UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark
One)





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





For
the fiscal year ended March 31, 2010





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: 72870











SONIC
SOLUTIONS


(Exact
name of registrant as specified in its charter)







California
                
                93-0925818(State
      or other jurisdiction of
                  incorporation
      or organization)
                
                (IRS
      Employer
                  Identification
      No.)7250
      Redwood Boulevard, Suite 300
                  Novato,
      California
                
                94945(Address
      of principal executive offices)
                
                (Zip
      Code)





415-893-8000


(Registrant’s
telephone number, including area code)





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





Title of each class
                
                Name of each exchange on which registeredCommon
      Stock, no par value
                
                The
      Nasdaq Stock Market LLC





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   Yes  ̈  No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   Yes  ̈  No x




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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes o  No o




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    ̈




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




Large
accelerated filer  ̈        Accelerated
filer x        Non-accelerated
filer  ̈    Smaller
reporting company  ̈




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




The
aggregate market value of Common Stock held by non-affiliates of the registrant
(based upon the closing sale price on The Nasdaq Global Select Market on
September 30, 2009) was approximately $141.0 million.  Shares held by
each executive officer, director and by each person who owns 10% or more of the
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.




The
number of outstanding shares of the registrant’s Common Stock on June 3, 2010
was 30,636,131.




DOCUMENTS
INCORPORATED BY REFERENCE:  None





SONIC
SOLUTIONS


TABLE
OF CONTENTS





PART
      I
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              Additional
      Information
                                                                                                              3Forward
      Looking Information
                                                                                                              3Item
      1.
                                                                                                              
                                                                                                              Business
                                                                                                              3Item
      1A.
                                                                                                              
                                                                                                              Risk
      Factors
                                                                                                              9Item
      1B.
                                                                                                              
                                                                                                              Unresolved
      Staff Comments
                                                                                                              18Item
      2.
                                                                                                              
                                                                                                              Properties
                                                                                                              19Item
      3.
                                                                                                              
                                                                                                              Legal
      Proceedings
                                                                                                              19Item
      4.
                                                                                                              
                                                                                                              (Removed
      and Reserved)
                                                                                                              19PART
      II
                                                                                                              
                                                                                                              Item
      5.
                                                                                                              
                                                                                                              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                                                              20Item
      6.
                                                                                                              
                                                                                                              Selected
      Financial Data
                                                                                                              22Item
      7.
                                                                                                              
                                                                                                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                                              23Item
      7A.
                                                                                                              
                                                                                                              Quantitative
      and Qualitative Disclosures About Market Risk
                                                                                                              39Item
      8.
                                                                                                              
                                                                                                              Financial
      Statements and Supplementary Data
                                                                                                              40Report
      of Independent Registered Public Accounting Firm
                                                                                                              41Item
      9.
                                                                                                              
                                                                                                              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                                                              68Item 9A.
                                                                                                              
                                                                                                              Controls
      and Procedures
                                                                                                              68Management’s
      Report on Internal Control Over Financial Reporting
                                                                                                              68Item 9B.
                                                                                                              
                                                                                                              Other
      Information
                                                                                                              69PART
      III
                                                                                                              
                                                                                                              Item
      10.
                                                                                                              
                                                                                                              Directors,
      Executive Officers and Corporate Governance
                                                                                                              70Item
      11.
                                                                                                              
                                                                                                              Executive
      Compensation
                                                                                                              73Item
      12.
                                                                                                              
                                                                                                              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                                                              86Item
      13.
                                                                                                              
                                                                                                              Certain
      Relationships and Related Transactions and Director
      Independence
                                                                                                              87Item
      14.
                                                                                                              
                                                                                                              Principal
      Accountant Fees and Services
                                                                                                              88PART IV
                                                                                                              
                                                                                                              Item 15.
                                                                                                              
                                                                                                              Exhibits
      and Financial Statement Schedules
                                                                                                              89




2


PART
I




Additional
Information




References
in this Annual Report on Form 10-K (“Annual Report”) to the “Company,” “Sonic,”
“it,” or “its” mean Sonic Solutions together with its subsidiaries, except where
the context otherwise requires.  Quantities or results referred to as
“to date” or “as of this date” mean as of or to March 31, 2010, unless otherwise
specifically noted.  References to “FY” or “fiscal year” refer to the
Company’s fiscal year ending on March 31 of the designated year.  For
example, “FY 2010” and “fiscal year 2010” each refer to the fiscal year ended
March 31, 2010.  Other references to “years” mean calendar
years.  This Annual Report includes references to certain Company
trademarks and registered trademarks.  Products or service names of
other companies mentioned in this Annual Report may be trademarks or registered
trademarks of their respective owners.




