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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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(MARK ONE)

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



For the fiscal year ended December 31, 2004



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 Number)



46430 Fremont
Boulevard

Fremont, California 94538

(Address of Principal Executive Offices including Zip Code)



(510) 651-0888

(Registrants Telephone Number, Including Area Code)



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



Securities Registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.001 PAR VALUE



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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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.  x



Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  YES ̈NO x



As of June 30, 2004, the last business day of
the registrants most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates, computed by reference to the closing price for the common stock as quoted by the Nasdaq National Stock Market
as of that date, was approximately $123,914,000. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the registrants outstanding common stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.



As of the close of business on March 15, 2005, the registrant had 13,831,338 shares of common stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



The Registrants definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 9, 2005, which the registrant will file with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report, is incorporated by reference in Part III of this Form 10-K to the extent
stated herein.



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TABLE OF CONTENTS



|           |  |                                                                                                                  |  |     
|---------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                  |  | Page
|Part I     |  |                                                                                                                  |  |     
|Item 1.    |  | Business                                                                                                         |  | 3   
|Item 2.    |  | Properties                                                                                                       |  | 12  
|Item 3.    |  | Legal Proceedings                                                                                                |  | 12  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                              |  | 12  
|Part II    |  |                                                                                                                  |  |     
|Item 5.    |  | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 13  
|Item 6.    |  | Selected Financial Data                                                                                          |  | 14  
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 15  
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 45  
|Item 8.    |  | Financial Statements and Supplementary Data                                                                      |  | 46  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             |  | 72  
|Item 9A.   |  | Controls and Procedures                                                                                          |  | 72  
|Item 9B.   |  | Other Information                                                                                                |  | 73  
|Part III   |  |                                                                                                                  |  |     
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                               |  | 74  
|Item 11.   |  | Executive Compensation                                                                                           |  | 74  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   |  | 74  
|Item 13.   |  | Certain Relationships and Related Transactions                                                                   |  | 74  
|Item 14.   |  | Principal Accountant Fees and Services                                                                           |  | 74  
|Part IV    |  |                                                                                                                  |  |     
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                       |  | 75  
|Signatures |  | 76                                                                                                              



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PART I



This Annual Report on
Form 10-K (the Annual Report) contains certain forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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. 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 Annual Report include, among others, statements regarding (1) our proposed transaction with Ulead and the anticipated impact to our business,
operations and financial conditions, (2) research and development expenses, (3) sales and marketing expenses, (4) other operating and capital expenditures, (5) anticipated growth of operations, personnel and infrastructure, (6) exercise prices of
future option grants, (7) the sufficiency of our capital resources, (8) 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) our efforts to improve our internal controls, (16) settlement of intellectual property claims, (17) stock-based compensation expenses, (18) general and administrative expenses,
and (19) the utility of certain products. Factors that could cause actual results to differ materially from those included herein include, but are not limited to, the information contained under the captions Part I, Item 1. Business, and
Part II, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations, and, in particular, Risk Factors. The Company disclaims any obligation to update information in any forward-looking
statement.



ITEM 1: BUSINESS



Introduction





We are a provider of DVD software, video editing and DVD burning software, television viewing and recording software and InstantON software that allows personal computer (PC) users to quickly access multimedia content and
devices without requiring booting into traditional operating systems such as Microsoft Windows. 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. Our multimedia software products bring the functionality of popular consumer electronics (CE) products such as the DVD player and
the digital video recorder, or DVR (also known as a PVR), to PCs. Our software is also used to enhance the functionality of next-generation CE devices. We now offer our multimedia products to manufacturers of handheld devices such as mobile
telephones and digital still cameras.



Our software is bundled
with products sold by PC and CE original equipment manufacturers (OEMs) and is also sold to CE manufacturers. We also sell our products to PC peripherals manufacturers worldwide and offer our software in up to 27 languages. In addition,
we sell our products through retail channels, including over 3,900 U.S. retail stores, and directly to consumers through our websites, which currently operate in 12 languages. We have historically derived a majority of our revenue from sales of our
flagship product, WinDVD, a DVD player software, to PC OEMs. In the future, we expect to derive an increasing percentage of our revenue from sales of products other than WinDVD, including: WinDVD Creator, a video editing, DVD authoring and burning
application; InterVideo DVD Copy, an application to copy and backup DVDs and CDs; InterVideo Home Theater, a media center suite for the viewing and management of digital media content; Linux-based versions of our DVD and DVR software designed for
Linux-based PCs and CE devices; and InstantON.



We have
developed the core technologies and products that enable rapid migration of our products to CE devices in addition to multiple PC platforms. We intend to continue developing our intellectual property portfolio



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and expanding our product offerings to include additional digital multimedia features, such as the ability to deliver digital video and audio through a home
network and to wireless electronics devices.



We were
incorporated in California in April 1998 and reincorporated in Delaware in May 2002. We maintain executive offices and principal facilities at 46430 Fremont Blvd., Fremont, CA 94538 and we have additional offices in Taiwan, China and Japan. Our
telephone number is 510-651-0888. We also maintain a web site at www.intervideo.com. Investors can obtain copies of our SEC filings from this web site free of charge, as well as from the SECs web site at www.sec.gov.



InterVideo and WinDVD are registered trademarks and WinDVD Creator, WinDVD
Recorder, LinDVD, LinDVR, WinDVR, WinProducer, IntraVideo Instant-On and InterVideo Home Theater are among the trademarks or service marks of InterVideo.



Tender Offer for Ulead Systems, Inc.



During the year ended December 31, 2004 and continuing through the first quarter of 2005, we purchased shares of stock in Ulead Systems, Inc.
(Ulead), a publicly traded company in Taiwan that is a leading developer of innovative video, imaging and DVD authoring software, accumulating a total shareholding percentage of 18.5 percent as of March 31, 2005. On March 14, 2005, we
and our wholly-owned subsidiary, InterVideo Digital Technology Corp., announced the commencement of a tender offer to purchase an additional 30.1 to 65 percent of the issued shares of Ulead at 30 NTD (US$0.98) per share of Ulead common stock. Our
obligation to purchase the shares is subject to certain closing conditions, including the requirement that there have not been any material adverse change in the financial condition or business of Ulead prior to the expiration of the tender offer on
April 13, 2005. Upon the successful completion of the tender offer, the transaction will be valued at between US$23 and US$49 million, and we will own between 50.1 and 85 percent of the outstanding shares of Ulead. These figures include the 18.5
percent of Uleads outstanding shares currently owned by us, the shares to be purchased in the tender offer and an additional 1.5% of Uleads shares to be purchased outside of the tender offer. We currently intend to maintain Ulead
as a majority-owned subsidiary on the Taiwan Stock Exchange.



We believe that our investment in Ulead will strengthen our technology offering and allow us to provide a more comprehensive digital media solution to both retail and OEM customers. Uleads strengths in professional DVD authoring,
video editing and still image processing complement our tools and provide enhanced opportunities for addressing emerging and rapidly growing markets including multimedia home networking, high definition and Blu-ray DVD and multimedia mobile phones.
Uleads complementary product offering, strong engineering resources and broad retail presence provide significant opportunities for synergies going forward. Upon completion of the tender offer, we plan to commence the integration of products
and technologies of the two companies.



Products



We offer a broad suite of multimedia software products that provide OEMs and
consumers with a single solution for a variety of multimedia functions. PCs running our integrated multimedia software can replace several dedicated hardware components such as separate DVD players, DVRs, MP3 players, CD players and digital
television set-top boxes. Our products have a common look and feel and allow users to toggle quickly and seamlessly between multimedia functions, such as viewing DVDs or TV and listening to music.



The current version of our software operates on multiple Windows operating
systems, including Windows 98, NT4.0, 2000, ME and XP editions. We have also developed versions of our key products for the Linux operating system, which is one of the primary operating systems used in next-generation CE devices.



WinDVD has been certified by Microsofts Windows Hardware Quality Lab,
or WHQL, as a Motion Video Device on PC hardware and software configurations. In addition, our software is compatible with a broad range



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of multimedia hardware products, including specialized graphics chips, audio cards and DVD drives from various suppliers and in various configurations.



Our product architecture has allowed us to efficiently develop
new products incorporating additional functionality, such as digital video recording, on-disk editing and direct recording onto DVDs. As a result, we can provide our customers with the ability to increase the functionality of their products at a low
cost and in a short time frame. Our proprietary layered architecture also generally enables consumers to update or upgrade multimedia features and capabilities without replacing hardware components, which decreases the risk of obsolescence.



The following is a list of our major products that we
currently license to PC OEMs, CE manufacturers, PC peripherals manufacturers and end users.



WinDVD



We have
historically derived a majority of our revenue from sales of our WinDVD product. Our OEM customers bundle WinDVD with PCs equipped with DVD drives and Microsoft Windows compatible software to enable those PCs to decode and play DVDs. WinDVD software
allows users to enjoy the advantages of DVDs, such as high picture quality, Dolby Digital and DTS surround sound audio decoding, multiple language and subtitle options, navigation and other entertainment options. Our user interface, which appears on
the computer screen, resembles the controls for a stand-alone DVD player and other home electronics devices.



We offer WinDVD in 27 different languages, including the most common languages in Europe, South America and Asia, including both traditional and
simplified Chinese, Japanese and Korean.



WinDVD Creator



In order to capitalize on increased sales of
DVD-recordable drives, we have developed an easy-to-use tool that allows end users to create their own DVDs from their home movies, television and other video content. WinDVD Creator ships with several of the top PC OEMs and DVD drive vendors.



WinDVD Creator integrates into a single package and interface
a number of functions by combining video DVD authoring and streamlined editing features. We have also integrated proprietary technology that allows end users to record directly from a camcorder or TV tuner onto a DVD disk without caching onto a hard
drive. Our on-disk DVD editing technology allows users to save time by making changes to a DVD directly on the optical media without having to transfer the contents of the DVD to the PC.



WinDVD Creator HD



WinDVD Creator HD is a high definition video version of WinDVD Creator and provides all of the same functionalities of WinDVD Creator.



WinDVR



Our WinDVR software permits PC users to create high-quality digital
recordings of broadcast, cable and satellite television programming with functionality similar to a set-top DVR. Combined with a TV tuner card, WinDVR permits users to manage their television viewing experience by recording programs, movies or
sporting events. Users may also utilize sophisticated time shifting features such as live TV pause, simultaneous record and playback, commercial skip, instant replay and multiple-channel preview.



WinDVR also enables PC users to watch high definition digital television, or
HDTV, digital video broadcast, or DVB, or other digital video and audio input. With a digital TV tuner card and our WinDVR



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software, users can watch digital broadcasts on a PC or on a DTV-ready television set. WinDVR supports all 18 ATSC, or American Television Systems Committee,
formats and DVB formats used in Europe and Asia.



WinDVD
Recorder



WinDVD Recorder provides all the
functionality of WinDVD and WinDVR and adds a single button recording function that allows users to record television or camcorder home movies onto their computer hard disk or onto DVD recordable media. WinDVD Recorder is designed to
take advantage of the same market growth in DVD recordable drives that WinDVD Creator leverages. WinDVD Recorder targets the non-expert user who is more comfortable with the features typically found on CE products such as VCRs.



Home Theater



Our InterVideo Home Theater product is a media center suite for viewing and
managing digital media content. This product enables users to watch high-quality video with surround sound, record favorite broadcast or cable programs, watch DVDs, manage and listen to CDs and digital audio files, and manage and view digital
photograph libraries. All of the functions are unified under a user-friendly software interface. The product is designed to be incorporated on PCs used as home digital multimedia entertainment platforms that may be connected to a television to
provide a living room style entertainment environment.



DVD Copy



Our InterVideo DVD Copy
software allows users to copy and backup DVDs and VideoCDs. With the rapid growth of DVD recordable devices, users increasingly want to duplicate DVDs and other video discs and to store and backup their discs. InterVideo DVD Copy is designed not to
allow the copy of copy-protected DVDs.



DiscMaster



Our InterVideo DiscMaster software allows users to
transfer their data files, music, etc. from their hard drive to a CD-RW drive or DVD-recordable drive.



PhotoAlbum



Our InterVideo PhotoAlbum software allows users to transfer their image files from digital still cameras, or import them from other storage or scanning
devices, organize the image files, edit them, and share them through playback, web, printing, and DVD slideshows.



MediaOne



Our recently introduced InterVideo MediaOne software packages many of InterVideos popular applications such as WinDVD, WinDVD Creator, DiscMaster,
PhotoAlbum and others into an organized task-based launch environment that allows users to easily select the task they wish to complete and enter the appropriate application to complete their task.



InstantON



InterVideo InstantON technology provides an embedded system infrastructure
that provides PCs with capabilities similar to those of CE devices, allowing PC users to access multimedia assets and devices without requiring booting into traditional operating systems such as Microsoft Windows. InstantON allows PCs to function
with a remote control in a manner familiar to users that are comfortable accessing CE devices. We believe that this infrastructure improves the system reliability, human interface, power management, noise control, mean time between failures (MTBF),
and glitch-free audio/video playback. InstantON allows PC users to



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access multimedia assets, such as music, photos and videos, and multimedia devices, such as DVD drives or TV tuners, much more quickly than is possible using
conventional operating systems and their applications.



Linux-based products



Linux is an
important operating platform used by CE manufacturers in their latest generation of intelligent CE devices. In addition, PC OEMs and manufacturers of cable, Internet and satellite set-top boxes have increasingly used Linux as the operating system
for their PCs and intelligent devices. We offer embedded Linux versions of our DVD and DVR PC software, including LinDVD and LinDVR. These products are designed to enable next-generation CE devices and Linux-based PCs, Internet appliances and
set-top boxes to provide DVD playback and recording capabilities. LinDVD and LinDVR are based on our Windows-based software engines, which reduced our time to market with these products and which contributes to a level of performance similar to our
WinDVD and WinDVR products.



InterVideo Technology Platform



Our technology platform incorporates the following design principles:



| |  |  | Modular and layered design for greater expandability and reusability;
| | - |  | ---------------------------------------------------------------------



| |  |  | Device-independent design and portable implementation for greater platform independence; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Utilization of industry standards whenever possible to promote market acceptance of our products.
| | - |  | -------------------------------------------------------------------------------------------------



Our modular and layered design approach enhances product expandability and component reusability. Because we arrange modular
components in layered structures, we can quickly and efficiently add new features to a product by plugging in new components into appropriate layers. For example, we incorporated the TV and video recording feature into our WinDVD product to create
WinDVD Recorder with the addition of new components. Similarly, we enhanced the capabilities of WinDVD Recorder by reusing the Direct Recording feature from WinDVD Creator to enable direct recording from TV or camera to DVD. Because of component
reusability, our new products were developed with fewer resources and in less time than would have been required to design them using entirely new components. As new functionality becomes necessary or available for a specific platform, we intend to
develop the appropriate modules that expand our products to deliver more and more technology under a single product or as specialized products for that platform.



Our flexible design approach and portable implementation allow our software to support a significant number of PC platforms
and to work with a broad variety of PC configurations. A significant portion of the software code that is used to implement our products is platform independent. Each software module contains a platform-independent core that is surrounded by a
platform-dependent software wrapper that interacts with the devices of a given platform. As a result, we can efficiently port an existing product to a new operating system or hardware platform and cost-effectively support many customers and varied
product lines. An example of this type of platform portability is the development of LinDVD from WinDVD. Although the platform dependent interfaces are very different, both products share the same DVD navigation and video and audio engines which
comprise the large majority of the software code contained in these products.



Customers



Our customer base consists
primarily of PC OEMs, CE manufacturers and manufacturers of PC peripherals that incorporate our software into their products. For the year ended December 31, 2004, our two largest customers accounted for 38% of our revenue. Our license agreements
with customers are typically for a term of one or two years and do not contain any minimum volume commitments.



We have also adapted our technology for use in CE and handheld devices.



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Consumers may purchase products and product upgrades directly through our Internet commerce sites. We
also use distributors to sell our products to consumers through retail distribution channels. Our products are sold in more than 3,900 U.S. retail stores. Our products are also sold by leading online retailers. Revenue derived from our websites and
retail channel accounted for 15% of our revenue in the year ended December 31, 2004.



Sales, Marketing and Technical Support



Our
sales and marketing strategy focuses on establishing and maintaining license arrangements with PC, peripherals and CE manufacturers. We license our digital multimedia solutions on a non-exclusive worldwide basis to PC, peripherals and CE
manufacturers that sell products incorporating these technologies to end users. Members of our sales force, located in China, Germany, Japan, Taiwan and the United States, work closely with our OEM customers to define and customize products, conduct
on-site testing and provide engineering and field application engineering support. We have also established a network of independent sales representatives and manufacturing representatives in the United States, Asia and Europe to assist in OEM
sales. In addition, we sell our products through established web and retail channels. We use our distribution channels through the Internet to increase direct contact with our customers, facilitate electronic sales of our products and sell
associated products directly to consumers. As part of our retail channel growth strategy, we intend to continue to increase our retail presence at several of the larger U.S. retailers that sell PC software. We also distribute free or trial versions
of our software through consumer distribution channels, including media and computer magazines, corporate, educational and training DVD titles and on our Internet commerce site.In addition, we intend to actively market and promote our
products and take actions to further develop our brand name through trade shows, advertising campaigns and other marketing efforts.



We believe the technical assistance that we provide to OEMs represents an important part of our competitive advantage in maintaining strong relationships
with these OEMs. We have built a customer assistance infrastructure composed of sales staff, program managers and quality assurance engineers. We have also created an efficient, cost-effective Internet-based system for the delivery of software and
software fixes to OEMs. This infrastructure reduces duplication of effort and fosters better communication channels between the OEMs and ourselves. This infrastructure enables us to provide technical assistance to OEMs with a relatively small staff
and has been a key factor in our ability to maintain and grow our OEM customer base.



Our on-line technical support group provides direct customer support to users that purchase our products through retail channels or our websites. Our on-line technical support group also trains the technical support
groups of our OEM customers so that they can provide more effective telephone and on-line support for their customers.



Total sales and marketing expenses for the year ended December 31, 2004 were $10.2 million. As of December 31, 2004, we had 93 sales, marketing and
technical support personnel residing in our offices in Fremont, California; Taipei, Taiwan; Shanghai and Beijing, China; and Kanagawa, Japan.



Research and Development



We have assembled a qualified team of engineers with core competencies in software architecture and development for the Windows, Windows CE and Linux
operating systems and digital video and audio encoders and decoders. Our engineers are located in Fremont, California; Taipei, Taiwan; and Shanghai, Shenzhen and Xian, China. We will continue to focus our research and development activities on
enhancing our existing products and developing new products to meet the evolving needs of our customers within the PC and the CE markets.



We believe that interaction with our OEM customers throughout the product design process enables us to anticipate technology trends and focus our research
and development efforts on addressing emerging customer



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needs. We design products to meet our OEM and CE manufacturing customers specifications and current industry standards and will continue to support
emerging standards that are complementary to our product strategy.



We believe that our competitive position will depend in large part on our ability to develop new and enhanced digital entertainment solutions and our ability to meet the evolving and rapidly changing needs of PC, peripherals and CE
manufacturers and consumers. We expect to increase our total research and development expenses in the future to provide resources for enhancement of existing and development of new product lines.



As of December 31, 2004, we employed 221 research and development personnel
in the aforementioned offices. For the year ended December 31, 2004, our research and development expenditures totaled $10.0 million. We intend to recruit, hire and retain highly qualified engineers and technicians to support our further research
and development efforts. To improve the quality of our developer base and to lower our overall developer costs, we intend to increase the number of developers in Taiwan and Mainland China.



Competition



Our industry is intensely 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.



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. 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 improved products at lower prices, and we will need to do the same to remain competitive. 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 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 believe the primary competitive factors impacting our business are:



| |  |  | the quality and reputation of products;
| | - |  | ---------------------------------------



| |  |  | the quality of the program management team;
| | - |  | -------------------------------------------



| |  |  | relationships with OEMs;
| | - |  | ------------------------



| |  |  | compatibility with emerging industry standards;
| | - |  | -----------------------------------------------



| |  |  | scope and responsiveness of service and technical support;
| | - |  | ----------------------------------------------------------



| |  |  | ability to offer cost-effective products that balance performance and cost;
| | - |  | ---------------------------------------------------------------------------



| |  |  | timeliness and relevance of new product introductions;
| | - |  | ------------------------------------------------------



| |  |  | timeliness and quality of modifications and enhancements to existing products to comply with new and evolving hardware and software;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | technical innovation;
| | - |  | ---------------------



| |  |  | breadth of product offerings; and
| | - |  | ---------------------------------



| |  |  | price structure and business model characteristics.
| | - |  | ---------------------------------------------------



Although we believe our products compete favorably with respect to each of these factors, the market for our products is rapidly evolving and we may not
be able to maintain our competitive position against current and potential competitors, especially those with greater resources.



Intellectual Property



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 competitive position. We
currently have or own the rights to 11 issued U.S. patents, 22 patents issued in Taiwan and 3 patents issued in China, and we have 90 pending patent applications in various jurisdictions, comprised of 35 U.S. patent applications and 55 foreign
patent applications.



Existing patent, 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 detecting
and preventing 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 revenue and some of our
competitive advantage. Infringement claims and lawsuits to protect our proprietary rights would likely be expensive to resolve and would require managements time and resources, and, therefore, could harm our business.



Our digital video and audio solutions comply with industry standard DVD
specifications. Some third parties have claimed that various aspects of DVD technology incorporated into our and our customers products infringe upon patents held by them, including MPEG LA, a consortium formed to enforce the proprietary
rights of certain holders of patents covering certain aspects of MPEG-2 technology and a consortium known as DVD 6C, formed by a separate group of companies to enforce the proprietary rights of certain holders of patents covering some
aspects of DVD technology. 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 related 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 for 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.



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INTERVIDEO, INC.



We may receive notices of claims of infringement of other parties proprietary rights, including
Nissim, DVD 6C or 4C, another consortium formed to enforce the proprietary rights of certain holders of patents covering some aspects of DVD technology. 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, 4C or Nissim. Similarly, other parties have alleged
that aspects of MPEG-2 and other multimedia technologies infringe upon patents held by them. We may be required to pay license fees and damages or be prohibited from selling our products in the future if it is determined that our products infringe
on patents owned by these third parties. In addition, other companies may form consortia in the future, similar to MPEG LA, DVD 6C and 4C, to enforce their proprietary rights and these consortia may seek to enforce their patent rights against us and
our customers. If DVD 6C, 4C, Nissim or another third party proves that our technology infringes its patents, we may be required to pay substantial damages for past infringement and may be required to pay license fees or royalties on future sales of
our products. If we are required to pay license fees in the amounts that are currently published by, for example, DVD 6C, for past sales to our large PC OEM customers, because such PC OEMs were not themselves licensed, 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 proprietary rights, 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 our products, obtain a license from the owner of the infringed intellectual property or redesign our products.



