Back to GetFilings.com

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

FORM 10-K

For The Fiscal Year Ended March 31, 2002

OR

For The Transition Period From                              To                             

Commission File Number 0-11071

IMAGE ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)

(818) 407-9100
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

        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 ý    No o

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

        At June 3, 2002, 15,828,253 shares of Common Stock were outstanding, and the aggregate market value of the shares of Common Stock held by the registrant's nonaffiliates was approximately $18,339,687 (based upon the closing price of the Common Stock on the NASDAQ National Market System on such date), excluding shares of Common Stock held by the registrant's directors, executive officers and 5% or more shareholders. Their holdings have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

        Part III—Proxy Statement for Registrant's 2002 Annual Meeting of Shareholders to be filed within 120 days of fiscal year-end.

IMAGE ENTERTAINMENT, INC.
Form 10-K Annual Report
For The Fiscal Year Ended March 31, 2002

TABLE OF CONTENTS

___________________________________________________________________________________________

PART I
___________________________________________________________________________________________

ITEM 1.  BUSINESS.

GENERAL

        Image Entertainment, Inc. ("Image") is an integrated home entertainment company, primarily engaged in the business of licensing and distributing entertainment programming. We license and exploit exclusive rights to a diverse array of general and specialty entertainment programming, such as music concerts and feature films, in DVD and other home entertainment formats. In addition to our current core business of domestic DVD distribution, we also license exclusive broadcast rights including video-on-demand, broadband streaming and digital download, pay-per-view, in-flight, radio, satellite, cable and broadcast television. Image not only licenses exclusive programming from third parties, we design and produce additional content and value-added features for our DVD programming such as interactive menus and packaging and marketing materials. We have also expanded our business and operations to produce our own original entertainment programming focusing on DVD live performance music. We are a leading provider of music-related DVD programming.

        Within this document, unless the context indicates otherwise, all references herein to "the Company," "we," "us," and "our" refer collectively to Image, its wholly-owned subsidiary DVDPlanet.com, Inc., a California corporation ("DVDPlanet"), and Image's 50%-owned joint venture, Aviva International, LLC, a California limited liability company ("Aviva"). Image was incorporated in Colorado as Key International Film Distributors, Inc. in April 1975, our present name was adopted in 1983, and we reincorporated in California in November 1989. Our principal executive offices are located at 9333 Oso Avenue, Chatsworth, California 91311, telephone (818) 407-9100. We maintain Web sites at www.image-entertainment.com and www.dvdplanet.com. The content of these sites does not constitute a part of this Annual Report.

        Our business strategy is to pursue, secure and exploit exclusive rights to as many different types of home entertainment programming as possible, for as many formats and distribution methods as possible, in as many territories as possible, for the longest term possible. The Company strives to grow a stream of licensing revenues by building a strong customer base and a library of evergreen titles that can be exploited in existing home entertainment formats such as DVD, VHS and CD and expanding distribution channels such as video-on-demand, Internet digital download and broadband streaming media.

        We have a current catalog of over 1,800 exclusive titles in distribution and also distribute approximately 13,000 non-Image exclusive titles. Some of the exclusive titles currently available or soon to be released by Image:

1

2

*

to date, the industry's best selling DVD music title

BUSINESS SEGMENTS

        We currently have three business segments:

•

Domestic Wholesale Distribution.



•

Retail Distribution.



•

International Wholesale Distribution.

        Image operates our Domestic Wholesale Distribution segment, including program licensing and production. Image's wholly-owned subsidiary, DVDPlanet, operates our Retail Distribution segment, which distributes programming direct-to-consumer, in conjunction with Image. Image's consolidated joint venture, Aviva, has been operating our International Wholesale Distribution segment, including sublicensing and worldwide broadcast rights exploitation, in conjunction with Image; however, during the quarter ended March 31, 2002, we began consolidating elements of Aviva's international wholesale distribution operations into Image. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Aviva International, LLC." Each of our business segments is discussed in greater detail below.

3

        The following table presents consolidated net revenues by reportable business segment for the periods presented:

Domestic Wholesale Distribution

        Most of the product we sell is in DVD format. According to industry estimates, there are currently more than 15,000 DVD titles available in the domestic market. Virtually all of these titles can be purchased from Image, thereby making us a leading "one-stop" provider of DVD product available in the domestic market. Image has developed a specialty niche in distribution of exclusive music-related entertainment programming. We believe we are the leading source of music-related DVD programming, as according to our internal estimates there are currently about 1,985 music-related DVDs on the market, of which Image exclusively distributes approximately 23%.

        According to Paul Kagan Associates ("Kagan"), U.S. consumers spent approximately $22 billion on home entertainment in 2001. The home video industry, which includes the rental and sale of movies on DVD and VHS, represented about $20 billion of the 2001 revenues with the remainder of the proceeds generated from consumer purchases of programming through pay-per-view and other specialized cable and satellite services. Kagan projects that the amount U.S. consumers spend on home movie entertainment will ascend to over $38 billion by the year 2010. Image believes that the DVD format, with its superior sound and picture quality, will drive continued growth in the home video industry. According to Kagan estimates, the current number of U.S. DVD households is almost a quarter of U.S. television households, and is expected to increase to almost half of U.S. television households by the end of 2003 and expand to three-quarters of U.S. television households by the end of 2009.

        Image believes that the value gained through the ability to entertain people at home for a reasonable price at convenient times, the opportunity to choose from a very broad selection of programming, and the ability to control the viewing experience by pausing, stopping or reviewing, will continue to make DVD sales a preferred medium of home entertainment for millions of consumers. Many DVDs also offer extra features, enhancements and ancillary materials, such as special menu design, separate audio tracks, behind-the-scenes footage, director commentaries, interviews and discographies, all of which Image is able to develop in-house for its exclusive titles.

        We believe that the studios' promotion of DVDs for sale has served to accelerate consumer interest in the DVD format. Because of Image's growing library of exclusive titles in a wide variety of genres, we believe that we have positioned ourselves to benefit from the market growth of the DVD format. We intend to continue steady expansion of our DVD library throughout fiscal 2003.

        Licensing.    When Image licenses programming, our licensed rights are exclusive. We produce, market and sell our exclusive programming according to exclusive license or distribution agreements. We also distribute programming on a nonexclusive basis. We purchase our nonexclusive product directly from suppliers in final, finished and packaged form for resale through our distribution channels.

4

        Image actively pursues and secures both domestic and international rights to its exclusively licensed titles. In return for exclusive licensing rights, Image pays royalties to its licensors. Royalties are expressed as a percentage of our wholesale net revenues from program sales. Typically, we pay royalty advances that are recouped against royalties earned on a title-by-title basis or, if "cross-collateralized," against groups of licensed titles from the same licensor. Our license agreements generally provide for a minimum distribution term of between five and ten years. Some license agreements contain provisions for an extension of the distribution term if we meet specified performance plateaus.

        Image has an existing catalog of over 1,800 exclusive titles, and released an average of 44 new exclusive titles each month during fiscal 2002. We generally license our exclusive titles from independent program suppliers. We purchase the balance of our offerings directly from major and independent motion picture studios and other program suppliers for distribution on a nonexclusive basis.

        The following table sets forth the percentage of consolidated net revenues derived from the distribution of exclusive and nonexclusive programming, by format, for our last three fiscal years:

        Under our exclusive licenses, we often secure the right to distribute entertainment programming in a range of home entertainment formats, which may include all or any combination of DVD, VHS, CD, and other formats. Our distribution territory for exclusive product has traditionally been the United States and Canada; however, since fiscal 2000, Image also actively pursues and secures exclusive international distribution rights. Increasingly, for exclusive programming, we also secure exclusive broadcast rights which include exploitation via all or any combination of broadcast television, cable, satellite, pay-per-view, video-on-demand, in-flight, radio and other broadcast media. The rights we acquire may also encompass Internet streaming and digital downloading. For a discussion regarding the Company's exploitation of international wholesale distribution and broadcast rights, see "International Wholesale Distribution" below.

        While domestic DVD distribution is the Company's core business, we continue to expand, securing and exploiting a broader grant of rights than the exclusive domestic distribution of home entertainment programming. As part of our strategic goal to secure the broadest range of rights possible for exclusive programming, we, in some instances, may finance the production of certain of our entertainment

5

programming. The programs Image produces are generally one-time, special event live music concerts, produced for the express purpose of exclusive exploitation by the Company in all home entertainment and broadcast markets. The distribution rights we retain in connection with our self-financed productions generally cover, in perpetuity, all territories throughout the world and all now known and hereafter devised home entertainment formats, as well as broadcast, audio, in-flight, Internet streaming, digital downloading, direct response, sponsorship and bundling rights.

        Additional Services.    Image also provides a variety of value-added services relative to its licensed programs, such as creation of packaging, DVD authoring and compression, menu design, video master quality control, manufacturing, marketing, sales, music clearance, warehousing, distribution, and, for some titles, the addition of enhancements such as separate audio tracks, commentaries, foreign language tracks, and other ancillary materials such as behind-the-scenes footage, interviews and discographies. All of these activities are typically performed by Image in-house, with the exception of the music clearance and manufacturing and packaging of the finished product, which are performed by third party vendors.

        Manufacturing.    Under a typical license agreement, the licensor delivers a program master and art work to Image. Our in-house post-production facility creates a submaster with specifications for the necessary format and on-screen menus for each title. Image's in-house authoring and compression team then typically performs the work necessary to prepare a DVD master for manufacturing. Occasionally, because of the large volume of exclusive Image releases, we may use an outside facility to perform such services. Our in-house creative services department, staffed with graphic designers, creates original and innovative packaging fundamental to the marketing success of our product. Image currently engages MRT Technology, LLC, doing business as Ritek Global Media ("Ritek") to manufacture and package our domestic and international DVD programming. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Disc Manufacturing Agreement and Term Loan Payable."

        Marketing.    Image's in-house marketing division directs marketing efforts toward consumers and video software and hardware retailers. Our marketing efforts involve point-of-sale advertising, print advertising in trade and consumer publications, national television and radio advertising campaigns, direct response campaigns, dealer incentive programs, trade show exhibits and bulletins featuring new releases and catalogue promotions. Image has also instituted account-specific marketing programs under which we work directly with retailers to optimize and customize print advertising and other advertising programs to promote our exclusive product. The creation of specialized in-store displays and celebrity appearances are other examples of account-specific marketing programs. Image also implements Internet promotional activities that include product tie-ins, sweepstakes and give-aways associated with on-line retail customers, and the creation of genre-specific "boutiques" within direct-to-consumer Web sites.

        The Company spent approximately $2,623,000 for product promotion, advertising in trade and consumer publications and advertising over the radio in fiscal 2002 (approximately $1,063,000 of which represents expenditures by the Retail Distribution and International Wholesale Distribution segments) and approximately $2,156,000 for product promotion and advertising in trade and consumer publications in fiscal 2001. Additionally, our market development expenditures for account-specific and other marketing programs were approximately $1,019,000 for fiscal 2002 and $736,000 for fiscal 2001.