Forward-Looking
Statements




This
Annual Report includes forward-looking statements within the meaning of the
federal securities laws.  These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking
statements.  Important factors that could cause such differences
include, but are not limited to:  the continuing negative impact of
current macroeconomic conditions on consumers and associated impact on their
ability and inclination to spend on leisure and entertainment-related activities
and related software and electronics; the Company’s ability to adapt to rapid
changes in technology and consumer preferences, and to cost-effectively develop
and introduce new and enhanced products and services; competitive pressures on
the Company’s products and services, both from large established competitors
with greater technological and financial resources than the Company possesses,
and from smaller companies that are able to compete effectively through low-cost
Internet sales of their software products and services; changes in operating
results, requirements or business models of the Company’s original equipment
manufacturer (“OEM”) or other major customers; the Company’s ability to
successfully introduce and profitably run its RoxioNow initiative, a business
with which it has had limited experience, which is dependent on third parties
for premium content selection and delivery services, and which may give rise to
legal exposure and other business risks; expenses and issues associated with
qualifying and supporting the Company’s products on multiple computer platforms
and in developing products and services designed to comply with industry
standards; issues impacting third parties who supply the Company with services
and operate its web store, as well as retailers, resellers and distributors of
its products and services; risks associated with international operations,
including risks related to currency fluctuations, as well as to the Company’s
extensive software development work in China; changes in product and service
offerings that could cause the Company to defer the recognition of revenue,
thereby harming operating results; the Company’s ability to maintain sufficient
liquidity and continue to fund capital needs; the loss of key management
personnel; risks related to the proposed merger with DivX, Inc. (“DivX”),
including (i) the parties may not obtain the requisite shareholder or regulatory
approvals for the transaction; (ii) the anticipated benefits of the transaction
may not be realized; (iii) the parties may not be able to retain key personnel;
(iv) the conditions to the closing of the transaction may not be satisfied or
waived; and (v) the impact of general economic conditions on the businesses and
results of operations of the two companies; risks related to acquisition and
integration of acquired businesses, assets, personnel and systems generally;
costs associated with litigation, patent prosecution, intellectual property and
other claims; changes in effective tax rates; and earthquakes, natural disasters
and other unexpected events.  Factors that could cause actual results
or conditions to differ from those anticipated by forward-looking statements
include those more fully described below under Item 1, “Business,” Item 1A,
“Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and elsewhere in this Annual
Report.  All forward-looking statements included in this Annual Report
are based on information available to the Company as of the date of filing of
this Annual Report, and the Company assumes no obligation to revise or publicly
release any revision to any such forward-looking statement, except as may
otherwise be required by law.




Item
1.  Business




General




The
Company is a leading developer of products and services that enable the
creation, management, and enjoyment of digital media content across a wide
variety of technology platforms.  The Company’s products and services
offer innovative technologies to consumers, OEMs, businesses, high-end
professional optical disc authoring experts and developers.  The
Company distributes its products and services through retailers and
distributors, personal computer (“PC”) and consumer electronics (“CE”) OEMs,
Internet websites including www.roxio.com, and other channels.  The
Company also licenses core technology and intellectual property to other
software companies and technology manufacturers for integration into their own
products and services.  Sonic software is intended for use with a wide
range of PC and CE operating systems, development environments, and proprietary
platforms.


3




Sonic
products and services are used to accomplish a wide variety of tasks, including
creating and distributing digital audio and video content in a variety of
formats; renting, purchasing and enjoying Hollywood movies and other premium
content; producing digital media photo and video shows for sharing online and
via television, PCs and CE devices; recording and playback of digital content on
DVD, Blu-ray Disc (“BD”), other storage media and portable devices; managing
digital media on PCs and CE devices; and backing up and preserving digital
information, both to local storage devices and on the Internet.




The
Company was incorporated in California in 1986 and completed its initial public
offering in 1994.  Its principal executive headquarters are located at
7250 Redwood Blvd., Suite 300, Novato, California 94945.  Its
telephone number is (415) 893-8000, and its corporate web address is
www.sonic.com.




Proposed
Acquisition of DivX




On June
1, 2010, the Company and DivX entered into an Agreement and Plan of Merger (the
“Merger Agreement”), pursuant to which DivX and the Company will combine their
businesses through the merger of DivX with a newly formed, wholly owned
subsidiary of the Company (the “DivX Acquisition”).At the effective time of
the DivX Acquisition (the “Effective Time”), each share of DivX common stock
issued and outstanding immediately prior to the Effective Time will be converted
into the right to receive 0.514 shares of the Company’s common stock and $3.75
in cash.  The Merger Agreement contains customary representations,
warranties and covenants of the Company and DivX including, among others,
covenants (1) to use commercially reasonable efforts to conduct their respective
businesses in the ordinary course during the interim period between the
execution of the Merger Agreement and consummation of the DivX Acquisition, (2)
not to engage in specified types of transactions during such period, and (3) not
to solicit proposals relating to alternative business combination transactions
or, subject to specified exceptions, enter into discussions or provide
confidential information in connection with proposals for alternative business
combination transactions.




