**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D. C.  20549**

**FORM 10-K**

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| **x**                                          | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                     | ** ** | ** **                                                                                    |
| **For the  Fiscal Year Ended: March 31, 2007** |
| ** **                                     |
| **OR**                                         |
| ** **                                     |
| **o**                                          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number: 0-15159**

| **RENTRAK CORPORATION**                                                   |
|---------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                   |
|                                                                      |
| **Oregon**                                                                |   | **93-0780536** |
| (State or other  jurisdiction of incorporation                            |   | (I.R.S. Employer  Identification No.) |
| or organization)                                                          |   |   |
|                                                                      |   |   |
| **7700 NE  Ambassador Place, Portland, Oregon**                           |   | **97220** |
| (Address of  principal executive offices)                                 |   | (Zip Code) |
|                                                                      |   |   |
| Registrant’s  telephone number, including area code:**503-284-7581** |
|                                                                      |   |   |
| Securities  Registered pursuant to Section 12(b) of the Act:              |   |   |
| Title of each  class                                                      |   | Name of each  exchange on which registered |
| **Common Stock, $0.001 par value per share**                              |   | **The NASDAQ Stock Market LLC (NASDAQ Global  Market)** |

 

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

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Indicate by check mark if theRegistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act: Yes o     No x

Indicate by check mark if the Registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act:  Yes o   Nox

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x   No o

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K, or anyamendment to this Form 10-K.   o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer. See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
|   Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o  No x

The aggregate market value of the voting and non-voting common equityheld by non-affiliates, computed by reference to the last sales price ($11.42)as reported by the Nasdaq Global Market, as of the last business day of theRegistrant’s most recently completed second fiscal quarter (September 29,2006), was $118,343,850.

The number of shares outstanding of the Registrant’s Common Stock as ofJune 5, 2007 was 10,726,341 shares.

**Documents Incorporated by Reference**

TheRegistrant has incorporated into Part III of Form 10-K, by reference,portions of its Proxy Statement for its 2007 Annual Meeting of Shareholders.

 

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**RENTRAK CORPORATION**

**2007 FORM 10-K ANNUAL REPORT**

**TABLE OFCONTENTS**
|            | ** ** | ** **                                                                                                          | ** ** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
|       |       | **PART I**                                                                                                          |       |       |
|       |       |                                                                                                                |       |       |
| Item  1.   |       | Business                                                                                                            |       |       |
|       |       |                                                                                                                |       |       |
| Item  1A.  |       | Risk  Factors                                                                                                       |       |       |
|       |       |                                                                                                                |       |       |
| Item 1B.   |       | Unresolved Staff  Comments                                                                                          |       |       |
|       |       |                                                                                                                |       |       |
| Item  2.   |       | Properties                                                                                                          |       |       |
|       |       |                                                                                                                |       |       |
| Item 3.    |       | Legal Proceedings                                                                                                   |       |       |
|       |       |                                                                                                                |       |       |
| Item 4.    |       | Submission of  Matters to a Vote of Security Holders                                                                |       |       |
|       |       |                                                                                                                |       |       |
|       |       | **PART II**                                                                                                         |       |       |
|       |       |                                                                                                                |       |       |
| Item 5.    |       | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities |       |       |
|       |       |                                                                                                                |       |       |
| Item 6.    |       | Selected Financial  Data                                                                                            |       |       |
|       |       |                                                                                                                |       |       |
| Item 7.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       |       |
|       |       |                                                                                                                |       |       |
| Item 7A.   |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |       |
|       |       |                                                                                                                |       |       |
| Item 8.    |       | Financial  Statements and Supplementary Data                                                                        |       |       |
|       |       |                                                                                                                |       |       |
| Item 9.    |       | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                               |       |       |
|       |       |                                                                                                                |       |       |
| Item 9A.   |       | Controls and Procedures                                                                                             |       |       |
|       |       |                                                                                                                |       |       |
| Item 9B.   |       | Other Information                                                                                                   |       |       |
|       |       |                                                                                                                |       |       |
|       |       | **PART III**                                                                                                        |       |       |
|       |       |                                                                                                                |       |       |
| Item 10.   |       | Directors,  Executive Officers and Corporate Governance                                                             |       |       |
|       |       |                                                                                                                |       |       |
| Item 11.   |       | Executive Compensation                                                                                              |       |       |
|       |       |                                                                                                                |       |       |
| Item 12.   |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       |       |
|       |       |                                                                                                                |       |       |
| Item 13.   |       | Certain  Relationships and Related Transactions, and Director Independence                                          |       |       |
|       |       |                                                                                                                |       |       |
| Item 14.   |       | Principal  Accountant Fees and Services                                                                             |       |       |
|       |       |                                                                                                                |       |       |
|       |       | **PART IV**                                                                                                         |       |       |
|       |       |                                                                                                                |       |       |
| Item 15.   |       | Exhibits and  Financial Statement Schedules                                                                         |       |       |
|       |       |                                                                                                                |       |       |
| Signatures |       |                                                                                                                |       |       |

 

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**PART I**

**ITEM 1.****                             BUSINESS**

**Forward Looking Statements**

Certaininformation included in this Annual Report on Form 10-K (including Management’sDiscussion and Analysis of Financial Condition and Results of Operationsregarding revenue growth, gross profit margin and liquidity) constitutesforward looking statements that involve a number of risks and uncertainties.Forward looking statements may be identified by the use of forward lookingwords such as “may,” “will,” “expects,” “intends,” “anticipates,” “estimates”or “continues” or the negative thereof or variations thereon or comparableterminology. Our forward-looking statements are based on our currentexpectations and are subject to numerous risks and uncertainties. As such, ouractual future results, performance or achievements may differ materially fromthe results expressed in, or implied by, our forward-looking statements. Pleaserefer to Item 1A. Risk Factors in this Annual Report on Form 10-K for examplesof reasons why our actual results may differ materially from ourforward-looking statements. We assume no future obligation to update ourforward-looking statements or to provide periodic updates or guidance.

**Where YouCan Find More Information**

We file annual, quarterly and other reports, proxy statements and otherinformation with the Securities and Exchange Commission (“SEC”) under theSecurities Exchange Act of 1934 as amended (“Exchange Act”). We alsomake available, free of charge on our website at www.rentrak.com, our annualreport on Form 10-K, quarterly reports on Form 10-Q, current reports on Form8-K, and amendments to those reports filed or furnished pursuant to Section13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after theyare filed electronically with the SEC. Youcan inspect and copy our reports, proxy statements and other information filedwith the SEC at the offices of the SEC’s Public Reference Room located at 100 FStreet, NE, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 forfurther information on the operation of Public Reference Rooms. The SEC alsomaintains an Internet website at http://www.sec.gov/ where you can obtain mostof our SEC filings. You can also obtain paper copies of these reports,without charge, by contacting Investor Relations at (503) 284-7581.

###### **Overview**

Weoperate in two business segments, our Pay-Per-Transaction (“PPT”) operatingdivision and our Advanced Media and Information (“AMI”) operating division.Accordingly, we report certain financial information by individual segment.

Our PPT Division focuses on managing our businessoperations that facilitate the delivery of home entertainment content productsand provides related rental and sales information for that content to home video specialty stores and otherretailers, including grocery stores and convenience stores (“Retailers”),on a revenue sharing basis. Our PPTDivision generated 85%, 87% and 88% of total revenues in fiscal 2007, 2006 and2005, respectively.

Our AMI Division concentrates on the management andgrowth of our Essentials SuiteTM of business intelligence services, which are nolonger in the development stage, as well as operating our direct revenuesharing (“DRS”) services. Our Essentials SuiteTM software and services,offered primarily on a recurring subscription basis, provides uniquedata collection, management, analysis and reporting functions, resulting inbusiness intelligence information valuable to our clients. Our DRS servicescollect, track, audit and report the results of certain retailers’ directrevenue sharing activity to the respective suppliers under establishedagreements, on a fee for service basis. Our AMI Division generated 15%, 13% and 12% of totalrevenues in fiscal 2007, 2006 and 2005, respectively.

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**PPT Division**

We collect, process, analyzeand report rental and sales information relating to digital videodiscs (“DVDs”)and videocassettes (“VHSs”) (collectively “Units”) subleased/sublicensed toRetailers. We lease product from various suppliers. Under our PPT System,Retailers that rent Units to consumers generally sublease Units from Rentrak,usually for a low initial fee, and share a portion of each retail rental orsale transaction with us. We share a portion of that rental and sales revenue with our suppliers under the terms of ouragreements.

***Pay-Per-Transaction System***

We distribute Units principallyto Retailers through our PPT System. The PPT System has various productprograms which enable Retailers to obtain Units at a significantly loweroverall cost than if they purchased the Units from traditional videodistributors.

After the Retailer is approvedfor participation in the PPT System, Units are subleased to the Retailer,generally for a low initial fee plus a percentage of revenues generated by theRetailer from rentals and/or sales to consumers. We retain a portion of mostfees and remit the remainder to the appropriate motion picture studios or otherlicensee or owner of the rights to certain video programming content (“ProgramSuppliers”) that hold the distribution rights to the Units. Due to the lowercost of “bringing Units in the door,” Retailers generally obtain a greaternumber of Units under the PPT System than they would if they purchased Unitsdirectly from a distributor. The intended benefit to the Retailer is a highervolume of rental transactions, as well as a reduction in capital cost and risk.The intended benefit to the Program Supplier is an increase in the total numberof Units shipped, resulting in increased revenues and opportunity for profit.The intended benefit to the consumer is the potential of finding more copies ofcertain newly released hit titles and a greater selection of other titles atRetailers participating in the PPT System (“Participating Retailers”).

***Marketing andRelationships with Program Suppliers***

We currentlymarket our PPT System throughout the United States and Canada. During fiscal2007, we offered titles from a number of Program Suppliers including, but notlimited to: DreamWorks, LLC; First Look Studios; Genius Products, Inc.; LionsGate Films, Inc.; Maple Pictures Corp; Paramount Home Entertainment, Inc.; SonyPictures Home Entertainment, Inc.; Twentieth Century Fox Home Entertainment,Inc.; Universal Studios Home Entertainment LLC; and Warner Brothers, includingWarner Home Video, Inc., HBO, New Line Cinema, TNT and Lightyear Entertainment.Our arrangements with our Program Suppliers are of varying duration, scope andformality. In some cases, we have obtained Units pursuant to contracts orarrangements with Program Suppliers on a title-by-title basis and in othercases the contracts or arrangements provide that all titles released fordistribution by such Program Supplier will be provided to us for the PPTSystem. Many of our agreements with Program Suppliers may be terminated uponrelatively short notice. Therefore, there is no assurance that any of theProgram Suppliers will continue to distribute Units through the PPT System,continue to have available for distribution titles which we can distribute on aprofitable basis, or continue to remain in business. Even if titles areotherwise available from Program Suppliers, there is no assurance that theywill be made available on terms acceptable to us. During the last three years,we have not experienced any material difficulty acquiring suitable Units forour markets on acceptable terms and conditions from Program Suppliers.

During fiscal 2007, 2006 and 2005, we had several Program Suppliersthat supplied product in excess of 10% of our total revenues as follows:
|                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| Program Supplier  1 |       | 20       | %          | 5        | %          | 6        | %          |
| Program Supplier  2 |       | 17       | %          | 14       | %          | 13       | %          |
| Program Supplier  3 |       | 16       | %          | 24       | %          | 36       | %          |
| Program Supplier 4  |       | 12       | %          | 16       | %          | 4        | %          |

 

There were no other Program Suppliers who provided product thatgenerated 10% or more of our total revenues for the years ended March 31, 2007,2006 or 2005. Additionally, we are currently negotiating with the third ProgramSupplier listed above in an effort to secure a new revenue sharing agreement.To

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date, however, we have been unable to finalize a new agreementacceptable to both parties. Although management does not believe that ourrelationships with our remaining significant Program Suppliers will beterminated in the near term, a loss of any of these suppliers could have amaterial adverse effect on our financial condition, results of operations andliquidity.

Certain Program Suppliers have requested, and we have provided,financial or performance commitments, including advances or guarantees, as acondition of obtaining certain titles. We determine whether to provide suchcommitments on a case-by-case basis, depending upon the Program Supplier’ssuccess with such titles prior to home video distribution and our assessment ofexpected success in home rental distribution. We currently have such guaranteeswith five Program Suppliers totaling approximately $3.8 million for fiscal2008. We expect to make these payments during the first two quarters of fiscal2008. Most of these guarantees were included in cost of sales during fiscal2007, since we recognize these costs on the release date of a Unit.

***SignificantCustomers***

We had one PPT customer that accounted for 19% of our total revenues infiscal 2005. The agreement with this PPT customer expired in September 2004.There were no other customers that accounted for 10% or more of our totalrevenue in fiscal 2007, 2006 or 2005.

***Distribution of DVDs and VHS Cassettes***

Our proprietaryRentrak Profit Maker Software (the “RPM Software”) and Video RetailerEssentials Software (the “VRE Software”) allow Participating Retailers to orderUnits through their Point of Sale (“POS”) system and provide the ParticipatingRetailers with substantial information regarding all offered titles. Orderingoccurs via a networked computer interface (RPM Software) or over the Internet(VRE Software). To further assist the Participating Retailers in ordering, wealso produce a monthly product catalog (“Ontrak”).

To be competitive,Participating Retailers must be able to rent their Units on the “street date”announced by the Program Supplier for the title. We contract with a third-partyfulfillment provider to distribute our Units via both ground and overnight aircourier to assure continued delivery to Participating Retailers on or prior tothe street date. The handling and freight costs of such distribution wereapproximately 3.2%, 3.8% and 4.7% of our cost of sales in fiscal 2007, 2006 and2005, respectively.

***Computer Operations***

To participate in our PPTSystem, Participating Retailers must install Rentrak-approved computer softwareand hardware to process all of their rental and sale transactions. Our RPMSoftware resides on the Participating Retailer’s POS computer system andtransmits a record of PPT transactions to us over a telecommunications network.The RPM Software also assists the Participating Retailer in ordering newlyreleased titles and in managing its inventory of Units.

Our information systemprocesses these transactions and prepares reports for Program Suppliers andParticipating Retailers. In addition, it determines variations from statisticalnorms for potential audit action. Our information system also transmitsinformation on new titles and confirms orders made via the RPM Software at theParticipating Retailer location.

***Auditing of Participating Retailers***

From time to time, we auditParticipating Retailers in order to verify that they are reporting all rentalsand sales of Units on a consistent, accurate and timely basis. Severaldifferent types of exception reports are produced weekly. These reports aredesigned to identify any Participating Retailers whose PPT business activityvaries from our statistical norms. Depending upon the results of our analysisof these reports, we may conduct an in-store audit. Audits may be performedwith or without notice and any refusal to allow such an audit can be cause forimmediate termination from the PPT System. If audit violations are found, theParticipating Retailer is subject to fines, audit fees, immediate removal fromthe PPT System and/or repossession of all leased Units.

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***Seasonality***

We believe that the home videoindustry is somewhat seasonal because Program Suppliers tend to theatricallyrelease their most promising movies during two periods of the year, earlysummer and during the holidays in the fourth calendar quarter. Since therelease of movies to home video usually follows the theatrical release byapproximately three to five months (although significant variations occur oncertain titles), the seasonal peaks of movies for home video also generallyoccur just prior to and/or during the fourth quarter holidays and in latewinter/early spring. We believe our volume of rental transactions and resultingrevenues and earnings reflect, in part, this seasonal pattern. However, changesin Program Suppliers’ titles available to Participating Retailers and us mayobscure any seasonal effect.

***Competition***

The PPT Division continues to be affected bythe changing dynamics in the home video rental market. This market is highlycompetitive, rapidly changing and influenced greatly by consumer spendingpatterns and behaviors. The end consumer has a wide variety of choices fromwhich to select their entertainment content. Some examples include rentingUnits of product from our Participating Retailers, purchasing previously viewedUnits from our Participating Retailers, ordering product via onlinesubscriptions and/or online distributors, subscribing to at-home moviechannels, purchasing and owning the Unit directly or selecting an at-home “pay-per-view”option and/or “on demand” content. Our PPT system focuses on the traditional “brickand mortar” retailer serviced by a distributor on a wholesale basis: forexample, a Retailer purchases Units from a distributor and then offers theUnits for rental or sale to the general public. As described in greater detailabove, our PPT System offers Participating Retailers an alternative method ofobtaining Units. Accordingly, we face intense competition from all of thetraditional distributors, including Ingram Entertainment, Inc., Video ProductDistributors, Inc. and Entertainment One. These and other traditionaldistributors have extensive distribution networks, long-standing relationshipswith Program Suppliers and Retailers, and, in some cases, significantly greaterfinancial resources than us. In the past, certain traditional distributorsoffered Units to Retailers on a revenue sharing basis. To our knowledge, onlyone does so today on a very limited basis.

We also facedirect competition from the Program Suppliers. All major Program Suppliers sellUnits directly to major Retailers, including Blockbuster, the world’s largestchain of home video specialty stores, and to online movie rental subscriptionservices, such as Netflix. We believe many of the major Program Suppliers havedirect revenue sharing arrangements with Blockbuster and Movie Gallery, theworld’s second largest chain of home video specialty stores, includingHollywood Entertainment. We also believe that certain Program Suppliers haveexecuted direct revenue sharing agreements with several other large Retailersand online movie rental subscription services. We do not believe that theProgram Suppliers have executed direct revenue sharing agreements with othersmaller Retailers, but there can be no assurance that they will not do so inthe future.

We also competewith businesses that use alternative distribution methods to provide videoentertainment directly to consumers, such as the following: (1) online movierental subscription services (2) direct broadcast satellite transmissionsystems; (3) traditional cable television systems; (4) pay-per-view cabletelevision systems; (5) video-on-demand, or VOD; and (6) delivery ofprogramming via the Internet. Technological improvements in any of thesedistribution methods, perceived greater convenience by customers, as well aslower pricing models, may make these options more attractive to consumers andthereby materially diminish the demand for Unit rentals. Such a consequencecould have a material adverse effect on our results of operations and financialcondition.

***Formovies.com***

Formovies.com is a website designed and hosted by us,and dedicated to assist consumers in finding a local video store where they canrent and/or purchase the video products they want. Consumers can find aparticular movie of their choice by searching on various attributes of thattitle.

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**AMI Division**

The AMI Division concentrates on expanding the customerbase of our Essentials SuiteTM of business intelligence services offeredprimarily on a recurring subscription basis, as well as operating our DirectRevenue Sharing (“DRS”) services. Through patent pending software systems andbusiness processes, we provide clients services from our Essentials SuiteTM.

***Essentials SuiteTM***

Currentlyincluded in the Essentials SuiteTM are the following:

·                  BoxOffice EssentialsTM for reporting domestic and international gross receipttheatrical ticket sales;

·                  HomeVideo EssentialsTM for reporting VHS, DVD and game rentals across the U.S. andCanada;

·                  Supply Chain Essentialsä for managing the flow of products andfunds at every point in the supply chain until the product reaches the consumer;

·                  OnDemand Essentialsä for measuring and reporting anonymousvideo on demand (“VOD”) usage data; and

·                  Retail Essentialsä for reporting North American nationalconsumer sales estimations of DVDs, VHS tapes and Universal Media Disks (“UMDs”)to motion picture studios and retailers (“RE clients”).

***BoxOffice Essentials*TM**

Box OfficeEssentialsTM primarily reports domestic and international theatrical grossreceipt ticket sales to motion picture studios (“BOE clients”) and movietheater owners. Rentrak provides BOE clients with access to box officeperformance data pertaining to specific motion pictures and movie theatercircuits, both real-time and historical. Data is currently collected forvirtually all movie theaters in North America, Guam and Puerto Rico and isprimarily obtained via electronic connectivity to theater box offices. BOEclients include Buena Vista, Twentieth Century Fox, New Line Cinema, ParamountPictures, Sony, Universal and Warner Bros.

Box OfficeEssentials continues to expand internationally. The international customer basewill initially focus on the international distributor community, much as thedomestic service successfully targeted motion picture studios in Hollywood,California. In order to successfully implement our current expansion plan, wewill require more information technology resources to support the compilationof data content from various territories throughout the world as well as ourdata processing center located in our Portland office.

Our primarycompetitor is Nielsen EDI, which is a service of Nielsen Entertainment and partof VNU Media Measurement & Information. A principal difference between ourproducts and our competitor’s is our use of technology to drive contentacquisition and real-time data polling from content providers. Since the marketin which we operate is comprised of a small number of major customers, clientrelations and retention are critical. Our competitor has significantly greaterfinancial resources than us, which could cause them to surpass ourtechnological advancements. This, combined with brand name recognition andlong-standing relationships with our BOE clients, could have a material adverseeffect on our ability to grow this line of business as well as on our resultsof operations and financial condition.

***Home Video Essentials*****TM**

HomeVideo EssentialsTM measures DVD, VHS and video game rentals from bothbrick-and-mortar and online channels across North America at the point-of-sale(POS). Home Video EssentialsTM covers approximately 50% of the video specialtyretailers within the United States, and 90% within the Canadian territories.Clients have 24/7 web-access to current weekly market and title-levelprojection data on consumer rental spending and activity. Additionally, clientshave access to historical data dating back to 2001.

Clients of HomeVideo EssentialsTM include all the home entertainment divisions of the major andmini-major Hollywood studios such as Warner Home Video, Buena Vista HomeEntertainment (Disney), Paramount/DreamWorks Home Entertainment, UniversalStudios Home Entertainment, Sony Pictures

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HomeEntertainment, 20th Century Fox Home Entertainment, New LineCinema Home Entertainment, Lionsgate Entertainment, Walden Media, The WeinsteinCompany, and Vivendi Visual Entertainment. Microsoft Corporation has been along-time subscriber to Home Video Essentials’TM video game data.

HomeVideo EssentialsTM is successfully branded, having its weekly informationpublished in the industry trade magazines Video Business, Daily Variety, HomeMedia Retailing and Billboard Magazine along with consumer visibility in theUSA Today, New York Times online and Entertainment Weekly.

