PART I

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended March 31, 2008 (“Annual Report”) of Image Entertainment, Inc. (“we,” “us,” “our,” or “Image”) includes forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Other than statements of historical fact, all statements made in this Annual Report are forward-looking, including, but not limited to, statements regarding industry prospects, future results of operations or financial position, and statements of our intent, belief and current expectations about our strategic direction, prospective and future results. In some cases, forward-looking statements may be identified by words such as “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “future,” “intend” or similar words. Forward-looking statements involve risks and uncertainties that are inherently difficult to predict, which could cause actual outcomes and results to differ materially from our expectations, forecasts and assumptions. The following important factors, in addition to those discussed above, could affect our future results and could cause those results to differ materially from those expressed in such forward-looking statements:

	•		changes in company-wide or business-unit strategies, which may result in changes in the types or mix of businesses in which we are involved or choose to invest;
	•		changes in U.S. and global financial and equity markets, including market disruptions and significant interest rate fluctuations, which may impede our access to, or increase the cost of, external financing for our operations and investments;
	•		increased competitive pressures, both domestically and internationally, which may, among other things, affect the performance of our business operations and profit margins;
	•		changes in the mix of titles sold to customers and/or customer-spending patterns;
	•		legal and regulatory developments that may affect the protection of intellectual property;
	•		the imposition by foreign countries of trade restrictions on motion picture or television content requirements or quotas, and changes in international tax laws or currency controls;
	•		technological developments that may affect the distribution of our products or create new risks to our ability to protect our intellectual property; and
	•		changing public and consumer taste, which may among other things, affect the entertainment and consumer products businesses generally.

All forward-looking statements should be evaluated with the understanding of inherent uncertainty. The inclusion of such forward-looking statements should not be regarded as a representation that contemplated future events, plans or expectations will be achieved. Unless otherwise required by law, we undertake no obligation to release publicly any updates or revisions to any such forward-looking statements that may reflect events or circumstances occurring after the date of this Annual Report. Important factors that could cause or contribute to such material differences include those discussed in “Item 1A. Risk Factors.” You are cautioned not to place undue reliance on such forward-looking statements.

ITEM 1. BUSINESS

OVERVIEW

Image Entertainment, Inc. is a leading worldwide independent licensee, producer and distributor of home entertainment programming.  The 25-plus year old company releases its vast library of exclusive content on a variety of formats and platforms, including DVD, Blu-ray Disc^®, digital (video-on-demand, electronic sell-through and streaming), broadcast television, cable, satellite, theatrical and non-theatrical exploitation.

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

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

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

	•		Over 3,500 exclusive DVD titles
	•		Approximately 370 CD titles
	•		Digital rights to

	•		Over 2,000 video titles
	•		Over 300 audio titles

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Containing more than 4,500 individual tracks

Each month, we release an average of over 35 new exclusive DVD titles, including an average of four feature films, 15-20 new exclusive digital video titles, and four new exclusive CD and digital audio titles.

We acquire programming mainly by entering into exclusive distribution agreements with producers and other content providers. We typically supplement such content by designing and producing additional value-added features. We also produce our own original entertainment programming, focused on DVD live performance music concerts and comedy events with some of the most recognizable names in each industry, and also various forms of urban genre content. We have also increased our focus on the acquisition of finished feature films via festivals, agency screenings, and producer relationships.

We were incorporated in Colorado as Key International Film Distributors, Inc. in April 1975. Our present name was adopted in 1983. We reincorporated in California in November 1989 and reincorporated again in Delaware in September 2005. Our principal executive offices are located at 20525 Nordhoff Street, Suite 200, Chatsworth, California 91311. We maintain a Web site at www.image-entertainment.com. The content of our Web site is not incorporated by reference and does not constitute a part of this Annual Report.

