IMAGE ENTERTAINMENT INC, 10-K, 1995-06-27

IMAGE ENTERTAINMENT INC
10-K, 1995-06-27
ALLIED TO MOTION PICTURE PRODUCTION

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_______________________

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1995

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For The Transition Period From ....................To
....................

Commission File Number 0-11071

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

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

9333 Oso Avenue, Chatsworth, California 91311
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(Address of principal executive offices, including zip code)

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

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, 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 (x) NO (_)

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. (_)

At June 1, 1995, 14,037,741 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 $54,489,340 (based upon the closing price of the
Common Stock on the NASDAQ National Market System). Shares of Common Stock held
by the registrant's directors, executive officers and 5% or more shareholders
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.

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IMAGE ENTERTAINMENT, INC.
FORM 10-K ANNUAL REPORT
FOR FISCAL YEAR ENDED MARCH 31, 1995

TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I

PAGE
----
<S> <C> <C>
ITEM 1. Business................................................... 1
ITEM 2. Properties................................................. 8
ITEM 3. Legal Proceedings.......................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders........ 9

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.................................................... 11
ITEM 6. Selected Financial Data.................................... 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................... 13
ITEM 8. Financial Statements and Supplementary Data................ 19
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 39

PART III

ITEM 10. Directors and Executive Officers of the Registrant......... 39
ITEM 11. Executive Compensation..................................... 39
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 39
ITEM 13. Certain Relationships and Related Transactions............. 39

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 39

SIGNATURES............................................................ 41
</TABLE>
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PART I
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ITEM 1. BUSINESS.
--------

GENERAL

Image Entertainment, Inc. (the "Company") was incorporated in Colorado in
April 1975 as Key International Film Distributors, Inc. The Company's present
name was adopted in June 1983. The Company reincorporated in California in
November 1989. Its principal executive offices are located at 9333 Oso Avenue,
Chatsworth, California 91311, and its telephone number is (818) 407-9100.

The Company has distributed programming on laserdisc since 1983, and is the
largest laserdisc licensee and distributor in North America with an estimated
35% market share. It distributes thousands of titles ranging from feature films
and music videos to family, documentary and special interest programming,
directly or through subdistributors. Titles are obtained from major motion
picture studios and other suppliers under exclusive and nonexclusive license and
wholesale distribution agreements.

To obtain exclusive titles, the Company generally enters into license
agreements whereby it acquires the exclusive right to manufacture and distribute
laserdisc programming in exchange for royalties. The Company releases exclusive
titles from licensors such as Disney's Buena Vista Home Video, Hallmark Home
Entertainment, New Line Home Video, Orion Home Video, Playboy Home Video and
Turner Home Entertainment. Some of the exclusive titles currently available
from the Company include: Aladdin, Snow White and the Seven Dwarfs, Quiz Show,
The Jungle Book, Terminal Velocity, Hoop Dreams, The Mask, and Blue Sky. Some
of the exclusive titles the Company expects to release during fiscal 1996
include: The Lion King, Cinderella, While You Were Sleeping, Pulp Fiction,
Crimson Tide, Judge Dredd, The Santa Clause, The Madness of King George, Dumb
and Dumber, Don Juan DeMarco, Special Collector's Editions of The Howling, The
Fog, Tron, Alice in Wonderland and Three Caballeros.

When the Company acts as a wholesale distributor, it generally acquires
laserdisc programming in finished, prepackaged form for resale to retail
accounts. The Company is the exclusive wholesale distributor of laserdisc
programming from Twentieth Century Fox Home Entertainment and The Voyager
Company (including Voyager's prestigious "Criterion Collection" line). Some of
the Twentieth Century Fox and Voyager titles currently available from the
Company include: Speed, True Lies, the THX Special Edition of Mrs. Doubtfire,
the Collector's Edition of Powell and Pressburger's The Red Shoes, A Night To
Remember and THX Special Editions of Robocop and Silence Of The Lambs. Some of
the Twentieth Century Fox and Voyager titles the Company expects to release
during fiscal 1996 include: Die Hard With A Vengeance, Kiss of Death, Nell,
Mighty Morphin Power Rangers, Miracle on 34th Street, French Kiss, the
Collector's Edition of Schindler's List, the Collector's Edition of The Day The
Earth Stood Still, the THX Edition of The Towering Inferno and the Special
Collector's Edition of The Rocky Horror Picture Show. In addition, the Company
is a nonexclusive wholesale distributor of laserdisc programming from motion
picture studios such as Columbia, MCA/Universal, MGM/UA, TriStar and Warner
Bros. Some of the nonexclusive studio titles currently distributed by the
Company include: Interview With The Vampire, Legends of the Fall, Four Weddings
and a Funeral, The Shawshank Redemption, Jurassic Park, Junior, Disclosure and
Eric Clapton Unplugged. Some of the nonexclusive studio titles the Company
expects to distribute during fiscal 1996 include: Batman Forever, The Bridges
of Madison County, Casper, Waterworld and Apollo 13.

In preparing titles for laserdisc replication, the Company uses its in-
house, state-of-the-art digital post-production facility to create laserdisc
masters. It then delivers the masters to manufacturers such as Digital Audio
Disc Corporation (Sony), Kuraray, Mitsubishi, Pioneer Video Manufacturing,
Technidisc and 3M for the replication of laserdiscs. The Company's in-house,
full-service creative services/computer

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Image Entertainment, Inc. 1
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graphics department designs laserdisc jackets and creative materials for
advertising and merchandising. The Company's in-house marketing department
implements marketing programs, issues publicity and publishes Image Laserdisc
Preview magazine, a consumer-oriented monthly featuring new releases and
containing articles and information of current interest to the
laserdisc/multimedia consumer.

RECENT DEVELOPMENTS

On November 15, 1994, to refinance its existing long-term debt and gain
borrowing flexibility to maintain growth, the Company entered into a Loan and
Security Agreement with Foothill Capital Corporation, an asset-based lender.
The agreement provides for revolving advances and the issuance of and guaranty
of standby letters of credit under a $14,250,000 revolving credit facility and a
series of term loans under a $750,000 capital expenditure term loan facility.
The term of the agreement is three years, renewable automatically thereafter for
successive one-year periods. Concurrent with funding of the revolving credit
facility, the Company immediately retired $11,500,000 of long-term debt
representing the outstanding balance of the Company's November 18, 1991 private
placement financing. See "Item 7. Management's Discussion and Analysis of
---
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

On January 16, 1995, the Company instituted a stock repurchase program to
buy up to one million shares of its outstanding common stock. Purchases will be
made from time to time in open market and/or privately negotiated transactions
based on current market conditions and other factors. As of March 31, 1995, the
Company had repurchased 254,800 shares of common stock for approximately $1.9
million. See "Item 7. Management's Discussion and Analysis of Financial
---
Condition and Results of Operations -- Liquidity and Capital Resources."

On March 30, 1995, the Company received an $880,000 business interruption
insurance claim settlement arising from losses sustained in the January 17, 1994
Northridge earthquake. See "Item 7. Management's Discussion and Analysis of
---
Financial Condition and Results of Operations -- Insurance Settlements -
Business Interruption and Property Damage."

On June 21, 1995, the Company, acquired V.T. Laser, Inc., a privately held
New Jersey based corporation doing business as "U.S. Laser Video Distributors,"
for approximately $3.1 million. U.S. Laser is a nonexclusive distributor of
optical disc programming and the publisher of LASERVIEWS: America's Laser Disc
Magazine, a bimonthly consumer periodical focusing on product announcements,
software reviews and articles of general interest to the laserdisc consumer, and
D.I.S.C.: Dealer's Interactive Software Companion, a dealer-oriented multimedia
publication. U.S. Laser has been in the laserdisc distribution business since
1985 and will continue to operate on a business as usual basis out of its New
Jersey offices. Prior to the acquisition, U.S. Laser was a competitor of the
Company and one of the Company's largest customers. See "Item 7. Management's
---
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Acquisition."

LASERDISC BASICS

The laserdisc, a larger, optical version of the compact disc (CD), is
encoded with both audio and visual information. Just as CDS offer distinct
advantages over records and audiotapes, laserdiscs offer distinct advantages
over videocassettes: higher resolution video, full-fidelity digital audio,
instant access to any scene, frame-by-frame viewing, greater durability and
superior interactive capability. The laserdisc is not to be confused with the
short-lived capacitance electronic disc (CED), which was introduced by RCA in
the early 1980s and abandoned by it in 1986. The CED (or "videodisc") was read
by a stylus and did not utilize optical laser technology.

Laserdisc (software) demand is primarily driven by the installed base of
laserdisc players (hardware). When introduced over a decade ago, laserdisc
players met with only moderate success because of their cost compared to VCRs,
their inability to record, limited software availability and

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2 Image Entertainment, Inc.
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consumers' unfamiliarity with the laserdisc format. However, the format has
since benefitted from consumer acceptance of CD technology and increasing
consumer interest in the "home theater" concept, including THX sound equipment,
big-screen televisions and wide-screen televisions. Player prices continue to
decline and a wide variety of models are available at retail.

Today, a large number of hardware manufacturers, including Denon, Kenwood,
Magnavox, Mitsubishi, Panasonic, Pioneer, Quasar, RCA, Runco, Samsung, Sharp,
Sony, Theta and Yamaha, offer a variety of laserdisc player models. Major
retailers of audio and video components such as Circuit City, Frys, Lechmere,
Montgomery Ward, Radio Shack, Sears and The Good Guys carry laserdisc players.

Virtually all laserdisc players are combination players ("Combi-players"),
which play both CDS and laserdiscs. The average selling price of an entry-level
player is between $299 and $379. Pioneer Electronics, a leading manufacturer of
laserdisc hardware, introduced an entry-level player listing at $299 in early
1995. Denon, Pioneer, Panasonic, Runco and Theta have introduced several high-
end laserdisc player models which retail between $1,000 and $4,500. Depending
upon the make and model, laserdisc players may also offer karaoke and game add-
ons and an assortment of other special features. Newly introduced by Pioneer in
calendar 1995, in all new models of players retailing for $399 and above, is
"Dolby Digital Surround" also known as "AC-3." This new audio feature,
currently available only with laserdisc technology, allows for six discrete
channels of audio to be played back in home theatre applications, giving the
viewer a closer approximation of the original theatrical experience and a more
true-to-life placement of sound.

The Company believes that growth in the installed player base will boost
laserdisc sales. Paul Kagan Associates, Inc. estimates the number of laserdisc-
player households, the percentage of television households with laserdisc
players and the number of laserdiscs sold in the United States as follows:

<TABLE>
<CAPTION>
# of Laserdisc- % of TV Households # of
Calendar Year Player Households With Laserdisc Players Laserdiscs Sold
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<S> <C> <C> <C>

1991 737,000 0.8% 5.7 million
1992 947,000 1.0% 6.4 million
1993 1,220,000 1.3% 7.0 million
1994 1,540,000 1.6% 8.3 million
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</TABLE>

The Company anticipates the laserdisc market will remain primarily a sell-
through rather than a rental market. Most titles currently have a suggested
retail price of $24.99 to $39.99, low enough for consumers to build a personal
library. If a large laserdisc rental market develops, the Company expects disc
sales per household to drop as the price per disc increases, but total disc
sales and the number of outlets renting or selling discs to multiply.

PROGRAM ACQUISITION

GENERAL. As the Company does not produce its own programming, its success
-------
depends upon entering into new and renewing existing licenses and wholesale
distribution agreements for feature films and other programming. There is no
assurance that suppliers of programming will continue to enter into or renew
licenses or distribution agreements on terms acceptable to the Company; however,
the Company believes that its production, creative services, marketing and
distribution expertise will continue to make it an attractive partner for such
suppliers.

Twentieth Century Fox and Disney's Buena Vista retain the right to
terminate their respective agreements with the Company if specified events of
default occur, such as a "change in control" (as

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Image Entertainment, Inc. 3
<PAGE>

defined in the agreements) of the Company. Future licenses and distribution
agreements may contain similar termination provisions.

LICENSES. The Company enters into licenses whereby it acquires from
--------
suppliers of programming the right to manufacture and distribute their titles on
laserdisc. Licenses are for specific titles or for a licensor's existing
library and future releases over a designated term ("output licenses"), and
generally give the Company exclusive rights. The Company releases exclusive
titles from licensors such as Buena Vista Home Video, Hallmark Home
Entertainment, Geffen Records, New Line Home Video, Orion Home Video, Playboy
Home Video and Turner Home Entertainment. Under a November 26, 1991 agreement
with Buena Vista Home Video, a subsidiary of The Walt Disney Company, the
Company has the exclusive right to replicate, market and distribute all Disney,
Touchstone, Buena Vista and Hollywood Pictures programming on laserdisc in the
United States and Canada and their respective territories (although Disney may
distribute to certain accounts if it so elects) until December 1995 or June 1996
depending on the title. In connection with the agreement, Buena Vista's parent
company was issued a warrant to purchase 1,671,760 shares of Common Stock at
$6.00 per share. The warrant has certain registration rights. See Item 8.
---
Financial Statements and Supplementary Data -- Note 10 to Financial Statements.
Under a December 22, 1992 agreement with New Line Home Video, Inc., a division
of New Line Cinema, the Company has the exclusive right to replicate, market and
distribute all New Line, Fine Line and other programming acquired by New Line on
laserdisc in the United States (and Canada for certain titles) until December
1997 or December 1998 if New Line elects. In connection with the agreement, New
Line was issued a warrant to purchase 500,000 shares of the Company's Common
Stock at $6.30 per share. The warrant has certain registration rights. See
---
Item 8. Financial Statements and Supplementary Data -- Note 10 to Financial
Statements.

In return for the grant of rights, the Company pays royalties to its
licensors. Royalties are expressed as a percentage of the Company's revenues
from laserdisc sales. In many cases, the Company pays licensors advances or
minimum guarantees on a title, which are recouped against any royalties earned
from that title and (if cross-collateralized) other titles under the license.
Advances under most output licenses are paid according to predetermined
schedules, regardless of the number and marketability of the titles subsequently
available. In entering into licenses, the Company depends, to a large extent,
on its ability to anticipate the public's changing taste in laserdisc
programming, foresee (as to output licenses) licensors' future releases, and pay
for any advances, minimum guarantees and other licensee obligations.

In general, licenses have terms of two to seven years and are limited to
the United States, Canada and their respective territories and possessions.
Under most output licenses, the Company has one to five years to select titles
and two to five years to distribute a title after its release on laserdisc.

Distribution of licensed titles accounted for approximately 55% of fiscal
1995 net sales, 50% of fiscal 1994 net sales and 48% of fiscal 1993 net sales.
Exclusive titles from the following licensors accounted for the largest
percentages of fiscal 1995 net sales (the only percentage in excess of 10% is
indicated): Buena Vista Home Video (29.2%), New Line Home Video, Orion Home
Video, Sultan Entertainment, and Turner Home Entertainment. Exclusive titles
from the following licensors accounted for the largest percentages of fiscal
1994 net sales (the only percentage in excess of 10% is indicated): Buena Vista
Home Video (18.4%), New Line Home Video, Orion Home Video, Academy
Entertainment, Inc. and Prism Entertainment. Exclusive titles from the following
licensors accounted for the largest percentages of the Company's fiscal 1993 net
sales (the only percentage in excess of 10% is indicated): Buena Vista Home
Video (20.0%), Playboy Video Entertainment, Orion Home Video, L.I.V.E Home
Video, Turner Home Entertainment and New Line Home Video (sales commenced in the
fourth quarter).

The selection periods under the five licenses which accounted for the
largest percentages of fiscal 1995 net sales will expire on various dates
between December 1995 and December 1999 and the distribution periods with
respect to individual titles under such licenses have expired or will expire on
various dates through approximately September 2003. While efforts are made to
renegotiate and renew

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4 Image Entertainment, Inc.
<PAGE>

licenses prior to expiration, there can be no assurance that licenses or
distribution agreements will be renegotiated or renewed.

Historically, the Company has not attempted to obtain foreign (with
the exception of Canadian) laserdisc distribution rights, since foreign sales,
outside of Canada and certain Pacific Rim countries where such rights are
generally unavailable to non-domestic entities, have been minimal. Under a
special arrangement, Image sells laserdiscs of Disney titles to Disney, for a
specified fulfillment fee, for distribution to designated Disney licensees and
distributors in the Philippines, Taiwan, Hong Kong, Malaysia, Singapore and
Thailand. From time to time the Company similarly acts as a fulfillment center
servicing foreign territories for other licensors.

Although the Company does not produce its own motion picture programming,
the Company often creates and releases Special Edition laserdiscs, an
increasingly important source of revenue, publicity and prestige for the
Company. Special Editions usually consist of a feature film (obtained under
license) and a variety of ancillary materials such as out-takes, restored
footage or a director's cut, interviews with the director, cast or other
participants in the film-making process, separate audio track narratives,
scripts and/or treatments, press clippings, compact discs of the soundtrack,
production photos, and other materials of interest. Recently, the Company began
releasing limited, numbered Special Editions personally autographed by the
film's director or other talent. The Voyager Company also creates and releases
Special Editions which the Company distributes on an exclusive basis. In
response to growing consumer demand, the Company will be releasing increasingly
more titles in THX, wide-screen (letterboxed) and/or AC-3 surround sound
versions.

WHOLESALE DISTRIBUTION. In addition to its licensing activities, the
----------------------
Company is a wholesale distributor of laserdisc programming which it acquires
from certain major motion picture studios and other suppliers.

On July 1, 1992, the Company and Twentieth Century Fox Home Entertainment
(formerly known as FoxVideo, Inc.) entered into an exclusive four-year laserdisc
distribution agreement which superseded the exclusive laserdisc distribution
agreement between the parties which had been in effect since September 1, 1990.
Under the agreement, the Company has the right to acquire existing and future
Fox titles until June 30, 1996 for distribution in the United States, Canada and
Puerto Rico (although Fox may distribute to certain accounts if it so elects).
In connection with the agreement, Twentieth Century Fox Film Corporation,
Twentieth Century Fox Home Entertainment's parent company, was issued a warrant
to purchase 1,671,760 shares of Common Stock at $6.00 per share. The warrant has
certain registration rights. See Item 8. Financial Statements and Supplementary
---
Data -- Note 10 to Financial Statements. Under a November 10, 1992 agreement,
the Company has the exclusive right to purchase and distribute Voyager
programming in the United States, and additional territories, under certain
circumstances. The Company's rights with respect to Voyager titles are exclusive
until the end of the term specified in the agreement and non-exclusive
thereafter.

The Company is also a nonexclusive wholesale distributor of laserdisc
programming from Warner Home Video, MGM/UA Home Video, MCA/Universal Home Video,
Columbia TriStar Home Video, Lumivision, Republic, BMG and Polygram.

In general, the Company acquires laserdisc programming for wholesale
distribution in finished, prepackaged form, and thus does not provide any
creative services with respect to such programming; however, in connection with
the Fox and Voyager exclusive distribution agreements, the Company finishes and
packages the product for a fee. The Company is generally not required to pay
advances, although the Voyager agreement requires an advance and the Fox and
Voyager agreements contain minimum guarantees. In a typical nonexclusive
wholesale distribution arrangement, the program supplier notifies the Company of
its upcoming releases and the Company then solicits its customers and places
orders for the releases. In acquiring laserdiscs for nonexclusive wholesale
distribution, the Company is generally required to pay within 60 days of
delivery.

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Image Entertainment, Inc. 5
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Wholesale (exclusive and nonexclusive) distribution of laserdiscs accounted
for approximately 45% of fiscal 1995 net sales, 50% of fiscal 1994 net sales and
52% of fiscal 1993 net sales. Exclusive wholesale distribution of Fox product
accounted for approximately 27% of fiscal 1995 net sales, 31% of fiscal 1994 net
sales and 27.3% of fiscal 1993 net sales. Generally, the Company's profit margin
on exclusive licensed product and exclusive distributed product has been greater
than its profit margin on nonexclusive product it distributes wholesale. The
Company's commitment to nonexclusive wholesale distribution has varied from time
to time, depending principally upon the availability of capital to carry
inventory and receivables. With the securing of financing in November 1991, the
Company expanded its nonexclusive wholesale distribution of studio titles, thus
strengthening its ability to provide a full range of laserdisc titles.

SALES AND CREDIT POLICIES

The Company sells product directly or through subdistributors subject to
the terms of the Company's dealer sales policies. Laserdisc sales to the
following customers accounted for the largest percentage of the Company's fiscal
1995 net sales (none equaled or exceeded 10%): Musicland, U.S. Laser, MTS/Tower
Records and Video, Camelot Music and Ken Crane's. Laserdisc sales to the
following customers accounted for the largest percentages of the Company's
fiscal 1994 net sales (none equalled or exceeded 10%): U.S. Laser, Norwalk
Record Distributors, Ken Crane's, Musicland and MTS/Tower Records and Video.
Laserdisc sales to the following customers accounted for the largest percentages
of the Company's fiscal 1993 net sales (the only percentage equal to or greater
than 10% is indicated): Camelot Music (10%), Musicland, U.S. Laser, Ken Crane's,
and MTS/Tower Records and Video.

The Company's prospective customers generally submit a credit application
followed by a minimum opening order for laserdiscs. If the application is
accepted, credit terms are assigned. Open account terms generally require
payment within 45 to 60 days of delivery. The Company may also require a
purchaser to provide a purchase money security interest, a personal guarantee, a
letter of credit and/or other collateral. Due largely to extensive controls
instituted by the Company and the efforts of its experienced credit department,
bad debt expense was less than 0.1% of net sales during fiscal 1995, 1994 and
1993. The amount of bad debt actually written off in fiscal 1995, 1994 and 1993
was approximately $47,000, $39,000 and $56,000, respectively.

Sales of laserdiscs are generally considered final, however, the Company
allows customers to return a portion of their stock on a quarterly basis. This
allowance is noncumulative and is based on the customer's prior quarter
purchases. Stock returns, other than for defective laserdiscs, amounted to
approximately 8.6% of all laserdiscs sold in fiscal 1995, 9.5% of all laserdiscs
sold in fiscal 1994 and 9.4% of all laserdiscs sold in fiscal 1993. Returns of
defective laserdiscs have been minimal and are generally covered by
manufacturers' warranties.

As part of its ongoing campaign to expand the laserdisc market, the Company
aggressively solicits new retail accounts, enticing them with a broad range of
titles. Although the Company generally sells directly to retailers it also sells
to certain major music and laserdisc subdistributors boasting a sizeable sales
force and an extensive retail network. To stay competitive with subdistributors,
the Company has offered improved pricing, faster delivery, expanded sales,
customer service and marketing departments and increased inventory of high-
demand titles.

MARKETING

The Company's strategy is to promote its product and the laserdisc format
in general. The Company's marketing efforts are directed toward consumers and
video software and hardware dealers, and involve point-of-sale advertising,
advertising in trade and consumer publications, dealer incentive programs, trade
show exhibits, bulletins featuring new releases and in-stock catalogue titles
and the publication of the Image Laserdisc Preview magazine, a monthly consumer-
oriented magazine with an estimated 100,000 unit circulation.

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6 Image Entertainment, Inc.
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Promotion of each new title generally begins eight to sixteen weeks before
the scheduled in-store release with the mailing of the Image Laserdisc Preview
magazine and bulletins to retailers. An active telemarketing campaign follows.
The Company attempts to release a title on laserdisc as close in time as
possible to its videocassette release date to capitalize on videocassette
advertising and publicity campaigns.

Since the installed base of laserdisc players and the demand for laserdiscs
are interrelated, the Company has worked closely with major player manufacturers
to promote the laserdisc format. For example, manufacturers of selected
laserdisc players sometimes make available to purchasers free or substantially
discounted laserdiscs.

LASERDISC PRODUCTION

Under a typical license, the licensor of a title delivers a program master
and art work to the Company for quality evaluation. If the Company deems the
master acceptable, its postproduction facility creates a submaster with
specifications for laserdisc format. This submaster is delivered to the
manufacturer for the replication of laserdiscs. The laserdisc jacket is designed
and produced by the Company's creative services staff and sent to a printer for
replication. The laserdisc manufacturer will either package and shrink-wrap the
laserdiscs and ship the completed product to the Company or ship the laserdiscs
in bulk to the Company and the Company will package and shrink-wrap the
laserdiscs at its own facility.

To reduce production costs and expedite the production process, in November
1990 the Company installed an in-house, state-of-the-art digital postproduction
facility. To further increase efficiencies and reduce costs, in January 1995 the
Company purchased a digital pre-press for high resolution, four color
separations. These unique facilities allow the Company to format over 90% of the
laserdisc masters it would otherwise contract out to post production facilities
and deliver final, color separated film to printers it would otherwise contract
out to graphics houses.

MANUFACTURING OF LASERDISCS

The Company currently uses six laserdisc manufacturers, four of which press
discs in the United States. In fiscal 1994, the following manufacturers supplied
the largest percentages of the laserdiscs pressed for the Company (percentages
in excess of 10% are indicated): Mitsubishi (32.0%), Technidisc (31.3%), Kuraray
(21.4%), Pioneer Video Manufacturing (12.7%), Sony's Digital Audio Disc
Corporation and 3M.

The Company attempts to solicit orders from its customers for laserdiscs
prior to submitting orders for the manufacture of such discs. Under its
manufacturing purchase orders, the Company generally must pay for finished
laserdiscs within 30 to 90 days of invoicing. The Company's goal is to order for
manufacture that number of units of each title which will enable the Company to
ship the bulk of the order within 60 days of delivery. Attainment of this goal
depends largely upon the Company's ability to predict the popularity of a
title.

While the Company believes that manufacturing facilities currently have the
aggregate capacity to fulfill its orders, if any manufacturer used by the
Company were unable to supply the Company with laserdiscs, the Company believes
it could place its orders for such laserdiscs with other manufacturers (subject
to such manufacturers' willingness to re-prioritize their laserdisc pressing
schedules).

SEASONALITY

The Company has generally experienced higher sales of laserdiscs in the
quarters ended December 31 and March 31 due to increased consumer spending
associated with the year-end holidays;

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Image Entertainment, Inc. 7
<PAGE>

however, since most sales of a title occur in the first few months after its
release, seasonal sales also vary with the popularity of titles in release.

COMPETITION

The Company believes that it is the largest laserdisc licensee and
distributor in the United States; however, the Company also faces competition
from Pioneer LDCA, which also licenses and distributes laserdiscs, laserdisc
subdistributors, and Columbia TriStar Home Video, MCA/Universal Home Video,
MGM/UA Home Video and Warner Home Video, who sell their own programming directly
to retailers, as well as to the Company and other distributors.

Laserdiscs also face competition from other forms of home video
entertainment, e.g., videocassettes and network, syndicated, pay/cable
---
television and DSS (direct satellite system). New technologies in the
entertainment industry also offer alternate forms of leisure-time entertainment
or alter the way in which existing forms are delivered, thereby increasing
competition.

OTHER APPLICATIONS FOR OPTICAL LASER TECHNOLOGY

The Company, consistent with its commitment to innovative programming, is
continually looking to exploit other applications for optical laser technology,
ranging from CD-ROM interactive programming to high definition television to
video games. In 1990, the Company introduced laserdiscs with interactive
programming which enables the consumer to view ancillary materials such as story
boards, portions of screenplays, still photographs and behind-the-scenes
footage. Future interactive programming may consist of a menu of options, either
on screen or in print, enabling the consumer to access and rearrange sequences.
The extent to which the Company releases interactive programming will depend
upon several factors, including market acceptance and availability of ancillary
materials. The Company distributes CD-ROM programming released by The Voyager
Company. The Company is aggressively pursuing license rights which, if granted,
will enable it to release additional programming in the CD-ROM format.

The Company's exploitation of other applications for optical laser
technology will depend upon many factors, including the success of its current
business and the availability of financing. No assurance exists that other
applications of optical laser technology will be exploited by the Company or, if
exploited, contribute to profitability.

TRADEMARKS

The Company has received federal registration of the trademark "IMAGE" in
the United States Patent and Trademark Office. The Company also uses the
trademarks "Vocal Images," "The Music Disc" and "The Finest in Laserdiscs" and
the service marks "Image Post" and "Image Creative Group."

EMPLOYEES

As of June 1, 1995, the Company had 94 full-time employees. The Company
considers its employee relations to be satisfactory.

ITEM 2. PROPERTIES.
----------

The lease for the company's office space (30,080 square feet) provides for
monthly rent of $13,726 (subject to annual adjustment based upon increases in
the consumer price index) and will expire on March 31, 2000.

- --------------------------------------------------------------------------------
8 Image Entertainment, Inc.
<PAGE>

The lease for the company's warehouse space (48,300 square feet) provides
for monthly rent of $22,039 (subject to annual adjustment based upon increases
in the consumer price index) and will expire on March 31, 2000.

ITEM 3. LEGAL PROCEEDINGS.
-----------------

The Company is not currently a party to any material legal action.

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

None.

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 9
<PAGE>

THE COMPANY'S EXECUTIVE OFFICERS

Executive officers serve at the pleasure of the Company's board of
directors (the "Board"). There are no family relationships between any executive
officer or director. The following information sets forth the position and age
of the Company's executive officers at June 1, 1995 and their business
experience for at least the prior five years:

EXECUTIVE OFFICER AGE POSITION & BACKGROUND
- --------------------------------------------------------------------------------

Martin W. Greenwald 53 Chairman of the Board, Chief Executive Officer and
President since April 1981, and Treasurer since
January 1988. Mr. Greenwald's prior experience
includes film production services and investment
management. Mr. Greenwald is a 1964 graduate of
Fairleigh Dickinson University. Since July 1990,
Mr. Greenwald has been a director of the Permanent
Charities Committee of the Entertainment
Industries, an umbrella organization which
coordinates charitable contributions from the
entertainment industries. Mr. Greenwald is also
the 1995 Chairperson of the Laserdisc Association
of America.

Cheryl L. Lee 36 Chief Administrative Officer since April 1993 and
General Counsel since April 1992; Vice President
of Business Affairs from February 1989 to March
1992; prior thereto, Counsel, Theatrical
Distribution & Acquisition, Twentieth Century Fox
Film Corporation. Ms. Lee received her A.B. degree
from Stanford University in 1980 and her J.D.
degree from New York University Law School in
1984. Ms. Lee is a member of the California Bar.

Jeff M. Framer 34 Chief Financial Officer since April 1993;
Controller from September 1990 to March 1993;
Senior Manager, KPMG Peat Marwick, from July 1989
to September 1990; and, Manager, KPMG Peat
Marwick, from July 1988 to June 1989. Mr. Framer
is a certified public accountant.

David Borshell 30 Senior Vice President, Operations, Sales and
Marketing from December 1994; Senior Vice
President, Operations, from April 1993 to December
1994; Vice President, Operations, from January
1991 to March 1993; Director of Operations from
July 1990 to December 1990; Director of Sales from
November 1988 to June 1990; and, Account Executive
from February 1986 to November 1988.

