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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A



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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, 2005

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 ̈No  x

Indicate by check mark whether Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈

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 November 8, 2005, the Registrant had 13,986,329 shares of common stock outstanding, $0.001 par value per share.



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##### Table of Contents

NTERVIDEO, INC.

FORM 10-Q/A

QUARTER ENDED SEPTEMBER 30, 2005

EXPLANATORY NOTE:

This Amendment No. 1 on Form 10-Q/A amends
and restates Part I, Items 1,2 and 4, and Part II, Item 6 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on November 14, 2005
(the Original Filing). The Company is filing this Amendment No. 1 to reflect the restatement of our condensed consolidated financial statements as of and for the three and nine month periods ended September 30, 2005.

As discussed in more detail in Note 2 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Amendment
No. 1 on Form 10-Q/A, this restatement was due to the misapplication of certain complex accounting principles to the Companys purchase of Ulead Systems, Inc. (Ulead) with non-controlling interest and other purchase accounting
related adjustments pertaining to amortization charges of intangible assets and deferred taxes. The misapplication of accounting principles concern the manner in which the Company accounted for the purchase of its controlling interest in Ulead in
April 2005. Ulead is a publicly traded company in Taiwan and a leading developer of innovative video, imaging and DVD authoring software. InterVideos review of its application of purchase accounting under Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, and the completion of its purchase price allocation has resulted in the determination to apply the partial goodwill method (or parent company theory) instead of the previously applied full
goodwill method (or entity theory). The application of the partial goodwill method requires the Company to record its share of Uleads assets, liabilities and resulting intangible assets, including goodwill, at the proportionate share acquired
based upon the purchase price. The overstated amortization charges are the result of the Company incorrectly calculating the amount of purchase related in-process research and development costs and intangibles amortization. The deferred tax
adjustments resulted from the finalization of the deferred income tax analysis associated with the Ulead purchase.

The purpose of the restatement is to
correctly reflect such changes, including but not limited to the computation of goodwill, other purchased intangible assets, deferred tax assets and liabilities, minority interest, and several expense items. The effect of the restatement is to
decrease total assets as of September 30, 2005 by $9.2 million and to increase the Companys net income for the three and nine month periods ended September 30, 2005 by $137,000 and $2.4 million, respectively. Additional detail
regarding the restatement is included in Note 2 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Amendment No. 1 on Form 10-Q/A.

Pursuant to SEC Rule 12b-15, this Form 10-Q/A sets forth the complete text of each item of Form 10-Q listed above as amended, and includes as Exhibits 31 and 32 new
certifications by the Chief Executive Officer and Chief Financial Officer.

In order to preserve the nature and character of the disclosures set forth in
such items as originally filed, this Amendment No. 1 does not reflect events occurring after the filing of the original Quarterly Report on Form 10-Q on November 14, 2005, or modify or update the disclosures presented in the original
Quarterly Report on Form 10-Q, except to reflect the revisions as described above. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made subsequent to the filing of the original Form 10-Q, including any amendments to
those filings.

INTERVIDEO, INC.

TABLE OF CONTENTS



|                              |  |                                                                                                                                                             |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                                             |  | Page
|PART I.
FINANCIAL INFORMATION |  |                                                                                                                                                            
|                              |  |                                                                                                                                                            
|Item 1.                       |  | Financial Statements:                                                                                                                                       |  |     
|                              |  | (a) Condensed Consolidated Balance Sheets at September 30, 2005 (restated and unaudited, see Note 2) and December 31, 2004                                  |  | 3   
|                              |  | (b) Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2005 and 2004 (restated and unaudited, see Note 2) |  | 4   
|                              |  | (c) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (restated and unaudited, see Note 2)              |  | 5   
|                              |  | (d) Notes to Condensed Consolidated Financial Statements (restated and unaudited)                                                                           |  | 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                                                                                                  |  | 45  
|                              |  |                                                                                                                                                            
|Item 4.                       |  | Controls and Procedures                                                                                                                                     |  | 46  
|                              | 
|PART II.
OTHER INFORMATION    |  |                                                                                                                                                            
|                              |  |                                                                                                                                                            
|Item 1.                       |  | Legal Proceedings                                                                                                                                           |  | 48  
|                              |  |                                                                                                                                                            
|Item 2.                       |  | Unregistered sales of equity securities and use of proceeds                                                                                                 |  | 48  
|                              |  |                                                                                                                                                            
|Item 6.                       |  | Exhibits                                                                                                                                                    |  | 49  
|                              | 
|Signatures                    |  | 50                                                                                                                                                         



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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 per share amounts)



|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ------- | - | -------------------- | - | ------- | -
|                                                                                                                         |  | September 30,2005 Restated(See Note 2) |         |   | December 31,2004 (1) |  
|ASSETS                                                                                                                   |  |                                        |         |   |                      |   |         |  
|Current assets:                                                                                                          |  |                                        |         |   |                      |   |         |  
|Cash and cash equivalents                                                                                                |  | $                                      | 31,384  |   |                      | $ | 27,410  |  
|Short-term investments                                                                                                   |  |                                        | 40,935  |   |                      |   | 47,177  |  
|Accounts receivable, net of allowance for doubtful accounts of $553 and $215, respectively                               |  |                                        | 13,307  |   |                      |   | 5,660   |  
|Deferred tax assets                                                                                                      |  |                                        | 723     |   |                      |   | 256     |  
|Inventory                                                                                                                |  |                                        | 2,298   |   |                      |   | 444     |  
|Held for sale assets                                                                                                     |  |                                        | 19,611  |   |                      |   |        |  
|Prepaid expenses and other current assets                                                                                |  |                                        | 3,809   |   |                      |   | 2,136   |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|Total current assets                                                                                                     |  |                                        | 112,067 |   |                      |   | 83,083  |  
|                                                                                                                         |  |                                       
|Property and equipment, net                                                                                              |  |                                        | 3,605   |   |                      |   | 2,606   |  
|Goodwill                                                                                                                 |  |                                        | 1,018   |   |                      |   | 1,018   |  
|Other purchased intangible assets                                                                                        |  |                                        | 7,449   |   |                      |   | 83      |  
|Deferred tax assets                                                                                                      |  |                                        | 4,718   |   |                      |   | 5,446   |  
|Other assets                                                                                                             |  |                                        | 4,383   |   |                      |   | 9,539   |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|Total assets                                                                                                             |  | $                                      | 133,240 |   |                      | $ | 101,775 |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  |                                        |         |   |                      |   |         |  
|Current liabilities:                                                                                                     |  |                                        |         |   |                      |   |         |  
|Accounts payable                                                                                                         |  | $                                      | 2,634   |   |                      | $ | 1,098   |  
|Accrued liabilities                                                                                                      |  |                                        | 17,445  |   |                      |   | 13,462  |  
|Deferred revenue                                                                                                         |  |                                        | 8,533   |   |                      |   | 4,002   |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|Total current liabilities                                                                                                |  |                                        | 28,612  |   |                      |   | 18,562  |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|Long term liabilities:                                                                                                   |  |                                        |         |   |                      |   |         |  
|Deferred tax liabilities                                                                                                 |  |                                        |        |   |                      |   |        |  
|Other long term liabilities                                                                                              |  |                                        | 1,407   |   |                      |   |        |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|                                                                                                                         |  |                                        | 1,407   |   |                      |   |        |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|Minority interest                                                                                                        |  |                                        | 19,285  |   |                      |   |        |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|Stockholders equity:                                                                                                    |  |                                        |         |   |                      |   |         |  
|Common stock, $0.001 par value: 150,000 shares authorized; 13,962 and 13,661 shares issued and outstanding, respectively |  |                                        | 14      |   |                      |   | 14      |  
|Additional paid-in capital                                                                                               |  |                                        | 74,890  |   |                      |   | 76,498  |  
|Notes receivable from stockholders                                                                                       |  |                                        | (570    | ) |                      |   | (830    | )
|Deferred stock-based compensation                                                                                        |  |                                        | (8      | ) |                      |   | (95     | )
|Accumulated other comprehensive income                                                                                   |  |                                        | (263    | ) |                      |   | 1,121   |  
|Retained earnings                                                                                                        |  |                                        | 9,873   |   |                      |   | 6,505   |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|Total stockholders equity                                                                                               |  |                                        | 83,936  |   |                      |   | 83,213  |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  
|Total liabilities and stockholders equity                                                                               |  | $                                      | 133,240 |   |                      | $ | 101,775 |  
|                                                                                                                         |  |                                        |         |   |                      |   |         |  

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|(1) | December 31, 2004 financials are obtained from audited financials in the 2004 10-K
|--- | ----------------------------------------------------------------------------------

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.

PART 1  FINANCIAL INFORMATION

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

(unaudited)



|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ------------------------ |  | - | ------ | - |  | - | ------ | -
|                                                           |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                           |  | 2005Restated(See Note 2)        |        |   | 2004                           |   |        | 2005Restated(See Note 2) |  |   | 2004   |  
|Revenue                                                    |  | $                               | 29,002 |   |                                | $ | 18,510 |                          |  | $ | 78,512 |   |  | $ | 54,035 |  
|Cost of revenue                                            |  |                                 | 9,330  |   |                                |   | 8,245  |                          |  |   | 28,860 |   |  |   | 23,798 |  
|Amortization of intangible assets                          |  |                                 | 324    |   |                                |   | 50     |                          |  |   | 661    |   |  |   | 150    |  
|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Gross profit                                               |  |                                 | 19,348 |   |                                |   | 10,215 |                          |  |   | 48,991 |   |  |   | 30,087 |  
|                                                           |  |                                 |        |  
|Operating expenses:                                        |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Research and development                                   |  |                                 | 6,272  |   |                                |   | 2,380  |                          |  |   | 14,709 |   |  |   | 7,276  |  
|Sales and marketing                                        |  |                                 | 5,367  |   |                                |   | 2,299  |                          |  |   | 13,424 |   |  |   | 7,771  |  
|General and administrative                                 |  |                                 | 4,019  |   |                                |   | 3,085  |                          |  |   | 10,849 |   |  |   | 6,764  |  
|Acquired in-process research and development               |  |                                 |       |   |                                |   |       |                          |  |   | 2,574  |   |  |   |       |  
|Stock-based compensation(1)                                |  |                                 | 3      |   |                                |   | 77     |                          |  |   | 70     |   |  |   | 226    |  
|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Total operating expenses                                   |  |                                 | 15,661 |   |                                |   | 7,841  |                          |  |   | 41,626 |   |  |   | 22,037 |  
|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Income from operations                                     |  |                                 | 3,687  |   |                                |   | 2,374  |                          |  |   | 7,365  |   |  |   | 8,050  |  
|                                                           |  |                                 |        |  
|Other income, net of expenses                              |  |                                 | 831    |   |                                |   | 211    |                          |  |   | 119    |   |  |   | 645    |  
|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Income before income taxes                                 |  |                                 | 4,518  |   |                                |   | 2,585  |                          |  |   | 7,484  |   |  |   | 8,695  |  
|                                                           |  |                                 |        |  
|Provision for income taxes                                 |  |                                 | (2,205 | ) |                                |   | (1,275 | )                        |  |   | (4,636 | ) |  |   | (3,652 | )
|                                                           |  |                                 |        |  
|Minority Interest                                          |  |                                 | 224    |   |                                |   |       |                          |  |   | 520    |   |  |   |       |  
|                                                           |  |                                 |        |  
|Net income                                                 |  | $                               | 2,537  |   |                                | $ | 1,310  |                          |  | $ | 3,368  |   |  | $ | 5,043  |  
|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Net income per share:                                      |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Basic                                                      |  | $                               | 0.18   |   |                                | $ | 0.10   |                          |  | $ | 0.24   |   |  | $ | 0.38   |  
|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Diluted                                                    |  | $                               | 0.16   |   |                                | $ | 0.09   |                          |  | $ | 0.22   |   |  | $ | 0.33   |  
|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Number of shares used in net income per share calculation: |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Basic                                                      |  |                                 | 14,046 |   |                                |   | 13,436 |                          |  |   | 13,940 |   |  |   | 13,354 |  
|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  
|Diluted                                                    |  |                                 | 15,382 |   |                                |   | 15,274 |                          |  |   | 15,400 |   |  |   | 15,352 |  
|                                                           |  |                                 |        |   |                                |   |        |                          |  |   |        |   |  |   |        |  

---

|(1) | Stock-based compensation expense is allocated among the operating expense classifications as follows:
|--- | -----------------------------------------------------------------------------------------------------



|                                        |  |                                 |    |                                |      |   |      |  |      |    |  |   |    
|--------------------------------------- |  | ------------------------------- | -- | ------------------------------ | ---- | - | ---- |  | ---- | -- |  | - | ---
|                                        |  | Three months endedSeptember 30, |    | Nine months endedSeptember 30,
|                                        |  | 2005                            |    |                                | 2004 |   | 2005 |  | 2004
|Research and development                |  | $                               | 5  |                                |      | $ | 25   |  | $    | 28 |  | $ | 81 
|Sales and marketing                     |  |                                 | (7 | )                              |      |   | 24   |  |      | 17 |  |   | 39 
|General and administrative              |  |                                 | 5  |                                |      |   | 28   |  |      | 25 |  |   | 106
|                                        |  |                                 |    |                                |      |   |      |  |      |    |  |   |    
|Total stock-based compensation expenses |  | $                               | 3  |                                |      | $ | 77   |  | $    | 70 |  | $ | 226
|                                        |  |                                 |    |                                |      |   |      |  |      |    |  |   |    

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.