The following table sets forth the percentage of consolidated net revenues derived from the distribution of entertainment content by format for our last three fiscal years. The information does not represent our business segments, but rather shows net revenue trends by product category:

		Fiscal Years Ended
		March 31,
(in thousands)		2008								2007								2006
DVD		$	88,030				91.9	%		$	90,243				90.5	%		$	97,956				87.6	%
CD			2,145				2.2				4,469				4.5				9,094				8.1
Sublicense			2,142				2.2				2,310				2.3				2,819				2.5
Digital			2,148				2.3				1,214				1.2				178				0.0
Broadcast			1,144				1.2				924				0.9				494				0.4
Other			209				0.2				591				0.6				1,361				1.4
TOTAL		$	95,818				100	%		$	99,751				100	%		$	111,902				100	%

BUSINESS SEGMENTS

We currently have three business segments:

	•		Domestic (U.S. and Canada)
	•		Digital
	•		International

Our domestic segment primarily consists of acquisition, production and distribution of exclusive DVD content in North America as well as exploitation of our North American broadcast rights. Our digital segment consists of revenues generated by digital distribution of our exclusive content via video on demand, streaming video and downloading. Our international segment includes international video sublicensing of all formats and exploitation of broadcast rights outside of North America.

Prior to fiscal 2008, we included revenues and expenses generated by digital distribution within our domestic segment. Beginning in fiscal 2008, we have reflected our digital financial results as a separate segment. Additionally, prior to fiscal 2008, worldwide broadcast revenues were included as a component of the international segment. Beginning in fiscal 2008, we have included the financial results of revenues generated by exploitation of our North American broadcast and non-theatrical rights as a component of the domestic segment and exploitation outside of North America as a component of our international segment. All digital and broadcast financial results for fiscal 2007 and 2006 have been conformed to the fiscal 2008 presentation.

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

		Fiscal Years Ended												Fiscal Years Ended
		March 31,												March 31,
(in thousands)		2008				2007				% Change				2007				2006				% Change
Net revenues:
Domestic		$	91,806			$	95,863				(4.2	)%		$	95,863			$	108,704				(11.8	)%
Digital			2,148				1,214				76.9				1,214				178				582.0
International			1,864				2,674				(30.3	)			2,674				3,020				(11.5	)
Consolidated		$	95,818			$	99,751				(3.9	)%		$	99,751			$	111,902				(10.9	)%

See “Note 19. Segment Information” in the Notes to Consolidated Financial Statements for earnings, loss, and total assets for each segment.

Domestic

Most of the product we release is in the DVD format. According to industry estimates, there are currently more than 87,000 DVD titles available in the domestic market, of which more than 3,500 are actively and exclusively distributed by us. We are a leading independent supplier of DVD content in the music, comedy, special interest, episodic television, urban and lifestyle genres. The following table reflects the number of cumulative titles we have released by content type, compared with the cumulative DVD software titles released by the industry through the week ended June 13, 2008, excluding discontinued titles, using data compiled monthly in The DVD Release Report. The following chart does not intend to indicate our market share of DVD revenues, only cumulative titles released.

		Total Number				Number of				Image
Type of DVD Content		of DVD Titles				Image Titles				Percentage
Music			10,804				615				5.7	%
Special Interest			21,555				549				2.5	%
Theatrical Catalog (pre-1997)			11,900				498				4.2	%
Foreign Language (including distributed lines)			7,765				303				3.9	%
Television Programming			5,132				204				4.0	%
Direct to DVD			9,323				452				4.8	%
All Other			20,562				908				4.4	%
Total Releases – Cumulative through 6/13/08			87,041				3,529				4.1	%

Source: DVD Release Report Revised 6/13/08

We believe that the value gained through the ability to entertain people at home for a reasonable price at convenient times, the opportunity to choose from a very broad selection of programming, the ability to select specific scenes quickly from interactive DVD menus, and the audio and video quality of the DVD format, continues to make DVD a preferred medium of home entertainment for millions of consumers. Many of our DVDs also offer special features, enhancements and ancillary materials, such as multiple audio tracks, behind-the-scenes footage, director commentaries, interviews and discographies, most of which we produce in-house.

Exclusive Acquisition. We generally acquire exclusive distribution rights to our content. We acquire our exclusive titles from a wide range of content holders, including:

	•		independent content suppliers
	•		producers
	•		music artists
	•		record labels
	•		artist management and talent agencies
	•		foreign sales companies

We produce, market and sell our exclusive content according to exclusive royalty or distribution fee agreements. We actively pursue and secure both domestic (U.S. and Canada) and international distribution rights to exclusive titles across multiple home entertainment formats. In order to acquire exclusive distribution rights to a title, we enter into written agreements with our licensors which are typically either distribution fee deals, or royalty deals.