        Image maintains a Web site at www.image-entertainment.com to help promote and sell our products to retailers. The Web site also includes information regarding our exclusive titles, information of general interest to the home entertainment consumer, and press releases.

        Customers.    We sell our product to retailers (including Internet retailers), distributors and via alternative distribution (which includes direct-to-consumer print catalogues, direct response campaigns

6

and other non-traditional sales channels). Domestic delivery of all of the Company's product is effected through our wholly owned and operated distribution and fulfillment facility in Las Vegas, Nevada. See "International Wholesale Distribution" below for information regarding our international distribution.

        We sell to many large and small retailers. Some of Image's key retail customers (excluding DVDPlanet) include Amazon.com, Best Buy, Wal-Mart, Ingram Entertainment, Musicland Group, Tower Records & Video, Transworld Entertainment, Borders, AEC One Stop and Vidcanada. On a consolidated basis, two customers, Best Buy and Musicland (which is owned by Best Buy as of January 2001) together accounted for 19.1% and 15.9% of fiscal 2002 and 2001 net revenues, respectively. No other customers accounted for net revenues individually in excess of 10% of Image's total net revenues for fiscal 2002 and 2001.

        Image allows retail customers to return a portion of their inventory on a quarterly basis. Image reserves for estimated returns as sales are recorded. Stock returns, other than for defective product, amounted to approximately 10.3% of net revenues in fiscal 2002, approximately 8.4% of net revenues in fiscal 2001, and approximately 6.9% of net revenues in fiscal 2000. Returns of defective product have been minimal and are generally covered by manufacturers' warranties.

        As of June 10, 2002, Image had approximately $4.1 million of backlog orders (92% from DVD product) from domestic retail customers compared with approximately $3.7 million of backlog orders (93% from DVD product) as of June 4, 2001. We expect to fill 100% of the backlog orders within the current fiscal year.

Retail Distribution

        Since January 1999, the Company has sold its products directly to consumers exclusively through its wholly-owned subsidiary, DVDPlanet. In fiscal 2002 and 2001, DVDPlanet's sales accounted for 19.7% and 16.9%, respectively, of the consolidated net revenues of the Company. DVDPlanet is Image's largest customer and makes all of its purchases from Image.

        DVDPlanet specializes in DVD software retailing through its www.dvdplanet.com Web site. DVDPlanet also owns and operates a DVD retail store in Westminster, California. DVDPlanet sells the majority of DVD titles distributed by Image (approximately 15,000 titles). DVDPlanet offers one of the largest selections of DVDs available on-line.

        The DVDPlanet.com Web site provides proprietary information about DVD releases, including titles, synopsis, supplemental features, technical details and MPAA ratings. Further, the site features a search engine that allows customers to find product and features in genre-specific boutiques within the Web site. On-line purchases may only be made with a major credit card. The site includes secure payment systems that protect the customer's name, address and credit card number.

        DVDPlanet sells its product at a uniform discount from the suggested retail price. In March 2001, Image instituted an action plan to improve fiscal 2002 operating results of DVDPlanet which included increases to customer pricing and shipping fees charged customers. The results of the plan positively affected the financial results of DVDPlanet for the fiscal year ended March 31, 2002.

        DVDPlanet's fulfillment operations are conducted at the Company's distribution and fulfillment facility in Las Vegas, Nevada.

        Online Promotion.    The Company has adopted an online marketing strategy to assure that DVDPlanet.com receives prime placement within search engines such as Yahoo! (www.yahoo.com), the largest Internet portal and the leader in online traffic, advertising, household and business user reach. DVDPlanet.com is listed in the "sponsor and Web site matches" section under DVD in the Yahoo! regular search line listings. To remain competitive in the industry, DVDPlanet.com continually renovates its keyword strategy with Yahoo!

7

        DVDPlanet.com also takes part in Yahoo!'s Sponsor Listings, which is a fee-based service that allows commercial sites already listed in the Yahoo! Directory to receive enhanced placement in certain commercial categories in the directory.

        Additionally, DVDPlanet.com has partnered with Yahoo! Shopping to provide a direct link to its pages as well as product listings, comparison shopping and featured merchant status throughout the shopping segments. DVDPlanet.com is currently one of six merchants that retain the "featured" status on Yahoo! for DVD-related products.

        DVDPlanet has an established Internet affiliate program whereby other Web sites refer customers to the DVDPlanet site and receive a fee based on sales generated per that referral. DVDPlanet provides customers with weekly e-mail updates on new product releases and sponsor promotions on other entertainment content Web sites.

        Radio Advertising.    Beginning in late November 2001, DVDPlanet began an on-going radio advertising campaign. The radio campaign utilizes Los Angeles based radio stations with a focus on driving sales at the DVDPlanet retail store. Since the launch of radio advertising, revenues for the retail store have grown compared to the previous year. The retail store has registered many new accounts and the online business has generated new accounts that customers attributed to DVDPlanet's radio advertising.

        In-Theater Advertising.    DVDPlanet began testing an "In-Theater" advertising campaign in March 2002. The advantage of "In-Theater" advertising is that DVDPlanet is promoted to a captive audience of moviegoers. It is expected that during the test period, in-theater advertising will create more than 4.25 million impressions on DVDPlanet's most coveted customer, the movie going public.

        Print Media.    In an effort to drive sales at its brick and mortar retail store, DVDPlanet is currently advertising in the popular Orange County-based entertainment guide, the OCWeekly. This publication is distributed and viewed by approximately 230,000 readers a week.

International Wholesale Distribution

        We operate our International Wholesale Distribution segment activities through Aviva, a joint venture formed in June 1999 and owned 50% by Image and 50% by industry veteran Michael Lopez. Mr. Lopez serves as Manager of Aviva and supervises the day-to-day operations of Aviva. The financial results of Aviva and the international operations of Image have been consolidated for segment reporting purposes under the operating segment International Wholesale Distribution. Per the terms of the Aviva Limited Liability Company Operating Agreement ("Operating Agreement"), Aviva receives a percentage of the net distribution revenues generated by the exploitation of Image's international distribution rights.

        In March 2002, Image began consolidating international wholesale distribution activities in-house as we believe we can more effectively and efficiently manage the international wholesale distribution activities on a direct basis. Through the remainder of calendar year 2002, Aviva will continue to downsize activity, reduce staff and transfer international home entertainment sublicense and broadcast sales responsibilities to Image, all of which will be concluded no later than December 31, 2002. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Aviva International, LLC."

        International Wholesale Distribution.    We achieve international distribution of home entertainment product through agreements with distributors local to each respective territory or through the sublicensing of international rights to licensees local to each territory. For each territory, the Company determines whether we will use a local distributor or whether we will sublicense our product. We then

8

identify the appropriate third party distributors and negotiate and secure the terms of the respective relationship.

        The Company holds distribution agreements in most major international territories, including but not limited to, Benelux (Belgium, Luxembourg and The Netherlands), Eire (Ireland), Finland, France, Germany, Greece, Iceland, Norway, Portugal, Russia, South Africa, Spain, Sweden, Spain, Ukraine, and the United Kingdom (England, Northern Ireland, Scotland and Wales). These international distributors provide marketing, sales, collection and physical distribution services. The Company maintains direct control over the manufacturing of the programming as well as the pricing, inventory levels, release schedule and overall marketing expenditures associated with the units. Image's in-house production facility creates international masters for each territory which are used by our manufacturer to replicate the programs. Image's in-house creative services department provides the appropriate marketing and packaging template artwork for each territory. In Europe, the largest international market for our programming, we contract DVD manufacturing and packaging through Ritek which, through a third party, also provides packaging services, inventory management and fulfillment services. We contract VHS duplication through a Netherlands entity which, in addition to duplication services, provides inventory and fulfillment services.

        International Sublicensing.    In other international markets, rather than engage the services of a local distributor, it is more efficient for the Company to enter into sublicense agreements with local sublicensees. Such agreements are negotiated, facilitated and managed by Aviva, and contain terms and conditions similar to the terms that govern Image's underlying rights agreements. The sublicensee is then responsible for the manufacturing, marketing, distribution and sale of the sublicensed program in its territory. The Company currently holds sublicenses in several territories including, but not limited to, Australia, Brazil, China, Hong Kong, India, Israel, Japan, New Zealand, South Korea, and Taiwan. Aviva will continue to secure such sublicense agreements on Image's behalf until we take over this responsibility (which will be no later than December 31, 2002).

        Worldwide Broadcast Licensing.    Aviva also exploits, on Image's behalf, broadcast rights both domestically and internationally. All broadcast arrangements are negotiated, facilitated and managed by Aviva. In an endeavor to bolster its broadcast opportunities, in August of 2001, the Company (through Aviva) hired a senior broadcast executive based in New York City to expand its growing broadcast segment. In June 2002, that executive became an employee of Image focusing on domestic broadcast licensing. Aviva will continue to facilitate and secure international broadcast licenses on behalf of Image until Image takes over this responsibility (which will be no later than December 31, 2002).

        The buyer of the Company's broadcast rights is typically a cable, pay-per-view, video-on-demand or satellite broadcaster, but is sometimes a terrestrial (free) television or in-flight broadcaster. With the exception of pay-per-view and video-on-demand, under a typical broadcast license we receive payment of a one-time, fixed, non-refundable fee for up to a two-year exploitation term limited to a specified number of airings. With respect to pay-per-view and video-on-demand, we typically receive a non-refundable advance against royalties that are based on a percentage of customer buys. The Company also, through a third party, seeks financial support through sponsorships of our "Special Event" pay-per-views. Our obligation under such broadcast licensing is usually only to provide a broadcast master of the program and to ensure that all music synchronization rights are secured. In order to minimize expenses, the Company is endeavoring to secure blanket licenses with all major music publishers to control the cost of broadcast synchronization and maximize broadcast exposure for all of its exclusive programming.

9

COMPETITION

        With respect to sale of our exclusive product, the Company's foremost competition is from major motion picture studios, other independent suppliers and music labels competing for limited retail shelf space and limited consumer dollars spent on home entertainment products. Most of these studios and labels are subsidiaries of media conglomerates that have far greater financial resources than the Company. However, Image, as an independent program supplier, can offer its licensors "personalized" relationships, as well as specialized and highly focused marketing campaigns for titles that may otherwise be deemed too small or may be neglected by a corporate conglomerate. With respect to the sale of our nonexclusive product, we face competition from other distributors such as Ingram Entertainment, Alliance Entertainment and Baker & Taylor, all of whom carry the same nonexclusive product as Image. DVDPlanet faces competition from on-line retailers and traditional retailers, including mail-order houses, video clubs and "brick and mortar" retailers.