- --------------------------------------------------------------------------------
10 Image Entertainment, Inc.
<PAGE>

- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------

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

The Common Stock is traded over-the-counter (OTC), has been quoted on the
National Association of Securities Dealers, Inc. Automated Quotation System
(NASDAQ) under the symbol "DISK" since February 1988, and has been included on
the NASDAQ National Market System ("NASDAQ/NMS") since February 19, 1991. The
table below presents the high and low closing prices on the NASDAQ/NMS. All
prices reflect a 1-for-14 6/7 reverse stock split effected February 8, 1991.

<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1995 High Low
-------------------------------- ---- ---
<S> <C> <C>
Quarter ended June 30, 1994 $ 8.31 $ 5.88
Quarter ended September 30, 1994 $ 9.00 $ 6.75
Quarter ended December 31, 1994 $ 8.06 $ 6.88
Quarter ended March 31, 1995 $ 8.13 $ 6.75

Fiscal Year Ended March 31, 1994 High Low
-------------------------------- ---- ---
Quarter ended June 30, 1993 $ 6.25 $ 5.00
Quarter ended September 30, 1993 $ 7.38 $ 5.50
Quarter ended December 31, 1993 $ 8.13 $ 5.50
Quarter ended March 31, 1994 $ 7.25 $ 5.38
</TABLE>

As of June 1, 1995 there were 2,064 holders of record of Common Stock. The
closing price on that date was $7.22.

The Company has never paid a cash dividend on the Common Stock and
presently intends to retain any future earnings for business development and
debt retirement. In addition, the Company is party to a loan agreement which
imposes restrictions on its payment of dividends. See Note 9 to Financial
---
Statements.

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 11
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.
-----------------------

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

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------

INCOME STATEMENT DATA: 1995 1994 1993 1992 1991
- --------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 85,590,730 $ 65,577,813 $ 59,813,867 $ 58,661,593 $ 47,962,176
Operating costs and expenses 77,850,931 60,575,598 74,380,855** 56,366,978 47,041,715
Operating income (loss) 7,739,799 5,002,215 (14,566,988) 2,294,615 920,461
Interest expense (1,184,190) (2,335,894) (2,531,729) (2,010,152) (1,558,648)
Interest income 518,258 486,889 439,481 349,165 162,770
Amortization of deferred financing costs (111,459) (270,251) (315,631) (116,620) ---
Net gain on insurance settlement 742,390 959,511 --- --- ---
Income (loss) before income
taxes and extraordinary item 7,704,798 3,842,470 (16,974,867) 517,008 (608,506)
Income taxes (175,303) (103,871) (800) (800) (800)
Income (loss) before
extraordinary item 7,529,495 3,738,599 (16,975,667) 516,208 (609,306)
Extraordinary item, net of taxes (1,218,831)* (377,535)* --- --- ---
Net income (loss) $ 6,310,664 $ 3,361,064 $ (16,975,667) $ 516,208 $ (609,306)
Income (loss) per share
before extraordinary item (Note 5) $ .51 $ .30 $ (1.44)** $ .04 $ (.06)
Extraordinary item per share (.07)* (.03)* --- --- ---
Net income (loss) per share (Note 5) $ .44 $ .27 $ (1.44)** $ .04 $ (.06)
Weighted average shares
outstanding (Note 5) 18,138,957 12,346,967 11,760,401 13,356,675 10,480,144

BALANCE SHEET DATA:
- ------------------
Total assets $ 33,490,930 $ 42,526,264 $ 46,745,395 $ 49,358,746 $ 38,713,920
Total liabilities 16,818,431 31,411,828 39,713,777 30,551,277 26,565,293
Net shareholders' equity 16,672,499 11,114,436 7,031,618 18,807,469 12,148,627
</TABLE>

* Extraordinary item - costs associated with early retirement of debt, net of
related taxes of $33,800 and $10,476 for fiscal 1995 and 1994,
respectively.
** Includes a nonrecurring pre-tax charge of $10,366,000 equal to $.88 per
share, related to the Company's restructuring of its operations.
<PAGE>

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

INSURANCE SETTLEMENTS - BUSINESS INTERRUPTION AND PROPERTY DAMAGE

On March 30, 1995, the Company received an $880,000 insurance settlement
from its claim of business interruption losses sustained in the January 17, 1994
Northridge earthquake. The settlement resulted in a net gain of $742,390 after
the accrual of related expenses and reimbursement of incurred costs. The net
gain was reported as other income in the accompanying statement of operations
for the year ended March 31, 1995.

In June 1994, the Company, under its commercial property insurance policy,
received a $7,543,000 insurance settlement from its claim to recover damage and
losses to personal property including fixtures, property, inventory and
equipment sustained in the Northridge earthquake. The settlement resulted in a
net gain of $959,511 after the write-off of the net book value of damaged
inventory, fixtures, property and equipment, accrual of related royalties and
expenses and reimbursement of incurred costs. The net gain was reported as
other income in the accompanying statement of operations for the year ended
March 31, 1994.

The Company has no further claim with respect to damage and losses
sustained in the January 17, 1994 Northridge earthquake.

MARCH 18, 1993 RESTRUCTURING PLAN

On March 18, 1993, the Company's Board of Directors unanimously approved a
comprehensive restructuring of the Company's operations. The restructuring plan
provided for changes in operational, sales, marketing and production strategies,
the prepayment of long-term debt (in part by accelerating the sale of certain
inventory at significantly reduced prices) and an overall work force reduction.
In fiscal 1995 and 1994, the restructuring positively impacted the Company's
cash flow through inventory reductions, reduced operating and interest expense
and improved gross margins.

Pursuant to the plan, the Company materially changed its sales strategies,
emphasizing the initial release/growth phase of a title's life cycle in order to
take advantage of the marketing dollars often spent by major program suppliers
to promote the videocassette release of a title and, in general, the excitement
generated by anticipation of a new release. Marketing strategies were similarly
refocused on the initial release/growth phase to further increase awareness of
new releases.

Pursuant to the plan, the Company materially changed its production
strategies. Prior to the restructuring, the Company's initial manufacturing
order for a title generally reflected a supply intended to satisfy demand over
the title's full distribution period. After the restructuring, manufacturing
orders reflect only that supply which is reasonably necessary to fill demand
during the initial release/growth phase, with incremental, smaller-quantity
reorders submitted throughout the remaining maturity/decline phase of the
distribution term on an as needed basis. As a result, on-hand inventory more
closely tracks actual sales experience (i.e., explosive initial demand which
----
slowly decreases over time as the title competes with new releases). Although
demand for the average title still exists throughout the distribution term, the
manufacturing and inventory strategies implemented in the restructuring were
intended to result in supply matching near-term demand, thus reducing inventory
carrying costs and reducing instances where sales made near the end of a
distribution term must be effected at a lower price.

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 13
<PAGE>

existed to satisfy demand over the duration of their distribution terms, were
targeted for sale over a twelve-month period commencing shortly after the
restructuring plan was implemented. The price of the targeted inventory was set
at or, in certain cases, below the then-current carrying cost, which such price
was intended to result in the sale of substantially all of the inventory by the
expiration of the self-imposed twelve-month period. The remaining balance of
the targeted inventory at March 31, 1995 is 10,000 units versus 506,000 units at
the date the restructuring plan was instituted.

The Company's decision to significantly reduce the selling prices of the
targeted inventory to encourage sales over a twelve-month period (a shorter time
period compared to the Company's typical distribution period) resulted in the
write-down of the then-current carrying cost of the targeted inventory and
related unamortized production costs and royalty advances to a carrying cost
equal to the reduced selling price of such inventory, resulting in an
approximate zero gross margin upon future sale. Additionally, royalty advances
relating to titles which would not be released or reordered in accordance with
the Company's restructured operational strategies were also written-down. The
write-downs were accrued as a restructuring charge in the accompanying statement
of operations for fiscal 1993.

The Company recorded a $10,366,000 pre-tax charge, or $.88 per share, for
restructuring costs during the fourth quarter of fiscal 1993. The restructuring
charge, by component, is summarized as follows:

<TABLE>
<S> <C>
Laserdisc inventory and production costs $ 5,164,000
Royalty advances 4,761,000
Severance pay 441,000
------------

$ 10,366,000
=============
</TABLE>

RESULTS OF OPERATIONS

The Company recorded all-time high net sales, up 30.5% in fiscal 1995 from
fiscal 1994, as well as all-time highs in operating income, income before
extraordinary item and net income for the year ended March 31, 1995. Net sales
have increased each year in the three-year period ended March 31, 1995 from
$59,813,867 in fiscal 1993 to $65,577,813 in fiscal 1994 to $85,590,730 in
fiscal 1995. Operating income was up 54.7% to $7,739,799 in fiscal 1995 from
$5,002,215 in fiscal 1994. Fiscal 1993 had an operating loss of $14,566,988.
Higher net sales, significantly reduced interest expense and net gains on
insurance settlements contributed to income before extraordinary item of
$7,529,495, or $.51 per share, and $3,738,599, or $.30 per share, for the years
ended March 31, 1995 and 1994, respectively, compared to a loss before
extraordinary item of $16,975,667, or $1.44 per share, which included a
$10,366,000 restructuring charge, for fiscal 1993. Net income increased to
$6,310,664, or $.44 per share, for fiscal 1995 from $3,361,064, or $.27 per
share, for fiscal 1994, as compared to a net loss of $16,975,667, or $1.44 per
share, for fiscal 1993.

FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994

Net sales for fiscal 1995 increased 30.5% to $85,590,730 from $65,577,813
for fiscal 1994. Fiscal 1995 net sales benefitted from a strong release
schedule which included the aggregate net sales of approximately $17,000,000
from the exclusive release of SNOW WHITE AND THE SEVEN DWARFS, SPEED, ALADDIN,
and TRUE LIES and the continued sale of STAR WARS TRILOGY: THE DEFINITIVE
COLLECTION. During fiscal 1994, the exclusive release of STAR WARS TRILOGY: THE
DEFINITIVE COLLECTION and BEAUTY AND THE BEAST, accounted for approximately
$8,000,000 of net sales. Net sales are affected by the popularity of new
releases and the current economic environment.

Cost of laserdisc sales for fiscal 1995 increased to $66,773,017 from
$50,985,390 for fiscal 1994. As a percentage of net sales, cost of laserdisc
sales for fiscal 1995 increased to 78.0% from 77.7% in fiscal 1994. The sales
mix of higher-margin exclusive product and lower-margin nonexclusive product and

- --------------------------------------------------------------------------------
14 Image Entertainment, Inc.
<PAGE>

the margins within each category have a direct effect on these percentages and
vary with the availability and popularity of titles and the Company's marketing
emphasis. Lower margin nonexclusive product sales accounted for 9.4% and 10.5%
of net sales for fiscal 1995 and 1994, respectively. During fiscal 1995, sales
of salvaged inventory, retained as part of the June 1994 insurance settlement
relating to the January 17, 1994 Northridge earthquake, decreased cost of
laserdisc sales as a percentage of net sales to 78.0% from 79.0%. Cost of
laserdisc sales as a percentage of net sales for fiscal 1995 was also impacted
by selling certain slower moving inventory at reduced prices, in the ordinary
course of business, not specifically targeted in the Company's March 1993
restructuring. Fiscal 1995 restructuring-targeted inventory sales had an
immaterial effect on cost of laserdisc sales as a percentage of net sales.

Selling expenses increased to $4,002,482 for fiscal 1995 from $3,113,131
for fiscal 1994; however, as a percentage of net sales, selling expenses were
4.7% in fiscal 1995 and 1994. Fiscal 1995 saw improvements in and expanded
circulation of the Company's monthly Image Laserdisc Preview magazine, increased
advertising in trade magazines, and the Company's introduction of a 2-day air
shipping program.

General and administrative expenses increased 10.1% to $4,025,822 for
fiscal 1995 from $3,657,082 for fiscal 1994; however, as a percentage of net
sales, general and administrative expenses decreased to 4.7% for fiscal 1995
from 5.6% for fiscal 1994. Fiscal 1995 saw an increase in the allowance for
doubtful accounts, higher depreciation expense related to the addition of the
creative services/ computer graphics department's digital pre-press system and
higher employee and executive performance-based bonuses.

Amortization of production costs increased 8.1% to $3,049,610 for fiscal
1995 from $2,819,995 for fiscal 1994; however, as a percentage of net sales,
amortization of production costs decreased to 3.6% for fiscal 1995 from 4.3% for
fiscal 1994. Amortization of production costs is a function of the timing and
number of Image exclusive titles placed into production. The Company has not
seen a trend toward higher per title production costs.

Interest expense and amortization of deferred financing costs together
decreased 50.3% to $1,295,649 for fiscal 1995 from $2,606,145 for fiscal 1994.
The reduction in interest expense and amortization of deferred financing costs
resulted from the fiscal 1995 and 1994 prepayments of debt and the November 1994
refinancing described in "Liquidity and Capital Resources."

Extraordinary item - costs associated with early retirement of debt of
$1,218,831, net of related taxes of $33,800 for fiscal 1995, resulted from the
July 1994 prepayment and the November 1994 refinancing described in "Liquidity
and Capital Resources" and is composed of prepayment penalties and amortization
of deferred financing costs and discount of debt issuance, accelerated as a
result of the early retirement ($759,138 of the extraordinary charge represents
noncash charges). The extraordinary charge of $377,535, net of related taxes of
$10,476, for fiscal 1994 resulted from voluntary prepayments of debt and is
composed of prepayment penalties and noncash charges of $263,011 in accelerated
amortization of deferred financing costs.

FISCAL YEAR ENDED MARCH 31, 1994 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1993

Net sales for fiscal 1994 increased 9.6% to $65,577,813 from $59,813,867
for fiscal 1993. Fiscal 1994 net sales benefitted from a strong release
schedule of higher-margin exclusive programming including the exclusive release
of two blockbuster titles: STAR WARS TRILOGY: THE DEFINITIVE COLLECTION and
BEAUTY AND THE BEAST. Net sales are affected by the popularity of new releases
and the current economic environment.

Cost of laserdisc sales for fiscal 1994 decreased to $50,985,390 from
$52,036,255 for fiscal 1993. As a percentage of net sales, cost of laserdisc
sales for fiscal 1994 decreased to 77.7% from 87.0% in fiscal 1993. Lower-
margin nonexclusive product sales accounted for 10.5% of net sales in fiscal
1994,

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 15
<PAGE>

substantially down from 18.9% in fiscal 1993. The sales mix of higher-margin
exclusive product and lower-margin nonexclusive product varies with the
availability and popularity of titles and the Company's marketing emphasis.
Fiscal 1993 included a fourth quarter accrual of $3,400,000 for estimated
unrecouped minimum royalty guarantees payable through the term of an exclusive
license agreement.

Fiscal 1994 cost of sales as a percentage of net sales was negatively
affected by sales of inventory targeted for liquidation in accordance with the
March 18, 1993 restructuring plan. The targeted inventory was sold at a price
approximating its written-down cost, effectively at a gross profit margin equal
to zero. The following table reflects the Company's fiscal 1994 quarterly and
annual net sales of the targeted inventory and cost of laserdisc sales as a
percentage of net sales with and without the effect of selling the targeted
inventory at a price equal to its written-down cost (all other measurable
effects of the restructuring on the gross profit margin are not material):

<TABLE>
<CAPTION>
NET COST OF SALES %
---------------
SALES WITH WITHOUT
----- ---- -------
(actual) (proforma)
<S> <C> <C> <C>
June 30, 1993 $ 943,000 76.8% 75.4%
September 30, 1993 413,000 77.9% 77.4%
December 31, 1993 1,559,000 79.1% 77.1%
March 31, 1994 (138,000) 76.8% 76.3%
---------- ---- ----

Year Ended March 31, 1994 $2,777,000 77.7% 76.7%
========== ==== ====
</TABLE>

The reduction in quarterly gross margins ranged from .5% to 2.0% depending
upon the level of quarterly restructuring targeted inventory net sales.

The March 1994 quarter included net returns of the targeted inventory. Due
to damage sustained in the January 17, 1994 Northridge earthquake, the Company
was unable to access and sell the targeted inventory from January 17, 1994 to
March 31, 1994. At March 31, 1994, the Company had approximately 70,000 units of
undamaged, targeted inventory. See aforementioned "Insurance
---
Settlements - Business Interruption and Property Damage."

Selling expenses for fiscal 1994 decreased to $3,113,131 from $5,125,916
for fiscal 1993, due to reduction in work force levels, related payroll costs,
advertising and other sales and marketing expenditures in accordance with the
March 18, 1993 restructuring plan. As a percentage of net sales, selling
expenses decreased to 4.7% for fiscal 1994 from 8.6% for fiscal 1993.

General and administrative expenses for fiscal 1994 decreased 4.5% to
$3,657,082 from $3,828,103 for fiscal 1993, due to reductions in work force
levels, related payroll costs and professional fees in accordance with the March
18, 1993 restructuring plan offset, in part, by payment and accrual of fiscal
1994 employee and executive performance bonuses totaling $413,000 (employee and
executive bonuses for fiscal 1993 were minimal). As a percentage of net sales,
general and administrative expenses decreased to 5.6% in fiscal 1994 from 6.4%
in fiscal 1993.

Amortization of production costs for fiscal 1994 decreased 6.8% to
$2,819,995 from $3,024,581 for fiscal 1993. Amortization of production costs is
a function of the timing and number of Image exclusive titles placed into
production. The decrease in amortization results from the reduction in
unamortized production costs effected in the restructuring, partially offset by
accelerated amortization rates set in accordance with the restructuring plan.

Interest expense for fiscal 1994 decreased 7.7% to $2,335,894 from
$2,531,729 for fiscal 1993. The reduction in interest expense resulted from the
fiscal 1994 prepayments of debt described in "Liquidity and Capital Resources."

- --------------------------------------------------------------------------------
16 Image Entertainment, Inc.
<PAGE>

Amortization of deferred financing costs of $270,251 and $315,631 for
fiscal 1994 and 1993, respectively, is attributable to the warrants and costs
relating to the Company's November 1991 financing. The reduction in amortization
resulted from the fiscal 1994 prepayments of debt described in "Liquidity and
Capital Resources."

Extraordinary item - costs associated with early retirement of debt of
$377,535, net of related taxes of $10,476, resulted from the fiscal 1994
voluntary prepayments of debt described in "Liquidity and Capital Resources" and
is composed of $125,000 in prepayment penalties and noncash charges of $263,011
in accelerated amortization of deferred financing costs.

ACCOUNTING POLICIES

The Company's earnings are significantly affected by accounting policies
required for the entertainment industry. The costs to produce licensed laserdisc
programming (the "Production Costs") are capitalized as incurred. Pursuant to
the income forecast method, as discussed in Financial Accounting Standards Board
Statement No. 53, a percentage of the Production Costs is charged to expense
each month based upon (i) a projected revenue stream resulting from distribution
of new and previously released laserdisc programming related to the Production
Costs and (ii) management's estimate of the ultimate net realizable value of the
Production Costs. Production Costs include the cost of converting film prints or
tapes into the laserdisc format, jacket artwork costs and the overhead of the
Company's creative services/computer graphics and production departments.
Estimates of future revenues are reviewed periodically and amortization of
Production Costs is adjusted accordingly. If estimated future revenues are not
sufficient to recover the unamortized balance of Production Costs, such costs
are reduced to estimated net realizable value.

Royalty and distribution fee advances represent fixed minimum payments made
to licensors for laserdisc programming distribution rights. A licensor's share
of program distribution revenues is retained by the Company until the share
equals the advance(s) paid to the licensor. Thereafter, any excess is paid to
the licensor. In the event of an excess, the Company records, as a cost of
laserdisc sales, an amount equal to the licensor's share of the distribution
revenues. Royalty and distribution fee advances are charged to operations as
revenues are earned, and are stated at the lower of unamortized cost or
estimated net realizable value on an individual-title or license-agreement
basis.

INFLATION

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

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital requirements vary primarily with the level of
its licensing, production and distribution activities. The principal uses of
working capital 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 distribution, principal and interest payments on long-term debt and
selling, general and administrative expenses. Working capital requirements
increase as licensing and distribution activities increase. Working capital has
historically been provided by private sales of common stock, notes representing
long-term debt, bank borrowings and cash flow from operations. For fiscal 1995,
operating activities provided cash of $11,015,346, investing activities provided
cash of $3,632,857 and financing activities used cash of $14,816,789, resulting
in a net decrease in cash and cash equivalents of $168,586.

To refinance its existing long-term debt and gain borrowing flexibility to
maintain growth, on November 15, 1994, the Company entered into a Loan and
Security Agreement with Foothill Capital Corporation, an asset-based lender. The
agreement provides for revolving advances and the issuance of

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 17
<PAGE>

and guaranty of standby letters of credit under a $14,250,000 revolving credit
facility and a series of term loans under a $750,000 capital expenditure term
loan facility. The term of the agreement is three years, renewable automatically
thereafter for successive one-year periods.

Borrowings under the agreement are secured by substantially all of the
Company's assets and bear interest at the highest prime rate of three reference
banks plus 1.5% (10.5% at March 31, 1995), payable monthly. Funds available for
borrowing under the credit facility may not exceed the borrowing base specified
in the agreement. At March 31, 1995, the Company had no borrowings outstanding
under the revolving credit and term loan facilities and had borrowing
availability of $7,172,000 and $750,000, respectively. The agreement requires
the Company to comply with certain financial and operating covenants. At March
31, 1995, the Company was in compliance with all covenants.

On January 16, 1995, the Company's Board of Directors announced approval of
a stock repurchase program authorizing the Company to buy up to one million
shares of its outstanding common stock. Purchases will be made from time to time
in open market and/or privately negotiated transactions based on current market
conditions and other factors. Since the announcement and through March 31, 1995,
the Company has repurchased 254,800 shares of its common stock for $1,868,481.

At March 31, 1995, the Company had license obligations for royalty advances
and minimum guarantees and exclusive distribution fee obligations for minimum
guarantees of approximately $6,325,000 during fiscal 1996, $4,033,000 during
fiscal 1997, $4,422,000 during fiscal 1998, $4,678,000 during fiscal 1999 and
$2,627,000 during fiscal 2000. These advances and guarantees are recoupable
against royalties and distribution fees earned by the licensors and program
suppliers, respectively. Depending upon the competition for license and
exclusive distribution rights, the Company may have to pay increased advances,
guarantees and/or royalty rates in order to acquire or retain such rights in the
future.

At March 31, 1995, the Company had $2,990,000 of outstanding letters of
credit of which $990,000 and $2,000,000 were issued and guaranteed,
respectively, by the Company's lender and expire on November 15, 1995. These
letters of credit secure balances due to program suppliers.

Management believes its internal and external sources of funding are
adequate to meet anticipated needs.

RECENT ACQUISITION

Effective June 8, 1995, the Company, through its newly created wholly owned
subsidiary, acquired and assumed substantially all of the assets and
liabilities, respectively, of V.T. Laser, Inc., a privately held New Jersey
based corporation doing business as "U.S. Laser Video Distributors" ("U.S.
Laser"), for a purchase price of approximately $3.1 million in cash. The
transaction was funded through operating cash flow and borrowings under the
Company's revolving credit facility. This acquisition will be accounted for as a
purchase in the Company's first quarter ending June 30, 1995. U.S. Laser is a
nonexclusive distributor of optical disc programming and the publisher of
LASERVIEWS: America's Laser Disc Magazine, a bimonthly consumer periodical
focusing on product announcements, software reviews and articles of general
interest to the laserdisc consumer, and D.I.S.C.: Dealer's Interactive Software
Companion, a dealer-oriented multimedia publication. U.S. Laser has been in the
laserdisc distribution business since 1985 and will continue to operate on a
business as usual basis out of its New Jersey offices.

- --------------------------------------------------------------------------------
18 Image Entertainment, Inc.
<PAGE>

SUMMARY AND OUTLOOK

The financial condition of the Company has strengthened considerably since
the March 18, 1993 Restructuring Plan was implemented. In the two years
following implementation, Company operations have provided strong positive
cashflow, which along with approximately $3.4 million from sales of
restructuring-targeted inventory, have afforded the Company the ability to
retire $20 million in long-term debt and embark on a stock buy back program. At
March 31, 1995, the Company was debt free excluding accounts payable and accrued
royalties and expenses.

The Company continues to aggressively license new programming for laserdisc
distribution as well as renew and extend relationships with existing studios as
distribution and or license agreements mature. The Company believes the
laserdisc industry will continue its growth through the turn of the century.

In addition to its laserdisc licensing and distribution, the Company
continues to seek investment opportunities in growth oriented companies which
would be complementary to the Company's existing operations such as proprietary
content production or software distribution businesses. Should additional
suitable investment opportunities arise that would require funds in excess of
those provided by operations and availability under the Company's revolving
credit facility, additional financing sources may be sought.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------

<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE

<S> <C>
Independent Auditors' Report............................................ 20

Balance Sheets at March 31, 1995 and 1994............................... 21

Statements of Operations for the years ended March 31, 1995, 1994 and
1993.................................................................... 23

Statements of Shareholders' Equity for the years ended March 31, 1995,
1994 and 1993........................................................... 24

Statements of Cash Flows for the years ended March 31, 1995, 1994 and
1993.................................................................... 25

Notes to Financial Statements........................................... 28
</TABLE>

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 19
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Image Entertainment, Inc.:

We have audited the accompanying financial statements of Image Entertainment,
Inc., as listed in the accompanying index. In connection with our audits of the
financial statements, we also have audited the accompanying financial statement
schedule, as listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Image Entertainment, Inc. as of
March 31, 1995 and 1994 and the results of its operations and its cash flows for
each of the years in the three-year period ended March 31, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

KPMG PEAT MARWICK LLP

Los Angeles, California
June 6, 1995, except for
Note 14, which is as of June 8, 1995.

- --------------------------------------------------------------------------------
20 Image Entertainment, Inc.
<PAGE>

BALANCE SHEETS

MARCH 31, 1995 AND 1994

================================================================================

ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash and cash equivalents $ 2,187,063 $ 2,355,649

Short-term investments, restricted as to
$2,865,326 - 1994 --- 4,656,407

Accounts receivable, net of allowances of
$2,700,000 - 1995; $4,243,570 - 1994 11,986,576 9,388,278

Insurance settlement receivable (Note 3) --- 6,543,059

Inventories (Notes 3, 4 and 6) 16,283,281 15,998,345

Prepaid expenses and other assets 668,590 670,856

Deferred financing costs, net (Note 9) --- 556,538

Notes receivable, net of deferred gain (Note 7) 352,017 571,699

Property, equipment and improvements, net (Notes 3 and 8) 2,013,403 1,785,433
----------- -----------

$33,490,930 $42,526,264
=========== ===========
</TABLE>

See accompanying notes to financial statements.

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 21
<PAGE>

BALANCE SHEETS

MARCH 31, 1995 AND 1994

================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:

Accounts payable and accrued liabilities $ 11,150,261 $ 11,973,876

Accrued royalties (Notes 4 and 6) 5,564,812 6,015,869

Senior secured and senior secured subordinated
notes payable, net of unamortized discount of
$396,858 - 1994 (Note 9) --- 13,103,142

Capital lease obligations 103,358 318,941
------------ ------------

Total liabilities 16,818,431 31,411,828
------------ ------------

Commitments and Contingencies (Notes 7, 13 and 14)

SHAREHOLDERS' EQUITY:

Preferred stock, $1 par value, 3,365,385 shares authorized;
none issued and outstanding --- ---

Common stock, no par value, 25,000,000 shares authorized;
13,797,429 and 12,559,914 issued and outstanding
in 1995 and 1994, respectively (Note 11) 25,216,305 26,248,386

Stock warrants (Note 10) (582,006) (930,611)

Additional paid-in capital (Note 10) 3,064,129 3,133,254

Accumulated deficit (11,025,929) (17,336,593)
------------ ------------

Net shareholders' equity 16,672,499 11,114,436
------------ ------------

$ 33,490,930 $ 42,526,264
============ ============
</TABLE>

See accompanying notes to financial statements.

- --------------------------------------------------------------------------------
22 Image Entertainment, Inc.
<PAGE>

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993

================================================================================

1995 1994 1993
---- ---- ----

<S> <C> <C> <C>
NET SALES $85,590,730 $65,577,813 $ 59,813,867

OPERATING COSTS AND EXPENSES:
Cost of laserdisc sales 66,773,017 50,985,390 52,036,255
Selling expenses 4,002,482 3,113,131 5,125,916
General and administrative expenses 4,025,822 3,657,082 3,828,103
Amortization of production costs 3,049,610 2,819,995 3,024,581
Restructuring charge (Note 4) --- --- 10,366,000
----------- ----------- ------------
77,850,931 60,575,598 74,380,855
----------- ----------- ------------

OPERATING INCOME (LOSS) 7,739,799 5,002,215 (14,566,988)

OTHER EXPENSES (INCOME):
Interest expense 1,184,190 2,335,894 2,531,729
Interest income (518,258) (486,889) (439,481)
Amortization of deferred financing costs 111,459 270,251 315,631
Net gain on insurance settlement (Note 3) (742,390) (959,511) ---
----------- ----------- ------------
35,001 1,159,745 2,407,879
----------- ----------- ------------

INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 7,704,798 3,842,470 (16,974,867)

INCOME TAXES (Note 12) 175,303 103,871 800
----------- ----------- ------------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 7,529,495 3,738,599 (16,975,667)

EXTRAORDINARY ITEM - COSTS ASSOCIATED
WITH EARLY RETIREMENT OF DEBT,
NET OF TAXES (Note 9) 1,218,831 377,535 ---
----------- ----------- ------------

NET INCOME (LOSS) $ 6,310,664 $ 3,361,064 $(16,975,667)
=========== =========== ============

NET INCOME (LOSS) PER SHARE (Note 5):
Income (loss) before extraordinary item $ .51 $ .30 $ (1.44)
Extraordinary item - costs associated with
early retirement of debt (.07) (.03) ---
----------- ----------- ------------

NET INCOME (LOSS) PER SHARE $ .44 $ .27 $ (1.44)
=========== =========== ============

WEIGHTED AVERAGE SHARES
OUTSTANDING (Note 5) 18,138,957 12,346,967 11,760,401
=========== =========== ============
</TABLE>

See accompanying notes to financial statements.

