—
Total liabilities		62,460			58,570
Long-term portion of stock warrant		—			904
Commitments and Contingencies (Note 8)
Total liabilities		58,570			51,344
Series B cumulative preferred stock, $0.0001 par value, 30,000 shares authorized; 22,600 issued and outstanding at March 31, 2012 and 2011, respectively, with a liquidation preference of $29.4 million and $26.1 million as of March 31, 2012 and 2011, respectively		5,839			5,839
Commitments and Contingencies (Note 9)
Series C junior participating preferred stock, $0.0001 par value, 67,933.4 shares authorized at March 31, 2012 and 2011, respectively; none issued and outstanding at March 31, 2012 and 2011, respectively		—			—
Series B cumulative preferred stock, $0.0001 par value, 30,000 shares authorized; 22,600 issued and outstanding at March 31, 2011 and 2010, respectively, with a liquidation preference of $22.6 million plus accrued and unpaid dividends as of March 31, 2011 and 2010, respectively (Note 10)		5,839			6,019
Stockholders' equity:
Series C junior participating preferred stock, $0.0001 par value, 67,933.4 and 270,000 shares authorized at March 31, 2011 and 2010, respectively; none and 202,066.6 issued and outstanding at March 31, 2011 and 2010, respectively		—			10,895
Common stock, $.0001 par value, 500 million shares authorized at March 31, 2012 and 2011, respectively; 256,402,000 and 255,602,000 issued and outstanding at March 31 2012 and 2011, respectively		26			26
Stockholders' equity (deficit):
Additional paid-in capital		66,324			65,000
Common stock, $.0001 par value, 500 million and 100 million shares authorized at March 31, 2011 and 2010, respectively; 255,602,000 and 25,356,000 issued and outstanding at March 31 2011 and 2010, respectively		26			3
Accumulated deficit		(58,907	)		(55,723	)
Additional paid-in capital		65,000			53,284
Net stockholders’ equity		7,443			9,303
Accumulated deficit		(55,723	)		(54,148	)
Total liabilities, preferred stock and stockholders’ equity	$	75,742		$	73,712
Net stockholders’ equity (deficit)		9,303			(861	)
Total liabilities, preferred stock and stockholders’ equity (deficit)	$	73,712		$	67,397

See accompanying notes to consolidated financial statements.

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IMAGE ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended March 31, ~~2011~~2012 and ~~2010~~2011

(In thousands, except per share data)	~~2011~~2012			~~2010~~2011
NET REVENUES	$	88100,~~959~~086		$	9388,~~070~~959
COST OF SALES		6877,~~480~~234			7468,~~337~~480
Gross profit		2022,~~479~~852			1820,~~733~~479
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling expenses		68,~~326~~195			116,~~272~~326
General and administrative expenses		1315,~~482~~733			1813,~~614~~482
Total selling, general and administrative expenses		1923,~~808~~928			2919,~~886~~808
INCOME (LOSS) FROM OPERATIONS		~~671~~(1,076	)		~~(11,153~~671	)
OTHER EXPENSES (INCOME):
OTHER INCOME (EXPENSES):
Interest expense		1,317			2,145
Interest expense, net		(1,077	)		(791	)
Loss on extinguishment of debt		—			277
Change in fair value of noncontrolling interest liability		2,103			(526	)
Other income		~~(2,386~~72	)		(72,~~751~~386	)
		(1,069	)		(5,329	)
Total other income		1,098			1,069
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		1,740			(5,824	)
INCOME BEFORE PROVISION FOR INCOME TAXES		22			1,740
PROVISION FOR INCOME TAXES		26			98
PROVISION FOR (BENEFIT FROM) INCOME TAXES		(66	)		26
NET INCOME (LOSS)		1,714			(5,922	)
NET INCOME		88			1,714
Dividend on Series B cumulative preferred stock		(23,~~930~~272	)		(~~616~~2,930	)
Deemed dividend on Series C junior participating preferred stock		~~(359~~—	)		(~~412~~359	)
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(13,~~575~~184	)	$	(61,~~950~~575	)
NET LOSS PER COMMON SHARE:
Net loss per common share – basic and diluted	$	(0.01	)	$	(0.3101	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted		~~110~~255,~~310~~856			22110,~~644~~310

See accompanying notes to consolidated financial statements.

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IMAGE ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ~~(DEFICIT)~~

For the Years Ended March 31, ~~2011~~2012 and ~~2010~~2011

	Common Stock
	Series B Preferred Stock					Series C Preferred Stock						Common Stock
(In thousands)	Shares		~~Par~~ Value			~~Additional Paid-In Capital~~Shares			~~Accumulated~~Par ~~Deficit~~Value			~~Total~~Shares			Par Value		Additional Paid-In Capital		Accumulated Deficit			Total Stockholders’ Equity
Balance at April 1, 2009		21,856	$	2		$	52,693		$	(47,198	)	$	5,497
Balance at April 1, 2010		22,600	$	6,019			202,066		$	20			25,356		$	3	$	53,284	$	(54,148	)	$	(861	)
Issuance of stock		3,500		1			226			—			227
Issuance of common stock		—		—			—			—			2,190			—		273		—			273
Series C junior participating preferred stock deemed dividend		—		—			—			(412	)		(412	)
Issuance of restricted stock awards		—		—			—			—			25,990			3		—		—			3
Series B cumulative preferred stock dividend		—		—			—			(616	)		(616	)
Series C junior participating preferred stock conversion		—		—			(202,066	)		(20	)		202,066			20		10,875		—			10,895
Share-based compensation		—		—			365			—			365
Series B cumulative preferred stock dividend		—		—			—			—			—			—		—		(2,930	)		(2,930	)
Net loss		—		—			—			(5,922	)		(5,922	)
Share-based compensation		—		—			—			—			—			—		568		—			568
Balance at March 31, 2010		25,356		3			53,284			(54,148	)		(861	)
Series B cumulative preferred stock adjustment		—		(180	)		—			—			—			—		—		—			—
Issuance of common stock		2,190		—			273			—			273
Series C junior participating preferred stock deemed dividend		—		—			—			—			—			—		—		(359	)		(359	)
Issuance of restricted stock awards		25,990		3			—			—			3
Net income		—		—			—			—			—			—		—		1,714			1,714
Series C junior participating preferred stock conversion		202,066		20			10,875			—			10,895
Balance at March 31, 2011		22,600		5,839			—			—			255,602			26		65,000		(55,723	)		9,303
Series B cumulative preferred stock dividend		—		—			—			(2,930	)		(2,930	)
Issuance of restricted stock awards		—		—			—			—			800			—		—		—			—
Share-based compensation		—		—			568			—			568
Series B cumulative preferred stock dividend		—		—			—			—			—			—		—		(3,272	)		(3,272	)
Series C junior participating preferred stock deemed dividend		—		—			—			(359	)		(359	)
Share-based compensation		—		—			—			—			—			—		1,324		—			1,324
Net income		—		—			—			~~1,714~~—			~~1,714~~—			—		—		88			88
Balance at March 31, 2011		255,602	$	26		$	65,000		$	(55,723	)	$	9,303
Balance at March 31, 2012		22,600	$	5,839			—		$	—			256,402		$	26	$	66,324	$	(58,907	)	$	7,443

See accompanying notes to consolidated financial statements.

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IMAGE ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended March 31, ~~2011~~2012 and ~~2010~~2011

(In thousands)	~~2011~~2012			~~2010~~2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,714		$	(5,922	)
Net income	$	88		$	1,714
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of production costs		4,~~366~~559			4,~~346~~366
Depreciation and other amortization		~~572~~138			~~1,085~~532
Amortization of debt discount		123			321
Amortization of debt discount and deferred financing costs		597			392
Amortization of deferred manufacturing costs		(40	)		(503	)
Amortization of intangible assets		682			398
Amortization of deferred financing costs		269			353
Provision for lower of cost or market inventory		759			—
Amortization of intangible assets		407			—
Provision for doubtful accounts		5			—
Benefit from reserves for doubtful accounts, sales returns and other credits		(1,184	)		(2,048	)
Accelerated amortization and fair value write-down of advance royalty and distribution fees		1,067			4,067
Accelerated amortization and fair value write-down of advance royalty and distribution fees		4,067			2,276
Change in fair value of warrant liability, purchase rights and embedded derivatives		(72	)		(2,370	)
Loss on extinguishment of debt		—			277
Stock-based compensation expense		1,324			568
Gain on forgiveness of liabilities		—			(5,218	)
Change in fair value of noncontrolling interest liability		(2,103	)		526
Change in fair value of warrant, purchase rights and embedded derivatives		(2,370	)		(570	)
Gain on disposal of property, equipment and improvements		—			(16	)
Stock-based compensation expense		568			365
Noncash consideration for investment banking services received		—			76
Noncash consideration from disposal of property, equipment and improvements		—			200
Change in fair value of noncontrolling interest liability		526			—
Gain on disposal of property, equipment and improvements		(16	)		(161	)
Noncash consideration for investment banking services received		76			597
Changes in assets and liabilities associated with operating activities:
Accounts receivable		(1,~~408~~318	)		3(2,~~748~~592	)
Inventories		~~372~~(1,779	)		~~1,713~~372
Royalty and distribution fee advances		(25,~~889~~596	)		(2,~~940~~889	)
Production cost expenditures		(3,~~052~~534	)		(3,~~784~~052	)
Other assets		(381,066	)		~~288~~(29	)
Accounts payable, accrued royalties, fees and liabilities		~~(771~~1,837	)		~~1,226~~(771	)
Deferred revenue		(1,~~240~~863	)		(1,~~536~~240	)
Net cash provided by operating activities		52			3,568
Net cash provided by (used in) operating activities		(3,639	)		52
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(~~100~~437	)		(68100	)
Proceeds from sale of equipment		44—			—44
Acquisition of business		(~~1,074~~139	)		—(1,074	)
Payment to noncontrolling interest holder		(75100	)		—(75	)
Net cash used in investing activities	$	(~~1,205~~676	)	$	(681,205	)

See accompanying notes to consolidated financial statements.

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IMAGE ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

For the Years Ended March 31, ~~2011~~2012 and ~~2010~~2011

(In thousands)	~~2011~~2012			~~2010~~2011
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility	$	5176,~~458~~841		$	8651,~~996~~458
Repayments of borrowings under revolving credit facility		(5170,~~722~~038	)		(9151,~~549~~722	)
Proceeds from long-term debt		~~2,500~~—			—2,500
Repayments of long-term debt		(12,~~210~~453	)		(181,~~197~~210	)
Net proceeds from issuance of preferred stock		—			18,908
Net cash provided by financing activities		4,350			1,026
Net cash provided by (used in) financing activities		1,026			(3,842	)
INCREASE (DECREASE) IN CASH:		35			(127	)
DECREASE IN CASH:		(127	)		(342	)
Cash at beginning of year		333			460
Cash at beginning of year		460			802
Cash at end of year	$	368		$	333
Cash at end of year	$	333		$	460
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest	$	~~376~~472		$	~~1,334~~376
Income taxes	$	3069		$	~~(75~~30	)

See accompanying notes to consolidated financial statements.

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IMAGE ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

For the Years Ended March 31, ~~2011~~2012 and ~~2010~~2011

SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES:

During the fiscal years ended March 31, ~~2011~~2012 and ~~2010~~2011, we accrued approximately $32.52 million and $13.15 million, respectively, for royalty advances and distribution fees for committed unpaid royalty and production advances where future payment is based upon the release of the program or the passage of time.

During the fiscal years ended March 31, ~~2011~~2012 and ~~2010~~2011, we accrued a total of $3.53 million and $~~616~~2.9 million,~~000,~~ respectively, for undeclared dividends on Series B Cumulative Preferred Stock (or Series B Preferred).

During the fiscal year ended March 31, 2011, we issued 1,250,000 shares of Common Stock in exchange for financial advisory and investment banking services from Pali Capital, Inc. During the fiscal year ended March 31, 2010, we issued 600 shares of Series B Preferred, 5,364.6 shares of Series C Junior Participating Preferred Stock in exchange for financial advisory and investment banking services from Pali Capital, Inc.

During the fiscal year ended March 31, 2011, we issued 940,070 shares of Common Stock to Madacy Entertainment US, LInc.P. in connection with the acquisition of certain assets and liabilities. Of the $1,213,000 cash consideration, $139,000 was included in accounts payable at March 31, 2011 resulting in cash paid of $1,074,000 during the fiscal year ended March 31, 2011. See “Note 2. Noncontrolling Interest Liability Resulting from Purchase of Madacy Home Video.”

See accompanying notes to consolidated financial statements.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Basis of Presentation and Summary of Significant Accounting Policies.

Basis of Presentation and Principles of Consolidation.

Effective June 30, 2010, weImage Entertainment, Inc. (or Image) merged ~~our~~its wholly owned subsidiaries, Egami Media, Inc. and Image Entertainment (UK), Inc., into the parent corporation, Image Entertainment, Inc. Effective August 9, 2010, we formed a new subsidiary, Image/Madacy Home Entertainment, LLC, as described in “Note 2. Noncontrolling Interest Liability Resulting from Purchase of Madacy Home Video” below.

The accompanying consolidated financial statements include the accounts of Image ~~Entertainment, Inc.~~ and its majority-owned subsidiary Image/Madacy Home Entertainment, LLC (or collectively, we, our or us).

All significant intercompany balances and transactions have been eliminated in consolidation.

Business. We engage primarily in the domestic acquisition and wholesale distribution of entertainment content for release on DVD/Blu-ray, digitally and in other entertainment formats, via exclusive distribution and royalty agreements. We also distribute our exclusive ~~DVD~~content ~~programming~~ internationally, primarily by relying on sublicensees (particularly Universal Music Group International, BET International, Warner Music Australia and ~~Digital~~Universal ~~Site~~Pictures Australia), from whom we receive revenues in the form of royalty income.

JH Partners Transaction. JH Partners, LLC and certain of their affiliates, collectively JH Partners, are ~~the Company~~Image's largest stockholders and beneficially control approximately 69% of ~~the Company~~Image's outstanding voting power, as well as a majority of ~~the Company~~Image's Series B Cumulative Preferred Stock (or Series B Preferred). In addition, JH Partners and ~~the~~Image ~~Company~~ are parties to various stockholder and management arrangements, which provide for, among other things, various equity transfer restrictions and participation rights and other requirements (including certain change-of-control events) and management fee payments. See “Note 109. Stockholders’ Equity” and “Note 1614. Related Party Transactions” below.

Use of Estimates in Preparation of Financial Statements. The preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles (or U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements. The significant areas requiring the use of management estimates are related to provisions for lower-of-cost or market inventory write-downs, accounts receivable doubtful debt and sales returns reserves, unrecouped royalty and distribution fee advances, valuation of deferred taxes, and valuation of warrants, noncontrolling interest liability, preferred stock and share based compensation expense. Although these estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results may ultimately differ materially from those estimates.

~~Cash~~Concentrations of Credit Risk. Financial instruments which potentially subject ~~the~~Image ~~Company~~ to concentrations of credit risk consist primarily of deposit accounts and trade accounts receivable. ~~The~~We ~~Company~~place ~~places~~our ~~its~~ cash with high credit quality financial institutions. ~~The~~Image ~~Company~~ maintains bank accounts at financial institutions, which at times may exceed amounts insured by the Federal Deposit Insurance Corporation (or FDIC) and Securities Investor Protection Corporation (or SIPC). ~~The~~Image ~~Company~~ has never experienced any losses related to these balances. Non-interest bearing cash balances were fully insured at March 31, ~~2011~~2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning in 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and non-interest bearing cash balances may again exceed federally insured limits. With respect to trade receivables, ~~the~~we ~~Company~~perform ~~performs~~ ongoing credit evaluations of ~~its~~our customers’ financial conditions and ~~limits~~limit the amount of credit extended when deemed necessary but generally ~~requires~~require no collateral.

Fair Value of Financial Instruments. The carrying amount of our financial instruments, which principally include cash, trade receivables, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The carrying amount of debt approximates the fair value of ~~our~~the ~~debt~~financial instruments, ~~approximates~~as the ~~amount~~interest ofrates ~~future~~are ~~discounted~~variable ~~cash~~and ~~flows~~approximate ~~associated~~the ~~with~~interest ~~each~~rates ~~instrument~~presently available to Image.

Financial Accounting Standards Board (or FASB) Accounting Standards Codification (or ASC) 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

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

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Liabilities valued with level 3 inputs are described in “Note 82 – Noncontrolling ~~Purchase~~Interest ~~Rights,~~Liability ~~Stock~~Resulting ~~Warrant~~from ~~Liability,~~Purchase ~~and~~of ~~Embedded~~Madacy ~~Derivatives~~Home Video” below.