HomeVideo Essentials’TM primary competitors are Adams Media Research (“AMR”) andHome Media Retailing Research (“HMRR”). The main difference between our serviceand those of our competitors is that we collect daily point-of-sale bar codescan data from video retailers, which provides a more reliable sample base andgreater accuracy. This methodology has positioned Home Video EssentialsTM as the“gold standard” for measuring North American consumer rental spending andactivity within the entertainment industry.

***Supply Chain EssentialsTM***

SupplyChain Essentials***TM*** (“SCE”) is supply chainmanagement software developed by us which allows clients to manage the flow ofproducts and funds at every point in the supply chain until the product reachesthe consumer. We host the software for customers’ access under an applicationservice provider’s model and license its use. A typical client for SCE is anycompany that receives orders (business to business or business to consumer),maintains warehouses and issues purchase orders to vendors.

Companieslike SAP, Oracle, Manhattan Associates, High Jump and Red Prairie already offerlogistics and supply chain software. To various degrees, these types ofsoftware solutions require specialized personnel and IT infrastructure with arelatively high initial investment, making the solution cost prohibitive forsmaller to mid-sized companies. Since we host our software, our clientsgenerally pay a monthly service fee which is significantly lower than ourcompetitors’ pricing and makes our offering more attractive to a broader rangeof customers. Furthermore, our software provides web presence to traditionalretail companies, known as “brick and mortar” companies, as well as integrationto their existing software infrastructure.

Weare targeting our potential clients though both direct sales and strategicalliances with established logistics and supply chain entities. Our solution isdeveloped in house and it does not depend on any third party code. It supportsvarious databases and it integrates with the clients’ existing software. Additionally,our solution can be customized to meet the clients’ needs without losingnecessary functionality.

***On Demand Essentials***TM

OnDemand EssentialsTM is the first of a new line of products designed to measure andreport anonymous video on demand (“VOD”) usage data. Participating distributorsin the service represent over 55% of VOD enabled homes and over 70% of all ondemand content. We have agreements with and collect data from 14 networkoperators including: Comcast, Insight, Cablevision, Charter, Suddenlink,Mediacom, Armstrong, Verizon, Service Electric, Atlantic Broadband,Midcontinent, Wide Open West, Elijay and Bresnan Communications.

We arein the development phase of a product extension to track on demand advertising.Several network and operator clients are participating in a beta trial of theservice module. Once launched, the product will provide additional revenue opportunitiesfrom current and potential OnDemand Essentialsäclients as well as from advertising agencies and advertisers.

Our OnDemand Essentialsä Content Provider site isa transactional tracking and uniform, flexible reporting system that enablesusers to view and analyze on-demand content across all cable multiple systemoperators (“MSOs”) with whom we have agreements in place. As of March 2007, wehad over 50 clients for the service, including cable networks and studiosdistributing on demand content to cable companies.

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Rentrak is the clearlyestablished leader in on demand television measurement with no currentcompetitors in the space. Nielsen Media Research has announced plans to trackVOD; however, their product has not yet materialized and we believe their modelwill continue to be a sampling model in comparison to our transactional model.

***RetailEssentialsTM***

Retail EssentialsTMprimarily reports North American national consumer sales estimations of DVDs,VHS tapes, HD DVDs, Blu-ray Discs and Universal Media Disks (“UMDs”) to motionpicture studios and retailers (“RE clients”). Through Retail EssentialsTM, weprovide RE clients with access to national consumer sales estimates at theindustry level, by format and at the title level. Data is collected fromthousands of retail locations in North America via weekly data feeds andprojected nationally. Prospective clients for Retail EssentialsTM include motionpicture studios, talent agencies, production companies and others.

***DRS***

Our DRS service is tailored to meet the needs of majorstudios (20th Century Fox Home Entertainment, Paramount Pictures HomeEntertainment, Warner Home Video, etc.) and major independent program suppliers(Lions Gate Films, Genius Products, etc.) (collectively “DRS clients”) whoprovide home entertainment content directly to large brick-and-mortar andonline retailers (Blockbuster Entertainment, Movie Gallery, Netflix, etc.)(collectively “DRS retailers”) on a revenue sharing basis. For each DRSclient, we collect, process, audit, summarize and report the number of rentaland previously viewed sales transactions and corresponding retail revenuegenerated on each title distributed to each DRS retailer on a revenue sharingbasis. Additionally, Rentrak conducts periodic physical audits of DRS retailersto insure all DRS inventory is utilized in a manner consistent with the terms ofits revenue sharing arrangement with our DRS client.

Our only direct competitor is SuperComm, Inc., a smallsubsidiary of Sony Pictures Home Entertainment (“SPHE”). SuperComm wasoriginally founded in 1991 as a third-party revenue sharing provider to the supermarketsegment of the home entertainment business. It was later sold to SPHE, whichnow relies on it for the services (collection, auditing, analysis, configuringand reporting of data) it requires to manage its DRS relationships. We do notbelieve that SuperComm provides DRS services to any home entertainment contentproviders other than SPHE.

There are a numberof risks that may adversely affect the size and profitability of our DRSbusiness. First and foremost, our business is dependent on the studios/ProgramSuppliers maintaining DRS relationships with the largest brick-and-mortar andonline retailers. Should content providers end their DRS relationships, theywould have no need for our DRS service. Secondly, our current DRS clients coulddecide to invest the resources necessary to recreate the services we provide,and therefore eliminate us as a third-party service provider. Thirdly, SPHEcould decide to invest significant resources to improve SuperComm’s serviceoffering, and take away one or more of our DRS clients. Lastly, should theoverall size of the home entertainment rental market contract significantly,and/or the large brick-and-mortar and online retailers’ share of the overallrental market decline significantly, the amount of data we process and audit onbehalf of our DRS clients would also be reduced, which would result in acorresponding decrease in our DRS revenues.

**Other Division**

The Other Division includes revenue and expenses relating to productsand/or services which are still in early stages, as well as corporate expensesand other expenses which are not allocated to a specific division. Included inthe Other Division as of March 31, 2007 was AdTrakerä, which will capture census-level data regarding viewing patterns ofon-demand advertising for reporting to marketers and advertising agencies.AdTraker is anticipated to be combined with OnDemand EssentialsTM services during fiscal 2008.

8

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**Trademarks, Copyrights, Proprietary Rights and Patents**

We have registeredour “RENTRAK,” “PPT,” “Pay Per Transaction,” “Entertainment Essentials,” “BoxOffice Essentials,” “Home Video Essentials,” “Supply Chain Essentials,” “OnDemand Essentials,” “Video Game Essentials,” “Retail Essentials,” “AdEssentials,”“Business Intelligence Essentials,” “ForMovies,” “ForMovies.com,” “DigiTrak,” “Ontrak,”“Fastrak,” “RPM,” “Videolink+” and other marks under federal trademark laws. Wehave applied and obtained registered status in several foreign countries formany of our trademarks. We have filed applications to register additional marksin the “Essentials” trademark family. Our trademark registrations will remainvalid for an unlimited period, as long as we continue using the trademarks incommerce or as long as we intend to resume use of the mark during any period ofnon-use. We claim a copyright on our RPM Software and consider it to beproprietary. We have also filed notice and claim a copyright on our Essentialssoftware. Our copyright in our software will last for at least 95 years fromthe first sale or licensing of the software. Our trademarks, copyrights andother proprietary rights give us the power to prevent competitors from competingwith us unfairly. We believe that our intellectual property is important to ourmarketing efforts and the competitive value of our services and we intend totake appropriate action to halt any infringement and protect against improperusage.

We haveapplied for patents related to certain of our proprietary technologies,primarily for our Essentials SuiteTM of products. We believe our proprietarytechnologies provide us with advantages over our competitors’ technologies.

**Employees**

As of March 31, 2007, includingall subsidiaries, we employed 213 full-time employees and 35 part-timeemployees. We consider our relations with our employees to be good.

**Financial Information About Industry Segments**

See Note 15 of Notes to theConsolidated Financial Statements for information regarding our businesssegments and revenue by product line.

**Geographic Information**

All of our revenues aregenerated within the United States and Canada, with Canada accounting for lessthan 10% of total revenues. All of our long-lived assets are located within theUnited States.

# **ITEM 1A.****                    RISK FACTORS**

# ***If our effortsto attract, retain and grow our base of retailers participating in our PPTsystem are not successful, our operations may be adversely affected.***

The success of ourcurrent PPT Division business depends on traditional “brick and mortar”retailers actively participating in our PPT System. Declines in the numbers ofParticipating Retailers and the volumes of Units leased by ParticipatingRetailers from us could ultimately lead to reductions in revenue and have anadverse impact on our results of operations, financial condition and cash flows.

# ***OurParticipating Retailers could establish relationships with Program Suppliersand enter into direct revenue sharing agreements.***

If ourParticipating Retailers formed direct revenue sharing relationships withProgram Suppliers, the need for our PPT system would be greatly reduced, whichcould have an adverse impact on our business, financial condition andliquidity.

9

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***Ifthe financial stability of our Participating Retailers and their performance oftheir obligations under our PPT System declines, our results of operations,financial condition and cash flows may be adversely impacted.***

Our ultimatesuccess is highly dependent on the successful operations of our ParticipatingRetailers. If their business declines due to changes in customer behavior, competition,management issues or other factors, they may be unable to meet their financialobligations to us. This could negatively affect our results of operations,financial condition and cash flows.

***Aloss of a significant Program Supplier, our ability to retain our base ofParticipating Suppliers along with the quality and volumes of content theyprovide, and adverse changes in terms of our revenue sharing agreements withProgram Suppliers could result in a decline in revenues and results ofoperations and have an adverse impact on our financial condition.***

Werely on our Program Suppliers for Units we sublease to Participating Retailers.A decrease in the number of Program Suppliers participating in our system, adecline in the financial stability of our Program Suppliers and/or a decline inthe quality and volume of the content they produce could result in a reductionin overall Units available to Participating Retailers. Additionally, many ofour agreements with Program Suppliers may be terminated upon relatively shortnotice. Therefore, there is no assurance that any of the Program Suppliers willcontinue to distribute Units through the PPT System, continue to have titlesavailable which we can distribute on a profitable basis, or continue to remainin business. Even if titles are otherwise available from Program Suppliers,there is no assurance that they will be made available on terms acceptable tous. A loss of any of our significant suppliers or a change in any one of theabove conditions could have a material adverse effect on our financialcondition, results of operations and liquidity.

# ***If our effortsto attract, retain and grow our base of clients who subscribe to ourEssentialsTM services are not successful, we may not be able to expand thoselines and our operations may be adversely affected***

The success of ourAMI Division depends on effective software solutions, marketing, sales andcustomer relations in regards to existing services as well as our clients’acceptance of future enhancements and new services. If we are unable to retainexisting clients and/or secure new clients, our operating costs may exceed ourrevenues, which could have an adverse impact on our results of operations,financial condition and liquidity.

***Wemay be unable to obtain requisite data and other content to source our systemswhich provide our EssentialsTM services.***

Our Essentials*TM*services rely on data which is collected from a widevariety of sources. Once received, the data must be reviewed, processed and, attimes, converted to our required file format. If we are unable to obtainquality data feeds and/or process that data timely, we may not be able to meetthe needs of our clients. Thus, we could lose clients, which would have anadverse impact on our ability to grow our Essentials*TM*linesof business, which could have an adverse impact on our results of operations,financial condition and liquidity.

***OurEssentialsTM services are highly dependent on Information Technology resources.***

If we are unableto attract, hire and retain high quality information technology personnel atreasonable rates, we may not be able to timely meet the needs of existingclients and may not be able to enhance existing services or develop new linesof business. This could have an adverse effect on our results of operations,financial condition and liquidity.

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***The market for on demand advertising has been slow to develop and maynot evolve for several years.***

The success of ouron demand ad tracking module is dependent on the market adoption of on demandadvertising, the rollout of dynamic ad insertion technology by the operator andthe automation of files regarding the location of advertising in on demandcontent. If the market does not evolve, we risk failing to meet our internalfinancial projections, resulting in an inability to recoup our investment.

***OurDRS business is dependent on the studios maintaining direct revenue sharingrelationships with the largest brick-and-mortar and online retailers.***

We currentlycollect, process, audit, summarize and report transactional data relating to rentaland sales activity of Units at very large traditional and online retailers whohave revenue sharing agreements directly with major studios. A change in theserelationships or declines in general in the overall size of the homeentertainment rental market could potentially reduce the need for our servicesand the quantity of data we process, which would result in a correspondingreduction in our DRS revenues, our results of operations, financial conditionand liquidity.

***Weface intense competition in the markets in which we operate and those in whichwe are currently developing new service offerings.***

Some of ourcompetitors have extensive distribution networks, long-standing relationshipswith our suppliers and customers, stronger brand name recognition andsignificantly greater financial resources than us. These factors may enable ourcompetition to have increased bargaining and purchasing power relating toresources that could enable them to operate in a more cost effective mannerand/or to surpass our technological advancements. This could have a materialadverse effect on our results of operations, financial condition and ourability to grow our lines of business.

# ***Our PPTbusiness is greatly influenced by 1) technological advancements, 2) consumerbehaviors and demand and 3) changes in the industries in which we operate.***

The markets in which our PPT division operatesare highly competitive, rapidly changing and influenced greatly by consumerspending patterns and behaviors. The end consumer has a wide variety of choicesfrom which to select their entertainment content. Some examples include rentingUnits of product from our Participating Retailers, ordering product directlyvia online subscriptions and/or online distributors, subscribing to at-homemovie channels, purchasing and owning the Unit directly or selecting an at-home“pay-per-view” option. Our systems primarily rely on the end consumer choosingto obtain Units from traditional “brick and mortar” retailers. Technologicaladvancements, changes in distribution methods as well as lower pricing modelsmay make other options more attractive to consumers and thereby materiallydiminish the demand for obtaining Units via traditional retailers. Such aconsequence could have a material adverse effect on our results of operationsand financial condition.

***Ourservices are highly dependent on the effective and efficient usage oftechnology and our overall information management infrastructure.***

If we are unableto acquire, establish and maintain our information management systems to ensureaccurate, reliable and timely data processed in an efficient and cost effectivemanner, we may not be able to meet the needs of existing clients or ourshareholders and may not be able to enhance existing services or develop newlines of business. This could have an adverse effect on our business andlong-term growth.

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***Theloss of our executive officers and key employees could have an adverse impacton our business and development initiatives.***

We believe that thedevelopment of our business has been, and will continue to be, dependent oncertain key executives and employees of Rentrak. The loss of any of theseindividuals could have a material adverse effect upon our business anddevelopment, and there can be no assurance that adequate replacements could befound in the event of their unavailability.

# **ITEM 1B.****                    UNRESOLVEDSTAFF COMMENTS**

None.

# **ITEM 2.****                             PROPERTIES**

Wemaintain our headquarters in Portland, Oregon where we lease 55,500 square feetof office space. The lease for this space expires on December 31, 2016. We alsomaintain an office in Los Angeles, California where we lease 4,000 square feetof space utilized for our Box Office Essentials business. The lease for thisspace expires in July 2009. We anticipate that these spaces will be adequatefor our near-term business needs.

# **ITEM 3.****                             LEGALPROCEEDINGS**

We may from time to time be a party to legal proceedings and claims thatarise in the ordinary course of our business. In the opinion of management, theamount of any ultimate liability with respect to these potential actions is notexpected to materially affect our financial condition or results of operations.We currently have no material outstanding litigation.

**ITEM 4.****                             SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

No matter was submitted to avote of our security holders during the fourth quarter of the fiscal yearcovered by this report.

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**PART II**

**ITEM 5.****                             MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

**Stock Price and Dividends**

Our common stock, $.001 parvalue, is traded on the NASDAQ Global Market, where its prices are quoted underthe symbol “RENT.” As of June 5, 2007 there were approximately 231 holders ofrecord of our common stock.

The following table sets forththe reported high and low sales prices of our common stock for each of thequarters in the last two fiscal years as regularly quoted on the Nasdaq GlobalMarket:
| Fiscal 2007 | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
| Quarter 1        |       | $        | 12.58      |    | 9.50       |   |
| Quarter 2        |       | 12.42    |       | 9.72    |       |
| Quarter 3        |       | 16.25    |       | 10.19   |       |
| Quarter 4        |       | 16.50    |       | 13.92   |       |
|                  |            |          |            |         |            |  |

 
| Fiscal 2006 | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
| Quarter 1        |       | $        | 11.09      |    | $          | 8.30 |   |
| Quarter 2        |       | 10.00    |       | 8.20    |       |
| Quarter 3        |       | 9.89     |       | 7.83    |       |
| Quarter 4        |       | 11.45    |       | 8.98    |       |
|                  |            |          |            |         |            |  |  |

 

Holders of our common stock areentitled to receive dividends if, as, and when declared by the Board ofDirectors out of funds legally available therefor, subject to the dividend andliquidation rights of any preferred stock that may be issued.

No cash dividends have beenpaid or declared during the last eight fiscal years. The present policy of theBoard of Directors is to retain earnings to provide funds for operation andexpansion of our business. We do not intend to pay cash dividends in theforeseeable future.

Informationregarding securities authorized for issuance under equity compensation plans isincluded in Item 12.

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**StockPerformance Graph**

This chartcompares the five year cumulative total return on our common stock with that ofthe Nasdaq U.S. index, and a group of peer companies selected by us. The chartassumes $100 was invested on March 31, 2002, in our common stock, theNasdaq U.S. index and the peer group, and that any dividends were reinvested.The peer group is composed of companies within the video distribution businessas follows: Hastings Entertainment, Inc., Blockbuster, Inc., Movie Gallery,Inc. and Netflix, Inc. The peer group indexutilizes the same methods of presentation and assumptions for the total returncalculation as does Rentrak and the Nasdaq U.S. Index. All companies in thepeer group index are weighted in accordance with their market capitalizations.
| ** **               | ** ** | **Base  Period** | ** ** | **Indexed Returns  Year Ended** | ** ** |
|--------------------------|------------|------------------|------------|-------------------------------------------|------------|
| **Company/Index**        | ** ** | **03/31/02**     | ** ** | **03/31/03**                              | ** ** | **03/31/04** | ** ** | **03/31/05** | ** ** | **03/31/06** | ** ** | **03/31/07** | ** ** |
| Rentrak Corporation |       | $                | 100.00     |                                      | $          | 73.43 |   | $ | 125.28 |   | $ | 158.27 |   | $ | 145.86 |   | $ | 223.27 | ** ** |
| Nasdaq U.S.  Index       |       | 100.00           |       | 73.02                                     |       | 109.08 |   | 110.00 |   | 129.82 |   | 135.23 |   |
| Peer Index               |       | 100.00           |       | 75.44                                     |       | 97.99 |   | 73.02 |   | 56.12 |   | 60.32 |   |
|                          |            |                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 6.       SELECTEDFINANCIAL DATA**
| ** **                                                                                                             | ** ** | **Year Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **(In thousands, except per share amounts)**                                                  | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Statement of Operations Data**                                                                                       | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                                                                                          | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| PPT Division                                                                                                           |       | $                                       | 90,590     |   | $ | 81,301 |   | $ | 86,806 |   | $ | 65,958 |   | $ | 67,067 |   |
| AMI Division                                                                                                           |       | 15,408                                  |       | 12,093 |   | 11,709 |   | 7,550 |   | 3,397 |   |
| Other Division(1)(2)                                                                                                   |       | —                                  |       | — |   | 23 |   | 4,624 |   | 15,420 |   |
| Total revenues                                                                                                         |       | 105,998                                 |       | 93,394 |   | 98,538 |   | 78,132 |   | 85,884 |   |
| **Operating expenses:**                                                                                                | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of sales                                                                                                          |       | 72,492                                  |       | 65,111 |   | 69,882 |   | 60,090 |   | 71,347 |   |
| Selling and  administrative expense                                                                                    |       | 24,938                                  |       | 22,241 |   | 20,046 |   | 16,357 |   | 14,434 |   |
| Net loss (gain)  from litigation settlements                                                                           |       | —                                  |       | — |   | 225 |   | — |   | (362 | ) |
| Asset impairment                                                                                                       |       | —                                  |       | — |   | 27 |   | — |   | 844 |   |
| Total operating  expenses                                                                                              |       | 97,430                                  |       | 87,352 |   | 90,180 |   | 76,447 |   | 86,263 |   |
| Income (loss)  from continuing operations                                                                              |       | 8,568                                   |       | 6,042 |   | 8,358 |   | 1,685 |   | (379 | ) |
| Other income                                                                                                           |       | 1,514                                   |       | 1,014 |   | 322 |   | 233 |   | 179 |   |
| Income (loss)  from continuing operations before income tax (provision) benefit and loss from discontinued  operations |       | 10,082                                  |       | 7,056 |   | 8,680 |   | 1,918 |   | (200 | ) |
| Income tax  (provision) benefit                                                                                        |       | (4,034                                  | )          | (2,590 | ) | (3,437 | ) | (479 | ) | 56 |   |
| Income (loss)  from continuing operations                                                                              |       | 6,048                                   |       | 4,466 |   | 5,243 |   | 1,439 |   | (144 | ) |
| Loss from  discontinued operations                                                                                     |       | —                                  |       | — |   | — |   | (129 | ) | (583 | ) |
| Net income  (loss)                                                                                                     |       | $                                       | 6,048      |   | $ | 4,466 |   | $ | 5,243 |   | $ | 1,310 |   | $ | (727 | ) |
| ** **                                                                                                             | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic income (loss) per  share from continuing operations                                                         |       | $                                       | 0.57       |   | $ | 0.42 |   | $ | 0.52 |   | $ | 0.15 |   | $ | (0.02 | ) |
| Basic loss per share  from discontinued operations                                                                     |       | —                                  |       | — |   | — |   | (0.01 | ) | (0.06 | ) |
| Basic net income (loss)  per share                                                                                     |       | $                                       | 0.57       |   | $ | 0.42 |   | $ | 0.52 |   | $ | 0.14 |   | $ | (0.08 | ) |
|                                                                                                                   |       |                                    |       |   |   |   |   |   |   |   |   |
| Diluted income (loss)  per share from continuing operations                                                            |       | $                                       | 0.54       |   | $ | 0.40 |   | $ | 0.49 |   | $ | 0.14 |   | $ | (0.02 | ) |
| Diluted loss per share  from discontinued operations                                                                   |       | —                                  |       | — |   | — |   | (0.01 | ) | (0.06 | ) |
| Diluted net income  (loss) per share                                                                                   |       | $                                       | 0.54       |   | $ | 0.40 |   | $ | 0.49 |   | $ | 0.13 |   | $ | (0.08 | ) |
| Shares used in per  share calculations:                                                                                |       |                                    |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                  |       | 10,632                                  |       | 10,575 |   | 10,081 |   | 9,600 |   | 9,641 |   |
| Diluted                                                                                                                |       | 11,170                                  |       | 11,047 |   | 10,592 |   | 10,119 |   | 9,641 |   |

 
| ** **                | ** ** | **March31,** | ** ** |
|---------------------------|------------|--------------|------------|
| ** **                | ** ** | **2007**     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Balance Sheet Data**    | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital           |       | $            | 38,155     |   | $ | 30,907 |   | $ | 25,802 |   | $ | 14,633 |   | $ | 11,485 |   |
| Total assets              |       | 60,372       |       | 54,328 |   | 45,083 |   | 36,203 |   | 31,488 |   |
| Long-term  liabilities    |       | 2,338        |       | — |   | 51 |   | 235 |   | 668 |   |
| Stockholders’ equity |       | 41,566       |       | 35,481 |   | 29,933 |   | 18,796 |   | 16,047 |   |
|                           |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Other Division revenue in fiscal 2004 and 2003primarily represents revenue from our fulfillment center, 3PF.com, which was sold in fiscal 2004.