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 23
<PAGE>

STATEMENTS OF SHAREHOLDERS' EQUITY (NOTES 10 AND 11)

FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993

================================================================================

<TABLE>
<CAPTION>
Common Stock Stock Additional Accumulated
------------
Shares Amount Warrants Paid-in Capital Deficit
------ ------ -------- --------------- -------
<S> <C> <C> <C> <C> <C>

BALANCES, March 31, 1992 11,412,439 $21,103,656 ($731,534) $2,357,337 ($3,721,990)
Exercise of options 49,904 221,581 --- --- ---
Issuance of stock 659,432 4,550,000 --- --- ---
Issuance of stock warrants --- --- (803,417) 775,917 ---
Amortization of stock warrants --- --- 255,735 --- ---
Net loss --- --- --- --- (16,975,667)
---------- ----------- ---------- ---------- ------------

BALANCES, March 31, 1993 12,121,775 25,875,237 (1,279,216) 3,133,254 (20,697,657)
Exercise of options 438,139 373,149 --- --- ---
Amortization of stock warrants --- --- 348,605 --- ---
Net income --- --- --- --- 3,361,064
---------- ----------- ---------- ---------- ------------

BALANCES, March 31, 1994 12,559,914 26,248,386 (930,611) 3,133,254 (17,336,593)
Exercise of options 1,492,315 836,400 --- --- ---
Stock repurchased (254,800) (1,868,481) --- --- ---
Warrant repurchased --- --- --- (69,125) ---
Amortization of stock warrants --- --- 348,605 --- ---
Net income --- --- --- --- 6,310,664
---------- ----------- ---------- ---------- ------------

BALANCES, March 31, 1995 13,797,429 $25,216,305 ($582,006) $3,064,129 ($11,025,929)
========== =========== ========== ========== ============
</TABLE>

See accompanying notes to financial statements.

<PAGE>

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993

================================================================================

<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ 6,310,664 $ 3,361,064 ($16,975,667)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Restructuring charge --- --- 10,366,000
Depreciation and amortization 3,811,965 3,498,781 3,547,883
Accelerated amortization of deferred financing costs
and debt discount 759,138 263,011 ---
Amortization of deferred financing costs
and debt discount 194,258 414,534 472,501
Amortization of stock warrants 348,605 348,605 255,735
Loss on disposition of equipment --- 4,264 ---
Changes in assets and liabilities
associated with operating activities:
Accounts receivable (2,598,298) 5,476,697 (2,666,081)
Insurance settlement receivable 6,543,059 (6,543,059) ---
Laserdisc inventory (1,821,629) 5,983,221 (4,387,545)
Royalty and distribution fee advances, net 1,419,132 477,855 (2,642,174)
Production cost expenditures (2,898,824) (2,636,821) (3,459,975)
Prepaid expenses and other assets 2,266 (107,829) 562,988
Notes receivable 219,682 142,284 73,833
Accounts payable, accrued royalties
and liabilities (1,274,672) (1,671,812) 7,959,788
----------- ----------- ------------

Net cash provided (used) by operating activities 11,015,346 9,010,795 (6,892,714)
----------- ----------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of short-term investments (1,015,479) (4,796,544) (4,599,792)
Proceeds from maturities of short-term investments 5,671,886 3,180,153 2,421,881
Capital expenditures (1,023,550) (26,601) (693,527)
----------- ----------- ------------

Net cash provided (used) by investing activities 3,632,857 (1,642,992) (2,871,438)
----------- ----------- ------------
</TABLE>

See accompanying notes to financial statements.

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 25
<PAGE>

STATEMENTS OF CASH FLOWS (CONT'D.)

FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993

================================================================================

<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of senior secured notes payable ($13,500,000) ($6,500,000) ---
Advances under revolving credit facility 29,102,618 --- ---
Repayment of advances under revolving credit facility (29,102,618) --- ---
Principal payments under capital lease obligations (215,583) (274,420) ($234,936)
Repurchase of warrant and common stock (1,937,606)
Net proceeds from exercise of stock options 836,400 373,149 221,581
Proceeds from issuance of common stock,
net of offering costs --- --- 4,550,000
Stock warrants --- --- (27,500)
------------- ------------ -----------

Net cash (used) provided by financing activities (14,816,789) (6,401,271) 4,509,145
------------- ------------ -----------

NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (168,586) 966,532 (5,255,007)

Cash and cash equivalents at beginning of year 2,355,649 1,389,117 6,644,124
------------- ------------ -----------

Cash and cash equivalents at end of year $ 2,187,063 $ 2,355,649 $ 1,389,117
============= ============ ===========

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:

Cash paid during the year for:
Interest $ 1,723,234 $ 2,432,269 $ 2,362,081
Income taxes $ 70,950 $ 66,000 $ 800
============= ============ ===========
</TABLE>

See accompanying notes to financial statements.

- --------------------------------------------------------------------------------
26 Image Entertainment, Inc.
<PAGE>

STATEMENTS OF CASH FLOWS (CONT'D.)

FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993

================================================================================

SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:

Fully amortized production costs removed from production costs totaled
$3,208,593 and $2,985,897 at March 31, 1995 and 1994, respectively.

Capital expenditures for the year ended March 31, 1994 excludes $204,053 of
property and equipment destroyed in the January 17, 1994 Northridge earthquake
and reimbursed under the insurance settlement. See Note 3 to the financial
---
statements for additional information.

Capital lease obligations totaling approximately $394,000 were incurred
during the fiscal year ended March 31, 1993. There were no capital lease
obligations incurred during fiscal years ended March 31, 1995 and 1994.

See accompanying notes to financial statements.

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 27
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1. ORGANIZATION AND BUSINESS.

Image Entertainment, Inc. (the "Company") was incorporated in Colorado on April
1, 1975. In November 1989, the Company reincorporated in California. The
Company's primary business is the distribution of programming on laserdisc under
exclusive and nonexclusive license and wholesale distribution agreements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Cash and Cash Equivalents
- -------------------------

The Company considers all highly liquid investments purchased with maturities
of three months or less to be cash equivalents.

Short-Term Investments
- ----------------------

Short-term investments at March 31, 1994 consist of liquid investments purchased
with original maturities between three and twelve months. Certain short-term
investments secured outstanding letters of credit at March 31, 1994.

Effective April 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under Statement No. 115, the Company has
classified its short-term investments as available-for-sale. Available-for-sale
securities are stated at market value and unrealized holding gains and losses,
net of the related tax effect, are excluded from earnings and are reported as a
separate component of shareholders' equity until realized. A decline in the
market value of the security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security.

Since the market value of short-term investments approximates cost as of April
1, 1994 the application of Statement No. 115 did not have material effect on the
Company's financial statements. Net unrealized gains and losses on available-
for-sale securities for fiscal 1995 were not material.

Accounts Receivable
- -------------------

At March 31, 1995 and 1994, the allowance for doubtful accounts was $200,000 and
$168,570, respectively, and the allowance for sales returns was $2,500,000 and
$4,075,000, respectively.

The Company discontinued selling product to a video tape distributor at the
close of fiscal 1994 to maintain better control over distribution of product and
eliminate any duplication of efforts. As a result, the allowance for sales
returns at March 31, 1994 includes approximately $1,300,000, representing the
Company's buy back of the distributor's inventory of Company product at
wholesale sales value, less a restocking fee.

Revenue Recognition
- -------------------

Revenue is recognized upon shipment. The Company's return policy allows
customers to return a percentage of laserdiscs purchased on a quarterly basis.
This allowance is non-cumulative and is based on the customer's prior-quarter
purchases and is limited on an individual-title basis. The Company provides for
estimated returns when product is shipped to customers.

- --------------------------------------------------------------------------------
28 Image Entertainment, Inc.
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Major Customers
- ---------------

No customers individually accounted for 10% or more of fiscal 1995 and 1994 net
sales. One customer accounted for 10% of 1993 net sales.

Depreciation and Amortization of Property, Equipment and Improvements
- ---------------------------------------------------------------------

Depreciation of property and equipment is provided for using the straight-line
method over the estimated useful lives of the related assets, generally five
years. Leasehold improvements are amortized over the shorter of the estimated
useful life of the improvements or the remaining lease term. Assets acquired
under capitalized leases are amortized over the life of the lease. The cost of
repairs and maintenance is charged to operations when incurred.

Income Taxes
- ------------

The Company accounts for income taxes pursuant to the provisions of Financial
Accounting Standards Board Statement No. 109. Under the asset and liability
method of Statement No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and the future tax benefits derived from operating
loss and tax credit carryforwards.

Fourth Quarter Adjustments
- --------------------------

During the fourth quarter of fiscal 1995 and 1994, the Company recorded a net
gain on insurance settlement of claims of business interruption and property
damage, respectively, related to the January 17, 1994 Northridge earthquake of
$742,390 and $959,511, respectively. See Note 3 to the financial statements.
---

During the fourth quarter of fiscal 1993, the Company recorded adjustments
aggregating approximately $13,766,000 as a charge to operations. The adjustments
are composed of a $3,400,000 accrual for estimated unrecouped minimum royalty
guarantees payable through the term of an exclusive license agreement and
$10,366,000 in restructuring charges described in Note 4 to the financial
statements.

Reclassifications
- -----------------

Certain fiscal 1994 and 1993 balances have been reclassified to conform with the
fiscal 1995 presentation.

Fair Value of Financial Instruments
- -----------------------------------

Carrying amounts approximate fair value due to the relatively short maturity of
such instruments.

NOTE 3. INSURANCE SETTLEMENTS - BUSINESS INTERRUPTION AND PROPERTY DAMAGE.

On March 30, 1995, the Company received an $880,000 insurance settlement from
its claim of business interruption losses sustained in the January 17, 1994
Northridge earthquake. The settlement resulted in a net gain of $742,390 after
the accrual of related expenses and reimbursement of incurred costs. The net
gain was reported as other income in the accompanying statement of operations
for the year ended March 31, 1995.

In June 1994, the Company received a $7,543,000 insurance settlement from its
claim to recover damage and losses to personal property including fixtures,
property, inventory and equipment sustained in the

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 29
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Northridge earthquake. Of the settlement, $1,000,000 was received in February
1994 and the remaining $6,543,000 was received in June 1994. The settlement
resulted in a net gain of $959,511 after the write-off of the net book value of
damaged inventory, fixtures, property and equipment, accrual of related
royalties and expenses and reimbursement of incurred costs. The net gain was
reported as other income in the accompanying statement of operations for the
year ended March 31, 1994.

The Company has no further claim with respect to damage and losses sustained in
the January 17, 1994 Northridge earthquake.

NOTE 4. MARCH 18, 1993 RESTRUCTURING PLAN.

Pursuant to the plan, the Company voluntarily prepaid long-term debt. The
Company made voluntary long-term debt prepayments of $2,000,000 during fiscal
1995 (through the date of its November 15, 1994 refinancing - See Note 9 to the
---
financial statements) and scheduled mandatory and voluntary prepayments of
$1,000,000 and $5,500,000, respectively, during fiscal 1994. Approximately
$650,000 and $2,777,000 of the prepayments during fiscal 1995 and 1994,
respectively, were funded by deliberate liquidation of certain inventory.
Certain exclusively distributed titles, from all genres, for which inventory
existed to satisfy demand over the duration of their distribution terms, were
targeted for sale over a twelve-month period commencing shortly after the
restructuring plan was implemented. The Company's decision to significantly
reduce the selling prices resulted in the write-down of the then-current
carrying cost of the targeted inventory and related unamortized production costs
and royalty advances to a carrying cost equal to the reduced selling price of
such inventory, resulting in an approximate zero gross margin upon future sale.
Additionally, royalty advances relating to titles which would not be released or
reordered in accordance with the Company's restructured operational strategies
were also written-down. The write-downs were accrued as a restructuring charge
in the accompanying statement of operations for fiscal 1993.

<S> <C>
Laserdisc inventory and production costs $ 5,164,000
Royalty advances 4,761,000
Severance pay 441,000
----------

$10,366,000
===========
</TABLE>

The remaining balance of the targeted inventory at March 31, 1995 was 10,000
units versus 506,000 units at the date the restructuring plan was instituted.

NOTE 5. NET INCOME (LOSS) PER SHARE.

Net income per share was based on the weighted average number of common shares
and common share equivalents (e.g., options and warrants), if dilutive,
outstanding for each of the periods presented. The amount of dilution to be
reflected in net income per share was computed by application of the treasury
stock method. In periods where the amount of common stock issuable if all
options and warrants are deemed exercised exceeds 20% of the total shares
outstanding at the end of the period, the treasury

- --------------------------------------------------------------------------------
30 Image Entertainment, Inc.
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

stock method was modified, as required by Accounting Principles Board Opinion
No. 15, to adequately reflect the dilutive effect of options and warrants on net
income per share. Under the modified treasury stock method, net income per
share data were computed as if all outstanding options and warrants were
exercised at the beginning of the period (or on the issuance date, if issued
during the period) and as if the funds obtained thereby were applied as follows:
first to repurchase up to 20% of the outstanding shares at the average market
price during the period, then any remaining proceeds are applied to reduce
long-term debt and, if any proceeds remain thereafter, such proceeds are applied
to invest in U.S. government securities. If the result of the foregoing
application of proceeds has an aggregate dilutive effect on net income per
share, the net income per share calculation must reflect the shares issuable
upon the assumed exercise of options and warrants, net of the assumed repurchase
of shares, and adjustments to net income resulting from the assumed application
of proceeds. If, on the other hand, the aggregate effect is anti-dilutive,
common share equivalents and adjustments to net income resulting from the
assumed application of proceeds are excluded from the calculation of net income
per share.

The effects of the application of the modified treasury stock method were
included in determining net income per share for the year ended March 31, 1995
and were excluded from the per share amounts for the years ended March 31, 1994
and 1993.

Fully diluted net income per share was not presented since the amounts do not
differ significantly from the primary net income per share.

The following table sets forth the calculation of net income (loss) per share
for the years ended March 31, 1995, 1994 and 1993:

1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income (loss) before extraordinary
item, unadjusted $ 7,529,495 $ 3,738,599 $(16,975,667)

Add: reduction of interest expense on
assumed reduction of debt, net of taxes 1,074,638 --- ---
Add: interest income on assumed investment
in U.S. government securities,
net of taxes 635,999 --- ---
----------- ----------- ------------

Income (loss) before extraordinary
item, as adjusted 9,240,132 3,738,599 (16,975,667)
Extraordinary item, net of taxes 1,218,831 377,535 ---
----------- ----------- ------------
Net income (loss) $ 8,021,301 $ 3,361,064 $(16,975,667)
=========== =========== ============

Weighted average common shares and
common share equivalents outstanding:
Common shares 13,255,228 12,346,967 11,760,401
Common stock options and warrants 4,883,729 --- ---
----------- ----------- ------------
18,138,957 12,346,967 11,760,401
=========== =========== ============

Net income (loss) per share:
Income before extraordinary item $ .51 $ .30 $ (1.44)
Extraordinary item (.07) (.03) ---
----------- ----------- ------------
Net income (loss) per share $ .44 $ .27 $ (1.44)
=========== =========== ============
</TABLE>

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 31
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 6. INVENTORIES.

Inventories at March 31, 1995 and 1994 are summarized as follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Laserdisc inventory $11,730,755 $ 9,909,126
Royalty and distribution fee advances 3,403,293 4,822,425
Production costs 1,149,233 1,266,794
----------- -----------

$16,283,281 $15,998,345
=========== ===========
</TABLE>

Laserdisc inventory consists of finished laserdiscs for sale and is stated at
the lower of average cost or market.

Royalty and distribution fee advances represent fixed minimum payments made to
licensors for laserdisc programming distribution rights. A licensor's share of
program distribution revenues is retained by the Company until the share equals
the advance(s) paid to the licensor. Thereafter, any excess is paid to the
licensor. In the event of an excess, the Company records, as a cost of
laserdisc sales, an amount equal to the licensor's share of the distribution
revenues. Royalty and distribution fee advances are charged to operations as
revenues are earned and are stated at the lower of unamortized cost or estimated
net realizable value on an individual-title or license-agreement basis.

The costs to produce licensed laserdisc programming include the cost of
converting film prints or tapes into the laserdisc format, jacket artwork costs
and the overhead of the Company's creative services/computer graphics and
production departments. The Company amortizes its capitalized production costs
in accordance with the provisions of Statement of Financial Accounting Standards
No. 53. Pursuant to the income forecast method, a percentage of the production
costs is charged to expense each month based upon (i) a projected revenue stream
resulting from distribution of new and previously released laserdisc programming
related to the production costs and (ii) management's estimate of the ultimate
net realizable value of the production costs. Estimates of future revenues are
reviewed periodically and amortization of production costs is adjusted
accordingly. If estimated future revenues are not sufficient to recover the
unamortized balance of production costs, such costs are reduced to the estimated
net realizable value. Production costs are net of accumulated amortization of
$4,838,547 and $5,030,756 at March 31, 1995 and 1994, respectively. The Company
expects to amortize substantially all of the March 31, 1995 production costs
through fiscal 1997.

NOTE 7. NOTES RECEIVABLE - SALE OF CERTAIN ASSETS.

On December 31, 1990, the Company sold assets relating to its licensing and
distribution of adult programming on laserdisc (the "Assets") for $3,828,600.
The Assets included inventory, jackets, artwork, laserdisc masters and
submasters, copyrights and contract rights, but excluded accounts receivable.
The buyer agreed to assume certain obligations related to the Assets.

Payment for the Assets consisted of $300,000 cash, a $1,328,600 note ("Note A")
and a $2,200,000 note ("Note B").

Note A bears annual interest of 10%, payable monthly. Two principal payments of
$82,700 each were received in February and March 1991. Two final principal
payments of $581,600 each are due in December 1995 and December 1996. Principal
prepayments may be required pursuant to a formula set forth in the note. The
note is secured by the Assets and certain other assets of the buyer acquired
after December 31, 1990.

- --------------------------------------------------------------------------------
32 Image Entertainment, Inc.
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Principal and interest on Note B, which is unsecured, are payable as follows:
until the principal is repaid, the buyer will pay the Company, by the 60th day
following December 31, 1991 and each subsequent six-month period ending June 30
and December 31, an amount, if any, pursuant to a formula set forth in the note.
Each amount paid, discounted to its present value at an annual rate of 11%
compounded monthly from the date of payment to December 31, 1990, is credited
against principal and the remainder is credited as interest. The buyer made
principal payments totaling $202,351 and $108,549 during fiscal years ended
March 31, 1995 and 1994, respectively. Currently, only one company manufactures
adult programming on laserdisc. If that company ceases to manufacture such
programming under certain circumstances, and the buyer is unable to secure
replacement manufacturing within a specified period, Notes A and B will be
canceled and the buyer will assign to the Company the Assets and other assets
then owned by the buyer (except for cash, inventory and accounts receivable).

The sale resulted in a gain, before applicable income taxes (if any), of
$2,626,450. Recognition of the gain is deferred until the net book value of
the Assets is recovered through principal repayment under Notes A and B and the
$300,000 down payment. Once the net book value of the Assets is recovered, the
gain will be recognized as cash payments under Notes A and B are received. In
the accompanying balance sheets at March 31, 1995 and 1994, the Notes A and B
plus a note receivable from a related party are presented as follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Notes receivable from an unrelated party $ 2,978,467 $ 3,180,818
Less deferred gain (2,626,450) (2,626,450)
----------- -----------
352,017 554,368
Note receivable from Starr Enterprises (a
related party), repaid on June 24, 1994 --- 17,331
----------- -----------

$ 352,017 $ 571,699
=========== ===========
</TABLE>

NOTE 8. PROPERTY, EQUIPMENT AND IMPROVEMENTS.

Property, equipment and improvements, stated at cost, at March 31, 1995 and 1994
are summarized as follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Furniture, fixtures and equipment $ 3,747,694 $ 2,383,029
Leasehold improvements 1,059,377 880,187
Assets under capitalized leases 455,098 975,403
Other 329,934 329,934
----------- -----------
5,592,103 4,568,553
Less accumulated depreciation and
amortization, including $232,844 and
$491,077 relating to capitalized leases
for 1995 and 1994, respectively. (3,578,700) (2,783,120)
----------- -----------

$ 2,013,403 $ 1,785,433
=========== ===========
</TABLE>

Depreciation and amortization of property, equipment and improvements was
$795,580, $623,777, and $523,303 for fiscal 1995, 1994, and 1993, respectively.

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 33
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 9. REVOLVING CREDIT AND TERM LOAN FACILITY.

On November 15, 1994, the Company entered into a Loan and Security Agreement
with Foothill Capital Corporation, an asset-based lender. The agreement
provides for revolving advances and the issuance of and guaranty of standby
letters of credit under a $14,250,000 revolving credit facility and a series of
term loans under a $750,000 capital expenditure term loan facility. The term of
the agreement is three years, renewable automatically thereafter for successive
one-year periods.

Borrowings under the agreement are secured by substantially all of the Company's
assets and bear interest at the highest prime rate of three reference banks plus
1.5% (10.5% at March 31, 1995), payable monthly. Funds available for borrowing
under the credit facility may not exceed the borrowing base specified in the
agreement. At March 31, 1995, the Company had no borrowings outstanding under
the revolving credit and term loan facilities and had borrowing availability of
$7,172,000 and $750,000, respectively. The Agreement requires the Company to
comply with certain financial and operational covenants. At March 31, 1995, the
Company was in compliance with all covenants.

Concurrent with funding of the revolving credit facility, the Company
immediately retired $11,500,000 of long-term debt representing the outstanding
balance of the November 18, 1991 private placement. The accelerated
amortization of deferred financing costs and discount on debt issuance and
penalties resulting from the early retirement of debt totaled $1,218,831 and
$377,535 for the fiscal years ending March 31, 1995 and 1994, respectively, of
which $759,138 and $263,011, respectively, represent noncash charges. The
extraordinary charges are recorded net of taxes of $33,800 and $10,476 for
fiscal 1995 and 1994, respectively.

For the years ended March 31, 1995, 1994 and 1993, amortization of the lender's
and investment banker's warrants issued in connection with the 1991 private
placement, excluding amortization accelerated as a result of the early
retirement of this debt, totaled $82,799, $144,283 and $156,870, respectively.
Amortization of the lender's and investment banker's warrants were recorded as
interest expense and amortization of deferred financing costs, respectively, in
the accompanying statements of operations.

NOTE 10. PROGRAM ACQUISITION AGREEMENTS AND ASSOCIATED WARRANTS.

On December 22, 1992, the Company entered into a five-year license agreement
with New Line Home Video, Inc. ("New Line") for the replication, marketing and
exclusive distribution of programming on laserdisc in the United States and
Canada. In connection with the agreement, New Line was issued a warrant to
purchase 500,000 shares of the Company's common stock at $6.30 per share. The
warrant is exercisable until December 31, 1997. The estimated fair market value
of the warrant at the date of issuance and associated costs, aggregating
$487,500, have been recorded in shareholders' equity as stock warrants.

On July 1, 1992, the Company entered into a four-year videodisc purchase and
distribution agreement with Twentieth Century Fox Home Entertainment (formerly
FoxVideo, Inc.) for the marketing and exclusive distribution of programming on
laserdisc in the United States and Canada. In connection with the agreement,
Twentieth Century Fox Film Corporation, parent of Twentieth Century Fox Home
Entertainment, was issued a warrant to purchase 1,671,760 shares of the
Company's common stock at $6.00 per share. The warrant vested as to 25% of the
shares on July 1, 1992 and the balance vests equally over the next three years,
subject to deferral and/or acceleration of vesting under certain circumstances.
The warrant is exercisable until June 30, 1996; however, as to any deferred-
vested shares, the warrant is exercisable only from January 1, 2000 to January
5, 2000. The estimated fair market value of the warrant at the date of issuance
and associated costs, aggregating $315,917, have been recorded in shareholders'
equity as stock warrants.

- --------------------------------------------------------------------------------
34 Image Entertainment, Inc.
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

On November 26, 1991, the Company entered into a four-year license agreement
with Buena Vista Home Video for the replication, marketing and exclusive
distribution of Walt Disney, Touchstone, Hollywood Pictures and Buena Vista Home
Video programming on laserdisc in the United States and Canada. In connection
with the agreement, The Walt Disney Company, parent of Buena Vista Home Video,
was issued a warrant to purchase 1,671,760 shares of the Company's common stock
at $6.00 per share. The warrant vested as to 25% of the shares on January 1,
1992 and the balance vests equally over the next three years, subject to
deferral and/or acceleration of vesting under certain circumstances. The
warrant is exercisable until December 31, 1996; however, as to any deferred-
vested shares, the warrant is exercisable only from January 1, 2000 to January
5, 2000. The estimated fair market value of the warrant at the date of issuance
and associated costs, aggregating $774,566, have been recorded in shareholders'
equity as stock warrants.

The value of all of the aforementioned warrants and issuance costs are amortized
ratably over the term of the agreements. Amortization for the years ended March
31, 1995 and 1994 totaled $348,605 each, and $255,735 for the year ended March
31, 1993, and was recorded as cost of laserdisc sales in the accompanying
statements of operations.

NOTE 11. STOCK OPTIONS AND WARRANTS.

The Company has three employee stock option plans. Incentive stock options may
be granted under one plan, and incentive stock options and nonstatutory options
under the other two. Under the plans, the exercise price of an incentive stock
option may not be less than the fair market value of the common stock on the
date of grant. The exercise price of a nonstatutory option generally may not be
less than 85% of the fair market value on the date of grant. The term of an
option may be no more than 10 years from the date of grant. In addition to
options under the three employee plans, the Company has granted options
(including the antidilution rights described below and the warrants described in
Notes 9 and 10) to officers, shareholders, creditors and others for various
business purposes.

Stock option transactions for the three years ended March 31, 1995 are as
follows:

<TABLE>
<CAPTION>
Per-Share
Shares Price Range
----------- -----------
<S> <C> <C>
Outstanding, March 31, 1992 6,105,640 $ .59-10.25
Granted 2,676,178 6.00-9.75
Exercised (49,904) 1.86-5.63
Canceled (19,000) 7.13-10.25
----------
Outstanding, March 31, 1993 8,712,914 .59-10.25
Granted 293,577 5.38-5.63
Exercised (438,139) .59-5.63
Surrendered (82,751) 2.50
Canceled (166,907) 5.10-9.75
----------
Outstanding, March 31, 1994 8,318,694 .59-10.25
Granted 537,771 7.00-8.75
Exercised (1,492,315) .59-5.63
Surrendered (269,174) 1.07-2.50
Canceled (65,208) 5.38-9.75
----------

Outstanding, March 31, 1995 7,029,768 $ .59-10.25
==========
</TABLE>

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 35
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Of the options reflected as outstanding on March 31, 1995 and 1994, options to
purchase 6,602,611 and 6,850,254 shares of common stock were exercisable,
respectively.

A December 29, 1987 stock purchase agreement (the "Agreement") provides for the
grant of antidilution rights (the "Rights") to various persons (the
"Investors"). Each Investor is entitled to Rights in connection with certain
issuances of common stock.

Upon the exercise of certain options outstanding as of December 29, 1987 (the
"Management Options"), each Investor will be granted Rights to purchase shares
of common stock pursuant to a formula based in part on the percentage of the
outstanding shares of common stock owned by the Investor on December 29, 1987.
Rights to purchase an aggregate of 522,135 shares of common stock may be granted
to the Investors if all the Management Options are exercised. As of March 31,
1995, Rights to purchase 449,878 shares had been granted, Rights to purchase
223,115 shares had been exercised (as to 12,299 shares in fiscal 1995, 36,933
shares in fiscal 1994, and 6,343 shares in fiscal 1993, at per-share exercise
prices ranging from $.74 to $1.07) and Rights to purchase 226,763 shares were
outstanding. The above table includes as outstanding on March 31, 1995
additional Rights to purchase 72,257 shares, which Rights would be granted only
upon subsequent exercises of Management Options.

Rights granted in connection with the exercise of a Management Option are
exercisable for two years from the date of grant and have a per-share exercise
price equal to the greater of (a) $.74 or (b) the exercise price of the
Management Option.

Upon certain issuances of shares of common stock other than pursuant to the
exercise of Management Options, each Investor will be granted a Right (the
"Other Right") so that the equity interest represented by the Agreement shares
held by the Investor (excluding the shares purchased upon the exercise of Rights
issued in connection with the exercise of Management Options) will not be
diluted. As of March 31, 1995, Other Rights to purchase 848,463 shares of
common stock had been exercised (as to 87,771 shares in fiscal 1995, none in
fiscal 1994, and 9,405 shares in fiscal 1993, at per-share exercise prices
ranging from $.59 to $9.29).

- --------------------------------------------------------------------------------
36 Image Entertainment, Inc.
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 12. INCOME TAXES.

Income taxes for the three years ended March 31, 1995, all current, are
summarized as follows:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal $128,806 $ 75,415 ---
State 46,497 28,456 $ 800
-------- -------- -------
$175,303 $103,871 $ 800
======== ======== =======
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 1995 and
1994 are presented below:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,150,000 $ 4,712,000
Royalty reserves 1,548,000 268,000
Sales returns reserve 416,000 122,000
Other 500,000 221,000
----------- -----------

Deferred tax assets 5,614,000 5,323,000

Less valuation allowance (4,874,000) (4,938,000)
----------- -----------
740,000 385,000

Deferred tax liabilities:
Earthquake insurance settlement --- (385,000)
Installment sales (740,000) ---
----------- -----------

Net deferred tax assets $ --- $ ---
=========== ===========
</TABLE>

Income taxes for the years ended March 31, 1995 and 1994 is net of credits of
approximately $7,362,000 and $3,583,000, respectively, which resulted from the
utilization of net operating loss carryforwards to offset taxable income for
Federal and state income tax purposes.

NOTE 13. COMMITMENTS AND CONTINGENCIES.

The Company entered into renegotiated leases for its office and warehouse space
on December 1, 1993. The new leases commenced on April 1, 1994 and expire on
March 31, 2000.

The lease for the Company's office provides for monthly rent of $13,726 (subject
to annual adjustment based upon increases in the consumer price index). The
lease for the Company's warehouse space provides for monthly rent of $22,039
(subject to annual adjustment based upon increases in the consumer price index).

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 37
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Future minimum annual rental payments at March 31, 1995 are approximately as
follows:

<TABLE>
<CAPTION>
March 31, Amount
--------- ------
<S> <C>
1996 $ 466,000
1997 429,000
1998 429,000
1999 429,000
2000 429,000
----------
$2,182,000
==========
</TABLE>

Rent expense was $458,819, $296,190, and $341,305 for fiscal 1995, 1994, and
1993, respectively.

At March 31, 1995, the Company had $2,990,000 of outstanding letters of credit
of which $990,000 and $2,000,000 were issued and guaranteed, respectively, by
the Company's lender and expire on November 15, 1995. These letters of credit
secure balances due to program suppliers.

The Company's future obligations for royalty advances and minimum guarantees and
exclusive distribution fee guarantees under the terms of existing licenses and
an exclusive distribution agreement, respectively, are as follows:

<TABLE>
<CAPTION>
March 31, Amount
--------- ------
<S> <C>
1996 $ 6,325,000
1997 4,033,000
1998 4,422,000
1999 4,678,000
2000 2,627,000
-----------

$22,085,000
===========
</TABLE>

NOTE 14. SUBSEQUENT EVENT.