In distribution fee arrangements, revenues generated by our distribution of a title are generally allocated as follows:

	•		First, we deduct our negotiated distribution fee (varies by agreement based on the size of the advance and level of risk);
	•		Next, we deduct and recoup all of our costs and expenses such as marketing, manufacturing, production and shipping costs;
	•		Next, if an advance or minimum guarantee was paid to the content supplier, we recoup that amount; and
	•		Finally, from the balance, considered “net profits”, a percentage split is divided between us and the content supplier.

In royalty arrangements, royalties are expressed as a percentage of our wholesale net revenues derived from title sales. Typically, we pay royalty advances that are recouped against royalties earned on a title-by-title basis or, if cross-collateralized, against groups of licensed titles from the same licensor.

Our agreements generally provide for a minimum distribution term of seven years but we often obtain considerably longer terms. Some agreements contain provisions for an extension of the distribution term if we meet specified financial performance milestones or if we are still unrecouped at the end of the distribution term.

We also may finance all or part of the production of some of our entertainment content focused on DVD live performance stand-up comedy events, music concerts and urban genre content. We are now focusing much of our content acquisition efforts on acquiring finished cast driven feature films for primarily North American distribution (DVD, digital, broadcast, non-theatrical and to a lesser extent theatrical).

Focus on Cast Driven Feature Film DVD Distribution. Prior to January 2008, Image’s “core” business was generated primarily from The Criterion Collection, Discovery Channel programming, live stand-up comedy shows, music, TV, and other special interest video.

In January we began to focus on the release of new, full-length cast driven feature films. This business concentrates primarily on the acquisition of finished feature films via festivals, agency screenings, and producer relationships. Most of these films are what we call “direct to video.” They will skip the traditional theatrical release of most bigger-budgeted studio films. We are careful to avoid the risky business of funding the prints and advertising that is needed to release films theatrically, with the exception of some smaller releases.

Bill Bromiley, a twenty-year veteran of the film and home entertainment industries, oversees our worldwide program acquisition efforts. Mr. Bromiley spearheaded our feature film initiative as a consultant from June 2007 until he was hired by Image in January 2008 and later appointed to the position of Chief Acquisitions Officer on April 1, 2008. Prior to joining Image, Bromiley spent seven years at First Look Home Entertainment, a division of First Look Studios, where he served as President at the time of his departure. Prior to that, he spent eleven years working for Roger Corman’s Concorde/New Horizon Pictures Corp. where he oversaw all theatrical operations and co-created the home entertainment division.

Our new feature film business requires a greater focus on the rental marketplace than Image has had in the past. Our core business relies primarily on the sell-through business. This new rental focus is made possible with the hiring of five experienced sales people dedicated entirely to the rental marketplace, focusing on customers such as Blockbuster, Netflix, Hollywood Entertainment, Movie Gallery and the new kiosk business.

With content acquisition at the core of our business, we have made several internal restructurings such that our key genres and areas of expertise are allowed to grow with an even greater focus and determination. Additional emphasis has been placed on stronger content with the potential of wider market penetration and larger unit sales. Image’s content acquisition team members have been selected to spearhead programming opportunities throughout our key genres, which include Comedy, Urban, Latin, Music, Feature Film and Special Interest.

Our content category acquisition teams partner with product development teams (which attempt to determine the best strategies for creating the most viable and marketable products based on consumer tastes and market demands) prior to the acquisition of programming, and also with marketing teams after the acquisition has been finalized, to determine optimal ways of maximizing revenue across all channels of distribution, including packaged goods, conventional broadcast, digital distribution and other areas of exploitation.

While our core business remains the domestic acquisition and distribution of content on DVD, we seek to secure and exploit exclusive content with the broadest possible grant of home entertainment programming rights. As part of our strategic goal, we may finance all or part of the production of some of our entertainment content. The rights we retain in connection with our self-financed productions generally cover all media, world-wide, in perpetuity.