The
Company’s and DivX’s obligations to consummate the DivX Acquisition are subject
to the satisfaction or waiver of customary conditions, including (1) requisite
approvals of their respective shareholders, (2) the absence of any law or order
prohibiting the consummation of the DivX Acquisition, (3) the declaration by the
U.S. Securities and Exchange Commission (the “SEC”) of the effectiveness of the
registration statement relating to the shares of Sonic Solutions common stock to
be issued to DivX stockholders pursuant to the Merger Agreement, (4) the
expiration or termination of applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (5) the
absence of any material adverse effect with respect to either party during the
interim period between the execution of the Merger Agreement and consummation of
the DivX Acquisition. In addition, each party’s
obligation to consummate the DivX Acquisition is subject to other specified
customary conditions, including (a) the accuracy of the representations and
warranties of the other party, subject to an overall material adverse effect
qualification, and (b) material compliance by the other party with its
covenants.





The
Merger Agreement provides each of the Company and DivX with specified
termination rights.  If the Merger Agreement is terminated under
circumstances specified in the Merger Agreement, DivX will be required to pay
the Company a termination fee of $8.35 million.  See Item 1A, “Risk
Factors” for a discussion of the risks associated with our failure to close the
DivX Acquisition and factors that impact our ability to successfully integrate
DivX’s operations into our existing business.





Operating
Segments




The
Company differentiates between digital media content that is created by
consumers (sometimes referred to herein as “personal” content) and digital
content that is professionally created for mass consumption (sometimes referred
to herein as “premium” content).  Accordingly, the Company organizes
its business into two reportable operating segments targeted at these different
forms of content:  the “Roxio Consumer Products” segment, which offers
products and services related to personal content, and the “Premium Content”
segment, which offers products and services related to premium
content.  These segments reflect the Company’s internal organizational
structure, as well as the processes by which management makes operating
decisions, allocates resources and assesses performance.


4


Roxio
Consumer Products Segment




The Roxio
Consumer Products segment creates software and services that enable consumers to
easily create, manage, and share personal digital media content on and across a
broad range of connected devices.  A wide array of leading technology
companies and developers rely on Roxio products, services and technologies to
bring innovative digital media functionality to PCs and next-generation CE
devices and platforms.  The Roxio Consumer Products segment offers
products and services under a variety of names, including BackonTrack, Backup
MyPC, CinePlayer, Crunch, Easy LP to MP3, Easy VHS to DVD, Just!Burn, MyDVD,
MyTV To Go, PhotoShow, PhotoSuite, Popcorn, RecordNow, Roxio Burn, Roxio Copy
& Convert, Roxio Creator, Toast, VideoWave, WinOnCD, and
others.  These products are sold in a number of different versions and
languages.  The Company distributes these products through various
channels, including “bundling” arrangements with OEMs, volume licensing
programs, its web store, and third party web-based and “bricks and mortar”
retail stores.  The Company also markets the core technology that
powers Roxio products to other companies who wish to build their own PC software
products.




Sales
and Distribution; Markets




Most
Roxio products are sold in a number of different versions and
languages.  The Company distributes Roxio products through various
channels, including “bundling” arrangements with OEMs, volume licensing
programs, its web store, and third party web-based and “bricks and mortar”
retail stores.  The Company also markets the core technology that
powers Roxio products to other companies who wish to build their own PC software
products.




OEM
Bundling




A primary
channel for the Company’s Roxio applications software is the inclusion or
“bundling” of the Company’s products with compatible products sold by
OEMs.  The Company believes that most consumers first become exposed
to digital media software when they purchase a new PC or a CE device, such as a
mobile phone, and begin to use the software that comes bundled with the PC or CE
device.  Some of these new users later add to their software
capabilities via upgrades or add-ons, in many cases through web transactions or
purchases at retail locations.




The
Company’s OEM customers include Roxio software as a value-added offering for
their customers and often pay the Company a royalty on each copy of the software
shipped with their products.  Typically the royalty paid is only a
small fraction of the retail price for the Company’s software.  The
Company enters into bundling arrangements because they generate revenue for the
Company as well as create a large installed base of customers to whom it can
sell upgraded, enhanced or different versions of its products and
services.  Many of the Company’s bundle deals permit it to capture
customer registrations or to invite the customer to click-through to the
www.roxio.com web site where it can offer additional products for sale
directly.