        Image faces competition in securing exclusive license rights from other independent distribution companies as well as major motion picture studios and music labels. Historically, we have paid significant up-front advances against future royalties to secure exclusive DVD and other home entertainment format distribution rights. The Company has begun implementing procedures to allow for more timely recoupment of its advances, which may limit the amount of advances we are willing to pay to secure certain rights. The Company may not be able to remain competitive against advance offers from licensing entities who are willing to pay larger advances or have greater financial resources. However, Image believes that we will continue to successfully compete to obtain exclusive rights to home entertainment programming because of our ability to offer an array of other assets to our licensors including, but not limited to: the high quality of the service our employees provide; the Company's superior reputation within the home entertainment industry; our notable ability to obtain and sustain ongoing relationships with valuable suppliers of entertainment programming; the quality of our finished product; our wide-ranging in-house services and our direct and long-standing relationships with "brick and mortar" and on-line retailers of entertainment programming.

        Finally, management believes that Image's status as an independent program supplier capable of exploiting programming in all home entertainment and broadcast formats on a worldwide basis is attractive to potential licensors thereby making the Company a leading "one-stop" provider of entertainment rights exploitation. See "Risk Factors" below.

10

TRADEMARKS

        The Company has obtained Federal registration of the trademark "Image" and the trademark and service mark "DVDPlanet" from the United States Patent and Trademark Office. Additionally, the trademark and service mark "DVDPlanet Your Online Source!" has been allowed by the United States Patent and Trademark Office. The Company also has pending applications for Federal registration of the trademark "Image Distributing" and the trademark and servicemark "Image Entertainment." It is the Company's policy to fully protect and vigorously defend its trademark rights in all applicable classes of goods and services.

EMPLOYEES

        As of June 3, 2002, Image had 176 full-time employees and 5 part-time employees, DVDPlanet had 40 full-time employees and 44 part-time employees, and Aviva had 3 full-time employees and 1 part-time employee.

RISK FACTORS

Forward-looking Statements.

        This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our intent, belief and current expectations about the Company's strategic direct, prospects and future results. In some cases forward-looking statements may be identified by words like "may," "should," "expect," "anticipate," "believe," "estimate," "continue" 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. The Company has made forward-looking statements in this Item 1 and subsequent Items (including but not limited to Item 7) of this Annual Report concerning, among other things:

•

Changes in Company-wide or business-unit strategies, which may result in changes in the types or mix of businesses in which the Company is involved or chooses to invest;



•

Changes in U.S. and global financial and equity markets, including market disruptions and significant interest rate fluctuations, which may impede the Company's access to, or increase the cost of, external financing for its operations and investments;



•

Increased competitive pressures, both domestically and internationally, which may, among other things, affect the performance of the Company's business operations and profit margins;



•

Legal and regulatory developments that may affect Internet activities or the protection of intellectual property; the imposition by foreign countries of trade restrictions on motion picture or television content requirements or quotas, and changes in international tax laws or currency controls;



•

Technological developments that may affect the distribution of the Company's products or create new risks to the Company's ability to protect its intellectual property; and



•

Changing public and consumer taste, which may among other things, affect the entertainment and consumer products businesses generally.

        This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of inherent uncertainty. The inclusion of such forward-looking information should not be regarded as a representation by the Company, its management or any other person that the future events, plans or expectations contemplated by the Company will be

11

achieved. Unless otherwise required by law, the Company undertakes no obligation to release publicly any updates or revisions to any such forward-looking statements that may reflect events or circumstances occurring after the date of this Annual Report. Important factors that could cause or contribute to such material differences include, but are not limited to, those discussed below and those described under the heading "Competition" above. You are cautioned not to place undue reliance on such forward-looking statements, which speak only as of their dates.

        We future caution you that the matters set forth below constitute cautionary statements with respect to our forward-looking statements, including risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, our forward-looking statements. Any of the matters set forth below could have a material adverse effect on our business, prospects, financial condition and results of operations.

Cautionary Statements Relating to Our Business in General.

        We May Not Be Able To Keep Pace with Technological Advances.    The entertainment industry in general, and the music and motion picture industries in particular, are continuing to undergo significant changes, primarily due to technological developments. As an independent distributor, Image believes we have a superior ability to adapt to changing formats and distribution methods, as we did when shifting our focus from laserdiscs to DVDs, and that our high quality customer service and loyal customer base will continue to purchase programming from Image through new distribution methods. However, because of the rapid growth of technology, shifting consumer tastes and the popularity and availability of other forms of entertainment, it is impossible to predict the overall effect these factors will have on potential revenue from and profitability of distributing entertainment programming, or the Company's ability to compete effectively in a changing market.

        If We Cannot Maintain Relationships with Our Program Suppliers and Vendors, Our Business May Be Adversely Affected.    We receive a significant amount of our revenue from the distribution of those DVDs for which we have exclusive agreements with program suppliers. We cannot be certain that we will be able to renew these exclusive rights as existing agreements with program suppliers expire. We also cannot assure you that our current program suppliers will continue to support the DVD format in accordance with our exclusive agreements or that our current program suppliers will continue to license titles to us on the current terms or on terms favorable to us or that we will be able to establish new supplier relationships to ensure acquisition of exclusive titles in a timely and efficient manner.

        Our Success Depends on the Unpredictable Commercial Success of Our Programming.    Operating in the entertainment industry involves a substantial degree of risk. Each music performance, feature film or other item of programming is an individual artistic work, and unpredictable audience reactions primarily determine commercial success. The commercial success of a title also depends upon the quality and acceptance of other competing programs or titles released into the marketplace, critical reviews, the availability of alternative forms of entertainment and leisure activities, general economic conditions and other tangible and intangible factors, all of which are subject to change and cannot be predicted with certainty. Our success will depend in part on the popularity of our programming. Even if a film achieves success during its theatrical release, the popularity of a particular program and its ratings may diminish over time and may have a material adverse affect on our business, results of operations or financial condition.

        Others' Failure To Promote Our Programming May Adversely Affect Our Business.    Decisions regarding the timing of release and promotional support of programming which we license and distribute are important in determining the success of a particular music concert, feature film or related product. We may not control the manner in which a particular artist, film or related product is marketed and promoted and may not be able to fully control our corresponding home video or CD release. Although artists, record companies, studios and producers have a financial interest in the

12

success of any such concerts or films distributed by Image, any marketing or promotional decision or restriction by such persons may negatively affect the success of our titles.

        Our Business Could be Negatively Affected by Changes in the Studios' Pricing Policies.    We cannot control or predict with certainty studio pricing policies. The studios have not created a higher priced "rental window" for movies released on DVD. Rather, the studios release DVDs at lower sell-through prices, which we believe has served to accelerate consumer interest in the DVD format. There is no guarantee that studios will continue to offer their DVD releases at current prices and it is impossible to predict the impact of changed studio pricing on the DVD format.

        If DVD Cannot Compete Successfully with Other Formats of Home Entertainment, Our Revenues May Be Negatively Impacted.    The DVD format competes with other formats of in-home entertainment, such as VHS, network, syndicated, cable and pay-per-view television and home satellite systems. The DVD format also competes with new and emerging technologies in the entertainment industry, such as entertainment programming on the Internet, video-on-demand, high-definition television, digital videotape and optical discs with greater storage capacity. While we are actively seeking to exploit these alternate formats of leisure-time entertainment and novel means of data delivery, they could negatively impact the overall market for DVD sales and the Company. In addition, emerging technology may allow consumers to download audio or entertainment programming directly to the consumer's home computer, or television set-top recording device, from the Internet (or other broadband delivery system) and store such products on a recordable disc or hard-drive. We may be unable to continue to adapt and exploit the development and advancement of such technology.

        The Introduction of The DVD Format is Relatively New and DVD Sales May Not Sustain The Same Level of Growth.    We believe that consumer interest in the DVD format is due in part to interest in building the consumer's personal DVD library of classic films. Although Image's exclusive titles have generally shown stable sales over extended periods, as consumers build their DVD libraries, or with the introduction of new home entertainment formats, DVD sales may decline and adversely affect our operations.

        We May Not Have Satisfactory Title to Our Properties.    Although we require satisfactory title information to our exclusively licensed properties, the risk exists that some titles may have a defective chain of title. The validity and ownership of rights to certain titles can be uncertain and may be contested by third parties.

        Our Results of Operations Fluctuate Based on Seasonality and Variability.    We have generally experienced higher sales of DVDs in the quarters ended December 31 and March 31 due to increased consumer spending associated with the year-end holidays. Accordingly, our revenues and results of operations may vary significantly from period to period, and the results of any one period may not be indicative of the results of any future periods. In addition to seasonality issues, other factors have contributed to variability in our DVD net revenues on a quarterly basis. These factors include:

•

the popularity of exclusive titles in release during the quarter;



•

our marketing and promotional activities;



•

our rights and distribution activities;



•

the extension, termination or non-renewal of existing license and distribution rights; and,



•

general economic changes affecting the buying habits of our customers, particularly those changes affecting consumer demand for home entertainment hardware and software.

        If We Do Not Effectively Implement Our Sales and Marketing Efforts, Our Profitability May Suffer.    We have increased our internal sales staff in order to enhance our sales efforts. We cannot

13

assure you that our sales team can successfully compete against the more extensive and well-funded sales operations of our current and future competitors. In addition, we have hired a new senior broadcast sales executive, who does not yet have a proven track record with us, therefore, we cannot assure you that he will be successful in overseeing the broadcast sales area of our business.

        We Face Risks Associated with Ritek's Performance under the Company's Manufacturing Services Agreement.    Effective August 1, 2001, we shifted our optical disc manufacturing from Warner Advanced Media Operations to Ritek. Any failure of Ritek to manufacture and deliver our product worldwide in a timely manner and with the same consistent quantity and quality that we and our customers have come to expect may adversely affect our revenues and profits. Although we believe we have the ability to shift our product manufacturing from Ritek to another facility should the need arise, we may be adversely affected for the period of time that we would need to direct manufacturing duties to another company.

        Occurrence of Events For Which We are Not Insured May Adversely Affect Our Business.    We maintain insurance to protect ourselves against certain risks related to our operations. This insurance is maintained in types and amounts that we believe to be reasonable depending upon the circumstances surrounding each identified risk. However, we may elect to limit coverage or not to carry insurance for certain risks because of the high premiums rates associated with insuring those risks or for various other reasons. Occurrence of events for which we are not insured may affect our cash flows and overall profitability.

        Protecting and Defending Against Intellectual Property Claims May Have A Material Adverse Effect On Our Business.    Our ability to compete in the home entertainment industry depends, in part, upon successful protection of our proprietary and intellectual property. We protect our property rights to our productions through available copyright and trademark laws and licensing and distribution arrangements with reputable international companies in specific territories and media for limited durations. Despite these precautions, existing copyright and trademark laws afford only limited practical protection in certain jurisdictions. In certain jurisdictions of our distribution, there are no copyright and/or trademark protections available. As a result, it may be possible for unauthorized third parties to copy and distribute our productions or certain portions or applications of our intended productions.

