Note 2. Noncontrolling Interest Liability Resulting from Purchase of Madacy Home Video.

On September 7, 2010 (the Closing), Image and its then wholly-owned subsidiary Image/Madacy Home Entertainment, LLC (IMHE) executed an Asset Purchase Agreement with the effective date of August 31, 2010 (Purchase Agreement) with Madacy Entertainment, LP (Seller) and Madacy Entertainment US, Inc. (Madacy US). Pursuant to the Purchase Agreement, IMHE purchased Seller's home video division, consisting of certain DVD inventory, content advances and certain other assets, including the trade name "Madacy Home Video" (collectively, the Home Video Division). Pursuant to a Sublicense Agreement also executed on September 7, 2010 with an effective date of August 31, 2010 (Sublicense Agreement), IMHE exclusively sublicensed all of Madacy US' rights to content for distribution (the Rights).

The purchase price for the above transactions included: (i) fair value of cash payments of $1,213,000, of which $139,000 was included in accrued liabilities at March 31, 2011 and paid during fiscal year ended March 31, 2012;(ii) the issuance of 940,070 shares of unregistered Image common stock valued at $200,000 (contractually based on the average closing price for 20 trading days ending immediately before the third trading day before the effective date of the Purchase Agreement, which approximates fair value); (iii) a 30% limited liability membership interest in IMHE (IMHE Noncontrolling Interest); (iv) the assumption of Seller's obligations by IMHE under (1) the Replication Services Agreement (Replication Services Agreement) dated July 28, 2010 with the effective date of July 1, 2010 between Sony DADC US Inc. (Sony DADC) and Seller; (2) the Security Agreement (Security Agreement) dated June 1, 2010 between Sony DADC and Seller; and (v) the execution of a Guarantee Agreement (Guarantee Agreement) dated August 31, 2010 by Image in favor of Sony DADC, guarantying all of the obligations of IMHE to Sony DADC pursuant to the Replication Services Agreement and Security Agreement. The obligations under the Replication Services Agreement include, without limitation, the repayment of a $2 million advance ($1,826,000 net of a discount of $174,000) to Sony DADC pursuant to the terms and conditions of such agreement.

The IMHE Noncontrolling Interest is subject to a right of repurchase by Image on August 31, 2013 at a repurchase price calculated as the product of 2.25 times the operating income for four consecutive fiscal quarters ending on or prior to the repurchase date, as determined in accordance with the terms of the Operating Agreement executed on September 7, 2010 with an effective date of August 31, 2010 (Operating Agreement), multiplied by the IMHE Noncontrolling Interest. If Image does not repurchase the IMHE Noncontrolling Interest on August 31, 2013, then Image is required to repurchase such interest on August 31, 2014 at a repurchase price calculated as the product of 2.75 times the operating income for four consecutive fiscal quarters ending on or prior to the repurchase date, as determined in accordance with the terms of the Operating Agreement. If Image undergoes a change of control on or prior to August 31, 2013, Seller may opt to have Image repurchase the IMHE Noncontrolling Interest substantially based on the formula for a repurchase at August 31, 2013. In connection with the repurchase of the IMHE Noncontrolling Interest, the Sublicense Agreement will terminate and Madacy US will transfer all of its ownership right, title and interest in and to the Rights to IMHE, as such Rights are added to or terminated (with IMHE's consent) during the period between August 31, 2010 and the date of Image's repurchase of the IMHE Noncontrolling Interest.

In connection with the purchase of the Home Video Division, on September 7, 2010, Image entered into a three year Management Services Agreement with Madacy Entertainment Management LP, and IMHE entered into an Employee Services Agreement with Sonoma Entertainment LP, each of which was effective August 31, 2010. Pursuant to the Management Services Agreement, Image will pay fees for management services provided by certain employees who oversaw the Seller's Home Video Division prior to the Closing. The management fee is $400,000 per year for each of the three years of the term, subject to adjustment based on IMHE's operating income as calculated in accordance with the terms and conditions of the Operating Agreement (which has a $200,000 floor and an $800,000 ceiling annually), to be paid quarterly. At each of March 31, 2012 and 2011, $33,000 was included as a component of accrued liabilities, and $400,000 and $233,000 was included in general and administrative expenses for the fiscal years ended March 31, 2012 and 2011, respectively. Pursuant to the Employee Services Agreement, IMHE agreed to pay approximately CDN$29,000 per month for the services of certain people employed in connection with the Seller's Home Video Division prior to the Closing who will continue to assist IMHE with the Home Video Division. The Employee Services Agreement will remain in effect until Image's repurchase of the IMHE Noncontrolling Interest. For the fiscal years ended March 31, 2012 and 2011, $368,000 and $175,000, respectively, was included in selling, general and administrative expenses.

