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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the Quarterly Period Ended June 30, 2006

OR



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

For the Transition Period From  To

Commission File Number: 000-49809



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INTERVIDEO, INC.

(Exact name of registrant as specified in its charter)



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

46430 Fremont Blvd., Fremont, CA 94538

(Address of principal executive offices, Zip Code)

(510) 651-0888

(Registrants telephone number, including area
code)



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

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

On August 7, 2006, the registrant had 14,034,236 shares of common stock outstanding, $0.001 par value per share.



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##### Table of Contents

INTERVIDEO, INC.

TABLE OF CONTENTS



|                              |  |                                                                                                                                  |  |     
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                  |  | Page
|PART I.
FINANCIAL INFORMATION |  |                                                                                                                                 
|                              |  |                                                                                                                                 
|Item 1.                       |  | Financial Statements:                                                                                                            |  |     
|                              |  |                                                                                                                                 
|                              |  | (a) Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 (unaudited)                                  |  | 3   
|                              |  |                                                                                                                                 
|                              |  | (b) Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2006 and 2005 (unaudited) |  | 4   
|                              |  |                                                                                                                                 
|                              |  | (c) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)                  |  | 5   
|                              |  |                                                                                                                                 
|                              |  | (d) Notes to Condensed Consolidated Financial Statements (unaudited)                                                             |  | 6   
|                              |  |                                                                                                                                 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                            |  | 17  
|                              |  |                                                                                                                                 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                       |  | 27  
|                              |  |                                                                                                                                 
|Item 4.                       |  | Controls and Procedures                                                                                                          |  | 28  
|                              | 
|PART II.
OTHER INFORMATION    |  |                                                                                                                                 
|                              |  |                                                                                                                                 
|Item 1.                       |  | Legal Proceedings                                                                                                                |  | 29  
|                              |  |                                                                                                                                 
|Item 1A.                      |  | Risk Factors                                                                                                                     |  | 30  
|                              |  |                                                                                                                                 
|Item 6.                       |  | Exhibits                                                                                                                         |  | 44  
|                              |  |                                                                                                                                 
|                              |  | Signatures                                                                                                                       |  | 45  



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##### Table of Contents

INTERVIDEO, INC.

PART 1  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except par value amounts)



|                                                                                                                         |  |                    |         |   |                        |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ---------------------- | - | ------- | -
|                                                                                                                         |  | As of June 30,2006 |         |   | As of December 31,2005 |  
|ASSETS                                                                                                                   |  |                    |         |   |                        |   |         |  
|Current assets:                                                                                                          |  |                    |         |   |                        |   |         |  
|Cash and cash equivalents                                                                                                |  | $                  | 25,771  |   |                        | $ | 31,169  |  
|Short-term investments                                                                                                   |  |                    | 79,113  |   |                        |   | 43,988  |  
|Accounts receivable, net of allowance for doubtful accounts of $658 and $746, respectively                               |  |                    | 8,391   |   |                        |   | 12,939  |  
|Deferred income taxes                                                                                                    |  |                    | 1,039   |   |                        |   | 1,034   |  
|Prepaid expenses and other current assets                                                                                |  |                    | 5,221   |   |                        |   | 6,470   |  
|Held for sale assets                                                                                                     |  |                    |        |   |                        |   | 19,611  |  
|                                                                                                                         |  |                    |         |   |                        |   |         |  
|Total current assets                                                                                                     |  |                    | 119,535 |   |                        |   | 115,211 |  
|                                                                                                                         |  |                    |         |   |                        |   |         |  
|Property and equipment, net                                                                                              |  |                    | 3,608   |   |                        |   | 3,414   |  
|Goodwill                                                                                                                 |  |                    | 1,018   |   |                        |   | 1,018   |  
|Other purchased intangible assets                                                                                        |  |                    | 9,161   |   |                        |   | 7,130   |  
|Deferred income taxes                                                                                                    |  |                    | 3,966   |   |                        |   | 3,965   |  
|Other assets                                                                                                             |  |                    | 3,225   |   |                        |   | 3,507   |  
|                                                                                                                         |  |                    |         |   |                        |   |         |  
|Total assets                                                                                                             |  | $                  | 140,513 |   |                        | $ | 134,245 |  
|                                                                                                                         |  |                    |         |   |                        |   |         |  
|                                                                                                                         |  |                   
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  |                    |         |   |                        |   |         |  
|Current liabilities:                                                                                                     |  |                    |         |   |                        |   |         |  
|Accounts payable                                                                                                         |  | $                  | 2,214   |   |                        | $ | 2,219   |  
|Accrued liabilities                                                                                                      |  |                    | 25,945  |   |                        |   | 19,087  |  
|Income taxes payable                                                                                                     |  |                    | 115     |   |                        |   | 1,566   |  
|Deferred revenue                                                                                                         |  |                    | 4,736   |   |                        |   | 3,938   |  
|                                                                                                                         |  |                    |         |   |                        |   |         |  
|Total current liabilities                                                                                                |  |                    | 33,010  |   |                        |   | 26,810  |  
|                                                                                                                         |  |                    |         |   |                        |   |         |  
|Long-term liabilities:                                                                                                   |  |                    |         |   |                        |   |         |  
|Other long term liabilities                                                                                              |  |                    | 911     |   |                        |   | 871     |  
|Minority interest                                                                                                        |  |                    | 18,208  |   |                        |   | 19,832  |  
|Stockholders equity:                                                                                                    |  |                    |         |   |                        |   |         |  
|Common stock, $0.001 par value: 150,000 shares authorized; 14,015 and 13,850 shares issued and outstanding, respectively |  |                    | 14      |   |                        |   | 14      |  
|Additional paid-in capital                                                                                               |  |                    | 76,907  |   |                        |   | 74,121  |  
|Notes receivable from stockholders                                                                                       |  |                    | (123    | ) |                        |   | (456    | )
|Accumulated other comprehensive income (loss)                                                                            |  |                    | (319    | ) |                        |   | 2,965   |  
|Retained earnings                                                                                                        |  |                    | 11,905  |   |                        |   | 10,088  |  
|                                                                                                                         |  |                    |         |   |                        |   |         |  
|Total stockholders equity                                                                                               |  |                    | 88,384  |   |                        |   | 86,732  |  
|                                                                                                                         |  |                    |         |   |                        |   |         |  
|Total liabilities and stockholders equity                                                                               |  | $                  | 140,513 |   |                        | $ | 134,245 |  
|                                                                                                                         |  |                    |         |   |                        |   |         |  

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



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INTERVIDEO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)



|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|                                                                  |  | 2006                       |        |   | 2005                     |   |        | 2006 |  |   | 2005   |  
|Revenue                                                           |  | $                          | 29,721 |   |                          | $ | 27,606 |      |  | $ | 61,043 |   |  | $ | 49,510 |  
|Cost of revenue                                                   |  |                            | 14,106 |   |                          |   | 10,407 |      |  |   | 29,094 |   |  |   | 19,529 |  
|Amortization of intangible assets                                 |  |                            | 420    |   |                          |   | 287    |      |  |   | 743    |   |  |   | 337    |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                      |  |                            | 15,195 |   |                          |   | 16,912 |      |  |   | 31,206 |   |  |   | 29,644 |  
|                                                                  |  |                            |        |  
|Operating expenses:                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Research and development                                          |  |                            | 6,122  |   |                          |   | 5,437  |      |  |   | 12,754 |   |  |   | 8,460  |  
|Sales and marketing                                               |  |                            | 4,969  |   |                          |   | 5,315  |      |  |   | 9,903  |   |  |   | 8,081  |  
|General and administrative                                        |  |                            | 4,441  |   |                          |   | 3,950  |      |  |   | 9,950  |   |  |   | 6,851  |  
|Acquired in-process research and development                      |  |                            |       |   |                          |   | 2,574  |      |  |   |       |   |  |   | 2,574  |  
|Gain from disposal of asset                                       |  |                            | (2,078 | ) |                          |   | (1     | )    |  |   | (2,006 | ) |  |   | (1     | )
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                          |  |                            | 13,454 |   |                          |   | 17,275 |      |  |   | 30,601 |   |  |   | 25,965 |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from operations                                     |  |                            | 1,741  |   |                          |   | (363   | )    |  |   | 605    |   |  |   | 3,679  |  
|                                                                  |  |                            |        |  
|Other income (expense), net                                       |  |                            | 1,156  |   |                          |   | (1,010 | )    |  |   | 3,621  |   |  |   | (712   | )
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                                 |  |                            | 2,897  |   |                          |   | (1,373 | )    |  |   | 4,226  |   |  |   | 2,967  |  
|                                                                  |  |                            |        |  
|Provision for income taxes                                        |  |                            | 1,190  |   |                          |   | 761    |      |  |   | 1,803  |   |  |   | 2,432  |  
|                                                                  |  |                            |        |  
|Minority interests                                                |  |                            | (976   | ) |                          |   | 296    |      |  |   | (607   | ) |  |   | 296    |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                                  |  |                            |        |  
|Net income (loss)                                                 |  | $                          | 731    |   |                          | $ | (1,838 | )    |  | $ | 1,816  |   |  | $ | 831    |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per share:                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                             |  | $                          | 0.05   |   |                          | $ | (0.13  | )    |  | $ | 0.13   |   |  | $ | 0.06   |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                           |  | $                          | 0.05   |   |                          | $ | (0.13  | )    |  | $ | 0.12   |   |  | $ | 0.05   |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Number of shares used in net income (loss) per share calculation: |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                             |  |                            | 13,991 |   |                          |   | 13,980 |      |  |   | 13,944 |   |  |   | 13,886 |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                           |  |                            | 14,995 |   |                          |   | 13,980 |      |  |   | 14,985 |   |  |   | 15,406 |  
|                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

