UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x ~~QUARTERLY~~QUATERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFPF THE SECURITIES EXCHANGE ACT OF 1934

For the ~~quarterly~~quaterly period ended ~~December~~June 3130, ~~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 ~~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 or organization)		(I.R.S. Employer Identification Number)

20525 Nordhoff Street, Suite 200, Chatsworth, California 91311

(Address of principal executive offices) (Zip code)

(818) 407-9100

(Registrant’s telephone number, including area code)

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 þ 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 þ NO o

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
		(Do not check if a smaller reporting company)

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

Number of shares outstanding of the issuer’s common stock on ~~February~~August 63, 2012: 256,402,133

IMAGE ENTERTAINMENT, INC.

INDEX TO FORM 10-Q

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited).
	(a)	Consolidated Balance Sheets at ~~December~~June 3130, ~~2011~~2012 and March 31, ~~2011~~2012.	4
	(b)	Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~December~~June 3130, ~~2011~~2012 and ~~2010~~2011.	6
	(c)	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~December~~June 3130, ~~2011~~2012 and ~~2010~~2011.	7
	(d)	Notes to Consolidated Financial Statements for the Three Months Ended June 30, 2012.	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		2118
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		2925
Item 4.	Controls and Procedures.		2926
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.		3027
Item 1A.	Risk Factors.		3027
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		3027
Item 3.	Defaults Upon Senior Securities.		3027
Item 4.	Mine Safety ~~Disclosure~~Disclosures.		3027
Item 5.	Other Information.		3027
Item 6.	Exhibits.		3128
SIGNATURES			3229

Index

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended ~~December~~June 3130, ~~2011~~2012 (or Quarterly Report) of Image Entertainment, Inc. (or we, us, our, or Image) 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 Quarterly 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 financial 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.

All forward-looking statements should be evaluated with the understanding of inherent uncertainty. The inclusion of such forward-looking statements should not be regarded as a representation that contemplated future events, plans or expectations will be achieved. 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 Quarterly Report. Important factors that could cause or contribute to such material differences include those discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K filed on June 2914, ~~2011, as amended on July 29, 2011~~2012. You are cautioned not to place undue reliance on such forward-looking statements.

Index

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

IMAGE ENTERTAINMENT, INC.

Consolidated Balance Sheets

(unaudited)

~~December~~June 3130, ~~2011~~2012 and March 31, ~~2011~~2012

ASSETS
(In thousands)	December 31, 2011		March 31, 2011
Current assets:
Cash	$	304	$	333
Accounts receivable, net of reserve for returns, allowances and provision for doubtful accounts of $7,293 - December 31, 2011; $8,462 - March 31, 2011		16,746		20,268
Inventories		14,027		13,709
Royalty and distribution fee advances		13,719		12,665
Prepaid expenses and other current assets		751		607
Total current assets		45,547		47,582
Noncurrent inventories, principally production costs		581		1,053
Noncurrent royalty and distribution fee advances		16,903		15,480
Property, equipment and improvements, net		752		605
Intangible assets, net		1,632		2,144
Goodwill		6,762		6,762
Other assets		86		86
Total assets	$	72,263	$	73,712

ASSETS

(In thousands)	June 30, 2012		March 31, 2012
Current assets:
Cash	$	266	$	368
Accounts receivable, net of reserve for returns, allowances and provision for doubtful accounts of $5,347 - June 30, 2012; $6,405 - March 31, 2012;		26,441		18,945
Inventories		14,632		14,202
Royalty and distribution fee advances		11,203		13,567
Prepaid expenses and other current assets		1,496		1,303
Total current assets		54,038		48,385
Noncurrent inventories, principally production costs		729		555
Noncurrent royalty and distribution fee advances		14,669		17,766
Property, equipment and improvements, net		655		726
Intangible assets, net		1,291		1,462
Goodwill		6,762		6,762
Other assets		86		86
Total assets	$	78,230	$	75,742

See accompanying notes to consolidated financial statements

Index

IMAGE ENTERTAINMENT, INC.

Consolidated Balance Sheets

(unaudited)

~~December~~June 3130, ~~2011~~2012 and March 31, ~~2011~~2012

LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(In thousands)	December 31, 2011			March 31, 2011
Current liabilities:
Accounts payable	$	10,060		$	6,781
Accrued liabilities		5,710			7,828
Accrued royalties and distribution fees		22,280			23,055
Deferred revenue		3,697			5,331
Revolving credit facility		8,479			6,116
Current portion of long-term debt, less debt discount		623			1,795
Stock warrant		—			72
Total current liabilities		50,849			50,978
Noncontrolling interest liability		2,524			2,603
Series B cumulative preferred stock dividends accrued		5,964			3,546
Long-term debt, less current portion, less debt discount		497			1,443
Total liabilities		59,834			58,570
Commitments and Contingencies
Series B cumulative preferred stock, $0.0001 par value, 30,000 shares authorized; 22,600 issued and outstanding at December 31, 2011 and March 31, 2011, respectively, with a liquidation preference of $28.6 million and $26.1 million as of December 31, 2011 and March 31, 2011, respectively		5,839			5,839
Series C junior participating preferred stock, $0.0001 par value, 67,933.4 shares authorized at December 31, 2011 and March 31, 2011; none issued and outstanding at December 31, 2011 and March 31, 2011, respectively		—			—
Stockholders' equity:
Common stock, $0.0001 par value, 500 million shares authorized at December 31, 2011 and March 31, 2011, respectively; 256,402,000 and 255,602,000 issued and outstanding at December 31, 2011 and March 31, 2011, respectively		26			26
Additional paid-in capital		66,028			65,000
Accumulated deficit		(59,464	)		(55,723	)
Total stockholders' equity		6,590			9,303
Total liabilities, preferred stock and stockholders’ equity	$	72,263		$	73,712

LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(In thousands, except share data)	June 30, 2012			March 31, 2012
Current liabilities:
Accounts payable	$	12,670		$	11,954
Accrued liabilities		5,752			4,164
Accrued royalties and distribution fees		19,249			21,624
Deferred revenue		3,233			3,468
Revolving credit facility		15,046			12,919
Current portion of long-term debt, less debt discount		720			664
Total current liabilities		56,670			54,793
Noncontrolling interest liability		521			500
Series B cumulative preferred stock dividends accrued		7,698			6,818
Long-term debt, less current portion, less debt discount		186			349
Total liabilities		65,075			62,460
Commitments and Contingencies
Series B cumulative preferred stock, $0.0001 par value, 30,000 shares authorized; 22,600 issued and outstanding at June 30, 2012 and March 31, 2012, respectively, with a liquidation preference of $30.3 million and $29.4 million as of June 30, 2012 and March 31, 2012, respectively		5,839			5,839
Series C junior participating preferred stock, $0.0001 par value, 67,933.4 shares authorized at June 30, 2012 and March 31, 2012, respectively; none issued and outstanding at June 30, 2012 and March 31, 2012, respectively		—			—
Stockholders' equity:
Common stock, $0.0001 par value, 500 million shares authorized at June 30, 2012 and March 31, 2012, respectively; 256,402,000 issued and outstanding at June 30, 2012 and March 31, 2012, respectively		26			26
Additional paid-in capital		66,692			66,324
Accumulated deficit		(59,402	)		(58,907	)
Total stockholders' equity		7,316			7,443
Total liabilities, preferred stock and stockholders’ equity	$	78,230		$	75,742

See accompanying notes to consolidated financial statements

Index

IMAGE ENTERTAINMENT, INC.

Consolidated Statements of Operations

(unaudited)

For the Three and Nine Months Ended December 31, 2011 and 2010
	Three Months Ended					Nine Months Ended
(In thousands, except per share data)	December 31, 2011		December 31, 2010			December 31, 2011			December 31, 2010
NET REVENUES	$	34,553	$	27,669		$	78,225		$	63,301
COST OF SALES		27,069		21,283			60,753			49,138
Gross profit		7,484		6,386			17,472			14,163
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling expenses		2,043		1,869			6,323			4,618
General and administrative expenses		3,361		3,193			11,319			9,662
Total selling, general and administrative expenses		5,404		5,062			17,642			14,280
INCOME (LOSS) FROM OPERATIONS		2,080		1,324			(170	)		(117	)
OTHER EXPENSE (INCOME):
Interest expense, net		293		315			809			621
Other expense (income)		41		(1,289	)		176			(2,195	)
Total other expense (income)		334		(974	)		985			(1,574	)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		1,746		2,298			(1,155	)		1,457
PROVISION FOR INCOME TAXES		144		106			168			137
NET INCOME (LOSS)		1,602		2,192			(1,323	)		1,320
Dividend on Series B preferred stock		839		804			2,418			2,240
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS	$	763	$	1,388		$	(3,741	)	$	(920	)
NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share – basic and diluted	$	0.00	$	0.01		$	(0.01	)	$	(0.01	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted		255,822		135,414			255,675			62,587

For the Three Months Ended June 30, 2012 and 2011

(In thousands, except per share data)	2012			2011
NET REVENUES	$	23,269		$	23,286
COST OF SALES		17,609			17,795
Gross profit		5,660			5,491
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling expenses		1,632			2,477
General and administrative expenses		3,182			3,929
Total selling, general and administrative expenses		4,814			6,406
INCOME (LOSS) FROM OPERATIONS		846			(915	)
OTHER EXPENSES (INCOME):
Interest expense, net		198			393
Change in fair value of noncontrolling interest liability		21			(173	)
Other expense		165			9
Total other expense		384			229
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		462			(1,144	)
PROVISION (BENEFIT) FOR INCOME TAXES		77			(116	)
NET INCOME (LOSS)		385			(1,028	)
Dividend on Series B preferred stock		880			791
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(495	)	$	(1,819	)
NET LOSS PER COMMON SHARE:
Net loss per common share – basic and diluted	$	(0.00	)	$	(0.01	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted		256,402			255,602

See accompanying notes to consolidated financial statements

Index

IMAGE ENTERTAINMENT, INC.

Consolidated Statements of Cash Flows

(unaudited)

For the Nine Months Ended December 31, 2011 and 2010
(In thousands)	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,323	)	$	1,320
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of production costs		3,520			3,195
Depreciation and other amortization		416			478
Amortization of debt discount and deferred financing costs		545			210
Amortization of intangible assets		512			237
Provision for doubtful accounts		5			24
Provision (benefit) for lower of cost or market inventory write-downs		773			(427	)
Accelerated amortization and fair value write-down of advance royalty and distribution fees		713			1,666
Change in fair values of warrant and purchase rights		(72	)		(2,177	)
Stock-based compensation expense		1,028			219
Gain on disposal of property, equipment and improvements		—			(19	)
Noncash consideration for investment banking services received		—			76
Change in fair value of noncontrolling interest liability		(79	)		151
Changes in assets and liabilities associated with operating activities:
Accounts receivable		3,517			(544	)
Inventories		(1,495	)		822
Royalty and distribution fee advances		(3,690	)		(4,580	)
Production cost expenditures		(2,644	)		(2,235	)
Prepaid expenses and other assets		(479	)		(34	)
Accounts payable, accrued royalties, fees and liabilities		709			4,217
Deferred revenue		(1,634	)		(3,481	)
Net cash provided by (used in) operating activities		322			(882	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(385	)		(35	)
Acquisition of business		—			(1,044	)
Net cash used in investing activities	$	(385	)	$	(1,079	)

For the Three Months Ended June 30, 2012 and 2011

(In thousands)	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	385		$	(1,028	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of production costs		907			1,141
Depreciation and other amortization		81			147
Amortization of debt discount and deferred financing costs		50			329
Amortization of intangible assets		171			171
Provision for doubtful accounts		—			57
Provision for lower of cost or market inventory write-downs		105			178
Accelerated amortization and fair value write-down of advance royalty and distribution fees		59			222
Change in fair values of stock warrant liability		—			(72	)
Stock-based compensation expense		368			284
Change in fair value of noncontrolling interest liability		21			(173	)
Changes in assets and liabilities associated with operating activities:
Accounts receivable		(7,496	)		8,367
Inventories		(723	)		(574	)
Royalty and distribution fee advances		4,988			(2,199	)
Production cost expenditures		(893	)		(977	)
Prepaid expenses and other assets		(229	)		(472	)
Accounts payable, accrued royalties, fees and liabilities		343			(1,855	)
Deferred revenue		(235	)		(1,014	)
Net cash provided by (used in) operating activities		(2,098	)		2,532
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(10	)		(41	)
Payment to noncontrolling interest holder		—			(60	)
Net cash used in investing activities	$	(10	)	$	(101	)

See accompanying notes to consolidated financial statements

Index

IMAGE ENTERTAINMENT, INC.