(2)          We did not have anyrevenues from our Other Division in 2007 as Supply Chain Essentialsä, OnDemand Essentialsä and Retail Essentialsä moved from the Other Division to the AMI Divisionduring the first quarter of fiscal 2007. Accordingly, revenue related to theseproducts in 2006, 2005 and 2004 was reclassified to the AMI Division forcomparison purposes.

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**ITEM 7.****                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Business Trends**

Ourcorporate structure includes separate Pay-Per-Transaction (“PPT”) and AdvancedMedia and Information (“AMI”) operating divisions and, accordingly, we reportcertain financial information by individual segment under this structure.

Our PPT Division focuses on managing our businessoperations that facilitate the delivery of home entertainment content products(DVDs, VHS tapes, etc.) and related rental and sales information for thecontent to home video specialty storesand other retailers, on a revenue sharing basis.  Welease product from various suppliers, typically motion picture studios. Underour PPT System, retailers sublease that product from us and rent it toconsumers. Retailers then share a portion of each retail rental transactionwith us and we share a portion of revenue with the studio. Since we collect,process and analyze rental and sales information at the title level, we reportthat information to both the studio and the respective retailers.

Our AMI Division concentrates on the management andgrowth of our Essentials SuiteTM of business intelligence services, as well asoperating our direct revenue sharing (“DRS”) services. Our Essentials SuiteTM software and services, offered on a recurring subscription basis,provide unique data collection, management, analysis and reporting functions,resulting in business intelligence information valuable to our clients. Our DRS servicescollect, track, audit and report the results to the respective suppliers underestablished agreements on a fee for service basis.  During the first quarter of fiscal 2007, Supply Chain Essentialsä, OnDemand Essentialsä and Retail Essentialsä moved from the Other Division to the AMI Divisionas these lines were considered to be no longer in the development stage.

*The PPTDivision*

The financial results from thePPT Division continue to be affected by the changing dynamics in the home videorental market. This market is highly competitive and influenced greatly byconsumer spending patterns and behaviors. The end consumer has a wide varietyof choices from which to select their entertainment content. Some examplesinclude renting Units of product from our Participating Retailers, purchasingpreviously viewed Units from our Participating Retailers, ordering product viaonline subscriptions and/or online distributors, subscribing to at-home moviechannels, purchasing and owning the unit directly or selecting an at-home “pay-per-view”or “on- demand” option. Our PPT system focuses on the traditional “brick andmortar” retailer. We believe that our system successfully addresses the manychoices available to consumers and affords our Participating Retailers theopportunity to stock their stores with a wider selection of titles and agreater supply of popular box office releases. Most of our arrangements are structured so that most ParticipatingRetailers pay minimal upfront fees and lower per transaction fees in exchangefor ordering Units of all titles offered by a particular Program Supplier(referred to as “output” programs). Since these programs usually result in moreoverall Units rented, our Retailers’ revenue and the corresponding share withthe studios have increased. These programs are, in part, an economic responseto the changing dynamics of the home video rental market.  We expect the growth of these output programsto continue, and believe that they will be financially beneficial for theParticipating Retailers, Program Suppliers and us.

Our base of ParticipatingRetailers continues to be strong and we are implementing strategies to obtainnew Participating Retailers and Program Suppliers in an effort to furtherstabilize and grow our overall PPT revenue and earnings streams.

Currently,we are continuing negotiations with our third largest Program Supplier. Todate, however, we have been unable to finalize a new agreement with thissupplier. Wecontinue to be in good standing with our remaining Program Suppliers and wemake on-going efforts to enhance those business relationships throughimprovement of current services offered and the development of new serviceofferings. We are also continually seeking to develop business relationshipswith new Program Suppliers. In November 2005, based on our successfulinvolvement with a major studio in Canada, we entered into a revenue sharingagreement which extends product offerings to Participating Retailers in theUnited States. This agreement was effective for titles released beginning inJanuary 2006, giving our U.S. Participating Retailers access to the large

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volume of high qualityentertainment that this major studio has been delivering for years, andyielding 20% of our total revenues in fiscal 2007. Also, in October 2006, webegan offering product from a major studio to our U.S. Participating Retailersyielding 5.6% of our total revenues in the fourth quarter of fiscal 2007.Additional Program Suppliers represented 17%, 16% and 12% of our total revenuesin fiscal 2007. As is typical of our agreements with Program Suppliers, ourrelationships with these Program Suppliers may be terminated without cause uponthirty days’ written notice by either party.

*AMI andOther Divisions*

We are also allocatingsignificant resources towards our business intelligence service offerings, boththose services that are currently operational as well as those that are invarious stages of development.  Our suiteof business intelligence services has been well received in the varioustargeted markets to date, as our offerings fit well with the needs identifiedby those market participants. Our Essentialsä business intelligence serviceofferings which are fully operational and no longer in significant stages ofdevelopment, realized a revenue increase of 28% during fiscal 2007 compared tofiscal 2006. We intend to continue to invest in our existing, as well as new,business intelligence services in the near-term as we expand the markets weserve and our service lines, which likely will lower our earnings. Longer-term,we believe these services will provide significant future revenue and earningsstreams and contribute to our overall success.

**Sources of Revenue**

Revenue by segment includes the following:

*PPT Division*

·                  order processing fees generated when Units areordered by and distributed to retailers;

·                  transaction fees generated when retailers rentUnits to consumers; additionally, certain arrangements include guaranteedminimum revenues from our customers; we recognize the guaranteed minimumrevenue on the street (release) date in accordance with Statement of Position 00-2, “Accounting byProducers or Distributors of Films,” (“SOP 00-2”) provided all other revenuerecognition criteria are met;

·                  sell-through fees generated when retailers sellpreviously-viewed rental Units to consumers; and

·                  buy-out fees generated when retailers purchaseUnits at the end of the lease term.

*AMI Division*

·                  direct revenue sharing fees from data tracking andreporting services provided to Program Suppliers (“DRS”);

·                  revenues from Box Office Essentialsä;

·                  revenues from Home Video Essentialsä;

·                  revenues from Supply Chain Essentialsä;

·                  revenues from OnDemand Essentialsä; and

·                  revenues from Retail Essentialsä.

*OtherDivision*

·                  revenue relating to other products and/or serviceswhich are still in the development stage, including AdTrakerä, which will capture census-level data regarding viewing patterns ofon-demand advertising for reporting to marketers and advertising agencies.

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**Results of Operations**
| ** **                               | ** ** | **Year Ended March 31, (1)** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(Dollars in thousands)**     | ** ** | **Dollars**                                      | ** ** | **% of   revenues** | ** ** | **Dollars** | ** ** | **% of  revenues** | ** ** | **Dollars** | ** ** | **% of   revenues** | ** ** |
| Revenues:                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
|  PPT Division                       |       | $                                                | 90,590     |   | 85.5 | % | $ | 81,301 |   | 87.1 | % | $ | 86,806 |   | 88.1 | % |
|  AMI Division                       |       | 15,408                                           |       | 14.5 |   | 12,093 |   | 12.9 |   | 11,709 |   | 11.9 |   |
|  Other  Division                    |       | —                                           |       | — |   | — |   | — |   | 23 |   | — |   |
|                                     |       | 105,998                                          |       | 100.0 |   | 93,394 |   | 100.0 |   | 98,538 |   | 100.0 |   |
| Operating  expenses:                     |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
|  Cost of sales                      |       | 72,492                                           |       | 68.4 |   | 65,111 |   | 69.7 |   | 69,882 |   | 70.9 |   |
|  Selling and  administrative        |       | 24,938                                           |       | 23.5 |   | 22,241 |   | 23.8 |   | 20,046 |   | 20.3 |   |
|  Net loss on  litigation settlement |       | —                                           |       | — |   | — |   | — |   | 225 |   | 0.2 |   |
|  Asset  impairment                  |       | —                                           |       | — |   | — |   | — |   | 27 |   | — |   |
|                                     |       | 97,430                                           |       | 91.9 |   | 87,352 |   | 93.5 |   | 90,180 |   | 91.5 |   |
| Income from  operations                  |       | 8,568                                            |       | 8.1 |   | 6,042 |   | 6.5 |   | 8,358 |   | 8.5 |   |
| Other income  (expense):                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
|  Interest  income                   |       | 1,521                                            |       | 1.4 |   | 1,016 |   | 1.1 |   | 333 |   | 0.3 |   |
|  Interest  expense                  |       | (7                                               | )          | — |   | (2 | ) | — |   | (11 | ) | — |   |
|                                     |       | 1,514                                            |       | 1.4 |   | 1,014 |   | 1.1 |   | 322 |   | 0.3 |   |
| Income before  income tax provision      |       | 10,082                                           |       | 9.5 |   | 7,056 |   | 7.6 |   | 8,680 |   | 8.8 |   |
| Income tax  provision                    |       | 4,034                                            |       | 3.8 |   | 2,590 |   | 2.8 |   | 3,437 |   | 3.5 |   |
| Net income                               |       | $                                                | 6,048      |   | 5.7 | % | $ | 4,466 |   | 4.8 | % | $ | 5,243 |   | 5.3 | % |

 

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(1)Percentages may not add due to rounding.

Certain results of operations information by segmentwas as follows:
|                                   | ** ** | **PPT**    | ** ** | **AMI**    | ** ** | **Other(1)** | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|--------------|------------|------------|------------|
| **Year  Ended March 31, 2007**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Sales to  external customers      |       | $          | 90,590     |       | $          | 15,408       |       | $          | —     |   | $ | 105,998 |   |
| Depreciation and  amortization    |       | 49         |       | 1,257      |       | 430          |       | 1,736      |       |
| Income (loss)  from operations    |       | 14,410     |       | 5,982      |       | (11,824      | )          | 8,568      |       |
| ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Year  Ended March 31, 2006**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Sales to  external customers      |       | $          | 81,301     |       | $          | 12,093       |       | $          | —     |   | $ | 93,394 |   |
| Depreciation and  amortization    |       | 42         |       | 1,545      |       | —       |       | 1,587      |       |
| Income (loss)  from operations    |       | 12,086     |       | 4,189      |       | (10,233      | )          | 6,042      |       |
|                              |       |       |       |       |       |         |       |       |       |
| **Year  Ended March 31, 2005(2)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Sales to external  customers      |       | $          | 86,806     |       | $          | 11,709       |       | $          | 23         |   | $ | 98,538 |   |

 

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(1)       Includes revenue andexpenses relating to products and/or services which are still in early stages,as well as corporate expenses and other expenses which are not allocated to aspecific segment.

(2)       The depreciation andamortization and operating income (loss) segment information for fiscal 2005 isnot included as it would be impracticable to do so.

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Additional results of operations information bysegment was as follows:
| ** **                           | ** ** | **Year Ended March 31,** (1) | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(Dollars in thousands)** | ** ** | **Dollars**                                      | ** ** | **% of   segment  revenues** | ** ** | **Dollars** | ** ** | **% of  segment  revenues** | ** ** | **Dollars** | ** ** | **% of   segment  revenues** | ** ** |
| **PPT  Division**                    |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                         | ** ** | **$     90,590**        | ** ** | **100.0** | **%** | **$     81,301** | ** ** | **100.0** | **%** | **$     86,806** | ** ** | **100.0** | % |
| Cost of sales                        |       | 70,255                                           |       | 77.6 |   | 63,538 |   | 78.2 |   | 68,848 |   | 79.3 |   |
| Gross margin                         |       | $                                                | 20,335     |   | 22.4 | % | $ | 17,763 |   | 21.8 | % | $ | 17,958 |   | 20.7 | % |
|                                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| **AMI  Division**                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                             |       | $                                                | 15,408     |   | 100.0 | % | $ | 12,093 |   | 100.0 | % | $ | 11,709 |   | 100.0 | % |
| Cost of sales                        |       | 2,237                                            |       | 14.5 |   | 1,573 |   | 13.0 |   | 1,034 |   | 8.8 |   |
| Gross margin                         |       | $                                                | 13,171     |   | 85.5 | % | $ | 10,520 |   | 87.0 | % | $ | 10,675 |   | 91.2 | % |
|                                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| **Other  Division**                  | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                             |       | $                                                | —     |   | — |   | $ | — |   | — |   | $ | 23 |   | 100.0 | % |
| Cost of sales                        |       | —                                           |       | — |   | — |   | — |   | — |   | — |   |
| Gross margin                         |       | $                                                | —     |   | — |   | $ | — |   | — |   | $ | 23 |   | 100.0 | % |

 

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(1)Percentages may not add due to rounding.

***Revenue***

Revenue increased$12.6 million, or 13.5% to $106.0 million in fiscal 2007 compared to $93.4million in fiscal 2006 and decreased $5.1 million, or 5.2%, in fiscal 2006compared to $98.5 million in fiscal 2005.

We realizedincreases in revenue across all of our major product lines in fiscal 2007compared to fiscal 2006.

The decrease inrevenue in fiscal 2006 compared to fiscal 2005 was primarily due to decreasesin transaction fees and sell-through fees, partially offset by increases inorder processing fees and our Essentials Suiteä of business intelligence services as describedmore fully below.

*PPTDivision*

PPT revenuesincreased $9.3 million, or 11.4% in fiscal 2007 compared to fiscal 2006 anddecreased $5.5 million, or 6.3% in fiscal 2006 compared to fiscal 2005. Detailof our PPT Division revenue by service line was as follows (in thousands):
| Year Ended March 31, | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Order processing  fees              |       | $        | 9,136      |     | $          | 7,546    |       | $ | 5,015 |   |
| Transaction fees                    |       | 65,212   |       | 59,062   |       | 64,335   |       |
| Sell-through  fees                  |       | 15,356   |       | 13,714   |       | 16,323   |       |
| Other                               |       | 886      |       | 979      |       | 1,133    |       |
|                                |       | $        | 90,590     |     | $          | 81,301   |       | $ | 86,806 |   |

 

Order processingfees increased $1.6 million, or 21.1%, in fiscal 2007 compared to fiscal 2006due partially to two new outputprograms with major suppliers, which went into effect in January and March2006, as well as increased volumes and quality of content from some of ourexisting Program Suppliers. These stronger product offerings resulted in higherorder processing fees per Unit in fiscal 2007 compared to fiscal 2006.These fees increased to $1.24 per Unit in fiscal 2007 compared to $1.13 perUnit in fiscal 2006, resulting in an increase of $0.8 million in revenues. Inaddition, the number of Units shipped with release dates in each periodincreased by 11% to 7.4 million Units in fiscal 2007 compared to 6.6 millionUnits in fiscal 2006, which contributed to a $0.8 million increase in revenue.

Order processingfees increased $2.5 million, or 50.5%, in fiscal 2006 compared to fiscal 2005due to a new output program with amajor supplier, which was effective April 1, 2005 and another new outputprogram that was effective in September 2005. The terms of these newagreements, and their utilization by our Participating Retailers during fiscal2006, resulted in higher order processing fees per unit 

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compared with fiscal 2005. These fees increased to $1.13 per Unitin fiscal 2006, compared to $0.64 per Unit in fiscal 2005, resulting in anincrease of $3.3 million. Partially offsetting this increase was a decrease inUnits shipped to 6.6 million Units during fiscal 2006 compared to 7.8 millionUnits in fiscal 2005, which contributed to an approximate $0.8 million decreasein revenue based on fiscal 2005 per Unit fees. In fiscal 2005, we shipped 1.5million Units to a major Participating Retailer whose contract expired inSeptember 2004. Excluding the impact of this contract, overall Units shipped toother Participating Retailers increased 5% in fiscal 2006 compared to fiscal2005, primarily due to the addition of the new output programs mentioned above.

Transaction fees increased $6.2 million, or 10.4%, in fiscal 2007compared to fiscal 2006 primarily due toincreased transactions related to output programs that began during the lastquarter of fiscal 2006 as discussed above. Rental transactions at ourParticipating Retailers increased 13% in fiscal 2007 compared to fiscal 2006,while the rate per transaction remained relatively flat. A portion of therental transactions were from arrangements which included minimum guarantees.For fiscal 2007, our rental transaction volume increase of 13% was reduced byrental guarantee transaction fees previously recognized in fiscal 2006, whichresulted in a net increase in transactions fees of 10%.

Transaction fees decreased $5.3 million, or 8.2%, in fiscal 2006compared to fiscal 2005. The decreasein transaction fees in fiscal 2006 compared to fiscal 2005 was primarily due tothe loss of a significant Participating Retailer whose contract expired inSeptember 2004, partially offset by increased fees related to the new outputprograms discussed above. Fees from this significant Participating Retailerwere $15.2 million in fiscal 2005. Excluding the impact of this ParticipatingRetailer, transaction fees from all other Participating Retailers increased$9.9 million, or 20%, in fiscal 2006 compared to fiscal 2005.

Sell-through fees increased $1.6 million, or 12.0%, in fiscal 2007compared to fiscal 2006 primarily due tohigher volumes of product available for sale to our Participating Retailers.

Sell-through fees decreased $2.6 million, or 16.0%, in fiscal 2006compared to fiscal 2005. We realized an approximate $4.1 million decrease in sell-through fees due to the lossof the significant Participating Retailer mentioned above. This decrease waspartially offset by a $1.4 million, or 12% increase, due to an increase in thenumber of Units shipped to other Participating Retailers.

*AMIDivision*

Revenuesfrom our AMI division increased $3.3 million, or 27.4%, in fiscal 2007 comparedto fiscal 2006 and increased $0.4 million, or 3.3% in fiscal 2006 compared tofiscal 2005.

OurEssentialsäbusiness intelligence service offerings, which include those services thatmanagement considers fully operational and no longer in significant stages ofdevelopment, saw  revenue increases of$1.7 million, or 27.7%, in fiscal 2007 compared to fiscal 2006 and of $1.3million, or 27.2%, in fiscal 2006 compared to fiscal 2005. Revenues related toour Essentialsäbusiness intelligence service offerings have increased primarily due to ourcontinued investment in, and marketing of, these offerings.

DRS revenues increased$1.6 million, or 27.1%, in fiscal 2007 compared to fiscal 2006 due to increasesin the number of transactions processed by us and the addition of newcustomers.

DRSrevenues decreased $0.9 million, or 13.4%, in fiscal 2006 compared to fiscal2005 due to a decrease in the total number of DRS rental transactionsprocessed. This decrease resulted from a decline in the number of DRS rentaltransactions processed for one of our major studios in fiscal 2006 compared tofiscal 2005 due to a change in the relationship between the studio and one ofits direct revenue sharing customers.

*OtherDivision*

We did not have any revenuesfrom our Other Division in fiscal 2007 as Supply Chain Essentialsä, OnDemand Essentialsä and Retail Essentialsä moved from the Other Division to the AMI Divisionduring the first quarter of fiscal 2007. Accordingly, revenue related to theseproducts in fiscal 2006 and fiscal 2005 was reclassified to the AMI Divisionfor comparison purposes.

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A new revenue stream, AdTrakerä, is still in development and has notgenerated any revenue to date.

***Cost of Sales***

Cost of salesconsists of order processing costs, transaction costs, sell-through costs,handling and freight costs in the PPT Division and costs in the AMI Divisionassociated with certain Essentialsä business intelligence service offerings. Theseexpenditures represent the direct costs to produce revenues.

In thePPT Division, order processing costs, transaction costs and sell through costsrepresent the amounts due to the Program Suppliers that hold the distributionrights to the Units. Freight costs represent the cost to pick, pack and shiporders of Units to the Participating Retailers. Our cost of sales can also beimpacted by the release dates of Units with guarantees. We recognize theguaranteed minimum costs on the release date. The terms of some of ouragreements result in 100% cost of sales on titles in the first month in whichthe Unit is released, which results in lower margins during the initial portionof the revenue sharing period. Once the Unit’s rental activity exceeds therequired amount for these guaranteed minimums, margins generally expand duringthe second and third months of the Unit’s revenue sharing period.  However, since these factors are highly dependent upon the quality,timing and release dates of all new products, margins may not expand to anysignificant degree during any period.  Assuch, it is difficult to predict the ultimate impact programs with guaranteedminimums will have on future results of operations in any reporting period.

In the AMIDivision, a portion of the Essentialsä business intelligence service offerings costsrepresent costs associated with the operation of a call center for our BoxOffice Essentialsäservices, as well as costs associated with amortizing capitalized internallydeveloped software used to provide the corresponding services and direct costsincurred to obtain, cleanse and process data and maintain our systems.

Cost of sales increased $7.4million, or 11.3%, to $72.5 million in fiscal 2007 compared to $65.1 million infiscal 2006 and decreased $4.8 million, or 6.8%, in fiscal 2006 compared to$69.9 million in fiscal 2005. Cost of sales as a percentage of revenue was68.4% in fiscal 2007, 69.7% in fiscal 2006 and 70.9% in fiscal 2005.