~~Revenue~~The ~~Recognition. Revenue~~following istable ~~recognized~~represents ~~upon~~our ~~meeting~~fair ~~the~~value ~~recognition~~hierarchy ~~requirements of ASC 926, Entertainment—Films and ASC 605, Revenue Recognition. Revenues from home video distribution are recognized net of an allowance~~ for ~~estimated returns, as well as related costs, in the period in which the product is available for sale by~~ our ~~customers~~financial ~~(at~~assets ~~the point that title~~ and ~~risk~~liabilities ofmeasured ~~loss~~at ~~transfer~~fair tovalue ~~the~~on ~~customer,~~a ~~which~~recurring isbasis generally upon receipt by the customer and in the case of new releases, after “street date” restrictions lapse). Rental revenues under revenue sharing arrangements are recognized when we are entitled to receipts and such receipts are determinable. Revenues from domestic and international broadcast licensing and home video sublicensing, as ~~well as associated costs, are recognized when the programming is available to the licensee and other ASC 605 recognition requirements are met. Fees received in advance~~ of ~~availability,~~March ~~usually in the case of advances received from Universal Music Group International~~31, ~~Digital~~2012 ~~Site,~~ and ~~other international home video sublicensees and for broadcast programming, are deferred until earned and all revenue recognition requirements have been satisfied~~2011. ~~Provisions for uncollectible accounts receivable are provided at the time of sale.~~

Inventories. Inventories consist primarily of finished products for sale (which are stated at the lower-of-cost or market, with cost being determined on an average-cost basis) and unamortized non-recoupable production costs. See “Non-Recoupable Production Costs” below.

(In thousands)	Level 1		Level 2		Level 3			Total

Noncontrolling interest liability – March 31, 2011	$	—	$	—	$	2,603		$	2,603
Change in fair value of noncontrolling interest liability		—		—		(2,103	)		(2,103	)
Noncontrolling interest liability – March 31, 2012	$	—	$	—	$	500		$	500

Stock warrant liability – March 31, 2011	$	—	$	72	$	—		$	72

The stock warrant liability is classified as Level 2 as the Black-Scholes model was used to determine the fair value and the related inputs are consistent with Level 2. The noncontrolling interest liability is classified as Level 3 as the fair value is based on unobservable inputs.

Revenue Recognition. Revenue is recognized upon meeting the recognition requirements of ASC 926, Entertainment—Films and ASC 605, Revenue Recognition. Revenues from home video distribution are recognized net of an allowance for estimated returns, as well as related costs, in the period in which the product is available for sale by our customers (at the point that title and risk of loss transfer to the customer, which is generally upon receipt by the customer and in the case of new releases, after “street date” restrictions lapse). Rental revenues under revenue sharing arrangements are recognized when we are entitled to receipts and such receipts are determinable. Revenues from domestic and international broadcast licensing and home video sublicensing, as well as associated costs, are recognized when the programming is available to the licensee and other ASC 605 recognition requirements are met. Fees received in advance of availability, usually in the case of advances received from Universal Music Group International, Digital Site, and other international home video sublicensees and for broadcast programming, are deferred until earned and all revenue recognition requirements have been satisfied. Provisions for sales returns and uncollectible accounts receivable are provided at the time of sale.

Allowances for Sales Returns and Doubtful Accounts Receivable. For each reporting period, we evaluate product sales and accounts receivable to estimate their effect on revenues due to product returns, sales allowances and other credits given, and delinquent accounts. Our estimates of product sales that will be returned and the amount of receivables that will ultimately be collected require the exercise of judgment and affect reported revenues and net earnings. In determining the estimate of product sales that will be returned, we analyze historical returns (quantity of returns and time to receive returned product), historical pricing and other credit memo data, current economic trends, and changes in customer demand and acceptance of our products, including reorder activity. Based on this information, we reserve a percentage of each dollar of product sales where the customer has the right to return such product and receive a credit memo. Actual returns could be different from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings. Estimates of future sales returns and other credits are subject to substantial uncertainty. Factors affecting actual returns include retailer financial difficulties, the perception of comparatively poor retail performance in one or several retailer locations, limited retail shelf space at various times of the year, inadequate advertising or promotions, retail prices being too high for the perceived quality of the content or other comparable content, the near-term release of similar titles, and poor responses to package designs. Underestimation of product sales returns and other credits would result in an overstatement of current revenues and lower revenues in future periods. Conversely, overestimation of product sales returns would result in an understatement of current revenues and higher revenues in future periods.

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~~Non-Recoupable Production Costs~~Inventories. ~~The~~For ~~costs~~each toreporting ~~produce~~period, ~~licensed~~we ~~content~~review ~~for domestic and international distribution include~~ the ~~cost~~value of ~~converting~~inventory ~~film~~on ~~prints~~hand ~~or tapes into the optical disc format. Costs also include menu design, authoring, compression, subtitling, closed captioning, service charges related~~ to ~~disc~~estimate ~~manufacturing, ancillary material production, product packaging design and related services, and~~ the ~~overhead~~recoverability ofthrough ~~our~~future ~~creative services and production departments~~sales. AValues ~~percentage~~in excess of ~~the~~anticipated ~~capitalized~~future ~~production~~sales ~~costs~~ are ~~amortized~~booked toas ~~expense~~obsolescence ~~each month based upon:~~reserve. ~~(i)~~Inventories aconsist ~~projected~~primarily ~~revenue stream resulting from distribution~~ of ~~new~~packaged ~~and~~goods ~~previously~~for ~~released~~sale ~~exclusive programming related to such production costs; and~~ (~~ii)~~which ~~management’s~~are ~~estimate~~stated ofat the ~~ultimate net realizable value~~ lower-of-cost ~~the~~or ~~production~~market, ~~costs. Estimates~~with ofcost ~~future~~being ~~revenues~~determined ~~are~~on ~~reviewed~~an ~~periodically~~average-cost basis) and ~~amortization~~unamortized ofnon-recoupable production costs ~~is adjusted accordingly~~. IfSee ~~estimated~~“Non-Recoupable ~~future~~Production ~~revenues~~Costs” ~~are not sufficient to recover the unamortized balance of production costs, such costs are reduced to their estimated fair value~~below.

~~Royalty and Distribution Fee Advances,~~ Non-Recoupable Production ~~Advances~~Costs. ~~Royalty~~The ~~and~~costs ~~distribution fee advances represent fixed minimum payments made~~ to ~~program~~produce ~~suppliers~~licensed ~~for exclusive~~ content ~~distribution~~for ~~rights. A~~domestic ~~program~~and ~~supplier’s~~international ~~share of exclusive program~~ distribution ~~revenues~~include isthe ~~retained~~cost byof usconverting ~~until~~film ~~the~~prints ~~share~~or ~~equals~~tapes ~~the~~into ~~advance(s) paid to~~ the ~~program~~optical ~~supplier~~disc ~~plus recoupable production costs~~format. ~~Thereafter,~~Costs ~~any~~also ~~excess~~include ismenu ~~paid~~design, toauthoring, ~~the program supplier. In the event of an excess~~compression, ~~we record~~subtitling, asclosed ~~a cost of sales~~captioning, anservice ~~amount~~charges ~~equal~~related to ~~the~~disc ~~program~~manufacturing, ~~supplier’s~~ancillary ~~share~~material ofproduction, ~~the~~product ~~net~~packaging ~~distribution~~design ~~revenues. Royalty~~ and ~~distribution~~related ~~fee~~services, ~~advances~~and ~~are~~the ~~charged~~overhead toof ~~operations~~our ascreative ~~revenues~~services ~~are~~and ~~earned~~production departments. ~~Royalty~~A ~~distribution~~percentage ~~fee~~of ~~advances~~the ~~and~~capitalized ~~recoupable~~ production costs are amortized to expense ineach ~~the~~month ~~same~~based ~~ratio~~upon: (i) ~~that~~a ~~current~~projected ~~period~~ revenue ~~for~~stream aresulting ~~title~~from ordistribution ~~group~~ of ~~titles~~new ~~bears~~and topreviously ~~the~~released ~~estimated~~exclusive ~~remaining~~content ~~unrecognized~~related ~~ultimate~~to ~~revenue~~such ~~for~~production ~~that~~costs; ~~title. Revenue~~ and ~~cost~~(ii) ~~forecasts~~management’s ~~are~~estimate ~~continually~~of ~~reviewed~~the byultimate ~~management~~net ~~and~~realizable ~~revised~~value ~~when~~of ~~warranted~~the byproduction ~~changing conditions~~costs. ~~When~~Estimates ~~estimates~~ of ~~total~~future revenues ~~and~~are ~~costs~~reviewed ~~indicate~~periodically ~~that~~and anamortization ~~individual title or group~~ of ~~cross-collateralized~~production ~~titles~~costs ~~which~~is weadjusted ~~exploit~~accordingly. If ~~via~~estimated ~~home~~future ~~entertainment~~revenues ~~formats~~are ~~(such~~not assufficient ~~DVD,~~to ~~Blu-ray,~~recover ~~digital,~~the CDunamortized orbalance ~~broadcast)~~of ~~will~~production ~~result in an ultimate loss~~costs, ansuch ~~impairment~~costs ~~charge~~are isreduced ~~recognized~~ to ~~the~~their ~~extent that capitalized advance royalties and distribution fees and recoupable production costs exceed~~ estimated fair value~~, based on discounted cash flows, in the period when estimated~~.

Royalty and Distribution Fee Advances, Recoupable Production Advances. Royalty and distribution fee advances represent fixed minimum payments made to program suppliers for exclusive content distribution rights. A program supplier’s share of exclusive program distribution revenues is retained by us until the share equals the advance(s) paid to the program supplier plus recoupable production costs. Thereafter, any excess is paid to the program supplier. In the event of an excess, we also record, as a cost of sales, an amount equal to the program supplier’s share of the net distribution revenues. Royalty and distribution fee advances are charged to operations as revenues are earned. Royalty distribution fee advances and recoupable production costs are amortized to expense in the same ratio that current period revenue for a title or group of titles bears to the estimated remaining unrecognized ultimate revenue for that title. Revenue and cost forecasts are continually reviewed by management and revised when warranted by changing conditions. When estimates of total revenues and costs indicate that an individual title or group of cross-collateralized titles which we exploit via home entertainment formats (such as DVD, Blu-ray, digital, CD or broadcast) will result in an ultimate loss, an accelerated impairment charge is recognized to the extent that capitalized advance royalties and distribution fees and recoupable production costs exceed estimated fair value, based on discounted cash flows, in the period when estimated. For fiscal years ended March 31, 2012 and 2011, we recorded a royalty and distribution fee advance acceleration and fair value write-down of $1.1 million and $4.1 million, respectively.

Property, Equipment and Improvements. Property, equipment and improvements are stated at cost less accumulated depreciation and amortization. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation and amortization are computed by applying the straight-line method over the estimated useful lives of the machinery, equipment and software (3-7 years). Leasehold improvements are amortized over the shorter of the useful life of the improvement or the 10-year life of the related leases.

Advertising Costs. Our advertising expense consists of expenditures related to advertising in trade and consumer publications, product brochures and catalogs, booklets for sales promotion, radio advertising and other promotional costs. In accordance with ASC 720-35, Other Expenses—Advertising Costs, and ASC 340-20, Other Assets and Deferred Costs—Capitalized Advertising Costs, we expense advertising costs in the period in which the advertisement first takes place. Product brochures and catalogs and various other promotional costs are capitalized and amortized over the expected period of future benefit, but generally not exceeding six months. ~~We had minimal prepaid advertising costs at March 31, 2011 and 2010.~~ For fiscal ~~2011~~2012 and ~~2010~~2011, advertising and promotion expense included as a component of selling expenses was $23,~~358~~775,000 and $52,~~706~~358,000, respectively.

Market Development Funds. In accordance with ASC 605-50, Revenue Recognition—Customer Payment and Incentives, market development funds, including funds for specific product positioning, taken as a deduction from payment for purchases by customers are classified by us as a reduction to revenues. ~~The~~Reductions ~~following reductions~~ to consolidated net revenues ~~have been~~ made in accordance with the guidelines of ~~ACS~~ASC 605-50: were $711,~~836~~020,000 ~~for fiscal 2011~~ and $87,~~590~~836,000 for fiscal ~~2010~~2012 and 2011, respectively.

~~Allowances~~Image ~~Received From Vendors. In accordance with ASC 605-50~~Entertainment, we classify consideration received as a reduction in cost of sales in the accompanying statements of operations unless we receive an identifiable benefit in exchange for the consideration, or the consideration represents reimbursement of a specific, identifiable cost incurred by us in selling the vendor’s productInc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Allowances Received From Vendors. In accordance with ASC 605-50, we classify consideration received as a reduction in cost of sales in the accompanying statements of operations unless the consideration represents reimbursement of a specific, identifiable cost incurred by us in selling the vendor’s product.

Shipping Income and Expenses. In accordance with ASC 605-45, Revenue Recognition—Principal Agent Considerations, we classify amounts billed to customers for shipping fees as revenues, and classify costs related to shipping as cost of sales in the accompanying consolidated statements of operations.

Major Customers and Suppliers. ~~Amazon.com,~~Walmart ~~Inc.~~ and Alliance Entertainment LLC (or AEC) each accounted for approximately 1611%, respectively, of our net revenues for the year ended March 31, ~~2011~~2012. Amazon.com, Inc. and AEC each accounted for approximately 1716% ~~and 14%~~, respectively, of our net revenues for the year ended March 31, ~~2010~~2011. No other customers accounted for more than 10% of our net revenues in fiscal ~~2011~~2012 or ~~2010~~2011. At March 31, ~~2011~~2012, ~~Amazon.com~~Walmart and AEC accounted for approximately 158.1% and 117.9%, respectively, of our gross accounts receivables. At March 31, ~~2010~~2011, Amazon and AEC accounted for approximately 1815% and 1311%, respectively, of our gross accounts receivables. Our content supplied by The Criterion Collection represented approximately 2623% and 2926% of our fiscal ~~2011~~2012 and ~~2010~~2011 net revenues, respectively.

Further, ~~42.1~~47% of our gross accounts receivables is attributable to Sony Pictures Home Entertainment (or SPHE), as they are our vendor of record for shipments of physical product to North American retailers and wholesalers. As part of our arrangement with SPHE, SPHE collects the receivables from our end customers, provides us with monthly advance payments on such receivables (less a reserve), then ~~trues~~settles up the accounts receivables accounting quarterly. See “Note 76. Long-Term Debt - New Distribution Services and License Agreement and Related Advance.”

Goodwill. Goodwill is not amortized, but instead is tested for impairment at least annually. We performed our annual test of goodwill impairment and have concluded that there was no impairment at March 31, 2012 and 2011.

Impairment of Long-Lived Assets. We review the impairment of long-lived and specific, definite-lived, identifiable intangible assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. We have no intangible assets with indefinite useful lives.

Foreign Currency Transactions. Foreign currency-denominated transactions are recorded at the exchange rate in effect at the time of occurrence, and the gains or losses resulting from subsequent translation of the corresponding receivable or payable at current exchange rates are included as a component of other income and expenses in the accompanying statements of operations. To date, we have not entered into foreign currency exchange contracts.

Income Taxes. We account for income taxes pursuant to the provisions of ASC 740, Income Taxes, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and the future tax benefits derived from operating loss and tax credit carryforwards. We provide a valuation allowance on our deferred tax assets when it is more likely than not that such deferred tax assets will not be realized. We have a valuation allowance against 100% of our net deferred tax assets at March 31, ~~2011~~2012 and ~~2010~~2011.

ASC 740, Income Taxes, requires that we recognize in the consolidated financial statements the ~~impact~~effect of a tax position that is more likely than not to be sustained upon examination based on the technical merits of the position. The first step is to determine whether or not a tax benefit should be recognized. A tax benefit will be recognized if the weight of available evidence indicates that the tax position is more likely than not to be sustained upon examination by the relevant tax authorities. The recognition and measurement of benefits related to our tax positions requires significant judgment as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and our assumptions, or changes in our assumptions in future periods, are recorded in the period they become known. For tax liabilities, we recognize accrued interest related to uncertain tax positions as a component of income tax expense, and penalties, if incurred, are recognized as a component of operating expenses.

Earnings/Loss per Share. Basic earnings/loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed using the combination of dilutive common share equivalents and the weighted-average shares outstanding during the period. Diluted loss per share is equivalent to basic loss per share, as inclusion of common share equivalents would be antidilutive for the fiscal years ended March 31, ~~2011~~2012 and ~~2010~~2011.

~~Series~~Image B Preferred Stock Dividends. We record preferred stock dividends on our Series B Preferred in our consolidated statements of operations based on the value of dividends at each dividend accrual date. Our Series B Preferred has a cumulative compounding dividend rate equal to 12% per year of the liquidation preference of $1Entertainment,~~000~~ ~~per share (subject to adjustment upon any stock dividend, stock split or similar event)~~Inc. Dividends will accrue automatically on a daily basis, but will be payable in cash only when, and if, declared by the Board. Accrued dividends will be compounded quarterly with the effect that an additional dividend will accrue on each share of Series B Preferred at the dividend rate on the amount so compounded until such amount is actually paid.