Because of our growing library of exclusive titles in a wide variety of genres, we believe that we are positioned to benefit from the widespread support of the traditional DVD format, the Blu-ray Disc^® high-definition format, and emerging digital distribution models. We intend to continue expanding our exclusive entertainment library.

Mining of Image’s Library. We continue to create new and special editions of previously released content that will encourage consumers to repurchase the product in these technically superior versions. We also continue to expand on strategies that extend the life cycle of our titles, including “second bite” strategies that focus on repricing and/or remarketing and repromotion; increased focus on budget product and shippers; and product shipped with merchandising displays. We have been encouraged by the success of these programs with mass merchant retailers such as Wal-Mart, and we are also implementing liquidation strategies to turn deep inventory overstocks, often for titles which are soon expiring, into cash.

We create multi-title DVD sets by placing the greatest amount of content on the smallest number of discs for a price that will entice consumers to buy. In addition to the new budget product, we are also focusing our sales efforts to include specialty video outlets such as sporting goods, apparel and youth-culture stores. We have realized great success with lifestyle products at a number of these accounts, and they are often sold at a higher price with greater margins.

Image’s Participation in the High Definition DVD Market. In January 2008, the format war between Sony’s Blu-ray Disc^® (“Blu-ray”) and Toshiba’s HD-DVD was won by Blu-ray. In January, Image began to release Blu-ray discs through an agreement with Sony DADC for the authoring, compression and initial manufacturing of the discs. In January, we began releasing titles in the Blu-ray format including the Sarah Michelle Gellar feature, Suburban Girl, the Australian classic Breaker Morant, the critically acclaimed Before the Devil Knows You’re Dead, the Forrest Whitaker starring The Air I Breathe, Stephen Sondheim’s Company and Mariah Carey: The Adventures of Mimi. Upcoming Blu-ray releases include Manilow Live, Heart: Alive in Seattle, Roy Orbison: Black & White Night, Chicago / Earth Wind & Fire: Live at the Greek, Moody Blues: Lovely to See You Live, Korn: Live on the Other Side, as well as the feature films The Secret, Stuck, Encounters at the End of the World, Re-Cycle and Then She Found Me. We will also release a number of titles originally made for exhibition in IMAX theatres as well as additional titles from the Discovery Channel, including When We Left Earth: The NASA Missions.

The authoring tools available currently for Blu-ray are relatively new and constantly evolving, so we are not contemplating the purchase of equipment or software necessary to compress or author this programming in-house at this time.

Nevertheless, we have over 210 high-definition masters that can be used for release on the Blu-ray format. Many of our programs originated on high definition video, but we can also convert to Blu-ray any content that was originally shot on film, which is actually capable of greater resolution than the current Blu-ray format. In order to convert elements that were shot on film, they must first be sent to a post-production facility specializing in transferring the film to a high definition video format, usually 1920 x 1080p. A typical transfer can cost anywhere from several thousand dollars to more than $80,000, depending on the amount of supervision, color correction, and restoration work required.

The video compression formats available for Blu-ray are VC-1, MPEG 4 AVC, and MPEG 2.  The audio compression formats available are variations of Dolby Digital (Standard, Plus and True High Definition), DTS (Standard, High Definition, High Resolution, and HD Master Audio) and uncompressed PCM.

As consumers continue to purchase high-definition capable televisions, become more exposed to high-definition content through satellite and cable, and begin to appreciate the advantages that high-definition offers over standard definition, they will expect to obtain the same level of quality from their video movie rentals and purchases. With a viable high-definition video-on-demand solution probably several years away, there is plenty of time for the Blu-ray format to take hold with consumers.  As successful and ubiquitous as DVD is right now, many people forget that the format lacked full studio support until well after its launch, to the extent that many in the industry referred to DVD as “Doubtful Very Doubtful;” Blu-ray now has the support of all the major studios.

One Village Entertainment. In September of 2007, we announced the launch of a newly formed urban division named One Village Entertainment. One Village Entertainment provides independent filmmakers with a home for their urban programming, from which it can then be distributed across multiple platforms including theatrical, broadcast, DVD and digital streaming and downloading.

The new division is headed by Brett Dismuke, who comes to Image as our Vice President of Urban Programming with over 13 years of marketing, sales and branding experience.

