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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-23747

GETTY IMAGES, INC.

(Exact name of registrant as specified in its charter)

601 N. 34TH STREET

SEATTLE, WASHINGTON 98103

(206) 925-5000

(Address, including zip code, and telephone number,

including area code, of principal executive offices)

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 twelve 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 ninety days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

As of April 30, 2003 there were 54,433,240 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

(unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S.) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and revenues and expenses reported during the period. Some of the estimates and assumptions that require management’s most difficult judgments include: a) the appropriateness of the valuation and useful lives, if applicable, of long-lived assets, including goodwill and identifiable intangible assets, b) determining the appropriate level of deferred tax asset valuation allowances, c) the designation of certain intercompany balances with foreign subsidiaries as long-term investments and d) the sufficiency of the allowance for doubtful accounts. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from management’s estimates and assumptions.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year’s presentation with no effect on previously reported: net assets; net cash flows from operating, investing or financing activities; or net income.

Principles of Consolidation

The Condensed Consolidated Financial Statements and notes thereto include the accounts of Getty Images, Inc. and its subsidiaries, from the respective dates of acquisition. Significant intercompany balances and transactions have been eliminated.

Quarterly Results

Certain information and footnote disclosures normally included in annual financial statements, prepared in accordance with accounting principles generally accepted in the U.S., have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. Management believes that the Condensed Consolidated Financial Statements include all adjustments, which are of a normal and recurring nature, necessary to a fair statement of the results of operations, financial position and cash flows for the interim periods presented. The condensed information should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our latest Annual Report on Form 10-K.

Foreign Currency Translation and Revaluation of Long-Term Intercompany Balances

Foreign exchange losses of $0.6 million and $3.6 million for the three months ended March 31, 2003 and 2002, respectively, arose from the revaluation of foreign currency denominated intercompany balances that are of a long-term investment nature, for which settlement is not planned or anticipated in the foreseeable future. These unrealized foreign exchange losses are reported and accumulated in other comprehensive income in the Condensed Consolidated Balance Sheets in the same manner as translation adjustments. Total accumulated translation adjustments, including amounts arising from the revaluation of long-term intercompany balances, were $0.7 million and $0.5 million at March 31, 2003 and December 31, 2002, respectively.

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Earnings Per Share

Basic earnings per share are calculated based upon the weighted average number of common shares outstanding during each period. Diluted earnings per share are calculated based on the shares used to calculate basic earnings per share plus the effect of dilutive stock options and restricted stock awards.

Approximately 2.2 million and 3.9 million other common shares potentially issuable from stock options for the three months ended March 31, 2003 and 2002, respectively, are excluded from the computation of diluted earnings per share because they are anti-dilutive. Also excluded because they are anti-dilutive are 4.1 million common shares in 2003 and 4.5 million common shares in 2002 potentially issuable from convertible subordinated notes.

Short-Term Investments

Available-for-sale securities are carried at market value with associated unrealized holding gains and losses recorded in other comprehensive income, while held-to-maturity securities are carried at amortized cost. All held-to-maturity securities mature in 2003, while available-for-sale securities mature between 2003 and 2007. Available-for-sale securities with contractual maturities beyond one year are classified as current because they represent the investment of cash that is available for current operations. Unamortized bond premium at March 31, 2003 and December 31, 2002 was nominal.

Accounts Receivable

Accounts receivable represent trade receivables, net of allowances for doubtful accounts of $12.8 million and $12.6 million at March 31, 2003 and December 31, 2002, respectively. The provisions recorded during the three months ended March 31, 2003 and 2002 were $1.3 million in each period. Approximately 14% of the company’s recorded investment in trade receivables, net of allowances for doubtful accounts, was past due 90 days or more as of March 31, 2003 and December 31, 2002.

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Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation of approximately $252.2 million and $237.1 million at March 31, 2003 and December 31, 2002, respectively.

Goodwill

Goodwill is the excess of the purchase price (including liabilities assumed and direct costs) over the fair value of tangible and identifiable intangible assets acquired in purchase business combinations. As of January 1, 2002, goodwill is no longer amortized but is reviewed for impairment annually on August 31 and between annual periods in certain circumstances.

Goodwill changed during the period as follows:

Identifiable Intangible Assets

Identifiable intangible assets are assets that do not have physical representation, but that arise from contractual or other legal rights or are capable of being separated or divided from the company and sold, transferred, licensed, rented or exchanged. Identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from two to 10 years. The gross carrying amounts and related accumulated amortization of identifiable intangible assets at the reported balance sheet dates were as follows:

Amortization of identifiable intangible assets was $0.9 million and $1.4 million for the three months ended March 31, 2003 and 2002, respectively. Based on balances at March 31, 2003, expected amortization of identifiable intangible assets for the next five years is as follows:

We are required to reassess the remaining useful lives of our identifiable intangible assets each reporting period to determine whether events and circumstances warrant revisions to the remaining periods of amortization. No revisions were determined to be necessary during the periods presented. Any future revisions would be applied prospectively.