PART 1  FINANCIAL INFORMATION

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                  |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine months endedSeptember 30, |        
|                                                                                  |  | 2005Restated(See Note 1)       |         |   | 2004 |  
|Cash flows from operating activities:                                             |  |                                |         |   |      |   |         |  
|Net income                                                                        |  | $                              | 3,368   |   |      | $ | 5,043   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                | 1,927   |   |      |   | 885     |  
|Deferred taxes                                                                    |  |                                |         |   |      |   | (71     | )
|Acquired in-process research and development                                      |  |                                | 2,574   |   |      |   |        |  
|Minority interest in loss                                                         |  |                                | (520    | ) |      |   |        |  
|Non cash investment loss                                                          |  |                                | 1,178   |   |      |   |        |  
|Stock-based compensation                                                          |  |                                | 70      |   |      |   | 226     |  
|Provision for doubtful accounts                                                   |  |                                | 181     |   |      |   | 115     |  
|Loss from disposal of property and equipment                                      |  |                                | 109     |   |      |   | 28      |  
|Interest income on notes receivable from stockholders                             |  |                                | (22     | ) |      |   | (30     | )
|Equity in net loss of long-term investments                                       |  |                                |        |   |      |   | 35      |  
|Changes in operating assets and liabilities:                                      |  |                                |         |   |      |   |         |  
|Accounts receivable                                                               |  |                                | (1,818  | ) |      |   | (2,624  | )
|Prepaid expenses and other current assets                                         |  |                                | (928    | ) |      |   | (593    | )
|Other assets                                                                      |  |                                | (1,657  | ) |      |   | 160     |  
|Accounts payable                                                                  |  |                                | 627     |   |      |   | (74     | )
|Deferred revenue                                                                  |  |                                | 4,152   |   |      |   | (40     | )
|Accrued liabilities and income taxes payable                                      |  |                                | (1,243  | ) |      |   | 2,018   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                | 7,998   |   |      |   | 5,078   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                             |  |                                |         |   |      |   |         |  
|Purchases of property and equipment                                               |  |                                | (1,258  | ) |      |   | (931    | )
|Purchases of short-term investments                                               |  |                                | (25,851 | ) |      |   | (71,758 | )
|Proceeds from maturities of short-term investments                                |  |                                | 46,057  |   |      |   | 56,265  |  
|Acquisition of Ulead, net of cash acquired of $13.6 million                       |  |                                | (22,744 | ) |      |   | (1,662  | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                                | (3,796  | ) |      |   | (18,086 | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash flows from financing activities:                                             |  |                                |         |   |      |   |         |  
|Proceeds from issuance of common stock under stock option plans                   |  |                                | 3,244   |   |      |   | 1,271   |  
|Proceeds from repayment of notes receivable                                       |  |                                | 282     |   |      |   | 113     |  
|Payment for repurchased stock                                                     |  |                                | (3,857  | ) |      |   | (2,596  | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash used in financing activities                                             |  |                                | (331    | ) |      |   | (1,212  | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Effect of change in exchange rates on cash and cash equivalents                   |  |                                | 103     |   |      |   | 9       |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                                | 3,974   |   |      |   | (14,211 | )
|                                                                                  |  |                               
|Cash and cash equivalents, beginning of period                                    |  |                                | 27,410  |   |      |   | 46,875  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                              | 31,384  |   |      | $ | 32,664  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Supplementary disclosure:                                                         |  |                                |         |   |      |   |         |  
|Income tax payments, net of refunds                                               |  | $                              | 3,267   |   |      | $ | 1,991   |  

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.

PART 1  FINANCIAL INFORMATION

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 has operations in the United States, Taiwan, Japan, China and Germany. A substantial portion of the Companys revenue is derived from the sale of software licenses to OEMs, which install its software
onto PCs prior to delivery to customers. The Company also sells software through retail channels and directly to end users through our 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.

The Company acquired a controlling interest in Ulead Systems, Inc. (Ulead) on April 20, 2005 which has expanded the products of the Company to include
PhotoImpact, VideoStudio, DVD Movie Factory, DVD Workshop and Media Studio Pro. The Companys software is bundled with products sold by PC OEMs. The Company sells its products to PC OEMs, CE manufacturers and PC peripherals manufacturers
worldwide. In addition, the Company sells products through retail channels and directly to consumers through its websites. InterVideos acquisition of Ulead has allowed the Company to expand these channels with a broader range of product
offerings and the combined marketing efforts of the two companies.

Note 2. Basis of presentation and restatement:

The accompanying 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. All international subsidiaries of the Company except for Ulead have established a month end cut-off period that is three working days prior to the end of any given month.

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America 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 generally accepted accounting principles for
annual financial statements.

The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2004, and notes thereto, included in InterVideos 2004 Annual Report on Form 10-K.

Restatement

The Company has restated its Unaudited Condensed Consolidated Financial Statements as of
September 30, 2005 including the Condensed Consolidated Balance Sheet as of September 30, 2005, the Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2005, the Condensed Consolidated
Statements of Cash Flows for the nine month period ended September 30, 2005 and the related Notes to Condensed Consolidated Financial Statements.

The
restatement on this Form 10-Q/A was due to the misapplication of certain complex accounting principles to Intervideos purchase of Ulead Systems, Inc. (Ulead) with non-controlling interest and other adjustments pertaining to
amortization charges of intangible assets and deferred taxes. The misapplication of accounting principles concern the manner in which the Company accounted for the purchase of its controlling interest in Ulead in April 2005. Ulead is a publicly
traded company in Taiwan and a leading developer of innovative video, imaging and DVD authoring software. InterVideos review of its application of purchase accounting under Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, and the completion of its purchase price allocation has resulted in the determination to apply the partial goodwill method (or parent company theory) instead of the previously applied full goodwill method (or entity theory).
The application of the partial goodwill method requires the Company to record its share of Uleads assets, liabilities and resulting intangible assets, including goodwill, at the proportionate share acquired based upon the purchase price. The
overstated amortization charges are the result of the Company incorrectly calculating the amount of purchase related research and development costs and intangibles amortization. The deferred tax adjustments resulted from the finalization of the
deferred income tax analysis associated with the Ulead purchase.

The effect of the restatement is to decrease total assets as of September 30, 2005
by $9.2 million and to increase the Companys net income for the three and nine month periods ended September 30, 2005 by $137,000 and $2.4 million, respectively. The following table shows the Condensed Consolidated Statements of Income
for the three and nine month periods ended September 30, 2005 and the Condensed Consolidated Balance Sheet as of September 30, 2005 as previously reported and the adjustments made to arrive at the restated Condensed Consolidated Statements
of Income for the three and nine month periods ended September 30, 2005 and the Condensed Consolidated Balance Sheet as of September 30, 2005. The Adjustments column of the table reflects changes in accounts including, but not
limited to, amortization of intangible assets and general and administrative expenses of the Condensed Consolidated Statement of Income, and other purchased intangible assets, goodwill, deferred tax liabilities and minority interest of the Condensed
Consolidated Balance Sheet, due to the Companys application of the partial goodwill method under SFAS No. 141 and other purchase accounting related adjustments pertaining to amortization charges of intangible assets and deferred taxes.
The restated financial and other information included in this Form 10-Q/A should be read together with the Form 10-K.



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##### Table of Contents

|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ------- | - | ----------- | - | ------ | ------------------------------------------ |  | - | ------- | -
|                                                                                                                         |  | As PreviouslyReportedSeptember 30,2005 |         |   | Adjustments |   |        | As RestatedSeptember 30, 2005 (See Note 2) | 
|ASSETS                                                                                                                   |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Current assets:                                                                                                          |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Cash and cash equivalents                                                                                                |  | $                                      | 31,384  |   |             | $ |       |                                            |  | $ | 31,384  |  
|Short-term investments                                                                                                   |  |                                        | 40,935  |   |             |   |       |                                            |  |   | 40,935  |  
|Accounts receivable, net of allowance for doubtful accounts of $553 and $215, respectively                               |  |                                        | 13,307  |   |             |   |       |                                            |  |   | 13,307  |  
|Deferred tax assets                                                                                                      |  |                                        | 723     |   |             |   |       |                                            |  |   | 723     |  
|Inventory                                                                                                                |  |                                        | 2,298   |   |             |   |       |                                            |  |   | 2,298   |  
|Held for sale assets                                                                                                     |  |                                        | 19,500  |   |             |   | 111    |                                            |  |   | 19,611  |  
|Prepaid expenses and other current assets                                                                                |  |                                        | 3,809   |   |             |   |       |                                            |  |   | 3,809   |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Total current assets                                                                                                     |  |                                        | 111,956 |   |             |   | 111    |                                            |  |   | 112,067 |  
|                                                                                                                         |  |                                        |        
|Property and equipment, net                                                                                              |  |                                        | 3,792   |   |             |   | (187   | )                                          |  |   | 3,605   |  
|Goodwill                                                                                                                 |  |                                        | 2,452   |   |             |   | (1,434 | )                                          |  |   | 1,018   |  
|Other purchased intangible assets                                                                                        |  |                                        | 13,918  |   |             |   | (6,469 | )                                          |  |   | 7,449   |  
|Deferred tax assets                                                                                                      |  |                                        | 5,683   |   |             |   | (965   | )                                          |  |   | 4,718   |  
|Other assets                                                                                                             |  |                                        | 4,670   |   |             |   | (287   | )                                          |  |   | 4,383   |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Total assets                                                                                                             |  | $                                      | 142,471 |   |             | $ | (9,231 | )                                          |  | $ | 133,240 |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Current liabilities:                                                                                                     |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Accounts payable                                                                                                         |  | $                                      | 2,634   |   |             |   |       |                                            |  | $ | 2,634   |  
|Accrued liabilities                                                                                                      |  |                                        | 17,282  |   |             |   | 163    |                                            |  |   | 17,445  |  
|Deferred revenue                                                                                                         |  |                                        | 8,194   |   |             |   | 339    |                                            |  |   | 8,533   |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Total current liabilities                                                                                                |  |                                        | 28,110  |   |             |   | 502    |                                            |  |   | 28,612  |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Long term liabilities:                                                                                                   |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Deferred tax liabilities                                                                                                 |  |                                        | 6,228   |   |             |   | (6,228 | )                                          |  |   |        |  
|Other long term liabilities                                                                                              |  |                                        | 1,407   |   |             |   |       |                                            |  |   | 1,407   |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|                                                                                                                         |  |                                        | 7,635   |   |             |   | (6,228 | )                                          |  |   | 1,407   |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Minority interest                                                                                                        |  |                                        | 23,949  |   |             |   | (4,664 | )                                          |  |   | 19,285  |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Stockholders equity:                                                                                                    |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Common stock, $0.001 par value: 150,000 shares authorized; 13,962 and 13,661 shares issued and outstanding, respectively |  |                                        | 14      |   |             |   |       |                                            |  |   | 14      |  
|Additional paid-in capital                                                                                               |  |                                        | 74,890  |   |             |   |       |                                            |  |   | 74,890  |  
|Notes receivable from stockholders                                                                                       |  |                                        | (570    | ) |             |   |       |                                            |  |   | (570    | )
|Deferred stock-based compensation                                                                                        |  |                                        | (8      | ) |             |   |       |                                            |  |   | (8      | )
|Accumulated other comprehensive income (loss)                                                                            |  |                                        | 1,025   |   |             |   | (1,288 | )                                          |  |   | (263    | )
|Retained earnings                                                                                                        |  |                                        | 7,426   |   |             |   | 2,447  |                                            |  |   | 9,873   |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Total stockholders equity                                                                                               |  |                                        | 82,777  |   |             |   | 1,159  |                                            |  |   | 83,936  |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  
|Total liabilities and stockholders equity                                                                               |  | $                                      | 142,471 |   |             | $ | (9,231 | )                                          |  | $ | 133,240 |  
|                                                                                                                         |  |                                        |         |   |             |   |        |                                            |  |   |         |  



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##### Table of Contents

|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|---------------------------------------------------------- |  | ----------------------------------------------------- | ------ | - | ----------- | - | ------ | ------------------------------------------- |  | - | ------ | -
|                                                           |  | As PreviouslyReported3-months EndedSeptember 30,2005  |        |   | Adjustments |   |        | As Restated3-months EndedSeptember 30,2005  | 
|Revenue                                                    |  | $                                                     | 29,002 |   |             | $ |       |                                             |  | $ | 29,002 |  
|Cost of revenue                                            |  |                                                       | 9,319  |   |             |   | 11     |                                             |  |   | 9,330  |  
|Amortization of intangible assets                          |  |                                                       | 611    |   |             |   | (287   | )                                           |  |   | 324    |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Gross profit                                               |  |                                                       | 19,072 |   |             |   | 276    |                                             |  |   | 19,348 |  
|                                                           |  |                                                       |       
|Operating expenses:                                        |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Research and development                                   |  |                                                       | 6,272  |   |             |   |       |                                             |  |   | 6,272  |  
|Sales and marketing                                        |  |                                                       | 5,367  |   |             |   |       |                                             |  |   | 5,367  |  
|General and administrative                                 |  |                                                       | 4,025  |   |             |   | (6     | )                                           |  |   | 4,019  |  
|Acquired in-process research and development               |  |                                                       |       |   |             |   |       |                                             |  |   |       |  
|Stock-based compensation(1)                                |  |                                                       | 3      |   |             |   |       |                                             |  |   | 3      |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Total operating expenses                                   |  |                                                       | 15,667 |   |             |   | (6     | )                                           |  |   | 15,661 |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Income from operations                                     |  |                                                       | 3,405  |   |             |   | 282    |                                             |  |   | 3,687  |  
|                                                           |  |                                                       |       
|Other income, net of expenses                              |  |                                                       | 831    |   |             |   |       |                                             |  |   | 831    |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Income before income taxes                                 |  |                                                       | 4,236  |   |             |   | 282    |                                             |  |   | 4,518  |  
|                                                           |  |                                                       |       
|Provision for income taxes                                 |  |                                                       | (2,060 | ) |             |   | (145   | )                                           |  |   | (2,205 | )
|                                                           |  |                                                       |       
|Minority Interest                                          |  |                                                       | 224    |   |             |   |       |                                             |  |   | 224    |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Net income                                                 |  | $                                                     | 2,400  |   |             | $ | 137    |                                             |  | $ | 2,537  |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Net income per share:                                      |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Basic                                                      |  | $                                                     | 0.17   |   |             |   |        |                                             |  | $ | 0.18   |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Diluted                                                    |  | $                                                     | 0.16   |   |             |   |        |                                             |  | $ | 0.16   |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Number of shares used in net income per share calculation: |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Basic                                                      |  |                                                       | 14,046 |   |             |   |        |                                             |  |   | 14,046 |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Diluted                                                    |  |                                                       | 15,382 |   |             |   |        |                                             |  |   | 15,382 |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|                                                           |  |                                                       |       
|                                                           |  | As PreviouslyReported 9-months EndedSeptember 30,2005 |        |   | Adjustments |   |        | As Restated 9-months EndedSeptember 30,2005 | 
|Revenue                                                    |  | $                                                     | 78,512 |   |             | $ |       |                                             |  | $ | 78,512 |  
|Cost of revenue                                            |  |                                                       | 28,849 |   |             |   | 11     |                                             |  |   | 28,860 |  
|Amortization of intangible assets                          |  |                                                       | 1,176  |   |             |   | (515   | )                                           |  |   | 661    |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Gross profit                                               |  |                                                       | 48,487 |   |             |   | 504    |                                             |  |   | 48,991 |  
|                                                           |  |                                                       |       
|Operating expenses:                                        |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Research and development                                   |  |                                                       | 14,709 |   |             |   |       |                                             |  |   | 14,709 |  
|Sales and marketing                                        |  |                                                       | 13,424 |   |             |   |       |                                             |  |   | 13,424 |  
|General and administrative                                 |  |                                                       | 10,860 |   |             |   | (11    | )                                           |  |   | 10,849 |  
|Acquired in-process research and development               |  |                                                       | 4,800  |   |             |   | (2,226 | )                                           |  |   | 2,574  |  
|Stock-based compensation(1)                                |  |                                                       | 70     |   |             |   |       |                                             |  |   | 70     |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Total operating expenses                                   |  |                                                       | 43,863 |   |             |   | (2,237 | )                                           |  |   | 41,626 |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Income from operations                                     |  |                                                       | 4,624  |   |             |   | 2,741  |                                             |  |   | 7,365  |  
|                                                           |  |                                                       |       
|Other income, net of expenses                              |  |                                                       | 119    |   |             |   |       |                                             |  |   | 119    |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Income before income taxes                                 |  |                                                       | 4,743  |   |             |   | 2,741  |                                             |  |   | 7,484  |  
|                                                           |  |                                                       |       
|Provision for income taxes                                 |  |                                                       | (4,342 | ) |             |   | (294   | )                                           |  |   | (4,636 | )
|Minority Interest                                          |  |                                                       | 520    |   |             |   |       |                                             |  |   | 520    |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Net income                                                 |  | $                                                     | 921    |   |             | $ | 2,447  |                                             |  | $ | 3,368  |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Net income per share:                                      |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Basic                                                      |  | $                                                     | 0.07   |   |             |   |        |                                             |  | $ | 0.24   |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Diluted                                                    |  | $                                                     | 0.06   |   |             |   |        |                                             |  | $ | 0.22   |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Number of shares used in net income per share calculation: |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Basic                                                      |  |                                                       | 13,940 |   |             |   |        |                                             |  |   | 13,940 |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  
|Diluted                                                    |  |                                                       | 15,400 |   |             |   |        |                                             |  |   | 15,400 |  
|                                                           |  |                                                       |        |   |             |   |        |                                             |  |   |        |  

Note 3. Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company based its estimates and
assumptions on historical experience and on various other assumptions believed to be applicable and evaluates them on an on-going basis to ensure they remain reasonable under current conditions. Actual results could differ materially from these
estimates.