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Series B Preferred Stock Dividends. We record preferred stock dividends on our Series B Preferred in our consolidated statements of operations based on the value of dividends at each dividend accrual date. Our Series B Preferred has a cumulative compounding dividend rate equal to 12% per year of the liquidation preference of $1,000 per share (subject to adjustment upon any stock dividend, stock split or similar event). Dividends accrue automatically on a daily basis, but are payable in cash only when, and if, declared by the Board. Accrued dividends are compounded quarterly with the effect that an additional dividend will accrue on each share of Series B Preferred at the dividend rate on the amount so compounded until such amount is actually paid.

Stock Options and Restricted Stock Awards. ASC 718, Compensation—Stock Compensation, establishes standards with respect to the accounting for transactions in which an entity exchanges its equity instruments for goods or services, or incurs liabilities in exchange for goods or services, that are based on the fair value of the entity’s equity instruments, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. ASC 718 requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions) and recognize the cost over the period during which an employee is required to provide service in exchange for the award.

Stock-Based Compensation Valuation and Expense Information. The fair value of each option award is estimated on the date of grant using an option valuation model based on the assumptions noted in the following table. Historically, we have used Black-Scholes model to value our options that have finite vesting terms. During the fiscal year ended March 31, 2012, there were no options granted. During the fiscal year ended March 31, 2011, we ~~issued~~granted options with performance and market conditions and therefore we used a Monte Carlo valuation model to value these options. Expected volatilities are based on historical volatility of our stock and other factors. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The following table represents the assumptions used in each of the specific models for options granted during fiscal 2011 ~~and 2010~~:

	Monte Carlo Model Fiscal Year Ended March 31, 2011	Black-Scholes Model Fiscal Year Ended March 31, 2010
	Monte Carlo Model
Risk-free interest rate	0.82% - 3.01%	1.68% - 1.89%
	Fiscal Year Ended March 31, 2011
Expected term (in years)	3.95 years	3.9 to 4.6 years
Risk-free interest rate	0.82% - 3.01%
Weighted-average vesting term (in years)	1.63 years	—
Expected term (in years)	3.95 years
Expected volatility for options	98.3% - 158.7%	96% - 103%
Weighted-average vesting term (in years)	1.63 years
Expected dividend yield	0%	0%
Expected volatility for options	98.3% - 158.7%
Expected dividend yield	0%

The expected term assumption ~~uses~~is based on historical exercise and option expiration data for Black-Scholes grant-date valuation purposes. We believe this historical data is currently the best estimate of the expected term of a new option. We have identified two groups, management and non-management, to determine historical patterns. Expected volatility uses our stock’s historical volatility for the same period of time as the expected term. We have no reason to believe our future volatility will differ from the past. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of grant for the same period of time as the expected term. Expected dividend yield is zero, as we have historically not paid dividends.

Stock-based compensation expense during fiscal ~~2011~~2012 and ~~2010~~2011 was $~~568~~1,324,000 and $~~365~~568,000, respectively.

Recently Issued Accounting Standards.

InImage ~~August 2010~~Entertainment, ~~the FASB issued ASU No~~Inc. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This Update amends various SEC paragraphs pursuant to the issuance of SEC Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and became effective upon issuance. The adoption of ASC No. 2010-21 did not have a material impact on the Company’s financial statements.

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In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This Update requires that all nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU No. 2011-05 is effective for interim and annual periods beginning after December 15, 2011, on a retrospective basis. Image is currently evaluating the effect of ASC No. 2011-05, however, the adoption is not expected to have a material effect on its financial statements.

In December ~~2010~~2011, the FASB issued ASU No. ~~2010~~2011-29 12, ~~Business~~Comprehensive ~~Combinations~~Income ~~(Topic~~– ~~805):~~Deferral ~~Disclosure~~ of ~~Supplementary~~the ~~Pro~~Effective ~~Forma~~Date ~~Information~~ for ~~Business~~Amendments ~~Combinations. This~~to ~~Update~~the ~~clarifies~~Presentation ~~that,~~of ~~when~~Reclassifications ~~presenting~~of ~~comparative~~Items ~~financial~~out ~~statements,~~of ~~SEC~~Accumulated ~~registrants~~Out ~~should disclose revenue and earnings~~ of ~~the~~Accumulated ~~combined~~Other ~~entity~~Comprehensive asIncome ~~though~~in ~~the~~Accounting ~~current~~Standards ~~period~~Update ~~business~~No. ~~combinations~~2011-05, ~~had~~which ~~occurred~~defers aschanges ofin ~~the~~ASC ~~beginning of the period only~~No. ~~The~~ ~~Update~~2011-05 ~~also~~that ~~expands~~relate ~~the supplemental pro forma disclosures~~ to ~~include a description of~~ the ~~nature~~presentation ~~and amount~~ of ~~material,~~reclassification ~~nonrecurring pro forma~~ adjustments. ~~directly~~ASU ~~attributable to the business combination included in the reported pro forma revenue and earnings~~No. ~~The~~ ~~amendments~~2011-12 inis ~~this Update are~~ effective for fiscal years, and interim periods within those ~~fiscal~~ years, beginning ~~on or~~ after December 15, ~~2010~~2011. The adoption of ~~ASC~~ASU No. ~~2010~~2011-2912 is not expected to have a material ~~impact~~effect on ~~the Company~~Image’s financial statements.

~~In May 2011, the FASB issued ASU No~~Reclassifications. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This Update resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” ~~ASU~~Some ~~2011-04~~fiscal ~~is effective for interim and annual periods beginning after December 15,~~ 2011. ~~The~~balances ~~adoption~~have ofbeen ~~ASC~~reclassified ~~No.~~to ~~2011-04~~conform ~~is not expected~~ to ~~have a material impact on~~ the ~~Company’s~~fiscal ~~financial~~2012 ~~statements~~presentation.

~~Reclassifications~~Liquidity. ~~Some~~During fiscal ~~2010~~2012, ~~balances~~we ~~have~~maintained ~~been~~our ~~reclassified~~overall liquidity and financial condition because, among other things, we continued to ~~conform~~work with SPHE to reduce our outstanding accounts receivable and we improved our borrowing availability as a result of amending our revolving credit facility with PNC Bank, N.A., which specifically (i) decreased the ~~fiscal~~availability ~~2011~~block, ~~presentation~~(ii) increased the availability from broadcast and digital receivables, and (iii) increased the credit support provided to PNC by JH Partners. Because of our history of losses and negative cash flows, our ability to obtain adequate additional financing on satisfactory terms may be limited. Our ability to raise financing through sales of equity securities depends on general market conditions, including the demand for our common stock. We may be unable to raise adequate capital through the sale of equity securities, and if we were able to sell equity, our existing stockholders could experience substantial dilution. If adequate financing is not available or unavailable on acceptable terms, we may find we are unable to fund expansion, continue offering products and services, take advantage of acquisition opportunities, develop or enhance services or products, or respond to competitive pressures in the industry.

~~Liquidity. While our balance sheet has improved over the past 12 months, our cash requirements for content acquisition continue to exceed the level of cash generated by day-to-day operations.~~ At March 31, ~~2011~~2012, we had a working capital deficit of $6.94 million, compared to a working capital deficit of $73.84 million at March 31, ~~2010~~2011. We may need to raise additional funds to acquire the rights to content we find desirable, particularly with respect to our competition for home entertainment rights to feature films. Therefore, maximizing available working capital is critical to our business operations. The distribution advances from SPHE and Entertainment One assisted us with the purchase of Madacy and other libraries. These distribution advances augment our working capital needs in acquiring content. On June 23, 2011, we obtained a three-year revolving credit line for up to $17.5 million. See “Note 65. Revolving Credit Facility” below. Our ability to borrow against collateralized assets such as receivables and inventory is more favorable compared to our previous revolving credit line.

~~Note~~Image ~~2. Purchase~~Entertainment, ~~of Madacy Home Video~~Inc.

On September 7, 2010 (the Closing), Image and its then wholly-owned subsidiary Image/Madacy Home Entertainment, LLC (IMHE) executed an Asset Purchase Agreement with the effective date of August 31, 2010 (Purchase Agreement) with Madacy Entertainment, LP (Seller) and Madacy Entertainment US, Inc. (Madacy US). Pursuant to the Purchase Agreement, IMHE purchased Seller’s home video division, consisting of certain DVD inventory, content advances and certain other assets, including the trade name “Madacy Home Video” (collectively, the Home Video Division). Pursuant to a Sublicense Agreement also executed on September 7, 2010 with an effective date of August 31, 2010 (Sublicense Agreement), IMHE exclusively sublicensed all of Madacy US’ rights to content for distribution (the Rights).54

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The~~We ~~purchase~~also ~~price~~continue ~~for~~to ~~the~~benefit ~~above~~from ~~transactions~~the ~~included:~~cost ~~(i)~~reduction ~~fair~~plan ~~value~~initiated ofin ~~cash~~the ~~payments~~latter ofhalf ~~$1,213,000,~~ of ~~which~~fiscal ~~$139,000~~2010. These ~~was~~improvements ~~included~~ in ~~accrued~~liquidity ~~liabilities~~enabled atImage ~~March~~to ~~31,~~increase ~~2011;(ii)~~its ~~the~~investment ~~issuance~~in ofhigh-profile ~~940,070~~content ~~shares~~(including ofRadio ~~unregistered~~Rebel ~~Image~~(starring ~~common~~Debby ~~stock valued at $200~~Ryan),~~000~~ ~~(contractually~~Paul ~~based~~Rodriguez: onJust ~~the average closing price~~ for ~~20 trading days ending immediately before~~ the ~~third trading day before the effective date of the Purchase Agreement~~Record, ~~which~~Note ~~approximates~~to ~~fair~~Self ~~value);~~ (~~iii)~~starring aChristian ~~30%~~Keys, ~~limited~~Letoya ~~liability membership interest in IMHE (IMHE Noncontrolling Interest~~Luckett);, ~~(iv)~~Love ~~the~~Buddies ~~assumption of Seller’s obligations by IMHE under~~ (1)starring ~~the~~Tatyana ~~Replication~~Ali, ~~Services~~Keith ~~Agreement (Replication Services Agreement~~Robinson) ~~dated July 28~~, ~~2010~~The ~~with~~Heart ~~the effective date~~ of ~~July~~Christmas ~~1, 2010 between Sony DADC US Inc.~~ (~~Sony~~starring ~~DADC)~~Candace ~~and~~Cameron ~~Seller;~~Bure, ~~(2)~~George ~~the Security Agreement (Security Agreement~~Newbern) ~~dated June 1, 2010 between Sony DADC~~ and ~~Seller; and (v) the execution of~~ a ~~Guarantee~~program ~~Agreement (Guarantee Agreement) dated August 31, 2010~~ by ~~Image~~David ~~in favor of Sony DADC, guarantying all of the obligations of IMHE to Sony DADC pursuant to the Replication Services Agreement and Security Agreement~~E. ~~The~~ ~~obligations under the Replication Services Agreement include~~Talbert, ~~without~~You ~~limitation,~~Can’t ~~the~~Choose ~~repayment of a $2 million advance ($1,826,000 net of a discount of $174,000~~Family) tonot ~~Sony~~released ~~DADC~~in ~~pursuant~~fiscal ~~to the terms and conditions of such agreement~~2012.

Should the transaction contemplated with RLJ Acquisition, Inc. not be consummated, Image will continue to focus on exploiting the value of our 4,000 title catalog, continue to make strategic acquisition of new products and remain committed to pursuing business combinations to maximize shareholder value. Image has several options to improve liquidity for product acquisition, which include (i) seek new cash infusion/added credit enhancements from our major shareholder, JH Partners, (ii) renegotiate terms with key suppliers/distributors, and (iii) further outsource non-core activities. Management cannot provide any assurance that we will be able to execute the options described above.

Note 2.

Noncontrolling Interest Liability Resulting from Purchase of Madacy Home Video.

The purchase price for the above transactions included: (i) fair value of cash payments of $1,213,000, of which $139,000 was included in accrued liabilities at March 31, 2011 and paid during fiscal year ended March 31, 2012;(ii) the issuance of 940,070 shares of unregistered Image common stock valued at $200,000 (contractually based on the average closing price for 20 trading days ending immediately before the third trading day before the effective date of the Purchase Agreement, which approximates fair value); (iii) a 30% limited liability membership interest in IMHE (IMHE Noncontrolling Interest); (iv) the assumption of Seller’s obligations by IMHE under (1) the Replication Services Agreement (Replication Services Agreement) dated July 28, 2010 with the effective date of July 1, 2010 between Sony DADC US Inc. (Sony DADC) and Seller; (2) the Security Agreement (Security Agreement) dated June 1, 2010 between Sony DADC and Seller; and (v) the execution of a Guarantee Agreement (Guarantee Agreement) dated August 31, 2010 by Image in favor of Sony DADC, guarantying all of the obligations of IMHE to Sony DADC pursuant to the Replication Services Agreement and Security Agreement. The obligations under the Replication Services Agreement include, without limitation, the repayment of a $2 million advance ($1,826,000 net of a discount of $174,000) to Sony DADC pursuant to the terms and conditions of such agreement.

The IMHE Noncontrolling Interest is subject to a right of repurchase by Image on August 31, 2013 at a repurchase price calculated as the product of 2.25 times the operating income for four consecutive fiscal quarters ending on or prior to the repurchase date, as determined in accordance with the terms of the Operating Agreement executed on September 7, 2010 with an effective date of August 31, 2010 (Operating Agreement), multiplied by the IMHE Noncontrolling Interest. If Image does not repurchase the IMHE Noncontrolling Interest on August 31, 2013, then Image is required to repurchase such interest on August 31, 2014 at a repurchase price calculated as the product of 2.75 times the operating income for four consecutive fiscal quarters ending on or prior to the repurchase date, as determined in accordance with the terms of the Operating Agreement. If Image undergoes a change of control on or prior to August 31, 2013, Seller may opt to have Image repurchase the IMHE Noncontrolling Interest substantially based on the formula for a repurchase at August 31, 2013. In connection with the repurchase of the IMHE Noncontrolling Interest, the Sublicense Agreement will terminate and Madacy US will transfer all of its ownership right, title and interest in and to the Rights to IMHE, as such Rights are added to or terminated (with IMHE’s consent) during the period between August 31, 2010 and the date of Image’s repurchase of the IMHE Noncontrolling Interest.

~~In connection with the purchase of the Home Video Division, on September 7, 2010,~~ Image ~~entered into a three year Management Services Agreement with Madacy~~ Entertainment ~~Management LP~~, ~~and IMHE entered into an Employee Services Agreement with Sonoma Entertainment LP, each of which was effective August 31, 2010~~Inc. Pursuant to the Management Services Agreement, Image will pay fees for management services provided by certain employees who oversaw the Seller’s Home Video Division prior to the Closing. The management fee is $400,000 per year for each of the three years of the term, subject to adjustment based on IMHE’s operating income as calculated in accordance with the terms and conditions of the Operating Agreement (which has a $200,000 floor and an $800,000 ceiling annually), to be paid quarterly. Pursuant to the Employee Services Agreement, IMHE agreed to pay approximately CDN$29,000 per month for the services of certain people employed in connection with the Seller’s Home Video Division prior to the Closing who will continue to assist IMHE with the Home Video Division. The Employee Services Agreement will remain in effect until Image’s repurchase of the IMHE Noncontrolling Interest.

The purchase price allocation is based upon our valuation using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets of Madacy acquired, based on their estimated fair values. The total purchase price was approximately $3.6 million as follows (in thousands):55

Fair value of cash payments	$	1,213
Image Entertainment, Inc. Common Stock		200
Total consideration paid		1,413
Noncontrolling interest liability		2,152
Total purchase consideration	$	3,565

Based upon our valuation, approximately $2.5 million of the purchase price was allocated to intangible assets, subject to amortization. We will amortize the non-compete, trade names and customer relationships intangible assets over five years and the film library intangible assets over three years using the straight-line method of amortization. We are using straight-line amortization as it approximates the pattern of economic benefit to be derived from the intangible assets, specifically customer relationships.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The~~In ~~total~~connection with the purchase ~~consideration~~of the Home Video Division, on September 7, 2010, Image entered into a three year Management Services Agreement with Madacy Entertainment Management LP, and IMHE entered into an Employee Services Agreement with Sonoma Entertainment LP, each of which was effective August 31, 2010. Pursuant to the Management Services Agreement, Image will pay fees for management services provided by certain employees who oversaw the Seller’s Home Video Division prior to the Closing. The management fee is ~~allocated~~$400,000 per year for each of the three years of the term, subject to adjustment based on IMHE’s operating income as ~~follows:~~calculated in accordance with the terms and conditions of the Operating Agreement (which has a $200,000 floor and an $800,000 ceiling annually), to be paid quarterly. At each of March 31, 2012 and 2011, $33,000 was included as a component of accrued liabilities, and $400,000 and $233,000 was included in general and administrative expenses for the fiscal years ended March 31, 2012 and 2011, respectively. Pursuant to the Employee Services Agreement, IMHE agreed to pay approximately CDN$29,000 per month for the services of certain people employed in connection with the Seller’s Home Video Division prior to the Closing who will continue to assist IMHE with the Home Video Division. The Employee Services Agreement will remain in effect until Image’s repurchase of the IMHE Noncontrolling Interest. For the fiscal years ended March 31, 2012 and 2011, $368,000 and $175,000, respectively, was included in selling, general and administrative expenses.