The
Company also has non-traditional bundling programs with some of its OEM
customers, under which the Company reduces or eliminates the royalty due to it
when a copy of its product is shipped by the OEM.  In return the OEM
actively promotes the purchase of an enhanced version of the bundled product,
either at “point of sale” (that is, the point at which end-user customers
purchase a PC or other device) or after point of sale.  The resulting
revenues are split between the Company and the OEM.




The
Company usually does not provide end-user support as part of its bundling
arrangements, instead relying on OEMs to support the end-user
customers.  The Company typically does provide “second line” support
to OEMs to back up their “first line” support of the Company’s products to their
consumer customers.




The
Company maintains an engineering and delivery staff that concentrates on
OEMs.  OEM customers tend to be very sensitive to product quality and
stability, and usually are focused on providing their end-user customers with a
simple and trouble-free experience.  They often demand significant
customization of Roxio products to meet their particular
requirements.  OEMs, particularly those with high volume businesses,
require strict adherence to the release schedules of their product
lines.




Volume
Licensing




The
Company licenses Roxio applications software for use by corporate and
institutional organizations on populations of in-house computing
devices.  In many ways, volume licensing resembles the Company’s OEM
business:  there is a single point of sale for a large number of
copies of its software; the price per copy is usually set at a significant
discount from retail price; often a single copy of its software is provided that
the volume license customer then replicates for internal
deployment.  Volume license customers also tend to be highly focused
on product quality and stability as well as on a simple and trouble-free user
experience.


5




Web
Store




The
Company makes its products available through web-based retail sites in North
America, Europe and Japan.  These retail sites are operated by third
party resellers.  Under these arrangements, the Company’s reseller
partners typically maintain Company-branded sites, provide the infrastructure to
handle secure purchase transactions, and deliver the product (whether via web
download or physical fulfillment).  The Company’s web store sales
constituted approximately 23%, 22% and 22% of total net revenues for fiscal
years 2010, 2009 and 2008, respectively.  For additional information
see Note 6, “Significant Customer Information, Segment Reporting and Geographic
Information,” to the Consolidated Financial Statements included in this Annual
Report.




Retail
Channel




The
Company distributes Roxio products through a large number of traditional
physical retail stores as well as catalog and web stores.  The Company
promotes its products in the retail channel through a variety of techniques,
including rebates, advertising in targeted publications, numerous trade show
appearances, web promotions, direct mail and e-mail, press and publicity tours
and events.  The Company’s retail products are often distributed
through distributors.  These distributors handle inventory, shipment
to particular retail locations, and product returns and stock rotation as
required by the Company’s retail resellers.




Technology
Licensing




The
Company also markets the core technology that powers Roxio products to other
companies who wish to build their own PC software products.  The
Company often markets this technology under the AuthorScript and CinePlayer
brand names.  The Company packages this software with an “application
programmer’s interface”; that is, a software interface that enables other
companies’ software engineers to access the Company’s processing technology and
easily integrate it with their own software applications.  The
Company’s technology licenses have a variety of
structures:  (i) software bundling type arrangements in which it
receives a royalty on every unit of its software shipped; (ii) annual or
one-time license fees; (iii) custom development work for which the Company
receives payment, and (iv) broad development relationships through which
the license partner receives source-level access and rights to participate with
the Company in one or more of its ongoing development programs.




Manufacturing
and Suppliers




The
Company outsources the manufacture of its Roxio products for physical delivery
through retail and web store channels.  HP Software Publishing is
currently the Company’s primary supplier providing services such as parts
procurement, parts warehousing, product assembly and supply chain
services.  These services are provided to the Company from two primary
HP locations:  Andover, Massachusetts, servicing North America; and
Galway, Ireland, servicing Europe.  Production services and supply
chain logistics for Asia and the Pacific Rim are serviced by ModusLink,
Taipei.  HP and ModusLink are non-exclusive suppliers.




The
Company selects its suppliers based on their ability to provide high quality,
responsive service, competitive costs and the capacity to scale up volumes as
necessary to meet Company’s product launches and seasonality
requirements.  The Company’s supply chain vendors produce the finished
goods, generate the required shipping and receiving documents, and provide
return goods documentation and reconciliation services.




Competitive
Environment




The
market for the Company’s Roxio consumer products and services is very
competitive.  A number of large and small companies produce video
editors, photo editors, backup solutions and other products and services that
compete with those of the Company’s.  The Company’s digital media
products, including optical disc playback, authoring and video editing, are in
direct competition for strategic relationships with PC and CE OEMs, software
companies, online services companies and technical developers.  Many
of the Company’s competitors have greater technical and financial resources than
the Company does.  Some of the Company’s products and services provide
features and technical capabilities that are generally comparable to higher
priced products offered by larger competitors.