Note 4. Revenue recognition

The
Companys revenue is primarily derived from fees paid under software licenses granted to PC OEMs, CE manufacturers, PC peripherals manufacturers, retail distributors, retail customers and directly to end users or businesses.



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INTERVIDEO, INC.

The Company records revenue generated from these sales in accordance with SOP 97-2, Software Revenue Recognition, as amended, 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. Deferred revenue consists of amounts billed to or collected from customers for products and services that have not met the criteria for revenue
recognition.

Typically, the Companys OEM customers do not have the right to claim a credit or refund for returns from an OEMs sales channel
partners or end customers back to the OEM. However, in the few instances where InterVideo has granted its OEM customers with the right to claim a refund or credit to a certain capped percentage of the contract amount, the Company defers revenue
based on the contractual return cap until it is able to establish a reasonable returns estimate based on historical return activity, that is specific to the respective sales channel, product line or country.

Certain distributors and retailers, primarily in Japan, have limited rights to return products that were purchased in the previous six months. These distributors have no
rights to product upgrades. The Company generally recognizes revenue, net of contractually obligated return rights and any additional required rebate or pricing reserves, upon completion of shipment to these distributors and retailers. Other
distributors and retailers, primarily in the United States and Europe, have unlimited rights of return. The Company generally recognizes revenue upon receipt of evidence that the distributors and retailers have sold our products through to end
users, less any required rebate or pricing reserves. Certain distributors and retailers of Ulead, primarily in Japan, have unlimited rights of return. For these customers, the Company has established a returns reserve based on a historical return
rates.

Certain customer agreements require payment by the Company of marketing development funds, co-operative advertising fees, rebates or similar
charges. The Company accounts for such fees in accordance with Emerging Issues Task Force (EITF) 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 the Company records these transactions as marketing expense. Commissions paid to third-party sales representatives are included in sales and marketing expenses.

Note 5. Net income per share

Basic net income per 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 share is calculated by dividing the net income for the period by the weighted average 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 share is as follows (unaudited, in thousands, except per
share amounts):



|                                                         |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  | ------------------------------- | ------ | ---- | ------------------------------ | ------ | -------------- |  | - | ------ | - |  | - | ------ | -
|                                                         |  | Three months endedSeptember 30, |        |      | Nine months endedSeptember 30, |       
|                                                         |  | 2005(Restated)                  |        | 2004 |                                |        | 2005(Restated) |  |   | 2004   |  
|Numerator:                                               |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Net income                                               |  | $                               | 2,537  |      | $                              | 1,310  |                |  | $ | 3,368  |   |  | $ | 5,043  |  
|                                                         |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Denominator:                                             |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Basic:                                                   |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding               |  |                                 | 14,046 |      |                                | 13,468 |                |  |   | 13,943 |   |  |   | 13,398 |  
|Less: weighted average shares subject to repurchase      |  |                                 |       |      |                                | (32    | )              |  |   | (3     | ) |  |   | (44    | )
|                                                         |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Denominator for basic calculation                        |  |                                 | 14,046 |      |                                | 13,436 |                |  |   | 13,940 |   |  |   | 13,354 |  
|                                                         |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Net income per share  Basic                             |  | $                               | 0.18   |      | $                              | 0.10   |                |  | $ | 0.24   |   |  | $ | 0.38   |  
|                                                         |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Diluted:                                                 |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding               |  |                                 | 14,046 |      |                                | 13,468 |                |  |   | 13,943 |   |  |   | 13,398 |  
|Weighted average dilutive effect of common stock options |  |                                 | 1,336  |      |                                | 1,806  |                |  |   | 1,457  |   |  |   | 1,954  |  
|                                                         |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Denominator for diluted calculation                      |  |                                 | 15,382 |      |                                | 15,274 |                |  |   | 15,400 |   |  |   | 15,352 |  
|                                                         |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  
|Net income per share  Diluted                           |  | $                               | 0.16   |      | $                              | 0.09   |                |  | $ | 0.22   |   |  | $ | 0.33   |  
|                                                         |  |                                 |        |      |                                |        |                |  |   |        |   |  |   |        |  



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INTERVIDEO, INC.

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 endedSeptember 30, |  | Nine months endedSeptember 30,
|                                               |  | 2005                            |  | 2004                           |  | 2005 |  | 2004
|Antidilutive options to purchase common shares |  | 1,012                           |  | 926                            |  | 894  |  | 840 

Note 6. Stock-based compensation

The Company accounts for stock-based compensation to employees under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) and related interpretations, and the disclosure requirements SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an amendment of SFAS 123, Accounting for
Stock-Based Compensation. No stock-based compensation expense is recorded for options granted for which the exercise price equals or exceeds the market price of the underlying stock on the date of grant in accordance with the provisions of APB
25.

The following table illustrates the effect on net income and net income per share had the Company applied the fair value recognition provisions of
SFAS 123 to stock-based compensation to employees.



|                                                                                                                |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | -------------- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|(unaudited; in thousands, except per share amounts)                                                             |  | 2005(Restated)                  |        |   | 2004                           |   |        | 2005(Restated) |  |   | 2004   |  
|Net income, as reported                                                                                         |  | $                               | 2,537  |   |                                | $ | 1,310  |                |  | $ | 3,368  |   |  | $ | 5,043  |  
|Add:                                                                                                            |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  
|Stock-based employee compensation expenses included in reported net income, net of related tax effects          |  |                                 | 3      |   |                                |   | 77     |                |  |   | 70     |   |  |   | 226    |  
|Deduct:                                                                                                         |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  
|Total stock-based employee compensation expenses determined under fair value method, net of related tax effects |  |                                 | (1,205 | ) |                                |   | (1,628 | )              |  |   | (3,590 | ) |  |   | (4,123 | )
|                                                                                                                |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  
|Pro forma net income (loss)                                                                                     |  | $                               | 1,335  |   |                                | $ | (241   | )              |  | $ | (152   | ) |  | $ | 1,146  |  
|                                                                                                                |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  
|Net income (loss) per share                                                                                     |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  
|Basic  as reported                                                                                             |  | $                               | 0.18   |   |                                | $ | 0.10   |                |  | $ | 0.24   |   |  | $ | 0.38   |  
|                                                                                                                |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  
|Basic  pro forma                                                                                               |  | $                               | 0.10   |   |                                | $ | (0.02  | )              |  | $ | (0.01  | ) |  | $ | 0.09   |  
|                                                                                                                |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  
|Diluted  as reported                                                                                           |  | $                               | 0.16   |   |                                | $ | 0.09   |                |  | $ | 0.22   |   |  | $ | 0.33   |  
|                                                                                                                |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  
|Diluted  pro forma                                                                                             |  | $                               | 0.09   |   |                                | $ | (0.02  | )              |  | $ | (0.01  | ) |  | $ | 0.07   |  
|                                                                                                                |  |                                 |        |   |                                |   |        |                |  |   |        |   |  |   |        |  

The weighted average fair value of options granted to employees in the three and nine months ended
September 30, 2005 and 2004 are summarized in the following table, and were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions (unaudited):



|                                                            |  |                                 |         |                                 |   |         |  |      |              |  |   |             
|----------------------------------------------------------- |  | ------------------------------- | ------- | ------------------------------- | - | ------- |  | ---- | ------------ |  | - | ------------
|                                                            |  | Three months endedSeptember 30, |         | Nine months ended September 30,
|                                                            |  | 2005                            |         | 2004                            |   | 2005    |  | 2004
|Weighted average fair value of options granted to employees |  | $                               | 9.69    |                                 | $ | 7.91    |  | $    | 8.32         |  | $ | 10.28       
|                                                            |  |                                 |         |                                
|Black-Scholes model assumptions:                            |  |                                 |         |                                 |   |         |  |      |              |  |   |             
|Risk-free interest rate                                     |  |                                 | 3.98%   |                                 |   | 2.92%   |  |      | 3.98%-3.61 % |  |   | 2.97%-2.17 %
|Expected life of the option                                 |  |                                 | 4 years |                                 |   | 4 years |  |      | 4 years      |  |   | 4 years     
|Dividend yield                                              |  |                                 | 0%      |                                 |   | 0%      |  |      | 0%           |  |   | 0%          
|Volatility                                                  |  |                                 | 80.0%   |                                 |   | 87.5%   |  |      | 80.0%        |  |   | 87.5%       



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INTERVIDEO, INC.

The Black-Scholes option valuation model requires the input of subjective assumptions, therefore, the resulting pro forma compensation cost may not be representative of that to be expected in future periods. The
Company used the minimum value method to determine the fair value of options granted prior to its initial filing of a registration statement for its Initial Public Offering (IPO) in January 2002. This method does not consider the
expected volatility of the underlying stock, and is only available to non-public entities. Accordingly, the Company has used an estimated volatility factor of 90% for grants issued subsequent to the initial filing date of the registration statement
and up to the completion of the Companys IPO in July 2003. Subsequent to the IPO in July 2003, the volatility factor has been adjusted based on the stock price for the Company and its competitors within the industry.

Note 7. Other income, net of expense

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



|                              |  |                                 |     |      |                                |     |      |  |   |      |   |  |   |     |  
|----------------------------- |  | ------------------------------- | --- | ---- | ------------------------------ | --- | ---- |  | - | ---- | - |  | - | --- | -
|                              |  | Three months endedSeptember 30, |     |      | Nine months endedSeptember 30, |    
|                              |  | 2005                            |     | 2004 |                                |     | 2005 |  |   | 2004 |  
|Interest income               |  | $                               | 276 |      | $                              | 224 |      |  | $ | 822  |   |  | $ | 584 |  
|Equity investment gain (loss) |  |                                 | 65  |      |                                | (35 | )    |  |   | (921 | ) |  |   | (52 | )
|Currency gain (loss)          |  |                                 | 333 |      |                                | (7  | )    |  |   | 5    |   |  |   | (27 | )
|Other                         |  |                                 | 157 |      |                                | 29  |      |  |   | 213  |   |  |   | 140 |  
|                              |  |                                 |     |      |                                |     |      |  |   |      |   |  |   |     |  
|Other income, net             |  | $                               | 831 |      | $                              | 211 |      |  | $ | 119  |   |  | $ | 645 |  
|                              |  |                                 |     |      |                                |     |      |  |   |      |   |  |   |     |  

Note 8. 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, 2005, the Company calculated its projected effective tax rate for the year ending December 31, 2005 to be 45% prior to the write-off of in-process research and development.
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, and foreign withholding taxes.

Note 9. 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, |  
|                                                                   |  | 2005(Restated)                   |       |   | 2004                            |   |       | 2005(Restated) |  |   | 2004   |  
|Net income                                                         |  | $                                | 2,537 |   |                                 | $ | 1,310 |                |  | $ | 3,368  |   |  | $ | 5,043 |  
|Other comprehensive income (loss):                                 |  |                                  |       |   |                                 |   |       |                |  |   |        |   |  |   |       |  
|Change in unrealized gain (loss) of available-for-sale investments |  |                                  | 5     |   |                                 |   | 89    |                |  |   | (1,189 | ) |  |   | (89   | )
|Change in cumulative translation adjustment                        |  |                                  | (303  | ) |                                 |   | (14   | )              |  |   | (196   | ) |  |   |      |  
|                                                                   |  |                                  |       |   |                                 |   |       |                |  |   |        |   |  |   |       |  
|Comprehensive income                                               |  | $                                | 2,239 |   |                                 | $ | 1,385 |                |  | $ | 1,983  |   |  | $ | 4,954 |  
|                                                                   |  |                                  |       |   |                                 |   |       |                |  |   |        |   |  |   |       |  



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INTERVIDEO, INC.

Note 10. Acquisition of Ulead Systems

On April 20, 2005, InterVideo and its wholly-owned subsidiary, InterVideo
Digital Technology Corp., acquired 33,284,395 shares of Ulead Systems, Inc. (Ulead) at 30 NT (US$0.95) per share pursuant to InterVideos previously-announced tender offer for the issued shares of Ulead and pursuant to stock
purchase agreements with Microtek International Inc. and certain other shareholders of Ulead. Also on April 20, 2005, InterVideo acquired an additional 1,000,000 shares of Ulead at a purchase price of 30 NT (US$0.95) per share through its
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 InterVideo purchased prior to the tender offer, InterVideo
now owns a total of 48,817,395 shares of Ulead, or approximately 63% of the issued shares of Ulead as of April 20, 2005, which were acquired for total cash payments of US$42.0 million.

We have included the financial results of Ulead in our consolidated financial statements beginning April 20, 2005, the date we acquired a majority interest in Ulead
(the Acquisition Date).