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



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INTERVIDEO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



|                                                                                  |  |                          |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Six months endedJune 30, |        
|                                                                                  |  | 2006                     |         |   | 2005 |  
|Cash flows from operating activities:                                             |  |                          |         |   |      |   |         |  
|Net income                                                                        |  | $                        | 1,816   |   |      | $ | 831     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                          | 1,873   |   |      |   | 1,407   |  
|Deferred taxes                                                                    |  |                          |        |   |      |   | 38      |  
|Acquired in-process research and development                                      |  |                          |        |   |      |   | 2,574   |  
|Minority interests in net (income) loss of subsidiary                             |  |                          | 607     |   |      |   | (296    | )
|Non cash investment loss                                                          |  |                          |        |   |      |   | 1,088   |  
|Stock-based compensation                                                          |  |                          | 1,936   |   |      |   | 67      |  
|Provision for doubtful accounts                                                   |  |                          | (2      | ) |      |   | 129     |  
|(Gain) from disposal of assets held for sale                                      |  |                          | (2,006  | ) |      |   | (1      | )
|Non cash currency adjustment                                                      |  |                          | (1,646  | ) |      |   |        |  
|Excess tax benefits from stock-based compensation                                 |  |                          | (383    | ) |      |   |        |  
|Other non cash items                                                              |  |                          | (16     | ) |      |   | (16     | )
|Changes in assets and liabilities:                                                |  |                          |         |   |      |   |         |  
|Accounts receivable                                                               |  |                          | 4,622   |   |      |   | (5,655  | )
|Prepaid expenses and other current assets                                         |  |                          | 1,061   |   |      |   | 511     |  
|Other assets                                                                      |  |                          | 214     |   |      |   | (777    | )
|Accounts payable                                                                  |  |                          | (31     | ) |      |   | 57      |  
|Deferred revenue                                                                  |  |                          | 948     |   |      |   | 3,729   |  
|Accrued liabilities and income taxes payable                                      |  |                          | 4,965   |   |      |   | (305    | )
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                          | 13,958  |   |      |   | 3,381   |  
|                                                                                  |  |                         
|Cash flows from investing activities:                                             |  |                          |         |   |      |   |         |  
|Purchases of property and equipment                                               |  |                          | (1,275  | ) |      |   | (863    | )
|Purchases of short-term investments                                               |  |                          | (93,074 | ) |      |   | (13,708 | )
|Proceeds from maturities of short-term investments                                |  |                          | 57,719  |   |      |   | 39,754  |  
|Acquisition of Ulead, net of cash acquired of $13.6 million                       |  |                          |        |   |      |   | (22,744 | )
|Acquisition of intangible assets                                                  |  |                          | (2,913  | ) |      |   |        |  
|Proceeds from Uleads assets held for sale                                        |  |                          | 21,181  |   |      |   |        |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                               |  |                          | (18,362 | ) |      |   | 2,439   |  
|                                                                                  |  |                         
|Cash flows from financing activities:                                             |  |                          |         |   |      |   |         |  
|Proceeds from issuance of common stock under stock option plans                   |  |                          | 467     |   |      |   | 2,706   |  
|Proceeds from repayment of notes receivable                                       |  |                          | 338     |   |      |   | 235     |  
|Excess tax benefits from stock-based compensation                                 |  |                          | 383     |   |      |   |        |  
|Payment for repurchased stock of subsidiary                                       |  |                          | (2,616  | ) |      |   | (671    | )
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                               |  |                          | (1,428  | ) |      |   | 2,270   |  
|                                                                                  |  |                         
|Effect of change in exchange rates on cash                                        |  |                          | 434     |   |      |   | 196     |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                          | (5,398  | ) |      |   | 8,286   |  
|                                                                                  |  |                         
|Cash and cash equivalents, beginning of period                                    |  |                          | 31,169  |   |      |   | 27,410  |  
|                                                                                  |  |                          |         |   |      |   |         |  
|                                                                                  |  |                         
|Cash and cash equivalents, end of period                                          |  | $                        | 25,771  |   |      | $ | 35,696  |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Supplementary disclosure:                                                         |  |                          |         |   |      |   |         |  
|Income tax payments, net of refunds                                               |  | $                        | 1,849   |   |      | $ | 1,269   |  

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



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ORGANIZATION AND BUSINESS

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

NOTE 2. BASIS OF PRESENTATION

The accompanying 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.

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. In addition, certain reclassifications have been made to prior year balances in order to conform to the current
period presentation. These reclassifications had no impact on previously reported earnings or retained earnings.

The condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005, and notes thereto, included in InterVideos 2005 Annual Report on Form 10-K.

During the first quarter of fiscal 2006, the Company adopted the provisions of and now accounts for stock-based compensation in accordance with the Financial Accounting
Standards Boards (FASB) Statement of Financial Accounting Standards No. 123(as revised in 2004  SFAS No. 123R), Share-Based Payment, as discussed in Note 3.

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

Estimates

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



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Stock-based compensation

Effective January 1, 2006 InterVideo
adopted SFAS No. 123R using the modified prospective method and therefore has not restated prior periods results. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested
stock options that are expected to vest over the requisite service periods beginning on January 1, 2006. Under the fair value recognition provisions of SFAS No. 123R, the Company recognize stock-based compensation net of an estimated forfeiture
rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award. Prior to SFAS No. 123R adoption, InterVideo accounted for share-based payments under Accounting Principles Board Opinion
No. 25 (APB 25), Accounting for Stock Issues to Employees, and accordingly, generally recognized compensation expense related to stock options with intrinsic value and accounted for forfeitures as they occurred.

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

The assumptions used in calculating the fair value of stock-based awards represent InterVideos best estimates, but these estimates involve inherent uncertainties
and the application of management judgment. As a result, if factors change and the Company uses different assumptions, its stock-based compensation expense could be materially different in the future. In addition, InterVideo is required to estimate
the expected forfeiture rate and only recognize expense for those shares expected to vest. The Company estimates the forfeiture rate based on its historical data from employee termination and option cancellations of the granted stock rewards issued.
If the Companys actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what it has recorded in the current period. See Note 5Stock-Based
Compensation in the Notes to Condensed Consolidated Financial Statements under Part I, Item 1 in this Form 10-Q for additional information.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 48,
Accounting for Income Tax Uncertainties (FIN 48). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as more-likely-than-not to be sustained by the taxing authority. The
recently issued literature also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income
tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties.

FIN 48 is effective for
fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a
cumulative-effect adjustment recorded to the beginning balance of retained earnings. Because the guidance was recently issued, we have not yet determined the impact, if any, of adopting the provisions of FIN 48 on our financial position, results of
operations and liquidity. We are required to adopt FIN 48 beginning January 1, 2007.

NOTE 4. NET INCOME PER SHARE

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



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4. NET INCOME PER SHARE (Continued)

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



|                                                                |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|--------------------------------------------------------------- |  | -------------------------- | ------ | ---- | ------------------------ | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                |  | Three months endedJune 30, |        |      | Six months endedJune 30, |       
|                                                                |  | 2006                       |        | 2005 |                          |        | 2006 |  | 2005 |       
|Numerator:                                                      |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Net income (loss)                                               |  | $                          | 731    |      | $                        | (1,838 | )    |  | $    | 1,816  |  | $ | 831    |  
|                                                                |  |                            |        |     
|Denominator:                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Basic:                                                          |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Weighted average common shares outstanding                      |  |                            | 13,991 |      |                          | 13,981 |      |  |      | 13,944 |  |   | 13,891 |  
|Less: weighted average shares subject to repurchase             |  |                            |       |      |                          | (1     | )    |  |      |       |  |   | (5     | )
|                                                                |  |                            |        |     
|Denominator for basic calculation                               |  |                            | 13,991 |      |                          | 13,980 |      |  |      | 13,944 |  |   | 13,886 |  
|                                                                |  |                            |        |     
|Net income (loss) per share  Basic                             |  | $                          | 0.05   |      | $                        | (0.13  | )    |  | $    | 0.13   |  | $ | 0.06   |  
|                                                                |  |                            |        |     
|Diluted:                                                        |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Weighted average common shares outstanding                      |  |                            | 13,991 |      |                          | 13,980 |      |  |      | 13,944 |  |   | 13,886 |  
|Weighted average dilutive effect of convertible preferred stock |  |                            |       |      |                          |       |      |  |      |       |  |   |       |  
|Weighted average dilutive effect of common stock options        |  |                            | 1,004  |      |                          |       |      |  |      | 1,041  |  |   | 1,520  |  
|                                                                |  |                            |        |     
|Denominator for diluted calculation                             |  |                            | 14,995 |      |                          | 13,980 |      |  |      | 14,985 |  |   | 15,406 |  
|                                                                |  |                            |        |     
|Net income (loss) per share  Diluted                           |  | $                          | 0.05   |      | $                        | (0.13  | )    |  | $    | 0.12   |  | $ | 0.05   |  

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 (in thousands):



|                                               |  |                            |  |                          |  |       |  |     
|---------------------------------------------- |  | -------------------------- |  | ------------------------ |  | ----- |  | ----
|                                               |  | Three months endedJune 30, |  | Six months endedJune 30,
|                                               |  | 2006                       |  | 2005                     |  | 2006  |  | 2005
|Antidilutive options to purchase common shares |  | 1,782                      |  | 2,337                    |  | 1,702 |  | 861 

NOTE 5. STOCK-BASED COMPENSATION

2003 Stock Option Plan (the Stock Plan)

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

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



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. STOCK-BASED COMPENSATION (Continued)