Segment
Information




The Roxio
Consumer Products segment accounted for approximately 86% of net revenue for
fiscal year 2010.  See Note 6, “Significant Customer Information,
Segment Reporting and Geographic Information,” to the Consolidated Financial
Statements included in this Annual Report for a summary of the Company’s
financial data by business segment, geography and customer
concentration.


6




Premium
Content Segment




The
Premium Content segment offers a range of products and services related to the
creation, distribution and enjoyment of premium content.  As part of
this segment, the Company also sells, rents and distributes premium
entertainment content to consumers over the Internet under RoxioNow branding (in
this Annual Report, this service may be referred to as the “RoxioNow
Service”).  Also within this segment, the Professional Products Group
offers software under the Scenarist, CineVision, and DVDit product names as well
as under the Sonic and Roxio Professional brands to major motion picture
studios, high-end authoring houses and other professional
customers.  The Company also develops software components that it
licenses to CE companies to enable their devices to offer premium content to
consumers, and licenses intellectual property, including patents.




RoxioNow
Service




The
Company has partnered with major retailers such as Best Buy and Blockbuster,
offering its RoxioNow Internet delivery platform for the sell-through or rental
of premium content.  The RoxioNow Service library contains thousands
of digital assets, including content from 20th Century
Fox, Walt Disney Co., DreamWorks Animation SKG, MGM, Miramax, NBC Universal,
Sony, Warner Bros. and Lions Gate Entertainment, which content includes major
Hollywood hits, feature-length films, television episodes, short films, and
music concerts.  This premium content is available for electronic
sell-through (“EST” or download to own), rental (video-on-demand or “VOD” ) and
DVD burning using Qflix technology.




Professional
Products




The
Professional Product Group develops, sells, and supports a range of
comprehensive authoring solutions that enable commercial content owners such as
major Hollywood motion picture studios to create and distribute high-end
commercially released digital media titles in DVD, BD and other formats to mass
consumer markets worldwide.  The Company’s professional products
include its Scenarist branded high-end authoring applications, its Scenarist
Publisher template-based authoring solutions, CineVision encoding systems, and
easy-to-use DVDit and DVDit Pro HD authoring solutions.  The Company’s
professional software solutions support video and audio encoding, authoring,
playback emulation, multiplexing (combining navigation programming with content
elements to produce finished disc images), and automated, customizable workflow
processing.




Qflix




The
Company offers its Qflix intellectual property and technology licensing program
for the application of Content Scrambling Systems (“CSS”) to recordable
DVD.  CSS is the standard protection mechanism used in essentially all
DVD players and on the majority of commercial, replicated DVDs.  The
Qflix program provides branding and certification for CSS recordable drives, CSS
recordable media, and related components, and licenses key
patents.  The Qflix program enables content owners to manufacture and
deliver industry-standard copy-protected DVDs directly to consumers on demand
replacing the traditional costs associated with DVD manufacturing, distribution
and inventory with internet distribution, which can be located in retail
establishments, or on a consumer’s PC or set-top box, as well as other
manufacturing facilities.  Under the Qflix program, retailers and
content owners are able to make a broader selection of DVD titles available to
consumers without having to manage a large stock of physical inventory, and
consumers are able to create their own personal DVDs of premium content at
home.




Technology
Licensing




The
Company licenses its technology to CE device manufacturers, including companies
that make the integrated circuits used by equipment
manufacturers.  The customers and agreements for this business are
similar to those for the technology licensing business engaged in by the Company
through its Roxio consumer segment.




Patent
Program




The
Premium Content segment also includes the Company’s patent management and
commercialization program.  Under the patent program the Company
identifies patentable ideas that arise in the course of its internal development
operations, assesses and acquires patents as part of its business acquisitions,
and assesses and may acquire patents and patent portfolios from other companies,
although it has not made an acquisition of separate patents or patent portfolios
to date.  The Company’s patent program is designed to generate
revenues by granting limited licenses to patents directly to other companies or
consortia, licensing the use of patents in connection with licenses of its
applications software or software technology, including patents in patent pools
associated with industry standard formats, and selling or licensing patents to
other companies for exploitation.  Under appropriate circumstances and
in order to protect its intellectual property, the Company may bring legal
proceedings against third parties who infringe its patents.