The acquisition has been accounted for using the purchase method of accounting in accordance with SFAS No.141,
Business Combinations. Assets acquired and liabilities assumed were recorded at their fair values as of April 20, 2005. The following summarizes the total purchase price for Ulead (unaudited, in thousands):



|                                   |  |            |       
|---------------------------------- |  | ---------- | ------
|                                   |  | (Restated)
|Cash consideration                 |  | $          | 42,012
|Estimated direct transaction costs |  |            | 843   
|                                   |  |            |       
|Total purchase price               |  | $          | 42,855
|                                   |  |            |       

Under the purchase method of accounting, the total estimated purchase price is allocated to Uleads net
tangible and identifiable intangible assets based on the book value as of April 20, 2005 and the step up value at the percentage of ownership interest acquired as set forth below. The excess of the fair value of the net assets to the extent of
the ownership interest acquired, over the purchase price equals the negative goodwill amount that has been allocated on a pro rata basis to certain of the acquired non-current assets. Based upon the estimated purchase price and review of the net
assets acquired and liabilities assumed, the preliminary price allocation is as follows (unaudited, in thousands):



|                                        |  |            |         |  
|--------------------------------------- |  | ---------- | ------- | -
|                                        |  | (restated) |        
|Current assets                          |  | $          | 36,854  |  
|Property, plant and equipment           |  |            | 20,556  |  
|Intangible assets                       |  |            | 7,942   |  
|In-process research and development     |  |            | 2,543   |  
|Other non-current assets                |  |            | 2,865   |  
|                                        |  |            |         |  
|Total assets                            |  |            | 70,760  |  
|                                        | 
|Current liabilities                     |  |            | (6,895  | )
|Long term liabilities                   |  |            | (1,852  | )
|Minority interest                       |  |            | (19,158 | )
|                                        |  |            |         |  
|Total liabilities and minority interest |  |            | (27,905 | )
|                                        |  |            |         |  
|Net assets:                             |  | $          | 42,855  |  
|                                        |  |            |         |  
|Total purchase price                    |  |            | 42,855  |  



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INTERVIDEO, INC.

Intangibles

The fair value of intangible assets was based, in part, on a valuation completed by
an independent third-party appraiser using both an income and a cost approach and estimates and assumptions provided by management when estimating the fair value. Their analysis was performed in accordance with SFAS 141 and other appropriate
accounting and valuation guidelines. The rates utilized to discount net cash flows to their present values were based on our weighted average cost of capital and the internal rate of return. The discount rates ranged from 25% to 50%. The following
table sets forth the components of intangible assets associated with the acquisition on April 20, 2005:



|                                                                 |  |                      |       |                                   |   |      |                                          |  |             |       |  |          
|---------------------------------------------------------------- |  | -------------------- | ----- | --------------------------------- | - | ---- | ---------------------------------------- |  | ----------- | ----- |  | ---------
|Intangible Assets (unaudited, in thousands) at approximately 63% |  | Fair Value(Restated) |       | AccumulatedAmortization(restated) |   |      | September 30,2005Net BookValue(restated) |  | Useful Life
|Existing technology  Photo, Video & DVD                         |  | $                    | 3,804 |                                   | $ | (269 | )                                        |  | $           | 3,535 |  | 5&6 years
|Customer contracts and related relationships                     |  |                      | 2,019 |                                   |   | (90  | )                                        |  |             | 1,929 |  | 8 years  
|Trade name                                                       |  |                      | 2,119 |                                   |   | (134 | )                                        |  |             | 1,985 |  | 6 years  
|                                                                 |  |                      |       |                                   |   |      |                                          |  |             |       |  |          
|Total intangible assets                                          |  | $                    | 7,942 |                                   | $ | (493 | )                                        |  | $           | 7,449 |  |          
|                                                                 |  |                      |       |                                   |   |      |                                          |  |             |       |  |          

Intangible assets are being amortized using the straight line method. The weighted average useful life of
such intangibles is estimated to be 6.3 years.

In-process research and development

In-process research and development (IPR&D) represents incomplete Ulead research and development projects that had not reached technological feasibility and had no
alternate future use as of the acquisition date. Technological feasibility is established when an enterprise has completed all planning, designing, coding and testing activities that are necessary to establish that a product can be produced to meet
its design specifications including functions, features, and technical performance requirements. The value assigned to IPR&D was determined by considering the importance of each project to our overall development plan, estimating costs to
develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value based on the percentage of completion of the
IPR&D projects. Purchased IPR&D relates primarily to projects associated with the development of Uleads new products which had not yet reached technological feasibility as of the acquisition date and have no alternative future use.

Deferred revenue

In connection
with the purchase price allocation, we have estimated the fair value of the support obligation to provide upgrades related to the deferred revenue assumed from Ulead in connection with the acquisition. We based our determination of the fair value of
the obligation, in part, on a valuation completed by an independent third party appraiser using estimates and assumptions provided by management. The estimated fair value of the support obligation was determined utilizing a cost build-up approach.
The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligation plus a normal profit margin. The estimated costs to fulfill the support obligation were based on the historical direct costs related to
providing the support services and costs associated with research and development. As a result, in allocating the acquisition purchase price, we recorded an adjustment to reduce the carrying value of Uleads April 20, 2005 deferred support
revenue from $1.9 million to $170,000 which represents our estimate of the fair value of the support obligation assumed.



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INTERVIDEO, INC.

Pro Forma Financial Information (unaudited)

Supplemental unaudited pro forma information reflecting the acquisition
of Ulead as if it occurred on January 1, 2004 is as follows (in thousands, except per share amounts):



|                             |  |                                 |        |                |   |        |  
|---------------------------- |  | ------------------------------- | ------ | -------------- | - | ------ | -
|                             |  | Nine months ended,September 30, |       
|                             |  | 2005(restated)                  |        | 2004(restated) |  
|Total revenue                |  | $                               | 87,927 |                | $ | 83,041 |  
|Net income                   |  | $                               | 3,643  |                | $ | (216   | )
|Basic net income per share   |  | $                               | 0.26   |                | $ | (0.02  | )
|Diluted net income per share |  | $                               | 0.24   |                | $ | (0.02  | )

The above pro forma results include adjustments for amortization expense related to intangible assets arising from
the acquisition, tax benefits related to the amortization of intangibles and the minority interest adjustment based on our less than 100% ownership interest in Ulead.

Note 11. Balance Sheet Components

Short-term investments

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



|                                |  |                          |        |                      |   |                       |  |   |                            |   |  |   |       
|------------------------------- |  | ------------------------ | ------ | -------------------- | - | --------------------- |  | - | -------------------------- | - |  | - | ------
|                                |  | As of September 30, 2005
|                                |  | Amortizedcost            |        | Grossunrealizedgains |   | Grossunrealizedlosses |  |   | Estimated fairmarket value
|Available-for-sale securities:  |  |                          |        |                      |   |                       |  |   |                            |   |  |   |       
|Treasury notes                  |  | $                        | 2,000  |                      | $ |                      |  | $ | (15                        | ) |  | $ | 1,985 
|State and municipal notes/bonds |  |                          | 4,504  |                      |   |                      |  |   | (6                         | ) |  |   | 4,498 
|Auction rate securities         |  |                          | 17,400 |                      |   |                      |  |   |                           |   |  |   | 17,400
|Mutual fund securities          |  |                          | 15,642 |                      |   | 2                     |  |   |                           |   |  |   | 15,644
|Corporate securities            |  |                          | 504    |                      | $ | 904                   |  |   |                           |   |  |   | 1,408 
|                                |  |                          |        |                      |   |                       |  |   |                            |   |  |   |       
|Total short-term investments    |  | $                        | 40,050 |                      | $ | 906                   |  | $ | (21                        | ) |  | $ | 40,935
|                                |  |                          |        |                      |   |                       |  |   |                            |   |  |   |       
|                                | 
|                                |  | As of December 31, 2004 
|                                |  | Amortizedcost            |        | Grossunrealizedgains |   | Grossunrealizedlosses |  |   | Estimated fairmarket value
|Treasury notes                  |  | $                        | 22,799 |                      | $ |                      |  | $ | (157                       | ) |  | $ | 22,642
|Corporate bonds                 |  |                          | 1,500  |                      |   |                      |  |   |                           |   |  |   | 1,500 
|State and municipal notes/bonds |  |                          | 23,063 |                      |   |                      |  |   | (28                        | ) |  |   | 23,035
|                                |  |                          |        |                      |   |                       |  |   |                            |   |  |   |       
|Total short-term investments    |  | $                        | 47,362 |                      | $ |                      |  | $ | (185                       | ) |  | $ | 47,177
|                                |  |                          |        |                      |   |                       |  |   |                            |   |  |   |       

The available-for-sale securities at September 30, 2005 have contractual maturities ranging from 2005 to
2006.

Held for sale assets

During the quarter ended September 30, 2005, the land and building owned by Ulead is available for immediate sale. Uleads board of directors has resolved to dispose of the building. The company has been actively pursuing a buyer
to complete the plan to sell the asset. The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The sale is expected to take place within one year. As of September 30, 2005, $19.6
million of land and building is classified as held for sale assets since it met the criteria of FASB (Financial Accounting Standards Board) No.144 Accounting for the Impairment or Disposal of Long-lived Assets.

As discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements, the Company has restated its financial statements to reflect a reduction of
amortization of several asset accounts due to the adoption of partial goodwill method in accordance with the provisions of SFAS 141 for the Ulead acquisition. As a result, the amount of held for sale assets has increased from $19.5 million to $19.6
million as of September 30, 2005.



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INTERVIDEO, INC.

Other purchased intangible assets, net

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



|                                             |  |                             |        |   |                  |   |       |  
|-------------------------------------------- |  | --------------------------- | ------ | - | ---------------- | - | ----- | -
|                                             |  | September 30,2005(Restated) |        |   | December 31,2004 |  
|Purchased development technology             |  | $                           | 3,839  |   |                  | $ | 1,000 |  
|In-process research and development          |  |                             | 2,574  |   |                  |   |      |  
|Customer contracts and related relationships |  |                             | 2,043  |   |                  |   |      |  
|Trade name                                   |  |                             | 2,145  |   |                  |   |      |  
|Less: Accumulated amortization               |  |                             | (3,152 | ) |                  |   | (917  | )
|                                             |  |                             |        |   |                  |   |       |  
|Total other purchased intangible assets      |  | $                           | 7,449  |   |                  | $ | 83    |  
|                                             |  |                             |        |   |                  |   |       |  

Accrued liabilities

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



|                                  |  |                             |        |                  |   |       
|--------------------------------- |  | --------------------------- | ------ | ---------------- | - | ------
|                                  |  | September 30,2005(Restated) |        | December 31,2004
|Payroll and related benefits      |  | $                           | 3,303  |                  | $ | 2,220 
|Royalties                         |  |                             | 8,263  |                  |   | 8,414 
|Audit and accounting related fees |  |                             | 795    |                  |   | 791   
|Taxes payable                     |  |                             | 984    |                  |   | 333   
|Other                             |  |                             | 4,100  |                  |   | 1,704 
|                                  |  |                             |        |                  |   |       
|Total accrued liabilities         |  | $                           | 17,445 |                  | $ | 13,462
|                                  |  |                             |        |                  |   |       

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.



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INTERVIDEO, INC.

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



|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|------------------------------ |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                               |  | Three months endedSeptember 30, |        | Nine months endedSeptember 30,
|                               |  | 2005                            |        | 2004                           |   | 2005   |  | 2004
|Revenues by Sales Channel:     |  |                                 |        |                                |   |        |  |      |        |  |   |       
|OEMs                           |  | $                               | 22,713 |                                | $ | 15,647 |  | $    | 60,483 |  | $ | 45,442
|Web sales and retail           |  |                                 | 6,289  |                                |   | 2,863  |  |      | 18,029 |  |   | 8,593 
|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total revenue                  |  | $                               | 29,002 |                                | $ | 18,510 |  | $    | 78,512 |  | $ | 54,035
|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Revenues by Geographic Region: |  |                                 |        |                                |   |        |  |      |        |  |   |       
|United States                  |  | $                               | 14,879 |                                | $ | 9,823  |  | $    | 39,557 |  | $ | 28,342
|Europe                         |  |                                 | 2,626  |                                |   | 681    |  |      | 7,493  |  |   | 2,977 
|Asia:                          |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Japan                          |  |                                 | 7,835  |                                |   | 6,125  |  |      | 25,317 |  |   | 18,337
|Other Asia                     |  |                                 | 3,662  |                                |   | 1,881  |  |      | 6,145  |  |   | 4,379 
|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total revenue                  |  | $                               | 29,002 |                                | $ | 18,510 |  | $    | 78,512 |  | $ | 54,035
|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Revenues by Products:          |  |                                 |        |                                |   |        |  |      |        |  |   |       
|WinDVD                         |  | $                               | 11,701 |                                | $ | 12,169 |  | $    | 37,994 |  | $ | 39,000
|License source code            |  |                                 | 4,000  |                                |   |       |  |      | 4,000  |  |   |      
|Other products                 |  |                                 | 13,301 |                                |   | 6,341  |  |      | 36,518 |  |   | 15,035
|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total revenue                  |  | $                               | 29,002 |                                | $ | 18,510 |  | $    | 78,512 |  | $ | 54,035
|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       

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



|                                 |  |                             |       |                  |   |      
|-------------------------------- |  | --------------------------- | ----- | ---------------- | - | -----
|                                 |  | September 30,2005(restated) |       | December 31,2004
|Tangible long-lived assets:      |  |                             |       |                  |   |      
|United States                    |  | $                           | 1,026 |                  | $ | 1,247
|Europe                           |  |                             | 110   |                  |   |     
|Asia:                            |  |                             |       |                  |   |      
|India                            |  |                             | 10    |                  |   |     
|Japan                            |  |                             | 293   |                  |   | 161  
|China                            |  |                             | 453   |                  |   | 408  
|Taiwan                           |  |                             | 1,713 |                  |   | 790  
|                                 |  |                             |       |                  |   |      
|Total tangible long-lived assets |  | $                           | 3,605 |                  | $ | 2,606
|                                 |  |                             |       |                  |   |      



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INTERVIDEO, INC.

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



|              |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|              |  | Three months endedSeptember 30, |   |  | Nine months endedSeptember 30, |  
|              |  | 2005                            |   |  | 2004                           |   |  | 2005 |   |  | 2004 |  
|Revenue from: |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Customer A    |  | 22                              | % |  | 26                             | % |  | 27   | % |  | 23   | %
|Customer B    |  | 9                               | % |  | 13                             | % |  | 10   | % |  | 13   | %
|Customer C    |  | 14                              | % |  | 0                              | % |  | 5    | % |  | 0    | %

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 (unaudited):



|                         |  |                   |   |  |                  |  
|------------------------ |  | ----------------- | - |  | ---------------- | -
|                         |  | September 30,2005 |   |  | December 31,2004 |  
|Account receivable from: |  |                   |   |  |                  |  
|Customer C               |  | 29                | % |  | 0                | %
|Customer D               |  | 6                 | % |  | 11               | %

Note 13. Contingencies

In the normal course of business, the Company is involved in various legal claims, actions and complaints, including matters involving patent infringement and other intellectual property claims and various other risks. It is not possible 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 agreements 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. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R (Revised 2004),Share-Based Payment, which requires that the
compensation cost relating to share-based payment transactions be recognized in financial statements based on alternative fair value models. The share-based compensation cost will be measured based on the fair value of the equity or liability
instruments issued. We currently disclose pro forma compensation expense quarterly and annually by calculating the stock option grants fair value using the Black-Scholes model. Upon adoption, pro forma disclosure will no longer be an
alternative. SFAS No. 123R was originally effective for reporting periods that began after June 15, 2005. In April 2005, the SEC announced the adoption of a new rule allowing companies to implement SFAS No. 123R at the
beginning of their next fiscal year that begins after June 15, 2005. We will begin to apply SFAS No. 123R using the most appropriate fair value model beginning January 1, 2006. We are evaluating the requirements under SFAS 123R
and expect the adoption to have a significant adverse impact on our results of operations, but not on our cash flows.