        In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and the diversion of resources could have a material adverse effect on our business, operating results or financial condition. From time to time, we may also receive claims of infringement of other parties' proprietary rights. Regardless of the validity or the success of the claims, we could incur significant costs and diversion of resources in defending against such claims, which could have a material adverse effect on our business, financial condition or results of operations.

        If Our Key Personnel Leave Us, Our Business May Be Adversely Affected.    Our success greatly depends on the performance of our executive management, including the President and Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. The loss of the services of key persons of our executive management could have an adverse material effect on the Company's operating results and financial condition.

        If We Do Not Successfully Optimize and Operate Our Fulfillment Center, Our Business Could Be Harmed.    All of our retail and domestic wholesale distribution is fulfilled from a single fulfillment center in Las Vegas, Nevada. If we are unable to operate this fulfillment center for any reason, it could significantly limit our ability to meet customer demand. Because it is difficult to predict sales increases or declines, we may not manage our facilities in an optimal way, which may result in excess inventory,

14

warehousing, fulfillment and distribution dilemmas. Our failure to properly handle inventory could result in unexpected costs, delays and harm to our business and reputation.

Cautionary Statements Relating to Domestic Wholesale Distribution.

        If We Cannot Continue to Secure DVD License and Distribution Rights, Our Business May Be Materially Adversely Affected.    We cannot assure you that we will be able to continue to secure DVD and other license and distribution rights on terms acceptable to us. See "Competition." We expect to continue to license exclusive DVD and other home entertainment format programming, but we cannot assure you that we can remain competitive against licensing entities with greater financial resources or that independent program suppliers will not distribute their programming themselves. In addition, our success will continue to be dependent upon our ability to identify and secure rights to exclusive programming that appeals to consumers. Major motion picture studios have not granted exclusive DVD licenses to Image for their new releases and most popular catalogue titles. Instead, the major motion picture studios sell DVD programming directly to retailers and other distributors including us on a nonexclusive basis. We expect to be able to continue to purchase DVD titles on a nonexclusive wholesale basis from all participating program suppliers for sale to our customers, but we cannot assure you that we will be able to continue to do so if DVD program suppliers elect to sell directly to retailers, decrease the number of entities distributing their programming or limit our access to their programming. To that point, in May 2002, Columbia TriStar notified the Company that effective June 30, 2002, it will cease sales of its home entertainment product nonexclusively to all but two distributors and, therefore, will no longer sell its product directly to the Company for wholesale distribution. Should the Company decide to continue to carry Columbia programming for sale to its own customers, it must now buy from other distributors, potentially cutting its gross profit margins on that programming. The Company believes, however, that Columbia will continue to sell its programming on a direct basis to the Company, specifically for fulfillment to DVDPlanet.

        We May Need Additional Funding to Continue Acquiring Desirable Programming.    Availability of working capital is a substantial factor in the Company's ability to license new programming. Therefore, maximizing available working capital is critical to Image's business operations. We may need to raise additional funds to acquire the rights to programming we find desirable. Should additional funds be raised through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders may be reduced. If adequate funds are not available or unavailable on acceptable terms, we may find we are unable to fund expansion, continue to offer products and services, take advantage of acquisition opportunities, develop or enhance services or products, and/or respond to competitive pressures in the industry.

        If Music Entertainment Programming Cannot Continue to Compete Successfully In the Home Entertainment Industry, Our Business May Be Adversely Affected.    Although we make efforts to diversify our exclusively licensed programming, approximately 28% of our revenue during fiscal 2002 was derived through sales of exclusively licensed music entertainment programming. We cannot assure you that the music industry in general will continue to prosper or that music entertainment programming will continue to compete successfully against other home entertainment programming, including but not limited to, film, television, and interactive gaming. If music programming cannot compete successfully in the home entertainment market, our business may be adversely affected.

Cautionary Statements Relating to Retail Distribution.

        If We Cannot Compete Successfully in the Internet Commerce Industry, Our Retail Sales May Be Adversely Affected.    We cannot assure you that the DVDPlanet.com Web site will be able to compete successfully against current or future on-line and traditional retailers. The market for commerce over the Internet is evolving and competitive and very few on-line retailers achieve profitability. We compete with a variety of other companies for sales of DVDs over the Internet. Some of these competitors are

15

able to devote substantial resources to Internet commerce. The DVDPlanet.com Web site also competes with traditional retailers of DVDs.

        We believe that the principal competitive factors faced in selling DVDs through the DVDPlanet.com Web site include price of product, product selection and availability, brand recognition, customer service, effectiveness of advertising, technical expertise, convenience, accessibility, quality of search tools, quality of editorial and site content, and reliability and speed of fulfillment. Some of the current and potential competitors of DVDPlanet have large customer bases, greater brand recognition and significantly greater financial, marketing and other resources than DVDPlanet. In addition, some competitors may be able to obtain merchandise from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory availability policies, and devote more resources to Web site and systems development than the Company. The DVDPlanet.com Web site could suffer reduced operating margins, market share and brand recognition as a result of increased competition.

        If We Cannot Keep Pace with Rapid Technological Change, Our Retail Sales May Be Adversely Affected.    We cannot assure you that we will successfully use new technologies effectively or adapt the DVDPlanet.com Web site or its systems to meet customer preferences, requirements or emerging industry standards. The technology driving Internet commerce changes rapidly. This rapid change results in the availability of many new products and services, new industry standards and frequent changes in user and customer preferences and requirements. The success of the DVDPlanet.com Web site depends, in part, on our ability to do the following:

•

license leading technologies useful in the Internet revenues business;



•

enhance the DVDPlanet.com Web site's existing services;



•

develop new services and technology that address the increasingly sophisticated and varied needs of our customers; and



•

respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

        If Internet Commerce Does Not Continue to Grow, Our Internet Sales Business May Be Adversely Affected.    Rapid growth in the use of and interest in the World Wide Web, Internet and other on-line services as a medium of consumer commerce is a recent phenomenon. Potential future revenues and profits from sales over the Internet substantially depend on the widespread acceptance and use of the Internet as an effective medium of commerce by consumers. We cannot assure you that the acceptance and use of the Internet will continue to develop of that a sufficiently broad base of consumers will adopt and use the Internet as a medium of commerce. For the DVDPlanet.com Web site to be successful, consumers who have historically used traditional means of commerce to purchase merchandise must accept and utilize this novel way of conducting business and exchanging information.

        Also, if the Internet continues to experience significant growth in the number of users, the frequency of use or larger bandwidth requirements, the infrastructure for the Internet could be adversely affected by capacity constraints. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of service activity. Changes in or insufficient availability of telecommunications services to support the Internet also could result in slower response times and could adversely affect consumer usage of the Internet. Our business, prospects, financial condition and results of operations could be materially adversely affected if use of the Internet does not continue to grow or grows more slowly than expected. Also, if the infrastructure for the Internet does not effectively support growth that may occur or if the Internet does not become a viable commercial marketplace, we could be adversely affected.

16

        We Face Security Risks in Selling Product Over the Internet.    Secure transmission of confidential information over public networks is a significant barrier to Internet commerce. Advances in computer "hacker" capabilities, new discoveries in the field of cryptography or other developments could compromise the security measures we employ to protect customer transaction data. In addition, concerns over the security of transactions conducted on the Internet and the privacy of users in general may inhibit the growth of Internet commerce. To the extent that our activities or the activities of third-party contractors involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate security-related problems and we cannot assure you that our security measures will prevent security breaches. Any compromise of our security systems could have a material adverse effect on our reputation, business, prospects, financial condition and results of operations.

        We May Experience Capacity Constraints and Other System Development Problems Relating to the Operation of the DVDPlanet Web Site.    A key element of our business strategy is to generate a high level of use of the DVDPlanet.com Web site. We believe it is important to our online reputation and the ability to attract customers that the DVDPlanet.com Web site offers superior customer service as well as reliability and availability of the related transaction-processing systems and network infrastructure. While we believe that we will be able to upgrade or install new hardware and software that will be sufficient to accommodate the anticipated traffic on the DVDPlanet.com Web site, we cannot assure you that periodic system interruptions will not occur even after any such upgrade or installation. Any substantial increase in the volume of traffic on the DVDPlanet.com Web site or substantial increase in the number of orders placed by customers will require us to further expand and upgrade our technology, including our transaction-processing systems and network infrastructure. In addition, we are dependent upon Web browser companies and Internet service providers to generate traffic to the Web site that will allow consumer access to our products and services. Viewers have experienced in the past and may in the future difficulties due to system or software failures or incompatibilities not within our control. Any system interruptions that result in the unavailability of the DVDPlanet.com Web site or reduced order fulfillment performance would reduce the volume of goods sold and the attractiveness of our online product and service offerings, which could have a material adverse effect on us.

        New Laws or Regulations Pertaining to the Internet, or the Application or Interpretation of Existing Laws Could Adversely Affect Our Business.    We could be materially adversely affected by any new legislation or regulation or by the application or interpretation of existing laws related to the Internet. Federal, state and foreign governmental organizations are currently considering many such legislative and regulatory proposals. If a government authority were to adopt laws or regulations that cover Internet-related issues such as user privacy, pricing and characteristics and quality of products and services provided, the growth of the Internet could be adversely affected. This could lead to a decrease in demand for products offered over the Internet, including those that the DVDPlanet.com Web site offers, and could increase the cost of doing business on the Internet. In addition, it is currently unclear how existing laws governing issues such as property ownership, copyright, trade secret, libel and personal privacy will be applied to the rapidly-changing Internet landscape. Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent, but remain largely unsettled.

Cautionary Statements Relating to International Wholesale Distribution & Broadcast Rights Exploitation.

        We Face Risks in Distributing Our Programming Internationally.    We distribute our programming internationally and derive an increasing percentage of our revenues from outside the United States. As

17

a result, our business may be subject to certain risks inherent in international trade, many of which are beyond our control. Risks faced in distributing our programming internationally include: cancellation or renegotiation of contracts, changes in laws and policies affecting international trade (including taxes), credit risk, fluctuating foreign exchange rates and controls, civil strife, acts of war, guerrilla activities, insurrection, terrorism, changing retailer and consumer tastes and preferences with regard to our programming, differing degrees of protection of our intellectual property, cultural barriers, and potential instability of foreign economies and governments.

ITEM 2.  PROPERTIES.

        Image's headquarters are located in Chatsworth, California and consists of two adjacent buildings (containing 30,080 and 15,440 square feet, respectively) that are leased from the same landlord. Both leases terminate on April 30, 2004. The monthly rent for the larger building is approximately $18,000 (subject to annual adjustment based on increases in the consumer price index). The monthly rent for the smaller building is approximately $11,000 (with scheduled yearly increases).

        Image owns approximately 8.4 acres of real property in Las Vegas, Nevada on which Image's 76,000 square foot distribution and fulfillment facility is located. Architectural plans prepared for Image allow for expanding the facility by an additional 74,000 square feet should the need arise. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Management's Assessment of the Company's Liquidity Position for the Next 12 Months."