The purchase price allocation was based upon our valuation using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the total purchase price was allocated to the net tangible and intangible assets of Madacy acquired, based on their estimated fair values. The total purchase price was approximately $3.6 million as follows (in thousands):

Fair value of cash payments	$	1,213
Image Entertainment, Inc. Common Stock		200
Total consideration paid		1,413
Noncontrolling interest liability		2,152
Total purchase consideration	$	3,565

Based upon our valuation, approximately $2.5 million of the purchase price was allocated to intangible assets, subject to amortization. We are amortizing the non-compete, trade names and customer relationships intangible assets over five years and the film library intangible assets over three years using the straight-line method of amortization. We are using straight-line amortization as it approximates the pattern of economic benefit to be derived from the intangible assets, specifically customer relationships.

The total purchase consideration was allocated as follows:

Inventories	$	1,588
Royalty advances		214
Trade name		110
Customer relationships		1,104
Film library		1,303
Non-compete		25
Goodwill		1,047
Total assets acquired		5,391
Liabilities assumed – Sony liability		(1,826	)
Net assets acquired	$	3,565

Goodwill represents the excess of the acquisition purchase ~~price~~consideration over the estimated fair value of net tangible and intangible assets acquired. Goodwill will not be amortized but instead will be tested for impairment at least annually. In the event that we determine that the value of goodwill has become impaired, we will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

The results of operations for IMHE from the date of acquisition are included in our consolidated financial statements for the fiscal year ended March 31, ~~2011. There~~2012 ~~were~~and nofrom ~~operations~~acquisition ~~for~~to ~~IMHE included for the~~ fiscal year ended March 31, ~~2010~~2011. The right to purchase IMHE Noncontrolling Interest is mandatorily redeemable by August 31, 2014, unless redeemed sooner at ~~the Company~~Image’s option~~. At~~ ~~acquisition, the IMHE Noncontrolling Interest was valued using the discounted cash flow method. Since the mandatory redemption is time certain and is not triggered by liquidation~~ or ~~termination of IMHE, the Noncontrolling Interest of $2,603,000 at March 31, 2011 is recorded~~ as a ~~liability~~result ~~at its fair value. There was no Noncontrolling Interest reported at March 31, 2010. The change in the fair value~~ of the ~~noncontrolling~~put ~~interest~~being ~~from~~exercised ~~acquisition to fiscal year ended March 31, 2011 was $526,000 and is included as a component of interest expense~~ in ~~the~~event ~~consolidated statement~~ of ~~operations. During~~a ~~the~~change ~~fiscal year ended March 31, 2011, the Company paid $75,000 to the noncontrolling interest holder towards the amount due for its share~~ in ~~the fiscal 2011 net income of IMHE~~control.

~~Intangible~~Image ~~assets at March 31~~Entertainment, ~~2011 consist of the following:~~Inc.

	Gross Carrying		Accumulated					Useful
(In thousands)	Amount		Amortization			Net		Life (Yrs)
Customer relationships	$	1,104	$	(128	)	$	976		5
Film library		1,303		(254	)		1,049		3
Trade name		110		(13	)		97		5
Non-compete		25		(3	)		22		5
	$	2,542	$	(398	)	$	2,144

Future amortization of intangible assets is approximately as follows:

Fiscal Year Ended March 31,	Amount
	(In thousands)
2012	$	682
2013		682
2014		429
2015		248
2016		103
	$	2,144

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Goodwill~~The ~~during~~IMHE Noncontrolling Interest was valued using the discounted cash flow method of the income approach, where a discount rate was applied to the net operating cash flows attributable to the noncontrolling interest. The discount rate was determined by performing a market-based weighted average cost of capital (or WACC) analysis. The WACC analysis calculates the weighted average of the cost of equity using a capital asset pricing model and the cost of debt using the applicable bond yield. Additional assumptions used include 5-year financial projections, growth rates over the 5-year period, constant gross margin rates, estimated working capital requirements, and estimated tax rate. We re-evaluate the value of the non-controlling interest internally on a quarterly basis and hire a third-party valuation firm to review the value on an annual basis. Assumptions used in the valuation include operating income projections, the probability of each option to purchase the IMHE Noncontrolling Interest, and a discount rate of 35%. Since the IMHE Noncontrolling Interest represents an unconditional obligation requiring Image to redeem the 30% ownership interest held by Madacy US by transferring its assets at specified dates, the IMHE Noncontrolling Interest was determined to be a mandatorily redeemable financial instrument. The IMHE Noncontrolling Interest of $2,603,000 at March 31, 2011 was recorded as a liability at fair value. The change in the fair value of the IMHE Noncontrolling Interest from acquisition to fiscal year ended March 31, 2011 ~~changed~~was $526,000 and was included as ~~follows:~~a component of other income (expense) in the respective consolidated statement of operations. During the fiscal year ended March 31, 2011, Image paid $75,000 to the noncontrolling interest holder towards the amount due for its share in the fiscal 2011 net income of IMHE.

(In thousands)	Total
Goodwill as of March 31, 2010 and 2009	$	5,715
Goodwill resulting from Madacy Home Video transaction		1,047
Goodwill as of March 31, 2011	$	6,762

As of March 31, 2012, we revalued the IMHE Noncontrolling Interest using the same methodology as described above. Assumptions used in the valuation include operating income projections, the probability of each option to purchase the IMHE Noncontrolling Interest, and a discount rate of 30%. The IMHE Noncontrolling Interest of $500,000 at March 31, 2012 was recorded as a liability at fair value. The change in the fair value of the IMHE Noncontrolling Interest during fiscal year ended March 31, 2012 was $2,103,000 and was included as a component of other income (expense) in the respective consolidated statement of operations. During the fiscal year ended March 31, 2012, Image paid $100,000 to the noncontrolling interest holder towards the amount due for its share in the fiscal 2012 net income of IMHE.

~~During~~Intangible assets related to the ~~years~~purchase ~~ended~~of ~~March~~the ~~31,~~Madacy ~~2011~~Home ~~and~~Video ~~2010,~~Division ~~there~~at ~~was~~March no31, ~~impairment~~2012 ~~relating~~and to2011 ~~goodwill~~consist orof ~~intangible~~the ~~assets.~~following:

Pro Forma Results

	March 31, 2012							March 31, 2011
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net		Useful Life (Yrs)

Customer relationships	$	1,104	$	(350	)	$	754	$	1,104	$	(128	)	$	946		5
Film library		1,303		(687	)		616		1,303		(254	)		1,049		3
Trade name		110		(35	)		75		110		(13	)		97		5
Non-compete		25		(8	)		17		25		(3	)		22		5
	$	2,542	$	(1,080	)	$	1,462	$	2,542	$	(398	)	$	2,144

~~The~~During ~~unaudited~~the ~~pro~~fiscal ~~forma~~years ~~consolidated~~ended ~~results~~March ~~presented~~31, ~~below~~2012 ~~include~~and ~~the~~2011, ~~effect of~~ the ~~Madacy~~intangible ~~transaction~~asset asamortization ifexpense it was ~~consummated~~$682,000 asand ~~of April 1~~$398, ~~2009. However~~000, ~~the pro forma results do not include the effect of anticipated synergies which typically drive the growth in revenue and earnings that arise subsequent to acquisition~~respectively.

~~The~~Future ~~unaudited~~amortization ~~pro~~of ~~forma~~intangible ~~consolidated~~assets ~~financial information below~~ is ~~not~~approximately ~~necessarily indicative of either future results of operations nor of results that might have been achieved had the acquisition been consummated~~ as ~~of April 1, 2009.~~follows:

	Unaudited Pro Forma Results
Fiscal Year Ended March 31,	Amount
	Fiscal Year Ended March 31,
	(In thousands)
(In thousands)	2011		2010
2013	$	682
Revenue	$	91,038	$	104,770
2014		429
Income (loss) from operations	$	1,103	$	(10,453	)
2015		248
Net income (loss)	$	2,126	$	(5,422	)
2016		103
	$	1,462

~~Note~~Image ~~3. Customers’~~Entertainment, ~~Bankruptcy Filings~~Inc.

On February 16, 2011, Borders Group, Inc., filed for Chapter 11 bankruptcy protection. Net revenues from Borders for fiscal 2011 were $742,000. As of March 31, 2011, we recorded an aggregate reserve of $408,000 for potential uncollectible receivables from Borders, which was the net amount due at March 31, 2011 less payments received prior to their bankruptcy filing. It is unclear as to whether we will recover any of the monies owed to us by Borders.57

On September 23, 2010, Blockbuster Inc. filed for Chapter 11 bankruptcy protection. Net revenues from Blockbuster for fiscal 2011 were $1,079,000. As of March 31, 2011, we recorded an aggregate reserve of $273,000 for potential uncollectible receivables from Blockbuster, which was the net amount due at March 31, 2011 less payments received prior to their bankruptcy filing. It is unclear as to whether we will recover any of the monies owed to us by Blockbuster.

On February 2, 2010, Movie Gallery Inc., owner of rental chain Hollywood Video, filed for Chapter 11 bankruptcy protection. Both Movie Gallery and Hollywood Video were customers of Image. Net revenues from Movie Gallery and Hollywood Video for fiscal 2010 were $697,000 and $856,000, respectively. As of March 31, 2010, we recorded an aggregate reserve of $948,000 for potential uncollectible receivables from Movie Gallery and Hollywood Video, which was the net amount due at March 31, 2010 less payments received prior to their bankruptcy filing. The fiscal 2010 reserve amount included revenue-sharing revenues reported after the bankruptcy filings that were paid subsequent to March 31, 2010 by the debtor in possession. Net revenue sharing revenues reported from Movie Gallery and Hollywood Video for fiscal 2011 were $112,000 and $134,000, respectively, were paid by the debtor in possession during fiscal 2011. As of March 31, 2011, we had reserved 100% of the remaining receivables of $815,000, which represents our receivables from them prior to the bankruptcy filing. It is unclear as to whether we will recover any of the monies owed to us by Movie Gallery or Hollywood Video or whether we will be required to repay any preferential payments made prior to their bankruptcy filing.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Note~~Goodwill ~~4. Inventories.~~during the fiscal years ended March 31, 2012 and 2011 changed as follows:

Inventories at March 31, 2011 and 2010 are summarized as follows:

(In thousands)	Total

Goodwill as of March 31, 2010	$	5,715
Goodwill resulting from Madacy Home Video transaction		1,047
Goodwill as of March 31, 2011		6,762
Goodwill as of March 31, 2012	$	6,762

(In thousands)	2011		2010
DVD	$	8,931	$	8,208
Other		2,588		2,095
		11,519		10,303
Production costs, net		3,243		4,557
		14,762		14,860
Less current portion of inventories		13,709		12,659
Noncurrent inventories, principally non-recoupable production costs	$	1,053	$	2,201

During the years ended March 31, 2012 and 2011, there was no impairment relating to goodwill or intangible assets.

~~Non-recoupable~~Note ~~production costs are net of accumulated amortization of $12,564,000 and $12,003,000 at March 31, 2011 and 2010, respectively~~3. We ~~expect to amortize approximately 67~~Inventories.~~5% and 90.4% of the March 31, 2011 unamortized production costs by March 31, 2012 and 2013, respectively.~~

~~Note~~Inventories ~~5. Property~~at March 31, ~~Equipment~~2012 and ~~Improvements.~~2011 are summarized as follows:

Property, equipment and improvements at March 31, 2011 and 2010, are summarized as follows:

(In thousands)	2012		2011
Packaged Goods	$	9,087	$	8,931
Other		3,452		2,588
		12,539		11,519
Production costs, net		2,218		3,243
		14,757		14,762
Less current portion of inventories		14,202		13,709
Noncurrent inventories, principally non-recoupable production costs	$	555	$	1,053

(In thousands)	2011		2010
Machinery, equipment and software	$	5,617	$	6,791
Leasehold improvements		960		934
Other		55		30
		6,632		7,755
Less accumulated depreciation and amortization		6,027		6,650
	$	605	$	1,105

Non-recoupable production costs are net of accumulated amortization of $11,922,000 and $12,564,000 at March 31, 2012 and 2011, respectively. We expect to amortize approximately 75.0% and 92.2% of the March 31, 2012 unamortized production costs by March 31, 2013 and 2014, respectively.

~~Depreciation~~Note ~~and amortization expense for the years ended March 31, 2011 and 2010 was $572,000 and $1,085,000, respectively~~4. ~~During~~ ~~the years ended March 31~~Property, ~~2011~~Equipment and ~~2010, there was no impairment to our long-lived assets~~Improvements.

~~Note~~Property, ~~6. Revolving~~equipment ~~Credit~~and ~~Facility.~~improvements at March 31, 2012 and 2011, are summarized as follows:

Our Loan and Security Agreement, as amended (or Loan Agreement), with Wells Fargo Capital Finance (or Wells Fargo) provided us with a revolving credit facility of up to $15 million (reduced from $20 million on February 1, 2011). Actual borrowing availability under the line was based upon our level of eligible accounts receivable and eligible inventories. Eligible accounts receivable primarily included receivables generated by domestic sales. In connection with our January 2010 sale of preferred stock to affiliates of JH Partners, LLC, these investors provided to Wells Fargo a $5.0 million irrevocable standby letter of credit through August 6, 2011 as credit support for our revolving line of credit. The term of the Loan and Security Agreement would have matured on July 31, 2011; however, on June 23, 2011, we entered into a three-year Credit and Security Agreement with PNC Bank. See “Note 17. Subsequent Events” below.

(In thousands)	2012		2011
Machinery, equipment and software	$	1,713	$	5,617
Leasehold improvements		960		960
Other		300		55
		2,973		6,632
Less accumulated depreciation and amortization		2,247		6,027
	$	726	$	605

~~Borrowings~~Depreciation ~~bore~~and ~~interest~~amortization atexpense ~~either~~for the ~~bank’s~~years ~~Prime~~ended ~~Rate (3.25% at~~ March 31, ~~2011)~~2012 ~~plus~~and up2011 towas ~~1.5% or~~$316,000 atand ~~our option~~$572,000, ~~LIBOR~~respectively. During ~~(three~~the ~~month~~years ~~LIBOR~~ended ~~– 0.3% at~~ March 31, ~~2011)~~2012 ~~plus~~and ~~up to 4.0%~~2011, ~~subject~~there towas ~~minimum~~no ~~borrowing~~impairment ~~levels. The level of interest rate margin~~ to ~~Prime Rate or LIBOR was dependent upon~~ our ~~future~~long-lived ~~financial performance as measured by earnings before interest, taxes, depreciation and amortization, as defined in the Loan and Security Agreement (EBITDA)~~assets.

WeNote were required to maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 measured at the end of each month on a fiscal year-to-date basis. If we maintained minimum borrowing availability equal to, or greater than, $1.5 ~~million, our fixed-charge coverage ratio was not tested~~. At ~~March~~Revolving 31Credit ~~2011, we were not tested for such covenant compliance because we had availability in excess of the required $1~~Facility.5 million minimum. Had we been tested, our EBITDA would have resulted in a fixed-charge coverage ratio more than the required 1.1 to 1.0. At March 31, 2011, our borrowing availability was $7.1 million ($8.6 million based upon eligible accounts receivable less the $1.5 million minimum requirement). At March 31, 2010, our borrowing availability was $3.8 million ($6.3 million based upon eligible accounts receivable less the $2.5 million minimum requirement). Accordingly, we had limited working capital available under the revolving credit facility.

55On June 23, 2011, we entered into a three-year Revolving Credit and Security Agreement (or PNC Credit Facility) with PNC Bank, National Association (or PNC).

Our previous credit facility with Wells Fargo Capital Finance, LLC, as successor by merger to Wachovia Capital Finance Corporation (Western), (or Wells Fargo), which provided a revolving line of credit of up to $15 million and was set to expire on July 31, 2011, was repaid in full with proceeds from the PNC Credit Facility and terminated. The PNC Credit Facility provides for up to a $17.5 million revolving line of credit commitment, including a letter of credit subfacility with a $1.5 million sublimit. Advances under the PNC Credit Facility generally are limited to the total of: (i) 85% of eligible accounts receivable; (ii) 60% of eligible inventory (with an inventory sublimit of 25% of the borrowing base); and (iii) the lesser of $3 million or the amount of certain letters of credit provided by one or more affiliates of JH Partners, LLC (or JH Parties). The reserve against the borrowing base, or availability block, may be reduced upon meeting certain terms and conditions at PNC's discretion. In addition, the amount of outstanding credit under the PNC Credit Facility is capped at $5 million during a 30-day clean-up period annually between January 1 and April 30, with such period to commence each year on a date we select. This clean-up period was waived by PNC for calendar year 2012.

