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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended September 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the Transition Period From  To

Commission File Number: 000-49809



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INTERVIDEO, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3300070                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

46430 Fremont Blvd., Fremont, CA 94538

(Address of principal executive offices, Zip Code)

(510) 651-0888

(Registrants telephone number, including area
code)



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Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

On October 31, 2006, the registrant had 14,275,379 shares of common stock outstanding, $0.001 par value per share.



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##### Table of Contents

INTERVIDEO, INC.

TABLE OF CONTENTS



|                              |  |                                                                                                                               |  |         
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                               |  | Page No.
|PART I.
FINANCIAL INFORMATION |  |                                                                                                                              
|                              |  |                                                                                                                              
|Item 1.                       |  | Financial Statements (Unaudited):                                                                                             |  |         
|                              |  |                                                                                                                              
|                              |  | Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005                                             |  | 3       
|                              |  |                                                                                                                              
|                              |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and September 30, 2005 |  | 4       
|                              |  |                                                                                                                              
|                              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and September 30, 2005           |  | 5       
|                              |  |                                                                                                                              
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                          |  | 6       
|                              |  |                                                                                                                              
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 18      
|                              |  |                                                                                                                              
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |  | 28      
|                              |  |                                                                                                                              
|Item 4.                       |  | Controls and Procedures                                                                                                       |  | 29      
|                              | 
|PART II.
OTHER INFORMATION    |  |                                                                                                                              
|                              |  |                                                                                                                              
|Item 1.                       |  | Legal Proceedings                                                                                                             |  | 30      
|                              |  |                                                                                                                              
|Item 1A.                      |  | Risk Factors                                                                                                                  |  | 30      
|                              |  |                                                                                                                              
|Item 5.                       |  | Other Information                                                                                                             |  | 45      
|                              |  |                                                                                                                              
|Item 6.                       |  | Exhibits                                                                                                                      |  | 45      
|                              |  |                                                                                                                              
|                              |  | SIGNATURES                                                                                                                    |  | 46      



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##### Table of Contents

INTERVIDEO, INC.

PART 1  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except par value amounts)



|                                                                                                                         |  |                          |         |   |                         |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ----------------------- | - | ------- | -
|                                                                                                                         |  | As of September 30, 2006 |         |   | As of December 31, 2005 |  
|ASSETS                                                                                                                   |  |                          |         |   |                         |   |         |  
|Current assets:                                                                                                          |  |                          |         |   |                         |   |         |  
|Cash and cash equivalents                                                                                                |  | $                        | 23,574  |   |                         | $ | 31,169  |  
|Short-term investments                                                                                                   |  |                          | 72,381  |   |                         |   | 43,988  |  
|Accounts receivable, net of allowance for doubtful accounts; $648 and $746, respectively                                 |  |                          | 8,254   |   |                         |   | 12,939  |  
|Income taxes receivable                                                                                                  |  |                          | 1,772   |   |                         |   |        |  
|Deferred tax assets                                                                                                      |  |                          | 1,034   |   |                         |   | 1,034   |  
|Prepaid expenses and other current assets                                                                                |  |                          | 5,564   |   |                         |   | 6,470   |  
|Held for sale assets                                                                                                     |  |                          |        |   |                         |   | 19,611  |  
|                                                                                                                         |  |                          |         |   |                         |   |         |  
|Total current assets                                                                                                     |  |                          | 112,579 |   |                         |   | 115,211 |  
|                                                                                                                         |  |                         
|Property and equipment, net                                                                                              |  |                          | 3,415   |   |                         |   | 3,414   |  
|Goodwill                                                                                                                 |  |                          | 1,018   |   |                         |   | 1,018   |  
|Other purchased intangible assets                                                                                        |  |                          | 8,524   |   |                         |   | 7,130   |  
|Deferred tax assets                                                                                                      |  |                          | 3,965   |   |                         |   | 3,965   |  
|Other assets                                                                                                             |  |                          | 2,916   |   |                         |   | 3,507   |  
|                                                                                                                         |  |                          |         |   |                         |   |         |  
|Total assets                                                                                                             |  | $                        | 132,417 |   |                         | $ | 134,245 |  
|                                                                                                                         |  |                          |         |   |                         |   |         |  
|                                                                                                                         |  |                         
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  |                          |         |   |                         |   |         |  
|Current liabilities:                                                                                                     |  |                          |         |   |                         |   |         |  
|Accounts payable                                                                                                         |  | $                        | 3,645   |   |                         | $ | 2,219   |  
|Accrued liabilities                                                                                                      |  |                          | 17,371  |   |                         |   | 19,087  |  
|Income taxes payable                                                                                                     |  |                          |        |   |                         |   | 1,566   |  
|Deferred revenue                                                                                                         |  |                          | 4,090   |   |                         |   | 3,938   |  
|                                                                                                                         |  |                          |         |   |                         |   |         |  
|Total current liabilities                                                                                                |  |                          | 25,106  |   |                         |   | 26,810  |  
|                                                                                                                         |  |                         
|Long-term liabilities:                                                                                                   |  |                          |         |   |                         |   |         |  
|Other long term liabilities                                                                                              |  |                          | 876     |   |                         |   | 871     |  
|Minority interest                                                                                                        |  |                          | 17,921  |   |                         |   | 19,832  |  
|Stockholders equity:                                                                                                    |  |                          |         |   |                         |   |         |  
|Common stock, $0.001 par value; 150,000 shares authorized; 14,233 and 13,850 shares issued and outstanding, respectively |  |                          | 14      |   |                         |   | 14      |  
|Additional paid-in capital                                                                                               |  |                          | 79,617  |   |                         |   | 74,121  |  
|Notes receivable from stockholders                                                                                       |  |                          | (125    | ) |                         |   | (456    | )
|Accumulated other comprehensive income (loss)                                                                            |  |                          | (1,198  | ) |                         |   | 2,965   |  
|Retained earnings                                                                                                        |  |                          | 10,206  |   |                         |   | 10,088  |  
|                                                                                                                         |  |                          |         |   |                         |   |         |  
|Total stockholders equity                                                                                               |  |                          | 88,514  |   |                         |   | 86,732  |  
|                                                                                                                         |  |                          |         |   |                         |   |         |  
|Total liabilities and stockholders equity                                                                               |  | $                        | 132,417 |   |                         | $ | 134,245 |  
|                                                                                                                         |  |                          |         |   |                         |   |         |  

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
financial statements.



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INTERVIDEO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)



|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Three months ended September 30, |        |   | Nine months ended September 30, |  
|                                                                  |  | 2006                             |        |   | 2005                            |   |        | 2006 |  |   | 2005   |  
|Revenue                                                           |  | $                                | 24,928 |   |                                 | $ | 29,002 |      |  | $ | 85,971 |   |  | $ | 78,512 |  
|Cost of revenue                                                   |  |                                  | 11,433 |   |                                 |   | 9,330  |      |  |   | 40,527 |   |  |   | 28,860 |  
|Amortization of intangible assets                                 |  |                                  | 611    |   |                                 |   | 324    |      |  |   | 1,354  |   |  |   | 661    |  
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                      |  |                                  | 12,884 |   |                                 |   | 19,348 |      |  |   | 44,090 |   |  |   | 48,991 |  
|                                                                  |  |                                  |        |  
|Operating expenses:                                               |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Research and development                                          |  |                                  | 7,093  |   |                                 |   | 6,277  |      |  |   | 19,847 |   |  |   | 14,737 |  
|Sales and marketing                                               |  |                                  | 4,672  |   |                                 |   | 5,360  |      |  |   | 14,575 |   |  |   | 13,441 |  
|General and administrative                                        |  |                                  | 5,677  |   |                                 |   | 3,915  |      |  |   | 15,627 |   |  |   | 10,766 |  
|Loss (gain) from disposal of assets                               |  |                                  | 8      |   |                                 |   | 109    |      |  |   | (1,998 | ) |  |   | 108    |  
|Acquired in-process research and development                      |  |                                  |       |   |                                 |   |       |      |  |   |       |   |  |   | 2,574  |  
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                          |  |                                  | 17,450 |   |                                 |   | 15,661 |      |  |   | 48,051 |   |  |   | 41,626 |  
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from operations                                     |  |                                  | (4,566 | ) |                                 |   | 3,687  |      |  |   | (3,961 | ) |  |   | 7,365  |  
|                                                                  |  |                                  |        |  
|Other income, net                                                 |  |                                  | 2,216  |   |                                 |   | 831    |      |  |   | 5,837  |   |  |   | 119    |  
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                                 |  |                                  | (2,350 | ) |                                 |   | 4,518  |      |  |   | 1,876  |   |  |   | 7,484  |  
|                                                                  |  |                                  |        |  
|Provision for (benefit from) income taxes                         |  |                                  | (810   | ) |                                 |   | 2,205  |      |  |   | 993    |   |  |   | 4,636  |  
|                                                                  |  |                                  |        |  
|Minority interest, net of tax                                     |  |                                  | 159    |   |                                 |   | (224   | )    |  |   | 766    |   |  |   | (520   | )
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|                                                                  |  |                                  |        |  
|Net income (loss)                                                 |  | $                                | (1,699 | ) |                                 | $ | 2,537  |      |  | $ | 117    |   |  | $ | 3,368  |  
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per share:                                      |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                             |  | $                                | (0.12  | ) |                                 | $ | 0.18   |      |  | $ | 0.01   |   |  | $ | 0.24   |  
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                           |  | $                                | (0.12  | ) |                                 | $ | 0.16   |      |  | $ | 0.01   |   |  | $ | 0.22   |  
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Number of shares used in net income (loss) per share calculation: |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                             |  |                                  | 14,084 |   |                                 |   | 14,046 |      |  |   | 13,991 |   |  |   | 13,940 |  
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                           |  |                                  | 14,084 |   |                                 |   | 15,382 |      |  |   | 15,009 |   |  |   | 15,400 |  
|                                                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
financial statements.



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INTERVIDEO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



|                                                                                  |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine months ended September 30, |        
|                                                                                  |  | 2006                            |         |   | 2005 |  
|Cash flows from operating activities:                                             |  |                                 |         |   |      |   |         |  
|Net income                                                                        |  | $                               | 117     |   |      | $ | 3,368   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                 | 3,013   |   |      |   | 1,927   |  
|Acquired in-process research and development                                      |  |                                 |        |   |      |   | 2,574   |  
|Minority interest, net of tax                                                     |  |                                 | 766     |   |      |   | (520    | )
|Net losses on sales and impairments of investments                                |  |                                 |        |   |      |   | 1,178   |  
|Stock-based compensation                                                          |  |                                 | 2,793   |   |      |   | 70      |  
|Provision for losses on receivables and other non-cash charges                    |  |                                 | 59      |   |      |   | 159     |  
|Loss (gain) from disposal of property and equipment                               |  |                                 | (1,998  | ) |      |   | 109     |  
|Non-cash currency adjustment                                                      |  |                                 | (1,646  | ) |      |   |        |  
|Excess tax benefits from stock-based compensation                                 |  |                                 | (906    | ) |      |   |        |  
|Changes in assets and liabilities:                                                |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                               |  |                                 | 4,648   |   |      |   | (1,818  | )
|Prepaid expenses and other current assets                                         |  |                                 | 687     |   |      |   | (928    | )
|Other assets                                                                      |  |                                 | 449     |   |      |   | (1,657  | )
|Accounts payable                                                                  |  |                                 | 1,420   |   |      |   | 627     |  
|Deferred revenue                                                                  |  |                                 | 404     |   |      |   | 4,152   |  
|Income taxes receivable, accrued liabilities, and income taxes payable            |  |                                 | (4,951  | ) |      |   | (1,243  | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                 | 4,855   |   |      |   | 7,998   |  
|                                                                                  |  |                                
|Cash flows from investing activities:                                             |  |                                 |         |   |      |   |         |  
|Purchases of property and equipment                                               |  |                                 | (1,414  | ) |      |   | (1,258  | )
|Purchases of short-term investments                                               |  |                                 | (83,542 | ) |      |   | (25,851 | )
|Proceeds from short-term investments                                              |  |                                 | 53,566  |   |      |   | 46,057  |  
|Acquisition of Ulead, net of cash acquired                                        |  |                                 |        |   |      |   | (22,744 | )
|Purchase of intangible assets                                                     |  |                                 | (2,913  | ) |      |   |        |  
|Proceeds from Uleads assets held for sale                                        |  |                                 | 21,181  |   |      |   |        |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                                 | (13,122 | ) |      |   | (3,796  | )
|                                                                                  |  |                                
|Cash flows from financing activities:                                             |  |                                 |         |   |      |   |         |  
|Proceeds from issuance of common stock under stock option plans                   |  |                                 | 1,812   |   |      |   | 3,244   |  
|Proceeds from repayment of notes receivable                                       |  |                                 | 338     |   |      |   | 282     |  
|Excess tax benefits from stock-based compensation                                 |  |                                 | 906     |   |      |   |        |  
|Payment for repurchased stock of subsidiary                                       |  |                                 | (2,616  | ) |      |   | (3,857  | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                               |  |                                 | 440     |   |      |   | (331    | )
|                                                                                  |  |                                
|Effect of exchange rates on cash and cash equivalents                             |  |                                 | 232     |   |      |   | 103     |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                                 | (7,595  | ) |      |   | 3,974   |  
|                                                                                  |  |                                
|Cash and cash equivalents at beginning of period                                  |  |                                 | 31,169  |   |      |   | 27,410  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|                                                                                  |  |                                
|Cash and cash equivalents at end of period                                        |  | $                               | 23,574  |   |      | $ | 31,384  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Supplementary disclosure:                                                         |  |                                 |         |   |      |   |         |  
|Income taxes paid, net of tax refunds                                             |  | $                               | 2,855   |   |      | $ | 3,267   |  

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
financial statements.



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ORGANIZATION AND BUSINESS

InterVideo, Inc. (InterVideo or the Company) is a provider of multimedia software products. These products span the digital
video cycle by allowing users to capture, edit, author, distribute, burn and play digital video. The Company, including its controlling interest in Ulead Systems, Inc. (Ulead), has operations in the United States, Taiwan, Japan, China,
India, Germany and the Philippines. A substantial portion of the Companys revenue is derived from the sale of software licenses to original equipment manufacturers (OEM), who install InterVideo software onto personal computers
(PC) prior to delivery to customers. The Company also sells software through retail channels and directly to end users through its websites. In addition, the Company derives revenue from the license of its software to consumer
electronics (CE) manufacturers, manufacturers of PC peripherals and other software and Internet companies that incorporate the Companys software into their own products for distribution.

NOTE 2. BASIS OF PRESENTATION

The accompanying unaudited condensed
consolidated financial statements include the accounts of InterVideo and its majority and wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In
addition, certain reclassifications have been made to prior year balances in order to conform to the current period presentation. These reclassifications had no impact on previously reported earnings or retained earnings.

The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended
December 31, 2005, and notes thereto, included in InterVideos 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 31, 2006.

NOTE 3. USE OF ESTIMATES, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Estimates

The preparation of condensed consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The
estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the condensed consolidated financial statements in the period identified. Management believes that the Company consistently applies these judgments
and estimates, and such consistent application results in the fair presentation of the Companys financial condition for all periods presented. Actual results could differ from such estimates.



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 3. USE OF ESTIMATES, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)

Stock-based compensation

Effective January 1, 2006 InterVideo adopted the provisions of, and account for stock-based compensation in accordance with, the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards
No. 123revised 2004 (SFAS No. 123R), Share-Based Payment, as discussed in Note 7. The Company elected the modified prospective method, under which prior periods are not revised for comparative purposes. The
modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are expected to vest over the requisite service periods beginning on January 1, 2006. Under the fair
value recognition provisions of SFAS No. 123R, the Company recognizes stock-based compensation net of an estimated forfeiture rate and therefore only recognizes compensation cost for those shares expected to vest over the service period of the
award. Prior to SFAS No. 123R adoption, InterVideo accounted for share-based payments under Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issues to Employees, and accordingly, generally
recognized compensation expense related to stock options with intrinsic value and accounted for forfeitures as they occurred.

Calculating stock-based
compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and pre-vesting option forfeitures. The Company estimates the expected life of options granted
based on historical exercise patterns, which it believes is representative of future behavior. InterVideos computation of expected volatility is based on the historical data of the market closing price for its common stock as reported by the
Nasdaq Stock Market under the symbol IVII and the expected term of its stock options. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the Companys employee stock
options. InterVideo does not currently pay dividends and has no plans to do so in the future.

The assumptions used in calculating the fair value of
stock-based awards represent InterVideos best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, its stock-based
compensation expense could be materially different in the future. In addition, InterVideo is required to estimate the expected forfeiture rate and only recognizes expense for those shares expected to vest. The Company estimates the forfeiture rate
based on its historical data from employee termination and option cancellations of the granted stock rewards issued. If the Companys actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could
be significantly different from what it has recorded in the current period. See Note 7Stock-Based Compensation in the Notes to Condensed Consolidated Financial Statements under Part I, Item 1 in this Form 10-Q for additional
information.

Recent Accounting Pronouncements

In
September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS
No. 158). SFAS No. 158 requires companies to recognize the overfunded or underfunded status of a defined benefit post-retirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the
year in which the changes occur through comprehensive income, effective for fiscal years ending after December 15, 2006. SFAS 158 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end, with
limited exceptions, effective for fiscal years ending after December 15, 2008. Ulead has a defined benefit plan, but the Company does not believe that SFAS No. 158 will have a material effect on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS No.157), Fair Value
Measurements, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective beginning our first quarter ending March 31, 2007. Earlier adoption is permitted, provided the Company has not yet issued financial
statements, including for interim periods, for that fiscal year. We are currently evaluating the impact of SFAS No. 157, but do not expect the adoption of SFAS No. 157 to have a material effect on our consolidated financial statements.

In September 2006, the SEC staff released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB No. 108). SAB No. 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement
on each of the companys financial statements and the related financial statement disclosures. This approach is commonly referred to as the dual approach because it requires quantification of errors under both the roll-over and iron
curtain methods.



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 3. USE OF ESTIMATES, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (Continued)

SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial
statements as if the dual approach had always been used or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an
offsetting adjustment recorded to the opening balance of retained earnings. Use of this cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the
cumulative adjustment and how and when it arose.

InterVideo will initially apply SAB 108 using the cumulative effect transition method in connection with
the preparation of its annual financial statements for the year ending December 31, 2006. When the Company initially applies the provisions of SAB 108, it expects to record: an increase of $106,000 in long term investments; an increase of
$97,000 in accrued expenses; an increase of $132,000 in deferred revenue; and a decrease of $421,000 in retained earnings. The accompanying financial statements do not reflect these adjustments.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of FASB
Statement No. 109, Accounting for Income Taxes (SFAS 109). A recognized tax position is then measured at the largest amount of benefit that is more-likely-than-not of being realized upon ultimate settlement.
Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, shall be reflected as an adjustment to the opening balance of retained earnings.

FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits
will significantly change in the next twelve months, a description of tax years that remain subject to examination by major tax jurisdictions, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each
annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position. The
Company is required to adopt FIN 48 beginning January 1, 2007. The Company is in the process of determining the impact, if any, of the recognition and measurement requirements of FIN 48 on its existing tax positions.

NOTE 4. ACQUISITION OF ULEAD SYSTEMS, INC.

On July 5, 2006,
InterVideo Digital Technology Corp., a wholly-owned subsidiary of InterVideo, Inc., entered into a merger agreement with Ulead. InterVideo currently owns 48,817,395 shares of Ulead, or approximately 67% of the issued shares of Ulead. Pursuant to the
merger agreement, InterVideo Digital Technology Corp. will purchase the remaining shares of Ulead for NT$30 (approximately U.S. $0.93) per share. Upon completion of the merger, Ulead will become a wholly-owned subsidiary of InterVideo.