2003 Employee
Stock Purchase Plan (the ESPP)

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

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

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

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

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



|                               |  |        |   |  |                               |      
|------------------------------ |  | ------ | - |  | ----------------------------- | -----
|Options                        |  | Shares |   |  | WeightedAverageExercise Price
|Outstanding at January 1, 2006 |  | 2,991  |   |  | $                             | 7.75 
|Granted                        |  | 23     |   |  |                               | 11.05
|Exercised                      |  | (93    | ) |  |                               | 1.48 
|Canceled or expired            |  | (26    | ) |  |                               | 13.67
|                               |  |        |   |  |                               |      
|Outstanding at March 31, 2006  |  | 2,895  |   |  | $                             | 7.93 
|                               |  |        |   |  |                               |      
|Granted                        |  | 313    |   |  |                               | 10.78
|Exercised                      |  | (43    | ) |  |                               | 1.98 
|Canceled or expired            |  | (26    | ) |  |                               | 12.56
|                               |  |        |   |  |                               |      
|Outstanding at June 30, 2006   |  | 3,139  |   |  | $                             | 8.25 
|                               |  |        |   |  |                               |      

The intrinsic value of stock options outstanding, exercisable and exercised is calculated based on the difference
between the weighted average of exercise price per share and the quoted market price per share of the Companys common stock as of the close of the last trading day of the fiscal quarter. The total intrinsic value of options exercised for the
three months ended June 30, 2006 was $330,000. The aggregate intrinsic value of options exercisable and options outstanding as of June 30, 2006 was $7.1 million and $4.7 million, respectively. Upon the exercise of options, the Company
issues new common stock from its authorized shares. The market price per share as of June 30, 2006 was $9.77 as reported by the Nasdaq Stock Market under the symbol IVII.



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. STOCK-BASED COMPENSATION (Continued)

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



|                        |                                  |                     |                                         |                     |                              |   |                                  |  |                              |  |   |      
|----------------------- | -------------------------------- | ------------------- | --------------------------------------- | ------------------- | ---------------------------- | - | -------------------------------- |  | ---------------------------- |  | - | -----
|Range of Exercise Price |                                  | Options Outstanding |                                         | Options Exercisable
|                        | Number ofSharesUnderlyingOptions |                     | WeightedAverageRemainingContractualLife |                     | WeightedAverageExercisePrice |   | Number ofSharesUnderlyingOptions |  | WeightedAverageExercisePrice
|$0.09                   |                                  | 695                 |                                         | 2.71                |                              | $ | 0.09                             |  | 695                          |  | $ | 0.09 
|$0.46 to $6.10          |                                  | 462                 |                                         | 4.18                |                              |   | 3.90                             |  | 462                          |  |   | 3.90 
|$7.39 to $9.98          |                                  | 459                 |                                         | 8.43                |                              |   | 9.47                             |  | 155                          |  |   | 8.89 
|$10.04 to $11.12        |                                  | 460                 |                                         | 9.51                |                              |   | 10.74                            |  | 48                           |  |   | 10.70
|$11.34 to $13.80        |                                  | 299                 |                                         | 8.17                |                              |   | 12.49                            |  | 162                          |  |   | 12.46
|$14.17                  |                                  | 627                 |                                         | 7.59                |                              |   | 14.17                            |  | 358                          |  |   | 14.17
|$14.57 to $16.99        |                                  | 137                 |                                         | 7.51                |                              |   | 15.60                            |  | 62                           |  |   | 16.32
|                        |                                  |                     |                                         |                     |                              |   |                                  |  |                              |  |   |      
|Total                   |                                  | 3,139               |                                         | 6.46                |                              | $ | 8.25                             |  | 1,942                        |  | $ | 6.11 
|                        |                                  |                     |                                         |                     |                              |   |                                  |  |                              |  |   |      

As of June 30, 2006, total unamortized stock-based compensation cost related to non-vested stock options was
$4.2 million which is expected to be recognized over the remaining vesting period of 1.45 years. Compensation costs for all stock-based awards granted on or prior to January 1, 2006 will continue to be recognized using the accelerated approach,
while compensation expense for all stock-based awards granted subsequent to January 1, 2006 will be recognized using the straight-line method.

Total
recognized tax benefit related to stock-based compensation expense was $132,000 and $292,000 for the three and six months ended June 30, 2006 and 2005. The following table summarizes the impact of SFAS No. 123R adoption on stock-based
compensation costs for employees on our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 (in thousands):



|                                        |  |                                 |     |                               |   |      
|--------------------------------------- |  | ------------------------------- | --- | ----------------------------- | - | -----
|                                        |  | Three months endedJune 30, 2006 |     | Six months endedJune 30, 2006
|Research and development                |  | $                               | 436 |                               | $ | 892  
|Sales and marketing                     |  |                                 | 141 |                               |   | 304  
|General and administrative              |  |                                 | 358 |                               |   | 738  
|Technical support                       |  |                                 | 1   |                               |   | 2    
|                                        |  |                                 |     |                               |   |      
|Total stock-based compensation expenses |  | $                               | 936 |                               | $ | 1,936

As a result of adopting SFAS No. 123R on January 1, 2006, the Companys income before income taxes and net
loss for the three and six months ended June 30, 2006 was lowered by $936,000 and $1,936,000, respectively, than if it had continued to account for share-based compensation under APB No. 25.

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



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. STOCK-BASED COMPENSATION (Continued)



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



|                                                                                                                          |  |                                 |        |   |                               |   |        |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------------------- | - | ------ | -
|                                                                                                                          |  | Three Months EndedJune 30, 2005 |        |   | Six Months EndedJune 30, 2005 |  
|Net income (loss), as reported                                                                                            |  | $                               | (1,838 | ) |                               | $ | 831    |  
|Add: Stock-based compensation expense for employees previously determined under intrinsic value method, net of tax effect |  |                                 | 27     |   |                               |   | 67     |  
|Less: Stock-based compensation expense for employees determined under fair value based method, net of tax effect          |  |                                 | (1,179 | ) |                               |   | (2,385 | )
|                                                                                                                          |  |                                
|Net loss, after effect of stock-based compensation for employees                                                          |  | $                               | (2,990 | ) |                               | $ | (1,487 | )
|                                                                                                                          |  |                                
|Net income (loss) per share:                                                                                              |  |                                 |        |   |                               |   |        |  
|Basic - as reported                                                                                                       |  | $                               | (0.13  | ) |                               | $ | 0.06   |  
|                                                                                                                          |  |                                
|Basic - pro forma, after effect of stock-based compensation for employees                                                 |  | $                               | (0.21  | ) |                               | $ | (0.11  | )
|Diluted - as reported                                                                                                     |  | $                               | (0.13  | ) |                               | $ | 0.05   |  
|Diluted - pro forma, after effect of stock-based compensation for employees                                               |  | $                               | (0.21  | ) |                               | $ | (0.11  | )

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



|                                                            |  |                            |           |   |                           |   |         |      |  |   |           |   |  |   |           |  
|----------------------------------------------------------- |  | -------------------------- | --------- | - | ------------------------- | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                            |  | Three months endedJune 30, |           |   | Six months ended June 30, |  
|                                                            |  | 2006                       |           |   | 2005                      |   |         | 2006 |  |   | 2005      |  
|Weighted average fair value of options granted to employees |  | $                          | 4.96      |   |                           | $ | 7.61    |      |  | $ | 4.96      |   |  | $ | 8.07      |  
|                                                            |  |                            |           |  
|Black-Scholes model assumptions:                            |  |                            |           |   |                           |   |         |      |  |   |           |   |  |   |           |  
|Risk-free interest rate                                     |  |                            | 4.97      | % |                           |   | 3.61    | %    |  |   | 4.48-4.97 | % |  |   | 3.34-3.61 | %
|Expected term of the option                                 |  |                            | 4.9 years |   |                           |   | 4 years |      |  |   | 4.9 years |   |  |   | 4 years   |  
|Dividend yield                                              |  |                            | 0         | % |                           |   | 0       | %    |  |   | 0         | % |  |   | 0         | %
|Volatility                                                  |  |                            | 44        | % |                           |   | 80.0    | %    |  |   | 44-45     | % |  |   | 80.0      | %

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

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

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



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. STOCK-BASED COMPENSATION (Continued)

The first ESPP offering
period began in July 2003 and ended in April 2004. The weighted average fair value of each common stock purchase right was $2.93 and none for the three and six months ended June 30, 2006, estimated on the beginning of the offering period using
the Black-Scholes-Merton option pricing model with the following assumptions (unaudited):



|                                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                            |  | Three months ended June 30, |            |   | Six months ended June 30, |  
|                                                            |  | 2006                        |            |   | 2005                      |   |            | 2006 |  |   | 2005       |  
|Weighted average fair value of purchased option (per share) |  | $                           | 2.93       |   |                           | $ | 4.84       |      |  | $ | 2.93       |   |  | $ | 4.84       |  
|                                                            |  |                             |            |  
|Black-Scholes model assumptions:                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Risk-free interest rate                                     |  |                             | 4.98       | % |                           |   | 3.34       | %    |  |   | 4.98       | % |  |   | 3.34       | %
|Expected term                                               |  |                             | 0.54 years |   |                           |   | 1.25 years |      |  |   | 0.54 years |   |  |   | 1.25 years |  
|Dividend yield                                              |  |                             | 0          | % |                           |   | 0          | %    |  |   | 0          | % |  |   | 0          | %
|Volatility                                                  |  |                             | 44         | % |                           |   | 76.0       | %    |  |   | 44         | % |  |   | 76.0       | %

The stock-based compensation expense recognized in the Companys results for the three and six months ended
June 30, 2006 is based on awards ultimately expected to vest. The Company estimate forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from their estimates. The forfeiture analysis
study produced an annual forfeiture assumption of 12%. Prior to fiscal year 2006, the Company accounted for forfeitures when they occurred.

