UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended December 31, 2010

¨ 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: 000-23190

SONIC SOLUTIONS

(Exact name of registrant as specified in its charter)

CALIFORNIA	93-0925818
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

7250 Redwood Blvd., Suite 300 Novato, CA	94945
(Address of principal executive offices)	(Zip code)

(415) 893-8000

(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨		Accelerated filer x
Non-accelerated filer ¨		Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding February 8, 2011
Common stock, no par value per share		50,235,511

SONIC SOLUTIONS

FORM 10-Q

Table of Contents

Part I.	Financial Information		3
	Item 1.	Financial Statements:	3
		Condensed Consolidated Balance Sheets (unaudited)	3
		Condensed Consolidated Statements of Operations (unaudited)	4
		Condensed Consolidated Statements of Cash Flows (unaudited)	5
		Notes to Condensed Consolidated Financial Statements (unaudited)	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
	Item 4.	Controls and Procedures	39
Part II.	Other Information		39
	Item 1.	Legal Proceedings	39
	Item 1A.	Risk Factors	39
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
	Item 3.	Defaults Upon Senior Securities	53
	Item 4.	Removed and Reserved	53
	Item 5.	Other Information	53
	Item 6.	Exhibits	54
	Signatures		55

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Sonic Solutions

Condensed Consolidated Balance Sheets

(in thousands, except share data)

(Unaudited)

	December 31, 2010			March 31, 2010
				(1)
ASSETS
Current assets:
Cash and cash equivalents	$	43,374		$	54,536
Short-term investments		3,284			-
Accounts receivable, net of allowances of $4,301and $2,511 at December 31, 2010 and March 31, 2010, respectively		45,740			11,270
Inventory		2,403			1,941
Prepaid expenses and other current assets		14,211			3,497
Total current assets		109,012			71,244
Fixed assets, net		2,407			1,670
Purchased software costs, net		433			165
Goodwill		107,756			4,628
Acquired intangibles, net		104,880			16,174
Deferred tax benefits, net of current portion		-			66
Other assets		15,175			1,463
Total assets	$	339,663		$	95,410

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	6,063		$	3,892
Accrued expenses and other current liabilities		28,329			21,916
Deferred revenue		7,303			5,874
Capital leases		64			123
Total current liabilities		41,759			31,805
Other long term liabilities		13,089			889
Deferred revenue, net of current portion		359			76
Capital leases, net of current portion		5			37
Total liabilities		55,212			32,807
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, no par value, 100,000,000 shares authorized; 49,611,381 and 30,610,102 shares issued and outstanding at December 31, 2010 and March 31, 2010, respectively		421,691			200,375
Accumulated deficit		(135,729	)		(136,289	)
Accumulated other comprehensive loss		(1,511	)		(1,483	)
Total shareholders' equity		284,451			62,603
Total liabilities and shareholders' equity	$	339,663		$	95,410

(1) Derived from audited consolidated financial statements as of March 31, 2010.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Sonic Solutions

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2010			2009			2010			2009

Net revenue	$	26,427		$	26,392		$	77,175		$	77,975
Cost of revenue		11,517			8,044			28,119			24,005
Gross profit		14,910			18,348			49,056			53,970

Operating expenses:
Marketing and sales		12,668			8,489			27,673			22,245
Research and development		13,928			5,784			26,195			19,024
General and administrative		7,925			4,673			17,144			13,689
Acquisition		2,400			-			4,966			-
Restructuring		-			(58	)		-			508
Total operating expenses		36,921			18,888			75,978			55,466
Operating loss		(22,011	)		(540	)		(26,922	)		(1,496	)
Interest income		422			12			461			65
Interest expense		(14	)		(105	)		(64	)		(122	)
Other income (expense), net		88			177			485			(209	)
Loss before income taxes		(21,515	)		(456	)		(26,040	)		(1,762	)
Provision for (benefit of) income taxes		(25,751	)		(112	)		(26,600	)		619
Net income (loss)	$	4,236		$	(344	)	$	560		$	(2,381	)

Net income (loss) per share:
Basic	$	0.09		$	(0.01	)	$	0.02		$	(0.09	)
Diluted	$	0.09		$	(0.01	)	$	0.02		$	(0.09	)

Shares used in computing net income (loss) per share:
Basic		47,792			27,317			36,439			26,871
Diluted		48,493			27,317			37,252			26,871

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Sonic Solutions

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Nine Months Ended December 31,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	560		$	(2,381	)
Adjustments to reconcile net income (loss ) to net cash provided by operating activities:
Depreciation and amortization		2,539			1,782
Impairment of intangible		-			585
Provision for returns and doubtful accounts, net of write-offs and recoveries		695			29
Loss on disposition of asset		-			22
Operating changes in restricted cash					456
Deferred income taxes		69			-
Share-based compensation		5,939			1,761
Fair value adjusted for vested warrant shares issued for strategic relationship		2,035			1,149
Changes in operating assets and liabilities, net:
Accounts receivable		28,361			3,409
Inventory		(459	)		(650	)
Prepaid expenses and other current assets		(3,153	)		847
Other assets		7,822			(116	)
Accounts payable		1,538			76
Accrued liabilities		(32,897	)		61
Other long-term liabilities		(7,163	)		-
Deferred revenue		366			(173	)
Net cash provided by operating activities		6,252			6,857

Cash flows from investing activities:
Purchase of fixed assets		(625	)		(497	)
Additions to purchased and internally developed software		(582	)		(37	)
Acquisition of Simple Star, Inc. net		-			(1,000	)
Acquisition of CinemaNow, Inc. net		-			(500	)
Acquisition of DivX, net		(19,576	)		-
Net cash used in investing activities		(20,783	)		(2,034	)

Cash flows from financing activities:
Proceeds from exercise of common stock options		3,937			1,026
Cash used to net share settle equity awards		(312	)		-
Principal payments on capital leases		(91	)		(98	)
Proceeds from stock offering, net		-			31,435
Net cash provided by financing activities		3,534			32,363

Effect of exchange rate changes on cash and cash equivalents		(165	)		(83	)
Net (decrease) increase in cash and cash equivalents		(11,162	)		37,103
Cash and cash equivalents, beginning of period		54,536			19,408
Cash and cash equivalents, end of period	$	43,374		$	56,511

Supplemental disclosure of cash flow information:
Interest paid	$	64		$	122
Income taxes paid, net of refunds	$	1,686		$	283
Supplemental disclosure of non-cash transactions:
Original cost of fixed asset written-off	$	562		$	420
Intangible assets acquired as a result of an asset purchase	$	(403	)	$	-
Stock consideration issued in connection with the DivX Acquisition	$	209,718		$	-

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Sonic Solutions and its subsidiaries (collectively “Sonic” or the “Company”) is a leading developer of technologies, products and services that enable the creation, management, and enjoyment of digital media content across a wide variety of technology platforms. The Company’s products and services offer innovative technologies and integrated solutions to consumers, major Hollywood and independent studios, original equipment manufacturers (“OEMs”), businesses, high-end professional DVD authoring experts and developers. The Company distributes its products and services through retailers and distributors, personal computer (“PC”) and consumer electronic (“CE”) OEMs, Internet websites and other channels. The Company’s brands now include Roxio®, RoxioNow™, DivX®, Sonic® and MainConcept®, among others. In addition, the Company licenses core technology and intellectual property to other software companies and technology manufacturers for integration into their own products and services.

Fiscal Year

References to “fiscal year” refer to the Company’s fiscal year ending on March 31 of the designated year. For example, “fiscal year 2011” refers to the fiscal year ended March 31, 2011. Other references to “years” mean calendar years.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). The unaudited Condensed Consolidated Statements of Operations for the interim periods presented are not necessarily indicative of the results expected for the entire year ending March 31, 2011. Additionally, the accompanying unaudited Condensed Consolidated Financial Statements do not include all information and footnotes required by GAAP for complete financial statements. This Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010, which was filed with the SEC on June 7, 2010, and amended on July 26, 2010 (the “Fiscal 2010 Annual Report”).

In the opinion of the management, the accompanying unaudited Condensed Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the financial position of the Company at December 31, 2010, results of operations for the three and nine months ended December 31, 2010 and 2009, and cash flows for the nine months ended December 31, 2010 and 2009. Certain amounts in prior periods have been reclassified to conform to the current period presentation. The reclassifications had no impact on the Company’s net income (loss) or shareholders’ equity as previously reported. The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

DivX Acquisition

On October 7, 2010, the Company completed the acquisition by merger of DivX, Inc. As a result of this acquisition, the Company consolidated DivX’s assets and liabilities into the Company’s unaudited Condensed Consolidated Balance Sheets as of October 7, 2010, and included DivX’s financial results since October 7, 2010 in the Company’s unaudited Condensed Consolidated Statement of Operations. Please refer to Note 14 of the Notes to the unaudited Condensed Consolidated Financial Statements contained in this Form 10-Q for detailed information regarding this completed acquisition.

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

Rovi Transaction

Significant Accounting Policies

With the exception of the changes stated below, there have been no material changes in the Company’s significant accounting polices during the three and nine months ended December 31, 2010 compared to the significant accounting policies described in the Company’s Fiscal 2010 Annual Report.

Fair Value Measurements and Disclosures

Effective October 7, 2010, as a result of the DivX acquisition, the Company adopted one of the amendments contained in the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures. This ASU 2010-06 amendment clarifies the fair value measurement disclosures for each class (rather than category) of assets and liabilities. In addition, this amendment modifies the disclosure requirements for the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements (required for Level 2 or Level 3). The adoption of this ASU 2010-06 clarifying guidance did not have an impact on the Company’s consolidated financial condition, results of operations or cash flows. Please refer to Note 4 of the Notes to the unaudited Condensed Consolidated Financial Statements contained in this Form 10-Q for detailed information.

The Company has not adopted the other amendment under ASU 2010-06, requiring the following new disclosures: (a) the significant transfers in and out of Levels 1 and 2 and describes the reasons for the transfer and (b) information about purchases, sales, issuances and settlements (on a gross basis rather than as one net number) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). These disclosure requirements are effective for fiscal years beginning on or after December 15, 2010. As this amendment requires disclosures only, adoption will not have an impact on the Company’s results of operations or financial position.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Management’s judgments are based on what impact certain estimates, assumptions of future trends or events may have on the financial condition and results of operations reported in its financial statements. Actual results could differ materially from these estimates, assumptions, projections and judgments.

On an ongoing basis, the Company evaluates estimates used. The following accounting policies require management to make estimates, judgments and assumptions and are critical in fully understanding and evaluating the Company’s reported financial results:

Revenue recognition

Allowances for sales returns and doubtful accounts

Share-based compensation

Valuation of acquired businesses, assets and liabilities

Goodwill, intangible assets and other long-lived assets

Accrued liabilities

Contingencies

Income tax and deferred tax asset valuation

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

NOTE 2 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition. ASU 2010-17 provides guidance on applying the milestone method to milestone payments for achieving specified performance measures when those payments are related to uncertain future events. Entities can make an accounting policy election to recognize arrangement consideration received for achieving specified performance measures during the period in which the milestones are achieved, provided certain criteria are met. The scope of this pronouncement is limited to transactions involving research or development. ASU 2010-17 is effective for interim and annual periods beginning on or after June 15, 2010 with early adoption permitted. The Company does not expect the adoption will have any material impact on its results of operations or financial position.

In December 2010, the FASB issued ASU 2010-28, Intangibles – Goodwill and Other – When to perform Step 2 of the Goodwill Impairment Test for Entities with Zero or Negative Carrying Amount. ASU 2010-28 modifies goodwill impairment testing for entities with zero or negative carrying amounts. The amendment requires these entities to perform Step 2 of the goodwill impairment test, which involves comparing the current value and the current book value of goodwill. The difference between these values represents the impairment amount which must be recognized in the current period. In addition, an entity should consider whether there are any adverse qualitative factors indicating that impairment exists. ASU 2010-28 is effective for interim and annual periods beginning on or after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact, if any, that it may have on its results of operations or financial position.

In December 2010, the FASB issued ASU 2010-29, Business Combinations – Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 clarifies the acquisition date that should be used for reporting the pro forma revenue and earnings disclosure requirements for business combination(s) when comparative financial statements are presented. The amendment specifies that an entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. In addition, the amendment expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination(s). ASU 2010-29 is effective for interim and annual periods beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect the adoption will have any material impact on its results of operations or financial position.

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

NOTE 3 – INVESTMENTS

The following is a summary of the Company’s investments as of December 31, 2010 (in thousands):

	Cost		Fair Value
Cash and cash equivalents:
Cash	$	21,937	$	21,937
Cash equivalents - money market accounts		14,047		14,047
Cash equivalents - corporate debt securities		7,390		7,390
Total cash and cash equivalents	$	43,374	$	43,374

	Amortized Cost		Fair Value
Short term held-to-maturity securities:
Corporate debt securities		3,284		3,284

Total cash equivalents and short-term investments	$	46,658	$	46,658

Long-term investments:
Auction rate securities (1)		2,756		2,756
Privately held investments		2,683		2,683
Total long-term investments	$	5,439	$	5,439

Total cash, cash equivalents, short-term investments and long-term investments	$	52,097	$	52,097

(1)

This represents auction rate securities with underlying asset-backed government educational loans, and is included in other assets on the unaudited Condensed Consolidated Balance Sheets.

The following is a summary of the Company’s investments as of March 31, 2010 (in thousands):

	Cost		Fair Value
Cash and cash equivalents:
Cash	$	13,029	$	13,029
Cash equivalents - money market accounts		41,507		41,507

Total cash and cash equivalents	$	54,536	$	54,536

Long-term investments:
Privately held investments		126		126
Total long-term investments	$	126	$	126

Total cash, cash equivalents, and long-term investments	$	54,662	$	54,662

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

The following table summarizes the contractual maturities of the Company's investments as of December 31, 2010 (in thousands):

	Amortized Cost		Fair Value
Due in 1 year or less	$	3,284	$	3,284
Due in 1-2 years		-		-
Due in 2-3 years		-		-
Due in greater than 3 years		-		-
Total	$	3,284	$	3,284

NOTE 4 - FAIR VALUE MEASUREMENTS

The Company defines fair value as the exit price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company measures its financial assets and liabilities at fair value at each reporting period. The Company applies the following fair value three-tier hierarchy, which prioritizes the inputs used in the valuation techniques in measuring fair value:

Level 1 – Observable inputs that reflect quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following tables present the information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2010 and indicate the hierarchy of the valuation (in thousands):

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

Asset Class	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Current assets:
Money market accounts (1)	$	14,047	$	14,047	$	-	$	-
Corporate debt securities (2)		10,674		10,674		-		-

Noncurrent assets:
Auction rate securities (3)		2,756		-		2,756		-

Total	$	27,477	$	24,721	$	2,756	$	-

(1)	This is comprised of high-quality, short-term, money market instruments of domestic and foreign issuers, and is included in cash and cash equivalents on the unaudited Condensed Consolidated Balance Sheets.

(2)	This represents government and corporate bonds of U.S. issuers from diverse industries, and is included $7.4 million classified as cash and cash equivalents and $3.3 million as short-term investments on the unaudited Condensed Consolidated Balance Sheets.

(3)	This represents auction rate securities with underlying asset-backed government educational loans, and is included in other assets on the unaudited Condensed Consolidated Balance Sheets.

The Company’s money market funds and corporate debt securities are unadjusted quoted market prices and the account balance approximates its fair value due to its short term nature. Accordingly, the Company classifies these funds and securities as Level 1 assets.

The Company classifies its auction rate securities as Level 2 as they have quoted prices in inactive markets with inputs that are observable. In valuing these auction rate securities, the Company utilized quoted prices and compared these securities to the observable market data for other securities with identical characteristics.

In addition, the Company has direct investments in privately held companies with a carrying value of $2.7 million included in Other Assets. The Company’s direct investments are accounted for under the cost method, and are periodically assessed for other-than-temporary impairment.

NOTE 5 – INVENTORY

Inventory is stated at the lower of cost (first-in, first-out method) or market (estimated net realizable value) and consisted of the following (in thousands):

	December 31, 2010		March 31, 2010
Raw Materials	$	208	$	142
Finished Goods		2,195		1,799
	$	2,403	$	1,941

Reserves for excess and obsolete inventory are established based on an analysis of products on hand and sales trends. Inventory is presented net of reductions for excess and obsolescence of $0.6 million at December 31, 2010 and $0.5 million at March 31, 2010. Inventory held on consignment at December 31, 2010 and March 31, 2010 was $2.4 million and $1.8 million, respectively.