Consolidated Statements of Cash Flows, Continued

(unaudited)

For the Nine Months Ended December 31, 2011 and 2010
(In thousands)	2011			2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility	$	51,433		$	44,367
Repayments of borrowings under revolving credit facility		(49,070	)		(44,623	)
Repayments of long-term debt		(2,329	)		(179	)
Proceeds from long-term debt		—			2,282
Net cash provided by financing activities		34			1,847
NET DECREASE IN CASH:		(29	)		(114	)
Cash at beginning of period		333			460
Cash at end of period	$	304		$	346
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	344		$	246
Cash paid during the period for income taxes	$	56		$	17

For the Three Months Ended June 30, 2012 and 2011

(In thousands)	2012			2011
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility	$	14,414		$	11,323
Repayments of borrowings under revolving credit facility		(12,287	)		(12,725	)
Repayments of long-term debt		(121	)		(678	)
Net cash provided by (used in) financing activities		2,006			(2,080	)
NET INCREASE (DECREASE) IN CASH:		(102	)		351
Cash at beginning of period		368			333
Cash at end of period	$	266		$	684
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	148		$	59
Income taxes	$	69		$	33

See accompanying notes to consolidated financial statements

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

Note 1.

Basis of Presentation.

The accompanying unaudited 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).

The balance sheet as of March 31, ~~2011~~2012 included in this report, which has been derived from audited financial statements, and the accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (or U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 810 of Regulation S-X of the Securities Exchange Commission. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. All significant intercompany balances and transactions as of and for the three ~~and~~month ~~nine~~periods ~~months~~ ended ~~December~~June 3130, ~~2011~~2012 and ~~as of March 31,~~ 2011 have been eliminated in consolidation.

In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Due to the seasonal nature of our business and other factors, including the strength of our new release schedule, interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying unaudited financial information should, therefore, be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K filed on June 2914, ~~2011, as amended on July 29, 2011~~2012. Note 1 of our audited consolidated financial statements included in our Annual Report on Form 10-K contains a summary of our significant accounting policies. The increase in accounts receivable and respective decrease in the reserve for returns, allowances and provision for doubtful accounts are the result of timing differences. The cash received from accounts receivable collections forecasted for the latter part of June 2012 were subsequently received in the first week of July. The reserve for returns, which are generally higher at our fiscal year ended in March 31 as a result of the holiday selling season, are lowered as they are processed in March, April and May of the following year.

Given our history of losses, ~~negative cash flows~~ and negative ~~working~~cash ~~capital~~flows, ~~it is possible that~~ we ~~will~~may ~~find~~need ~~it necessary~~ to supplement our sources of working capital with additional financing to sustain operations. Future capital requirements will depend on many factors, including our rate of revenue growth and acquisition of programming content. To the extent that existing capital resources and sales growth are not sufficient to fund future activities, we may need to raise funds through private equity offerings, debt-financing and public financing, as well as to limit cash outflows through monitoring and controlling our expenditures. Additional funds may not be available on terms favorable to us or at all. Failure to raise additional capital, if and when needed, could have a material adverse effect on our financial position, results of operations, and cash flows.

While our ~~balance~~working ~~sheet~~capital deficit has improved over the past ~~12 months~~quarter, our cash requirements for content acquisition continue to exceed the level of cash generated by day-to-day operations. During the nine months ended December 31, 2011, we invested in many high-profile titles which have either been recently released or are scheduled for release in the coming fiscal quarters. Notable titles where monies have been advanced with releases scheduled subsequent to December 31, 2011, include, among others, The Double (starring Richard Gere and Topher Grace), Beneath the Darkness (starring Dennis Quaid), What My Husband Doesn’t Know (a David E. Talbert production), Division III (starring Andy Dick), Radio Rebel (starring Debby Ryan), and Betty White: Champion for Animals. At ~~December~~June 3130, ~~2011~~2012, we had a working capital deficit of $52.36 million, compared to a working capital deficit of $36.4 million at March 31, ~~2011~~2012. At ~~December~~June 3130, ~~2011~~2012, we had an accumulated deficit of $59.54 million, compared to an accumulated deficit of $5558.79 million at March 31, ~~2011~~2012. 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. On June 23, 2011, we obtained a three-year revolving credit line for up to $17.5 million. See “Note 5. 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.

Certain prior-year balances have been reclassified to conform to the current presentation.

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

Note 2.

Recent Accounting Pronouncements.

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 did not have ~~any~~a ~~impact~~material effect on ~~the Company~~Image’s financial statements.

In ~~December~~June ~~2010~~2011, the FASB issued ASU No. ~~2010~~2011-2805, ~~Intangibles—Goodwill~~Comprehensive ~~and~~Income ~~Other~~ (Topic ~~350~~220): ~~When~~Presentation toof ~~Perform~~Comprehensive ~~Step~~Income. 2This ofUpdate ~~the~~requires ~~Goodwill~~that ~~Impairment~~all ~~Test~~nonowner ~~for~~changes ~~Reporting~~in ~~Units~~shareholders’ ~~with~~equity ~~Zero~~be orpresented ~~Negative~~either ~~Carrying~~in ~~Amounts~~a -single acontinuous ~~consensus~~statement of ~~the~~comprehensive ~~FASB~~income ~~Emerging~~or ~~Issues~~in ~~Task~~two ~~Force. This~~separate ~~Update~~but ~~amends~~consecutive ~~the~~statements, ~~criteria~~eliminating ~~for~~the ~~performing~~option ~~Step~~to 1present of the ~~goodwill~~components ~~impairment~~of ~~test~~other ~~for~~comprehensive ~~reporting~~income ~~units~~as ~~with~~part ~~zero~~of orthe ~~negative~~statement ~~carrying~~of ~~amounts~~changes ~~and~~in ~~requires~~shareholders’ ~~performing~~equity. ~~Step~~ASU 2No. if2011-05 ~~qualitative factors indicate that it~~ is ~~more likely than not that a goodwill impairment exists. The amendments in this Update are~~ effective for ~~fiscal~~interim ~~years,~~ and ~~interim~~annual periods ~~within~~beginning ~~those~~after ~~fiscal~~December ~~years~~15, ~~beginning~~2011, on ora ~~after~~retrospective ~~December 15, 2010~~basis. The adoption of ASC No. ~~2010~~2011-2805 did not have ~~any~~a ~~impact~~material effect on ~~the Company~~Image’s financial statements.

In ~~December~~September ~~2010~~2011, the FASB issued ASU No. ~~2010~~2011-2908, ~~Business~~Intangibles ~~Combinations~~- Goodwill and Other (Topic ~~805~~350):, ~~Disclosure~~Testing ofGoodwill ~~Supplementary~~for ~~Pro~~Impairment, ~~Forma~~which ~~Information~~permits ~~for~~an ~~Business~~entity ~~Combinations. This~~to ~~Update~~make ~~clarifies~~a ~~that,~~qualitative ~~when~~assessment ~~presenting~~of ~~comparative~~whether ~~financial~~it ~~statements,~~is ~~SEC~~more ~~registrants~~likely ~~should~~than ~~disclose~~not ~~revenue~~that ~~and~~a ~~earnings~~reporting ofunit's ~~the~~fair ~~combined~~value ~~entity~~is asless ~~though~~than ~~the~~its ~~current~~carrying ~~period~~value ~~business~~before ~~combinations~~applying ~~had~~the ~~occurred~~two-step asgoodwill ofimpairment ~~the~~model ~~beginning~~that ofis ~~the~~currently ~~period~~in ~~only~~place. ~~The~~ ~~Update~~If ~~also~~it ~~expands~~is determined through the ~~supplemental~~qualitative ~~pro~~assessment ~~forma~~that ~~disclosures~~a toreporting ~~include~~unit's afair ~~description~~value ofis ~~the~~more ~~nature~~likely ~~and~~than ~~amount~~not ofgreater ~~material~~than its carrying value, ~~nonrecurring~~the ~~pro~~remaining ~~forma~~impairment ~~adjustments~~steps ~~directly~~would ~~attributable~~be tounnecessary. ~~the~~The ~~business~~qualitative ~~combination~~assessment ~~included~~is inoptional, ~~the~~allowing ~~reported~~companies ~~pro~~to ~~forma~~go ~~revenue~~directly ~~and~~to ~~earnings. The~~the ~~amendments~~quantitative inassessment. ~~this~~ASU ~~Update~~No. ~~are~~2011-08 is effective for ~~fiscal~~annual ~~years,~~ and interim ~~periods~~goodwill ~~within~~impairment ~~those~~tests performed in fiscal years, beginning ~~on or~~ after December 15, ~~2010~~2011; however, early adoption is permitted. The adoption of ASC No. ~~2010~~2011-2908 did not have ~~any~~a ~~impact~~material effect on ~~the Company~~Image’s financial statements.

In ~~May~~December 2011, the FASB issued ASU No., 2011-0411, ~~Fair~~Balance ~~Value~~Sheet ~~Measurement~~ (Topic ~~820~~210): ~~Amendments~~Disclosures toabout ~~Achieve~~Offsetting ~~Common~~Assets ~~Fair~~and ~~Value~~Liabilities, ~~Measurement~~which reconciles the differences in the requirements for offsetting assets and ~~Disclosure~~liabilities ~~Requirements~~in the presentation of financial statements prepared in accordance with U.S. GAAP and ~~IFRSs~~financial statements prepared in accordance with International Financial Reporting Standards (IFRS) that made comparability of those statements difficult. The ~~This~~objective ~~Update~~of ~~resulted~~ASU inNo. ~~common~~2011-11 ~~requirements~~is ~~for~~to ~~measuring~~facilitate ~~fair~~comparison ~~value~~between those financial statements, specifically within the scope instruments and transaction eligible for ~~disclosing~~offset ~~information~~in ~~about~~the ~~fair~~form ~~value~~of ~~measurements~~derivatives, ~~including~~sale aand ~~consistent~~repurchase ~~meaning~~agreements ofand ~~the~~reverse ~~term~~sale ~~“fair~~and ~~value~~repurchase agreements, and securities borrowing and securities lending arrangements.” ~~ASU~~This ~~No.~~update ~~2011-04~~ is effective for ~~interim and~~ annual reporting periods beginning on or after ~~December~~January 151, ~~2011~~2013 and interim periods within that fiscal year. The adoption of ASC No. 2011-0411 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.

In ~~June~~December 2011, the FASB issued ASU No. 2011-0512, Comprehensive Income ~~(Topic~~– ~~220):~~Deferral ~~Presentation~~ of ~~Comprehensive~~the ~~Income.~~Effective ~~This~~Date ~~Update~~for ~~requires~~Amendments ~~that~~to ~~all~~the ~~nonowner~~Presentation ~~changes~~of inReclassifications ~~shareholders’~~of ~~equity~~Items beout ~~presented either in a single continuous statement~~ of ~~comprehensive~~Accumulated ~~income~~Other orComprehensive Income in ~~two~~Accounting ~~separate~~Standards ~~but~~Update ~~consecutive~~No. ~~statements~~2011-05, ~~eliminating~~which ~~the~~defers ~~option~~changes toin ~~present~~ASC ~~the~~No. ~~components~~2011-05 ofthat ~~other~~relate ~~comprehensive~~to ~~income as part of~~ the ~~statement~~presentation of ~~changes~~reclassification ~~in shareholders’ equity~~adjustments. ASU No. 2011-0512 is effective for ~~interim~~fiscal years, and ~~annual~~interim periods within those years, beginning after December 15, 2011~~, on a retrospective basis~~. The ~~Company~~adoption ~~is currently evaluating the impact~~ of ~~ASC~~ASU No. 2011-~~05,~~12 ~~however,~~did ~~the adoption is~~ not ~~expected to~~ have a material ~~impact~~effect on ~~its~~Image’s financial statements.

In ~~September~~July ~~2011~~2012, the FASB issued ASU No. ~~2011~~2012-0802, Intangibles - —Goodwill and Other (Topic 350),: Testing ~~Goodwill~~Indefinite-Lived Intangible Assets for Impairment, which permits an entity to make a qualitative assessment ofto determine whether it is more likely than not that aan ~~reporting~~indefinite-lived ~~unit's~~intangible ~~fair~~asset, ~~value~~other than goodwill, is ~~less~~impaired. ~~than~~Currently, ~~its~~entities ~~carrying~~are ~~value~~required ~~before~~to ~~applying~~quantitatively ~~the~~test ~~two~~indefinite-~~step~~lived ~~goodwill~~intangible assets for impairment ~~model~~at ~~that~~least isannually ~~currently~~and inmore ~~place~~frequently if indicators of impairment exist. IfUnder itthis isupdate, ~~determined~~if ~~through~~an ~~the~~entity ~~qualitative~~concludes, ~~assessment~~based ~~that~~on aan ~~reporting~~evaluation ~~unit's~~of ~~fair~~all ~~value~~relevant qualitative factors, that it is not more likely than not ~~greater~~that ~~than~~the ~~its~~fair ~~carrying~~ value, ~~the~~of ~~remaining~~an ~~impairment~~indefinite-lived ~~steps~~intangible ~~would~~asset beis ~~unnecessary.~~less ~~The~~than ~~qualitative~~its ~~assessment~~carrying ~~is optional~~amount, ~~allowing~~it ~~companies~~will tonot gobe ~~directly~~required to perform the quantitative ~~assessment~~impairment test for that asset. ASU No. ~~2011~~2012-0802 is effective for annual and interim ~~goodwill~~ impairment tests performed infor fiscal years beginning after ~~December~~September 15, ~~2011,~~2012 ~~however,~~and ~~early adoption~~ is ~~permitted. The adoption of ASC No. 2011-08 is~~ not expected to have a material ~~impact~~effect on ~~the Company~~Image’s financial statements.