NOTE 6.
OTHER INCOME (EXPENSE), NET

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



|                                         |  |                            |       |      |                          |        |      |  |      |       |  |   |      |  
|---------------------------------------- |  | -------------------------- | ----- | ---- | ------------------------ | ------ | ---- |  | ---- | ----- |  | - | ---- | -
|                                         |  | Three months endedJune 30, |       |      | Six months endedJune 30, |       
|                                         |  | 2006                       |       | 2005 |                          |        | 2006 |  | 2005 |      
|Interest income                          |  | $                          | 539   |      | $                        | 236    |      |  | $    | 839   |  | $ | 547  |  
|Investment gain (loss)                   |  |                            | 326   |      |                          | (899   | )    |  |      | 692   |  |   | (986 | )
|Foreign currency translation gain (loss) |  |                            | 105   |      |                          | (364   | )    |  |      | 1,690 |  |   | (329 | )
|Other                                    |  |                            | 186   |      |                          | 17     |      |  |      | 400   |  |   | 56   |  
|                                         |  |                            |       |      |                          |        |      |  |      |       |  |   |      |  
|                                         |  |                            |       |     
|Other income (expense), net              |  | $                          | 1,156 |      | $                        | (1,010 | )    |  | $    | 3,621 |  | $ | (712 | )

NOTE 7. 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 June 30, 2006, the Company calculated its projected effective tax rate for the year ending December 31, 2006 to be 45%. This rate differs from the statutory federal rate of 35% primarily
due to state taxes, net of federal benefit, differences between federal and foreign tax rates, foreign withholding taxes and tax effect of stock-based compensation expense resulted from the adoption of SFAS No. 123R.



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##### Table of Contents

INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 8. 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 (in thousands):



|                                         |  |                                               |      |   |                            |   |        |                                     |  |   |        |  
|---------------------------------------- |  | --------------------------------------------- | ---- | - | -------------------------- | - | ------ | ----------------------------------- |  | - | ------ | -
|                                         |  | Unrealized GaininAvailable-for-SaleSecurities |      |   | ForeignCurrencyTranslation |   |        | AccumulatedOtherComprehensiveIncome | 
|Balance as of December 31, 2005          |  | $                                             | 328  |   |                            | $ | 2,637  |                                     |  | $ | 2,965  |  
|Net change during the three month period |  |                                               | 56   |   |                            |   | (2,441 | )                                   |  |   | (2,385 | )
|Balance as of March 31, 2006             |  | $                                             | 384  |   |                            | $ | 196    |                                     |  | $ | 580    |  
|Net change during the three month period |  |                                               | (197 | ) |                            |   | (702   | )                                   |  |   | (899   | )
|                                         |  |                                               |      |   |                            |   |        |                                     |  |   |        |  
|Balance as of June 30, 2006              |  | $                                             | 187  |   |                            | $ | (506   | )                                   |  | $ | (319   | )

NOTE 9. BALANCE SHEET COMPONENTS

Short-term investments

Short-term investments consist of (in thousands):



|                                |  |                         |        |                      |   |                       |  |   |                            |   |  |   |       
|------------------------------- |  | ----------------------- | ------ | -------------------- | - | --------------------- |  | - | -------------------------- | - |  | - | ------
|                                |  | As of June 30, 2006    
|                                |  | Amortizedcost           |        | Grossunrealizedgains |   | Grossunrealizedlosses |  |   | Estimated fair marketvalue
|Available-for-sale securities:  |  |                         |        |                      |   |                       |  |   |                            |   |  |   |       
|U.S. government debt securities |  | $                       | 2,001  |                      | $ |                      |  | $ | (26                        | ) |  | $ | 1,975 
|State and municipal notes/bonds |  |                         | 9,272  |                      |   |                      |  |   | (40                        | ) |  |   | 9,232 
|Auction rate securities         |  |                         | 29,750 |                      |   |                      |  |   |                           |   |  |   | 29,750
|Mutual fund securities          |  |                         | 36,570 |                      |   | 4                     |  |   | (56                        | ) |  |   | 36,518
|Corporate securities            |  |                         | 534    |                      |   | 1,104                 |  |   |                           |   |  |   | 1,638 
|                                |  |                         |        |                      |   |                       |  |   |                            |   |  |   |       
|Total short-term investments    |  | $                       | 78,127 |                      | $ | 1,108                 |  | $ | (122                       | ) |  | $ | 79,113
|                                | 
|                                |  | As of December 31, 2005
|                                |  | Amortizedcost           |        | Grossunrealizedgains |   | Grossunrealizedlosses |  |   | Estimatedfairmarket value 
|Available-for-sale securities:  |  |                         |        |                      |   |                       |  |   |                            |   |  |   |       
|U.S. government debt securities |  | $                       | 4,001  |                      | $ |                      |  | $ | (20                        | ) |  | $ | 3,981 
|State and municipal notes/bonds |  |                         | 5,829  |                      |   |                      |  |   | (16                        | ) |  |   | 5,813 
|Auction rate securities         |  |                         | 16,850 |                      |   |                      |  |   |                           |   |  |   | 16,850
|Mutual fund securities          |  |                         | 15,549 |                      |   | 29                    |  |   |                           |   |  |   | 15,578
|Corporate securities            |  |                         | 508    |                      |   | 1,258                 |  |   |                           |   |  |   | 1,766 
|                                |  |                         |        |                      |   |                       |  |   |                            |   |  |   |       
|Total short-term investments    |  | $                       | 42,737 |                      | $ | 1,287                 |  | $ | (36                        | ) |  | $ | 43,988

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

Sale of assets

In June 2006, Ulead entered
into an agreement to sell its interest in land and building with a book value of $19.6 million. The fair value of the land and building was $21.9 million. After deducting selling and related currency translation adjustments, the net realized gain on
the disposal of land and building was $2.1 million.



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9. BALANCE SHEET COMPONENTS (Continued)

Purchase of
intangible assets

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

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



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

Other purchased intangible assets, net

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



|                                             |  |              |        |   |                  |   |       |  
|-------------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ----- | -
|                                             |  | June 30,2006 |        |   | December 31,2005 |  
|Purchased development technology             |  | $            | 6,172  |   |                  | $ | 3,839 |  
|Customer contracts and related relationships |  |              | 2,483  |   |                  |   | 2,043 |  
|Trade name                                   |  |              | 2,145  |   |                  |   | 2,145 |  
|Less: Accumulated amortization               |  |              | (1,639 | ) |                  |   | (897  | )
|                                             |  |              |        |   |                  |   |       |  
|Total other purchased intangible assets      |  | $            | 9,161  |   |                  | $ | 7,130 |  
|                                             |  |              |        |   |                  |   |       |  

Other identifiable intangible assets, including purchased developed technology, customer base and trademarks are
being amortized over their useful lives of five to six years; customer contracts and related relationships are being amortized over their estimated useful lives of seven months to eight years; and the trade name is being amortized over its estimated
useful life of six years.

Accrued liabilities

Accrued liabilities consist of the following (in thousands):



|                                                 |  |              |        |                  |   |       
|------------------------------------------------ |  | ------------ | ------ | ---------------- | - | ------
|                                                 |  | June 30,2006 |        | December 31,2005
|Payroll and related benefits                     |  | $            | 3,352  |                  | $ | 4,125 
|Royalties                                        |  |              | 16,254 |                  |   | 7,967 
|Legal, audit and other consulting fees           |  |              | 1,034  |                  |   | 2,330 
|Value-added tax, sales and other withholding tax |  |              | 1,624  |                  |   | 1,245 
|Accrued reserve for sales returns                |  |              | 965    |                  |   | 1,094 
|Other                                            |  |              | 2,716  |                  |   | 2,326 
|                                                 |  |              |        |                  |   |       
|Total accrued liabilities                        |  | $            | 25,945 |                  | $ | 19,087
|                                                 |  |              |        |                  |   |       



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION

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

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

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



|                               |  |                            |        |                          |   |        |  |      |        |  |   |       
|------------------------------ |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                               |  | Three months endedJune 30, |        | Six months endedJune 30,
|                               |  | 2006                       |        | 2005                     |   | 2006   |  | 2005
|Revenues by Sales Channel:     |  |                            |        |                          |   |        |  |      |        |  |   |       
|OEMs                           |  | $                          | 21,874 |                          | $ | 19,046 |  | $    | 46,671 |  | $ | 37,770
|Web sales and retail           |  |                            | 7,847  |                          |   | 8,560  |  |      | 14,372 |  |   | 11,740
|                               |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total revenue                  |  | $                          | 29,721 |                          | $ | 27,606 |  | $    | 61,043 |  | $ | 49,510
|                               |  |                            |        |                          |   |        |  |      |        |  |   |       
|Revenues by Geographic Region: |  |                            |        |                          |   |        |  |      |        |  |   |       
|United States                  |  | $                          | 14,039 |                          | $ | 11,837 |  | $    | 30,928 |  | $ | 24,678
|Europe                         |  |                            | 2,529  |                          |   | 3,026  |  |      | 4,938  |  |   | 4,867 
|Asia:                          |  |                            |        |                          |   |        |  |      |        |  |   |       
|Japan                          |  |                            | 9,590  |                          |   | 11,180 |  |      | 18,956 |  |   | 17,482
|Other Asia                     |  |                            | 3,563  |                          |   | 1,563  |  |      | 6,221  |  |   | 2,483 
|                               |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total revenue                  |  | $                          | 29,721 |                          | $ | 27,606 |  | $    | 61,043 |  | $ | 49,510
|                               |  |                            |        |                          |   |        |  |      |        |  |   |       
|Revenues by Products:          |  |                            |        |                          |   |        |  |      |        |  |   |       
|WinDVD                         |  | $                          | 10,664 |                          | $ | 12,500 |  | $    | 24,094 |  | $ | 26,293
|VideoStudio                    |  |                            | 3,192  |                          |   | 3,282  |  |      | 4,883  |  |   | 3,282 
|Royalty                        |  |                            | 4,792  |                          |   |       |  |      | 8,901  |  |   |      
|Other products                 |  |                            | 11,073 |                          |   | 11,824 |  |      | 23,165 |  |   | 19,935
|                               |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total revenue                  |  | $                          | 29,721 |                          | $ | 27,606 |  | $    | 61,043 |  | $ | 49,510
|                               |  |                            |        |                          |   |        |  |      |        |  |   |       