Image Entertainment, Inc.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At ~~March~~our 31option, ~~2011~~subject to certain limitations (including, wemost ~~had~~notably, ~~$6.1~~on ~~million~~eurodollar ~~outstanding~~rate advances), interest rates under the ~~revolving~~PNC ~~credit~~Credit ~~facility~~Facility are equal to either (a) the sum of the alternate base rate plus 1.75% or (b) the sum of the eurodollar rate plus 3.25%. AtFor ~~March~~purposes ~~31,~~of ~~2010~~the PNC Credit Facility: the "alternate base rate" means a rate equal to the higher of (i) PNC's base commercial lending rate, we(ii) ~~had~~the $6average rate on overnight federal funds plus 0.45% ~~million~~and ~~outstanding~~(iii) ~~under~~the applicable daily LIBOR rate plus 1%; and the ~~revolving~~"eurodollar ~~credit~~rate" ~~facility~~means the interest rate determined by PNC by dividing (i) the rate which appears on the Bloomberg Page BBAM1 or another eligible source selected by PNC, by (ii) a number equal to 1.00 minus the applicable Federal Reserve percentage.

The ~~Loan~~obligations ~~Agreement~~under ~~was~~the ~~amended~~PNC Credit Facility are secured by a lien on ~~March~~substantially ~~31,~~all ~~2011~~of our assets. ~~Among~~Our ~~other~~obligations ~~modifications~~under the PNC Credit Facility, up to ~~the~~a ~~underlying~~maximum ~~revolving~~of ~~credit~~$6.5 ~~facility~~million, ~~the~~are ~~Amendment~~guaranteed ~~revised~~by ~~the~~JH ~~fee~~Parties, ~~structure~~with Messrs. We ~~were~~Theodore inS. ~~compliance~~Green ~~with~~(our ~~all~~Chief ~~financial~~Executive Officer and ~~operating~~Chairman), ~~covenants~~John ~~under~~W. ~~the~~Hyde ~~Loan~~(our Vice Chairman) and ~~Security~~John ~~Agreement~~P. Avagliano (our Chief Financial Officer and Chief Operating Officer) providing any applicable contribution to such guaranty in the portion of their ownership of our Series B Cumulative Preferred Stock (or Series B Preferred). JH Parties also provides up to $5 million in additional credit support for our revolving line of credit, which is currently a $3.7 million irrevocable standby letter of credit, as amended through August 15, at2012. Effective ~~March~~July 3113, 2011, the PNC Credit Facility was amended solely to allow for contemplated consideration to be paid to JH Parties, which consideration includes (i) $500,000 commitment fee and ~~2010~~(ii) a 5% annual fee on the total credit support provided, half of which is payable monthly in cash and half of which is deferred for 12 months, convertible at JH Parties’ option into Image common stock at the end of the 12 months. See “Note 14. Related Party Transactions” below.

~~Note~~The PNC Credit Facility provides for certain loan covenants, including financial covenants providing for a minimum senior fixed charge coverage ratio of not less than 1.20 to 1.00 and a minimum fixed charge coverage ratio of not less than 1.10 to 1.00 (i.e., consolidated earnings before interest, taxes, depreciation and amortization, as defined in the Loan Agreement (or EBITDA) (minus unfinanced capital expenditures and income taxes) to consolidated total debt (plus certain management fees, and, in the case of the fixed charge coverage ratio, certain dividend payments) over a rolling prior four fiscal quarter period), and limitations on our ability with regard to the incurrence of debt, the disposition and preservation of collateralized assets, transactions with affiliates (other than payment of certain management fees), the existence of liens, capital expenditures, stock repurchases and dividends, investments, amendments of certain business arrangements with Sony Pictures Home Entertainment (or SPHE) and Sony DADC (collectively Sony parties) and of the IMHE management agreement and mergers, dispositions and acquisitions (with certain limited exceptions for the purchase of third-party equity interests in Image/Madacy Home Entertainment, LLC (or IMHE)). At March 31, 2012, our EBITDA resulted in a fixed-charge coverage ratio more than the required minimum senior fixed charge coverage ratio of not less than 1.20 to 1.00 and a minimum fixed charge coverage ratio of not less than 1.10 to 1.00. At March 31, 2012, our borrowing availability was $2.7 million ($4. ~~Long~~1 million based upon eligible accounts receivable and inventory less the $1.35 million availability block) and our borrowing rates were 5.00% (based on the alternative base rate, which is Prime Rate of 3.25% plus 1.75%) and 3.72% (based on the eurodollar rate, which is three-~~Term~~month ~~Debt~~LIBOR of 0.47% plus 3.25%).

~~New~~The ~~Distribution~~PNC ~~Services~~Credit Facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and ~~License~~warranties, ~~Agreement~~bankruptcy and ~~Related~~insolvency ~~Advance~~events, material judgments, cross defaults to certain other contracts (including, for example, business arrangements with Sony parties and other material contracts) and indebtedness and events constituting a change of control or a material adverse effect in any of our results of operations or condition (financial or otherwise). The occurrence of an event of default will increase the applicable rate of interest and could result in the acceleration of our obligations under the PNC Credit Facility and JH Parties being required to pay certain of our obligations under the PNC Credit Facility.

OnThe ~~August~~agreement ~~23,~~imposes ~~2010,~~restrictions weon ~~signed~~such aitems ~~three-year~~as ~~Distribution~~encumbrances ~~Services~~ and ~~License Agreement with Sony Pictures Home Entertainment Inc. (SPHE)~~liens, topayments ~~act~~of ~~as exclusive manufacturer to meet the Company’s DVD requirements~~dividends, ~~including Blu-ray Disc high-definition format, and to provide related distribution and~~ other ~~logistics services in exchange for certain fees. SPHE acts as our vendor of record for shipments of physical product to North American retailers and wholesalers. However~~indebtedness, ~~under~~stock ~~our~~repurchases ~~relationship with SPHE, the Company is responsible for the credit risk from the end customer with respect to accounts receivable~~ and ~~risk~~capital ~~of inventory loss~~expenditures. OnAny September 8, 2010, an interest-free $2.5 million advance against future replication from SPHE, to be repaid at $0.15 per disc manufactured until the advance is repaid, of which approximately $601,000 has been repaid at March 31, 2011, and a $750,000 non-recoupable advance were received from SPHE and were used to reduce then-outstanding borrowings ~~under~~are ~~our~~secured ~~previous~~by ~~revolving credit facility with Wells Fargo Capital Finance (or Wells Fargo). The non-recoupable advance was used to pay the fee incurred for terminating~~ our ~~arrangement with our former replicator~~assets. ~~Both~~The ~~advances~~agreement ~~(non-recoupable,~~also ~~for~~requires ~~the~~us ~~first year only, and recoupable) are subordinated~~ to ~~all~~comply ~~obligations outstanding to under the Company’s revolving credit facility, previously~~ with ~~Wells~~minimum ~~Fargo~~financial and ~~currently~~operating ~~with PNC Bank, N~~covenants. A. (or PNC). Until the advance is repaid, SPHE will have a security interest in all the Company’s assets in second position behind PNC. Given the progress we have made with the transition, it is probable that none of the termination conditions will be triggered within the first year and, therefore the termination fee was offset by the non-recoupable advance resulting in a net zero impact to cost of sales. After the first year, the unrecouped portion of the recoupable advance is refundable, but the unrecoupable advance is nonrefundable.

~~Prior~~We towere ~~August~~in ~~23,~~compliance ~~2010,~~with ~~Arvato~~all ~~manufactured~~financial ~~our~~and ~~DVDs~~operating ~~and~~covenants under the ~~majority~~Wells ofCredit ~~our~~Facility ~~CDs. There~~at ~~was~~March no31, ~~amount~~2011, ~~outstanding~~and aswhen ofterminated ~~March~~on 31June 23, ~~2010~~2011, ~~under~~and ~~the~~are ~~previous~~in ~~advance~~compliance ~~from~~with ~~Arvato,~~all ~~exclusive~~financial ofoperating ~~the~~covenants ~~debt~~under ~~discount. Although~~our wePNC ~~now~~Credit ~~use~~Facility aat ~~different~~March ~~service~~31, ~~provider~~2012. However, ~~amortization~~given ofour ~~the~~current ~~debt~~liquidity ~~discount~~constraints, ~~and~~it ~~deferred~~is ~~manufacturing~~not ~~credit~~possible ~~related~~ to ~~Arvato~~determine ~~for~~whether ~~fiscal~~we ~~2010~~will ~~are~~be ~~disclosed~~in compliance with all financial and operating covenants in the ~~paragraph~~future ~~below~~although we expect to ~~provide~~be ~~comparison~~in tocompliance ~~fiscal~~with ~~2011~~all covenants.

AsImage ~~the SPHE $2.5 million recoupable advance~~Entertainment, ~~or deferred manufacturing credit, is non-interest bearing, we imputed and recorded a debt discount of $218,000 based upon a three-year loan interest rate of 5~~Inc.5%. Amortization of the debt discount was a noncash interest expense and totaled $69,000 and $180,000 for SPHE in fiscal 2011 and Arvato in fiscal 2010, respectively. The deferred manufacturing credit was classified in long-term debt, net of current portion, after manufacturing commenced in October 2010. We amortized the deferred manufacturing credit as a reduction to inventory purchase cost based upon actual discs manufactured by SPHE. Amortization of the deferred manufacturing credit, included as a component of cost of sales, totaled $40,000 and $503,000 for SPHE in fiscal 2011 and Arvato in fiscal 2010, respectively.

Effective August 31, 2010, we entered into an amendment to the Replication Services Agreement and Security Agreement between Sony DADC US Inc. (Sony DADC) and Madacy Entertainment LP, which included execution of the Guarantee Agreement dated August 31, 2010 by Image in favor of Sony DADC, guarantying all of the obligations of IMHE to Sony DADC pursuant to the Replication Services Agreement and Security Agreement. The obligations under the Replication Services Agreement include, without limitation, the repayment of a $2 million advance to Sony DADC pursuant to the terms and conditions of such agreement. The $2 million advance is to be repaid at $0.10 per IMHE disc manufactured until the advance is repaid, of which approximately $391,000 has been repaid at March 31, 2011. As the obligation is non-interest bearing, we have imputed and recorded a debt discount of $174,000 to the $2 million advance based upon a three-year loan interest rate of 5.5%. Amortization of the debt discount related to Sony DADC was a noncash interest expense and totaled $54,000 for fiscal 2011.59

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

InOn ~~connection~~November ~~with~~2, 2011 we entered into the ~~purchase~~Second ofAmendment ~~Madacy~~to ~~Home~~Revolving ~~Video,~~Credit ~~Madacy’s~~and ~~distribution~~Security ~~agreement~~Agreement with ~~MMS~~PNC. Among other non-~~Millennium~~substantive ~~Media~~changes, ~~Services~~the ~~was~~amendment ~~assigned~~revised toa ~~IMHE~~financial ~~for~~covenant ~~distribution~~definition. There ofwas no change to the ~~IMHE~~borrowing ~~products~~capacity.

~~Long-term~~On ~~debt~~February at29, ~~March~~2012 ~~31,~~we ~~2011~~entered into the Third Amendment to Revolving Credit and ~~2010~~Security Agreement with PNC. The amendment lowered the availability block from $2.6 million to $1.35 million thereby improving liquidity. Among other non-substantive changes, ~~consisted~~the ofamendment revised definitions for a financial covenant and eligible receivables. There was no change to the ~~following:~~borrowing capacity.

(In thousands)	March 31, 2011		March 31, 2010
Subordinated manufacturing advance obligation, less debt discount of $269	$	3,238	$	—
Current portion of long-term debt, less debt discount of $175		1,795		—
Long-term debt less current portion, less debt discount	$	1,443	$	—

At March 31, 2012, we had $12.9 million outstanding under the revolving credit facility. At March 31, 2011, we had $6.1 million outstanding under the previous revolving credit facility.

Prior ~~Disc~~to ~~Replication~~June 23, 2011, our Loan and Security Agreement, as amended (or Loan Agreement), with Wells Fargo provided us with a revolving line of credit of up to $20 million (reduced to $15 million on February 1, 2011). Actual borrowing availability under the line was based upon our level of eligible accounts receivable and ~~Related~~eligible ~~Advance~~inventory. Eligible accounts receivable primarily included receivables generated by domestic sales. The Loan Agreement would have expired on July 31, 2011. In connection with our January 2010 sale of preferred stock to affiliates of JH Partners, LLC (or JH Transaction), these investors provided to Wells Fargo a $5.0 million irrevocable standby letter of credit through August 6, 2011 as credit support for our revolving line of credit. Borrowings bore interest at either the Prime Rate (3.25% at June 23, 2011 and at March 31, 2011) plus up to 1.5% or, at our option, LIBOR (three month LIBOR – 0.25% at June 23, 2011 and 0.31% at March 31, 2011) plus up to 4.0%, subject to minimum borrowing levels. The level of interest rate margin to Prime Rate or LIBOR was dependent upon our future financial performance as measured by EBITDA.

~~Prior~~We towere ~~August~~required ~~23,~~to ~~2010,~~maintain ~~Arvato~~a ~~manufactured~~minimum ~~our~~fixed ~~DVDs~~charge ~~and~~coverage ~~the~~ratio ~~majority~~ of ~~our CDs~~1. On1 ~~June~~to ~~30, 2006, we received an interest-free $10~~1.0 ~~million~~measured ~~advance against future DVD manufacturing from Arvato, to be repaid~~ at ~~$0.20~~the ~~per~~end ~~DVD~~of ~~manufactured,~~each ~~plus~~month ~~payment~~on of a ~~$0.04~~fiscal ~~administrative~~year-to-date ~~fee~~basis. If ~~per~~we ~~DVD~~maintained ~~manufactured~~minimum ~~until~~borrowing ~~the~~availability ~~advance~~equal isto, ~~repaid. On~~or ~~January~~greater 25than, ~~2010, we repaid the remaining~~ $1.85 million, ~~manufacturing~~our ~~advance~~fixed-charge ~~pursuant~~coverage toratio ~~this~~was ~~waiver~~not ~~agreement~~tested. ~~There~~At ~~was~~March no31 ~~amount~~2011, ~~outstanding~~we aswere ofnot ~~March~~tested ~~31,~~for ~~2010~~such ~~under~~covenant ~~the~~compliance ~~previous~~because ~~advance~~we ~~from~~had ~~Arvato,~~availability ~~exclusive~~in excess of the ~~debt~~required ~~discount~~$1.5 million minimum. ~~Although~~Had we ~~now~~been ~~use~~tested, aour ~~different~~EBITDA ~~service~~would ~~provider,~~have ~~amortization~~resulted ofin ~~the~~a ~~debt~~fixed-charge ~~discount~~coverage ~~and~~ratio ~~deferred~~more ~~manufacturing~~than ~~credit~~the ~~related~~required 1.1 to ~~Arvato~~1.0. At ~~for~~March ~~fiscal~~31, ~~2010~~2011, ~~are~~our ~~disclosed~~borrowing toavailability ~~provide~~was ~~comparison~~$7.1 tomillion ~~fiscal~~($8.6 ~~2011~~million inbased ~~“New~~upon ~~Distribution~~eligible ~~Services~~accounts ~~and~~receivable ~~License~~less ~~Agreement~~the ~~and~~$1.5 ~~Related~~million ~~Advance”~~minimum ~~above~~requirement).

~~Arvato~~Note ~~had a security interest in all of our assets in second position behind Wells Fargo~~6. As ~~the obligation was non~~Long-~~interest~~Term ~~bearing, we initially imputed and recorded a debt discount of $1,945,000 to the $10~~Debt.0 million face amount of the advance based upon our then-borrowing rate with our bank and recorded a deferred manufacturing credit, classified in other long-term liabilities. We were amortizing the debt discount, using the effective interest method, to interest expense. We were amortizing the deferred manufacturing credit as a reduction to the DVD disc purchase cost based upon actual discs manufactured by Arvato. The $0.04 administrative fee per disc manufactured was being recorded as an additional inventory manufacturing cost.

~~Senior~~Distribution ~~Convertible~~Services ~~Note~~and License Agreement and ~~Warrant~~Related Advance

On August 3023, ~~2006~~2010, we ~~issued~~signed a ~~$17~~three-year Distribution Services and License Agreement with Sony Pictures Home Entertainment Inc. (SPHE),~~000~~ to act as exclusive manufacturer to meet Image’s DVD requirements,~~000~~ ~~senior~~including ~~secured~~Blu-ray ~~note~~Disc ~~(or~~high-definition ~~Note)~~format, and ato provide related ~~warrant~~distribution and other logistics services in exchange for certain fees. SPHE acts as our vendor of record for shipments of physical product to ~~purchase~~North 1American retailers and wholesalers. However,~~000~~ under our relationship with SPHE,~~000~~ ~~shares~~Image ofis ~~our~~responsible ~~common~~for ~~stock~~the credit risk from the end customer with respect to accounts receivable and risk of inventory loss. ~~The~~On ~~note~~September ~~accrued~~8, 2010, an interest-free $2.5 million advance against future replication from SPHE, to be repaid at 7$0.~~875%~~15 per ~~annum~~disc manufactured until the advance was repaid, ~~payable~~of ~~quarterly~~which approximately $601,000 was repaid at March 31, 2011, and repaid the remainder at March 31, 2012, and a $750,000 non-recoupable advance were received from SPHE and were used to reduce then-outstanding borrowings under our previous revolving credit facility with Wells Fargo Capital Finance (or Wells Fargo). The ~~related~~non-recoupable ~~warrant~~advance was ~~recorded~~used asto pay the fee incurred for terminating our arrangement with our former replicator resulting in a ~~component~~net zero effect to cost of ~~long-term~~sales. After ~~liabilities~~the first year, the unrecouped portion of the recoupable advance is refundable, but the unrecoupable advance is nonrefundable. Until the recoupable advance was repaid, SPHE had a security interest in all Image’s assets in second position behind PNC.