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INTERVIDEO, INC.

PART 1  FINANCIAL INFORMATION

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

The Managements Discussion and Analysis of Financial Condition and Results of Operations set forth in this Item 2 has been restated to reflect certain
adjustments to the Companys condensed consolidated financial statements as of and for the three and nine months ended September 30, 2005 as previously reported in the Companys Form 10-Q for the quarter ended September 30, 2005.
See Note 2 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Amendment No. 1 on Form 10-Q/A.

The following Managements Discussion and Analysis of Financial Condition and Results of Operation, as well as 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. Forward-looking statements contained in this Quarterly Report include, among others, statements regarding (1) the anticipated impact on
our business, operations and financial conditions of our acquisition of a controlling interest in Ulead Systems, Inc., (2) research and development expenses, (3) sales and marketing expenses, (4) otheroperating and capital
expenditures, (5) anticipated growth of operations, personnel and infrastructure and acceleration of product innovation, (6) gross profit, (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, (13) 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 rights. The Company disclaims any obligation to update information in any forward-looking statement.

Overview

Founded in 1998, InterVideo is a provider of DVD software,
video editing and DVD burning software, television viewing and recording software and 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 have operations in the United States, Taiwan, Japan, China and Germany. 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. We also sell our software through retail channels and directly to end users through our websites. In addition, we derive revenue from the license of
our software to consumer electronics (CE) manufacturers, manufacturers of PC peripherals and other software and internet companies that incorporate our software into their own products for distribution.

Historically, sales of our WinDVD product, a software DVD player for PCs, to PC OEMs have accounted for a majority of our revenue. Although we expect that revenue from
sales of our WinDVD product to PC OEMs will continue to account for a substantial portion of our revenue for the foreseeable future, we expect to derive an increasing percentage of our revenue in future periods from sales of other products,
including WinDVD Creator, InstantON, MediaOne, InterVideo Home Theater, InterVideo DVD Copy and Linux-based versions of our DVD and DVR software designed for Linux-based PCs and CE devices as well as products sold through our retail and web-based
sales channels. Our recent acquisition of a controlling interest in Ulead Systems, Inc. (Ulead) is expected to accelerate this trend with the addition of their products, including PhotoImpact, VideoStudio, DVD Movie Factory, DVD Workshop
and Media Studio Pro.

Our software is generally bundled with products sold by PC OEMs. Our PC OEM customers include, among others, Dell, Fujitsu, Fujitsu
Siemens, Hewlett-Packard (HP), Lenovo (formerly IBM), NEC, Microsoft and Toshiba. Due to concentration in the PC OEM industry, we derive a substantial portion of our revenue from a small number of OEM customers. We expect that a small
number of OEM customers will continue to account for a substantial portion of our revenue and gross profit for the foreseeable future, although the identity of those customers may change from period to period. We expect our revenue from HP, which
accounted for 22% and 27% of our revenue for the three and nine month periods ended September 30, 2005, to decline in future periods because we have been informed by HP that they will not incorporate certain of our products into certain future
HP notebook models. At this time we are unable to determine the impact this will have on our financial statements. A significant decrease in revenue from HP, or the loss of any of our large OEM customers, without an offseting increase in
revenue from other customers, would reduce our revenue and gross profit and otherwise harm our business.

Due to a limited number of potential new, large
PC OEM customers for our WinDVD product, we must derive any future revenue growth principally from increased sales of WinDVD or other products to existing PC OEMs, CE manufacturers, PC peripherals manufacturers, smaller PC OEMs, other software and
internet companies 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 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 over the three and nine month periods ended September 30, 2005, 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 will 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 will 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.

We currently sell our products through internet commerce and retail channels. Our
acquisition of Ulead has allowed us to expand these channels with a broader range of product offerings and marketing efforts. We intend to continue to invest in selling and marketing programs in these channels to further increase our sales
opportunities. The gross profits associated with our products sold through our web and retail channels 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. For the nine months ended September 30, 2005, web and retail sales accounted for 23% of our total revenue and overall gross profits were 62% of revenue as compared to web and retail sales accounting for
16% of our total revenue with overall gross profits of 56% for the nine months ended September 30, 2004.

We derive and expect to continue to derive a
significant portion of our revenue from sales outside of the United States. Currently, a significant portion 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. We expect that our recent acquisition of a controlling interest in Ulead will reduce 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. InterVideo and WinDVD are registered trademarks and WinDVD Creator, WinDVD Recorder, LinDVD, LinDVR, WinDVR, InterVideo InstantON, InterVideo Home Theater and InterVideo MediaOne are among the
trademarks or service marks of InterVideo. Ulead, Ulead DVD MovieFactory, DVD Workshop, MediaStudio Pro, VideoStudio and PhotoImpact are among the registered trademarks of Ulead Systems, Inc.

Acquisition of controlling interest in Ulead Systems, Inc.

On
April 20, 2005 we acquired a controlling interest in Ulead through a tender offer and purchases of shares outside of the tender offer. Through the tender offer, we purchased a total of 33,284,395 shares of Ulead common stock at the price of 30
NT (US$0.95) per share. In addition, on April 20, 2005 we acquired another 1,000,000 shares outside the tender offer at a price of 30 NT (US$0.95) per share. Previously, we had acquired by means of open market purchases 14,533,000 shares
at an average price per share of US$0.65. Therefore, following the completion of the tender offer, the purchase of additional shares in private transactions outside of the tender offer and open market purchases, we had acquired in total 48,817,395
shares, or approximately 63% of the total issued shares of Ulead, at a total cost of $42 million. As a result, the financial data presented herein include the financial results of Ulead, shown on a consolidated basis, for the period commencing with
the date of acquisition on April 20, 2005.

Ulead was founded in 1989 and is a leading developer of innovative video, imaging and DVD authoring
software for desktop, server, mobile and internet platforms. Headquartered in Taipei, Taiwan, Ulead maintains offices in the United States, Germany, Japan and China and, in March 1999, became the first publicly traded software company in Taiwan. The
majority of Uleads product revenue derives from sales of software to end users through retailers which purchase the products from national and international distributors, including Softbank Commerce Corp. of Japan. Uleads strengths in
professional DVD authoring, video editing and still image processing complement our tools and enhance our ability to address emerging and rapidly growing markets such as multimedia home networking, high definition DVD, Blu-ray Disc and multimedia
mobile phones markets. We believe our acquisition of the shares of Ulead supports our long-term strategic direction, strengthens our competitive position in the multimedia software market, expands our retail presence and provides greater scale to
increase our investment in research and development to accelerate product innovation and increase shareholder value. However, the future quantitative impact on our financial results is difficult to determine at this time due to the uncertainties
inherent in the two companies future financial results, uncertainties regarding the amount of synergies and efficiencies that may be garnered as a result of the consolidation and uncertainties regarding the reconciliation of Uleads
financial results from R.O.C. GAAP to U.S. GAAP, among other factors. Please see Risk FactorsWe may not be successful in addressing problems encountered in connection with our transaction with Ulead or any other acquisitions we may
undertake, which could disrupt our operations or otherwise harm our business.



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INTERVIDEO, INC.

Critical Accounting Estimates

We base the discussions and analysis of our financial condition and results of
operations upon our condensed consolidated financial statements, which we prepare in accordance with United States generally accepted accounting principles. 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 acquisitions; and
| | - |  | --------------------------------



| |  |  | Accounting for income taxes.
| | - |  | ----------------------------

Revenue recognition

Our 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 directly to end users. We record revenue generated from these sales in accordance with SOP 97-2,
Software Revenue Recognition, as amended, 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.
| | - |  | ---------------------------

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 sell 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. While 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, under certain agreements where the OEM is granted PCS for a period greater than one year, including upgrades, revenue is recognized ratably over the shorter of the
contractual PCS period or estimated life of the product.

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.



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INTERVIDEO, INC.

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 from the date of purchase. We currently reserve for returns using a 30-day sales return reserve based upon historical return percentages. End user sales through third party websites have unlimited rights of return. For these sales
we have established a return reserve based on historical return activity.

We sell our products to retailers and distributors either on a consignment or
non-consignment basis. For consignment product shipments, in general, the distributor will not take ownership of the product at the point in time when we ship product to the distributor. Once the distributor sells the consignment-based product to a
retailer or an end customer and ownership is transferred from us to the retailer or end customer, the distributor will report those sales to us and we invoice the distributor. For non-consignment product shipments, the distributor will take
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, we do
not recognize revenue for retail product distribution prior to invoicing. Certain distributors and retailers, primarily in Japan, have limited rights to return products that were purchased in the previous six months. These distributors have no
rights to product upgrades. 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. Other distributors and
retailers, 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 rebate
or pricing reserves. Certain distributors and retailers of Ulead, primarily in Japan, have unlimited rights of return. For these customers, the Company has established a returns reserve based on historical return activity.

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
Acquisitions

Accounting for acquisitions requires management to make judgments and estimates in determining the purchase price, the fair
value of the assets and liabilities acquired and merger-related and restructuring expenses. In recording the Ulead acquisition during the quarter, significant judgment was required in estimating:



| |  |  | valuation of deferred revenue, and
| | - |  | ----------------------------------



| |  |  | valuation of intangible assets and acquired in-process research and development
| | - |  | -------------------------------------------------------------------------------

Changes to purchase price estimates, prior to the completion of the final purchase price allocation, are reflected as adjustments to goodwill and/or other acquired assets. Subsequent adjustments are reflected in our results of
operations. In accordance with Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets, goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment
at least annually or as circumstances indicate their value may no longer be recoverable.

As discussed in more detail in Note 2 of the Notes to the
Condensed Consolidated Financial Statements included in Part I, Item 1 of this Amendment No. 1 on Form 10-Q/A, our review of the purchase accounting method under SFAS No. 141 has resulted in a determination to apply the partial
goodwill method instead of the full goodwill method to our acquisition of Ulead due to the existence of the non-controlling interest in Ulead after this acquisition. The application of the partial goodwill method requires the Company to record its
share of Uleads assets, liabilities and resulting intangible assets, including goodwill, at the proportionate share acquired based upon the purchase price.

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.



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INTERVIDEO, INC.

Results of Operations  Comparison of the three and nine months ended September 30, 2005 and 2004.

All
information presented reflects activities of Ulead subsequent to the acquisition date of April 20, 2005.

Revenue (unaudited, dollars in
thousands)



|        |  |                                 |  |               |  |    |                                |  |               |  |        |  |    |  
|------- |  | ------------------------------- |  | ------------- |  | -- | ------------------------------ |  | ------------- |  | ------ |  | -- | -
|        |  | Three months endedSeptember 30, |  | PercentChange |  |    | Nine months endedSeptember 30, |  | PercentChange | 
|        |  | 2005                            |  | 2004          |  |    | 2005                           |  | 2004          | 
|Revenue |  | 29,002                          |  | 18,510        |  | 57 | %                              |  | 78,512        |  | 54,035 |  | 45 | %

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 directly to end users or businesses.

Revenue increased 57% to $29.0 million for the three months ended September 30, 2005 from $18.5 million for the three months ended September 30, 2004 with
Ulead accounting for 63% of this increase. OEM product sales increased 45% to $22.7 million for the three months ended September 30, 2005 from $15.6 million for the three months ended September 30, 2004 and accounted for 78% of total
revenue for the three month period ended September 30, 2005 and 85% for the three month period ended September 30, 2004. Ulead revenue accounted for 39% of the increase in OEM revenue for the three months ended September 30, 2005.
Included in OEM revenue for the three months ended September 30, 2005 was $4.0 million or 14% of total revenue from one of our two previously announced agreements with Microsoft. Revenue from the second Microsoft agreement has been deferred
because product acceptance did not occur prior to September 30, 2005. Additionally, HP accounted for 22% of our revenue for the three months ended September 30, 2005. In the three months ended September 30, 2004, HP accounted for 26%
of our revenue and Toshiba accounted for 13% of our revenue. Web and retail sales increased 120% to $6.3 million for the three months ended September 30, 2005 from $2.9 million for the three months ended September 30, 2004. Ulead revenue
accounted for 115% of the increase in web and retail sales for the three months ended September 30, 2005. Sales outside the United States accounted for 49% of our revenue for the three months ended September 30, 2005 with Ulead
representing approximately 40% of this amount. Sales outside of the United States were 47% of our revenue for the three months ended September 30, 2004. Overall, WinDVD continues to represent a significant portion of our revenue, accounting for
40% of total revenue for the three months ended September 30, 2005 as compared to 66% of total revenue for the three months ended September 30, 2004. Sales from products other than WinDVD, including WinDVD Creator, InterVideo DVD Copy,
InstantON and Ulead products such as Video Studio, DVD Factory and PhotoImpact increased 173% from the three months ended September 30, 2004 to September 30, 2005, with Ulead products accounting for 61% of this growth.

For the nine months ended September 30, 2005, including Ulead, revenue increased 45% to $78.5 million as compared to $54.0 million for the nine months ended
September 30, 2004. This increase was partly attributable to our OEM product sales, which increased 33% to $60.5 million for the nine months ended September 30, 2005 from $45.4 million for the nine months ended September 30, 2004.
Ulead revenue accounted for approximately 37% of the increase in OEM revenue for the nine months ended September 30, 2005. Included in OEM revenue for the nine months ended September 30, 2005 was $4.0 million from one of our two previously
announced agreements with Microsoft. Additionally, for the nine months ended September 30, 2005, our two largest customers accounted for 37% of our revenue, with HP accounting for 27% of our revenue and Toshiba accounting for 10% of our
revenue. In the nine months ended September 30, 2004 these same two customers accounted for 36% of our revenue with HP accounting for 23% of our revenue and Toshiba accounting for 13% of our revenue. We expect our revenue from HP to decline in
the fourth quarter of 2005 and continue to decrease significantly into 2006 because we have been informed by HP that they will not incorporate certain of our products into certain future HP models. A significant decrease in revenue from HP 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



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INTERVIDEO, INC.

harm our business. Web and retail sales increased 110% to $18.0 million for the nine months ended September 30, 2005 from $8.6 million for the nine months ended September 30, 2004 with Ulead contributing
substantially all of this increase. Sales outside the United States accounted for 50% of our revenue for the nine months ended September 30, 2005 and 48% of our revenue for the nine months ended September 30, 2004. Overall, WinDVD
continues to represent a significant portion of our revenue, accounting for 48% of total revenue for the nine months ended September 30, 2005 as compared to 72% of total revenue for the three months ended September 30, 2004. Sales from
products other than WinDVD, including WinDVD Creator, InterVideo DVD Copy, InstantON and Ulead products such as Video Studio, DVD Factory and PhotoImpact for the nine months ended September 30, 2005 increased 169% from the nine months ended
September 30, 2004, with Ulead products accounting for 59% of this growth. This shift on product mix to higher priced products has offset the continued price erosion of our WinDVD product sale. Included in the nine months ended
September 30, 2004 is approximately $600,000 representing the recognition of previously deferred revenue as a result of changes in contractual agreements.