7




Sales
and Distribution; Markets




The
Company sells its professional products through a field sales force in
combination with a network of specialized professional audio/video
dealers.  As of March 31, 2010, the Company employed 18 people in its
field sales organization for Premium Content professional
products.  Sales personnel are based in the Company’s headquarters in
Novato, CA as well as its offices in Santa Clara, CA, Burbank, CA, London,
England and Tokyo, Japan.  The Company’s professional products are
mainly sold to the high-end film and video post-production facilities that
process and prepare audio, video and film content for delivery across a variety
of broadcast, broadband and mobile playback platforms.  The titles
authored by its professional customers consist primarily of major feature film,
entertainment, and educational programs as well as business-to-business and
business-to-consumer content.  The Company’s professional customers
range in size from relatively small organizations with few employees to major
content creation facilities with thousands of employees.




The
Company offers its RoxioNow Service directly through websites and, increasingly,
through third party partners who offer the service through their own websites,
through PCs and through CE devices.  To the extent that the Company
offers the RoxioNow Service through PC and CE OEMs, its distribution
relationships are similar to, and often overlap with, the OEM relationships that
it establishes through the Roxio consumer segment.




Competitive
Environment




A number
of companies offer products and services that compete with some or all of the
Company’s premium product and service offerings.  The Company’s
RoxioNow Service, in particular, faces a wide range of competition from other
companies seeking to position themselves strategically as the digital
distribution of Hollywood movies and other premium content grows in scope and
importance.  Significant competition exists from well-established
traditional premium content distribution channels, including retailers that
rent, sell or trade DVDs and games, cable and satellite VOD services, and other
in-home entertainment.  Consumers have a variety of vendor choices and
multiple distribution options for premium content consumption, and the Company
believes that this competition will increase over the coming years as the
proliferation of digital delivery continues.  Some of the Company’s
competitors have greater financial or organizational resources and/or greater
familiarity than the Company does with certain technologies.




Segment
Information




The
Premium Content segment accounted for approximately 14% of net revenue for
fiscal year 2010.  See Note 6, “Significant Customer Information,
Segment Reporting and Geographic Information,” to the Consolidated Financial
Statements included in this Annual Report for a summary of the Company’s
financial data by business segment, geography and customer
concentration.




General
Business Factors




The
matters described in this section apply generally to the Company’s business
activities, including both of its operating segments.




Intellectual
Property




The
Company protects its proprietary rights through a variety of means and measures,
including patents, trade secrets, copyrights, trademarks, contractual
restrictions and technical measures.  The Company generally offers its
products and services subject to purchase and license agreements that restrict
unauthorized disclosure of its proprietary software and designs, or copying for
purposes other than the use intended when the product is sold.




The
Company owns or licenses many patents and has a number of patent applications
pending in the United States and foreign countries.  The status of
software and business method patent protection has been in flux.  On
the one hand, there has recently been a trend on the part of patent authorities
to grant patents in audio and video processing techniques and, in particular,
for software based techniques, with increasing liberality.  On the
other hand, there has been an increasing tendency on the part of some courts to
invalidate patents granted by the patent authorities (for example, in the case
of KSR v. Teleflex
(April 2007), the U.S. Supreme Court enunciated a new standard of “obviousness”
that may call into question many patents granted under the recent, liberal
patent regime).  Given the general confusion and imprecision in this
area, the Company believes that it is possible that some of its present or
future products or services might be found to infringe issued or yet to be
issued patents, and it is almost certain that the Company will be asked by
patent holders to respond to infringement claims.  If such patents
were held to be valid, and if they covered a portion of the Company’s technology
for which there was no ready substitute, the Company might suffer significant
market and financial losses.


8




The
Company has endeavored to reduce its risk to some extent by means of contractual
provisions.  For example, in the case of low revenue-per-copy bundling
agreements with OEM customers, the Company typically attempts to limit any
indemnity it provides relating to infringement.  However, not all of
the Company’s OEM customers are willing to agree to the terms that the Company
seeks, and, even if they agree, there is no assurance that such limitations will
in fact reduce the Company’s exposure to liability.




The
Company relies to a great extent on the protection the law gives to trade
secrets to protect its proprietary technology.  The Company policy is
to request confidentiality agreements from all of its employees and key
consultants, and it regularly enters into confidentiality agreements with other
companies with whom the Company discusses its proprietary technology, financial
issues, business opportunities and other confidential
matters.  Despite trade secret protection, the Company cannot be
certain that third parties will not independently develop the same or similar
technologies, or whether third parties will improperly disclose or use Company
technologies.




Seasonal
Trends




The
Company’s software product sales have historically followed a seasonal trend,
with sales being typically higher in the December and March
quarters.  Due to adverse global economic conditions, this normal
seasonality was not pronounced during fiscal years 2009 and
2010.