NOTE 5. MERGER AGREEMENT WITH COREL CORPORATION

On
August 28, 2006, the Company entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with Corel Corporation, a corporation organized and existing under the laws of Canada (Corel) and Iceland
Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Corel (Merger Sub). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge
with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Corel (the Merger). Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of the
Companys common stock issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $13.00 per share in cash, for an aggregate purchase price of approximately $196 million.

Consummation of the merger is subject to several conditions, including (i) absence of any material adverse effect on the Company, (ii) approval of the
Merger Agreement by the Companys stockholders at a special meeting of stockholders scheduled for December 6, 2006 in at the Companys executive offices in Fremont, California, (iii) expiration or termination of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), and (iv) the Company having a certain specified amount of cash on its balance sheet at closing. Early termination of the
applicable waiting period under the HSR Act was granted on October 6, 2006. The Merger is expected to close in December 2006, but there can be no assurance that the Merger will close in a timely manner, or at all.



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 5. MERGER AGREEMENT WITH COREL CORPORATION (Continued)

The Merger Agreement contains certain termination rights for both the Company and Corel, and further provides that, upon termination of the Merger Agreement under
specified circumstances, the Company may be required to pay Corel a termination fee of $6 million and reimburse Corels third party expenses in connection with the Merger up to $2 million.

The foregoing description of the Merger Agreement does not purport to be complete, and is qualified in its entirety by reference to the Merger Agreement that has been
filed with the Securities and Exchange Commission.

NOTE 6. NET INCOME PER SHARE

Basic net income per common share is calculated by dividing net income for the period by the weighted average common shares outstanding during the period, less shares subject to repurchase. Diluted net income per
common share is calculated by dividing the net income for the period by the weighted average common shares outstanding, adjusted for all potential common shares, which include shares issuable upon the exercise of outstanding common stock options,
convertible preferred stock and other contingent issuances of common stock to the extent these shares are dilutive.

A reconciliation of the numerator and
denominator used in the calculation of basic and diluted net income per common share is as follows (unaudited, in thousands, except per share amounts):



|                                                         |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|-------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | ---- | - | ------ |  | ---- | ------ |  | - | ------ | -
|                                                         |  | Three Months Ended September 30, |        | Nine Months Ended September 30, |     
|                                                         |  | 2006                             |        |                                 | 2005 |   | 2006   |  | 2005 |       
|Basic and diluted net income (loss) per share:           |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Numerator:                                               |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Net income (loss)                                        |  | $                                | (1,699 | )                               |      | $ | 2,537  |  | $    | 117    |  | $ | 3,368  |  
|                                                         |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Denominator:                                             |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Weighted average common shares outstanding               |  |                                  | 14,084 |                                 |      |   | 14,046 |  |      | 13,991 |  |   | 13,943 |  
|Less: Weighted average shares subject to repurchase      |  |                                  |       |                                 |      |   |       |  |      |       |  |   | (3     | )
|                                                         |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Denominator for basic calculation                        |  |                                  | 14,084 |                                 |      |   | 14,046 |  |      | 13,991 |  |   | 13,940 |  
|Effect of dilutive securities:                           |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Add:                                                     |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Weighted average dilutive effect of common stock options |  |                                  |       |                                 |      |   | 1,336  |  |      | 1,018  |  |   | 1,460  |  
|                                                         |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Denominator for diluted calculation                      |  |                                  | 14,084 |                                 |      |   | 15,382 |  |      | 15,009 |  |   | 15,400 |  
|                                                         |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Net income (loss) per share, basic                       |  | $                                | (0.12  | )                               |      | $ | 0.18   |  | $    | 0.01   |  | $ | 0.24   |  
|                                                         |  |                                  |        |                                 |      |   |        |  |      |        |  |   |        |  
|Net income (loss) per share, diluted                     |  | $                                | (0.12  | )                               |      | $ | 0.16   |  | $    | 0.01   |  | $ | 0.22   |  

The following are potential common shares not included in the denominator used in the dilutive net income per
share calculation, because to do so would be antidilutive for the periods presented (unaudited, in thousands):



|                                               |  |                                  |  |                                 |  |       |  |     
|---------------------------------------------- |  | -------------------------------- |  | ------------------------------- |  | ----- |  | ----
|                                               |  | Three months ended September 30, |  | Nine months ended September 30,
|                                               |  | 2006                             |  | 2005                            |  | 2006  |  | 2005
|Antidilutive options to purchase common shares |  | 2,680                            |  | 1,012                           |  | 2,777 |  | 894 

NOTE 7. STOCK-BASED COMPENSATION

2003 Stock Option Plan (the Stock Plan)

During 1998, the Company established the 1998 Stock
Option Plan covering employees, consultants and directors of the Company. In connection with the Companys initial public offering (IPO) in 2003, the Company adopted the 2003 Stock Option Plan. The Stock Plan authorized the Company
to grant options totaling 216,000 shares of common stock plus (a) any shares that have been reserved but not issued under the 1998 Stock Option Plan as of the effective date of the IPO and (b) any shares returned to the 1998 Stock Option
Plan on or after the effective date of the IPO as a result of termination of options. In addition, the Plan provides for annual increases in the number of shares available for issuance on the first day of each fiscal year, beginning with the fiscal
year 2004, equal to the lesser of (i) 5% of the Companys outstanding shares of common stock on the first day of the applicable fiscal year, (ii) 1,082,000 shares or (iii) another amount determined by the Board of Directors.



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 7. STOCK-BASED COMPENSATION (Continued)

The Stock Plan provides for the granting of stock options to InterVideos employees, consultants and directors. Options granted under the Stock Plan may be either
incentive stock options (ISOs) or nonstatutory stock options (NSOs). Options are generally granted at the market value of the common stock on the grant date. ISOs are granted to employees, generally vest over four years and expire in ten years. NSOs
generally expire in ten years and vest over four years or over schedules as determined by the Board of Directors. Stock options granted to an employee owning more than 10% of the total combined voting power of all classes of stock of the Company
must be granted with exercise prices equal to at least 110% of the fair market value of the common stock on the day of grant and have a maximum term of five years from the date of grant.

2003 Employee Stock Purchase Plan (the ESPP)

The ESPP was initially adopted during 2002 and was
amended in January 2003. The Companys employees and employees of designated subsidiaries are eligible to participate in the ESPP if they are customarily employed for at least 20 hours per week and more than five months in any calendar year.
The ESPP permits participants to purchase common stock through payroll deductions of up to 15% of their eligible compensation which includes a participants base salary, bonuses and commissions. A participant may purchase a maximum of 5,000
shares during a six month purchase period.

A total of 216,000 shares of common stock were made available-for-sale under the ESPP. In addition, the ESPP
provides for annual increases in the number of shares available for issuance under the plan on the first day of each fiscal year, beginning with the fiscal year 2004, equal to the lesser of (i) 1.5% of the outstanding shares of
InterVideos common stock on the first day of the applicable fiscal year, (ii) 216,000 shares or (iii) another amount determined by the Board of Directors.

The ESPP consisted of overlapping twenty-four-month offering periods with four six-month purchase periods in each offering period. Purchases are made twice a year, in the months of May and November. The ESPP permits
participants to purchase common stock at 85% of the lower of the market value of common stock at the beginning of an offering period, or at the end of purchase period. If the market value of common stock on the purchase date is less than the value
at the beginning of the offering period, participants will be withdrawn from the current offering period and automatically re-enrolled in the new offering for the following purchase period. Participants may end their participation at any time and
will be refunded their payroll deduction to date.

On April 27, 2006, the Compensation Committee of the Board of Directors approved an amendment of
the ESPP. As amended, the first offering period will commence on May 1, 2006 and continue through November 15, 2006. Thereafter, the offering periods will begin on the first trading day on or after May 15 and November 15 of each
year and the purchase date will be six months from the offering begin date. The price of shares purchased will be the lower of the price at the date of the beginning of offering period or the purchase date. In addition, under the amended plan,
employees can elect to change the ESPP payroll contribution percentage at the inception of an offering period, but may withdraw from the purchase at any time.

Stock Options Activities

The following table sets forth the summary of option activity under InterVideos stock option program
for the nine months ended September 30, 2006 (unaudited, in thousands, except per share data):



|                                  |  |        |   |  |                                 |      
|--------------------------------- |  | ------ | - |  | ------------------------------- | -----
|Options                           |  | Shares |   |  | Weighted Average Exercise Price
|Outstanding at January 1, 2006    |  | 2,991  |   |  | $                               | 7.75 
|Granted                           |  | 417    |   |  |                                 | 10.71
|Exercised                         |  | (353   | ) |  |                                 | 4.43 
|Canceled or expired               |  | (87    | ) |  |                                 | 12.65
|                                  |  |        |   |  |                                 |      
|Outstanding at September 30, 2006 |  | 2,968  |   |  | $                               | 8.42 
|                                  |  |        |   |  |                                 |      



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 7. STOCK-BASED COMPENSATION (Continued)

The intrinsic value of stock options outstanding, exercisable and exercised is calculated based on the difference between the weighted average of exercise price per share
and the quoted market price per share of the Companys common stock as of the close of the last trading day of the fiscal quarter. The total intrinsic value of options exercised for the three months ended September 30, 2006 was $1.4
million. The aggregate intrinsic value of options exercisable and options outstanding as of September 30, 2006 was $11.5 million and $12.9 million, respectively. Upon the exercise of options, the Company issues new common stock from its
authorized shares. The market price per share as of September 29, 2006 was $12.75 as reported by the Nasdaq Stock Market under the symbol IVII.

All vested options are exercisable. The following table summarizes information about stock options outstanding and exercisable as of September 30, 2006 (unaudited, in thousands, except number of years and per share amounts):



|                        |  |                                     |  |                                             |  |                                 |       |                                     |       |                                 |   |      
|----------------------- |  | ----------------------------------- |  | ------------------------------------------- |  | ------------------------------- | ----- | ----------------------------------- | ----- | ------------------------------- | - | -----
|                        |  | Options Outstanding                 |  | Options Exercisable                        
|Range of Exercise Price |  | Number of Shares Underlying Options |  | Weighted Average Remaining Contractual Life |  | Weighted Average Exercise Price |       | Number of Shares Underlying Options |       | Weighted Average Exercise Price
|$0.09                   |  | 640                                 |  | 2.45                                        |  | $                               | 0.09  |                                     | 640   |                                 | $ | 0.09 
|$0.46 to $6.10          |  | 399                                 |  | 3.87                                        |  |                                 | 3.96  |                                     | 399   |                                 |   | 3.96 
|$7.39 to $11.03         |  | 907                                 |  | 8.86                                        |  |                                 | 10.06 |                                     | 190   |                                 |   | 9.22 
|$11.05 to $13.80        |  | 269                                 |  | 8.18                                        |  |                                 | 12.50 |                                     | 119   |                                 |   | 12.67
|$14.17                  |  | 616                                 |  | 7.34                                        |  |                                 | 14.17 |                                     | 391   |                                 |   | 14.17
|$14.57 to $16.99        |  | 137                                 |  | 7.25                                        |  |                                 | 15.60 |                                     | 78    |                                 |   | 16.06
|                        |  |                                     |  |                                             |  |                                 |       |                                     |       |                                 |   |      
|Total                   |  | 2,968                               |  |                                             |  | $                               | 8.42  |                                     | 1,817 |                                 | $ | 6.43 
|                        |  |                                     |  |                                             |  |                                 |       |                                     |       |                                 |   |      

As of September 30, 2006, total unamortized stock-based compensation cost related to non-vested stock options
was $3.9 million which is expected to be recognized over the remaining vesting period of 1.41 years. Compensation costs for all stock-based awards granted on or prior to January 1, 2006 will continue to be recognized using the accelerated
approach, while compensation expense for all stock-based awards granted subsequent to January 1, 2006 will be recognized using the straight-line method.

Total recognized tax benefit related to stock-based compensation expense was $721,000 and $1,411,000 for the three and nine months ended September 30, 2006. The following table summarizes the impact of SFAS No. 123R adoption on
stock-based compensation costs for employees on our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 (unaudited, in thousands):



|                                        |  |                                       |     |                                      |   |      
|--------------------------------------- |  | ------------------------------------- | --- | ------------------------------------ | - | -----
|                                        |  | Three months ended September 30, 2006 |     | Nine months ended September 30, 2006
|Research and development                |  | $                                     | 425 |                                      | $ | 1,317
|Sales and marketing                     |  |                                       | 137 |                                      |   | 441  
|General and administrative              |  |                                       | 295 |                                      |   | 1,033
|Technical support                       |  |                                       |    |                                      |   | 2    
|                                        |  |                                       |     |                                      |   |      
|Total stock-based compensation expenses |  | $                                     | 857 |                                      | $ | 2,793

As a result of adopting SFAS No. 123R on January 1, 2006, the Companys income before income taxes
and net loss for the three and nine months ended September 30, 2006 was lowered by $857,000 and $2,793,000, respectively, than if it had continued to account for share-based compensation under APB No. 25.

Prior to the adoption of SFAS No. 123R, we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as
allowed under SFAS No. 123. Under the intrinsic value method, no stock-based compensation expense for grants of employee stock options had been recognized in our results of operations in the prior period, because the exercise price of the stock
options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant. In accordance with the modified prospective transition method that we used in adopting SFAS No. 123R, our Consolidated
Statements of Operations prior to fiscal year 2006 have not been restated to reflect, and do not include, the impact of SFAS No. 123R.



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 7. STOCK-BASED COMPENSATION (Continued)

The table below reflects net income (loss) and net income (loss) per share, and pro forma information for the three and nine months ended September 30, 2005
(unaudited, in thousands, except per share amounts):



|                                                                                                                          |  |                                      |        |   |                                     |   |        |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ----------------------------------- | - | ------ | -
|                                                                                                                          |  | Three Months EndedSeptember 30, 2005 |        |   | Nine Months EndedSeptember 30, 2005 |  
|Net income, as reported                                                                                                   |  | $                                    | 2,537  |   |                                     | $ | 3,368  |  
|Add: Stock-based compensation expense for employees previously determined under intrinsic value method, net of tax effect |  |                                      | 3      |   |                                     |   | 70     |  
|Less: Stock-based compensation expense for employees determined under fair value based method, net of tax effect          |  |                                      | (1,205 | ) |                                     |   | (3,590 | )
|                                                                                                                          |  |                                      |        |   |                                     |   |        |  
|Net income (loss), after effect of stock-based compensation for employees                                                 |  | $                                    | 1,335  |   |                                     | $ | (152   | )
|                                                                                                                          |  |                                     
|Net income (loss) per share:                                                                                              |  |                                      |        |   |                                     |   |        |  
|Basic - as reported                                                                                                       |  | $                                    | 0.18   |   |                                     | $ | 0.24   |  
|                                                                                                                          |  |                                     
|Basic  pro forma, after effect of stock-based compensation for employees                                                 |  | $                                    | 0.10   |   |                                     | $ | (0.01  | )
|Diluted  as reported                                                                                                     |  | $                                    | 0.16   |   |                                     | $ | 0.22   |  
|Diluted - pro forma, after effect of stock-based compensation for employees                                               |  | $                                    | 0.09   |   |                                     | $ | (0.01  | )

The weighted average fair value of options granted to employees for the three and nine months ended
September 30, 2006 and 2005 is summarized in the following table, and was estimated with the following assumptions (unaudited):



|                                                            |  |                                  |           |   |                                 |   |         |      |  |   |             |   |  |   |           |  
|----------------------------------------------------------- |  | -------------------------------- | --------- | - | ------------------------------- | - | ------- | ---- |  | - | ----------- | - |  | - | --------- | -
|                                                            |  | Three months ended September 30, |           |   | Nine months ended September 30, |  
|                                                            |  | 2006                             |           |   | 2005                            |   |         | 2006 |  |   | 2005        |  
|Weighted average fair value of options granted to employees |  | $                                | 4.75      |   |                                 | $ | 9.69    |      |  | $ | 4.83        |   |  | $ | 8.32      |  
|                                                            |  |                                  |           |  
|Black-Scholes model assumptions:                            |  |                                  |           |   |                                 |   |         |      |  |   |             |   |  |   |           |  
|Risk-free interest rate                                     |  |                                  | 4.90      | % |                                 |   | 3.98    | %    |  |   | 4.48-4.97   | % |  |   | 3.61-3.98 | %
|Expected term of the option                                 |  |                                  | 4.7 years |   |                                 |   | 4 years |      |  |   | 4.7-4.9 yrs |   |  |   | 4 years   |  
|Dividend yield                                              |  |                                  | 0         | % |                                 |   | 0       | %    |  |   | 0           | % |  |   | 0         | %
|Volatility                                                  |  |                                  | 47        | % |                                 |   | 80      | %    |  |   | 44-47       | % |  |   | 80        | %

The Company estimates the volatility of its common stock by using historical volatility and the volatilities of
five other publicly-traded companies in similar industries to project future trends. Management has determined that a blended volatility considering other publicly-traded companies with longer trading history as well as in similar industries is more
reflective of market conditions and a better indicator of expected volatility than using purely historical volatility. Prior to fiscal year 2006, InterVideo based the volatility assumption solely on the volatility of other companies in the same
industry. The comparative company group may change from year to year due to acquisitions, mergers and other significant events. The Company will continue to monitor relevant factors used to measure expected volatility for future option grants on a
quarterly basis.

The risk-free interest rates are derived from schedules published by the U.S. Federal Reserve appropriate for the term of our stock
options.

The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. The
Company derived the expected term assumption based on our historical settlement experience, while giving consideration to options that have life cycles less than the contractual terms and vesting schedules in accordance with guidance in
SFAS No. 123R and SAB 107. In prior periods, the Company estimated that the vesting term approximated the expected term.

The stock-based
compensation expense recognized in the Companys results for the three and nine months ended September 30, 2006 is based on awards ultimately expected to vest. The Company estimate forfeitures at the time of grant and revises those
estimates in subsequent periods if actual forfeitures differ from their estimates. The forfeiture analysis study produced an annual forfeiture assumption of 11%. Prior to fiscal year 2006, the Company accounted for forfeitures when they occurred.



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 8. OTHER INCOME, NET

Other income, net consists of the following (unaudited, in thousands):



|                                  |  |                                  |       |                                 |   |      |  |      |       |  |   |      |  
|--------------------------------- |  | -------------------------------- | ----- | ------------------------------- | - | ---- |  | ---- | ----- |  | - | ---- | -
|                                  |  | Three months ended September 30, |       | Nine months ended September 30, |  
|                                  |  | 2006                             |       | 2005                            |   | 2006 |  | 2005 |      
|Interest income                   |  | $                                | 438   |                                 | $ | 276  |  | $    | 1,277 |  | $ | 822  |  
|Investment gain (loss)            |  |                                  | 1,452 |                                 |   | 65   |  |      | 2,144 |  |   | (921 | )
|Foreign currency translation gain |  |                                  | 123   |                                 |   | 333  |  |      | 1,813 |  |   | 5    |  
|Other                             |  |                                  | 203   |                                 |   | 157  |  |      | 603   |  |   | 213  |  
|                                  |  |                                  |       |                                 |   |      |  |      |       |  |   |      |  
|                                  |  |                                  |       |                                
|Other income, net                 |  | $                                | 2,216 |                                 | $ | 831  |  | $    | 5,837 |  | $ | 119  |  

NOTE 9. INCOME TAXES

The Company accounts for income taxes using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the
enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain.