Cost of revenue (unaudited, dollars in thousands)



|                            |  |                                 |   |  |               |   |  |                                |                |  |               |      |  |        |   |  |    |  
|--------------------------- |  | ------------------------------- | - |  | ------------- | - |  | ------------------------------ | -------------- |  | ------------- | ---- |  | ------ | - |  | -- | -
|                            |  | Three months endedSeptember 30, |   |  | PercentChange |   |  | Nine months endedSeptember 30, |                |  | PercentChange |     
|                            |  | 2005(Restated)                  |   |  | 2004          |   |  |                                | 2005(Restated) |  |               | 2004 |  |       
|Cost of revenue             |  | 9,654                           |   |  | 8,295         |   |  | 16                             | %              |  | 29,521        |      |  | 23,948 |   |  | 23 | %
|Percentage of total revenue |  | 33                              | % |  | 45            | % |  |                                |                |  | 38            | %    |  | 44     | % |  |    |  

Cost of revenue consists primarily of license royalties, expenses incurred to manufacture, package and distribute
our software products, the amortization of developed technology, costs associated with end-user PCS and the cost of settlement of intellectual property matters.

Cost of revenue was $9.7 million, or 33% of revenue, for the three months ended September 30, 2005 as compared to $8.3 million, or 45% of revenue, for the three months ended September 30, 2004. For the nine months ended
September 30, 2005, cost of revenue increased 23% to $29.5 million as compared to $23.9 million for the nine months ended September 30, 2004. The increase in absolute dollars for both the three and nine month periods ended
September 30, 2005 was primarily due to cost of revenue from Ulead operations and overall increased unit sales. The decrease as a percentage of revenue for the three month period ended September 30, 2005 was largely due to the lower per
unit costs as a percentage of revenue on Ulead product sales offset somewhat by an overall decline in selling prices of our WinDVD products and increased royalties paid to Dolby Laboratories due to higher sales volume. The decrease as a percentage
of revenue for the nine month period ended September 30, 2005 was largely due to the lower per unit costs as a percentage of revenue on Ulead product sales offset somewhat by an overall decline in selling prices of our WinDVD products, an
increase in per unit royalties paid to Dolby Laboratories which was effective during the second quarter of fiscal year 2004 and overall increased royalties resulting from higher sales volume.

Cost of revenue in absolute dollars will continue to be impacted by per unit costs of royalties which are impacted by sales volume and product mix. We expect that cost
of revenue as a percentage of revenue will be impacted favorably by the integration and growth of Ulead product sales that complement our own and the introduction of our newer, higher margin products offset by continued price erosion in our WinDVD
sales to our OEM customers.

As discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements, we have restated our financial
statements to reflect a reduction of amortization expense due to the application of the partial goodwill method to the Ulead acquisition in accordance with the provisions of SFAS 141. As a result, cost of revenue as a percentage of revenue has been
reduced, from 34% to 33% for the three month period ended September 30, 2005. In absolute dollars, the amount has been reduced by $276,000 and $504,000, from $9.9 million and $30.0 million to $9.7 million and $29.5 million for the three and
nine month periods ended September 30, 2005, respectively.



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INTERVIDEO, INC.

Gross profit (unaudited, dollars in thousands)



|                            |  |                                 |   |  |               |   |  |                                |                |  |               |      |  |        |   |  |    |  
|--------------------------- |  | ------------------------------- | - |  | ------------- | - |  | ------------------------------ | -------------- |  | ------------- | ---- |  | ------ | - |  | -- | -
|                            |  | Three months endedSeptember 30, |   |  | PercentChange |   |  | Nine months endedSeptember 30, |                |  | PercentChange |     
|                            |  | 2005(Restated)                  |   |  | 2004          |   |  |                                | 2005(Restated) |  |               | 2004 |  |       
|Gross profit                |  | 19,348                          |   |  | 10,215        |   |  | 89                             | %              |  | 48,991        |      |  | 30,087 |   |  | 63 | %
|Percentage of total revenue |  | 67                              | % |  | 55            | % |  |                                |                |  | 62            | %    |  | 56     | % |  |    |  

Gross profits were 67% of revenue for the three months ended September 30, 2005 as compared to 55% for the
three months ended September 30, 2004. The increase reflects the sale of higher margin Ulead products and an increase in revenues from other products that typically enjoy higher gross profits including revenue pursuant to the Microsoft
agreement. These increases were offset somewhat by the lower average selling prices of our WinDVD products to our major OEM customers, an increase in royalties paid to Dolby Laboratories due to higher sales volume and higher amortization of
intangible assets associated with the acquisition of Ulead which we expect will remain constant over future periods.

For the nine months ended
September 30, 2005, gross profits were $49.0 million or 62% of revenue as compared to $30.1 million or 56% of revenue for the nine months ended September 30, 2004. The increase reflects the sale of higher margin Ulead products and an
increase in revenues from other products that typically enjoy higher gross profits. These increases were offset somewhat by the lower average selling prices of our WinDVD products to our major OEM customers, an increase in per unit royalties paid to
Dolby Laboratories which was effective during the second quarter of fiscal year 2004 and overall increased royalties resulting from higher sales volume. Also reflected in the gross profits for the nine month period ended September 30, 2004 was
recognition of approximately $600,000 of previously deferred revenue as a result of changes in contractual arrangements wherein the related product costs were recorded in an earlier period.

We expect that the integration of the Ulead products into our product mix and the continued movement of our InterVideo product sales toward higher margin products will
continue to have a favorable impact on gross profits. However, increased revenue through our OEM channels and from the sale of our products through other software and internet companies at lower margins will somewhat offset these higher margins.

As discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements, we have restated our financial statements to reflect a reduction
of amortization expense due to the application of the partial goodwill method to the Ulead acquisition in accordance with the provisions of SFAS 141. As a result, gross profit increased by $276,000 to $19.3 million, and $504,000 to $49.0 million for
the three and nine month periods ended September 30, 2005, respectively.

Research and development expenses (unaudited, dollars in
thousands)



|                                  |  |                                 |   |  |               |   |  |                                |      |  |               |      |  |       |   |  |     |  
|--------------------------------- |  | ------------------------------- | - |  | ------------- | - |  | ------------------------------ | ---- |  | ------------- | ---- |  | ----- | - |  | --- | -
|                                  |  | Three months endedSeptember 30, |   |  | PercentChange |   |  | Nine months endedSeptember 30, |      |  | PercentChange |     
|                                  |  | 2005                            |   |  | 2004          |   |  |                                | 2005 |  |               | 2004 |  |      
|Research and development expenses |  | 6,272                           |   |  | 2,380         |   |  | 164                            | %    |  | 14,709        |      |  | 7,276 |   |  | 102 | %
|Percentage of total revenue       |  | 22                              | % |  | 13            | % |  |                                |      |  | 19            | %    |  | 14    | % |  |     |  

Research and development 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.

Research and development
expenses were $6.3 million, or 22% of revenue, for the three months ended September 30, 2005 and $2.4 million, or 13% of revenue, for the three months ended September 30, 2004. This increase in absolute dollars reflects an increase of $2.5
million in expenses associated with the acquisition of Ulead primarily due to increased headcount, $927,000 in increased payroll and payroll related expenses due to increased research and development headcount mainly in Taiwan and China and
increased travel and other operating expenses of $418,000. Included in the Ulead research and development expenses for the three months ended September 30, 2005 are $149,000 related to reduction in force activities in conjunction with the
acquisition. The overall increase as a percentage of revenue is primarily a result of the increased expenses associated with the Ulead acquisition without a proportionate increase in revenues for the period.

For the nine months ended September 30, 2005, research and development expenses were $14.7 million or 19% of revenue as compared to $7.3 million or 14% of revenue
for the nine months ended September 30, 2004. This increase in absolute dollars and as a percentage of revenue reflects an increase of $4.8 million in expenses associated with the acquisition of Ulead primarily due to increased headcount, $2.1
million in increased payroll and payroll related expenses



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due to increased research and development headcount mainly in Taiwan and China, increased travel expenses of $284,000 and other operating expenses of $500,000 primarily associated with expanded operations in Asia.
These increases were partially offset by a decrease in legal fees of $182,000. Included in the Ulead research and development expenses for the nine months ended September 30, 2005 are $303,000 related to reduction in force activities in
conjunction with the acquisition.

We believe that a significant level of research and development expenses will be required for us to remain competitive,
and, as a result, we expect these expenses to continue to increase in absolute dollars in future periods while remaining relatively consistent with the nine month period as a percentage of revenue.

Sales and marketing expenses, (unaudited, dollars in thousands)



|                             |  |                                 |   |  |               |   |  |                                |      |  |               |      |  |       |   |  |    |  
|---------------------------- |  | ------------------------------- | - |  | ------------- | - |  | ------------------------------ | ---- |  | ------------- | ---- |  | ----- | - |  | -- | -
|                             |  | Three months endedSeptember 30, |   |  | PercentChange |   |  | Nine months endedSeptember 30, |      |  | PercentChange |     
|                             |  | 2005                            |   |  | 2004          |   |  |                                | 2005 |  |               | 2004 |  |      
|Sales and marketing expenses |  | 5,367                           |   |  | 2,299         |   |  | 133                            | %    |  | 13,424        |      |  | 7,771 |   |  | 73 | %
|Percentage of total revenue  |  | 19                              | % |  | 12            | % |  |                                |      |  | 17            | %    |  | 14    | % |  |    |  

Sales and marketing 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.

Sales and marketing expenses increased to $5.4 million, or 19% of revenue, for the three months ended September 30, 2005 from $2.3 million, or 12% of revenue, for the three months ended September 30, 2004. The increase is
primarily due to increased costs of $2.9 million as a result of the Ulead acquisition including $130,000 in reduction in force activities. Additionally, increases in payroll and payroll related expenses, outside consulting fees and travel expenses
of $485,000 offset by decreases in commission fees and trade show expenses of $286,000. The decrease in trade show expenses is largely due to the timing of the specific trade shows during the year and the overall reassessment of sales and marketing
strategies. The increase as a percentage of revenue is primarily attributable to the increase in expenses from the Ulead acquisition without a proportionate increase in revenue.

For the nine months ended September 30, 2005, sales and marketing expenses increased to $13.4 million or 17% of revenue as compared to $7.8 million or 14% of revenue for the nine months ended September 30,
2004. The increase is largely due to increased costs of $5.7 million as a result of the Ulead acquisition, including $268,000 associated with a reduction in force. Additional increases in payroll and payroll related expenses, outside consulting fees
and travel expenses of $329,000 were offset by decreases in commissions paid to external sales representatives and decreased trade show expenses of $464,000. The decrease in trade show expenses is largely due to the timing of the specific trade
shows during the year and the overall reassessment of sales and marketing strategies.

We intend to actively market, sell and promote our products and take
actions to further develop our brand name and retail presence in conjunction with the coordinated marketing efforts of the combined operations of InterVideo and Ulead. Therefore, we expect sales and marketing expenses to increase in absolute dollars
in the future as we seek to further establish our retail presence.

General and administrative expenses, (unaudited, dollars in
thousands)



|                                    |  |                                 |   |  |               |   |  |                                |                |  |               |      |  |       |   |  |    |  
|----------------------------------- |  | ------------------------------- | - |  | ------------- | - |  | ------------------------------ | -------------- |  | ------------- | ---- |  | ----- | - |  | -- | -
|                                    |  | Three months endedSeptember 30, |   |  | PercentChange |   |  | Nine months endedSeptember 30, |                |  | PercentChange |     
|                                    |  | 2005(Restated)                  |   |  | 2004          |   |  |                                | 2005(Restated) |  |               | 2004 |  |      
|General and administrative expenses |  | 4,019                           |   |  | 3,085         |   |  | 30                             | %              |  | 10,849        |      |  | 6,764 |   |  | 60 | %
|Percentage of total revenue         |  | 14                              | % |  | 17            | % |  |                                |                |  | 14            | %    |  | 13    | % |  |    |  

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, including legal and accounting fees.

General
and administrative expenses were $4.0 million, or 14% of revenue, for the three months ended September 30, 2005 as compared to $3.1 million, or 17% of revenue, for the three months ended September 30, 2004. The amount for the period ended
September 30, 2005 includes a $1.2 million increase as a result of the Ulead acquisition, an increase in payroll and payroll related costs of $350,000 due to increases in headcount primarily in the United States and Taiwan operations and a loss
on the disposal of assets of $109,000 associated with the relocation of facilities in Taiwan. These increases were offset by a decrease of $734,000 associated with costs incurred during the three months ended September 30, 2004 for legal and
administrative expenses associated with the pursuit of strategic transactions.

For the nine months ended September 30, 2005, general and
administrative expenses were $10.8 million or 14% of revenue as compared to $6.8 million or 13% of revenue for the nine months ended September 30, 2004. In addition to the increase in general and administrative expenses attributable to the
Ulead acquisition of $2.7 million, the amount for the nine months ended September 30, 2005 includes increases in payroll and payroll related costs of $1.1 million due to increases in headcount primarily in the United States and Taiwan
operations, increased audit, legal and other professional fees of $906,000 related to our annual report filings, Sarbanes-Oxley compliance and outside consulting offset by the aforementioned legal and administrative expenses associated with the
pursuit of strategic transactions that occurred in the nine months ended September 30, 2004. Included in the Ulead general and administrative expenses for the nine months ended September 30, 2005 are $286,000 related to reduction in force
activities in conjunction with the acquisition.

We expect general and administrative expenses to increase in absolute dollars as we build our
infrastructure to support our anticipated growth and operations with the combined InterVideo and Ulead entities and as we incur increased legal expenses to defend and protect our intellectual property position.

As discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements, we have restated our financial statements to reflect a reduction of amortization
expense due to the application of the partial goodwill method to the Ulead acquisition in accordance with the provisions of SFAS 141. The impact on general and administrative expenses as a percentage of revenue and in absolute dollars for the three
and six month periods ended September 30, 2005 was immaterial.



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INTERVIDEO, INC.