Our license agreements, including the agreements we have entered into with our large PC OEM customers, generally contain
warranties of non-infringement and commitments to indemnify our customers against liability arising from infringement of third-party intellectual property rights. Examples of third-party intellectual property rights include the patents held by
Nissim and by members of MPEG LA, DVD 6C and 4C. These commitments may require us to indemnify or pay damages to our customers for all or a portion of any license fees or other damages, including attorneys fees, our customers are required to
pay, or agree to pay, these or other third parties. 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. 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 any claims of infringement brought by MPEG LA against those customers.



We license technology from Dolby Laboratories for use in our DVD-related products. We pay a royalty to Dolby on a lump-sum and per-unit shipped basis. The
technology is comprised of Dolby Pro Logic, Dolby Digital, Dolby Virtual Surround, MLP Lossless, Dolby Digital Audio System, Dolby Headphone System and other related technologies designed to create theater quality sound by routing audio
signals from a DVD to different speakers in a multi-speaker setup. The Dolby Digital technology is part of the industry standard DVD specification.



We license encryption software technology from the DVD Copy Control Association, Inc. This technology is designed to provide protection for content
encoded onto DVD discs. We pay DVD Copy Control Association, Inc. an annual license fee for this technology.



If any of the licenses for the technologies and software described above terminate and are not renewed on commercially reasonable terms, we could be
prevented from shipping products using the MPEG-2 standards and our revenue could decline.



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INTERVIDEO, INC.



Employees



As of December 31, 2004, we employed 382 people, of whom 78 worked in the United States and 304 worked in our various international locations. Of the U.S.
employees, 23 were in sales and marketing, 29 were in research and development and 26 were in general and administration. Of the international employees, 70 were in sales and marketing, 192 were in research and development and 42 were in general and
administration.



ITEM 2: PROPERTIES



We currently lease the
following properties:



|                    |  |                                                         |  |             |  |                   
|------------------- |  | ------------------------------------------------------- |  | ----------- |  | ------------------
|Location            |  | Primary Use                                             |  | Square Feet |  | Date Lease Expires
|Fremont, California |  | Corporate/Research and Development/ Sales and Marketing |  | 35,069      |  | December 2010     
|                    |  |                                                         | 
|Kanagawa, Japan     |  | Sales and Marketing                                     |  | 3,417       |  | April 2006        
|                    |  |                                                         | 
|Shanghai, China     |  | Research and Development/Sales and Marketing            |  | 16,258      |  | August 2005       
|                    |  |                                                         | 
|Beijing, China      |  | Sales and Marketing                                     |  | 1,615       |  | December 2005     
|                    |  |                                                         | 
|Xian, China        |  | Research and Development                                |  | 11,248      |  | April 2005        
|                    |  |                                                         | 
|Shenzhen, China     |  | Research and Development                                |  | 418         |  | April 2005        
|                    |  |                                                         | 
|Taipei, Taiwan      |  | Research and Development/Sales and Marketing            |  | 15,805      |  | May 2007          
|                    |  |                                                         | 
|Tapei, Taiwan       |  | Research and Development/Sales and Marketing            |  | 24,167      |  | January 2009      



We believe our
existing facilities are well maintained, suitable for our operations and adequate to meet our current requirements.



ITEM 3: LEGAL PROCEEDINGS



We are not a party to
any material legal proceedings.



ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.



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INTERVIDEO, INC.



PART II



|ITEM 5: | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



Our common stock is traded on the Nasdaq National Market under the symbol
IVII. On March 15, 2005, there were 48 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders
represented by these record holders. The following table sets forth the high and low sales price per share of our common stock, for the periods indicated.



|                  |  |               |  |       |   
|----------------- |  | ------------- |  | ----- | --
|                  |  | Price Range * | 
|                  |  | High          |  | Low   |   
|Fiscal year 2004: |  |               |  |       |   
|First Quarter     |  | 15.00         |  | 9.81  |   
|Second Quarter    |  | 13.90         |  | 10.49 |   
|Third Quarter     |  | 12.50         |  | 10.42 |   
|Fourth Quarter    |  | 13.23         |  | 10.63 |   
|Fiscal Year       |  | 15.35         |  | 9.81  |   
|                  |  |              
|Fiscal year 2003: |  |               |  |       |   
|Third Quarter     |  | 28.04         |  | 14.00 | **
|Fourth Quarter    |  | 22.03         |  | 9.70  |   
|Fiscal Year       |  | 28.04         |  | 9.70  |   

---

|* | Market price per share as reported on the Nasdaq National Market from the date of our IPO on July 17, 2003, the date of our initial public offering.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|** | IPO Issuance price
|-- | ------------------



We have not paid cash dividends on our common stock. The declaration of dividends, whether in cash or in-kind, is within the discretion of
InterVideos Board of Directors.



Our Insider Trading
Policy allows our directors, officers and other employees covered under the policy to establish, under limited circumstances contemplated by Rule 10b5-1 under the Exchange Act of 1934, written trading plans that permit automatic trading of our
common stock. On November 30, 2004, Randall Bambrough, our Chief Financial Officer, Honda Shing, our Chief Technology Officer and Raul Diaz, our Vice President of Sales, adopted Rule 10b5-1 trading plans that became effective on February 23, 2005.
We believe that additional directors, officers and employees may establish such trading plans in the future.



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ITEM 6: SELECTED FINANCIAL DATA



The following selected consolidated financial data are derived from InterVideos consolidated financial statements. This data should be read in conjunction with Item 8, the Consolidated Financial Statements and Notes thereto, and with
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.



Consolidated Statement of Operations Data



|                                                             |  |                         |        |      |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                             |  | Year Ended December 31, |       
|(in thousands, except per share data)                        |  | 2004                    |        | 2003 |   | 2002   |  |   | 2001   |   |  | 2000 |       
|Revenue                                                      |  | $                       | 74,460 |      | $ | 57,078 |  | $ | 45,494 |   |  | $    | 33,763 |   |  | $ | 15,426 |  
|Cost of revenue                                              |  |                         | 32,878 |      |   | 23,849 |  |   | 16,879 |   |  |      | 17,895 |   |  |   | 5,133  |  
|Gross profit                                                 |  |                         | 41,582 |      |   | 33,229 |  |   | 28,615 |   |  |      | 15,868 |   |  |   | 10,293 |  
|Income (loss) from operations                                |  |                         | 11,972 |      |   | 11,426 |  |   | 5,153  |   |  |      | (8,298 | ) |  |   | (7,088 | )
|Income (loss) before provision (benefit) for income taxes    |  |                         | 12,882 |      |   | 11,989 |  |   | 5,320  |   |  |      | (7,760 | ) |  |   | (6,399 | )
|Provision (benefit) for income taxes                         |  |                         | 4,056  |      |   | 4,196  |  |   | (2,409 | ) |  |      | 924    |   |  |   | 552    |  
|Net income (loss)                                            |  |                         | 8,826  |      |   | 7,793  |  |   | 7,729  |   |  |      | (8,684 | ) |  |   | (6,951 | )
|Net income (loss) per common share, basic                    |  | $                       | 0.66   |      | $ | 1.07   |  | $ | 3.15   |   |  | $    | (4.61  | ) |  | $ | (4.89  | )
|                                                             |  |                         |        |      |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss) per common share, diluted                  |  | $                       | 0.58   |      | $ | 0.57   |  | $ | 0.65   |   |  | $    | (4.61  | ) |  | $ | (4.89  | )
|                                                             |  |                         |        |      |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Number of shares used in per share calculation (see Note 2): |  |                         |        |      |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Basic                                                        |  |                         | 13,409 |      |   | 7,273  |  |   | 2,456  |   |  |      | 1,885  |   |  |   | 1,421  |  
|                                                             |  |                         |        |      |   |        |  |   |        |   |  |      |        |   |  |   |        |  
|Diluted                                                      |  |                         | 15,337 |      |   | 13,723 |  |   | 11,945 |   |  |      | 1,885  |   |  |   | 1,421  |  
|                                                             |  |                         |        |      |   |        |  |   |        |   |  |      |        |   |  |   |        |  



Consolidated Balance Sheet Data



|                                                  |  |              |         |      |   |        |  |      |        |      |   |        |  |   |       
|------------------------------------------------- |  | ------------ | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                  |  | December 31,
|(in thousands)                                    |  | 2004         |         | 2003 |   | 2002   |  | 2001 |        | 2000
|Cash, cash equivalents and short-term investments |  | $            | 74,587  |      | $ | 69,737 |  | $    | 21,241 |      | $ | 14,348 |  | $ | 14,668
|Working capital                                   |  |              | 64,521  |      |   | 63,760 |  |      | 15,684 |      |   | 3,955  |  |   | 11,547
|Total assets                                      |  |              | 101,775 |      |   | 87,919 |  |      | 34,716 |      |   | 22,153 |  |   | 22,134
|Total liabilities                                 |  |              | 18,562  |      |   | 15,503 |  |      | 12,275 |      |   | 13,686 |  |   | 5,817 
|Total stockholders equity                        |  |              | 83,213  |      |   | 72,416 |  |      | 22,441 |      |   | 8,467  |  |   | 15,314



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INTERVIDEO, INC.



|ITEM 7: | 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 Operations, information
contained under the caption Part I, Item 1. Business, as well as information contained in Risk Factors below and elsewhere in this Annual Report on Form 10-K (the Annual Report), 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, as amended. 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 Annual Report include, among others, statements regarding (1) our proposed transaction with Ulead
and the anticipated impact to our business, operations and financial conditions, (2) research and development expenses, (3) sales and marketing expenses, (4) other operating and capital expenditures, (5) anticipated growth of operations, personnel
and infrastructure, (6) exercise prices of future option grants, (7) the sufficiency of our capital resources, (8) 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) our efforts to improve internal controls, (16) settlement of intellectual property claims, (17) stock-based compensation expenses,
(18) general and administrative expenses, and (19) the utility of certain products. The Company disclaims any obligation to update information in any forward-looking statement.



Overview



Founded in 1998, InterVideo is a provider of DVD software, video editing and DVD burning software, television viewing and recording software and InstantOn
software. We have developed a technology platform from which we have created a broad suite of integrated multimedia software products. These products span the digital video cycle by allowing users to capture, edit, author, distribute, burn and play
digital video. We sell our products to PC OEMs, CE manufacturers and PC peripherals manufacturers worldwide. We have operations in the United States, Taiwan, Japan and China. We derive revenue primarily 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 majority of our revenue. We derived 71% of our
revenue for the year ended December 31, 2004 from sales of our WinDVD product, primarily to PC OEMs, as compared to 82% and 89% of our revenue in the years ended December 31, 2003 and December 31, 2002, respectively. We expect that revenue from
sales of our WinDVD product to PC OEMs will continue to account for a majority of our revenue. However, in the future, we expect to derive an increasing percentage of our revenue from sales of other products, including WinDVD Creator, InstantON,
InterVideo Home Theater, InterVideo DVD Copy and Linux-based versions of our DVD and DVR software designed for Linux-based PCs and CE devices, and products sold through our retail and web-based sales channels.



Our software is generally bundled with products sold by PC OEMs. Our PC OEM
customers include, among others, Dell, Fujitsu, Fujitsu Siemens, Hewlett-Packard, IBM, NEC and Toshiba. 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 year
ended December 31, 2004, our two largest customers accounted for 38% of our revenue, with Hewlett-Packard



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accounting for 25% of our revenue and Toshiba accounting for 13% of our revenue. We expect that the revenue from Dell, which accounted for 7% and 13% of our
revenue during the twelve months ended December 31, 2004 and December 31, 2003, respectively, may decrease to $0 in future periods because we understand that our current portion of their business is moving to one of our competitors. We expect that a
small number of customers will continue to account for a majority of our revenue and gross profit for the foreseeable future, although the identity of those customers may change from period to period. Because there is 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.



We have an Internet commerce sales initiative that allows users to purchase
products from our websites. We also continue to expand our retail channels. For the year ended December 31, 2004, we derived 15% of our revenue from web and retail sales as compared to 16% of revenue for the prior year. 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 47% of our revenue for the year ended December 31, 2004, as compared to 44% for the prior year. 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.



Tender Offer for Ulead Systems, Inc



During the year ended December 31, 2004 and continuing through the first quarter of 2005 we purchased shares of stock in Ulead Systems, Inc.
(Ulead), a publicly traded company in Taiwan that is a leading developer of innovative video, imaging and DVD authoring software, accumulating a total shareholding



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percentage at 18.5 percent as of March 31, 2005. On March 14, 2005, we and our wholly-owned subsidiary, InterVideo Digital Technology Corp. announced the
commencement of a tender offer to purchase an additional 30.1 to 65 percent of the issued shares of Ulead at 30 NTD (US$0.98) per share of Ulead common stock. Our obligation to purchase the shares is subject to certain closing conditions, including
the requirement that there have not been any material adverse change in the financial condition or business of Ulead. The tender offer is scheduled to expire on April 13, 2005. Upon the successful completion of the tender offer, the transaction will
be valued at between US$23 and US$49 million, and we will own between 50.1 and 85 percent of the outstanding shares of Ulead. These figures include the 18.5 percent of Uleads outstanding shares currently owned by us, the shares to be purchased
in the tender offer and an additional 1.5% of Uleads shares to be purchased outside of the tender offer.



Upon the successful completion of the tender offer, we will commence reporting our financial results and those of Ulead on a consolidated basis. For its
2004 fiscal year, Ulead reported revenue of NTD 1,352,886,000 (US$40 million), operating income of NTD 49,928,000 (US$1.5 million) and a net loss of NTD 84,731,000 (US$2.5 million). Ulead does not provide public guidance with respect to its
anticipated financial results. However, we anticipate that our financial consolidation with Ulead will increase substantially the consolidated companys revenue, cost of revenue and operating expenses. The quantitative impact on our financial
results cannot be determined at this time due to the uncertainties inherent in the two companies future financial results, uncertainties regarding the amount of synergies and efficiencies that would be garnered as a result of the consolidation
and uncertainties regarding the reconciliation of Uleads financial results from Taiwan GAAP to U.S. GAAP, among other factors. Nonetheless, we believe that the consolidation will be accretive to our net income for the current fiscal year.
There can be no assurance, however, that the transaction will be accretive, that any synergies will be achieved, that the transaction will be consummated at all or that other negative factors will not arise from the attempted or completed tender
offer. Please see Risk FactorsWe may not be successful in addressing problems encountered in connection with our proposed transaction with Ulead or any other acquisitions we may undertake, which could disrupt our operations or otherwise
harm our business.



Critical Accounting 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.
| | - |  | ----------------------------



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 record revenue
generated from these sales in accordance with SOP 97-2, Software Revenue Recognition, as amended, under which revenue is recognized when:



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



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



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



| |  |  | Collectibility is probable.
| | - |  | ---------------------------



Typically, under the terms of our license agreements with our OEM customers, they are entitled only to unspecified upgrades on a when and if available
basis, prior to sale into the OEMs sales channel partners or sell through to the OEMs end customers. Under the terms of our revenue recognition policy, we recognize revenue based on evidence of products sold by the OEMs to end customers
or to the OEMs sales channel partners. We do not typically provide upgrades or post contract support (PCS) to the OEMs customers or sales channel partners. Accordingly, under such agreements we do not defer any revenue, as we
no longer have an obligation once an OEMs products have been shipped from the OEM to the OEMs sales channel partners or to an OEMs end customer. Under certain other agreements, we defer the recognition of OEM revenue due to ongoing
obligations in association with upgrade rights to end users or significant PCS provided to the OEMs customers. Depending on the specific contractual obligation, we recognize this revenue over a period of the shorter of the contractual
obligation period or the estimated life of the product. In general, we consider the estimated life of our products to be three years.



Typically, our OEM customers do not have the right to claim a credit or refund for returns from the OEMs sales channel partners or end customers
back to the OEM. However, in the few instances where we have granted our OEM customers with the right to claim a refund or credit for these types of returns, we defer 100% of the revenue until we are able to establish a returns reserve based on
historical returns activity that is specific to the respective sales channel, product line or country. We have determined that the return percentage for the WinDVD product line for our OEM sales channel for sales made in the United States has been
less than 0.1% of sales. As a result, we have not deferred WinDVD sales to OEM customers in the United States that have been granted a right of return. If in the future, the actual or estimated number of returned units materially increases as a
percentage of sales, we may be required to establish a returns reserve for these sales.



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.



A small number of OEMs that sell PC components, place orders with us for a
fixed quantity of units at a fixed price based on an agreed-upon purchase order or contract. In such cases, qualification of our software is not required, and these OEMs have no rights to upgrades or returns. We generally recognize revenue upon the
completion of shipment, in accordance with the terms of the respective agreement, to these OEMs.



In addition to the per unit license fees discussed above, certain OEM agreements also include prepaid license fees and/or non-recurring engineering
(NRE) service fees primarily for porting our software to the OEMs hardware and software configurations. Since we provide when and if available upgrade rights to our OEM customers on the products they have licensed from the point in
time when they receive the product until the point in time when they have sold the product to their sales channel partners or end customers, any prepaid license fees are recognized based on actual shipments after the upgrade rights have lapsed. The
NRE service fees are recognized upon completion and acceptance of the NRE service. Some OEM agreements provide the OEM



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with rights to PCS to be provided by us to the OEMs end customers. This PCS may or may not include the right to unspecified future software upgrades.
However, PCS is typically not available to the OEMs end users. We have established vendor specific objective evidence (VSOE) of fair value for PCS for end customer support on a limited number of products sold to OEMs in Japan. On
these arrangements, we use the residual method to account for the allocation between the license revenue and the service revenue. The allocated license revenue is recognized in full upon the OEMs sale of the licensed product to the OEMs
sales channel partners and, where the only undelivered element of the agreement is PCS, the allocated PCS is recognized over the period of the PCS obligation. In all other agreements where we have sold PCS in which we have not been able to establish
a VSOE of fair value for PCS or where there are additional undelivered elements, such as NRE service fees, we defer all of the revenue until the additional undelivered elements are accepted and the only undelivered element is PCS. Once the only
undelivered element is PCS, we recognize the entire arrangement fee over the PCS period.



End-user sales are made directly through our 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 our 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 they have purchased
in the previous 14 days, which we currently reserve for using a 30-day sales return reserve based upon historical return percentages.



We sell our products to retailers and distributors either on a consignment or non-consignment basis. For consignment product shipments, in general, the
distributor will not take ownership of the product at the point in time when we ship product to the distributor. Once the distributor sells the consignment-based product to a retailer or an end customer and ownership is transferred from us to the
retailer or end customer, the distributor will report those sales to us and we invoice the distributor. For non-consignment product shipments, the distributor will take ownership of the product at the point in time when we ship the product to the
distributor and we invoice the distributor upon such shipment. Since we do not have contractually obligated minimum orders or payment terms with our distributors, we do not recognize revenue for retail product distribution prior to invoicing.
Certain distributors and retailers, primarily in Japan, have limited rights to return products that were purchased in the previous six months. These distributors have no rights to product upgrades. We generally recognize revenue, net of
contractually obligated return rights and any additional required rebate or pricing reserves, upon completion of shipment to these distributors and retailers. Other distributors and retailers, primarily in the United States and Europe, have
unlimited rights of return. We generally recognize revenue upon receipt of evidence that the distributors and retailers have sold our products through to end users, less any required rebate or pricing reserves.



We have begun selling licenses of our products to corporations and other
businesses in the United States. This corporate licensing program is generally conducted either directly between InterVideo and the licensee or through a reseller. For these sales we do not provide the corporation a right to return the product once
it has been delivered and we do not provide support or upgrade rights to that licensee. We currently recognize revenue for these sales upon confirmation of delivery of the product.



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. 99-19 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



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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.



Results of Operations



|                                     |  |                         |   |  |      |   |  |      |  
|------------------------------------ |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                     |  | Year ended December 31, |  
|                                     |  | 2004                    |   |  | 2003 |   |  | 2002 |  
|As a percentage of revenue:          |  |                         |   |  |      |   |  |      |  
|Revenue                              |  | 100                     | % |  | 100  | % |  | 100  | %
|Cost of revenue                      |  | 44                      |   |  | 42   |   |  | 37   |  
|                                     |  |                         |   |  |      |   |  |      |  
|Gross Profit                         |  | 56                      |   |  | 58   |   |  | 63   |  
|Operating expenses:                  |  |                         |   |  |      |   |  |      |  
|Research and development             |  | 14                      |   |  | 13   |   |  | 16   |  
|Sales and marketing                  |  | 14                      |   |  | 16   |   |  | 18   |  
|General and administrative           |  | 12                      |   |  | 8    |   |  | 8    |  
|Stock compensation                   |  |                        |   |  | 1    |   |  | 5    |  
|Cost of delayed public offering      |  |                        |   |  |     |   |  | 4    |  
|                                     |  |                         |   |  |      |   |  |      |  
|Total operating expenses             |  | 40                      |   |  | 38   |   |  | 51   |  
|Income from operations               |  | 16                      |   |  | 20   |   |  | 12   |  
|Other income, net                    |  | 1                       |   |  | 1    |   |  |     |  
|                                     |  |                         |   |  |      |   |  |      |  
|Income before income taxes           |  | 17                      |   |  | 21   |   |  | 12   |  
|Provision (benefit) for income taxes |  | 5                       |   |  | 7    |   |  | (5   | )
|                                     |  |                         |   |  |      |   |  |      |  
|Net income                           |  | 12                      | % |  | 14   | % |  | 17   | %
|                                     |  |                         |   |  |      |   |  |      |  



The following
describes certain line items in our statement of operations:



Revenue:Revenue is primarily derived from fees paid under software licenses granted to PC OEMs, CE manufacturers, PC peripherals manufacturers, retail distributors, retail customers and directly to end users or businesses.



Cost of Revenue:Cost of revenue consists primarily of
license royalties, expenses incurred to manufacture, package and distribute our software products, the amortization of developed technology, costs associated with end-user PCS and the cost of settlement of intellectual property matters. License
royalties consist of royalties paid or accrued for payment to third parties for technologies incorporated into our products. In general, the amount of royalties depends on the number of our product units sold and the royalty rates associated with
the third-party technology incorporated into those products. We sometimes prepay for the right to bundle and distribute certain licensed technologies. In general, these prepayments are at a flat rate and are not determined by the number of units of
the bundled product that are shipped. In general, the license rights are granted for one year and the estimated useful life of the technology is three years. End-user PCS costs include the costs associated with providing assistance to end users of
our products. With the exception of packaging and distribution costs, the cost of revenue is generally the same for each product, regardless of sales channel. Certain product costs associated with sales to distributors, retailers and end users are
deferred until the corresponding revenue has been recognized. Cost of settlement of intellectual property matters consists of amounts that we have agreed to pay to third parties in settlement of alleged infringement of certain patented technology
used in our customers products and accruals for royalties related to our usage of technologies under patent where no agreement exists.



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Gross Profit: Gross profit is affected by competitive price pressures, fluctuations in unit
volumes, changes in royalty amounts and changes in the mix of products sold and in our mix of distribution channels. Differences in gross profits by sales channel are primarily a reflection of product pricing differences, which can be impacted by
distribution and marketing rebates, associated with each sales channel. In addition, our gross profit may be affected by costs associated with the settlement of intellectual property matters.