In December 2011, the FASB issued ASU No, 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, which reconciles the differences in the requirements for offsetting assets and liabilities in the presentation of financial statements prepared in accordance with U.S. GAAP and financial statements prepared in accordance with International Financial Reporting Standards (IFRS) that made comparability of those statements difficult. The objective of ASU No. 2011-11 is to facilitate comparison between those financial statements, specifically within the scope instruments and transaction eligible for offset in the form of derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. This update is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within that fiscal year. The adoption of ASC No. 2011-11 is not expected to have a material impact on the Company’s financial statements as the Company does not currently enter into any right of offset arrangements.

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

In December 2011, the FASB issued ASU No. 2011- 12, Comprehensive Income – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers changes in ASC No. 2011-05 that relate to the presentation of reclassification adjustments. ASU No. 2011-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU No. 2011-12 is not expected to have a material impact on the Company’s financial statements.

Note 3.

Accounting for Stock-Based Compensation.

As of ~~December~~June 3130, ~~2011~~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.

OnAt ~~November~~June 1930, ~~2010~~2012, ~~three~~there ~~types of options~~ were ~~granted~~approximately ~~(Types A~~19,200,000 Bshares ~~and~~available C)for ~~from~~future ~~the~~grants ~~2010~~under ~~Plan. Type~~the ~~A options have time based vesting as follows: 25% vested 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~~Plan, ~~2014. Type~~nine Bshares ~~options~~available ~~have~~for ~~market~~future ~~conditions~~grants asunder ~~well as performance conditions as follows: 100% vested upon~~ the ~~earlier~~2010 ~~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~~Plan, ~~2012~~652,500 ~~(ii)~~shares aavailable ~~change~~for infuture ~~control~~grants inunder ~~which~~ the ~~Company’s~~2008 ~~Common~~Plan ~~Stock's~~and ~~equity value equals or exceeds $0.0733 per share~~853,930 orshares ~~(iii)~~available 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 the Company’s Common Stock's fair market value equals or exceeds $0.19 for ~~any~~future 20grants ~~out~~under ~~of 30 consecutive trading days on or after January 8, 2013 (ii) a change in control in which~~ the ~~stock's~~2004 ~~equity value equals or exceeds $0~~Plan.~~19 per share, or (iii) January 8, 2019.~~

At December 31, 2011, there were approximately 19,200,000 shares available for future grants under the 2011 Plan, nine shares available for future grants under the 2010 Plan, 622,500 shares available for future grants under the 2008 Plan and 845,930 shares available for future grants under the 2004 Plan.

We measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date for all awards granted in accordance with ASC Topic 718, Compensation – Stock Compensation.

Stock Options

There were no options granted during the ~~nine~~three months ended ~~December~~June 3130, 2012 or June 30, 2011.

Stock option activity for the Plans for the three months ended June 30, 2012 is summarized as follows:

(In thousands, except share prices)	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at April 1, 2012		12,957		$	0.237		8.574
Granted		—			—		—
Exercised		—			—		—
Forfeited or Expired		(38	)		1.479		5.984
Options outstanding at June 30, 2012		12,919		$	0.233		8.332	$	—
Options exercisable at June 30, 2012		5,358		$	0.281		8.245	$	—

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $0.07 as of June 29, 2012, the last trading day of the quarter, which theoretically could have been received by the option holders had all option holders exercised their options as of that date. There were no options exercised, and thus no aggregate intrinsic value of options exercised or cash received, during the three months ended June 30, 2012 and 2011. There were no in-the-money options exercisable as of June 30, 2012 and 2011.

As of June 30, 2012, there were approximately 7,561,000 unvested stock options and $275,000 in remaining unamortized stock based compensation expense.

There was no excess tax benefit recorded for the tax deductions related to stock options during the three months ended June 30, 2012 and 2011.

The following table summarizes significant ranges of outstanding and exercisable options at June 30, 2012:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Number of Shares at June 30, 2012 (In thousands)		Weighted-Average Remaining Contractual Life (Years)		Weighted- Average Exercise Price		Number of Shares at June 30, 2012 (In thousands)		Weighted- Average Exercise Price
Under $2.00			12,826		8.4	$	0.208		5,265	$	0.218
$	2.01 to $4.00		93		2.2		3.800		93		3.800
			12,919						5,358

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

Option activity for the Plans for the nine months ended December 31, 2011 is summarized as follows:

(In thousands, except share prices)	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at April 1, 2011		13,037		$	0.252		9.559
Granted		—			—		—
Exercised		—			—		—
Canceled		(80	)		1.791		6.192
Options outstanding at December 31, 2011		12,957		$	0.237		8.824	$	—
Options exercisable at December 31, 2011		2,332		$	0.406		8.507	$	—

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $0.06 as of December 30, 2011, the last trading day of the quarter, which theoretically could have been received by the option holders had all option holders exercised their options as of that date. There were no options exercised, and thus no aggregate intrinsic value of options exercised or cash received, during the three and nine months ended December 31, 2011 and 2010. There were no in-the-money options exercisable as of December 31, 2011 and 2010.

There was no excess tax benefit recorded for the tax deductions related to stock options during the three and nine months ended December 31, 2011 and 2010.

As of December 31, 2011, there were 10,625,000 unvested stock options.

Restricted Stock Awards

OnRestricted ~~December 6, 2011, an aggregate of 800,000 shares of restricted~~ stock ~~awards~~award ~~were~~activity ~~granted~~under ~~to two independent directors. The restricted shares were issued on~~ the ~~date~~Plans offor ~~grant, but will not be transferrable until their restrictions are removed. We measured~~ the ~~fair~~three ~~value~~months ofended ~~the~~June ~~restricted~~30, stock on the date of grant based on the closing market price of our common stock on that day. We amortize this value to stock-based compensation expense table over the vesting period. We have assumed that all of the restricted stock will ultimately vest2012, and ~~therefore~~changes weduring ~~have not incorporated a forfeiture rate for purposes of determining~~ the ~~stock-based~~three ~~compensation~~months ~~expense;~~then ~~however~~ended ~~the~~are ~~restricted~~presented ~~stock may be subject to forfeiture if the director terminates his or her service during the vesting period.~~below:

Restricted stock award activity under the Plans for the nine months ended December 31, 2011 is presented below:

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

Nonvested at April 1, 2012		26,623	$	0.148
Granted		—		—
Vested		83		0.086
Forfeited or Expired		—		—
Nonvested at June 30, 2012		26,540	$	0.148

Vested at June 30, 2012		250	$	0.134

Restricted Stock Awards	Shares (000)		Weighted-Average Exercise Price
Outstanding at April 1, 2011		25,990	$	0.151
Granted		800		0.050
Exercised		—		—
Forfeited or Expired		—		—
Outstanding at December 31, 2011		26,790	$	0.148
Vested at December 31, 2011		9,250	$	0.151

There were no restricted stock awards awarded in the three months ended June 30, 2012 or June 30, 2011.

As of December 31, 2011, there were approximately 17,540,000 unvested restricted stock awards.

Stock-Based Compensation Valuation and Expense Information

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes) based on the assumptions noted in the following table. Expected volatilities are based on implied volatilities from traded options on our stock, 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. There were no options granted ~~during~~for the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~2012 and ~~2010,~~2011; therefore, no inputs were used to value options.

12Compensation expense relating to stock options and restricted stock awards for the three months ended June 30, 2012 and 2011 was $368,000 and $284,000, respectively. Remaining unamortized compensation expense related to stock options and restricted stock awards for the three months ended June 30, 2012 is $2.8 million.

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

Compensation expense relating to stock options and restricted stock awards for the three and nine months ended December 31, 2011 was $336,000 and $1,028,000, respectively, and for both the three and nine months ended December 31, 2010 was $219,000. Remaining unamortized compensation expense related to stock options and restricted stock awards at December 31, 2011 was $3.4 million.

Note 4.

Inventories.

Inventories at ~~December~~June 3130, ~~2011~~2012, and March 31, ~~2011~~2012, are summarized as follows:

(In thousands)	~~December~~June 3130, ~~2011~~2012		March 31, ~~2011~~2012
Discs	$	9,~~048~~535	$	89,~~931~~087
Other (principally disc packaging components)		3,~~194~~622		23,~~588~~452
		12,242		11,519
		13,157		12,539
Production costs, net		2,~~366~~204		32,~~243~~218
		14,608		14,762
		15,361		14,757
Less current portion of inventories		14,~~027~~632		1314,~~709~~202
Noncurrent inventories, principally non-recoupable production costs	$	~~581~~729	$	~~1,053~~555

Inventories consist primarily of finished discs (i.e., DVDs and Blu-ray discs) for sale and are stated at the lower of average cost or market.

Production costs consist of capitalized costs to produce licensed programming for domestic and international distribution and include the costs of film and tape conversion to the optical disc format, menu and packaging design, authoring, compression and mastering. Non-recoupable production costs are reflected net of accumulated amortization of $10,~~779~~604,000 and $1211,~~564~~922,000 at ~~December~~June 3130, ~~2011~~2012 and March 31, ~~2011~~2012, respectively.

Note 5.

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. 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.12

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.

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, with Messrs. Theodore S. Green (our Chief Executive Officer and Chairman), John W. Hyde (our Vice Chairman) and John 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). Effective July 13, 2011, the PNC Credit Facility was amended solely to allow for contemplated consideration to be paid to JH Parties. The Borrowers and JH Parties are in discussions regarding compensation JH Parties may receive for providing their guaranty and letter(s) of credit.

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

~~The~~Our ~~PNC~~previous ~~Credit~~credit ~~Facility~~facility ~~provides~~with ~~for~~Wells ~~certain~~Fargo ~~loan~~Capital ~~covenants~~Finance, ~~including~~LLC, ~~financial~~as ~~covenants~~successor ~~providing~~by ~~for~~merger ato ~~minimum~~Wachovia ~~senior~~Capital ~~fixed~~Finance ~~charge~~Corporation ~~coverage~~(Western), ~~ratio~~(or ofWells ~~not~~Fargo), ~~less~~which ~~than~~provided ~~1.20 to 1.00 and~~ a ~~minimum~~revolving ~~fixed~~line ~~charge~~of ~~coverage~~credit ~~ratio~~ of ~~not~~up ~~less~~to ~~than~~$15 ~~1.10~~million toand ~~1.00~~was ~~(i.e.,~~set ~~consolidated~~to ~~earnings~~expire ~~before~~on ~~interest,~~July ~~taxes~~31, ~~depreciation and amortization~~2011, aswas ~~defined~~repaid in ~~the~~full ~~Loan~~with ~~Agreement~~proceeds ~~(or~~from ~~EBITDA)~~the ~~(minus~~PNC ~~unfinanced~~Credit ~~capital~~Facility ~~expenditures~~ and ~~income~~was ~~taxes)~~terminated. The toPNC ~~consolidated~~Credit ~~total~~Facility ~~debt~~provides ~~(plus~~for ~~certain~~up ~~management~~to ~~fees,~~a ~~and,~~$17.5 inmillion ~~the~~revolving ~~case~~line of ~~the~~credit ~~fixed~~commitment, ~~charge~~including ~~coverage~~a ~~ratio,~~letter ~~certain~~of ~~dividend~~credit ~~payments)~~subfacility ~~over~~with a ~~rolling~~$1.5 ~~prior~~million ~~four~~sublimit. Advances ~~fiscal~~under ~~quarter~~the ~~period),~~PNC ~~and~~Credit ~~limitations~~Facility ongenerally ~~our~~are ~~ability~~limited ~~with regard~~ to the ~~incurrence~~total of: (i) ~~debt,~~85% ~~the disposition and preservation~~ of ~~collateralized~~eligible ~~assets,~~accounts ~~transactions~~receivable; ~~with affiliates~~ (~~other than payment of certain management fees~~ii), ~~the~~60% ~~existence~~ of ~~liens,~~eligible ~~capital~~inventory ~~expenditures,~~(with ~~stock~~an ~~repurchases~~inventory ~~and~~sublimit ~~dividends,~~of ~~investments,~~25% ~~amendments~~ of ~~certain~~the ~~business~~borrowing ~~arrangements with Sony Pictures Home Entertainment (or SPHE~~base); and ~~Sony DADC~~ (~~collectively Sony parties~~iii) ~~and of~~ the ~~IMHE~~lesser ~~management~~of ~~agreement~~$3 ~~and~~million ~~mergers,~~or ~~dispositions~~the ~~and~~amount ~~acquisitions~~of ~~(with~~ certain ~~limited~~letters ~~exceptions~~of ~~for~~credit ~~the~~provided ~~purchase~~by ofone ~~third-party~~or ~~equity~~more ~~interests~~affiliates inof ~~Image/Madacy~~JH ~~Home Entertainment~~Partners, LLC (or ~~IMHE~~JH Parties)). AtThe ~~December~~$1.35 ~~31,~~million ~~2011,~~reserve ~~our~~against ~~EBITDA resulted in a fixed-charge coverage ratio more than~~ the ~~required~~borrowing ~~minimum~~base, ~~senior~~or ~~fixed~~availability ~~charge~~block, ~~coverage~~may ~~ratio~~be ofreduced ~~not~~upon ~~less~~meeting ~~than~~certain ~~1.20~~terms ~~to 1.00~~ and aconditions ~~minimum~~at ~~fixed~~PNC's ~~charge coverage ratio of not less than 1~~discretion.~~10 to 1.00.~~ AtIn ~~December 31~~addition, ~~2011,~~the ~~our~~amount ~~borrowing~~of ~~availability~~outstanding ~~was~~credit ~~$8.0~~under ~~million~~the ~~($10.6~~PNC ~~million~~Credit ~~based~~Facility ~~upon~~is ~~eligible~~capped ~~accounts~~at ~~receivable and inventory less the~~ $~~2.6~~5 million ~~minimum~~during ~~requirement)~~a ~~and~~30-day ~~our~~clean-up ~~borrowing~~period ~~rates~~annually ~~were~~between ~~5.00%~~January ~~(based~~1 onand ~~the~~April ~~alternative~~30, ~~base~~with ~~rate,~~such ~~which~~period isto ~~Prime~~commence ~~Rate~~each ofyear ~~3.25%~~on ~~plus~~a ~~1.75%)~~date ~~and~~we 3select.~~81%~~ This ~~(based~~clean-up onperiod ~~the~~was ~~eurodollar~~waived ~~rate,~~by ~~which~~PNC isfor ~~three-month~~calendar ~~LIBOR~~year ~~of 0~~2012.~~56% 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 $6.5 million, are guaranteed by JH Parties, with Messrs. Theodore S. Green (our Chief Executive Officer and Chairman), John W. Hyde (our Vice Chairman) and John 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. Effective July 13, 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 (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.