Stock-based compensation expenses, (unaudited, dollars in thousands)



|                                  |  |                                 |   |  |               |   |  |                                |      |  |               |      |  |     |   |  |     |   
|--------------------------------- |  | ------------------------------- | - |  | ------------- | - |  | ------------------------------ | ---- |  | ------------- | ---- |  | --- | - |  | --- | --
|                                  |  | Three months endedSeptember 30, |   |  | PercentChange |   |  | Nine months endedSeptember 30, |      |  | PercentChange |     
|                                  |  | 2005                            |   |  | 2004          |   |  |                                | 2005 |  |               | 2004 |  |    
|Stock-based compensation expenses |  | 3                               |   |  | 77            |   |  | (96                            | )%   |  | 70            |      |  | 226 |   |  | (69 | )%
|Percentage of total revenue       |  |                                | % |  |              | % |  |                                |      |  |              | %    |  |    | % |  |     |   

Deferred stock-based compensation is recorded when options are granted with exercise prices less than the fair
market value of the underlying common stock. Stock-based compensation expenses are recognized as deferred stock-based compensation is amortized on an accelerated basis over the vesting period of the related options, which is generally four years.

In 2005, we have continued to grant our stock options at exercise prices equal to the fair market value of our common stock on the date of grant, and
therefore no additional deferred stock-based compensation has been recorded. Additionally, employee terminations have further reduced the amount being amortized. Accordingly, we expect stock-based compensation expenses to continue to decrease
through the remainder of 2005.

On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), Share Based Payments
(SFAS No. 123R), which is a revision of SFAS No. 123 and supersedes APB No. 25 and will require us to calculate and record in the income statement the cost of equity instruments, such as stock options awarded to employees
for services received which we have previously disclosed as pro forma information in the Notes to the Consolidated Financial Statements. The cost of the equity instruments is to be measured based on the fair value of the instruments on the date they
are granted (with certain exceptions) and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments. On April 14, 2005, the Securities and Exchange Commission
(SEC) announced a delay of up to six months in the effective date of SFAS 123R and, as such, the statement will be effective beginning with the first quarter of our fiscal year 2006. The impact of adopting SFAS No. 123R cannot be accurately
estimated at this time, as it will depend on the market value and the amount of share based awards granted in future periods but it is expected that the impact will increase our stock-based compensation expenses once it has been adopted.



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INTERVIDEO, INC.

In-Process Research and Development, (unaudited, dollars in thousands)



|                                    |  |                                 |   |  |               |   |                                |     |                |                |   |      |   |   |  |    
|----------------------------------- |  | ------------------------------- | - |  | ------------- | - | ------------------------------ | --- | -------------- | -------------- | - | ---- | - | - |  | ---
|                                    |  | Three months endedSeptember 30, |   |  | PercentChange |   | Nine months endedSeptember 30, |     |                | Percent Change
|                                    |  | 2005                            |   |  | 2004          |   |                                |     | 2005(Restated) |                |   | 2004 |   |  
|In-process research and development |  | 0                               |   |  | 0             |   |                                | N/A |                | 2,574          |   |      | 0 |   |  | N/A
|Percentage of total revenue         |  |                                | % |  |              | % |                                |     |                | 3              | % |      |  | % |  |    

In-process research and development represents incomplete research and development projects that had not reached
technological feasibility and had no alternate future use as of the acquisition date of Ulead.

During the nine months 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.

As discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements, we have restated our financial statements to reflect a reduction
of amortization expense due to the application of the partial goodwill method to the Ulead acquisition in accordance with the provisions of SFAS 141. As a result, in-process research and development as a percentage of revenue has decreased, from 6%
to 3% for the nine month period ended September 30, 2005. In-process research and development decreased by $2.2 million from $4.8 million to $2.6 million for the nine month period ended September 30, 2005.

Other income, net of expense (unaudited, dollars in thousands)



|                             |  |                                 |   |  |               |   |  |                                |      |  |               |      |  |     |   |  |     |   
|---------------------------- |  | ------------------------------- | - |  | ------------- | - |  | ------------------------------ | ---- |  | ------------- | ---- |  | --- | - |  | --- | --
|                             |  | Three months endedSeptember 30, |   |  | PercentChange |   |  | Nine months endedSeptember 30, |      |  | PercentChange |     
|                             |  | 2005                            |   |  | 2004          |   |  |                                | 2005 |  |               | 2004 |  |    
|Other income, net of expense |  | 831                             |   |  | 211           |   |  | 294                            | %    |  | 119           |      |  | 645 |   |  | (82 | )%
|Percentage of total revenue  |  | 3                               | % |  | 1             | % |  |                                |      |  |              | %    |  | 1   | % |  |     |   

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 to
$831,000 for the three months ended September 30, 2005 from $211,000 for the three months ended September 30, 2004. The three month period ended September 30, 2005 includes $399,000 in investment income and net foreign currency
translation gains, $102,000 in rental income and $330,000 in net interest and other income.

For the nine months ended September 30, 2005, other
income, net decreased to $119,000 from $645,000 for the nine months ended September 30, 2004. The nine month period ended September 30, 2005 includes $916,000 in net investment losses and net foreign currency translation gains. These
amounts include a $297,000 realized loss from the liquidation of short term investments for purposes of generating cash for the purchase of Ulead and the $672,000 write-off of the Master Integrated Appliances Co., Ltd. long-term investment. These
amounts were offset by $193,000 in rental income and $842,000 in net interest and other income.



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INTERVIDEO, INC.

Provision for income taxes, (unaudited, dollars in thousands)



|                            |  |                                 |   |  |               |   |  |                                |                |  |               |      |  |       |   |  |    |  
|--------------------------- |  | ------------------------------- | - |  | ------------- | - |  | ------------------------------ | -------------- |  | ------------- | ---- |  | ----- | - |  | -- | -
|                            |  | Three months endedSeptember 30, |   |  | PercentChange |   |  | Nine months endedSeptember 30, |                |  | PercentChange |     
|                            |  | 2005(Restated)                  |   |  | 2004          |   |  |                                | 2005(Restated) |  |               | 2004 |  |      
|Provision for income taxes  |  | 2,205                           |   |  | 1,275         |   |  | 73                             | %              |  | 4,636         |      |  | 3,652 |   |  | 27 | %
|Percentage of total revenue |  | 8                               | % |  | 7             | % |  |                                |                |  | 6             | %    |  | 7     | % |  |    |  

We recorded a provision for income taxes of $2.2 million and $4.6 million for the three and nine months ended
September 30, 2005, respectively, as compared to $1.3 million and $3.7 million for the three and nine months ended September 30, 2004, respectively. Our effective tax rate for the three months ended September 30, 2005 was 49%. For the
nine months ended September 30, 2005 our effective tax rate was 45% prior to the write off of in-process research and development of $2.6 million related to the Ulead acquisition, which is not deductible for income tax purposes. For the three
and nine month ended September 30, 2004 our effective tax rates were 49% and 42%, respectively. The effective tax rate for the three and nine months ended September 30, 2005 differs from the statutory federal rate primarily due to the in
process research and development charge, state taxes, net of federal benefit, difference between federal and foreign tax rates and foreign withholding taxes.

As discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements, we have restated our financial statements to reflect a reduction in amortization expense due to the application of the partial goodwill method to the
Ulead acquisition in accordance with the provisions of SFAS 141. The resulted increased income before income taxes caused the provision for income taxes increased by $145,000 to $2.2 million, and $294,000 to $4.6 million for the three and nine month
periods ended September 30, 2005, respectively. Provision for income taxes as a percentage of revenue increased from 7% to 8% for the three month period ended September 30, 2005.

Liquidity and Capital Resources

During the nine months ended
September 30, 2005, cash, cash equivalents and short-term investments decreased by $2.3 million to $72.3 million, representing 54% of our total assets. Our cash, cash equivalents and short-term investments totaled $74.6 million at
December 31, 2004 and represented 73% 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 US treasury
and federal agency notes, state and municipal notes/bonds, corporate bonds and certificates of deposit.

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 an $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 provided by operating activities was $5.1 million for the nine months ended September 30, 2004. Net income of $5.0 million was adjusted for depreciation and amortization of $885,000, stock-based compensation of $226,000, a decrease in
other assets of $160,000 and increases in accrued liabilities and taxes payable of $2.0 million. This was partially offset by an increase in accounts receivable of $2.6 million and prepaid expenses and other current assets of



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$593,000 and a decrease in accounts payable and deferred revenue of $114,000. The increase in accrued liabilities and taxes payable is primarily due to accrued payroll and bonuses of $496,000 due to timing of payroll
and bonus payments, accrued license and royalty fees of $221,000 directly related to sales activities, accrued consulting and auditing fees of $388,000, deferred rent of $178,000 and accrued legal fees of $546,000 associated with the pursuit of
strategic transactions. The increase in accounts receivable is primarily due to a payment totaling $2.6 million from a major customer that has historically been received prior to the end of the reporting period which were received shortly after the
end of this quarter.

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 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.

Net cash
used in investing activities was $18.1 million for the nine months ended September 30, 2004 due to purchases of short-term investments, net of proceeds from maturities of short-term investments of $15.5 million and purchases of property and
equipment of $931,000 which was largely attributable to the implementation of our new ERP system, and expanded operations in Asia. Additionally, we invested $1.7 million in two private companies in Taiwan

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.

The effect of the aforementioned restatement
as a result of the application of the partial goodwill method in accordance with the provisions of SFAS 141 to the Ulead acquisition was to increase net income by $2.4 million, decrease depreciation and amortization charges by $526,000, decrease the
acquired in-process research and development charge by $2.2 million, increase deferred revenue by $11,000 and reduce the decrease in accrued liabilities and income taxes payable by $294,000. The restatement had no impact on the overall net cash
provided by (used in) operating, investing and financing activities or the net increase in cash and cash equivalents for the nine month period ended September 30, 2005. We currently have no significant commitments for capital expenditures, but
we expect to spend approximately $500,000 on capital expenditures in the remainder of 2005, which includes the upgrading and expansion of our world-wide facilities. We anticipate that we will increase our capital expenditures consistent with our
anticipated growth in personnel and infrastructure, including facilities and systems. We have future lease commitments for buildings under non-cancelable operating leases through 2010. We have no other debt obligations.

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. We have used a total of $42 million to acquire a controlling interest in Ulead, including $32.6 million in April 2005, and we may continue to spend more cash to acquire additional shares of Ulead or to fund other
acquisition activities. 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 your percentage ownership in us.

Off Balance Sheet Arrangements

As of September 30, 2005, we had no off balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commissions Regulation S-K.



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Risk Factors

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 may 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.

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 and rapidly growing markets, such as multimedia home networking, high definition DVD, Blu-ray Disc and multimedia mobile phone markets. 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 acquisition of a controlling interest in Ulead has made 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;
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| |  |  | changes in the timing of orders or the completion of customer contracts with significant OEM customers;
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| |  |  | entering into contracts with customers that result in non-recurring revenue;
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| |  |  | 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 and audio software markets, which may result in our loss of business;
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| |  |  | decisions to acquire other companies, including non-accretive or non-synergetic results from the acquisition of Ulead;
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| |  |  | increases in third party license fees, such as the increase in royalties paid to Dolby;
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| |  |  | changes in consumer demand for our products due to the marketing of alternative technologies by our OEM customers;
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| |  |  | declines in selling prices of our products to our OEM or other customers ;
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| |  |  | market acceptance of new products developed by us, such as our InstantOn product;
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| |  |  | changes in the relative portion of our revenue represented by our various products and customers including the mix of OEM, retail and web sales;
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| |  |  | 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;
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| |  |  | economic conditions specific to the PC, consumer electronics and related industries; and
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| |  |  | changes in accounting regulations that will require us to expense stock options.
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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.

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 Creator, InterVideo Home Theater, InterVideo DVD Copy, MediaOne and
InstantON. Our recent acquisition of a controlling interest in Ulead is expected to accelerate 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 our product prices to decline, which could harm our
operating results.

We expect prices for our 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. Accordingly, our future success will



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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 our fiscal year ended December 31 2002, and we incurred a net loss for the quarter ended June 30, 2005. As of
September 30, 2005, we had retained earnings of $9.9 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 recent 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.

We may not be successful in addressing problems encountered in connection with our acquisition of a controlling interest in Ulead or any other
acquisitions we may undertake, which could disrupt our operations or otherwise harm our business.

On April 20, 2005, we acquired a
controlling percentage of the issued shares of Ulead. We have limited experience in acquiring businesses and technologies, including businesses with international operations. The transaction with Ulead is our largest acquisition to date. The
transaction with Ulead and any other proposed or completed acquisitions and investments involve numerous risks, including:



| |  |  | unanticipated developments or events concerning the financial condition, assets, liabilities, operations, business or prospects of Ulead 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;
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| |  |  | adverse effects on existing business relationships with suppliers and customers;
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| |  |  | diversion of managements attention from our core business including international travel to Taiwan;
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| |  |  | customer acceptance of new technology or product offerings from the Ulead business;
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| |  |  | problems maintaining internal accounting and disclosure controls and procedures and other uniform standards or policies with a company that was not 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;
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| |  |  | problems integrating the operations, personnel, technologies or products of the companies;
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| |  |  | challenges in providing accurate financial forecasts;
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| |  |  | conflicts of interest issues that might arise between InterVideo and Ulead as a majority-owned subsidiary; and
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| |  |  | potential loss of key management, engineers and other employees.
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We expect to continue to review opportunities to buy or make investments in other businesses, products or technologies that would enhance our technical capabilities, complement our current products or expand the
breadth of our markets or that may otherwise offer growth opportunities. We have utilized $42 million of our working capital to purchase approximately 63% of the issued shares of Ulead. Any additional purchase of shares of Ulead or other
acquisitions of businesses or technologies will require significant commitment of resources beyond the substantial portion of our cash already spent for the Ulead transaction. We may be required to pay for any acquisitions with cash, but we cannot
be certain that additional capital will be available to us on favorable terms, if at all. In lieu of paying cash, we could issue stock as consideration for an acquisition that would dilute existing stockholders percentage ownership, incur
substantial debt or assume contingent liabilities.

If Microsoft develops or licenses digital video and audio solutions that compete directly
with ours, our business could suffer.

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.
If Microsoft develops or licenses digital video and audio solutions that compete directly with ours and incorporates the solutions into its operating system, or otherwise changes its operating system to render our products incompatible, our revenue
could decline significantly and our business could be harmed.

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, a license with MPEG-LA for its
MPEG-2 video technology, a license from Thomson Licensing S.A. for its MP3 audio technology and various other license agreements relating to 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 is 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 our InstantON product, and from retail sales as a result of the Ulead transaction. Because there is 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.



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We depend substantially on our relationships with HP and 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
HP and a small number of PC OEMs. For the quarter ended September 30, 2005, our two largest OEM customers accounted for 36% of our revenue, with HP accounting for 22% and Microsoft accounting for 14% of our revenue during that period. However,
we expect our revenue from HP to decline beginning in the fourth quarter of 2005 and into 2006 because we have been informed by HP that they will not incorporate certain of our products into certain future HP notebook models. A significant
decrease in revenue from HP, 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 HP 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.

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.

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;
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| |  |  | the engineering, marketing and management capabilities of these customers and the technical challenges that they face in developing their products;
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| |  |  | the financial and other resources of these customers;
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| |  |  | new governmental regulations or changes in taxes or tariffs applicable to these customers; and
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| |  |  | 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 attest 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 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, 2004, as well as our remediation
efforts to date, are more fully discussed in Item 4 of this report, Controls and Procedures.