        DVDPlanet leases approximately 8,102 square feet of combined office, retail and warehouse space in Westminster, California. The lease provides for monthly rent of approximately $15,000 (subject to annual adjustment based on increases in the consumer price index) and will expire on November 22, 2002. The Company is currently evaluating whether to renew its existing lease or move its retail store to a larger leased location. As of April 2001, DVDPlanet has subleased additional office space of approximately 6,541 square feet in Huntington Beach, California for monthly rent of approximately $11,000 (subject to annual adjustment based on increases in the consumer price index). Such sublease will expire on August 31, 2002 and the space will subsequently be leased for a one-year term.

        Aviva leases approximately 2,325 square feet of office space in Belmont, California. The lease provides for monthly rent of $4,000 and expires on October 31, 2003. Aviva will vacate the office space no later than December 31, 2002. The Company remains responsible for the payments through the term of the lease and plans to sublease this space through the remainder of the lease period.

        Image leases, on a month-to-month basis, office space in New York City for its senior broadcast executive. The lease provides for monthly rent of approximately $1,000.

ITEM 3.  LEGAL PROCEEDINGS.

        In the normal course of business, the Company is 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 the Company's financial position, results of operations or liquidity.

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

        None.

18

EXECUTIVE OFFICERS OF THE REGISTRANT

        Executive officers serve at the pleasure of Image's board of directors. There is no family relationship between any executive officer or director. The following table sets forth the position and age of Image's executive officers at June 1, 2002 and their business experience for at least the prior five years:

19

___________________________________________________________________________________________

PART II
___________________________________________________________________________________________

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

        Image's common stock trades on The Nasdaq Stock Market under the symbol DISK. Image's common stock has been included on the Nasdaq National Market since February 19, 1991. The table below presents the quarterly high and low closing prices on the Nasdaq National Market during the past two fiscal years.

        As of June 3, 2002 there were 1,442 holders of record of Image's common stock.

        Image has never paid a cash dividend on its common stock and presently intends to retain any future earnings for business development. In addition, Image is party to loan agreements which prohibit Image's payment of dividends.

20

ITEM 6.  SELECTED FINANCIAL DATA.

        The selected financial data presented below was derived from the consolidated financial statements of the Company and should be read in conjunction with the financial statements, the notes thereto and the other financial information included therein.

(1)

Includes $899,000 in proceeds from settlements of litigation.

(2)

Income tax benefit reflects the elimination of the valuation allowance recorded against deferred tax assets as a result of management's estimate that future taxable income will be sufficient to utilize the entire benefit of the deferred tax assets.

(3)

Minimal or no income tax expenses were recorded due to the utilization of net operating losses to offset taxable income.

(4)

Net revenues and operating costs and expenses have been restated to reflect the guidelines of the Emerging Issues Task Force No. 01-09, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products. Net revenues and operating costs and expenses have been reduced on a historical basis from what was previously reported as follows: $736,000 for 2001, $441,000 for 2000, $300,000 for 1999 and $665,000 for 1998.

(5)

Includes $1,818,000 in one-time noncash credit relating to the discontinuation of the Company's laserdisc operations.

(6)

Includes a $696,000 write-down of advance royalties, relating to a certain line of programming, to estimated fair value.

21

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

        The following discussion and analysis should be read together with "Item 6. Selected Financial Data" and the Company's consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.

General

        The Company is an integrated home entertainment company, primarily engaged in the business of licensing and distributing entertainment programming. The Company licenses and exploits exclusive rights to a diverse array of general and specialty entertainment programming, such as music concerts and feature films, in DVD and other home entertainment formats. In addition to the Company's current core business of domestic DVD distribution, the Company also licenses exclusive broadcast rights including video-on-demand, broadband streaming and digital download, pay-per-view, in-flight, radio, satellite, cable and broadcast television. The Company not only licenses exclusive programming from third parties, it designs and produces additional content and value-added features for its DVD programming such as interactive menus, packaging and marketing materials. The Company has also expanded its business and operations to produce its own original entertainment programming focusing on DVD live performance music.

        The Company's three reportable business segments are Domestic Wholesale Distribution, including program licensing and production, Retail Distribution, which distributes programming direct-to-consumer and International Wholesale Distribution, including sublicensing and worldwide broadcast rights exploitation. Management currently analyzes the financial performance of these business segments based primarily on net revenues, operating costs and expenses and income (loss) before income taxes, to evaluate and allocate Company resources.

Critical Accounting Policies

        The Securities and Exchange Commission ("SEC") has recently issued Financial Reporting Release No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies ("FRR 60"), suggesting companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results, and requires significant judgment and estimates on the part of management in its application. The Company believes the following represent the critical accounting policies of the Company as contemplated by FRR 60. Decisions involved in our critical accounting policies are based on management's exercise of judgment. For a summary of all the Company's significant accounting policies, including the critical accounting policies discussed below, see Note 1 to the accompanying consolidated financial statements.

Royalty and Distribution Fee Advances and Production Costs

        For each reporting period, management estimates the total revenues to be received throughout a title's license period from exploitation of that title in multiple home entertainment formats. While royalty and distribution fee advances and production costs are charged to operations as related revenues are earned, estimates of ultimate revenue are important in determining whether additional royalty expense or amortization of production costs should be recorded in any given reporting period. Royalty and distribution fee advances and production costs are amortized to expense in the same ratio that current period revenue for a title or group of titles bear to the estimated remaining unrecognized ultimate revenue for that title. Additionally, when estimates of total revenues and costs indicate that a title will result in an ultimate loss, additional amortization is recognized to the extent that capitalized

22

advance royalty and distribution fees and production costs exceed their estimated fair value in the period when estimated.

        Management bases its estimates of ultimate revenue for each title on the historical performance of that title and of similar titles. Management updates such estimates based upon the actual results of each format's exploitation.

Inventory Valuation

        For each reporting period, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. In addition, we write off inventories that are considered obsolete. Remaining inventory balances are adjusted to approximate the lower of our cost or market value and result in a new basis in such inventory until sold. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required, and would be reflected in cost of sales in the period the revision is made.

Allowance for Sales Returns and Doubtful Accounts Receivable

        For each reporting period, management evaluates product sales and accounts receivables to estimate their effect on revenues due to product returns and delinquent accounts. Management's estimate of product sales that will be returned and the amount of receivables that will ultimately be collected requires the exercise of judgment and affects reported revenues and net income. In determining the estimate of product sales that will be returned, management analyzes historical returns, historical pricing and other credit memo data, current economic trends and changes in customer demand and acceptance of Image's products. Based on this information, management reserves a percentage of each dollar of product sales that provide the customer with the right of return as well as the right to take pricing or other credit memo items. Actual returns could be different from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings.

        Similarly, management evaluates accounts receivables to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for Image's larger customers and an analysis of the length of time receivables have been past due. Based on the information, Management reserves an amount that is believed to be doubtful of collection. If the financial condition of our customers were to deteriorate or if economic conditions worsened, additional allowances may be required in the future.

Accounting for Income Taxes

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

        Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The Company has not recorded a valuation allowance as of March 31, 2002, as we believe we currently have the ability to utilize our deferred tax assets before they expire. In the event that actual

23

results differ from these estimates, or we adjust these estimates in future periods, we may need to establish a valuation allowance which could materially impact our financial position and results of operations.

Results of Operations

Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001

        The following tables present consolidated net revenues by format and net revenues by format as a percentage of total consolidated net revenues for the fiscal years ended March 31, 2002 and 2001. The information in the table below does not represent segment data, but rather is presented for purposes of explaining certain trends within net revenues:

24

        The following table presents consolidated net revenues by reportable business segment for the fiscal years ended March 31, 2002 and 2001:

        Consolidated net revenues for all segments for the fiscal year ended March 31, 2002 decreased 5.2% to $94,813,000 from $100,033,000 for the fiscal year ended March 31, 2001. Factors that contributed to the decrease in consolidated net revenues for the fiscal year ended March 31, 2002 as compared to the fiscal year ended March 31, 2001 are detailed below.

        Net revenues for the Company's Domestic Wholesale Distribution segment for the fiscal year ended March 31, 2002 decreased 13.2% to $66,376,000 from net revenues of $76,485,000 for the fiscal year ended March 31, 2001. Management believes this segment's revenue performance was negatively impacted by economic weakness in the retail sector over the first half of fiscal 2002, coupled with the loss of exclusive revenues from the Orion and Universal license agreements which expired at the end of the last fiscal year. Revenue generated from these two agreements totaled $12,924,000 and $9,143,000 for fiscal 2001 and 2000, respectively. There was no revenue generated from these agreements in fiscal 2002. The Company experienced revenue growth in its Retail Distribution and its International Wholesale Distribution segments for fiscal 2002. Management believes that future revenue growth will be primarily dependent upon Image's ability to continue to license new exclusive programming as well as renew existing license agreements upon their expiration.

        Net revenues for DVDPlanet, the Company's Retail Distribution segment, for the fiscal year ended March 31, 2002 increased 10.6% to $18,678,000 from net revenues of $16,886,000 for the fiscal year ended March 31, 2001. Net revenues of DVD programming sold via the Internet increased 15.5% to $12,746,000 for fiscal 2002 from $11,034,000 for fiscal 2001. Management believes DVDPlanet began to benefit from consolidation in the DVD Internet retailing sector as well as the growing popularity of the DVD format. Management further believes a weak economic retail environment, especially in the first half of the fiscal year, negatively affected DVDPlanet's revenues. During fiscal 2002, DVDPlanet increased its selling prices to customers as well as shipping fees charged customers as part of management's plan to improve fiscal 2002 operating results. Shipping fees charged customers totaled $840,000 for fiscal 2002, up 52.2% from $552,000 for fiscal 2001.

        Net revenues for the Company's International Wholesale Distribution segment for the fiscal year ended March 31, 2002 were up 46.5% to $9,759,000 from net revenues of $6,662,000 for the fiscal year ended March 31, 2001. For fiscal 2002 and 2001, revenues of approximately $8,412,000 and $5,299,000, respectively, were derived from international wholesale distribution of Image's licensed DVD and VHS programming, either through international distribution or international sublicensees. For the fiscal years ended March 31, 2002 and 2001, revenues of approximately $1,347,000 and $1,363,000, respectively, were derived from international and domestic broadcast exploitation of the Image's licensed programming. Management expects that projected international growth of DVD player-households as well as a growing catalog of Image exclusive international DVD titles should continue to increase the Company's international DVD revenues.

25

        The following tables present consolidated cost of sales by reportable business segment and as a percentage of related segment net revenues for the fiscal years ended March 31, 2002 and 2001:

        Consolidated cost of sales for fiscal 2002 was $66,640,000, or 70.3% of net revenues, compared to $70,651,000, or 70.6% of net revenues, for fiscal 2001. Accordingly, consolidated gross profit margins were 29.7% and 29.4% for fiscal 2002 and fiscal 2001, respectively. For comparative purposes, exclusive of the fiscal 2002 $1,818,000 one-time credit to cost of sales for unnecessary reserves related to the discontinuation of the Company's domestic laserdisc distribution operations and a $696,000 charge to cost of sales related to the write-down to estimated net realizable value of advance royalties paid for international distribution rights for a certain line of programming, consolidated gross profit margin would have been 28.5%, or 0.9% lower than fiscal 2001. Several factors leading to the decrease in gross profit margin are addressed below.