~~Direct~~As ~~costs~~the ofSPHE $~~1,187,000~~2.5 ~~incurred~~million inrecoupable ~~August~~advance, ~~2006~~or ~~relating~~deferred tomanufacturing ~~this~~credit, ~~senior~~was ~~convertible~~non-interest ~~note~~bearing, ~~were~~we imputed and recorded asa ~~asset-deferred~~debt ~~financing~~discount ~~costs~~of ~~and~~$218,000 ~~were~~based ~~amortized~~upon asa ~~additional~~three-year ~~noncash~~loan interest ~~expenses~~rate ~~using~~of 5.5%. Amortization of the ~~effective~~debt discount was a noncash interest ~~rate~~expense ~~method~~and ~~over~~totaled ~~the~~$149,000 ~~life~~and of$69,000 ~~the~~in ~~related~~fiscal ~~private~~2012 ~~placement~~and ~~debt~~2011, respectively. ~~Amortization~~The ofdeferred ~~the~~manufacturing credit was classified in long-term debt, ~~discount~~net ~~and~~of ~~the~~current ~~deferred~~portion, ~~financing~~after ~~costs~~manufacturing ~~using~~commenced ~~the~~in ~~effective~~October ~~interest~~2010. We ~~rate~~amortized ~~method~~the ~~was~~deferred amanufacturing ~~noncash~~credit ~~charge~~as a reduction to ~~interest~~inventory ~~expense~~purchase ~~and~~cost ~~totaled~~based ~~$343,000~~upon ~~for~~actual ~~fiscal~~discs ~~2010~~manufactured by SPHE. AsAmortization of ~~March~~the 31deferred manufacturing credit, ~~2010~~included as a component of cost of sales, ~~there~~totaled ~~was~~$178,000 noand ~~remaining~~$40,000 ~~unamortized~~for ~~balance~~SPHE in fiscal 2012 and 2011, respectively.

OnImage ~~July 30~~Entertainment, ~~2009, we amended the note by increasing the interest rate to 8~~Inc.875%. At the time we entered into such amendment, the outstanding principal amount of the note was $13 million. The $2,701,000 principal increase represented 20% of the principal and accrued interest under the original note as of and through July 30, 2009.

~~Extinguishment of the Amended Note~~60

On January 7, 2010, we entered into an agreement to repay the amended note. The terms included repaying $15.0 million in cash and the issuance of 3.5 million shares of the Company’s Common Stock. In exchange for the repayment and share issuance, our obligations under the amended note would be terminated. On January 8, 2010, we paid retired the amended note by making the $15.0 million cash payment and issuance of 3.5 million shares of the Company’s Common Stock.

Net Loss on Extinguishments of Debt

During fiscal 2010, the Company had two extinguishments of debt, one in July 2009 and one in January 2010, which resulted in a net loss on extinguishments of debt of $277,000.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~July~~Effective 30August 31, ~~2009~~2010, ~~Extinguishment~~we entered into an amendment to the Replication Services Agreement and Security Agreement between Sony DADC US Inc. (Sony DADC) and Madacy Entertainment LP, which included execution of ~~Debt~~the Guarantee Agreement dated August 31, 2010 by Image in favor of Sony DADC, guarantying all of the obligations of IMHE to Sony DADC pursuant to the Replication Services Agreement and Security Agreement. The obligations under the Replication Services Agreement include, without limitation, the repayment of a $2 million advance to Sony DADC pursuant to the terms and conditions of such agreement. The $2 million advance is to be repaid at $0.10 per IMHE disc manufactured until the advance is repaid, of which approximately $554,000 and $392,000 has been repaid at March 31, 2012, and 2011, respectively. At March 31, 2012 and 2011, $1.1 million and $1.6 million, respectively, of this advance remains outstanding. As the obligation is non-interest bearing, we have imputed and recorded a debt discount of $174,000 to the $2 million advance based upon a three-year loan interest rate of 5.5%. Amortization of the debt discount related to Sony DADC was a noncash interest expense and totaled $78,000 and $54,000 for fiscal 2012 and 2011, respectively.

~~The~~Long-term ~~issuance of the amended note was accounted for as an extinguishment of~~ debt, asat ~~the~~March ~~terms of the amended note were deemed to be substantially different~~31, as2012 ~~defined in ASC 470-50 Debt – Modifications~~ and ~~Extinguishments~~2011, ~~from~~consisted ~~the terms~~ of the original note. Accordingly, the amended note was recorded at fair value and was compared to the carrying value of the original note including any bifurcated derivative to determine the debt extinguishment gain or loss to be recognized.following:

The difference in fair value of the amended note and the original note was recorded as an extinguishment of debt with a loss on extinguishment. The amended note value was recorded at $15,701,000 (fair value) and was used to determine the debt extinguishment loss to be recognized at the effective rate of the new instrument. The book value (including the remaining unamortized debt discount associated with the issuance of the warrant of approximately $306,000) of $12,694,000, when compared to the amended note value of $15,701,000 yielded a loss on extinguishment of debt of approximately $3,007,000.

(In thousands)	March 31, 2012		March 31, 2011
Subordinated manufacturing advance obligation, less debt discount of $42-March 31, 2012; $269-March 31, 2011	$	1,013	$	3,238
Current portion of long-term debt, less debt discount of $40-March 31, 2012; $175-March 31, 2011		664		1,795
Long-term debt less current portion, less debt discount	$	349	$	1,443

~~The~~Prior ~~difference~~Disc inReplication ~~fair~~Agreement ~~value of the derivatives, impacted by the amendment, at July 30, 2009 (immediately prior to the amendment)~~ and ~~the~~Related ~~fair value at July 30, 2009 (immediately after the amendment) resulted in a gain on extinguishment of $1,018,000.~~Advance

AtPrior ~~July~~to 30August 23, ~~2009~~2010, ~~unamortized~~Arvato ~~deferred~~Digital ~~financing~~Services ~~costs~~LLC ~~related~~(or toArvato) ~~the~~manufactured ~~original~~our ~~note~~DVDs ~~were~~and ~~$192,000. These~~the ~~amounts~~majority ~~were~~of ~~written~~our ~~off~~CDs. On ~~during~~June ~~the~~30, ~~fiscal~~2006, ~~year~~we ~~ended~~received ~~March~~an ~~31,~~interest-free ~~2010~~$10.0 asmillion aadvance ~~loss~~against onfuture ~~extinguishment~~manufacturing offrom ~~debt. Costs~~Arvato, ~~incurred~~to ~~with~~be ~~third~~repaid ~~parties~~at (i$0.~~e.,~~20 ~~other~~per ~~than~~disc ~~the~~manufactured, ~~lender)~~plus ~~associated~~payment ~~with~~of ~~the~~a ~~amended~~$0.04 ~~note~~administrative offee ~~$114,000~~per ~~were~~disc ~~capitalized~~manufactured ~~and~~until ~~amortized~~the ~~over~~advance ~~the~~is ~~term~~repaid. On ofJanuary ~~the~~25, ~~amended~~2010, ~~note~~we ~~using~~repaid the ~~effective~~remaining ~~interest~~$1.8 ~~method~~million manufacturing advance. ~~The~~There ~~net~~was ~~loss~~no onamount ~~extinguishment~~remaining ofunder ~~debt~~the atprevious ~~July~~advance ~~30,~~from ~~2009~~Arvato ~~was~~at $2March 31,~~181,000~~ 2011.

~~January~~Arvato 8had a security interest in all of our assets in second position behind Wells Fargo. As the obligation was non-interest bearing, ~~2010~~we ~~Extinguishment~~initially imputed and recorded a debt discount of ~~Debt~~$1,945,000 to the $10.0 million face amount of the advance based upon our then-borrowing rate with our bank and recorded a deferred manufacturing credit, classified in other long-term liabilities. We were amortizing the debt discount, using the effective interest method, to interest expense. We were amortizing the deferred manufacturing credit as a reduction to the disc purchase cost based upon actual discs manufactured by Arvato. The $0.04 administrative fee per disc manufactured was being recorded as an additional inventory manufacturing cost.

OnNote ~~January 8, 2010, as a result of both the $15~~7.0 ~~million cash payment and the issuance of 3.5 million shares of Common~~ Stock ~~with~~Warrant aLiability ~~fair value of $215,000 to retire the amended note, the book value of the amended note of $15,701,000~~ and related accrued interest of $427,000 were extinguished. During the fiscal year ended March 31, 2010, we recognized gain on the extinguishment of debt of $888,000. The valuation of the 3.5 million shares of Common Stock was included in the valuation of the January 2010 Series B Preferred, Series C Junior Participating Preferred Stock (or Series C Preferred) and purchase rights as described below under “Note 8. Purchase Rights, ~~Stock Warrant~~ Liability~~, and Embedded Derivatives~~.”

The ~~difference in~~ fair ~~value~~values of ~~the~~our ~~derivatives~~outstanding stock warrant, ~~impacted~~purchase byrights ~~the~~and ~~payoff,~~embedded atderivatives ~~January~~are 7,adjusted ~~2009~~to ~~(immediately~~their ~~prior~~fair tovalues at the ~~payoff)~~end of each reporting period, with liability increases and decreases recorded as other income or expense during the reporting period. The fair value atof ~~January~~the 8,stock ~~2009~~warrant ~~(immediately~~is ~~after~~estimated by using the ~~payoff)~~Black-Scholes ~~resulted~~pricing inmodel awhere ~~gain~~the oninputs ~~extinguishment~~are consistently applied and reflect the contractual terms of $1the warrant,~~016~~ including the period to maturity,~~000~~ and market-based parameters such as interest rates, and volatility. ~~The~~This ~~net~~model ~~gain~~does onnot ~~extinguishment~~contain a high level of ~~debt~~subjectivity atas ~~January~~the 8valuation techniques used do not require significant judgment, ~~2010~~and ~~was~~inputs $1thereto are readily observable from actively quoted markets. The fair value of the embedded derivatives are estimated by using pricing models,~~904,000~~ where some of the inputs to those models are based on readily observable market parameters and some inputs require valuation techniques using subjectivity and judgment.

~~The~~We ~~net~~currently ~~loss~~do onnot ~~both~~use ~~extinguishments~~hedging ofcontracts ~~debt~~to ~~for~~manage the ~~fiscal~~risk ~~year ended March 31, 2010 was $277,000 and reflects the $2,119,000 loss from the change in fair value~~ of ~~the~~our ~~notes,~~overall ~~$192,000~~exposure into ~~previously~~interest ~~unamortized~~rate ~~deferred financing costs~~ and ~~the~~foreign ~~$2,034,000~~currency ~~gain~~changes. ~~from~~The ~~the~~derivative ~~change~~liabilities indescribed ~~fair~~below ~~value~~are ofnot ~~the~~hedging ~~embedded derivatives~~instruments.

WeImage ~~had~~Entertainment, ~~no similar event for fiscal 2011~~Inc.

~~Note 8. Purchase Rights, Stock Warrant Liability, and Embedded Derivatives.~~61

In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the fair values of our outstanding stock warrant, purchase rights and embedded derivatives are adjusted to their fair values at the end of each reporting period, with liability increases and decreases recorded as other income or expense during the reporting period. The fair value of the stock warrant is estimated by using the Black-Scholes pricing model where the inputs are consistently applied and reflect the contractual terms of the warrant, including the period to maturity, and market-based parameters such as interest rates, and volatility. This model does not contain a high level of subjectivity as the valuation techniques used do not require significant judgment, and inputs thereto are readily observable from actively quoted markets. The fair value of the embedded derivatives are estimated by using pricing models, where some of the inputs to those models are based on readily observable market parameters and some inputs require valuation techniques using subjectivity and judgment.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We currently do not use hedging contracts to manage the risk of our overall exposure to interest rate and foreign currency changes. The derivative liabilities described below are not hedging instruments.

Purchase Rights

In connection with the January 8, 2010 sale of preferred stock to JH Partners (or Transaction Date), purchase rights (or Purchase Rights) were granted to purchase additional 7,400 shares of Series B Preferred and 66,163.4 shares of Series C Preferred for an aggregate purchase price of $7.4 million divided in two equal tranches, exercisable by 120 days or May 8, 2010 and 360 days or January 3, 2011. These Purchase Rights were classified as liabilities due to the existence of events outside of ~~the Company~~Image’s control that gave rise to the possibility for ultimate settlement by a transfer of assets or cash ~~and were recorded as a component of long-term liabilities at March 31, 2010~~. We performed a valuation to determine the fair value of the Series B Preferred and Series C Preferred price per share and exercise price at March 31, 2010 using an option pricing model. At March 31, 2010, the combined fair value of both tranches of Purchase Rights was $1,538,000. ~~Subsequent~~During tothe fiscal year ended March 31, ~~2010~~2011, both tranches of the Purchase Rights expired with respect to 7,400 shares of Series B Preferred and 66,163.4 shares of Series C Preferred. None of the purchase rights were exercised prior to expiration,; therefore, at March 31, 2011 there was no remaining fair value of the Purchase Rights. The ~~thus~~decrease noin ~~Black-Scholes~~fair ~~option~~value ~~pricing~~of ~~model~~$1,538,000 ~~inputs~~was ~~used~~recorded as a component of other income during the fiscal year ended March 31, 2011.

The fair value of the Purchase Rights liability at March 31, 2010 was determined by using the Black-Scholes option pricing model based on the following inputs:

Series B Preferred price per share	$	313.89
Series C Preferred price per share	$	59.15
Series B Preferred exercise price per share	$	372.47
Series C Preferred exercise price per share	$	70.19
Risk-free interest rate		0.2%-0.4	%
Expected term (in years)	0.75-0.80 years
Expected volatility for purchase rights		120%-150	%
Expected dividend yield		0%-12	%

~~The change in fair value of $1,538,000 was recorded as a component of other income during the fiscal year ended March 31, 2011. We include these Purchase Rights in the tables below within~~ Stock Warrant ~~Liabilities.~~Liability

~~Stock~~On ~~Warrant~~August 30, 2006, we issued a $17,000,000 senior secured note (or Note) and a related warrant to purchase 1,000,000 shares of our common stock to Portside Growth and Opportunity Fund. The Note was paid off in January 2010. The related warrant was recorded as a component of long-term liabilities.

In connection with the issuance of the Note on August 30, 2006, Portside Growth and Opportunity Fund was issued a warrant to purchase 1,000,000 shares of our common stock. See “Note 7. Long-Term Debt” above. The warrant had a term of five years and an exercise price of $4.25 per share. In the event of a change of control, the warrant must be settled in cash using the Black-Scholes model in accordance with the underlying terms contained in the warrant agreement. The transaction with JH Partners triggered the antidilution provisions contained in the warrant~~. As~~ and as a result, ~~the~~became ~~warrant is now~~ exercisable for 8,018,868 shares of our common stock at an exercise price of $0.53 per share. The initial fair value of the warrant liability was determined by using the Black-Scholes valuation method as of August 30, 2006 and this model has historically been used to determine fair value as of the end of each subsequent reporting period. The assumptions used included the closing price of our common stock on the valuation date, the strike price of the warrant, the risk-free rate equivalent to the U.S. Treasury maturities, the historical volatility of our common stock and the remaining term of the warrant. The assumptions used as of March 31, 2011 ~~and 2010~~ are as follows:

	March 31, 2011		~~March 31, 2010~~
Risk-free interest rate	~~0.14%~~	0.14	~~0.66~~%
Expected term (in years)	0.42 years		~~1.42 years~~
Expected volatility	~~121.89%~~	121.89	~~162.37~~%

59The following table reflects outstanding and exercisable warrants at March 31, 2011:

		Warrants Outstanding and Exercisable
Exercise Price		Shares (In thousands)		Weighted-Average Remaining Life (Years)		Weighted-Average Exercise Price
$	0.53		8,019		0.42	$	0.53

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As the stock warrant expired in August 2011, there was no remaining balance at March 31, 2012. The ~~following~~balance ~~table~~at ~~reflects~~March ~~outstanding~~31, 2011 was $72,000. The decrease in the fair value of the stock warrant of $72,000 and ~~exercisable~~$832,000 ~~warrants~~was atincluded as a component of other income during the fiscal years ended March 31, 2012 and 2011:, respectively.

		Warrants Outstanding and Exercisable
Exercise Price		Shares (In thousands)		Weighted-Average Remaining Life (Years)		Weighted-Average Exercise Price
$	0.53		8,019		0.42	$	0.53

Note 8.

Commitments and Contingencies.