Effective June 8, 1995, the Company, through its newly created wholly owned
subsidiary, acquired and assumed substantially all of the assets and
liabilities, respectively, of V.T. Laser, Inc., a privately held New Jersey
based corporation doing business as "U.S. Laser Video Distributors" ("U.S.
Laser"), for a purchase price of approximately $3.1 million in cash. The
transaction was funded through operating cash flow and borrowings under the
Company's revolving credit facility. This acquisition will be accounted for
as a purchase in the Company's first quarter ending June 30, 1995. U.S. Laser
is a nonexclusive distributor of optical disc programming and the publisher of
LASERVIEWS: America's Laser Disc Magazine, a bimonthly consumer periodical
focusing on product announcements, software reviews and articles of general
interest to the laserdisc consumer, and D.I.S.C.: Dealer's Interactive
Software Companion, a dealer-oriented multimedia publication.

- --------------------------------------------------------------------------------
38 Image Entertainment, Inc.
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------

None.

- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------

The information required to be set forth in this Part III (except for the
list of Executive Officers set forth in Part I hereof) is included in a
definitive Proxy Statement pursuant to Regulation 14A, incorporated herein by
reference, to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the Company's fiscal year ended March 31,
1995.

- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
---------------------------------------------------------------

<TABLE>
<CAPTION>
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT. Page
----
<S> <C> <C>

1. Financial Statements:

Independent Auditors' Report............................... 20

Balance Sheets at March 31, 1995 and 1994.................. 21

Statements of Operations for the years ended March 31,
1995, 1994 and 1993........................................ 23

Statements of Shareholders' Equity for the years ended
March 31, 1995, 1994 and 1993.............................. 24

Statements of Cash Flows for the years ended March 31,
1995, 1994 and 1993........................................ 25

Notes to Financial Statements.............................. 28

2. Financial Statement Schedule:
Schedule VIII - Valuation and Qualifying Accounts.......... 40

3. Exhibits: See the Exhibit Index on pages (i) through (ii).

(b) REPORTS ON FORM 8-K.

None.
</TABLE>

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 39
<PAGE>

SCHEDULE VIII
- VALUATION AND QUALIFYING ACCOUNTS -
FOR THE YEARS ENDED MARCH 31, 1995, 1994 AND 1993

================================================================================

Allowance for Doubtful Accounts
-------------------------------
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
of Year Expenses Written-Off of Year
------- -------- ----------- -------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1995: $ 168,570 $ 78,343 $ (46,913) $ 200,000
========== ========== =========== ==========

For the Year Ended March 31, 1994: $ 206,657 $ 875 $ (38,962) $ 168,570
========== ========== =========== ==========

For the Year Ended March 31, 1993: $ 117,878 $ 145,167 $ (56,388) $ 206,657
========== ========== =========== ==========
</TABLE>

Allowance for Sales Returns
---------------------------

<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and Amounts at End
of Year Expenses Written-Off of Year
------- -------- ----------- -------
<S> <C> <C> <C> <C>
For the Year Ended March 31, 1995: $4,075,000 $ --- $(1,575,000) $2,500,000
========== ========== =========== ==========

For the Year Ended March 31, 1994: $2,500,000 $1,575,000 $ --- $4,075,000
========== ========== =========== ==========

For the Year Ended March 31, 1993: $1,500,000 $1,000,000 $ --- $2,500,000
========== ========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
40 Image Entertainment, Inc.
<PAGE>

- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

IMAGE ENTERTAINMENT, INC.,
a California corporation

Dated: June 26, 1995 By: /s/ Martin W. Greenwald
-------------------------------------------
MARTIN W. GREENWALD,
Chairman of the Board, Chief Executive Officer,
President & Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

/s/ Martin W. Greenwald
-------------------------------------------
Dated: June 26, 1995 MARTIN W. GREENWALD,
Chairman of the Board, Chief Executive Officer,
President & Treasurer

/s/ Jeff M. Framer
-------------------------------------------
Dated: June 26, 1995 JEFF M. FRAMER,
Chief Financial Officer (Principal Financial and
Accounting Officer)

/s/ Stuart Segall
-------------------------------------------
Dated: June 26, 1995 STUART SEGALL,
Vice President & Director

/s/ Ira Epstein
-------------------------------------------
Dated: June 26, 1995 IRA EPSTEIN,
Director

/s/ Russell Harris
-------------------------------------------
Dated: June 26, 1995 RUSSELL HARRIS,
Director

/s/ Kyle Kirkland
-------------------------------------------
Dated: June 26, 1995 KYLE KIRKLAND,
Director

- --------------------------------------------------------------------------------
Image Entertainment, Inc. 41
<PAGE>

- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------

EXHIBIT NO. DESCRIPTION
- ----------- -----------

3.1 * Restated Articles of Incorporation.

3.2 * Bylaws.

10.1 + The Company's Restated 1989 Incentive Stock Option Plan, as
amended. Filed as Exhibit 10.1 of the Company's Form 10-K for the
year ended March 31, 1992, and incorporated by reference herein.

10.2 + The Company's 1990 Stock Option Plan. Filed as Exhibit A of the
Company's Proxy Statement dated December 27, 1990, and
incorporated by reference herein.

10.3 + The Company's Restated 1992 Stock Option Plan. Filed as Exhibit A
of the Company's Proxy Statement dated September 9, 1994, and
incorporated by reference herein.

10.4 * The Company's 1994 Eligible Directors Stock Option Plan and Form
of Eligible Director Non-Qualified Stock Option Agreement.

10.5 + Form of Option Agreement dated October 15, 1991 between the
Company and Martin W. Greenwald. Filed as Exhibit 10.3 of the
Company's 10-Q for the quarter ended September 30, 1991, and
incorporated by reference herein.

10.6 + Option granted August 13, 1992 by the Company to Cheryl Lee.

10.7 + Form of Option granted May 19, 1994 to Jeff Framer, Cheryl Lee and
David Borshell.

10.8 * + Employment Agreement of Martin W. Greenwald dated July 1, 1994.

10.9 * + Employment Agreement of Cheryl Lee dated July 1, 1994.

10.10 * + Employment Agreement of Jeff Framer dated July 1, 1994.

10.11 * + Employment Agreement of David Borshell dated July 1, 1994.

10.11.A * + Amendment No. 1 dated and effective as of September 1, 1994 to
Employment Agreement of David Borshell dated July 1, 1994.

10.12 + Form of Indemnity Agreement between the Company and its directors
and officers. Filed as Exhibit F of the Company's Proxy Statement
dated September 5, 1989, and incorporated by reference herein.

10.13 Stock Purchase Agreement among the Company, Directors of the
Company and various Buyers dated December 29, 1987. Filed as
Exhibit 4.3 of the Company's Form 8-K dated December 29, 1987, and
incorporated by reference herein.

10.13.A Form of First Amendment dated July 7, 1992 to the Stock Purchase
Agreement referenced in Exhibit 10.19 above. Filed as Exhibit 10.5
of the Company's Form 10-Q for the quarter ended September 30,
1992, and incorporated by reference herein.

- --------------------------------------------------------------------------------
Image Entertainment, Inc.
<PAGE>

10.14 Stock Purchase Agreement among the Company, Directors of the
Company and Image Investors Co. dated June 27, 1990. Filed as
Exhibit 10.53 of the Company's Form 10-K for the year ended March
31, 1990. The Company and Image Investors Co. are parties to Stock
Purchase Agreements dated July 14, 1988, November 30, 1988,
January 11, 1989, February 14, 1989, May 10, 1989 and June 20,
1990, which are virtually identical to this Exhibit except for the
number of shares of Common Stock purchased, and incorporated by
reference herein.

10.15 Stock Purchase Agreement between the Company and Image Investors
Co. dated December 30, 1992, including Warrant. Filed as Exhibit
10.6 of the Company's Form 10-Q for the quarter ended December 31,
1992, and incorporated by reference herein.

10.16 Purchase and Sale Agreement between the Company and LEI Partners,
L.P. dated December 31, 1990. Filed as Exhibit 10.1 of the
Company's Form 10-Q for the quarter ended December 31, 1990, and
incorporated by reference herein.

10.17 Standard Industrial Lease for 9333 Oso Avenue, Chatsworth,
California, dated December 1, 1993 and effective April 1, 1994,
between the Company and P&R Investment Company. Filed as Exhibit
10.1 of the Company's Form 10-Q for the quarter ended December 31,
1993.

10.18 Standard Industrial Lease for 20350 Prairie Street, Chatsworth,
California, dated December 1, 1993 and effective April 1, 1994,
between the Company and P&R Investment Company. Filed as Exhibit
10.2 of the Company's Form 10-Q for the quarter ended December 31,
1993.

10.19 Loan and Security Agreement between the Company and Foothill
Capital Corporation dated as of November 15, 1994, including
Capital Expenditure Loan Note and Trademark Security Agreement.
Filed as Exhibit 4 of the Company's Form 10-Q for the quarter
ended September 30, 1994.

10.20 * Stock Purchase Agreement between the Company and Kyle Kirkland
dated as of January 26, 1995.

21 * Subsidiaries of the Registrant.

23 * Consent Letter of KPMG Peat Marwick LLP.

27 * Financial Data Schedule.
_______________________________________________________________

* Exhibit(s) not previously filed with the Securities and Exchange
Commission.
+ Management Contracts, Compensatory Plans or Arrangements

- --------------------------------------------------------------------------------
Image Entertainment, Inc.

<PAGE>

EXHIBIT 3.1

RESTATED ARTICLES OF INCORPORATION
----------------------------------
OF
--
IMAGE ENTERTAINMENT, INC.
-------------------------

The name of this corporation is IMAGE ENTERTAINMENT, INC.

The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.

III

The corporation is authorized to issue two classes of shares, which shall
be designated "Common Stock" and "Preferred Stock" and referred to herein either
as Common Stock or Common Shares and Preferred Stock or Preferred Shares,
respectively. The total number of shares of Common Stock that this corporation
is authorized to issue is 25,000,000, no par value, and the total number of
shares of Preferred Stock that this corporation is authorized to issue is
3,365,385, $1.00 par value.

The Board of Directors of this corporation, without further action by the
holders of the outstanding shares of Common Stock or Preferred Stock, if any,
may issue the Preferred Stock from time to time in one or more series, may fix
the number of shares and the designation of any wholly unissued series of
Preferred Stock, may determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any such series and, within the limits
and restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series of
Preferred Stock, may increase or decrease (but not below the number of shares of
such series then outstanding) the number of shares of such series subsequent to
the issue of shares of that series.

The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law as
currently or hereafter in effect. No amendment or repeal of this Article V
shall apply with respect to any act or omission by a director occurring prior to
the effective date of such amendment or repeal.
<PAGE>

The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the Corporations Code), of the corporation, in their
capacity as such, through bylaw provisions or by agreement, vote of shareholders
or disinterested directors or otherwise, with respect to facts or omissions for
which such agents might not otherwise be entitled to indemnification under
Section 317 of the Corporations Code subject to the limits on such
indemnification set forth in Section 204 of the Corporations Code. The amendment
or repeal of this Article VI shall not apply with respect to any act or omission
by a director occurring prior to the effective date of such amendment or repeal.

<PAGE>

EXHIBIT 3.2

BY-LAWS
-------
OF
--
IMAGE ENTERTAINMENT, INC.
-------------------------

<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I OFFICES
Section 1 Principal Offices............................................. 1
Section 2 Other Offices................................................. 1

ARTICLE II MEETINGS OF SHAREHOLDERS
Section 1 Place of Meetings............................................. 1
Section 2. Annual Meetings............................................... 1
Section 3 Special Meetings.............................................. 1
Section 4 Notice of Meetings of Shareholders............................ 2
Section 5 Manner of Giving Notice; Affidavit of Notice.................. 2
Section 6 Quorum........................................................ 2
Section 7 Adjourned Meeting; Notice..................................... 3
Section 8 Voting........................................................ 3
Section 9 Waiver of Notice or Consent by Absent Shareholders............ 3
Section 10 Shareholder Action by Written Consent Without a Meeting....... 4
Section 11 Record Date for Shareholder Notice, Voting and Giving Consents 4
Section 12 Proxies....................................................... 5
Section 13 Inspectors of Election........................................ 5

ARTICLE III DIRECTORS
Section 1 Powers........................................................ 6
Section 2 Number and Qualification of Directors......................... 6
Section 3 Election and Term of Office of Directors...................... 6
Section 4 Nomination of Directors....................................... 6
Section 5 Vacancies..................................................... 7
Section 6 Place of Meetings and Meetings by Telephone................... 7
Section 7 Regular Meetings.............................................. 8
Section 8 Special Meetings.............................................. 8
Section 9 Quorum........................................................ 8
Section 10 Waiver of Notice.............................................. 8
Section 11 Adjournment................................................... 8
Section 12 Notice of Adjournment......................................... 9
Section 13 Action Without Meeting........................................ 9
Section 14 Fees and Compensation of Directors............................ 9

ARTICLE IV COMMITTEES
Section 1 Committees of Directors....................................... 9
Section 2 Meetings and Action of Committees............................. 10

ARTICLE V OFFICERS
Section 1 Officers...................................................... 10
Section 2. Election of Officers.......................................... 10
Section 3 Subordinate Officers.......................................... 10
Section 4 Removal and Resignation of Officers........................... 10
Section 5 Vacancies in Offices.......................................... 11
</TABLE>
<PAGE>

<TABLE>
<S> <C> <C>
Section 6 Chairman of the Board.......................................... 11
Section 7 President...................................................... 11
</TABLE>
<PAGE>

<TABLE>
<S> <C> <C>
Section 8 Vice-Presidents................................................ 11
Section 9 Secretary...................................................... 11
Section 10 Chief Financial Officer........................................ 12
Section 11 Fees and Compensation.......................................... 12

ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER
AGENTS; PURCHASE OF LIABILITY INSURANCE
Section 1 Indemnification of Agents of the Corporation................... 12
Section 2. Purchase of Liability Insurance................................ 13

ARTICLE VII RECORDS AND REPORTS
Section 1 Maintenance and Inspection of Share Register................... 13
Section 2 Maintenance and Inspection of Bylaws........................... 13
Section 3 Maintenance and Inspection of Other Corporate Records.......... 13
Section 4 Inspection by Directors........................................ 14
Section 5 Annual Report to Shareholders.................................. 14
Section 6 Financial Statements........................................... 14
Section 7 Annual Statement of General Information........................ 15

ARTICLE VIII GENERAL CORPORATE MATTERS
Section 1 Record Date for Purposes Other Than Notice and Voting.......... 15
Section 2 Checks, Drafts, Evidence of Indebtedness....................... 15
Section 3 Execution of Corporate Contracts and Instruments............... 15
Section 4 Certificates for Shares........................................ 16
Section 5 Transfer of Shares............................................. 16
Section 6 Lost Certificates.............................................. 16
Section 7 Representation of Shares of Other Corporations................. 16
Section 8 Dividends...................................................... 16
Section 9 Seal........................................................... 17
Section 10 Construction and Definitions................................... 17

ARTICLE IX AMENDMENTS
Section 1 Amendment by Shareholders...................................... 17
Section 2. Amendment by Directors......................................... 17

ARTICLE X VOLUNTARY DISSOLUTION
Section 1 Procedure...................................................... 17
Section 2 Revocation..................................................... 17
</TABLE>
<PAGE>

BYLAWS
OF
IMAGE ENTERTAINMENT, INC.

ARTICLE I
OFFICES

Section 1. Principal Offices.
--------- -----------------

The Board of Directors shall fix the location of the principal executive
office of the Corporation at any place within or outside the State of
California. If the principal executive office is located outside the State of
California and the Corporation has one or more business offices in the State of
California, the Board of Directors shall fix and designate a principal business
office in the State of California.

Section 2. Other Offices.
--------- -------------

The Board of Directors may at any time establish branch or subordinate
offices at any place or places it may choose from time to time.

ARTICLE II
MEETINGS OF SHAREHOLDERS

Section 1. Place of Meetings.
--------- -----------------

Meetings of shareholders shall be held at any place within or outside the
State of California designated by the Board of Directors. In the absence of any
such designation, meetings of shareholders shall be held at the principal
executive office of the Corporation.

Section 2. Annual Meeting.
--------- --------------

The annual meeting of shareholders shall be held at such date and time as
the Board of Directors may determine. However, if this day falls on a legal
holiday, the meeting shall be held at the same time and place on the next
succeeding full business day. The annual meeting shall be held at the
Corporation's principal offices or at any other location as may be determined by
the Board of Directors. At each annual meeting, directors shall be elected and
any other proper business may be transacted.

Section 3. Special Meetings.
--------- ----------------

A special meeting of the shareholders may be called at any time by the
Board of Directors, the Chairman of the Board of Directors, the President, or
one or more shareholders holding shares in the aggregate entitled to cast not
less than 10% of the votes at such meeting.

If a special meeting is called by any person or persons other than the
Board of Directors, the request shall be in writing, specifying the time of such

1
<PAGE>

meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board of Directors, the
President, any Vice-President or the Secretary of the Corporation. The officer
receiving the request shall promptly cause notice to be given to the
shareholders entitled to vote, in accordance with the provisions of Sections 4
and 5 of this Article II, that a meeting will be held at the time requested by
the person or persons calling the meeting, not fewer than 35 days or more than
60 days after the receipt of the request. If such notice is not given within 20
days after the receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this Section
3 shall be construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the Board of Directors may be held.

Section 4. Notice of Meetings of Shareholders.
--------- ----------------------------------

All notices of meetings of shareholders shall be sent or otherwise given in
accordance with Section 5 of this Article II not less than 10 days or more than
60 days before the date of the meeting. Such notice shall specify the place,
date, and hour of the meeting and (i) in the case of a special meeting, the
general nature of the business to be transacted, or (ii) in the case of the
annual meeting, those matters that the Board of Directors, at the time of giving
the notice, intends to present for action by the shareholders. The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees whom, at the time of the notice, management intends to
present for election.

If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the Articles of Incorporation, pursuant to Section 902 of such
Code, (iii) a reorganization of the Corporation, pursuant to Section 1201 of
such Code, (iv) a voluntary dissolution of the Corporation, pursuant to Section
1900 of such Code, or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares, pursuant to Section 2007 of
such Code, the notice shall also state the general nature of such proposal.

Section 5. Manner of Giving Notice; Affidavit of Notice.
---------- --------------------------------------------

Notice of any meeting of shareholders shall be given either personally or
by first-class mail or telegraphic or other written communication, charges
prepaid, addressed to each shareholder at the address of such shareholder
appearing on the books of the Corporation or given by the shareholder to the
Corporation for the purpose of notice. If no such address appears on the books
of the Corporation or is given, notice shall be deemed to have been given if
sent to a shareholder by first-class mail or telegraphic or other written
communication to the Corporation's principal executive office, or if published
at least once in a newspaper of general circulation in the county where such
office is located. Notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by telegram or other means
of written communication.

If any notice addressed to a shareholder at the address of such shareholder

2
<PAGE>

appearing on the books of the Corporation is returned to the Corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver such notice to such shareholder at such address,
each future notice and report shall be deemed to have been duly given without
further mailing if it shall be available to the shareholder on written demand by
the shareholder at the principal executive office of the Corporation for a
period of one year from the date of the giving of such notice or report.

An affidavit of the mailing or other means of giving any notice of any
meeting of shareholders shall be executed by the Secretary, Assistant Secretary
or any transfer agent of the Corporation giving the notice and shall be filed
and maintained in the minutes book of the Corporation.

Section 6. Quorum.
--------- ------

The presence in person or by proxy of the holders of a majority of the
shares entitled to vote at a meeting of shareholders shall constitute a quorum
for the transaction of business at such meeting. The shareholders in attendance
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.

Section 7. Adjourned Meeting; Notice.
--------- -------------------------

Any meeting of shareholders, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at such meeting, either in person or by proxy; but in the
absence of a quorum, no other business may be transacted at such meeting, except
as provided in Section 6 of this Article II.

When any meeting of shareholders, annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at a meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed or unless the
adjournment is for more than 45 days from the date set for the original meeting,
in which case the Board of Directors shall set a new record date. Notice of any
such adjourned meeting shall be given to each shareholder of record entitled to
vote at the adjourned meeting in accordance with the provisions of Sections 4
and 5 of this Article II. At any adjourned meeting, the Corporation may
transact any business that might have been transacted at the original meeting.

Section 8. Voting.
--------- ------

The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 11 of this Article II,
subject to the provisions of Sections 700 to 704, inclusive, of the Corporations
Code of California (relating to voting shares held by a fiduciary or in joint
ownership). The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election of directors must be by ballot if demanded by any
shareholder before the voting has begun. On any matter other than the election
of directors, any shareholder may vote part of the shares in favor of the
proposal and refrain from voting the remaining shares or vote them against the

3
<PAGE>

proposal; but if a shareholder fails to specify the number of shares such
shareholder is voting affirmatively, it shall be presumed conclusively that such
shareholder's approving vote is with respect to all shares that such shareholder
is entitled to vote. Except as provided in Section 6 of this Article II, the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or voting by classes is
required by California General Corporation Law or the Articles of Incorporation.

At a meeting of shareholders at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one or more
----
candidates a number of votes greater than the number of such shareholder's
shares) unless the candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder has given notice prior to
commencement of the voting of such shareholder's intention to cumulate votes. If
any shareholder has given such a notice, every shareholder entitled to vote may
cumulate votes for candidates in the number of directors to be elected
multiplied by the number of votes to which such shareholder's shares are
entitled or distribute such shareholder's votes on the same principle among any
or all of the candidates as the shareholder thinks fit. The candidates
receiving the highest number of votes, up to the number of directors to be
elected, shall be elected.

Section 9. Waiver of Notice or Consent by Absent Shareholders.
--------- --------------------------------------------------

The transactions of any meeting of shareholders, annual or special, however
called and noticed and wherever held, shall be as valid as though they had
occurred at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after such
meeting, each person entitled to vote who was not present in person or by proxy
signs a written waiver of notice or a consent to a holding of such meeting or an
approval of the minutes thereof. Such waiver of notice or consent need not
specify either the business to be transacted or the purpose of any annual or
special meeting of shareholders, except that if action is taken or proposed to
be taken for approval of any of those matters specified in the second paragraph
of Section 4 of this Article II, the waiver of notice or consent shall state the
general nature of the proposal. All such waivers, consents or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.

Attendance by a person at a meeting shall also constitute a waiver of
notice of such meeting, except that when the person objects at the beginning of
the meeting to the transaction of any business thereat because such meeting is
not lawfully called or convened, and except that attendance at a meeting is not
a waiver of any right to object to the consideration of matters not included in
the notice of such meeting if an objection is expressly made at such meeting.

Section 10. Shareholder Action by Written Consent Without a Meeting.
---------- -------------------------------------------------------

Any action that may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would

4
<PAGE>

be necessary to authorize or take such action at a meeting at which all shares
entitled to vote on such action were present and voted. In the case of the
election of directors, such a consent shall be effective only if signed by the
holders of all outstanding shares entitled to vote for the election of
directors; provided, however, that by the written consent of the holders of a
majority of the outstanding shares entitled to vote for the election of
directors, a director may be elected at any time to fill a vacancy on the Board
of Directors that has not been filled by the directors, other than a vacancy
created by removal. All such consents shall be filed with the Secretary of the
Corporation and shall be maintained in the corporate records. Any shareholder
giving a written consent or the shareholder's proxy holders or a transferee of
the shares or a personal representative of the shareholder or their respective
proxy holders may revoke the consent by a writing received by the Secretary of
the Corporation before written consents of the number of shares required to
authorize the proposed action have been filed with the Secretary.

If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all shareholders
has not been received, the Secretary shall give prompt notice of the corporate
action approved by the shareholders without a meeting. Such notice shall be
given in the manner specified in Section 5 of this Article II. In the case of
approval of (i) contracts or transactions in which a director has a direct or
indirect financial interest, pursuant to Section 310 of the Corporations Code of
California, (ii) indemnification of agents of the corporation, pursuant to
Section 317 of such Code, (iii) a reorganization of the Corporation, pursuant to
Section 1201 of such Code, and (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of such Code, such notice shall be given at least 10 days before the
consummation of any action authorized by such approval.

Section 11. Record Date for Shareholder Notice, Voting and Giving
---------- -----------------------------------------------------
Consents.
- --------

For purposes of determining the shareholders entitled to receive notice of
any meeting or to give consent to corporate action without a meeting, the Board
of Directors may fix in advance a record date, which shall not be more than 60
days or less than 10 days before the date of any such meeting nor more than 60
days before any such action without a meeting. In this event, only shareholders
of record on the date so fixed are entitled to receive notice and to vote or to
give consents, as the case may be, notwithstanding any transfer of any shares on
the books of the Corporation after the record date, except as otherwise provided
in the California General Corporation Law.

If the Board of Directors does not so fix a record date:

(a) The record date for determining shareholders entitled to receive
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the date on which the meeting is held; or

(b) The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, (i) when no prior

5
<PAGE>

action by the Board of Directors has been taken, shall be the day on which the
first written consent is given, or (ii) when prior action of the Board has been
taken, shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating to that action or at the close of
business on the sixtieth day before the date of such other action, whichever is
later.

Section 12. Proxies.
---------- -------

Every person entitled to vote for directors or on any other matter shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the Secretary of the
Corporation. A proxy shall be deemed signed if the shareholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy that does not state that it is irrevocable shall continue
in full force and effect unless (i) revoked by the person executing it, before
the vote pursuant to such proxy, by a writing delivered to the Corporation
stating that such proxy is revoked, or by a subsequent proxy executed by, or
attendance at the meeting and voting in person by, the person executing such
proxy; or (ii) written notice of the death or incapacity of the maker of such
proxy is received by the Corporation before the vote pursuant to such proxy is
counted; provided, however, that no proxy shall be valid after the expiration of
eleven months from the date of the proxy unless otherwise provided in the proxy.
The revocability of a proxy that states on its face that it is irrevocable shall
be governed by the provisions of Sections 705(e) and 705(f) of the Corporations
Code of California.

Section 13. Inspectors of Election.
---------- ----------------------

Before any meeting of shareholders, the Board of Directors may appoint any
persons other than nominees for office to act as inspectors of election at the
meeting or its adjournment. If no inspectors of election are so appointed, the
chairman of the meeting may, and on the request of any shareholder or a
shareholder's proxy shall, appoint inspectors of election at the meeting. The
number of such inspectors shall be either one or three. If such inspectors are
appointed at a meeting on the request of one or more shareholders or proxies,
the holders of a majority of shares or their proxies present at the meeting
shall determine whether one or three inspectors are to be appointed. If any
person appointed as inspector fails to appear or fails or refuses to act, the
chairman of the meeting may, and upon the request of any shareholder or a
shareholder's proxy shall, appoint a person to fill that vacancy.

Such inspectors shall:

(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;

(b) Receive votes, ballots or consents;

6
<PAGE>

(d) Count and tabulate all votes or consents;

(e) Determine when the polls shall close;

(f) Determine the result; and

(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.

ARTICLE III
DIRECTORS

Section 1. Powers.
--------- ------

Subject to the provisions of the California General Corporation Law and any
limitations in the Articles of Incorporation and these Bylaws relating to action
required to be approved by the shareholders or by the outstanding shares, the
business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board of Directors.
The Board may delegate the management of the day to day operations of the
business of the Corporation to a management company or other person provided
that the business and affairs of the Corporation shall be managed and all
corporate powers shall be exercised under the ultimate discretion of the Board.

Section 2. Number and Qualification of Directors.
--------- -------------------------------------

The number of directors of the Corporation shall not be less than three nor
more than five. The exact number of directors shall be three until changed,
within the limits specified above, by a resolution, duly approved by the Board
of Directors or approved by the shareholders. The indefinite number of
directors may be changed, or a definite number fixed without provision for an
indefinite number, by a duly adopted amendment of the Articles of Incorporation
or by amendment to this Bylaw approved by the shareholders; provided, however,
that an amendment reducing the number or the minimum number of directors to a
number less than five cannot be adopted if the votes cast against its adoption
at a meeting of the shareholders, or the shares not consenting in the case of
action by written consent, are equal to more than 16-2/3 percent of the
outstanding shares entitled to vote. No amendment may change the stated maximum
number of authorized directors to a number greater than two times the stated
minimum number of directors minus one.

Section 3. Election and Term of Office of Directors.
--------- ----------------------------------------

Directors shall be elected at each annual meeting of shareholders to hold
office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.

Section 4. Nomination for Director.
--------- -----------------------

Nominations for election of members of the Board of Directors may be made
by the Board of Directors or by any shareholder of any outstanding class of

7
<PAGE>

voting stock of the Corporation entitled to vote for the election of directors.
Notice of intention to make any nominations, other than by the Board of
Directors, shall be made in writing and shall be received by the President of
the Corporation no more than 60 days prior to any meeting of shareholders called
for the election of directors, and no more than 10 days after the date the
notice of such meeting is sent to shareholders pursuant to Section 4 of Article
II of these bylaws; provided, however, that if only 10 days' notice of the
meeting is given to shareholders, such notice of intention to nominate shall be
received by the President of the Corporation not later than the time fixed in
the notice of the meeting for the opening of the meeting. Such notification
shall contain the following information to the extent known to the notifying
shareholder: (a) the name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the number of shares of
voting stock of the Corporation owned by each proposed nominee; (d) the name and
residence address of the notifying shareholder; and (e) the number of shares of
voting stock of the Corporation owned by the notifying shareholder. Nominations
not made in accordance herewith shall be disregarded by the then chairman of the
meeting, and the inspectors of election shall then disregard all votes cast for
each nominee.

Section 5. Vacancies.
--------- ---------

Vacancies on the Board of Directors may be filled by a majority of the
remaining directors, though less than a quorum, or by a sole remaining director,
except that a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
vote of a majority of the shares entitled to vote represented at a duly held
meeting at which a quorum is present, or by the written consent of holders of a
majority of the outstanding shares entitled to vote. Each director so elected
shall hold office until the next annual meeting of shareholders and until a
successor has been elected and qualified.

A vacancy or vacancies on the Board of Directors shall be deemed to exist
in the event of the death, resignation or removal of any director, or if the
Board of Directors by resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or who has been convicted
of a felony, or if the authorized number of directors is increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be elected at such
meeting.

The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent other than to fill a vacancy created by removal shall require
the consent of a majority of the outstanding shares entitled to vote.

Any director may resign effective on giving written notice to the Chairman
of the Board of Directors, the President, the Secretary or the Board of
Directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a later time,
the Board of Directors may elect a successor to take office when the resignation
becomes effective.

No reduction of the authorized number of directors shall have the effect

8
<PAGE>

of removing any director before the expiration of such director's term of
office.

Section 6. Place of Meetings and Meetings by Telephone.
--------- -------------------------------------------

Regular meetings of the Board of Directors may be held at any place within
or outside the State of California that has been designated from time to time by
resolution of the Board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the Corporation. Special
meetings of the Board shall be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the Corporation. Any meeting, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another, and all such directors shall
be deemed to be present in person at the meeting.