Research and development expenses: Research and development expenses
consist primarily of personnel and related costs, consulting expenses associated with the development of new products, technology license fees, professional fees and product evaluation and testing costs.



Sales and marketing expenses: Sales and marketing expenses consist
primarily of personnel and related costs, including salaries and commissions, travel expenses, commissions paid to third party sales representatives and costs associated with trade shows, advertising and other marketing efforts.



General and administrative expenses: 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.



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



Other income, net:Other income, net consists primarily of interest earned on our cash and cash equivalent balances, offset by other expenses.



Comparison of Years Ended December 31, 2004 and 2003



Revenue



|                       |  |                              |  |                       |   |  |                             
|---------------------- |  | ---------------------------- |  | --------------------- | - |  | ----------------------------
|                       |  | Year Ended December 31, 2004 |  | % Change 2003 to 2004 |   |  | Year Ended December 31, 2003
|Revenue (in thousands) |  | 74,460                       |  | 30                    | % |  | 57,078                      



Revenue increased 30%
to $74.5 million for the year ended December 31, 2004 from $57.1 million for the year ended December 31, 2003. OEM product sales increased 31% to $62.9 million for the year ended December 31, 2004 from $48.1 million for the year ended December 31,
2003. Web and retail sales increased 29% to $11.5 million for the year ended December 31, 2004 from $8.9 million for the year ended December 31, 2003. OEM product sales accounted for 85% of total revenue for the year ended December 31, 2004 as
compared to 84% of total revenue for the year ended December 31, 2003. We derived a substantial portion of our revenue from a small number of customers. For the year ended December 31, 2004, our two largest customers accounted for 38% of our
revenue, with Hewlett-Packard accounting for 25% and Toshiba accounting for 13% of our revenue. In the year ended December 31, 2003, our two largest customers accounted for 32% of our revenue with Hewlett-Packard accounting for 19% and Dell
accounting for 13% of our revenue. Sales outside the United States accounted for 47% of our revenue for the year ended December 31, 2004 as compared to 44% for the year ended December 31, 2003. The growth in revenue for the year ended December 31,
2004 over the same period in the prior year reflects increased revenue from our WinDVD product sales of 12%. Additionally, increased sales of our non-WinDVD products which includes WinDVD Creator, InterVideo Home Theater and InterVideo DVD Copy
accounted for 29% of revenue for the year ended December 31, 2004, as compared to 18% for the year ended December 31, 2003.



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Cost of revenue



|                               |  |                              |   |  |                       |   |  |                              |  
|------------------------------ |  | ---------------------------- | - |  | --------------------- | - |  | ---------------------------- | -
|                               |  | Year Ended December 31, 2004 |   |  | % Change 2003 to 2004 |   |  | Year Ended December 31, 2003 |  
|Cost of revenue (in thousands) |  | 32,878                       |   |  | 38                    | % |  | 23,849                       |  
|Percentage of total revenue    |  | 44                           | % |  |                       |   |  | 42                           | %



Cost of revenue
increased 38% to $32.9 million, or 44% of revenue, for the year ended December 31, 2004 from $23.8 million, or 42% of revenue, for the year ended December 31, 2003. The increase in absolute dollars was primarily due to increased unit sales and an
increase in the per unit cost of licensed royalties paid to Dolby Laboratories. Royalties paid to Dolby Laboratories increased $6.4M, or 29%, in the year ended December 31, 2004 over the year ended December 31, 2003. The increase as a percentage of
revenue was primarily due to a credit of $1.1 million taken during the year ended December 31, 2003 representing the reversal of a previous accrual for unlicensed royalties no longer deemed probable. Cost of revenue in absolute dollars will continue
to be impacted by per-unit costs of royalties. We expect that cost of revenue as a percentage of revenue will be impacted by the introduction of our newer, higher margin products offset by continued price erosion in our WinDVD sales to our OEM
customers.



Gross profit



|                            |  |                              |   |  |                       |   |  |                              |  
|--------------------------- |  | ---------------------------- | - |  | --------------------- | - |  | ---------------------------- | -
|                            |  | Year Ended December 31, 2004 |   |  | % Change 2003 to 2004 |   |  | Year Ended December 31, 2003 |  
|Gross profit (in thousands) |  | 41,582                       |   |  | 25                    | % |  | 33,229                       |  
|Percentage of total revenue |  | 56                           | % |  |                       |   |  | 58                           | %



Gross profits were 56%
of revenue for the year ended December 31, 2004 as compared to 58% for the year ended December 31, 2003. The decrease was primarily due to a credit of $1.1 million taken during the year ended December 31, 2003 representing the reversal of a previous
accrual for unlicensed royalties no longer deemed probable. Gross profits were also impacted by lower average selling prices of our WinDVD, WinDVD Creator and other products to our major OEM customers without a proportional decrease in third party
royalties and an increase in per unit pricing of third party royalties paid to Dolby Laboratories. These factors were offset by shifts in our sales mix volumes to higher margin products such as WinDVD Creator. We expect that gross profits will be
impacted by the introduction of our newer, higher margin products offset by continued price erosion in our WinDVD sales to our OEM customers and higher per-unit costs.



Research and development expenses



|                                                 |  |                              |   |  |                       |   |  |                              |  
|------------------------------------------------ |  | ---------------------------- | - |  | --------------------- | - |  | ---------------------------- | -
|                                                 |  | Year Ended December 31, 2004 |   |  | % Change 2003 to 2004 |   |  | Year Ended December 31, 2003 |  
|Research and development expenses (in thousands) |  | 10,002                       |   |  | 31                    | % |  | 7,626                        |  
|Percentage of total revenue                      |  | 14                           | % |  |                       |   |  | 13                           | %



Research and
development expenses were $10.0 million, or 14% of revenue, for the year ended December 31, 2004 and $7.6 million, or 13% of revenue, for the year ended December 31, 2003. The increase in absolute dollars was primarily attributable to a $1.4 million
increase in payroll and payroll related expenses due to increased research and development headcount at our international locations, a $330,000 increase in depreciation expense due to increased capital expenditures, a $190,000 increase in legal and
outside consulting fees, a $190,000 increase in travel and entertainment expenses and a $280,000 increase in facilities charges and other general operating expenses. Research and development headcount grew to 221 during the year ended December 31,
2004, an increase of 64% as compared to 135 at December 31, 2003. This growth required us to increase our facilities in Taiwan and China. We believe that a significant level of research and development expenses will be



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required to remain competitive, and, as a result, we expect these expenses to increase in absolute dollars and that such expenses may increase as a
percentage of revenue in the future.



Sales and marketing
expenses



|                                            |  |                              |   |  |                       |   |  |                              |  
|------------------------------------------- |  | ---------------------------- | - |  | --------------------- | - |  | ---------------------------- | -
|                                            |  | Year Ended December 31, 2004 |   |  | % Change 2003 to 2004 |   |  | Year Ended December 31, 2003 |  
|Sales and marketing expenses (in thousands) |  | 10,229                       |   |  | 15                    | % |  | 8,908                        |  
|Percentage of total revenue                 |  | 14                           | % |  |                       |   |  | 16                           | %



Sales and marketing
expenses increased to $10.2 million, or 14% of revenue, for the year ended December 31, 2004 from $8.9 million, or 16% of revenue, for the year ended December 31, 2003. The increase in absolute dollars was primarily attributable to a $440,000
increase in payroll and payroll related expenses due to increased sales and marketing headcount, a $450,000 increase in outside consulting fees and commissions to outside sales representatives, a $180,000 increase in travel, promotional and
tradeshow expenses and a $250,000 increase in depreciation and facilities related expenses. The decrease, as a percentage of revenue, for the year ended December 31, 2004 as compared to the prior year was primarily due to the overall increase in
revenue without a proportional increase in sales and marketing expenses. 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 sales and marketing
expenses to increase in absolute dollars and that such expenses may increase as a percentage of revenue in the future as we seek to further establish our retail presence.



General and administrative expenses



|                                                   |  |                              |   |  |                       |   |  |                              |  
|-------------------------------------------------- |  | ---------------------------- | - |  | --------------------- | - |  | ---------------------------- | -
|                                                   |  | Year Ended December 31, 2004 |   |  | % Change 2003 to 2004 |   |  | Year Ended December 31, 2003 |  
|General and administrative expenses (in thousands) |  | 9,108                        |   |  | 109                   | % |  | 4,357                        |  
|Percentage of total revenue                        |  | 12                           | % |  |                       |   |  | 8                            | %



General and
administrative expenses increased to $9.1 million or 12% of revenue, for the year ended December 31, 2004 from $4.4 million, or 8% of revenue, for the year ended December 31, 2003. This increase in absolute dollars and as a percentage of revenue was
primarily due to a $650,000 increase in payroll and payroll related expenses due to increased general and administrative headcount, a $2.4 million increase in outside consulting and audit fees due to Sarbanes-Oxley compliance efforts, a $320,000
increase in legal fees, a $110,000 increase in travel and entertainment expenses, a $520,000 increase in investor relations expenses, directors and officers insurance premiums, board of directors fees and other expenses associated with being a
publicly traded entity for a full year and a $120,000 increase in general operating expenses, offset by a $175,000 decrease in losses on the disposal of fixed assets. Additionally, during the year-ended December 31, 2004, we incurred $780,000 in
legal and administrative expenses associated with the pursuit of strategic transactions. We expect general and administrative expenses to remain relatively flat as a percentage of revenue but to increase in absolute dollars in the future as we build
our infrastructure to support our anticipated growth and operations as a public company.



Stock-based compensation expenses



|                                                 |  |                              |   |  |                       |    |  |                              |  
|------------------------------------------------ |  | ---------------------------- | - |  | --------------------- | -- |  | ---------------------------- | -
|                                                 |  | Year Ended December 31, 2004 |   |  | % Change 2003 to 2004 |    |  | Year Ended December 31, 2003 |  
|Stock-based compensation expenses (in thousands) |  | 271                          |   |  | (70                   | %) |  | 912                          |  
|Percentage of total revenue                      |  |                             | % |  |                       |    |  | 1                            | %



Stock-based
compensation expenses decreased to $271,000 for the year ended December 31, 2004 compared with $912,000 for the year ended December 31, 2003.



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On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), Share Based
Payments (SFAS No. 123R), which is a revision of SFAS No. 123 and supersedes APB No. 25 and will require us to calculate and record in the income statement the cost of equity instruments, such as stock options awarded to employees
for services received which we have previously disclosed as pro forma information in the Notes to the Consolidated Financial Statements. The cost of the equity instruments is to be measured based on the fair value of the instruments on the date they
are granted (with certain exceptions) and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments. The statement will be effective in our third quarter of the
year ending December 31, 2005. The impact of adopting SFAS No. 123R cannot be accurately estimated at this time, as it will depend on the market value and the amount of share based awards granted in future periods but it is expected that the impact
will increase our stock-based compensation expenses once it has been adopted.



Other income, net



|                                 |  |                              |   |  |                       |   |  |                              |  
|-------------------------------- |  | ---------------------------- | - |  | --------------------- | - |  | ---------------------------- | -
|                                 |  | Year Ended December 31, 2004 |   |  | % Change 2003 to 2004 |   |  | Year Ended December 31, 2003 |  
|Other income, net (in thousands) |  | 910                          |   |  | 62                    | % |  | 563                          |  
|Percentage of total revenue      |  | 1                            | % |  |                       |   |  | 1                            | %



Other income, net
increased to $910,000 for the year ended December 31, 2004 from $563,000 for the year ended December 31, 2003. This increase is primarily due a full year of interest earned on the cash, cash equivalents and short-term investments generated from our
initial public offering in July 2003 and income from operations.



Provision for income taxes



|                                          |  |                              |   |  |                       |    |  |                              |  
|----------------------------------------- |  | ---------------------------- | - |  | --------------------- | -- |  | ---------------------------- | -
|                                          |  | Year Ended December 31, 2004 |   |  | % Change 2003 to 2004 |    |  | Year Ended December 31, 2003 |  
|Provision for income taxes (in thousands) |  | 4,056                        |   |  | (3                    | %) |  | 4,196                        |  
|Percentage of total revenue               |  | 5                            | % |  |                       |    |  | 7                            | %



We recorded a
provision for income taxes for the period ended December 31, 2004 of $4.1 million on income before income taxes of $12.9 million, compared to a provision for income taxes of $4.2 million on income before income taxes of $12.0 million for the period
ended December 31, 2003. Our 2004 income tax expense differs from the expected provision derived by applying the applicable U.S. federal statutory rate to the income from operations primarily due to the benefit from a release of remaining valuation
allowance on certain deferred tax assets provided in prior years, previous un-benefited stock option compensation, current year research and experimental credits and export sales activities, offset by state income tax expenses, foreign income taxes
net of foreign tax credits and foreign losses with no benefit. Our 2003 income tax expense was the same as the expected provision derived by applying the applicable U.S. federal statutory rate to the income from operations after taking into
consideration non-deductible amortization of deferred compensation and state income tax expenses, offset by benefits from research and experimental credits, export sales activities and other credits. We expect our effective tax rate for 2005 to
approximate 38% to 40% of our income before income taxes. See Note 5 in the Notes to the Consolidated Financial Statements.



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Comparison of Years Ended December 31, 2003 and 2002



Revenue



|                      |  |                              |  |                       |   |  |                             
|--------------------- |  | ---------------------------- |  | --------------------- | - |  | ----------------------------
|                      |  | Year Ended December 31, 2003 |  | % Change 2002 to 2003 |   |  | Year Ended December 31, 2002
|Revenue(in thousands) |  | 57,078                       |  | 25                    | % |  | 45,494                      



Revenue increased 25%
to $57.1 million for the year ended December 31, 2003 from $45.5 million for the year ended December 31, 2002. OEM product sales increased 24% to $48.1 million for the year ended December 31, 2003 from $38.8 million for the year ended December 31,
2002. Web and retail sales increased 33% to $8.9 million for the year ended December 31, 2003 from $6.7 million for the year ended December 31, 2002. OEM product sales accounted for 84% of total revenue for the year ended December 31, 2003 as
compared to 85% of total revenue for the year ended December 31, 2002. We derived a substantial portion of our revenue from a small number of customers. For the year ended December 31, 2003, our two largest customers accounted for 32% of our
revenue, with Hewlett-Packard accounting for 19% and Dell accounting for 13% of our revenue during that period. In the year ended December 31, 2002 these same two customers accounted for 31% of our revenue with Hewlett-Packard accounting for 17% and
Dell accounting for 14% of our revenue during that period. Sales outside the United States accounted for 44% of our revenue for the year ended December 31, 2003 as compared to 50% for the year ended December 31, 2002. The growth in revenue for the
year ended December 31, 2003 over the same period in the prior year reflects increased revenue from our WinDVD product sales of 16%. Additionally, increased sales of our non-WinDVD products which includes WinDVD Creator, InterVideo Home Theater and
InterVideo DVD Copy accounted for 18% of revenue for the year ended December 31, 2003, as compared to 11% for the year ended December 31, 2002.



Cost of revenue



|                               |  |                            |   |  |                      |   |  |                            |  
|------------------------------ |  | -------------------------- | - |  | -------------------- | - |  | -------------------------- | -
|                               |  | Year EndedDecember 31,2003 |   |  | % Change2002 to 2003 |   |  | Year EndedDecember 31,2002 |  
|Cost of revenue (in thousands) |  | 23,849                     |   |  | 41                   | % |  | 16,879                     |  
|Percentage of total revenue    |  | 42                         | % |  |                      |   |  | 37                         | %



Cost of revenue
increased to $23.8 million, or 42% of revenue, for the year ended December 31, 2003 from $16.9 million, or 37% of revenue, for the year ended December 31, 2002. The increase in absolute dollars was primarily due to increased unit sales. The increase
as a percentage of revenue was primarily due to the aforementioned decline in selling prices of our WinDVD products without a proportional decrease in third-party royalties as well as the inclusion of royalty costs associated with certain OEM
revenues that have been deferred.Also included in the cost of revenue for the year ended December 31, 2003 is a credit of $1.1 million taken in the third quarter representing the reversal of a previous accrual for unlicensed royalties no
longer deemed probable.



Gross profit



|                            |  |                            |   |  |                      |   |  |                            |  
|--------------------------- |  | -------------------------- | - |  | -------------------- | - |  | -------------------------- | -
|                            |  | Year EndedDecember 31,2003 |   |  | % Change2002 to 2003 |   |  | Year EndedDecember 31,2002 |  
|Gross profit (in thousands) |  | 33,229                     |   |  | 16                   | % |  | 28,615                     |  
|Percentage of total revenue |  | 58                         | % |  |                      |   |  | 63                         | %



Gross profits were 58%
of revenue for the year ended December 31, 2003 as compared to 63% for the year ended December 31, 2002. The decrease reflects lower average selling prices of our WinDVD products to our major OEM customers without a proportional decrease in third
party royalties. Gross profits were also negatively impacted by the inclusion of royalty costs associated with certain OEM revenues that have been deferred, offset



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by a credit of $1.1 million representing the reversal of a previous accrual for unlicensed royalties no longer deemed probable.



Research and development expenses



|                            |  |                            |   |  |                      |   |  |                            |  
|--------------------------- |  | -------------------------- | - |  | -------------------- | - |  | -------------------------- | -
|                            |  | Year EndedDecember 31,2003 |   |  | % Change2002 to 2003 |   |  | Year EndedDecember 31,2002 |  
|Research and development    |  |                            |   |  |                      |   |  |                            |  
|expenses (in thousands)     |  | 7,626                      |   |  | 6                    | % |  | 7,185                      |  
|Percentage of total revenue |  | 13                         | % |  |                      |   |  | 16                         | %



Research and
development expenses were $7.6 million, or 13% of revenue, for the year ended December 31, 2003 and $7.2 million, or 16% of revenue, for the year ended December 31, 2002. The increase in absolute dollars was primarily attributable to a $293,000
increase in payroll and payroll related expenses due to increased research and development headcount and a $95,000 increase in legal and outside consulting fees. The decrease, as a percentage of revenue, for the year ended December 31, 2003 as
compared to the corresponding period of the prior year was primarily due to the overall increase in revenue without a proportional increase in research and development expenses. This is primarily attributable to a shift in personnel resources to
overseas locations with lower cost structures.



Sales and
marketing expenses



|                            |  |                            |   |  |                      |   |  |                            |  
|--------------------------- |  | -------------------------- | - |  | -------------------- | - |  | -------------------------- | -
|                            |  | Year EndedDecember 31,2003 |   |  | % Change2002 to 2003 |   |  | Year EndedDecember 31,2002 |  
|Sales and marketing         |  |                            |   |  |                      |   |  |                            |  
|expenses (in thousands)     |  | 8,908                      |   |  | 9                    | % |  | 8,179                      |  
|Percentage of total revenue |  | 16                         | % |  |                      |   |  | 18                         | %



Sales and marketing
expenses increased to $8.9 million, or 16% of revenue, for the year ended December 31, 2003 from $8.2 million, or 18% of revenue, for the year ended December 31, 2002. The increase in absolute dollars was primarily attributable to a $750,000
increase in payroll and payroll related expenses due to increased sales and marketing headcount, a $680,000 increase in travel, promotional and tradeshow expenses and a $155,000 increase in postage and communication expenses. These increased
expenses were partially offset by a decrease in commissions paid to outside sales representatives of $934,000, mainly in Japan. The decrease, as a percentage of revenue, for both the year ended December 31, 2003 as compared to the prior year was
primarily due to the overall increase in revenue without a proportional increase in sales and marketing expenses.



General and administrative expenses



|                            |  |                            |   |  |                      |   |  |                            |  
|--------------------------- |  | -------------------------- | - |  | -------------------- | - |  | -------------------------- | -
|                            |  | Year EndedDecember 31,2003 |   |  | % Change2002 to 2003 |   |  | Year EndedDecember 31,2002 |  
|General and administrative  |  |                            |   |  |                      |   |  |                            |  
|expenses (in thousands)     |  | 4,357                      |   |  | 11                   | % |  | 3,921                      |  
|Percentage of total revenue |  | 8                          | % |  |                      |   |  | 8                          | %



General and
administrative expenses increased to $4.4 million or 8% of revenue, for the year ended December 31, 2003 from $3.9 million, or 8% of revenue, for the year ended December 31, 2002. This increase in absolute dollars was primarily due to an increase in
directors and officers liability insurance premiums of $250,000, an increase in payroll and payroll related expenses of $300,000 and an increase in local taxes of



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$106,000, which was largely due to the increase in shares authorized as a result of our initial public offering in July 2003. These increases were offset by
a decrease in outside consulting, legal and accounting service fees of $284,000.



Stock-based compensation expenses



|                            |  |                            |   |  |                      |    |  |                            |  
|--------------------------- |  | -------------------------- | - |  | -------------------- | -- |  | -------------------------- | -
|                            |  | Year EndedDecember 31,2003 |   |  | % Change2002 to 2003 |    |  | Year EndedDecember 31,2002 |  
|Stock-based compensation    |  |                            |   |  |                      |    |  |                            |  
|expenses (in thousands)     |  | 912                        |   |  | (63                  | %) |  | 2,469                      |  
|Percentage of total revenue |  | 2                          | % |  |                      |    |  | 5                          | %



Stock-based
compensation expenses decreased to $912,000 for the year ended December 31, 2003 compared with $2.5 million for the year ended December 31, 2002 due to the effects of accelerated amortization and forfeitures.



Other income, net



|                                |  |                            |   |  |                      |   |  |                            |  
|------------------------------- |  | -------------------------- | - |  | -------------------- | - |  | -------------------------- | -
|                                |  | Year EndedDecember 31,2003 |   |  | % Change2002 to 2003 |   |  | Year EndedDecember 31,2002 |  
|Other income, net(in thousands) |  | 563                        |   |  | 237                  | % |  | 167                        |  
|Percentage of total revenue     |  | 1                          | % |  |                      |   |  |                           | %



Other income, net
increased to $563,000 for the year ended December 31, 2003 from $167,000 for the year ended December 31, 2002. This increase is primarily due to the interest earned on the additional cash generated from our initial public offering in July 2003.



Provision (benefit) for income taxes



|                            |  |                            |   |  |                      |   |  |                            |  
|--------------------------- |  | -------------------------- | - |  | -------------------- | - |  | -------------------------- | -
|                            |  | Year EndedDecember 31,2003 |   |  | % Change2002 to 2003 |   |  | Year EndedDecember 31,2002 |  
|Provision (benefit) for     |  |                            |   |  |                      |   |  |                            |  
|income taxes (in thousands) |  | 4,196                      |   |  | *                    | % |  | (2,409                     | )
|Percentage of total revenue |  | 7                          | % |  |                      |   |  | *                          | %

---

|* | Percentage not meaningful
|- | -------------------------



We recorded a provision for income taxes of $4.2 million for the year ended December 31, 2003 as compared to an income tax benefit of $2.4 million for
year ended December 31, 2002. The income tax benefit for the year ended December 31, 2002 was the result of the release of a significant portion of our valuation allowance. Such release of valuation allowance was due to our reassessment of the
realizability of certain of our deferred tax assets as being more likely than not. Our effective tax rate for the year ended December 31, 2003 was 35%. See Note 5 in the Notes to the Consolidated Financial Statements.