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

NOTE 6 – PURCHASED SOFTWARE, GOODWILL AND ACQUIRED INTANGIBLES

The following table presents the components of the Company’s capitalized software, intangible assets and goodwill (in thousands):

		December 31, 2010							March 31, 2010
	Useful Life in Years	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Goodwill	Indefinite	$	107,756		-		$	107,756	$	4,628	$	-		$	4,628
Purchased software	3		4,010		(3,577	)		433		3,584		(3,419	)		165
Acquired technology	3-9.25		72,320		(14,809	)		57,511		14,520		(14,277	)		243
Customer lists	2-15		34,256		(15,558	)		18,698		16,870		(15,040	)		1,830
Trademarks	3-7.25		14,967		(396	)		14,571		250		(249	)		1
Trademark/brand name	Indefinite		14,100		-			14,100		14,100		-			14,100
		$	247,409	$	(34,340	)	$	213,069	$	53,952	$	(32,985	)	$	20,967

The following table presents the activity of goodwill and other intangibles during the period from March 31, 2010 to December 31, 2010 (in thousands):

	March 31, 2010										December 31, 2010
Intangible asset	Net Carrying Amount		Additions		Adjustment			Amortization			Net Carrying Amount
Goodwill	$	4,628	$	103,129	$	(1	)	$	-		$	107,756
Purchased software		165		426		(16	)		(142	)		433
Acquired technology		243		57,800		-			(532	)		57,511
Customer lists		1,830		17,386		-			(518	)		18,698
Trademarks		1		14,717		1			(148	)		14,571
Trademark/brand name		14,100		-		-			-			14,100
	$	20,967	$	193,458	$	(16	)	$	(1,340	)	$	213,069

Acquired intangibles with finite lives and purchased software are being amortized using accelerated and straight-line methods over their estimated useful lives. Amortization expense for intangibles was $1.0 million and $1.3 million for the three and nine months ended December 31, 2010, respectively. Comparatively, amortization of intangibles was $0.1 million and $0.5 million for the three and nine months ended December 31, 2009, respectively. The future annual amortization expense of definitive-lived intangibles is expected to be as follows (in thousands):

Years Ending March 31,	Amortization Expense
2011 (remaining three months)	$	3,793
2012		14,702
2013		13,553
2014		14,569
Thereafter		44,163
	$	90,780

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

NOTE 7 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of (in thousands):

	December 31, 2010		March 31, 2010
Commissions payable	$	1,015	$	543
Accrued compensation and benefits		6,712		2,761
Accrued professional services		2,416		1,146
Accrued marketing costs		977		927
Accrued sales returns and discounts		1,407		2,124
Accrued royalties		7,472		2,629
Accrued restructuring costs		173		385
Income tax liabilities		2,103		2,729
Other tax liabilities		2,494		7,134
Other accrued expense		3,560		1,538
Total accrued expenses and other current liabilities	$	28,329	$	21,916

NOTE 8 – COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain facilities and equipment under non-cancelable operating and capital leases. Operating leases include leased facilities and capital leases include leased equipment. Rent expense under operating leases was approximately $1.5 million and $3.6 million for the three and nine months ended December 31, 2010, respectively. Comparatively, rent expense under operating leases was approximately $1.0 million and $3.4 million for the three and nine months ended December 31, 2009, respectively.

Future payments under various operating and capital leases that have remaining non-cancelable lease terms in excess of one year are as follows (in thousands):

Years Ending March 31,	Operating Leases		Capital Leases		Total Lease Obligations
2011 (remaining three months)	$	904	$	33	$	937
2012		3,854		32		3,886
2013		2,393		2		2,395
2014 and thereafter		3,216		2		3,218
	$	10,367	$	69	$	10,436

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

Litigation Matters

DivX-Related Litigation. In connection with acquisition of DivX, two sets of previously reported shareholder class action lawsuits were filed against DivX, members of the DivX board of directors, the Company, Siracusa Merger Corporation, and Siracusa Merger LLC, alleging breaches of fiduciary duty by the DivX board of directors in connection with the merger. The first set of lawsuits, captioned Gahlen v. DivX, Inc. et al. (Case No. 37-2010-00094693-CU-SL-CTL), and Pared v. DivX, Inc. et al. (Case No. 37-2010-00096242-CU-SL-CTL), were filed in Superior Court of the State of California, County of San Diego, and were consolidated as In re DivX, Inc. Shareholder Litigation (Case No. 37-2010-00094693-CU-SL-CTL). The second set of lawsuits, captioned Chropufka v. DivX, Inc. et al. (C.A. No. 5643-CC), and Willis v. DivX, Inc. et al. (C.A. No. 5647-CC), were filed in Delaware Chancery Court, and were consolidated as In re DivX, Inc. Shareholders Litigation (Consolidated C.A. No. 5463-CC). The lawsuits, brought by individual DivX stockholders purportedly on behalf of a class of DivX stockholders, sought, among other things, to enjoin defendants from completing the merger pursuant to the terms of the merger agreement. As previously reported, on August 22, 2010, the parties reached an agreement in principle to settle all of these lawsuits. After first memorializing the terms of the agreement in a memorandum of understanding, dated August 31, 2010, the parties executed a formal Stipulation of Settlement on December 29, 2010. On January 21, 2011, the Court granted preliminary approval of the settlement and set April 1, 2011, as the hearing date for plaintiffs’ motion for final approval of the settlement. The parties have thus far been unable to agree on the fees payable to plaintiffs’ counsel and, pursuant to the Stipulation of Settlement, plaintiffs will file a fee application with the court if an agreement is not reached.

Rovi-Related Litigation. In connection with the merger of Rovi and the Company, on January 3, 2011, a putative class action lawsuit entitled Vassil Vassilev v. Sonic Solutions, et al. was filed in California Superior Court for the County of Marin by an individual purporting to be a shareholder of Sonic Solutions against Sonic, the members of its board of directors, Rovi and Sparta Acquisition Sub. This lawsuit alleged that the members of Sonic’s board of directors breached their fiduciary duties of care and loyalty by, inter alia, failing to maximize shareholder value and by approving the merger transaction via an unfair process, and further alleged that Rovi and Sparta Acquisition Sub aided and abetted the breach of fiduciary duties, and sought to enjoin the acquisition of Sonic by Rovi, rescission of the transaction in the event it is consummated, imposition of a constructive trust, and monetary damages, fees and costs in an unspecified amount. Thereafter, on January 10, 14 and 18, 2011, three substantially similar putative class action lawsuits were filed in the same court against the same defendants, entitled Matthew Barnes v. Habinger [sic] et al., Mark Chropufka v. Sonic Solutions, et al. and Diana Willis v. Sonic Solutions, et al. On January 21, 2011, plaintiff Mark Chropufka filed an amended class action complaint, which all plaintiffs then designated as the operative complaint, and which adds allegations of omissions in the Schedule 14D-9 Recommendation Statement filed by the Company on January 14, 2011. On January 27, 2011, these parties submitted a stipulation and proposed order consolidating all lawsuits filed in connection with the proposed merger (the “Consolidated Action”), which order was signed by the Court on January 28, 2011. On January 25, 2011, another substantially similar putative class action lawsuit was filed in the same court against the same defendants, entitled Joann Thompson v. Sonic Solutions, et al. On January 28, 2011, the parties to the Consolidated Action reached an agreement in principle to settle, and on January 31, 2011 they entered into a memorandum of understanding setting forth this agreement in principle. The proposed settlement, which is subject to court approval following notice to the class and a hearing, disposes of all causes of action asserted in the Consolidated Action and in Thompson v. Sonic Solutions, et. al. on behalf of all class members who do not elect to opt out of the settlement. Class members, who elect to opt out, if any, may continue to pursue causes of action against the defendants. On February 4, 2011, Thompson applied to the court for an order temporarily restraining Rovi from accepting tendered shares on the ground that the Offer and Merger allegedly violate a provision of the California Corporation Code. The Court denied the application that same day.

Contingencies

From time to time the Company is subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. The Company accrues the loss contingency as a charge to income if it is probable and the amount of the loss can be reasonably estimated. The Company did not record a loss contingency reserve in the three and nine months ending December 31, 2010 and 2009, respectively.

Indemnification Obligations

In the normal course of business, the Company provides indemnifications of varying scopes, including limited product warranties and indemnification of customers against claims of intellectual property infringement made by third parties arising from the use of its products or services. The Company accrues for known indemnification issues if a loss is probable and can be reasonably estimated. Historically, costs related to these indemnifications have not been significant, and because potential future costs are highly variable, the Company is unable to estimate the maximum potential impact of these indemnifications on its future results of operations. As permitted under California law and in accordance with its Bylaws and certain other commitments and agreements, the Company indemnifies its officers, directors and members of its senior management against certain claims and liabilities, subject to certain limits, while they serve at its request in such capacity. The maximum amount of potential indemnification is unknown and potentially unlimited; however, the Company has D&O liability insurance that enables it to recover a portion of future indemnification claims paid, subject to retentions, conditions and limitations of those policies.

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

Purchase Commitments

In the normal course of business, the Company enters into various purchase commitments for goods and services. Total non-cancellable purchase commitments as of December 31, 2010 were approximately $0.6 million. The purchase commitments are mainly associated with royalty contracts related to the Company’s Roxio Consumer products and RoxioNow businesses.

NOTE 9 – SHARE-BASED COMPENSATION

The Company recognizes share-based compensation expense ratably over the vesting terms of the underlying share-based awards. Share-based compensation expense was as follows (in thousands):

	Three Months Ended December 31,				Nine Months Ended December 31,
	2010		2009		2010		2009
Marketing and sales	$	1,268	$	225	$	1,911	$	561
Research and development		1,897		36		2,133		202
General and administrative		1,006		398		1,895		998
	$	4,171	$	659	$	5,939	$	1,761

NOTE 10 - COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes certain changes in equity that are excluded from net income. The Company’s other comprehensive income (loss) consists primarily of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.

Components of comprehensive income (loss), net of tax, were as follows (in thousands):

	Three Months Ended December 31,						Nine Months Ended December 31,
	2010			2009			2010			2009
Net income (loss)	$	4,236		$	(344	)	$	560		$	(2,381	)
Other comprehensive loss:
Foreign currency translation losses		(4	)		(20	)		(28	)		(56	)
Comprehensive income (loss)	$	4,232		$	(364	)	$	532		$	(2,437	)

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

NOTE 11 – EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted income (loss) per share (in thousands):

	Three Months Ended December 31,					Nine Months ended December 31,
	2010		2009			2010		2009
Numerator:

Net income (loss) applicable to common shareholders	$	4,236	$	(344	)	$	560	$	(2,381	)
Denominator:
Weighted-average number of common shares outstanding(1)		47,792		27,317			36,439		26,871
Diluted weighted-average number of common shares outstanding		48,493		27,317			37,252		26,871

Basic net income (loss) per share	$	0.09	$	(0.01	)	$	0.02	$	(0.09	)
Diluted net income (loss) per share	$	0.09	$	(0.01	)	$	0.02	$	(0.09	)

Potentially dilutive securities(2)		1,673		865			1,118		2,433

(1)

Weighted-average number of common shares outstanding excludes unnvested stock options, restricted stock units, and warrants.

(2)

The potentially dilutive securities are excluded from the computation of diluted net income (loss) per share for the three and nine months ended December 31, 2010 and 2009, because their effect would have been anti-dilutive.

NOTE 12 – INCOME TAXES

The provision for income taxes is calculated using the asset and liability method of accounting. Under the asset and liability method, the Company determines its income tax (benefit) expense and recognizes deferred tax assets and liabilities based on the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing net deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. When the Company does not believe realization of a deferred tax asset is more likely than not, it records a valuation allowance.

The Company calculates its projected annual effective tax rate for the fiscal year ending March 31, 2011 to be 46.1%. This rate includes a tax rate differential on earnings in foreign jurisdictions and increases in reserves for uncertain tax positions.

During the three and nine months ended December 31, 2010, the Company recorded an income tax (benefit) of ($25.8) million and ($26.6) million, respectively. After considering discrete items including valuation allowance, the effective tax rate for the nine months ended December 31, 2010 was 102.2%. The Company does not provide for United States (“U.S.”) income taxes on undistributed earnings of its foreign operations that are intended to be invested indefinitely outside the U.S.

As indicated in Note 14 of the Notes to the unaudited Condensed Consolidated Financial Statements contained in this Form 10-Q, the Company acquired the outstanding shares of DivX Inc., during the three months ended December 31, 2010 and recorded deferred tax liabilities of $33.2 million related to this acquisition. The combination of the acquired deferred tax liabilities with the Company’s U.S. net deferred tax assets led the Company to reassess its ability to utilize existing gross deferred tax assets against the acquired deferred tax liabilities in future years. Accordingly, the Company released $27.0 million of its valuation allowances related to the DivX acquisition during the three months ending December 31, 2010. The remaining $6.2 million net deferred tax liabilities are related to foreign operations. As of December 31 2010, the Company continued to have a full valuation allowance against its U.S. net deferred tax assets (with the exception of certain deferred tax liabilities related to indefinite life intangible assets) and certain foreign jurisdictions’ net deferred tax assets.

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

The Company increased its unrecognized tax benefits $0.7 million as a result of the DivX acquisition for a total of $6.7 million at December 31, 2010. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued at December 31, 2010 is not material.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and foreign jurisdictions. The Company is no longer subject to U.S. federal and state income tax examination by tax authorities for years prior to fiscal year 2004. Foreign income tax matters for significant foreign jurisdictions have been concluded for years through fiscal year 2003.

NOTE 13 – SIGNIFICANT CUSTOMER INFORMATION, SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

Significant Customer Information

The following table shows the Company’s significant customers (in percentages):

	Percent of Total Net Revenue
	Three Months Ended December 31,						Nine Months Ended December 31,
Customer	2010			2009			2010			2009
Navarre		19	%		20	%		20	%		21	%
Digital River		19	%		25	%		19	%		23	%
Dell		8	%		11	%		9	%		13	%
Ingram		7	%		10	%		7	%		8	%
Hewlett-Packard		6	%		11	%		6	%		12	%

Segment Reporting

Net Revenue by Segment

The Company organizes its business into three reportable operating segments: the “Roxio Consumer Products” segment, which offers products and services related to personal content, the “Premium Content” segment, which offers products and services related to premium content (and includes the MainConcept technologies acquired through the DivX acquisition), and the “DivX” segment, which provides high-quality video compression-decompression software libraries, or codecs, to enable distribution of content across the Internet and through recordable media. These segments reflect the Company’s internal organizational structure, as well as the processes by which management makes operating decisions, allocates resources and assesses performance.

During the three months ended December 31, 2010, the Company’s Roxio Consumer Products, Premium Content and DivX segments accounted for approximately 74%, 18% and 8% of net revenue, respectively. Comparatively, the Company’s Roxio Consumer Products, Premium Content and DivX segments accounted for approximately 84%, 16% and 0% of net revenue for the three months ended December 31, 2009, respectively. During the nine months ended December 31, 2010, the Company’s Roxio Consumer Products, Premium Content and DivX segments accounted for approximately 78%, 20% and 2% of net revenue, respectively. Comparatively, the Company’s Roxio Consumer Products, Premium Content and DivX segments accounted for approximately 87%, 13% and 0% of net revenue for the nine months ended December 31, 2009, respectively.

The following tables show the net revenue attributable to the Company’s three reportable segments, operating results by segment, and revenue by geographic location (in thousands):

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

	Three Months Ended December 31,				Nine Months Ended December 31,
Net Revenue	2010		2009		2010		2009
Roxio Consumer Products	$	19,573	$	22,298	$	59,860	$	67,964
Premium Content		4,675		4,094		15,136		10,011
DivX		2,179		-		2,179		-
Total net revenue(1)	$	26,427	$	26,392	$	77,175	$	77,975

(1) Results for the three and nine months ended December 31, 2010 included activities for DivX from October 8, 2010, and reflected the impacts of the acquisition method of accounting.

Operating Income (Loss) by Segment (in thousands)

	Three Months Ended December 31,						Nine Months Ended December 31,
Operating income (loss)	2010			2009			2010			2009
Roxio Consumer Products	$	5,376		$	7,008		$	14,036		$	21,109
Premium Content		(4,384	)		(2,947	)		(6,214	)		(8,469	)
DivX		(12,490	)		-			(12,490	)		-
Unallocated operating expenses		(10,513	)		(4,601	)		(22,254	)		(14,136	)
Total operating loss(1)	$	(22,011	)	$	(540	)	$	(26,922	)	$	(1,496	)

(1)Results for the three and nine months ended December 31, 2010 included activities for DivX from October 8, 2010, and reflected the impacts of the acquisition method of accounting.

Net Revenue by Geographic Location (in thousands)

	Three Months Ended December 31,				Nine Months Ended December 31,
Revenue by region	2010		2009		2010		2009
United States	$	18,926	$	20,405	$	55,825	$	60,965
Export
Canada		369		253		1,626		672
France		333		65		898		479
Germany		1,168		794		2,316		2,069
United Kingdom		860		1,020		2,133		2,445
Europe: Other		606		496		3,445		1,734
Japan		2,224		1,411		6,271		5,358
Singapore		770		1,048		2,419		2,375
Taiwan		306		377		533		653
Other Pacific Rim		456		375		759		817
Other International		409		148		950		408
Total net revenue(1)	$	26,427	$	26,392	$	77,175	$	77,975

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

(1) Results for the three and nine months ended December 31, 2010 included activities for DivX from October 8, 2010, and reflected the impacts of the acquisition method of accounting.

The Company sells its products and services to customers categorized geographically by each customer’s country of domicile. For the three months ended December 31, 2010 and 2009, domestic net revenue was $18.9 million and $20.4 million, and international net revenue was $7.5 million and $6.0 million, respectively. Domestic net revenue was $55.8 million and $61.0 million and international net revenue was $21.4 million and $17.0 million for the nine months ended December 31, 2010 and 2009, respectively.

NOTE 14 – ACQUISITION

On October 7, 2010, the Company acquired all of the outstanding shares of common stock of DivX, Inc. pursuant to the Agreement and Plan of Merger entered into June 1, 2010. Each share of DivX common stock issued and outstanding immediately prior to the acquisition date was converted into the right to receive 0.514 shares of the Company’s common stock and $3.75 in cash.

DivX, Inc. is a leading digital media company that enables consumers to enjoy a high-quality video experience across any kind of device. The Company believes that the DivX transaction will help the Company enhance its strategic positioning in consumer electronic devices, facilitate the further penetration of the RoxioNow content platform relating into Internet-enabled consumer electronic devices and expanding the business model of the Roxio brand through DivX’s online community. The results of DivX’s operations have been included in the unaudited Consolidated Financial Statements since October 8, 2010.