The goal of One Village is to enhance the previously successfully urban business of Image. In the past, Image had a string of urban titles that sold very well, particularly the stand-up comedy programs, staged plays, hip-hop documentaries and music concerts. One Village will continue to service the marketplace with these specialty types of programming, but will also release higher-end, award-winning feature films. These films will feature a range of genres including romance, comedy, drama, action and suspense. One Village will release approximately 2 titles per month annually.

The overall mission of One Village is to mirror the efforts of the re-vamped Image platform by offering a diverse, quality product that has the ability to generate multiple revenue streams while establishing us as the premiere urban independent outlet in home entertainment.

Additional Value-Added Services. We provide a full range of value-added services relative to our licensed content and many of our exclusively distributed titles, including:

	•		creation of packaging
	•		DVD authoring and compression
	•		menu design
	•		video master quality control
	•		manufacturing
	•		marketing

	•		sales
	•		music clearance
	•		warehousing
	•		distribution
	•		for some titles, the addition of enhancements such as:

	•		multiple audio tracks
	•		commentaries
	•		foreign language tracks
	•		behind-the-scenes footage
	•		interviews
	•		discographies

These services are typically performed in-house, with the exception of DVD and CD disc manufacturing, package printing, and packaging of the finished product which are generally performed by third party vendors. In mid-2007, we successfully transitioned all of our warehousing and distribution services from our Las Vegas-based distribution facility to a facility located in Pleasant Prairie, Wisconsin, which is owned and operated by our DVD replicator, Arvato Digital Services (“Arvato” – formerly Sonopress) under our March 29, 2007, exclusive distribution services agreement detailed below.

New Criterion Distribution Agreement. In November 2007, we signed a new long-term exclusive home video distribution agreement with The Criterion Collection to distribute its special edition DVDs through July 2013. This agreement replaces the previous exclusive home video distribution agreement signed in August 2005. In March 2007, Criterion introduced Eclipse, a selection of lost, forgotten, or overshadowed classic films in simple, affordable box set editions. The Criterion Collection currently contains approximately 400 active DVD titles while Eclipse contains approximately 12 active DVD titles. The Criterion Collection releases 6-7 new titles each month and Eclipse releases 1-2 new series each quarter.

Distribution Services.  We have historically distributed our own product via our in-house Las Vegas-based distribution facility.  In the fall of 2006, however, we began discussions with our new DVD replicator Arvato Digital Services (formerly Sonopress) regarding the concept of moving our warehousing and distribution services to a facility they were in the process of purchasing as part of a new initiative by Arvato to offer these services to their replication customers.  Arvato is staffed in significant part by key people from our previous replicator, Deluxe Media Services, Inc. (“Deluxe”), who sold the facility to Arvato.  After receiving price quotes at preferential rates from Arvato, we conducted an extensive internal analysis of potential cost savings, expenses relating to the prospective closure of our Las Vegas facility, freight savings from the ability to ship from centrally-located Wisconsin compared to West Coast-located Las Vegas, and, importantly in light of our plans to distribute significant feature films on DVD, the potential scalability of distribution services in each location.  Ultimately, on March 29, 2007, we entered into an agreement whereby Arvato would become our exclusive provider of warehousing and distribution services.  We completed the process of integrating Arvato’s logistics and warehouse management systems with our order management and inventory control software as well as transitioned all of our warehousing and distribution services to Arvato’s facility in Pleasant Prairie, Wisconsin in the calendar third quarter of 2007.  We completed the process of closing, subleasing, and ultimately exiting the lease of our Las Vegas-based distribution facility in February 2008.

Manufacturing.  Typically, a content supplier delivers a title master and artwork to us, and our in-house post-production facility creates a sub master with specifications for the necessary format and on-screen menus for each title.  Our in-house authoring and compression team then generally performs the work necessary to prepare a DVD master for manufacturing.  Occasionally, because of a large volume of exclusive releases at any given time, we may use an outside facility to perform such services. Additionally, as authoring and compression tools for Blu-ray are quickly changing, we use third parties for these services rather than committing to expend the capital necessary to purchase the hardware and technology required to do so internally. Our in-house creative services department, staffed with graphic designers, copywriters and proofreaders, creates original and innovative packaging fundamental to the marketing success of our product.  During fiscal 2007 and in the years prior, we used Deluxe to manufacture and package our domestic DVD programming.  Now Arvato performs our manufacturing, packaging, warehousing and distribution services.  During fiscal 2007, we primarily used U-Tech Media for CD manufacturing, although we have now transitioned all of our CD manufacturing to Arvato. From time to time, we use Sony DADC and Technicolor for manufacturing as required by certain content providers.