9
<PAGE>

Section 7. Regular Meetings.
--------- ----------------

Regular meetings of the Board of Directors shall be held without call at
such time as shall from time to time be fixed by the Board of Directors. Such
regular meetings may be held without notice.

Section 8. Special Meetings.
--------- ----------------

Special meetings of the Board of Directors for any purpose or purposes may
be called at any time by the Chairman of the Board of Directors, the President,
any Vice-President, the Secretary or any two directors.

Notice of the time and place of such special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at such director's address
as is shown on the records of the Corporation. In case such notice is mailed,
it shall be deposited in the United States mail at least four days before the
time of the holding of such meeting. In case such notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least 48 hours before the time of the
holding of such meeting. Any oral notice given personally or by telephone may
be communicated either to the director or to a person at the office of the
director whom the person giving such notice has reason to believe will promptly
communicate it to such director. The notice need not specify the purpose of the
meeting or the place if the meeting is to be held at the principal executive
office of the Corporation.

Section 9. Quorum.
--------- ------

A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 11 of
this Article III. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the Board of Directors, subject to the provisions of
Section 310 of the Corporations Code of California (as to approval of contracts
or transactions in which a director has a direct or indirect material financial
interest), Section 311 of such Code (as to appointment of committees) and
Section 317(e) of such Code (as to indemnification of directors). A meeting at
which a quorum initially is present may continue to transact business
notwithstanding the withdrawal of directors, provided any action taken is
approved by at least a majority of the required quorum for such meeting.

Section 10. Waiver of Notice.
---------- ----------------

The transactions of any meeting of the Board of Directors, however called
and noticed, and wherever held, shall be as valid as though they had occurred at
a meeting duly held after regular call and notice if a quorum is present and if,
either before or after such meeting, each of the directors not present signs a
written waiver of notice, a consent to hold such meeting or an approval of the
minutes. The waiver of notice or consent need not specify the purpose of such
meeting. All such waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of such meeting. Notice of a
meeting shall also be deemed given to any director who attends the meeting

10
<PAGE>

without protesting, before or at its commencement, the lack of notice to such
director.

Section 11. Adjournment.
---------- -----------

A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.

11
<PAGE>

Section 12. Notice of Adjournment.
---------- ---------------------

Notice of the time and place of holding an adjourned meeting need not be
given, unless the meeting is adjourned for more than 24 hours, in which case
notice of the time and place shall be given before the time of the adjourned
meeting in the manner specified in Section 6 of this Article III to the
directors who were not present at the time of the adjournment.

Section 13. Action Without Meeting.
---------- ----------------------

Any action required or permitted to be taken by the Board of Directors may
be taken without a meeting if all members of the Board shall individually or
collectively consent in writing to such action. Such action by written consent
shall have the same force and effect as a unanimous vote of the Board of
Directors. Such written consent or consents shall be filed with the minutes of
the proceedings of the Board of Directors.

Section 14. Fees and Compensation of Directors.
---------- ----------------------------------

Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the Board of Directors. This Section 14 shall not be
construed to preclude any director from serving the Corporation in any other
capacity as an officer, agent, employee or otherwise, and receiving compensation
for such service.

ARTICLE IV
COMMITTEES

Section 1. Committees of Directors.
--------- -----------------------

The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the Board. The
Board may designate one or more directors as alternate members of any such
committee, who may replace any absent member at any meeting of such committee.
Any committee, to the extent provided in such a resolution of the Board, shall
have all the authority of the Board, except with respect to:

(a) The approval of any action that, under the California General
Corporation Law, also requires shareholders' approval or approval of the
outstanding shares;

(b) The filling of vacancies on the Board of Directors or in any
committee;

(d) The amendment or repeal of bylaws or the adoption of new bylaws;

(e) The amendment or repeal of any resolution of the Board of Directors

12
<PAGE>

that by its express terms is not so amendable or repealable;

(f) A distribution to the shareholders of the Corporation, except at a
rate or in a periodic amount or within a price range determined by the Board of
Directors; and

(g) The appointment of any other committees of the Board of Directors or
the members of such committees.

Section 2. Meetings and Action of Committees.
--------- ---------------------------------

Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Sections 6 (place of meetings), 7 (regular
meetings), 8 (special meetings), 9 (quorum), 10 (waiver of notice), 11
(adjournment), 12 (notice of adjournment), and 13 (action without meeting) of
Article III, with such changes in the context of such Bylaws as are necessary to
substitute the committee and its members for the Board of Directors and its
members, except that the time of regular meetings of committees may be
determined either by resolution of the Board of Directors or by resolution of
the committee; special meetings of committees also may be called by resolution
of the Board of Directors; and notice of special meetings of committees also
shall be given to all alternate members, who shall have the right to attend all
meetings of the committee. The Board of Directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
Bylaws.

ARTICLE V
OFFICERS

Section 1. Officers.
--------- --------

The officers of the Corporation shall include a President, a Secretary, and
a Chief Financial Officer. The Corporation may also have, at the discretion of
the Board of Directors, a Chairman of the Board, one or more Vice-Presidents,
one or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers
and such other officers as may be appointed in accordance with the provisions of
Section 3 of this Article V. Any number of offices may be held by the same
person.

Section 2. Election of Officers.
--------- --------------------

The officers of the Corporation, except such officers as may be appointed
in accordance with the provisions of Section 3 or Section 5 of this Article V,
shall be chosen by the Board of Directors, and each shall serve at the pleasure
of the Board, subject to the rights, if any, of any officer under any contract
of employment.

Section 3. Subordinate Officers.
--------- --------------------

The Board of Directors may appoint, and may empower the President to
appoint, such other officers as the business of the Corporation may require,
each of whom shall hold office for such period, have such authority and perform
such duties as are provided in the Bylaws or as the Board of Directors may from
time

13
<PAGE>

to time determine.

Section 4. Removal and Resignation of Officers.
--------- -----------------------------------

Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
Board of Directors at any regular or special meeting of the Board or, except in
the case of any officer chosen by the Board of Directors, by any officer upon
whom such power of removal may be conferred by the Board of Directors.

Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
such notice or at any later time specified in such notice; and, unless otherwise
specified in such notice, the acceptance of such resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the resigning
officer is a party.

Section 5. Vacancies in Offices.
--------- --------------------

A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these Bylaws for regular appointments to such office.

Section 6. Chairman of the Board.
--------- ---------------------

The Chairman of the Board of Directors, if such an officer be chosen,
shall, if present, preside at meetings of the Board of Directors and exercise
and perform such other powers and duties as from time to time may be assigned to
him by the Board of Directors or prescribed by these Bylaws. The Chairman of the
Board of Directors shall in addition be the Chief Executive Officer of the
Corporation and shall have the powers and duties prescribed in Section 7 of this
Article V.

Section 7. President.
--------- ---------

Subject to such supervisory powers, if any, as may be given by the Board of
Directors to the Chairman of the Board of Directors, if there is such an
officer, the President shall be the Chief Operating Officer of the Corporation
and shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the business and the officers of the
Corporation, He shall preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board or if there is none, at all meetings of the
Board of Directors. He shall have the general powers and duties of management
usually vested in the office of President of a Corporation and shall have such
other powers and duties as may be prescribed by the Board of Directors or these
Bylaws.

Section 8. Vice-Presidents.
--------- ---------------

In the absence or disability of the President, the Vice-Presidents, if any,
in order of their rank as fixed by the Board of Directors or, if not ranked, a
Vice-President designated by the Board of Directors, shall perform all the
duties

14
<PAGE>

of the President and, when so acting, shall have all the powers of, and be
subject to all the restrictions upon, the President. The Vice-Presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them by the Board of Directors, the Chairman of the Board, the
President or these Bylaws.

Section 9. Secretary.
--------- ---------

The Secretary shall keep or cause to be kept, at the principal executive
office or such other place as the Board of Directors may direct, a book of
minutes of all meetings and actions of directors, committees of directors and
shareholders, with the time and place of holding, whether regular or special
and, if special, how authorized, the notice given, the names of those present at
Board meetings or committee meetings, the number of shares present or
represented at meetings of shareholders and the proceedings.

The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the Corporation's transfer agent or registrar, as
determined by resolution of the Board of Directors, a share register or a
duplicate share register showing the names of all shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same and the number and date of cancellation of
every certificate surrendered for cancellation.

The Secretary shall give, or cause to be given, notice of all meetings of
shareholders and of the Board of Directors required by these Bylaws or by law to
be given, and he shall keep in safe custody the seal of the Corporation, if one
is adopted, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or by these Bylaws.

Section 10. Chief Financial Officer.
---------- -----------------------

The Chief Financial Officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director.

The Chief Financial Officer shall deposit all money and other valuables in
the name and to the credit of the Corporation with such depositaries as may be
designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
President and Directors, whenever they request it, an account of all of his
transactions as Chief Financial Officer and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or these Bylaws.

Section 11. Fees and Compensation.
---------- ---------------------

Executive officers may receive such compensation for their services, and
such reimbursement for expenses, as may be fixed or determined by resolution of
the board. Subordinate officers may receive such compensation as may be fixed

15
<PAGE>

or determined by the President.

ARTICLE VI

INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS;
PURCHASE OF LIABILITY INSURANCE

Section 1. Indemnification of Agents of the Corporation.
--------- --------------------------------------------

The Corporation shall, to the maximum extent permitted by the California
General Corporation Law, indemnify each of its agents against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceeding arising by reason of the fact that any such
person is or was an agent of the Corporation. For purposes of this Article VI,
an "agent" of the Corporation includes any person who is or was a director,
officer, employee or other agent of the Corporation; or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise; or was a
director, officer, employee or agent of a predecessor corporation of the
Corporation or of another enterprise at the request of such predecessor
corporation.

The indemnification provided by, or granted pursuant to, this Article VI
shall not be deemed exclusive of any other rights to which any person seeking
indemnification or advancement of expenses may be entitled under any Bylaws,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office. No provision of these Bylaws shall limit or prohibit
indemnification by the Corporation to the fullest extent permitted by California
law.

Section 2. Purchase of Liability Insurance.
--------- -------------------------------

In the event of a determination by the Board of Directors of this
Corporation to purchase liability insurance, this Corporation shall have the
power to purchase and maintain insurance on behalf of any agent of the
Corporation against any liability asserted against or incurred by the agent in
such capacity or arising out of the agent's status as such whether or not this
Corporation would have the power to indemnify the agent against such liability
under the provisions of this section.

ARTICLE VII
RECORDS AND REPORTS

Section 1. Maintenance and Inspection of Share Register.
--------- --------------------------------------------

The Corporation shall keep at its principal executive office or at the
office of its transfer agent or registrar, if either be designated and as
determined by resolution of the Board of Directors, a record of its
shareholders,

16
<PAGE>

giving the names and addresses of all shareholders and the number and class of
shares held by each shareholder.

A shareholder or shareholders of the Corporation holding at least 5% in the
aggregate of the outstanding voting shares of the Corporation may (i) inspect
and copy the record of shareholders' names and addresses and shareholdings
during usual business hours, on five days' prior written demand on the
Corporation, and (ii) obtain from the transfer agent of the Corporation, on
written demand and on the tender of such transfer agent's usual charges for such
list, a list of the names and addresses of the shareholders who are entitled to
vote for the election of directors, and their shareholdings, as of the most
recent record date for which such list has been compiled or as of a date
specified by such shareholder or shareholders after the date of demand. Such
list shall be made available to any such shareholder by the transfer agent on or
before the later of five days after the demand is received or the date specified
in the demand as the date as of which such list is to be compiled. The record
of shareholders shall also be open to inspection on the written demand of any
shareholder or holder of a voting trust certificate, at any time during usual
business hours, for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate. Any inspection and
copying under this Section 1 may be made in person or by an agent or attorney of
the shareholder or a holder of a voting trust certificate making the demand.

Section 2. Maintenance and Inspection of Bylaws.
--------- ------------------------------------

The Corporation shall keep at its principal executive office or if its
principal executive office is not in the State of California, at its principal
business office in the State of California, the original or a copy of these
Bylaws as amended to date, which shall be open to inspection by the shareholders
at all reasonable times during office hours. If the principal executive office
of the Corporation is outside the State of California and the Corporation has no
principal business office in the State of California, the Secretary shall, upon
the written request of any shareholder, furnish to such shareholder a copy of
these Bylaws as amended to date.

Section 3. Maintenance and Inspection of Other Corporate Records.
--------- -----------------------------------------------------

The accounting books and records and minutes of proceedings of the
shareholders and the Board of Directors and any committee or committees of the
Board of Directors shall be kept at such place or places as may be designated
by the Board of Directors or in the absence of such designation, at the
principal executive office of the Corporation. The minutes shall be kept in
written form, and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection upon
the written demand of any shareholder or holder of a voting trust certificate,
at any reasonable time during usual business hours, for a purpose reasonably
related to the holder's interests as a shareholder or as a holder of a voting
trust certificate. The inspection may be made in person or by an agent or
attorney and shall include the right to copy and make extracts. The rights of
inspection set forth in this Section 3 shall extend to the equivalent records of
each subsidiary corporation of the Corporation.

17
<PAGE>

Section 4. Inspection by Directors.
--------- -----------------------

Every director shall have the absolute right at any reasonable time to
inspect all books, records and documents of every kind and the physical
properties of the Corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney, and
the right of inspection includes the right to copy and make extracts of all
documents.

Section 5. Annual Report to Shareholders.
--------- -----------------------------

The Board of Directors of the Corporation shall not be required to cause an
annual report to be sent to the shareholders pursuant to Section 1501 of the
California Corporations Code so long as there are less than 100 holders of
record of its shares (determined as provided in Section 605 of the California
Corporations Code). If there are at least 100 holders of record of the
corporation's shares (determined as provided in Section 605 of the California
Corporations Code) or if the Board of Directors so resolves by a vote of a
majority of the Directors, the Board of Directors shall cause an annual report
to be sent to the shareholders not later than 120 days after the close of the
fiscal year and at least 15 days prior to the annual meeting of shareholders to
be held during the next fiscal year. Such report shall contain a balance sheet
as of the end of such fiscal year and an income statement and statement of
changes in financial position for such fiscal year, accompanied by any report
thereon of independent accountants of, if there is no such report, the
certificate of an authorized officer of the Corporation that such statements
were prepared without audit from the books and records of the Corporation.
Nothing herein shall be interpreted as prohibiting the Board of Directors from
issuing other periodic reports to the shareholders of the Corporation as the
Board of Directors considers appropriate.

Section 6. Financial Statements.
--------- --------------------

A copy of any annual financial statement and any income statement of the
Corporation for each quarterly period of each fiscal year, and any accompanying
balance sheet of the Corporation as of the end of each such period, that has
been prepared by the Corporation shall be kept on file in the principal
executive office of the Corporation for 12 months, and each such statement shall
be exhibited at all reasonable times to any shareholder demanding an examination
of any such statement or a copy shall be mailed to any such shareholder.

If a shareholder or shareholders holding at least 5% of the outstanding
shares of any class of stock of the Corporation makes a written request to the
Corporation for an income statement of the Corporation for the three-month, six-
month or nine-month period of the then-current fiscal year ending more than 30
days before the date of the request and a balance sheet of the Corporation as of
the end of such period, the Chief Financial Officer shall cause such statement
to be prepared, if not already prepared, and shall deliver personally or mail
such statement to the person making such request within 30 days after the
receipt of such request. If the Corporation has not sent to the shareholders its
annual report for the last fiscal year, this report shall likewise be delivered
or mailed to the shareholder or shareholders within 30 days after such request.

18
<PAGE>

The Corporation shall also, on the written request of any shareholder, mail
to the shareholder a copy of the last annual, semiannual or quarterly income
statement that it has prepared and a balance sheet as of the end of that period.

The quarterly income statements and balance sheets referred to in this
Section 6 shall be accompanied by the report, if any, of any independent
accountants engaged by the Corporation or the certificate of an authorized
officer of the Corporation that the financial statements were prepared without
audit from the books and records of the Corporation.

Section 7. Annual Statement of General Information.
--------- ---------------------------------------

The Corporation shall, within the statutorily required time period, file
with the Secretary of State of the State of California, on the prescribed form,
a statement setting forth the authorized number of directors, the names and
complete business or residence addresses of all incumbent directors, the names
and complete business or residence addresses of the Chief Executive Officer,
Secretary and Chief Financial Officer, the street address of its principal
executive office or principal business office in this state and the general type
of business constituting the principal business activity of the Corporation, and
a designation of the agent of the Corporation for the purpose of service of
process, all in compliance with Section 1502 of the Corporations Code of
California.

ARTICLE VIII
GENERAL CORPORATE MATTERS

Section 1. Record Date for Purposes Other Than Notice and Voting.
--------- -----------------------------------------------------

For purposes of determining the shareholders entitled to receive any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights with respect to any other lawful action (other than action
by shareholders by written consent without a meeting), the Board of Directors
may fix, in advance, a record date, which shall not be more than 60 days before
any such action, and in such case only shareholders of record on the date so
fixed are entitled to receive such dividend, distribution or allotment of rights
or to exercise the rights, as the case may be, notwithstanding any transfer of
any shares on the books of the Corporation after the record date so fixed,
except as otherwise provided in the California General Corporation Law.

If the Board of Directors does not so fix a record date, the record date
for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the applicable resolution or the
sixtieth day before the date of such action, whichever is later.

Section 2. Checks, Drafts, Evidence of Indebtedness.
--------- ----------------------------------------

All checks, drafts or other orders for payment of money, notes or other
evidences of indebtedness issued in the name of or payable to the Corporation
shall be signed or endorsed by such person or persons and in such manner as,
from time to time, shall be determined by resolution of the Board of Directors.

19
<PAGE>

Section 3. Execution of Corporate Contracts and Instruments.
--------- ------------------------------------------------

The Board of Directors, except as otherwise provided in these Bylaws, may
authorize any officer, officers, agent or agents to enter into any contract or
execute any instrument in the name of and for the Corporation; such authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or in any amount.

Section 4. Certificates for Shares.
--------- -----------------------

A certificate or certificates for shares of the capital stock of the
Corporation shall be issued to each shareholder when any of such shares are
fully paid; the Board of Directors may authorize the issuance of certificates or
shares as partly paid, provided that such certificates shall state the amounts
of the consideration paid and owing. All certificates shall be signed in the
name of the Corporation by the Chairman of the Board or Vice-Chairman of the
Board or the President or Vice-President and by the Chief Financial Officer or
an Assistant Treasurer or the Secretary or any Assistant Secretary, certifying
the number of shares and the class or series of shares owned by the shareholder.
Any or all of the signatures on the certificate may be facsimile. In case an
officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed on, a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.

Section 5. Transfer of Shares.
--------- ------------------

Transfer of shares of the Corporation shall be made only on the stock
transfer books of the Corporation by the holder of record thereof, or by his
legal representative, who shall furnish proper evidence of authority to
transfer, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the Corporation and on surrender for
cancellation of the certificate for such shares. The person in whose name shares
stand on the books of the Corporation shall be deemed by the Corporation to be
the owner thereof for all purposes.

Section 6. Lost Certificates.
--------- -----------------

Except as provided in this Section 6, no new certificate for shares shall
be issued to replace an old certificate unless the latter is surrendered to the
Corporation and canceled at the same time. The Board of Directors may, in case
any share certificate or certificate for any other security is lost, stolen or
destroyed, authorize the issuance of a replacement certificate on such terms and
conditions as the Board may require, including a provision for indemnification
of the Corporation secured by a bond or other adequate security sufficient to
protect the Corporation against any claim that may be made against it, including
any expense or liability, on account of the alleged loss, theft or destruction
of the certificate or the issuance of the replacement certificate.

20
<PAGE>

Section 7. Representation of Shares of Other Corporations.
--------- ----------------------------------------------

The Chairman of the Board, the President, any Vice-President or any person
authorized either by the Board of Directors or by any of the foregoing
designated officers is authorized to vote on behalf of the Corporation any and
all shares of any other corporation or corporations standing in the name of the
Corporation. The authority granted to such officers to vote or represent on
behalf of the Corporation any and all shares held by the Corporation in any
other corporation or corporations may be exercised by any of such officers in
person or by any person authorized to do so by proxy duly executed by such
officers.

Section 8. Dividends.
--------- ---------

The Board may from time to time declare and the Corporation may pay in
cash, stock or other property, dividends on its outstanding shares in the manner
and upon the terms and conditions provided by law and its Articles of
Incorporation.

21
<PAGE>

Section 9. Seal.
--------- ----

The Board of Directors shall provide a corporate seal, circular in form,
having inscribed thereon the corporate name, the state of incorporation and the
word "seal".

Section 10. Construction and Definitions.
---------- ----------------------------

Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the California General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, any indication of gender includes both genders and the
term "person" includes a corporation, a natural person, an association and a
partnership.

ARTICLE IX
AMENDMENTS

Section 1. Amendment by Shareholders.
--------- -------------------------

New bylaws may be adopted or these Bylaws may be amended or repealed by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the Articles of Incorporation set
forth the number of authorized directors of the Corporation, the authorized
number of directors may be changed only by an amendment of such Articles of
Incorporation.

Section 2. Amendment by Directors.
--------- ----------------------

Subject to the rights of the shareholders as provided in Section 1 of this
Article IX, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors, may be adopted, amended or repealed by the Board
of Directors.

ARTICLE X
VOLUNTARY DISSOLUTION

Section 1. Procedure.
--------- ---------

The Corporation shall be voluntarily dissolved upon the affirmative vote of
the holders of at least fifty percent of the shares entitled to vote thereon at
a meeting duly called for that purpose, or when authorized or ratified by the
written consent of the holders of all of the shares entitled to vote thereon.

Section 2. Revocation.
--------- ----------

The Corporation shall revoke voluntary dissolution proceedings upon the
affirmative vote of the holders of at least a majority of the shares entitled to
vote at a meeting duly called for that purpose, or when authorized or ratified
by the written consent of the holders of all the shares entitled to vote
thereon.

<PAGE>

EXHIBIT 10.4

IMAGE ENTERTAINMENT, INC.
1994 ELIGIBLE DIRECTORS STOCK OPTION PLAN

1. THE PLAN

1.1 Purpose.
-------

The purpose of this Plan is to promote the success of the Corporation by
providing an additional means through the grant of Options to attract, motivate
and retain experienced and knowledgeable Eligible Directors. Capitalized terms
are defined in Article 4.

1.2 Administration.
--------------

(a) Board Authority and Powers; Interpretation. This Plan shall be,
------------------------------------------
to the maximum extent possible, self-effectuating. This Plan shall be
interpreted and, to the extent any determinations are required hereunder, shall
be administered by the Board. Subject to the express provisions of this Plan,
the Board shall have the authority to construe and interpret this Plan and any
agreements defining the rights and obligations of the Corporation and
Participants under this Plan.

(b) Binding Determinations. Any action taken by, or inaction of, the
----------------------
Corporation or the Board relating or pursuant to this Plan shall be within the
absolute discretion of that entity or body and shall be conclusive and binding
upon all persons. No member of the Board or officer of the Corporation shall be
liable for any such action or inaction, except in circumstances involving such
person's bad faith.

(c) Reliance on Experts. In making any determination or in taking or
-------------------
not taking any action under this Plan, the Board may obtain and may rely upon
the advice of experts, including professional advisors to the Corporation. No
director, officer or agent of the Corporation shall be liable for any such
action or determination taken or made or omitted in good faith.

(d) Delegation. The Board may delegate ministerial, non-discretionary
----------
functions to individuals who are officers or employees of the Corporation.

1.3 Shares Available for Options.
----------------------------

Subject to the provisions of Section 3.4, the capital stock that may
be delivered under this Plan shall be shares of the Corporation's authorized but
unissued Common Stock.

(a) Number of Shares. The maximum number of shares of Common Stock
----------------
that may be delivered pursuant to Options granted to Eligible Directors under
this Plan shall not exceed 275,000 shares, subject to adjustments contemplated
by Section 3.4.

(b) Calculation of Available Shares and Replenishment. The shares
-------------------------------------------------
authorized under this Plan shall be reserved for issuance. If any
<PAGE>

Option shall expire or be cancelled or terminated without having been exercised
in full, the undelivered shares subject thereto shall again be available for the
purposes of this Plan.

2. THE OPTIONS

2.1 Automatic Option Grants. Subject to adjustments contemplated by
-----------------------
Section 3.4 and the limitations of Section 2.5,

(a) Initial Options. Subject to shareholder approval of this Plan:
---------------
(1) each person who is an Eligible Director on July 12, 1994 shall be granted an
Option to purchase 15,000 shares of Common Stock; and (2) any person who is not
on July 12, 1994 an Eligible Director, but who thereafter becomes an Eligible
Director shall be granted automatically (without any further action by the
Board) an Option (the Option Date of which shall be the date such person becomes
an Eligible Director) to purchase 15,000 shares of Common Stock. No person
shall receive more than one Option under this Section 2.1(a).

(b) Subsequent Options. On the close of business on each July 12 (or
------------------
if it is not a business day the first business day thereafter) during the term
of this Plan, commencing in 1995, there shall be granted automati cally
(without any further action by the Board) to each person who is then an Eligible
Director an Option to purchase 15,000 shares of Common Stock; provided, however,
-------- -------
that if the director received a grant under Section 2.1(a) within six months of
such date, his or her participation in annual grants shall not commence until
the following year.

(c) Maximum Number of Shares. Any annual grants under Section 2.1(b)
------------------------
that would otherwise exceed the maximum number of shares under Section 1.3(a)
shall be prorated within such limitation among the number of Eligible Directors
entitled thereto.

(d) Option Price. The purchase price per share of the Common Stock
------------
covered by each Option granted pursuant to Section 2.1(a) shall be the Fair
Market Value of the Common Stock on the Option Date, plus $0.25, and by each
Option granted pursuant to Section 2.1(b) shall be the Fair Market Value of the
Common Stock on the Option Date.

(e) Option Period and Exercisability. Subject to shareholder approval
--------------------------------
of this Plan, each Option granted under this Plan shall become exercisable in
installments at the rate of 50% of the shares initially subject to such Option
on the date six months after the Option Date, and another 25% of such initial
number of shares at the end of each of the next two three month periods
thereafter.

(f) Non-Qualified Options. Each Option granted under this Plan is
---------------------
intended to be a non-qualified stock option (i.e., not an "incentive stock
option") under the Code and shall be so designated.

2.2 Payment of Exercise Price.
-------------------------

The exercise price of any Option granted under this Plan shall be paid
in full at the time of each exercise in cash or by check or in shares of Common
Stock valued at their Fair Market Value on the date of exercise of the
<PAGE>

Option, or partly in previously owned shares and partly in cash, provided that
-------------
any shares used in payment shall have been owned by the Participant at least six
months prior to the date of exercise.

2.3 Option Period.
-------------

Each Option granted under this Plan and all rights or obligations
thereunder shall expire ten years after the Option Date and shall be subject to
earlier termination under Article 3 hereof.

2.4 Limitations on Exercise and Vesting of Options.
----------------------------------------------

(a) Provisions for Exercise. No Option shall be exercisable or shall
-----------------------
vest until at least six months after the initial Option Date, and once
exercisable an Option to such extent shall remain exercisable until the
expiration or earlier termination of the Option.

(b) Procedure. Any exercisable Option shall be deemed to be exercised
---------
when the Secretary of the Corporation receives written notice of such exercise
from the Participant, together with the required payment of the exercise price.

(c) Fractional Shares/Minimum Issue. Fractional share interests shall
-------------------------------
be disregarded, but shall be accumulated. No fewer than 100 shares may be
purchased on exercise of any Option at one time unless the number purchased is
the total number at the time available for purchase under the Option.

2.5 Individual Option Limits.
------------------------

The maximum number of shares of Common Stock subject to any and all
options that are or have been granted to any individual under this Plan and
under any other compensatory plan or authority (including individual grants
without reference to a plan) of the Corporation or any subsidiaries shall not
exceed 75,000 (subject to adjustment under Section 3.4), excluding shares
subject to options granted for special or unique services (other than services
as an employee, officer or director or services substantially comparable
thereto) or pursuant to antidilution or similar rights or adjustments in respect
of outstanding options.

3. OTHER PROVISIONS.

3.1 Rights of Participants and Beneficiaries.
----------------------------------------

(a) No Service Commitment. Nothing contained in this Plan (or in any
---------------------
other documents related to this Plan or to any Option) shall confer upon any
Participant any right to continue to serve as a director of the Corporation nor
shall interfere in any way with the right of the Corporation to change director
compensation or other benefits or to terminate the director's service as a
director, with or without cause. Nothing contained in this Plan or any document
related hereto shall influence the construction or interpretation of the
Corporation's Articles of Incorporation or Bylaws regarding service on the Board
or adversely affect any independent contractual right of any Eligible Director
without his or her consent thereto.

(b) Plan Not Funded. Options payable under this Plan shall be
---------------
<PAGE>

payable in shares and (except as provided in Section 1.3(b)) no special or
separate reserve, fund or deposit shall be made to assure payment of such
Options. No Participant, Beneficiary or other person shall have any right, title
or interest in any fund or in any specific asset (including shares of Common
Stock) of the Corporation by reason of any Option hereunder. Neither the
provisions of this Plan (or of any related documents), nor the creation or
adoption of this Plan, nor any action taken pursuant to the provisions of this
Plan shall create, or be construed to create, a trust of any kind or a fiduciary
relationship between the Corporation and any Participant, Beneficiary or other
person. To the extent that a Participant, Beneficiary or other person acquires a
right to receive payment pursuant to any Option hereunder, such right shall be
no greater than (and will be subordinate to) the right of any unsecured general
creditor of the Corporation.

3.2 No Transferability.
------------------

Options may be exercised only by, and shares issuable pursuant to an
Option shall be paid only to the Participant or, if the Participant has died,
the Participant's Beneficiary or, if the Participant has suffered a Disability,
the Participant's Personal Representative, if any, or if there is none, the
Participant. Other than by will or the laws of descent and distribution, no
right or benefit under this Plan or any Option shall be transferrable by the
Participant or shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge and any such attempted
action shall be void. The designation of a Beneficiary hereunder shall not
constitute a transfer for these purposes.

3.3 Termination of Directorship.
---------------------------

If a Participant's services as a member of the Board terminate by
reason of death or Disability an Option granted pursuant to this Plan held by
such Participant shall, to the extent then exercisable, remain exercisable for
one year after the date of such termination or until the expiration of the
stated term of such Option, whichever first occurs. The portion of the Option
not then exercisable shall terminate. If a Participant's services as a member
of the Board terminate for any other reason, any portion of an Option granted
pursuant to this Plan which is not then exercisable shall terminate and any
portion of such Option which is then exercisable may be exercised for six months
after the date of such termination or until the expiration of the stated term
whichever first occurs, and shall then terminate.