        In general, the Company's cost of sales, as a percentage of net revenues, will vary from period to period depending upon the mix of revenue recognized from various distribution formats and other factors. Revenues that typically generate the highest gross profit margins are from domestic distribution of exclusively licensed programming. International distribution of exclusive programming typically generates somewhat lower gross profit margins due to lower international selling prices for DVD and VHS programming (as compared to the United States). Revenues from non-licensed exclusively distributed programming also generate lower gross profit margins than exclusively licensed programming. Revenues recognized from international sublicense of video programming and revenues recognized from domestic and international broadcast also generate lower gross profit margins than direct distribution of exclusive video programming due to normally higher royalty rates specific to those revenues. Revenues that generate the Company's lowest gross profit margins are from nonexclusive distribution of video programming.

        Gross margins for the Domestic Wholesale Distribution segment, as a percentage of segment revenues, increased by 0.6% to 33.9% for fiscal 2002 from 33.3% for fiscal 2001. Exclusive of the aforementioned credit to cost of sales related to laserdisc distribution, gross margins for the segment decreased by 2.2% to 31.1% for fiscal 2002 from 33.3% for fiscal 2001. The decrease was a result of lower revenues from sale of exclusive programming, due to the loss of the Orion and Universal agreements, in fiscal 2002 than fiscal 2001, offset, in part, by lower manufacturing costs for exclusive programming during fiscal 2002.

26

        Gross margins for the Retail Distribution segment improved by 6.6% to 17.7% for fiscal 2002, from 11.1% for fiscal 2001. The 6.6% improvement in gross profit margin was primarily due to the increase in selling prices to customers as well as an increase in shipping fees charged to customers as part of management's plan to improve fiscal 2002 operating results.

        Gross margins for the International Wholesale Distribution segment decreased by 6.1% to 24.4% for fiscal 2002 from 30.5% for fiscal 2001. For comparative purposes, excluding an impairment write-down of $696,000 in advance royalties paid for the international distribution rights to a certain line of programming to the estimated fair value of the distribution rights, gross profit margins increased to 31.5% for fiscal 2002 from 30.5% for fiscal 2001. The increase in gross margins was due to a more favorable sales mix of higher-margin direct distribution revenues during fiscal 2002 compared to fiscal 2001. Management expects gross margins to decline slightly from fiscal 2002 levels during fiscal 2003 as a result of declining DVD pricing internationally.

        The following tables present consolidated selling expenses by reportable business segment and as a percentage of related segment net revenues for the fiscal years ended March 31, 2002 and 2001:

        Consolidated selling expenses for fiscal 2002 increased 7.1% to $8,802,000 for fiscal 2002 from $8,219,000 for fiscal 2001. As a percentage of consolidated net revenues, consolidated selling expenses increased by 1.1% to 9.3% for fiscal 2002 from 8.2% for fiscal 2001. Factors that led to the increase in consolidated selling expenses as a percentage of consolidated net revenues for fiscal 2002 as compared to fiscal 2001 are detailed below.

        Selling expenses for the Domestic Wholesale Distribution segment were up 12.8% to $4,712,000 for fiscal 2002 from $4,177,000 for fiscal 2001. As a percentage of segment net revenues, selling expenses for fiscal 2002 were 7.1%, up from 5.5% for fiscal 2001. During fiscal 2002, Image incurred comparatively higher advertising and product promotional expenditures (higher by $420,000) and increased personnel costs (higher by $180,000), offset, in part, by reduced trade-show convention expenditures (lower by $125,000). Image is incurring increasingly higher advertising and promotional expenditures on a specific title and line of programming basis. Management believes these higher expenditures are necessary for Image's exclusive titles to compete in the retail marketplace with programming released by the major motion picture studios as well as other program suppliers and expects this trend to continue in fiscal 2003.

        Selling expenses for the Retail Distribution segment decreased 9.4% to $2,271,000 for fiscal 2002 from $2,506,000 for fiscal 2001. As a percentage of segment net revenues, selling expenses were down by 2.6% to 12.2% from 14.8% for fiscal 2001. The decrease, as a percentage of net sales, was due to

27

the staffing reduction, staffing redeployment and reduced promotional charges initiated in the fourth quarter of fiscal 2001 as part of management's plan to improve fiscal 2002 DVDPlanet operating results. Management expects to increase its advertising expenditures for DVDPlanet during fiscal 2003, as compared to fiscal 2002, in an effort to increase both retail store and Internet revenues.

        Selling expenses for the International Wholesale Distribution segment increased 18.4% to $1,819,000 for fiscal 2002 from $1,536,000 for fiscal 2001. As a percentage of segment net revenues, selling expenses were down by 4.5% to 18.6% from 23.1% for fiscal 2001. The decrease, as a percentage of net sales, was due, in part, to spreading of fixed segment costs over higher comparative fiscal revenues. On an absolute dollar basis, fiscal 2002 had comparatively higher personnel and trade show convention expenses (higher by $332,000) offset, in part by reduced advertising and promotion expenses (lower by $122,000). See "Aviva International, LLC."

        The following tables present consolidated general and administrative expenses by reportable business segment and as a percentage of related segment net revenues for the fiscal years ended March 31, 2002 and 2001:

        Consolidated general and administrative expenses for fiscal 2002 increased 21.3% to $12,244,000 for fiscal 2002 from $10,095,000 for fiscal 2001. As a percentage of consolidated net revenues, consolidated general and administrative expenses increased by 2.8% to 12.9% for fiscal 2002 from 10.1% for fiscal 2001. Factors that led to the increase in consolidated general and administrative expenses as a percentage of consolidated net revenues for fiscal 2002 as compared to fiscal 2001 are detailed below.

        General and administrative expenses for the Domestic Wholesale Distribution segment were up 14.2% to $9,064,000 for fiscal 2002 from $7,937,000 for fiscal 2001. As a percentage of segment net revenues, general and administrative expenses for fiscal 2002 were 13.7%, up from 10.4% for fiscal 2001, with part of the increase due to spreading of fixed costs over lower revenues. The increase in absolute dollar general and administrative expenses for fiscal 2002 results, in part, from higher depreciation and amortization expense (higher by $423,000), a one-time litigation settlement expense accrual (including associated legal fees) totaling $310,000, higher other legal fees (higher by $231,000), higher personnel costs (higher by $225,000), higher professional fees (higher by $169,000) and the one-time write off of an investment of $150,000. These increased fiscal 2002 expenses were offset, in part, by lower performance-based bonuses in fiscal 2002 as compared to fiscal 2001 (lower by $584,000).

28

        General and administrative expenses for the Retail Distribution segment increased 34.6% to $2,096,000 for fiscal 2002 from $1,557,000 for fiscal 2001. As a percentage of segment net revenues, general and administrative expenses were up by 2.0% to 11.2% from 9.2% for fiscal 2001. The increase, as a percentage of net sales, was primarily due to higher costs related to personnel (including management information systems and third-party computer programmer services-higher by $208,000), higher depreciation and amortization expenses (higher by $120,000), higher bank credit card servicing fees (higher by $73,000) and higher rent expense (higher by $64,000) for fiscal 2002.

        General and administrative expenses for the International Wholesale Distribution segment increased 80.4% to $1,084,000 for fiscal 2002 from $601,000 for fiscal 2001. As a percentage of segment net revenues, general and administrative expenses were up by 2.1% to 11.1% from 9.0% for fiscal 2001. The increase in absolute dollar general and administrative expenses was primarily due to increased personnel costs (higher by $336,000). See "Aviva International LLC."

        Amortization of production costs for fiscal 2002 increased 4.1% to $5,065,000, or 5.3% of consolidated net revenue for fiscal 2002 from $4,867,000, or 4.9% of consolidated net revenue for fiscal 2001. This increase resulted primarily from an increase in exclusive programming released internationally during fiscal 2002 compared to fiscal 2001. Amortization of production costs for fiscal 2002 included $854,000 attributable to the International Wholesale Distribution segment as compared to $647,000 for fiscal 2001. The Company is beginning to see reduced production costs on a per-title basis as a result of lower mastering and other fees charged the Company by its manufacturer Ritek as compared to those costs charged the Company by its previous manufacturer in fiscal 2001. See "Liquidity and Capital Resources—Disc Manufacturing Agreement and Term Note Payable."

        Interest Expense, net of interest income, for fiscal 2002 increased 4.8% to $1,806,000, or 1.9% of consolidated net revenues from $1,724,000, or 1.7% of consolidated net revenues for fiscal 2001. The increase is attributable to higher weighted average outstanding debt levels offset, in part, by lower weighted average interest rate levels during fiscal 2002 as compared to fiscal 2001. The Company's weighted average interest rate for fiscal 2002 and fiscal 2001 was 6.97% and 9.14%, respectively.

        Other income for fiscal 2002 and fiscal 2001 was $18,000 and $468,000, respectively. Other income for fiscal 2002 consisted of the minority interest in the net loss of Aviva. Other income for fiscal 2001 consisted of a gain on sale of land in Nevada of $499,000, net of the minority interest in the net earnings of Aviva.

        The Company recorded an income tax benefit of $40,000 for fiscal 2002 based on a consolidated effective tax rate of approximately 17%. The effective tax rate was lower than the previously estimated 36% due to the disallowance of 45% of the state net operating loss carryforwards negatively impacting the deferred tax asset benefit. Income tax benefit of $3,996,000 for fiscal 2001 reflects the elimination of the valuation allowance recorded against the deferred tax assets as a result of management's estimates that future taxable income will be sufficient to utilize the entire benefit of the deferred tax assets. The effective tax rate is subject to on going review by management on a regular basis.

        Consolidated net loss for fiscal 2002 of $195,000, or $.01 per diluted share, compared to consolidated net earnings for fiscal 2001 of $8,432,000, or $.50 per diluted share.

29

Fiscal Year Ended March 31, 2001 Compared to Fiscal Year Ended March 31, 2000

        The following tables present consolidated net revenues by format and net revenues by format as a percentage of total consolidated net revenues for the fiscal years ended March 31, 2001 and 2000. The information in the table below does not represent segment data, but rather is presented for purposes of explaining certain trends within total revenues:

        The following table presents consolidated net revenues by reportable business segment for the fiscal years ended March 31, 2001 and 2000:

*

Not meaningful

        Consolidated net revenues for all segments for the fiscal year ended March 31, 2001 increased 18.5% to $100,033,000 from $84,413,000, for the fiscal year ended March 31, 2000 due to growth in the DVD marketplace, both domestically and internationally. Image was unable to renew its exclusive

30

domestic distribution agreements with Orion Home Entertainment Corp. (12 catalogue titles for which the Company's "sell-off period" expired March 31, 2001) and Universal Studios Home Video, Inc. (52 catalogue titles for which the Company's "sell-off period" expired March 13, 2001). Revenue generated from these two agreements totaled $12,924,000 in 2001 and $9,143,000 in 2000.