The acquisition has been accounted for under the acquisition method of accounting. The purchase price, in aggregate, was approximately, $356.0 million, comprised of $126.3 million in cash, $204.1 million of Sonic common stock, $5.6 million representing the fair value of stock options and warrants assumed, and $20.0 million of assumed liabilities.

The following table summarizes the purchase price allocation based on the fair value for the assets acquired (in thousands):

Cash	$	116,245
Short-term investments		13,814
Accounts receivable		59,720
Other receivables		13,906
Prepaid expenses and other assets		7,564
Fixed assets		1,386
Other assets		6,011
Long-term investments		5,313
Intangibles		89,300
Goodwill		104,617
Accounts payable		(633	)
Accrued liabilities		(5,128	)
Deferred revenue		(1,012	)
Deferred tax liabilities		(34,658	)
Other long-term liabilities		(20,376	)
Net assets acquired	$	356,069

Transaction costs and integration costs associated with the acquisition were expensed as incurred. For the three and nine months ended December 31, 2010, the Company incurred $1.8 million and $4.4 million related to the DivX acquisition and integration costs.

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

Valuation of Intangible Assets and Goodwill

The application of the acquisition method of accounting resulted in recorded goodwill of $104.6 million. The goodwill recorded for the acquisition of DivX will not be amortized but tested for impairment at least annually, or more frequently if certain indicators are present. In the event that management determines that the value of goodwill has become impaired, the Company will record an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. Since the DivX acquisition was a stock purchase, goodwill will not be deductible for tax purposes.

Identifiable Intangible Assets

In performing the purchase price allocation, the fair value of certain significant intangibles, developed technology, customer relationships and trademarks, was calculated primarily using an income approach. The rates utilized to discount net cash flows to their present values were based on a weighted average cost of capital of 17-19%. The discount rates were determined after consideration of the overall enterprise rate of return, the relative risk, and relative importance of the asset to the generation of the cash flows.

The following table sets forth the components of intangible assets associated with the DivX acquisition (in thousands):

	Fair Value		Useful Life
Acquired technology	$	57,600	8.25-9.25 years
Customer lists		17,000	5.25-10.25 years
Trademarks and other		14,700	7.25 years
Total intangible assets		89,300

Acquired technology is comprised of products that have reached technological feasibility and are a part of DivX’s product lines. Proprietary knowledge can be leveraged to continue to enhance and add new features. Customer lists represent the underlying relationships and agreements with DivX’s customers. Trademarks represent the brand and name recognition associated with the marketing of DivX’s products and services.

Accounts Receivable

The purchase price allocation includes estimated accounts receivable of $59.7 million. Of this amount, $54.8 million is attributable to an adjustment to record the fair value of assumed contractual payments due to DivX for which no additional obligations exists in order to receive such payments. These contractual payments are for fixed multi-year site licenses, guaranteed minimum-royalty licenses, and unbilled per-unit royalties for unit shipped prior to the acquisition.

DivX’s revenue was primarily derived from royalties paid by licensees to acquire intellectual property rights. Revenue in such transactions was recognized during the period in which such customers reported the number of royalty-eligible units that they have shipped (in accordance with ASC Topic 605, Revenue Recognition). As the first royalty reports received from customers post-acquisition were for shipments made prior to the acquisition, these amounts did not meet the requirements for the Company to recognize the revenue. However, the cash payments associated with these reports were (and will be) received by the Company.

In certain multi-year site licenses and guaranteed minimum-royalty licenses, DivX entered into extended payment programs. Revenue related to such extended payment programs were recognized at the earlier of when cash was received or when periodic payments became due, (in accordance with ASC Topic 605). The payment terms extend over the term of the multi-year license, the remaining contractual payments that exist at the acquisition date will be received by the Company. As the Company assumed no additional obligations under such contracts, these payments are considered a fixed payment stream, rather than revenue. This fixed payment stream is accounted for as an element of accounts receivable and included as part of the acquisition accounting.

Sonic Solutions

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands except for share and per share data)

The fair value of the remaining contractual payment due under the applicable contracts is estimated by calculating the discounted cash flows associated with such future billings. Although, the Company will not recognize revenue as it collects the corresponding site license payments under these pre-acquisition contracts, the Company will recognize interest income at the discounted rate of the fair valued receivable.

Supplemental Pro Forma Information

The following unaudited pro forma information presents the consolidated results of operations of Sonic and DivX as if the acquisition had occurred at the beginning of each period presented, with pro forma adjustments to give effect to amortization of intangible assets and certain other adjustments (in thousands):

	Three Months Ended December 31,					Nine Months Ended December 31,
	2010		2009			2010			2009
Net Revenue (1)	$	27,903	$	46,365		$	118,695		$	129,611
Net income (loss) (2)	$	88	$	(1,424	)	$	(6,852	)	$	(3,464	)

(1)

Net revenue for the three and nine months ended December 31, 2010, excludes approximately $19.2 million of revenue that the Company did not recognize, but would have been recognized by DivX in the periods presented, as a stand-alone company in the ordinary course of its business.

(2)

Net income (loss) for the three and nine months ended December 31, 2010, includes the benefit of $27.0 million associated with the release of the Company's tax valuation allowance in connection with the DivX acquisition and excludes approximately $19.2 million of revenue that the Company did not recognize, but would have been recognized by DivX in the periods presented, as a stand-alone company in the ordinary course of its business.

The unaudited pro forma results are not necessarily indicative of the results that the Company would have attained had, the acquisition of DivX occurred at the beginning of the periods presented.

NOTE 15 – SUBSEQUENT EVENTS

Rovi Transaction

On December 22, 2010, the Company entered into the Merger Agreement with Rovi and Rovi's wholly owned subsidiary, Sparta Acquisition Sub, Inc. (“Purchaser”). Pursuant to the Merger Agreement, on January 14, 2011, Purchaser filed a Tender Offer Statement on Schedule TO with the SEC in which it offered to purchase each outstanding share of common stock, no par value, of the Company. Each Sonic shareholder who participates in the Offer (as defined below) may elect to receive consideration in the form of $14.00 per share in cash (the “cash election”) or a fraction of a share of Rovi’s common stock equal to 0.2489 (the “stock election”), in each case, subject to adjustment for stock splits, stock dividends and similar events as described in the Prospectus/Offer to Purchase, dated January 14, 2011, and amended on January 31, 2011 (the “Prospectus/Offer to Purchase”), and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the “Offer”). The aggregate amount of cash and of Rovi common stock available to be paid and issued in the Offer will be determined on a 55/45 basis, such that if the holders of more than 55% of the shares of Sonic common stock tendered in the Offer elect more than the amount of cash available, or if the holders of more than 45% of the shares of Sonic common stock tendered in the Offer elect more than the amount of Rovi common stock available, Sonic shareholders will receive on a pro rata basis the other kind of consideration to the extent the kind of consideration they elect to receive is oversubscribed. Sonic shareholders that tender their shares of Sonic common stock in the Offer, but do not make a cash election or a stock election will be treated as if they had made no election and the amount of cash and/or shares of Rovi common stock that they receive will be based on the amount of cash and/or shares of Rovi common stock remaining after giving effect to the cash elections and stock elections. On January 24, 2011, Federal Trade Commission and Department of Justice granted early termination of the waiting period under the Hart-Scott Antitrust Improvements Act relating to the Offer. The Offer and subsequent merger contemplated by the Merger Agreement remain subject to other closing conditions.

Nowtilus Acquisition

On January 31, 2011, the Company acquired all of the outstanding equity of an internet media distribution company, Nowtilus Onlinevertriebsgesellschaft mbH, Halle (“Nowtilus”), a limited liability company established under the laws of Germany. The preliminary purchase price is estimated to be EUR 5.8 million payable in three installments over a six-month period after the closing date, January 31, 2011. The first installment was paid on the closing date in the amount of EUR 3.3 million. Since the acquisition date occurred subsequent to December 31, 2010, the Nowtilus’ assets acquired and liabilities assumed are not included in the unaudited Condensed Consolidated Balance Sheets as of December 31, 2010. Due to the limited time, the initial purchase accounting for this business combination was incomplete as of the date of filing of this Quarterly Report.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q (“Quarterly Report”) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, statements regarding: the markets for the Company’s products and services; macroeconomic conditions; risks and uncertainties relating to satisfaction of closing conditions for the acquisition of Sonic by Rovi including the tender of a majority of the outstanding shares of common stock of Sonic; the effects of the announcement of the acquisition on Sonic’s business and the impact of any failure to complete the acquisition; the effects of the DivX acquisition, including its integration into the Company’s operations; consumer and business spending; leisure and entertainment related activities and related technologies; proliferation of Internet-connected devices; the Company’s competitive position; continued popularity of the DVD format; popularity of the Blu-ray Disc (“BD”) format; market for digital distribution of premium content; impact of restructuring plans; liquidity and capital needs; gross margins; operating expenses; significant customers, major distributors and key suppliers; content licensing; impacts of the Company’s pricing strategies; acquisitions and integration of related assets, business, personnel and systems; international operations; litigation or patent prosecution; intellectual property claims; and changes in effective tax rates. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ. Risks that may affect the Company’s operating results include, but are not limited to, those discussed in “Item 1.A Risk Factors” of this Quarterly Report. Readers should carefully review the risk factors described in this Quarterly Report and in other documents that the Company files from time to time with the Securities and Exchange Commission (“SEC”).

Overview of Business

The Company is a leading developer of technologies, products and services that enable the creation, management, and enjoyment of digital media content across a wide variety of technology platforms. The Company’s products and services offer innovative technologies to consumers, major Hollywood and independent studios, original equipment manufacturers (“OEMs”), businesses, high-end professional DVD authoring experts and developers. The Company distributes its products and services through retailers and distributors, personal computer (“PC”) and consumer electronic (“CE”) OEMs, Internet websites and other channels. The Company’s brands now include Roxio®, RoxioNow™, DivX®, Sonic® and MainConcept®, among others. In addition, the Company licenses core technology and intellectual property to other software companies and technology manufacturers for integration into their own products and services.

Fiscal Year

Products

The Company offers a range of technologies, products and services that are used to accomplish a wide variety of tasks, including creating and distributing digital audio and video content in a variety of formats; renting, purchasing and enjoying Hollywood movies and other premium content; producing digital media photo and video shows for sharing online and via television, PCs and CE devices; recording and playback of digital content on DVD, BD, other storage media and portable devices; managing digital media on PCs and CE devices; and backing up and preserving digital information, both to local storage devices and on the Internet.

DivX Acquisition, Rovi Transaction and Nowtilus Acquisition

DivX Acquisition

On October 7, 2010, the Company completed the acquisition by merger of DivX, Inc. As a result of this acquisition, the Company consolidated DivX’s assets and liabilities into the Company’s unaudited Condensed Consolidated Balance Sheets as of October 7, 2010, and included DivX’s financial results from October 7, 2010 in the Company’s unaudited Condensed Consolidated Statement of Operations. Please refer to Note 14 of the Notes to the unaudited Consolidated Financial Statements contained in this Form 10-Q for additional information regarding this completed acquisition.

Rovi Transaction

On December 22, 2010, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Rovi Corporation, a Delaware corporation (“Rovi”), and Rovi's wholly owned subsidiary, Sparta Acquisition Sub, Inc., a California corporation (“Acquisition Sub”). The Merger Agreement was filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 27, 2010. Pursuant to the Merger Agreement, on January 14, 2011, Acquisition Sub filed a Tender Offer Statement on Schedule TO with the SEC in which it offered to purchase each outstanding share of common stock, no par value, of the Company. Each Sonic shareholder who participates in the Offer (as defined below) may elect to receive consideration in the form of $14.00 per share in cash (the “cash election”) or a fraction of a share of Rovi’s common stock equal to 0.2489 (the “stock election”), in each case, subject to adjustment for stock splits, stock dividends and similar events as described in the Prospectus/Offer to Purchase, dated January 14, 2011, and amended on January 31, 2011 (the “Prospectus/Offer to Purchase”), and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the “Offer”). The aggregate amount of cash and of Rovi common stock available to be paid and issued in the Offer will be determined on a 55/45 basis, such that if the holders of more than 55% of the shares of Sonic common stock tendered in the Offer elect more than the amount of cash available, or if the holders of more than 45% of the shares of Sonic common stock tendered in the Offer elect more than the amount of Rovi common stock available, Sonic shareholders will receive on a pro rata basis the other kind of consideration to the extent the kind of consideration they elect to receive is oversubscribed. Sonic shareholders that tender their shares of Sonic common stock in the Offer, but do not make a cash election or a stock election will be treated as if they had made no election and the amount of cash and/or shares of Rovi common stock that they receive will be based on the amount of cash and/or shares of Rovi common stock remaining after giving effect to the cash elections and stock elections. On January 24, 2011, Federal Trade Commission and Department of Justice granted early termination of the waiting period under the Hart-Scott Antitrust Improvements Act relating to the proposed acquisition of Sonic Solutions by Rovi in a stock and cash transaction. The Offer and subsequent merger remain subject to other closing conditions.

Nowtilus Acquisition

On January 31, 2011, the Company acquired all of the outstanding equity of an internet media distribution company, Nowtilus Onlinevertriebsgesellschaft mbH, Halle (“Nowtilus”), a limited liability company established under the laws of Germany. The preliminary purchase price is estimated to be EUR 5.8 million payable in three installments over a six-month period after the closing date, January 31, 2011. The first installment was paid on the closing date in the amount of EUR 3.3 million. Since the acquisition date occurred subsequent to December 31, 2010, the Nowtilus assets acquired and liabilities assumed are not included in the unaudited Condensed Consolidated Balance Sheets as of December 31, 2010. Due to the limited time, the initial purchase accounting for this business combination was incomplete as of the date of filing of this Quarterly Report.

Operating Segment Information

The Company organizes its business into three reportable operating segments: the “Roxio Consumer Products” segment, which offers products and services related to personal content, the “Premium Content” segment, which offers products and services related to premium content, and the “DivX” segment, which provides high-quality video compression-decompression software libraries, or codecs, to enable distribution of content across the Internet and through recordable media. These segments reflect the Company’s internal organizational structure, as well as the processes by which management makes operating decisions, allocates resources and assesses performance.

Roxio Consumer Products Segment

The Roxio Consumer Products segment creates software and services that enable consumers to easily create, manage, and share personal digital media content on and across a broad range of connected devices. A wide array of leading technology companies and developers rely on Roxio products, services and technologies to bring innovative digital media functionality to PCs and next-generation CE devices and platforms. The Roxio Consumer Products segment offers products and services under a variety of names, including BackonTrack, Backup MyPC, CinePlayer, Crunch, Just!Burn, MyDVD, MyTV To Go, PhotoShow, PhotoSuite, Popcorn, RecordNow, Roxio Burn, Roxio Copy & Convert, Roxio Creator, Roxio Easy LP to MP3, Roxio Easy VHS to DVD, Toast, VideoWave, WinOnCD, and others. These products are sold in a number of different versions and languages. The Company distributes these products through various channels, including “bundling” arrangements with OEMs, volume licensing programs, its web store, and third party web-based and “bricks and mortar” retail stores. The Company also markets the core technology that powers Roxio products to other companies who wish to build their own PC software products.

Premium Content Segment

The Premium Content segment offers a range of products and services related to the creation, distribution and enjoyment of premium content. As part of this segment, the Company also sells, rents and distributes premium entertainment content to consumers over the Internet under RoxioNow branding (in this Quarterly Report, this service may be referred to as the “RoxioNow Service”). Also within this segment, the Professional Products Group offers software under the Scenarist, CineVision, and DVDit product names as well as under the Sonic and Roxio Professional brands to major motion picture studios, high-end authoring houses and other professional customers. Additionally, in connection with the DivX Acquisition, in the third quarter of fiscal year 2011, the Company added DivX’s MainConcept technology business to this segment. The Company also develops software components that it licenses to CE companies to enable their devices to offer premium content to consumers, and licenses intellectual property, including patents.

DivX Segment

The goal of the DivX segment is to create products and provide services that improve the way consumers experience media. The first step toward this goal was to build and release a high-quality video compression-decompression software library, or codec, to enable distribution of content across the Internet and through recordable media. As a result, DivX created the DivX codec. Since the creation of the first DivX codec, DivX codecs have been actively sought out and downloaded by consumers hundreds of millions of times. These downloads include those for which DivX receives revenue as well as free downloads, such as limited time trial versions, and downloads provided as upgrades or support to existing end users of DivX products. After the significant grass-roots adoption of DivX codecs, the next step toward its goal was to license similar technology to consumer hardware device manufacturers and to certify their products to ensure the interoperable support of DivX-encoded content. DivX is entitled to receive a royalty and/or license fee for DivX Certified devices shipped by its customers. In addition to licensing revenue from such licensees, DivX also generates revenue from software licensing, advertising and content distribution.

Recent Trends and Events

Due to the accelerated growth in the computer technology industry, broadband Internet connectivity and personal electronic devices of all kinds, digital media content is now everywhere. The Company faces fast evolving trends in the technology industry that can provide opportunities as well as potential risks, including:

Optical Disc Playback Evolution – Optical disc technologies have enjoyed tremendous growth and extremely widespread consumer adoption, but they tend to evolve, mature and change rapidly. Over the past several years, DVD sales have been falling as consumers have begun to embrace online alternatives, as well as new formats such as BD. Sales of BD units and players have been growing rapidly, but the growth of the BD format has not yet fully compensated for the recent drop in DVD sales.