Liquidity and Capital Resources



As of December 31, 2004, we had cash, cash equivalents and short-term
investments of $74.6 million representing 73% of our total assets, compared to $69.7 million or 79% of total assets, as of December 31, 2003. Our cash and cash equivalents are highly liquid investments with an original maturity of 90 days or less at
the



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date of purchase and totaled $27.4 million at December 31, 2004 and $46.9 million at December 31, 2003. Short-term investments consist principally of US
treasury notes, state and municipal notes/bonds and corporate bonds.



Net cash provided by operating activities in 2004 was $14.5 million, primarily comprised of $8.8 million of net income adjusted for non-cash charges for depreciation and amortization of $1.3 million, deferred taxes of $526,000, tax benefits
derived from stock option activity of $1.2 million, stock-based compensation of $271,000 and other non-cash charges and credits, a net increase in accounts payable, accrued liabilities and taxes payable of $2.4 million and an increase in deferred
revenue of $547,000, offset by increases in accounts receivable, prepaid expenses and other assets of $624.000. The non-cash adjustment for tax benefits derived from stock option activity results primarily from disqualified disposition of incentive
stock option and non-qualified stock option exercises. The non-cash adjustment for stock-based compensation expense reflects the amortization of deferred stock-based compensation resulting for the granting of stock options with exercise prices less
than the deemed fair market value of the underlying common stock. Beginning in the third quarter of 2005, when we are required to adopt the aforementioned SFAS No. 123R, we expect our stock-based compensation expense will increase but the actual
impact of adopting SFAS No. 123R cannot be accurately estimated at this time, as it will depend on the market value and the amount of share based awards granted in future periods. The net increase in accounts payable, accrued liabilities and taxes
payable is primarily due to increases in accrued license royalties of $1.4 million as a result of increased unit shipments as well as an increase in the per unit cost of these royalties, increases in accrued payroll and bonuses of $1.1 million due
to increased headcount and increases in accruals for outside consulting and external audit fees of $600,000 largely due to Sarbanes-Oxley 404 efforts offset by a $1.2 million decrease in taxes payable due to the lower effective tax rate. The
increase in deferred revenue is primarily due to growth in retail sales in North America and Europe for which revenue with certain customers has been deferred until evidence of sell-through to the end user is obtained. These increases were partially
offset by the recognition of previously deferred revenue as a result of changes in certain contractual arrangements.



Net cash provided by operating activities in 2003 was $9.3 million, primarily comprised of $7.8 million of net income adjusted for non-cash charges for
depreciation and amortization of $774,000, stock-based compensation of $912,000, loss on disposal of property and equipment of $205,000, and other non-cash charges and credits and increases in accounts payable of $595,000 and deferred revenue,
accrued liabilities and taxes payable of $2.6 million, offset by increases in accounts receivable of $1.6 million and prepaid expenses and other current assets of $1.8 million. The non-cash adjustment for stock-based compensation expense reflects
the amortization of deferred stock-based compensation resulting for the granting of options with exercise prices less than the deemed fair market value of the underlying common stock. The loss on disposal of property is largely a result of the
relocation of our corporate headquarters and the resultant write-off of assets not fully depreciated at the time of the move. The increase in deferred revenue is partially due to growth in retail sales in North America and Europe for which revenue
with certain customers has been deferred until evidence of sell-through to the end user is obtained. Additionally, the deferral of revenue associated with implied future obligations on certain contracts with our OEM customers contributed to the
increase in deferred revenue during the period. Included in the change in accrued liabilities is the reversal of an unlicensed royalty accrual of $1.1 million as a result of the determination that the potential liability related to a previously
established accrual is no longer deemed probable as well as payments of $1.0 million on intellectual property claim settlements during the year. These amounts were offset by an increase in accrued license fees due to increased unit shipments of our
products.



Net cash used in investing activities was $33.3
million in 2004, which included the purchase of property and equipment of $1.4 million including the implementation of our new ERP system and expanded operations in Asia and net purchases of short-term investments of $24.5 million. Additionally, we
invested $1.7 million in two private companies in Taiwan and invested $5.7 million for the acquisition of shares of common stock of Ulead Systems, Inc. (Ulead), a publicly traded company in Taiwan.



Net cash used in investing activities was $20.2 million in 2003, which
included the purchase of property and equipment of $1.4 million and net purchases of short-term investments of $18.8 million.



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Net cash used in financing activities in 2004 was $727,000, consisting of $2.6 million used for the
repurchase of common stock offset by $1.8 million in proceeds from the issuance of common stock under stock option and employee stock purchase plans.



Net cash provided by financing activities in 2003 was $40.6 million, consisting of net proceeds from our initial public offering in July 2003 of $40.4
million and $199,000 due to the issuance of common stock upon the exercise of stock options.



We currently have no significant commitments for capital expenditures but we expect to spend approximately $1 million to $2 million on capital expenditures in 2005, which will include the world-wide roll-out of our
ERP system. We anticipate that we will increase our capital expenditures consistent with our anticipated growth in personnel and infrastructure, including facilities and systems. As of December 31, 2004 we had future lease commitments for buildings
of a total of $3.4 million under non-cancelable operating leases through 2010. We have no debt obligations.



On March 14, 2005, we announced the commencement of a tender offer to purchase an additional 30.1 to 65 percent of the issued shares of Ulead at NTD 30
(US$0.98) per share of Ulead common stock. Our obligation to purchase the shares is subject to certain closing conditions, including the requirement that there have not been any material adverse change in the financial condition or business of Ulead
prior to the expiration of the tender offer on April 13, 2005. Upon the successful completion of the tender offer, the transaction will be valued at between US$23 and US$49 million, and we will own between 50.1 and 85 percent of the outstanding
shares of Ulead. These figures include the 18.5 percent of Uleads outstanding shares currently owned by us, the shares to be purchased in the tender offer and an additional 1.5% of Uleads shares to be purchased outside of the tender
offer.



We believe that our current cash, cash equivalent and
short-term investments will be sufficient to meet our current working capital and capital expenditure requirements for at least the next twelve months. The successful completion of the tender offer would utilize between $23 and $49 million of our
working capital. Furthermore, potential investment in Ulead is likely to increase our capital requirements in 2005 although the amount of such increase is not currently known. To the extent our existing sources of cash and cash flows from operations
are not sufficient to fund our activities, we will need to raise additional funds. If we issue additional stock to raise capital, your percentage ownership in us will be reduced. 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. 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. We do not anticipate a need for raising funds by equity or debt financing in the year 2005.



Disclosures About Contractual Obligations and Commercial Commitments



We lease certain of our facilities under non-cancelable operating leases, which expire at various dates through 2010. Some
of these facility lease agreements generally provide base rental rates which increase at various times during the terms of the leases and also provide for renewal options at fair market rental value. We are also responsible for common area
maintenance charges on certain office leases, which are generally less than 10% of base rents and, as such are not included in the information presented below. Total operating lease expense, including month-to-month rentals, was approximately
$745,000, $924,000 and $802,000 for the years ended December 31, 2004, 2003 and 2002, respectively.



We generally make purchases under cancelable purchase orders and do not enter into long term supply agreements.



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As of December 31, 2004, future minimum commitments under operating leases are as follows (in
thousands) and we do not have further material contractual obligations:



|                                |  |   |      
|------------------------------- |  | - | -----
|In the year ending December 31, |  |  
|2005                            |  | $ | 837  
|2006                            |  |   | 701  
|2007                            |  |   | 610  
|2008                            |  |   | 558  
|2009                            |  |   | 357  
|Thereafter                      |  |   | 367  
|                                |  |   |      
|                                |  | $ | 3,430
|                                |  |   |      



We have no contractual
obligations or commercial commitments that are not already accrued for in our financial statements.



Risk Factors



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



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. 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. Our current and future expense levels are based largely on our investment plans and estimates of
future revenue and are, to a large extent, fixed. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which would harm our operating results.



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



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



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



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



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



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



| |  |  | decisions to acquire other companies, including the announcement of our tender offer for Ulead;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | declines in selling prices of our products to our OEM customers or other customers;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | market acceptance of new products developed by us, such as our InstantOn product;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | 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 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;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | changes in accounting regulations that will require us to expense stock options.
| | - |  | --------------------------------------------------------------------------------



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



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



We have created, and intend to continue to create, new software and software bundles such as WinDVD Creator, InterVideo Home
Theater, InterVideo DVD Copy and InstantOn. These products contain advanced features and functionality that have required and may continue to require us to provide an increased level of end-user support. In the future, as these new products become
more complex, we may also be obligated to provide additional support to our OEM customers to bundle our software with their products. These potential increases in OEM and end-user support obligations could require us to defer both license and PCS
revenues to future periods, which could harm our operating results and adversely impact our ability to accurately forecast revenue.



We expect our product prices to continue to decline, which could harm our operating results.



We expect prices for our products to continue to decline over the next few
years. Because of competition from other software providers, competition in the PC industry and diminishing margins experienced by PC OEMs as a result of decreased selling prices and lower unit sales, we have reduced the prices we charge PC OEMs for
our WinDVD, WinDVD Creater 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



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revenue will decline. Accordingly, 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 our fiscal year ended December 31, 2002. As of December 31, 2004, we had retained
earnings of $6.5 million. We expect to incur significant operating expenses over the next several years in connection with the continued development and expansion of our business. Our expenses include research and development and marketing expenses
relating to products that will not be introduced and will not generate revenue until later periods, if at all. We may not sustain or increase profitability on a quarterly or annual basis in the future.



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



On March 14, 2005, we announced the commencement of a tender offer to purchase a controlling percentage of the issued shares
of Ulead. The tender offer is scheduled to expire on April 13, 2005. We have limited experience in acquiring businesses and technologies, including businesses with international operations. The proposed transaction with Ulead will be our largest
acquisition to date. The transaction with Ulead and any other proposed or completed acquisitions and investments involve numerous risks, including:



| |  |  | risks that the tender offer might not be consummated if less than 30.1 percent of the issued shares of Ulead are rendered;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | unanticipated developments or events concerning the financial condition, assets, liabilities, operations, business or prospects of Ulead might arise after the completion of the
tender offer because we only conducted limited due diligence on Ulead based on publicly available information;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unanticipated costs associated with the transaction including 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 including international travel to Taiwan;
| | - |  | ----------------------------------------------------------------------------------------------------



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



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



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



| |  |  | conflicts of interest issues that might arise between InterVideo and Ulead as a majority-owned subsidiary; and
| | - |  | --------------------------------------------------------------------------------------------------------------



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



We expect to continue to review opportunities to buy or make investments in other businesses, products or technologies that would enhance our technical
capabilities, complement our current products or expand the breadth of our markets or that may otherwise offer growth opportunities. The successful completion of our tender offer for Ulead would utilize between $23 and $49 million of our working
capital. Any other acquisitions of



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businesses or technologies will require significant commitment of resources beyond the substantial portion of our cash committed for the tender offer. We may
be required to pay for any acquisitions with cash, but we cannot be certain that additional capital will be available to us on favorable terms, if at all. In lieu of paying cash, we could issue stock as consideration for an acquisition that would
dilute existing stockholders percentage ownership, incur substantial debt or assume contingent liabilities.



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



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



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



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



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 year ended December 31, 2004, our two largest customers accounted for 38% of our revenue, with Hewlett-Packard accounting for 25% and Toshiba accounting for 13% of our revenue during that period. 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 our customers dispute the accounts
receivables or are otherwise unable to pay the balance, our income from operations could decline.



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If 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 material
decrease in revenue from these customers, would reduce our gross profit or otherwise harm our business.



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



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



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



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



| |  |  | 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 under the Sarbanes-Oxley Act of 2002 requires that we assess, and our independent registered public
accounting firm attest to, the design and operating effectiveness of our controls over financial reporting. If we cannot provide reliable and accurate financial reports and prevent fraud, our business and operating results could be harmed. We have
in the past discovered, and may in the future discover, areas of our internal controls that need improvement. Although we, and our independent registered public accounting firm, have not completed all of the procedures and assessments required by
Section 404 and we will avail ourselves of the 45-day exemptive order to complete such assessment, deficiencies in our internal controls that are considered to be material weaknesses have been identified in the procedures completed to date. The
material weaknesses, as well as our remediation efforts, are more fully discussed in this Annual Report under Item 9A, Controls and Procedures.



While we have taken steps to remediate the identified material weaknesses during the first quarter of 2005, we cannot be certain that any remedial
measures we take will ensure that we design, implement, and maintain adequate disclosure and internal controls over our financial processes and reporting in the future or will be



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sufficient to address and eliminate the material weaknesses in our first quarter 2005 or next years annual assessment. Remedying the material
weaknesses that have been identified, and any additional deficiencies, significant deficiencies or material weaknesses that we or our independent registered public accounting firm may identify in the future, could require us to incur significant
costs, expend significant time and management resources or make other changes. We are currently unable to determine whether any of the material weaknesses identified in this report will be remediated by the end of our first quarter of fiscal 2005,
and if they are not, we may be required to report in our Quarterly Report on Form 10-Q for the first quarter of fiscal 2005 or in subsequent reports filed with the Securities and Exchange Commission that material weaknesses in our internal controls
over financial reporting continue to exist. 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, any failure to remediate such material weaknesses in a timely fashion or
having or maintaining ineffective disclosure and internal controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.



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



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



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



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



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



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



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



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



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



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



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



| |  |  | 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



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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.



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



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



We have derived a majority 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 71% of our revenue for the year ended December 31, 2004 from sales of our WinDVD product, primarily to PC OEMs. We expect that revenue from sales of our WinDVD product to PC OEMs will continue to account
for a majority 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 or negative growth in the PC industry were to recur, 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.



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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 growth would not likely continue, and 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, particularly if Microsoft chooses to compete with us in the future.



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



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



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



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



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



Microsoft currently offers products in the
digital video and audio software markets. Some video and audio capabilities are built directly into their operating systems or are offered as upgrades to those operating systems at no additional charge. If Microsoft develops or licenses digital
video and audio solutions that compete directly with ours and incorporates the solutions into its operating system, or otherwise changes its operating system or its Windows Hardware Qualification Labs standards to render our products incompatible,
our business could be harmed.



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



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



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



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



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



Our primary competitors are Adobe Systems Incorporated, Cyberlink Corporation, Pinnacle Systems, Inc., Sonic Solutions, Inc.
and Ulead Systems, 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. 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, we expect revenues from Dell to decline in successive quarters with the possibility of no revenue from Dell in the future periods, because our current portion of their business is moving to one of our competitors.
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.



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Increased competition in the market may result in price reductions, decreased customer orders, reduced profit margins and loss of market share, any of which
could harm our business.



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



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



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



Our success depends on our ability to effectively manage the growth of our operations. 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.



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A failure to meet our customers design specification often results in a loss of sales due to the length of time required to redesign the product. Our
products may also be required to interface with defective third-party software or components. If we are unable to detect or fix errors, or meet our customers design specifications, our business and results of operations would suffer.



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



Our
financial condition and results of operations are likely to be affected by seasonality in the future. Historically, PC OEMs have experienced their highest volume of sales during the year-end holiday season. Because of the timing of our recognition
of revenue associated with the sale of our products to OEMs, we expect this seasonality to have a positive effect on our revenue and operating income in the first quarter of each calendar year and a negative effect on our revenue and operating
income in the second quarter of that year. To the extent our retail sales increase as a percentage of our revenue, we expect this would also result in greater seasonality in our results of operations.



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



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



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



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



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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. We currently have or own the rights to 11 issued U.S. patents, 22 patents issued in
Taiwan and three in China and we have 90 pending patent applications, comprised of 35 U.S. patent applications and 55 foreign patent applications. 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. Infringement claims and lawsuits would likely be expensive to resolve and would require managements time and resources and, therefore, could harm our business.



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



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



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



A substantial majority of our revenue is generated by our PC OEM and consumer electronics 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



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and product development, we rely on our customers to accurately report the number of units licensed. We have never audited any of our customers to verify the
accuracy of their reports or payments. Most of our license agreements permit us to audit our customers, but audits are expensive and time consuming and could harm our customer relationships. From time to time, customers have provided us with
inaccurate reports, which resulted in our under-reporting or over-reporting revenue for the associated period and recording an adjustment in a future period. If any of our customer reports are inaccurate, the revenue we collect and report will be
inaccurate and we may be required to make an adjustment to our revenue for a subsequent period, which could harm our business and credibility in the financial community.



Our international operations accounted for 47% of our revenue for the year ended December 31, 2004 and 44% of our
revenue for the year ended December 31, 2003, 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.
| | - |  | ---------------------------------------------------



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



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



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



Our capital requirements will depend on
many factors, including:



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



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



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



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



| |  |  | the number and timing of acquisitions, including the $23 to $49 million committed to complete our tender offer for Ulead; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



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



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



Our stock price is volatile.



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



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



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



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



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



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



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



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



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



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



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



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



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



In addition, the stock market has experienced significant price and volume fluctuations that has affected the market prices for the common stock of
technology companies. In the past, these market fluctuations were often



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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.



Other Information



Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934 as
added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for listing the non-audit services pre-approved in the fourth quarter of 2004 by our Audit Committee to be performed by KPMG LLP, our external auditor. During the third
quarter ended September 30, 2004, KPMG performed certain due diligence procedures in connection with a strategic transaction.



ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



Foreign currency risk



To date, most of our revenue has been denominated in U.S. dollars. We may,
however, begin denominating revenue from selected international markets in the currency of the applicable market. As a result, our operating results may become subject to significant fluctuations based upon changes in the exchange rates of some
currencies in relation to the U.S. dollar. We will continue to monitor our exposure to currency fluctuations and in the future, we may use economic hedging techniques to minimize the effect of these exchange rate fluctuations that may harm our
financial results. For the year ended December 31, 2004, we did not have significant foreign currency denominated net assets or net liabilities positions, and had no foreign currency contracts outstanding.



Interest rate risk



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



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INTERVIDEO, INC.



ITEM 8:     FINANCIAL STATEMENTS



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                         |  |      
|------------------------------------------------------------------------ |  | -----
|                                                                         |  | Page 
|Report of Independent Registered Public Accounting Firm                  |  | 47   
|Consolidated Balance Sheets                                              |  | 48   
|Consolidated Statements of Income                                        |  | 49   
|Consolidated Statements of Shareholders Equity and Comprehensive Income |  | 50   
|Consolidated Statements of Cash Flows                                    |  | 51   
|Notes to Consolidated Financial Statements                               |  | 5270



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

InterVideo, Inc.:



We have audited the accompanying consolidated balance sheets of InterVideo, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related
consolidated statements of income, stockholders equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InterVideo, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2004, in conformity with U.S. generally accepted accounting principles.



/s/     KPMG LLP



Mountain View, California

March 31, 2005



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INTERVIDEO, INC.



Consolidated Balance Sheets

(in thousands, except per share amounts)



|                                                                                                                         |  |                    |         |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ---- | - | ------ | -
|                                                                                                                         |  | As of December 31, |        
|                                                                                                                         |  | 2004               |         |   | 2003 |  
|ASSETS                                                                                                                   |  |                    |         |   |      |   |        |  
|Current assets:                                                                                                          |  |                    |         |   |      |   |        |  
|Cash and cash equivalents                                                                                                |  | $                  | 27,410  |   |      | $ | 46,875 |  
|Short-term investments                                                                                                   |  |                    | 47,177  |   |      |   | 22,862 |  
|Accounts receivable, net of allowance for doubtful accounts of $215 and $254, respectively                               |  |                    | 5,660   |   |      |   | 5,515  |  
|Deferred tax assets                                                                                                      |  |                    | 256     |   |      |   | 1,543  |  
|Prepaid expenses and other current assets                                                                                |  |                    | 2,580   |   |      |   | 2,468  |  
|                                                                                                                         |  |                    |         |   |      |   |        |  
|Total current assets                                                                                                     |  |                    | 83,083  |   |      |   | 79,263 |  
|Property and equipment, net                                                                                              |  |                    | 2,606   |   |      |   | 2,241  |  
|Goodwill                                                                                                                 |  |                    | 1,018   |   |      |   | 1,018  |  
|Other purchased intangible assets                                                                                        |  |                    | 83      |   |      |   | 283    |  
|Deferred tax assets                                                                                                      |  |                    | 5,446   |   |      |   | 4,685  |  
|Other assets                                                                                                             |  |                    | 9,539   |   |      |   | 429    |  
|                                                                                                                         |  |                    |         |   |      |   |        |  
|Total assets                                                                                                             |  | $                  | 101,775 |   |      | $ | 87,919 |  
|                                                                                                                         |  |                    |         |   |      |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  |                    |         |   |      |   |        |  
|Current liabilities:                                                                                                     |  |                    |         |   |      |   |        |  
|Accounts payable                                                                                                         |  | $                  | 1,098   |   |      | $ | 1,039  |  
|Accrued liabilities                                                                                                      |  |                    | 13,129  |   |      |   | 9,503  |  
|Income taxes payable                                                                                                     |  |                    | 333     |   |      |   | 1,539  |  
|Deferred revenue                                                                                                         |  |                    | 4,002   |   |      |   | 3,422  |  
|                                                                                                                         |  |                    |         |   |      |   |        |  
|Total current liabilities                                                                                                |  |                    | 18,562  |   |      |   | 15,503 |  
|                                                                                                                         |  |                    |         |   |      |   |        |  
|Stockholders equity:                                                                                                    |  |                    |         |   |      |   |        |  
|Common stock, $0.001 par value: 150,000 shares authorized; 13,661 and 12,970 shares issued and outstanding, respectively |  |                    | 14      |   |      |   | 13     |  
|Additional paid-in capital                                                                                               |  |                    | 76,498  |   |      |   | 76,283 |  
|Notes receivable from stockholders                                                                                       |  |                    | (830    | ) |      |   | (905   | )
|Deferred stock-based compensation                                                                                        |  |                    | (95     | ) |      |   | (531   | )
|Accumulated other comprehensive income(loss)                                                                             |  |                    | 1,121   |   |      |   | (123   | )
|Retained earnings (accumulated deficit)                                                                                  |  |                    | 6,505   |   |      |   | (2,321 | )
|                                                                                                                         |  |                    |         |   |      |   |        |  
|Total stockholders equity                                                                                               |  |                    | 83,213  |   |      |   | 72,416 |  
|                                                                                                                         |  |                    |         |   |      |   |        |  
|Total liabilities and stockholders equity                                                                               |  | $                  | 101,775 |   |      | $ | 87,919 |  
|                                                                                                                         |  |                    |         |   |      |   |        |  



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



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INTERVIDEO, INC.