        Net revenues for the Company's Domestic Wholesale Distribution segment for fiscal 2001 increased 11.9% to $76,485,000 from net revenues of $68,326,000 for fiscal 2000, due to overall growth in the DVD marketplace.

        Net revenues for DVDPlanet, the Company's Retail Distribution segment, for fiscal 2001 increased 6.6% to $16,886,000 from $15,837,000 for fiscal 2000. Net revenues of DVD programming for DVDPlanet were up 44.3% to $15,098,000, or 89.4% of segment net revenues, for fiscal 2001 from $10,461,000, or 66.1% of segment net revenues, for fiscal 2000. Net revenues of DVD programming via the Internet increased 47.7% to $11,034,000 for fiscal 2001 from $7,469,000 for fiscal 2000. Although comparative annual net revenues of DVD programming were up 44.3%, or $4,637,000, comparative net revenues for laserdisc programming were down 77.9%, or $3,361,000. Net revenues of laserdisc programming were $955,000 for fiscal 2001 versus $4,316,000 for fiscal 2000.

        Net revenues for the Company's International Wholesale Distribution segment for fiscal 2001 were $6,662,000 compared to $250,000 for fiscal 2000. This segment was formed in June 1999. Approximately $5,299,000, or 79.5% of segment revenues, was derived from International Wholesale Distribution of Image's licensed DVD and VHS programming, either through international distribution or international sublicensees. Approximately $1,363,000, or 20.5% of segment revenues, was derived from international broadcast exploitation of the Image's licensed programming.

        The following tables present consolidated cost of sales by reportable business segment and as a percentage of related segment net revenues for the fiscal years ended March 31, 2001 and 2000:

        Consolidated cost of sales for fiscal 2001 was $70,651,000, or 70.6% of net revenues, compared to $63,243,000, or 74.9% of net revenues for fiscal 2000. Accordingly, consolidated gross profit margin improved to 29.4% for fiscal 2001 from 25.1% for fiscal 2000. The increase in gross profit margin primarily reflects the growth in the Company's exclusive DVD programming revenues, the continued shift in sales mix from laserdisc to higher-profit margin DVD programming and lower DVD replication costs. Additionally, the fiscal 2001 lower of cost or market inventory writedowns were $148,000,

31

substantially lower than $1,010,000 in fiscal 2000, contributing to a lower comparative gross profit margin in fiscal 2000.

        Gross margins for the wholesale distribution segment improved 5.3% to 33.3% for fiscal 2001 from 28.0% for fiscal 2000. The 5.3% increase was primarily due to a more favorable sales mix of higher-margin exclusive programming.

        Gross margins for the Retail Distribution segment declined 1.3% to 11.1% for fiscal 2001 from 12.4% for fiscal 2000. The 1.3% reduction is primarily due to the sales mix of programming sold during the period as well as a less favorable ratio of shipping income included in revenues and shipping expenses included in cost of sales for fiscal 2001 compared to fiscal 2000.

        Gross margins for the international distribution segment, as a percentage of segment net revenues, declined 8.7% to 30.5% for fiscal 2001 from 39.2% for fiscal 2000. Fiscal 2001 represents the first full year of revenue generating operations for this segment.

        The following tables present consolidated selling expenses by reportable business segment and as a percentage of related segment net revenues for the fiscal years ended March 31, 2001 and 2000:

        Consolidated selling expenses for fiscal 2001 increased 28.9% to $8,219,000 from $6,378,000 for fiscal 2000. As a percentage of consolidated net revenues, consolidated selling expenses for fiscal 2001 increased to 8.2% from 7.6% for fiscal 2000. Factors that led to the increase in consolidated selling expenses for fiscal 2001 as compared to fiscal 2000 are detailed below.

        Selling expenses for the Domestic Wholesale Distribution segment were up 17.8% to $4,177,000 for fiscal 2001 from $3,545,000 for fiscal 2000. As a percentage of segment net revenues, selling expenses for fiscal 2001 were 5.5%, up from 5.2% for fiscal 2000. Image incurred comparatively higher promotional and advertising expenditures (higher by $249,000) during fiscal 2001. In an effort to drive exclusive sales, Image's incurred higher expenditures during fiscal 2001 for specific title and line of programming promotions. Additionally, as compared to fiscal 2000, fiscal 2001 included comparatively higher sales commissions and personnel costs (higher by $262,000).

        Selling expenses for the Retail Distribution segment increased 10.6% to $2,506,000 for fiscal 2001 from $2,266,000 for fiscal 2000. As a percentage of segment net revenues, selling expenses for fiscal 2001 were 14.8%, up from 14.3% for fiscal 2000. Fiscal 2001 included comparatively higher personnel costs (higher by $552,000). This was offset by lower promotional expenses of $335,000.

32

        Selling expenses for the International Wholesale Distribution segment increased 170.9% to $1,536,000 for fiscal 2001 from $567,000 for fiscal 2000. Selling expenses for the International Wholesale Distribution segment, as a percentage of segment revenues, were 23.1% for fiscal 2001. Fiscal 2001 had comparatively higher expenditures for advertising and promotion (higher by $764,000) and personnel (higher by $96,000). Additionally, fiscal 2001 had comparatively higher costs attributable to international travel and trade shows (higher by $89,000).

        The following tables present consolidated general and administrative expenses by reportable business segment and as a percentage of related segment net revenues for the fiscal years ended March 31, 2001 and 2000:

        Consolidated general and administrative expenses for fiscal 2001 increased 16.9% to $10,095,000 from $8,635,000 for fiscal 2000. As a percentage of consolidated net revenues, consolidated general and administrative expenses for fiscal 2001 were 10.1%, down from 10.2% for fiscal 2000. Factors that led to the increase in consolidated general and administrative expenses in absolute dollars for fiscal 2001 as compared to fiscal 2000 are detailed below.

        General and administrative expenses for the Domestic Wholesale Distribution segment for fiscal 2001 were up 9.8% to $7,937,000 from $7,229,000 for fiscal 2000. As a percentage of segment net revenues, general and administrative expenses for fiscal 2001 were 10.4%, down from 10.6% for fiscal 2000. The increase in absolute dollar general and administrative expenses for fiscal 2001 results, in part, from higher personnel costs, including performance-based bonuses, annual raises and amortization of restricted stock units (higher by $638,000). Additionally, for fiscal 2001, Image incurred higher depreciation and amortization expense (higher by $261,000) relating to increased capital expenditures; accrued compensation costs, including salary, severance and bonus under an executive employment agreement totaling $196,000, and a higher provision for potential uncollectible accounts receivable (higher by $146,000) related to the Chapter 11 bankruptcy of Internet retailer Express.com. These increases were offset by a $300,000 reduction in accrued legal settlement costs and reduced shareholder relations costs (lower by $192,000).

        General and administrative expenses for the Retail Distribution segment increased 25.4% to $1,557,000 for fiscal 2001 from $1,242,000 for fiscal 2000. As a percentage of segment net revenues, general and administrative expenses for fiscal 2001 were 9.2%, up from 7.8% for fiscal 2000. The increase in general and administrative expenses was primarily due to higher depreciation and amortization expenses relating to increased capital expenditures (higher by $166,000) and higher personnel costs (higher by $71,000) for fiscal 2001.

33

        General and administrative expenses for the International Wholesale Distribution segment increased 266.5% to $601,000 for fiscal 2001 from $164,000 for fiscal 2000. As a percentage of sales, general and administrative expenses were 9.0% for fiscal 2001. Fiscal 2001 represented the first full fiscal year of revenue generating operations for the International Wholesale Distribution segment.

        Amortization of production costs for fiscal 2001 increased 21.9% to $4,867,000, or 4.9% of consolidated net revenues, from $3,992,000, or 4.7% of consolidated net revenues, for fiscal 2000 resulting from an increase in exclusive titles, primarily international versions, released and amortized during fiscal 2001 compared to fiscal 2000. Amortization of production costs for fiscal 2001 included $647,000 attributable to the International Wholesale Distribution segment.

        Interest expense, net of interest income, for fiscal 2001 increased 10.4% to $1,724,000, or 1.7% of consolidated net revenues, from $1,562,000, or 1.9% of consolidated net revenues, for fiscal 2000. The increase is attributable primarily to higher weighted average interest rate levels during fiscal 2001 as compared to fiscal 2000.

        Other income for fiscal 2001 was $468,000 consisting of gain on sale of land in Nevada of $499,000, net of the minority interest in the net earnings of Aviva of $31,000. Other income for fiscal 2000 of $1,315,000 consisted primarily of proceeds from settlements in connection with Image's litigation against LEI Partners, L.P. totaling $899,000 and the minority interest in the net loss of Aviva of $383,000.

        Income tax benefit of $3,996,000 for fiscal 2001 reflects the elimination of the valuation allowance recorded against the deferred tax assets. In March 2001, Image entered into a then-new disc manufacturing agreement that it expected would result in a lower future cost structure beginning in the quarter ending December 31, 2001. In addition, in March 2001, management implemented an action plan to improve DVDPlanet's future operating results. Based on these factors and projections for future taxable income, management concluded that it was more likely than not that the results of future operations would generate sufficient taxable income to realize the benefit of the deferred tax assets. The effective tax rate is subject to on going review by management on a regular basis. The Company did not record an income tax expense for fiscal 2000 due to the availability of net operating loss carryforwards to offset taxable income and no net change in the net deferred tax asset position.

        Consolidated net earnings for fiscal 2001 and 2000 was $8,432,000 and $1,415,000, respectively, or $.50 and $.09 per diluted share, respectively.

Aviva International, LLC

        In June 1999, Image formed Aviva with Michael Lopez, President of International Consulting & Business Management. Aviva is 50% owned by each of Image and Mr. Lopez. Aviva acts as international sales agent for Image's licensed programming for which it holds distribution rights for worldwide broadcast and international home video. Mr. Lopez serves as Manager of Aviva and supervises the day-to-day operations. Aviva receives a percentage of the net distribution revenues generated by the exploitation of Image's international distribution rights during the term of the Operating Agreement (representing 100% of Aviva's revenues). Both Image and Mr. Lopez have contributed funds to Aviva in the form of interest-bearing loans to be used for working capital. Mr. Lopez remains contingently liable for his share of the obligations of Aviva. Loans to Aviva from Image totaled approximately $732,000 at March 31, 2002. Loans from Image and Mr. Lopez will be repaid by Aviva prior to any profit distributions to Image or Mr. Lopez. Although Image owns only 50% of the joint venture, it has the ability to exercise control over the operations of Aviva. Image has final approval for all hiring, capital budgeting and expenditure decisions. Image has final approval for all negotiated international exploitation agreements for Image-licensed programming and the authority to compel Aviva to add/reduce staff or reorganize the operations of the joint venture. Accordingly, Aviva's operating loss, since its formation, is consolidated with the Company's consolidated statements

34

of operations for the fiscal years ended March 31, 2002, 2001 and 2000; and a minority interest representing Mr. Lopez's share of profits and losses is reflected in the Company's consolidated financial statements. The financial results of Aviva and the international operations of Image have been consolidated for segment reporting purposes under the operating segment International Wholesale Distribution.