Research
and Development




The
Company’s research and development staff is located principally at its
headquarters in Novato and Santa Clara, California, and in Shanghai and
Hangzhou, China, as well as San Luis Obispo, California and Wayne,
Pennsylvania.  The Company typically hires research and development
personnel with backgrounds in digital audio signal processing, digital video
image processing, distributed networking and computer systems
design.  For information regarding research and development expenses,
see Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” included in this Annual Report.




Employees




As of
March 31, 2010, the Company had approximately 490 full-time
employees.  The total included 99 employees engaged in sales and
marketing, 290 engaged in research and development and the remaining 101 engaged
in general and administration.  As of March 31, 2010, the Company had
approximately 229 employees in North America, 16 employees in Europe, and 245
employees in Asia.  The Company believes that its future success will
depend in large part on its ability to attract and retain highly skilled
technical, managerial, and sales and marketing personnel.  None of the
employees are subject to collective bargaining agreements.  The
Company believes relations with employees are good.




Available
Information




The
Company’s corporate website is www.sonic.com.  The Company makes
available free of charge, on or through its website, this Annual Report,
quarterly reports on Form 10-Q, and previous annual reports on Form 10-K,
current reports on Form 8-K and amendments to those reports, if any, and any
other filings filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after electronically filing or
furnishing these reports with the SEC.  Information contained on any
of the Company’s websites is not a part of this Annual Report.




The
Company files annual, quarterly and special reports, proxy statements and other
information with the SEC.  You may inspect and copy these materials at
the Public Reference Room maintained by the Commission at Room 100 F Street,
N.W., Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330
for more information on the Public Reference Room.  The SEC also
maintains a website atwww.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers, such as the Company, that file electronically with the
SEC.




Item
1A.  Risk Factors




The
following are certain risk factors that could affect the Company’s business,
financial results and results of operations and its stock
price.  These risk factors should be considered in connection with
evaluating the forward-looking statements contained in this Annual Report
because these factors could cause the actual results and conditions to differ
materially from those projected in the forward-looking
statements.  You should carefully consider the following risk factors
as well as those in other documents the Company files with the
SEC.  The risks and uncertainties described below are not the only
ones the Company may face.  Additional risks and uncertainties not
presently known to the Company or that it currently deems immaterial may also
impair its business operations.


9




Adverse
global economic conditions may continue to negatively affect the Company’s
business, results of operations, and financial condition.




Adverse
global economic conditions have had, and may continue to have, a negative impact
on consumers and limit their ability and inclination to spend on leisure and
entertainment related products and services.  If demand for the
Company’s products and services further decreases, as a result of economic
conditions or otherwise, the Company’s financial condition would be adversely
impacted.




The
recent financial downturn and continuing financial market volatility may
continue to negatively affect the Company’s business, results of operations, and
financial condition.




The
recent global economic downturn and continuing financial market volatility have
resulted in tight credit markets, a low level of liquidity in many financial
markets, and extreme volatility in fixed income, credit and equity
markets.  These factors could lead to a number of follow-on effects on
the Company’s business, including insolvency of key suppliers resulting in
product delays; inability of customers to obtain credit to finance purchases of
the Company’s products and services; increased expense or inability to obtain
financing for the Company’s operations or other business plans.




The
Company was not profitable in fiscal years 2010, 2009 and 2008, and there can be
no assurance that the Company will generate net income in future
periods.




The
Company experienced net losses for fiscal years 2010, 2009 and 2008, and there
can be no assurance that the Company will be cash flow positive or generate net
income in fiscal year 2011 or future years.




Rapid
changes in technology and consumer preferences may adversely affect the
Company’s operating results.




The
market for the Company’s products and services is characterized by rapid
technological change.  The Company may not accurately predict customer
or business partner behavior and may not recognize or respond to emerging
trends, changing preferences or competitive factors.  The Company’s
operating results may fluctuate significantly as a result of a variety of
factors, many of which are outside its control.  These factors
include:




·
            fluctuations
      in demand for, and sales of, the Company’s products and
      services;




·
            introduction
      of new products and services by the Company or its
      competitors;




·
            competitive
      pressures that result in pricing
fluctuations;




·
            variations
      in the timing of orders for and shipments of the Company
      products;




·
            changes
      in the mix of products and services that the Company sells and the
      resulting impact on its gross
margins;




·
            changes
      in the terms of the Company’s licensing, distribution and other
      agreements;




·
            costs
      associated with litigation and intellectual property claims;
      and




·
            general
      adverse economic and financial market conditions as noted above in these
      risks.