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 June 30, 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 June 30, 2012, our borrowing availability was $2.4 million ($3.8 million based upon eligible accounts receivable and inventory less the $1.35 million reserve against the borrowing base) 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-month LIBOR of 0.47% plus 3.25%).

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.

The agreement imposes restrictions on such items as encumbrances and liens, payments of dividends, other indebtedness, stock repurchases and capital expenditures. Any outstanding borrowings are secured by our assets. The agreement also requires us to comply with minimum financial and operating covenants.13

We were in compliance with all financial and operating covenants under the Wells Credit Facility at June 23, 2011 and are in compliance with all financial operating covenants under our PNC Credit Facility at December 31, 2011. However, given our current liquidity constraints, it is not possible to determine whether we will be in compliance with all financial and operating covenants in the future.

On November 2, 2011, we entered into the Second Amendment to Revolving Credit and Security Agreement with PNC. Among other non-substantive changes, the amendment revises a financial covenant definition. There was no change to the borrowing capacity.

At December 31, 2011 we had $8.5 million outstanding under the revolving line of credit.

Prior to June 23, 2011, our Loan and Security Agreement, as amended (or Loan Agreement), with Wells Fargo Capital Finance, LLC, as successor by merger to Wachovia Capital Finance Corporation (Western), (or Wells Fargo), provided us with a revolving line of credit of up to $20 million (reducing to $15 million on February 1, 2011). Actual borrowing availability under the line was based upon our level of eligible accounts receivable and eligible 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) plus up to 1.5% or, at our option, LIBOR (three month LIBOR – 0.25% at June 23, 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.

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

The PNC Credit Facility was further amended as of July 31, 2012. See “Note 14. Subsequent Events” below.

At June 30, 2012, we had $15.0 million outstanding under the revolving line of credit.

Note 6.

Noncontrolling Interest Liability

In September 2010, Image and its then wholly-owned subsidiary Image/Madacy Home Entertainment, LLC (IMHE) entered into an Asset Purchase Agreement (Purchase Agreement) with Madacy Entertainment for certain home video division assets. Part of the purchase price included a 30% limited liability membership interest in IMHE (IMHE Noncontrolling Interest).

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, 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. If Image undergoes a change of control on or prior to August 31, 2013, Madacy Entertainment may opt to have Image repurchase the IMHE Noncontrolling Interest substantially based on the formula for a repurchase at August 31, 2013.

The ~~right~~purchase toof ~~purchase~~the IMHE Noncontrolling Interest ~~is mandatorily redeemable~~ by August 31, 2014 is mandatorily redeemable, unless ~~redeemed~~the interest is purchased sooner at the Company’s option. At acquisition and each reporting period thereafter, the IMHE Noncontrolling Interest is valued using the discounted cash flow method. Since of the ~~income~~purchase ~~approach,~~is ~~where~~time acertain ~~discount~~and ~~rate~~is ~~was~~not ~~applied~~triggered toby ~~the~~liquidation ~~net~~or ~~operating~~termination ~~cash~~of ~~flows~~IMHE, ~~attributable~~the toNoncontrolling ~~the~~Interest ~~IMHE~~of ~~Noncontrolling~~$521,000 ~~interest. The~~at ~~discount~~June ~~rate~~30, ~~was~~2012 ~~determined~~and by$500,000 ~~performing~~at aMarch ~~market-based~~31, ~~weighted~~2012 ~~average~~is ~~cost~~recorded ofas ~~capital~~a ~~(or~~liability ~~WACC)~~at ~~analysis~~its fair value. The ~~WACC~~change ~~analysis~~in ~~calculates~~ the ~~weighted~~fair ~~average~~value of the ~~cost~~noncontrolling ofinterest ~~equity~~liability ~~using~~during athe ~~capital~~three ~~asset~~months ~~pricing~~ended ~~model~~June ~~and~~30, ~~the~~2012 ~~cost~~and of2011 ~~debt~~was ~~using~~$21,000 ~~the~~and ~~applicable~~($173,000), ~~bond~~respectively, ~~yield. Additional~~and ~~assumptions~~is ~~used~~included ~~include~~as ~~5-year~~a ~~financial~~component ~~projections,~~of ~~growth~~other ~~rates~~expense ~~over~~(income) in the ~~5-year~~consolidated ~~period,~~statement ~~constant~~of ~~gross~~operations. In ~~margin rates~~addition, ~~estimated~~during ~~working~~the ~~capital~~three ~~requirements,~~months ~~and~~ended ~~estimated~~June ~~tax~~30, ~~rate.~~2012 Weand ~~reevaluate~~2011, the ~~value~~Company ofrecorded ~~the~~$165,000 ~~IMHE~~and ~~Noncontrolling~~$81,000, ~~Interest~~respectively, ~~internally~~as on a ~~quarterly~~component ~~basis~~of ~~and~~other ~~hire~~expense arelating ~~third-party~~to to ~~valuation~~the ~~firm~~noncontrolling tointerest ~~review~~holder for its share in the ~~value~~net onoperating anincome ~~annual~~of ~~basis~~IMHE.

~~Since~~In connection with the ~~mandatory~~purchase ~~redemption~~of isthe ~~time~~Home ~~certain~~Video Division, on September 7, 2010, Image entered into a three year Management Services Agreement with Madacy Entertainment Management LP, and isIMHE ~~not~~entered ~~triggered~~into byan ~~liquidation~~Employee orServices ~~termination~~Agreement with Sonoma Entertainment LP, each of ~~IMHE~~which was effective August 31, 2010. Pursuant to the Management Services Agreement, Image pays 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, subject to adjustment based on IMHE’s ~~Noncontrolling~~operating ~~Interest~~income as calculated in accordance with the terms and conditions of the Operating Agreement (which has a $2200,~~524~~000 floor and an $800,000 atceiling ~~December~~annually), 31to be paid quarterly. At each of June 30, 2012 and 2011, none and $233,~~603~~000 was included as a component of accrued liabilities, and $50,000 atand ~~March~~$100,000 31was included in general and administrative expenses for each of the three months ended June 30, 2012 and 2011, isrespectively. Pursuant ~~recorded~~to asthe aEmployee ~~liability~~Services atAgreement, ~~its~~IMHE ~~fair~~agreed ~~value~~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 ~~net~~Employee ~~change~~Services Agreement will remain in ~~the~~effect ~~fair~~until ~~value~~Image’s repurchase of the IMHE Noncontrolling Interest. For ~~liability during~~ the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~2012 ~~was~~and 2011, $7994,000 and is$92,000, ~~included~~respectively, aswas aincluded ~~component of interest expense~~ in ~~the~~selling, ~~consolidated~~general ~~statement~~and ofadministrative ~~operations~~expenses.

~~Note 7. Long-Term Debt.~~14

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. 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 then-outstanding borrowings under our previous Wells Fargo Capital Finance (Wells Fargo) revolving line of credit facility. The recoupable advance is now subordinated to all obligations outstanding to PNC under the PNC Credit Facility, as amended. Until the recoupable advance is repaid, SPHE will have a security interest in all the Company’s assets in second position behind PNC. Within the first year of the SPHE agreement, the unrecouped portion of both the recoupable and non-recoupable advances would have been fully refundable to SPHE upon termination under the terms and conditions of the SPHE agreement. The non-recoupable advance was used to pay the fee incurred for terminating our arrangement with our former replicator. None of the termination conditions were triggered within the first year; 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, only the unrecouped portion of the recoupable advance is refundable.

As the $2.5 million recoupable advance is non-interest bearing, we imputed and recorded a debt discount of $218,000 based upon a three-year loan interest rate of 5.5%. Amortization of the debt discount was a noncash interest expense and totaled $42,000 and $149,000 for the three and nine months ended December 31, 2011, 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 $73,000 and $178,000 for the three and nine months ended December 31, 2011, respectively.

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

~~Effective~~Note ~~August 31, 2010, we entered into an amendment to the Replication Services Agreement and Security Agreement between Sony DADC US Inc~~7. (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. As the obligation is nonLong-~~interest~~Term ~~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~~Debt.~~5%. Amortization of the debt discount was a noncash interest expense and totaled $20,000 and $61,000 for the three and nine months ended December 31, 2011, respectively.~~

InOn ~~connection~~August ~~with~~23, ~~the~~2010, ~~purchase~~we ofsigned ~~the~~a ~~home~~three-year ~~video~~Distribution ~~division~~Services ~~from~~and ~~Madacy~~License Agreement with Sony Pictures Home Entertainment Inc. (SPHE), ~~Madacy~~to act as exclusive manufacturer to meet the Company’s DVD requirements, including Blu-ray Disc high-definition format, and to provide related distribution ~~agreement~~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 ~~MMS~~SPHE, Image is responsible for the credit risk from the end customer with respect to accounts receivable and risk of inventory loss. On September 8, 2010, an interest-~~Millennium~~free ~~Media~~$2.5 ~~Services~~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 then-outstanding borrowings under our Wells Fargo revolving line of credit facility. The non-recoupable advance was ~~assigned~~used to ~~IMHE~~pay the fee incurred for ~~distribution~~terminating our arrangement with our former replicator resulting in a net zero effect to cost of sales. After the ~~IMHE~~first ~~products~~year, only the unrecouped portion of the recoupable advance is refundable, but the non-recoupable advance is nonrefundable. Until the recoupable advance was fully repaid in November 2011, SPHE had a security interest in all Image’s assets in second position behind PNC.

~~Long~~As the $2.5 million recoupable advance is non-~~term~~interest bearing, we imputed and recorded a debt atdiscount ~~December~~of 31$218,000 ~~2011,~~based upon a three-year loan interest rate of 5.5%. Amortization of the debt discount was a noncash interest expense and ~~March~~totaled 31$32,000 for the three months ended June 30, 2011. The deferred manufacturing credit was classified in long-term debt, ~~consisted~~net of current portion, after manufacturing commenced in October 2010. We amortized the ~~following:~~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 $58,000 for the three months ended June 30, 2011. The advance was fully repaid in fiscal 2012 and there was no debt discount or deferred manufacturing credit for the three months ended June 30, 2012.

(In thousands)	December 31, 2011		March 31, 2011
Subordinated manufacturing advance obligation, less debt discount of $59	$	1,120	$	3,238
Current portion of long-term debt, less debt discount of $51		623		1,795
Long-term debt less current portion, less debt discount	$	497	$	1,443

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 $121,000 and $161,000 was repaid during the three months ended June 30, 2012 and 2011, respectively. At June 30, 2012 and March 31, 2012, $934,000 and $1.1 million, respectively, of this advance remained 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 was a noncash interest expense and totaled $14,000 and $20,000 for the three months ended June 30, 2012 and 2011, respectively.