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



|                  |  |                            |   |  |                          |   |  |      |   |  |      |  
|----------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                  |  | Three months endedJune 30, |   |  | Six months endedJune 30, |  
|                  |  | 2006                       |   |  | 2005                     |   |  | 2006 |   |  | 2005 |  
|Revenue from:     |  |                            |   |  |                          |   |  |      |   |  |      |  
|HP                |  | 18                         | % |  | 24                       | % |  | 22   | % |  | 29   | %
|Microsoft         |  | 16                         | % |  |                         | % |  | 15   | % |  |     | %
|Toshiba           |  | 11                         | % |  | 9                        | % |  | 12   | % |  | 10   | %
|Softbank Commerce |  | 7                          | % |  | 11                       | % |  | 5    | % |  | 6    | %

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:



|                         |  |              |   |  |                  |  
|------------------------ |  | ------------ | - |  | ---------------- | -
|                         |  | June 30,2006 |   |  | December 31,2005 |  
|Account receivable from: |  |              |   |  |                  |  
|Microsoft                |  |             | % |  | 29               | %
|Softbank Commerce        |  | 11           | % |  | 9                | %



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INTERVIDEO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

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



|                                 |  |              |       |                  |   |      
|-------------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                                 |  | June 30,2006 |       | December 31,2005
|Tangible long-lived assets:      |  |              |       |                  |   |      
|United States                    |  | $            | 1,079 |                  | $ | 945  
|Europe                           |  |              | 91    |                  |   | 16   
|Asia:                            |  |              |       |                  |   |      
|India                            |  |              | 45    |                  |   | 18   
|Japan                            |  |              | 350   |                  |   | 377  
|China                            |  |              | 529   |                  |   | 453  
|Taiwan                           |  |              | 1,514 |                  |   | 1,605
|                                 |  |              |       |                  |   |      
|Total tangible long-lived assets |  | $            | 3,608 |                  | $ | 3,414
|                                 |  |              |       |                  |   |      

NOTE 11. CONTINGENCIES

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

NOTE 12. SUBSEQUENT EVENTS

On July 5, 2006, InterVideo Digital Technology Corp., a wholly-owned subsidiary of InterVideo, Inc. (InterVideo), entered into a merger agreement with Ulead Systems, Inc (Ulead).
InterVideo currently owns 48,817,395 shares of Ulead, or approximately 67% of the issued shares of Ulead. Pursuant to the merger agreement, InterVideo Digital Technology Corp. will purchase the remaining shares of Ulead for NT$30 (approximately U.S.
$0.93) per share. Upon completion of the merger, InterVideo will assume 100% of all assets and liabilities of Ulead. The merger is subject to approval by the shareholders of Ulead and regulatory approvals.



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INTERVIDEO, INC.

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

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

Overview

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

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

Historically, sales of our WinDVD product, a software DVD player for PCs, to PC OEMs have accounted for a substantial portion of our revenue. We derived 36% and 39% of
our revenue for the three and six months ended June 30, 2006 from sales of our WinDVD product, primarily to PC OEMs, as compared to 45% and 53% of our revenue for the same periods ended June 30, 2005. We expect that revenue from sales of
our WinDVD product to PC OEMs will continue to account for a substantial portion of our revenue. However, in the future, we expect to derive an increasing percentage of our revenue from sales of other products, including royalties related to
Microsoft Xbox sales, WinDVD Creator, InterVideo InstantON, InterVideo Home Theater, InterVideo DVD Copy, MediaOne and Linux-based versions of our DVD and DVR software designed for Linux-based PCs and CE devices, products sold through our retail and
web-based sales channels as well as Ulead product offerings including DVD MovieFactory, VideoStudio and PhotoImpact.



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INTERVIDEO, INC.

Our software is generally bundled with products sold by PC OEMs. Our PC OEM customers include, among others, Hewlett-Packard, Toshiba, Microsoft, NEC, Fujitsu, Fujitsu Siemens, Sony and IBM/Lenovo. Due to a
concentration in the PC OEM industry, we derive a substantial portion of our revenue from a small number of customers. For the three months ended June 30, 2006, our three largest customers accounted for 45% of our revenue, with Hewlett-Packard
accounting for 18%, Microsoft accounting for 16% and Toshiba accounting for 11% of our revenue. For the six months ended June 30, 2006, our three largest customers accounted for 49% of our revenue, with Hewlett-Packard accounting for 22%,
Microsoft accounting for 15% and Toshiba accounting for 12% of our revenue. Our revenue from HP has declined 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 of from other customers including HP, would reduce our revenue and
gross profit and otherwise harm our business. We expect that a small number of customers will continue to account for a substantial portion of our revenue for the foreseeable future, although the identity of those customers may change from period to
period. Because there are only a limited number of potential new, large PC OEM customers for our WinDVD product, we must derive any future revenue growth principally from increased unit sales of WinDVD or other products to existing PC OEMs, CE
manufacturers, PC peripherals manufacturers, smaller PC OEMs and to consumers through retail channels and our websites. Because some of these other revenue opportunities are more fragmented than the PC OEM market and will require more time and
effort to penetrate, our revenue may decline or grow at a slower rate than in prior periods.

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

Users may also purchase products through our websites and retail channels. During the three and six months ended June 30, 2006, we derived 26% and 24% of our revenue from web and retail sales as compared to 31%
and 24% of our revenue for the same periods ended June 30, 2005. To increase our web and retail sales in the future, we intend to increase investments in associated selling and marketing programs. The gross profits associated with our products
sold through our websites are generally higher than those associated with our OEM sales. Accordingly, fluctuations in our web and retail revenue as a percentage of total revenue will impact our gross profits.

We derive and expect to continue to derive a significant portion of our revenue from sales outside of the United States. Sales outside of the United States accounted for
53% and 49% of our revenue for the three and six months ended June 30, 2006 as compared to 57% and 50% of our revenue for the same periods ended June 30, 2005. Currently, most of our international sales are denominated in U.S. dollars.
Therefore, a strengthening dollar could make our products less competitive in foreign markets. Our current distribution agreements shift foreign exchange risk to our foreign distributors. In the future, an increasing portion of our international
revenue may be denominated in foreign currencies and we may use derivative instruments to hedge foreign exchange risk.

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



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INTERVIDEO, INC.

Critical Accounting Policies, Significant Judgments, and Estimates

We base the discussions and analysis of our
financial condition and results of operations upon our consolidated financial statements, which we prepare in accordance with 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 income taxes; and
| | - |  | --------------------------------



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

Revenue recognition

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



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



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



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



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

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

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

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



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INTERVIDEO, INC.

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



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



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



| |  |  | other distributors and retailers of our InterVideo products have limited rights to return products up to six months following the purchase. We generally recognize revenue, net of
contractually obligated return rights and any additional required rebate or pricing reserves, upon completion of shipment to these distributors and retailers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

Accounting for income taxes

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

Stock-based compensation

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

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

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



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INTERVIDEO, INC.

We use the Black-Scholes-Merton option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date
of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. See Note 5 for further information regarding the SFAS No. 123R disclosures on assumptions.

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

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

Results of Operations  Comparison of the three and six months ended June 30,
2006 and 2005

Revenue, Cost of Revenue and Gross Profit



|                                   |  |                            |        |   |              |   |        |                          |      |   |              |      |  |   |        |   |  |   |        |   |  |   |        |  
|---------------------------------- |  | -------------------------- | ------ | - | ------------ | - | ------ | ------------------------ | ---- | - | ------------ | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|(In thousands, except percentages) |  | Three months endedJune 30, |        |   | Changeamount |   |        | Six months endedJune 30, |      |   | Changeamount |     
|                                   |  | 2006                       |        |   | 2005         |   |        |                          | 2006 |   |              | 2005 |  |  
|Total revenue                      |  | $                          | 29,721 |   |              | $ | 27,606 |                          |      | $ | 2,115        |      |  | $ | 61,043 |   |  | $ | 49,510 |   |  | $ | 11,533 |  
|Cost of revenue                    |  |                            | 14,526 |   |              |   | 10,694 |                          |      |   | 3,832        |      |  |   | 29,837 |   |  |   | 19,866 |   |  |   | 9,971  |  
|Gross profit                       |  |                            | 15,195 |   |              |   | 16,912 |                          |      |   | (1,717       | )    |  |   | 31,206 |   |  |   | 29,644 |   |  |   | 1,562  |  
|As percent of total revenue        |  |                            | 51     | % |              |   | 61     | %                        |      |   | (10          | )%   |  |   | 51     | % |  |   | 60     | % |  |   | 5      | %

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. Cost of revenue consists
primarily of license royalties, expenses incurred to manufacture, package and distribute our software products, the amortization of other purchased intangible assets and costs associated with end-user PCS.