Consolidated Statements of Income

(in thousands, except per share amounts)



|                                                |  |                         |        |      |   |        |  |   |        |  
|----------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | -
|                                                |  | Year Ended December 31, |       
|                                                |  | 2004                    |        | 2003 |   | 2002   | 
|Revenue                                         |  | $                       | 74,460 |      | $ | 57,078 |  | $ | 45,494 |  
|Cost of revenue                                 |  |                         | 32,878 |      |   | 23,849 |  |   | 16,879 |  
|                                                |  |                         |        |      |   |        |  |   |        |  
|Gross profit                                    |  |                         | 41,582 |      |   | 33,229 |  |   | 28,615 |  
|Operating expenses:                             |  |                         |        |      |   |        |  |   |        |  
|Research and development                        |  |                         | 10,002 |      |   | 7,626  |  |   | 7,185  |  
|Sales and marketing                             |  |                         | 10,229 |      |   | 8,908  |  |   | 8,179  |  
|General and administrative                      |  |                         | 9,108  |      |   | 4,357  |  |   | 3,921  |  
|Stock-based compensation(1)                     |  |                         | 271    |      |   | 912    |  |   | 2,469  |  
|Cost of delayed public offering                 |  |                         |       |      |   |       |  |   | 1,728  |  
|Restructuring charges                           |  |                         |       |      |   |       |  |   | (20    | )
|                                                |  |                         |        |      |   |        |  |   |        |  
|Total operating expenses                        |  |                         | 29,610 |      |   | 21,803 |  |   | 23,462 |  
|                                                |  |                         |        |      |   |        |  |   |        |  
|Income from operations                          |  |                         | 11,972 |      |   | 11,426 |  |   | 5,153  |  
|Other income, net                               |  |                         | 910    |      |   | 563    |  |   | 167    |  
|                                                |  |                         |        |      |   |        |  |   |        |  
|Income before income taxes                      |  |                         | 12,882 |      |   | 11,989 |  |   | 5,320  |  
|Provision (benefit) for income taxes            |  |                         | 4,056  |      |   | 4,196  |  |   | (2,409 | )
|                                                |  |                         |        |      |   |        |  |   |        |  
|Net income                                      |  | $                       | 8,826  |      | $ | 7,793  |  | $ | 7,729  |  
|                                                |  |                         |        |      |   |        |  |   |        |  
|Net income per common share, basic              |  | $                       | 0.66   |      | $ | 1.07   |  | $ | 3.15   |  
|                                                |  |                         |        |      |   |        |  |   |        |  
|Net income per common share, diluted            |  | $                       | 0.58   |      | $ | 0.57   |  | $ | 0.65   |  
|                                                |  |                         |        |      |   |        |  |   |        |  
|Number of shares used in per share calculation: |  |                         |        |      |   |        |  |   |        |  
|Basic                                           |  |                         | 13,409 |      |   | 7,273  |  |   | 2,456  |  
|                                                |  |                         |        |      |   |        |  |   |        |  
|Diluted                                         |  |                         | 15,337 |      |   | 13,723 |  |   | 11,945 |  
|                                                |  |                         |        |      |   |        |  |   |        |  

---

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



|                                        |  |                         |     |      |   |      |  |   |      
|--------------------------------------- |  | ----------------------- | --- | ---- | - | ---- |  | - | -----
|                                        |  | Year Ended December 31,
|                                        |  | 2004                    |     | 2003 |   | 2002
|Research and development                |  | $                       | 90  |      | $ | 308  |  | $ | 969  
|Sales and marketing                     |  |                         | 58  |      |   | 309  |  |   | 761  
|General and administrative              |  |                         | 123 |      |   | 295  |  |   | 739  
|                                        |  |                         |     |      |   |      |  |   |      
|Total stock-based compensation expenses |  | $                       | 271 |      | $ | 912  |  | $ | 2,469
|                                        |  |                         |     |      |   |      |  |   |      



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



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INTERVIDEO, INC.



Consolidated Statements of Stockholders Equity and Comprehensive Income

(in thousands)



|                                                                                    |  |                            |   |  |              |     |                          |        |        |                                  |        |   |                                  |  |   |                                              |   |  |                                         |      |   |                           |   |        |                       |  |   |       |   |  |   |         |   |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------- |  | -------------------------- | - |  | ------------ | --- | ------------------------ | ------ | ------ | -------------------------------- | ------ | - | -------------------------------- |  | - | -------------------------------------------- | - |  | --------------------------------------- | ---- | - | ------------------------- | - | ------ | --------------------- |  | - | ----- | - |  | - | ------- | - |  | - | ------ | - |  | - | ------ | -
|                                                                                    |  | ConvertiblePreferred Stock |   |  | Common Stock |     | AdditionalPaid-inCapital |        |        | NotesReceivablefromStock-holders |        |   | DeferredStock-basedCompen-sation |  |   | Accumu-latedOtherCompre-hensiveIncome/(Loss) |   |  | RetainedEarnings/ (Accum-ulatedDeficit) |      |   | TotalStock-holdersEquity |   |        | Compre-hensive Income | 
|                                                                                    |  | Shares                     |   |  | Amount       |     |                          | Shares |        |                                  | Amount |   |                                  |  |   |                                              |   | 
|BALANCE, December 31, 2001                                                          |  | 12,189                     |   |  | $            | 12  |                          |        | 2,428  |                                  |        | $ | 2                                |  | $ | 28,294                                       |   |  | $                                       | (824 | ) |                           | $ | (1,616 | )                     |  | $ | (188  | ) |  | $ | (17,843 | ) |  | $ | 8,467  |   |  |   |        |  
|Issuance of common stock under stock option plans                                   |  |                           |   |  |              |    |                          |        | 216    |                                  |        |   | 1                                |  |   | 89                                           |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | 90     |   |  |   |        |  
|Issuance of Series D convertible preferred stock for settlement                     |  | 650                        |   |  |              | 1   |                          |        |       |                                  |        |   |                                 |  |   | 3,717                                        |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | 3,718  |   |  |   |        |  
|Stock compensation to non-employees                                                 |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   | 157                                          |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | 157    |   |  |   |        |  
|Interest income on notes receivable from stockholders                               |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         | (40  | ) |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | (40    | ) |  |   |        |  
|Deferred stock-based compensation                                                   |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   | 2,310                                        |   |  |                                         |     |   |                           |   | (2,310 | )                     |  |   |      |   |  |   |        |   |  |   |       |   |  |   |        |  
|Amortization of deferred stock-based compensation expense                           |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   | 2,312  |                       |  |   |      |   |  |   |        |   |  |   | 2,312  |   |  |   |        |  
|Foreign currency translation adjustment                                             |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   |       |                       |  |   | 26    |   |  |   |        |   |  |   | 26     |   |  | $ | 26     |  
|Unrealized loss on available-for-sale investments                                   |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   |       |                       |  |   | (18   | ) |  |   |        |   |  |   | (18    | ) |  |   | (18    | )
|Net income                                                                          |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   | 7,729   |   |  |   | 7,729  |   |  |   | 7,729  |  
|                                                                                    |  |                            |   |  |              |     |                          |        |        |                                  |        |   |                                  |  |   |                                              |   |  |                                         |      |   |                           |   |        |                       |  |   |       |   |  |   |         |   |  |   |        |   |  |   |        |  
|BALANCE, December 31, 2002                                                          |  | 12,839                     |   |  |              | 13  |                          |        | 2,644  |                                  |        |   | 3                                |  |   | 35,197                                       |   |  |                                         | (864 | ) |                           |   | (1,614 | )                     |  |   | (180  | ) |  |   | (10,114 | ) |  |   | 22,441 |   |  | $ | 7,737  |  
|                                                                                    |  |                            |   |  |              |     |                          |        |        |                                  |        |   |                                  |  |   |                                              |   |  |                                         |      |   |                           |   |        |                       |  |   |       |   |  |   |         |   |  |   |        |   |  |   |        |  
|Issuance of common stock in Initial Public Offering, net of offering cost of $4,713 |  |                           |   |  |              |    |                          |        | 3,220  |                                  |        |   | 3                                |  |   | 40,364                                       |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | 40,367 |   |  |   |        |  
|Conversion of preferred stock to common stock                                       |  | (12,839                    | ) |  |              | (13 | )                        |        | 6,948  |                                  |        |   | 7                                |  |   | 6                                            |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   |       |   |  |   |        |  
|Issuance of common stock under stock option and stock purchase plans                |  |                           |   |  |              |    |                          |        | 158    |                                  |        |   |                                 |  |   | 199                                          |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | 199    |   |  |   |        |  
|Interest income on notes receivable from stockholders                               |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         | (41  | ) |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | (41    | ) |  |   |        |  
|Deferred stock-based compensation                                                   |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   | (171                                         | ) |  |                                         |     |   |                           |   | 171    |                       |  |   |      |   |  |   |        |   |  |   |       |   |  |   |        |  
|Amortization of deferred stock-based compensation expense                           |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   | 912    |                       |  |   |      |   |  |   |        |   |  |   | 912    |   |  |   |        |  
|Tax benefits from stock options transactions                                        |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   | 688                                          |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | 688    |   |  |   |        |  
|Foreign currency translation adjustment                                             |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   |       |                       |  |   | 83    |   |  |   |        |   |  |   | 83     |   |  | $ | 83     |  
|Unrealized loss on available-for-sale investments                                   |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   |       |                       |  |   | (26   | ) |  |   |        |   |  |   | (26    | ) |  |   | (26    | )
|Net income                                                                          |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   | 7,793   |   |  |   | 7,793  |   |  |   | 7,793  |  
|                                                                                    |  |                            |   |  |              |     |                          |        |        |                                  |        |   |                                  |  |   |                                              |   |  |                                         |      |   |                           |   |        |                       |  |   |       |   |  |   |         |   |  |   |        |   |  |   |        |  
|BALANCE, December 31, 2003                                                          |  |                           |   |  |              |    |                          |        | 12,970 |                                  |        |   | 13                               |  |   | 76,283                                       |   |  |                                         | (905 | ) |                           |   | (531   | )                     |  |   | (123  | ) |  |   | (2,321  | ) |  |   | 72,416 |   |  | $ | 7,850  |  
|                                                                                    |  |                            |   |  |              |     |                          |        |        |                                  |        |   |                                  |  |   |                                              |   |  |                                         |      |   |                           |   |        |                       |  |   |       |   |  |   |         |   |  |   |        |   |  |   |        |  
|Repurchased of common stock                                                         |  |                           |   |  |              |    |                          |        | (200   | )                                |        |   |                                 |  |   | (2,596                                       | ) |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | (2,596 | ) |  |   |        |  
|Issuance of common stock under stock option and stock purchase plans                |  |                           |   |  |              |    |                          |        | 891    |                                  |        |   | 1                                |  |   | 1,755                                        |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | 1,756  |   |  |   |        |  
|Interest income on notes receivable from stockholders                               |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         | (38  | ) |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | (38    | ) |  |   |        |  
|Repayment of notes receivable from stockholders                                     |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         | 113  |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | 113    |   |  |   |        |  
|Deferred stock-based compensation                                                   |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   | (165                                         | ) |  |                                         |     |   |                           |   | 165    |                       |  |   |      |   |  |   |        |   |  |   |       |   |  |   |        |  
|Amortization of deferred stock-based compensation expense                           |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   | 271    |                       |  |   |      |   |  |   |        |   |  |   | 271    |   |  |   |        |  
|Tax benefits from stock options transactions                                        |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   | 1,221                                        |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   |        |   |  |   | 1,221  |   |  |   |        |  
|Foreign currency translation adjustment                                             |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   |       |                       |  |   | 30    |   |  |   |        |   |  |   | 30     |   |  | $ | 30     |  
|Unrealized gain on available-for-sale investments                                   |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   |       |                       |  |   | 1,214 |   |  |   |        |   |  |   | 1,214  |   |  |   | 1,214  |  
|Net income                                                                          |  |                           |   |  |              |    |                          |        |       |                                  |        |   |                                 |  |   |                                             |   |  |                                         |     |   |                           |   |       |                       |  |   |      |   |  |   | 8,826   |   |  |   | 8,826  |   |  |   | 8,826  |  
|                                                                                    |  |                            |   |  |              |     |                          |        |        |                                  |        |   |                                  |  |   |                                              |   |  |                                         |      |   |                           |   |        |                       |  |   |       |   |  |   |         |   |  |   |        |   |  |   |        |  
|BALANCE, December 31, 2004                                                          |  |                           |   |  | $            |    |                          |        | 13,661 |                                  |        | $ | 14                               |  | $ | 76,498                                       |   |  | $                                       | (830 | ) |                           | $ | (95    | )                     |  | $ | 1,121 |   |  | $ | 6,505   |   |  | $ | 83,213 |   |  | $ | 10,070 |  
|                                                                                    |  |                            |   |  |              |     |                          |        |        |                                  |        |   |                                  |  |   |                                              |   |  |                                         |      |   |                           |   |        |                       |  |   |       |   |  |   |         |   |  |   |        |   |  |   |        |  



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



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INTERVIDEO, INC.



Consolidated Statements of Cash Flows

(in thousands)



|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                  |  | Year Ended December 31, |        
|                                                                                  |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Cash flows from operating activities:                                             |  |                         |         |   |      |   |         |      |  |   |        |  
|Net income                                                                        |  | $                       | 8,826   |   |      | $ | 7,793   |      |  | $ | 7,729  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |         |   |      |   |         |      |  |   |        |  
|Depreciation and amortization                                                     |  |                         | 1,277   |   |      |   | 774     |      |  |   | 922    |  
|Deferred taxes                                                                    |  |                         | 526     |   |      |   | (771    | )    |  |   | (5,457 | )
|Tax benefit from stock option transactions                                        |  |                         | 1,221   |   |      |   | 688     |      |  |   |       |  
|Write-down of long term investments                                               |  |                         |        |   |      |   |        |      |  |   | 200    |  
|Amortization and impairment of software license agreement                         |  |                         |        |   |      |   | 22      |      |  |   | 29     |  
|Stock-based compensation                                                          |  |                         | 271     |   |      |   | 912     |      |  |   | 2,469  |  
|Provision for doubtful accounts                                                   |  |                         | 46      |   |      |   | 75      |      |  |   | 105    |  
|Loss from disposal of property and equipment                                      |  |                         | 30      |   |      |   | 205     |      |  |   | 143    |  
|Interest income on notes receivable from stockholders                             |  |                         | (38     | ) |      |   | (41     | )    |  |   | (40    | )
|Equity in net loss of long-term investments                                       |  |                         | 93      |   |      |   |        |      |  |   |       |  
|Changes in operating assets and liabilities:                                      |  |                         |         |   |      |   |         |      |  |   |        |  
|Accounts receivable                                                               |  |                         | (112    | ) |      |   | (1,645  | )    |  |   | (1,254 | )
|Prepaid expenses and other current assets                                         |  |                         | (91     | ) |      |   | (1,779  | )    |  |   | (766   | )
|Other assets                                                                      |  |                         | (421    | ) |      |   | (63     | )    |  |   | 536    |  
|Accounts payable                                                                  |  |                         | 29      |   |      |   | 595     |      |  |   | (182   | )
|Deferred revenue                                                                  |  |                         | 547     |   |      |   | 2,362   |      |  |   | 805    |  
|Accrued liabilities and taxes payable                                             |  |                         | 2,336   |   |      |   | 189     |      |  |   | 1,685  |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Net cash provided by operating activities                                         |  |                         | 14,540  |   |      |   | 9,316   |      |  |   | 6,924  |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Cash flows from investing activities:                                             |  |                         |         |   |      |   |         |      |  |   |        |  
|Purchases of property and equipment                                               |  |                         | (1,441  | ) |      |   | (1,436  | )    |  |   | (700   | )
|Purchases of short-term investments                                               |  |                         | (98,963 | ) |      |   | (24,030 | )    |  |   | (3,522 | )
|Proceeds from maturities of short-term investments                                |  |                         | 74,507  |   |      |   | 5,246   |      |  |   |       |  
|Purchase of long-term investments                                                 |  |                         | (7,419  | ) |      |   |        |      |  |   |       |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Net cash used in investing activities                                             |  |                         | (33,316 | ) |      |   | (20,220 | )    |  |   | (4,222 | )
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Cash flows from financing activities:                                             |  |                         |         |   |      |   |         |      |  |   |        |  
|Proceeds from initial public offering, net                                        |  |                         |        |   |      |   | 40,367  |      |  |   |       |  
|Proceeds from issuance of common stock under stock option and purchase plans      |  |                         | 1,756   |   |      |   | 199     |      |  |   | 90     |  
|Proceeds from repayment of notes receivables                                      |  |                         | 113     |   |      |   |        |      |  |   |       |  
|Repurchase of common stock for retirement                                         |  |                         | (2,596  | ) |      |   |        |      |  |   |       |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Net cash provided by (used in) financing activities                               |  |                         | (727    | ) |      |   | 40,566  |      |  |   | 90     |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Effect of change in exchange rates on cash and cash equivalents                   |  |                         | 38      |   |      |   | 76      |      |  |   | (3     | )
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                              |  |                         | (19,465 | ) |      |   | 29,738  |      |  |   | 2,789  |  
|Cash and cash equivalents, beginning of period                                    |  |                         | 46,875  |   |      |   | 17,137  |      |  |   | 14,348 |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Cash and cash equivalents, end of period                                          |  | $                       | 27,410  |   |      | $ | 46,875  |      |  | $ | 17,137 |  
|                                                                                  |  |                         |         |   |      |   |         |      |  |   |        |  
|Supplementary disclosures of non-cash investing and financing activities:         |  |                         |         |   |      |   |         |      |  |   |        |  
|Issuance of Series D convertible preferred stock for settlement                   |  |                         |        |   |      |   |        |      |  |   | 3,718  |  
|Conversion of convertible preferred stock into common stock                       |  |                         |        |   |      |   | 24,904  |      |  |   |       |  
|Supplementary disclosure:                                                         |  |                         |         |   |      |   |         |      |  |   |        |  
|Income tax payments, net of refunds                                               |  | $                       | 1,720   |   |      | $ | 1,497   |      |  | $ |       |  



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



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INTERVIDEO, INC.



Notes to Consolidated Financial Statements



Note 1. Organization and Business



InterVideo,
Inc. (InterVideo or the Company) is a provider of multimedia software products. These products span the digital video cycle by allowing users to capture, edit, author, distribute, burn and play digital video. The Company has
historically derived a majority of its revenue from sales of its WinDVD product, a software DVD player for personal computers (PCs) to PC original equipment manufacturers (OEMs). Other products include WinDVD Creator,
InstantON, InterVideo Home Theater, InterVideo DVD Copy and Linux-based versions of its DVD and DVR software designed for Linux-based PCs and consumer electronic (CE) devices. The Companys software is bundled with products sold by
PC OEMs. The Company sells its products to PC OEMs, CE manufacturers and PC peripherals manufacturers worldwide. In addition, the Company sells products through retail channels and directly to consumers through its websites.



In April 2002, the Board of Directors approved the Companys
reincorporation in Delaware, which was completed in May 2002.



In July 2003, the Company completed its initial public offering (IPO), issuing 3,220,000 shares at the offering price of $14.00 per share. The net proceeds were approximately $40.4 million after deducting the underwriting fee
and other offering expenses, a total of $4.7 million. Upon the completion of IPO, all 12.8 million shares of preferred stock automatically converted into 6.9 million shares of common stock.



Note 2. Summary of Significant Accounting Policies:



Basis of presentation



The accompanying consolidated financial statements include the accounts of
InterVideo, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All international subsidiaries of the Company have established a month end cut-off of three working days prior to the
end of any given month.



Use of estimates



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



Foreign currency translation



The functional currency of the Companys subsidiaries is the local currency. Accordingly, all assets and liabilities are translated into U.S. dollars
at the current exchange rate at the applicable balance sheet date. Revenue and expenses are translated at the average exchange rate prevailing during the period. The effects of these translation adjustments are recorded in accumulated other
comprehensive income (loss) as a separate component of stockholders equity. Exchange gains or losses arising from transactions denominated in a currency other than the functional currency of an entity are included in other income, net and have
not been significant to the Companys operating results in any periods presented.



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INTERVIDEO, INC.



Fair value of financial instruments



The fair value of the Companys cash equivalents, short-term
investments, accounts receivable, marketable equity securities and accounts payable approximate their respective carrying amounts due to their relatively short-term maturities.



Cash and cash equivalents



The Company considers all highly liquid investments with an original maturity of three months or less, at the date of
purchase, to be cash equivalents.



Short-term investments



Short-term investments consist principally of United
States treasury, state and municipal notes/bonds and corporate bonds. The Company currently classifies all investment securities as available-for-sale. Securities classified as available-for-sale are required to be reported at fair value with
unrealized gains and losses excluded from earnings and included in other comprehensive income (loss).



Significant concentrations



Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company
generally does not require its customers to provide collateral or other security to support accounts receivable. To reduce credit risk, management performs ongoing credit evaluations of its customers financial condition and maintains
allowances for estimated potential bad debt losses.



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



|           |  |                   |   |  |      |  
|---------- |  | ----------------- | - |  | ---- | -
|           |  | As ofDecember 31, |  
|           |  | 2004              |   |  | 2003 |  
|Customer A |  | 11                | % |  | 6    | %
|Customer B |  | 6                 | % |  | 14   | %
|Customer C |  | 5                 | % |  | 12   | %
|Customer D |  | 3                 | % |  | 15   | %



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



|                              |  |                         |   |  |      |   |  |      |  
|----------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                              |  | Year ended December 31, |  
|                              |  | 2004                    |   |  | 2003 |   |  | 2002 |  
|Revenue from major customers: |  |                         |   |  |      |   |  |      |  
|Customer C                    |  | 7                       | % |  | 13   | % |  | 14   | %
|Customer E                    |  | 25                      | % |  | 19   | % |  | 17   | %
|Customer F                    |  | 13                      | % |  | 4    | % |  | 9    | %



Valuation
accounts



The Company makes judgments as to its
ability to collect outstanding receivables and provides allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and
age of those invoices not specifically reviewed. An additional provision is made for invoices not specifically reviewed that are older than sixty days past due, net of any other reserves.



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INTERVIDEO, INC.



Below is a summary of the changes in the Companys allowance for doubtful accounts for the years
ended December 31, 2004, 2003 and 2002.



|                                |  |                                |     |            |   |            |  |   |                          |   |  |   |    
|------------------------------- |  | ------------------------------ | --- | ---------- | - | ---------- |  | - | ------------------------ | - |  | - | ---
|Allowance for Doubtful Accounts |  | Balance atbeginning ofthe Year |     | Provisions |   | Write-offs |  |   | Balanceat end ofthe Year
|December 31, 2004               |  | $                              | 254 |            | $ | 46         |  | $ | (85                      | ) |  | $ | 215
|December 31, 2003               |  |                                | 205 |            |   | 75         |  |   | (26                      | ) |  |   | 254
|December 31, 2002               |  |                                | 319 |            |   | 105        |  |   | (219                     | ) |  |   | 205



Property and
equipment



Property and equipment are recorded at cost
less accumulated depreciation or amortization. Depreciation is calculated using the straight-line method based on estimated useful lives of between three and seven years. Leasehold improvements are amortized over the lesser of the lease terms or the
estimated useful lives of the improvements. Expenditures for maintenance and repairs are charged to expense as incurred. Cost and accumulated depreciation of assets sold or retired are removed from the respective property accounts, and the gain or
loss is reflected in the statement of operations



Goodwill



The Company accounts for
goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires that intangible assets with an indefinite life should not
be amortized until their life is determined to be finite. SFAS 142 also requires that goodwill not be amortized but instead tested for impairment at least annually and more frequently upon the occurrence of certain events. The Company adopted SFAS
142 effective January 1, 2002.