~~Note~~Long-term 8.debt ~~Stock~~at ~~Warrant~~June 30, 2012, and ~~Purchase~~March ~~Rights~~31, ~~Liability.~~2012, consisted of the following:

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

(In thousands)	June 30, 2012		March 31, 2012
Subordinated manufacturing advance obligation, less debt discount of $28-June 30, 2012; $42-March 31, 2012	$	906	$	1,013
Current portion of long-term debt, less debt discount of $28-June 30, 2012; $40-March 31, 2012		720		664
Long-term debt less current portion, less debt discount	$	186	$	349

Note 8. Stock Warrant Liability.

InWe ~~August~~currently ~~2006,~~do wenot ~~issued~~use tohedging ~~Portside~~contracts ~~Growth and Opportunity Fund a senior convertible note and a related warrant. The senior convertible note was paid in full in January 2010. Portside was issued a five-year warrant~~ to ~~purchase~~manage ~~1,000,000 shares of our common stock at an exercise price of $4.25 per share. In~~ the ~~event~~risk 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 JH Transaction triggered the antidilution provisions contained in the warrant. As a result, the warrant was exercisable for 8,018,868 shares of our ~~common~~overall ~~stock~~exposure 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~~interest fair value as of the end of each subsequent reporting period. The warrant expired on August 30, 2011. 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~~foreign ~~remaining~~currency ~~term of the warrant~~changes. The ~~assumptions~~derivative ~~used~~liabilities asdescribed ofbelow ~~March~~are ~~31,~~not ~~2011~~hedging ~~were as follows:~~instruments.

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

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

~~Purchase~~Stock ~~Rights~~Warrant Liability

In ~~connection~~August ~~with the January 8~~2006, ~~2010~~we ~~sale~~issued ofa ~~preferred~~$17 ~~stock~~million tosenior JHsecured ~~Partners~~note (or ~~Transaction Date~~Note), ~~purchase~~and ~~rights~~related ~~(or~~warrant ~~Purchase Rights) were granted~~ to purchase ~~an additional 7~~1,~~400 shares of Series B Preferred and 66~~000,~~163.4~~000 shares of ~~Series~~our Ccommon ~~Junior~~stock ~~Participating~~to ~~Preferred~~Portside ~~Stock~~Growth ~~(or~~and ~~Series~~Opportunity CFund. The ~~Preferred)~~Note ~~for~~was anpaid ~~aggregate~~in ~~purchase~~full ~~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~~2010. The ~~These~~related ~~Purchase~~warrant ~~Rights~~was ~~were classified as liabilities due to the existence of events outside of the Company’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 December 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 December 31, 2010 using an option pricing model. During the nine months ended December 31, 2010, one tranche of the Purchase Rights expired with respect to 3,700 shares of Series B Preferred and 33,081.7 shares of Series C Preferred. At December 31, 2010, the remaining fair value of one tranche of Purchase Rights was $18,000. 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 thus no Black-Scholes option pricing model inputs used.

The ~~fair~~warrant ~~value~~had a term of 5 years and an exercise price of $4.25 per share. In the ~~Purchase~~event ~~Rights~~of ~~liability~~a atchange ~~December~~of 31control, ~~2010~~the warrant must have been settled in cash using the Black-Scholes model in accordance with the underlying terms contained in the warrant agreement. The JH Transaction triggered the antidilution provisions contained in the warrant and, as a result, became 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 ~~option~~valuation ~~pricing~~method as of August 30, 2006 and this model ~~based~~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 ~~following~~valuation ~~inputs~~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 June 30, 2011 are as follows:

	December 31, 2010
	June 30, 2011
Series B Preferred price per share	$	364.54
Risk-free interest rate		0.02%
Series C Preferred price per share	$	71.07
Expected term (in years)	0.17 years
Series B Preferred exercise price per share	$	287.58
Expected volatility		51.04%
Series C Preferred exercise price per share	$	61.75
Risk-free interest rate		0.07%
Expected term (in years)	0.01 years
Expected volatility for purchase rights		135.8%
Expected dividend yield		0%-12%

InAs ~~accordance~~the ~~with~~stock ~~ASC~~warrant ~~820,~~expired ~~“Fair~~in ~~Value~~August ~~Measurements and Disclosures~~2011,” the ~~fair~~valuation ~~value~~ of the stock warrant ~~and purchase rights were adjusted to their fair value~~ at ~~the~~June ~~end~~30, of2011 ~~each~~resulted ~~reporting~~in ~~period,~~a ~~with~~de ~~liability~~minimus ~~increases~~remaining value and ~~decreases~~there ~~recorded~~was asno ~~other~~remaining ~~income~~balance orat ~~expense~~June ~~during~~30, ~~the reporting period~~2012. The decrease in fair value of the stock warrant ~~was~~liability ~~estimated by using the Black-Scholes pricing model, in which the inputs are consistently applied and reflected the contractual terms~~ of ~~the warrant~~$72,000 ~~including~~was ~~the~~included ~~period to maturity, and market-based parameters such~~ as ~~interest rates, and volatility. This model does not contain~~ a ~~high~~component ~~level~~ of ~~subjectivity~~other asincome ~~the~~during ~~valuation techniques used do not require significant judgment, and inputs thereto are readily observable from actively quoted markets. The fair values of~~ the ~~purchase~~three ~~rights~~months ~~were~~ended ~~estimated~~June ~~by using pricing models~~30, ~~in which some of the inputs to those models are based on readily observable market parameters and some inputs require valuation techniques using subjectivity and judgment~~2011.

AtNote ~~March 31, 2011, the remaining stock warrant value was recorded on the balance sheet~~9. ~~Included~~ inNet ~~the~~Loss ~~table~~per ~~below~~Share ~~is the change in fair value recorded for the stock warrant and purchase rights as a component of other income during the nine months ended December 31, 2010~~Data. ~~As the stock warrant expired on August 30, 2011, the valuation of the stock warrant at December 31, 2011 resulted in no remaining value.~~

(In thousands)	Stock Warrant and Purchase Rights Liabilities
Balance, March 31, 2010	$	2,442
Change in fair value		(2,177	)
Balance, December 31, 2010	$	265
Balance, March 31, 2011	$	72
Change in fair value		(72	)
Balance, December 31, 2011	$	—

The following presents a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share for the three months ended June 30, 2012 and 2011:

(In thousands, except per share data)	2012			2011

Net income (loss) – basic and diluted numerator	$	385		$	(1,028	)
Less: Dividend on Series B preferred stock		880			791
Net loss per common – basic and diluted numerator		(495	)		(1,819	)
Weighted-average common shares outstanding – basic denominator		256,402			255,602
Effect of dilutive securities		—			—
Weighted-average common shares outstanding – diluted denominator		256,402			255,602
Basic and diluted net loss per share	$	(0.00	)	$	(0.01	)

Outstanding common stock options and warrants not included in the computation of diluted net loss per share totaled 12,919,000 and 21,038,000, respectively, for the three months ended June 30, 2012 and 2011. They were excluded as their effect would be antidilutive.

Note 10.

Preferred Stock.

The Series B Preferred and Series C Preferred, prior to conversion, were classified as mezzanine equity. The Series B Preferred continues to be classified as mezzanine equity due to the clause in the Certificate of Designation, which provides that upon a merger or other reorganization events, as defined, the Series B Preferred must be cash settled, thereby causing the redemption to 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, which would not be in the Company’s control.

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

InNote ~~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 December 31, 2011 and March 31, 2011~~11. ~~There~~Commitments ~~were no financial assets subject to the provisions of ASC 820 as of December 31, 2011~~ and ~~March 31, 2011~~Contingencies.

(In thousands)	Level 1		Level 2		Level 3		Total
Derivative liabilities:
Stock warrant as of December 31, 2011	$	—	$	—	$	—	$	—
Stock warrant as of March 31, 2011	$	—	$	72	$	—	$	72

The stock warrant was 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.

During the three and nine months ended December 31, 2011 and 2010, other income related to the fluctuation in the fair value of the warrant was recorded as non-operating income included as a component of other income in the accompanying consolidated statements of operations.

Note 9. Net Income (Loss) per Share Data.

The following presents a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share for the three and nine months ended December 31, 2011 and 2010:

	Three months ended December 31,				Nine months ended December 31,
(In thousands, except per share data)	2011		2010		2011			2010
Net income (loss) – basic and diluted numerator	$	1,602	$	2,192	$	(1,323	)	$	1,320
Less: Dividend on Series B preferred stock		839		804		2,418			2,240
Net income (loss) applicable to common shareholders	$	763	$	1,388	$	(3,741	)	$	(920	)
Weighted average common shares outstanding – basic and diluted denominator		255,822		135,414		255,675			62,587
Net income (loss) per share – basic and diluted	$	0.00	$	0.01	$	(0.01	)	$	(0.01	)

Outstanding common stock options not included in the computation of diluted net income (loss) per share for the three and nine months ended December 31, 2011 totaled 12,957,000. Outstanding common stock options and warrants not included in the computation of diluted net income (loss) per share for the three and nine months ended December 31, 2010 totaled 21,076,000. They were excluded as their effect would be antidilutive.

Note 10. Other (Expense) Income.

Other Expense (Income)

Other expense of $41,000 for the three months ended December 31, 2011 included:

· $41,000 in expense resulting from the noncontrolling interest charge.

Other income of $1,289,000, net for the three months ended December 31, 2010 included:

· $1,289,000 in noncash income resulting from the change in fair value of a warrant and purchase rights.

Other expense, net, of $176,000 for the nine months ended December 31, 2011 included:

· $248,000 in expense resulting from the noncontrolling interest charge; and

· $72,000 in noncash income resulting from the change in fair value of a warrant.

Other income of $2,195,000 for the nine months ended December 31, 2010 included:

· $2,177,000 in noncash income resulting from the change in fair value of a warrant and purchase rights.

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

Interest Expense

Interest expense, comprised of noncash amortization of debt discount, noncash amortization of deferred financing costs, change in fair value of noncontrolling interest and cash interest expense, net of interest income, was $293,000 and $809,000 for the three and nine months ended December 31, 2011, respectively, compared to $315,000 and $621,000 for the three and nine months ended December 31, 2010, respectively. Net noncash charges to interest expense, representing amortization of the manufacturing advance debt discount and deferred financing costs, for the three and nine months ended December 31, 2011, totaled $92,000 and $545,000, respectively, compared to $51,000 and $210,000 for the three and nine months ended December 31, 2010, respectively.

Note 11. Preferred Stock.

The Series B Preferred and, prior to conversion, Series C Preferred were classified as mezzanine equity. The Series B Preferred continues to be classified as mezzanine equity due to the clause in the Certificate of Designation, which provides that upon a merger or other reorganization events, as defined, the Series B Preferred must be cash settled, thereby causing the redemption to 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, which would not be in the Company’s control.

Note 12. Commitments and Contingencies.

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, the opinion of management is, based on consultations with legal counsel, that the ultimate disposition of known proceedings will not have a material adverse impact on our financial condition, results of operations or liquidity.

Note 1312. Related Party Transactions.

Transaction with JH Partners, LLC and Affiliates

On December 21, 2009, we entered into a Securities Purchase Agreement, as amended, (the SPA) with JH Partners, LLC, as the investor representative (or Investor Representative), and JH Partners Evergreen Fund, L.P. (or JH Evergreen), JH Investment Partners III, L.P. (or JH Investment III) and JH Investment Partners GP Fund III, LLC (or JH Investment GP Fund and together with JH Evergreen and JH Investment III, the Investors). Pursuant to the SPA, on January 8, 2010, wethe ~~sold~~Investors purchased 22,000 shares of ~~a newly authorized series of~~ our ~~capital stock entitled~~ Series B Cumulative Preferred Stock, ~~par value $0.0001 per share (or Series B Preferred),~~ and 196,702 shares of ~~a newly authorized series of~~ our ~~capital stock entitled~~ Series C Junior Participating Preferred Stock, ~~par value $0.0001 per share (or Series C Preferred and together with the Series B Preferred, the Preferred Shares),~~ for an aggregate purchase price of $22.0 million. In connection with our sale to the Investors of the Preferred Shares, the Investors acquired control of Image. After subsequent transactions involving our capital stock, the Investors beneficially ~~owned~~own approximately 69% of our outstanding voting securities as of ~~December~~June 3130, ~~2011~~2012.

Pursuant to the SPA, we are required to pay the Investor Representative or its designee a management fee of $300,000 on each of December 31, 2010 and December 31, 2011. As of ~~December~~each 31of June 30, ~~2011~~2012 and March 31, ~~2011~~2012, $600,000 ~~and $375,000, respectively,~~ was included as a component of accrued liabilities and ~~$75,000~~none and $~~225~~75,000 was included in general and administrative expenses for the three ~~and nine~~ months ended ~~December~~June 3130, ~~2011~~2012 and ~~2010~~2011, respectively~~, in connection with such fee~~.