Revenue increased 8% to $29.7 million for the three months ended June 30, 2006 from $27.6 million for the three months ended June 30, 2005. OEM product sales
increased 15% to $21.9 million for the three months ended June 30, 2006 from $19.0 million for the three months ended June 30, 2005 and accounted for approximately 74% of total revenue for the three months ended June 30, 2006 as
compared to 69% for the three months ended June 30, 2005. Web and retail sales decreased 8% to $7.8 million for the three months ended June 30, 2006 from $8.6 million for the three months ended June 30, 2005. We derived a substantial
portion of our revenue from a small number of customers. For the three months ended June 30, 2006, our three largest customers accounted for 45% of our revenue, with Hewlett-Packard accounting for 18%, Microsoft accounting for 16% and Toshiba
accounting for 11% of our revenue. For the three months ended June 30, 2005, three largest customers accounted for 44% of our revenue with Hewlett-Packard accounting for 24%, Softbank Commerce accounting for 11% of our revenue and Toshiba
accounting for 9% of our revenue. Sales outside the United States accounted for 53% of our revenue for the three months ended June 30, 2006 and 57% of our revenue for the three months ended June 30, 2005. The growth in revenue for the
three months ended June 30, 2006 over the same period in the prior year reflects increased revenue from our non-WinDVD product sales including royalty revenue from Microsoft of $4.8 million or 16% of our revenue and Uleads VideoStudio
product revenue of $3.2 million or 11% of our revenue. These increases were offset by a decrease in WinDVD of 15% mainly due to lower average selling prices of 7% as compared to the three month period ended June 30, 2005 and an overall decrease
in Uleads non-VideoStudio product revenue of $1.5 million from the year ago period. During the three month period ended June 30, 2006, sales outside the United States decreased by 1% to $15.7 million as compared to $15.8 million in the
same period last year.



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INTERVIDEO, INC.

For the six months ended June 30, 2006 revenue increased 23% to $61.0 million as compared to $49.5 million for the six months ended June 30, 2005. The amounts for the six months ended June 30, 2005
include Ulead revenue from the date of our acquiring a controlling interest in Ulead which accounts for 32% or $3.7 million of the overall increase in revenue largely from increases in web and retails sales. The increase was also partly attributable
to our OEM product sales, which increased 24% to $46.7 million for the six months ended June 30, 2005 from $37.8 million for the six months ended June 30, 2005. OEM product sales accounted for approximately 76% of total revenue for both
the six months ended June 30, 2006 and June 30, 2005. Web and retail sales increased 22% to $14.4 million for the six months ended June 30, 2005 from $11.7 million for the six months ended June 30, 2005. The overall revenue
increase for the six months ended June 30, 2006 as compared with the six months ended June 30, 2005 reflects 59% growth in our non-WinDVD product sales, which includes royalty revenue from Microsoft of $8.9 million or 15% of our revenue
and Ulead core products, including PhotoImpact, VideoStudio, and DVD Factory, which accounted for 15% of our revenue. These increases were offset by a decrease in WinDVD revenue of 8% mainly due to lower average selling prices of 9% as compared with
the six month period ended June 30, 2005. We derived a substantial portion of our revenue from a small number of customers. For the six months ended June 30, 2006, our three largest customers accounted for 49% of our revenue, with
Hewlett-Packard accounting for 22% of our revenue, Microsoft accounting for 15% of our revenue and Toshiba accounting for 12% of our revenue. For the six months ended June 30, 2005, our two largest customers accounted for 39% of our revenue,
with Hewlett-Packard accounting for 29% of our revenue and Toshiba accounting for 10% of our revenue. Our revenue from HP began to decline beginning in the fourth quarter of 2005 and continuing into 2006 because of HPs decision not to
incorporate certain of our products into certain HP notebook models. A significant decrease in revenue from HP, or the loss of any of our large customers without an increase in sales from other customers, would reduce our revenue and gross profit
and otherwise harm our business. Sales outside the United States accounted for 49% of our revenue for the six months ended June 30, 2006 and 50% of our revenue for the six months ended June 30, 2005.

Cost of revenue increased in absolute dollars by $3.8 million to $14.5 million for the three months ended June 30, 2006 from $10.7 million for the three months
ended June 30, 2005. This increase was largely the result of costs associated with the Microsoft revenue, other direct cost of $144,000 and overall increased sales of our royalty bearing products as well as a $133,000 increase in amortization
of purchased intangible assets largely resulting from Uleads acquisition of Institute for Information Industry.

Cost of revenue increased in
absolute dollars by $10.0 million to $29.8 for the six months ended June 30, 2006 from $19.8 million for the six months ended June 30, 2005. This increase was largely the result of costs associated with the Microsoft revenue, other direct
cost of $144,000 and overall increased sales of our royalty bearing products as well as a $406,000 increase in amortization of purchased intangible assets resulting from the acquisition of a majority interest in Ulead during the second quarter of
2005 as well as Uleads acquisition of Institute for Information Industry during the second quarter of 2006.

Gross profit as a percentage of revenue
decreased to 51% for the three months ended June 30, 2006 from 61% for the three months ended June 30, 2005. The decrease is primarily attributable to the Microsoft royalty revenue and certain Hewlett-Packard revenues which are sold at
cost and decreased average selling prices of our royalty bearing products without a corresponding decrease in per unit costs of licensed royalties. The decrease in gross profit in absolute dollars was primarily due to the aforementioned sales at
cost in the three months ended June 30, 2006.

For the six months ended June 30, 2006, gross profits were $31.2 million or 51% of revenue as
compared with $29.6 million or 60% of revenue for the six months ended June 30, 2005. the decrease is primarily attributable to the Microsoft royalty revenue and certain Hewlett-Packard revenues which are sold at cost and decreased average
selling prices of our royalty bearing products without a corresponding decrease in per unit costs of licensed royalties. The decrease in gross profit in absolute dollars was primarily due to the aforementioned sales at cost in the three months ended
June 30, 2006. While we expect that the shift in our product mix toward higher margin products will have a favorable impact on gross profit, we also expect our gross profit to be adversely impacted by continued price erosion in our WinDVD
product sales to our OEM customers and the aforementioned costs related to expected increases in Microsoft revenue.



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INTERVIDEO, INC.

Research and development expenses



|                                   |  |                             |       |   |               |   |       |                           |      |   |               |      |  |   |        |   |  |   |       |   |  |   |       |  
|---------------------------------- |  | --------------------------- | ----- | - | ------------- | - | ----- | ------------------------- | ---- | - | ------------- | ---- |  | - | ------ | - |  | - | ----- | - |  | - | ----- | -
|(In thousands, except percentages) |  | Three months ended June 30, |       |   | Change amount |   |       | Six months ended June 30, |      |   | Change amount |     
|                                   |  | 2006                        |       |   | 2005          |   |       |                           | 2006 |   |               | 2005 |  |  
|Research and development expenses  |  | $                           | 6,122 |   |               | $ | 5,437 |                           |      | $ | 685           |      |  | $ | 12,754 |   |  | $ | 8,460 |   |  | $ | 4,294 |  
|As percent of total revenue        |  |                             | 21    | % |               |   | 20    | %                         |      |   | 13            | %    |  |   | 21     | % |  |   | 17    | % |  |   | 51    | %

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

R&D expenses increased $685,000, or 13%, to $6.1 million for the three months ended June 30, 2006 from $5.4 million for the three months ended June 30, 2005. This increase was due to a $427,000 increase in stock-based
compensation expense resulting from the adoption of SFAS No. 123R, an increase in payroll and payroll related expenses of $424,000 due to increased research and development headcount in our Asian facilities and increases in travel and
entertainment costs and facilities expenses totaling $181,000. These increases were offset primarily by a decrease in overall Ulead expenses totaling $279,000 largely as a result of reduction in force actions taken during the second half of fiscal
year 2005.

For the six months ended June 30, 2006, research and development expenses were $12.8 million or 21% of revenue as compared with $8.5
million for the six months ended June 30, 2005. In addition to the increase in research and development expenses of $2.1 million attributable to the Ulead acquisition, the increase also reflects increases in payroll and payroll related expenses
of $1.0 million due to increased research and development headcount in our Asian facilities, a $869,000 increase in stock-based compensation expense resulting from the adoption of SFAS No. 123R, an increase of $133,000 of facilities and related
costs mainly due to expanded operations in Asia and an increase in travel expenses of $263,000.

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

Sales and marketing expenses



|                                   |  |                            |        |   |              |   |       |                          |      |   |              |      |  |   |       |   |  |   |       |   |  |   |       |  
|---------------------------------- |  | -------------------------- | ------ | - | ------------ | - | ----- | ------------------------ | ---- | - | ------------ | ---- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|(In thousands, except percentages) |  | Three months endedJune 30, |        |   | Changeamount |   |       | Six months endedJune 30, |      |   | Changeamount |     
|                                   |  | 2006                       |        |   | 2005         |   |       |                          | 2006 |   |              | 2005 |  |  
|Sales and marketing expenses       |  | $                          | 4, 969 |   |              | $ | 5,315 |                          |      | $ | (346         | )    |  | $ | 9,903 |   |  | $ | 8,081 |   |  | $ | 1,822 |  
|As percent of total revenue        |  |                            | 17     | % |              |   | 19    | %                        |      |   | (7           | )%   |  |   | 16    | % |  |   | 16    | % |  |   | 23    | %

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

S&M expenses decreased $346,000, or 7%, to $5.0 million for the three months ended June 30, 2006 from $5.3 million for the three months ended June 30, 2005. This decrease was due primarily to a $535,000
decrease in Ulead related expenses largely as a result of reduction in force actions taken during the second half of fiscal year 2005, $151,000 in lower commissions as a result of utilizing fewer outside sales representatives during the second
quarter of 2006 and also a decrease of $113,000 in outside consultants. These decreases are partially offset by an increase in compensation and related benefits of $156,000 and other operating expenses of $111,000. Additionally, we incurred an
increase of $130,000 in stock-based compensation expense as a result of adopting SFAS No. 123R.

For the six months ended June 30, 2006, sales
and marketing expenses were $9.9 million or 23% of revenue as compared to $8.1 million for the six months ended June 30, 2005. This increase was primarily due to an increase of $1.7 million in Ulead related expenses, a $148,000 increase in
payroll and payroll related expenses, a $113,000 increase in travel and entertainment expenses and an increase in other operating expenses of $231,000 largely due to VAT consumption tax charges and membership fees. These increases were offset by
decreases in outside consulting fees of $128,000, commissions paid to outside sales representatives of $353,000 and telephone and communication charges of $141,000. Additionally, we incurred an increase of $280,000 in stock-based compensation
expense as a result of adopting SFAS No. 123R.