For the period ended September 30, 2006, the Company calculated its projected effective tax rate for the year ending December 31, 2006 to be 72%. This rate differs from the statutory federal rate of 35%
primarily due to state taxes, net of federal benefit, differences between federal and foreign tax rates, foreign withholding taxes, foreign losses with no benefit, and tax effect of stock-based compensation expense resulted from the adoption of SFAS
No. 123R.

NOTE 10. OTHER COMPREHENSIVE INCOME

Comprehensive income is the total of net income and all other non-owner changes in stockholders equity. The Companys components of other comprehensive income are foreign currency translation adjustments and unrealized gain or
loss on available-for-sale investments. Such amounts are excluded from net income and are reported in accumulated other comprehensive income in the accompanying condensed consolidated financial statements.

The components of comprehensive income were as follows (unaudited, in thousands):



|                                                                   |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                   |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                                   |  | 2006                             |        |   | 2005                            |   |       | 2006 |  |   | 2005   |  
|Net income (loss)                                                  |  | $                                | (1,699 | ) |                                 | $ | 2,537 |      |  | $ | 117    |   |  | $ | 3,368  |  
|Other comprehensive loss:                                          |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Change in unrealized gain (loss) on available-for-sale investments |  |                                  | (571   | ) |                                 |   | 5     |      |  |   | (712   | ) |  |   | (1,189 | )
|Currency translation adjustments                                   |  |                                  | (308   | ) |                                 |   | (303  | )    |  |   | (3,451 | ) |  |   | (196   | )
|                                                                   |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Other comprehensive loss                                           |  |                                  | (879   | ) |                                 |   | (298  | )    |  |   | (4,163 | ) |  |   | (1,385 | )
|                                                                   |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Total comprehensive income (loss)                                  |  | $                                | (2,578 | ) |                                 | $ | 2,239 |      |  | $ | (4,046 | ) |  | $ | 1,983  |  
|                                                                   |  |                                  |        |   |                                 |   |       |      |  |   |        |   |  |   |        |  



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 11. BALANCE SHEET COMPONENTS

Short-term investments

Short-term investments consist of
(unaudited, in thousands):



|                                |  |                          |        |                        |   |                         |  |   |                             |   |  |   |       
|------------------------------- |  | ------------------------ | ------ | ---------------------- | - | ----------------------- |  | - | --------------------------- | - |  | - | ------
|                                |  | As of September 30, 2006
|                                |  | Amortized cost           |        | Gross unrealized gains |   | Gross unrealized losses |  |   | Estimated fair market value
|Available-for-sale securities:  |  |                          |        |                        |   |                         |  |   |                             |   |  |   |       
|U.S. government debt securities |  | $                        | 4,001  |                        | $ |                        |  | $ | (9                          | ) |  | $ | 3,992 
|State and municipal notes/bonds |  |                          | 7,898  |                        |   |                        |  |   | (10                         | ) |  |   | 7,888 
|Auction rate securities         |  |                          | 21,950 |                        |   |                        |  |   |                            |   |  |   | 21,950
|Mutual fund securities          |  |                          | 38,275 |                        |   | 1                       |  |   |                            |   |  |   | 38,276
|Corporate securities            |  |                          | 167    |                        |   | 108                     |  |   |                            |   |  |   | 275   
|                                |  |                          |        |                        |   |                         |  |   |                             |   |  |   |       
|Total short-term investments    |  | $                        | 72,291 |                        | $ | 109                     |  | $ | (19                         | ) |  | $ | 72,381
|                                | 
|                                |  | As of December 31, 2005 
|                                |  | Amortized cost           |        | Gross unrealized gains |   | Gross unrealized losses |  |   | Estimated fair market value
|Available-for-sale securities:  |  |                          |        |                        |   |                         |  |   |                             |   |  |   |       
|U.S. government debt securities |  | $                        | 4,001  |                        | $ |                        |  | $ | (20                         | ) |  | $ | 3,981 
|State and municipal notes/bonds |  |                          | 5,829  |                        |   |                        |  |   | (16                         | ) |  |   | 5,813 
|Auction rate securities         |  |                          | 16,850 |                        |   |                        |  |   |                            |   |  |   | 16,850
|Mutual fund securities          |  |                          | 15,549 |                        |   | 29                      |  |   |                            |   |  |   | 15,578
|Corporate securities            |  |                          | 508    |                        |   | 1,258                   |  |   |                            |   |  |   | 1,766 
|                                |  |                          |        |                        |   |                         |  |   |                             |   |  |   |       
|Total short-term investments    |  | $                        | 42,737 |                        | $ | 1,287                   |  | $ | (36                         | ) |  | $ | 43,988

The available-for-sale securities at September 30, 2006 have contractual maturities ranging from 2006 to
2008.



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 11. BALANCE SHEET COMPONENTS (Continued)

Purchase of intangible assets

On May 9, 2006, Ulead
Systems, Inc. acquired the JAVA/WAP patent and software technology, and customer service contracts from Institute for Information Industry (III) for $2.9 million in cash, including $15,000 of refundable operational fee consideration. The
appraised value of the JAVA/WAP patents, software technology, customer service contracts, and R&D tangible assets was approximately $2.9 million. Under the terms of the agreement, the Company owns the licensing rights to use the patent and
software.

In accordance with SFAS No. 141 the total purchase price was allocated to intangible assets based upon their estimated fair values as of
the date of acquisition. The following represents the allocation of the purchase price to the acquired net assets of III (unaudited, in thousands) and the associated estimated useful lives:



|                     |  |        |       |                       |        
|-------------------- |  | ------ | ----- | --------------------- | -------
|                     |  | Amount |       | Estimated Useful Life
|Patent and software  |  | $      | 2,492 |                       | 72 mos.
|Customer contracts   |  |        | 282   |                       | 7 mos. 
|VAT                  |  |        | 139   |                       | N/A    
|                     |  |        |       |                       |        
|Total purchase price |  | $      | 2,913 |                       |        
|                     |  |        |       |                       |        

Other purchased intangible assets, net

Other purchased intangible assets, net, consist of the following (unaudited, in thousands):



|                                             |  |                    |        |   |                   |   |       |  
|-------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ----- | -
|                                             |  | September 30, 2006 |        |   | December 31, 2005 |  
|Purchased developed technology               |  | $                  | 6,145  |   |                   | $ | 3,839 |  
|Customer contracts and related relationships |  |                    | 2,478  |   |                   |   | 2,043 |  
|Trade name                                   |  |                    | 2,145  |   |                   |   | 2,145 |  
|Less: Accumulated amortization               |  |                    | (2,244 | ) |                   |   | (897  | )
|                                             |  |                    |        |   |                   |   |       |  
|Total other purchased intangible assets      |  | $                  | 8,524  |   |                   | $ | 7,130 |  
|                                             |  |                    |        |   |                   |   |       |  

Other identifiable intangible assets, including purchased developed technology, customer base and trademarks are
being amortized over their useful lives of five to six years; customer contracts and related relationships are being amortized over their estimated useful lives of seven months to eight years; and the trade name is being amortized over its estimated
useful life of six years. The gross amount of intangible assets this quarter reflects a $32,000 decrease due to foreign exchange translation of Uleads acquisition of IIIs technology and customer contracts.

Accrued liabilities

Accrued liabilities consist of the
following (unaudited, in thousands):



|                                                 |  |                   |        |                  |   |       
|------------------------------------------------ |  | ----------------- | ------ | ---------------- | - | ------
|                                                 |  | September 30,2006 |        | December 31,2005
|Payroll and related benefits                     |  | $                 | 3,957  |                  | $ | 4,125 
|Royalties                                        |  |                   | 6,455  |                  |   | 7,967 
|Legal, audit and other consulting fees           |  |                   | 1,875  |                  |   | 2,330 
|Value-added tax, sales and other withholding tax |  |                   | 1,222  |                  |   | 1,245 
|Accrued reserve for sales returns                |  |                   | 1,239  |                  |   | 1,094 
|Other                                            |  |                   | 2,623  |                  |   | 2,326 
|                                                 |  |                   |        |                  |   |       
|Total accrued liabilities                        |  | $                 | 17,371 |                  | $ | 19,087
|                                                 |  |                   |        |                  |   |       



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Companys chief operating decision maker is the chief executive officer of the Company.

The Company has one operating segment: multimedia software. The Company sells its products primarily through OEMs and to end users through the Companys websites
and through retail channels. Sales of licenses to the Companys software occur in three geographic locations, namely the United States, Europe and Asia. International revenues are based on the country in which the customer is located.

The following is a summary of revenue by sales channel and geographic region (unaudited, in thousands):



|                               |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|------------------------------ |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                               |  | Three months ended September 30, |        | Nine months ended September 30,
|                               |  | 2006                             |        | 2005                            |   | 2006   |  | 2005
|Revenues by Sales Channel:     |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|OEMs                           |  | $                                | 18,707 |                                 | $ | 22,713 |  | $    | 65,378 |  | $ | 60,483
|Web sales and retail           |  |                                  | 6,221  |                                 |   | 6,289  |  |      | 20,593 |  |   | 18,029
|                               |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total revenue                  |  | $                                | 24,928 |                                 | $ | 29,002 |  | $    | 85,971 |  | $ | 78,512
|                               |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Revenues by Geographic Region: |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|United States                  |  | $                                | 11,944 |                                 | $ | 14,879 |  | $    | 42,872 |  | $ | 39,557
|Europe                         |  |                                  | 2,107  |                                 |   | 2,626  |  |      | 7,045  |  |   | 7,493 
|Asia:                          |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Japan                          |  |                                  | 8,664  |                                 |   | 7,835  |  |      | 27,620 |  |   | 25,317
|Other Asia                     |  |                                  | 2,213  |                                 |   | 3,662  |  |      | 8,434  |  |   | 6,145 
|                               |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total revenue                  |  | $                                | 24,928 |                                 | $ | 29,002 |  |      | 85,971 |  | $ | 78,512
|                               |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Revenues by Products:          |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|WinDVD                         |  | $                                | 8,094  |                                 | $ | 11,701 |  | $    | 32,188 |  | $ | 37,994
|VideoStudio                    |  |                                  | 1,925  |                                 |   | 1,874  |  |      | 6,808  |  |   | 5,156 
|Royalty                        |  |                                  | 5,105  |                                 |   |       |  |      | 14,006 |  |   |      
|Other products                 |  |                                  | 9,804  |                                 |   | 15,427 |  |      | 32,969 |  |   | 35,362
|                               |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total revenue                  |  | $                                | 24,928 |                                 | $ | 29,002 |  | $    | 85,971 |  | $ | 78,512
|                               |  |                                  |        |                                 |   |        |  |      |        |  |   |       

The following individual customers accounted for greater than 10% of revenue in any of the periods presented:



|                |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|--------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                |  | Three months ended September 30, |   |  | Nine months ended September 30, |  
|                |  | 2006                             |   |  | 2005                            |   |  | 2006 |   |  | 2005 |  
|Revenue from:   |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Hewlett-Packard |  | 11                               | % |  | 22                              | % |  | 19   | % |  | 27   | %
|Microsoft       |  | 20                               | % |  | 14                              | % |  | 17   | % |  | 5    | %
|Toshiba         |  | 14                               | % |  | 9                               | % |  | 12   | % |  | 10   | %



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

Customers with accounts receivable balances that were individually greater than 10% of total accounts receivable, before allowances for doubtful accounts, at any of the
periods presented were:



|                         |  |                    |   |  |                   |  
|------------------------ |  | ------------------ | - |  | ----------------- | -
|                         |  | September 30, 2006 |   |  | December 31, 2005 |  
|Account receivable from: |  |                    |   |  |                   |  
|Microsoft                |  |                   | % |  | 29                | %
|Softbank Commerce        |  | 25                 | % |  | 7                 | %

The following is a summary of tangible long-lived assets by geographic region (unaudited, in thousands):



|                                 |  |                   |       |                  |   |      
|-------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                 |  | September 30,2006 |       | December 31,2005
|Tangible long-lived assets:      |  |                   |       |                  |   |      
|United States                    |  | $                 | 938   |                  | $ | 945  
|Europe                           |  |                   | 103   |                  |   | 16   
|Asia:                            |  |                   |       |                  |   |      
|India                            |  |                   | 59    |                  |   | 18   
|Japan                            |  |                   | 360   |                  |   | 377  
|China                            |  |                   | 605   |                  |   | 453  
|Taiwan                           |  |                   | 1,350 |                  |   | 1,605
|                                 |  |                   |       |                  |   |      
|Total tangible long-lived assets |  | $                 | 3,415 |                  | $ | 3,414
|                                 |  |                   |       |                  |   |      

NOTE 13. CONTINGENCIES

In the normal course of business, the Company is periodically involved in various legal claims, actions and complaints, including matters involving patent infringement and other intellectual property claims and various other risks.
Management is unable to predict with certainty whether or not the Company will ultimately be successful in any of these legal matters, or if not, what the impact might be. InterVideos license may contain warranties of non-infringement and
commitments to indemnify our customers against liability arising from infringement of third-party intellectual property rights. Such indemnification provisions are accounted for in accordance with SFAS No. 5. To date, claims under such
indemnification provisions have not been significant.

NOTE 14. SUBSEQUENT EVENTS

On October 6, 2006, early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, was granted regarding the proposed acquisition of InterVideo by
Corel.

As a result of the pending Corel merger, the Company announced that its ESPP will be suspended after November 15, 2006.



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INTERVIDEO, INC.

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

The following
Managements Discussion and Analysis of Financial Condition and Results of Operation, as well as information contained in Risk Factors under Part II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are not guarantees of future performance and involve risks and
uncertainties. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. These risks, uncertainties and other factors include, among others, those identified under Risk
Factors. Forward-looking statements are generally written in the future tense and/or are preceded by words such as will, may, should, could, expect, suggest,
believe, anticipate, intend, plan, or other similar words. Forward-looking statements contained in this Quarterly Report include, among others, statements regarding (1) the ability to consummate our
proposed merger with Corel in a timely manner, or at all, (2) the impact on our business, operations and financial conditions of the pending merger with and the continued integration of our majority owned subsidiary, Ulead Systems, Inc., (3)
research and development expenses, (4) sales and marketing expenses, (5) other operating and capital expenditures, (6) anticipated growth of operations, personnel and infrastructure and acceleration of product innovation, (7) the sufficiency of
our capital resources, (8 ) revenue trends and future sources of revenue, (9) growth, decline and seasonality of revenue, (10) deferrals of revenue, (11) interest income, (12) competition and competitive pressures, (13) general market and economic
outlook, (14) product sales and prices, (15) disclosure and internal controls, (16) settlement of intellectual property claims, (17) stock-based compensation expenses, (18) general and administrative expenses, (19) the utility of certain products,
(20) certain customer concentration trends and changes in the composition of our customer mix, (21) the revenue growth expected to result from our agreements with Microsoft, Inc. (22) Sarbanes-Oxley compliance costs, and (23) higher legal costs
associated with enforcement of our intellectual property right. The Company disclaims any obligation to update information in any forward-looking statement.

Merger Agreement with Corel Corporation

On August 28, 2006, we entered into a definitive Agreement and Plan of Merger (the
Merger Agreement) with Corel Corporation, a corporation organized and existing under the laws of Canada (Corel) and Iceland Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Corel (Merger
Sub). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into our company, with our company continuing as the surviving corporation and a wholly
owned subsidiary of Corel (the Merger). Pursuant to the Merger Agreement, at the effective time of the Merger, each of our outstanding shares of common stock issued and outstanding immediately prior to the effective time of the Merger
will be converted into the right to receive $13.00 per share in cash, for an aggregate purchase price of approximately $196 million.

Consummation of the
merger is subject to several conditions, including (i) absence of any material adverse effect on our company, (ii) approval of the Merger Agreement by our stockholders at a special meeting of stockholders scheduled for December 6,
2006 at our executive offices in Fremont, California, (iii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), and (iv) having a
certain specified amount of cash on our balance sheet at closing. Early termination of the applicable waiting period under the HSR Act was granted on October 6, 2006. The Merger is expected to close in December 2006, but there can be no
assurance that the Merger will close in a timely manner, or at all.

The Merger Agreement contains certain termination rights for both Corel and us, and
further provides that, upon termination of the Merger Agreement under specified circumstances, we may be required to pay Corel a termination fee of $6 million and reimburse Corels third party expenses in connection with the Merger up to $2
million.

The foregoing description of the Merger Agreement does not purport to be complete, and is qualified in its entirety by reference to the Merger
Agreement that has been filed with the Securities and Exchange Commission.



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INTERVIDEO, INC.



Overview

The following MD&A is
intended to help the reader understand the results of operations and financial condition of InterVideo. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the
financial statements.

Founded in 1998, InterVideo is a provider of DVD software, video editing and DVD burning software, television viewing and recording
software and InterVideo InstantON software. We have developed a technology platform from which we have created a broad suite of integrated multimedia software products. These products span the digital video cycle by allowing users to capture, edit,
author, distribute, burn and play digital video. We sell our products to PC OEMs, CE manufacturers and PC peripherals manufacturers worldwide. We have business operations in the United States, Taiwan, Japan, China, India, Germany and the
Philippines. We derive a substantial portion of our revenue from the sale of software licenses to OEMs, which install our software onto PCs prior to delivery to customers. In addition, we derive revenue from the license of our software to CE
manufacturers and manufacturers of PC peripherals that incorporate our software into their own products for distribution. We also sell our software through retail channels and directly to end users through our websites.

Historically, sales of our WinDVD product, a software DVD player for PCs, to PC OEMs have accounted for a substantial portion of our revenue. We derived 32% and 37% of
our revenue for the three and nine months ended September 30, 2006 from sales of our WinDVD product, primarily to PC OEMs, as compared to 40% and 48% of our revenue for the same periods ended September 30, 2005. We expect that revenue from
sales of our WinDVD product to PC OEMs will continue to account for a substantial portion of our revenue. However, in the future, we expect to derive an increasing percentage of our revenue from sales of other products, including royalties related
to Microsoft Xbox sales, WinDVD Creator, InterVideo InstantON, InterVideo Home Theater, InterVideo DVD Copy, MediaOne and Linux-based versions of our DVD and DVR software designed for Linux-based PCs and CE devices, products sold through our retail
and web-based sales channels as well as Ulead product offerings such as DVD MovieFactory, VideoStudio and PhotoImpact.

Our software is generally bundled
with products sold by PC OEMs. Our PC OEM customers include, among others, Hewlett-Packard, Toshiba, Microsoft, NEC, Fujitsu, Fujitsu Siemens, Sony and IBM/Lenovo. Due to a concentration in the PC OEM industry, we derive a substantial portion of our
revenue from a small number of customers. For the three months ended September 30, 2006, our three largest customers accounted for 45% of our revenue, with Hewlett-Packard accounting for 11%, Microsoft accounting for 20% and Toshiba accounting
for 14% of our revenue. For the nine months ended September 30, 2006, our three largest customers accounted for 48% of our revenue, with Hewlett-Packard accounting for 19%, Microsoft accounting for 17% and Toshiba accounting for 12% of our
revenue. Our revenue from Hewlett-Packard has declined beginning in the fourth quarter of 2005 and into 2006 from $6.4 million for the quarter ended December 31, 2005 to $2.7 million for the quarter ended September 30, 2006 because we have
been informed by Hewlett-Packard that they will not incorporate certain of our products into certain future Hewlett-Packard notebook models. While turnover in the OEM markets in which we operate is not unusual, we have increased our focus on efforts
to penetrate other OEM opportunities, including those that exist within other Hewlett-Packard product offerings. We are also focused on our continued product development, on-going marketing strategies and other revenue generating activities in our
attempt to offset the loss of the Hewlett-Packard business. A continued decrease in revenue from Hewlett-Packard or the loss of any of our large customers without an offsetting increase in sales of from other customers including Hewlett-Packard,
would reduce our revenue and gross profit and otherwise harm our business. We expect that a small number of customers will continue to account for a substantial portion of our revenue for the foreseeable future, although the identity of those
customers may change from period to period. Because there are only a limited number of potential new, large PC OEM customers for our WinDVD product, we must derive any future revenue growth principally from increased unit sales of WinDVD or other
products to existing PC OEMs, CE manufacturers, PC peripherals manufacturers, smaller PC OEMs and to consumers through retail channels and our websites. Because some of these other revenue opportunities are more fragmented than the PC OEM market and
will require more time and effort to penetrate, our revenue may decline or grow at a slower rate than in prior periods.