Stockholders’ Agreement

On April 14, 2010, the Company entered into a Stockholders’ Agreement (or the Stockholders’ Agreement) with JH Evergreen, JH Investment III, JH Investment GP Fund (together with JH Evergreen and JH Investment III, the JH Stockholders), Messrs. Green and Avagliano, Producers Sales, and Ray Gagnon, an executive of the Company (together with Messrs. Green and Avagliano and Producers Sales, the Management Stockholders, and the Management Stockholders and JH Stockholders collectively, the Stockholders). In addition to imposing customary transfer restrictions on Company capital stock held by the Stockholders, the Stockholders’ Agreement includes agreements among the Stockholders regarding tag-along rights, drag-along rights, and approval of a new equity incentive plan pursuant to which the Management Stockholders received stock options and restricted stock awards. In addition, the Stockholders’ Agreement gives the Company a call option on capital stock and vested options held by each of the Management Stockholders, exercisable within 90 days of the termination of employment or consulting engagement of the Management Stockholder. The exercise price of the call option is based on the fair market value of the underlying shares at the time of exercise, except in the case of termination for “cause,” in which case shares underlying equity compensation awards may be purchased at the original acquisition price, if lower. We determined that the fair value of this call option is de minimus.

Index

Image Entertainment, Inc.

Notes To Consolidated Financial Statements

(Unaudited)

The Stockholders’ Agreement was entered into in connection with the April 14, 2010 purchase by the Management Stockholders of an aggregate of 2,300 shares of the Company’s Series B Preferred and 20,564.3 shares of Series C Preferred from the JH Stockholders. In connection with such purchase, the Management Stockholders also became parties to the January 2010 Registration Rights Agreement.

JH Partners, LLC and Affiliates Guaranty

In connection with ~~the~~ PNC Credit Facility, JH Partners, LLC and certain of its affiliates guaranteed up to a maximum of $106.5 million,. Effective ~~with~~July ~~Messrs.~~13, ~~Green~~2011, ~~Hyde~~the ~~and~~PNC ~~Avagliano~~Credit ~~providing~~Facility ~~any~~was ~~applicable~~amended ~~contribution~~solely to ~~such~~allow ~~guaranty~~for incontemplated ~~the~~consideration ~~portion~~to ofbe ~~their~~paid ~~ownership~~to ofJH ~~our~~Parties, ~~Series~~which Bconsideration ~~Preferred. Effective~~includes ~~July~~(i) 13$500,000 ~~2011,~~commitment fee and (ii) a 5% annual fee on the ~~PNC~~total ~~Credit~~credit ~~Facility~~support ~~was~~provided, ~~amended~~half ~~solely~~of towhich ~~allow~~is ~~for~~payable ~~contemplated~~monthly ~~consideration~~in tocash beand ~~paid~~half toof which is deferred for 12 months, convertible at JH Parties’ option into Image common stock at the end of the 12 months. ~~The~~Of ~~Borrowers~~this consideration, during the three months ended June 30, 2012 and JH2011 ~~Parties~~$181,000 ~~are~~and innone ~~discussions~~was ~~regarding~~included ~~compensation~~as JHa ~~Parties~~component ~~may~~of ~~receive~~operating ~~for~~expense ~~providing~~and ~~their~~at ~~guaranty~~June 30, 2012 and ~~letter(s)~~March of31, ~~credit~~2012, $630,000 and $543,000, respectively, was included in accrued liabilities. See "“Note 5. Revolving Credit Facility"” above.

Employment and Consulting Agreements

On April 14, 2010, we entered into employment agreements with Messrs. ~~Theodore S.~~ Green, (our Chief Executive Officer and Chairman ~~and~~of ~~John~~the P.Board) and Avagliano, (our Chief ~~Financial~~Operating Officer and Chief ~~Operating~~Financial Officer) and a consulting agreement with Mr. ~~John W.~~ Hyde, (our Vice Chairman,) and his wholly owned consulting business, Producers Sales Organization. Each agreement, ~~as subsequently amended,~~ has an initial three-year term and, subject to advance-notice termination, renews automatically for successive one-year terms. These employment and consulting agreements, which were amended on July 12, 2010, each provide for, among other things, an annual base salary or consulting fee, as applicable, of $300,000, cash bonus eligibility, stock options and restricted stock awards, severance benefits, reimbursement of commuting and relocation expenses, and certain tax gross-up payments. The stock options and restricted stock awards were granted on November 19, 2010.

Note 1413. Subsequent Events.

We have performed an evaluation of subsequent events through the date we issued these financial statements.

20Fourth Amendment to Revolving Credit and Security Agreement

On July 31, 2012, we entered into the Fourth Amendment to Revolving Credit and Security Agreement with PNC. Among other non-substantive changes, the amendment revised certain covenant definitions. There was no change to the borrowing capacity.

Index

Item 2.

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 at the beginning of this Quarterly Report under the heading “Forward-Looking Statements,” our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could contribute to such differences include those discussed elsewhere in this Quarterly Report under the heading “Forward-Looking Statements.” You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly 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 1 of this Quarterly Report and with our audited consolidated financial statements and notes thereto, and with the information under the headings entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in our Annual Report on Form 10-K~~, as amended~~.

Overview

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 packaged goods (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. We have one reporting segment, Worldwide Entertainment, which consists of the acquisition, content enhancement and worldwide distribution of exclusive content on the formats and platforms mentioned above.

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 ~~Comedy~~also ·acquire ~~Independent~~exclusive ~~films~~rights to audio content for distribution via digital platforms and on CD in a variety of genres and configurations.

·We ~~Music~~strive ~~concerts~~to ·grow ~~Foreign~~a ~~films~~stream of 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 exploiting in the following formats:

·● ~~Urban~~Approximately ~~(including~~3,700 ~~stage~~DVD/Blu-ray ~~plays)~~titles/300 ·CD ~~Youth culture/lifestyle~~titles

·● ~~Theatre~~Digital ·rights ~~Television~~to approximately:

·o ~~Documentaries~~2,600 ~~· Sports~~video

·o ~~Faith~~400 ~~and~~audio ~~Family~~titles containing more than 5,600 individual tracks

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

We strive to grow a stream of revenue by maintaining and building a library of titles that can be exploited in a variety of formats and distribution channels. Our library of rights currently contains:

· Approximately 3,700 exclusive titles

· Digital rights to

o Approximately 2,200 video programs

o Approximately 500 audio titles containing more than 5,700 individual tracks

· Approximately 300 CD titles

Each month, we release an average of 15-20 exclusive DVD/Blu-ray titles, most of which also include digital, broadcast and VOD rights.

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:

2118

Index

·● independent content suppliers;

·● producers;

·● ~~film~~music ~~financiers~~artists and ~~attorneys~~record labels;

·● ~~music~~artist ~~artists~~management and ~~record~~talent ~~labels~~agencies; and

·● ~~artist~~foreign ~~management~~sales ~~and talent agencies; and~~companies.

· foreign sales companies.

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

We typically supplement such content by designing and producing additional value-added features. We continue to aggressively add numerous video and audio titles to our growing library of exclusive digital rights each month. We have established direct relationships with many digital industry-retailers and continue to seek additional distribution partners as they emerge.

~~Third~~First Quarter Fiscal ~~2012~~2013 Highlights

·● Net revenues ~~increased~~for ~~24.9%~~the toquarter ended June 30, 2012 were essentially flat at $3423,~~553~~269,000, compared to net revenues of $2723,~~669~~286,000 for the three months ended ~~December~~June 3130, ~~2010~~2011. ~~The~~However, ~~increase~~the innet revenues ~~was~~by ~~primarily~~format aswere asubstantially ~~result~~different ofdue ~~stronger~~to ~~performance~~changes in ~~both~~product ~~physical~~ and format mix, including the digital ~~formats~~and broadcast release of two high profile new releases in the prior year quarter ended June 30, 2011.

o ~~Discs~~Packaged goods (DVD and Blu-ray) revenues increased 1012.71% to $2719.96 million, from $2517.25 million.

o Digital distribution revenues ~~increased~~decreased ~~286~~37.97% to $42.31 million, from $13.13 million.

o Broadcast revenues ~~increased~~decreased 4344.76% to $1.62 million, from $12.1 million.

·o ~~Gross~~Other ~~profit~~net ~~margins~~revenues, ~~were~~including ~~21.7%,~~theatrical ~~compared~~and tonon-theatrical, 23increased 10.12% ~~for~~to ~~the three months ended December 31~~$422, ~~2010~~000, ~~primarily~~from ~~as a result of lower margins realized on new release product partially offset by higher margin digital revenues and lower manufacturing costs and freight and fulfillment expenses~~$383,000.

·● ~~Selling~~Gross ~~expenses~~profit ~~approximated~~margins 5were 24.93% ~~of net revenues~~, ~~down~~compared ~~from~~to 623.86% ~~of net revenues~~ for the three months ended ~~December~~June 3130, ~~2010. The reduction resulted from increased digital and broadcast revenues~~2011, ~~which~~primarily ~~typically~~as ~~carry~~a ~~lower~~result ~~selling~~of ~~costs~~changes asin ~~compared~~product toand ~~physical~~format ~~product sales~~mix.

·● ~~General~~Selling ~~and~~expenses ~~administrative~~approximated ~~expenses~~7.0% ~~were~~of $3net revenues,~~361,000~~ ~~compared~~down tofrom ~~$3,193,000,~~10.6% of net revenues for the three months ended ~~December~~June 3130, ~~2010~~2011, ~~and,~~primarily asdue ato ~~percentage~~lower ofadvertising ~~consolidated~~and ~~net~~promotional ~~revenues,~~expenses ~~decreased~~compared to ~~9.7%~~the ~~from~~June ~~11.5%~~2011 ~~for three months ended December 31~~quarter, ~~2010.~~which ~~The~~included ~~increase~~two inhigh ~~absolute~~profile ~~costs~~new ~~was~~releases ~~primarily~~The ~~attributable~~Way toBack ~~increased legal fees~~ and ~~higher~~Passion ~~stock-based compensation expense~~Play.

·● ~~Income~~General ~~from~~and ~~operations~~administrative ~~was~~expenses were $23,~~080~~182,000, compared to ~~income from operations of~~ $13,~~324~~929,000, for the three months ended ~~December~~June 3130, ~~2010~~2011, and, as a percentage of consolidated net revenues, decreased to 13.7% from 16.9% for three months ended June 30, 2011. Lower management fees and legal fees primarily accounted for the decrease in overall expense as compared to the prior year quarter.

·● ~~Other~~Income ~~expense~~from operations was $41846,000, compared to ~~other~~loss ~~income~~from operations of $1915,~~289,~~000, for the three months ended ~~December~~June 3130, ~~2010, primarily as a result of the change in fair value of the warrant and purchase rights~~2011.

·● Net ~~income~~loss applicable to common shareholders was $~~763~~495,000 ($0.00 per diluted share), compared to a net ~~income~~loss applicable to common shareholders of $1,~~388~~819,000 ($0.01 per diluted share) for the three months ended ~~December~~June 3130, ~~2010~~2011.

The highlights above are intended to identify some of our more significant events and transactions during the quarter ended ~~December~~June 3130, ~~2011~~2012. However, these highlights are not intended to be a full discussion of our results for the quarter. These highlights should be read in conjunction with the following discussion of “Results of Operations” and “Liquidity and Capital Resources” and with our consolidated financial statements and notes thereto accompanying this Quarterly Report.

2219

Index

Recent Events

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. 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. A registration statement filed with the SEC by RLJ Entertainment, Inc. to effect the forgoing transactions has been declared effective.

Results of Operations

Our unaudited consolidated financial information for the three ~~and nine~~ months ended ~~December~~June 3130, ~~2011~~2012, should be read in conjunction with our consolidated financial statements and the notes thereto and the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed on June 2914, ~~2011, as amended on July 29, 2011~~2012.

We have one reporting segment, our Worldwide Entertainment business, which 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. Our consolidated net revenues ~~increased~~were ~~24.9%~~flat toat $3423,~~553~~269,000, compared to $2723,~~669~~286,000 for the three months ended ~~December~~June 3130, 2010, primarily as a result of a stronger new release slate, increased activity with Walmart and Best Buy and higher Criterion catalogue shipments. In addition, digital and broadcast revenues significantly outpaced the comparable quarter twelve months ago, as a result of high profile titles and strong catalog product licensed to Netflix, Amazon and prominent cable providers. Our consolidated net revenues increased 23.6% to $78,225,000, compared to $63,301,000 for the nine months ended December 31, 2010, primarily as a result of strong new releases, including two high-profile new releases in the first fiscal quarter during the nine months ended December 31, 2011 ~~as well as the impact of selling directly to both Walmart and Best Buy~~. Net revenues from Walmart increased four-fold and Best Buy two-fold compared to the same quarter of the prior year. Digital net revenues from Netflix increased seven-fold compared to the same quarter of the prior year primarily due to several sales programs.