Growth of Digital Distribution of Premium Content – Content owners, such as Hollywood studios, are increasingly offering sell-through and rental of premium content through digital distribution. Simultaneously, a growing number of consumers are enjoying and taking advantage of the benefits of digital distribution of premium content. As more Internet-enabled electronic devices offer delivery of premium content, the rate of adoption and number of title offerings should continue to increase.

Digital Phone, Portable and Gaming Devices – Consumer usage of mobile phones, gaming consoles and portable CE devices, particularly those with high-end digital media capabilities, continues to increase worldwide. The growing popularity of portable devices leads to greater demand for software products and services, such as those offered by the Company, that provide digital media management and functionality.

Growth of Online Social Networks – Online social networks, such as Facebook and MySpace, increasingly feature personal digital photo, video and audio content, and these networks function as distribution platforms for sharing and enjoying digital media content. The rising popularity of these networks and their platforms creates an increased demand for products and services that can capture, create, edit and manage digital media.

Other technological trends and events – New technologies can also impact the demand for the Company’s digital media products and services. For example, as new operating systems are introduced (for example, Windows 7 in October 2009), consumers are offered new tools for editing, formatting and burning digital media, and there are opportunities for software vendors such as the Company to provide products that are complementary to the new operating systems.

DivX Acquisition

On October 7, 2010, the Company completed the acquisition of DivX pursuant to the Agreement and Plan of Merger entered into June 1, 2010. In deciding to acquire DivX, the Company sought to capitalize on the following strategic advantages and opportunities:

Enhanced Strategic Positioning of the Businesses:

The presence of DivX technology in over 300 million CE devices, its relationships with all the major CE OEMs, large and experienced sales force and strong technical qualification and support organization may accelerate the Company’s Premium Content business by permitting new consumer use models, and facilitating deployment of the RoxioNow content platform.

DivX TV, a technology designed to enable consumers to stream Internet video and services directly to Internet-connected digital televisions and other Internet-connected CE devices, may permit the Company to expand the range of service offerings it provides to its retailer partners.

DivX’s large online community and well-known brand, indicated by more than 500 million software downloads since inception, an average of 12 million unique website visits per month in calendar 2009 and approximately 1.8 billion player and web player launches in calendar 2009, offer a significant marketing opportunity for the Company’s software applications that enhance the customer end-to-end media experience.

DivX and its subsidiary MainConcept’s codec technologies and commercial licensing of codecs and other enterprise level technologies and tools enlarge the Company’s professional authoring solutions portfolio, enhancing its position with premium content owners and distributors, including major Hollywood studios, to create and distribute high-end commercially released digital media titles in DVD, BD, and Internet streaming formats.

Improvement in the DivX Businesses:

The Company’s RoxioNow premium content service may enhance the DivX CE licensing business, particularly if the Company’s retail partners begin to view the DivX codec as an important part of the premium content services they offer based on the RoxioNow service.

The attractiveness of DivX TV to CE partners may be enhanced to the extent that it incorporates the RoxioNow premium content service.

Roxio consumer software applications augment and extend the appeal of DivX consumer tool sets, improving capabilities offered to DivX’s existing consumer customers.

Cost Savings: Following the integration period, the Company expects to benefit from efficiencies associated with operating a larger business and anticipates significant annual cost savings relating primarily to the elimination of DivX’s public company reporting obligations and a reduction in aggregate headcount.

Revenue Diversification: The Company expects to have a combined customer base that is more diverse than the customer base of either company standing alone.

Geographic Diversification: The revenue of the combined company will have greater geographic diversity. In the fiscal year ended March 31, 2010, international sales accounted for $22.9 million, or 22%, of Sonic’s net revenue. In the fiscal year ended December 21, 2009, DivX’s net revenue outside North America comprised 82% of its net revenues, or approximately $58.0 million.

Although there can be no assurance that all the Company’s strategic objectives for the DivX acquisition will be achieved, the Company believes the acquisition should assist it in achieving its revenue growth objectives and profitability targets and that it will be accretive to earnings, particularly if the expected cost savings are realized.

Strategic Objectives

The Company’s products and services enable people to create, manage, enjoy and distribute premium and personal digital content, allowing them to organize and share their digital lives and memories in new and innovative ways. The Company’s core strategy is to utilize its technology, expertise and competitive positioning to deliver exciting products and services to enhance the value of digital media in people’s lives. The Company’s strategic objectives are the following:

Enable Consumers to Buy and Play Premium Content Anywhere and at Anytime. The Company believes that digital distribution of premium content will grow dramatically over the next few years, and that ultimately industry revenue from the digital distribution of premium content may surpass revenue from the sale and rental of premium content on optical media such as DVD and BD. The Company has put substantial effort into its online premium content initiatives, such as the RoxioNow Service and DivX TV, as it believes that this area may offer a strong opportunity for counterbalancing the recent decline in DVD sales and the adverse impact of that trend on the Company’s operating results. As the digital content ecosystem continues to expand and evolve, the Company aims to make its products and services available through an increasing range of platforms, devices and partners, with the goal that the Company’s technology will represent a symbol of compatibility and a common point of interaction for consumers who want to enjoy Hollywood movies and other premium digital content anywhere and anytime.

Develop and strengthen Roxio and DivX branded technologies, products and services. The Company seeks to build on the brand strength of its Roxio and DivX technologies, products and services by strengthening its relationships with OEMs and retail partners, while deepening its relationship with consumers by adding new products and services. The Company continues to utilize its knowledge and expertise to develop and introduce products and services relating to new formats such as BD, and believes that these efforts will assist it in offsetting price pressure and declining sales associated with the DVD format. Additionally, the Company plans to continue to enhance its Web-based offerings, add innovative solutions to its consumer product portfolio and extend the reach of the Roxio and DivX brands to a new audience of online users.

Outlook

While the continuing global economic downturn and the maturation of the DVD format have adversely impacted the Company’s business and financial results during recent periods, the Company believes that the digital distribution of premium content is poised to enjoy commercial success, and that online premium content initiatives provide it with a strategic opportunity to grow its business rapidly in this area. The Company further believes that it is well positioned to capitalize on its strong brand names, consumer market position, and OEM relationships as digital media formats and distribution methodologies. The Company plans to continue to make significant strategic investments in new digital content and technology areas, while maintaining and enhancing its product and service offerings to generate revenues and position the Company for growth.

International Locations and Revenue

The Company is headquartered in Novato, California, and has sales and marketing offices in North America, Europe, Japan, China, Taiwan, Singapore and remote offices in a number of locations around the world. In the three months ended December 31, 2010 and 2009, approximately 72% and 77% of net revenue was attributable to domestic sales while 28% and 23% of net revenue was attributable to international sales, respectively. In the nine months ended December 31, 2010 and 2009, approximately 72% and 78% of net revenue was attributable to domestic sales while 28% and 22% of net revenue was attributable to international sales, respectively. The DivX acquisition will result in significant additional growth in the Company’s international operations and revenues. In the future, the Company may expand its operations, professional services and direct sales force abroad, thereby incurring additional operating expenses and capital expenditures.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

With the exception of those stated below, there have been no material changes in the Company’s significant accounting polices during the three and nine months ended December 31, 2010 compared to the significant accounting policies described in the Company’s Fiscal 2010 Annual Report.

Fair Value measurements

Effective October 7, 2010, as a result of the DivX acquisition, the Company adopted one of the amendments contained in Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures. This ASU 2010-06 amendment clarifies the fair value measurement disclosures for each class (rather than category) of assets and liabilities. In addition, this amendment modifies the disclosure requirements for the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements (required for Level 2 or Level 3). The adoption of this ASU 2010-06 clarifying guidance did not have an impact on the Company’s consolidated financial condition, results of operations or cash flows. Please refer to Note 4 of the Notes to the unaudited Condensed Consolidated Financial Statements contained in this Form 10-Q for detailed information.

Use of estimates

Revenue recognition

Allowances for sales returns and doubtful accounts

Share-based compensation

Valuation of acquired businesses, assets and liabilities

Goodwill, intangible assets and other long-lived assets

Accrued liabilities

Contingencies

Income tax and deferred tax asset valuation

RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended December 31, 2010 and 2009

The following table sets forth certain items from the Company’s statements of operations as a percentage of net revenue:

	Three Months Ended December 31,						Nine Months Ended December 31,
	2010			2009			2010			2009
Net revenue		100	%		100	%		100	%		100	%
Cost of revenue		44	%		30	%		36	%		31	%
Gross profit		56	%		70	%		64	%		69	%

Operating expenses:
Marketing and sales		48	%		32	%		36	%		29	%
Research and development		52	%		22	%		35	%		24	%
General and administrative		30	%		18	%		22	%		18	%
Acquisition		9	%		0	%		6	%		0	%
Restructuring		0	%		0	%		0	%		1	%
Total operating expenses		139	%		72	%		99	%		72	%
Operating loss		(83	)%		(2	)%		(35	)%		(3	)%
Interest income		2	%		0	%		1	%		0	%
Other income (expenses)		0	%		1	%		1	%		(0	)%
Loss before income taxes		(81	)%		(1	)%		(33	)%		(3	)%
Provision for (benefit of) income taxes		(97	)%		0	%		(34	)%		1	%
Net income (loss)		16	%		(1	)%		1	%		(4	)%

Net Revenue Comparison of Three and Nine Months Ended December 31, 2010 and 2009

The following tables set forth a comparison of net revenue by segment (in thousands other than percentages):

	Three Months Ended December 31,				2010 to 2009
Net Revenue	2010		2009		Inc (Dec)			% Change
Roxio Consumer Products	$	19,573	$	22,298	$	(2,725	)		(12	)%
Premium Content		4,675		4,094		581			14	%
DivX		2,179		-		2,179			100	%
Total net revenue(1)	$	26,427	$	26,392	$	35			0	%

(1) Results for the three months ended December 31, 2010 included activities for DivX from October 8, 2010, and reflected the impacts of the acquisition method of accounting.

For the three months ended December 31, 2010, total net revenue remained flat compared to the same period in the prior year. The $2.7 million or 12% decrease in Roxio Consumer Products was partially offset by $2.2 million net revenue generated by the newly acquired DivX segment, along with a $0.6 million or 14% increase in Premium Content.

The Roxio Consumer Products segment experienced a $2.3 million reduction in OEM bundling revenue due to changes in product mixes, per-unit pricing pressure, and lower unit volumes, plus a $1.8 million reduction in sales through the Company’s web store as a result of lower per unit sales of Creator and CinePlayer, along with the extension of the Toast product life cycle. The decrease in Roxio Consumer Products net revenue was partially offset by a $0.7 million increase in the retail channel driven by supporting fewer price promotions, $0.4 million generated through the renewal of a volume licensing program, and $0.4 million increase in technology licensing revenue from several PC manufacturers.

The increase in Premium Content net revenue included $0.8 million of revenue generated by MainConcept’s codec technologies. MainConcept’s codec revenue is reflected net of $1.4 million recorded in accounts receivable rather than revenue as a result of the acquisition method accounting applied to the DivX acquisition. Also contributing to the increase in Premium Content net revenue was $0.4 million increase from services and licensing associated with the RoxioNow format adoption, and $0.4 million in professional due to a prepaid royalty agreement. The increase was partially offset by a $0.8 million decrease in technology licensing revenue from several CE manufacturers and a $0.3 decrease in licensing of the Qflix technology.

DivX segment results were substantially impacted by the application of acquisition method accounting to the transaction. The $2.2 million net revenue generated by DivX segment included $1.2 in technology licensing and $1.0 million in advertising and third-party product distribution. Under the acquisition method of accounting, the Company did not recognize approximately $19.2 million, including the $1.4 million attributable to the MainConcept as noted above, that DivX would have recognized in the quarter as a stand-alone company in the ordinary course of its business, including royalties and other amounts paid pursuant to certain multi-year site licenses and guaranteed minimum-royalty licenses, royalties and other amounts received by the Company post-acquisition, based upon shipments and other activities conducted by customers prior to the DivX acquisition, and certain DivX deferred revenues, which were reduced to a discounted fair value. This impact may be referred to as the “DivX Acquisition Accounting Impact” in this Quarterly Report on Form 10-Q.

	Nine Months Ended December 31,				2010 to 2009
Net Revenue	2010		2009		Inc (Dec)			% Change
Roxio Consumer Products	$	59,860	$	67,964	$	(8,104	)		(12	)%
Premium Content		15,136		10,011		5,125			51	%
DivX		2,179		-		2,179			100	%
Total net revenue(1)	$	77,175	$	77,975	$	(800	)		(1	)%

(1) Results for the nine months ended December 31, 2010 included activities for DivX from October 8, 2010, and reflected the impacts of the acquisition method of accounting.

Total net revenue decreased by $0.8 million to $77.2 million for the nine months ended December 31, 2010, from $78.0 million for the nine months ended December 31, 2009. The decrease in net revenue for the nine months ended December 31, 2010 included a decrease of $8.1 million or 12% in Roxio Consumer Products net revenue, which was offset by increases of $5.1 million or 51% in Premium Content net revenue and $2.2 million generated by the newly acquired DivX segment.

During the nine months ended December 31, 2010, Roxio Consumer Products segment experienced a $6.6 million reduction in OEM bundling revenue due to changes in product mixes, per-unit pricing pressure, and lower unit volumes plus a $3.6 million reduction in sales through the Company’s web store as a result of lower per unit sales of CinePlayer, Creator, and Roxio Easy VHS to DVD. The decrease in Roxio Consumer Products net revenue was partially offset by $1.8 million generated through volume licensing programs.

The increase in Premium Content net revenue included $4.0 million from services and licensing associated with the RoxioNow format adoption, $1.2 million generated through the RoxioNow Service, and $0.8 million in new sales of the MainConcept codec technologies acquired in the DivX acquisition. MainConcept’s codec revenue is reflected net of $1.4 million recorded in accounts receivable rather than revenue as a result of acquisition method accounting applied to the DivX acquisition. The increase in Premium Content net revenue was partially offset by a $0.5 million reduction in professional products revenue resulting from continued global economic weakness affecting consumer demand and corporate spending, along with $0.3 decrease in licensing of the Qflix technology.

As noted above, DivX segment results were substantially affected by the DivX Acquisition Accounting Impact. The $2.2 million net revenue generated by DivX segment included $1.2 in technology licensing and $1.0 million in advertising and third-party product distribution.

The following tables set forth a comparison of net revenue geographically (in thousands other than percentages):

	Three Months Ended December 31,
Net Revenue	2010		2009		Inc (Dec)			%
United States	$	18,926	$	20,405	$	(1,479	)		(7	)%
Export
Canada		369		253		116			46	%
France		333		65		268			412	%
Germany		1,168		794		374			47	%
United Kingdom		860		1,020		(160	)		(16	)%
Other European		606		496		110			22	%
Japan		2,224		1,411		813			58	%
Singapore		770		1,048		(278	)		(27	)%
Taiwan		306		377		(71	)		(19	)%
Other Pacific Rim		456		375		81			22	%
Other International		409		148		261			176	%
Net revenue(1)	$	26,427	$	26,392	$	35			0	%

(1) Results for the three months ended December 31, 2010 included activities for DivX from October 8, 2010, and reflected the impacts of the acquisition method of accounting.

United States (domestic) sales accounted for $18.9 million and $20.4 million, or 72% and 77% of total net revenue for the three months ended December 31, 2010 and 2009, respectively. The $1.5 million or 7% decrease in domestic net revenue included a $2.4 million reduction in OEM bundling revenue, associated with changes in product mixes, per-unit pricing pressure, and lower unit volumes. In addition, the Company experienced a $1.8 million reduction in sales through the Company’s web store as a result of lower per unit sales of Creator and CinePlayer, along with the extension of the Toast product life cycle. Also contributing to the decrease in domestic net revenue was a $0.3 decrease in licensing of the Qflix technology. This decrease was partially offset by a $0.9 million increase in retail channel revenue driven by support for fewer price promotions and $0.9 million generated through the newly acquired DivX business from advertisements or third party software applications that are embedded or included with software packages the Company offers to consumers. Moreover, additional increases in domestic revenue included a $0.4 million increase in professional product revenue due to a prepaid royalty agreement, $0.3 million generated from RoxioNow Service revenue, $0.2 million generated from the sale of the MainConcept’s codec technologies, and $0.2 generated through volume licensing programs.

International sales accounted for $7.5 million and $6.0 million, or 28% and 23% of total net revenue for the three months ended December 31, 2010 and 2009, respectively. The $1.5 million increase in international sales partially resulted from the sale of the DivX technology and MainConcept’s codec technologies acquired. These sales resulted in an increase in revenue in Germany of $0.4 million, Japan of $0.3 million and France of $0.2 million. Also contributing to the increase in international sales was $0.4 million in technology license revenue resulting from the change in a Japan PC manufacture royalty contract from a prepaid to an “as-used” reporting structure. This increase was partially offset by $0.2 million decrease in royalty revenue from a Singapore OEM customer as a result of decreased shipments.

	Nine Months Ended December 31,
Net Revenue	2010		2009		Inc (Dec)			%
United States	$	55,825	$	60,965	$	(5,140	)		(8	)%
Export
Canada		1,626		672		954			142	%
France		898		479		419			87	%
Germany		2,316		2,069		247			12	%
United Kingdom		2,133		2,445		(312	)		(13	)%
Other European		3,445		1,734		1,711			99	%
Japan		6,271		5,358		913			17	%
Singapore		2,419		2,375		44			2	%
Taiwan		533		653		(120	)		(18	)%
Other Pacific Rim		759		817		(58	)		(7	)%
Other International		950		408		542			133	%
Net revenue(1)	$	77,175	$	77,975	$	(800	)		(1	)%

(1) Results for the nine months ended December 31, 2010 included activities for DivX from October 8, 2010, and reflected the impacts of the acquisition method of accounting.