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INTERVIDEO, INC.



Historically, prices for our products have declined because of competition from other software providers, competition in the PC industry and
diminishing margins experienced by PC OEMs as a result of decreased selling prices and periodic declines in unit sales. Accordingly, we have reduced the prices we charge PC OEMs for our WinDVD, WinDVD Creator and other products, and expect such
price reductions will continue in the future. As a matter of policy, we evaluate such price reductions on a continual basis and, in certain circumstances, may determine it would not be in the best interests of the Company to reduce prices below a
certain level. We may decide not to lower our product prices, even if a loss of revenue would result. As a result of declining prices, it may be more difficult for us to increase or maintain our revenue levels and price declines may cause a decline
in our gross profits even if our WinDVD and other product unit sales increase.

Users may also purchase products through our websites and retail channels.
During the three and nine months ended September 30, 2006, we derived 25% and 24% of our revenue from web and retail sales as compared to 22% and 23% of our revenue for the same periods ended September 30, 2005. To increase our web and
retail sales in the future, we intend to increase investments in associated selling and marketing programs. The gross profits associated with our products sold through our websites are generally higher than those associated with our OEM sales.
Accordingly, fluctuations in our web and retail revenue as a percentage of total revenue will impact our gross profits to a greater extent than OEM revenue fluctuations.

We derive and expect to continue to derive a significant portion of our revenue from sales outside of the United States. Sales outside of the United States accounted for 52% and 50% of our revenue for the three and
nine months ended September 30, 2006 as compared to 49% and 50% of our revenue for the same periods ended September 30, 2005, respectively. Currently, most of our international sales are denominated in U.S. dollars. Therefore, a
strengthening dollar could make our products less competitive in foreign markets. Our current distribution agreements shift foreign exchange risk to our foreign distributors. In the future, an increasing portion of our international revenue may be
denominated in foreign currencies and we may use derivative instruments to hedge foreign exchange risk.

Our financial condition and results of operations
are likely to be affected by seasonality in the future. Historically, PC OEMs have experienced their highest volume of sales during the year-end holiday season. Because we generally recognize revenue associated with the sale of our products to our
OEMs customers in the month or quarter following the sales of our products to these OEMs customers, we expect this seasonality to have a positive effect on our revenue and operating income in the first quarter of each calendar year and a
negative effect on our revenue and operating income in the second quarter of that year. While the acquisition of a controlling interest in Ulead and the anticipated 100% ownership of Ulead has and will continue to impact this trend because a
substantial portion of Ulead revenues are derived from web and retail sales which are typically recognized in the period in which they occur and, thus, generally experience more sales during the year-end holiday season, we do not expect Uleads
seasonality to materially change the overall seasonality of our consolidated results.

Critical Accounting Policies, Significant Judgments, and
Estimates

We base the discussions and analysis of our financial condition and results of operations upon our consolidated financial statements, which
we prepare in accordance with U.S. GAAP. In preparing these financial statements, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates based on historical experiences and various other assumptions we believe are reasonable under the circumstances. Our actual results may differ from these estimates.

The accounting policies that most frequently require us to make estimates and judgments, and therefore are critical to understanding the results of our operations are:



| |  |  | revenue recognition;
| | - |  | --------------------



| |  |  | accounting for income taxes; and
| | - |  | --------------------------------



| |  |  | stock-based compensation.
| | - |  | -------------------------



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INTERVIDEO, INC.



Revenue recognition

Our revenue
is primarily derived from fees received under software licenses granted to PC OEMs, CE manufacturers, PC peripherals manufacturers, retail distributors, retail customers and directly to end users or businesses. We recognize revenue generated from
these sales in accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition, and SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, under which revenue
is recognized when:



| |  |  | evidence of an arrangement exists;
| | - |  | ----------------------------------



| |  |  | delivery of the software has occurred;
| | - |  | --------------------------------------



| |  |  | the fee is fixed or determinable; and
| | - |  | -------------------------------------



| |  |  | collectibility is probable.
| | - |  | ---------------------------

Determining whether or not some of these
criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. Typically, under the terms of our license agreements with our OEM customers, they are entitled
only to unspecified upgrades on a when and if available basis, prior to sale into the OEMs sales channel partners or prior to being sold through to the OEMs end customers. Under the terms of our revenue recognition policy, we recognize
revenue based on evidence of products sold by the OEMs to end customers or to the OEMs sales channel partners. We do not typically provide upgrades or post contract support (PCS) to the OEMs customers or sales channel
partners and, thus do not defer revenue on these arrangements. Under certain agreements where the OEM is granted PCS for a period greater than one year, including unspecified upgrades, revenue is recognized ratably over the contractual PCS period.

Under the terms of the OEM license agreements, each OEM qualifies our software on their hardware and software configurations. Once our software has been
qualified, the OEM begins shipping products and reports net sales to us, at which point we record revenue. Most OEMs pay a license fee based on the number of copies of licensed software included in the products sold to their customers. These OEMs
pay fees on a per-unit basis, and we record associated revenue when we receive notification of the OEMs sales of the licensed software to an end customer or sales channel partner. The terms of the license agreements generally require the OEMs
to notify us of sales of our products within 30 to 45 days after the end of the month or quarter in which the sales occur. As a result, we generally recognize revenue in the month or quarter following the sales of the software to these OEMs
customers.

End-user sales are made directly through our websites and third party websites. We do not offer specified upgrade rights to any class of
customer, and there are no unspecified upgrade rights associated with end-user sales. We recognize revenue from sales through these websites upon delivery of product and the receipt of payment by means of an authorized credit card. End users who
purchase our software from our websites have limited rights of return for products for up to 14 days which we currently reserve for based upon historical return percentages.

We sell our products to retailers and distributors either on a consignment or non-consignment basis. For consignment product shipments, in general, the distributor does not take ownership of the product at the point
in time when we ship product to the distributor. When the distributor sells the consignment-based product to a retailer or an end customer, ownership of the product is transferred from us to the retailer or end customer. The distributor reports
those sales to us and we invoice the distributor. For non-consignment product shipments:



| |  |  | the distributor takes ownership of the product at the point in time when we ship the product to the distributor and we invoice the distributor upon such shipment. Since we do not
have contractually obligated minimum orders or payment terms with our distributors under such arrangements, we do not recognize revenue for retail product distribution and sales prior to invoicing;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | certain distributors and retailers of our InterVideo products, primarily in the United States and Europe, have unlimited rights of return. We generally recognize revenue upon
receipt of evidence that the distributors and retailers have sold our products through to end users less any required rebates;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other distributors and retailers of our InterVideo products have limited rights to return products up to six months following the purchase. We generally recognize revenue, net of
contractually obligated return rights and any additional required rebate or pricing reserves, upon completion of shipment to these distributors and retailers. These reserves are based on the historical return rates in accordance with Statement of
Financial Accounting Standard No. 48, Revenue Recognition When Right of Return Exists; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | certain distributors and retailers of Ulead products, primarily in Japan, have unlimited rights of return. Revenue from these customers is recognized upon delivery of the product to
the distributor or reseller, net of allowance for returns which is based on Uleads historical product return rates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Certain customer agreements call for the payment by us of marketing development funds, co-operative advertising fees, rebates or similar
charges. We account for such fees in accordance with Emerging Issues Task Force Issue No. 01-09 as a reduction in revenue unless there is an identifiable benefit and the fair value of the charges can be reasonably estimated in which case we
record these transactions as marketing expense. Commissions paid to third-party sales representatives are included in sales and marketing expenses.

Accounting for income taxes

In preparing our consolidated financial statements, we assess the likelihood that our deferred tax
assets will be realized from future taxable income. We establish a valuation allowance if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Changes in the valuation allowance
are included in our consolidated statements of income as provision for income taxes. We exercise significant judgment in determining our provision for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes
of assessing our ability to utilize any future tax benefits from our deferred tax assets. If actual circumstances differ from our expectations, we may be required to adjust our estimates in future periods and our financial position, cash flows and
results of operations could be materially affected.

Stock-based compensation

On December 16, 2004, the Financial Accounting Standard Board (FASB) issued Statement No. 123 (revised 2004) (SFAS No. 123R),Share Based Payment, which is a
revision of SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (APB) No. 25,Accounting for Stock Issued to Employees. SFAS No. 123R
requires companies to expense the fair value of employee stock options and similar awards, including purchases made under an Employee Stock Purchase Plan. SFAS No. 123R applies to all outstanding and unvested share-based payment awards at
adoption. On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 providing supplemental implementation guidance for SFAS No. 123R. We adopted the provisions of, and accounted for stock-based compensation
in accordance with, SFAS No. 123R during the first quarter of fiscal 2006. We have applied the provisions of SAB 107 in our adoption of SFAS No. 123R.

Prior to the adoption of SFAS No. 123R, we accounted for stock-based compensation related to employee stock-based compensation plans using the intrinsic value method prescribed by APB No. 25 as allowed under SFAS No. 123.
Under the intrinsic value method, only minimal stock-based compensation in relation to employee stock options or purchases under the employee stock purchase plan had been recognized in our results of operations since the exercise price of the
majority of options issued to employees and directors were granted at the fair market value of the underlying stock at the date of grant.

We elected the
modified-prospective-transition method, under which prior periods are not revised for comparative purposes. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair
value of the award and will be recognized over the requisite service period, which is generally the vesting period.

We use the Black-Scholes-Merton option
pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price
as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest
rate and expected dividends. See Note 7 for further information regarding the SFAS No. 123R disclosures on assumptions.

If factors change, results in
future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share. Additionally, the Black-Scholes-Merton option pricing model was developed
for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Existing assumptions used and valuation
modeling may not provide measures of the fair values of our stock-based compensation that reflect the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain
stock-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively,
value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. Currently, there is no market-based mechanism or other practical
application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

The guidance in SFAS No. 123R and SAB No. 107 is relatively new. The application of these principles may be subject to further interpretation and refinement over time.



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INTERVIDEO, INC.



Results of Operations  Comparison of the three and nine months ended September 30, 2006 and 2005

Revenue, Cost of Revenue and Gross Profit



|                                   |  |                                  |        |   |              |   |        |                                 |      |   |              |      |  |   |        |   |  |   |        |   |  |   |        |   
|---------------------------------- |  | -------------------------------- | ------ | - | ------------ | - | ------ | ------------------------------- | ---- | - | ------------ | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | --
|(In thousands, except percentages) |  | Three months ended September 30, |        |   | Changeamount |   |        | Nine months ended September 30, |      |   | Changeamount |     
|                                   |  | 2006                             |        |   | 2005         |   |        |                                 | 2006 |   |              | 2005 |  |  
|Total revenue                      |  | $                                | 24,928 |   |              | $ | 29,002 |                                 |      | $ | (4,074       | )    |  | $ | 85,971 |   |  | $ | 78,512 |   |  | $ | 7,459  |   
|Cost of revenue                    |  |                                  | 12,044 |   |              |   | 9,654  |                                 |      |   | 2,390        |      |  |   | 41,881 |   |  |   | 29,521 |   |  |   | 12,360 |   
|Gross profit                       |  |                                  | 12,884 |   |              |   | 19,348 |                                 |      |   | (6,464       | )    |  |   | 44,090 |   |  |   | 48,991 |   |  |   | (4,901 | ) 
|As percent of total revenue        |  |                                  | 52     | % |              |   | 67     | %                               |      |   | (33          | )%   |  |   | 51     | % |  |   | 62     | % |  |   | (10    | )%

Revenue is primarily derived from fees paid under software licenses granted to PC OEMs, CE manufacturers,
manufacturers of PC peripherals and other software and internet companies that incorporate our software into their own products for distribution, retail distributors, retail customers and other end users or businesses. Cost of revenue consists
primarily of license royalties, expenses incurred to manufacture, package and distribute our software products, the amortization of other purchased intangible assets and costs associated with end-user PCS.

Revenue decreased 14% to $24.9 million for the three months ended September 30, 2006 from $29.0 million for the three months ended September 30, 2005. OEM
product sales decreased 18% to $18.7 million for the three months ended September 30, 2006 from $22.7 million for the three months ended September 30, 2005 and accounted for approximately 75% of total revenue for the three months ended
September 30, 2006 as compared to 78% for the three months ended September 30, 2005. Included in OEM revenue for the three months ended September 30, 2005 was $4.0 million of one-time licensed source code revenue from Microsoft. Web
and retail sales decreased 1% to $6.2 million for the three months ended September 30, 2006 from $6.3 million for the three months ended September 30, 2005. We derived a substantial portion of our revenue from a small number of customers.
For the three months ended September 30, 2006, our three largest customers accounted for 45% of our revenue, with Hewlett-Packard accounting for 11%, Microsoft accounting for 20% and Toshiba accounting for 14% of our revenue. For the three
months ended September 30, 2005, three largest customers accounted for 45% of our revenue with Hewlett-Packard accounting for 22%, Microsoft accounting for 14% of our revenue and Toshiba accounting for 9% of our revenue. Sales outside the
United States accounted for 52% of our revenue for the three months ended September 30, 2006 and 49% of our revenue for the three months ended September 30, 2005. The decline in revenue for the three months ended September 30, 2006
over the same period in the prior year reflects decreased revenue from $11.7 million to $8.1 million or 31% from our WinDVD products which reflects a 29% decrease in product shipments largely a result of a decrease in Hewlett-Packard revenue. Our
revenue from Hewlett-Packard has declined beginning in the fourth quarter of 2005 and into 2006. Revenue from Hewlett-Packard declined from $6.5 million for the quarter ended September 30, 2005 to $2.7 million for the quarter ended
September 30, 2006 because we have been informed by Hewlett-Packard that they will not incorporate certain of our products into certain future Hewlett-Packard notebook models. As previously discussed, our ability to penetrate opportunities
within other Hewlett-Packard product offerings will impact whether or not the Hewlett-Packard revenue decline continues. During the three month period ended September 30, 2006, sales in the United States decreased by 20% to $11.9 million as
compared to $14.9 million in the same period last year which is also a reflection of the decrease in Hewlett-Packard revenue.

For the nine months ended
September 30, 2006 revenue increased 10% to $86.0 million as compared to $78.5 million for the nine months ended September 30, 2005. The amounts for the nine months ended September 30, 2005 include Ulead revenue from the date of our
acquiring a controlling interest in Ulead which accounts for 35% or $2.6 million of the overall increase in revenue largely from increases in web and retails sales. The increase was also partly attributable to our OEM product sales, which increased
8% to $65.4 million for the nine months ended September 30, 2006, from $60.5 million for the nine months ended September 30, 2005. OEM product sales accounted for approximately 76% of total revenue for the nine months ended
September 30, 2006 as compared to 77% of total revenue for the nine months ended September 30, 2005. Web and retail sales increased 14% to $20.6 million for the nine months ended September 30, 2006 from $18.0 million for the nine
months ended September 30, 2005. The overall revenue increase for the nine months ended September 30, 2006 as compared with the nine months ended September 30, 2005 reflects 33% growth in our non-WinDVD product sales including royalty
revenue from Microsoft of $14.0 million or 16% of our revenue and Ulead core products, including PhotoImpact, VideoStudio, and DVD Factory, which accounted for 16% of our revenue. These increases were offset by a decrease in WinDVD revenue of 15%
mainly due a 9% decrease in product shipments largely a result of a decrease in Hewlett-Packard revenue. We derived a substantial portion of our revenue from a small number of customers. For the nine months ended September 30, 2006, our three
largest customers accounted for 48% of our revenue, with Hewlett-Packard accounting for 19% of our revenue, Microsoft accounting for 17% of our revenue and Toshiba accounting for 12% of our revenue. For the nine months ended September 30, 2005,
our two largest customers accounted for 37% of our revenue, with Hewlett-Packard accounting for 27% of our revenue and Toshiba accounting for 10% of our revenue. Our revenue from Hewlett-Packard has declined beginning in the fourth quarter of 2005
and into 2006. Revenue from Hewlett-Packard declined from $20.9 million for the nine months ended September 30, 2005 to $16.0 million for the nine months ended September 30, 2006 because we have been informed by Hewlett-Packard that they
will not incorporate certain of our products into certain future Hewlett-Packard notebook models. Sales outside the United States accounted for 50% of our revenue for the nine months ended September 30, 2006 and September 30, 2005.



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Cost of revenue increased by $2.4 million to $12.0 million for the three months ended September 30, 2006 from $9.6 million for the
three months ended September 30, 2005. This increase was largely the result of Microsoft revenue sold at cost and a $288,000 increase in amortization of intangible assets purchased by Ulead from Institute for Information Industry.

Cost of revenue increased by $12.4 million to $41.9 for the nine months ended September 30, 2006 from $29.5 million for the nine months ended September 30,
2005. This increase was largely the result of Microsoft revenue sold at cost and a $694,000 increase in amortization of purchased intangible assets resulting from the acquisition of a majority interest in Ulead during the second quarter of 2005 as
well as Uleads acquisition of Institute for Information Industrys assets during the second quarter of 2006.

Gross profit as a percentage of
revenue decreased to 52% for the three months ended September 30, 2006 from 67% for the three months ended September 30, 2005. The decrease is primarily attributable to the Microsoft royalty revenue and certain Hewlett-Packard revenues
which are sold at cost and the high margin one-time Microsoft source code revenue included in the three months ended September 30, 2005. The decrease in gross profit in absolute dollars was primarily due to the aforementioned sales at cost in
the three months ended September 30, 2006.

For the nine months ended September 30, 2006, gross profits were $44.1 million or 51% of revenue as
compared with $49.0 million or 62% of revenue for the nine months ended September 30, 2005. The decrease in gross profit percentage is primarily attributable to the Microsoft royalty revenue and certain Hewlett-Packard revenues which are sold
at cost, decreased average selling prices of our royalty bearing products without a corresponding decrease in per unit costs of licensed royalties and the high margin one-time Microsoft source code revenue included in the three months ended
September 30, 2005. The decrease in gross profit in absolute dollars was primarily due to the aforementioned sales at cost in the three months ended September 30, 2006. While we expect that the shift in our product mix toward higher margin
products will have a favorable impact on gross profit, we also expect our gross profit to be adversely impacted by continued price erosion in our WinDVD product sales to our OEM customers. Gross profits will also be impacted by the aforementioned
costs related to expected increases in seasonal Microsoft revenues.

Research and development expenses



|                                   |  |                                  |       |   |               |   |       |                                |      |   |               |      |  |   |        |   |  |   |        |   |  |   |       |  
|---------------------------------- |  | -------------------------------- | ----- | - | ------------- | - | ----- | ------------------------------ | ---- | - | ------------- | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|(In thousands, except percentages) |  | Three months ended September 30, |       |   | Change amount |   |       | Nine months endedSeptember 30, |      |   | Change amount |     
|                                   |  | 2006                             |       |   | 2005          |   |       |                                | 2006 |   |               | 2005 |  |  
|Research and development expenses  |  | $                                | 7,093 |   |               | $ | 6,277 |                                |      | $ | 816           |      |  | $ | 19,847 |   |  | $ | 14,737 |   |  | $ | 5,110 |  
|As percent of total revenue        |  |                                  | 28    | % |               |   | 22    | %                              |      |   | 13            | %    |  |   | 23     | % |  |   | 19     | % |  |   | 35    | %

Research and development (R&D) expenses consist primarily of personnel and related costs,
consulting expenses associated with the development of new products, technology license fees, professional fees and product evaluation and testing costs.