The purchase price allocation was based upon our valuation using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the total purchase price was allocated to the net tangible and intangible assets of Madacy acquired, based on their estimated fair values. The total purchase price was approximately $3.6 million as follows (in thousands):

Fair value of cash payments	$	1,213
Image Entertainment, Inc. Common Stock		200
Total consideration paid		1,413
Noncontrolling interest liability		2,152
Total purchase consideration	$	3,565

Based upon our valuation, approximately $2.5 million of the purchase price was allocated to intangible assets, subject to amortization. We are amortizing the non-compete, trade names and customer relationships intangible assets over five years and the film library intangible assets over three years using the straight-line method of amortization. We are using straight-line amortization as it approximates the pattern of economic benefit to be derived from the intangible assets, specifically customer relationships.

The total purchase consideration was allocated as follows:

Inventories	$	1,588
Royalty advances		214
Trade name		110
Customer relationships		1,104
Film library		1,303
Non-compete		25
Goodwill		1,047
Total assets acquired		5,391
Liabilities assumed - Sony liability		(1,826	)
Net assets acquired	$	3,565

Goodwill represents the excess of the acquisition purchase consideration over the estimated fair value of net tangible and intangible assets acquired. Goodwill will not be amortized but instead will be tested for impairment at least annually. In the event that we determine that the value of goodwill has become impaired, we will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

The results of operations for IMHE from the date of acquisition are included in our consolidated financial statements for the fiscal year ended March 31, 2012 and from acquisition to fiscal year ended March 31, 2011. The right to purchase IMHE Noncontrolling Interest is mandatorily redeemable by August 31, 2014, unless redeemed sooner at Image's option or as a result of the put being exercised in event of a change in control.

The IMHE Noncontrolling Interest was valued using the discounted cash flow method of the income approach, where a discount rate was applied to the net operating cash flows attributable to the noncontrolling interest. The discount rate was determined by performing a market-based weighted average cost of capital (or WACC) analysis. The WACC analysis calculates the weighted average of the cost of equity using a capital asset pricing model and the cost of debt using the applicable bond yield. Additional assumptions used include 5-year financial projections, growth rates over the 5-year period, constant gross margin rates, estimated working capital requirements, and estimated tax rate. We re-evaluate the value of the non-controlling interest internally on a quarterly basis and hire a third-party valuation firm to review the value on an annual basis. Assumptions used in the valuation include operating income projections, the probability of each option to purchase the IMHE Noncontrolling Interest, and a discount rate of 35%. Since the IMHE Noncontrolling Interest represents an unconditional obligation requiring Image to redeem the 30% ownership interest held by Madacy US by transferring its assets at specified dates, the IMHE Noncontrolling Interest was determined to be a mandatorily redeemable financial instrument. The IMHE Noncontrolling Interest of $2,603,000 at March 31, 2011 was recorded as a liability at fair value. The change in the fair value of the IMHE Noncontrolling Interest from acquisition to fiscal year ended March 31, 2011 was $526,000 and was included as a component of other income (expense) in the respective consolidated statement of operations. During the fiscal year ended March 31, 2011, Image paid $75,000 to the noncontrolling interest holder towards the amount due for its share in the fiscal 2011 net income of IMHE.

As of March 31, 2012, we revalued the IMHE Noncontrolling Interest using the same methodology as described above. Assumptions used in the valuation include operating income projections, the probability of each option to purchase the IMHE Noncontrolling Interest, and a discount rate of 30%. The IMHE Noncontrolling Interest of $500,000 at March 31, 2012 was recorded as a liability at fair value. The change in the fair value of the IMHE Noncontrolling Interest during fiscal year ended March 31, 2012 was $2,103,000 and was included as a component of other income (expense) in the respective consolidated statement of operations. During the fiscal year ended March 31, 2012, Image paid $100,000 to the noncontrolling interest holder towards the amount due for its share in the fiscal 2012 net income of IMHE.

Intangible assets related to the purchase of the Madacy Home Video Division at March 31, 2012 and 2011 consist of the following:

	March 31, 2012							March 31, 2011
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net		Useful Life (Yrs)

Customer relationships	$	1,104	$	(350	)	$	754	$	1,104	$	(128	)	$	946		5
Film library		1,303		(687	)		616		1,303		(254	)		1,049		3
Trade name		110		(35	)		75		110		(13	)		97		5
Non-compete		25		(8	)		17		25		(3	)		22		5
	$	2,542	$	(1,080	)	$	1,462	$	2,542	$	(398	)	$	2,144

During the fiscal years ended March 31, 2012 and 2011, the intangible asset amortization expense was $682,000 and $398,000, respectively.

Future amortization of intangible assets is approximately as follows:

Fiscal Year Ended March 31,	Amount
	(In thousands)
2013	$	682
2014		429
2015		248
2016		103
	$	1,462

Goodwill during the fiscal years ended March 31, 2012 and 2011 changed as follows:

(In thousands)	Total

Goodwill as of March 31, 2010	$	5,715
Goodwill resulting from Madacy Home Video transaction		1,047
Goodwill as of March 31, 2011		6,762
Goodwill as of March 31, 2012	$	6,762

During the years ended March 31, 2012 and 2011, there was no impairment relating to goodwill or intangible assets.