As required by SFAS 142, the
Company ceased amortization of goodwill associated with the acquisition of Audio Video Product Division (AVPD) effective January 1, 2002. Prior to January 1, 2002, the Company amortized goodwill associated with the AVPD acquisition over
five years using the straight-line method.



The Company tests
goodwill for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by SFAS 142. Consistent with the Companys determination that it has only one operating segment, the
Company has determined that it has only one reporting unit. Goodwill is tested for impairment annually, in the fourth quarter, in a two-step process. First, the Company determines if the carrying amount of its reporting unit exceeds the fair
value of the reporting unit, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, the Company compares the implied fair value of the goodwill, as defined by SFAS 142, to its
carrying amount to determine if there is an impairment loss. Since the fair value of the reporting unit exceeds its net book value as of December 31, 2004, there is no goodwill impairment for the year.



Impairment of long-lived assets and other purchased intangibles



The Company accounts for intangible assets with
finite lives in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. In accordance with SFAS
144, when events and circumstances warrant a review, the Company evaluates the carrying value of long-lived assets to be held and used. The carrying value of an asset is considered impaired when the anticipated undiscounted cash flow from such an
asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds its fair value. Fair value is determined using the anticipated cash flows discounted at a rate commensurate with the
risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner except that fair values are reduced by the cost to dispose of such assets.



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INTERVIDEO, INC.



Long-term investments



The Company from time to time acquires certain equity investments for the promotion of business and strategic objectives.
Non-marketable equity investments are accounted for using the equity method if the Company has significant influence over operating and financial policies of the investee, or using the cost method if the Company cannot assert significant influence
over the investee. Marketable equity investments are accounted for as available-for-sale securities with unrealized gains and losses included in other comprehensive income in equity. Such investments are also subjected to periodic impairment review.
If there are no liquid markets to provide information for valuing such securities, the impairment analysis involves significant judgment on the part of management. Should the Company determine that a decline in the securities fair value is
considered to be other than temporary, a writedown is recorded in other income, net. As of December 31, 2004, the Company has concluded there is no indication of loss in value that is other than temporary for its long-term investments and therefore,
there is no impairment recorded for the year.



Revenue
recognition



The Companys 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. The Company records revenue generated from these
sales in accordance with SOP 97-2, Software Revenue Recognition, as amended, under which revenue is recognized when evidence of an arrangement exists, delivery of the software has occurred, the fee is fixed or determinable, and
collectibility is probable.



Typically, under the terms of the
Companys license agreements with its OEM customers, they are entitled only to unspecified upgrades on a when and if available basis, prior to sale into the OEMs sales channel partners or sell through to the OEMs end customers.
Under the terms of the Companys revenue recognition policy, the Company recognizes revenue based on evidence of products sold by our OEM customers to end customers or to the OEMs sales channel partners. The Company does not typically
provide upgrades or post contract support (PCS) to the OEMs customers or sales channel partners. Accordingly, under such agreements the Company does not defer any revenue, as the Company no longer has an obligation once an
OEMs products have been shipped from the OEM to the OEMs sales channel partners or to an OEMs end customer. Under certain other agreements, the Company defers the recognition of OEM revenue due to ongoing obligations in association
with upgrade rights to end users or significant PCS provided to the OEMs customers. Depending on the specific contractual obligation, the Company recognizes this revenue over a period of the shorter of the contractual obligation period or the
estimated life of the product. In general, the Company considers the estimated life of our products to be three years.



Typically, the Companys OEM customers do not have the right to claim a credit or refund for returns from the OEMs sales channel partners or
end customers back to the OEM. However, in the few instances where InterVideo has granted its OEM customers with the right to claim a refund or credit for these types of returns, the Company defers 100% of the revenue until it is able to establish a
returns reserve based on historical returns activity, that is specific to the respective sales channel, product line or country. InterVideo has determined that the return percentage for the WinDVD product line for its OEM sales channel for sales
made in the United States has been less than 0.1% of sales. As a result, InterVideo has not deferred WinDVD sales to OEM customers in the United States that have been granted a right of return. If in the future, the actual or estimated number of
returned units materially increases as a percentage of sales, InterVideo may be required to establish a return reserve for these sales.



Under the terms of the OEM license agreements, each OEM qualifies InterVideos software on their hardware and software configurations. Once the
Companys software has been qualified, the OEM begins shipping products and reports net sales to the Company, at which point the Company records revenue. Most OEMs pay a license fee based on the number of copies of licensed software included in
the products sold to their



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INTERVIDEO, INC.



customers. These OEMs pay fees on a per-unit basis, and the Company records associated revenue when it receives notification of the OEMs sales of the
licensed software to an end customer or a sales channel partner. The terms of the license agreements generally require the OEMs to notify the Company 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, the Company generally recognizes revenue in the month or quarter following the sales of the software to these OEMs customers.



A small number of OEMs that sell PC components, place orders with the Company for a fixed quantity of units at a fixed price based on an agreed-upon
purchase order or contract. In such cases, qualification of the Companys software is not required, and these OEMs have no rights to upgrades or returns. The Company generally recognizes revenue upon the completion of shipment, in accordance
with the terms of the respective agreement, to these OEMs.



In
addition to the per unit license fees discussed above, certain OEM agreements also include prepaid license fees and/or non-recurring engineering (NRE) service fees primarily for porting the Companys software to the OEMs
hardware and software configurations. Since the Company provides when and if available upgrade rights to its OEM customers on the products they have licensed from the point in time when they receive the product until the point in time when they have
sold the product to their sales channel partners or end customers, any prepaid license fees are recognized based on actual shipments after the upgrade rights have lapsed. The NRE service fees are recognized upon completion and acceptance of the NRE
service. Some OEM agreements provide the OEM with rights to PCS to be provided by InterVideo to the OEMs end customers. This PCS may or may not include the right to unspecified future software upgrades. PCS is typically not available to the
OEMs end users. InterVideo has established vendor specific objective evidence (VSOE) of fair value for PCS for end customer support on a limited number of products sold to OEMs in Japan. On these arrangements, the Company uses the
residual method to account for the allocation between the license revenue and the service revenue. The allocated license revenue is recognized in full upon the OEMs sale of the licensed product to the OEMs sales channel partners and,
where the only undelivered element of the agreement is PCS, the allocated PCS is recognized over the period of the PCS obligation. In all other agreements where InterVideo has sold PCS in which the Company has not been able to establish a VSOE of
fair value for PCS or where there are additional undelivered elements, such as NRE service fees, the Company defers all of the revenue until the additional undelivered elements are accepted and the only undelivered element is PCS. Once the only
undelivered element is PCS, the Company recognizes the entire arrangement fee over the PCS period.



End-user sales are made directly through the Companys websites. The Company does not offer specified upgrade rights to any class of customer, and
there are no unspecified upgrade rights associated with end-user sales. The Company recognizes revenue from sales through its websites upon delivery of product and the receipt of payment by means of an authorized credit card. End users who purchase
InterVideos software from the Companys websites have limited rights of return for products they have purchased in the previous 14 days, which the Company currently reserves for using a 30-days sales return reserve based on the historical
return percentage.



The Company sells its products to retailers
and retail distributors either on a consignment or non-consignment basis. For consignment product shipments, in general, the distributor will not take ownership of the product at the point in time when InterVideo ships product to the distributor.
Once the distributor sells the consignment-based product to a retailer or an end customer ownership is transferred from the Company to the retailer or end customer, the distributor will report those sales to the Company and InterVideo invoices the
distributor. For non-consignment product shipments, the distributor will take ownership of the product at the point in time when the Company ships the product to the distributor and the Company invoices the distributor upon such shipment. Since the
Company does not have contractually obligated minimum orders or payment terms with our distributors, the Company does not recognize revenue for retail product distribution prior to invoicing. Certain distributors and retailers, primarily in Japan,
have limited rights to return products that were



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INTERVIDEO, INC.



purchased in the previous six months. These distributors have no rights to product upgrades. The Company generally recognizes revenue, net of contractually
obligated return rights and any additional required rebate or pricing reserves, upon completion of shipment to these distributors and retailers. Other distributors and retailers, primarily in the United States and Europe, have unlimited rights of
return. The Company generally recognizes revenue upon receipt of evidence that the distributors and retailers have sold our products through to end users, less any required rebate or pricing reserves.



The Company has begun selling licenses of its products to corporations and
other business in the United States. This corporate licensing program is generally conducted either directly between InterVideo and the licensee or through a reseller. For these sales the Company does not provide the corporation a right to return
the product once it has been delivered and we do not provide support or upgrade rights to that licensee. The Company currently recognizes revenue for these sales upon confirmation of delivery of the product.



Certain customer agreements call for the payment by the Company of marketing
development funds, co-operative advertising fees, rebates or similar charges. The Company accounts for such fees in accordance with Emerging Issues Task Force (EITF) Issue No. 99-19 as a reduction in revenue unless there is an
identifiable benefit and the fair value of the charges can be reasonably estimated in which case the Company records these transactions as marketing expense. Commissions paid to third-party sales representatives are included in sales and marketing
expenses.



Cost of revenue



Cost of revenue consists primarily of licensed royalties, expenses incurred
to manufacture, package and distribute the Companys software products, the amortization of developed technology, costs associated with end-user PCS and the cost of settlement of intellectual property matters. Licensed royalties consist of
royalties paid or accrued for payment to third parties for technologies incorporated into the Companys products. In general, the amount of royalties depends on the number of units sold of the Companys product and the royalty rates
associated with the third-party technology incorporated into those products. The Company sometimes prepays for the right to bundle and distribute certain licensed technologies. In general, these prepayments are at a flat rate and are not associated
with the number of units of the bundled product that is shipped. In general, the license rights are granted for one year and the estimated useful life of the technology is three years. End-user PCS costs include the costs associated with providing
assistance to end users of the Companys products. With the exception of packaging and distribution costs, the cost of revenue is generally the same for each product, regardless of sales channel. Certain product costs associated with sales to
distributors, retailers and end users are deferred until the corresponding revenue has been recognized. Cost of settlement of intellectual property matters consists of amounts that we have agreed to pay to third-parties in settlement of alleged
infringement of certain patented technology used in our customers products and accruals for royalties related to our usage of technologies under patent where no agreement exists.



Software development costs



Under SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, costs
incurred in the research and development of software are expensed as incurred until technological feasibility has been established. Software development costs incurred subsequent to the establishment of technological feasibility through the period
of general marketability of the products are capitalized. The Company defines establishment of technological feasibility as the completion of a working model. The establishment of technological feasibility and the ongoing assessment of
recoverability of these costs require considerable judgment by management. Because the period of time between development of a working model and the products general release is short, the Company generally views technological feasibility as
the point in time that the software is released. Amounts that were capitalizable under SFAS 86 were insignificant, and therefore no costs have been capitalized to date.



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INTERVIDEO, INC.



Net income per share



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



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



|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                |  | Year ended December 31, |       
|                                                                |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|Numerator:                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                                                      |  | $                       | 8,826  |   |      | $ | 7,793  |      |  | $ | 7,729  |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Denominator:                                                    |  |                         |        |   |      |   |        |      |  |   |        |  
|Basic:                                                          |  |                         |        |   |      |   |        |      |  |   |        |  
|Weighted average common shares outstanding                      |  |                         | 13,447 |   |      |   | 7,358  |      |  |   | 2,611  |  
|Less: weighted average shares subject to repurchase             |  |                         | (38    | ) |      |   | (85    | )    |  |   | (155   | )
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Denominator for basic calculation                               |  |                         | 13,409 |   |      |   | 7,273  |      |  |   | 2,456  |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income per common share  Basic                             |  | $                       | 0.66   |   |      | $ | 1.07   |      |  | $ | 3.15   |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Diluted:                                                        |  |                         |        |   |      |   |        |      |  |   |        |  
|Weighted average common shares outstanding                      |  |                         | 13,447 |   |      |   | 7,358  |      |  |   | 2,611  |  
|Weighted average dilutive effect of convertible preferred stock |  |                         |       |   |      |   | 3,750  |      |  |   | 6,837  |  
|Weighted average dilutive effect of common stock options        |  |                         | 1,890  |   |      |   | 2,615  |      |  |   | 2,497  |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Denominator for diluted calculation                             |  |                         | 15,337 |   |      |   | 13,723 |      |  |   | 11,945 |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income per common share  Diluted                           |  | $                       | 0.58   |   |      | $ | 0.57   |      |  | $ | 0.65   |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  



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):



|                                               |  |                         |  |      |  |     
|---------------------------------------------- |  | ----------------------- |  | ---- |  | ----
|                                               |  | Year ended December 31,
|                                               |  | 2004                    |  | 2003 |  | 2002
|Antidilutive options to purchase common shares |  | 858                     |  | 9    |  |    
|                                               |  |                         |  |      |  |     



Stock-based
compensation expense



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



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INTERVIDEO, INC.



Stock-based compensation expense is allocated among the operating expense classifications as follows:



|                                        |  |                         |     |      |   |      |  |   |      
|--------------------------------------- |  | ----------------------- | --- | ---- | - | ---- |  | - | -----
|                                        |  | Year Ended December 31,
|                                        |  | 2004                    |     | 2003 |   | 2002
|Research and development                |  | $                       | 90  |      | $ | 308  |  | $ | 969  
|Sales and marketing                     |  |                         | 58  |      |   | 309  |  |   | 761  
|General and administrative              |  |                         | 123 |      |   | 295  |  |   | 739  
|                                        |  |                         |     |      |   |      |  |   |      
|Total stock-based compensation expenses |  | $                       | 271 |      | $ | 912  |  | $ | 2,469
|                                        |  |                         |     |      |   |      |  |   |      



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



|                                                                                                                        |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|(in thousands, except per share amounts)                                                                                |  | Year ended December 31, |       
|                                                                                                                        |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|Net income, as reported                                                                                                 |  | $                       | 8,826  |   |      | $ | 7,793  |      |  | $ | 7,729  |  
|Add: Stock-based employee compensation expenses included in reported net income, net of related tax effects             |  |                         | 46     |   |      |   | 912    |      |  |   | 2,312  |  
|Deduct: Total stock-based employee compensation expenses determined under fair value method, net of related tax effects |  |                         | (5,349 | ) |      |   | (2,570 | )    |  |   | (3,382 | )
|                                                                                                                        |  |                         |        |   |      |   |        |      |  |   |        |  
|Pro forma net income                                                                                                    |  | $                       | 3,523  |   |      | $ | 6,135  |      |  | $ | 6,659  |  
|                                                                                                                        |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income per share                                                                                                    |  |                         |        |   |      |   |        |      |  |   |        |  
|Basic  as reported                                                                                                     |  | $                       | 0.66   |   |      | $ | 1.07   |      |  | $ | 3.15   |  
|                                                                                                                        |  |                         |        |   |      |   |        |      |  |   |        |  
|Basic  pro forma                                                                                                       |  | $                       | 0.26   |   |      | $ | 0.84   |      |  | $ | 2.71   |  
|                                                                                                                        |  |                         |        |   |      |   |        |      |  |   |        |  
|Diluted  as reported                                                                                                   |  | $                       | 0.58   |   |      | $ | 0.57   |      |  | $ | 0.65   |  
|                                                                                                                        |  |                         |        |   |      |   |        |      |  |   |        |  
|Diluted  pro forma                                                                                                     |  | $                       | 0.23   |   |      | $ | 0.45   |      |  | $ | 0.56   |  
|                                                                                                                        |  |                         |        |   |      |   |        |      |  |   |        |  



Other income,
net



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



|                                            |  |                         |     |   |      |   |      |  |   |      |  
|------------------------------------------- |  | ----------------------- | --- | - | ---- | - | ---- |  | - | ---- | -
|                                            |  | Year ended December 31, |    
|                                            |  | 2004                    |     |   | 2003 |   | 2002 | 
|Interest income                             |  | $                       | 856 |   |      | $ | 400  |  | $ | 258  |  
|Write-off of long-term investment           |  |                         |    |   |      |   |     |  |   | (200 | )
|Equity in net loss of long-term investments |  |                         | (93 | ) |      |   |     |  |   |     |  
|Other                                       |  |                         | 147 |   |      |   | 163  |  |   | 109  |  
|                                            |  |                         |     |   |      |   |      |  |   |      |  
|Other income, net                           |  | $                       | 910 |   |      | $ | 563  |  | $ | 167  |  
|                                            |  |                         |     |   |      |   |      |  |   |      |  



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.



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Comprehensive income



Comprehensive income is the total of net income and all other non-owner changes in stockholders equity. The components
of the Companys other comprehensive income consists primarily of adjustments related to foreign currency translation and adjustments related to the market valuation on the Companys available-for-sale investments. Such amounts are
excluded from net income and are reported in accumulated other comprehensive income (loss) in the accompanying consolidated financial statements.



Recent accounting pronouncements



In March 2004, the Financial Accounting Standards Board (FASB) issued EITF Issue No. 03-01 (EITF 03-1), The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments which provides new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments
that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact
of EITF 03-1 once final guidance is issued.



On December 16,
2004, the FASB issued SFAS 123R, Share Based Payments, which is a revision of SFAS No. 123. SFAS 123R supersedes APB 25. Under SFAS 123R, companies must calculate and record in the income statement the cost of equity instruments, such as
stock options awarded to employees for services received; pro forma disclosure is no longer permitted. The cost of the equity instruments is to be measured based on the fair value of the instruments on the date they are granted (with certain
exceptions) and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments. The statement is effective in the first interim or annual reporting period beginning
after June 15, 2005. The Company currently accounts for stock options granted to employees and shares issued under our employee stock purchase plans in accordance with the intrinsic value method permitted under APB 25. The impact of adopting SFAS
123R cannot be accurately estimated at this time, as it will depend on the market value and the amount of share based awards granted in future periods. However, had we adopted SFAS 123R in a prior period, the impact would approximate the impact of
SFAS 123 as described under stock-based compensation expense in the disclosure of pro forma net income.



In December 2004, FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004 (FAS 109-2) was issued, providing guidance under SFAS 109, Accounting for Income Taxes for recording the potential impact of the repatriation provisions of the American Jobs Creation
Act of 2004 (Jobs Act), enacted on October 22, 2004. FAS 109-2 allows time beyond the financial reporting period of enactment to evaluate the effects of the Jobs Act before applying the requirements of FAS 109-2. Accordingly, we are
evaluating the potential effects of the Jobs Act and have not adjusted our tax expense or deferred tax liability to reflect the requirements of FAS 109-2.



Note 3. Balance Sheet Components:



Short-term investments



The Company currently classifies all investment securities as available-for-sale. Securities classified as available-for-sale are reported at fair value
with unrealized gains and losses excluded from net income and included in other comprehensive income.



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INTERVIDEO, INC.



Short-term investments consist of (in thousands):



|                                |  |                         |        |                       |   |      |                           |  |   |       
|------------------------------- |  | ----------------------- | ------ | --------------------- | - | ---- | ------------------------- |  | - | ------
|                                |  | As of December 31, 2004
|                                |  | Amortizedcost           |        | Grossunrealizedlosses |   |      | Estimatedfair marketvalue
|Treasury notes                  |  | $                       | 22,799 |                       | $ | (157 | )                         |  | $ | 22,642
|Corporate bonds                 |  |                         | 1,500  |                       |   |     |                           |  | $ | 1,500 
|State and Municipal notes/bonds |  |                         | 23,063 |                       |   | (28  | )                         |  |   | 23,035
|                                |  |                         |        |                       |   |      |                           |  |   |       
|Total short-term investments    |  | $                       | 47,362 |                       | $ | (185 | )                         |  | $ | 47,177
|                                |  |                         |        |                       |   |      |                           |  |   |       
|                                | 
|                                |  | As of December 31, 2003
|                                |  | Amortizedcost           |        | Grossunrealizedlosses |   |      | Estimatedfair marketvalue
|Treasury notes                  |  | $                       | 19,081 |                       | $ | (38  | )                         |  | $ | 19,043
|Corporate bonds                 |  |                         | 276    |                       |   |     |                           |  | $ | 276   
|Certificates of deposit         |  |                         | 3,549  |                       |   | (6   | )                         |  |   | 3,543 
|                                |  |                         |        |                       |   |      |                           |  |   |       
|Total short-term investments    |  | $                       | 22,906 |                       | $ | (44  | )                         |  | $ | 22,862
|                                |  |                         |        |                       |   |      |                           |  |   |       



The available-for-sale
securities have been in unrealized loss positions for less than one year. All short-term investments from prior years matured in 2004 with no unrealized loss remaining. Market values were determined for each individual security in the investment
portfolio. The declines in value of these investments is primarily related to changes in interest rates and are considered to be temporary in nature. The contractual maturities of available-for-sale securities at December 31, 2004 ranged from 2005
to 2007 and the contractual maturities of available-for-sale securities at December 31, 2003 were all less than one year.



Property and equipment, net



Property and Equipment, net, consists of the following (in thousands):



|                                                 |  |                    |        |   |      |   |        |  
|------------------------------------------------ |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                                 |  | As of December 31, |       
|                                                 |  | 2004               |        |   | 2003 |  
|Equipment                                        |  | $                  | 2,025  |   |      | $ | 1,582  |  
|Furniture and fixtures                           |  |                    | 415    |   |      |   | 280    |  
|Computer software                                |  |                    | 1,866  |   |      |   | 810    |  
|Leasehold improvements                           |  |                    | 572    |   |      |   | 492    |  
|Construction in process                          |  |                    | 142    |   |      |   | 703    |  
|Vehicles                                         |  |                    | 147    |   |      |   | 115    |  
|                                                 |  |                    |        |   |      |   |        |  
|                                                 |  |                    | 5,167  |   |      |   | 3,982  |  
|Less : Accumulated depreciation and amortization |  |                    | (2,561 | ) |      |   | (1,741 | )
|                                                 |  |                    |        |   |      |   |        |  
|Property and equipment, net                      |  | $                  | 2,606  |   |      | $ | 2,241  |  
|                                                 |  |                    |        |   |      |   |        |  



Depreciation
expense for property and equipment was $1.1 million, $574,000 and $722,000 for the years ended December 31, 2004, 2003 and 2002 respectively.



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INTERVIDEO, INC.



Other purchased intangible assets, net



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



|                                        |  |                    |       |   |      |   |       |  
|--------------------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | -
|                                        |  | As of December 31, |      
|                                        |  | 2004               |       |   | 2003 |  
|Purchased development technology        |  | $                  | 1,000 |   |      | $ | 1,000 |  
|Less: Accumulated amortization          |  |                    | (917  | ) |      |   | (717  | )
|                                        |  |                    |       |   |      |   |       |  
|Total other purchased intangible assets |  | $                  | 83    |   |      | $ | 283   |  
|                                        |  |                    |       |   |      |   |       |  



Purchased development
technology is amortized over 5 years from the original purchase date, or until 2005. The annual amortization amount was $200,000 and the remaining amortization in 2005 will be $83,333.