United States (domestic) sales accounted for $55.9 million and $61.0 million, or 72% and 78% of total net revenue for the nine months ended December 31, 2010 and 2009, respectively. The $5.1 million or 8% decrease in domestic net revenue included a $7.3 million reduction in OEM bundling revenue, associated with changes in product mixes, per-unit pricing pressure, and lower unit volumes. In addition, the Company experienced a $3.6 million reduction in sales through the Company’s web store as a result of lower per unit sales of Creator, CinePlayer, and Roxio Easy VHS to DVD along with the extension of the Toast product life cycle. This decrease was partially offset by $2.9 million generated through the RoxioNow Service, along with $0.5 million generated through volume licensing programs. Moreover, additional increases in domestic revenue included $0.9 million generated through the newly acquired DivX business from advertisements or third party software applications that are embedded or included with software packages the Company offers to consumers and a $0.6 million increase in the retail channel.

International sales accounted for $21.4 million and $17.0 million, or 28% and 22% of total net revenue for the nine months ended December 31, 2010 and 2009, respectively. The $4.4 million increase in international sales partially resulted from $2.0 million related to a one-time development contract associated with content delivery for a customer in Ireland. Also contributing to the increase in international sales was $1.8 million in sales of the DivX technology and MainConcept’s codec technologies.

Other European revenue increased due to $2.0 million received in connection with a one-time development contract for content delivery to a customer in Ireland. Japan revenue increased due to $0.9 million in technology license revenue from the change in a Japan PC manufacture royalty contract from a prepaid to an “as-used” reporting structure, plus $0.3 million from the sale of the DivX technology and MainConcept’s codec technologies, partially offset by a reduction in one-time technology licensing contracts with CE and PC manufacturers. Canada revenue increased mainly due to $0.6 million from a one-time technology licensing contract with a Canadian CE manufacturer.

Significant Customers

The following table reflects sales to significant customers as a percentage of total net revenue and the related accounts receivable as a percentage of total receivables (in percentages):

	% of Total Net Revenue						% of Total Accounts Receivable
	Three Months Ended December 31,						Three Months Ended December 31,
Customer	2010			2009			2010 (1)			2009
Navarre		19	%		20	%		23	%		26	%
Digital River		19	%		25	%		13	%		15	%
Dell		8	%		11	%		4	%		5	%
Ingram		7	%		10	%		11	%		8	%
Hewlett-Packard		6	%		11	%		4	%		12	%

	% of Total Net Revenue						% of Total Accounts Receivable
	Nine Months Ended December 31,						Nine Months Ended December 31,
Customer	2010			2009			2010 (1)			2009
Navarre		20	%		21	%		23	%		26	%
Digital River		19	%		23	%		13	%		15	%
Dell		9	%		13	%		4	%		5	%
Ingram		7	%		8	%		11	%		8	%
Hewlett-Packard		6	%		12	%		4	%		12	%

(1) Calculation of related receivable to significant customers as a percentage of total receivables excluded the $31.8 million fixed stream payments associated with DivX Acquisition.

No other customer accounted for more than 10% of the Company’s revenue for the three and nine months ended December 31, 2010 and 2009, respectively. The Company sells products to Dell and Hewlett-Packard pursuant to individual supplements, exhibits or other attachments that are appended to the standard terms and conditions the Company has negotiated with each of these customers. These standard terms and conditions include provisions relating to the delivery of the Company’s products, the customer’s distribution of these products, representations by the Company with respect to the quality of the products and the Company’s ownership of the products, obligations by the Company to comply with law, confidentiality obligations, and indemnification by the Company for breach of its representations or obligations. The underlying agreements generally renew for one year periods, subject to annual termination by either party or termination for breach. Under each agreement, the OEM has the sole discretion to decide whether to purchase any of the Company’s products. The agreements are non-exclusive and do not contain any minimum purchase obligations or similar commitments. The loss of Dell, Hewlett-Packard, or any other major customer would have a material adverse effect on the Company, if it were unable to replace that customer.

Revenue recognized from Digital River was pursuant to a reseller arrangement, and revenue recognized from Navarre was pursuant to a distribution arrangement. The Digital River agreement covers the electronic delivery of Company software and the creation and maintenance of the shopping cart process for the Company’s online stores. The Navarre agreement provides for both physical and electronic delivery, and under both consignment and direct sale models. The Company provides products to Digital River and Navarre pursuant to agreements with standard terms and conditions including provisions relating to the delivery of the Company’s products, distribution of these products, representations by the Company with respect to the quality of the products and the Company’s ownership of the products, obligations by the Company to comply with law, confidentiality obligations, and indemnification by the Company for breach of its representations or obligations. The agreements generally renew for one-year periods, subject to annual termination by either party as well as other termination provisions, such as termination for breach. The agreements are non-exclusive and do not contain any minimum purchase obligations or similar commitments.

It is impracticable for the Company to report the net revenues by significant customer per business segment for the three and nine months ended December 31, 2010, and 2009, as some of these customers may be included in all segments.

Cost of Revenue

Cost of revenue consists mainly of third party licensing expenses, employee salaries and benefits for personnel directly involved in the production and support of revenue-generating products and services, packaging and distribution costs, if applicable, and amortization of acquired and intangible assets. In the case of consumer software distributed in retail channels, cost of revenue also includes the cost of packaging, if any, and certain distribution costs. The following table reflects cost of revenue (in thousands other than percentages):

	Three Months Ended December 31,						2010 to 2009
	2010			2009			Inc (Dec)			% Change
Roxio Consumer Products	$	5,649		$	5,926		$	(277	)		(5	)%
Premium Content		3,217			2,118			1,099			52	%
DivX		2,651			-			2,651			100	%
Cost of revenue	$	11,517		$	8,044		$	3,473			43	%
Percent of total revenues		44	%		30	%

The Company’s overall cost of revenue as a percentage of net revenue increased to 44% of net revenue for the three months ended December 31, 2010 from 30% for the three months ended December 31, 2009. Roxio Consumer Products cost of revenue as a percentage of Roxio Consumer Products net revenue increased to 29% for the three months ended December 31, 2010 compared to 27% for the three months ended December 31, 2009. The higher cost of revenue percentages was driven by an increase in royalty costs associated with adding features to products in the retail and web store channels, along with a reduction in OEM sales, which have lower royalty costs.

Premium Content cost of revenue as a percentage of Premium Content net revenue increased to 69% for the three months ended December 31, 2010 compared to 52% for the three months ended December 31, 2009. The higher cost of revenue percentage was driven by a 13% increase in development and operational costs associated with the RoxioNow Service. Also contributing to the higher cost of revenue percentage was a 4% increase in purchased technology amortization and a 1% increase in technical support costs mainly as a result of the MainConcept business acquired in the DivX acquisition. This was partially offset by a 1% decrease in the cost of revenue percentage due to lower royalty costs as a result of lower professional sales, along with the acquisition of the MainConcept technology for which the Company has traditionally paid a license fee to use.

DivX cost of revenue was $2.7 million. This included $1.9 million in royalty costs and $0.7 million in amortization of intangibles obtained through the DivX acquisition. DivX cost of revenue as a percentage of DivX net revenue was 122% for the three months ended December 31, 2010. As noted above, DivX results were substantially affected by the DivX Acquisition Accounting Impact. This impact is expected to continue to affect DivX results, including cost of revenue as a percentage of net revenue, in future periods.

	Nine Months Ended December 31,						2010 to 2009
	2010			2009			Inc (Dec)			% Change
Roxio Consumer Products	$	16,894		$	18,154		$	(1,260	)		(7	)%
Premium Content		8,574			5,851			2,723			47	%
DivX		2,651			-			2,651			100	%
Cost of revenue	$	28,119		$	24,005		$	4,114			17	%
Percent of total revenues		36	%		31	%

The Company’s overall cost of revenue as a percentage of net revenue increased to 36% of net revenue for the nine months ended December 31, 2010 from 31% for the nine months ended December 31, 2009.

Roxio Consumer Products cost of revenue as a percentage of Roxio Consumer Products net revenue increased to 28% for the nine months ended December 31, 2010 compared to 27% for the nine months ended December 31, 2009. The higher cost of revenue percentage was driven by a 1% increase in cost of revenue resulting from technical and operational support costs arising from the new product offerings, along with a 1% increase in royalty costs associated with adding features to products in the retail and web store channels, along with a reduction in OEM sales, which have a lower royalty costs. This was partially offset by a 1% decrease in the cost of revenue percentage resulting from lower product costs due to lower retail and web store sales and lower pricing on certain promotional items bundled with the Company’s products.

Premium Content cost of revenue as a percentage of Premium Content net revenue decreased to 57% for the nine months ended December 31, 2010 compared to 58% for the nine months ended December 31, 2009. The lower cost of revenue percentage was driven by a 3% decrease in cost of revenue resulting from lower technical support costs. The decrease was mainly in the professional products group due to lower sales activities. This was partially offset by the addition of the MainConcept business. Also contributing to the lower cost of revenue percentage was a 2% decrease in royalty costs as a result of lower professional sales, mainly as a result of the acquisition of the MainConcept technology for which the Company has traditionally paid a license fee to use. These decreases were partially offset by a 3% increase in the cost of revenue percentage resulting from additional operational, development, and content costs associated with the RoxioNow Service.

Operating Expenses for the Three and Nine Months Ended December 31, 2010 and 2009

Marketing and Sales

Marketing and sales expenses include salaries, benefits, sales commissions and share-based compensation expense for marketing and sales employees, promotions and incentive programs aimed to generate revenue such as advertising, trade shows, travel related costs, and facility costs related to marketing and sales personnel. The following table reflects the Company’s marketing and sales operating expenses (in thousands other than percentages):

	Three Months Ended December 31,
	2010			2009			Increase (Decrease)		% Change
Marketing and sales expenses	$	12,668		$	8,489		$	4,179		49	%
Percentage of net revenue		48	%		32	%

For the three months ended December 31, 2010, marketing and sales expenses increased by $4.2 million, or 49% compared to the same period in the prior year. Marketing and sales expenses as a percentage of net revenue increased 16% from 32% to 48% for the three months ended December 31, 2010 and 2009, respectively. The increase during the three months ended December 31, 2010 compared to the same period in the prior year was due to increases of $2.6 million in employee related costs attributable to increased headcount associated with the DivX acquisition, $1.4 million in stock-based compensation as a result of assumed grants in relation to the DivX acquisition, $0.5 million in travel related expenses, $0.5 million in bad debt expenses as a result of a bankruptcy of a customer and $0.3 million in outside consulting services. These increases were partially offset by a $1.0 million decrease in advertising and promotional expense related to warrants to acquire Sonic common stock issued in connection with a strategic relationship in the three months ended December 31, 2009 that did not occur in the three months ended December 31, 2010. In addition, as noted above, DivX Acquisition Accounting Impact affected the increase in marketing and sales expenses as a percentage of net revenue.

	Nine Months Ended December 31,
	2010			2009			Increase (Decrease)		% Change
Marketing and sales expenses	$	27,673		$	22,245		$	5,428		24	%
Percentage of net revenue		36	%		29	%

For the nine months ended December 31, 2010, marketing and sales expenses increased by $5.4 million, or 24% compared to the same period in the prior year. Marketing and sales expenses as a percentage of net revenue increased 7% from 29% to 36% for the nine months ended December 31, 2010 and 2009, respectively. The increase during the nine months ended December 31, 2010 compared to the same period in the prior year was due to increases of $3.2 million in employee related costs attributable to increased headcount associated with the DivX acquisition, $1.3 million in stock-based compensation as a result of assumed grants in relation to the DivX acquisition, $0.9 million in travel related expenses, $0.8 million in bad debt expenses as a result of a bankruptcy of a customer and $0.4 million in outside consulting services. These increases were partially offset by a $1.0 million decrease in advertising and promotional expense related to warrants to acquire Sonic common stock issued in connection with a strategic relationship in the nine months ended December 31, 2009 that did not occur in the nine months ended December 31, 2010. During the three and nine months ended December 31, 2010, the Company released certain payroll tax liabilities associated with the Company’s voluntary stock option review, reducing marketing and sales employee-related costs by $0.9 million. In addition, as noted above, DivX Acquisition Accounting Impact affected the increase in marketing and sales expenses as a percentage of net revenue.

The Company expects to continue to invest in marketing and sales of its products and services to develop market opportunities and promote its offerings while continuing to monitor its needs to align expenditures to its operating results. During the three and nine months ended December 31, 2010, the Company experienced an increase in personnel-related expenses as well as in travel related expenses due to increased efforts to expand and attract new customers and to maintain existing customers, along with the increase related to DivX acquisition.

Research and Development

Research and development expenses include salaries, benefits, share-based compensation expenses for engineers, contracted development efforts, facility costs related to engineering personnel, and expenses associated with equipment used for development. The following table reflects the Company’s research and development operating expenses (in thousands other than percentages):

	Three Months Ended December 31,
	2010			2009			Increase (Decrease)		% Change
Research and development expenses	$	13,928		$	5,784		$	8,144		141	%
Percentage of net revenue		53	%		22	%

For the three months ended December 31, 2010, research and development expenses increased by $8.1 million, or 141% compared to the same period in the prior year. Research and development expenses as a percentage of net revenue increased 31% from 22% to 53% for the three months ended December 31, 2010 and 2009, respectively. The increase during the three months ended December 31, 2010 compared to the same period in the prior year included increases of $4.4 million in employee related costs as a result of increased headcount associated with the DivX acquisition, $1.9 million in stock-based compensation as a result of assumed grants in relation to the DivX acquisition, $0.8 million in promotional expenses relating to new contract, $0.6 million in outside consulting services, and $0.3 million in facility and other expenses. In addition, as noted above, DivX Acquisition Accounting Impact affected the increase in research and development expenses as a percentage of net revenue.

	Nine Months Ended December 31,
	2010			2009			Increase (Decrease)		% Change
Research and development expenses	$	26,195		$	19,024		$	7,171		38	%
Percentage of net revenue		34	%		24	%

For the nine months ended December 31, 2010 research and development expense increased by $7.2 million, or 38% compared to the same period in the prior year. Research and development expenses as a percentage of net revenue increased 10% from 24% to 34% for the nine months ended December 31, 2010 and 2009, respectively. The increase during the nine months ended December 31, 2010 compared to the same period in the prior year included increases in employee related costs of $3.4 million as a result of increased headcount associated with the DivX acquisition, $1.9 million in stock-based compensation as a result of assumed grants in relation to the DivX acquisition, $0.8 million in outside consulting services, $0.4 million in operating supplies and $0.8 million in promotional expenses relating to new contract. During the three and nine months ended December 31, 2010, the Company released certain payroll tax liabilities associated with the Company’s voluntary stock option review, reducing research and development employee-related costs by $0.8 million. In addition, as noted above, DivX Acquisition Accounting Impact affected the increase in research and development expenses as a percentage of net revenue.

The Company continues to have a higher ratio of engineers located in China with lower salaries, and a larger portion of the engineering time spent in the production and support of revenue-generating products and services, which were reclassified to cost of revenues.

General and Administrative

General and administrative expenses include salaries, benefits, share-based compensation, outside consulting services, travel expenses, legal costs including loss contingency reserves, facility costs for finance, facilities, human resources, legal, information services and executive personnel. The following table reflects the Company’s general and administrative operating expenses (in thousands other than percentages):

	Three Months Ended December 31,
	2010			2009			Increase (Decrease)		% Change
General and administrative expenses	$	7,925		$	4,673		$	3,252		70	%
Percentage of net revenue		30	%		18	%

For the three months ended December 31, 2010, general and administrative expense increased by $3.3 million, or 70% compared to the same period in the prior year. General and administrative expenses as a percentage of net revenue increased 12% from 18% to 30% for the three months ended December 31, 2010 and 2009, respectively. The increase during the three months ended December 31, 2010 compared to the same period in the prior year included increases in employee related costs of $2.6 million attributable to increased headcount related to the DivX acquisition and $0.6 million in stock-based compensation as a result of assumed grants in relation to the DivX acquisition. In addition, as noted above, DivX Acquisition Accounting Impact affected the increase in general and administrative expenses as a percentage of net revenue.

	Nine Months Ended December 31,
	2010			2009			Increase (Decrease)		% Change
General and administrative expenses	$	17,144		$	13,689		$	3,455		25	%
Percentage of net revenue		22	%		18	%

For the nine months ended December 31, 2010, general and administrative expense increased by $3.5 million, or 25% compared to the same period in the prior year. General and administrative expenses as a percentage of net revenue increased 4% from 18% to 22% for the nine months ended December 31, 2010 and 2009, respectively. The increase during the nine months ended December 31, 2010 compared to the same period in the prior year included increases in employee related costs of $2.8 million attributable to increased headcount and $0.9 million in stock-based compensation as a result of assumed grants associated with the DivX acquisition, offset by a $0.2 million decrease in facilities expenses as a result of the Company’s ongoing effort to manage its operating expenses. During the three and nine months ended December 31, 2010, the Company released certain payroll tax liabilities associated with the Company’s voluntary stock option review, reducing general and administrative employee-related costs by $1.5 million. In addition, as noted above, DivX Acquisition Accounting Impact affected the increase in general and administrative expenses as a percentage of net revenue.

Acquisition Costs

For the three and nine months ended December 31, 2010, the Company incurred approximately $2.4 million and $5.0 million, respectively, in connection with the DivX acquisitions costs and Rovi merger transaction costs and expects to incur additional expenses relating to the Rovi merger transaction.