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Stock-Based Compensation

We apply the intrinsic value provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock-based compensation. Accordingly, we do not recognize compensation expense when granting employee stock options, as we do not grant options below the market price of our common stock on the date of the grant. The only compensation expense we recognize in relation to stock options is upon infrequent modification of the terms of outstanding options. There were no modifications that resulted in compensation expense during the periods presented.

Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma information as if we had adopted the fair-value method of accounting for stock-based compensation. Under this method, compensation cost is measured on all awards based on the fair value of the awards at the grant date. The pro forma effect on our net income (loss) and earnings (loss) per share of applying SFAS No. 123 would have been as follows:

A Black-Scholes multiple option valuation model was utilized in calculating these figures, with forfeitures recognized as they occur and the following assumptions:

Catalogs

As part of our marketing efforts, we produce and distribute catalogs containing images offered through our creative professional, press and editorial collections. The costs of producing these catalogs through September 30, 2001, were deferred and amortized over the period during which revenue was generated by the catalog images.

In the fourth quarter of 2001, we began the implementation of new financial information systems. These new systems are not capable of directly associating image revenue with specific catalogs. Accordingly, as required by the American Institute of Certified Public Accountants Statement of Position No. 93-7 “Reporting on Advertising Costs,” catalog production costs are expensed upon initial distribution of each catalog effective October 1, 2001. Deferred catalog costs were fully amortized at December 31, 2002.

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Direct catalog production costs and amortization of any such costs that were deferred, and their impact on our Condensed Consolidated Statements of Income are as follows:

Recent Accounting Pronouncements

Effective January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement requires that the fair value of a liability for an asset retirement obligation, such as an obligation to return leased property to its original condition, be recognized in the period in which the obligation is incurred if a reasonable estimate of the fair value of the obligation can be made. We do not have any material asset retirement obligations.

Effective July 1, 2003, we will adopt Emerging Issues Task Force Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables” effective for all arrangements entered into on or after that date. Adoption of this pronouncement is not expected to have a material impact on our consolidated financial statements.

NOTE 2. ACCRUED EXPENSES

Accrued expenses at the reported balance sheet dates are summarized below, with balances comprising 5% or more of total current liabilities at either date shown separately:

NOTE 3. COMMITMENTS AND CONTINGENCIES

Following are future minimum payments under operating leases, receipts under non-cancelable subleases, and payments and receipts under minimum royalty guarantee agreements, all committed at March 31, 2003:

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NOTE 4. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS

As a provider of visual content, we operate in one business segment. Due to the nature of our operations, sales are made to a diverse client base and there is no reliance on a single customer or group of customers. Sales are reported in the geographic area where they originate. The U.S. dollar value of sales reported below reflects both the sales performance of each country and the impact of the change in each country’s currency relative to the U.S. dollar. Sales to customers by geographic area, with countries experiencing 5% or more of sales in a reportable period shown separately, are summarized below:

NOTE 5. LOSS ON DISPOSITION OF A BUSINESS

During the first quarter of 2002, we entered into an agreement to dispose of a subsidiary, American Royal Arts (ARA), a provider of animation art, and accrued a loss of $0.8 million. The assets and liabilities of ARA were written off against the accrued loss upon consummation of the transaction on April 2, 2002. The net assets, results of operations and cash flows of ARA were not significant to the company as a whole for any period presented.

NOTE 6. INCOME TAXES AND NET DEFERRED TAX ASSETS

The effective tax rates used to calculate income tax expense for the first quarter of 2003 and 2002 were 39.0% and 39.8%, respectively. The decrease in the effective tax rate was primarily due to increased book income compared to permanent differences, principally non-deductible expenses, which did not increase. At March 31, 2003, we had $49.3 million in net deferred tax assets, net of a valuation allowance of $18.5 million. This is compared to $56.1 million in net deferred tax assets, net of a valuation allowance of $17.5 million at December 31, 2002.

NOTE 7. ACQUISITION

During the first quarter of 2003, we acquired ImageDirect, Inc., an editorial photography agency, for a purchase price (including liabilities assumed) of $4.4 million. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations since the date of acquisition are included in those of the consolidated company. The portion of the purchase price allocated to goodwill was $3.9 million. This allocation is preliminary as we are currently in the process of identifying, and determining the fair value of, identifiable intangible assets acquired. This acquisition was not significant to the company as a whole for any period presented.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of Getty Images, Inc. We may, from time to time, make written or oral statements that are “forward-looking,” including statements contained in this Quarterly Report on Form 10-Q, the documents incorporated herein by reference, and other filings with the Securities and Exchange Commission. These statements are based on management’s current expectations, assumptions and projections about Getty Images, Inc. and its industry, and are made on the basis of management’s views as of the time the statements are made. All statements, analyses and other information contained in this report relative to trends in sales, gross margin, anticipated expense levels, and liquidity and capital resources, as well as other statements including, but not limited to, words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “seek,” “intend” and other similar expressions, constitute forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks

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