R&D expenses increased $816,000, or 13%, to $7.1 million for the three months ended September 30, 2006 from $6.3 million for the three months ended September 30, 2005. This increase was due to a $419,000 increase in
stock-based compensation expense resulting from the adoption of SFAS No. 123R, an increase in payroll and payroll related expenses of $473,000 due to increased research and development headcount in our Asian facilities and increases in travel
and entertainment costs and facilities expenses totaling $108,000. These increases were offset primarily by a decrease in overall Ulead expenses totaling $184,000 largely as a result of reduction in force at Ulead actions taken during the second
half of fiscal year 2005.

For the nine months ended September 30, 2006, research and development expenses were $19.8 million or 23% of revenue as
compared with $14.7 million or 19% of revenue for the nine months ended September 30, 2005. In addition to the increase in research and development expenses of $1.9 million attributable to the Ulead acquisition, the increase also reflects
increases in payroll and payroll related expenses of $1.5 million due to increased research and development headcount in our Asian facilities, a $1.3 million increase in stock-based compensation expense resulting from the adoption of SFAS
No. 123R, an increase of $184,000 of facilities and related costs mainly due to expanded operations in Asia and an increase in travel expenses of $244,000.

We believe that a significant level of R&D expenses will be required to remain competitive, and, as a result, we expect these expenses to increase in absolute dollars in the future as we integrate and expand engineering resources and
aggressively focus on product development.



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INTERVIDEO, INC.



Sales and marketing expenses



|                                   |  |                                  |       |   |              |   |       |                                |      |   |              |      |  |   |        |   |  |   |        |   |  |   |       |  
|---------------------------------- |  | -------------------------------- | ----- | - | ------------ | - | ----- | ------------------------------ | ---- | - | ------------ | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|(In thousands, except percentages) |  | Three months ended September 30, |       |   | Changeamount |   |       | Nine months endedSeptember 30, |      |   | Changeamount |     
|                                   |  | 2006                             |       |   | 2005         |   |       |                                | 2006 |   |              | 2005 |  |  
|Sales and marketing expenses       |  | $                                | 4,672 |   |              | $ | 5,360 |                                |      | $ | (688         | )    |  | $ | 14,575 |   |  | $ | 13,441 |   |  | $ | 1,134 |  
|As percent of total revenue        |  |                                  | 19    | % |              |   | 18    | %                              |      |   | (13          | )%   |  |   | 17     | % |  |   | 17     | % |  |   | 8     | %

Sales and marketing (S&M) expenses consist primarily of personnel and related costs, including
salaries and commissions, travel expenses, commissions paid to third party sales representatives and costs associated with trade shows, advertising and other marketing efforts.

S&M expenses decreased $688,000, or 13%, to $4.7 million for the three months ended September 30, 2006 from $5.4 million for the three months ended September 30, 2005. This decrease was due primarily to
a $1.0 million decrease in Ulead related expenses largely as a result of reduction in force actions taken during the second half of fiscal year 2005 at Ulead and a decrease of $233,000 in outside consultants. These decreases were partially offset by
an increase in compensation and related benefits of $174,000, tradeshow and promotional expenses of $93,000 and other operating expenses of $167,000. Additionally, we incurred an increase of $144,000 in stock-based compensation expense as a result
of adopting SFAS No. 123R.

For the nine months ended September 30, 2006, sales and marketing expenses were $14.6 million or 17% of revenue as
compared to $13.4 million or 17% of revenue for the nine months ended September 30, 2005. This increase was primarily due to an increase of $638,000 in Ulead related expenses, a $321,000 increase in payroll and payroll related expenses,
increases in VAT consumption tax charges of $179,000, membership fess and licenses of $134,000 and other operating expenses of $224,000. These increases were offset by decreases in outside consulting fees of $233,000, commissions paid to outside
sales representatives of $384,000 and telephone and communication charges of $169,000. Additionally, we incurred an increase of $424,000 in stock-based compensation expense as a result of adopting SFAS No. 123R.

We intend to actively market, sell and promote our products and take actions to further develop our brand name and retail presence. Therefore, we expect S&M expenses
to increase in absolute dollars as we seek to further expand our international sales network and continue to establish our retail presence.

General
and administrative expenses



|                                    |  |                                  |       |   |              |   |       |                                 |      |   |              |      |  |   |        |   |  |   |        |   |  |   |       |  
|----------------------------------- |  | -------------------------------- | ----- | - | ------------ | - | ----- | ------------------------------- | ---- | - | ------------ | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ----- | -
|(In thousands, except percentages)  |  | Three months ended September 30, |       |   | Changeamount |   |       | Nine months ended September 30, |      |   | Changeamount |     
|                                    |  | 2006                             |       |   | 2005         |   |       |                                 | 2006 |   |              | 2005 |  |  
|General and administrative expenses |  | $                                | 5,677 |   |              | $ | 3,915 |                                 |      | $ | 1,762        |      |  | $ | 15,627 |   |  | $ | 10,766 |   |  | $ | 4,861 |  
|As percent of total revenue         |  |                                  | 23    | % |              |   | 13    | %                               |      |   | 45           | %    |  |   | 18     | % |  |   | 14     | % |  |   | 45    | %

General and administrative expenses consist primarily of personnel and related costs, support costs for finance,
human resources, legal, operations, information systems and administration departments and professional fees.

General and administrative expenses
increased $1.8 million, or 45%, to $5.7 million for the three months ended September 30, 2006 from $3.9 million for the three months ended September 30, 2005. The overall change is attributable to increases of $291,000 in stock-based
compensation expense resulting from the adoption of SFAS No. 123R, $90,000 in payroll and payroll related expenses due to increased general and administrative headcount for the purpose of supporting expanded operational activities, $181,000 in
audit and consulting fees and $1.4 million in legal fees and other expenses in connection with the proposed acquisition by Corel. These charges were offset by a decrease of $162,000 in Ulead related expenses primarily resulting from reduction in
force activities that occurred in the second half of fiscal year 2005 at Ulead.

For the nine months ended September 30, 2006, general and
administrative expenses were $15.6 million or 18% of revenue as compared to $10.8 million for the nine months ended September 30, 2005. Reflected in the change from the prior year period are increases of $1.0 million in stock-based compensation
expense resulting from the adoption of SFAS No. 123R, $1.3 million in overall audit and consulting fees primarily related to Sarbanes-Oxley compliance and legal fees primarily related to patent infringement litigation, $515,000 in payroll and
payroll related expenses due to increased general and administrative headcount for the purpose of supporting expanded general and administrative activities, and $1.6 million in additional legal fees and other expenses in connection with the proposed
acquisition by Corel. Also included in this change are increases in Uleads general and administrative expenses of $481,000 because of a full nine months of activities being accounted for in 2006 as opposed to only activities since the date of
acquisition included in the 2005 amounts offset somewhat by the aforementioned reduction in force activities in the second half of fiscal year 2005 at Ulead.



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We expect recurring general and administrative expenses to increase in absolute dollars as we continue to build infrastructure to support
our anticipated growth and global operations. Additionally, we anticipate incurring increased legal costs to defend and protect our intellectual property position and to complete the proposed Corel merger.

Gain from disposal of assets



|                                    |  |                                  |   |   |              |   |     |                                |      |   |               |      |  |   |        |    |  |   |     |   |  |   |        |   
|----------------------------------- |  | -------------------------------- | - | - | ------------ | - | --- | ------------------------------ | ---- | - | ------------- | ---- |  | - | ------ | -- |  | - | --- | - |  | - | ------ | --
|(In thousands, except percentages)  |  | Three months ended September 30, |   |   | Changeamount |   |     | Nine months endedSeptember 30, |      |   | Change amount |     
|                                    |  | 2006                             |   |   | 2005         |   |     |                                | 2006 |   |               | 2005 |  |  
|Gain (loss) from disposal of assets |  | $                                | 8 |   |              | $ | 109 |                                |      | $ | (101          | )    |  | $ | (1,998 | )  |  | $ | 108 |   |  | $ | (2,106 | ) 
|As percent of total revenue         |  |                                  |  | % |              |   |    | %                              |      |   | (93           | )%   |  |   | (2     | )% |  |   |    | % |  |   | (1950  | )%

In June 2006, Ulead entered into an agreement to sell its interest in land and building with a book value of $19.6
million. A gain of $2.1 million was recognized from these assets held for sale.

In-process research and development



|                                    |  |                                  |   |   |              |   |                                |   |      |               |  |      |   |   |  |   |       |   |  |        |   
|----------------------------------- |  | -------------------------------- | - | - | ------------ | - | ------------------------------ | - | ---- | ------------- |  | ---- | - | - |  | - | ----- | - |  | ------ | --
|(In thousands, except percentages)  |  | Three months ended September 30, |   |   | Changeamount |   | Nine months endedSeptember 30, |   |      | Change amount | 
|                                    |  | 2006                             |   |   | 2005         |   |                                |   | 2006 |               |  | 2005 |   |  
|In-process research and development |  | $                                |  |   |              | $ |                               |   |      | N/A           |  | $    |  |   |  | $ | 2,574 |   |  | (2,574 | ) 
|As percent of total revenue         |  |                                  |  | % |              |   |                               | % |      | N/A           |  |      |  | % |  |   | 3     | % |  | (100   | )%

During the three and nine month periods ended September 30, 2005, a $2.6 million charge to operating expenses
was incurred in connection with the Ulead acquisition because we identified research projects in areas for which technological feasibility had not been established and no alternative future uses existed.

Other income, net



|                                   |  |                                  |       |   |               |   |     |                                 |      |   |               |      |  |   |       |   |  |   |     |   |  |   |       |  
|---------------------------------- |  | -------------------------------- | ----- | - | ------------- | - | --- | ------------------------------- | ---- | - | ------------- | ---- |  | - | ----- | - |  | - | --- | - |  | - | ----- | -
|(In thousands, except percentages) |  | Three months ended September 30, |       |   | Change amount |   |     | Nine months ended September 30, |      |   | Change amount |     
|                                   |  | 2006                             |       |   | 2005          |   |     |                                 | 2006 |   |               | 2005 |  |  
|Other income, net                  |  | $                                | 2,216 |   |               | $ | 831 |                                 |      | $ | 1,385         |      |  | $ | 5,837 |   |  | $ | 119 |   |  | $ | 5,718 |  
|As percent of total revenue        |  |                                  | 9     | % |               |   | 3   | %                               |      |   | 167           | %    |  |   | 7     | % |  |   |    | % |  |   | 4,805 | %

Other income, net consists primarily of interest earned on our cash and cash equivalent balances, rental income,
foreign currency translation gains and losses and realized gains and losses on investments offset by other expenses.

Other income, net increased $1.4
million to $2.2 million for the three months ended September 30, 2006 from $831,000 for the three months ended September 30, 2005. The increase in the third quarter of 2006 is attributable primarily to a $1.4 million increase in gain
on disposal of the short-term investments from Ulead, a $162,000 increase in interest income, and an offset by $211,000 in losses due to foreign currency exchange.

Other income, net increased $5.7 million to $5.8 million for the nine months ended September 30, 2006 from $119,000 for the nine months ended September 30, 2005. The increase in the third quarter of 2006 is attributable primarily
to a $1.6 million increase in realized foreign currency translation gain, a $2.1 million increase in gain on disposal of the short-term investments from Ulead, a $965,000 increase in gain from long-term investments, a $455,000 increase in interest
income and other increases of $602,000.

Provision for (benefit from) income taxes



|                                          |  |                                  |      |    |               |   |       |                                 |      |   |               |      |  |   |     |   |  |   |       |   |  |   |        |   
|----------------------------------------- |  | -------------------------------- | ---- | -- | ------------- | - | ----- | ------------------------------- | ---- | - | ------------- | ---- |  | - | --- | - |  | - | ----- | - |  | - | ------ | --
|(In thousands, except percentages)        |  | Three months ended September 30, |      |    | Change amount |   |       | Nine months ended September 30, |      |   | Change amount |     
|                                          |  | 2006                             |      |    | 2005          |   |       |                                 | 2006 |   |               | 2005 |  |  
|Provision for (benefit from) income taxes |  | $                                | (810 | )  |               | $ | 2,205 |                                 |      | $ | (3,015        | )    |  | $ | 993 |   |  | $ | 4,636 |   |  | $ | (3,643 | ) 
|As percent of total revenue               |  |                                  | (3   | )% |               |   | 8     | %                               |      |   | (137          | )%   |  |   | 1   | % |  |   | 6     | % |  |   | (79    | )%



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The provision for (benefit from) income taxes (income taxes) decreased $3.0 million, to a tax benefit of $810,000 for the three
months ended September 30, 2006 from $2.2 million for the three months ended September 30, 2005. We recorded a provision for income taxes of $1.0 million for the nine months ended September 30, 2006 as compared to $4.6 million for the
nine months ended September 30, 2005. The decrease in income taxes is primarily attributable to a decrease in taxable net income for the three months ended September 30, 2006. Our effective tax rate for the three months ended
September 30, 2006 was approximately 41%. This rate differs from the statutory federal rate primarily due to state taxes, net of federal benefit and differences between federal and foreign tax rates as well as the tax impact resulting from the
adoption of SFAS No. 123R. The Company calculated its projected effective tax rate for the year ending December 31, 2006 to be 72%. This rate differs from the statutory federal rate of 35% primarily due to state taxes, net of federal benefit,
differences between federal and foreign tax rates, foreign withholding taxes, foreign losses with no benefit, and tax effect of stock-based compensation expense resulted from the adoption of SFAS No. 123R.

Liquidity and Capital Resources

During the nine months ended
September 30, 2006, cash, cash equivalents and short-term investments increased by $20.8 million to $96.0 million, representing 73% of our total assets. Our cash, cash equivalents and short-term investments totaled $75.2 million at
December 31, 2005 and represented 56% of our total assets. Cash and cash equivalents are highly liquid investments with an original maturity of 90 days or less at the date of purchase. Short-term investments consist principally of United States
treasury, state and municipal notes/bonds, corporate bonds and auction rate securities.

Net cash provided by operating activities was $4.9 million for the
nine months ended September 30, 2006. Net income of $117,000 was adjusted for non-cash charges for gain on the disposal of assets of $2.0 million, realized foreign currency translation gains of $1.6 million, depreciation and amortization of
$3.0 million, stock-based compensation of $2.8 million, excess tax benefits from stock-based compensation of $906,000 and minority interests in income of subsidiary of $766,000. Additionally, cash provided from operating activities was impacted by
decreases in accounts receivable of $4.6 million, accrued liabilities and taxes payable of $5.0 million, prepaid expenses and other current assets of $687,000 and other assets of $449,000 and increases in accounts payable of $1.4 million and
deferred revenue of $404,000. The decrease in accounts receivable is primarily due to the collection of Microsoft invoices that were outstanding at the end of the 2005. The increase in deferred revenue is due to increased Ulead sales activity with
specified upgrades and PCS for the undelivered elements prior to September 30, 2006. The decrease in accrued liabilities and taxes payable is primarily due to the decrease in product cost liability associated with a decrease in revenue from
Hewlett-Packard.

Net cash provided by operating activities was $8.0 million for the nine months ended September 30, 2005. Net income of $3.4 million
was adjusted for depreciation and amortization of $1.9 million, non-cash investment loss of $1.2 million, the write-off of in-process research and development of $2.6 million, stock-based compensation of $70,000, provision for doubtful accounts of
$181,000, increase in accounts payable of $627,000 and an increase in deferred revenue of $4.2 million. These amounts were offset by the minority interest in losses of subsidiary of $520,000, increases in accounts receivable of $1.8 million,
increases in prepaid expenses and other current assets of $928,000, an increase in other assets of $1.7 million and a decrease in accrued liabilities and income taxes payable of $1.2 million. The adjustment for depreciation and amortization includes
$661,000 for amortization of intangible assets arising primarily as a result of the Ulead acquisition. Non-cash investment loss includes a $672,000 write-off of a long term investment and $295,000 realized loss on the sale of securities in
connection with the acquisition of Ulead. The write-off of in-process research and development represents a charge to operating expenses in conjunction with the Ulead acquisition whereby we identified research projects in areas for which
technological feasibility had not been established and no alternative future uses existed. The increase in prepaid expenses and other current assets includes $573,000 of audit and accounting fees and the renewal of directors and officers
insurance premiums. The increase in deferred revenue and accounts receivable is primarily due to the Microsoft agreement which was deferred because product acceptance did not occur prior to September 30, 2005. The remaining increase in accounts
receivable is primarily due to Ulead sales activity since the acquisition. The decrease in accrued liabilities and income taxes payable includes a decrease in the license royalty accrual of $151,000 and a decrease in audit and accounting fees of
$535,000.

As part of the purchase price allocation, we acquired assets and assumed liabilities for a total purchase price of $42.8 million as of the date
of the acquisition that did not impact the post acquisition cash flows.

Net cash used in investing activities was $13.1 million for the nine months ended
September 30, 2006 including $21.2 million cash received from the sale of land and the building at Ulead previously reported as held for sale assets offset by cash used for Uleads purchase of the JAVA/WAP patent and software technology,
and customer service contracts from Institute for Information Industry of $2.9 million, purchases of property and equipment of $1.4 million and maturities of short-term investments, net of purchases, of $30.0 million.

Net cash used in investing activities was $3.8 million for the nine months ended September 30, 2005 primarily due to proceeds from the sale and maturities of
short-term investments in the amount of $20.2 million which included $32.0 million related to the Ulead acquisition in addition to normal investment activities. This amount was offset by the use of $22.7 million, net of $13.6 million in cash
acquired, to execute the Ulead tender offer. Additionally, we used $1.3 million for the purchase of property and equipment.



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Net cash provided by financing activities was $440,000 for the nine months ended September 30, 2006 consisting of $2.6 million used for
the repurchase of treasury stock by Ulead, offset by proceeds from the issuance of common stock under our stock option plans and repayments of notes receivable of $2.2 million and the excess tax benefits from stock-based compensation of $906,000.

Net cash used in financing activities was $331,000 for the nine months ended September 30, 2005 as a result of proceeds from the issuance of common
stock under our stock option and employee stock purchase plans of $3.2 million, including $979,000 attributable to Ulead stock plans, and proceeds from the repayment of employee notes receivables of $282,000 offset by the use of $3.9 million for the
repurchase of common stock. Cash used in financing activities was $1.2 million for the nine months ended September 30, 2004 as a result of $2.6 million used for the repurchase of common stock offset by $1.3 million in proceeds from the issuance
of common stock under our stock option and employee stock purchase plans and a $113,000 repayment of a note receivable.

Upon adoption of SFAS
No. 123R, the benefits of tax deductions in excess of recognized compensation expense are reported as a financing cash flow, rather than as an operating cash flow as in prior periods. This has reduced net operating cash flows and increased net
financing cash flows starting in 2006 after adoption of SFAS No. 123R. Total cash flow remains unchanged from what would have been reported under prior accounting rules.

While we anticipate our operating expenses will continue to change in correlation with changes in revenue for the foreseeable future and while we intend to continue to fund our operating expenses through cash flows
from operations the proposed acquisition by Corel may have a significant impact on these same operating expenses as well as cash flows. We currently have no significant commitments for capital expenditures and, in anticipation of the Corel
acquisition, we do not expect to have significant capital expenditures for the remainder of fiscal 2006. We have future lease commitments for buildings under non-cancelable operating leases through 2013. We have no other debt obligations.