Provision (Benefit) for Income Taxes

For the nine months ended December 31, 2010, the Company recorded a tax benefit of $26.6 million compared to a provision of $0.6 million for the same period in the prior year. The Company calculated its projected annual effective tax rate for the year ending March 31, 2011 to be 46.1% compared to (60.9%) for the fiscal year ended March 31, 2010. The projected annual effective tax rate for the year ending March 31, 2011 includes a tax rate differential on earnings in foreign jurisdictions and increases in reserves for uncertain tax positions. The annual effective tax rate for the year ended March 31, 2010 differed from the statutory United States federal rate of 35% due to losses that were not more likely than not to be realizable and the tax rate differential on earnings in foreign jurisdiction. During the three months ended December 31, 2010 the Company recorded deferred tax liabilities of $33.2 million related to the DivX acquisition. The combination of the acquired deferred tax liabilities with the Company’s U.S. net deferred tax assets led the Company to reassess its ability to utilize existing net deferred tax assets against the acquired deferred tax liabilities in future years. Accordingly, the Company released $27.0 million of its valuation allowances related to the DivX acquisition during the three months ending December 31, 2010.

Non-Operating Income for the Three and Nine Months Ended December 31, 2010 and 2009

Interest Income and Interest Expense, Net

Interest income includes interest earned on cash balances and long-term investments. Interest income was $422 thousand and $461 thousand, respectively, for the three and nine months ended December 31, 2010 compared to $12 thousand and $65 thousand, respectively, for same periods in the prior year. The increase during the three and nine months ended December 31, 2010 is due to $0.4 million interest earned from the acquired fixed payment streams as part of the DivX acquisition.

Interest expense includes interest incurred on the capital leases of equipments. Interest expense was $14 thousand and $64 thousand for the three and nine months ended December 31, 2010, respectively, compared to $105 thousand and $122 thousand for the three and nine months ended December 31, 2009, respectively. The decrease in interest expense was related to the finalization of a California sales tax audit during the three months ended December 31, 2009.

Other Income (Expense), Net

The Company recorded $88 thousand and $485 thousand, respectively, of other income for the three and nine months ended December 31, 2010 compared to $177 thousand of income and $209 thousand of expense, respectively, of other income (expense) for the same periods in the prior year. This change was due to foreign exchange fluctuations.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents (in thousands other than percentages)

	December 31,		March 31,
	2010		2010		Inc (Dec)			Inc (Dec) %
Cash and cash equivalents	$	43,374	$	54,536	$	(11,162	)		(20	)%
Working capital	$	67,253	$	39,439	$	27,814			71	%

As of December 31, 2010, the Company had $43.3 million in cash and cash equivalents, a decrease of $11.2 million from March 31, 2010. The decrease in cash and cash equivalents was due to cash paid for the DivX acquisition and related costs. As of December 31, 2010, the Company had working capital of $67.3 million compared with $39.4 million at March 31, 2010. The $27.8 million increase was related to an increase in net accounts receivable of $34.5 million related to the increase in fixed stream payments associated with the DivX acquisition, partially offset by an increase in accrued expenses and other current liabilities of $6.4 million.

The Company believes that existing cash and cash equivalents and cash generated from operations will be sufficient to meet its working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations for at least the next twelve months. The Company’s liquidity is affected by various risks and uncertainties, including, but not limited to, the risks detailed in the “Risk Factors” section of this Quarterly Report.

Statement of Cash Flows Discussion (in thousands other than percentages)

	December 31,			December 31,
	2010			2009			Inc (Dec)			Inc (Dec) %
Net cash provided by (used by) operating activities	$	6,252		$	6,857		$	(605	)		(9	)%
Net cash provided by (used by) investing activities	$	(20,783	)	$	(2,034	)	$	(18,749	)		922	%
Net cash provided by (used by) financing activities	$	3,534		$	32,363		$	(28,829	)		(89	)%

Net cash provided by operating activities was $6.3 million for the nine months ended December 31, 2010 compared to $6.9 million for the same period in the prior year. Historically, cash provided by operating activities has been affected by net income, changes in working capital accounts and add-backs of non-cash adjustments such as depreciation and amortization and stock-based compensation. In addition, as noted above, DivX Acquisition Accounting Impact affected the increase in these non-cash adjustments in the nine months ended December 31, 2010.

Net cash used in investing activities was $20.8 million for the nine months ended December 31, 2010 compared to net cash used in investing activities of $2.0 million for the same period in the prior year. The increase in net cash used in investing activities was a result of cash used for the DivX acquisition during the nine months ended December 31, 2010.

Net cash provided by financing activities was $3.5 million for the nine months ended December 31, 2010 compared to $32.4 million for the same period in the prior year. During the nine months ended December 31, 2009, the Company received net proceeds from stock offering of $31.4 million. In addition, during the nine months ended December 31, 2010, the Company had $3.9 million in cash proceeds from employee exercises of stock options.

The Company believes its cash balances and cash flows generated by operations will be sufficient to satisfy its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, the Company may require additional cash to fund acquisitions or investment opportunities. In these instances, the Company may seek to raise such additional funds through public, private equity, debt financing, or from other sources. The Company may not be able to obtain adequate or favorable financing at that time. Any equity financing the Company may obtain may dilute existing ownership interests and any debt financing could contain covenants that impose limitations on the conduct of its business.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements, as defined by applicable SEC rules, that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has global operations and thus makes investments and enters into transactions in various foreign currencies. The value of the Company’s consolidated assets and liabilities located outside the United States (translated at period end exchange rates) and income and expenses (translated using average rates prevailing during the period), are affected by the translation into the Company’s reporting currency (the U.S. Dollar). Such translation adjustments are reported as a separate component of comprehensive income. In future periods, foreign exchange rate fluctuations could have an increased impact on the Company’s reported results of operations.

The Company’s market risk has not changed significantly from the interest rate and foreign currency risks disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010. The Company does not engage in any hedging activities and does not use derivatives or equity instruments for cash investment purposes.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer (“CEO”) and its Chief Financial Officer (“CFO”), the Company conducted an evaluation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the CEO and the CFO have concluded that the design and operation of the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to its management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes to Internal Control over Financial Reporting

There were no changes to the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See “Note 8 – Commitments and Contingencies” to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.

ITEM 1A. RISK FACTORS

The following are certain risk factors that could affect the Company’s business, financial results and results of operations and its stock price. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Quarterly Report because these factors could cause the actual results and conditions to differ materially from those projected in the forward-looking statements. You should carefully consider the following risk factors as well as those in other documents the Company files with the SEC. The risks and uncertainties described below are not the only ones the Company may face. Additional risks and uncertainties not presently known to the Company or that it currently deems immaterial may also impair its business operations.

RISKS RELATED TO THE PROPOSED ACQUISITION OF THE COMPANY BY ROVI

Failure to complete, or delays in completing, the Transaction with Rovi announced on December 22, 2010 could materially and adversely affect the Company’s results of operations and stock price.

On December 22, 2010, the Company entered into an Agreement and Plan of Merger Reorganization with Rovi and Acquisition Sub (the “Merger Agreement”). Consummation of the offer and the mergers described therein (collectively, the “Transaction”) is subject to the conditions described elsewhere in this Form 10-Q including the minimum tender requirement. The Transaction is not subject to a financing condition. The Company cannot assure you that it will be able to successfully consummate the Transaction as currently contemplated under the Merger Agreement or at all. Risks related to the failure of the proposed Transaction to be consummated include the following:

If the Transaction is not completed, the Company would not realize any or all of the potential benefits of the Transaction, including any synergies that could result from combining the financial and proprietary resources of the Company and Rovi, which could have a negative effect on the Company’s stock price;

The Company will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the Transaction regardless of whether the Transaction is consummated;

Under some circumstances, the Company may have to pay a termination fee to Rovi in the amount of $21.6 million if the Offer is not completed;

The attention of the Company’s management and employees may be diverted from day-to-day operations during the period up to the completion of the merger;

The Company’s technology licensing process may be disrupted by customer and salesperson uncertainty over when or if the Transaction will be completed;

The Company’s customers and other third parties may seek to modify or terminate existing agreements, or prospective customers may delay entering into new agreements or licensing the Company’s technologies as a result of the announcement of the merger;

Under the Merger Agreement, the Company is subject to certain restrictions on the conduct of its business prior to completing the Transaction, which restrictions could adversely affect its ability to conduct business as it otherwise would have done if it were not subject to these restrictions; and

The Company’s ability to retain current key employees or attract new employees may be harmed by uncertainties associated with the proposed Transaction.

The occurrence of any of these events individually or in combination could materially and adversely affect the Company’s results of operations and stock price.

Lawsuits have been filed against the Company, the members of its board of directors, Rovi and Acquisition Sub challenging the proposed Transaction, and an adverse judgment in any such lawsuit may prevent the Offer from being consummated or the Transaction from being completed within the expected timeframe, and may result in costs to the Company.

As described in Note 15 of the Notes to the unaudited Condensed Consolidated Financial Statements contained in Item 1 of Part II of this Form 10-Q, the Company, the members of its board of directors, Rovi and Acquisition Sub are named as defendants in purported shareholder class action lawsuits brought by certain Company shareholders as plaintiffs, seeking, among other things, to enjoin the Transaction on the grounds that the Company’s directors allegedly breached their fiduciary duties of care and loyalty by, inter alia, failing to maximize shareholder value, by approving the merger transaction via an unfair process and by causing omissions in the Schedule 14D-9 Recommendation Statement filed by the Company on January 14, 2011. One of the conditions to the consummation of the Offer is that no temporary restraining order, preliminary or permanent injunction or other order preventing the consummation shall have been issued by any court of competent jurisdiction and be in effect. Consequently, if any of the plaintiffs is successful in obtaining an injunction prohibiting the parties from consummating the Offer on the agreed-upon terms, the injunction may prevent completion of the Transaction in the expected timeframe, or at all.

The Company has obligations under certain circumstances to hold harmless and indemnify each of the defendant directors against judgments, fines, settlements and expenses related to claims against such directors and otherwise to the fullest extent permitted under California law and the Company’s bylaws and articles of incorporation and their indemnification agreements. Such obligations may apply to the lawsuits. Company management believes that the allegations in the lawsuits are without merit and intends to vigorously contest any lawsuits that may be pursued by plaintiffs who opt out of the proposed settlement. However, there can be no assurance that the Company and the other defendants in these lawsuits will be successful in their defenses. An unfavorable outcome in any of the lawsuits could prevent or delay the consummation of the Offer, completion of the Transaction and/or result in substantial costs to the Company or Rovi or both.

If the Transaction is completed, the combined company may not perform as the Company or the market expects, which could have an adverse effect on the price of Rovi Stock, which Company shareholders will own following such completion.

The integration of the Company into Rovi’s existing operations will be a complex, time-consuming and expensive process and may disrupt Rovi’s existing operations if it is not completed in a timely and efficient manner. If Rovi’s management is unable to minimize the potential disruption to its business during the integration process, Rovi may not realize the anticipated benefits of the Transaction. Realizing the benefits of the Transaction will depend in part on the integration of technology, operations, and personnel while maintaining adequate focus on Rovi’s core businesses. Rovi may encounter substantial difficulties, costs and delays in integrating the Company including the following, any of which could seriously harm its results of operations, business, financial condition and/or the price of its stock:

conflicts between business cultures;

difficulties and delays in the integration of operations, personnel, technologies, products, services, business relationships and information and other systems of the acquired businesses;

the diversion of management’s attention from normal daily operations of the business;

complexities associated with managing the larger, more complex, combined business;

large one-time write-offs;

the incurrence of contingent liabilities;

contractual and/or intellectual property disputes;

lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company;

problems, defects or other issues relating to acquired products or technologies that become known to Rovi only after the consummation of the offer or the mergers;

conflicts in distribution, marketing or other important relationships;

difficulties caused by entering geographic and business markets in which Rovi has no or only limited experience;

acquired products and services that may not attract customers;

loss of key employees and disruptions among employees that may erode employee morale;

inability to implement uniform standards, controls, policies and procedures; and

failure to achieve anticipated levels of revenue, profitability or productivity.

Rovi’s operating expenses may increase significantly over the near term due to the increased headcount, expanded operations and changes related to the Transaction. To the extent that the expenses increase but revenues do not, there are unanticipated expenses related to the integration process, or there are significant costs associated with presently unknown liabilities, Rovi’s business, operating results and financial condition may be adversely affected. Failure to minimize the numerous risks associated with the post-acquisition integration strategy also may adversely affect the trading price of Rovi’s common stock.

The announcement and pendency of the Rovi Transaction could cause disruptions in the businesses of Rovi or the Company, which could have an adverse effect on their respective business and financial results, and consequently on the combined company.

Rovi and the Company have operated and, until the consummation of the first merger (as described in the Merger Agreement), will continue to operate, independently. Uncertainty about the effect of the Offer and the Transaction on customers, suppliers and employees may have an adverse effect on Rovi or the Company and consequently on the combined company. In response to the announcement of the offer and mergers, existing or prospective customers or suppliers of Rovi or the Company may:

delay, defer or cease purchasing products or services from or providing products or services to Rovi, the Company or the combined company;

delay or defer other decisions concerning Rovi, the Company or the combined company; or

otherwise seek to change the terms on which they do business with Rovi, the Company or the combined company.

Any such delays or changes to terms could seriously harm the business of each company or, if the Transaction is completed, the combined company.

In addition, as a result of the offer and the mergers, current and prospective employees could experience uncertainty about their future with Rovi, the Company or the combined company. These uncertainties may impair the ability of each company to retain, recruit or motivate key personnel.

The Company and Rovi will incur significant costs in connection with the Transaction, whether or not it is consummated, and the integration of the Company into Rovi may result in significant expenses and accounting charges that adversely affect Rovi’s operating results and financial condition.

The Company and Rovi will incur substantial expenses related to the Transaction, whether or not the Offer and the Transaction are completed. The Company estimates that it will incur direct transaction costs of approximately $7.5 million in connection with the Transaction, approximately $2.1 million of which is not contingent upon consummation of the Offer and the Transaction. Rovi has disclosed that it estimates that it will incur direct transaction costs of approximately $3.6 million in connection with the Transaction, none of which is contingent on consummation of the Offer or the Transaction. Moreover, in the event that the Merger Agreement is terminated, the Company may, under some circumstances, be required to pay Rovi a $21.6 million termination fee. Payment of these expenses by the Company as a standalone entity would adversely affect the Company’s operating results and financial condition and would likely adversely affect its stock price.

In accordance with generally accepted accounting principles, Rovi will account for the acquisition of the Company using the acquisition method of accounting. Rovi’s financial results may be adversely affected by the resulting accounting charges incurred in connection with the offer and the mergers. Rovi also expects to incur additional costs associated with combining the operations of Rovi and the Company, which may be substantial. There are a large number of systems that must be integrated, including management information, purchasing, accounting and finance, sales, billing, payroll and benefits, fixed assets and lease administration systems, and regulatory compliance. Moreover, many of the expenses that will be incurred, by their nature, are impracticable to estimate at the present time. These expenses could, particularly in the near term, exceed the savings that Rovi expects to achieve from the elimination of duplicative expenses, the realization of economies of scale, and cost savings and revenue synergies related to the integration of the two companies following the consummation of the Transaction. The amount and timing of any these charges are uncertain at the present time. In addition, Rovi may incur additional material charges in subsequent fiscal quarters following the merger to reflect additional currently unknown costs in connection with the offer and the mergers.

The price of Rovi’s common stock could decline to the extent Rovi’s financial results are materially affected by the foregoing charges and costs, or if the foregoing charges and costs are larger than anticipated. The consummation of the Transaction may result in dilution of future earnings per share to Rovi’s stockholders. It may also result in fewer net profits or a weaker financial condition compared to that which would have been achieved by Rovi on a stand-alone basis.

Consummation of the Offer may adversely affect the liquidity of the shares of Sonic common stock not tendered in the Offer.

If the Offer is completed but not all shares of Sonic common stock are tendered in the Offer, the number of Sonic shareholders and the number of shares of Sonic common stock publicly held will be greatly reduced. As a result, the closing of the Offer could adversely affect the liquidity and market value of the remaining shares of Sonic common stock held by the public.

RISKS AFFECTING THE COMPANY AS A STANDALONE ENTITY

Adverse global economic conditions may continue to negatively affect the Company’s business, results of operations, and financial condition.

Adverse global economic conditions have had, and may continue to have, a negative impact on consumers and limit their ability and inclination to spend on leisure and entertainment related technologies, products and services. If demand for the Company’s technologies, products and services decreases, as a result of economic conditions or otherwise, the Company’s financial condition would be adversely impacted.

The recent financial downturn and continuing financial market volatility may continue to negatively affect the Company’s business, results of operations, and financial condition.

The recent global economic downturn and continuing financial market volatility have resulted in tight credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit and equity markets. These factors could lead to a number of follow-on effects on the Company’s business, including insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of the Company’s products and services; increased expense or inability to obtain financing for the Company’s operations or other business plans.

There can be no assurance that the Company will generate net income in future periods.

The Company experienced net losses for fiscal years 2010, 2009 and 2008. The Company acquired DivX on October 7, 2010. As previously disclosed, the combined company would have experienced net losses for the fiscal year ended March 31, 2010 and the three months ended June 30, 2010. There can be no assurance that the Company will be cash flow positive or generate net income for the full 2011 fiscal year or future years.

Integrating DivX into the Company’s existing operations is ongoing and may not be successful.