3.4 Adjustments.
-----------

If there shall occur any extraordinary distribution in respect of the
Common Stock (whether in the form of Common Stock, other securities, or other
property), or any recapitalization, stock split (including a stock split in the
form of a stock dividend), reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, or exchange of Common Stock or
other securities of the Corporation, or there shall occur any other similar
corporate transaction or event in respect of the Common Stock, or a sale of
substantially all of the assets of the Corporation as an entirety, then the
Board shall, in such manner and to such extent (if any) as may be appropriate
and equitable, (1) proportionately adjust any or all of (a) the number and type
of shares of Common Stock (or other securities) which thereafter may be made the
subject of Options (including the specific limits and numbers of
<PAGE>

shares set forth elsewhere in this Plan), (b) the number, amount and type of
shares of Common Stock (or other securities or property) subject to any or all
outstanding Options and the vesting provisions of the Options, (c) the grant,
purchase, or exercise price of any or all outstanding Options, or (d) the
securities, cash or other property deliverable upon exercise of any outstanding
Options, or (2) in the case of an extraordinary distribution, merger,
reorganization, consolidation, combination, sale of assets, split up, exchange,
or spin off, make provision for a substitution or exchange of any or all
outstanding Options or for a change in the securities, cash or property
deliverable upon exercise of outstanding Options based upon the distribution or
consideration payable to holders of the Common Stock of the Corporation upon or
in respect of such event ; provided, however, that (i) such adjustment and the
-------- -------
Board's actions in respect thereof are based on objective criteria, and (ii)
such adjustment (to the extent consistent with Section 3.11(c)) is consistent
with adjustments to comparable Options (if any) held by persons other than
directors of the Corporation.

3.5 Acceleration Upon a Change in Control Event; Early Termination on
-----------------------------------------------------------------
Certain Events.
- --------------

Upon the occurrence of a Change in Control Event, each Option shall
become immediately exercisable in full; provided, however, that no Option shall
-------- -------
be so accelerated to a date less than six months after the Option Date of the
Option. To the extent that any Option granted under this Plan is not exercised
prior to (i) a dissolution of the Corporation or (ii) a merger or other
corporate event that the Corporation does not survive, and no provision is (or
consistent with the provisions of Section 3.4 can be) made for the assumption,
conversion, substitution or exchange of the Option, the Option shall terminate
upon the occurrence of such event.

3.6 Compliance with Laws.
--------------------

This Plan, the granting and vesting of Options under this Plan and the
issuance and delivery of shares of Common Stock, and/or of other securities or
property pursuant to Section 3.4, under this Plan or under Options granted
hereunder are subject to compliance with all applicable federal and state laws,
rules and regulations (including but not limited to state and federal tax and
securities laws) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Corporation, be
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Corporation, provide such assurances and
representations to the Corpora tion as the Corporation may deem necessary or
desirable to assure such compliance.

3.7 Plan Amendment, Shareholder Approval and Suspension.
---------------------------------------------------

(a) Board Authorization. The Board may, at any time, terminate or,
-------------------
from time to time, amend, modify or suspend this Plan, in whole or in part. No
Options may be granted during any suspension of this Plan or after termination
of this Plan, but the Board shall retain jurisdiction as to Options then
outstanding in accordance with the terms of this Plan.

(b) Shareholder Approval. To the extent required by law or the
--------------------
<PAGE>

provisions of Rule 16b-3, any amendment to this Plan or any then outstanding
Option shall be subject to shareholder approval.

(c) Limitations on Amendments to Plan and Options. The provisions of
---------------------------------------------
this Plan shall not be amended more than once every six months (other than as
may be necessary to conform to any applicable changes in the Code or the rules
thereunder), unless such amendment would be consistent with the provisions of
Rule 16b-3(c)(2)(ii)(or any successor provision). No amendment, suspension or
termination of this Plan or change of or affecting any outstanding Option shall,
without written consent of the Participant, affect in any manner materially
adverse to the Participant any rights or benefits of the Participant or
obligations of the Corporation under any Option granted under this Plan prior to
the effective date of such change. Changes contemplated by Section 3.4 shall
not be deemed to constitute changes or amendments for purposes of this Section
3.7.

3.8 Privileges of Stock Ownership.
-----------------------------

Except as otherwise expressly authorized by this Plan, a Participant
shall not be entitled to any privilege of stock ownership as to any shares of
Common Stock subject to an Option granted under this Plan prior to the
satisfaction of all conditions to the valid exercise of the Option. No
adjustment will be made for dividends or other rights as a shareholders for
which a record date is prior to such date of delivery.

3.9 Effective Date of Plan.
----------------------

This Plan shall be effective as of July 12, 1994, but shall be subject
to approval of a majority of the shares represented and entitled to vote at the
shareholder meeting at which this Plan is first submitted for approval (referred
to herein as "shareholder approval").
--------------------

3.10 Term of Plan.
------------

No Option shall be granted more than ten years after the effective
date of this Plan (the "termination date"). Unless otherwise expressly provided
in this Plan or in an applicable Option Agreement, any Option theretofore
granted may extend beyond such date, and this Plan shall continue to apply
thereto.

3.11 Legal Issues.
------------

(a) Choice of Law. This Plan, the Options, all documents evidencing
-------------
Options and all other related documents shall be governed by, and construed in
accordance with the laws of the state of incorporation of the Corporation.

(b) Severability. If any provision shall be held by a court of
------------
competent jurisdiction to be invalid and unenforceable, the remaining provisions
of this Plan shall continue in effect.

(c) Plan Construction. It is the intent of the Corporation that this
-----------------
Plan and Options hereunder satisfy the requirements of a formula plan under Rule
16b-3 and be interpreted in a manner that satisfies the applicable requirements
of Rule 16b-3 so that participants will be able to administer
<PAGE>

other stock plans of the Corporation consistent with such Rule and be entitled
to the benefits of Rule 16b-3 (or other exemptive rules under Section 16 of the
Exchange Act) in respect of the option grants and certain other transactions in
respect thereof and will not be subjected to avoidable liability thereunder. If
any provision of this Plan or of any Option would otherwise frustrate or
conflict with the intent expressed above, that provision to the extent possible
shall be interpreted and deemed amended so as to avoid such conflict.

(d) Non-Exclusivity of Plan. Nothing in this Plan shall limit or be
-----------------------
deemed to limit the authority of the Board to grant awards or authorize any
other compensation under any other plan or authority.

4. DEFINITIONS

4.1 Definitions.
-----------

(a) "Beneficiary" shall mean the person, persons, trust or trusts
-----------
designated by a Participant or, in the absence of a designation, entitled by
will or the laws of descent and distribution, to receive the benefits specified
in the Option Agreement and under this Plan in the event of a Participant's
death, and shall mean the Participant's executor or administrator if no other
Beneficiary is identified and able to act under the circumstances.

(b) "Board" shall mean the Board of Directors of the Corporation or,
-----
with respect to administrative matters (as distinguished from Plan amendments,
suspension, or termination), any duly authorized committee of members of the
Board designated to administer this Plan.

(1) Approval by the shareholders of the Corporation of the
dissolution or liquidation of the Corporation; or

(2) Approval by the shareholders of the Corporation of an
agreement to merge or consolidate, or otherwise reorganize, with or into
one or more entities that are not Subsidiaries or other affiliates, as a
result of which less than 50% of the outstanding voting securities of the
surviving or resulting entity immediately after the reorganization are, or
will be, owned directly or indirectly by shareholders of the Corporation
immediately before such reorganization (assuming for purposes of such
determination that (A) there is no change in the record ownership of the
Corporation's securities from the record date for such approval until such
reorganization and (B) such record owners hold no securities of the other
parties to such reorganization, except that any securities of such other
parties that are held by affiliates of the Corporation shall be considered
owned by shareholders of the Corporation); or

(3) Approval by the shareholders of the Corporation of the sale
of substantially all of the Corporation's business and/or assets to a
person or entity which is not an affiliate; or

(4) Any person (as such term is used in Sections 3(a)(9)
<PAGE>

and 13(d)(3) of the Exchange Act, but excluding any person described in and
satisfying the conditions of Rule 13d-1(b)(1) thereunder) becomes the
beneficial owner (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing 45%
or more of the combined voting power of the Corporation's then outstanding
securities entitled to vote in the election of directors of the
Corporation; or

(5) During any period not longer than two consecutive years,
individuals who at the beginning of such period constituted the Board cease
to constitute at least a majority thereof, unless the election, or the
nomination for election by the Corporation's share holders, of each new
Board member was approved by a vote of at least two-thirds of the Board
members then still in office who were Board members at the beginning of
such period (including for these purposes (but, in the case of a successor,
without duplication) any new members whose election or nomination was so
approved).

(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
----
from time to time.

(e) "Commission" shall mean the Securities and Exchange Commission.
----------

(f) "Common Stock" shall mean the Common Stock of the Corporation and
------------
such other securities or property as may become the subject of Options, or
become subject to Options, pursuant to an adjustment made under Section 3.4 of
this Plan.

(g) "Corporation" shall mean Image Entertainment, Inc., a California
-----------
corporation, and its successors.

(h) "Disability" shall mean a "permanent and total disability" within
----------
the meaning of Section 22(e)(3) of the Code.

(i) "Eligible Director" shall mean a member of the Board who is not:
----------------- ---
(1) as of the applicable Option Date, an officer or employee of the Corporation
or any subsidiary, or (2) as of the applicable Option Date or during the prior
one year period, a person to whom equity securities (including options, stock
appreciation rights or other derivative securities) of the Corporation or an
affiliate are or have been granted or awarded (or for whose benefit any thereof
have been materially amended) under or pursuant to any discretionary equity
securities plan of the Corporation or an affiliate ("Other Stock Plan") (except
----------------
under this Plan or any other formula or ongoing securities acquisition plan, the
participation in which does not compromise the disinterested administration of
---
any Other Stock Plan under Rule 16b-3).

(j) "ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended.

(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended from time to time.

(l) "Fair Market Value" on any specified date shall mean (i) if the
-----------------
stock is listed or admitted to trade on a national securities exchange,
<PAGE>

the closing price of the stock on the Composite Tape, as published in the
Western Edition of The Wall Street Journal, of the principal national securities
exchange on which the stock is so listed or admitted to trade, on such date or,
if there is no trading of the stock on such date, then the closing price of the
stock as quoted on such Composite Tape on the next preceding date on which there
was trading in such shares (the "reference date"); (ii) if the stock is not
--------------
listed or admitted to trade on a national securities exchange, the last price
for the stock on the reference date, as furnished through the NASDAQ National
Market Reporting System by the National Association of Securities Dealers, Inc.
("NASD") or a similar organization if the NASD is no longer reporting such
----
information; (iii) if the stock is not listed or admitted to trade on a national
securities exchange and is not reported on the NASDAQ National Market Reporting
System, the mean between the bid and asked price for the stock on the reference
date, as furnished by the NASD or a similar organization; or (iv) if the NASD or
a similar organization does not furnish the mean between the bid and asked price
for the stock on the reference date, the valuation as of the reference date
furnished by an independent advisor or investment banker to the Corporation who
is recognized in valuations of this type.

(m) "Option" shall mean an option to purchase Common Stock authorized
------
and granted under this Plan, and related rights.

(n) "Option Agreement" shall mean an agreement in the form of Exhibit
---------------- -------
A, completed in the manner required by this Plan and executed on behalf of the
- -
Corporation by an executive officer of the Corporation.

(o) "Option Date" shall mean the applicable date for automatic grant
-----------
of Options set forth in Article 2.

(p) "Participant" shall mean an Eligible Director who has been granted
------------
an Option under the provisions of this Plan.

(q) "Personal Representative" shall mean the person or persons who,
-----------------------
upon the disability or incompetence of a Participant, shall have acquired on
behalf of the Participant, by legal proceeding or otherwise, the power to
exercise the rights or receive benefits under this Plan and who shall have
become the legal representative of the Participant.

(r) "Plan" shall mean this Eligible Directors' Stock Option Plan.
----

(s) "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the
----------
Commission pursuant to the Exchange Act, as amended from time to time.
<PAGE>

EXHIBIT A to ELIGIBLE DIRECTOR PLAN

IMAGE ENTERTAINMENT, INC.

ELIGIBLE DIRECTOR

NON-QUALIFIED STOCK OPTION AGREEMENT

THIS AGREEMENT dated as of the 12th day of July, 19__, between Image
Entertainment, Inc., a California corporation (the "Corporation"), and
-----------
_________________ (the "Director").

W I T N E S S E T H
-------------------

WHEREAS, the Corporation has adopted [subject to shareholders
approval] a 1994 Eligible Directors Stock Option Plan (the "Plan").
----

WHEREAS, pursuant to Section 2.1 of the Plan, the Corporation has
granted an option (the "Option") to the Director upon the terms and conditions
------
evidenced hereby, as required by the Plan, which Option is not intended as and
shall not be deemed to be an incentive stock option within the meaning of
Section 422 of the Code.

NOW, THEREFORE, in consideration of the services rendered and to be
rendered by the Director, the Corporation and the Director agree to the terms
and conditions set forth herein, as required by the terms of the Plan.

1. Option Grant. This Agreement evidences the grant to the
------------
Director, as of July 12, ____ (the "Option Date"), of an Option to purchase an
-----------
aggregate of 15,000 shares of Common Stock (the "Shares") under Section
------
2(______) of the Plan, subject to the terms and conditions and to adjustment as
set forth herein or in or pursuant to the Plan.

2. Exercise Price. The Option entitles the Director to purchase
--------------
(subject to the terms of Sections 3 through 5 below), all or any part of the
Option shares at a price per share of $________.

3. Option Exercisability and Term. The Option shall first become
------------------------------
and remain exercisable as to 7,500 shares on January 12, _____; and as to an
additional 3,750 shares on the following April 12 and July 12, subject to
shareholder approval of the Plan, to adjustments under Section 3.4 of the Plan
and to acceleration under Section 3.5 of the Plan. The Option shall terminate
on July 11, 20___, unless earlier terminated in accordance with the terms of
Section 4 below.

4. Service and Effect of Termination of Service or Other Event. The
-----------------------------------------------------------
Director agrees to serve as a director in accordance with the provisions of the
Corporation's Articles of Incorporation, Bylaws and applicable law. If the
Director's services as a member of the Board shall terminate or in the other
circumstances addressed in Article 3 of the Plan, this Option shall terminate at
the times and to the extent set forth therein.

5. General Terms. The Option and this Agreement are subject
-------------
to, and the Corporation and the Director agree to be bound by, the provisions
<PAGE>

of the Plan that apply to the Option. Such provisions are incorporated herein by
this reference. The Director acknowledges receiving a copy of the Plan and
reading its applicable provisions. Capitalized terms not otherwise defined
herein shall have the meaning assigned to such terms in the Plan.

6. Nontransferability. The grant of the Option is intended to
------------------
constitute an exempt transaction under Rule 16b-3. In furtherance thereof, and
for other reasons, the Option shall be non-transferable as provided in Section
3.2 of the Plan.

7. Shareholder Approval. This Option may not be exercised prior to
--------------------
shareholder approval of the Plan and in any event shall be rescinded if
shareholder approval of the Plan is not obtained by December 31, 1995.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

IMAGE ENTERTAINMENT, INC.
(a California corporation)

By ___________________________

Title _____________________

OPTIONEE DIRECTOR

_____________________________
(Signature)

_____________________________
(Print Name)

_____________________________
(Address)

_____________________________
(City, State, Zip Code)

_________________________________________

SPOUSAL CONSENT
---------------

In consideration of the execution of the foregoing Stock Option
Agreement by Image Entertainment, Inc., I, ____________________________, the
spouse of the Director therein named, do hereby agree to be bound by all of the
terms and provisions thereof and of the Plan.

DATED: ______________, 19__.
<PAGE>

_____________________________
Signature of Spouse

<PAGE>

EXHIBIT 10.8

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this
---------
1st day of July, 1994, by and between IMAGE ENTERTAINMENT INC., a California
corporation ("Image"), and MARTIN W. GREENWALD, an individual ("Executive").
----- ---------

RECITALS

A. Image is engaged in the business of licensing, manufacturing,
promoting, marketing and selling laserdisc format programming.

B. Executive has unique experience with respect to sales and marketing,
management and other aspects of the business of Image.

C. Executive desires to render to Image, on an exclusive basis,
Executive's professional services with respect to Executive's
experience and abilities, and Image desires to secure, on an exclusive
basis, Executive's services, on the terms and conditions set forth
below.

NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:

1. TERM OF AGREEMENT.

Except as otherwise expressly set forth herein, this Agreement shall remain
in full force and effect for a 2-year term commencing on the date hereof
and ending on June 30, 1996 (the "Term"); provided, however, that unless
---- -------- -------
Executive receives written notice on or before June 30, 1995 that this
Agreement will not be renewed at June 30, 1996 the Term will automatically
extend to June 30, 1997. In the event of any additional extensions, Image
must give Executive at least 1 year's prior written notice if the Term will
not be further extended.

2. ENGAGEMENT.

Subject to the terms and conditions contained herein, Image hereby engages
the services of Executive (the "Services") and Executive hereby accepts
--------
such engagement and agrees to render Executive's Services to Image for the
Term. Executive shall report directly to the Image Board of Directors and
shall have the title of "CHIEF EXECUTIVE OFFICER, PRESIDENT & TREASURER.

a. EXTENT OF SERVICES AND DUTIES. Executive shall perform such duties,
compatible with Executive's position as an "Executive Officer" (as
defined below) and as a majority of the Board of Directors of Image
may reasonably require. In rendering Services to Image, Executive
shall use Executive's best efforts and ability to maintain, further
and promote the interests and welfare of Image. For purposes of this
Agreement "Executive Officer" shall include any person similarly
-----------------
designated as an "Executive Officer"
<PAGE>

in that person's Employment Agreement with Image.

b. EXCLUSIVE ENGAGEMENT. Executive hereby acknowledges and agrees that
the engagement of Executive by Image under this Agreement is exclusive
and that during the Term hereof Executive shall not, directly or
indirectly, whether for compensation or otherwise, engage in any
business that is competitive with the business of Image, or render any
services of a business, commercial or professional nature to any other
person or organization that is a competitor of Image or in a business
similar to that of Image, without the prior written consent of Image.

3. COMPENSATION.

a. BASE SALARY. Image hereby agrees to pay Executive for Services to be
rendered hereunder, including all services to be rendered as an Image
director, a minimum annual base salary of $195,000 for each year of
the Term, payable in equal biweekly installments or as otherwise
provided in accordance with Image's regular Executive Officer
compensation procedures in effect from time to time ("Base Salary").
-----------

b. BONUS COMPENSATION. Executive shall receive such bonus compensation
equal to the sum of the following "Pre-Tax Profits" (as defined in
Exhibit A) percentages:

Percentage of
Pre-Tax Profits Pre-Tax Profit Amounts
--------------- ----------------------

2% of the first $6 million of Pre-Tax Profits,
3% of that portion of Pre-Tax Profits over $6 million
and up to $8 million,
4% of that portion of Pre-Tax Profits over $8 million;
provided, however,
-------- -------
0% if aggregate Pre-Tax Profits are less than $4
million.

Bonus compensation shall be payable to Executive in accordance with
the terms and conditions of that certain Bonus Plan for Executive
Officers, attached hereto and incorporated herein by this reference as
Exhibit A. Image may modify the Bonus Plan from time-to-time and, so
long as such modifications are of general applicability to all
participants in such program, all such modifications shall be
applicable to Executive hereunder ("Bonus Compensation").
------------------

4. STOCK OPTIONS.

In addition to Base Salary and Bonus Compensation, Image may grant stock
options to Executive in such form and amounts, and at such time or times,
as Image's Board of Directors (or, if applicable, Image's stock option plan
administrators) shall determine. If this Agreement is terminated early
"Without "Cause" under Subparagraph 12(b) or due to a "Change In Control"
under Paragraph 13, all unvested options granted to Executive will
immediately vest. Further, unless this Agreement is
<PAGE>

terminated early for Cause under Subparagraph 12(a), all vested options
granted to Executive shall be exercisable for the longest period
permissible under the grant after employment ceases.

5. FRINGE BENEFITS.

a. Image agrees to provide Executive with fringe benefits including but
not limited to the medical, dental and life insurance, expense
allowance and vacation time described below:

i. MEDICAL, DENTAL, LIFE & LONG-TERM DISABILITY INSURANCE. Image
shall purchase (or, if applicable, maintain) during the Term
medical, dental and life insurance for Executive, and provide
coverage under the medical and dental policies for Executive's
direct dependent beneficiaries (e.g., spouse and minor children),
on terms no less favorable than the terms and conditions in
effect as of the date hereof and at all times at least equal to
that received by any other Executive Officer (collectively
"Insurance").
----------

ii. BUSINESS/TRAVEL EXPENSES. Executive shall be reimbursed in full
for all reasonable and actual out-of-pocket business and travel
expenses incurred in the performance of Executive's Services, on
terms and at all times at least equal to that received by any
other Executive Officer, provided Executive shall first present
an itemized account of such expenditures together with supporting
vouchers.

iii. VACATION TIME. Executive is entitled to 4 weeks of paid
vacation time per year of the Term. Any unused vacation time
will continue to accrue throughout the Term and will not be
subject to any offset, reduction, deduction or maximum accrual
limitation of any kind.

b. CEO FRINGE BENEFITS. Notwithstanding the foregoing, Image agrees to
also provide Executive with the following fringe benefits.

i. PERSONAL LIFE AND DISABILITY INSURANCE. Image shall purchase
(or, if applicable, maintain) during the Term personal life and
disability insurance for Executive on terms no less favorable
than the terms and conditions in effect as of the date hereof;
provided, however, that the aggregate annual premium payment for
-------- -------
such coverage together with payment for any non-reimbursable
medical expenses (i.e., medical expenses not covered by the
policy) shall not exceed $17,000 per annum. Executive shall have
the exclusive right to name the beneficiaries of such coverage.

ii. PERSONAL EXPENSES. Executive shall receive an unaccountable,
personal expense allowance annualized at $54,000 per year of the
Term. For each full calendar quarter of the Term, Image will
reimburse Executive for all personal expenses submitted during
the period up to $13,500; provided, however, that Executive shall
-------- -------
be entitled to
<PAGE>

receive the difference between $13,500 and the aggregate expenses
submitted for the period if said amount is less than $13,500.

iii. COMPANY CAR. Executive shall be entitled to the use of a
company car.

6. SEVERANCE.

Upon expiration of the Term, Executive shall be entitled to receive:

a. Base Salary continuation for a period of 6 months; and

b. a prorated portion of Bonus Compensation, if any, otherwise payable
pursuant to Subparagraph 3(b) for 6 months or any partial fiscal year
that has occurred prior to the expiration of the Term, whichever is
greater; and

c. Insurance continuation for a period of 6 months.

7. WITHHOLDING.

There shall be deducted from all compensation payable to Executive
hereunder (except Paragraph 5(b)(ii) compensation), such sums, including
without limitation, social security, income tax withholding and
unemployment insurance, as Image is by law obligated to deduct.

8. CONFIDENTIALITY.

In consideration of the payments to be received hereunder, Executive agrees
as follows:

a. That during the Term of this Agreement he will have access to and
become acquainted with various "Trade Secrets" (as defined below) and
proprietary information of Image. Except as Executive's duties may
require or as Image may otherwise consent to in writing, Executive
will not at any time disclose or use to the detriment of Image or the
sole benefit of Executive, either directly or indirectly, and either
during or subsequent to the Term hereof, any information, knowledge or
data he receives in confidence or acquires from Image or which relates
to the Trade Secrets of Image. For purposes of this Agreement "Trade
-----
Secrets" shall include, but not be limited to:
-------

i. Financial information, such as Image's earnings, assets, debts,
prices, pricing structure, volumes of purchases or sales or other
financial data, whether relating to Image generally, or to
particular products, services, geographic areas, or time periods;

to the extent that the combination of suppliers or use of a
particular supplier, though generally known or available, yields
advantages to Image, the details of which are not generally
known;

iii. Marketing information, such as details about ongoing or proposed
marketing programs or agreements by or on behalf of Image, sales
forecasts or results of marketing efforts or information about
impending transactions;

iv. Licensing or Distribution information, such as details about
ongoing or proposed negotiations or agreements by or on behalf of
Image, terms and details of such negotiations or agreements or
results of licensing or distribution efforts or information about
impending transactions; or,

v. Customer information, such as any compilation of past, existing
or prospective customers, customers' proposals or agreements
between customers and status of customers accounts or credit, or
related information about actual or prospective customers.

b. That all files, records, documents, data information and customer
lists are special, valuable and unique assets of Image and are
essential to its continued business success, and that under no
circumstance during the Term hereof or subsequent thereto will he
influence or attempt to influence any employee of Image to terminate
his or her employment with Image to work for any competitor of Image,
nor shall the Executive solicit, directly or indirectly, any customers
of Image or disclose or use for the purpose of such solicitation,
without the prior written consent of Image, any files, records,
documents, data, information, customer lists or any other proprietary
information of Image.

c. Executive acknowledges that any violation of the terms of this
Paragraph 8 will constitute a material breach of this Agreement and
will cause Image immediate and irreparable harm and that the damages
which Image will suffer may be difficult or impossible to measure.
Therefore, upon any actual or impending violation of this Paragraph 8,
Image shall be entitled to the issuance of a restraining order,
preliminary and permanent injunction, without bond, restraining or
enjoining such violation by Executive or any entity or person acting
in concert with Executive. Such remedy shall be additional to and not
in limitation of any other remedy which may otherwise be available to
Image.

9. INDEMNIFICATION OF EXECUTIVE.

Image will, to the maximum extent permitted by law, indemnify and hold
Executive harmless against expenses, including reasonable attorney's fees,
judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of
Executive's employment by Image. Image shall advance to Executive any
expenses incurred in defending any proceeding to the maximum extent
permitted by law. Image will at all times maintain directors' and
<PAGE>

officers' liability insurance ("D&O Insurance"), or have sufficient funds
-------------
to self-insure, in amounts and on terms at least as favorable as the D&O
Insurance policy in effect on the date hereof.

10. DEATH.

In the event of Executive's death, this Agreement will terminate on the
last day of the calendar month of Executive's death. In such event,
Executive's personal representative, heirs or beneficiaries shall be
entitled to receive:

a. Base Salary continuation for a period of 6 months or the expiration of
the Term, whichever occurs first; and

b. a prorated portion of Bonus Compensation, if any, otherwise payable
pursuant to Subparagraph 3(b) for 6 months or any partial fiscal year
that has occurred prior to the effective date of termination,
whichever is greater; and

c. dependent Insurance continuation for a period of 6 months or the
expiration of the Term, whichever occurs first.

11. PERMANENT DISABILITY/SUSPENSION.

If, for any reason including physical, mental illness, failure, refusal or
other inability, Executive does not perform a majority of Executive's usual
duties for a period of longer than 120 consecutive days, Image's obligation
to pay Base Salary will be suspended. If the suspension is reasonably
anticipated to exceed 180 consecutive days, Image may terminate this
Agreement effective upon 30 days prior written notice to Executive. In
such event, Executive shall be entitled to receive:

a. Base Salary continuation for a period of 6 months or the expiration of
the Term, whichever occurs first; and

c. Insurance continuation for a period of 6 months or the expiration of
the Term, whichever occurs first.

Disagreement as to the anticipation of a permanent disability/suspension
and/or the date such permanent disability/suspension commenced shall be
settled by the majority decision of 3 neutral arbitrators (or, if
applicable, licensed physicians) one to be selected by each party to the
dispute, the two thus appointed shall choose the third, and the three thus
appointed shall constitute the board of arbitration. Such board, acting by
majority vote within 30 days after choosing the third arbitrator, shall
resolve such disagreement and their decision shall be final and binding on
Executive, Image and any other person with an interest in the matter.

12. TERMINATION.
<PAGE>

a. "CAUSE." In the event of "Cause" (as defined below), Image may
terminate this Agreement at any time effective upon delivery of
written notice to Executive. In such event, all of Image's
obligations hereunder will immediately terminate without further
liability. Moreover, Executive shall not be entitled to receive any
severance, fringe benefits, compensation or other such rights, nor
shall Executive be entitled to receive a pro-rata portion of Bonus
Compensation otherwise payable pursuant to Subparagraph 3(b). For
purposes of this Agreement "Cause" shall include, but is not limited
-----
to:

i. Executive's (i) fraud, felonious conduct or dishonesty or (ii)
willful misconduct or gross negligence in the performance of
Executive's duties hereunder; provided, however, that bona fide
-------- -------
disagreements or disputes as to expense reimbursement shall not
be deemed fraud or felonious conduct or Executive's breach of any
material provision of this Agreement; or

ii. Executive's breach of any material provision of this Agreement or
any other material agreement between Image and Executive.

b. "WITHOUT CAUSE." Notwithstanding anything contained herein to the
contrary, in the event this Agreement is terminated prior to
expiration of the Term for any reason other than pursuant to
Paragraphs 10 or 11 or for Cause, this Agreement shall be deemed to
have been terminated "Without Cause" and Executive shall be entitled
to receive all of the compensation, rights and benefits described in
Paragraphs 3, 4 and 5 through the expiration of the Term and the
severance described in Paragraph 6, as if this Agreement were in full
force.