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

	•		point-of-sale advertising
	•		print advertising in trade and consumer publications
	•		national television and radio advertising campaigns
	•		Internet advertising, including viral and social network marketing campaigns
	•		minimal direct response campaigns
	•		dealer incentive programs
	•		trade show exhibits
	•		bulletins featuring new releases and catalogue promotions

We also have account-specific marketing programs where we work directly with retailers to optimize and customize print advertising and other advertising programs to promote our exclusive product. The creation of specialized in-store displays and celebrity appearances are other examples of account-specific marketing programs. We occasionally implement Internet promotional activities that include product tie-ins, sweepstakes, and giveaways associated with online retail customers, and the creation of genre-specific boutiques within direct-to-consumer Web sites. National and niche campaigns are managed by our in-house publicist and outside agencies for traditional and on-line outlets.

Our Web site at www.image-entertainment.com helps promote us and our exclusive content. The Web site includes press releases, information regarding our exclusive titles, and information of general interest to the home entertainment consumer.

Customers.

We sell our products to:

	•		traditional retailers
	•		specialty retailers
	•		Internet retailers
	•		wholesale distributors
	•		alternative distribution

	•		direct-to-consumer print catalogs
	•		direct response campaigns
	•		subscription service/club sales
	•		home shopping television channels
	•		other non-traditional sales channels
	•		kiosks and rentailers
	•		sub-distributors

Some of our key sell-through customers in alphabetical order include:

	•		Amazon.com, Inc.
	•		Barnes & Noble
	•		Best Buy Co., Inc.
	•		Borders Group Inc.
	•		Costco
	•		Handleman Company
	•		Infinity Resources (Critics’ Choice Video, Inc. and DeepDiscount.com)
	•		Target
	•		Wal-Mart (through Anderson Merchandisers)

Some of our key distribution customers in alphabetical order include:

	•		AEC One Stop Group
	•		Baker & Taylor
	•		Ingram Entertainment, Inc.
	•		Paradox Entertainment
	•		VPD
	•		Waxworks

In addition, our key rental customers in alphabetical order are:

	•		Blockbuster Inc.
	•		DVD Play
	•		Family Video
	•		Hastings
	•		Movie Gallery, Inc. (including Hollywood Video)
	•		Netflix, Inc.
	•		Redbox
	•		Video Warehouse

Special Markets: Our special markets division is designed to take advantage of our large and diverse catalog and specifically targets niche sales opportunities. Special Markets encompasses all sales channels outside the traditional marketplace. Within Special Markets, some of our key customers in alphabetical order include:

	•		Acorn Media
	•		Ark Media
	•		BBC Worldwide
	•		BMG Columbia House
	•		Follett Library
	•		Forest Incentives
	•		Four Winds Trading Company
	•		Midwest Tapes
	•		Movies Unlimited
	•		Niche Sales
	•		Olive Films
	•		PBS Video
	•		Waxworks (Team Marketing)

On a consolidated basis, Amazon.com, Inc., Anderson Merchandisers (which supplies Wal-Mart) and AEC One Stop Group accounted for approximately 15%, 13%, and 11%, respectively, of our fiscal 2008 net revenues. In fiscal 2007, Amazon.com, Inc., AEC One Stop Group and Anderson Merchandisers accounted for 12%, 12% and 10%, respectively, of our net revenues, and in fiscal 2006, Anderson Merchandisers accounted for 11% of our net revenues. No other customers accounted for net revenues individually in excess of 10% of our total net revenues for fiscal 2008, 2007 or 2006.