Net Revenue by Format:

	Three Months Ended December 31,									Nine Months Ended December 31,
	Three Months Ended June 30,
	2011			2010			% Change			2011			2010			% Change
	2012			2011			% Change
	(in thousands)									~~(in thousands)~~
Discs (DVD & Blu-ray)	$	27,917		$	25,228			10.7	%	$	62,735		$	54,514			15.1	%
Packaged Goods (DVD & Blu-ray)	$	19,631		$	17,510			12.1	%
Digital		42,~~302~~062			13,~~112~~311			~~286~~(37.97	)		~~8,484~~			~~3,634~~			~~133.5~~
Broadcast		1,~~605~~154			12,~~117~~082			43(44.76	)		~~5,550~~			~~3,753~~			~~47.9~~
Other		729			212			243.9			1,456			1,400			4.0
Sublicensing and Other		422			383			10.2
Total Net Revenues	$	34,553		$	27,669			24.9	%	$	78,225		$	63,301			23.6	%
Net Revenues	$	23,269		$	23,286			0.1	%
As a percentage of net revenues:
Discs (DVD & Blu-ray)		80.8	%		91.2	%					80.2	%		86.1	%
Packaged Goods (DVD & Blu-ray)		84.4	%		75.2	%
Digital		128.58			414.02						~~10.8~~			~~5.8~~
Broadcast		45.60			49.0						~~7.1~~			~~5.9~~
Other		2.1			0.8						1.9			2.2
Sublicensing and Other		1.8			1.6
		100.0	%		100.0	%					~~100.0~~	%		~~100.0~~	%

2320

Index

Our best selling new releases for the ~~three~~June ~~months~~2012 ~~ended~~quarter ~~December 31, 2011~~ as compared to the ~~three~~June ~~months~~2011 ~~ended~~quarter ~~December 31, 2010~~ were:

December 2011 Quarter	December 2010 Quarter
A Little Help (starring Jenna Fischer, Chris O’Donnell,) Island of Lost Souls (Criterion) Chillerama Twelve Angry Men (Criterion) Rushmore (Criterion) Dear Santa The River Why Alleged Blue (Criterion) Red (Criterion) White (Criterion) Kuroneko (Criterion) Freerunner Identification of a Woman Ghost Hunters – Volume 1 The Perfect Gift	16 Wishes (starring Debby Ryan, Jean-Luc Bilodeau) Night of the Hunter (Criterion) Paths of Glory (Criterion) House (Criterion) Antichrist (Criterion) Modern Times (Criterion) Sondheim: The Birthday Concert Darjeeling Limited (Criterion) Cronos (Criterion) Tapout: The Complete Series (MMA) The Magician (Criterion)

June 2012 Quarter

Memorial Day (starring Jonathan Bennett, James Cromwell, John Cromwell)

The Twilight Zone: The Complete Series (Blu-ray version)

Radio Rebel (starring Debby Ryan)

Harold & Maude (a Hal Ashby film – Criterion Collection)

Being John Malkovich (starring John Malkovich, Cameron

Diaz, John Cusack, Catherine Keener – Criterion Collection)

Teen Spirit (an ABC Family original movie)

Shallow Grave (a Danny Boyle film – Criterion Collection)

Certified Copy (starring Academy Award winners Juliette

Binoche and Jean-Claude Carrière – Criterion Collection)

The Twilight Zone: More Fan Favorites

David E. Talbert’s A Fool and His Money

Summer with Monika (an Ingmar Bergman film – Criterion Collection)

June 2011 Quarter

The Way Back (starring Ed Harris, Jim Sturgess, Saoirse Ronan, Colin Farrell)

Passion Play (starring Mickey Rourke, Bill Murray,

Megan Fox)

Blow Out (Criterion Collection)

The Inheritance (2010)

The Violent Kind

The Great Dictator (Criterion Collection)

Summer Eleven

Kiss Me Deadly (Criterion Collection)

Something Wild (Criterion Collection)

Kes (Criterion Collection)

The Makioka Sisters (Criterion Collection)

Mega Python Vs. Gatoroid

Our best selling new releases for the nine months ended December 31, 2011 as compared to the nine months ended December 31, 2010 were:

Nine Months Ended December 31, 2011

Nine Months December 31, 2010

The Way Back (starring Ed Harris, Jim Sturgess, Saoirse Ronan, Colin Farrell) The Perfect Game (starring Clifton Collins Jr., Cheech Marin) Passion Play (starring Mickey Rourke, Bill Murray, Megan Fox) A Little Help (starring Jenna Fischer, Chris O’Donnell,) Blow Out (Criterion) Island of Lost Souls (Criterion) Carlos (Criterion) The Reef The Great Dictator (Criterion) The Killing (Criterion) Kiss Me Deadly (Criterion) Chillerama The Kennedys Ghost Hunters – Season 6: Volume 1 35 and Ticking Born To Ride Hellraiser 2011 NBA Champions: Dallas Mavericks Twelve Angry Men (Criterion) Dear Santa Legends of Flight (IMAX)

Thriller: The Complete Series (hosted by Boris Karloff) $5 A Day (starring Christopher Walken, Sharon Stone, Amanda Peet) 16 Wishes (starring Debby Ryan, Jean-Luc Bilodeau) America Lost and Found: The BBS Story Stagecoach (Criterion) Fallen (starring Paul Wesley, Tom Skerritt, Bryan Cranston) Don McKay (starring Thomas Haden Church, Elisabeth Shue) The Night of the Hunter Disgrace (starring John Malkovich) That Evening Sun Paths of Glory House (Criterion)

Index

Cost of Sales

Our consolidated cost of sales for the ~~three~~quarter ~~and nine months~~ ended ~~December~~June 3130, ~~2011~~2012 ~~were~~was $2717,~~069~~609,000 ~~and $60~~,~~753,000,~~ or 7875.~~3% and 77.~~7% of net revenues, ~~respectively,~~ compared to $2117,~~283~~795,000 ~~and $49~~,~~138,000,~~ or 76.94% ~~and 77.6%~~ of net revenues, for the ~~three~~same ~~and~~quarter ~~nine~~last ~~months ended December 31, 2010, respectively~~year. The fluctuation in consolidated cost of sales as a percentage of consolidated net revenue between the two ~~respective~~ periods is discussed in Gross Profit ~~Margins~~Margin below.

Gross Profit Margins

Our consolidated gross ~~profit~~ margins for the ~~three~~June ~~and~~2012 ~~nine~~quarter ~~months ended December 31, 2011~~ were $75,~~484~~660,000 ~~and $17~~,~~472,000,~~ or 2124.~~7% and 22.~~3% of net revenues, ~~respectively,~~ compared to $65,~~386~~491,000 ~~and $14~~,~~163,000,~~ or 23.16% ~~and~~of ~~22.4%~~net revenues, for the ~~three~~June ~~and~~2011 ~~nine months ended December 31~~quarter, ~~2010, respectively,~~ primarily as a result of ~~lower~~changes ~~margins~~in ~~realized on new release~~ product ~~partially offset by higher margin digital revenues,~~ and ~~lower~~format ~~manufacturing costs~~mix.

Generally, items affecting our gross ~~profit~~ margins include:

·● the sales mix of individual titles (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 provided for in the agreements.

A reconciliation of the factors contributing to the ~~decrease~~increase in gross ~~profit~~ margin percentage for the ~~three~~June ~~months~~2012 ~~ended~~quarter ~~December 31, 2011~~ of 2124.73%, from the ~~three~~June ~~months~~2011 ~~ended~~quarter ~~December 31, 2010~~ of 23.16% follows:

	1.2	%	Lower manufacturing and production costs
3.7	%	Changes in product and format mix
1.1	~~1.1~~	Lower manufacturing and production costs	~~Lower freight and fulfillment expenses~~
	0.5		Lower pricing discounts and market development funds provided to customers
(2.0	)	Higher freight and fulfillment expenses
	(4.2	)	Changes in product and format mix
(2.1	)	Higher pricing discounts and market development funds provided to customers
	(1.4	)%	Decrease in gross profit margin
0.7	%	Increase in gross profit margin

A reconciliation of the factors contributing to the decrease in gross margin percentage for the nine months ended December 31, 2011 of 22.3%, from the nine months ended December 31, 2010 of 22.4% follows:

1.7	%	Lower pricing discounts and market development funds provided to customers
1.0		Lower manufacturing and production costs
(1.2	)	Higher freight and fulfillment expenses
(1.5	)	Changes in product and format mix
(0.1	)%	Decrease in gross profit margin

Selling Expenses

Selling expenses for the three months ended ~~December~~June 3130, ~~2011~~2012 were $21,~~043~~632,000 compared to $12,~~869~~477,000 for ~~the~~ three months ended ~~December~~June 3130, ~~2010~~2011 and, as a percentage of consolidated net revenues, decreased to 57.90% from 610.86% for ~~the~~ three months ended ~~December~~June 3130, ~~2010~~2011. ~~The~~This ~~increase~~decrease inwas ~~digital~~primarily ~~and~~due ~~broadcast~~to ~~revenues, which typically carry~~ lower ~~selling~~advertising ~~costs~~and aspromotional expenses compared to ~~physical~~the ~~product~~June ~~sales~~2011 quarter, ~~primarily~~which ~~accounts~~included ~~for~~two ~~the~~high ~~lower~~profile ~~percentage~~new ofreleases ~~selling~~The ~~costs~~Way toBack ~~overall~~and ~~revenues~~Passion Play.

Selling expenses for the nine months ended December 31, 2011 were $6,323,000 compared to $4,618,000 for nine months ended December 31, 2010 and, as a percentage of consolidated net revenues, increased to 8.1% from 7.3% for the nine months ended December 31, 2010. This increase was primarily due to higher advertising expenses related to the two high-profile new releases during the first fiscal quarter during the nine months ended December 31, 2011.21

Index

General and Administrative Expenses

General and administrative expenses for the three months ended ~~December~~June 3130, ~~2011~~2012 were $3,~~361~~182,000 compared to $3,~~193~~929,000 for ~~the~~ three months ended ~~December~~June 3130, ~~2010~~2011 and, as a percentage of consolidated net revenues, decreased to 913.7% from 1116.59% for ~~the~~ three months ended ~~December~~June 3130, ~~2010, primarily due to higher stock-based compensation expense~~2011.

~~More~~The ~~specifically,~~decrease ~~the increase~~ in ~~absolute dollars in~~ general and administrative expenses was ~~primarily~~ due to the following changes compared to the quarter ended June 30, 2011:

· ~~lower~~legal ~~recovery~~fees onwere ~~reserved receivables by~~ $~~201~~423,000 less;

· ~~higher~~external ~~stock-based~~management ~~compensation~~fees ~~expense~~were by $~~108~~261,000 lower; and

· ~~higher~~bad ~~legal~~debt ~~and~~expense ~~consulting~~was ~~costs by~~ $~~185~~69,000 lower.

~~Partly~~Other ~~offsetting the above expense increases were:~~Expenses/Income

·Other ~~lower~~Expenses/Income ~~salaries~~consisted byof ~~$116~~interest expense,~~000;~~ change in fair value of noncontrolling interest and other expense/income.

·Interest ~~lower depreciation costs by $69,000.~~Expense

General and administrative expenses for the nine months ended December 31, 2011 were $11,319,000 compared to $9,662,000 for the nine months ended December 31, 2010 and, as a percentage of consolidated net revenues, decreased to 14.5% from 15.3% for the nine months ended December 31, 2010 primarily due to higher legal fees associated with potential content acquisitions and higher stock-based compensation expense.

	Three Months Ended June 30,
	2012			2011			% Change
	(in thousands)
Noncash amortization of debt discount	$	14		$	52			(73.1	)%
Noncash amortization of deferred financing costs		36			277			(87.0	)
Cash interest expense, net of interest income		148			64			131.3
Interest expense, net	$	198		$	393			(49.6	)%

As a percentage of net revenues		0.9	%		1.7	%		(0.8	)%

~~More~~Interest ~~specifically~~expense, net of interest income, for the ~~increase~~three inmonths ~~absolute~~ended ~~dollars~~June in30, ~~general~~2012, ~~and~~decreased ~~administrative~~to ~~expenses~~$198,000, ~~was~~from $393,000 for the three months ended June 30, 2011 primarily ~~due~~as a result of increased interest-bearing debt fees. Net noncash charges to interest expense, representing amortization of the ~~following:~~manufacturing advance debt discount and deferred financing costs for the three months ended June 30, 2012, totaled $50,000 compared to $329,000 for the three months ended June 30, 2011.