Long-term investments



The Company acquired certain equity investments for strategic objectives,
during the year ended December 31, 2004. The non-marketable equity investments are accounted for using the equity method because the Company has significant influence over operating and financial policies of the investee. The Company records
its proportionate share of the investees net income or loss on a one-quarter lag, as it is not practical to obtain financial information from these privately-owned investees prior to the issuance of the Companys current period financial
statements. Marketable equity investments are accounted for as available-for-sale securities with unrealized gain and loss included in other comprehensive income (loss) in stockholders equity.



The following table summaries the long-tem investments which are included in
other assets in the consolidated balance sheet as of December 31, 2004 (amounts in thousands):



|                                       |  |         |  |                |   |  |                             |       |                    |                    
|-------------------------------------- |  | ------- |  | -------------- | - |  | --------------------------- | ----- | ------------------ | -------------------
|Name of the Investees                  |  | Country |  | Shareholding % |   |  | Carrying valueof investment |       | Accounting Methods
|Master Integrated Appliances Co., Ltd. |  | Taiwan  |  | 35             | % |  | $                           | 795   |                    | Equity method      
|Appro Photoelectron Inc.               |  | Taiwan  |  | 6              | % |  |                             | 825   |                    | Equity method      
|Ulead Systems, Inc.                    |  | Taiwan  |  | 12             | % |  |                             | 7,061 |                    | Available- for-sale
|                                       |  |         |  |                |   |  |                             |       |                    |                    
|                                       |  |         |  |                |   |  | $                           | 8,681 |                    |                    
|                                       |  |         |  |                |   |  |                             |       |                    |                    



The carrying value of
the Ulead investment includes the cost of $5.7 million and an unrealized gain of $1.4 million.



Accrued liabilities



Accrued liabilities consist of the following (in thousands):



|                                 |  |                    |        |      |   |      
|-------------------------------- |  | ------------------ | ------ | ---- | - | -----
|                                 |  | As of December 31,
|                                 |  | 2004               |        | 2003
|Payroll and related benefits     |  | $                  | 2,220  |      | $ | 1,102
|Royalties                        |  |                    | 8,414  |      |   | 7,052
|Audit and accounting related fee |  |                    | 791    |      |   | 335  
|Other                            |  |                    | 1,704  |      |   | 1,014
|                                 |  |                    |        |      |   |      
|Total accrued liabilities        |  | $                  | 13,129 |      | $ | 9,503
|                                 |  |                    |        |      |   |      



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INTERVIDEO, INC.



Note 4. Stockholders Equity:



Common stock



In July 2003, the Company closed the sale of 3,220,000 shares of common stock, including the underwriter exercise of an over-allotment option, in an
initial public offering at a price of $14.00 per share. The net proceeds were approximately $40.4 million after deducting the underwriting fee and other offering expenses, totaling $4.7 million.



As of December 31, 2004, the Company had reserved shares of authorized but
unissued common stock for the following (in thousands):



|                             |  |                    |  |      
|---------------------------- |  | ------------------ |  | -----
|                             |  | As of December 31,
|                             |  | 2004               |  | 2003 
|Employee stock purchase plan |  | 371                |  | 208  
|Stock options                |  | 3,824              |  | 4,036
|                             |  |                    |  |      
|Total shares reserved        |  | 4,195              |  | 4.244
|                             |  |                    |  |      



During the year ended
December 31, 2004, the Company announced a stock repurchase program pursuant to which it may purchase up to $10 million or 700,000 shares, of its outstanding common stock from time to time. The duration of the repurchase program is open-ended. Under
the program, the Company could purchase shares of common stock through open market transactions at prices deemed appropriate by management. The timing and amount of repurchase transactions under this program depends on market conditions and
corporate and regulatory considerations.



During the year ended
December 31, 2004, $2.6 million of common stock, or 200,200 shares, were repurchased and retired.



1998 Stock Plan



During 1998, the Company established the 1998 Stock Option Plan covering employees, consultants and directors of the Company. Under the terms of the 1998
Stock Option Plan, as amended, incentive and nonstatutory stock options may be granted for up to 5,412,000 shares of the Companys authorized but unissued common stock. Options issued under the 1998 Stock Option Plan generally have a maximum
term of 10 years and vest over schedules determined by the Board of Directors. Options issued under the 1998 Stock Option Plan to stockholders owning 10% of the total combined voting power of all classes of stock shall have a maximum term of five
years from the date of grant.



Nonstatutory stock options may
be granted to employees, consultants and directors at no less than 85% of the fair market value of the common stock as determined by the Board of Directors at the date of grant. Incentive stock options may be granted only to employees at the fair
market value of the common stock at the date of the grant. Stock options granted to a person 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.



2003 Stock Plan



In connection with the
Companys IPO in 2003, the Company adopted the 2003 Stock Plan. The 2003 Stock Plan was adopted by the Board of Directors in January 2002 and approved by the stockholders in April 2002, and was amended by the Board of Directors in January 2003.



The 2003 Stock Plan authorized the grant of a total of 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



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(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 or the repurchase of
unvested restricted shares issued under the 1998 Stock Option Plan. In addition, the 2003 Stock Plan provides for annual increases in the number of shares available for issuance under the 2003 Stock Plan 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 as the Board of Directors may
determine. The administrator determines the exercise price of options granted under the 2003 Stock Plan, but with respect to nonstatutory stock options intended to qualify as performance-based compensation within the meaning of Section
162(m) and all incentive stock options, the exercise price must be at least equal to the fair market value of the Companys common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with
respect to any participant who owns 10% of the voting power of all classes of the Companys outstanding capital stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant
date. The administrator determines the term of all other options. The terms of the 2003 Stock Plan allow the administrator to grant options at exercise prices that are below, equal to or above market.



The following is a summary of stock option activities for all the plans for
the three years ended December 31, 2004 (in thousands, except per share amounts):



|                  |  |                          |   |  |                |   |  |                                    |   |  |                         |   |  |                               |      
|----------------- |  | ------------------------ | - |  | -------------- | - |  | ---------------------------------- | - |  | ----------------------- | - |  | ----------------------------- | -----
|                  |  | SharesAvailablefor Grant |   |  | OptionActivity |   |  | Option ActivityOutside of thePlans |   |  | TotalOutstandingOptions |   |  | WeightedAverageExercise Price
|December 31, 2001 |  | 1,280                    |   |  | 2,872          |   |  | 32                                 |   |  | 2,904                   |   |  | $                             | 1.14 
|Authorized        |  |                         |   |  |               |   |  |                                   |   |  |                        |   |  |                               |     
|Options Granted   |  | (611                     | ) |  | 611            |   |  |                                   |   |  | 611                     |   |  | $                             | 6.61 
|Options Exercised |  |                         |   |  | (216           | ) |  |                                   |   |  | (216                    | ) |  | $                             | 0.41 
|Options Cancelled |  | 138                      |   |  | (138           | ) |  |                                   |   |  | (138                    | ) |  | $                             | 4.23 
|                  |  |                          |   |  |                |   |  |                                    |   |  |                         |   |  |                               |      
|December 31, 2002 |  | 807                      |   |  | 3,129          |   |  | 32                                 |   |  | 3,161                   |   |  | $                             | 2.11 
|Authorized        |  | 216                      |   |  |               |   |  |                                   |   |  |                        |   |  |                               |     
|Options Granted   |  | (186                     | ) |  | 186            |   |  |                                   |   |  | 186                     |   |  | $                             | 13.57
|Options Exercised |  |                         |   |  | (149           | ) |  |                                   |   |  | (149                    | ) |  | $                             | 0.65 
|Options Cancelled |  | 122                      |   |  | (122           | ) |  |                                   |   |  | (122                    | ) |  | $                             | 6.86 
|                  |  |                          |   |  |                |   |  |                                    |   |  |                         |   |  |                               |      
|December 31, 2003 |  | 959                      |   |  | 3,044          |   |  | 32                                 |   |  | 3,076                   |   |  | $                             | 2.68 
|Authorized        |  | 648                      |   |  |               |   |  |                                   |   |  |                        |   |  |                               |     
|Options Granted   |  | (1,026                   | ) |  | 1,026          |   |  |                                   |   |  | 1,026                   |   |  | $                             | 13.58
|Options Exercised |  |                         |   |  | (827           | ) |  | (32                                | ) |  | (859                    | ) |  | $                             | 1.70 
|Options Cancelled |  | 157                      |   |  | (157           | ) |  |                                   |   |  | (157                    | ) |  | $                             | 11.87
|                  |  |                          |   |  |                |   |  |                                    |   |  |                         |   |  |                               |      
|December 31, 2004 |  | 738                      |   |  | 3,086          |   |  |                                   |   |  | 3,086                   |   |  | $                             | 6.11 
|                  |  |                          |   |  |                |   |  |                                    |   |  |                         |   |  |                               |      



The following table
summarizes the stock options outstanding and exercisable as of December 31, 2004 (in thousands, except per share amounts):



|                        |  |                                                  |  |                                                    |  |                                 |       |                                                      |       |                               |   |      
|----------------------- |  | ------------------------------------------------ |  | -------------------------------------------------- |  | ------------------------------- | ----- | ---------------------------------------------------- | ----- | ----------------------------- | - | -----
|                        |  | Options Outstanding                              |  | Options Exercisable                               
|Range ofExercise Prices |  | Number of OptionsOutstanding atDecember 31, 2004 |  | Weighted Average Remaining ContractualLife (Years) |  | Weighted Average Exercise Price |       | Number of Options Exercisable as ofDecember 31, 2004 |       | WeightedAverageExercise Price
|$  0.09    0.11        |  | 985                                              |  | 4.20                                               |  | $                               | 0.09  |                                                      | 985   |                               | $ | 0.09 
|0.46    0.51           |  | 229                                              |  | 4.86                                               |  |                                 | 0.48  |                                                      | 229   |                               |   | 0.48 
|3.70    7.39           |  | 765                                              |  | 6.45                                               |  |                                 | 4.88  |                                                      | 642   |                               |   | 4.71 
|9.24  12.50            |  | 299                                              |  | 9.13                                               |  |                                 | 11.26 |                                                      | 75    |                               |   | 11.12
|13.69  14.17           |  | 766                                              |  | 9.10                                               |  |                                 | 14.15 |                                                      | 3     |                               |   | 14.17
|16.90  16.99           |  | 42                                               |  | 5.48                                               |  |                                 | 16.94 |                                                      | 14    |                               |   | 16.95
|                        |  |                                                  |  |                                                    |  |                                 |       |                                                      |       |                               |   |      
|$  0.09  16.99         |  | 3,086                                            |  | 6.52                                               |  | $                               | 6.11  |                                                      | 1,948 |                               | $ | 2.23 
|                        |  |                                                  |  |                                                    |  |                                 |       |                                                      |       |                               |   |      



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The weighted average fair value of options granted to employees in the three years ended December 31,
2004 is summarized in the following table, and were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



|                                                            |  |                         |             |      |   |             |  |   |            
|----------------------------------------------------------- |  | ----------------------- | ----------- | ---- | - | ----------- |  | - | -----------
|                                                            |  | Year Ended December 31,
|                                                            |  | 2004                    |             | 2003 |   | 2002       
|Weighted average fair value of options granted to employees |  | $                       | 10.13       |      | $ | 10.51       |  | $ | 9.21       
|Black-Scholes model assumptions:                            |  |                         |             |      |   |             |  |   |            
|Risk-free interest rate                                     |  |                         | 3.05%2.17% |      |   | 2.38%1.77% |  |   | 4.14%2.23%
|Expected life of the option                                 |  |                         | 4 years     |      |   | 4 years     |  |   | 4 years    
|Dividend yield                                              |  |                         | 0%          |      |   | 0%          |  |   | 0%         
|Volatility                                                  |  |                         | 87.5%       |      |   | 94%90%     |  |   | 90%        



As the Black-Scholes
option valuation model requires the input of subjective assumptions, the resulting pro forma compensation cost may not be representative of that to be expected in future periods. The Company used the minimum value method to determine the fair value
of options granted prior to its initial filing for IPO in January 2002 of a registration statement under the Securities Act of 1933 relating to an initial public offering of the Companys common stock. This method does not consider the expected
volatility of the underlying stock, and is only available to non-public entities. Accordingly, the Company has used an estimated volatility factor of 90% for grants issued subsequent to the initial filing date of the registration statement and up to
the IPO in July 2003. Subsequent to the July 2003, the volatility factor is calculated based on the fluctuation of Companys stock price on the market as well as volatility of other companies in the same industry.



In July 2003, the Company commenced its 2003 Employee Stock Purchase Plan,
which has an overlapping 24-month offering period, and includes four 6-month purchase periods. Purchases are to be made twice a year, in the months of May and November. The plan permits participants to purchase common stock at 85% of the lower of
the fair market value of common stock at the beginning of an offering period, or at the end of purchase period, through payroll deduction of up to 15% of their eligible compensation. If the fair market value of common stock at the end of a purchase
period is less than the fair market value at the beginning of the offering period, participants will be withdrawn from the current offering period following their purchase of shares on the purchase date and will be automatically re-enrolled in a new
offering period. Participants may end their participation at any time during an offering period and will be refunded their payroll deduction to date. The weighted average fair value of each purchase option granted for the year ended December 31,
2004 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



|                                                                     |  |                             |  |                            
|-------------------------------------------------------------------- |  | --------------------------- |  | ---------------------------
|                                                                     |  | Year EndedDecember 31, 2004 |  | Year EndedDecember 31, 2003
|Weighted average fair value of purchase options granted to employees |  | $ 5.26                      |  | $10.97                     
|                                                                     |  |                            
|Black-Scholes model assumptions:                                     |  |                             |  |                            
|Risk-free interest rate                                              |  | 3.05%                       |  | 2.20%                      
|Expected life                                                        |  | 1.25 year                   |  | 1.1 year                   
|Dividend yield                                                       |  | 0%                          |  | 0%                         
|Volatility                                                           |  | 76%                         |  | 90%                        



Deferred stock
compensation



In connection with the grant of certain
stock options to employees for the years ended December 31, 2004, 2003 and 2002, the Company recorded deferred stock compensation within stockholders equity of ($165,000),



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($171,000) and $2.3 million, respectively, representing forfeitures of stock compensation related to cancelled options in 2004 and 2003 and the difference
between the fair market value of the common stock and the option exercise price of those options at the date of grant, net of adjustments for cancelled options in 2002. Such amount is presented as a reduction of stockholders equity and is
amortized over the vesting period of the applicable options using an accelerated method of amortization under FASB Interpretation No 28.



2003 Employee Stock Purchase Plan



The Company has established the 2003 Employee Stock Purchase Plan after the IPO. The 2003 Employee Stock Purchase Plan was adopted by the board of
directors in January 2002 and the stockholders in April 2002, and was amended by the board in January 2003.



A total of 216,000 shares of common stock were made available-for-sale under the 2003 Employee Stock Purchase Plan. In addition, the plan 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 our common stock on the first day
of the applicable fiscal year, (ii) 216,000 shares or (iii) another amount as the Board of Directors may determine.



The Companys employees and employees of designated subsidiaries are eligible to participate in the 2003 Employee Stock Purchase Plan if they are
customarily employed for at least 20 hours per week and more than five months in any calendar year. The plan 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, but excludes all other compensation. A participant may purchase a maximum of 5,000 shares during a six-month purchase period.



Notes receivable from stockholders



In March 2001, the Company granted a senior executive an option to purchase 162,000 shares of common stock. This option was
early exercised with a promissory note at the time of grant, and the Company recorded a note receivable and a reduction in stockholders equity. The note bears interest at 5.07% per annum and is due on the earlier of March 22, 2006 or the first
anniversary of the termination of services. The note is secured by the underlying stock and is with full recourse. The Company records interest income as interest accrues on the promissory note. All interest is due upon maturity of the note. The
shares issued are subject to a repurchase right at the option of the Company. The repurchase right lapses over a four-year period in accordance with the vesting terms of the original option. As of December 31, 2004 and 2003, 31,000 and 72,000 shares
respectively, were still subject to repurchase by the Company.



In June 2001, the Company granted to each of two directors of the Company options to purchase 27,000 shares of common stock. These options were early exercised with promissory notes in December 2001. The notes bear interest at 5.07% per
annum and become payable in full upon the earlier of December 11, 2006 or the first anniversary of the termination of services with the Company. The notes are secured by the underlying stock and are full recourse. The Company records interest income
as interest accrues on the promissory notes. The shares issued are subject to a repurchase right at the option of the Company. The repurchase right lapses in accordance with the vesting terms of the original options. As of December 31, 2004 and
2003, 7,000 and 14,000 shares respectively, were still subject to repurchase by the Company. During the year ended December 31, 2004, one director repaid the promissory note amount in full.



Convertible preferred stock



Pursuant to the Amended and Restated Certificate of Incorporation filed June
17, 2003, each share of convertible preferred stock was convertible, at the option of the holder, into 0.54 shares of common stock. Upon



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INTERVIDEO, INC.



completion of the Companys IPO in July 2003, all convertible preferred stock was converted into common stock, totaling 6,948,000 shares of common
stock.



Note 5. Income Taxes



The significant components of income tax expense (benefit) for the years
ended December 31, 2004, 2003 and 2002 are as follows (in thousands):



|          |  |                         |       |   |      |   |       |      |  |   |        |  
|--------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|          |  | Year ended December 31, |      
|          |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|Current:  |  |                         |       |   |      |   |       |      |  |   |        |  
|Federal   |  | $                       | (187  | ) |      | $ | 1,535 |      |  | $ | 386    |  
|State     |  |                         | 647   |   |      |   | 268   |      |  |   | 1      |  
|Foreign   |  |                         | 2,284 |   |      |   | 2,476 |      |  |   | 2,661  |  
|          |  |                         |       |   |      |   |       |      |  |   |        |  
|          |  |                         | 2,744 |   |      |   | 4,279 |      |  |   | 3,048  |  
|Deferred: |  |                         |       |   |      |   |       |      |  |   |        |  
|Federal   |  |                         | 1,206 |   |      |   | (606  | )    |  |   | (4,527 | )
|State     |  |                         | 123   |   |      |   | 604   |      |  |   | (930   | )
|Foreign   |  |                         | (17   | ) |      |   | (81   | )    |  |   |       |  
|          |  |                         |       |   |      |   |       |      |  |   |        |  
|          |  |                         | 1,312 |   |      |   | (83   | )    |  |   | (5,457 | )
|          |  |                         |      
|Total     |  | $                       | 4,056 |   |      | $ | 4,196 |      |  | $ | (2,409 | )
|          |  |                         |       |   |      |   |       |      |  |   |        |  



The provision for
income taxes differs from the expected tax expense amount computed by applying the statutory federal income tax rate to income before taxes as follows:



|                                     |  |                         |   |  |       |   |  |        |   
|------------------------------------ |  | ----------------------- | - |  | ----- | - |  | ------ | --
|                                     |  | Year Ended December 31, |  
|                                     |  | 2004                    |   |  | 2003  |   |  | 2002   |   
|Federal statutory rate               |  | 35.0                    | % |  | 35.0  | % |  | 35.0   | % 
|State taxes, net of federal benefit  |  | 3.9                     |   |  | 4.7   |   |  | 10.3   |   
|Foreign tax                          |  | 17.2                    |   |  | 18.6  |   |  | 50.0   |   
|Non-deductible expenses              |  | 1.0                     |   |  | 0.3   |   |  | 11.6   |   
|Foreign losses not benefited         |  | 4.1                     |   |  |      |   |  |       |   
|Change in valuation allowance        |  | (7.4                    | ) |  | (4.0  | ) |  | (106.6 | ) 
|Foreign tax credits                  |  | (15.9                   | ) |  | (19.3 | ) |  | (48.7  | ) 
|Research and experimentation credits |  | (1.7                    | ) |  | (1.8  | ) |  | (10.4  | ) 
|Export Sales Benefit                 |  | (1.9                    | ) |  | (2.0  | ) |  |       |   
|Stock Compensation                   |  | (1.8                    | ) |  | 2.7   |   |  | 15.0   |   
|Other                                |  | (1.0                    | ) |  | 0.8   |   |  | (1.5   | ) 
|                                     |  |                         |   |  |       |   |  |        |   
|Effective tax rate                   |  | 31.5                    | % |  | 35.0  | % |  | (45.3  | )%
|                                     |  |                         |   |  |       |   |  |        |   



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INTERVIDEO, INC.



Deferred income taxes consist of the following (in thousands):



|                                                            |  |                    |       |   |      |   |        |  
|----------------------------------------------------------- |  | ------------------ | ----- | - | ---- | - | ------ | -
|                                                            |  | As of December 31, |      
|                                                            |  | 2004               |       |   | 2003 |  
|Deferred income tax assets:                                 |  |                    |       |   |      |   |        |  
|State net operating loss carryforwards                      |  | $                  |      |   |      | $ | 233    |  
|Research and development credit                             |  |                    | 437   |   |      |   | 343    |  
|Amortization                                                |  |                    | 1,280 |   |      |   | 915    |  
|Other temporary differences                                 |  |                    | 1,321 |   |      |   | 1,935  |  
|Other tax credits                                           |  |                    | 3,496 |   |      |   | 4,117  |  
|                                                            |  |                    |       |   |      |   |        |  
|                                                            |  |                    | 6,534 |   |      |   | 7,543  |  
|Valuation allowance                                         |  |                    | (534  | ) |      |   | (1,127 | )
|                                                            |  |                    |       |   |      |   |        |  
|Total deferred income tax assets                            |  |                    | 6,000 |   |      |   | 6,416  |  
|Deferred income tax liabilityproperty, plant and equipment |  |                    | (298  | ) |      |   | (188   | )
|                                                            |  |                    |       |   |      |   |        |  
|Net deferred tax asset                                      |  | $                  | 5,702 |   |      | $ | 6,228  |  
|                                                            |  |                    |       |   |      |   |        |  



As of December 31,
2004, the Company has federal research and development tax credit carryforwards of $437,000 which expire on various dates from 2023. The Company also has foreign tax credit carryforwards at December 31, 2004 of $3.5 million that expire starting
2006.



SFAS 109, Accounting for Income Taxes
requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all positive and negative evidence needs to be considered, including the
Companys current and past performance, the market environment in which the Company operates, the utilization of past tax credits, length of carryback and carryforward periods and existing contracts that will result in future profits. The
Internal Revenue Code contains provisions that may limit the net operating losses and tax credit carryforwards that may be utilized in any given year based on the occurrence of certain events, including a significant change in ownership interest.



During the fourth quarter of 2004, the Company reviewed its
operating results of the recent years as well as the outlook for its future operations and concluded that it is more likely than not that all of its U.S. federal and state net deferred tax assets at December 31, 2004 will be fully realized. Based on
this determination, approximately $1.1 million of valuation allowance brought forward from earlier years was reversed and recorded as a benefit for income taxes in the fourth quarter of 2004.