        During the quarter ended March 31, 2002, Image began consolidating international wholesale home video distribution activities because management believes its existing infrastructure can more effectively and efficiently manage international distribution operations rather than shared responsibility with the staff at Aviva. Through the remainder of calendar year 2002, Aviva will downsize operations, reduce staff and transfer international home video sublicense and broadcast sales responsibilities to Image by December 31, 2002. Thereafter, Aviva will continue to receive its percentage of net revenues generated by the exploitation of Image's international distribution rights until all of its debt obligations to Image and Mr. Lopez are fully repaid in accordance with the Operating Agreement. Management expects the loans to be repaid of out of Aviva's share of the internationally generated revenues by December 31, 2003. Severance costs related to staff reductions at Aviva totaled approximately $29,000 and are accrued as selling and general and administrative expenses in the accompanying statements of operations. Image remains financially responsible for monthly lease payments of $4,000 on Aviva's Belmont, California leased office space through October 31, 2003, the end of the lease term. The Company plans to sublease the space through the remainder of the lease period and believes any net loss on this lease will be nominal.

        Royalties and distribution fees payable by Image to program suppliers in connection with international distribution revenues generated by Aviva's sales agency efforts are generally used to recoup advance royalties and distribution fees paid by Image to program suppliers for exclusive international distribution rights.

Inflation

        Management believes that inflation is not a material factor in the operation of the Company's business at this time.

Recently Issued Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS No. 142. Image adopted the new rules for measuring the impairment of goodwill and certain intangible assets on April 1, 2002.

        During its fourth quarter ended March 31, 2002, Image engaged Houlihan Lokey Howard & Zukin, an independent financial advisory services company, to prepare certain analyses as a valuation basis for goodwill impairment testing and financial reporting purposes. Specifically they were engaged to express their conclusions as of April 1, 2002, regarding (i) the fair value of DVDPlanet (a Reporting Unit as defined by SFAS No. 142) on an enterprise value basis to be used to determine whether the carrying value of goodwill is impaired and (ii) the fair value of the material identifiable intangible assets and goodwill of DVDPlanet for use in determining the amount of goodwill impairment. This is the only goodwill that exists at March 31, 2002.

        Based upon their findings, the carrying value of Image's acquired goodwill was determined to be impaired pursuant to the new valuation guidelines of SFAS No. 142. The adoption of SFAS No. 142 will result in a one-time, noncash, pretax charge of $5,997,000. The non-operating impairment charge will be recorded as a cumulative effect of a change in accounting principle, net of the tax effect, in the Company's consolidated statement of operations for the quarter ending June 30, 2002.

35

        In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 ("APB No. 30"), Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for recognizing and measuring the impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 121 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of APB No. 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). The Company plans to adopt SFAS No. 144 in the quarter ending June 30, 2002. Management does not expect the adoption of SFAS No. 144 to have a material impact on the Company's financial statements because the impairment assessment under SFAS No. 144 is largely unchanged by SFAS No. 121.

        In April 2001, the FASB's Emerging Issues Task Force ("EITF") Issue No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products, which was later codified along with other similar issues, into EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products. EITF 01-09 was effective for the Company in the fourth quarter ended March 31, 2002. EITF clarifies the income statement classification of costs incurred by a vendor in connection with the reseller's purchase or promotion of the vendor's products, resulting in certain market development advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. As a result of applying the provisions of EITF 01-09, the Company's revenues and selling expenses each were reduced by $1,019,000, $736,000 and $441,000 for fiscal years ended 2002, 2001 and 2000, respectively.

        In June 2000, the FASB issued SFAS No. 139, which, effective for financial statements for fiscal years beginning after December 15, 2001, rescinds SFAS No. 53. The companies that were previously subject to the requirements of SFAS No. 53 are now to follow the guidance in American Institute of Certified Public Accountants Statement of Position ("SOP") 00-2, Accounting by Producers or Distributors of Films, issued in June 2001. SOP 00-2 establishes new accounting and reporting standards for all producers and distributors that own or hold the rights to distribute or exploit films. SOP 00-2 provides that the cumulative effect of changes in accounting principles caused by its adoption should be included in the determination of net earnings in conformity with Accounting Principles Board Opinion No. 20, Accounting Changes. The Company adopted SOP 00-2 on April 1, 2001. The adoption of SOP 00-2 did not have a material impact on the Company's consolidated financial statements.

        In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Deferral of the Effective Date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment to SFAS No. 133, which is effective for all quarters of the fiscal years beginning after June 15, 2001. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company adopted SFAS No. 133 on April 1, 2001. The adoption of SFAS No. 133 did not impact its consolidated results of operations.

36

Liquidity and Capital Resources

        The Company's working capital requirements vary primarily with the level of its licensing, production and distribution activities. The principal recurring uses of working capital in operations are for program licensing costs (i.e., royalty payments, including advances to program suppliers), distribution fee advances, manufacturing and production costs, costs of acquiring finished product for wholesale and retail distribution and selling, general and administrative expenses. Continued availability of sufficient working capital is a substantial limiting factor in Image's ability to license new programming, and therefore maximizing available working capital is therefore critical to the Company's operations. Working capital has historically been provided by cash flows from operations, private and public sales of common stock, notes representing short- and long-term debt and bank borrowings.

Sources and Uses of Working Capital for Fiscal 2002.

        The Company's net loss for fiscal 2002 was $195,000. During fiscal year 2002, the significant uses of working capital in operating activities were: royalty and distribution fee advances (higher by $4,496,000) to obtain exclusively distributed programming and an increase in level of accounts receivable (higher by $4,580,000) primarily due to timing of collections. Our sales to our largest customers grew during fiscal 2002 as compared to fiscal 2001. These larger customers have a tendency to be slower paying and accordingly, have increased the Company's average collection period from 72 days for fiscal 2001 to 89 days for fiscal 2002. Additionally, our revenues generated from international distribution were higher in the fourth quarter of fiscal 2002 as compared to the fourth quarter of fiscal 2001.

        The Company's significant sources of working capital used to fund the Company's operations during fiscal 2002 were increased borrowings under its revolving credit and term loan facility with Foothill (higher by $7,517,000), offset, in part, by principal payments reducing other debt obligations (higher by $1,622,000).

The Company's Liquidity Position at March 31, 2002

        At March 31, 2001, the Company had cash of $606,000, borrowings outstanding of $2,603,000 and borrowing availability of $12,512,000 under its $15 million revolving credit and $500,000 capital expenditures term loan facilities with Foothill Capital Corporation ("Foothill"). At March 31, 2002, the Company had cash of $303,000, borrowings outstanding of $10,120,000 and borrowing availability of $5,730,000 under its $15 million revolving credit and $1 million capital expenditures term loan facilities, as amended, with Foothill. During the fiscal year ended March 31, 2002, the Company's outstanding borrowings increased with Foothill because operational cash flow was insufficient to fund the Company's working capital needs. During this period, the Company's working capital needs increased significantly, primarily by reason of the Company's aggressive acquisition of exclusive rights to entertainment programming for worldwide distribution. Management believes the slowing economy and its effect on our wholesale customers' buying habits and retail customers' discretionary spending habits, and the loss of exclusive revenues due to the expiration of two significant license agreements, negatively impacted revenue performance over fiscal 2002.

        At March 31, 2002, the Company had one outstanding standby letter of credit in the amount of $150,000 issued by Foothill which expires November 18, 2002. This letter of credit secures trade payables due to a program supplier.

        At March 31, 2002, the Company had future license obligations for royalty advances, minimum guarantees and other fees of $5,647,000 due in fiscal 2003, $835,000 due in fiscal 2004 and $100,000 due in fiscal 2005. These advances and guarantees are recoupable against future royalties and distribution fees earned (in connection with Company revenues) by the licensors and program suppliers, respectively. Depending upon the competition for license and exclusive distribution rights, the Company

37

may have to pay increased advances, guarantees and/or royalty rates in order to acquire or retain such rights in the future.

Management's Assessment of the Company's Liquidity Position for the next 12 Months.

        Over the past 18 months, the Company has been on an aggressive licensing campaign to provide a foundation for future exclusive worldwide revenue growth, as well as to replace the exclusive revenues lost by reason of the expiration of the Orion and Universal agreements in March 2001. We believe that our aggressive licensing efforts will substantially contribute to our success as a leading independent provider of DVD programming, including music-related and other entertainment programming. See "Item 1. Business—Business Segments—Domestic Wholesale Distribution." These license agreements normally require substantial up-front royalty advances prior to the release of the programming.

        Management disclosed in its Form 10-Q for the quarterly period ended June 30, 2001, that based upon then-operating results, borrowing availability and the state of the economy, it believed it may have over-committed its then-available working capital to fund then-existing exclusive license agreements. Management disclosed its concern that the Company's then-sources of working capital might be insufficient to fund working capital requirements for the next 12 months unless certain discretionary licensing and capital investment programs were rescheduled, restructured or curtailed and/or additional sources of working capital were secured either through the sale of equity or debt securities, the incurrence of new debt financing or the restructuring of existing obligations.

        During the nine months ended March 31, 2002, management has taken the following courses of action to manage its expected cash outflows against cash inflows and accordingly, fund working capital requirements for the next 12 months:

        Suspended Stock Repurchase Plan.    In June 2001, management suspended the repurchase of its common stock under its existing stock repurchase plan until such time as the Company's projected short-term and long-term operating cash flow improves and then-current market conditions and other factors may allow.

        Amended Revolving Credit and Term Loan Facilities.    Effective September 30, 2001, management amended the Company's revolving credit and term loan facilities with Foothill to extend the term of the facilities and increase its then-borrowing availability. See "Financing."

        Rescheduled Commitments Under Existing License Agreements.    Management was successful in working with certain licensors to reschedule payment of certain royalty advance commitments to later in fiscal 2002 and into fiscal 2003 in an attempt to better match such advances paid with the release of the related licensed content.

        Negotiated Extended Repayment Terms Under Ritek Obligation.    At March 31, 2002, Image owed Ritek $5,347,000 of the original $6,500,000 loan. Image had not been making timely principal payments in accordance with the provisions of the loan obligation. Based upon management's projections of future disc manufacturing with Ritek, management estimated that a significant portion of the $5,347,000 outstanding obligation would become due by September 1, 2002. Effective March 26, 2002, Image renegotiated the terms of the loan with Ritek, converting it from an essentially current obligation to a 48 month obligation. See "Disc Manufacturing Agreement and Term Note Payable."