The increase in cost of salesin fiscal 2007 compared to fiscal 2006 was primarily due to the increase inrevenues discussed above.

The decrease in cost of salesas a percentage of revenue in fiscal 2007 compared to fiscal 2006 was primarilydue to higher PPT revenue discussed above and an increase in AMI revenue as apercentage of total revenue. Revenue from our AMI Division generates highergross margins than revenue from our PPT Division.

The decrease in cost of salesin fiscal 2006 compared to fiscal 2005 was primarily due to the decrease inrevenues discussed above. The decrease in cost of sales as a percentage ofrevenue was primarily due to improved margins for the PPT segment, offset bylower margins in the AMI segment. The PPT segment experienced lower cost ofsales as a percentage of revenue primarily as a result of the higher orderprocessing fees related to the new output programs mentioned above. The higherorder processing fees per Unit from most of these new output programs generateminimal corresponding costs, which resulted in improved margins. The highercosts for the AMI segment primarily related to reduced DRS revenue as well asincreased costs associated with the operation of our call center.

***Selling andAdministrative***

Sellingand administrative expenses consist primarily of compensation and benefits,development, marketing and advertising costs, legal and professional fees,communications costs, depreciation and amortization of tangible fixed assetsand software, real and personal property leases, as well as other generalcorporate expenses.

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Selling and administrativeexpenses increased $2.7 million, or 12.1%, to $24.9 million in fiscal 2007compared to $22.2 million in fiscal 2006 and increased $2.2 million, or 10.9%,in fiscal 2006 compared to $20.0 million in fiscal 2005.

The increase in selling andadministrative expenses in fiscal 2007 compared to fiscal 2006 was primarilydue to increases in compensation and related expenses due to expansion of ourexisting and new lines of business. In addition, fiscal 2007 included $856,000of stock-based compensation expense related to stock options and deferred stockunits in connection with the implementation of SFAS No. 123R compared to zeroin fiscal 2006. See also Note 11 of Notes to the Condensed ConsolidatedFinancial Statements.

As a percentage of revenues,selling and administrative expenses decreased to 23.5% in fiscal 2007 comparedto 23.8% in fiscal 2006, primarily due to increased revenues over which fixed costsare spread, partially offset by the increases noted above.

The increase in selling andadministrative expenses in fiscal 2006 compared to fiscal 2005 was primarilydue to a $1.4 million increase in expenditures related to our continuedinvestment in the development and marketing of our Essentialsä business service offerings and a $0.3 million increase in our bonusaccrual. Additionally, selling and administrative expenses in fiscal 2006included a non-cash charge of $0.2 million related to the fair value of stockoptions granted to a consultant. These increases were offset in part by lowerfees for Sarbanes-Oxley related consulting services in fiscal 2006 compared tofiscal 2005. Additionally, in fiscal 2005, we recovered $0.4 million related toan embezzlement, which was discovered in March 2004.

***Net Loss onLitigation Settlement***

The net loss on litigationsettlement of $0.2 million in fiscal 2005 relates to the settlement of adisagreement with a fulfillment provider which arose in connection with the saleof our 3PF.Com assets. The $0.2 million includes $0.1 million in damages andrelated interest for full settlement of all the claims and the completemutual release from any further obligations of either party and $0.1 million oflegal fees.

***Asset Impairment***

Asset impairment of $27,000 in fiscal 2005 relates tothe write-off of capitalized software development costs for two projects whichmanagement determined would not be completed or placed in service.

***Interest Income***

Interest income was $1.5million, $1.0 million and $0.3 million, respectively, in fiscal 2007, 2006 and2005. The increases in interest income primarily related to higher interestrates and higher average cash and investment balances in fiscal 2007 comparedto fiscal 2006 and in fiscal 2006 compared to fiscal 2005. The higher interestrates were due to both higher market rates and the investment of our cash inhigher-yield investments. Our average combined cash and investment balance was$30.2 million, $25.2 million and $13.6 million for fiscal 2007, fiscal 2006 andfiscal 2005, respectively.

***Income Taxes***

Oureffective tax rate was 40.0%, 36.7% and 39.6%, respectively, in fiscal 2007,2006 and 2005. Our effective tax rate differs from the federal statutory taxrate primarily due to state income taxes. The 36.7% effective tax rate infiscal 2006 benefited from the utilization of net operating loss carryforwardsand capital loss carryforwards, most of which were fully utilized by March 31,2006, and which previously had been reserved against.

***Inflation***

We believe thatthe impact of inflation was minimal on our business in fiscal 2007, 2006 and2005.

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**Liquidity and Capital Resources**

Our sources of liquidityinclude our cash, cash equivalents and marketable securities, cash expected tobe generated from future operations and investment income and our $15.0 millionline of credit. Based on our current financial projections and projected cashneeds, we believe that our available sources of liquidity will be sufficient tofund our current operations, the continued current development of our businessintelligence services and other cash requirements through at least March 31,2008.

Cash and cash equivalentsdecreased $4.3 million to $11.4 million at March 31, 2007 compared to $15.7million at March 31, 2006. This decrease resulted primarily from the use of$6.9 million for the purchase of marketable securities, $3.2 million for thepurchase of property and equipment and $1.9 million for the repurchase of ourcommon stock, partially offset by $5.9 million provided by operations and $1.0million provided by notes payable. Our current ratio was 3.3:1.0 at March 31,2007 and 2.6:1.0 at March 31, 2006.

Accounts receivable, net ofallowances, increased $1.7 million to $20.0 million at March 31, 2007 comparedto $18.3 million at March 31, 2006, due primarily to higher revenues on ourEssentialsä lines of business whichled to higher balances on accounts from our Essentialsä customers, as well as the timing of billings to customers of the PPTDivision.

During fiscal 2007, we spent$3.2 million on property and equipment, including $1.2 million for thecapitalization of internally developed software for our business intelligenceservice offerings. The remaining expenditures were primarily for new accountingsoftware and costs associated with our corporate headquarter officerenovations. As further discussed below, we have received reimbursementstotaling $1.8 million from our landlord, the state of Oregon and the PortlandDevelopment Commission to offset these expenditures. See also Note 6 of Notesto Consolidated Financial Statements.

We anticipate spending a totalof approximately $4.6 million on property and equipment in fiscal 2008,including approximately $3.2 million for the capitalization of internallydeveloped software, primarily for our business intelligence service offerings.Other capital expenditures in fiscal 2008 will be primarily for computerequipment.

Accounts payable decreased $1.8million to $13.7 million at March 31, 2007 compared to $15.5 million at March31, 2006 primarily due to the timing of Program Supplier and other vendorpayments.

Deferredrent, current and long-term, of $1.1 million at March 31, 2007 representsamounts received for qualified renovations on our corporate headquarters andfree rent for the first three months of the lease term. The deferred rent isbeing amortized against rent expense over the term of the related lease andtotals approximately $29,000 per quarter. See also Note 2 of Notes to Consolidated FinancialStatements and “Critical Accounting Policies and Estimates — LandlordIncentives” below.

Notes payable of$1.0 million at March 31, 2007 represents a loan from the Portland DevelopmentCommission (“PDC”), a $58,000 conditional grant from the PDC and a loan fromthe State of Oregon related to our corporate headquarters renovations. The loanfrom the PDC of $0.7 million does not bear interest until it becomes due, whichis January 1, 2009, and contains provisions relating to forgiveness if we meetcertain requirements. If the loan is not forgiven, it will accrue interest atthe rate of 8.5% per annum beginning on the date that it becomes due. However,if the loan is forgiven, no interest will accrue. Similar terms apply to theconditional grant of $58,000.  The loanfrom the State of Oregon of $0.2 million bears interest at the rate of 5% perannum and contains provisions relating to forgiveness if we meet certainrequirements. See also Note 6 of Notes to Consolidated Financial Statements.

In January 2006,our board of directors adopted a share repurchase program authorizing thepurchase of up to 1,000,000 shares of our common stock. Through March 31, 2007,193,500 shares had been repurchased under this plan at an average price of$10.07 per share and 806,500 shares remained available for purchase. This plandoes not have an expiration date.

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We currently have a securedrevolving line of credit for $15.0 million, with a maturity of December 1,2007. Interest on the line of credit is at our choice of either the bank’sprime interest rate minus 0.5 percent or LIBOR plus 1.5 percent. The creditline is secured by substantially all of our assets. The line of credit includescertain financial covenants requiring: (1) a consolidated pre-tax income to beachieved each fiscal quarter of a minimum of $1.00, and consolidated after-taxincome not less than $1.00 on an annual basis, determined at fiscal year end;(2) a minimum current ratio of 1.5:1.0, measured quarterly; and (3) a maximumdebt-to-tangible net worth ratio of 1.5:1.0, measured quarterly. Based upon thefinancial results reported as of, and for the quarter ended March 31, 2007, wedetermined that we were in compliance with the financial covenants at March 31,2007. At March 31, 2007, we had no outstanding borrowings under this agreement.

**Contractual Payment Obligations**

Asummary of our contractual commitments and obligations as of March 31, 2007 wasas follows (in thousands):
|                                   | ** ** | **Payments Due By Fiscal Period** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------|------------|
| **Contractual Obligation**        | ** ** | **Total**                                             | ** ** | **2008** | ** ** | **2009 and  2010** | ** ** | **2011 and  2012** | ** ** | **2013 and  beyond** | ** ** |
| ** **                        | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases             |       | $                                                     | 10,840     |   | $ | 1,140 |   | $ | 2,212 |   | $ | 2,082 |   | $ | 5,406 | ** ** |
| PDC loan and conditional grant(1) |       | 748                                                   |       | — |   | 748 |   | — |   | — |   |
| State of Oregon loan(1)           |       | 207                                                   |       | — |   | 207 |   | — |   | — |   |
| Program Supplier guarantees       |       | 3,826                                                 |       | 3,826 |   | — |   | — |   | — |   |
| Management contracts(2)           |       | 1,138                                                 |       | 1,138 |   | — |   | — |   | — |   |
|                              |       | $                                                     | 16,759     |   | $ | 6,104 |   | $ | 3,167 |   | $ | 2,082 |   | $ | 5,406 |   |

 

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(1)       The loan from the PDC of $0.7 million does notbear interest until it becomes due and contains provisions relating toforgiveness if we meet certain requirements. If the loan is not forgiven, itwill accrue interest at the rate of 8.5% per annum beginning on the date thatit becomes due, which is January 1, 2009. However, if the loan is forgiven, nointerest will accrue. Similar terms apply to the conditional grant of $58,000.The loan from the State of Oregon of $0.2 million bears interest at the rate of5% per annum and contains provisions relating to forgiveness if we meet certainrequirements.

(2)       Most of the contracts with executivemanagement have a one-year initial term. The above amounts do not include anyadditional payments which may be required in the event of termination or achange in control. See also our definitive proxy statement for our 2007 annualmeeting for details of our 2007 executive compensation.

**CriticalAccounting Policies and Estimates**

The preparation ofour financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Ourestimates are based on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Following isa discussion of our critical accounting estimates. See Note 2 of Notes toConsolidated Financial Statements, *Significant AccountingPolicies*, for additional information.

***Allowance for Doubtful Accounts***

Credit limits areestablished through a process of reviewing the financial history and stabilityof each customer. We regularly evaluate the collectibility of accountsreceivable by monitoring past due balances. If it is determined that a customermay be unable to meet its financial obligations, a specific reserve isestablished based on the amount we expect to recover. An additional generalreserve is provided based on aging of accounts receivable and our historicalcollection experience. If circumstances change related to specific customers,overall aging of accounts receivable or collection experience, our estimate ofthe recoverability of accounts receivable could materially change. Ourallowance for doubtful accounts totaled $596,000 and $461,000, respectively, atMarch 31, 2007 and 2006.

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***Program Supplier Reserves***

Wehave entered into guarantee contracts with certain Program Suppliers providingtitles for distribution under our PPT system. These contracts guarantee theProgram Suppliers minimum payments per Unit shipped that are recoupable basedon revenue-sharing activity. In some cases, these guarantees are paid inadvance. For amounts not paid in advance, we record a liability for the grossamount of the guarantee due to the Program Supplier on the street date inaccordance with Statement of Position 00-2, “Accounting by Producers orDistributors of Films” (“SOP 00-2”). For guarantees paid in advance, theunearned portion of the guarantees is included as Advances to Program Supplierson our consolidated balance sheets. Using historical experience and year to date rental experience for eachtitle, we estimate the projected revenue to be generated under each guarantee.We have historically been able to reasonably estimate shortages after 30 to 60days of rental activity. We then establish a Program Supplier reserve fortitles that are projected to experience a shortage under the provisions of theguarantee. The Program Supplier reserve is netted against Advances to ProgramSuppliers on our consolidated balance sheets. We continually review thesefactors and make adjustments to the reserves as needed. The balance in thisreserve totaled $0.02 million and $0.03 million, respectively, at March 31,2007 and 2006.

***Deferred Taxes***

We account forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Inaccordance with SFAS No. 109, deferred tax assets arise from the tax benefit ofamounts expensed for financial reporting purposes but not yet deducted for taxpurposes and from unutilized tax credits and NOL carry forwards. We evaluateour deferred tax assets on a regular basis to determine if a valuationallowance is required. To the extent it is determined the recoverability of thedeferred tax assets is unlikely, we will record a valuation allowance againstdeferred tax assets. As of March 31, 2007 and 2006, we had a valuationallowance of $0.1 million and $0.6 million, respectively, recorded against ourCanadian net operating loss carryforwards. Net deferred tax assets(liabilities) totaled $(0.3) million and $0.4 million, respectively, as ofMarch 31, 2007 and 2006.

***Landlord Incentives***

We maintain our headquarters in Portland,Oregon. On December 2, 2005, we renewed our current lease. The new lease termbegan on January 1, 2007 and expires on December 31, 2016. During fiscal 2007,we renovated our headquarter offices and expanded our occupancy from 48,000square feet to approximately 55,500 square feet. Our new lease containsprovisions relating to an allowance from our landlord associated with the costsof our improvements, as well as three months of free rent. These landlordincentives totaled $1.1 million at March 31, 2007, are recorded as deferredrent and are being amortized at the rate of approximately $29,000 per quarter,as a reduction to lease expense over the lease term. The leasehold improvementsare recorded as assets and are included in Property and Equipment on theconsolidated balance sheet. The leasehold improvements are being depreciatedover their economic lives, which are estimated to be 10 years.

***Stock-Based Compensation***

On April 1, 2006,we adopted SFAS No. 123R, “Share-Based Payment,” which requires the measurementand recognition of compensation expense for all share-based payment awardsgranted to our employees and directors, including employee stock options anddeferred stock units (“DSUs”) based on the estimated fair value of the award onthe grant date.  Upon the adoption of SFAS No. 123R, we maintained ourmethod of valuation for stock option awards using the Black-Scholes valuationmodel, which we had used historically for the purpose of providing pro formafinancial disclosures in accordance with SFAS No. 123, “Accounting forStock-Based Compensation.” As of March 31, 2007, unrecognized stock-basedcompensation related to outstanding, but unvested, options and DSUs was $0.7million, which will be recognized over the weighted average remaining vestingperiod of 2.8 years.

Theuse of the Black-Scholes valuation model to estimate the fair value of stockoption awards requires us to make judgments on assumptions regarding therisk-free interest rate, expected dividend yield, expected term and expectedvolatility over the expected term of theaward. The assumptions used in calculating the fair value of share-basedpayment awards represent management’s best estimates, but these estimatesinvolve inherent uncertainties and the application of expense could bematerially different in the future.

25

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Compensation expense isonly recognized on awards that ultimately vest. However, we have notreduced the stock-based compensation expense for estimated forfeitures as thereis no basis for estimating future forfeitures as most unvested options are heldby members of senior management and the Board of Directors.  Weupdate for forfeitures as they occur and recognize any changes to accumulatedcompensation expense in the period of change. If actual forfeitures aresignificant, our results of operations could be materially impacted.

**NewAccounting Pronouncements**

See Note 3 ofNotes to Consolidated Financial Statements for a discussion of the impact ofnew accounting pronouncements.

**Off-BalanceSheet Arrangements**

Other thandisclosed above under Contractual Payment Obligations, we do not have anyoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources that is material to investors.

**ITEM 7A.****                    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

We have considered the provisions of FinancialReporting Release No. 48 “Disclosure of Accounting Policies for DerivativeFinancial Instruments and Derivative Commodity Instruments, and Disclosure ofQuantitative and Qualitative Information about Market Risk Inherent inDerivative Financial Instruments, Other Financial Instruments and DerivativeCommodity Instruments.” We had no holdings of derivative financial or commodityinstruments at March 31, 2007.

A review of our other financial instrumentsand risk exposures at March 31, 2007 revealed that we had exposure to interestrate risk related to our cash deposits and marketable securities. We utilizedsensitivity analyses to assess the potential effect of this risk and concludedthat near-term changes in interest rates should not materially adversely affectour financial position, results of operations or cash flows.

26

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**ITEM 8.**** ****       FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Boardof Directors and Stockholders

Rentrak Corporation

We have auditedthe accompanying consolidated balance sheets of Rentrak Corporation as of March31, 2007 and 2006, and the related consolidated statements of income,stockholders’ equity and comprehensive income, and cash flows for each of thethree years in the period ended March 31, 2007.**Thesefinancial statements are the responsibility of the Company’s management.**Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).**Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.**An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements.**An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.**We believethat our audits provide a reasonable basis for our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Rentrak Corporation as of March31, 2007 and 2006, and the results of their consolidated operations and theirconsolidated cash flows for each of the three years in the period ended March31, 2007 in conformity with accounting principles generally accepted in theUnited States of America.

As discussed in Note 2to the consolidated financial statements, the Company changed its method ofaccounting for stock-based compensation as a result of adopting Statement ofFinancial Accounting Standards No. 123(R), *Share-Based Payment* (Revised 2004), effective April 1, 2006.

Our audits wereconducted for the purpose of forming an opinion on the basic consolidatedfinancial statements taken as a whole. The financial statement schedule listedin the Index at Item 15 is presented for purposes of additional analysis and isnot a required part of the basic financial statements. This schedule has beensubjected to the auditing procedures applied in the audit of the basicfinancial statements and, in our opinion, is fairly stated in all materialrespects in relation to the basic financial statements taken as a whole.

We also have audited,in accordance with the standards of the Public Company Accounting OversightBoard (United States), the effectiveness of Rentrak Corporation’s internalcontrol over financial reporting as of March 31, 2007, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) and our report dated June 4, 2007 expressed an unqualified opinionthereon.
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|
|                   |
| Portland, OR           |
| June 4, 2007           |

 

27

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**Rentrak Corporation and SubisdiariesConsolidated Balance Sheets(In thousands, except per share amounts)**
| ** **                                                                                                         | ** ** | **March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                         | ** ** | **2007**           | ** ** | **2006** | ** ** |
| **Assets**                                                                                                         | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current Assets:                                                                                                    |       |               |       |   |   |
| Cash and cash equivalents                                                                                          |       | $                  | 11,351     |   | $ | 15,666 |   |
| Marketable securities                                                                                              |       | 22,105             |       | 14,832 |   |
| Accounts receivable, net of allowances for doubtful  accounts of $596 and $461                                     |       | 19,965             |       | 18,314 |   |
| Note receivable                                                                                                    |       | 385                |       | — |   |
| Advances to program suppliers, net of program supplier  reserves of $23 and $32                                    |       | 166                |       | 225 |   |
| Deferred income tax assets                                                                                         |       | 77                 |       | 110 |   |
| Other current assets                                                                                               |       | 574                |       | 607 |   |
| Total Current Assets                                                                                               |       | 54,623             |       | 49,754 |   |
|                                                                                                               |       |               |       |   |   |
| Property and  Equipment, net of accumulated  depreciation of $6,325 and $5,876                                |       | 5,097              |       | 3,623 |   |
| Deferred Income  Tax Assets                                                                                        |       | —             |       | 312 |   |
| Other Assets                                                                                                       |       | 652                |       | 639 |   |
| Total Assets                                                                                                       |       | $                  | 60,372     |   | $ | 54,328 |   |
|                                                                                                               |       |               |       |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                     | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current  Liabilities:                                                                                              |       |               |       |   |   |
| Accounts payable                                                                                                   |       | $                  | 13,707     |   | $ | 15,493 |   |
| Taxes payable                                                                                                      |       | 125                |       | 972 |   |
| Accrued liabilities                                                                                                |       | 455                |       | 532 |   |
| Deferred rent, current portion                                                                                     |       | 90                 |       | — |   |
| Accrued compensation                                                                                               |       | 1,631              |       | 1,366 |   |
| Deferred revenue                                                                                                   |       | 460                |       | 484 |   |
| Total Current Liabilities                                                                                          |       | 16,468             |       | 18,847 |   |
|                                                                                                               |       |               |       |   |   |
| Deferred Rent,  long-term portion                                                                                  |       | 1,050              |       | — |   |
| Deferred Income  Tax Liabilities                                                                                   |       | 333                |       | — |   |
| Notes Payable                                                                                                      |       | 955                |       | — |   |
| Total Liabilities                                                                                                  |       | 18,806             |       | 18,847 |   |
|                                                                                                               |       |               |       |   |   |
| Commitments and  Contingencies                                                                                     |       | —             |       | — |   |
|                                                                                                               |       |               |       |   |   |
| Stockholders’  Equity:                                                                                        |       |               |       |   |   |
| Preferred stock, $0.001 par value; 10,000 shares  authorized; none issued                                          |       | —             |       | — |   |
| Common stock, $0.001 par value; 30,000 shares  authorized; shares issued and outstanding:   10,724 and 10,697 |       | 11                 |       | 11 |   |
| Capital in excess of par value                                                                                     |       | 48,155             |       | 48,069 |   |
| Accumulated other comprehensive income                                                                             |       | 132                |       | 181 |   |
| Accumulated deficit                                                                                                |       | (6,732             | )          | (12,780 | ) |
| Total Stockholders’ Equity                                                                                    |       | 41,566             |       | 35,481 |   |
| Total  Liabilities and Stockholders’ Equity                                                                   |       | $                  | 60,372     |   | $ | 54,328 |   |

 

See accompanying Notes toConsolidated Financial Statements.

