diff --git a/cmd/d2/main.go b/cmd/d2/main.go
index 04e37aa3e..9e8d290d1 100644
--- a/cmd/d2/main.go
+++ b/cmd/d2/main.go
@@ -169,7 +169,7 @@ func run(ctx context.Context, ms *xmain.State) (err error) {
 		_ = 343
 	}
 
-	_, err = compile(ctx, ms, plugin, *themeFlag, inputPath, outputPath, pw.Page)
+	_, err = compile(ctx, ms, false, plugin, *themeFlag, inputPath, outputPath, pw.Page)
 	if err != nil {
 		return err
 	}
@@ -177,7 +177,7 @@ func run(ctx context.Context, ms *xmain.State) (err error) {
 	return nil
 }
 
-func compile(ctx context.Context, ms *xmain.State, plugin d2plugin.Plugin, themeID int64, inputPath, outputPath string, page playwright.Page) ([]byte, error) {
+func compile(ctx context.Context, ms *xmain.State, isWatching bool, plugin d2plugin.Plugin, themeID int64, inputPath, outputPath string, page playwright.Page) ([]byte, error) {
 	input, err := ms.ReadPath(inputPath)
 	if err != nil {
 		return nil, err
@@ -205,16 +205,24 @@ func compile(ctx context.Context, ms *xmain.State, plugin d2plugin.Plugin, theme
 	if err != nil {
 		return nil, err
 	}
-	svg, err = imgbundler.InlineLocal(ms, svg)
+	svg, err = imgbundler.InlineLocal(svg)
 	if err != nil {
-		return nil, err
+		// Missing/broken images are fine during watch mode, as the user is likely building up a diagram.
+		// Otherwise, the assumption is that this diagram is building for production, and broken images are not okay.
+		if !isWatching {
+			return nil, err
+		}
+		ms.Log.Debug.Printf("ignoring missing/broken local image in watch mode: %v", err)
 	}
 
 	out := svg
 	if filepath.Ext(outputPath) == ".png" {
-		svg, err = imgbundler.InlineRemote(ms, svg)
+		svg, err = imgbundler.InlineRemote(svg)
 		if err != nil {
-			return nil, err
+			if !isWatching {
+				return nil, err
+			}
+			ms.Log.Debug.Printf("ignoring missing/broken remote image in watch mode: %v", err)
 		}
 
 		out, err = png.ConvertSVG(ms, page, svg)
diff --git a/cmd/d2/watch.go b/cmd/d2/watch.go
index b49489df6..ed528ead3 100644
--- a/cmd/d2/watch.go
+++ b/cmd/d2/watch.go
@@ -345,7 +345,7 @@ func (w *watcher) compileLoop(ctx context.Context) error {
 			w.pw = newPW
 		}
 
-		b, err := compile(ctx, w.ms, w.layoutPlugin, w.themeID, w.inputPath, w.outputPath, w.pw.Page)
+		b, err := compile(ctx, w.ms, true, w.layoutPlugin, w.themeID, w.inputPath, w.outputPath, w.pw.Page)
 		if err != nil {
 			err = fmt.Errorf("failed to %scompile: %w", recompiledPrefix, err)
 			w.ms.Log.Error.Print(err)
diff --git a/lib/imgbundler/imgbundler.go b/lib/imgbundler/imgbundler.go
index 71aaa9ee9..8782bea0e 100644
--- a/lib/imgbundler/imgbundler.go
+++ b/lib/imgbundler/imgbundler.go
@@ -16,8 +16,6 @@ import (
 
 	"go.uber.org/multierr"
 	"oss.terrastruct.com/xdefer"
-
-	"oss.terrastruct.com/d2/lib/xmain"
 )
 
 var imageRe = regexp.MustCompile(`<image href="([^"]+)"`)
@@ -28,15 +26,15 @@ type resp struct {
 	err    error
 }
 
-func InlineLocal(ms *xmain.State, in []byte) ([]byte, error) {
-	return inline(ms, in, false)
+func InlineLocal(in []byte) ([]byte, error) {
+	return inline(in, false)
 }
 
-func InlineRemote(ms *xmain.State, in []byte) ([]byte, error) {
-	return inline(ms, in, true)
+func InlineRemote(in []byte) ([]byte, error) {
+	return inline(in, true)
 }
 
-func inline(ms *xmain.State, svg []byte, isRemote bool) (_ []byte, err error) {
+func inline(svg []byte, isRemote bool) (_ []byte, err error) {
 	defer xdefer.Errorf(&err, "failed to bundle images")
 	imgs := imageRe.FindAllSubmatch(svg, -1)
 
@@ -95,7 +93,7 @@ func inline(ms *xmain.State, svg []byte, isRemote bool) (_ []byte, err error) {
 	for {
 		select {
 		case <-ctx.Done():
-			return nil, fmt.Errorf("failed to wait for imgbundler workers: %w", ctx.Err())
+			return nil, fmt.Errorf("failed waiting for imgbundler workers: %w", ctx.Err())
 		case resp, ok := <-respChan:
 			if !ok {
 				return svg, nil
@@ -112,7 +110,7 @@ func inline(ms *xmain.State, svg []byte, isRemote bool) (_ []byte, err error) {
 var transport = http.DefaultTransport
 
 func fetch(ctx context.Context, href string) (string, error) {
-	ctx, cancel := context.WithTimeout(context.Background(), time.Minute)
+	ctx, cancel := context.WithTimeout(ctx, time.Minute)
 	defer cancel()
 
 	req, err := http.NewRequestWithContext(ctx, "GET", href, nil)
diff --git a/lib/imgbundler/imgbundler_test.go b/lib/imgbundler/imgbundler_test.go
index fe5754ee9..4ccd69854 100644
--- a/lib/imgbundler/imgbundler_test.go
+++ b/lib/imgbundler/imgbundler_test.go
@@ -5,15 +5,9 @@ import (
 	"fmt"
 	"net/http"
 	"net/http/httptest"
-	"os"
 	"path/filepath"
 	"strings"
 	"testing"
-
-	"oss.terrastruct.com/cmdlog"
-	"oss.terrastruct.com/xos"
-
-	"oss.terrastruct.com/d2/lib/xmain"
 )
 
 //go:embed test_png.png
@@ -90,17 +84,7 @@ width="328" height="587" viewBox="-100 -131 328 587"><style type="text/css">
 		return respRecorder.Result()
 	})
 
-	ms := &xmain.State{
-		Name: "test",
-
-		Stdin:  os.Stdin,
-		Stdout: os.Stdout,
-		Stderr: os.Stderr,
-
-		Env: xos.NewEnv(os.Environ()),
-	}
-	ms.Log = cmdlog.Log(ms.Env, os.Stderr)
-	out, err := InlineRemote(ms, []byte(sampleSVG))
+	out, err := InlineRemote([]byte(sampleSVG))
 	if err != nil {
 		t.Fatal(err)
 	}
@@ -151,17 +135,7 @@ width="328" height="587" viewBox="-100 -131 328 587"><style type="text/css">
 }]]></style></svg>
 `, svgURL, pngURL)
 
-	ms := &xmain.State{
-		Name: "test",
-
-		Stdin:  os.Stdin,
-		Stdout: os.Stdout,
-		Stderr: os.Stderr,
-
-		Env: xos.NewEnv(os.Environ()),
-	}
-	ms.Log = cmdlog.Log(ms.Env, os.Stderr)
-	out, err := InlineLocal(ms, []byte(sampleSVG))
+	out, err := InlineLocal([]byte(sampleSVG))
 	if err != nil {
 		t.Fatal(err)
 	}