While we believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months the anticipated acquisition by Corel may impact our current cash position and cash needs. We used a total of $42.8 million to acquire a controlling interest in Ulead, including $32.6 million
in April 2005 and, subject to shareholder approval, we intend to spend additional cash to acquire the remaining shares of Ulead for NT $30 (approximately US $0.93) per share as per the previously announced merger agreement between InterVideo Digital
Technology Corp., a wholly-owned subsidiary of InterVideo, Inc. (InterVideo) and Ulead Systems, Inc. To the extent that our existing sources of cash and cash flow from operations are not sufficient to fund our activities, we will need to
raise additional funds. If we raise funds through debt financing, we will have to pay interest and may be subject to restrictive covenants, which could limit our ability to take advantage of future opportunities or respond to competitive pressures
or unanticipated industry changes. If we raise funds through an equity financing, it may have a dilutive effect on our existing stockholders. Additional financing may not be available when needed and, even if such financing is available, it may not
be available on terms acceptable to us. In addition, although we have no present understandings, commitments or agreements with respect to any acquisitions of other businesses, services, products or technologies, we may from time to time evaluate
potential acquisitions. These acquisitions may increase our capital requirements and reduce shareholders percentage ownership in us.

Commitments

Our principal commitment as of September 30, 2006 consists of obligations under operating leases which have not changed materially from our Annual
Report on Form 10-K for fiscal year 2005.

Off-Balance Sheet Arrangements

As of September 30, 2006, we had no off balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commissions Regulation S-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In comparison with what we disclosed in our Annual
Report on Form 10-K for fiscal 2005, we believe that there have been no significant changes in our market risk exposures for the nine months ended September 30, 2006.



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INTERVIDEO, INC.



ITEM 4. CONTROLS AND PROCEDURES

a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. As of the last completed fiscal year, we are not required to include in our managements report on internal control over financial reporting an evaluation of
the internal control over financial reporting of Ulead Systems Inc. (Ulead), which we acquired on April 20, 2005. As such, we have excluded from our evaluation the internal control over financial reporting of Ulead, however,
management noted a material weakness in obtaining from Uleads ability to timely and accurate financial results based on U.S. Generally-Accepted Accounting Principles. The identified material weaknesses in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that existed as of December 31, 2005, are not yet fully remediated. Based upon this, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were not effective as of September 30, 2006.

The material weaknesses in our internal control
over financial reporting that were identified at December 31, 2005 and are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 are related to:



| |  |  | Our incorrect application of Statement of Financial Accounting Standards No. 141, Business Combinations resulting from the acquisition of a majority interest in
Ulead Systems, Inc. The financial statements incorrectly included amortization of intangible assets attributable to the minority interest holders. Due to this error, on March 10, 2006, we restated the Companys consolidated financial
statements for the periods ended June 30, 2005, and September 30, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inadequate controls and oversight of the Ulead financial reporting process to facilitate obtaining timely and accurate financial results based on U.S. generally-accepted accounting
principles. As a result of this deficiency, there is more than a remote likelihood that a material misstatement of the financial statements that is more than inconsequential will not be prevented or detected on a timely basis by employees in the
normal cause of their work.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A material weakness (within the meaning of PCAOB Auditing Standard No. 2) is a control deficiency, or
aggregation of control deficiencies, that results in more than a remote likelihood that a material misstatement in financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work.

b) Changes in Internal Control over Financial Reporting

During the third quarter of 2006, we have taken the following actions to remediate the material weaknesses described above:



| |  |  | We have continued to engage outside consultants to provide additional expertise in the financial reporting area.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | We have continued to re-assess our current expertise and staffing needs to ensure we have adequate staffing in key areas of the Ulead reporting process and in the event complex
transactions such as the ones described herein arise in the future.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within InterVideo have been detected.



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INTERVIDEO, INC.

PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On August 15, 2005, InterVideo Digital Technology Corporation, a subsidiary of
InterVideo, filed a patent infringement lawsuit in the United States District Court for the Northern District of California against Dell Inc. for infringement of U.S. Patent No. 6,765,788 (the 788 Patent), entitled
Method and apparatus for integrating personal computer and electronic device functions. InterVideo alleges that, upon information and belief, Dell had full and prior knowledge of the 788 patent and therefore Dells
infringement has been and continues to be intentional and willful by importing, making, using, selling and/or offering for sale in the United States computer products, and components and peripherals thereof, that embody the inventions of the
788 Patent. InterVideo has asked the California court to enjoin Dell from importing, manufacturing, use, sales and offers to sell products which infringe the 788 Patent, and to order Dell to account for and pay to InterVideo all damages,
plus enhanced damages and attorney fees and costs. In January 2006, the District Court action was stayed pending the termination of the reexamination and ITC proceedings discussed below.

On December 6, 2005, InterVideo Digital Technology Corporation, a subsidiary of InterVideo, filed a complaint with the U.S. International Trade Commission (ITC) under Section 337 of the Tariff Act of 1930
asserting that its 788 patent is infringed by certain imported personal computer/consumer electronic convergent devices, components thereof, and products containing such devices of Dell, Inc. of Round Rock, Texas and WinBook Computer
Corporation of Columbus, Ohio that contain technology and software supplied by Cyberlink Corporation of Taipei, Taiwan and Cyberlink.com Corporation of Fremont California. The complaint requests an exclusion order prohibiting continued importations
into the United States of infringing products, including laptop computers of Dell and WinBook, as well as certain Cyberlink components of those computers, as well as a cease and desist order against certain commercial activities involving previously
imported computers. On January 4, 2006, the ITC instituted an investigation into whether those companies are in violation of Section 337 and delegated the investigation to an administrative law judge. On February 1, 2006, the
administrative law judge set April 4, 2007 as the target date for completion of the investigation and issuance of any remedial orders. On February 2, 2006, InterVideo entered into a settlement agreement with WinBook and on May 11,
2006 the ITC investigation of WinBook was terminated pursuant to that settlement agreement. On February 7, 2006, the ITC investigation was stayed in view of a reexamination of the 788 patent by the United States Patent and Trademark
Office (the USPTO). On June 27, 2006, the USPTO issued a Notice of Intent to issue a Reexamination Certificate, which concluded substantive reexamination of the 788 patent, and a panel of three examiners indicated that amended
claims one through twenty-two of the 788 patent are patentable. The ITC is currently considering whether to lift the stay or to terminate the investigation in light of the amendment to the 788 patent claims at issue. At this stage of the
investigation, the merits of the Companys request for relief have not yet been determined.

ITEM 1A. RISK FACTORS.

The information contained in Risk Factors below and elsewhere in this
Quarterly Report on Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. These risks, uncertainties and other factors include,
among others, those identified under Risk Factors. Forward-looking statements are generally written in the future tense and/or are preceded by words such as will, may, should, could,
expect, suggest, believe, anticipate, intend, plan, or other similar words.

We are subject to a number of risks. Some of these risks are endemic to the DVD software industry. The fact that certain risks are endemic to the industry does not lessen the significance of these risks. The risks and uncertainties
described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that harm our business. If any of the following risks actually occurs,
our business could be harmed. In that case, the trading price of our common stock could decline, and you might lose all or part of your investment. You should carefully consider each of the Risk Factors and the other information in this Quarterly
Report on Form 10-Q.



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We may be materially affected by risks associated with the proposed merger with Corel.

We are subject to various risks associated with the proposed merger with Corel, including the following:



| |  |  | Our operations may be disrupted from employee uncertainty following public announcement of the merger. Current employees may experience uncertainty about their
post-merger roles with Corel. This may materially adversely affect the ability of the Company to attract and retain key management, marketing and technical personnel. In addition, key employees may depart due to issues relating to uncertainty
relating to the merger. Accordingly, there can be no assurance that we will be able to attract or retain key employees to the extent that we have in the past.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We cannot provide any assurance that the merger will provide greater value to stockholders than if we continued as an independent public company. We are unable to
predict with certainty our future prospects or the market price of our common stock. Therefore, we cannot provide any assurance that the merger will provide greater value to stockholders than if we continued as an independent company.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Failure to complete the merger could have a negative impact on the market price of our common stock and on our business. If the merger is not completed, the price of
our common stock may decline to the extent that the current market price reflects a market assumption that the merger will be completed. In addition, our business and operations may be harmed to the extent that customers, suppliers, and others
believe that we cannot compete effectively if the merger is not completed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may be required to pay a termination fee to Corel in specified circumstances.The merger agreement provides that upon termination of the merger agreement under
specified circumstances, we may be required to pay to Corel a termination fee of $6 million and reimburse Corels third party expenses in connection with the merger up to $2 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Delays in customer purchase decisions and increased competitive pressures may result due to the announcement of the merger. Our customers could delay purchase
decisions pending completion of the merger and our competitors may seek to exert competitive pressure over our customers while the merger is pending.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The merger is subject to the satisfaction of certain conditions to closing. Closing conditions to the merger include, without limitation, approval by the
Companys stockholders at a special meeting of stockholders scheduled for December 6, 2006 in Fremont, California, the absence of a material adverse effect on the Company, the Companys compliance with its covenants, obligations and
agreements under the merger agreement, and the Company having a certain amount of cash on its balance sheet at closing. We can provide no assurance that these conditions to closing will be satisfied and that the merger will occur in a timely manner,
or at all.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The rapidly evolving nature of our industry makes it difficult to forecast our future results.

The market for our products is characterized by rapid changes in technology. Demand for our products depends on our ability to maintain competitive pricing and to provide
new or improved products that keep up with changes in technology. Any evaluation of our business and prospects must be made in light of the risks and difficulties encountered by companies offering products or services in new and rapidly evolving
markets. The market for software-based digital video and audio solutions for incorporation in products in the PC and consumer electronics industries is rapidly evolving, and it is difficult to forecast the future growth rate, if any, or size of the
market for our products. For example, our future growth will depend on our ability to compete in emerging markets, such as multimedia home networking, high definition DVD, Blu-ray Disc and multimedia mobile phone markets, and the markets
acceptance of next generation DVD playback remains uncertain. We may not accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us, and, therefore, we may fail to make
accurate financial forecasts. In addition, our proposed merger and acquisition of 100% of Ulead will make it more difficult to make accurate financial forecasts. Our current and future expense levels are based largely on our investment plans and
estimates of future revenue and are, to a large extent, fixed. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which would harm our operating results.

We expect our operating results to fluctuate on an annual and quarterly basis, which may result in volatility of our stock price.

We expect our operating results to fluctuate on an annual and quarterly basis, which may cause our stock price to be volatile. Important factors, many of which are
outside our control, that could cause our operating results to fluctuate include:



| |  |  | fluctuations in demand for, and sales of, our products and the PCs and CE devices with which our products are bundled;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | timely and accurate reporting to us by our OEM customers of units shipped, which determines the timing and level of revenue received from these customers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the timing of orders or the completion of customer contracts with significant OEM customers;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | entering into contracts with customers that result in non-recurring revenue;
| | - |  | ----------------------------------------------------------------------------



| |  |  | competitive factors, including introductions of new products, product enhancements and the introduction of new technologies by our competitors and the entry of new competitors into
the digital video software markets, which may result in our loss of business;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decisions to acquire other companies, including potential for non-accretive or non-synergetic results from our acquisition of the outstanding minority interest in Ulead, which will
result in it becoming our wholly-owned subsidiary;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increases in third party license fees, such as the increase in royalties paid to Dolby;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | changes in consumer demand for our products due to the marketing of alternative technologies by our OEM customers;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | decline in gross margins and/or selling prices of our products to our OEM or other customers;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | market acceptance of new products developed by us, such as InterVideo InstantON and our DVD playback in HD or Blu-ray disc format;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the relative portion of our revenue represented by our various products and customers including the mix of OEM, retail and web sales;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | timing of revenue recognition, including deferrals of revenue;
| | - |  | --------------------------------------------------------------



| |  |  | the mix of international and domestic revenue;
| | - |  | ----------------------------------------------



| |  |  | the costs of litigation and intellectual property claims, including the legal costs incurred to protect our intellectual property rights and settlement of claims based upon our
violation or alleged violation of others intellectual property rights;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | economic conditions specific to the PC, consumer electronics and related industries; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the impact of employee stock-based compensation expenses on our earnings per share including specifically the newly-adopted SFAS No. 123R.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------

Due to these and other factors, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on our results for any one period as
an indication of our future performance. In addition, our future operating results may fall below the expectations of public market analysts or investors. In this event, our stock price could decline significantly.



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Competition in our industry is intense and is likely to continue to increase, which could result in price reductions, decreased
customer orders, reduced product margins and loss of market share, any of which could harm our business.

Our industry is highly competitive, and we
expect competition to intensify in the future. Our competitors include:



| |  |  | software companies that offer digital video or audio applications;
| | - |  | ------------------------------------------------------------------



| |  |  | companies offering hardware or semiconductor solutions as alternatives to our software products; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | operating system providers that may develop and integrate applications into their products.
| | - |  | -------------------------------------------------------------------------------------------

Our primary competitors are Adobe Systems Incorporated, Cyberlink Corporation, RealNetworks, Inc and Sonic Solutions, Inc. Additional competitors are likely to enter our industry in the future. We also face
competition from the internal research and development departments of other software companies and PC and CE manufacturers, including some of our current customers. Some of our customers have the capability to integrate their operations vertically
by developing their own software-based digital and audio solutions or by acquiring our competitors or the rights to develop competitive products or technologies, which may allow these customers to reduce their purchases or cease purchasing from us
completely. Operating system providers with an established customer base, such as Microsoft, already offer products in the digital video and audio software markets. Some video and audio capabilities are built directly into their operating systems or
are offered as upgrades to those operating systems at no additional charge. During the second quarter of 2005, we granted to Microsoft, Inc. a worldwide right and license to use, copy, create derivative works of, publicly perform or display, import,
broadcast, transmit, offer to sell, sell, have sold, rent, lease, lend, transfer or otherwise distribute certain key components of our DVD, audio and video decoding technology. If Microsoft or other operating system providers develop or license
digital video and audio solutions that compete directly with ours and incorporate the solutions into their operating systems, our products could lose market share.

We expect our current competitors to introduce similar or improved products at lower prices, and we will need to do the same to remain competitive. For example, our revenues from Dell and Hewlett-Packard have declined compared to prior
periods, because we have lost portions of our business to our competitors. We also expect our revenue from Hewlett-Packard to decrease significantly into 2006 because we have been informed by Hewlett-Packard that they will not incorporate certain of
our products into certain future Hewlett-Packard notebook models. We may not be able to compete successfully against either current or future competitors with respect to new or improved products. We believe that competitive pressures may result
in price reductions, reduced margins and our loss of market share.

Many of our current competitors and potential competitors have longer operating
histories and significantly greater financial, technical, sales and marketing resources or greater name recognition than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of
their products. In addition, our competitors that have large market capitalizations or cash reserves are in a better position to acquire other companies in order to gain new technologies or products that may displace our products. Any of these
potential acquisitions could give our competitors a strategic advantage. In addition, some of our current competitors and potential competitors have greater brand name recognition, a more extensive customer base, more developed distribution channels
and broader product offerings than we do. These companies can use their broader customer base and product offerings, or adopt aggressive pricing policies, to gain market share. Increased competition in the market may result in price reductions,
decreased customer orders, reduced profit margins and loss of market share, any of which could harm our business.

We depend substantially on our
relationships with a small number of PC OEMs, and our failure to maintain or expand these relationships would reduce our revenue and gross profit or otherwise harm our business.

The PC industry is highly concentrated, and we have derived a substantial portion of our revenue from sales of our products to a small number of PC OEMs. For the three months ended September 30, 2006, our three
largest customers accounted for 45% of our revenue, with Hewlett-Packard accounting for 11%, Microsoft accounting for 20% and Toshiba accounting for 14% of our revenue. However, our revenue from Hewlett-Packard began declining in the fourth quarter
of 2005 and is continuing to decline into 2006 because of Hewlett-Packards decision not to incorporate certain of our products into certain Hewlett-Packard notebook models. A significant decrease in revenue from Hewlett-Packard, or the
loss of any of our large customers without an offsetting increase in sales from other customers, would reduce our revenue and gross profit and otherwise harm our business.

We expect that a small number of customers will continue to account for a majority of our revenue, gross profit and accounts receivables for the foreseeable future because of the concentrated nature of our client
base. If the PC industry continues to consolidate, the number of customers accounting for the majority of our revenue could decrease further. Our agreements with our customers typically do not contain minimum purchase commitments and are of limited
duration or are terminable with little or no notice. The loss of any of these customers, or a significant decrease in revenue from any of these customers, including Hewlett-Packard would reduce our revenue and gross profit or otherwise harm our
business. If our customers dispute the accounts receivables or are otherwise unable to pay the balance, our income from operations could decline.



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If our competitors offer our OEM customers more favorable terms than we do or if our competitors are able to take advantage of their
existing relationships with these OEMs, then these OEMs may not include our software with their PCs. If we are unable to maintain or expand our relationships with PC OEMs, our business will suffer.

We may not be successful in addressing problems encountered in connection with our acquisition of Ulead that we may undertake in the future, which could disrupt
our operations or otherwise harm our business.

We have limited experience in acquiring businesses and technologies, including businesses with
international operations, such as Ulead. Such acquisitions and investments involve numerous risks, including:



| |  |  | unanticipated developments or events concerning the financial condition, assets, liabilities, operations, business or prospects of the acquired business might arise;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unanticipated costs and accounting errors associated with the transaction including the restatement of financial results and other issues associated with complicated cross-border
transactions;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adverse effects on existing business relationships with suppliers and customers;
| | - |  | --------------------------------------------------------------------------------



| |  |  | diversion of managements attention from our core business;
| | - |  | -----------------------------------------------------------



| |  |  | customer acceptance of new technology or product offerings;
| | - |  | -----------------------------------------------------------



| |  |  | problems maintaining internal accounting and disclosure controls and procedures and other uniform standards or policies with a company that may not have been subject to U.S.
generally-accepted accounting principles or disclosure requirements prior to the consummation of the transaction and that has operations outside of the United States;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | problems integrating the operations, personnel, technologies or products;
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| |  |  | challenges in providing accurate financial forecasts; and
| | - |  | ---------------------------------------------------------



| |  |  | potential loss of key management, engineers and other employees.
| | - |  | ----------------------------------------------------------------

We
expect to continue to review opportunities to enter into strategic transactions that would enhance our technical capabilities, complement our current products or expand the breadth of our markets or that may otherwise offer growth opportunities.
There can be no assurances that such transactions will be completed or, if completed, will ultimately be successful

The market for our products is
new and constantly changing. If we do not respond to changes in a timely manner, our products likely will no longer be competitive.

The market for
our products is characterized by rapid technological change, new and improved product introductions, changes in customer requirements and evolving industry standards. Our future success will depend to a substantial extent on our ability to develop,
introduce and support cost-effective new products and technologies on a timely basis. If we fail to develop and deploy new cost-effective products and technologies or enhancements of existing products on a timely basis, or if we experience delays in
the development, introduction or enhancement of our products and technologies, our products will no longer be competitive and our business will suffer. The development of new, technologically advanced products is a complex and uncertain process
requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We may not be able to identify, develop, manufacture, market or support new or
enhanced products on a timely basis, if at all. Furthermore, our new products may never gain market acceptance, and we may not be able to respond effectively to product announcements by competitors, technological changes or emerging industry
standards. Our failure to respond to product announcements, technological changes or changes in industry standards would likely prevent our products from gaining market acceptance and harm our business.

Changes in our product and service offerings could cause us to defer the recognition of revenue, which could harm our operating results and adversely impact our
ability to forecast revenue.