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INTERVIDEO, INC.

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



General and administrative expenses



|                                    |  |                             |       |   |               |   |       |                           |      |   |               |      |  |   |       |   |  |   |       |   |  |   |       |  
|----------------------------------- |  | --------------------------- | ----- | - | ------------- | - | ----- | ------------------------- | ---- | - | ------------- | ---- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|(In thousands, except percentages)  |  | Three months ended June 30, |       |   | Change amount |   |       | Six months ended June 30, |      |   | Change amount |     
|                                    |  | 2006                        |       |   | 2005          |   |       |                           | 2006 |   |               | 2005 |  |  
|General and administrative expenses |  | $                           | 4,441 |   |               | $ | 3,950 |                           |      | $ | 491           |      |  | $ | 9,950 |   |  | $ | 6,851 |   |  | $ | 3,099 |  
|As percent of total revenue         |  |                             | 15    | % |               |   | 14    | %                         |      |   | 12            | %    |  |   | 16    | % |  |   | 14    | % |  |   | 45    | %

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

General and administrative expenses
increased 491,000, or 12%, to $4.4 million for the three months ended June 30, 2006 from $3.9 million for the three months ended June 30, 2005. The overall change is attributable to increases of $350,000 in stock-based compensation expense resulting
from the adoption of SFAS No. 123R, $214,000 in payroll and payroll related expenses due to increased general and administrative headcount for the purpose of supporting expanded operational activities and $271,000 in other operating expenses offset
by a decrease of $344,000 in Ulead related expenses primarily resulting from reduction in force activities that occurred in the second half of fiscal year 2005.

For the six months ended June 30, 2006, general and administrative expenses were $10 million or 16% of revenue as compared to $6.9 million for the six months ended June 30, 2005. Reflected in the change from the prior year period are
increases of $718,000 in stock-based compensation expense resulting from the adoption of SFAS No. 123R, $1.1 million in overall audit and consulting fees primarily related to Sarbanes-Oxley compliance and legal fees primarily related to patent
infringement litigation, $425,000 in payroll and payroll related expenses due to increased general and administrative headcount for the purpose of supporting expanded general and administrative activities and $252,000 in telecommunications and other
charges. Also included in this change are increases in Uleads general and administrative expenses of $602,000 because of a full six months of activities being accounted for in 2006 as opposed to only activities since the date of acquisition
included in the 2005 amounts offset somewhat by the aforementioned reduction in force activities of 2005.

We expect general and administrative expenses to
increase in absolute dollars as we continue to build infrastructure to support our anticipated growth and global operations and as we incur increased legal expenses to defend and protect our intellectual property position.

In-process research and development



|                                    |  |                             |   |   |              |   |                          |   |      |              |  |      |   |   |  |   |       |   |  |    
|----------------------------------- |  | --------------------------- | - | - | ------------ | - | ------------------------ | - | ---- | ------------ |  | ---- | - | - |  | - | ----- | - |  | ---
|(In thousands, except percentages)  |  | Three months ended June 30, |   |   | Changeamount |   | Six months endedJune 30, |   |      | Changeamount
|                                    |  | 2006                        |   |   | 2005         |   |                          |   | 2006 |              |  | 2005 |   |  
|In-process research and development |  | $                           |  |   |              | $ | 2,574                    |   |      | N/A          |  | $    |  |   |  | $ | 2,574 |   |  | N/A
|Percentage of total revenue         |  |                             |  | % |              |   | 9                        | % |      | N/A          |  |      |  | % |  |   | 6     | % |  | N/A

During the three and six month periods ended June 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.

Gain from disposal of asset



|                                   |  |                             |        |    |              |   |    |                          |      |   |              |      |  |   |        |    |  |   |    |   |  |   |        |  
|---------------------------------- |  | --------------------------- | ------ | -- | ------------ | - | -- | ------------------------ | ---- | - | ------------ | ---- |  | - | ------ | -- |  | - | -- | - |  | - | ------ | -
|(In thousands, except percentages) |  | Three months ended June 30, |        |    | Changeamount |   |    | Six months endedJune 30, |      |   | Changeamount |     
|                                   |  | 2006                        |        |    | 2005         |   |    |                          | 2006 |   |              | 2005 |  |  
|Gain from asset disposal           |  | $                           | (2,078 | )  |              | $ | (1 | )                        |      | $ | (2,077       | )    |  | $ | (2,006 | )  |  | $ | (1 | ) |  | $ | (2,005 | )
|As percent of total revenue        |  |                             | (7     | )% |              |   |   | %                        |      |   | N/A          |      |  |   | (3     | )% |  |   |   | % |  |   | N/A    |  

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



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INTERVIDEO, INC.

Other income (expense), net



|                                   |  |                            |       |   |               |   |        |                          |      |   |               |      |  |   |       |   |  |   |      |    |  |   |       |   
|---------------------------------- |  | -------------------------- | ----- | - | ------------- | - | ------ | ------------------------ | ---- | - | ------------- | ---- |  | - | ----- | - |  | - | ---- | -- |  | - | ----- | --
|(In thousands, except percentages) |  | Three months endedJune 30, |       |   | Change amount |   |        | Six months endedJune 30, |      |   | Change amount |     
|                                   |  | 2006                       |       |   | 2005          |   |        |                          | 2006 |   |               | 2005 |  |  
|Other income (expense), net        |  | $                          | 1,156 |   |               | $ | (1,010 | )                        |      | $ | 2,166         |      |  | $ | 3,621 |   |  | $ | (712 | )  |  | $ | 4,333 |   
|As percent of total revenue        |  |                            | 4     | % |               |   | (4     | )%                       |      |   | (114          | )%   |  |   | 6     | % |  |   | (1   | )% |  |   | (509  | )%

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 $2.2
million to $1.2 million for the three months ended June 30, 2006 from a negative $1.0 million for the three months ended June 30, 2005. The increase in the second quarter of 2006 is attributable primarily to a $469,000 increase in realized
foreign currency translation gain, a $363,000 increase in gain on disposal of the short-term investments from Ulead, a $863,000 increase in gain from long-term investments and other increases of $477,000.

Other income (expense), net increased $4.3 million to $3.6 million for the six months ended June 30, 2006 from ($1.0) million for the six months ended June 30,
2005. The increase in the second quarter of 2006 is attributable primarily to a $2.0 million increase in realized foreign currency translation gain, a $710,000 increase in gain on disposal of the short-term investments from Ulead, a $967,000
increase in gain from long-term investments, a $103,000 increase in rental income derived from Ulead subleases and other increases of $535,000.

Provision for income taxes



|                                   |  |                            |       |   |              |   |     |                          |      |   |              |      |  |   |       |   |  |   |       |   |  |   |      |   
|---------------------------------- |  | -------------------------- | ----- | - | ------------ | - | --- | ------------------------ | ---- | - | ------------ | ---- |  | - | ----- | - |  | - | ----- | - |  | - | ---- | --
|(In thousands, except percentages) |  | Three months endedJune 30, |       |   | Changeamount |   |     | Six months endedJune 30, |      |   | Changeamount |     
|                                   |  | 2006                       |       |   | 2005         |   |     |                          | 2006 |   |              | 2005 |  |  
|Provision for income taxes         |  | $                          | 1,190 |   |              | $ | 761 |                          |      | $ | 429          |      |  | $ | 1,803 |   |  | $ | 2,432 |   |  | $ | (629 | ) 
|As percent of total revenue        |  |                            | 4     | % |              |   | 3   | %                        |      |   | 56           | %    |  |   | 3     | % |  |   | 5     | % |  |   | (26  | )%

The provision for income taxes (income taxes) increased $429,000, to $1.2 million for the three months
ended June 30, 2006 from $761,000 for the three months ended June 30, 2005. We recorded a provision for income taxes of $1.8 million for the six months ended June 30, 2006 as compared to $2.4 million for the six months ended
June 30, 2005. The increase in income taxes is primarily attributable to an increase in taxable net income for the three months ended June 30, 2006. Our effective tax rate for the three months ended June 30, 2006 was approximately
41%. This rate differs from the statutory federal rate primarily due to state taxes, net of federal benefit and differences between federal and foreign tax rates as well as the tax impact resulting from the adoption of SFAS No. 123R.



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INTERVIDEO, INC.

Liquidity and Capital Resources

During the six months ended June 30, 2006, cash, cash equivalents and
short-term investments increased by $29.7 million to $104.9 million, representing 75% of our total assets. Our cash, cash equivalents and short-term investments totaled $75.2 million at December 31, 2005 and represented 56% of our total assets.
Cash and cash equivalents are highly liquid investments with an original maturity of 90 days or less at the date of purchase. Short-term investments consist principally of United States treasury, state and municipal notes/bonds, corporate bonds and
auction rate securities.

Net cash provided by operating activities was $14.0 million for the six months ended June 30, 2006. Net income of $1.8
million was adjusted for non-cash charges for gain on the disposal of held for sale assets of $2.0 million, realized foreign currency translation gains of $1.6 million, depreciation and amortization of $1.9 million, stock-based compensation of $2.0
million, excess tax benefits from stock-based compensation of $383,000 and minority interests in income of subsidiary of $607,000. Additionally, cash provided from operating activities was impacted by decreases in accounts receivable of $4.6
million, prepaid expenses and other current assets of $1.1 million and other assets of $214,000 and increases in accrued liabilities and income taxes payable of $5.0 million and deferred revenue of $948,000. The decrease in accounts receivable is
primarily due to the collection of a Microsoft invoices that were outstanding at the end of the 2005. The increase in deferred revenue is due to increased Ulead sales activity with the revenue deferred because of specified upgrades and PCS. The
increase in accrued liabilities and taxes payable is primarily due to the increase in product cost liability associated with Microsoft revenue and MPEGs royalty fees.