As the stock warrant expires in August 2011, as of the fiscal year ended March 31, 2011, the related balance of $72,000 has been classified as a component of current liabilities. As of March 31, 2010, the stock warrant balance of $904,000 was included as a component of long-term liabilities. As the Purchase Rights were subject to exercise by January 2011, the related balance of $1,538,000 at March 31, 2010, was included as a component of current liabilities. Included in the table below are the changes in fair value recorded for stock warrant, purchase right and embedded derivatives during the fiscal year ended March 31, 2011 and 2010.

	Stock Warrant			Purchase Rights			Embeddded Derivatives			Total
Balance at April 1, 2009	$	550		$	—		$	1,555		$	2,105
Issuance of purchase rights January 8, 2010		—			2,942						2,942
Gain of extinguishment of debt		—						(2,034	)		(2,034	)
Change in fair value		354			(1,404	)		479			(571	)
Balance at March 31, 2010		904			1,538			—			2,442
Change in fair value		(832	)		(1,538	)		—			(2,370	)
Balance at March 31, 2011	$	72		$	—		$	—		$	72

In accordance with ASC 820, the following table represents our fair value hierarchy for our financial liabilities measured at fair value on a recurring basis as of March 31, 2011 and 2010. There were no financial assets subject to the provisions of ASC 820 as of March 31, 2011 or 2010.

(In thousands)	Level 1		Level 2		Level 3		Total
Derivative liabilities:
Stock warrant as of March 31, 2011	$	—	$	72	$	—	$	72
Stock warrant and purchase right as of March 31, 2010	$	—	$	904	$	1,538	$	2,442

The stock warrant is classified as Level 2 as the Black-Scholes model was used to determine the fair value and the related inputs are consistent with Level 2. The purchase right was classified as Level 3 as the basis of the valuation included unobservable inputs.

During fiscal 2011 and 2010, other income related to the fluctuation in the fair value of the warrant, purchase rights and the embedded derivatives was recorded as non-operating income included as a component of other income in the accompanying consolidated statements of operations. For fiscal 2011 and 2010, the related amounts included in other income and expense were $2,370,000 and $570,000, respectively.

Note 9. Commitments and Contingencies.

Operating Leases

Our headquarters are located in Chatsworth, California, and consist of approximately 30,000 square feet on one floor of a multi-tenant building. InThe ~~conjunction with the transaction with JH Partners, we negotiated a reduction in the~~ monthly ~~cost for our headquarters from approximately $87,000 to $46,000 for approximately half of the leased space beginning in January 2010. After amendments effective January and May 2010, the monthly~~ rent is $46,000 per month, on a gross basis. The office lease, as amended, has an initial 10-year term expiring June 30, 2014 with two five-year options. ~~Although~~In aaddition, ~~base~~we ~~level~~lease ofstorage ~~operating~~space ~~expenses is included~~ in the ~~rent~~building ~~payment,~~at ~~we are responsible for~~ a ~~percentage~~rate of ~~actual~~approximately ~~annual operating expense increases capped at 5% annually~~$4,600 ~~excluding~~per ~~utilities, insurance and real estate taxes~~month.

60Future minimum annual rental payments by year under operating leases at March 31, 2012, are approximately as follows:

Fiscal	Amount
	(In thousands)
2013	$	552
2014		552
2015		138
	$	1,242

Rent expense was $602,000 and $604,000 for fiscal 2012 and 2011, respectively.

Employment Agreements. At March 31, 2012, our future contractual obligations under eight employment (including one consulting) agreements are $1,833,000, and $124,000 for the fiscal years ending March 31, 2013 and 2014, respectively.

Other. At March 31, 2012, our future obligations by year for royalty advances, minimum royalty guarantees and exclusive distribution fee guarantees under the terms of our existing licenses and exclusive distribution agreements were as follows:

Fiscal	Amount
	(in thousands)
2013	$	16,648
2014		5,437
	$	22,085

At March 31, 2012, we had accrued $2.2 million of the fiscal 2013 obligation, not included above, as the content suppliers have met their related contractual requirements.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Future~~Note ~~minimum~~9. ~~annual~~Stockholders’ ~~rental payments by year under operating leases at March 31, 2011, are approximately as follows:~~Equity.

Fiscal	Amount
	(In thousands)
2012	$	552
2013		552
2014		552
2015		138
	$	1,794

Stock Awards, and Options. As of March 31, 2012, we had four equity compensation plans: the 2011 Equity Incentive Plan (2011 Plan), the 2010 Equity Incentive Award Plan (2010 Plan), the 2008 Stock Awards and Incentive Plan (2008 Plan) and the 2004 Incentive Compensation Plan (2004 Plan, and together with the 2011 Plan, the 2010 Plan and the 2008 Plan, the Plans). The 2011 Plan provides for stock options, stock appreciation rights, stock awards, restricted stock awards and stock units, performance shares and performance units conditioned upon meeting performance criteria, and other stock or cash-based awards. The 2010 Plan provides for stock options, stock appreciation rights, restricted stock awards and restricted stock units, dividend equivalents, stock payment awards and other stock or cash-based awards that may be payable upon attainment of pre-established performance goals. The 2008 Plan provides for equity awards, including stock options, stock appreciation rights, restricted stock awards, performance awards, phantom stock awards, or stock units. The 2004 Plan provides for equity awards, including stock options and restricted stock units.

~~Rent~~At ~~expense~~March ~~was~~31, ~~$604~~2012,~~000~~ ~~and~~there ~~$961~~were approximately 19,200,000 shares available for ~~fiscal~~future grants under the 2011 ~~and~~Plan, nine shares available for future grants under the 2010 Plan, ~~respectively~~622,500 shares available for future grants under the 2008 Plan and 845,930 shares available for future grants under the 2004 Plan.

Employment Agreements. At March 31, 2011, our future contractual obligations under eight employment (including one consulting) agreements are $1,818,000, $1,375,000 and $72,000 for the fiscal years ending March 31, 2012, 2013 and 2014, respectively.

Other. At March 31, 2011, our future obligations by year for royalty advances, minimum royalty guarantees and exclusive distribution fee guarantees under the terms of our existing licenses and exclusive distribution agreements were as follows:

Fiscal	Amount
	(in thousands)
2012	$	20,138
2013		16,648
2014		5,437
	$	42,223

At March 31, 2011, we had accrued $3.5 million of the fiscal 2012 obligation above as the content suppliers have met their related contractual requirements.

Note 10. Stockholders’ Equity.

Stock Awards, and Options. As of March 31, 2011, we had four equity compensation plans: the 2011 Equity Incentive Plan (2011 Plan), the 2010 Equity Incentive Award Plan (2010 Plan), the 2008 Stock Awards and Incentive Plan (2008 Plan) and the 2004 Incentive Compensation Plan (2004 Plan, and together with the 2011 Plan, the 2010 Plan and the 2008 Plan, the Plans). The 2011 Plan provides for stock options, stock appreciation rights, stock awards, restricted stock awards and stock units, performance shares and performance units conditioned upon meeting performance criteria, and other stock or cash-based awards. The 2010 Plan provides for stock options, stock appreciation rights, restricted stock awards and restricted stock units, dividend equivalents, stock payment awards and other stock or cash-based awards that may be payable upon attainment of pre-established performance goals. The 2008 Plan provides for equity awards, including stock options, stock appreciation rights, restricted stock awards, performance awards, phantom stock awards, or stock units. The 2004 Plan provides for equity awards, including stock options and restricted stock units. At March 31, 2011, there were approximately 20,000,000 shares available for future grants under the 2011 Plan (no grants have been made under this plan), nine shares available for future grants under the 2010 Plan, 567,500 shares available for future grants under the 2008 Plan and 820,430 shares available for future grants under the 2004 Plan.

Under the Plans, the maximum term allowed for an option is 10 years and a stock award shall either vest or be forfeited not more than 10 years from the date of grant.

During fiscal 2011, we granted 12,678,000 options under the 2010 Plan on November 19, 2010 at an exercise price of $0.20, which was $0.05 higher than the closing stock price of $0.15 on the date of grant. The options are subject to performance conditions and either time-based vesting or market conditions. As a result, we used a Monte Carlo simulation model (Monte Carlo) to determine the fair value of these stock options. The Monte Carlo model required the input of subjective assumptions, including items such as the expected term of the options. If factors change and we use different assumptions for estimating share-based compensation expense related to stock options, our share-based compensation expense may differ materially from that recorded in the current period. The weighted-average grant-date fair value for options granted during the fiscal year ended March 31, 2011 was $0.09 per share. ~~There were no options granted subsequent to the November 19, 2010 grant, through March 31, 2011.~~

61On November 19, 2010, three types of options were granted (Types A, B and C) from the 2010 Plan. Type A options have time based vesting as follows: 25% vests on January 8, 2011 and 6.25% vests each three-month period thereafter (vesting round up to nearest whole share). Type A options will be 100% vested on January 8, 2014. Type B options have market conditions as well as performance conditions as follows: 100% vested upon the earlier of (i) the date the stock's fair market value equals or exceeds $0.0733 for any 20 out of 30 consecutive trading days on or after January 8, 2012, (ii) a change in control in which Image’s Common Stock's equity value equals or exceeds $0.0733 per share, or (iii) January 8, 2019. Type C options have market conditions as well as performance conditions as follows: 100% vested upon the earlier of (i) the date Image’s Common Stock's fair market value equals or exceeds $0.19 for any 20 out of 30 consecutive trading days on or after January 8, 2013 (ii) a change in control in which the stock's equity value equals or exceeds $0.19 per share, or (iii) January 8, 2019.

There were no options granted subsequent to the November 19, 2010 grant, through March 31, 2012.

Stock option activity under the Plans for the fiscal year ended March 31, 2012, and changes during the year then ended are presented below:

Options	Shares (000)			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)

Outstanding at March 31, 2011		13,037		$	0.252
Granted		—			—
Exercised		—			—
Forfeited or Expired		(80	)		1.791
Outstanding at March 31, 2012		12,957		$	0.237		8.574	$	—

Exercisable at March 31, 2012		5,103		$	0.294		8.468	$	—

The aggregate intrinsic value of our outstanding options represents the total pre-tax intrinsic value, based on our options with an exercise price less than Image’s closing stock price of $0.075 as of March 31, 2012, which theoretically could have been received by the option holders had all option holders exercised their options as of that date. There was no aggregate intrinsic value of options outstanding or exercisable as there were no in-the-money options exercisable as of March 31, 2012 and 2011. There were no options exercised, and thus no aggregate intrinsic value of options exercised, during the fiscal year ended March 31, 2012 and 2011. At March 31, 2012, there were approximately 20,668,000 shares of common stock available for new awards, including stock options, to our directors and employees.

Image Entertainment, Inc.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OnAs ~~November~~of ~~19,~~March ~~2010~~31, ~~an aggregate of 25~~2012,~~790,000~~ ~~shares~~there ~~of restricted stock awards~~ were ~~granted to five members of management. The restricted shares were issued on the date of grant~~7, ~~but will not be transferable until their restrictions are removed. Further~~854,000 ~~the~~unvested stock ~~awards~~options ~~are~~and subject to forfeiture until certain vesting conditions are met. We measured the fair value of the restricted stock on the date of grant based on the closing market price of our common stock, which was $~~0.15 per share~~357,000 ~~and~~in toremaining ~~the~~unamortized ~~extent vesting is contingent upon achieving a target market price we determined the~~ stock’s ~~fair value using a Monte Carlo simulation model. We amortize this value to stock-~~based compensation expense ~~ratably over the award’s explicit service period of 4~~.~~1 years. To the extent the awards vest before 4.1 years, compensation expense will be accelerated based on actual vesting.~~

OnAs ~~September~~there ~~17, 2010, an aggregate of 200,000 shares of restricted stock awards~~ were ~~granted~~no toexercises ~~two independent directors. The restricted shares were issued on the date~~ of ~~grant, but will not be transferable until their restrictions are removed. We measured the fair value of the restricted~~ stock ~~on the date of grant based on the closing market price of our common stock on that day~~options, ~~which~~there was ~~$0.23~~no ~~per~~excess ~~share.~~tax Webenefit ~~amortize~~recorded this value to stock-based compensation expense ratably over the vesting period. We have assumed that all of the restricted stock will ultimately vest, and therefore we have not incorporated a forfeiture rate for ~~purposes of determining~~ the ~~stock-based~~tax ~~compensation~~deductions ~~expense;~~related ~~however~~to ~~the restricted~~ stock ~~may~~options ~~be subject to forfeiture if the director terminates his or her service~~ during ~~the~~fiscal ~~vesting~~2012 ~~period~~and 2011.

~~During~~The ~~fiscal~~following ~~2010,~~table wesummarizes ~~granted~~significant ~~445,000~~ranges ~~options under the 2008 Plan on April 29, 2009 at an exercise price~~ of $0.86 per share, which was the closing stock price on the date of grant. These options were valued using the Black Scholes method. The weighted-average grant-date fair value of these options was $0.60 per share. On January 8, 2010, the vesting was accelerated for 363,000 unvested options outstanding ~~under the 2008 Plan~~ and ~~the~~exercisable options ~~became~~at ~~immediately exercisable. At~~ March 31, ~~2010, there were no unvested options under the then-outstanding equity compensation plans~~2012: ~~2008 Plan and 2004 Plan.~~

Compensation expense relating to these stock options and restricted stock awards for the fiscal year ended March 31, 2011 was approximately $568,000. Unrecognized stock-based compensation expense relating to these stock options and restricted stock awards of approximately $4,450,000 at March 31, 2011 is expected to be expensed ratably over the remaining respective vesting and derived service periods.

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Number of Shares at March 31, 2012 (In thousands)		Weighted-Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Number of Shares at March 31, 2012 (In thousands)		Weighted- Average Exercise Price
Under $2.00			12,856		8.6	$	0.209		5,002	$	0.223
$	2.01 to $4.00		101		2.5		3.800		101		3.800
			12,957						5,103

~~Restricted~~During ~~stock~~fiscal ~~award~~2012, ~~activity~~we granted 800,000 restricted stock awards under the ~~Plans~~2011 ~~for~~Plan on December 6, 2011 to two independent directors. The restricted shares were issued on the ~~fiscal~~date ~~year~~of ~~ended~~grant, ~~March~~but 31will not be transferrable until their restrictions are removed. We measured the fair value of the restricted stock on the date of grant based on the closing market price of our common stock on that day, ~~2011~~which was $0.05 per share. We amortize this value to stock-based compensation expense over the vesting period, which is in equal installments quarterly over three years. We have assumed that all of the restricted stock will ultimately vest, and ~~changes~~therefore ~~during~~we have not incorporated a forfeiture rate for purposes of determining the ~~year~~stock-based ~~then~~compensation ~~ended~~expense; ~~are~~however ~~presented~~the ~~below:~~restricted stock may be subject to forfeiture if the director terminates his or her service during the vesting period.

Restricted Stock Awards	Shares (000)		Weighted-Average Exercise Price
Outstanding at March 31, 2010		—	$	—
Granted		25,990		0.151
Exercised		—		—
Forfeited or Expired		—		—
Outstanding at March 31, 2011		25,990	$	0.151
Exercisable at March 31, 2011		5,271	$	0.151

On November 19, 2010, an aggregate of 25,790,000 shares of restricted stock awards were granted under the 2010 Plan to five members of management. The restricted shares were issued on the date of grant, but will not be transferable until their restrictions are removed. The restrictions are similar to the vesting terms described above for the options granted on the same date, however, the restricted stock awards are subject to transfer restrictions equal to the percentage of stock sold by the JH Entities. At March 31, 2012, this sales percentage was zero so none of these restricted stock awards are transferable. Further, the stock awards are subject to forfeiture until certain vesting conditions are met. We measured the fair value of the restricted stock on the date of grant based on the closing market price of our common stock, which was $0.15 per share, and to the extent vesting is contingent upon achieving a target market price we determined the stock’s fair value using a Monte Carlo simulation model. We amortize this value to stock-based compensation expense ratably over the award’s explicit service period of 4.1 years. To the extent the awards vest before 4.1 years, compensation expense will be accelerated based on actual vesting.

~~Stock~~On ~~option~~September ~~activity~~17, 2010, an aggregate of 200,000 shares of restricted stock awards were granted under the ~~Plans~~2008 ~~for~~Plan to two independent directors. The restricted shares were issued on the ~~fiscal~~date ~~year~~of ~~ended~~grant, ~~March~~but 31will not be transferable until their restrictions are removed. We measured the fair value of the restricted stock on the date of grant based on the closing market price of our common stock on that day, ~~2011~~which was $0.23 per share. We amortize this value to stock-based compensation expense ratably over the vesting period. We have assumed that all of the restricted stock will ultimately vest, and ~~changes~~therefore ~~during~~we have not incorporated a forfeiture rate for purposes of determining the ~~year~~stock-based ~~then~~compensation ~~ended~~expense; ~~are~~however ~~presented~~the ~~below:~~restricted stock may be subject to forfeiture if the director terminates his or her service during the vesting period.