The integration of DivX into the Company’s existing operations is a complex, time-consuming and expensive process and may disrupt existing operations if it is not completed in a timely and efficient manner. If the Company management is unable to minimize the potential disruption to its business during the integration process, the Company and Rovi may not realize the anticipated benefits of the DivX acquisition. Realizing the benefits of the DivX acquisition will depend in part on the integration of technology, operations, and personnel while maintaining adequate focus on core businesses. The Company may encounter substantial difficulties, costs and delays in integrating DivX, including the following, any of which could seriously harm its results of operations, business, financial condition and/or the price of the Company’s common stock:

difficulties and delays in the integration of DivX’s operations, personnel, technologies, products, services, business relationships and information and other systems;

the diversion of management’s attention from normal daily operations of the business;

complexities associated with managing the larger, more complex, combined business; conflicts between business cultures;

large one-time write-offs; the incurrence of contingent, unknown or unanticipated liabilities;

contractual and/or intellectual property disputes; lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company; problems, defects or other issues relating to acquired technologies, products or services that become known only after the closing of the DivX acquisition;

conflicts in distribution, marketing or other important relationships;

difficulties caused by entering geographic and business markets in which the Company has no or only limited experience;

acquired technologies, products or services that may not attract customers;

loss of key employees and disruptions among employees that may erode employee morale;

inability to implement uniform standards, controls, policies and procedures;

failure to achieve anticipated levels of revenue, profitability or productivity; and

poor acceptance of the Company’s revised business model and strategies.

The Company’s operating expenses have increased significantly due to the increased headcount, expanded operations and changes related to the DivX acquisition. These expenses could, particularly in the near term, exceed the anticipated savings from the elimination of duplicative expenses, the realization of economies of scale, and cost savings and revenue synergies related to the integration of the two companies following the completion of the DivX acquisition. In addition, the Company may incur additional material charges in subsequent fiscal quarters following the DivX acquisition to reflect additional merger-related costs.

The merger agreement governing the acquisition of DivX also did not contain any post-closing indemnification provisions. Therefore, any claims for known or unknown DivX liabilities, whether related to intellectual property ownership, infringement or otherwise, are the Company’s responsibility. Any such claim, with or without merit, could be time consuming to defend, result in costly litigation and divert management’s attention.

To the extent that expenses increase but revenues do not, there are unanticipated expenses related to the process of integrating the DivX business, or there are significant costs associated with presently unknown liabilities, the Company’s business, operating results and financial condition may be adversely affected. Under the acquisition method of accounting, the amount of net revenue that the Company may recognize based on the DivX acquisition will be reduced during the Company’s next two fiscal years, which will impact the Company’s net income and could adversely affect the trading price of the Company’s stock. In addition, failure to minimize the numerous risks associated with the post-acquisition integration strategy also may adversely affect the trading price of the Company’s common stock.

The Company’s business and prospects depend on the strength of its brands, and if it does not maintain and strengthen its brands, it may be unable to maintain or expand its business.

Maintaining and strengthening the Company’s brands, particularly the “DivX,” “Roxio” and “RoxioNow” brands, is critical to maintaining and expanding the Company’s business, as well as to its ability to enter into new markets for its technologies, products and services. Maintaining and strengthening its brands will depend on the Company’s ability to continue to develop and provide innovative and high-quality technologies, products and services. Moreover, because the Company engages in relatively little direct brand advertising, the promotion of its brands depends, among other things, upon business partners displaying its trademarks on their products. If these partners choose for any reason not to display the Company trademarks on their products, or if these partners use the Company trademarks incorrectly or in an unauthorized manner, the strength of the Company’s brands may be diluted or its ability to maintain or increase its brand awareness may be harmed. Further, unauthorized third parties may use the Company brands in ways that may dilute or undermine their strength.

Rapid changes in technology and consumer preferences may adversely affect the Company’s operating results.

The markets for the Company’s technologies, products and services are characterized by rapid technological change. the Company may not accurately predict customer or business partner behavior and may not recognize or respond to emerging trends, changing preferences or competitive factors. The Company’s operating results may fluctuate significantly as a result of a variety of factors, many of which are outside its control. These factors include:

fluctuations in demand for, and sales of, the Company’s technologies, products and services;

introduction of new technologies, products and services by the Company or its competitors;

costs associated with entering into new markets;

competitive pressures that result in pricing fluctuations;

variations in the timing of orders for and shipments of the Company technologies and products;

changes in the mix of technologies, products and services that the Company sells and the resulting impact on its gross and operating margins;

changes in the terms of the Company’s licensing, distribution and other agreements;

costs associated with litigation and intellectual property claims; and

general adverse economic and financial market conditions as noted elsewhere in these risks.

The Company’s operating expenses are based on its current expectations of its future revenues and are relatively fixed in the short term. Customer purchasing behavior and business partner requirements can be difficult to forecast, and if the Company has lower revenues than expected, it may not be able to quickly reduce its expenses in response. As a consequence, the Company’s operating results for a particular quarter could be adversely impacted.

The Company must develop and introduce new and enhanced technologies, products and services in a timely manner to remain competitive.

To compete successfully in the markets in which the Company operates, it must develop and sell new or enhanced technologies, products and services that provide increasingly higher levels of performance and reliability. The Company may need to expend considerable resources to continue to design and deliver enduring and innovative technologies, products and services. As new industry standards, technologies and formats are introduced, there may be limited sources for the intellectual property rights and background technologies necessary for implementation, and the prices that the Company may negotiate in an effort to bring its technologies, products and services to market may put the Company at a competitive disadvantage. Further, if new formats and technologies prove to be unfeasible, untimely, unsuccessful or not accepted by the marketplace for any reason, demand for the Company’s technologies, products or services could be limited. Delays and cost overruns could also affect the Company’s ability to respond to technological changes, competitive developments or customer requirements. If the Company is unable to recover the costs associated with its research and development activities or to deliver innovative technologies, products and services, the Company’s business, financial condition and results of operations will be adversely affected.

Revenues derived from the Company’s DVD technologies and products have declined in recent years and will likely continue to decline.

The Company continues to experience declines in consumer products revenue relating to the DVD format. To the extent that sales of DVD technologies, products and services continue to decline, the Company’s revenues will be adversely affected.

The Company relies on distributors, resellers and retailers to sell its consumer products, and disruptions to these channels would affect adversely the Company’s ability to generate revenues from the sale of its products.

The Company sells its retail consumer software to end-users via retail channels through its network of distributors and resellers, and relies on two distributors for a significant portion of sales. Any decrease in revenue from these distributors or the loss of one of these distributors and the Company’s inability to find a satisfactory replacement in a timely manner could negatively impact its operating results. Moreover, the Company’s failure to maintain favorable arrangements with its distributors and resellers may adversely impact its business. If the Company’s competitors offer its distributors, resellers or retailers more favorable terms, those distributors, resellers or retailers may de-emphasize, fail to recommend or decline to carry the Company products. If the Company’s distributors, resellers or retailers attempt to reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, the Company’s sales could be impacted negatively. Further, if the Company reduces the prices of its products, the Company may have to compensate its distributors, resellers or retailers for the difference between the higher price they paid to buy their inventory and the new lower prices of the Company’s products. In addition, the Company is exposed to the risk of product returns from distributors, resellers or retailers through their exercise of contractual return rights.

Because many of the Company’s technologies, products and services are designed to comply with industry standards, to the extent the Company cannot distinguish its technologies, products and services from those sold by its competitors, its current distributors and customers may choose alternate technologies, products and services or choose to purchase them from multiple vendors.

The Company cannot provide any assurance that the industry standards for which the Company develops new technologies, products and services will allow it to compete effectively with companies possessing greater financial and technological resources than the Company has to market, promote and exploit sales opportunities as they arise in the future. Technologies, products and services that are designed to comply with standards may also be viewed as interchangeable commodities by certain customers. The Company may be unable to compete effectively if it cannot produce technologies and products more quickly or at lower cost than its competitors. Further, any new technologies, products and services developed may not be introduced in a timely manner or in advance of the Company’s competitors’ comparable offerings and may not achieve the broad market acceptance necessary to generate significant revenues.

The Company’s business depends on sales of consumer technologies, products and services, which subject it to risks relating to, among other things, changing consumer demands and increased competition.

The Company’s business depends on sales of consumer technologies, products and services, subjecting it to risks associated with changing consumer demands and extensive competition. The Company’s ability to succeed in consumer markets depends upon its ability to enhance its existing offerings, introduce new competitive technologies, products and services, and minimize the impact of sudden price decreases. Additionally, some of the Company’s competitors have well established distribution capabilities and existing brands with market acceptance that provide them with a significant competitive advantage. If the Company is not successful in overcoming these challenges, its business and results of operations may be adversely impacted.

Because a substantial portion of the Company’s revenue is from OEM customers, sales of its technologies, products and services are tied to OEM product sales.

A substantial portion of the Company’s revenue is derived from sales through OEM customers who either license its technologies, products and services and incorporate them into or bundle them with their products. Temporary fluctuations in the pricing and availability of the OEM customers’ products could negatively impact sales of the Company technologies, products and services, which could in turn harm its business, financial condition and results of operations. Moreover, sales of these technologies, products and services depend in large part on consumer acceptance and purchase of PCs and CE devices such as DVD players, BD players, DVD recorders, television sets, mobile handsets and other digital media devices marketed by the Company’s OEM customers. Consumer acceptance of these OEM products depends significantly on the price and ease of use of these devices, among other factors. If the demand for these OEM products is impaired, the Company’s OEM sales will suffer a corresponding decline.

The Company often sells its products to OEMs pursuant to individual supplements or other attachments to standard terms and conditions the Company has negotiated with each of these customers. These terms and conditions include provisions relating to the delivery of the Company technologies, products and services, the OEM’s distribution of these products, representations by the Company with respect to the quality and its ownership of the technologies, products and services, its obligations to comply with law, confidentiality obligations, and indemnifications by the Company. The payment terms in the Company’s OEM agreements can vary substantially. In some cases, the OEM pays a per-unit royalty for every shipped OEM product that incorporates the Company’s technologies, products or services; in other cases, the agreement provides for specific royalties based on the Company’s estimations of the volumes of certain units the OEM is likely to ship during a given term and, if the estimates are too low, the actual per-unit revenues received may be lower than expected; and in some cases, the OEM pays a single flat fee for the applicable technologies, products or services during period of time. Many of the Company’s OEM arrangements do not require the payment of minimum amounts or contain any minimum purchase obligations or similar commitments.

The Company’s OEM agreements are typically non-exclusive, with terms of two years or less in duration. The underlying agreements often renew, but are subject to periodic termination by either party or termination for breach and, in certain cases, the ability to terminate without cause with no or short notice. Although the Company has maintained relationships with many of its OEMs for many years, if an OEM agreement with a major customer were terminated and the Company were unable to replace such relationship, its business and results of operations would suffer.

Changes in requirements or business models of the Company’s OEM customers may affect negatively its financial results.

OEM customers can be demanding with respect to the features they demand, as well as with respect to quality and testing requirements and economic terms. Because there are a relatively small number of significant OEM customers, if they demand reduced prices, the Company may not be in a position to refuse such demands, which would adversely impact revenues and results of operations. If particular OEMs demand technologies, products or services that the Company is unable to deliver, or if they impose higher quality requirements than the Company is able to satisfy, it could lose those relationships, which would adversely impact its revenues and results of operations. Also, if the Company’s competitors offer its OEM customers more favorable terms than the Company does or if its competitors are able to take advantage of their existing relationships with OEMs, then these OEMs may not include the Company’s offerings with their products. The Company’s business will suffer if it is unable to maintain or expand its relationships with OEMs.

The prices for the Company’s technologies, products and services may continue to decline in response to competitive market pressures, which could harm its operating results.

The markets for the consumer hardware and software products sold by the Company’s OEM customers are intensely competitive and price sensitive. It is likely that licensing fees for the Company’s technologies, products and services, particularly in the DVD area, will continue to decline due to competitive pricing pressures. In addition, the Company’s retail sales business is also subject to significant competitive pricing pressures, and the Company may also experience pricing pressures in other parts of its business. These trends could make it more difficult for the Company to increase or maintain its revenue and could adversely affect its operating results. To maintain or increase per unit royalties, the Company must continue to introduce new, more highly functional versions of its technologies, products and services for which it can charge higher amounts. Any inability to introduce such technologies, products and services in the future or other declines in the amounts the Company can charge would also adversely affect its revenues.

The Company relies on its licensees and OEM customers to provide accurate royalty and sales reports for its determination of licensing and OEM product revenues, and if these reports are inaccurate, the Company’s revenues may be understated or overstated and its forecasts and budgets may be incorrect.

The Company typically receives royalty reports from its OEM customers, and relies on these customers to accurately report the number of units shipped and other bases for payment of amounts due to the Company. The Company calculates its revenues, prepares financial reports, projections and budgets, and directs its sales and technology development efforts based in part on these reports. However, it is often difficult to independently determine whether customers are reporting accurately. Most of the Company’s OEM agreements provide rights to audit the OEM’s records, but audits can be expensive and time-consuming and in some instance may harm the Company’s relationships with the OEM. To the extent that customers provide inaccurate reports, the Company may not collect and recognize revenue to which it is entitled.

The Company depends on a limited number of customers for a significant portion of its revenue, and the loss of one or more of these customers could materially harm its operating results, business and financial condition.

During the fiscal year ended March 31, 2010, approximately 13% and 11% of the Company’s net revenue were received from various OEM divisions of Dell and Hewlett-Packard, respectively, and approximately 7% and 22% of the Company’s net revenue for fiscal year 2010 were received from its two largest distributors, Ingram and Navarre, respectively. In addition, during fiscal year 2010, approximately 23% of the Company’s net revenue consisted of online web store revenue received through Digital River. During the nine months ended December 31, 2010, approximately 9% and 7% of the Company’s net revenue were received from various OEM divisions of Dell and Hewlett-Packard, respectively, and approximately 6% and 20% of the Company’s net revenue for period were received from its two largest distributors, Ingram and Navarre, respectively. In addition, during the nine months ended December 31, 2010, approximately 19% of the Company’s net revenue consisted of online web store revenue received through Digital River.

The Company anticipates that the relationships with Dell, Google, Hewlett-Packard, Navarre, Digital River, Samsung and, to a lesser extent, Ingram, will continue to account for a significant portion of its revenue in the future. Any adverse changes in the Company’s relationships with any of these companies could seriously harm its operating results, business, and financial condition if the Company was unable to replace that relationship.

The Company’s web-based revenue is vulnerable to third party operational problems and other risks.

The Company makes its products and services available through web-based retail sites operated by third party resellers. Under these arrangements, the Company’s reseller partners typically utilize co-branded sites, provide the infrastructure to handle purchase transactions through their secure web sites, and deliver the product (whether via web download or physical fulfillment). The Company’s web store operations are subject to numerous risks, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures and the need to invest in additional computer systems, diversion of sales from other channels, rapid technological change, liability for online content, credit card fraud, and issues relating to the use and protection of customer information. The Company relies on the third party resellers who operate these web stores for their smooth operation. Any interruption of these web stores could have a negative effect on the Company’s business. If the Company’s web store resellers were to withdraw from this business or change their terms of service in ways that were unfavorable to the Company, there might not be a ready alternative outsourcing organization available to the Company, and it might be unprepared to assume operation of the web stores. If any of these events occurs, the Company’s results of operations would be harmed.

Changes in the Company’s technology, product and service offerings could cause it to defer the recognition of revenue, which could harm its operating results and adversely impact its ability to forecast revenue.

The Company’s technologies, products and services contain advanced features and functionality that may require it to provide increased levels of end user support, and its services require the Company to continue to provide various benefits during the applicable service terms. To the extent that the Company offers a greater degree of customer support and ongoing services, it may be required to defer a greater percentage of revenues into future periods, which could harm short term operating results.

There is no assurance that the Company can provide effective digital rights management technology to its customers.

The DivX Codec is designed to provide effective digital rights management technology that controls access to digital content that addresses, among other things, content providers’ concerns over piracy. The Company cannot be certain that it can continue to develop, license or acquire such technology, or that content licensors, consumer hardware device manufacturers or consumers will accept such technology. If digital rights management technology is not effective, is perceived as not effective or is compromised by third parties, or if laws are enacted that require digital rights management technology to allow consumers to convert content stored in a protected format into an unprotected format, content providers may not be willing to encode their content using the Company products and consumer hardware device manufacturers may not be willing to include the Company technologies in their products.

Qualifying, certifying and supporting the Company’s technologies, products and services is time consuming and expensive.

The Company devotes significant time and resources to qualify and support its software products on various PC and CE platforms, including Microsoft and Apple operating systems. In addition, the Company maintains high-quality standards for products that incorporate its DivX technologies and products through a quality-control certification process. To the extent that any previously qualified, certified and/or supported platform or product is modified or upgraded, or the Company needs to qualify, certify or support a new platform or product, it could be required to expend additional engineering time and resources, which could add significantly to its development expenses and adversely affect its operating results.

The Company’s failure to manage its global operations effectively may adversely affect its business and operating results.

As of December 31, 2010, the Company had 12 major locations (defined as a location with more than 15 employees) and employed 438 employees outside the United States. The Company faces challenges inherent in efficiently managing employees over large geographic distances, including the need to implement appropriate systems, controls, policies, benefits and compliance programs. The Company’s inability to successfully manage its global organization could have a material adverse effect on its business and results of operations.