28

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**Rentrak Corporation andSubisdiaries**

**ConsolidatedIncome Statements**

**(In thousands, except per shareamounts)**

 
| ** **                              | ** ** | **For the Year Ended March 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                    |       |                                                      |       |   |   |   |   |
| Revenue                                 |       | $                                                         | 105,998    |   | $ | 93,394 |   | $ | 98,538 |   |
|                                    |       |                                                      |       |   |   |   |   |
| Operating  expenses:                    |       |                                                      |       |   |   |   |   |
| Cost of sales                           |       | 72,492                                                    |       | 65,111 |   | 69,882 |   |
| Selling and administrative              |       | 24,938                                                    |       | 22,241 |   | 20,046 |   |
| Net loss from litigation settlements    |       | —                                                    |       | — |   | 225 |   |
| Asset impairment                        |       | —                                                    |       | — |   | 27 |   |
|                                    |       | 97,430                                                    |       | 87,352 |   | 90,180 |   |
| Income from  operations                 |       | 8,568                                                     |       | 6,042 |   | 8,358 |   |
|                                    |       |                                                      |       |   |   |   |   |
| Other income  (expense):                |       |                                                      |       |   |   |   |   |
| Interest income                         |       | 1,521                                                     |       | 1,016 |   | 333 |   |
| Interest expense                        |       | (7                                                        | )          | (2 | ) | (11 | ) |
|                                    |       | 1,514                                                     |       | 1,014 |   | 322 |   |
| Income before  income taxes             |       | 10,082                                                    |       | 7,056 |   | 8,680 |   |
| Provision for  income taxes             |       | 4,034                                                     |       | 2,590 |   | 3,437 |   |
| Net income                              |       | $                                                         | 6,048      |   | $ | 4,466 |   | $ | 5,243 |   |
|                                    |       |                                                      |       |   |   |   |   |
| Basic net income  per share             |       | $                                                         | 0.57       |   | $ | 0.42 |   | $ | 0.52 |   |
|                                    |       |                                                      |       |   |   |   |   |
| Diluted net  income per share           |       | $                                                         | 0.54       |   | $ | 0.40 |   | $ | 0.49 |   |
|                                    |       |                                                      |       |   |   |   |   |
| Shares used in  per share calculations: |       |                                                      |       |   |   |   |   |
| Basic                                   |       | 10,632                                                    |       | 10,575 |   | 10,081 |   |
| Diluted                                 |       | 11,170                                                    |       | 11,047 |   | 10,592 |   |

 

See accompanying Notes toConsolidated Financial Statements.

29

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**Rentrak Corporation andSubsidiaries**

**ConsolidatedStatements of Stockholders’ Equity and Comprehensive Income**

**For The Years Ended March 31,2007, 2006 and 2005**

**(In thousands, except shareamounts)**

 
| ** **                                                  | ** ** | ** **            | ** ** | ** **         | ** ** | ** **                 | ** ** | **Cumulative**  | ** ** | ** **             | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|----------------------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                                  | ** ** | ** **            | ** ** | ** **         | ** ** | **Capital**                | ** ** | **Other**       | ** ** | ** **             | ** ** | **Total**  | ** ** |
| ** **                                                  | ** ** | **Common Stock** | ** ** | **In Excess** | ** ** | **Comprehensive**          | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                  | ** ** | **Shares**            | ** ** | **Amount**         | ** ** | **of Par Value** | ** ** | **Income**      | ** ** | **Deficit**            | ** ** | **Equity** | ** ** |
| **Balance  at March 31, 2004**                              |       | 9,739,537             |       | $                  | 9          |                       | $          | 41,094          |       | $                      | 181        |       | $          | (22,489 | ) | $ | 18,795 |   |
|                                                        |       |                  |       |               |       |                       |       |            |       |                   |       |       |       |
| Net income                                                  |       | —                |       | —             |       | —                     |       | —          |       | 5,243                  |       | 5,243      |       |
| Common stock  issued pursuant to stock plans                |       | 522,557               |       | 1                  |       | 2,394                      |       | —          |       | —                 |       | 2,395      |       |
| Common stock used  to pay for option exercises              |       | (25,381               | )          | —             |       | (270                       | )          | —          |       | —                 |       | (270       | )          |
| Issuance of  common stock                                   |       | 308,200               |       | —             |       | 2,774                      |       | —          |       | —                 |       | 2,774      |       |
| Income tax  benefit from stock option exercises             |       | —                |       | —             |       | 996                        |       | —          |       | —                 |       | 996        |       |
| **Balance  at March 31, 2005**                              |       | 10,544,913            |       | 10                 |       | 46,988                     |       | 181             |       | (17,246                | )          | 29,933     |       |
|                                                        |       |                  |       |               |       |                       |       |            |       |                   |       |       |       |
| Net income                                                  |       | —                |       | —             |       | —                     |       | —          |       | 4,466                  |       | 4,466      |       |
| Common stock  issued pursuant to stock plans                |       | 152,423               |       | 1                  |       | 707                        |       | —          |       | —                 |       | 708        |       |
| Fair value of  options granted to non-employee              |       | —                |       | —             |       | 219                        |       | —          |       | —                 |       | 219        |       |
| Income tax  benefit from stock option exercises             |       | —                |       | —             |       | 155                        |       | —          |       | —                 |       | 155        |       |
| **Balance  at March 31, 2006**                              |       | 10,697,336            |       | 11                 |       | 48,069                     |       | 181             |       | (12,780                | )          | 35,481     |       |
|                                                        |       |                  |       |               |       |                       |       |            |       |                   |       |       |       |
| Net income                                                  |       | —                |       | —             |       | —                     |       | —          |       | 6,048                  |       | 6,048      |       |
| Unrealized loss  on foreign currency translation            |       | —                |       | —             |       | —                     |       | (49             | )          | —                 |       | (49        | )          |
| Comprehensive  income                                       |       |                  |       |               |       |                       |       |            |       |                   |       | 5,999      |       |
| Common stock  issued pursuant to stock plans                |       | 321,359               |       | —             |       | 465                        |       | —          |       | —                 |       | 465        |       |
| Common stock used  to pay for option exercises and taxes    |       | (114,172              | )          | —             |       | (131                       | )          | —          |       | —                 |       | (131       | )          |
| Common stock  issued pursuant to warrant exercise           |       | 12,705                |       | —             |       | —                     |       | —          |       | —                 |       | —     |       |
| Deferred stock  units granted to Board of Directors         |       | —                |       | —             |       | 358                        |       | —          |       | —                 |       | 358        |       |
| Stock-based  compensation expense - options                 |       | —                |       | —             |       | 498                        |       | —          |       | —                 |       | 498        |       |
| Common stock  repurchased                                   |       | (193,500              | )          | —             |       | (1,948                     | )          | —          |       | —                 |       | (1,948     | )          |
| Income tax  benefit from stock option and warrant exercises |       | —                |       | —             |       | 844                        |       | —          |       | —                 |       | 844        |       |
| **Balance at March 31, 2007**                               |       | 10,723,728            |       | $                  | 11         |                       | $          | 48,155          |       | $                      | 132        |       | $          | (6,732 | ) | $ | 41,566 |   |

 

See accompanying Notes toConsolidated Financial Statements.

30

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**Rentrak Corporation andSubsidiaries**

**ConsolidatedStatements of Cash Flows**

**(In thoisands)**

 
| ** **                                                                                | ** ** | **For the Year Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities:**                                                | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                |       | $                                                         | 6,048      |   | $ | 4,466 |   | $ | 5,243 |   |
| Adjustments to reconcile net income to net cash  flows provided by operating activities:  |       |                                                      |       |   |   |   |   |
| (Gain) loss on disposition of assets                                                      |       | 37                                                        |       | — |   | (1 | ) |
| Tax benefit from stock option and warrant exercises                                       |       | 844                                                       |       | 155 |   | 996 |   |
| Depreciation and amortization                                                             |       | 1,736                                                     |       | 1,587 |   | 1,078 |   |
| Amortization of discount on marketable securities                                         |       | (421                                                      | )          | (181 | ) | — |   |
| Abandonment of capitalized software projects                                              |       | —                                                    |       | — |   | 27 |   |
| Adjustment to allowance for doubtful accounts                                             |       | —                                                    |       | 1 |   | 28 |   |
| Stock-based compensation                                                                  |       | 856                                                       |       | — |   | — |   |
| Excess tax benefits from stock-based compensation                                         |       | (358                                                      | )          | — |   | — |   |
| Deferred income taxes                                                                     |       | 679                                                       |       | 637 |   | 2,303 |   |
| Options granted to non-employee                                                           |       | 39                                                        |       | 179 |   | — |   |
| (Increase) decrease in:                                                                   |       |                                                      |       |   |   |   |   |
| Accounts and notes receivable                                                             |       | (2,036                                                    | )          | (3,887 | ) | 934 |   |
| Advances to program suppliers                                                             |       | 59                                                        |       | 960 |   | 3,003 |   |
| Income taxes receivable and prepaid taxes                                                 |       | —                                                    |       | 580 |   | (512 | ) |
| Other current assets                                                                      |       | (127                                                      | )          | 159 |   | (625 | ) |
| Increase (decrease) in:                                                                   |       |                                                      |       |   |   |   |   |
| Accounts payable                                                                          |       | (1,786                                                    | )          | 3,063 |   | (2,977 | ) |
| Accrued liabilities and compensation                                                      |       | (828                                                      | )          | 620 |   | 762 |   |
| Deferred rent                                                                             |       | 1,140                                                     |       | — |   | — |   |
| Deferred revenue and other liabilities                                                    |       | 6                                                         |       | 54 |   | (6 | ) |
| Net cash provided by operating activities                                                 |       | 5,888                                                     |       | 8,393 |   | 10,253 |   |
|                                                                                      |       |                                                      |       |   |   |   |   |
| **Cash  flows from investing activities:**                                                | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of marketable securities                                                         |       | (6,852                                                    | )          | (14,651 | ) | — |   |
| Purchase of property and equipment                                                        |       | (3,233                                                    | )          | (1,966 | ) | (1,806 | ) |
| Proceeds from sale of assets                                                              |       | —                                                    |       | — |   | 1 |   |
| Purchase of equity investment                                                             |       | —                                                    |       | — |   | (475 | ) |
| Note receivable payments received                                                         |       | 183                                                       |       | 486 |   | 412 |   |
| Net cash used in investing activities                                                     |       | (9,902                                                    | )          | (16,131 | ) | (1,868 | ) |
|                                                                                      |       |                                                      |       |   |   |   |   |
| **Cash  flows from financing activities:**                                                | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payments on capital lease obligation                                                      |       | —                                                    |       | (40 | ) | (36 | ) |
| Proceeds from notes payable                                                               |       | 955                                                       |       | — |   | — |   |
| Issuance of common stock                                                                  |       | 334                                                       |       | 708 |   | 2,124 |   |
| Excess tax benefits from stock-based compensation                                         |       | 358                                                       |       | — |   | — |   |
| Issuance of common stock to non-employees                                                 |       | —                                                    |       | — |   | 2,774 |   |
| Repurchase of common stock                                                                |       | (1,948                                                    | )          | — |   | — |   |
| Collection of note receivable, related party                                              |       | —                                                    |       | 753 |   | — |   |
| Net cash (used in) provided by financing activities                                       |       | (301                                                      | )          | 1,421 |   | 4,862 |   |
|                                                                                      |       |                                                      |       |   |   |   |   |
| (Decrease)  increase in cash and cash equivalents                                         |       | (4,315                                                    | )          | (6,317 | ) | 13,247 |   |
|                                                                                      |       |                                                      |       |   |   |   |   |
| **Cash  and cash equivalents:**                                                           | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning of year                                                                         |       | 15,666                                                    |       | 21,983 |   | 8,736 |   |
| End of year                                                                               |       | $                                                         | 11,351     |   | $ | 15,666 |   | $ | 21,983 |   |
|                                                                                      |       |                                                      |       |   |   |   |   |
| **Supplemental  cash flow information:**                                                  | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during  the year for interest                                                   |       | $                                                         | —     |   | $ | 3 |   | $ | 11 |   |
| Cash paid during  the year for income taxes, net of  refunds received                |       | $                                                    | 3,356      |   | $  | 592 |   | $  | 518 |   |
|                                                                                      |       |                                                      |       |   |   |   |   |
| **Supplemental  non-cash information:**                                                   | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts  Receivable converted to Note Receivable                                         |       | $                                                         | 385        |   | $ | — |   | $ | — |   |
| Common Stock withheld  in payment of exercise price for  stock  options and warrants |       | $                                                    | 1,537      |   | $  | — |   | $  | — |   |

 

See accompanying Notes toConsolidated Financial Statements.

31

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**RentrakCorporation and Subsidiaries**

**Notes to ConsolidatedFinancial Statements**

**Note 1.**          Overview

Rentrak Corporation is locatedin Portland, Oregon. We have two operating divisions, the Pay-Per-Transaction(“PPT”) Division and Advanced Media and Information (“AMI”) Division as well asan Other Division.  

Our PPT Division focuses on managing our businessoperations that facilitate the delivery of home entertainment content products(DVDs, cassettes, etc.) and related rental and sales information for the contentto home video specialty stores andother retailers, on a revenue sharing basis.  Welease product from various suppliers, typically motion picture studios. Underour PPT System, retailers sublease that product from us and rent it toconsumers. Retailers then share a portion of each retail rental transactionwith us and we share a portion of revenues with the studio. Since we collect,process and analyze rental and sales information at the title level, we reportthat information to both the studio and the respective retailers. 

Our AMI Division concentrates on the management andgrowth of our Essentials SuiteTM of business intelligence services, as well asoperating our direct revenue sharing (“DRS”) services. Our Essentials SuiteTM software and services, offered on a recurring subscription basis,provide unique data collection, management, analysis and reporting functions,resulting in business intelligence information valuable to our clients. Our DRS servicescollect, track, audit and report the results to our suppliers under establishedagreements on a fee for service basis. During the first quarter of fiscal 2007,Supply Chain Essentialsä, OnDemand Essentialsä and Retail Essentialsä moved from the Other Division to the AMI Divisionas these lines were considered to be no longer in the development stage.

Our Other Division includes revenue relating to otherproducts and/or services which are still in the development stage, includingAdTrakerä, which will capture census-level data regardingviewing patterns of on-demand advertising for reporting to marketers andadvertising agencies. The Other Division also includes corporate andadministrative costs.

**Note 2.****         ****Significant Accounting Policies**

***Basis of Consolidation***

The consolidated financial statements include the accounts of RentrakCorporation, its majority owned subsidiaries, and those subsidiaries in whichwe have a controlling interest after elimination of all intercompany accountsand transactions. 

***Management Estimates***

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differmaterially from those estimates. We consider our most critical accountingpolicies to be those that require the use of estimates and assumptions,specifically, accounts receivable reserves, Program Supplier guaranteereserves, judgments regarding realization of deferred tax assets, and estimatesrelated to stock-based compensation.  

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***Revenue Recognition***

We follow Statement of Position (“SOP”) 00-2, “Accounting by Producersor Distributors of Films,” and recognize revenue when all of the followingconditions are met:

·        Persuasive evidence of an arrangement exists;

·        The products or services have been delivered;

·        The license period has begun (which is referred to asthe “street date” for a product);

·        The arrangement fee is fixed or determinable; and

·        Collection of the arrangement fee is reasonablyassured.

PPT agreements generally provide for an initial order processing feeand continuing transaction fees based on a percentage of rental revenues earnedby the retailers upon renting the Units to their customers. Initial orderprocessing fees cover the direct costs of accessing Units from ProgramSuppliers and handling, packaging and shipping of the Units to the retailer.Once the Units are shipped, we have no further obligation to provide servicesto the retailer.

We recognize order processing fees as revenue on the street date andrecognize transaction fees when the Units are rented to the consumers, providedall other revenue recognition criteria have been met.  Certain arrangements include guaranteedminimum revenues from our customers. In these arrangements, we recognize the guaranteedminimum revenue on the street date, provided all other revenue recognitioncriteria are met.

We recognize other services revenue, including direct revenue sharing(“DRS”) and business intelligence services revenue, ratably over the period ofservice.

***Cash and Cash Equivalents***

We consider all highly liquid investments purchased with a maturity ofthree months or less at acquisition to be cash equivalents. We have fundsdeposited in various financial institutions in excess of the federal fundsdeposit insurance limits.  

***Marketable Securities***

We classify our marketable securities as held-to-maturity, and,accordingly, they are reported at amortized cost with earnings included as acomponent of interest income. Dividend and interest income is recognized whenearned. Realized gains and losses are included in earnings and are derivedusing the specific identification method for determining the cost of securitiessold. 

We periodically evaluatewhether declines in fair values of our investments below their cost are“other-than-temporary.” This evaluation consists of qualitative andquantitative factors regarding the severity and duration of the unrealizedloss, as well as our ability and intent to hold the investment until aforecasted recovery occurs. If we determine that an “other-than-temporary”impairment has occurred, the security will be written-down to fair value, whichwill then be the new cost basis. The write-down will be included currently as arealized loss as a component of other income (expense). The new cost basis willnot be changed for subsequent recoveries in fair value.

***Accounts Receivable and Allowance for DoubtfulAccounts***

Trade accounts receivable are recorded at the invoiced amount and donot bear interest. The allowance for doubtful accounts is our best estimate ofthe amount of probable credit losses in our existing accounts receivable. 

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Credit limits areestablished through a process of reviewing the financial history and stabilityof each customer. We regularly evaluate the collectibility of accountsreceivable by monitoring past due balances. If it is determined that a customermay be unable to meet its financial obligations, a specific reserve isestablished based on the amount we expect to recover. An additional generalreserve is provided based on aging of accounts receivable and our historicalcollection experience. If circumstances change related to specific customers,overall aging of accounts receivable or collection experience, our estimate ofthe recoverability of accounts receivable could materially change. We are ableto recover certain bad debts from our Program Suppliers. Such recoveries arerecorded as reductions to expense when they are fixed and determinable pursuantto the Program Supplier contract.

During 2005, one of our customers filed a petition forrelief under Chapter 7 in the U.S. Bankruptcy Court. The balance this customerowed us on its account was approximately $588,000 and was written off in fiscal2006 and substantially recovered. This had no material impact on net income infiscal 2006.

***No customeraccounted for 10% or more of our accounts receivable balance as of March 31,2007 or 2006.***

***We do not haveany off-balance sheet credit exposure related to our customers.***

###### ***FairValue of Financial Assets and Liabilities***

Weestimate the fair value of our monetary assets and liabilities based uponcomparison of such assets and liabilities to the current market values forinstruments of a similar nature and degree of risk. Our monetary assets andliabilities include cash, marketable securities, accounts and notes receivableand accounts payable. Based on the short-term nature of these instruments, weestimate that the recorded value of all our monetary assets and liabilitiesapproximates fair value as of March 31, 2007 and 2006.

***Impairment of Long-Lived Assets***

Pursuant to Statement of Financial AccountingStandards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” long-lived assets, such as property, plant and equipment,capitalized software and purchased intangibles subject to amortization, arerequired to be reviewed for impairment annually or whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to estimated undiscounted futurecash flows expected to be generated by the asset. If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized for the amount by which the carrying amount of the asset exceeds thefair value of the asset. Assets to be disposed of are reported at the lower ofthe carrying value or fair value less costs to sell, and depreciation ceases. In fiscal 2005, we recorded an impairment charge of $27,000related to the write-off of capitalized software development costs for twoprojects which management determined would not be completed and placed inservice.  

***Property and Equipment***

Depreciation of property and equipment is computed on the straight-linemethod over estimated useful lives of three to seven years for furniture andfixtures, three to ten years for equipment and, prior to April 1, 2007, threeyears for capitalized software. Effective April 1, 2007, we increased theestimated lives of our capitalized software to five years based on a review ofour previous usage of such internally developed software. Historically, we havebeen able to utilize the systems we have put in place for a period of at leastfive years. Leasehold improvements are amortized over the lives of theunderlying leases or the service lives of the improvements, whichever isshorter. Property and equipment is reviewed for impairment in accordance with SFAS No. 144 as discussed above.

***Landlord Incentives***

On December 2, 2005, we renewed ourheadquarters building lease in Portland, Oregon. The new lease term began onJanuary 1, 2007 and expires on December 31, 2016. During fiscal 2007, werenovated our

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headquarter offices and expanded our occupancyfrom 48,000 square feet to approximately 55,500 square feet. Our new leasecontains provisions relating to an allowance from our landlord associated withthe costs of our improvements. These landlord incentives totaled $0.9 millionat March 31, 2007, were recorded as deferred rent and are being amortized atthe rate of approximately $22,000 per quarter as a reduction to rent expenseover the lease term. The leasehold improvements, which totaled $1.0 million,net of accumulated amortization, at March 31, 2007, are recorded as assets and areincluded in Property and Equipment on the consolidated balance sheet. Theleasehold improvements are being depreciated over their economic lives, whichare estimated to be 10 years.  We alsoreceived three months of free rent totaling $0.2 million. This is also includedin deferred rent and is being amortized over the lease term.

***CapitalizedSoftware***

We account for capitalized software in accordance with SOP 98-1,*“*Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalizedsoftware, included in Property and Equipment, net, consists of costs topurchase and develop internal-use software, as well as costs to developinternal software which is used by us to provide various services to clientswithin our expanding Essentials SuiteTM of services. These services provideunique data collection, management, analysis and reporting functions, resultingin business intelligence information valuable to our clients. For example, ourBox Office EssentialsTM business line reports domestic and international grossreceipt theatrical ticket sales to motion picture studios and movie theatreowners. Our OnDemand EssentialsTM business line measures and reports anonymousvideo on demand (“VOD”) usage data to our clients. Such internal and externalcosts to develop the internal software used to support these services arecapitalized after the technological and business feasibility of the project isdetermined and the preliminary project stage is completed. We continue todevelop our internal software systems in order to expand our service offerings.Once we begin to utilize such software in our products, these costs areamortized on a straight-line basis over the estimated economic life of thesoftware. Effective April 1, 2007, we increased the estimated useful life ofcapitalized software from three to five years based on a review of our previoususage of such internally developed software. Historically, we have been able toutilize the systems we have put in place for a period of at least five years.Capitalized software is reviewed for impairment in accordance with SFAS No. 144as discussed above. Changes in technology could affect our estimate of theuseful life of such assets.  See Note 5.