13. CHANGE IN CONTROL.

Notwithstanding anything contained herein to the contrary, the terms and
conditions of this Paragraph 13 shall control following a "Change In
Control" (as defined below).

a. TERMINATION. In the event this Agreement is terminated prior to
expiration of the Term for any reason other than pursuant to
Paragraphs 10 or 11 or for Cause following a Change In Control,
Executive shall be entitled to receive all of the compensation, rights
and benefits described in Paragraphs 3, 4 and 5 for a period of 1 year
following the effective date of termination or through the expiration
of the Term, whichever is longer, and the severance described in
Paragraph 6, as if this Agreement were in full force. If any other
Executive Officer's options are acquired pursuant to a Change In
Control, Executive's options will be acquired on terms and at all
times at least equal to any other Officer. Executive must receive 30
days prior written notice of termination regardless of the reason for
termination.
<PAGE>

b. "Change In Control." For purposes of this Agreement "Change In
---------
Control" shall mean and be deemed to have occurred on the earliest of
-------
the following dates:

i. the date, pursuant to Section 13(d) of the Act and the rules
promulgated thereunder, a person shall have acquired beneficial
ownership of more than 45% of the Voting Stock;

ii. the date the persons who were members of the Board at the
beginning of any 24-month period shall cease to constitute a
majority of the Board, unless the election, or the nomination for
election by Image's shareholders, of each new director was
approved by two-thirds of the members of the Board then in office
who were in office at the beginning of the 24-month period; or

iii. the date Image's shareholders shall approve a definitive
agreement (a) to merge or consolidate Image with or into another
corporation, unless the holders of Image's capital stock
immediately before such merger or consolidation will, immediately
following such merger or consolidation, hold as a group on a
fully-diluted basis the ability to elect at least a majority of
the directors of the surviving corporation (assuming cumulative
voting, if applicable), or (b) to sell or otherwise dispose of
all or substantially all the assets of Image.

c. EXECUTIVE'S RIGHT TO TERMINATE FOR GOOD REASON. During the Term,
Executive shall be entitled to terminate Executive's employment with
Image for "Good Reason" (as defined below) following a Change In
Control. For purposes of this Agreement "Good Reason" shall mean any
of the following events which occurs without Executive's express
written consent:

i. the assignment of any duties inconsistent with Executive's status
as an Executive Officer or a substantial alteration in the nature
or status of Executive's responsibilities from those in effect
immediately prior to a Change In Control other than any such
alteration primarily attributable to the fact that Image may no
longer be a public company;

ii. a reduction by Image in Base Salary, except for across-the-board
salary reductions similarly affecting all Executive Officers and
any subsidiaries and all executives of any person, firm or entity
in control of Image;

iii. the relocation of Image's principal executive offices to a
location more than 35 miles from the current locale or Image's
requiring Executive to be based anywhere other than Image's
principal executive offices except for required travel on Image's
business to an extent substantially consistent with Executive's
present travel obligations;

iv. the failure by Image to continue in effect without material
change any compensation or benefit plan in which Executive
<PAGE>

is entitled to participate, or the failure by Image to continue
Executive's participation therein, or the taking of any action
by Image which would directly or indirectly materially reduce
any of the benefits of such plans enjoyed by Executive at the
time of the Change In Control, or the failure by Image to
provide Executive with the number of paid vacation days to which
Executive is entitled hereunder, or the taking of any other
action by Image which materially adversely changes the
conditions or perquisites of Executive's employment;

v. the failure of Image to obtain a satisfactory agreement from any
successor to assume and agree to perform the Services
contemplated by this Agreement;

vi. any purported termination of employment which is not effected
pursuant to Subparagraph 13(a), any such purported termination
shall not be effective for purposes of this Agreement;

vii. the failure of Image to maintain adequate D&O insurance coverage
pursuant to the terms of this Agreement; or

viii. the breach by Image of any material term of this Agreement.

d. LEGAL FEES AND EXPENSES. If Executive is terminated following a
Change In Control and Executive shall incur any legal fees or expenses
as a result of (i) seeking to obtain or enforce any right or benefit
provided by this Agreement or (ii) a claim of wrongful discharge or
breach of this Agreement, Image agrees to pay or reimburse Executive
for such fees and expenses; provided, however, that any claims giving
-------- -------
rise to such fees or expenses must be made in good faith and for good
cause. In the event there is a dispute regarding Executive's good
faith or the merits of Executive's claim, and it is determined by the
court that the claim lacked merit or was made in bad faith, Executive
shall not be entitled to recover any fees and expenses including,
reasonable attorneys' fees under the terms of this Agreement and
Executive shall be limited to recover such fees and expenses, if any,
as the court shall determine.

14. GENERAL PROVISIONS.

a. SUCCESSORS AND ASSIGNS. This Agreement is binding upon and shall inure
to the benefit of the parties hereto, and any of their heirs,
legatees, devisees, personal representatives, assigns and successors
in interest of every kind and nature whatsoever. The parties hereto
agree that Executive's services are personal and that this Agreement
is executed with respect thereto. Executive shall have no right to
sell, transfer or assign this Agreement in any manner whatsoever.

any and all prior and preliminary discussions, and (ii) any and all
prior written or oral and any and all contemporaneous written or oral
agreements, understandings and negotiations between the parties;
including but not limited to prior written or oral employment
agreements and severance agreements, and, there are no warranties,
representations or other agreements between the parties in connection
with the subject matter hereof except as set forth or referred to
herein. This Agreement shall not be modified, amended or altered
except by an instrument in writing executed by the parties hereto.

c. SEVERABILITY. In case one or more of the provisions contained in this
Agreement (or any portion of any such provision) shall for any reason
be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement (or any portion of any such provision),
but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision (or portion thereof) had never been contained
herein.

d. WAIVER. The failure by Image, at any time, to require performance by
Executive of any of the provisions hereof, shall not be deemed a
waiver of any kind nor shall it in any way affect Image's rights
thereafter to enforce the same.

e. NOTICES. All notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be deemed
to have been given 24 hours after deposit there of for mailing at any
general or branch United States Post Office, enclosed in a registered
or certified postpaid envelope and addressed as follows:

To Image: IMAGE ENTERTAINMENT, INC.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: General Counsel

To Executive: MARTIN W. GREENWALD
349 South Linden Drive, #B
Beverly Hills, CA 90212

The parties hereto may designate a different place at which notice
shall be given; provided, however, that any such notice of change of
address shall be effective only upon receipt.

f. GOOD FAITH. The parties hereto shall perform, fulfill and discharge
their duties and obligations hereunder in a reasonable manner in good
faith.

g. GOVERNING LAW. This Agreement and all rights, obligations and
liabilities arising hereunder shall be construed and enforced in
accordance with the laws of the State of California.

h. ATTORNEYS' FEES. In the event it becomes necessary to commence
<PAGE>

any proceeding or action to enforce the provisions of this Agreement,
the court before whom the same shall be tried may award the prevailing
party all costs and expenses thereof, including without limitation,
reasonable attorney's fees, the usual, customary and lawfully
recoverable court costs, and all other expenses in connection
therewith.

i. ADVICE OF COUNSEL. The parties represent and warrant that in
executing this Agreement, they have each had the opportunity to obtain
independent financial, legal, tax and other appropriate advice, and
are not relying upon any other party (or the attorneys or other agents
of such other party) for any such advice

j. SUBJECT HEADINGS AND DEFINED TERMS. Subject headings and choice of
defined terms are included for convenience only and shall not be
deemed part of this Agreement.

k. CUMULATIVE RIGHTS AND REMEDIES. The rights and remedies provided for
in this Agreement shall be cumulative; resort to one right or remedy
shall not preclude resort to another or to any other right or remedy
provided for by law or in equity.

IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.

"Image":
-----
IMAGE ENTERTAINMENT, INC.,
a California corporation

By:/s/MARTIN W. GREENWALD
--------------------------------------------
MARTIN W. GREENWALD, President

"Executive":
---------

/s/ MARTIN W. GREENWALD
-----------------------------------------------
MARTIN W. GREENWALD, an individual
<PAGE>

Exhibit A to Greenwald Employment Agreement

- --------------------------------------------------------------------------------
EXECUTIVE OFFICER

BONUS COMPENSATION PLAN
- --------------------------------------------------------------------------------

. OBJECTIVES OF THE PLAN. In addition to Base Salary and stock options, to
provide Executive Officer incentive compensation based upon Image's
operating profits.

. "PRE-TAX PROFIT" PERCENTAGE. The incentive compensation plan is designed to
provide Executive Officers with a bonus based on Image's "Pre-Tax Profits,"
as defined on the attached. The actual amount earned pursuant to the Plan
shall be based upon audited fiscal year end numbers and determined using
the calculation method attached. Concurrent with the payment of Bonus
Compensation, Image shall deliver to Executive a detailed statement setting
forth the numbers and method of calculation.

. PAYMENT. Bonus Compensation, if any, for the applicable fiscal year will be
paid, using best efforts, at the earliest practicable date following
completion of Image's annual audit, as conducted by Image's independent
certified public accountants, and the filing of Image's Annual Report on
Form 10-K for that fiscal year.

. AUDIT RIGHTS. Executive shall be entitled to audit, at Executive's own
expense, Image's records in order to verify any Bonus Compensation
statement rendered hereunder. Any such audit shall be conducted by a
certified public accountant upon reasonable notice to Image and during
Image's normal business hours. Any statement not questioned by Executive in
writing within 3 years from the date of such statement shall be deemed
final and conclusive. In the event an audit reveals a discrepancy of 5% or
more, Image shall bear the full cost of the audit and pay Executive
interest on any underage at the highest rate permitted by law.

. DISPUTES. Disagreement as to the computation of Bonus Compensation and/or
any numbers used in such computation shall be settled by the majority
decision of 3 certified public accountants, one to be selected by each
party to the dispute, the two thus appointed shall choose the third, and
the three thus appointed shall constitute the board of arbitration. Such
board, acting by majority vote within 30 days after choosing the third
arbitrator, shall resolve such disagreement and their decision shall be
final and binding on Executive, Image and any other person with an interest
in the matter.

. PRORATION OF BONUS COMPENSATION. For any partial fiscal year for which
Executive is entitled to receive Bonus Compensation, the proration shall be
determined by multiplying total Net Profits for the fiscal year within
which such partial fiscal year occurs by (a) the decimal equivalent of the
applicable percentage bonus and by (b) a number equal to the number of
months during any such partial fiscal year in which Executive was employed
by Image (or, if applicable, such longer period as is set forth in the
Employment Agreement), divided by 12.

<PAGE>

EXHIBIT 10.9

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this
---------
1st day of July, 1994, by and between IMAGE ENTERTAINMENT INC., a California
corporation ("Image"), and CHERYL LEE, an individual ("Executive").
----- ---------

RECITALS

A. Image is engaged in the business of licensing, manufacturing,
promoting, marketing and selling laserdisc format programming.

B. Executive has unique experience with respect to sales and marketing,
management and other aspects of the business of Image.

NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:

1. TERM OF AGREEMENT.

2. ENGAGEMENT.

Subject to the terms and conditions contained herein, Image hereby engages
the services of Executive (the "Services") and Executive hereby accepts
--------
such engagement and agrees to render Executive's Services to Image for the
Term. Executive shall report directly to the President of Image and shall
have the title of "CHIEF ADMINISTRATIVE OFFICER & GENERAL COUNSEL."

3. COMPENSATION.

a. BASE SALARY. Image hereby agrees to pay Executive for Services to be
rendered hereunder, including all services to be rendered as an Image
director, a minimum annual base salary of $136,000 for each year of
the Term, payable in equal biweekly installments or as otherwise
provided in accordance with Image's regular Executive Officer
compensation procedures in effect from time to time ("Base Salary").
-----------

b. BONUS COMPENSATION. Executive shall receive such bonus compensation
equal to 5/8% of "Pre-Tax Profits" (as defined in Exhibit A), if any,
as shall be payable to Executive in accordance with the terms and
conditions of that certain Bonus Plan for Executive Officers, attached
hereto and incorporated herein by this reference as Exhibit A. Image
may modify the Bonus Plan from time-to-time and, so long as such
modifications are of general applicability to all participants in such
program, all such modifications shall be applicable to Executive
hereunder ("Bonus Compensation").
------------------

4. STOCK OPTIONS.

5. FRINGE BENEFITS.

a. Image agrees to provide Executive with fringe benefits including but
not limited to the medical, dental and life insurance, expense
allowance and vacation time described below:

i. MEDICAL, DENTAL, LIFE & LONG-TERM DISABILITY INSURANCE. Image
shall purchase (or, if applicable, maintain) during the Term
medical, dental and life insurance for Executive,
<PAGE>

and provide coverage under the medical and dental policies for
Executive's direct dependent beneficiaries (e.g., spouse and
minor children), on terms no less favorable than the terms and
conditions in effect as of the date hereof and at all times at
least equal to that received by any other Executive Officer
(collectively "Insurance").
---------

6. SEVERANCE.

Upon expiration of the Term, Executive shall be entitled to receive:

a. Base Salary continuation for a period of 6 months; and

c. Insurance continuation for a period of 6 months.

7. WITHHOLDING.

8. CONFIDENTIALITY.

In consideration of the payments to be received hereunder, Executive agrees
as follows:

confidence or acquires from Image or which relates to the Trade
Secrets of Image. For purposes of this Agreement "Trade Secrets"
-------------
shall include, but not be limited to:

ii. Supply and service information, such as goods and services,
supplier's names or addresses, terms of supply or service
contracts, or of particular transactions, or related information
about potential suppliers, to the extent that such information is
not generally known to the public, and to the extent that the
combination of suppliers or use of a particular supplier, though
generally known or available, yields advantages to Image, the
details of which are not generally known;

restraining order, preliminary and permanent injunction, without bond,
restraining or enjoining such violation by Executive or any entity or
person acting in concert with Executive. Such remedy shall be
additional to and not in limitation of any other remedy which may
otherwise be available to Image.

9. INDEMNIFICATION OF EXECUTIVE.

Image will, to the maximum extent permitted by law, indemnify and hold
Executive harmless against expenses, including reasonable attorney's fees,
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of Executive's
employment by Image. Image shall advance to Executive any expenses
incurred in defending any proceeding to the maximum extent permitted by
law. Image will at all times maintain directors' and officers' liability
insurance ("D&O Insurance"), or have sufficient funds to self-insure, in
-------------
amounts and on terms at least as favorable as the D&O Insurance policy in
effect on the date hereof.

10. DEATH.

a. Base Salary continuation for a period of 6 months or the expiration of
the Term, whichever occurs first; and

c. dependent Insurance continuation for a period of 6 months or the
expiration of the Term, whichever occurs first.

11. PERMANENT DISABILITY/SUSPENSION.

a. Base Salary continuation for a period of 6 months or the expiration of
the Term, whichever occurs first; and

c. Insurance continuation for a period of 6 months or the expiration of
the Term, whichever occurs first.

12. TERMINATION.

ii. Executive's breach of any material provision of this Agreement or
any other material agreement between Image and Executive.

13. CHANGE IN CONTROL.

Notwithstanding anything contained herein to the contrary, the terms and
conditions of this Paragraph 13 shall control following a "Change In
Control" (as defined below).
<PAGE>

b. "CHANGE IN CONTROL." For purposes of this Agreement "Change In
---------
Control" shall mean and be deemed to have occurred on the earliest of
-------
the following dates:

i. the date, pursuant to Section 13(d) of the Act and the rules
promulgated thereunder, a person shall have acquired beneficial
ownership of more than 45% of the Voting Stock;

ii. the date the persons who were members of the Board at the
beginning of any 24-month period shall cease to constitute a
majority of the Board, unless the election, or the nomination
for election by Image's shareholders, of each new director was
approved by two-thirds of the members of the Board then in
office who were in office at the beginning of the 24-month
period; or

iii. the date Image's shareholders shall approve a definitive
agreement (a) to merge or consolidate Image with or into another
corporation, unless the holders of Image's capital stock
immediately before such merger or consolidation will,
immediately following such merger or consolidation, hold as a
group on a fully-diluted basis the ability to elect at least a
majority of the directors of the surviving corporation (assuming
cumulative voting, if applicable), or (b) to sell or otherwise
dispose of all or substantially all the assets of Image.

i. the assignment of any duties inconsistent with Executive's
status as an Executive Officer or a substantial alteration in
the nature or status of Executive's responsibilities from those
in effect immediately prior to a Change In Control other than
any such alteration primarily attributable to the fact that
Image may no longer be a public company;
<PAGE>

iii. the relocation of Image's principal executive offices to a
location more than 35 miles from the current locale or Image's
requiring Executive to be based anywhere other than Image's
principal executive offices except for required travel on
Image's business to an extent substantially consistent with
Executive's present travel obligations;

iv. the failure by Image to continue in effect without material
change any compensation or benefit plan in which Executive is
entitled to participate, or the failure by Image to continue
Executive's participation therein, or the taking of any action
by Image which would directly or indirectly materially reduce
any of the benefits of such plans enjoyed by Executive at the
time of the Change In Control, or the failure by Image to
provide Executive with the number of paid vacation days to which
Executive is entitled hereunder, or the taking of any other
action by Image which materially adversely changes the
conditions or perquisites of Executive's employment;

v. the failure of Image to obtain a satisfactory agreement from any
successor to assume and agree to perform the Services
contemplated by this Agreement;

vi. any purported termination of employment which is not effected
pursuant to Subparagraph 13(a), any such purported termination
shall not be effective for purposes of this Agreement;

vii. the failure of Image to maintain adequate D&O insurance coverage
pursuant to the terms of this Agreement; or

viii. the breach by Image of any material term of this Agreement.

14. GENERAL PROVISIONS.

a. SUCCESSORS AND ASSIGNS. This Agreement is binding upon and shall
inure to the benefit of the parties hereto, and any of their heirs,
legatees, devisees, personal representatives, assigns and successors
in interest of every kind and nature whatsoever. The parties hereto
agree that Executive's services are personal and that this Agreement
is executed with respect thereto. Executive shall have no right to
sell, transfer or assign this Agreement in any manner whatsoever.

b. ENTIRE UNDERSTANDING. This Agreement, and the Exhibits hereto,
constitute the entire understanding and agreement between the parties
with respect to the subject matter hereof; supersedes (I) any and all
prior and preliminary discussions, and (ii) any and all prior written
or oral and any and all contemporaneous written or oral agreements,
understandings and negotiations between the parties; including but not
limited to prior written or oral employment agreements and severance
agreements, and, there are no warranties, representations or other
agreements between the parties in connection with the subject matter
hereof except as set forth or referred to herein. This Agreement
shall not be modified, amended or altered except by an instrument in
writing executed by the parties hereto.

To Image: IMAGE ENTERTAINMENT, INC.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: General Counsel

To Executive: CHERYL LEE
1010 Washington Boulevard
<PAGE>

Santa Monica, CA 90403

The parties hereto may designate a different place at which notice
shall be given; provided, however, that any such notice of change of
address shall be effective only upon receipt.

f. GOOD FAITH. The parties hereto shall perform, fulfill and discharge
their duties and obligations hereunder in a reasonable manner in good
faith.

g. GOVERNING LAW. This Agreement and all rights, obligations and
liabilities arising hereunder shall be construed and enforced in
accordance with the laws of the State of California.

h. ATTORNEYS' FEES. In the event it becomes necessary to commence any
proceeding or action to enforce the provisions of this Agreement, the
court before whom the same shall be tried may award the prevailing
party all costs and expenses thereof, including without limitation,
reasonable attorney's fees, the usual, customary and lawfully
recoverable court costs, and all other expenses in connection
therewith.

j. SUBJECT HEADINGS AND DEFINED TERMS. Subject headings and choice of
defined terms are included for convenience only and shall not be
deemed part of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.

"Image":
-----
IMAGE ENTERTAINMENT, INC.,
a California corporation

By:/s/ MARTIN W. GREENWALD
-----------------------------------------
MARTIN W. GREENWALD, President

"Executive":
---------
<PAGE>

/s/ CHERYL LEE
--------------------------------------------
CHERYL LEE, an individual
<PAGE>

EXHIBIT A to Cheryl Lee Employment Agreement

- --------------------------------------------------------------------------------
EXECUTIVE OFFICER

BONUS COMPENSATION PLAN
- --------------------------------------------------------------------------------

. OBJECTIVES OF THE PLAN. In addition to Base Salary and stock options, to
provide Executive Officer incentive compensation based upon Image's
operating profits.

"PRE-TAX PROFIT" PERCENTAGE. The incentive compensation plan is designed
to provide Executive Officers with a bonus based on Image's "Pre-Tax
Profits," as defined on the attached. The actual amount earned pursuant to
the Plan shall be based upon audited fiscal year end numbers and determined
using the calculation method attached. Concurrent with the payment of
Bonus Compensation, Image shall deliver to Executive a detailed statement
setting forth the numbers and method of calculation.

. PAYMENT. Bonus Compensation, if any, for the applicable fiscal year will
be paid, using best efforts, at the earliest practicable date following
completion of Image's annual audit, as conducted by Image's independent
certified public accountants, and the filing of Image's Annual Report on
Form 10-K for that fiscal year.

. AUDIT RIGHTS. Executive shall be entitled to audit, at Executive's own
expense, Image's records in order to verify any Bonus Compensation
statement rendered hereunder. Any such audit shall be conducted by a
certified public accountant upon reasonable notice to Image and during
Image's normal business hours. Any statement not questioned by Executive
in writing within 3 years from the date of such statement shall be deemed
final and conclusive. In the event an audit reveals a discrepancy of 5% or
more, Image shall bear the full cost of the audit and pay Executive
interest on any underage at the highest rate permitted by law.

<PAGE>

EXHIBIT 10.10

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
---------
this 1st day of July, 1994, by and between IMAGE ENTERTAINMENT INC., a
California corporation ("Image"), and JEFF FRAMER, an individual ("Executive").
----- ---------

RECITALS

A. Image is engaged in the business of licensing, manufacturing,
promoting, marketing and selling laserdisc format programming.

B. Executive has unique experience with respect to sales and marketing,
management and other aspects of the business of Image.

C. Executive desires to render to Image, on an exclusive basis,
Executive's professional services with respect to Executive's
experience and abilities, and Image desires to secure, on an
exclusive basis, Executive's services, on the terms and conditions
set forth below.

NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:

1. TERM OF AGREEMENT.

Except as otherwise expressly set forth herein, this Agreement shall
remain in full force and effect for a 2-year term commencing on the date
hereof and ending on June 30, 1996 (the "Term"); provided, however, that
---- -------- -------
unless Executive receives written notice on or before June 30, 1995 that
this Agreement will not be renewed at June 30, 1996 the Term will
automatically extend to June 30, 1997. In the event of any additional
extensions, Image must give Executive at least 1 year's prior written
notice if the Term will not be further extended.

2. ENGAGEMENT.

Subject to the terms and conditions contained herein, Image hereby engages
the services of Executive (the "Services") and Executive hereby accepts
--------
such engagement and agrees to render Executive's Services to Image for the
Term. Executive shall report directly to the President of Image and shall
have the title of "CHIEF FINANCIAL OFFICER."

b. EXCLUSIVE ENGAGEMENT. Executive hereby acknowledges and agrees that
the engagement of Executive by Image under this Agreement is
exclusive and that during the Term hereof Executive shall not,
directly or indirectly, whether for compensation or otherwise,
engage in any business that is competitive with the business of
Image, or render any services of a business, commercial or
professional nature to any other person or organization that is a
competitor of Image or in a business similar to that of Image,
without the prior written consent of Image.

3. COMPENSATION.

a. BASE SALARY. Image hereby agrees to pay Executive for Services to
be rendered hereunder, including all services to be rendered as an
Image director, a minimum annual base salary of $115,000 for each
year of the Term, payable in equal biweekly installments or as
otherwise provided in accordance with Image's regular Executive
Officer compensation procedures in effect from time to time ("Base
Salary") . ----
------

b. BONUS COMPENSATION. Executive shall receive such bonus compensation
equal to 5/8% of "Pre-Tax Profits" (as defined in Exhibit A), if
any, as shall be payable to Executive in accordance with the terms
and conditions of that certain Bonus Plan for Executive Officers,
attached hereto and incorporated herein by this reference as Exhibit
A. Image may modify the Bonus Plan from time-to-time and, so long as
such modifications are of general applicability to all participants
in such program, all such modifications shall be applicable to
Executive hereunder ("Bonus Compensation") .
------------------

4. STOCK OPTIONS.

In addition to Base Salary and Bonus Compensation, Image may grant stock
options to Executive in such form and amounts, and at such time or times,
as Image's Board of Directors (or, if applicable, Image's stock option
plan administrators) shall determine. If this Agreement is terminated
early "Without "Cause" under Subparagraph 12(b) or due to a "Change In
Control" under Paragraph 13, all unvested options granted to Executive
will immediately vest. Further, unless this Agreement is terminated early
for Cause under Subparagraph 12(a), all vested options granted to
Executive shall be exercisable for the longest period permissible under
the grant after employment ceases.

5. FRINGE BENEFITS.

a. Image agrees to provide Executive with fringe benefits including but
not limited to the medical, dental and life insurance, expense
allowance and vacation time described below:

i. MEDICAL, DENTAL, LIFE & LONG-TERM DISABILITY INSURANCE. Image
shall purchase (or, if applicable, maintain) during the Term
medical, dental and life insurance for Executive,
<PAGE>

ii. BUSINESS/TRAVEL EXPENSES. Executive shall be reimbursed in
full for all reasonable and actual out-of-pocket business and
travel expenses incurred in the performance of Executive's
Services, on terms and at all times at least equal to that
received by any other Executive Officer, provided Executive
shall first present an itemized account of such expenditures
together with supporting vouchers.

6. SEVERANCE.

Upon expiration of the Term, Executive shall be entitled to receive:

a. Base Salary continuation for a period of 6 months; and

b. a prorated portion of Bonus Compensation, if any, otherwise payable
pursuant to Subparagraph 3(b) for 6 months or any partial fiscal
year that has occurred prior to the expiration of the Term,
whichever is greater; and

c. Insurance continuation for a period of 6 months.

7. WITHHOLDING.

8. CONFIDENTIALITY.

In consideration of the payments to be received hereunder, Executive
agrees as follows:

a. That during the Term of this Agreement he will have access to and
become acquainted with various "Trade Secrets" (as defined below)
and proprietary information of Image. Except as Executive's duties
may require or as Image may otherwise consent to in writing,
Executive will not at any time disclose or use to the detriment of
Image or the sole benefit of Executive, either directly or
indirectly, and either during or subsequent to the Term hereof, any
information, knowledge or data he receives in
<PAGE>

confidence or acquires from Image or which relates to the Trade
Secrets of Image. For purposes of this Agreement "Trade Secrets"
-------------
shall include, but not be limited to:

i. Financial information, such as Image's earnings, assets,
debts, prices, pricing structure, volumes of purchases or
sales or other financial data, whether relating to Image
generally, or to particular products, services, geographic
areas, or time periods;

ii. Supply and service information, such as goods and services,
supplier's names or addresses, terms of supply or service
contracts, or of particular transactions, or related
information about potential suppliers, to the extent that such
information is not generally known to the public, and to the
extent that the combination of suppliers or use of a
particular supplier, though generally known or available,
yields advantages to Image, the details of which are not
generally known;

iii. Marketing information, such as details about ongoing or
proposed marketing programs or agreements by or on behalf of
Image, sales forecasts or results of marketing efforts or
information about impending transactions;

iv. Licensing or Distribution information, such as details about
ongoing or proposed negotiations or agreements by or on behalf
of Image, terms and details of such negotiations or agreements
or results of licensing or distribution efforts or information
about impending transactions; or,

v. Customer information, such as any compilation of past,
existing or prospective customers, customers' proposals or
agreements between customers and status of customers accounts
or credit, or related information about actual or prospective
customers.

b. That all files, records, documents, data information and customer
lists are special, valuable and unique assets of Image and are
essential to its continued business success, and that under no
circumstance during the Term hereof or subsequent thereto will he
influence or attempt to influence any employee of Image to terminate
his or her employment with Image to work for any competitor of
Image, nor shall the Executive solicit, directly or indirectly, any
customers of Image or disclose or use for the purpose of such
solicitation, without the prior written consent of Image, any files,
records, documents, data, information, customer lists or any other
proprietary information of Image.

restraining order, preliminary and permanent injunction, without
bond, restraining or enjoining such violation by Executive or any
entity or person acting in concert with Executive. Such remedy shall
be additional to and not in limitation of any other remedy which may
otherwise be available to Image.

9. INDEMNIFICATION OF EXECUTIVE.

Image will, to the maximum extent permitted by law, indemnify and hold
Executive harmless against expenses, including reasonable attorney's fees,
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of
Executive's employment by Image. Image shall advance to Executive any
expenses incurred in defending any proceeding to the maximum extent
permitted by law. Image will at all times maintain directors' and
officers' liability insurance ("D&O Insurance"), or have sufficient funds
-------------
to self-insure, in amounts and on terms at least as favorable as the D&O
Insurance policy in effect on the date hereof.

10. DEATH.

a. Base Salary continuation for a period of 6 months or the expiration
of the Term, whichever occurs first; and

b. a prorated portion of Bonus Compensation, if any, otherwise payable
pursuant to Subparagraph 3(b) for 6 months or any partial fiscal
year that has occurred prior to the effective date of termination,
whichever is greater; and

c. dependent Insurance continuation for a period of 6 months or the
expiration of the Term, whichever occurs first.

11. PERMANENT DISABILITY/SUSPENSION.

If, for any reason including physical, mental illness, failure, refusal or
other inability, Executive does not perform a majority of Executive's
usual duties for a period of longer than 120 consecutive days, Image's
obligation to pay Base Salary will be suspended. If the suspension is
reasonably anticipated to exceed 180 consecutive days, Image may terminate
this Agreement effective upon 30 days prior written notice to Executive.
In such event, Executive shall be entitled to receive:

a. Base Salary continuation for a period of 6 months or the expiration
of the Term, whichever occurs first; and

b. a prorated portion of Bonus Compensation, if any, otherwise payable
pursuant to Subparagraph 3(b) for 6 months or any partial fiscal
year that has occurred prior to the effective date of termination,
whichever is greater; and
<PAGE>

c. Insurance continuation for a period of 6 months or the expiration of
the Term, whichever occurs first.

12. TERMINATION.

i. Executive's (i) fraud, felonious conduct or dishonesty or (ii)
willful misconduct or gross negligence in the performance of
Executive's duties hereunder; provided, however, that bona
-------- -------
fide disagreements or disputes as to expense reimbursement
shall not be deemed fraud or felonious conduct or Executive's
breach of any material provision of this Agreement; or

ii. Executive's breach of any material provision of this Agreement
or any other material agreement between Image and Executive.