Revenue derived from international customers accounted for approximately 28%, 22%, 28% and 18% of the Company’s net revenues in the nine months ended December 31, 2010 and the fiscal years 2010, 2009 and 2008, respectively. In addition, for the years 2009, 2008 and 2007, DivX’s net revenue outside North America comprised 81%, 74% and 77%, respectively, of its total net revenues. As the Company integrates DivX into its existing business, it expects that international sales will account for an increasing portion of its net revenues. As a result, the occurrence of adverse international political, economic or geographic events could result in significant revenue shortfalls, which could harm the Company’s business, financial condition and results of operations. Areas of risk associated with the Company’s international operations include:

import and export restrictions and duties, including tariffs, quotas, and other barriers; difficulties in obtaining export licenses for certain technology;

foreign regulatory requirements, such as safety or radio frequency emissions regulations; uncertainties and liabilities associated with foreign tax laws;

burdens of complying with foreign laws, including consumer and data protection laws;

changes in, or impositions of, foreign legislative or regulatory requirements;

difficulties in coordinating the activities of geographically dispersed and culturally diverse operations;

difficulties in staffing, managing, and operating its international operations, including compliance with laws governing labor and employment;

potential loss of proprietary information due to misappropriation or laws that are less protective of the Company’s intellectual property rights than U.S. law;

liquidity problems in various foreign markets;

fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities;

changes in diplomatic and trade relationships;

political and economic instability in the countries in which the Company operates or sells products; and

other factors beyond its control including terrorism, war, natural disasters and diseases, particularly in areas in which it has facilities.

Certain political, economic and social considerations relating to China could adversely affect the Company.

In addition to other risks associated with the Company’s global business, it faces risks due to the substantial operations it conducts in China, which could be adversely affected by political, economic and social uncertainties in China. As of December 31, 2010, the Company had 249 employees in China, primarily carrying out research and development activities. Operations in China are subject to greater political, legal and economic risks than its operations in other countries. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. The Company’s ability to operate in China may be adversely affected by changes in Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, employee benefits and other matters. In addition, the Company may not obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. Any of the foregoing could limit the remedies available in the event of any claims or disputes with third parties.

In addition, the Company has direct license relationships with many consumer hardware device manufacturers located in China and a number of the OEMs that license the Company technologies utilize captive or third-party manufacturing facilities located in China. The Company expects consumer hardware device manufacturing in China to continue to increase due to its lower manufacturing cost structure as compared to other industrialized countries. As a result, the Company faces additional risks in China, in large part due to China’s historically limited recognition and enforcement of contractual and intellectual property rights. Unauthorized use of the Company’s technologies and intellectual property rights by China-based consumer hardware device manufacturers may dilute or undermine the strength of the Company’s brands. If the Company cannot adequately monitor the use of its technologies by China-based consumer hardware device manufacturers, or enforce its intellectual property rights in China, its revenue could be adversely affected.

The Company faces increasing competition for online sales from smaller software providers.

The Internet enables smaller software providers to distribute products with relatively low upfront costs and resources. In the past, a substantial barrier to entry into the packaged software market for small-scale providers was the need to manufacture, package and distribute software through a retail or commercial distribution chain. To the extent consumers increasingly purchase software over the Internet, the Company expects to face increased competition from small software development companies and programmers worldwide. New entrants that have business models focused on Internet distribution may have more favorable cost structures than the companies that employ a multi-channel distribution network, which could give those competitors cost savings, pricing and profitability advantages.

The Company’s reliance on a limited number of suppliers for its manufacturing makes it vulnerable to supplier operational problems.

The Company outsources the manufacturing of its consumer software products to two primary suppliers, who provide services such as parts procurement, parts warehousing, product assembly and supply chain services. Any disruption in the operations of these suppliers, or any product shortages or quality assurance problems could increase the costs of manufacturing and distributing the Company’s products and could adversely impact its operating results. Moreover, although the Company believes there is significant competition in the manufacture of consumer software products, if these suppliers cease to perform or fail to perform as the Company expects, The Company could face potentially significant delays in engaging substitute suppliers and negotiating terms and conditions acceptable to the Company.

The Company has had limited experience with online premium content services, and cannot assure you when or if its RoxioNow Service or the DivX TV or other online initiatives will have a positive impact on the Company’s profitability.

During fiscal year 2009, the Company acquired substantially all of the assets of CinemaNow, Inc., an online movie download and streaming business, which the Company now operates as part of its RoxioNow Service. The DivX acquisition was effective in October 2010 and the DivX TV and related online video communities and distribution services and platforms became part of the Company’s offerings. There is no assurance that consumers will widely adopt the Company’s RoxioNow Service or DivX online offerings or that they will become profitable. Online video distribution is a relatively new enterprise, and successful business models for delivering digital media over the Internet are not fully tested. The Company has invested, and will continue to invest, significant time and money in building and organizing the premium content business, and its success could be jeopardized by difficulties in implementing and maintaining premium content information technology systems and infrastructure and/or by increased operating expenses and capital expenditures required to in connection with online premium content offerings. Because the Company has limited experience with online premium content offerings, it cannot assure you that it will be successful or profitable.

The Company depends on studios to license content for its RoxioNow Service and to make content available in the DivX media format.

The Company’s ability to provide its RoxioNow Service depends on studios licensing content for online delivery. The studios have great discretion whether to license their content, and the license periods and the terms and conditions of such licenses vary by studio. If studios change their terms and conditions, are no longer willing or able to provide the Company licenses, or if the Company is otherwise unable to obtain premium content on terms that are acceptable, the ability to provide the RoxioNow Service will be adversely affected, which could harm its business and operating results. In addition, a limited number of studios have agreed to make certain video content available in the DivX media format and there is no assurance that the Company can enter into agreements with additional studios. If the Company, and/or its consumer electronics partners or retail partners, fail to implement certain technological safeguards mandated under those agreements, the agreements may be suspended or terminated, either of which could negatively impact the Company’s business.

The Company relies on a number of third parties to deliver its RoxioNow Service and DivX online offerings.

The Company’s RoxioNow Service and online DivX offerings are embedded in various PC and CE platforms and devices, which are then distributed through multiple retail channels. If the Company is not successful in establishing and maintaining appropriate OEM and distribution relationships, or if it encounters technological, content licensing or other impediments, the Company’s ability to grow its RoxioNow Service and DivX online businesses could be adversely impacted, which could harm its business and operating results.

If the Company’s systems or networks fail, become unavailable, are breached or perform poorly so that current or potential users do not have adequate and secure access to its online products and websites, the Company’s revenues will be adversely affected and its reputation harmed.

The Company’s ability to provide its online offerings depends on the continued secure operation of its information systems and networks. The Company has invested and expects to continue to invest substantial amounts to purchase or lease data centers and equipment and to upgrade its technology and network infrastructure to handle increased traffic on its websites and to introduce new technologies, products and services. If the Company does not implement these expansions successfully, or if it experiences delays, inefficiencies and operational failures during implementation, the quality of its technologies, products and services and its users’ experience could decline. This could damage the Company’s reputation and result in lost current and potential users, advertisers and content providers.

In addition, significant or repeated reductions in the performance, reliability or availability of the Company’s information systems and network infrastructure could harm its ability to provide content distribution offerings and advertising platforms. System and network failures could result from the Company’s failure to adequately maintain and enhance these systems and networks, natural disasters and similar events, power failures, intentional actions to disrupt its systems and networks, including terrorist attacks, computer viruses and computer denial of service attacks, and many other causes. Any compromise of the Company’s ability to transmit and store such information and data securely, and any costs associated with preventing or eliminating such problems, could impair its ability to distribute technologies and products or collect revenue, threaten the proprietary or confidential nature of its technology, harm its reputation and expose the Company to litigation or liability.

The vulnerability of the Company’s computer and communications infrastructure is increased because it is largely located at facilities in California, an area that is at heightened risk of earthquake, wildfires and flood. Moreover, certain facilities are located near the landing path of a military base and are subject to risks related to falling debris and aircraft crashes. The Company does not currently have fully redundant systems or a formal disaster recovery plan, and may not have adequate business interruption insurance to compensate it for losses that may occur from a system outage.

The Company is vulnerable to earthquakes, labor issues and other unexpected events.

The Company’s corporate headquarters and DivX operations, as well as the majority of its research and development activities, are located in California and China, both of which are areas known for seismic activity. An earthquake or other natural or manmade disaster could result in an interruption in the Company business. The Company’s business also may be impacted by labor issues related to its operations and/or those of its suppliers, distributors or customers. Such an interruption could harm its operating results. The Company is not likely to have sufficient insurance to compensate adequately for lost revenues and losses that it may sustain as a result of any natural disasters or other unexpected events.

If the Company’s customers select titles or formats that are more expensive for the Company to acquire and deliver more frequently, the Company’s expenses may increase.

Certain titles cost the Company more to acquire or result in greater revenue-sharing expenses. If customers select these titles more often on a proportional basis compared to all titles selected, the Company’s costs and margins could be adversely affected. In addition, films released in high-definition formats may be more expensive for the Company to acquire and deliver, and if customers select these formats more frequently on a proportional basis, the Company’s costs and margins could be adversely affected.

The Company could be liable for substantial damages if there is unauthorized duplication of the content it sells or other improper conduct by users.

The Company believes that it is able to license premium content through its RoxioNow Service in part because the service has been designed to reduce the risk of unauthorized duplication and playback of this content. In addition, the terms of use and end-user license agreements for the Company’s technologies, products and services prohibit a broad range of unlawful or undesirable conduct. If these security measures fail, studios and other content providers may terminate their agreements with the Company and, in addition, the Company could be liable for substantial damages. Security breaches might also discourage other content providers from entering into agreements with the Company.

Current and future government standards or standards-setting organizations may affect the Company’s ability to compete.

Various national governments have adopted or are in the process of adopting standards for digital television broadcasts, including cable and satellite broadcasts. In the event national governments adopt similar standards for video codecs used in consumer hardware devices, software products or Internet applications, the Company’s technology may not satisfy such standards. In addition, standards-setting organizations are adopting or establishing formal technology standards for use in a wide range of consumer hardware devices, software products and Internet applications. Failure to satisfy any such future standards could require the Company to redesign its technologies to be in compliance in order to sell such technologies and products in those countries and markets, which could be costly and result in delays in introducing new technologies and products into those markets.

The Company may be subject to market risk and legal liability in connection with the data collection capabilities of its various online services.

Many components of the Company’s online services include interactive components that by their very nature require communication between a client and server to operate. To provide better consumer experiences and to operate effectively, the Company collects certain information from users. Collection and use of such information may be subject to United States state and federal privacy and data collection laws and regulations, as well as foreign laws such as the EU Data Protection Directive. The Company posts its privacy policies concerning the collection, use and disclosure of user data, including that involved in interactions between client and server products. Any failure by the Company to comply with its posted privacy policies, any failure to conform the privacy policy to changing aspects of its business or applicable law, or any existing or new legislation regarding privacy issues could impact the market for the Company’s online services, technologies and products and subject it to fines, litigation or other liability.

The Company’s executive officers and other key personnel are critical to its business, and because there is significant competition for personnel in the Company’s industry, it may not be able to attract and retain qualified personnel.

The Company’s success depends on the continued contributions of its executive management team and its technical, marketing, sales, customer support and product development personnel. The loss of key individuals or significant numbers of such personnel could significantly harm the Company’s business, financial condition and results of operations. The Company does not have any life insurance or other insurance covering the loss of any of its key employees.

Errors in the Company technologies, products and services may result in loss of or delay in market acceptance, which could adversely impact the Company’s reputation and business.

The Company’s technologies, products and services may contain undetected errors, especially when first introduced or as new versions are released, and the Company may need to make significant modifications to correct these errors. Failure to achieve acceptance could result in a delay in, or inability to, receive payment, a rejection of products and services, damage to the Company’s reputation, as well as lost revenues, diverted development resources, increased service and warranty costs and related litigation expenses and potential liability to third parties, any of which could harm the Company’s business.

If the Company fails to protect its intellectual property rights it may not be able to market its technologies, products and services successfully.

Unlicensed copying and use of the Company’s intellectual property or illegal infringements of its intellectual property rights represent losses of revenue to the Company. The Company has sought to protect its technologies, products and services with patents, trademarks, copyrights and trade secrets. Effective intellectual property protection may not be available in every country in which the Company’s technologies, products and services may be manufactured, marketed, distributed, sold or used. Moreover, despite the Company’s efforts, these measures only provide limited protection. Third parties may try to copy or reverse engineer portions of the Company’s technologies, products or services or otherwise obtain and use its intellectual property without authorization. The Company cannot assure you that the protection of its proprietary rights will be adequate or that its competitors will not develop independently similar technology, duplicate the Company’s technologies, products or services or design around any of its patents or other intellectual property rights.

The Company may become involved in costly and time-consuming intellectual property litigation.

Third parties could claim that the Company’s technologies, products or services infringe their patents, trademarks or other intellectual property rights. As new standards and technologies evolve, the Company believes that it may face an increasing number of third party claims relating to alleged patent infringements. Intellectual property litigation is time consuming and costly, diverts management resources and could result in the invalidation or impairment of the Company’s intellectual property rights. If litigation results in an unfavorable outcome, the Company could be subject to substantial damage claims and/or be required to cease production of infringing products, terminate its use of the infringing technology, develop non-infringing technology and/or obtain a license agreement to continue using the technology at issue. Such license agreements might not be available to the Company on acceptable terms, resulting in serious harm to its business.

The Company may be liable to some of its customers for damages that they incur in connection with intellectual property claims.

Although the Company attempts to limit its exposure to liability arising from infringement of third-party intellectual property rights in the Company’s agreements with customers, it does not always succeed in obtaining the limitations it seeks. If the Company is required to pay damages to or incur liability on behalf of its customers, its business could be harmed. Moreover, even if a particular claim falls outside of the Company indemnity or warranty obligations, its customers may be entitled to additional contractual remedies against the Company, which could harm its business. Furthermore, even if the Company is not liable to its customers, its customers may stop buying its technologies, products or services or attempt to pass on to the Company the cost of any license fees or damages owed to third parties by reducing the amounts they pay for the Company’s technologies, products or services. Any of these results could harm the Company’s business.

The Company may incur losses associated with currency fluctuations and may not effectively reduce its exposure.

The Company’s operating results are subject to volatility resulting from fluctuations in foreign currency exchange rates, including:

currency movements in which the U.S. dollar becomes stronger with respect to foreign currencies, thereby reducing relative demand for its products and services outside the United States; and

currency movements in which a foreign currency in which the Company has incurred expenses becomes stronger in relation to the U.S. dollar, thereby raising the Company’s expenses for the same level of operating activity.

The Company’s quarterly results and stock price fluctuate significantly, which is likely to continue.

The Company’s operating results can fluctuate significantly, which can lead to volatility in the price of the Company’s common stock, for any of the following reasons, among others:

fluctuations in the U.S. or world economy or general market conditions, as well as those specific to specific to the PC, CE, technology and related industries, as well as those specific to Hollywood and other entertainment; future announcements concerning the Company or its competitors;

Concerns about the integration of the Company and DivX operations;

earnings announcements, quarterly variations in operating results, including variations due to one-time payments and other non-recurring revenues or costs, as well as variations due to the timing of revenue recognition, including deferrals of revenue; charges, amortization and other financial effects relating to the DivX acquisition with DivX or any future acquisitions or divestitures;

introduction of new technologies, products or services or changes in technology, product or service pricing policies by the Company or its competitors, or the entry of new competitors into the markets for video codecs, digital media software or the digital distribution of premium content;

acquisition or loss of significant customers, distributors or suppliers;

timing of payments received by the Company pursuant to its licensing agreements;

changes in earnings estimates by the Company or by independent analysts who cover it;

discussion of the Company or its stock price by the financial press and in online investor chat rooms or blogs;

delay in delivery to market or acceptance of new technologies, products and services of the Company or its competitors;

the mix of international and United States revenues attributable to the Company’s technologies, products and services;

disclosure of material weaknesses in the Company’s internal control over financial reporting or its disclosure controls and procedures or of other corporate governance issues; and/or

costs of litigation and intellectual property claims.

In addition, stock markets in general, and those for technology stocks in particular, have experienced extreme price and volume fluctuations in recent years, which frequently have been unrelated to the operating performance of the affected companies. These broad market fluctuations may impact adversely the market price of the Company’s common stock.

The Company may require additional capital, and raising additional funds by issuing securities, debt financing or through strategic alliances or licensing arrangements may cause dilution to existing shareholders, restrict operations or require the Company to relinquish proprietary rights.

The Company may raise additional funds through public or private equity offerings, debt financings, strategic alliances or licensing arrangements. To the extent that it raises additional capital by issuing equity securities, existing shareholders’ ownership will be diluted. Any debt financing may involve covenants that restrict Company operations, including limitations on additional borrowing, specific restrictions on the use of assets as well as prohibitions on the ability to create liens, pay dividends, redeem stock or make investments. In addition, if the Company raises additional funds through strategic alliances or licensing arrangements, it may be necessary to relinquish potentially valuable rights to potential products or proprietary technologies, or grant licenses on terms that are not favorable.

Compliance with changing corporate governance and public disclosure requirements will result in additional expenses and pose challenges for the Company’s management team.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated and to be promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. The Company’s management team will need to devote significant time and financial resources to comply with existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

The fees payable in the lawsuits that were filed in connection with the DivX acquisition have not been resolved and the amount that could be paid by the Company could be material.

The parties to the lawsuits challenging the DivX acquisition reached a tentative agreement in August 2010 to settle all of the lawsuits and have signed a memorandum of understanding that is subject to confirmatory discovery, a more detailed settlement agreement and court approval. The parties are currently negotiating the fees payable to the plaintiff’s counsel. If the parties cannot agree on the fees, plaintiffs will file a fee application with the court. It is possible that the fees payable by the Company could be material.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

SONIC SOLUTIONS/CA/ 10-Q