***Income Taxes***

We account forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under the asset and liability method specified by SFAS No. 109,deferred tax assets and liabilities are determined based on the temporarydifferences between the financial statement basis and tax basis of assets andliabilities as measured by the enacted tax rates for the years in which thetaxes are expected to be paid.  Weevaluate our deferred tax assets on a regular basis to determine if a valuationallowance is required. To the extent it is determined the recoverability of thedeferred tax assets is unlikely, we record a valuation allowance againstdeferred tax assets. As of March 31, 2007 and 2006, we had a valuationallowance of $0.1 million and $0.6 million, respectively, recorded against ourCanadian net operating loss carryforwards and net deferred tax assets(liabilities) totaled $(0.3) million and $0.4 million, respectively.

***Program SupplierReserves ***

We have entered intoguarantee contracts with certain Program Suppliers providing titles fordistribution under our PPT system. These contracts guarantee the ProgramSuppliers minimum payments per Unit shipped that are recoupable based onrevenue-sharing activity. In some cases, these guarantees are paid in advance.For amounts not paid in advance, we record a liability for the gross amount ofthe guarantee due to the Program Supplier on the street date in accordance withSOP 00-2. For guarantees paid in advance, the unearned portion of theguarantees is included as Advances to Program Suppliers on our consolidatedbalance sheets. Using historical experience and year to date rental experiencefor each title, we estimate the projected revenue to be generated under eachguarantee. We have historically been able to reasonably estimate shortages after30 to 60 days of rental activity. We then establish a Program Supplier reservefor titles that are projected to experience a shortage under the provisions ofthe guarantee. The Program Supplier reserve is netted against Advances toProgram

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Suppliers on ourconsolidated balance sheets. We continually review these factors and makeadjustments to the reserves as needed. The balance in this reserve totaled$0.02 million and $0.03 million, respectively, at March 31, 2007 and 2006.

***Foreign Currency Translation***

Adjustments from translating foreign functional currency financialstatements into U.S. dollars are included in Cumulative Other ComprehensiveIncome in the consolidated statements of stockholders’ equity and comprehensiveincome. Transaction gains and losses that arise from exchange rate fluctuationson transactions denominated in a currency other than the local currency areincluded as a component of Selling and Administrative expenses in ourconsolidated statements of operations.  

***Earnings Per Share***

Basic net incomeper share (“EPS”) and diluted EPS are computed using the methods prescribed bySFAS No. 128, “Earnings per Share.” Following is a reconciliation of the shares used for the basic EPS anddiluted EPS calculations for fiscal 2007, 2006 and 2005 (in thousands):
|                                                                | ** ** | **Year Ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Basic  EPS**:                                                |       |                                    |       |   |   |   |   |
| Weighted average  number of shares of common stock outstanding |       | 10,632                                  |       | 10,575 |   | 10,081 |   |
| **Diluted  EPS:**                                              | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Effect of  dilutive stock options                              |       | 538                                     |       | 472 |   | 511 |   |
|                                                           |       | 11,170                                  |       | 11,047 |   | 10,592 |   |

 

Options notincluded in diluted EPS because the exercise price of the options was greaterthan the average market price of the common shares for the period were zero infiscal 2007 and 0.2 million in each of fiscal 2006 and 2005.

***Stock-BasedCompensation***

Effective April 1,2006, we adopted SFAS No. 123R, “Share-Based Payment.” We elected to use themodified prospective transition method as provided by SFAS No. 123R and,accordingly, financial statement amounts for the prior periods have not beenrestated to reflect the fair value method of expensing stock-basedcompensation. Under this method, the provisions of SFAS No. 123R apply to allawards granted or modified after the date of adoption. In addition, theunrecognized expense of awards not yet vested at the date of adoption isrecognized in net income in the periods after the date of adoption using theBlack-Scholes valuation method over the remainder of the requisite serviceperiod. Prior to April 1, 2006, we accounted for stock options using theintrinsic value method as prescribed by Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees.” See also “CriticalAccounting Policies and Estimates” in Part II, Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations.

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We provided disclosures of net income andearnings per share as if the method prescribed by SFAS No. 123,“Accounting for Stock-Based Compensation,”had been applied in measuring compensation expense in prior years as follows(in thousands, except per share amounts):
| Year Ended March 31,                                                                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income, as  reported                                                                                                                                |       | $        | 4,466      |     | $          | 5,243 |   |
| Deduct – total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of related tax effects |       | (824     | )          | (860     | )          |
| Net income, pro  forma                                                                                                                                  |       | $        | 3,642      |     | $          | 4,383 |   |
|                                                                                                                                                    |       |     |       |     |       |
| Net income per  share – basic, as reported                                                                                                         |       | $        | 0.42       |     | $          | 0.52 |   |
|                                                                                                                                                    |       |     |       |     |       |
| Net income per  share – basic, pro forma                                                                                                           |       | $        | 0.34       |     | $          | 0.43 |   |
|                                                                                                                                                    |       |     |       |     |       |
| Net income per  share – diluted, as reported                                                                                                       |       | $        | 0.40       |     | $          | 0.49 |   |
|                                                                                                                                                    |       |     |       |     |       |
| Net income per share –  diluted, pro forma                                                                                                         |       | $        | 0.33       |     | $          | 0.41 |   |

 

***Advertising Expense***

Advertising costs are expensed as incurred. Expenses incurred totaled approximately $1.6 million, $1.2 million and $1.4 million, respectively, in fiscal 2007, 2006 and 2005. Reimbursements received for direct and indirect expenses totaled approximately $1.7 million, $1.3 million and $1.3 million, respectively, in fiscal 2007, 2006 and 2005.

The advertising reimbursements from Program Suppliers are contractually provided to us to offset expenses incurred in maintaining ongoing marketing programs utilized by our Participating Retailers. A significant amount of these reimbursements are passed through to our Participating Retailers as we reimburse them for their direct expense of local advertising, such as newspaper or radio ads. In addition, the reimbursements offset expenses paid by us to third-party vendors in maintaining programs that indirectly assist Participating Retailers in these marketing efforts. These reimbursements are based on contractual agreements. Contractual terms fluctuate by Program Supplier and the amount of reimbursement tends to be based on the performance of individual movie titles.

Reimbursements provided by a Program Supplier can be “accountable” or “unaccountable.” The Program Supplier provides accountable amounts only to the extent that we provide documentary evidence of the funds paid either to our Participating Retailers directly or paid to third parties. Accountable reimbursements are recorded as a reduction of the same income statement line item, selling and administrative expenses, in which the costs are recorded, which typically occurs in the same accounting period. Unaccountable reimbursements are normally calculated and awarded on a fixed amount per unit of product shipped and do not require substantiation that any payments were made to promote marketing efforts. Unaccountable reimbursements are recognized when units of their associated product are shipped, which is when a majority of the direct or indirect marketing effort and the corresponding expense is incurred, which typically occurs within the same reporting period. Unaccountable reimbursements are classified as reductions to cost of sales on the statement of operations in accordance with Emerging Issues Task Force 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor.” 

***Comprehensive Income***

 

Components of our comprehensive income consist of the changes in ourcumulative translation adjustment. 

***Reclassifications***

 

Certain reclassifications have been made to prior year amounts toconform to the current year presentation.

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***Note 3.***       New Accounting Pronouncements

***SFAS No. 159***

In February 2007,******the Financial Accounting Standards Board (“FASB”)issued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities,” which permits entities to choose to measure many financialinstruments and certain other items at fair value. SFAS No. 159 is effective asof the beginning of an entity’s first fiscal year that begins after November15, 2007. We are currently analyzing the effects of adopting SFAS No. 159.

***SFAS No. 158***

In September 2006,******the FASB issued SFAS No.158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans,” which requires employers to recognize on their balancesheets the funded status of pension and other postretirement benefit plans,effective December 31, 2006 for calendar year-end companies. In addition, SFASNo. 158 requires fiscal year-end measurement of plan assets and benefitobligations, eliminating the use of earlier measurement dates currentlypermissible, effective for fiscal years ending after December 15, 2008. We donot have any defined benefit pension or other postretirement plans and,accordingly, the adoption of the provisions of SFAS No. 158 will not have anyeffect on our financial position or results of operations.

***SFAS No. 157***

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a singleauthoritative definition of fair value, sets out a framework for measuring fairvalue and requires additional disclosures about fair-value measurements. SFASNo. 157 is effective for fiscal years beginning after November 15, 2007. Whilewe are still analyzing the effects of applying SFAS No. 157, we believe thatthe adoption of SFAS No. 157 will not have a material effect on our financial position or results ofoperations.

***Staff Accounting Bulletin No. 108***

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No.108, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements,” which addresses how theeffects of prior-year uncorrected misstatements should be considered whenquantifying misstatements in current-year financial statements. SAB No. 108requires companies to quantify misstatements using both the balance sheet andincome statement approaches and to evaluate whether either approach results inquantifying an error that is material in light of relevant quantitative andqualitative factors. SAB No. 108 is effective for annual financial statementscovering the first fiscal year ending after November 15, 2006. The adoption ofSAB No. 108 in the fourth quarter of fiscal 2007 did not have any materialaffect on our financial position or results of operations.

***FASB Staff Position No. AUG AIR-1***

In September 2006, the FASB issued Staff PositionNo. AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” whichprohibits accruing for the future cost of periodic major overhauls and plannedmaintenance of plant and equipment in annual and interim periods. This StaffPosition is effective for fiscal years beginning after December 15, 2006 andmust be retrospectively applied. We do not accrue for such costs in annual orinterim periods and, accordingly, the adoption of this Staff Position will nothave any effect on our financial position or results of operations.

***FASBInterpretation No. 48***

In July 2006, the FASBissued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,”which defines the threshold for recognizing the benefits of tax returnpositions in the financial statements as “more-likely-than-not” to be sustainedby the taxing authority. Interpretation No. 48 applies to all tax positionsaccounted for under SFAS No. 109, “Accounting for Income Taxes.” InterpretationNo. 48 is effective for fiscal years beginning after December 15, 2006. Uponadoption, we will adjust our financial statements to reflect only those taxpositions that are more-likely-than-not to be sustained as of the adoptiondate. Any adjustment will be recorded directly to our beginning retainedearnings balance in the

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period of adoption andreported as a change in accounting principle. We are currently analyzing theeffects of adopting Interpretation No. 48.

**Note 4.****      ****Marketable Securities**

Marketablesecurities, all of which were classified as “held-to-maturity,” consisted ofthe following (in thousands):
|                                   | ** ** | **March 31,** | ** ** |
|-----------------------------------|------------|--------------------|------------|
| ** **                        | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Corporate debt securities         |       |               |       |   |   |
| Amortized cost                    |       | $                  | 22,105     |   | $ | 14,832 |   |
| Gross unrecognized holding gains  |       | —             |       | 2 |   |
| Gross unrecognized holding losses |       | (45                | )          | (16 | ) |
| Aggregate fair  value             |       | $                  | 22,060     |   | $ | 14,818 |   |

 

Allof the above securities mature at various dates through November 2007.

**Note 5.**       Property and Equipment

Property andequipment consisted of the following (in thousands):
|                                                 | ** ** | **March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Furniture,  fixtures and computer equipment     |       | $                  | 3,993      |   | $ | 4,228 |   |
| Leasehold  improvements                         |       | 1,664              |       | 640 |   |
| Capitalized  software(1)                        |       | 5,765              |       | 4,631 |   |
|                                            |       | 11,422             |       | 9,499 |   |
| Less accumulated  depreciation and amortization |       | (6,325             | )          | (5,876 | ) |
|                                            |       | $                  | 5,097      |   | $ | 3,623 |   |

 

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(1)          Includes $1.0 million and $1.4 million of capitalizedcosts associated with software projects which are still in the applicationdevelopment stage as of March 31, 2007 and 2006, respectively, and, as such,are not being amortized.

Duringfiscal 2007, we retired and/or disposed of fixed assets which were beingreplaced by new assets associated with our renovations (see Note 6). The grossvalue of the assets was $1.3 million; however, since most of these assets werefully depreciated, the amount of the loss associated with the disposals wasapproximately $33,000 and was included as a component of Selling andAdministrative expense. 

As discussed in Note 2, in fiscal 2005, we recorded animpairment charge of $27,000 related to the write-off of capitalized softwaredevelopment costs for two projects which management determined would not becompleted and placed in service.

Amortization expense related to capitalized softwarewas $1.1 million, $1.0 million and $0.5 million for the years ended March 31,2007, 2006, and 2005, respectively. Accumulated amortization related tocapitalized software was $3.0 million and $1.9 million at March 31, 2007 and2006, respectively. Effective April 1, 2007, we increased the estimated livesof our capitalized software from 3 years to 5 years. Amortization expenserelated to capitalized software no longer in the application development stageover the next five fiscal years as of March 31, 2007 is as follows (inthousands):
| 2008       |   | $      | 461    |   |
|------------|--------|--------|--------|--------|
| 2009       |   | 461    |   |
| 2010       |   | 455    |   |
| 2011       |   | 315    |   |
| 2012       |   | 107    |   |
| Thereafter |   | — |   |
|       |   | $      | 1,799  |   |

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**Note 6.****       Renovationof Corporate Headquarter Office and State of Oregon and City of Portland Loansand Grant**

Inconnection with our corporate headquarter office renovations, we receivedcash-based rent incentives of $0.9 million from the lessor based on ourqualified expenditures. These amounts are being amortized against rentalexpense over the term of the lease, which began January 1, 2007. 

Inaddition, in June 2006, we received commitments for conditional loans from theState of Oregon and the Portland Development Commission (“PDC”) for funding inthe amounts of $0.2 million and $0.7 million, respectively. In the secondquarter of fiscal 2007, we also received a conditional grant from the PDC for$58,000. The loan from the PDC of $0.7 million does not bear interest until itbecomes due and contains provisions relating to forgiveness if we meet certainrequirements. If the loan is not forgiven, it will accrue interest at the rateof 8.5% per annum beginning on the date that it becomes due, which is January1, 2009. However, if the loan is forgiven, no interest will accrue. Similarterms apply to the conditional grant of $58,000.  The loan from the State of Oregon of $0.2million bears interest at the rate of 5% per annum and contains provisionsrelating to forgiveness if we meet certain requirements. This loan is due onAugust 1, 2009 if it is not forgiven. These funds were used to pay forleasehold improvements associated with our corporate headquarters and wereprovided to us as an incentive to maintain our corporate headquarters inPortland, Oregon rather than relocating to another state. Through March 31,2007, we received all of these funds from these agencies as our renovations arecomplete. Additionally, through March 31, 2007, we were in compliance withthese agreements. We recorded these funds as Notes Payable on our consolidatedbalance sheet at March 31, 2007. 

**Note7.**       Securities Purchase Agreement  

InNovember 2004, we entered into a securities purchase agreement to purchasecommon stock of, and a professional services agreement to receive softwaredevelopment and support services from, a privately held company that developsand provides information technology solutions for clients in variousentertainment industry market segments. During fiscal 2005, we paid $25,000under the professional services agreement and, during fiscal 2006, we made afinal payment of $25,000 under this agreement.

Thepurchase of the securities for $0.5 million was comprised of two elements. Thefirst element, which totaled $0.4 million, was paid upon execution of theagreement in November 2004 and the second, which totaled $0.1 million, was paidin March 2005 upon completion by the investee of additional software development.Our purchase of the common stock represents 4% of the outstanding stock of thiscompany. This investment is carried at historical cost as a component of OtherAssets on our consolidated balance sheets and is evaluated quarterly forimpairment. No impairment has been recorded as of March 31, 2007.

**Note 8.**       Line of Credit

We currently have a secured $15.0 million revolvingline of credit with Wells Fargo Bank, National Association (the “Line ofCredit”), which expires December 1, 2007. The interest rate on the Line ofCredit is calculated at our choice of (a) the bank’s prime interest rateminus 0.5 percent or (b) LIBOR plus 1.5 percent. Certainfinancial covenants apply as follows: (1) consolidated pre-tax income must beat least $1.00 for each fiscal quarter, and consolidated after-tax income mustbe at least $1.00 on an annual basis, determined at fiscal year end; (2) ourcurrent ratio must be at least 1.5:1.0, measured quarterly; and (3) ourdebt-to-tangible net worth ratio must not exceed 1.5:1.0, measured quarterly.The Line of Credit is secured by all of our assets. As of, and through, March31, 2007, we were in compliance with these covenants. No amounts wereoutstanding under the Line of Credit at March 31, 2007.

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**Note 9.  RelatedParty Transaction**

In February 2005, pursuant to his separation agreement, we loaned Mr.F. Kim Cox, our former President and Secretary, $0.8 million to assist him withexercising a portion of his vested options to purchase shares of our commonstock. The loan bore interest at 2.78% per annum and was repaid in full,including accrued interest, in May 2005.

In addition, we entered into a consulting agreement with Mr. Cox onJanuary 25, 2005 whereby he is assisting us with strategic planning and productdevelopment issues. Pursuant to the agreement, we paid Mr. Cox $25,000 permonth from February 2005 through March 2007. We paid Mr. Cox a total of$300,000, $300,000 and $62,000 pursuant to this agreement in fiscal 2007, 2006and 2005, respectively.

**Note 10.  Income Taxes**

Income from continuing operations before income taxesconsisted of the following (in thousands):
|            | ** ** | **Year Ended March 31,** | ** ** |
|------------|------------|-----------------------------------------|------------|
| ** ** | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| U.S.       |       | $                                       | 9,824      |   | $ | 7,056 |   | $ | 8,459 |   |
| Non-U.S.   |       | 258                                     |       | — |   | 221 |   |
|       |       | $                                       | 10,082     |   | $ | 7,056 |   | $ | 8,680 |   |

 

The provision for income taxes from continuingoperations was as follows (in thousands):
|                         | ** ** | **Year Ended March 31,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current tax  provision: |       |                                    |       |   |   |   |   |
| Federal                 |       | $                                       | 2,914      |   | $ | 1,674 |   | $ | 59 |   |
| State                   |       | 441                                     |       | 279 |   | 210 |   |
|                    |       | 3,355                                   |       | 1,953 |   | 269 |   |
| Deferred tax  provision |       | 679                                     |       | 637 |   | 3,168 |   |
|                    |       | $                                       | 4,034      |   | $ | 2,590 |   | $ | 3,437 |   |

 

The reported provision for income taxes fromcontinuing operations differs from the amount computed by applying thestatutory federal income tax rate of 34% to income before provision forincome taxes as follows (in thousands):
|                                        | ** ** | **Year Ended March 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Provision  computed at statutory rates |       | $                                       | 3,428      |   | $ | 2,399 |   | $ | 2,951 |   |
| State taxes, net  of federal benefit   |       | 694                                     |       | 273 |   | 561 |   |
| Amortization of  intangibles           |       | (146                                    | )          | (144 | ) | (122 | ) |
| Change in  valuation allowance         |       | (156                                    | )          | 35 |   | 104 |   |
| Other                                  |       | 214                                     |       | 27 |   | (57 | ) |
|                                   |       | $                                       | 4,034      |   | $ | 2,590 |   | $ | 3,437 |   |

 

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Deferred tax assets (liabilities) were comprised ofthe following components (in thousands):
|                                                       | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|
| ** **                                            | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Current deferred  taxes:                              |       |               |       |   |   |
| Deferred revenue                                      |       | $                  | 188        |   | $ | 168 |   |
| Deferred gain                                         |       | —             |       | 20 |   |
| Other                                                 |       | (111               | )          | (78 | ) |
| Total current deferred taxes                          |       | 77                 |       | 110 |   |
|                                                  |       |               |       |   |   |
| Non-current  deferred taxes:                          |       |               |       |   |   |
| Depreciation                                          |       | 264                |       | 161 |   |
| Deferred rent                                         |       | 312                |       | — |   |
| Accelerated research and experimentation expenditures |       | (1,254             | )          | — |   |
| Stock-based compensation                              |       | 270                |       | 72 |   |
| Net operating loss and capital carryforwards          |       | 107                |       | 624 |   |
| Other                                                 |       | 75                 |       | 79 |   |
| Total non-current deferred taxes                      |       | (226               | )          | 936 |   |
| Valuation  allowance                                  |       | (107               | )          | (624 | ) |
| Net non-current  deferred taxes                       |       | (333               | )          | 312 |   |
| Net deferred taxes                                    |       | $                  | (256       | ) | $ | 422 |   |

 

Total deferred tax assets were $1.2 million and $0.5 million,respectively, at March 31, 2007 and 2006 and total deferred tax liabilitieswere $1.4 million and $0.1 million, respectively. The increase (decrease) toour valuation allowance was $(0.5) million, $0.2 million and $0.1 million infiscal 2007, 2006 and 2005, respectively.

As of March 31, 2007, we had net operating loss carryforwards inCanada totaling $0.1 million, the tax benefit of which has been fully reserved,which expire through 2014. Additionally, we had state net operating and capitalloss carryforwards totaling $2.6 million, the tax benefit of which has also beenfully reserved.

In assessing the realizability of deferred tax assets, we considerwhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. We consider the scheduledreversal of deferred tax liabilities, projected future taxable income and taxplanning strategies in making this assessment. Based on these assessments andconsiderations, we have provided a valuation allowance against our Canadian netoperating loss carryforwards due to expected revenue and income levels from ourCanadian operations in the near term. We also provided a valuation allowanceagainst certain of our state net operating loss and capital loss carryforwardsdue to the lack of expected operating income and capital gains in the near termin those jurisdictions. We anticipate that all other deferred tax assets willbe realized based on future estimated taxable income and have, therefore, notrecorded a valuation allowance against them.

**Note 11.  Stockholders’ Equity**

***Sale of Common Stock***

On December 21, 2004, we sold 308,200 shares of our common stock to Mr.Mark Cuban in a privately-negotiated, arms-length transaction for $9.00 pershare. Total proceeds were $2.8 million. In addition to the 308,200 sharespurchased from us, Mr. Cuban purchased an additional 191,800 shares of ourcommon stock at $9.00 per share from eight of our executive officers. All500,000 shares purchased by Mr. Cuban were restricted securities and subject toa one-year holding period pursuant to Rule 144 under the Securities Act of1933. Mr. Cuban currently has demand registration rights in the event that heis not able to sell the shares pursuant to Rule 144.