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While we have taken steps to remediate the identified material weaknesses during the first nine months of 2005, 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 in next years annual assessment. 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 are currently unable to determine whether any of the material weaknesses identified in this report will be remediated by the end of fiscal 2005, and if they are not,
we may be required to report in our Annual Report on Form 10-K for fiscal 2005 or in subsequent reports filed with the Securities and Exchange Commission that material weaknesses in our internal controls over financial reporting continue to exist.
During the preparation of the consolidated financial statements for the third quarter of 2005, management noted deficiencies in obtaining from Ulead timely and accurate financial results based on U.S. Generally-Accepted Accounting Principles (US
GAAP). The deficiencies in oversight of the Ulead financial reporting process result in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected. 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 cover various aspects of DVD technology
incorporated into our and our customers products.

Our digital video and audio products comply with industry standard DVD 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 has notified us that we may need a license so that our products that incorporate DVD technology do not infringe 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 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 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. Similarly,
other parties have alleged that aspects of MPEG-2 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 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;
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| |  |  | 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
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| |  |  | 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.
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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 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, Micron Electronics and MPC
LLC (formerly known as Micron PC LLC), 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 Limited, 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;
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| |  |  | we may not apply for or obtain effective patent protection in every country in which we do business;
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| |  |  | 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;
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| |  |  | 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;
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| |  |  | 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.
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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.

Our ongoing patent litigation with Dell 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 our pending patent infringement lawsuit against Dell, 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 40% and 48% of our revenue for the three and nine months ended
September 30, 2005 and 66% and 72% of our revenue for the three and nine months ended September 30, 2004 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.



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INTERVIDEO, INC.

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, and any failure to adapt to changes in
operating systems by the PC industry could result in significant harm to our business.

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 customers may license a competitors software.

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.

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, Pinnacle Systems, 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.



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INTERVIDEO, INC.

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, we expect revenues from Dell to decline in successive
quarters with the possibility of no revenue from Dell in the future periods, because our current portion of their business is moving to one of our competitors. Further, we expect our revenue from HP to decline beginning in the fourth quarter of 2005
and decrease significantly into 2006 because we have been informed by HP that they will not incorporate certain of our products into certain future HP 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.

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 will need to 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.

Our ability to achieve
profitability will suffer if we fail to manage our growth effectively.

Our success depends on our ability to effectively manage the growth
of our operations, including successfully integrating the operations of Ulead. We cannot be certain that our current cost structure is appropriate for the level of revenue that we generate. Furthermore, we expect to increase the scope of our
operations in the future. To manage the growth of our operations and personnel, we will need to improve our operational and financial systems, procedures and controls as well as hire additional qualified personnel. Our current and planned systems,
procedures and controls may not be adequate to support our future operations and expected growth. Delays or problems associated with any improvement or expansion of our operational systems and controls could harm our relationships with customers,
reputation and brand.

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.



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INTERVIDEO, INC.

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. A failure to meet our customers design
specification often results in a 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.

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 of the timing of our recognition of revenue associated with the sale of our products to OEMs, 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 recent acquisition
of a controlling interest in Ulead will impact this trend in future periods because a substantial portion of their revenues are derived from web and retail sales which are typically recognized in the period in which they occur. Our retail sales is
expected to increase as a percentage of our revenue as a result of the Ulead transaction, which would also result in greater seasonality in our results of operations.

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.

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.



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INTERVIDEO, INC.

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. Our 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.

Our international operations accounted for 49% and 50% of our revenue for the three and nine months
ended September 30, 2005 and 47% and 48% of our revenue for the three and nine months ended September 30, 2004, 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;
| | - |  | ----------------------------------------------------------------------



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INTERVIDEO, INC.



| |  |  | 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.
| | - |  | ---------------------------------------------------

Currently, most of
our international sales are denominated in U.S. dollars. Therefore, a strengthening of the dollar could make our products less competitive in foreign markets. Our current distribution agreements shift foreign exchange risk to our foreign
distributors. This exchange risk may harm the businesses of those distributors or make them less willing to carry and sell our products. We do not use derivative instruments to hedge foreign exchange risk. In the future, a portion of our
international revenue and expenses may be denominated in foreign currencies. Accordingly, we could experience the risks of fluctuating currencies and may choose to engage in currency hedging activities. In addition, if we conduct sales in local
currencies, we may engage in hedging activities, which may not be successful and could expose us to additional risks.

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 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 recent Ulead transaction; and
| | - |  | ----------------------------------------------------------------------------------



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

To the extent the proceeds of
this offering and 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 stockholders 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.



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INTERVIDEO, INC.

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 has 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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INTERVIDEO, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of changes in foreign currency exchange rates and changes in interest rates.

Foreign currency risk

A substantial portion of our revenue is denominated in U.S. dollars. We
may, however, begin denominating revenue from selected international markets in the currency of the applicable market. As a result, our operating results may become subject to significant fluctuations based upon changes in the exchange rates of some
currencies in relation to the U.S. dollar. We will continue to monitor our exposure to currency fluctuations and in the future, we may use economic hedging techniques to minimize the effect of these exchange rate fluctuations that may harm our
financial results. For the quarter ended September 30, 2005, we did not have significant foreign currency denominated net assets or net liabilities positions, and had no foreign currency contracts outstanding.

Interest rate risk

We have limited exposure to
financial market risks, including changes in interest rates. Due to the short-term nature of our investments, we believe that we are not exposed to any material market risk. In addition, our investment portfolio consists of investment-grade
securities diversified among security types, industries, and issuers. Our cash and investments are held and managed by recognized financial institutions that follow InterVideos investment policy. Our policy limits the amount of market exposure
to any one security issue or issuer, and we believe no significant concentration of market risk exists with respect to these investments.



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INTERVIDEO, INC.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has 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. Due to the fact that the 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, 2004 described below, have not been remediated, and in addition, our management has
determined that a material weakness (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) in our internal control over financial reporting, described below, existed as of
September 30, 2005. Accordingly, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2005.

Material weaknesses in our internal control over financial reporting that were identified at December 31, 2004 are related to:



| |  |  | Inadequate controls and procedures in place to effectively identify and monitor amendments to software license arrangements. As a result of these deficiencies, our accounting
personnel may not be made aware of changes to software license arrangements that require recognition in our financial accounting records. Accordingly, errors in our accounting for revenue may occur and not be detected. As a result of these
deficiencies, more than a remote likelihood exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis by employees during the normal course of performing their assigned
functions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Insufficient processes and controls, including management oversight and review, over our income tax accounting practices, estimates, calculations and required disclosures. As a
result of these deficiencies, material errors were identified in the computation of our current period income tax expense and in amounts reported as deferred income taxes in our income tax disclosures. These errors were identified and corrected
prior to the issuance of our financial statements as of and for the year ended December 31, 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inadequate controls within our accounting and financial information systems over user access, segregation of duties and monitoring of information systems. As a result of these
deficiencies, we identified instances whereby users had access to and authority to initiate transactions within certain modules and applications of our accounting and financial systems that were not consistent with their respective roles and
responsibilities. Such inappropriate access rights and inappropriate segregation of duties give rise to the potential for unauthorized and undetected activity within our information systems and results in more than a remote likelihood that a
material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis by employees during the normal course of performing their assigned functions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Material weakness in our internal control over financial reporting that was identified at September 30, 2005 is related to:



| |  |  | Insufficient processes and controls over financial accounting and disclosures in connection with the Ulead acquisition. The Ulead acquisition posed complexities associated with the
application of purchase accounting under SFAS No. 141, Business Combinations due to the Companys non-controlling interest ownership and consequently resulted in adjustments pertaining to the purchase related in-process
research and development costs and intangibles amortization attributable to minority interest holders. These control deficiencies resulted in the restatement of the Companys consolidated financial statements for the periods ended June 30,
2005, and September 30, 2005. We identified the necessary adjustments subsequent to the issuance of the Forms 10-Q for the aforementioned periods.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal
control system was designed to provide reasonable assurance to our management and board of directors regarding the reliability, preparation and fair presentation of published financial statements in accordance with generally accepted accounting
principles.

A material weakness (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) is
a control deficiency, or aggregation of control deficiencies, that results in more than a remote risk that a material misstatement in our annual or interim financial statements will not be prevented or detected.

In making our assessment of the internal control over financial reporting, our management used the criteria issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) inInternal Control-Integrated Framework. In connection with this restatement, management determined that the material weakness existed as of June 30, 2005 and as of September 30, 2005 and it has not been
remediated.



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INTERVIDEO, INC.

Changes in Internal Control over Financial Reporting

During the third quarter of 2005, we began
testing the controls and procedures, described below, that were put in place to remediate the material weaknesses identified above. These material weaknesses will remain as such until adequately tested by management and our independent registered
public accounting firm. We anticipate the testing to be completed with the 2005 Annual Audit.



| |  |  | We have completed and implemented the revised contract review process by specifically identifying key positions throughout the Company that are accountable for monitoring and
tracking all contractual documents. The contract administrator was hired to ensure that all contracts, including licensing agreements, are properly and timely reviewed by all appropriate personnel. This revised process has been fully documented and
provided to the relevant employees.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have successfully implemented the parameters outlined in the engagement letter, which was signed during the first quarter of 2005, enhancing the communications between us and our
external tax service provider. These enhancements have included frequent discussions and regular dissemination of pertinent information to ensure the service providers knowledge of our business is current in order that appropriate guidance can
be provided to our management. Additionally, several members of management have participated in tax education seminars offered by our service provider and other external sources.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under the direction of our Director of Information Technology, we have completed the implementation of limitations over user access to certain applications and modules within our
information systems to more appropriately segregate certain individuals authority in a manner consistent with their respective roles and responsibilities. We have also developed a user and job function matrix to clearly identify and limit
specific application user access consistent with the roles and responsibilities of a given job function. Additionally, we have purchased and implemented a software tool that allows for the monitoring of our critical application environment including
databases, application functions, scheduled processes and the overall system environment. This tool provides us with an audit trail and log of any unauthorized access to our systems as well as notification when an unauthorized change within these
systems occurs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In relation to the adjustments required pertaining to the accounting and disclosures associated with the Ulead acquisition, we announced the restatement of our financial statements
for the quarters ended June 30, 2005 and September 30, 2005 and publicly released the effect of these adjustments on our financial statements, accordingly. While we identified the necessary adjustments, we acknowledge that these
adjustments were not identified until after the filing of our Forms 10-Q for the quarters ended June 30, 2005 and September 30, 2005. As such, we have engaged outside consultants to provide additional expertise in the financial reporting
area and are re-assessing our current expertise and staffing needs in the event complex transactions such as the ones described herein arise in the future.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In April 2005, we acquired a controlling interest in the shares of Ulead. During the preparation of the consolidated financial statements for the third quarter of 2005, management noted deficiencies in obtaining from
Ulead timely and accurate financial results based on U.S. Generally-Accepted Accounting Principles (US GAAP). The deficiencies in oversight of the Ulead financial reporting process result in more than a remote likelihood that a misstatement of the
financial statements that is more than inconsequential will not be prevented or detected. During the third quarter of 2005, we have taken the following actions to address the above:

We have provided a training seminar for certain Ulead accounting and finance staff members, addressing several specific Securities and Exchange Commission filing requirements.

We are currently assessing our resource requirements at Ulead to ensure we have adequate staffing in key areas of the Ulead reporting process and, likewise, have the
appropriate level of technical expertise to ensure timely and accurate US GAAP reported financial statements.



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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 manufacture, sales,
offers to sell, use and importation of products which infringe on the 788 Patent, and to order Dell to account for and pay to InterVideo all damages, plus enhanced damages and attorney fees and costs.

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

Issuer Purchases of Equity Securities

In June, 2004, we announced a stock repurchase program pursuant to which we may purchase up to $10 million, or 700,000 shares, of our outstanding
common stock from time to time. The duration of the repurchase program is open-ended. Under the program, we may purchase shares of common stock through open market transactions at prices deemed appropriate by management.

The timing and amount of repurchase transactions under this program depends on market conditions and corporate and regulatory considerations.

The following table summarizes the stock repurchase transactions that occurred during the quarter ended September 30, 2005.



|                                             |  |                                |  |                             |       |                                                                        |         |                                                                   |        
|-------------------------------------------- |  | ------------------------------ |  | --------------------------- | ----- | ---------------------------------------------------------------------- | ------- | ----------------------------------------------------------------- | -------
|                                             |  | Total number ofsharespurchased |  | Average pricepaid per share |       | Total number of shares purchased as part of publicly announced program |         | Maximum numberof shares that mayyet be purchasedunder the program
|August 1, 2005 through August 31, 2005       |  | 281,100                        |  | $                           | 10.18 |                                                                        | 281,100 |                                                                   |        
|September 1, 2005 through September 30, 2005 |  | 32,500                         |  | $                           | 9.55  |                                                                        | 32,500  |                                                                   | 124,700

Our Insider Trading Policy allows our directors, officers and other employees covered under the policy to
establish, under limited circumstances contemplated by Rule 10b5-1 under the Exchange Act of 1934, written trading plans that permit automatic trading of our common stock. On August 26, 2005, Chinn Chin, our VP of Engineering, and Mike Ling,
our Vice President of Sales and Marketing, adopted Rule 10b5-1 trading plans that will become effective on November 17, 2005.



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##### Table of Contents

INTERVIDEO, INC.

ITEM 6. EXHIBITS

(a) Exhibits

Exhibits filed with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 are
as follows:

EXHIBIT INDEX



|                 |  |                |  |                                                                                                                                                      
|---------------- |  | -------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit footnote |  | Exhibit Number |  | Description                                                                                                                                          
|(a)              |  | 3.1            |  | Certificate of Incorporation                                                                                                                         
|                 |  |               
|(b)              |  | 3.2            |  | Bylaws                                                                                                                                               
|                 |  |               
|(c)              |  | 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 Exhibit 3.2 to Registrants S-1 Registration Statement filed on July 16, 2003 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------

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

|(c) | 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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##### Table of Contents

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: March 10, 2006InterVideo, Inc. (Registrant)By:

/s/ STEVE ROSteve Ro Chief Executive OfficerBy:

/s/ RANDALL BAMBROUGHRandall Bambrough Chief Financial
Officer




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##### Table of Contents

INTERVIDEO, INC.

EXHIBIT INDEX



|                 |  |               |  |                                                                                                                                                      
|---------------- |  | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit footnote |  | ExhibitNumber |  | Description                                                                                                                                          
|(a)              |  | 3.1           |  | Certificate of Incorporation                                                                                                                         
|                 |  |              
|(b)              |  | 3.2           |  | Bylaws                                                                                                                                               
|                 |  |              
|(c)              |  | 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 Exhibit 3.2 to Registrants S-1 Registration Statement filed on July 16, 2003 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------

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

|(c) | 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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