We allow retail customers to return a portion of their unsold inventory on a quarterly basis. We reserve for estimated returns at the time the sale is recognized, based in part upon our historical returns experience and knowledge of specific product movement within distribution channels. Our inventory returns, as a percentage of our gross (as opposed to net) distribution revenues, were 23.9% in fiscal 2008, 23.0% in fiscal 2007 and 21.9% in fiscal 2006, respectively. Returns of defective product have been minimal and are generally covered by manufacturers’ warranties.

As of June 13, 2008, we had approximately $2.8 million of backlog orders, of which 99% of the backlog was attributable to domestic DVD product, compared with approximately $3.7 million of backlog orders as of June 13, 2007, of which 96% of the backlog was attributable to domestic DVD product. We expect to fill 100% of the backlog orders, less any cancelled orders, in the current fiscal year.

Worldwide Broadcast 

Revenues generated from North American broadcasts are included in the domestic segment. Revenues generated from outside North America are included in the international segment.

In March of 2008, Steve Saltman was named Senior Vice President of Image’s newly-formed worldwide television division. Mr. Saltman is responsible for all forms of television distribution, including the worldwide sales of Image content across broadcast television, pay-per-view, video-on-demand and non-theatrical platforms.

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Worldwide Television. Buyers of our standard and high-definition content are typically cable, pay-per-view, or satellite broadcasters, and sometimes terrestrial (free) television broadcasters.  Under a typical broadcast license we receive payment of a one-time, fixed, non-refundable fee for a multi-year exploitation term and in many instances for a specified number of telecasts.  Our obligations under broadcast licensing are usually only to provide a broadcast master of the title, ensure that music synchronization rights are secured along with the providing of documentation that Image has the right to distribute any and all titles licensed.

•

The exclusive worldwide sales agency agreement with London-based NBD Television Ltd. (“NBD”) terminated in January 2008. NBD had sublicensed to third parties on a territory by territory basis approximately 100 of our current 250 title broadcast television library. NBD represented us for conventional television broadcast sales, whether standard or high-definition, including cable, pay-per-view, video-on-demand, satellite television, and sales to non-theatrical venues.

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Worldwide PPV and VOD.  With respect to pay-per-view (“PPV”), video-on-demand “(VOD”) and electronic sell-through (“EST”) in the television environment, Image has a North American sales agency agreement with Warner Digital Distribution, a division of Time-Warner, Inc. (“Warner”).  Warner, on our behalf, sublicenses our premiere high-end programs to cable, satellite and hotel/motel operators who are in the VOD and EST businesses.  Revenue is typically derived on a revenue sharing basis whereby Warner’s sub-licensees retain a percentage of the revenue while passing back to Warner both Warner’s and Image’s share of the revenue.  Our obligations with Warner is to provide a broadcast master of the title, an MPAA approved trailer, artwork and promotional materials already created by Image for DVD distribution, to ensure that music synchronization rights are secured along with the providing of documentation that Image has the right to distribute any and all titles licensed.

	•		Worldwide Non-theatrical. In the non-theatrical areas of airlines, ships at sea, schools, hospitals and other institutions, Image has entered into exclusive output agreements with Jaguar Distribution, Inc. (“Jaguar”) (airlines, merchant marine vessels), Swank Motion Pictures, Inc. (“Swank”) (cruise lines, schools, hospitals and other institutions). Under a typical license we may receive payment of a one-time, fixed, non-refundable fee for a pre-determined exhibition term through our sales agents from their sub-licensees or we may receive payment together with regular periodic reporting of sales. Our obligations with both Jaguar and Swank is to provide a broadcast master of the title, an MPAA approved trailer, artwork and promotional materials already created by Image for DVD distribution, to ensure that music synchronization rights are secured along with the providing of documentation that Image has the right to distribute any and all titles licensed.
	•		Worldwide Hotel/Motel For Performance Properties.  For exploitation of our music and stand-up comedy performances for hotels and motels, we entered into a non-exclusive output arrangement with Instant Media Network (“IMN”).   IMN is partially owned by Lodgenet and On Command – the two largest distributors of entertainment product to the hotel/motel industry in North America.

Digital

Image, through our wholly-owned subsidiary, Egami, engages in the exclusive wholesale distribution of the digital rights to our library of audio and video content.  The demand for the types of programming found in our library continues to increase as new retailers enter this primarily online marketplace.  Egami seeks to differe