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***Share Repurchase Program***

Our stockrepurchase program, which was approved by our Board of Directors in January2006, authorized the purchase of up to 1.0 million shares of our common stockand does not have an expiration date. Shares may be repurchased from time totime in both open market and privately negotiated purchases in such amounts asour authorized officer, Paul Rosenbaum, Chairman and Chief Executive Officer,deems appropriate. The timing and actual number of shares repurchased willdepend on a variety of factors, including price, corporate and regulatoryrequirements and other market conditions. Currently, the price per share whichmay be paid to repurchase shares cannot exceed $10.75, unless furtherreauthorized by our Board of Directors.

During fiscal2007, we repurchased a total of 193,500 shares of our common stock at anaverage price of $10.07 per share, which totaled $1.9 million. At March 31,2007, 806,500 shares remained available for repurchase under this plan.

***Stock-Based Compensation Plans***

Certaininformation regarding our stock-based compensation was as follows (inthousands, except per share amounts):
|                                                                                                                     | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average  grant-date per share fair value of share options granted                                          |       | $                                       | —     |   | $ | 10.21 |   | $ | 6.97 |   |
| Total intrinsic  value of share options exercised                                                                   |       | 2,446                                   |       | 921 |   | 2,989 |   |
| Stock-based  compensation recognized in results of operations as a component of selling  and administrative expense |       | 856                                     |       | — |   | — |   |
| Tax benefit  recognized in statement of operations                                                                  |       | 180                                     |       | — |   | — |   |
| Cash received  from options exercised and shares purchased under all share-based  arrangements(1)                   |       | 465                                     |       | 708 |   | 5,168 |   |
| Tax deduction realized  related to stock options exercised(2)                                                       |       | 782                                     |       | 155 |   | 996 |   |
|                                                                                                                     |            |                                         |            |  |  |  |  |  |  |  |

 

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(1)       During fiscal 2007 and fiscal 2005, wewithheld $131,000 and $270,000, respectively, in shares related to employmenttaxes on stock option exercises as well as the payment for the cost of stockoptions.

(2)       Excludes a tax deduction totaling $62,000related to the exercise of warrants.

No stock-basedcompensation was capitalized as a part of an asset during fiscal 2007, 2006 or2005.

To determine thefair value of stock options granted, we used the Black-Scholes option pricingmodel and the following weighted average assumptions:
| Year Ended March 31,    | ** ** | **2006**       | ** ** | **2005**     | ** ** |
|-------------------------|------------|----------------|------------|--------------|------------|
| Risk-free interest rate |       | 4.16% - 4.49   | %          | 4.17% - 4.58 | %          |
| Expected dividend yield |       | 0              | %          | 0            | %          |
| Expected lives          |       | 6 - 9 years    |       | 5 - 10 years |       |
| Expected volatility     |       | 64.87% - 70.08 | %          | 73.09        | %          |

 

There were nooptions granted in fiscal 2007.

The risk-free rate usedis based on the U.S. Treasury yield over the estimated term of the optionsgranted. Prior to the adoption of SFAS No. 123R, the expected term wasestimated based on historical experience. Under SFAS No. 123R, our optionpricing model will utilize the simplified method accepted under StaffAccounting Bulletin No. 107 to estimate the expected term for all option grantsissued prior to December 31, 2007. We are currently in the process ofevaluating historical experience and other information in order to refine ourmethods to estimate the expected term for all options granted afterDecember 31, 2007. The expected volatility for options granted iscalculated based on our historical volatility over the

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prior seven year period.We have not paid dividends in the past and we do not expect to pay dividends inthe future and, therefore, the expected dividend rate is 0%.

Effective June 15,2006, our Board of Directors (the “Board”), upon recommendation of theCompensation Committee of the Board, approved the grant of 9,000 deferred stockunits (“DSUs”) to each of our five non-employee directors in lieu of the annualgrants of stock options that had been in place under the 1997 EquityParticipation Plan. The DSUs represent the right to receive an equal number ofshares of our Common Stock pursuant to the terms and conditions of our 2005Stock Incentive Plan on a deferred basis in compliance with the terms ofSection 409A of the Internal Revenue Code, as amended. The awards of DSUswill vest in full on June 15, 2007, provided that the recipient continuesto be a non-employee director on that date, and provided further that the DSUs willfully vest upon termination of the recipient’s service on the Board due todeath or disability or a change in control of Rentrak Corporation before thatdate. The awards of DSUs will be payable following the recipient’s ceasing tobe a director.

Totalcompensation expense related to DSUs of $452,000 was calculated based on thefair value on the date of grant as if the stock was vested. We recorded anexpense of $358,000 during fiscal 2007, with the remaining $94,000 of relatedcompensation to be recognized in the first quarter of fiscal 2008.

We amortize stock-basedcompensation on a straight-line basis over the vesting period of the individualaward, which is the requisite service period. We have not reduced thestock-based compensation for estimated forfeitures as there is no basis forestimating future forfeitures as most unvested options are held by members ofsenior management and the non-employee Directors.

Shares to be issuedunder stock-based awards will come from authorized but unissued shares.

The followingreconciles what certain operating results would have been without the effectsof applying SFAS No. 123R in fiscal 2007 (in thousands, except per shareamounts):
|                                      | ** ** | **Year Ended March 31, 2007** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **As  reported**                                  | ** ** | **If reported  following  APB 25** | ** ** |
| Income before  income taxes          |       | $                                                 | 10,082     |   | $ | 10,580 |   |
| Net income                           |       | 6,048                                             |       | 6,563 |   |
| Cash flow from  operating activities |       | 5,888                                             |       | 6,246 |   |
| Cash flow from  financing activities |       | (301                                              | )          | (659 | ) |
| Basic earnings  per share            |       | 0.57                                              |       | 0.62 |   |
| Diluted earnings per  share          |       | 0.54                                              |       | 0.59 |   |
|                                      |            |                                                   |            |  |  |  |  |

 

***Stock Incentive Plan***

TheRentrak Corporation 2005 Stock Incentive Plan (the “2005 Plan”) replaced the1997 Non-Officer Employee Stock Option Plan and the 1997 Equity ParticipationPlan (the “Prior Plans”).

Underthe 2005 Plan, we may grant incentive or nonqualified stock options, stockappreciation rights, restricted stock or units with time-based vesting,performance shares with vesting tied to performance goals and otherequity-based awards to eligible participants, including our officers, other keyemployees, our non-employee directors and certain consultants. Up to a total of1.0 million shares of our common stock may be issued pursuant to awards grantedunder the 2005 Plan, subject to adjustment for changes in capitalization. In addition,shares covered by outstanding stock options under the Prior Plans that arecancelled, terminate or otherwise expire without being exercised becomeavailable for grants of new awards under the 2005 Plan.

Our equity-based plans are administered by the Compensation Committeeof our Board, which determines the terms and conditions of awards made underthe plans. Generally, options granted under the plans vest over periods of oneto four years and expire ten years after the date of grant.

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As of March 31, 2007, awards covering 905,275 shares of our commonstock remained available for grant under our 2005 Plan and 2,158,214 shares ofour common stock were reserved for issuance pursuant to the 2005 Plan and thePrior Plans combined.

Stock option activity for fiscal 2007 was as follows:
|                                    | ** ** | **Options  Outstanding** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|
| **Outstanding  at March 31, 2006** |       | 1,574,798                |       | $                                              | 6.17       |   |
| Granted                            |       | —                   |       | —                                         |       |
| Exercised                          |       | (321,359                 | )          | 5.82                                           |       |
| Forfeited                          |       | (67,775                  | )          | 7.08                                           |       |
| **Outstanding at March 31, 2007**  |       | 1,185,664                |       | 6.10                                           |       |
|                                    |            |                          |            |                                                |            |  |

 

During fiscal 2007,114,172 shares of common stock with a market value of approximately $1.5million were withheld in payment of the exercise price for stock options.

Certain informationregarding options outstanding as of March 31, 2007 was as follows:
|                                              | ** ** | **Options    Outstanding  ** | ** **  | **Options     Exercisable   ** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|-------------|--------------------------------------------------------------|------------|
| Number                                       |       | 1,185,664                                        |        | 1,087,164                                                    |       |
| Weighted average  exercise price             |       | $                                                | 6.10        |                                                         | $          | 5.78 |   |
| Aggregate  intrinsic value                   |       | $                                                | 7.2 million |                                                         | $          | 6.3 million |   |
| Weighted average  remaining contractual term |       | 4.8 years                                        |        | 4.7 years                                                    |       |

 

Deferred stock unit (“DSU”)activity for fiscal 2007 was as follows:
|                                    | ** ** | **Units  Outstanding** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|------------------------------------|------------|------------------------|------------|-------------------------------------------------------------|------------|
| **Outstanding  at March 31, 2006** |       | —                 |       | —                                                      |       |
| Granted                            |       | 45,000                 |       | $                                                           | 10.04      |   |
| Vested                             |       | —                 |       | —                                                      |       |
| Issued                             |       | —                 |       | —                                                      |       |
| Forfeited                          |       | —                 |       | —                                                      |       |
| **Outstanding at March 31, 2007**  |       | 45,000                 |       | 10.04                                                       |       |
|                                    |            |                        |            |                                                             |            |  |

 

On April 2, 2007,we granted 9,000 DSUs to each non-employee member of our Board of Directors,for a total of 45,000 DSUs, which vest one year from the date ofgrant. The fair market value of our common stock on the date of grant was$15.45 per share. Accordingly, the total value of the DSUs granted was $0.7million and will be recognized in fiscal 2008.

As of March 31,2007, unrecognized stock-based compensation related to outstanding, butunvested options and DSUs was $0.7 million, which will be recognized over theweighted average remaining vesting period of 2.8 years.

In February 2006, we granted options to purchase 25,000 shares ofour common stock to a consultant.  These options vested immediatelyand expire in ten years. We recorded these options in accordance withEmerging Issues Task Force (“EITF”) 00-18, “Accounting Recognition for CertainTransactions involving Equity Instruments Granted to Other Than Employees.” Pursuantto the provisions of EITF 00-18, we recognized expense of $0.04 millionand $0.2 million in fiscal 2007 and 2006, respectively, which was included inSelling and Administrative expense.

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***Warrants***

As of March 31, 2006, we had warrants outstanding to purchase 30,000shares of our common stock with a purchase price of $7.50 per share and anexpiration date of May 16, 2009, which were issued to an investment bankingfirm in May 2002 as partial consideration for financial advisory services inconnection with strategic opportunities or financing transactions of potentialinterest to us. On November 9, 2006, we issued 12,705 shares of our commonstock in full satisfaction of this warrant. The warrant exercise price of $7.50per share, or a total of $225,000, was satisfied through the tender of thebalance of 17,295 shares covered by the warrant with a then current marketprice of $13.00 per share.

***Shareholders’ Rights Plan***

In May 2005, our Board of Directors approved a replacementshareholders’ rights plan designed to ensure that all of our shareholdersreceive fair and equal treatment in the event of certain proposals to acquirecontrol of Rentrak. Under the rights plan, each shareholder received a dividendof one right for each share of our outstanding common stock, entitling theholders to purchase common stock having a market value equal to twice theexercise price. The rights become exercisable after any person or groupacquires 15% or more of our outstanding common stock, or announces a tenderoffer which would result in the offeror becoming the beneficial ownerof 15% or more of our outstanding common stock. Prior to the time that aperson or group acquires beneficial ownership of 15% or more of ouroutstanding common stock, the Board of Directors, at their discretion, mayamend the rights plan, redeem the rights for $0.001 per right or waiveapplication of the rights plan with respect to a merger or other acquisition ofRentrak. This rights plan expires May 18, 2015.

**Note12.  Commitments**

***Leases***

***Welease certain facilities under operating leases expiring at various datesthrough 2016. Minimum lease payments over the terms of the leases exceeding oneyear are as follows (in thousands):***
| Year Ending March 31, | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| 2008                                 |       | $          | 1,140      |   |
| 2009                                 |       | 1,145      |       |
| 2010                                 |       | 1,067      |       |
| 2011                                 |       | 1,027      |       |
| 2012                                 |       | 1,055      |       |
| Thereafter                           |       | 5,406      |       |
| Total minimum lease  payments        |       | $          | 10,840     |   |

 

The leases require us to pay for taxes, insurance and maintenance. Wealso received $0.9 million from the landlord in fiscal 2007 as anincentive upon our lease renewal. These amounts are shown as deferred rent andwill be amortized as a reduction to our rent expense over the lease term. Rentexpense under operating leases is recognized on a straight-line basis over theterms of the leases and was approximately $1.0 million in fiscal 2007, 2006 and2005.

**Note 13.  Contingencies**

We may, from time to time, be a party to legal proceedings and claimsthat arise in the ordinary course of our business. In the opinion ofmanagement, the amount of any ultimate liability with respect to these actionsis not expected to materially affect our financial condition or results ofoperations. We currently have no material outstanding litigation.

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**Note 14.  401(k) Plan**

We have an employee benefit plan pursuant to Section 401(k) of theInternal Revenue Code (the “401(k) Plan”) for certain qualified employees.Contributions made to the 401(k) Plan are based on percentages ofemployees’ salaries. The total amount of our contribution is at the discretionof our Board of Directors. Contributions under the 401(k) Plan forcalendar 2005 and 2004 were approximately $93,000 and $81,000, respectively.Our plan year ends on December 31. As of March 31, 2007, we have accrued$110,000 for anticipated contributions related to the plan year ended December31, 2006 and $41,000 relating to the plan year ending December 31, 2007. Duringthe first quarter of fiscal 2008, we paid $108,000 related to our contributionfor the plan year ended December 31, 2006.

**Note 15. BusinessSegments, Significant Suppliers, Product Lines and Major Customer**

Weoperate in two business segments, our Pay-Per-Transaction (“PPT”) Division andAdvanced Media and Information (“AMI”) Division, and, accordingly, we reportcertain financial information by individual segment under this structure. The PPT Division focuses on managing our businessoperations that facilitate the delivery of home entertainment content productsand related rental and sales information for that content to our ParticipatingRetailers on a revenue sharing basis. The AMI Division concentrates on themanagement and growth of our Essentials SuiteTM of business intelligenceservices, primarily offered on a recurring subscription basis, which are nolonger in the early stages, as well as operating our direct revenue sharing (“DRS”)services.

We did not have any revenuesfrom our Other Division in fiscal 2007 as Supply Chain Essentialsä, OnDemand Essentialsä and Retail Essentialsä moved from the Other Division to the AMI Divisionduring the first quarter of fiscal 2007. Accordingly, revenue related to theseproducts in fiscal 2006 and fiscal 2005 was reclassified to the AMI Divisionfor comparison purposes.

Assetsare not specifically identified by segment as the information is not used bythe chief operating decision maker to measure the segments’ performance.

Certaininformation by segment was as follows (in thousands):
|                                   | ** ** | **PPT** | ** ** | **AMI** | ** ** | **Other(1)** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|---------|------------|---------|------------|--------------|------------|-----------|------------|
| **Year  Ended March 31, 2007**    |       |    |       |    |       |         |       |      |       |
| Sales to  external customers      |       | $       | 90,590     |    | $          | 15,408       |       | $         | —     |   | $ | 105,998 |   |
| Depreciation and  amortization    |       | 49      |       | 1,257   |       | 430          |       | 1,736     |       |
| Income (loss)  from operations    |       | 14,410  |       | 5,982   |       | (11,824      | )          | 8,568     |       |
| ** **                        |       |    |       |    |       |         |       |      |       |
| **Year  Ended March 31, 2006**    |       |    |       |    |       |         |       |      |       |
| Sales to  external customers      |       | $       | 81,301     |    | $          | 12,093       |       | $         | —     |   | $ | 93,394 |   |
| Depreciation and  amortization    |       | 42      |       | 1,545   |       | —       |       | 1,587     |       |
| Income (loss)  from operations    |       | 12,086  |       | 4,189   |       | (10,233      | )          | 6,042     |       |
|                              |       |    |       |    |       |         |       |      |       |
| **Year  Ended March 31, 2005(2)** |       |    |       |    |       |         |       |      |       |
| Sales to external  customers      |       | $       | 86,806     |    | $          | 11,709       |       | $         | 23         |   | $ | 98,538 |   |

 

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(1)   Includes revenue andexpenses relating to products and/or services which are still in early stages,as well as corporate expenses and other expenses which are not allocated to aspecific segment.

(2)   The depreciation andamortization and operating income (loss) segment information for fiscal 2005 isnot included as it would be impracticable to do so.

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Additional results of operations information bysegment was as follows:
| ** **                           | ** ** | **Year Ended March 31,(1)** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(Dollars in thousands)** | ** ** | **Dollars**                                | ** ** | **% of  segment  revenues** | ** ** | **Dollars** | ** ** | **% of  segment  revenues** | ** ** | **Dollars** | ** ** | **% of  segment  revenues** | ** ** |
| **PPT Division**                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                             |       | $                                          | 90,590     |   | 100.0 | % | $ | 81,301 |   | 100.0 | % | $ | 86,806 |   | 100.0 | % |
| Cost of sales                        |       | 70,255                                     |       | 77.6 |   | 63,538 |   | 78.2 |   | 68,848 |   | 79.3 |   |
| Gross margin                         |       | $                                          | 20,335     |   | 22.4 | % | $ | 17,763 |   | 21.8 | % | $ | 17,958 |   | 20.7 | % |
|                                 |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **AMI Division**                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                             |       | $                                          | 15,408     |   | 100.0 | % | $ | 12,093 |   | 100.0 | % | $ | 11,709 |   | 100.0 | % |
| Cost of sales                        |       | 2,237                                      |       | 14.5 |   | 1,573 |   | 13.0 |   | 1,034 |   | 8.8 |   |
| Gross margin                         |       | $                                          | 13,171     |   | 85.5 | % | $ | 10,520 |   | 87.0 | % | $ | 10,675 |   | 91.2 | % |
|                                 |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **Other Division**                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                             |       | $                                          | —     |   | — |   | $ | — |   | — |   | $ | 23 |   | 100.0 | % |
| Cost of sales                        |       | —                                     |       | — |   | — |   | — |   | — |   | — |   |
| Gross margin                         |       | $                                          | —     |   | — |   | $ | — |   | — |   | $ | 23 |   | 100.0 | % |

 

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(1)   Percentages may not add due to rounding.

PPT revenue by service activity was as follows (in thousands):
| Year Ended March 31, | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Order processing  fees              |       | $        | 9,136      |     | $          | 7,546    |       | $ | 5,015 |   |
| Transaction fees                    |       | 65,212   |       | 59,062   |       | 64,335   |       |
| Sell-through  fees                  |       | 15,356   |       | 13,714   |       | 16,323   |       |
| Other                               |       | 886      |       | 979      |       | 1,133    |       |
|                                |       | $        | 90,590     |     | $          | 81,301   |       | $ | 86,806 |   |

 

AMI revenue by service activity was as follows (in thousands):
| Year Ended March 31, | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Essentials                          |       | $        | 7,822      |     | $          | 6,126    |       | $ | 4,818 |   |
| DRS                                 |       | 7,586    |       | 5,967    |       | 6,891    |       |
|                                |       | $        | 15,408     |     | $          | 12,093   |       | $ | 11,709 |   |

 

During fiscal 2007, 2006 and 2005, we had several Program Suppliersthat supplied product in excess of 10% of our total revenues as follows:
| Year Ended March 31, | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Program Supplier  1                 |       | 20       | %          | 5        | %          | 6        | %          |
| Program Supplier  2                 |       | 17       | %          | 14       | %          | 13       | %          |
| Program Supplier  3                 |       | 16       | %          | 24       | %          | 36       | %          |
| Program Supplier 4                  |       | 12       | %          | 16       | %          | 4        | %          |

 

There were no other Program Suppliers who provided product thataccounted for 10% or more of our total revenues for fiscal 2007, 2006 or 2005.Additionally, we are currently negotiating with the third Program Supplierlisted above in an effort to secure a new revenue sharing agreement. To date,however, we have been unable to finalize a new agreement acceptable to bothparties. Although management does not believe that the relationships with ourremaining significant Program Suppliers will be terminated in the near term, aloss of any one of these suppliers could have an adverse effect on ourfinancial condition and results of operations.

We had one PPT customer that accounted for 19% of our total revenue infiscal 2005. The agreement with this PPT customer expired in September 2004.There were no other customers that accounted for 10% or more of our totalrevenue in fiscal 2007, 2006 and 2005.