·Change ~~higher~~in ~~stock-based~~Fair ~~compensation~~Value ~~expense~~of byNoncontrolling ~~$756,000;~~Interest

·The ~~higher~~change ~~legal~~in ~~fees~~the byfair value of noncontrolling interest liability due to the valuation of the mandatorily redeemable right to purchase the IMHE Noncontrolling Interest resulted in expense of $~~739~~21,000; for the three months ended June 30, 2012 and income of $173,000 for the three months ended June 30, 2011.

· higher amortization of intangibles by $275,000;

· higher external management fees by $167,000; and

· higher salaries and severance costs by $110,000.

Partly offsetting the above expense increases were:

· lower depreciation costs by $240,000; and

· lower technical support costs by $100,000.

Other Expense (Income)

Other expense of $41165,000 for the three months ended ~~December~~June 3130, 2012 resulted from the noncontrolling interest portion of the IMHE net operating results. Other expense of $9,000 for the three months ended June 30, 2011 ~~included:~~resulted from $72,000 of income from the change in fair value of a warrant and $81,000 of expense relating to the noncontrolling interest portion of the IMHE net operating results.

· $41,000 in expense resulting from the noncontrolling interest charge.

Other income of $1,289,000, net for the three months ended December 31, 2010 included:

· $1,289,000 in noncash income resulting from the change in fair value of a warrant and purchase rights.

Other expense of $176,000 for the nine months ended December 31, 2011 included:

· $248,000 in expense resulting from the noncontrolling interest charge; and

· $72,000 in noncash income resulting from the change in fair value of a warrant.

Other income of $2,195,000 for the nine months ended December 31, 2010 included:

· $2,177,000 in noncash income resulting from the change in fair value of a warrant and purchase rights.

Index

Interest Expense, Net

Interest expense, net of interest income, for the three and nine months ended December 31, 2011, were $293,000 and $809,000, respectively, and $315,000 and $621,000 for the three and nine months ended December 31, 2010, respectively, as described in the table below. Net noncash charges to interest expense, representing amortization of the manufacturing advance debt discount and deferred financing costs, for the three and nine months ended December 31, 2011, totaled $92,000 and $545,000, respectively, compared to $51,000 and $210,000 for the three and nine months ended December 31, 2010, respectively.

	Three Months Ended December 31,									Nine Months Ended December 31,
	2011			2010			% Change			2011			2010			% Change
	(in thousands)									(in thousands)
Noncash amortization of debt discount	$	62		$	59			5.1	%	$	210		$	59			255.9	%
Noncash amortization of deferred financing costs		30			(8	)		475.0			335			151			121.9
Change in fair value of noncontrolling interest		53			151			(64.9	)		(79	)		125			(163.2	)
Cash interest expense, net of interest income		148			113			31.0			343			286			19.9
Interest expense, net	$	293		$	315			(7.0	)%	$	809		$	621			30.3	%
As a percentage of net revenues		0.8	%		1.1	%		(0.3	)%		1.0	%		1.0	%		(0.0	)%

Income Taxes

We recorded federal and state tax expense of approximately $~~144~~77,000 ~~and $168,000~~ for the ~~three~~quarter ~~and nine months~~ ended ~~December~~June 3130, ~~2011~~2012, using aan ~~negative~~ estimated effective tax rate of (524.878)% for fiscal 2013. The tax rate is lower than statutory rates due to the utilization of net operating loss carryforwards. We recorded federal and state tax ~~expense~~benefit of $~~106~~116,000 ~~and $137,000~~ for the ~~three~~quarter ~~and nine months~~ ended ~~December~~June 3130, ~~2010~~2011.

Index

Liquidity and Capital Resources

~~Liquidity~~At June 30, 2012, we had a working capital deficit of $2.6 million compared to a working capital deficit of $6.4 million at March 31, 2012.

At December 31, 2011, we had a working capital deficit of $5.3 million compared to a working capital deficit of $3.4 million at March 31, 2011.

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

·● operating cash flows;

·● availability under our revolving line of credit;

·● private placement of debt and equity instruments;

·● advances from our disc manufacturer; and

·● trade credit.

The more significant factors affecting cash provided by operating activities during the ~~nine~~quarter ~~months~~ ended ~~December~~June 3130, ~~2011~~2012 were:

·● decreased ~~accounts~~royalties ~~receivable~~and distribution fee advances paid for exclusive content of $3.5.0 million.

The more significant factors affecting cash used in operating activities during the ~~nine~~quarter ~~months~~ ended ~~December~~June 3130, ~~2011~~2012 were:

·● increased ~~royalties~~accounts ~~and~~receivable ~~distribution~~of ~~fee~~$7.5 ~~advances~~million ~~paid~~as a result of timing differences where collections forecasted for ~~exclusive~~the ~~content~~latter part of ~~$3.7~~June ~~million~~2012 were subsequently received in the first week of July;

·● increased production cost expenditures of $~~2.6 million~~893,000; and

·● increased inventories of $1723,000.~~5 million.~~

Capital Resources

Cash. As of ~~December~~June 3130, ~~2011~~2012, we had cash of $~~304~~266,000, as compared to $~~333~~368,000 as of March 31, ~~2011~~2012.

27Borrowing Availability. At June 30, 2012, our borrowing availability was $2.4 million ($3.8 million based upon eligible accounts receivable less the $1.35 million reserve against the borrowing base).

Revolving Credit Facility. During the three months ended June 30, 2012, we had a revolving credit facility with PNC Bank, N.A. (or PNC) that 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 revolving 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. In addition, the amount of outstanding credit under the PNC revolving 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.

We were in compliance with all financial and operating covenants under the PNC revolving credit facility at June 30, 2012. These covenants are measured at various times through-out the year, and while we believe we will be in compliance with all financial and operating covenants at those dates, given our current liquidity constraints there can be no assurance that we will continue to be in compliance.

Disc Replication Advance. Sony Pictures Home Entertainment Inc. (or 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, that was repaid at the rate $0.15 per disc manufactured.

Given our history of losses and negative cash flows, we may need to supplement our sources of working capital with additional financing to sustain operations. Future capital requirements will depend on many factors, including our rate of revenue growth and acquisition of programming content. If existing capital resources and sales growth are not sufficient to fund future activities, we may need to raise funds through private equity offerings, debt-financing and public financing, as well as to limit cash outflows through monitoring and controlling our expenditures. Additional funds may not be available on terms favorable to us or at all. Failure to raise additional capital, if and when needed, could have a material adverse effect on our financial position, results of operations, and cash flows.

Index

~~Borrowing~~While ~~Availability~~our working capital deficit has improved over the past quarter, our cash requirements for content acquisition continue to exceed the level of cash generated by day-to-day operations. At ~~December~~June 3130, ~~2011~~2012, ~~our~~we ~~borrowing~~had ~~availability~~a ~~was~~working capital deficit of $82.06 million, (compared to a working capital deficit of $~~10.~~6.4 million ~~based~~at ~~upon~~March ~~eligible~~31, ~~accounts~~2012. At ~~receivable~~June ~~less~~30, ~~the~~2012, we had an accumulated deficit of $259.64 million, ~~minimum~~compared ~~requirement)~~to an accumulated deficit of $58.9 million at March 31, 2012. 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. Our ability to borrow against collateralized assets such as receivables and inventory is more favorable compared to our previous revolving credit line.

Revolving Credit Facility. During a portion of the nine months ended December 31, 2011 (until June 23, 2011), we had a revolving credit facility with Wells Fargo that provided us with a revolving credit facility of up to $15 million (reduced from $20 million on February 1, 2011) (Wells Credit Facility), and since June 23, 2011, we have had access to our PNC Credit Facility. Actual borrowing availability under the Wells Credit Facility was based upon our level of eligible accounts receivable and eligible inventories. The term of our Wells Credit Facility would have matured on July 31, 2011; however, on June 23, 2011, we entered into our three-year PNC Credit Facility and repaid and terminated our Wells Credit Facility. 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 s $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. 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.

Disc Replication Advance. Sony Pictures Home Entertainment Inc. (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.

Given our history of losses and negative cash flows, it is possible that we will find it necessary to supplement our sources of working capital with additional financing to sustain operations. Future capital requirements will depend on many factors, including our rate of revenue growth and acquisition of programming content. To the extent that existing capital resources and sales growth are not sufficient to fund future activities, we may need to raise funds through private equity offerings, debt-financing and public financing, as well as to limit cash outflows through monitoring and controlling our expenditures. Additional funds may not be available on terms favorable to us or at all. Failure to raise additional capital, if and when needed, could have a material adverse effect on our financial position, results of operations, and cash flows.

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. During the nine months ended December 31, 2011, we invested in many high-profile titles which have either been recently released or are scheduled for release in the coming fiscal quarters. Notable titles where monies have been advanced with releases scheduled subsequent to December 31, 2011, include, among others, The Double (starring Richard Gere and Topher Grace), Beneath the Darkness (starring Dennis Quaid), What My Husband Doesn’t Know (a David E. Talbert production), Division III (starring Andy Dick), Radio Rebel (starring Debby Ryan), and Betty White: Champion for Animals. At December 31, 2011, we had a working capital deficit of $5.3 million, compared to a working capital deficit of $3.4 million at March 31, 2011. At December 31, 2011, we had an accumulated deficit of $59.5 million, compared to an accumulated deficit of $55.7 million at March 31, 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. On June 23, 2011, we obtained a three-year revolving credit line for up to $17.5 million. See “Note 5. Revolving Credit Facility” above. Our ability to borrow against collateralized assets such as receivables and inventory is more favorable compared to our previous revolving credit line.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

Index

Critical Accounting Policies and Procedures

There have been no significant changes in the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed on June 2914, ~~2011, as amended on July 29, 2011~~2012.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Index

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. “Disclosure controls and procedures” refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We have evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our system of disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, we have evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes occurred to our internal control over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no such changes during the period covered by this Quarterly Report.

2925

Index

PART II - OTHER INFORMATION

Item 1.

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 on our financial position, results of operations or liquidity.

Item 1A.

Risk Factors.

Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K filed on June 2914, ~~2011, as amended on July 29, 2011~~2012. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted. As of ~~December 31~~June 30, ~~2011~~2012, there have been no material changes to the risk factors set forth in ~~the~~that ~~above-referenced~~ Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

None.

3026

Index

Item 6.

Exhibits.

10.1 Second Amendment to Revolving Credit and Security Agreement dated November 2, 2011, between PNC Bank National Association, Image Entertainment, Inc. and Image/Madacy Home Entertainment, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed November 14, 2011 (file no. 000-11071).

	10.1*	Fourth Amendment to Revolving Credit and Security Agreement dated July 31, 2012, between PNC Bank National Association, Image Entertainment, Inc. and Image/Madacy Home Entertainment, LLC.

	31.1*	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

	31.2*	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

	32.1*	Section 1350 Certification of Chief Executive Officer.

	32.2*	Section 1350 Certification of Chief Financial Officer.

	101.INS	XBRL Instance Document

	101.SCH	XBRL Taxonomy Extension Schema Document

	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

	101.LAB	XBRL Taxonomy Extension Label Linkbase Document

	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

~~10.2* Form of 2011 Equity Incentive Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement.~~_____________

31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1* Section 1350 Certification of Chief Executive Officer.

32.2* Section 1350 Certification of Chief Financial Officer.

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

___________

Filed herewith.

31† Management contract or compensatory plan or arrangement.

Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	IMAGE ENTERTAINMENT, INC.
Date: February 14, 2012	By:	/S/ THEODORE S. GREEN
Date: August 14, 2012	By:	/s/THEODORE S. GREEN
		Theodore S. Green
		Chief Executive Officer and Chairman of the Board
		(Authorized Officer and Principal Executive Officer)
Date: February 14, 2012	By:	/S/ JOHN P. AVAGLIANO
Date: August 14, 2012	By:	/s/JOHN P. AVAGLIANO
		John P. Avagliano
		Chief Operating Officer and Chief Financial Officer
		(Authorized Officer and Principal Financial Officer)

3228

Index

EXHIBIT INDEX

	10.1*	Fourth Amendment to Revolving Credit and Security Agreement dated July 31, 2012, between PNC Bank National Association, Image Entertainment, Inc. and Image/Madacy Home Entertainment, LLC.

	31.1*	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

	31.2*	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

	32.1*	Section 1350 Certification of Chief Executive Officer.

	32.2*	Section 1350 Certification of Chief Financial Officer.

	101.INS	XBRL Instance Document

	101.SCH	XBRL Taxonomy Extension Schema Document

	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

	101.LAB	XBRL Taxonomy Extension Label Linkbase Document

	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

~~10.2* Form of 2011 Equity Incentive Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement.~~_____________

31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1* Section 1350 Certification of Chief Executive Officer.

32.2* Section 1350 Certification of Chief Financial Officer.

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

___________

Filed herewith.

33† Management contract or compensatory plan or arrangement.

Filing Compare · IMAGE ENTERTAINMENT INC