We have created, and intend to continue to create, new software and software bundles such as WinDVD HD, WinDVD BD,
WinDVD Creator, InterVideo Home Theater, InterVideo DVD Copy, MediaOne and InterVideo InstantON. Our acquisition of a controlling interest in Ulead has accelerated this trend with the addition of their products, including PhotoImpact, VideoStudio,
DVD Movie Factory, DVD Workshop and Media Studio Pro. These products contain advanced features and functionality that have required and may continue to require us to provide an increased level of end-user support. In the future, as these new
products become more complex, we may also be obligated to provide additional support to our OEM customers to bundle our software with their products. These potential increases in OEM and end-user support obligations could require us to defer both
license and PCS revenues to future periods, which could harm our operating results and adversely impact our ability to accurately forecast revenue.

We expect prices of our existing products to decline, which could harm our operating results.

We expect prices for our existing
products to continue to decline over the next few years. Because of competition from other software providers, competition in the PC industry and diminishing margins experienced by PC OEMs as a result of decreased selling prices and lower unit
sales, we have reduced the prices we charge PC OEMs for our WinDVD product, WinDVD Creator and other products. We expect this trend to continue, which will make it more difficult to increase or maintain our revenue and may cause a decline in our
gross profits, even if unit sales of any particular product increase. If unit sale increases do not offset anticipated price declines, our revenue will decline. In addition, our gross profit may decline as a result of the Microsoft royalty revenue
which is sold at cost. Our future success will depend in part on our ability to increase sales of our higher-margin products and to introduce and sell new products and upgrades to our existing products, which could increase our revenue and could
improve our profit margins.

We may not sustain profitability on a quarterly or annual basis.

We did not achieve profitability until the fiscal year ended December 31, 2002. As of September 30, 2006, we had retained earnings of $10.2 million. We expect
to incur significant operating expenses over the next several years in connection with the continued development and expansion of our business. These expenses include research and development and marketing expenses relating to products that may not
be introduced and will not generate revenue until later periods, if at all. We may also incur significant operating expenses associated with the enforcement of our intellectual property rights. Further, our acquisition of Ulead makes it more
difficult for us to predict profitability on a quarterly or annual basis. We may not achieve profitability on a quarterly or annual basis in the future.



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Changes in accounting rules applicable to us could negatively impact our earnings and financial results.

The U.S. GAAP are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and
Exchange Commission and various other organizations formed to promulgate and interpret accounting principles. A change in these principles or interpretations could have a significant effect on our historical or projected financial results. For
example, we have historically not been required to record stock-based compensation charges if an employees stock option exercise price is equal to or exceeds the deemed fair value of the underlying security at the measurement date.

However, Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, or SFAS No. 123R, was recently implemented and
requires companies to expense the fair value of employee stock options and similar awards. SFAS No. 123R addresses accounting for transactions in which an entity obtains employee services in exchange for share-based payments. SFAS No. 123R
requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the fair value of those awards on the grant date, with limited exceptions. For the three and nine months ended September 30, 2006 ,
we recorded stock-based compensation expenses on our Condensed Consolidated Statements of Operations of approximately $857,000 and $2.8 million related to our SFAS No. 123R compliance. To the extent that we continue to make stock option grants
to employees in the future, we will continue to incur such expenses, which will have a negative impact on our future earnings and results of operations.

We may not realize the benefits from our acquisition due to challenges associated with integrating the operations, technologies, sales and other aspects of the our business with the Ulead business.

On April 20, 2005, we acquired, directly and though one of our wholly owned subsidiaries, 33,284,395 shares of Ulead Systems, Inc. (Ulead) a publicly
traded Taiwanese company at NT$30 (approximately U.S. $0.95) per share pursuant to our previously-announced tender offer for the issued shares of Ulead and pursuant to stock purchase agreements with certain shareholders of Ulead. Also on
April 20, 2005, we acquired an additional 1,000,000 shares of Ulead at a purchase price of NT$30 (approximately U.S. $0.95) per share through the acquisition of a holding company, Strong Ace Limited. The aggregate purchase price for
the 34,284,395 shares of Ulead was US $32.6 million and was paid in cash. Together with the shares that we purchased prior to the tender offer, we now own a total of 48,817,395 shares of Ulead, or approximately 67% of the issued shares of Ulead.

On July 5, 2006 we, entered into a merger agreement with Ulead Systems, Inc (Ulead). Pursuant to the merger agreement, we will purchase
the remaining shares of Ulead for NT$30 (approximately U.S. $0.93) per share. Upon completion of the merger, we will assume 100% of all assets and liabilities of Ulead. The merger is subject to approval by the shareholders of Ulead as well as
regulatory approvals.

This has been our most significant corporate acquisition to date. Our future success will depend, in large part, on
managements success in integrating the operations, technologies and personnel of our business with the Ulead business. If we fail to integrate the operations of Ulead into our business successfully or otherwise fail to realize any of the
anticipated benefits of the acquisition, our results of operations could be impaired.

In addition, the overall integration of the two companies may result
in unanticipated operational problems, expenses and liabilities, and diversion of managements attention. For example, we were unable to obtain audited financial statements for the Ulead business in a timely manner resulting in delays in
the timing of certain of our public filings. If we are unable to anticipate and address future challenges related to the integration of the Ulead business into our business, our results of operations could be negatively impacted by such
challenges.

The introduction of Microsoft Windows Vista could harm our operating results.

Microsoft currently offers products in the digital video and audio software markets. Some video and audio capabilities are built directly into their operating systems or
are offered as upgrades to those operating systems at no additional charge. During the second quarter of 2005, we granted to Microsoft, Inc. a worldwide right and license to use, copy, create derivative works of, publicly perform or display, import,
broadcast, transmit, offer to sell, sell, have sold, rent, lease, lend, transfer or otherwise distribute certain key components of our DVD, audio and video decoding technology. We believe Microsoft will incorporate DVD playback features into its new
operating system, Microsoft Windows Vista. Our revenue could decline significantly and our business could be harmed as a result of the introduction of Microsoft Windows Vista.



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We license technology from third parties for use in our WinDVD and other standards-based products, and we might not be able to ship
our products in their present forms if we fail to maintain these license arrangements.

We license technology for use in our WinDVD, WinDVD Creator
and InterVideo Home Theater products and other existing and planned products from third parties under agreements, some of which have a limited duration. For example, we have a license agreement with Dolby Laboratories for its audio technology and
logo, a license agreement with the DVD Copy Control Association, Inc. for the content scrambling system designed to prevent the copying of DVDs, licenses with MPEG-LA for its MPEG-2 video technology and MPEG-4 related technologies, a license from
Thomson Licensing S.A. for its MP3 audio technology and various other license agreements relating to the HD or BD DVD, as well as patents, know-how and trademarks that are important to various aspects of the development, marketing and sale of our
products. We are obligated to pay royalties under each of the Dolby, DVD Copy Control Association, MPEG-LA and Thomson Licensing S.A. agreements, and Dolby, DVD Copy Control Association, MPEG LA and Thomson Licensing may each terminate its license
if we breach any material provision of the license or if other events occur, as specified in the license agreement. If we fail to maintain these license arrangements, we might not be able to ship our products in their present forms and our revenue
could decline.

Because there are a small number of large PC OEMs, we have only a limited number of potential new large OEM customers for our WinDVD
product, which will likely cause our revenue to grow at a slower rate than in recent periods.

Historically, our revenue growth has been achieved in
large part due to sales of our WinDVD product to new, large PC OEM customers. More recently, we have derived an increasing percentage of our revenue from sales of our non-WinDVD products, which include WinDVD Creator, InterVideo Home Theater,
InterVideo DVD Copy and InterVideo InstantON product, and from retail sales as a result of the Ulead transaction. Because there are only a limited number of potential new, large PC OEM customers for our products, we must derive any future revenue
growth principally from increased sales of WinDVD or other products to existing PC OEMs and PC peripherals manufacturers and from sales to smaller regional PC OEMs and directly to consumers through retail channels and our websites. Because some of
these other revenue opportunities are more fragmented than the PC OEM market and will take more time and effort to penetrate, our revenue may grow at a slower rate than historically. Additionally, if the rate of such expansion via retail channels
and our website proceeds slower than we anticipate, our financial position could be adversely affected.

As a result of our dependency on a small
number of large PC OEMs, any problems those customers experience, or their failure to promote products that contain our software, could harm our operating results.

As a result of our concentrated customer base, problems that our PC OEM customers experience could harm our operating results. Some of the factors that affect the business of our PC OEM customers, all of which are
beyond our control, include:



| |  |  | the competition these customers face and the market acceptance of their products;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the engineering, marketing and management capabilities of these customers and the technical challenges that they face in developing their products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the financial and other resources of these customers;
| | - |  | -----------------------------------------------------



| |  |  | new governmental regulations or changes in taxes or tariffs applicable to these customers; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the failure of third parties to develop and introduce content for DVD and other digital media applications in a timely fashion.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------

The inability of our PC OEM customers to successfully address any of these risks could harm our business. In addition, we have little or no influence over the degree to
which these customers promote products that incorporate our software or the prices at which these products are sold to end users. If our PC OEM customers fail to adequately promote products that incorporate our software, our revenue could decline.

We have material weaknesses in our disclosure controls and internal controls over financial reporting that may prevent us from being able to
accurately report our financial results or prevent fraud, which could harm our business and operating results.

Effective disclosure and internal
controls are necessary for us to provide reliable and accurate financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002 requires that we assess, and our independent registered public accounting firm
attests to, the design and operating effectiveness of our controls over financial reporting. If we cannot provide reliable and accurate financial reports and prevent fraud, our business and operating results, as well as our stock price, could be
harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. The material weaknesses in our internal control over financial reporting that we identified at December 31, 2005, as
well as our remediation efforts to date, are more fully discussed under Part I, Item 4, Controls and Procedures.



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While we have taken steps to remediate the identified material weaknesses, we cannot be certain that any remedial measures we take will
ensure that we design, implement, and maintain adequate disclosure and internal controls over our financial processes and reporting in the future or will be sufficient to address and eliminate the material weaknesses. Remedying the material
weaknesses that have been identified, and any additional deficiencies, significant deficiencies or material weaknesses that we or our independent registered public accounting firm may identify in the future, could require us to incur significant
costs, expend significant time and management resources or make other changes. We restated our consolidated financial statements for the period ended June 30, 2005 and September 30, 2005 due to the material weakness related to our
incorrect application of Statement of Financial Accounting Standards No. 141 Business Combinations. During the preparation of our consolidated financial statements for the year ended December 31, 2005, management noted a
material weakness in obtaining from Ulead timely and accurate financial results based on U.S. GAAP. The material weakness in oversight of the Ulead financial reporting process results in more than a remote likelihood that a material misstatement of
the financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work. Any delay or failure to design and implement new or improved controls, or difficulties encountered in their implementation
or operation, could harm our operating results, cause us to fail to meet our financial reporting obligations, or prevent us from providing reliable and accurate financial reports or avoiding or detecting fraud. Disclosure of our material weaknesses
or our failure to remediate such material weaknesses in a timely fashion could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.

We have received notices of claims, and may receive additional notices of claims in the future, regarding the alleged infringement of third
parties intellectual property rights that may result in restrictions or prohibitions on the sale of our products and cause us to pay license fees and damages.

Some third parties hold patents that such parties claim to cover various aspects of DVD technology incorporated into our and our customers products.

Our digital video and audio products comply with various industry standard specifications. Some third parties have claimed that various aspects of DVD technology
incorporated into our and our customers products infringe upon patents held by them, including the following:



| |  |  | MPEG LA. DVD specifications include technology known as MPEG-2 that governs the process of storing video in digital form. A group of companies, comprised
primarily of CE manufacturers, has formed a consortium known as MPEG LA, LLC to enforce member companies patents covering certain aspects of MPEG-2 technology. MPEG LA, and certain members of the consortium, have notified us that
they believe that our products infringe on patents owned by members of the consortium. In March 2002, we entered into a license agreement with MPEG LA pursuant to which we obtained a license, retroactive to our inception, to MPEG LAs patents
necessary to the MPEG-2 standard in exchange for a cash payment and our agreement to make ongoing royalty payments. This license requires that we pay a royalty to MPEG LA on our sales to end users and that we notify the OEMs to whom we sell our
products that they are obligated to obtain a license from MPEG LA for any use of our products that comply with the MPEG-2 standard. In addition, MPEG LA, and certain members of the consortium have notified a number of PC OEMs, including some of our
customers that they believe MPEG LA members patents are infringed by those PC OEM products that incorporate MPEG-2 technology. We are aware that a number of PC OEMs, including some of our customers, have settled the MPEG LA claims and entered
into license agreements with MPEG LA.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | DVD 6C. Another group of companies has formed a consortium known as DVD 6C to enforce the proprietary rights of holders of patents covering some aspects of DVD
technology. DVD 6C and certain of its member companies have notified us that we may need a license so that our products that incorporate DVD technology do not infringe upon patents owned by members of the consortium. In addition, DVD 6C or its
members may demand that PC OEMs or other companies manufacturing or licensing DVD-related products, including our customers, pay license fees or stop selling products covered by the patents of the member companies.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Others. Other third parties, including Nissim Corporation, have notified a number of PC OEMs, including some of our customers, that they believe their patents are infringed
by the products of these PC OEMs that incorporate certain InterVideo DVD-related technology. Nissim and the other third parties making such claims may demand that these PC OEMs pay license fees or stop selling products that are covered by the third
partys patents.
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We and our customers may be subject to additional third-party claims that our and our customers products violate the
intellectual property rights of those parties.

In addition to the claims described above, we may receive notices of claims of infringement of other
parties proprietary rights. Many companies aggressively use their patent portfolios to bring infringement claims against competitors and other parties. As a result, we may become a party to litigation in the future as a result of an alleged
infringement of the intellectual property rights of others, including DVD 6C and its members or Nissim. In addition, we are aware that a consortium of companies, known as 4C, has been formed for the purpose of asserting the patent rights
of its members covering some aspects of DVD technology. 4C may demand that PC OEMs or other companies manufacturing or licensing DVD-related products, including us and our customers, pay license fees and damages for the use of the technology, or be
prohibited from selling products, covered by the 4C patents. We have also received notices from AT&T that they hold patents covering aspects of the MPEG-4 technology. Similarly, other parties have alleged that aspects of MPEG-2, MPEG-4 and other
multimedia technologies infringe upon patents held by them. We may be required to pay license fees and damages or be prohibited from selling our products in the future if it is determined that our products infringe on patents owned by these third
parties. In addition, other companies may form consortia in the future, similar to MPEG LA, DVD 6C and 4C, to enforce their proprietary rights and these consortia may seek to enforce their patent rights against us and our customers. Some of our
products can be used in connection with the copying of video content, which may include content protected by copyright. Though we believe these products do not contribute to copyright infringement and do not defeat encryption in violation of the
Digital Millennium Copyright Act, some content owners have shown a willingness to instigate litigation against producers of products that could be used to copy copyrighted content. Defending such suits could be costly and could cause a serious
disruption in our business regardless of the outcome.

We may be required to pay substantial damages and may be restricted or prohibited from selling
our products if it is proven that we violate the intellectual property rights of others.

If DVD 6C, 4C, Nissim, AT&T or another third party proves
that our technology infringes its patents, we may be required to pay substantial damages for past infringement and may be required to pay license fees or royalties on future sales of our products. If we are required to pay license fees in the
amounts that are currently published by, for example, DVD 6C for past sales to our large PC OEM customers, such fees would exceed the revenue we have received from those PC OEM customers. In addition, if it were proven that we willfully infringed on
a third partys patents, we may be held liable for three times the amount of damages we would otherwise have to pay. In addition, intellectual property litigation may require us to:



| |  |  | stop selling, incorporating or using our products that use the infringed intellectual property;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, which license may not be available on commercially reasonable
terms, or at all; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible and may cause us to expend significant resources.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Furthermore, the defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive to resolve and could
require a significant portion of managements time. In addition, rather than litigating an infringement matter, we may determine that it is in our best interests to settle the matter. Terms of a settlement may include restrictions or
prohibitions on our ability to sell products incorporating the other partys technology, the payment of damages and our agreement to license technology in exchange for a license fee and ongoing royalties. These fees may be substantial. If we
are forced to take any of the actions described above, defend against any claims from third parties or pay any license fees or damages, our business could be harmed.



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We may be liable to some of our customers for damages that they incur in connection with intellectual property claims.

Our license agreements, including the agreements we have entered into with our large PC OEM customers, generally contain warranties of non-infringement and commitments to
indemnify our customers against liability arising from infringement of third-party intellectual property rights. Examples of third-party intellectual property rights include the patents held by Nissim, AT&T and by members of MPEG LA, DVD 6C and
4C. These commitments may require us to indemnify or pay damages to our customers for all or a portion of any license fees or other damages, including attorneys fees, our customers are required to pay, or agree to pay, these or other third
parties. We have received notices from some of our customers asserting that we are required to indemnify them under our agreements with them, or providing notice that they have received from third parties infringement claims that are related to our
products. These customers include, among others, Hewlett-Packard, Microsoft, MicronPC LLC and Fujitsu Limited, as well as other customers with which we have settled. We expect to make additional cash payments to settle similar claims in the future.
Although MPEG LA has stated that some of our PC OEM customers, including Dell, Fujitsu, Gateway, Hewlett-Packard, Sony and Toshiba, are currently MPEG LA licensees, not all of our PC OEM customers are MPEG LA licensees. Notwithstanding that we have
signed a license agreement with MPEG LA, we may continue to be liable to some of our customers for amounts that those customers pay or have paid to MPEG LA in settlement of claims of infringement brought by MPEG LA against those customers. Even with
respect to those PC OEM customers that have become licensees, we may have liability to these customers for prior infringement and future royalty payments. If we are required to pay damages to our customers or indemnify our customers for damages they
incur, our business could be harmed. If our customers are required to pay license fees in the amounts that are currently published by some claimants, and we are required to pay damages to our customers or indemnify our customers for such amounts,
such payments would exceed our revenue from these customers. Even if a particular claim falls outside of our indemnity or warranty obligations to our customers, our customers may be entitled to additional contractual remedies against us.
Furthermore, even if we are not liable to our customers, our customers may attempt to pass on to us the cost of any license fees or damages owed to third parties by reducing the amounts they pay for our products. These price reductions could harm
our business.

We rely on patents, trademarks, copyrights, trade secrets and license agreements to protect our proprietary rights, which afford only
limited protection.

Our success depends upon our ability to protect our proprietary rights. We rely on a combination of patent, copyright,
trademark and trade secret laws, as well as license and confidentiality agreements with our employees, customers, strategic partners and others to establish and protect our proprietary rights. The protection of patentable inventions is important to
our future opportunities. It is possible that:



| |  |  | our pending patent applications may not result in the issuance of patents;
| | - |  | --------------------------------------------------------------------------



| |  |  | we may not apply for or obtain effective patent protection in every country in which we do business;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | our patents may not be broad enough to protect our proprietary rights;
| | - |  | ----------------------------------------------------------------------



| |  |  | any issued patent could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from using the inventions claimed in
those patents;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be required to grant cross-licenses to our patents in accordance with the terms of the agreements we enter into with customers or strategic partners;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | for business reasons we may choose not to enforce our patents against certain third parties; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | current and future competitors may independently develop similar technology, duplicate our products or design new products in a way that circumvents our patents.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Existing copyright, trademark and trade secret laws and license and confidentiality agreements afford only limited protection. In addition,
the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and policing the unauthorized use of our products is difficult. Any failure to adequately protect our proprietary rights
could result in our competitors offering similar products, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue.



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Our ongoing patent litigation with Dell and Cyberlink and the potential for new litigation matters may divert financial and management
resources.