Net cash provided by operating activities was $3.4 million for the six months ended June 30, 2005. Net income of $831,000 was adjusted for depreciation and amortization of $1.4 million, non-cash investment loss
of $1.1 million, the write-off of in-process research and development of $2.6 million, stock-based compensation of $67,000, provision for doubtful accounts of $129,000, decreases in prepaid expenses and other current assets of $511,000, and an
increase in deferred revenue of $3.7 million. These amounts were offset by the minority interest in losses of subsidiary of $296,000, increases in accounts receivable of $5.7 million and other assets of $777,000 and a decrease in accrued liabilities
and income taxes payable of $305,000. The adjustment for depreciation and amortization includes $337,000 for amortization of intangible assets arising primarily as a result of the Ulead acquisition. Non-cash investment loss includes $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 decrease in prepaid expenses and other current assets includes $270,000
of amortization of directors and officers insurance premiums and a decrease in deferred costs related to the realization of deferred retail revenue of $294,000. The increase in deferred revenue and accounts receivable is primarily due to
the Microsoft, Inc. agreement signed during the quarter. The remaining increase in accounts receivable is primarily due to Ulead accounts receivable changes since the acquisition.

Net cash used in investing activities was $18.4 million for the six months ended June 30, 2006 including $21.2 million cash received from the sale of land and the building at Ulead previously reported as held for
sale assets offset by cash used for Uleads purchase of the JAVA/WAP patent and software technology, and customer service contracts from Institute for Information Industry of $2.9 million, purchases property and equipment of $1.3 million and
maturities of short-term investments, net of purchases, of $35.4 million.

Net cash provided by investing activities was $2.4 million for the six months
ended June 30, 2005 primarily due to proceeds from the sale and maturities of short-term investments in the amount of $39.8 million which included $32.0 million related to the Ulead acquisition in addition to normal investment activities. This
amount was offset by the use of $22.7 million, net of $13.6 million in cash acquired, to execute the Ulead tender offer. Additionally, we used $13.7 million in the purchase of short-term investments and $863,000 for the purchase of property and
equipment.

Net cash used in financing activities was $1.4 million for the six months ended June 30, 2006 consisting of $2.6 million used for the
repurchase of treasury stock by Ulead, offset by proceeds from the issuance of common stock under our stock option plans and repayments of notes receivable of $805,000 and the excess tax benefits from stock-based compensation of $383,000.

Net cash provided by financing activities was $2.3 million for the six months ended June 30, 2005 as a result of proceeds from the issuance of common stock under
our stock option and employee stock purchase plans of $2.7 million, including $847,000 attributable to Ulead stock plans, and proceeds from the repayment of employee notes receivables of $235,000 offset by the use of $671,000 for the repurchase of
common stock.



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INTERVIDEO, INC.

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

We anticipate our operating expenses will grow in absolute dollars and in line with total revenue for the foreseeable future, and we intend to fund our operating
expenses through cash flows from operations. We currently have no significant commitments for capital expenditures, but we expect to spend approximately $2 to $3 million on capital expenditures in 2006, 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 2013. 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 used a total of $42.8 million to acquire a controlling interest in Ulead, including $32.6 million in April 2005 and,
subject to shareholder approval, we intend to spend additional cash to acquire the remaining shares of Ulead for NT $30 (approximately US $0.93) per share as per the previously announced merger agreement between InterVideo Digital Technology Corp.,
a wholly-owned subsidiary of InterVideo, Inc. (InterVideo) and Ulead Systems, Inc. We also may continue to spend more cash 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 shareholders percentage ownership in us.

Commitments

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

Off-Balance
Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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



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INTERVIDEO, INC.

ITEM 4. CONTROLS AND PROCEDURES

a) Evaluation of Disclosure Controls and Procedures

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

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



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



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

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

b) Changes in Internal Control over Financial Reporting

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



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



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

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



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INTERVIDEO, INC.

PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

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



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INTERVIDEO, INC.

ITEM 1A. RISK FACTORS.

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

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

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

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

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

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

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

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



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



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



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

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

We expect our current competitors to introduce similar or improved products at lower prices, and we will need to do the same to remain competitive. For example, our revenues from Dell and HP have declined compared to prior periods, because
we have lost portions of our business to our competitors. We also expect our revenue from HP 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
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.



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

The PC industry is highly concentrated, and we have derived a substantial portion of our revenue from sales of our products to a small number of PC
OEMs. For the three months ended June 30, 2006, our three largest customers accounted for 45% of our revenue, with Hewlett-Packard accounting for 18%, Microsoft accounting for 16% and Toshiba accounting for 11% of our revenue. However, our
revenue from HP began declining in the fourth quarter of 2005 and is continuing to decline into 2006 because of HPs decision not to incorporate certain of our products into certain 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.



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

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



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



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



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



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



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



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



| |  |  | problems integrating the operations, personnel, technologies or products;
| | - |  | -------------------------------------------------------------------------



| |  |  | challenges in providing accurate financial forecasts; and
| | - |  | ---------------------------------------------------------



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

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



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

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

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

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

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

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

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

We did not achieve profitability until the fiscal year ended December 31, 2002. As of June 30, 2006, we had retained earnings of
$11.9 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 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.

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

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



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However, Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, or SFAS No. 123R, was recently implemented and requires companies to expense the fair value of employee
stock options and similar awards. SFAS No. 123R addresses accounting for transactions in which an entity obtains employee services in exchange for share-based payments. SFAS No. 123R requires entities to recognize stock compensation
expense for awards of equity instruments to employees based on the fair value of those awards on the grant date, with limited exceptions. For the three and six months ended June 30, 2006 , we recorded stock-based compensation expenses on our
Condensed Consolidated Statements of Operations of approximately $936,000 and $1.9 million related to our SFAS No. 123R compliance. To the extent that we continue to make stock option grants to employees in the future, we will continue to incur
such expenses, which will have a negative impact on our future earnings and results of operations.

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

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

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

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

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

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

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



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INTERVIDEO, INC.

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

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

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

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

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

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



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



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



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



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



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

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

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

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



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

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

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

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



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



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



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



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INTERVIDEO, INC.

We and our customers may be subject to additional third-party claims that our and our customers products violate the intellectual property rights of those parties.

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

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

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



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



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



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

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



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INTERVIDEO, INC.

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

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

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

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



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



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



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



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



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



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



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

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



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INTERVIDEO, INC.

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

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

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

We derived 36% of our revenue for the three months ended June 30, 2006 from sales of our WinDVD product, primarily to PC OEMs. We expect that revenue from sales of
our WinDVD product to PC OEMs will continue to account for a significant portion of our revenue for the foreseeable future. Accordingly, our business will suffer if our existing PC OEM customers do not continue to incorporate our WinDVD product into
the PCs they sell or if we are unable to obtain new PC OEM customers for our WinDVD product.

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

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

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

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

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

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

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



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INTERVIDEO, INC.

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

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

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

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

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.

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

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



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INTERVIDEO, INC.

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

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

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

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

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

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

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

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



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INTERVIDEO, INC.

Our international operations accounted for 53% of our revenue for the three months ended June 30, 2006 and 57% of our revenue for the three months ended June 30, 2005, which may expose us to political,
regulatory, economic, foreign exchange and operational risks.

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



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



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



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



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



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



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



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



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



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

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

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

We are an international company, and we derived approximately 49%, 50% and 47% of our 2006, 2005 and 2004 revenues from products sold in, and
services performed from, our facilities located outside the United States, primarily in Asia and Europe. We also have substantial assets located outside of the United States, and a large portion of our sales and service revenues are denominated
in foreign currencies. We recently augmented our international operations with the purchase of a majority interest in Ulead Systems, Inc., a publicly traded Taiwanese company. Our substantial international assets and operations subject us to
the risk of adverse foreign currency fluctuations which could negatively impact our results of operations.

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

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

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

Our capital requirements will depend on many factors, including:



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



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



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



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INTERVIDEO, INC.



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



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



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

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

Our stock price is volatile.

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



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



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



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



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



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



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



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



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



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



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



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



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

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

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

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



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INTERVIDEO, INC.

ITEM 6. EXHIBITS

(a) Exhibits

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



|                |  |               |  |                                                                                                                                                      
|--------------- |  | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibitfootnote |  | ExhibitNumber |  | Description                                                                                                                                          
|                |  | 2.1           |  | Merger Agreement, dated July 5, 2006, between InterVideo Digital Technology Corp. and Ulead Systems, Inc.                                            
|                |  |              
|(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                      
|                |  |              
|                |  | 10.1          |  | 2003 Employee Stock Purchase Plan, as amended on April 27, 2006                                                                                      
|                |  |              
|                |  | 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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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: August 9, 2006InterVideo, Inc. (Registrant)By:

/s/ STEVE ROSteve Ro Chief Executive OfficerBy:

/s/ RANDALL BAMBROUGHRandall Bambrough Chief Financial
Officer




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INTERVIDEO, INC.

EXHIBIT INDEX



|                |  |               |  |                                                                                                                                                      
|--------------- |  | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibitfootnote |  | ExhibitNumber |  | Description                                                                                                                                          
|                |  | 2.1           |  | Merger Agreement, dated July 5, 2006, between InterVideo Digital Technology Corp. and Ulead Systems, Inc.                                            
|                |  |              
|(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                      
|                |  |              
|                |  | 10.1          |  | 2003 Employee Stock Purchase Plan, as amended on April 27, 2006                                                                                      
|                |  |              
|                |  | 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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