13. CHANGE IN CONTROL.

Notwithstanding anything contained herein to the contrary, the terms and
conditions of this Paragraph 13 shall control following a "Change In
Control" (as defined below).
<PAGE>

a. TERMINATION. In the event this Agreement is terminated prior to
expiration of the Term for any reason other than pursuant to
Paragraphs 10 or 11 or for Cause following a Change In Control,
Executive shall be entitled to receive all of the compensation,
rights and benefits described in Paragraphs 3, 4 and 5 for a period
of 1 year following the effective date of termination or through the
expiration of the Term, whichever is longer, and the severance
described in Paragraph 6, as if this Agreement were in full force.
If any other Executive Officer's options are acquired pursuant to a
Change In Control, Executive's options will be acquired on terms and
at all times at least equal to any other Officer. Executive must
receive 30 days prior written notice of termination regardless of
the reason for termination.

b. "CHANGE IN CONTROL." For purposes of this Agreement "Change In
---------
Control" shall mean and be deemed to have occurred on the earliest
-------
of the following dates:

i. the date, pursuant to Section 13(d) of the Act and the rules
promulgated thereunder, a person shall have acquired
beneficial ownership of more than 45% of the Voting Stock;

ii. the date the persons who were members of the Board at the
beginning of any 24-month period shall cease to constitute a
majority of the Board, unless the election, or the nomination
for election by Image's shareholders, of each new director was
approved by two-thirds of the members of the Board then in
office who were in office at the beginning of the 24-month
period; or

iii. the date Image's shareholders shall approve a definitive
agreement (a) to merge or consolidate Image with or into
another corporation, unless the holders of Image's capital
stock immediately before such merger or consolidation will,
immediately following such merger or consolidation, hold as a
group on a fully-diluted basis the ability to elect at least a
majority of the directors of the surviving corporation
(assuming cumulative voting, if applicable), or (b) to sell or
otherwise dispose of all or substantially all the assets of
Image.

i. the assignment of any duties inconsistent with Executive's
status as an Executive Officer or a substantial alteration in
the nature or status of Executive's responsibilities from
those in effect immediately prior to a Change In Control other
than any such alteration primarily attributable to the fact
that Image may no longer be a public company;
<PAGE>

ii. a reduction by Image in Base Salary, except for across-the-
board salary reductions similarly affecting all Executive
Officers and any subsidiaries and all executives of any
person, firm or entity in control of Image;

iii. the relocation of Image's principal executive offices to a
location more than 35 miles from the current locale or Image's
requiring Executive to be based anywhere other than Image's
principal executive offices except for required travel on
Image's business to an extent substantially consistent with
Executive's present travel obligations;

iv. the failure by Image to continue in effect without material
change any compensation or benefit plan in which Executive is
entitled to participate, or the failure by Image to continue
Executive's participation therein, or the taking of any action
by Image which would directly or indirectly materially reduce
any of the benefits of such plans enjoyed by Executive at the
time of the Change In Control, or the failure by Image to
provide Executive with the number of paid vacation days to
which Executive is entitled hereunder, or the taking of any
other action by Image which materially adversely changes the
conditions or perquisites of Executive's employment;

v. the failure of Image to obtain a satisfactory agreement from
any successor to assume and agree to perform the Services
contemplated by this Agreement;

vi. any purported termination of employment which is not effected
pursuant to Subparagraph 13(a), any such purported termination
shall not be effective for purposes of this Agreement;

vii. the failure of Image to maintain adequate D&O insurance
coverage pursuant to the terms of this Agreement; or

viii. the breach by Image of any material term of this Agreement.

d. LEGAL FEES AND EXPENSES. If Executive is terminated following a
Change In Control and Executive shall incur any legal fees or
expenses as a result of (i) seeking to obtain or enforce any right
or benefit provided by this Agreement or (ii) a claim of wrongful
discharge or breach of this Agreement, Image agrees to pay or
reimburse Executive for such fees and expenses; provided, however,
-------- -------
that any claims giving rise to such fees or expenses must be made in
good faith and for good cause. In the event there is a dispute
regarding Executive's good faith or the merits of Executive's claim,
and it is determined by the court that the claim lacked merit or was
made in bad faith, Executive shall not be entitled to recover any
fees and expenses including, reasonable attorneys' fees under the
terms of this Agreement and Executive shall be limited to recover
such fees and expenses, if any, as the court shall determine.
<PAGE>

14. GENERAL PROVISIONS.

a. SUCCESSORS AND ASSIGNS. This Agreement is binding upon and shall
inure to the benefit of the parties hereto, and any of their heirs,
legatees, devisees, personal representatives, assigns and successors
in interest of every kind and nature whatsoever. The parties hereto
agree that Executive's services are personal and that this Agreement
is executed with respect thereto. Executive shall have no right to
sell, transfer or assign this Agreement in any manner whatsoever.

b. ENTIRE UNDERSTANDING. This Agreement, and the Exhibits hereto,
constitute the entire understanding and agreement between the
parties with respect to the subject matter hereof; supersedes (I)
any and all prior and preliminary discussions, and (ii) any and all
prior written or oral and any and all contemporaneous written or
oral agreements, understandings and negotiations between the
parties; including but not limited to prior written or oral
employment agreements and severance agreements, and, there are no
warranties, representations or other agreements between the parties
in connection with the subject matter hereof except as set forth or
referred to herein. This Agreement shall not be modified, amended or
altered except by an instrument in writing executed by the parties
hereto.

c. SEVERABILITY. In case one or more of the provisions contained in
this Agreement (or any portion of any such provision) shall for any
reason be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement (or any portion of any such
provision), but this Agreement shall be construed as if such
invalid, illegal or unenforceable provision (or portion thereof) had
never been contained herein.

d. WAIVER. The failure by Image, at any time, to require performance
by Executive of any of the provisions hereof, shall not be deemed a
waiver of any kind nor shall it in any way affect Image's rights
thereafter to enforce the same.

e. NOTICES. All notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be
deemed to have been given 24 hours after deposit there of for
mailing at any general or branch United States Post Office, enclosed
in a registered or certified postpaid envelope and addressed as
follows:

To Image: IMAGE ENTERTAINMENT, INC.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: General Counsel

To Executive: JEFF FRAMER
2225 Memory Lane
<PAGE>

Westlake Village, CA 91361

The parties hereto may designate a different place at which notice
shall be given; provided, however, that any such notice of change of
address shall be effective only upon receipt.

f. GOOD FAITH. The parties hereto shall perform, fulfill and discharge
their duties and obligations hereunder in a reasonable manner in
good faith.

g. GOVERNING LAW. This Agreement and all rights, obligations and
liabilities arising hereunder shall be construed and enforced in
accordance with the laws of the State of California.

h. ATTORNEYS' FEES. In the event it becomes necessary to commence any
proceeding or action to enforce the provisions of this Agreement,
the court before whom the same shall be tried may award the
prevailing party all costs and expenses thereof, including without
limitation, reasonable attorney's fees, the usual, customary and
lawfully recoverable court costs, and all other expenses in
connection therewith.

i. ADVICE OF COUNSEL. The parties represent and warrant that in
executing this Agreement, they have each had the opportunity to
obtain independent financial, legal, tax and other appropriate
advice, and are not relying upon any other party (or the attorneys
or other agents of such other party) for any such advice

j. SUBJECT HEADINGS AND DEFINED TERMS. Subject headings and choice of
defined terms are included for convenience only and shall not be
deemed part of this Agreement.

k. CUMULATIVE RIGHTS AND REMEDIES. The rights and remedies provided
for in this Agreement shall be cumulative; resort to one right or
remedy shall not preclude resort to another or to any other right or
remedy provided for by law or in equity.

IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
"Image":
-----
IMAGE ENTERTAINMENT, INC.,
a California corporation

By:/s/ MARTIN W. GREENWALD
----------------------------------------
MARTIN W. GREENWALD, President

"Executive":
---------

/s/ JEFF FRAMER
-------------------------------------------
<PAGE>

JEFF FRAMER, an individual
<PAGE>

EXHIBIT A to Jeff Framer's Employment Agreement

- --------------------------------------------------------------------------------
EXECUTIVE OFFICER

BONUS COMPENSATION PLAN
- --------------------------------------------------------------------------------

. OBJECTIVES OF THE PLAN. In addition to Base Salary and stock options, to
provide Executive Officer incentive compensation based upon Image's
operating profits.

. "PRE-TAX PROFIT" PERCENTAGE. The incentive compensation plan is designed
to provide Executive Officers with a bonus based on Image's "Pre-Tax
Profits," as defined on the attached. The actual amount earned pursuant to
the Plan shall be based upon audited fiscal year end numbers and
determined using the calculation method attached. Concurrent with the
payment of Bonus Compensation, Image shall deliver to Executive a detailed
statement setting forth the numbers and method of calculation.

. PAYMENT. Bonus Compensation, if any, for the applicable fiscal year will
be paid, using best efforts, at the earliest practicable date following
completion of Image's annual audit, as conducted by Image's independent
certified public accountants, and the filing of Image's Annual Report on
Form 10-K for that fiscal year.

. AUDIT RIGHTS. Executive shall be entitled to audit, at Executive's own
expense, Image's records in order to verify any Bonus Compensation
statement rendered hereunder. Any such audit shall be conducted by a
certified public accountant upon reasonable notice to Image and during
Image's normal business hours. Any statement not questioned by Executive
in writing within 3 years from the date of such statement shall be deemed
final and conclusive. In the event an audit reveals a discrepancy of 5% or
more, Image shall bear the full cost of the audit and pay Executive
interest on any underage at the highest rate permitted by law.

. PRORATION OF BONUS COMPENSATION. For any partial fiscal year for which
Executive is entitled to receive Bonus Compensation, the proration shall
be determined by multiplying total Net Profits for the fiscal year within
which such partial fiscal year occurs by (a) the decimal equivalent of the
applicable percentage bonus and by (b) a number equal to the number of
months during any such partial fiscal year in which Executive was employed
by Image (or, if applicable, such longer period as is set forth in the
Employment Agreement), divided by 12.

<PAGE>

EXHIBIT 10.11

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this
---------
1st day of July, 1994, by and between IMAGE ENTERTAINMENT INC., a California
corporation ("Image"), and DAVID BORSHELL, an individual ("Executive").
----- ---------

RECITALS

A. Image is engaged in the business of licensing, manufacturing,
promoting, marketing and selling laserdisc format programming.

B. Executive has unique experience with respect to sales and marketing,
management and other aspects of the business of Image.

NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto agree as follows:

1. TERM OF AGREEMENT.

2. ENGAGEMENT.

Subject to the terms and conditions contained herein, Image hereby engages
the services of Executive (the "Services") and Executive hereby accepts
--------
such engagement and agrees to render Executive's Services to Image for the
Term. Executive shall report directly to the President of Image and shall
have the title of "SR. VICE PRESIDENT OF OPERATIONS."

a. EXTENT OF SERVICES AND DUTIES. Executive shall perform such duties,
compatible with Executive's position as an "Officer" (as defined
below) and as a majority of the Board of Directors of Image may
reasonably require. In rendering Services to Image, Executive shall
use Executive's best efforts and ability to maintain, further and
promote the interests and welfare of Image. For purposes of this
Agreement "Officer" shall include any person similarly designated as
-------
an "Officer" in that person's Employment Agreement with Image.
<PAGE>

3. COMPENSATION.

a. BASE SALARY. Image hereby agrees to pay Executive for Services to be
rendered hereunder, including all services to be rendered as an Image
director, a minimum annual base salary of $87,140 for each year of the
Term, payable in equal biweekly installments or as otherwise provided
in accordance with Image's regular Officer compensation procedures in
effect from time to time ("Base Salary").
-----------

b. BONUS COMPENSATION. Executive shall receive such bonus compensation
equal to 5/8% of "Pre-Tax Profits" (as defined in Exhibit A), if any,
as shall be payable to Executive in accordance with the terms and
conditions of that certain Bonus Plan for Officers, attached hereto
and incorporated herein by this reference as Exhibit A. Image may
modify the Bonus Plan from time-to-time and, so long as such
modifications are of general applicability to all participants in such
program, all such modifications shall be applicable to Executive
hereunder ("Bonus Compensation").
------------------

4. STOCK OPTIONS.

5. FRINGE BENEFITS.

a. Image agrees to provide Executive with fringe benefits including but
not limited to the medical, dental and life insurance, expense
allowance and vacation time described below:

i. MEDICAL, DENTAL, LIFE & LONG-TERM DISABILITY INSURANCE. Image
shall purchase (or, if applicable, maintain) during the Term
medical, dental and life insurance for Executive,
<PAGE>

ii. BUSINESS/TRAVEL EXPENSES. Executive shall be reimbursed in full
for all reasonable and actual out-of-pocket business and travel
expenses incurred in the performance of Executive's Services, on
terms and at all times at least equal to that received by any
other Officer, provided Executive shall first present an
itemized account of such expenditures together with supporting
vouchers.

iii. VACATION TIME. Executive is entitled to 4 weeks of paid vacation
time per year of the Term. Any unused vacation time will
continue to accrue throughout the Term and will not be subject
to any offset, reduction, deduction or maximum accrual
limitation of any kind.

6. SEVERANCE.

Upon expiration of the Term, Executive shall be entitled to receive:

a. Base Salary continuation for a period of 6 months; and

c. Insurance continuation for a period of 6 months.

7. WITHHOLDING.

8. CONFIDENTIALITY.

In consideration of the payments to be received hereunder, Executive agrees
as follows:

a. That during the Term of this Agreement he will have access to and
become acquainted with various "Trade Secrets" (as defined below) and
proprietary information of Image. Except as Executive's duties may
require or as Image may otherwise consent to in writing, Executive
will not at any time disclose or use to the detriment of Image or the
sole benefit of Executive, either directly or indirectly, and either
during or subsequent to theTerm hereof, any information, knowledge or
data he receives in
<PAGE>

confidence or acquires from Image or which relates to the Trade
Secrets of Image. For purposes of this Agreement "Trade Secrets"
-------------
shall include, but not be limited to:

i. Financial information, such as Image's earnings, assets, debts,
prices, pricing structure, volumes of purchases or sales or
other financial data, whether relating to Image generally, or to
particular products, services, geographic areas, or time
periods;

ii. Supply and service information, such as goods and services,
supplier's names or addresses, terms of supply or service
contracts, or of particular transactions, or related information
about potential suppliers, to the extent that such information
is not generally known to the public, and to the extent that the
combination of suppliers or use of a particular supplier, though
generally known or available, yields advantages to Image, the
details of which are not generally known;

iv. Licensing or Distribution information, such as details about
ongoing or proposed negotiations or agreements by or on behalf
of Image, terms and details of such negotiations or agreements
or results of licensing or distribution efforts or information
about impending transactions; or,

9. INDEMNIFICATION OF EXECUTIVE.

Image will, to the maximum extent permitted by law, indemnify and hold
Executive harmless against expenses, including reasonable attorney's fees,
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of Executive's
employment by Image. Image shall advance to Executive any expenses
incurred in defending any proceeding to the maximum extent permitted by
law. Image will at all times maintain directors' and officers' liability
insurance ("D&O Insurance"), or have sufficient funds to self-insure, in
-------------
amounts and on terms at least as favorable as the D&O Insurance policy in
effect on the date hereof.

10. DEATH.

a. Base Salary continuation for a period of 6 months or the expiration of
the Term, whichever occurs first; and

c. dependent Insurance continuation for a period of 6 months or the
expiration of the Term, whichever occurs first.

11. PERMANENT DISABILITY/SUSPENSION.

a. Base Salary continuation for a period of 6 months or the expiration of
the Term, whichever occurs first; and

c. Insurance continuation for a period of 6 months or the expiration of
the Term, whichever occurs first.

12. TERMINATION.

ii. Executive's breach of any material provision of this Agreement
or any other material agreement between Image and Executive.

13. CHANGE IN CONTROL.

Notwithstanding anything contained herein to the contrary, the terms and
conditions of this Paragraph 13 shall control following a "Change In
Control" (as defined below).
<PAGE>

a. TERMINATION. In the event this Agreement is terminated prior to
expiration of the Term for any reason other than pursuant to
Paragraphs 10 or 11 or for Cause following a Change In Control,
Executive shall be entitled to receive all of the compensation, rights
and benefits described in Paragraphs 3, 4 and 5 for a period of 1 year
following the effective date of termination or through the expiration
of the Term, whichever is longer, and the severance described in
Paragraph 6, as if this Agreement were in full force. If any other
Officer's options are acquired pursuant to a Change In Control,
Executive's options will be acquired on terms and at all times at
least equal to any other Officer. Executive must receive 30 days prior
written notice of termination regardless of the reason for
termination.

b. "CHANGE IN CONTROL." For purposes of this Agreement "Change In
---------
Control" shall mean and be deemed to have occurred on the earliest of
-------
the following dates:

i. the date, pursuant to Section 13(d) of the Act and the rules
promulgated thereunder, a person shall have acquired beneficial
ownership of more than 45% of the Voting Stock;

ii. the date the persons who were members of the Board at the
beginning of any 24-month period shall cease to constitute a
majority of the Board, unless the election, or the nomination
for election by Image's shareholders, of each new director was
approved by two-thirds of the members of the Board then in
office who were in office at the beginning of the 24-month
period; or

iii. the date Image's shareholders shall approve a definitive
agreement (a) to merge or consolidate Image with or into another
corporation, unless the holders of Image's capital stock
immediately before such merger or consolidation will,
immediately following such merger or consolidation, hold as a
group on a fully-diluted basis the ability to elect at least a
majority of the directors of the surviving corporation (assuming
cumulative voting, if applicable), or (b) to sell or otherwise
dispose of all or substantially all the assets of Image.

i. the assignment of any duties inconsistent with Executive's
status as an Officer or a substantial alteration in the nature
or status of Executive's responsibilities from those in effect
immediately prior to a Change In Control other than any such
alteration primarily attributable to the fact that Image may no
longer be a public company;
<PAGE>

ii. a reduction by Image in Base Salary, except for across-the-board
salary reductions similarly affecting all Officers and any
subsidiaries and all executives of any person, firm or entity in
control of Image;

iii. the relocation of Image's principal executive offices to a
location more than 35 miles from the current locale or Image's
requiring Executive to be based anywhere other than Image's
principal executive offices except for required travel on
Image's business to an extent substantially consistent with
Executive's present travel obligations;

v. the failure of Image to obtain a satisfactory agreement from any
successor to assume and agree to perform the Services
contemplated by this Agreement;

vi. any purported termination of employment which is not effected
pursuant to Subparagraph 13(a), any such purported termination
shall not be effective for purposes of this Agreement;

vii. the failure of Image to maintain adequate D&O insurance coverage
pursuant to the terms of this Agreement; or

viii. the breach by Image of any material term of this Agreement.

14. GENERAL PROVISIONS.

a. SUCCESSORS AND ASSIGNS. This Agreement is binding upon and shall
inure to the benefit of the parties hereto, and any of their heirs,
legatees, devisees, personal representatives, assigns and successors
in interest of every kind and nature whatsoever. The parties hereto
agree that Executive's services are personal and that this Agreement
is executed with respect thereto. Executive shall have no right to
sell, transfer or assign this Agreement in any manner whatsoever.

To Image: IMAGE ENTERTAINMENT, INC.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: General Counsel

To Executive: DAVID BORSHELL
679 Washington Blvd.
<PAGE>

Los Angeles, CA 90292

The parties hereto may designate a different place at which notice
shall be given; provided, however, that any such notice of change of
address shall be effective only upon receipt.

f. GOOD FAITH. The parties hereto shall perform, fulfill and discharge
their duties and obligations hereunder in a reasonable manner in good
faith.

g. GOVERNING LAW. This Agreement and all rights, obligations and
liabilities arising hereunder shall be construed and enforced in
accordance with the laws of the State of California.

j. SUBJECT HEADINGS AND DEFINED TERMS. Subject headings and choice of
defined terms are included for convenience only and shall not be
deemed part of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.

"Image":
-----
IMAGE ENTERTAINMENT, INC.,
a California corporation

By:/s/ MARTIN W. GREENWALD
---------------------------------------
MARTIN W. GREENWALD, President

"Executive":
---------

/s/ DAVID BORSHELL
------------------------------------------
<PAGE>

DAVID BORSHELL, an individual
<PAGE>

EXHIBIT A to David Borshell's Employment Agreement

- --------------------------------------------------------------------------------
OFFICER

BONUS COMPENSATION PLAN
- --------------------------------------------------------------------------------

. OBJECTIVES OF THE PLAN. In addition to Base Salary and stock options, to
provide Officer incentive compensation based upon Image's operating
profits.

. "PRE-TAX PROFIT" PERCENTAGE. The incentive compensation plan is designed
to provide Officers with a bonus based on Image's "Pre-Tax Profits," as
defined on the attached. The actual amount earned pursuant to the Plan
shall be based upon audited fiscal year end numbers and determined using
the calculation method attached. Concurrent with the payment of Bonus
Compensation, Image shall deliver to Executive a detailed statement setting
forth the numbers and method of calculation.

. PAYMENT. Bonus Compensation, if any, for the applicable fiscal year will
be paid, using best efforts, at the earliest practicable date following
completion of Image's annual audit, as conducted by Image's independent
certified public accountants, and the filing of Image's Annual Report on
Form 10-K for that fiscal year.

. AUDIT RIGHTS. Executive shall be entitled to audit, at Executive's own
expense, Image's records in order to verify any Bonus Compensation
statement rendered hereunder. Any such audit shall be conducted by a
certified public accountant upon reasonable notice to Image and during
Image's normal business hours. Any statement not questioned by Executive
in writing within 3 years from the date of such statement shall be deemed
final and conclusive. In the event an audit reveals a discrepancy of 5% or
more, Image shall bear the full cost of the audit and pay Executive
interest on any underage at the highest rate permitted by law.

<PAGE>

EXHIBIT 10.11.A

AMENDMENT #1 TO
EMPLOYMENT AGREEMENT DATED JULY 1, 1994

Reference is made to that certain Employment Agreement dated as of July 1,
1994 (the "Agreement"), by and between Image Entertainment, Inc., a California
---------
corporation ("Image"), and David Borshell, an individual ("Borshell"). All
----- --------
defined terms not defined herein will have the meanings set forth in the
Agreement.

1. EFFECTIVE DATE. All of the terms and conditions of this Amendment will be
applicable commencing on and effective as of September 1, 1994 (the
"Effective Date").
--------------

2. EXECUTIVE OFFICER STATUS & TITLE. Paragraph 2 of the Agreement is amended
to the following extent:

a. Borshell's status will be increased from an "Officer" to an
"Executive Officer," such that all references to "Officer" in the
Agreement will hereinafter automatically be "Executive Officer,"
except as set forth in Paragraph 4(a) below; and,

b. Borshell's title will "Sr. Vice President of Operations, Sales &
Marketing," subject to the approval of the Company's Board of
Directors.

3. BASE SALARY. "Base Salary," in Paragraph 3(a) of the Agreement is hereby
-----------
increased from $87,140 to $100,000.

4. FRINGE BENEFITS. Borshell's fringe benefits will be amended as follows:

a. "Insurance," in Paragraph 5(a)(i) of the Agreement will be upgraded
---------
to that of an Executive Officer as of July 1, 1995; and,

b. "Vacation," in Paragraph 5(a)(iii) of the Agreement is hereby
--------
increased from 3 to 4 weeks.

5. GENERAL PROVISIONS.

a. Headings. Article and paragraph headings, as used in this
--------
Amendment, are for convenience only and are not a part hereof, and
will not be used to interpret any provision of this Amendment or the
Agreement.

b. Integration. The parties hereby acknowledge and agree that the
-----------
Agreement as amended hereby constitutes the entire agreement between
the parties with respect to the subject matter hereof.

c. Severability. In the event that any provision of the Agreement as
------------
amended hereby will be held invalid or unenforceable, such provision
will be severable from, and such invalidity or unenforceability will
not be construed to have any effect on, the remaining provisions of
the Agreement.
<PAGE>

d. Ratification and Confirmation of Agreement. Except as set forth
------------------------------------------
herein to the contrary, the Agreement is hereby ratified and
affirmed; provided, however, that in the event of any
-------- -------
inconsistencies, the terms, conditions and definitions set forth
herein will control.

IN WITNESS WHEREOF, each of the parties has executed and entered into this
Amendment as of the Effective Date set forth above.

IMAGE ENTERTAINMENT, INC. DAVID BORSHELL

/s/ MARTIN W. GREENWALD /s/ DAVID BORSHELL
- ----------------------------------- -----------------------------------
Martin W. Greenwald, President David Borshell, an individual

<PAGE>

EXHIBIT 10.20

STOCK REPURCHASE AGREEMENT

THIS STOCK REPURCHASE AGREEMENT ("Agreement") is made and entered into
---------
this 26th day of January, 1995, by and between KYLE KIRKLAND, an individual
("Kirkland"), and IMAGE ENTERTAINMENT, INC., a California corporation (the
- ----------
"Company").
-------

RECITALS

A. On November 18, 1991, the Company issued a warrant to Dabney Resnick,
Inc., formerly Dabney Resnick & Wagner ("D/R"), in consideration for
---
investment banking services rendered in connection with the Company's
$20 million senior debt financing with Sun Life Insurance Company of
America.

B. On January 7, 1992, D/R transferred a portion of the warrant
representing 243,286 stock units to Kirkland.

C. On January 27, 1994, Kirkland effected a cashless exercise of the
warrant for 100,000 stock units and received a net issuance of 67,871
unregistered shares, which such 67,871 unregistered shares Kirkland
subsequently sold under Rule 144.

D. On August 3, 1994, Kirkland effected a cashless exercise of the
warrant for 143,286 stock units, the balance of the stock units
covered by the warrant, and received a net issuance of 99,721
unregistered shares, 39,721 shares of which Kirkland sold under Rule
144.

E. On January 12, 1995, the Company's Board of Directors authorized the
repurchase of up to one million shares of the Company's common stock.

F. As of the date hereof, Kirkland owns 60,000 shares, representing the
unsold balance of the August 3, 1994 warrant exercise (the "Shares"),
------
and the closing price of the Company's common stock was $7.75.

G. Kirkland desires to sell the Shares to the Company and the Company
deems it to be in its best interest to purchase such Shares, upon the
terms and conditions set forth below.

NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

1. PURCHASE AND SALE OF THE SHARES. Kirkland hereby sells, assigns,
-------------------------------
transfers and delivers to the Company all of the Shares by delivery to the
Company of Stock Certificate No. 19937 evidencing the same, duly endorsed
for transfer and signature guaranteed by a bank or trust company and,
against delivery thereof and in full payment therefor, the Company hereby
agrees to deliver to Kirkland, upon
<PAGE>

receipt of said Certificate, its check in the total amount of
$446,250.00, representing a purchase price of $7.4375 per share.

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
---------------------------------------------
represents and warrants that:

a. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of California,
and has all of the requisite corporate power and authority to
carry out the transaction contemplated by this Agreement;

b. The execution, delivery and performance of this Agreement have
been duly authorized by the Company's Board of Directors and
shall not violate any provisions of any judicial or
governmental decree, order or judgment, or conflict with, or
result in a breach of, or constitute a default under any
agreement, instrument or understanding to which the Company is
a party or by which the Company is bound; and,

c. The Company's annual report of Form 10-K for the fiscal year
ended March 31, 1994 and its quarterly reports on Form 10-Q for
the periods ended June 30, 1994 and September 30, 1994, copies
of which have been made available to Kirkland by the Company,
contained no untrue statement of any material fact and did not
omit a material fact required to be stated therein where
necessary to make the statements therein not misleading.

3. REPRESENTATIONS AND WARRANTIES OF KIRKLAND. Kirkland hereby
------------------------------------------
represents and warrants that:

a. Kirkland is the owner of the Share, beneficially and of record,
and that such Shares are free and clear of all liens, claims
and encumbrances of any kind; and,

b. Kirkland and Kirkland's legal and financial advisors
(collectively, "Advisors") have carefully read this Agreement;
--------
that all documents, records and books pertaining to this
transaction have been made available to Kirkland and his
Advisors for inspection; that in evaluating the fairness and
adequacy of this transaction Kirkland and his Advisors have not
relied upon any representations or other information, whether
oral or written, other than as set forth herein; and, that
Kirkland and his Advisors have had the opportunity to discuss
this transaction with representatives of the Company and to ask
questions of them.

4. GENERAL PROVISIONS.
------------------

a. Assignment. Neither party will assign or transfer the whole or
----------
any part of this Agreement to any person, firm or
company without the prior written consent of the other party.

b. Governing Law. This Agreement shall be construed and
-------------
interpreted in accordance with the laws of California
<PAGE>

applicable to contracts made and fully performed in California,
and the state and/or federal courts in Los Angeles, California
shall have exclusive jurisdiction.

c. No Implied Waivers. The failure of one party hereto at any
------------------
time to require performance by the other of any provision
hereof will not in any way affect such party's right to require
full performance thereof at any time thereafter nor will the
waiver by one party hereto of a breach of any provision hereof
be taken or held to be the waiver by such party of any
succeeding breach of such provision or as a waiver of the
provision itself.

d. Notice. All notices hereunder will be in writing, and will be
------
sent by regular mail (or transmission by facsimile transmission
if confirmed by such mailing), and will be directed to the
following addresses, or at such other address as may be
specified in a notice given in accordance herewith:

To Kirkland: Kirkland Messina, Inc.
11100 Santa Monica Blvd., Ste. 825
Los Angeles, 90025
Attn: Kyle Kirkland

To Image: Image Entertainment, Inc.
9333 Oso Avenue
Chatsworth, CA 91311
Attn: Cheryl Lee, Esq., CAO & General Counsel

e. Entire Agreement and Modification. This Agreement constitutes
---------------------------------
the entire agreement between the parties hereto with respect to
the subject matter hereof and supersedes all prior or
contemporaneous communications or agreements with regard to the
subject matter hereof. This Agreement may not be modified
except in writing signed by each party hereto.

IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as
of the day and year first above written.
"KIRKLAND":
--------

_______________________________________________
KYLE KIRKLAND, an individual

THE "COMPANY":
-------

IMAGE ENTERTAINMENT, INC.
<PAGE>

_______________________________________________
MARTIN W. GREENWALD, President

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT
------------------------------

Image NewCo, Inc., a New Jersey corporation
(dba "U.S. Laser Video Distributors")

<PAGE>

EXHIBIT 23

INDEPENDENT ACCOUNTANTS' CONSENT
--------------------------------

The Board of Directors and Shareholders
Image Entertainment, Inc.:

We consent to incorporation by reference in the registration statements (Nos.
33-43241, 33-55393 and 33-57336) all on Form S-8 of Image Entertainment, Inc. of
our report dated June 6, 1995, except for Note 14, which is as of June 8, 1995,
relating to the balance sheets of Image Entertainment, Inc. as of March 31, 1995
and 1994, and the related statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended March 31, 1995,
and the related schedule, which report appears in the March 31, 1995 annual
report on Form 10-K of Image Entertainment, Inc.

/s/ KPMG PEAT MARWICK LLP

Los Angeles, California
June 26, 1995

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K,
MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 2,187,063
<SECURITIES> 0
<RECEIVABLES> 14,686,576
<ALLOWANCES> 2,700,000
<INVENTORY> 16,283,281
<CURRENT-ASSETS> 0<F1>
<PP&E> 5,592,103
<DEPRECIATION> 3,578,700
<TOTAL-ASSETS> 33,490,930
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
<COMMON> 25,216,305
0
0
<OTHER-SE> (8,543,806)
<TOTAL-LIABILITY-AND-EQUITY> 33,490,930
<SALES> 85,590,730
<TOTAL-REVENUES> 85,590,730
<CGS> 66,773,017
<TOTAL-COSTS> 66,773,017
<OTHER-EXPENSES> 3,049,610<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,184,190
<INCOME-PRETAX> 7,704,798
<INCOME-TAX> 175,303
<INCOME-CONTINUING> 7,529,495
<DISCONTINUED> 0
<EXTRAORDINARY> 1,218,831<F2>
<CHANGES> 0
<NET-INCOME> 6,310,664
<EPS-PRIMARY> .44
<EPS-DILUTED> 0<F3>
<FN>
<F1>The Company has an unclassified balance sheet due to the nature of its
industry.
<F2>Costs associated with early retirement of debt.
<F3>Not presented since the amounts do not differ significantly from the primary
net income per share.
<F4>Amortization of Production Costs.
</FN>

</TABLE>