Our industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights.
We are subject to the ongoing risks of claims of violation of third party intellectual properties. In addition, we may find it necessary use litigation to enforce our intellectual property rights. Such litigation matters, such as the pending ITC
investigation against Dell and Cyberlink, are very costly. Our management team could be required to devote so much time, effort and energy to the legal proceedings that the rest of our business may suffer. Until our litigation matters are resolved,
we will continue to incur substantial legal expenses that vary with the level of activity in the legal proceedings. This level of activity is not within our control as we may need to respond to legal actions by the opposing parties or scheduling
decisions by the judges. Consequently, we may find it difficult to predict our general and administrative expenses for any given quarter, which will impair our ability to forecast our results of operations for that quarter. Despite the financial and
management resources required in any lawsuit, our efforts to enforce our intellectual property rights may ultimately prove unsuccessful.

We have
derived a substantial portion of our revenue from the sale of our WinDVD product to PC OEMs, and these customers may not continue to purchase this product or we may fail to attract new customers for this product.

We derived 32% of our revenue for the three months ended September 30, 2006 from sales of our WinDVD product, primarily to PC OEMs. We expect that revenue from sales
of our WinDVD product to PC OEMs will continue to account for a significant portion of our revenue for the foreseeable future. Accordingly, our business will suffer if our existing PC OEM customers do not continue to incorporate our WinDVD product
into the PCs they sell or if we are unable to obtain new PC OEM customers for our WinDVD product.

Slow growth, or negative growth, in the PC
industry could reduce demand for our products and reduce our gross profit.

Our revenue depends in large part on the demand for our products by PC
OEMs. The PC industry has experienced slow or negative growth in the recent past due to general economic slowdowns, market saturation and other factors. If slow growth in the PC industry continues or negative growth occurs, demand for our products
may decrease. Furthermore, if a reduction in demand for our products occurs, we may not be able to reduce expenses commensurately, due in part to the continuing need for research and development. Accordingly, continued slow growth or negative growth
in the PC industry could reduce our gross profit.

Our success in generating revenue depends on the growth of the use of software solutions in the PC
and consumer electronics industries.

Our continued success in generating revenue depends on growth in the use of software solutions to add features
and functionality to PCs and CE devices. Our software is currently used primarily in PCs, and we expect it to be useful for CE products. These markets are rapidly evolving, and it is difficult to predict their potential size or future growth rate.
In addition, we are uncertain as to the extent to which software products such as ours will be used in these markets in the future. Their market acceptance may be impacted by the performance, cost and availability of semiconductors that perform
similar functions and the level of copy protection that can be attained and maintained in software products. Our success in generating revenue in these markets will depend on increased adoption of software solutions based on the same standards as
ours. If the PC and consumer electronics markets adopt software solutions more slowly than we expect, or if content providers are dissatisfied with the level of copy protection available in software products, our business would likely suffer.

Our products are based primarily on the Microsoft Windows operating system, and most of our customers require that the combination of our software
products and their PCs be certified by Microsofts Windows Hardware Qualification Labs. Accordingly, we are dependent on Microsoft, which exposes us to risks.

Our products are based primarily on the Microsoft Windows operating system. If industry and customer preferences in operating systems shift, our products may not be compatible with other operating systems and our
business could be harmed.

Our revenue is highly dependent upon acceptance of products that are based on the Microsoft Windows operating system, which
is currently the dominant operating system used in the PC industry. Microsoft could make changes to its operating system that could render our products incompatible. Other industry participants could develop operating systems to replace the Windows
operating system, and our products might not be compatible with those operating systems. If our products are not compatible with one or more of the operating systems with significant PC market share, we could incur substantial costs and expend
significant capital and other resources to adapt our products to one or more operating systems. There is no assurance that we would be able to adapt our products to changes made in the Windows operating system in the future or to a new operating
system such as Microsoft Vista and any failure to adapt to changes in operating systems by the PC industry could result in significant harm to our business.



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Most of our customers require that the combination of our software products and their PCs be certified by Microsofts Windows
Hardware Qualification Labs. If certification is not obtained, our revenue could decline or our business could be harmed.

We sell most of our products
through PC OEMs, which bundle our products with their hardware products. Most of our PC OEM customers require Microsofts Windows Hardware Qualifications Labs, or WHQL, certification for our products on each PC platform before bundling and
distribution. The certification process is entirely under Microsofts control, and we may not obtain certification for any product on a timely basis or at all. Furthermore, Microsoft may change the requirements for certification at any time
without notice. At various times in the past, Microsoft has changed standards applicable to our products, which caused us to be out of compliance for a period of time. In the future, we may not be able to obtain necessary certification on a timely
basis, if at all, for new PC models introduced by our customers, for any of our products under development or for existing products, if the current standards are changed. Any delays in receipt of, or failure to receive, such certification could
cause our revenue to decline or our customers to license a competitors software.

If we do not provide acceptable customer support, our
reputation will suffer and it will be difficult to retain existing customers or to acquire new customers.

We must continue to provide acceptable
customer support to our customers. An inability to do so will harm our reputation and make it difficult to retain existing customers or acquire new customers. Most of our experience to date has been with corporate customers, some of which require
significant support when familiarizing themselves with the features and functionality of our products. We intend to increase sales of our products directly to consumers. We have limited experience with widespread distribution of our products
directly to consumers, and we may not have adequate experience or personnel to provide the levels of support that these customers require. Our failure to provide adequate customer support for our products to either our corporate or consumer
customers could damage our reputation and brand in the marketplace and strain our relationships with customers. This could prevent us from retaining existing customers or acquiring new customers.

The loss of any of our strategic relationships would make it more difficult to design competitive products and keep pace with evolving industry standards, which
could reduce demand for our products and harm our business.

We must design our software products to interoperate effectively with a variety of
hardware and software products, including operating system software, graphics chips, DVD drives, PCs and PC chipsets. We depend on strategic relationships with software developers and manufacturers of these products, particularly Microsoft and
Intel, to achieve our design objectives, to produce products that interoperate successfully, to provide us with information concerning customer preferences and evolving industry standards and trends, and to assist us in distributing our products to
users. For example, we have been able to learn about future product lines being developed by some of our OEM customers in advance so that we were able to more efficiently design products that our customers, and the ultimate end users, find valuable.
However, we generally do not have any agreements with these third parties to ensure that such information will be provided to us, and these relationships may not continue in the future. The loss of any one of these relationships could reduce demand
for our products and harm our business.

Our products may have defects or may be incompatible with other software or components contained in our
customers products, which could cause us to lose customers, damage our reputation and create substantial costs.

Defects, referred to in the
software industry as bugs, have been found in our products in the past and may be found in the future. In addition, our products may fail to meet our customers design specifications or be incompatible with other software or
components contained in our customers products, or our customers may change their design specifications or add additional third-party software or components after the production of our products. We may be required to devote significant
financial resources and personnel to correct any defects. Failure to meet our customers design specification will result in loss of sales due to the length of time required to redesign the product. Our products may also be required to
interface with defective third-party software or components. If we are unable to detect or fix errors, or meet our customers design specifications, our business and results of operations would suffer.



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We may experience seasonality in our business, which could cause our operating results to fluctuate.

Our financial condition and results of operations are likely to be affected by seasonality in the future. Historically, PC OEMs have experienced their highest volume of
sales during the year-end holiday season. Because we generally recognize revenue associated with the sale of our products to our OEMs customers in the month or quarter following the sales of our products to these OEMs customers, we
expect this seasonality to have a positive effect on our revenue and operating income in the first quarter of each calendar year and a negative effect on our revenue and operating income in the second quarter of each year. We expect our acquisition
of a controlling interest in Ulead and the pending acquisition of the remaining outstanding minority interest will impact this trend in future periods because a substantial portion of Ulead revenues are derived from web and retail sales which are
typically recognized in the period in which they occur.

If we do not successfully establish strong brand identity in the PC and consumer electronics
markets, we may be unable to achieve widespread acceptance of our products.

We believe that establishing and strengthening the InterVideo brand is
critical to achieving widespread acceptance of our products and to establishing key strategic relationships. The importance of brand recognition will increase as current and potential competitors enter the market with competing products. Our ability
to promote and position our brand depends largely on the success of our marketing efforts and our ability to provide high quality products and customer support. These activities are expensive and we may not generate a corresponding increase in
customers or revenue to justify these costs. If we fail to establish and maintain our brand, or if our brand value is damaged or diluted, we may be unable to attract new customers and compete effectively. Historically, we have relied primarily on a
limited direct sales force, supported by third-party manufacturers representatives and distributors, to sell our products. Our sales strategy focuses primarily on our corporate customers bundling our products with their hardware and
distributing our products through their own distribution channels. We rely on our customers sales forces, marketing budgets and brand images to promote sales of bundled products. If our corporate customers fail to successfully market and sell
their products bundled with our products, or if our relationship with our corporate customers are terminated, we may be unable to effectively market and distribute our products and services.

Our success depends on retaining our key personnel, including our executive officers, the loss of any of whom could disrupt our operations or otherwise harm our
business.

Our success depends on the continued contributions of our senior management and other key engineering, sales and marketing and operations
personnel. Competition for employees in our industry can be intense. We do not have employment agreements with, or key man life insurance policies covering, any of our executives. In addition, significant portions of the capital stock and options
held by the members of our management are vested, and some of our executives are parties to agreements that provide for the acceleration of the vesting of a portion of their unvested shares and options under certain circumstances in connection with
a change of control. There can be no assurance that we will retain our key employees or be able to hire replacements. The loss of any key employee or an inability to replace lost key employees and add new key employees as we grow could disrupt our
operations or otherwise harm our business.

We rely on the accuracy of our customers sales reports for collecting and reporting revenue. If
these reports are not accurate, our reported revenue will be inaccurate.

A substantial majority of our revenue is generated by our PC OEM customers
that pay us a license fee based upon the number of copies of our software they bundle with the PCs that they sell. In collecting these fees, preparing our financial reports, projections and budgets and in directing our sales efforts and product
development, we rely on our customers to accurately report the number of units licensed. We have never audited any of our customers to verify the accuracy of their reports or payments. Most of our license agreements permit us to audit our customers,
but audits are expensive and time consuming and could harm our customer relationships. From time to time, customers have provided us with inaccurate reports, which resulted in our under-reporting or over-reporting revenue for the associated period
and recording an adjustment in a future period. If any of our customer reports are inaccurate, the revenue we collect and report will be inaccurate and we may be required to make an adjustment to our revenue for a subsequent period, which could harm
our business and credibility in the financial community.



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Our international operations accounted for 52% of our revenue for the three months ended September 30, 2006 and 49% of our
revenue for the three months ended September 30, 2005, which may expose us to political, regulatory, economic, foreign exchange and operational risks.

Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. We expect to continue to derive a significant portion of our revenue from international sales. We intend to expand our
international operations in the future. Significant management attention and financial resources are needed to develop our international sales, support and distribution channels and manufacturing. We may not be able to maintain international market
demand for our products. Our future results could be harmed by a variety of factors related to international operations, including:



| |  |  | foreign currency exchange rate fluctuations;
| | - |  | --------------------------------------------



| |  |  | seasonal fluctuations in sales;
| | - |  | -------------------------------



| |  |  | changes in a specific countrys or regions political or economic condition, particularly in emerging markets;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | trade protection measures and import or export licensing requirements;
| | - |  | ----------------------------------------------------------------------



| |  |  | potentially adverse tax consequences;
| | - |  | -------------------------------------



| |  |  | longer accounts receivable collection cycles and difficulties in collecting accounts receivables;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | difficulty in managing widespread sales, development and manufacturing operations; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | less effective protection of intellectual property.
| | - |  | ---------------------------------------------------

In addition, we and
certain of our OEM customers maintain significant operations in Asia. Any kind of economic, political or environmental instability in this region of the world could harm our operating results. Further, we may be impacted by the political, economic
and military instability in Taiwan.

We are exposed to foreign currency risks as a result of our substantial international operations.

We are an international company, and we derived approximately 50%, 50% and 47% of our 2006, 2005 and 2004 revenues from products sold in, and
services performed from, our facilities located outside the United States, primarily in Asia and Europe. We also have substantial assets located outside of the United States, and a large portion of our sales and service revenues are denominated
in foreign currencies. We recently augmented our international operations with the purchase of a majority interest in Ulead Systems, Inc., a publicly traded Taiwanese company. Our substantial international assets and operations subject us to
the risk of adverse foreign currency fluctuations which could negatively impact our results of operations.

Currently, we do not hedge against foreign
currency exchange risks but in the future we may commence hedging against specific foreign currency transaction risks. We may be unable to hedge all of our exchange rate exposure economically and exchange rate fluctuations may have a negative effect
on our ability to meet our obligations. With respect to our international sales that are U.S. dollar denominated, decreases in the value of foreign currencies relative to the U.S. dollar could make our products less price competitive. These factors
may have a material adverse effect on our future international revenue.

We expect that our international operations and sales efforts will continue to
make up a substantial portion of our business. We may, in the future, undertake hedging or other such transactions, should we determine that it is necessary to offset exchange rate risks. If we do not engage in hedging transactions or fail
to do so effectively, our results of operations may be negatively impacted by foreign currency fluctuations.

We may require substantial additional
capital, which may not be available on acceptable terms or at all.

Our capital requirements will depend on many factors, including:



| |  |  | acceptance of, and demand for, our products;
| | - |  | --------------------------------------------



| |  |  | the costs of developing new products;
| | - |  | -------------------------------------



| |  |  | the need to license new technology, to enter into license agreements for existing technology or to settle intellectual property matters;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the extent to which we invest in new technology and research and development projects;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the number and timing of acquisitions, including the Ulead transaction; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | the costs associated with our expansion.
| | - |  | ----------------------------------------



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To the extent our existing sources of cash and cash flow from operations are not sufficient to fund our activities, we may need to raise
additional funds. If we issue additional stock to raise capital, each stockholders percentage ownership in the Company would be reduced. Additional financing may not be available when needed on terms acceptable to us or at all. If we raise
funds through debt financing, we will have to pay interest and may be subject to restrictive covenants, which could limit our ability to take advantage of future opportunities, respond to competitive pressures or unanticipated industry changes. If
we cannot raise necessary additional capital on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated industry changes.

Our stock price is volatile.

The price at which our common
stock trades is likely to be highly volatile and may fluctuate substantially due to many factors, some of which are:



| |  |  | actual or anticipated fluctuations in our results of operations;
| | - |  | ----------------------------------------------------------------



| |  |  | changes in securities analysts expectations or our failure to meet those expectations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | developments with respect to intellectual property rights;
| | - |  | ----------------------------------------------------------



| |  |  | announcements of technological innovations or significant contracts by us or our competitors;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | introduction of new products by us or our competitors;
| | - |  | ------------------------------------------------------



| |  |  | commencement of or our involvement in litigation;
| | - |  | -------------------------------------------------



| |  |  | our sale of common stock or other securities in the future;
| | - |  | -----------------------------------------------------------



| |  |  | conditions and trends in technology industries;
| | - |  | -----------------------------------------------



| |  |  | changes in market valuation or earnings of our competitors;
| | - |  | -----------------------------------------------------------



| |  |  | the trading volume of our common stock;
| | - |  | ---------------------------------------



| |  |  | changes in the estimation of the future size and growth rate of our markets; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | general economic conditions.
| | - |  | ----------------------------

In addition, the stock market has
experienced significant price and volume fluctuations that have affected the market prices for the common stock of technology companies. In the past, these market fluctuations were often unrelated or disproportionate to the operating performance of
these companies. Any significant fluctuations in the future might result in a significant decline in the market price of our common stock.

We have
implemented anti-takeover provisions that could discourage a third party from acquiring us and consequently cause our stock price to decline.

Our
certificate of incorporation and bylaws contain provisions that may have the effect of delaying or preventing a change of control or changes in management that a stockholder might consider favorable. Our certificate and bylaws, among other things,
provide for a classified board of directors, require that stockholder actions occur at duly called meetings of the stockholders, limit who may call special meetings of stockholders and require advance notice of stockholder proposals and director
nominations. These provisions, along with the provisions of the Delaware General Corporation Law, such as Section 203, prohibiting certain business combinations with an interested stockholder, may delay or impede a merger, tender offer or proxy
contest involving us. Any delay or prevention of a change of control transaction or changes in management could cause the market price of our common stock to decline.



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ITEM 5. OTHER INFORMATION

On November 9, 2006, InterVideo issued a press release announcing its financial results for the
fiscal quarter ended September 30, 2006. The financial results contained in the press release are filed with this Form 10-Q.

ITEM 6. EXHIBITS

(a) Exhibits

Exhibits filed with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 are as follows:



|                 |  |                |  |                                                                                                                                                      
|---------------- |  | -------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit footnote |  | Exhibit Number |  | Description                                                                                                                                          
|(a)              |  | 2.1            |  | Agreement and Plan of Merger, dated as of August 28, 2006, by and among Corel Corporation, Iceland Acquisition Corporation, and the Company.         
|                 |  |               
|(b)              |  | 3.1            |  | Certificate of Incorporation                                                                                                                         
|                 |  |               
|(c)              |  | 3.2            |  | Bylaws                                                                                                                                               
|                 |  |               
|(d)              |  | 4.1            |  | Investors Rights Agreement, dated July 2, 1999, as amended, by and among Registrant and the parties who are signatories thereto                      
|                 |  |               
|                 |  | 31.1           |  | Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                            
|                 |  |               
|                 |  | 31.2           |  | Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                            
|                 |  |               
|                 |  | 32.1           |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|                 |  |               
|                 |  | 32.2           |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

|(a) | Filed as Annex A of the Registrants Definitive Proxy Statement filed on Form DEFM14A on October 25, 2006 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Filed as Exhibit 3.2 to Registrants S-1 Registration Statement filed on July 16, 2003 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(c) | Filed as Exhibit 3.4 to Registrants S-1 Registration Statement filed on July 16, 2003 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(d) | Filed as Exhibit 10.5 to Registrants S-1 Registration Statement filed on July 16, 2003 and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------



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INTERVIDEO, INC.



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.



Date: November 9, 2006InterVideo, Inc. (Registrant)By:

/s/ STEVE ROSteve Ro Chief Executive OfficerBy:

/s/ RANDALL BAMBROUGHRandall Bambrough Chief Financial
Officer




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INTERVIDEO, INC.



EXHIBIT INDEX



|                 |  |                |  |                                                                                                                                                      
|---------------- |  | -------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit footnote |  | Exhibit Number |  | Description                                                                                                                                          
|(a)              |  | 2.1            |  | Agreement and Plan of Merger, dated as of August 28, 2006, by and among Corel Corporation, Iceland Acquisition Corporation, and the Company.         
|                 |  |               
|(b)              |  | 3.1            |  | Certificate of Incorporation                                                                                                                         
|                 |  |               
|(c)              |  | 3.2            |  | Bylaws                                                                                                                                               
|                 |  |               
|(d)              |  | 4.1            |  | Investors Rights Agreement, dated July 2, 1999, as amended, by and among Registrant and the parties who are signatories thereto                      
|                 |  |               
|                 |  | 31.1           |  | Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                            
|                 |  |               
|                 |  | 31.2           |  | Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                            
|                 |  |               
|                 |  | 32.1           |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|                 |  |               
|                 |  | 32.2           |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

|(a) | Filed as Annex A of the Registrants Definitive Proxy Statement filed on Form DEFM14A on October 25, 2006 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Filed as Exhibit 3.2 to Registrants S-1 Registration Statement filed on July 16, 2003 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(c) | Filed as Exhibit 3.4 to Registrants S-1 Registration Statement filed on July 16, 2003 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(d) | Filed as Exhibit 10.5 to Registrants S-1 Registration Statement filed on July 16, 2003 and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------



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