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**QUARTERLYFINANCIAL DATA**

Unauditedquarterly financial data**for each ofthe eight quarters in the two-year period ended March 31, 2007 was as follows(in thousands, except per share amounts):
|                               | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|-------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| **2007**                      | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** |
| Revenue                       |       | $                    | 26,901     |                 | $          | 24,083               |       | $                    | 26,757     |   | $ | 28,257 |   |
| Income from  operations       |       | 2,359                |       | 2,689                |       | 1,095                |       | 2,425                |       |
| Net income                    |       | 1,588                |       | 1,931                |       | 869                  |       | 1,660                |       |
| Basic net income  per share   |       | 0.15                 |       | 0.18                 |       | 0.08                 |       | 0.16                 |       |
| Diluted net  income per share |       | 0.14                 |       | 0.17                 |       | 0.08                 |       | 0.15                 |       |
|                          |       |                 |       |                 |       |                 |       |                 |       |
| **2006**                      | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** |
| Revenue                       |       | $                    | 20,882     |                 | $          | 20,164               |       | $                    | 23,957     |   | $ | 28,391 |   |
| Income from  operations       |       | 877                  |       | 1,485                |       | 1,489                |       | 2,191                |       |
| Net income                    |       | 656                  |       | 1,104                |       | 1,126                |       | 1,580                |       |
| Basic net income  per share   |       | 0.06                 |       | 0.10                 |       | 0.11                 |       | 0.15                 |       |
| Diluted net income per  share |       | 0.06                 |       | 0.10                 |       | 0.10                 |       | 0.14                 |       |

 

49

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**Rentrak Corporation**

**Valuationand Qualifying Accounts**

**ScheduleII**

(Inthousands)
| ** **                                                          | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions  (Reductions)  to Reserve** | ** ** | **Write-Offs  Charged  Against  Reserves** | ** ** | **Recoveries** | ** ** | **Balance  at End of  Period** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|----------------|------------|------------------------------------------|------------|
| **Allowance for doubtful accounts**                                 | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                 | ** ** | ** **     | ** ** | ** **                               | ** ** |
| Fiscal 2005                                                         |       | $                                              | 839        |                                         | $          | 28                                         |       | $              | (604       | )                                        | $          | 391 |   | $ | 654 |   |
| Fiscal 2006                                                         |       | 654                                            |       | 1                                            |       | (849                                       | )          | 655            |       | 461                                      |       |
| Fiscal 2007                                                         |       | 461                                            |       | —                                       |       | (400                                       | )          | 535            |       | 596                                      |       |
|                                                                |       |                                           |       |                                         |       |                                       |       |           |       |                                     |       |
| **Program Suppliers reserve**                                       | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                 | ** ** | ** **     | ** ** | ** **                               | ** ** |
| Fiscal 2005                                                         |       | $                                              | 4,521      |                                         | $          | 593                                        |       | $              | (1,828     | )                                        | $          | (40 | ) | $ | 3,246 |   |
| Fiscal 2006                                                         |       | 3,246                                          |       | 108                                          |       | (3,320                                     | )          | (2             | )          | 32                                       |       |
| Fiscal 2007                                                         |       | 32                                             |       | 23                                           |       | (9                                         | )          | (23            | )          | 23                                       |       |
|                                                                |       |                                           |       |                                         |       |                                       |       |           |       |                                     |       |
| **Other current assets – retailer  financing program reserve** | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                 | ** ** | ** **     | ** ** | ** **                               | ** ** |
| Fiscal 2005                                                         |       | $                                              | 838        |                                         | $          | —                                     |       | $              | (838       | )                                        | $          | — |   | $ | — |   |
| Fiscal 2006                                                         |       | —                                         |       | —                                       |       | —                                     |       | —         |       | —                                   |       |
| Fiscal 2007                                                         |       | —                                         |       | —                                       |       | —                                     |       | —         |       | —                                   |       |
|                                                                |       |                                           |       |                                         |       |                                       |       |           |       |                                     |       |
| **Other assets – retailer  financing program reserve**         | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                 | ** ** | ** **     | ** ** | ** **                               | ** ** |
| Fiscal 2005                                                         |       | $                                              | 5,661      |                                         | $          | —                                     |       | $              | (5,642     | )                                        | $          | (19 | ) | $ | — |   |
| Fiscal 2006                                                         |       | —                                         |       | —                                       |       | —                                     |       | —         |       | —                                   |       |
| Fiscal 2007                                                         |       | —                                         |       | —                                       |       | —                                     |       | —         |       | —                                   |       |
|                                                                |       |                                           |       |                                         |       |                                       |       |           |       |                                     |       |
| **Valuation allowance on deferred  tax assets**                     |       |                                           |       |                                         |       |                                       |       |           |       |                                     |       |
| Fiscal 2005                                                         |       | $                                              | 299        |                                         | $          | 104                                        |       | $              | —     |                                     | $          | — |   | $ | 403 |   |
| Fiscal 2006                                                         |       | 403                                            |       | 221                                          |       | —                                     |       | —         |       | 624                                      |       |
| Fiscal 2007                                                         |       | 624                                            |       | (517                                         | )          | —                                     |       | —         |       | 107                                      |       |

 

50

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

 

None.

**ITEM 9A.****       CONTROLSAND PROCEDURES**

**Disclosure Controls and Procedures**

Our management hasevaluated, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, asamended (Exchange Act). Based on that evaluation our Chief Executive Officerand our Chief Financial Officer have concluded that, as of the end of theperiod covered by this report, our disclosure controls and procedures wereeffective in ensuring that information required to be disclosed in our ExchangeAct reports is (1) recorded, processed, summarized and reported in a timelymanner, and (2) accumulated and communicated to our management, including ourChief Executive Officer and our Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.

**Changesin Internal Control Over Financial Reporting**

There has been no change in our internal control overfinancial reporting that occurred during our last fiscal quarter that hasmaterially affected or is reasonably likely to materially affect our internalcontrol over financial reporting.

**Management’sReport on Internal Control Over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rules 13a –15(f).Under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl – Integrated Framework**issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO).* Based onour evaluation under the framework in *InternalControl – Integrated Framework**issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO)*, ourmanagement concluded that our internal control over financial reporting waseffective as of March 31, 2007.

Our independentregistered public accounting firm, Grant Thornton LLP, has audited ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of March 31, 2007, as stated in their report appearingbelow.

51

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and Stockholders

RentrakCorporation

We have audited management’s assessment, included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting in Item 9A,that Rentrak Corporation maintained effective internal control over financialreporting as of March 31, 2007, based on criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Rentrak Corporation’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinions.

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Rentrak Corporationmaintained effective internal control over financial reporting as of March 31,2007, is fairly stated, in all material respects, based on criteria established in *Internal Control—Integrated Framework*issued by COSO. Also in our opinion, Rentrak Corporation maintained, inall material respects, effective internal control over financial reporting asof March 31, 2007, based on criteriaestablished in *Internal Control—IntegratedFramework* issued by COSO.

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balance sheet of Rentrak Corporation as of March 31, 2007and 2006, and the related consolidated statements of income, stockholders’equity and comprehensive income, and cash flows for each of the three years inthe period ended March 31, 2007 and our report dated June 4, 2007 expressedan unqualified opinion on thosefinancial statements.
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|
|                   |   |
| Portland, OR           |   |
| June 4, 2007           |   |

 

52

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**ITEM 9B.****       OTHERINFORMATION**

None.

**PART III**

**ITEM 10.****       DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

Pursuant to General InstructionG(3) to Form 10-K, the information called for by this item is incorporated byreference from our definitive Proxy Statement for our 2007 Annual Meeting ofShareholders to be filed with the Securities and Exchange Commission pursuantto Regulation 14A under the Securities Exchange Act of 1934, as amended.  See “Election of Directors,” “Committees andMeetings of the Board,” “Code of Ethics,” “Executive Officers” and “SecurityOwnership of Certain Beneficial Owners and Management – Section 16(a)Beneficial Ownership Reporting Compliance.”

**ITEM 11.****       EXECUTIVE COMPENSATION**

Pursuant to General InstructionG(3) to Form 10-K, the information called for by this item is incorporated byreference from our definitive Proxy Statement for our 2007 Annual Meeting ofShareholders to be filed with the Securities and Exchange Commission pursuantto Regulation 14A under the Securities Exchange Act of 1934, as amended. See “ExecutiveCompensation,” “Director Compensation for Fiscal 2007” and “Report of theCompensation Committee.”

**ITEM 12.****      SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

Thefollowing table sets forth information, as of March 31, 2007, about shares ofour common stock that may be issued under our equity compensation plans andarrangements.

**EquityCompensation Plan Information**
| **Plan Category(1)**                                  | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in  first column)** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by shareholders(2)     |       | 1,167,650                                                                                                                                        |       | $                                                                                                                | 6.17       | (4)                                                                                                                                                                                                            | 905,275    |   |
|                                                       |       |                                                                                                                                             |       |                                                                                                             |       |                                                                                                                                                                                                           |       |
| Equity compensation  plans not approved by shareholders(3) |       | 63,014                                                                                                                                           |       | 4.87                                                                                                             |       | —                                                                                                                                                                                                         |       |
| Total                                                      |       | 1,230,664                                                                                                                                        |       | $                                                                                                                | 6.10       |                                                                                                                                                                                                           | 905,275    |   |

 

----

(1)   SeeNote 11 of Notes to Consolidated Financial Statements for a description of thesignificant terms of the outstanding options and deferred stock units.

(2)   Equitycompensation plans approved by shareholders include the 2005 Stock IncentivePlan and the 1997 Equity Participation Plan, as amended.

(3)   Equitycompensation plans or arrangements approved by our board of directors, but notsubmitted for shareholder approval include the 1997 Non-Officer Employee StockOption Plan.

(4)   Theweighted average exercise price does not take into account deferred stock units(“DSUs”) granted to our non-employee directors under the 2005 Stock IncentivePlan. DSUs represent the right to receive shares of our common stock uponceasing to be a director following a one-year vesting period, with immediatevesting in full upon death, disability or a change in control of Rentrak. Therewere 45,000 DSUs outstanding at March 31, 2007, representing the right toreceive an equal number of shares.

53

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Pursuant to General InstructionG(3) to Form 10-K, additional information called for by this item isincorporated by reference from our definitive Proxy Statement for our 2007Annual Meeting of Shareholders to be filed with the Securities and ExchangeCommission pursuant to Regulation 14A under the Securities Exchange Act of1934, as amended. See “Security Ownership of Certain Beneficial Owners andManagement – Stock Ownership Table.”

**ITEM 13.****       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR INDEPENDENCE**

Pursuant to General InstructionG(3) to Form 10-K, the information called for by this item is incorporated byreference from our definitive Proxy Statement for our 2007 Annual Meeting ofShareholders to be filed with the Securities and Exchange Commission pursuantto Regulation 14A under the Securities Exchange Act of 1934, as amended. See “Electionof Directors” and “Committees and Meetings of the Board.”

**ITEM 14.****       PRINCIPAL ACCOUNTANT FEES AND SERVICES**

Pursuant to General InstructionG(3) to Form 10-K, the information called for by this item is incorporated byreference from our definitive Proxy Statement for our 2007 Annual Meeting ofShareholders to be filed with the Securities and Exchange Commission pursuantto Regulation 14A under the Securities Exchange Act of 1934, as amended. See “MattersRelating to Our Auditors.”

**PART IV**

**ITEM 15.****       EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

**FinancialStatements and Schedules**

The ConsolidatedFinancial Statements, together with the report thereon of our independentregistered public accounting firm, are included on the pages indicated below:
| Report of Grant Thornton  LLP, Independent Registered Public Accounting Firm                                                      |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                              |   |   |
| Consolidated Balance  Sheets as of March 31, 2007 and 2006                                                                        |   |   |
|                                                                                                                              |   |   |
| Consolidated Income  Statements for the years ended March 31, 2007, 2006 and 2005                                                 |   |   |
|                                                                                                                              |   |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the years  ended March 31, 2007, 2006 and 2005 |   |   |
|                                                                                                                              |   |   |
| Consolidated  Statements of Cash Flows for the years ended March 31, 2007, 2006 and 2005                                          |   |   |
|                                                                                                                              |   |   |
| Notes to  Consolidated Financial Statements                                                                                       |   |   |
|                                                                                                                              |   |   |
| The following  schedule is filed herewith:                                                                                        |   |   |
|                                                                                                                              |   |   |
| Schedule  II        Valuation and Qualifying  Accounts                                         |   |   |

 

Schedules not included havebeen omitted because they are not applicable or the required information isshown in the financial statements or notes thereto.

**Exhibits**

The exhibits required to befiled pursuant to Item 601 of Regulation S-K are listed in the Exhibit Index,which immediately follows the signature page of this report.

54

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**SIGNATURES**

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
| Date:   June 13, 2007 | RENTRAK CORPORATION           |
|--------------------------------------|-------------------------------|
|                                 |                          |   |
|                                 | By:                           | /s/ Paul A. Rosenbaum |   |
|                                 | Paul A. Rosenbaum             |
|                                 | Chairman of the Board and     |
|                                 | Chief Executive Officer       |
|                                 | (Principal Executive Officer) |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities indicatedon June 13, 2007.

Principal Financial andAccounting Officer:
| By:                         | /S/ Mark L. Thoenes            |   |   |   |
|-----------------------------|--------------------------------|--------|--------|--------|
| Mark L. Thoenes             |                           |   |
| Executive Vice President    |                           |   |
| and Chief Financial Officer |                           |   |
|                        |                           |   |
| Majority of Directors:      |                           |   |
|                        |                           |   |
| By:                         | /S/ Judith G. Allen            |   |   |   |
|                        | Judith G. Allen, Director      |   |   |
|                        |                           |   |   |
| By:                         | /S/ Cecil D. Andrus            |   |   |   |
|                        | Cecil D. Andrus, Director      |   |   |
|                        |                           |   |   |
| By:                         | /S/ George H. Kuper            |   |   |   |
|                        | George H. Kuper, Director      |   |   |
|                        |                           |   |   |
| By:                         | /S/ Ralph R. Shaw              |   |   |   |
|                        | Ralph R. Shaw, Director        |   |   |
|                        |                           |   |   |
| By:                         | /S/ Stanford C. Stoddard       |   |   |   |
|                        | Stanford C. Stoddard, Director |   |   |
|                             |                                |        |        |        |  |  |  |

 

55

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**EXHIBIT INDEX**

Thefollowing exhibits are filed herewith or, if followed by a number inparentheses, are incorporated herein by reference from the correspondingexhibit filed in the report or registration statement identified in thefootnotes following this index:
| Exhibit  Number                                    | ** ** | **Exhibit Description**                                                                                                                    |
|----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                                                |       | Restated Articles of Incorporation of Rentrak  Corporation as filed on June 10, 2005. (23)                                                 |
| 3.2                                                |       | 1995 Restated Bylaws, as amended to date. (1)                                                                                              |
| 10.1*                                              |       | Summary of compensation arrangements for  non-employee directors of Rentrak Corporation. (35)                                              |
| 10.2                                               |       | Reserved.                                                                                                                                  |
| 10.3*                                              |       | The 1997 Equity Participation Plan of Rentrak  Corporation, as amended. (3)                                                                |
| 10.4*                                              |       | Form of Non-Qualified Stock Option Agreement under  1997 Equity Participation Plan. (4)                                                    |
| 10.5*                                              |       | Form of Incentive Stock Option Agreement under 1997  Equity Participation Plan. (5)                                                        |
| 10.6*                                              |       | The 1997 Non-Officer Employee Stock Option Plan of  Rentrak Corporation. (13)                                                              |
| 10.7*                                              |       | Amendment to the 1997 Non-Officer Employee Stock  Option Plan of Rentrak Corporation. (14)                                                 |
| 10.8*                                              |       | Second Amendment to the 1997 Non-Officer Employee  Stock Option Plan of Rentrak Corporation. (15)                                          |
| 10.9*                                              |       | Third Amendment to the 1997 Non-Officer Employee  Stock Option Plan of Rentrak Corporation. (16)                                           |
| 10.10*                                             |       | Rentrak Corporation 2005 Stock Incentive Plan. (29)                                                                                        |
| 10.11*                                             |       | Form of Award Agreement for Non-Qualified Stock  Option under 2005 Stock Incentive Plan. (30)                                              |
| 10.12                                              |       | Credit Agreement with Wells Fargo Bank, National  Association (“Wells Fargo Bank”) dated July 15, 2002. (24)                     |
| 10.13                                              |       | First Amendment, dated July 1, 2003, to Credit  Agreement with Wells Fargo Bank, dated July 15, 2002. (25)                                 |
| 10.14                                              |       | Fourth Amendment, dated February 11, 2005, to Credit  Agreement with Wells Fargo Bank, dated July 15, 2002. (26)                           |
| 10.15                                              |       | Fifth Amendment to Credit Agreement, dated December  1, 2005, to Credit Agreement with Wells Fargo Bank, dated July 15, 2002. (27)         |
| 10.16                                              |       | Sixth Amendment, dated December 1, 2006, to Credit  Agreement with Wells Fargo Bank, dated July 15, 2002. (36)                             |
| 10.17                                              |       | Revolving Line of Credit Note, dated December 1,  2005. (28)                                                                               |
| 10.18*                                             |       | Employment Agreement with Mark L. Thoenes  effective January 1, 2007. (6)                                                        |
| 10.19*                                             |       | Employment Agreement with Timothy J. Erwin effective  January 1, 2007.                                                                     |
| 10.20                                              |       | Rights Agreement dated as of May 18, 2005,  between Rentrak Corporation and U.S. Stock Transfer Corporation. (8)                      |
| 10.21*                                             |       | Incentive Stock Option Agreement with Paul A.  Rosenbaum dated March 30, 2001. (9)                                               |
| 10.22*                                             |       | Non-Qualified Stock Option Agreement with  Paul A. Rosenbaum dated March 30, 2001. (10)                                          |
| 10.23*                                             |       | Incentive Stock Option Agreement with Paul A.  Rosenbaum dated February 9, 2005. (32)                                                 |
| 10.24*                                             |       | Non-Qualified Stock Option Agreement with  Paul A. Rosenbaum dated February 9, 2005. (33)                                             |
| 10.25*                                             |       | Employment Agreement with Amir Yazdani effective  January 1, 2007.                                                                         |
| 10.26*                                             |       | Employment Agreement with Paul A. Rosenbaum  dated October 1, 2001. (12)                                                         |
| 10.27*                                             |       | Employment Agreement between Rentrak Corporation and  Marty Graham effective January 1, 2007. (31)                                         |
| 10.28*                                             |       | Employment Agreement with Ronald Giambra dated July  1, 2002. (17)                                                                         |
| 10.29*                                             |       | Amendment, dated June 1, 2003, to Employment  Agreement dated July 1, 2002, between Ronald Giambra and Rentrak Corporation.  (18)          |
| 10.30*                                             |       | Amendment No. 2 dated February 10, 2005 to  Employment Agreement dated July 1, 2002, between Ronald Giambra and Rentrak  Corporation. (21) |
| 10.31*                                             |       | Employment Agreement between Kenneth M. Papagan and  Rentrak Corporation effective January 1, 2007. (19)                                   |
| 10.32*                                             |       | Employment Agreement between Cathy Hetzel and  Rentrak Corporation effective January 1, 2007. (20)                                         |
| 10.33*                                             |       | Form of Award Agreement for Non-Employee Director  Deferred Stock Units. (37)                                                              |
|         21 |       | List of Subsidiaries of Registrant. (22)                                                                                                   |
| 23.1                                               |       | Consent of GRANT THORNTON LLP, independent  registered public accounting firm.                                                             |
| 31.1                                               |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a).                                                                      |
| 31.2                                               |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a).                                                                      |
| 32.1                                               |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350.                                                              |
| 32.2                                               |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350.                                                              |
| 99.1                                               |       | Description of Capital Stock of Rentrak Corporation.  (34)                                                                                 |

 

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*      ManagementContract or Compensatory Plan or Arrangement.

**    Portionsomitted pursuant to a request for confidentiality treatment filed with theSecurities and Exchange Commission.

E-1

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| 1.  |   | Filed as Exhibit 3.1 to Form 10-Q filed on  February 14, 2001.    |
|-----|--------|------------------------------------------------------------------------|
| 2.  |   | Reserved.                                                              |
| 3.  |   | Filed as Exhibit 10.10 to 2002 Form 10-K filed on  June 28, 2002.      |
| 4.  |   | Filed as Exhibit 10.8 to 2003 Form 10-K filed on  June 26, 2003.       |
| 5.  |   | Filed as Exhibit 10.9 to 2003 Form 10-K filed on  June 26, 2003.       |
| 6.  |   | Filed as Exhibit 10.1 to Form 8-K filed on May 4,  2007.               |
| 7.  |   | Reserved.                                                              |
| 8.  |   | Filed as Exhibit 4.1 to Form 8-K filed on May 18,  2005.               |
| 9.  |   | Filed as Exhibit 10.30 to 2001 Form 10-K filed on  June 29, 2001.      |
| 10. |   | Filed as Exhibit 10.31 to 2001 Form 10-K filed on  June 29, 2001. |
| 11. |   | Reserved.                                                              |
| 12. |   | Filed as Exhibit 10.1 to Form 10-Q filed on  February 14, 2002.   |
| 13. |   | Filed as Exhibit 4.1 to Form S-8 filed on June 5,  1997.               |
| 14. |   | Filed as Exhibit 4.1 to Form S-8 filed on October  29, 1997.           |
| 15. |   | Filed as Exhibit 10.31 to 2002 From 10-K filed on  June 28, 2002.      |
| 16. |   | Filed as Exhibit 10.1 to Form 10-Q filed on November  13, 2002.        |
| 17. |   | Filed as Exhibit 10.5 to Form 10-Q filed on February  14, 2003.        |
| 18. |   | Filed as Exhibit 10.27 to Form 10-K filed on July  14, 2004.           |
| 19. |   | Filed as Exhibit 10.1 to Form 8-K filed on February  26, 2007.         |
| 20. |   | Filed as Exhibit 10.1 to Form 8-K filed on March 27,  2007.            |
| 21. |   | Filed as Exhibit 10.1 to Form 8-K filed on February  15, 2005.         |
| 22. |   | Filed as Exhibit 21 to Form 10-K filed on July 14,  2004.              |
| 23. |   | Filed as Exhibit 3.1 to Form 10-K filed on June 13,  2005.             |
| 24. |   | Filed as Exhibit 10.7 to Form 10-K filed on June 13,  2005.            |
| 25. |   | Filed as Exhibit 10.8 to Form 10-K filed on June 13,  2005.            |
| 26. |   | Filed as Exhibit 10.11 to Form 10-K filed on June  13, 2005.           |
| 27. |   | Filed as Exhibit 10.1 to Form 10-Q filed on February  7, 2006.         |
| 28. |   | Filed as Exhibit 10.2 to Form 10-Q filed on February  7, 2006.         |
| 29. |   | Filed as Exhibit 10.1 to Form 8-K filed on August  31, 2005.           |
| 30. |   | Filed as Exhibit 10.1 to Form 10-Q filed on November  8, 2005.         |
| 31. |   | Filed as Exhibit 10.1 to Form 8-K filed on March 6,  2007.             |
| 32. |   | Filed as Exhibit 10.17 to Form 10-K filed on June  13, 2005.           |
| 33. |   | Filed as Exhibit 10.18 to Form 10-K filed on June  13, 2005.           |
| 34. |   | Filed as Exhibit 99.1 to Form 8-K filed on May 18,  2005.              |
| 35. |   | Filed as Exhibit 10.1 to Form 10-Q filed on August  9, 2006.           |
| 36. |   | Filed as Exhibit 10.1 to Form 10-Q filed on February  9, 2007.         |
| 37. |   | Filed as Exhibit 10.1 to Form 10-Q filed on November  9, 2006.         |

 

E-2

----