Options	Shares (000)			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
Outstanding at March 31, 2010		1,030		$	2.699
Granted		12,678			0.200
Exercised		—			—
Forfeited or Expired		(671	)		3.125
Outstanding at March 31, 2011		13,037		$	0.252		9.559	$	—
Exercisable at March 31, 2011		1,532		$	0.597		8.900	$	—

Restricted stock award activity under the Plans for the fiscal year ended March 31, 2012, and changes during the year then ended are presented below:

Restricted Stock Awards	Shares (000)			Weighted-Average Exercise Price

Nonvested at March 31, 2011		25,956		$	0.151
Granted		800			0.050
Vested		(133	)		0.141
Forfeited		—			—
Nonvested at March 31, 2012		26,623		$	0.148

Image Entertainment, Inc.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The~~Compensation ~~aggregate~~expense ~~intrinsic~~relating ~~value~~to ofthese ~~our~~stock ~~outstanding~~ options ~~represents~~and ~~the~~restricted ~~total~~stock ~~pre-tax~~awards ~~intrinsic~~for ~~value,~~the ~~based~~fiscal onyears ~~our~~ended ~~options~~March ~~with~~31, an2012 ~~exercise~~and ~~price~~2011 ~~less~~was ~~than~~approximately ~~Image’s closing stock price of~~ $~~0.18~~1,324,000 asand ~~of March 31~~$568, ~~2011~~000, ~~which~~respectively. Unrecognized ~~theoretically~~stock-based ~~could~~compensation ~~have~~expense ~~been~~relating ~~received~~to bythese ~~the~~stock ~~option holders had all option holders exercised their~~ options asand ofrestricted ~~that~~stock ~~date. There~~awards ~~was no aggregate intrinsic value~~ of ~~options~~approximately ~~outstanding~~$3,165,000 orat ~~exercisable as there were no in-the-money options exercisable as of~~ March 31, ~~2011~~2012 ~~and~~is ~~2010. There~~expected ~~were~~to nobe ~~options~~expensed ~~exercised,~~ratably ~~and~~over ~~thus~~the noremaining ~~aggregate~~grant-specific ~~intrinsic~~respective ~~value~~vesting ofand ~~options~~derived ~~exercised,~~service ~~during~~periods ~~the~~through ~~fiscal~~December ~~year ended March 31, 2011 and 2010~~2014.

The weighted-average grant-date fair value of options granted during the fiscal years 2011 and 2010 was $0.090 and $0.600, respectively. Of the options reflected as outstanding on March 31, 2011, options to purchase approximately 1,532,000 shares of common stock were exercisable. At March 31, 2011, there were approximately 21,388,000 shares of common stock available for new awards, including stock options, to our directors and employees.

A summary of the status of nonvested options at March 31, 2011, and changes during the year then ended, are presented below:

Nonvested Shares	Shares (000)			Weighted-Average Grant-Date Fair Value
Nonvested at March 31, 2010		—		$	—
Granted		12,678			0.200
Vested		(1,173	)		0.200
Forfeited		—			—
Nonvested at March 31, 2011		11,505		$	0.200

As of March 31, 2011, there were 11,505,000 unvested stock options and $4,414,000 in remaining unamortized stock based compensation expense.

During fiscal 2011 and fiscal 2010 there were no exercises of stock options. There was no excess tax benefit recorded for the tax deductions related to stock options during fiscal 2011 and 2010.

The following table summarizes significant ranges of outstanding and exercisable options at March 31, 2011:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Number of Shares at March 31, 2011 (In thousands)		Weighted-Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Number of Shares at March 31, 2010 (In thousands)		Weighted- Average Exercise Price
Under $2.00			12,911		9.6	$	0.212		1,406	$	0.309
$	2.01 to $4.00		126		3.5		3.800		126		3.800
			13,037						1,532

Stockholder Rights Plan. On October 31, 2005, we adopted a stockholder rights plan intended to protect the interests of the stockholders from coercive, abusive or unfair takeover tactics.

On January 8, 2010, in connection with the JH Partners transaction, this stockholder rights plan was terminated.

Preferred Stock. In January 2010, ~~the~~Image ~~Company~~ issued 22,600 shares of Series B Cumulative Preferred Stock (or Series B Preferred) and 202,066.6 shares of Series C Junior Participating Preferred Stock (or Series C Preferred), which automatically converted into common stock in November 2010 upon shareholder approval of the increased authorized number of common stock. After conversion of the outstanding Series C Preferred, no further shares of Series C Preferred remain outstanding.

63The Series B Preferred bears a cumulative dividend equal to 12% per annum of the liquidation preference of $1,000 per share (subject to adjustment upon any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred) compounding quarterly. Dividends accrue automatically on a daily basis whether or not declared by our board of directors, but are payable in cash only when, and if, declared by the board. If not declared and paid earlier, such dividends are payable upon liquidation. So long as any shares of Series B Preferred are outstanding and until all dividends on the Series B Preferred have been paid or declared and set aside for payment, we will be prohibited from (i) declaring or paying any dividend (whether in cash or property) on any shares of our preferred stock or Common Stock, and (ii) subject to certain exceptions, redeeming any shares of our preferred stock or Common Stock. The Series B Preferred also has liquidation preference with priority over liquidating distributions to holders of Common Stock or any capital stock that ranks junior to the Series B Preferred equal to the sum of (i) $1,000 per share (subject to adjustment upon any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred) (or Liquidation Preference) and (ii) an amount equal to all accrued but unpaid dividends thereon. The Series B Preferred has an aggregate Liquidation Preference at March 31, 2012 and 2011 of $29.4 million and $26.1 million, respectively. In the event of any merger of Image with or into another person or of any person with or into Image, any sale, transfer, lease or conveyance to another person of all or substantially all of our property or any statutory share exchange of Image with another person, each share of Series B Preferred will be entitled to receive an amount in cash equal to the sum of (y) the Liquidation Preference and (z) the amount per share equal to accrued but unpaid dividends. Certain internal reorganization transactions will not trigger the foregoing payment right. Holders of Series B Preferred do not have any voting rights, including the right to elect directors, other than those rights required by law but do have limited voting rights with respect to matters affecting the rights and privileges of the Series B Preferred. The Series B Preferred is not redeemable by us or its holders and is not convertible.

Image employed an option pricing model to determine the relative fair value of the Series B Preferred, Series C Preferred and the Purchase Rights (see Note 7 above). The Series B Preferred and Series C Preferred, prior to conversion, were classified as mezzanine equity. The Series B Preferred is classified as mezzanine equity due to the clause in the Certificate of Designation, which provides upon a merger or other reorganization events, as defined, the Series B Preferred is cash settled. This redemption event would likely be outside of Image’s control. The Series C Preferred was classified as mezzanine equity, prior to conversion, due to certain obligations under a related registration rights agreement (or RRA), which would not be in Image’s control. The costs associated with the preferred stock transaction reimbursed to the Investors reduced the proceeds received by Image and affected the calculation of the fair value of Series C Preferred. The calculated affect was recorded as a deemed dividend on Series C Preferred.

Image Entertainment, Inc.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The~~Note Series B Preferred bears a cumulative dividend equal to 12% per annum of the liquidation preference of $1,000 per share (subject to adjustment upon any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred) compounding quarterly10. ~~Dividends~~ ~~will~~Net ~~accrue~~Income automatically on a daily basis whether or not declared by our board of directors, but will be payable in cash only when, and if, declared by the board. If not declared and paid earlier, such dividends will be paid upon liquidation. So long as any shares of Series B Preferred are outstanding and until all dividends on the Series B Preferred have been paid or declared and set aside for payment, we will be prohibited from (iLoss) ~~declaring~~ orper ~~paying any dividend (whether in cash or property) on any shares of our preferred stock or~~ Common ~~Stock,~~Share ~~and (ii) subject to certain exceptions, redeeming any shares of our preferred stock or Common Stock~~Data. The Series B Preferred also has liquidation preference with priority over liquidating distributions to holders of Common Stock or any capital stock that ranks junior to the Series B Preferred equal to the sum of (i) $1,000 per share (subject to adjustment upon any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred) (or Liquidation Preference) and (ii) an amount equal to all accrued but unpaid dividends thereon. The Series B Preferred has an aggregate Liquidation Preference at March 31, 2011 and 2010 of $26.1 million and $23.2 million, respectively. In the event of any merger of Image with or into another person or of any person with or into Image, any sale, transfer, lease or conveyance to another person of all or substantially all of our property or any statutory share exchange of Image with another person, each share of Series B Preferred will be entitled to receive an amount in cash equal to the sum of (y) the Liquidation Preference and (z) the amount per share equal to accrued but unpaid dividends. Certain internal reorganization transactions will not trigger the foregoing payment right. Holders of Series B Preferred do not have any voting rights, including the right to elect directors, other than those rights required by law but do have limited voting rights with respect to matters affecting the rights and privileges of the Series B Preferred. The Series B Preferred is not redeemable by us or its holders and is not convertible.

The ~~Company~~following ~~employed~~is ana ~~option~~reconciliation ~~pricing model to determine the relative fair value~~ of the ~~Series~~numerators ~~B Preferred, Series C Preferred~~ and ~~the~~denominators ~~Purchase~~used ~~Rights~~in ~~(see~~computing ~~Note~~basic ~~8 above). The Series B Preferred~~ and ~~Series~~diluted Cnet ~~Preferred,~~income prior to conversion, were classified as mezzanine equity. The Series B preferred stock is classified as mezzanine equity due to the clause in the Certificate of Designation, which provides upon a merger or other reorganization events, as defined, the Series B Preferred is cash settled. This redemption event would likely be outside of the Company’s control. The Series C Preferred was classified as mezzanine equity, prior to conversion, due to certain obligations under a related registration rights agreement (~~or RRA~~loss), ~~which~~per ~~would~~common ~~not~~share befor in the ~~Company’s~~years ~~control. The~~ended ~~costs~~March ~~associated~~31, ~~with~~2012 ~~the preferred stock transaction reimbursed to the Investors reduced the proceeds received by the Company~~ and ~~impact the calculation of the fair value of Series C Preferred. The calculated impacted was recorded as a deemed dividend on Series C Preferred.~~ 2011:

Note 11. Net Loss per Common Share Data.

(In thousands, except per share data)	2012			2011

Net income	$	88		$	1,714
Dividend on Series B Preferred		(3,272	)		(2,930	)
Deemed dividend on Series C Preferred		—			(359	)
Net loss applicable to common shareholders – basic and diluted numerator	$	(3,184	)	$	(1,575	)
Weighted-average common shares outstanding – basic denominator		255,856			110,310
Effect of dilutive securities		—			—
Weighted-average common shares outstanding – diluted denominator		255,856			110,310
Net loss per common share:
Basic and diluted net loss per common share	$	(0.01	)	$	(0.01	)

~~The~~Outstanding ~~following~~common isstock aoptions ~~reconciliation of the numerators~~ and ~~denominators~~warrants ~~used~~not included in ~~computing~~the ~~basic~~computation ~~and~~of diluted net loss per common share totaled 12,957,000 and 21,056,000, respectively, for the years ended March 31, ~~2011~~2012 and ~~2010:~~2011, as their effect would be antidilutive.

(In thousands, except per share data)	2011			2010
Net income (loss)	$	1,714		$	(5,922	)
Dividend on Series B Preferred		(2,930	)		(616	)
Deemed dividend on Series C Preferred		(359	)		(412	)
Net loss per common – basic and diluted numerator	$	(1,575	)	$	(6,950	)
Weighted-average common shares outstanding – basic denominator		110,310			22,644
Effect of dilutive securities		—			—
Weighted-average common shares outstanding – diluted denominator		110,310			22,644
Net loss per common share:
Basic and diluted net loss per common share	$	(0.01	)	$	(0.31	)

On November 18, 2010, our authorized number of shares of common stock was increased from 100,000,000 to 500,000,000 which allowed for the conversion in full of the outstanding shares of Series C Preferred, each of which converted into 1,000 shares of common stock. Image’s 202,066.6 outstanding shares of Series C Preferred converted into 202,066,600 shares of common stock.

~~Outstanding~~Note ~~common~~11. ~~stock~~Income options and warrants not included in the computation of diluted net loss per common share totaled 21,056,000 and 9,049,000, respectively, for the years ended March 31, 2011 and 2010, as their effect would be antidilutiveTaxes.

OnWe ~~November~~do ~~18,~~not ~~2010,~~believe ~~our~~that ~~authorized~~we ~~number~~have ofincluded ~~shares~~any of"uncertain ~~common~~tax ~~stock~~positions" ~~was~~in ~~increased~~our ~~from~~federal ~~100,000,000~~income totax ~~500,000,000~~return ~~which~~or ~~allowed~~any ~~for~~of the ~~conversion~~state inincome ~~full~~tax returns we are currently filing. We have made an evaluation of the ~~outstanding~~potential ~~shares~~effect of ~~Series~~additional Cstate ~~Preferred,~~taxes ~~each~~being ofassessed by jurisdictions in which ~~converted~~we ~~into~~do ~~1,000~~not ~~shares~~currently ofconsider ~~common~~ourselves ~~stock~~liable. ~~The~~We ~~Company’s~~do ~~202~~not anticipate that such additional taxes,~~066.6~~ ~~outstanding~~if ~~shares~~any, ofwould ~~Series~~result Cin ~~Preferred~~a ~~converted~~material ~~into~~change ~~202,066,600~~to ~~shares~~our financial position. A reconciliation of ~~common~~the ~~stock.~~beginning and ending amount of unrecognized tax benefits is as follows:

Balance at March 31, 2011	$	105
Additions based on current year tax positions		—
Additions for prior year tax positions		—
Reductions related to lapse of statute of limitations		(30	)
Balance at March 31, 2012	$	75

If recognized, the entire amount of unrecognized tax benefits would be recorded as a reduction in income tax expense. The amount accrued for payment of interest as of March 31, 2012 and 2011 was $4,000 and $9,000, respectively. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months.

Image Entertainment, Inc.

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IMAGE ENTERTAINMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Income Taxes.

ASC 740, Income Taxes, requires that we recognize in the consolidated financial statements the impact of a tax position that is more likely than not to be sustained upon examination based on the technical merits of the position. ASC 740 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of each tax position taken or expected to be taken in a tax return. Under ASC 740, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws.

We do not believe that we have included any "uncertain tax positions" in our federal income tax return or any of the state income tax returns we are currently filing. We have made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which we do not currently consider ourselves liable. We do not anticipate that such additional taxes, if any, would result in a material change to our financial position. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at March 31, 2010	$	117
Additions based on current year tax positions		20
Additions for prior year tax positions		—
Reductions related to lapse of statute of limitations		(32	)
Balance at March 31, 2011	$	105

If recognized, the entire amount of unrecognized tax benefits would be recorded as a reduction in income tax expense. The amount accrued for payment of interest as of March 31, 2011 and 2010 was $9,000 and $12,000, respectively. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Tax years ended on or after March 31, 2008 remain open to examination by federal authorities; however, we recently closed an IRS examination for the March 31, 2008 and March 31, 2009 tax years that resulted in no adjustments. Tax years ended on or after March 31, 2007 remain open to examination by state authorities. We classify any interest and penalties related to income taxes assessed by a jurisdiction as part of income tax expense. Interest and penalties were immaterial during fiscal 2011 and 2010.

Valuation of Deferred Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent that it is more likely than not that such deferred tax assets will not be realized, we must establish a valuation allowance. The establishment, or increase, of a valuation allowance increases income tax expense for such year. We have a valuation allowance against 100% of our net deferred tax assets, which are composed primarily of net operating loss (or NOL) carryforwards. Even though we have fully reserved these net deferred tax assets for book purposes, we would still be able to utilize them to reduce future income taxes payable should we have future earnings. To the extent such deferred tax assets relate to NOL carryforwards, the ability to use such NOLs against future earnings will be subject to applicable carryforward periods. As of March 31, ~~2011~~2012, we had NOL carryforwards for federal and state tax purposes of $1216.43 million and $1820.02 million, respectively, which are available to offset taxable income through ~~2031~~2032. These amounts reflect that the utilization of ~~the Company~~Image’s NOLs carryforwards is subject to a substantial annual limitation due to ownership change (such as the one that occurred at Image in 2010) limitations as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state limitations. This resulted in approximately $25.3 million and $22.7 million of federal and state NOL carryforwards, respectively, being subject to limitations that caused these carryforwards to expire without utilization in 2010. As a result, ~~the~~Image ~~Company~~ has written-off the deferred tax assets associated with the excess net operating losses, along with the corresponding valuation allowance. In addition, Image may incur further limitations on the use the available NOLs in connection with the proposed RLJ transaction. We are currently in consultation with outside tax counsel with respect to quantifying post-transaction NOL usage.

65Income tax expense (benefit) for each of the years ended March 31, 2012 and 2011, is summarized as follows:

(In thousands)	2012			2011
Current
Federal	$	—		$	—
State		(66	)		26
Foreign		—			—
		(66	)		26
Deferred
Federal		—			—
State		—			—
		—			—

Total Tax Expense (Benefit)	$	(66	)	$	26

The tax effects of temporary differences that give rise to a significant portion of the net deferred tax assets at March 31, 2012 and 2011, are presented below:

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