Note 6. 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 this software occur in three
geographic locations, namely the United States, Europe and Asia. Revenues are based on the country in which the customer is located.



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INTERVIDEO, INC.



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



|                              |  |                         |        |      |   |        |  |   |       
|----------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                              |  | Year ended December 31,
|                              |  | 2004                    |        | 2003 |   | 2002  
|Revenue by Sales Channel:     |  |                         |        |      |   |        |  |   |       
|OEMs                          |  | $                       | 62,945 |      | $ | 48,145 |  | $ | 38,798
|Web sales and retail          |  |                         | 11,515 |      |   | 8,933  |  |   | 6,696 
|                              |  |                         |        |      |   |        |  |   |       
|Total revenue                 |  | $                       | 74,460 |      | $ | 57,078 |  | $ | 45,494
|                              |  |                         |        |      |   |        |  |   |       
|Revenue by Geographic Region: |  |                         |        |      |   |        |  |   |       
|United States                 |  | $                       | 39,631 |      | $ | 31,816 |  | $ | 22,693
|Europe                        |  |                         | 3,825  |      |   | 3,489  |  |   | 3,194 
|Asia:                         |  |                         |        |      |   |        |  |   |       
|Japan                         |  |                         | 25,341 |      |   | 14,358 |  |   | 14,377
|Other Asia                    |  |                         | 5,663  |      |   | 7,415  |  |   | 5,230 
|                              |  |                         |        |      |   |        |  |   |       
|Total revenue                 |  | $                       | 74,460 |      | $ | 57,078 |  | $ | 45,494
|                              |  |                         |        |      |   |        |  |   |       
|Revenue by Product:           |  |                         |        |      |   |        |  |   |       
|WinDVD                        |  | $                       | 52,740 |      | $ | 46,999 |  | $ | 40,612
|Other products                |  |                         | 21,720 |      |   | 10,079 |  |   | 4,882 
|                              |  |                         |        |      |   |        |  |   |       
|Total revenue                 |  | $                       | 74,460 |      | $ | 57,078 |  | $ | 45,494
|                              |  |                         |        |      |   |        |  |   |       



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



|                                 |  |                    |       |      |   |      
|-------------------------------- |  | ------------------ | ----- | ---- | - | -----
|                                 |  | As of December 31,
|                                 |  | 2004               |       | 2003
|Tangible long-lived assets:      |  |                    |       |      |   |      
|United States                    |  | $                  | 1,247 |      | $ | 1,691
|Asia:                            |  |                    |       |      |   |      
|Japan                            |  |                    | 161   |      |   | 147  
|China                            |  |                    | 408   |      |   | 481  
|Taiwan                           |  |                    | 790   |      |   | 351  
|                                 |  |                    |       |      |   |      
|Total tangible long-lived assets |  | $                  | 2,606 |      | $ | 2,670
|                                 |  |                    |       |      |   |      



Note 7. Commitments and
Contingencies:



Lease commitments



As of December 31, 2004, future minimum commitments
under operating leases are as follows (in thousands):



|                                |  |   |      
|------------------------------- |  | - | -----
|In the year ending December 31, |  |  
|2005                            |  | $ | 837  
|2006                            |  |   | 701  
|2007                            |  |   | 610  
|2008                            |  |   | 558  
|2009                            |  |   | 357  
|Thereafter                      |  |   | 367  
|                                |  |   |      
|                                |  | $ | 3,430
|                                |  |   |      



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INTERVIDEO, INC.



Rent expense was $745,000, $924,000 and $802,000 for the years ended December 31, 2004, 2003 and
2002, respectively.



Contingencies



In the normal course of business, the Company is
involved in various legal claims, actions and complaints, including matters involving patent infringement and other intellectual property claims and various other risks. It is not possible to predict with certainty whether or not the Company will
ultimately be successful in any of these legal matters, or if not, what the impact might be. InterVideos license agreements include certain warranties and indemnification provisions for claims from certain customers to InterVideos
intellectual property. Such indemnification provisions are accounted for in accordance with SFAS No. 5. The indemnification is generally limited to the amount paid by the customer. To date, claims under such indemnification provisions have not been
significant.



Note 8. Related Party Transactions With Customers



During the year ended December 31, 2004, the Company
invested $765,000 in Appro Photoelectron Inc., (Appro Photoelectron), one of the Companys customers. As of December 31, 2004, the Companys investment totaled 6.4% ownership interest in Appro Photoelectron. During the year
ended December 31, 2004, the Company derived revenue from Appro Photoelectron in the normal course of business and all transactions were on an arm-length basis. In 2004, total revenue earned from Appro Photoelectron were $155,000 and there was no
revenue earned in 2003.



Note 9. Subsequent Events



During the first quarter of 2005 the Company continued to invest in Ulead
Systems, Inc. (Ulead), a leading developer of innovative video, imaging and DVD authoring software, accumulating a total shareholding percentage at 18.5 percent as of March 31, 2005.



On March 14, 2005, the Company announced the commencement of a tender offer
to purchase an additional 30.1 to 65 percent of the issued shares of Ulead at 30 NTD (US$0.98) per share of Ulead common stock. The Companys obligation to purchase the shares is subject to certain closing conditions, including the requirement
that there have not been any material adverse change in the financial condition or business of Ulead. The tender offer is scheduled to expire on April 13, 2005.



Upon the successful completion of the tender offer, the transaction will be valued at between $23 and $49 million. The Company will own between 50.1
and 85 percent of the outstanding shares of Ulead, have a controlling interest in Ulead and, accordingly, will include Ulead in its consolidated financial statements from the date it obtains a controlling interest, currently anticipated to be April
13, 2005. The acquisition of Ulead will be accounted for as a step acquisition.



Pursuant to stock repurchase program announced in early 2004, the Company has continued to repurchase shares of common stock through open market transactions in March 2005, 61,500 shares of common stock totaling
$669,000 were repurchased.



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INTERVIDEO, INC.



ITEM 8: SUPPLEMENTARY DATA



Quarterly Results (unaudited)



(in thousands, except per share data)



|                           |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|-------------------------- |  | ------------------ | ------ | ----------- | - | ----------- |  | ----------- | ------ | ----------- | - | ----------- |  | ----------- | ------ | ----------- | - | ------ |  | - | ------ |  | - | ------
|                           |  | Three months ended
|                           |  | Dec 31,2004        |        | Sep 30,2004 |   | Jun 30,2004 |  | Mar 31,2004 |        | Dec 31,2003 |   | Sep 30,2003 |  | Jun 30,2003 |        | Mar 31,2003
|Revenue                    |  | $                  | 20,425 |             | $ | 18,510      |  | $           | 16,704 |             | $ | 18,821      |  | $           | 16,248 |             | $ | 14,358 |  | $ | 13,099 |  | $ | 13,373
|Cost of revenue            |  |                    | 8,930  |             |   | 8,295       |  |             | 7,719  |             |   | 7,934       |  |             | 7,589  |             |   | 5,427  |  |   | 5,398  |  |   | 5,435 
|                           |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|Gross profit               |  |                    | 11,495 |             |   | 10,215      |  |             | 8,985  |             |   | 10,887      |  |             | 8,659  |             |   | 8,931  |  |   | 7,701  |  |   | 7,938 
|                           |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|Operating expenses:        |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|Research and development   |  |                    | 2,726  |             |   | 2,380       |  |             | 2,608  |             |   | 2,288       |  |             | 2,098  |             |   | 1,907  |  |   | 1,907  |  |   | 1,714 
|Sales and marketing        |  |                    | 2,458  |             |   | 2,299       |  |             | 2,713  |             |   | 2,759       |  |             | 2,283  |             |   | 2,230  |  |   | 2,120  |  |   | 2,275 
|General and administrative |  |                    | 2,344  |             |   | 3,085       |  |             | 1,975  |             |   | 1,704       |  |             | 1,485  |             |   | 1,018  |  |   | 901    |  |   | 953   
|Stock-based compensation   |  |                    | 45     |             |   | 77          |  |             | 74     |             |   | 75          |  |             | 173    |             |   | 189    |  |   | 217    |  |   | 333   
|                           |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|Total operating expenses   |  |                    | 7,573  |             |   | 7,841       |  |             | 7,370  |             |   | 6,826       |  |             | 6,039  |             |   | 5,344  |  |   | 5,145  |  |   | 5,275 
|                           |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|Income from operations     |  |                    | 3,922  |             |   | 2,374       |  |             | 1,615  |             |   | 4,061       |  |             | 2,620  |             |   | 3,587  |  |   | 2,556  |  |   | 2,663 
|Other income, net          |  |                    | 265    |             |   | 211         |  |             | 262    |             |   | 172         |  |             | 248    |             |   | 152    |  |   | 75     |  |   | 88    
|                           |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|Income before income taxes |  |                    | 4,187  |             |   | 2,585       |  |             | 1,877  |             |   | 4,233       |  |             | 2,868  |             |   | 3,739  |  |   | 2,631  |  |   | 2,751 
|Provision for income taxes |  |                    | 404    |             |   | 1,275       |  |             | 747    |             |   | 1,630       |  |             | 611    |             |   | 1,385  |  |   | 1,057  |  |   | 1,143 
|                           |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|Net income                 |  | $                  | 3,783  |             | $ | 1,310       |  | $           | 1,130  |             | $ | 2,603       |  | $           | 2,257  |             | $ | 2,354  |  | $ | 1,574  |  | $ | 1,608 
|                           |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|Net income per share       |  |                    |        |             |   |             |  |             |        |             |   |             |  |             |        |             |   |        |  |   |        |  |   |       
|Basic                      |  | $                  | 0.28   |             | $ | 0.10        |  | $           | 0.08   |             | $ | 0.20        |  | $           | 0.18   |             | $ | 0.21   |  | $ | 0.61   |  | $ | 0.63  
|Diluted                    |  | $                  | 0.25   |             | $ | 0.09        |  | $           | 0.07   |             | $ | 0.17        |  | $           | 0.15   |             | $ | 0.16   |  | $ | 0.13   |  | $ | 0.13  



Market price per
share*



|      |  |                    |       |              |   |              |  |             |       |             |   |              |  |   |       |  |   |       |   
|----- |  | ------------------ | ----- | ------------ | - | ------------ |  | ----------- | ----- | ----------- | - | ------------ |  | - | ----- |  | - | ----- | --
|      |  | Three months ended |      
|      |  | Dec 31,2004        |       | Sept 30,2004 |   | June 30,2004 |  | Mar 31,2004 |       | Dec 31,2003 |   | Sept 30,2003 | 
|High  |  | $                  | 13.23 |              | $ | 12.50        |  | $           | 13.90 |             | $ | 15.00        |  | $ | 22.03 |  | $ | 28.04 |   
|Low   |  | $                  | 10.63 |              | $ | 10.42        |  | $           | 10.49 |             | $ | 9.81         |  | $ | 9.70  |  | $ | 14.00 | **
|Close |  | $                  | 13.23 |              | $ | 12.00        |  | $           | 12.94 |             | $ | 10.54        |  | $ | 11.75 |  | $ | 21.45 |   

---

|* | Market price per share as reported on NASDAQ market from the date of our IPO on July 17, 2003.
|- | ----------------------------------------------------------------------------------------------

|** | IPO Issuance price
|-- | ------------------



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INTERVIDEO, INC.



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



Not Applicable



ITEM 9A: CONTROLS AND PROCEDURES



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 described below under Evaluation of Internal Control over Financial Reporting, we identified material weaknesses in our internal controls over financial reporting (as defined Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934). Accordingly, our Chief Executive Officer and Chief Financial Officer have concluded that as a result of these material weaknesses in internal control over financial reporting as of the end of the
period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were not effective.



Evaluation of Internal Control over Financial Reporting



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



A material weakness (within the meaning of PCAOB Auditing Standard No. 2) is a control deficiency, or aggregation of control deficiencies, that results in
more than a remote likelihood the risk 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.



Our management is in the process of assessing the effectiveness of our
internal control over financial reporting as of December 31, 2004, and this assessment, while not yet complete, identified the following material weaknesses in our internal control over financial reporting.



The material weaknesses identified relate to:



| |  |  | Inadequate controls and procedures to monitor and track amendments to license arrangements which could impact reported revenue;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Insufficient processes and controls, including management oversight, over our income tax accounting practices, estimates, and calculations and required disclosures; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inadequate controls within our information systems over user access and the related monitoring of the accounting and financial systems.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



We expect to conclude its testing and evaluation of internal control over
financial reporting and managements assessment of such controls prior to filing our amended annual report on Form 10-K/A within the 45-day period provided by the exemptive order issued by the SEC on November 30, 2004. There can be no
assurances that no further material weaknesses will be identified during this process. The Form 10-K/A will include managements report and the reports of our independent registered public accounting firm, KPMG LLP, on our internal control over
financial reporting.



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INTERVIDEO, INC.



In making its assessment of internal control over financial reporting, our management used the
criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework. Because of the material weaknesses described above, managements report on internal control
over financial reporting will indicate that, as of December 31, 2004, the Company's internal control over financial reporting was not effective based on those criteria. In addition, management expects that upon KPMGs completion of its
evaluation and testing of internal control over financial reporting, KPMG will issue an adverse opinion with respect to the effectiveness of our internal control over financial reporting.



Changes in Internal Control over Financial Reporting.



During the fourth quarter of the year ended December 31, 2004 we hired a
Director of IT whose responsibility is to identify, design and implement the necessary best practice systems, controls and procedures to ensure our IT infrastructure is adequate to meet our current and future needs. Also during the fourth quarter we
hired a Director of Internal Audit & Chief Compliance Officer to ensure adherence to Company policies and procedures, monitoring of remediation activities and on-going compliance with Sarbanes-Oxley requirements.



During the first quarter of 2005 we have taken the following steps to
remediate the identified material weaknesses above:



| |  |  | We have hired a contracts administrator whose responsibilities include monitoring, tracking and ensuring all contracts, including licensing agreements, are properly and timely
reviewed by appropriate personnel;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have executed a new arrangement with our tax service provider to include more frequent communication and concurrent involvement in the Companys day-to-day operations; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under the direction of the aforementioned IT Director, we are in the process of executing a plan to remediate user access and related monitoring controls over our accounting and
financial systems.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



There were no other
significant changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934 that occurred during the fourth fiscal quarter that has materially
affected or is reasonably likely to materially affect our internal controls over financial reporting.



ITEM 9B: OTHER INFORMATION



None



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INTERVIDEO, INC.



PART III



ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Code of Ethics



We have
adopted a written code of ethics that applies to our Board of Directors and all of our employees, including our principal executive officer, principal financial officer and principal accounting officer. A copy of such code of ethics is
available free of charge upon written request to the Companys principal executive offices, 46430 Fremont Boulevard, Fremont, CA 94538, attention Randall Bambrough.



The information required by this item concerning the Companys directors, the executive officers, the audit committee,
the audit committee financial expert, changes to the procedures by which security holders may recommend nominees and Section 16(a) beneficial ownership reporting compliance is incorporated by reference from the section captioned Election of
Directors and Executive Officers contained in our Definitive Proxy Statement to be filed not later than 120 days following the close of the fiscal year (the Definitive Proxy Statement).



ITEM 11: EXECUTIVE COMPENSATION



Information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the section captioned Executive Officer Compensation of our Definitive Proxy Statement.



|ITEM 12: | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
|-------- | -----------------------------------------------------------------------------------------------



Information required by this item regarding equity compensation plan, security ownership of certain holders and
change-in-control arrangements is incorporated herein by reference from the sections captioned Equity Compensation Plan Information, Security Ownership of Certain Beneficial Owners and Management, and Change-in-Control
Agreements in our Definitive Proxy Statement.



ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Information required by this item regarding certain relationships and related party transactions is incorporated herein by reference from the section entitled Certain Relationships and Related Transactions
in our Definitive Proxy Statement.



ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this item regarding accounting fees and services and audit committee pre-approval policies is incorporated herein by reference from certain sections in our Definitive Proxy Statement.



With the exception of the information incorporated in Items
10, 11, 12, 13 and 14 of this Annual Report on Form 10-K, Intervideos Definitive Proxy Statement is not deemed filed as part of this Annual Report on Form 10-K.



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INTERVIDEO, INC.



PART IV



ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



(a) The following documents are filed as part of this Form 10-K:



(1) Index to Consolidated Financial Statements. The following Consolidated Financial Statements of InterVideo, Inc. and its subsidiaries
are filed as part of this Form 10-K:



|                                                                         |  |                   
|------------------------------------------------------------------------ |  | ------------------
|                                                                         |  | Form 10-K Page No.
|Report of Independent Registered Public Accounting Firm                  |  | 47                
|Consolidated Balance Sheets                                              |  | 48                
|Consolidated Statements of Income                                        |  | 49                
|Consolidated Statements of Stockholders Equity and Comprehensive Income |  | 50                
|Consolidated Statements of Cash Flows                                    |  | 51                
|Notes to Consolidated Financial Statements                               |  | 5270             



(2)
Index to Financial Statement Schedules. The following Consolidated Financial Statement Schedule of InterVideo, Inc. and its subsidiaries for each of the years ended December 31, 2004, 2003 and 2002 are filed as part of this Form 10-K:



|                              |  |                  
|----------------------------- |  | -----------------
|                              |  | Form 10-KPage No.
|Financial Statement Schedules |  | None             



Schedules not listed
above have been omitted because the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.



(3) Exhibits. The exhibits listed in the accompanying Index to Exhibits are filed as part of this Annual Report on Form 10-K.



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INTERVIDEO, INC.



SIGNATURES



Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2005



INTERVIDEO, INC.By:

/s/ Steve RoSteve RoPresident and Chief Executive Officer




Pursuant to the requirements of
the Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:



|                                       |  |                                                                               |  |               
|-------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|Signature                              |  | Title                                                                         |  | Date          
|                                       |  |                                                                              
|/s/ Steve RoSteve Ro                   |  | Chairman, President and Chief Executive Officer (Principal Executive Officer) |  | March 30, 2005
|                                       |  |                                                                              
|/s/ Randall BambroughRandall Bambrough |  | Chief Financial Officer (Principal Financial and Accounting Officer)          |  | March 30, 2005
|                                       |  |                                                                              
|/s/ Joseph LiuJoseph Liu               |  | Director                                                                      |  | March 29, 2005
|                                       |  |                                                                              
|George Haber                           |  | Director                                                                      |  |               
|                                       |  |                                                                              
|/s/ Joseph ZaelitJoseph Zaelit         |  | Director                                                                      |  | March 31, 2005
|                                       |  |                                                                              
|/s/ Henry ShawHenry Shaw               |  | Director                                                                      |  | March 31, 2005



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INTERVIDEO, INC.



INDEX TO EXHIBITS



|              |  |                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                       
|              | 
|2.14          |  | Tender Offer Filing and Tender Offer Circular                                                                                                                                                                     
|              | 
|3.11          |  | Amended and Restated Certificate of Incorporation, as currently in effect.                                                                                                                                        
|              | 
|3.21          |  | Bylaws, as currently in effect.                                                                                                                                                                                   
|              | 
|10.11         |  | Registrants 1998 Stock Option Plan and form of option agreement.                                                                                                                                                 
|              | 
|10.21         |  | Registrants 2003 Stock Plan and form of option agreement.                                                                                                                                                        
|              | 
|10.31         |  | Registrants 2003 Employee Stock Purchase Plan and form of subscription agreement.                                                                                                                                
|              | 
|10.41         |  | Form of Directors and Officers Indemnification Agreement with Steve Ro, Randall Bambrough, Honda Shing, Chinn Chin, Raul Diaz, Mike Ling, Christine Wong, George Haber, Joseph Liu, Henry
Shaw and Joseph Zaelit.
|              | 
|10.51         |  | Investor Rights Agreement dated July 2, 1999, as amended, by and among the registrant and the parties who are signatories thereto.                                                                                
|              | 
|10.6++        |  | Dolby System License Agreement between the Registrant and Dolby Laboratories Licensing Corporation dated May 20, 2004.                                                                                            
|              | 
|10.71+        |  | CSS License Agreement between the registrant and DVD Copy Control Association dated December 22, 2000.                                                                                                            
|              | 
|10.8          |  | Lease Agreement between the registrant and CarrAmerica Realty Corporation dated October 6, 2003                                                                                                                   
|              | 
|10.91         |  | Employment offer letter with Randall Bambrough.                                                                                                                                                                   
|              | 
|10.101        |  | Form of Nonstatutory Stock Option Agreement for grants to Joseph Liu and George Haber.                                                                                                                            
|              | 
|10.111        |  | Nonstatutory Stock Option Agreement for Henry Shaw.                                                                                                                                                               
|              | 
|10.121        |  | Form of Promissory Notes issued by George Haber, Joseph Liu and Randall Bambrough.                                                                                                                                
|              | 
|10.131        |  | Common Stock Purchase Agreement with Honda Shing dated May 15, 1998.                                                                                                                                              
|              | 
|10.141+       |  | Software License Agreement between the registrant and Dell Products, L.P. dated August 4, 1999, as amended.                                                                                                       
|              | 
|10.151        |  | Settlement Agreement and Release between the registrant and Dell Products, L.P. dated April 26, 2002.                                                                                                             
|              | 
|10.161        |  | Form of Change of Control Agreement with Steve Ro, Chinn Chin and Raul Diaz.                                                                                                                                      
|              | 
|10.171+       |  | Software License Agreement between the registrant and Hewlett-Packard Company, dated February 25, 2000, as amended.                                                                                               
|              | 
|10.182        |  | Offer Letter with Christine Wong.                                                                                                                                                                                 
|              | 
|10.194        |  | Stock Purchase Agreement dated as of March 12, 2005 among Strong Tops Limited and Strong Ace Limited and InterVideo Digital Technology Corp.                                                                      
|              | 
|10.204        |  | Tender Agreement dated as of March 12, 2005 between Microtek International Inc. and InterVideo Digital Technology Corp.                                                                                           



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INTERVIDEO, INC.



|              |  |                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                        
|              | 
|10.214        |  | Tender Agreement dated as of March 12, 2005 between certain persons named in Schedule 1 of the Agreement and International Digital Technology Corp.
|              | 
|21.11         |  | Subsidiaries of the registrant.                                                                                                                    
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                          
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                             
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                              
|              | 
|32.1          |  | Certification of 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002. 

---

|(1) | Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-102851) as declared effective by the Securities and Exchange Commission on July 16, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to our Form 8-K filed on February 17, 2005.
|--- | ---------------------------------------------------------------------

|(3) | Incorporated by reference to our Form 8-K filed on March 14, 2005.
|--- | ------------------------------------------------------------------

|(4) | Incorporated by reference to our Form 8-K filed on March 25, 2005.
|--- | ------------------------------------------------------------------

|(+) | Confidential Treatment granted for certain portions of this Agreement.
|--- | ----------------------------------------------------------------------

|(++) | Confidential Treatment requested for certain portions of this Agreement.
|---- | ------------------------------------------------------------------------



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