The
Company’s operating expenses are based on its current expectations of its future
revenues and are relatively fixed in the short term.  Customer
purchasing behavior can be difficult to forecast, and if the Company has lower
revenues than expected, it may not be able to quickly reduce its expenses in
response.  As a consequence, the Company’s operating results for a
particular quarter could be adversely impacted.




The
Company must develop and introduce new and enhanced products in a timely manner
to remain competitive.




To
compete successfully in the markets in which the Company operates, it must
develop and sell new or enhanced products and services that provide increasingly
higher levels of performance and reliability.  As new industry
standards, technologies and formats are introduced, there may be limited sources
for the intellectual property rights and background technologies necessary for
implementation, and the initial prices that the Company may negotiate in an
effort to bring its products and services to market may prove to be higher than
those ultimately offered to other licensees, putting the Company at a
competitive disadvantage.  Further, if new formats and technologies
prove to be unsuccessful or are not accepted for any reason, there may be
limited demand for the Company’s products or services.  The products
and services that the Company is currently developing or intends to develop may
not achieve feasibility or be accepted by the market, and if the Company is
unable to recover the costs associated with its research and development
activities, it may adversely impact the Company’s business, financial condition
and results of operations.


10




The
Company relies on distributors, resellers and retailers to sell its products,
and disruptions to these channels would affect adversely the Company’s ability
to generate revenues from the sale of its products.




The
Company sells its retail consumer software to end-users via retail channels
through its network of distributors and resellers, and relies on two
distributors for a significant portion of sales.  Any decrease in
revenue from these distributors or the loss of one of these distributors and the
Company’s inability to find a satisfactory replacement in a timely manner could
negatively impact its operating results.




Moreover,
the Company’s failure to maintain favorable arrangements with its distributors
and resellers may adversely impact its business.  For example, the
Company’s distributors and resellers and the retailers who sell the Company’s
software to the public also sell products offered by the Company’s
competitors.  If the Company’s competitors offer its distributors,
resellers or retailers more favorable terms, those distributors, resellers or
retailers may de-emphasize, fail to recommend or decline to carry the Company
products.  If Company’s distributors, resellers or retailers attempt
to reduce their levels of inventory or if they do not maintain sufficient levels
to meet customer demand, the Company’s sales could be impacted
negatively.  Further, if the Company reduces the prices of its
products, the Company may have to compensate its distributors, resellers or
retailers for the difference between the higher price they paid to buy their
inventory and the new lower prices of the Company’s products.  In
addition, the Company is exposed to the risk of product returns from
distributors, resellers or retailers through their exercise of contractual
return rights.  If direct sales to customers through the Company’s
web-based channels increase, the Company’s distributors, resellers and retailers
may suffer decreased sales as a consequence.  These changes may cause
the Company’s distributors, resellers or retailers to cease distribution of its
products or seek more favorable terms, either of which could seriously harm the
Company’s business.




Because
many of the Company’s products are designed to comply with industry standards,
to the extent the Company cannot distinguish its products from those produced by
its competitors, its current distributors and customers may choose alternate
products or choose to purchase products from multiple vendors.  The
Company may be unable to compete effectively if it cannot produce products more
quickly or at lower cost than its competitors.




The
Company cannot provide any assurance that the industry standards for which the
Company develops new products will allow it to compete effectively with
companies possessing greater financial and technological resources than the
Company has to market, promote and exploit sales opportunities as they arise in
the future.  Products that are designed to comply with standards may
be viewed as interchangeable commodities by certain customers.  The
Company may be unable to compete effectively if it cannot produce products more
quickly or at lower cost than its competitors.  Further, any new
products developed may not be introduced in a timely manner or in advance of the
Company’s competitors’ products and may not achieve the broad market acceptance
necessary to generate significant revenues.




The
Company’s business depends on sales of consumer products and services, which
subject it to risks relating to, among other things, changing consumer demands
and increased competition.




The
Company’s business depends on sales of consumer products and services,
subjecting it to risks associated with changing consumer demands and extensive
competition.  The Company’s ability to succeed in consumer markets
depends upon its ability to enhance its existing offerings, introduce new
competitive products and services, and minimize the impact of sudden price
decreases.  The Company sells its consumer products through bundling
arrangements with OEM customers, through its web store, and through physical and
web-based retail channels.  The Company may not have the resources or
expertise to continue to develop and exploit these distribution channels
effectively.  Additionally, some of the Company’s non-OEM revenue
opportunities are fragmented and take more time and effort to establish and
maintain.  Also, some of the Company’s competitors have well
established retail distribution capabilities and existing brands with market
acceptance that provide them with a significant competitive
advantage.  If the Company is not successful in overcoming these
challenges, its business and results of operations may be adversely
impacted.


11


Because
a large portion of the Company’s revenue is from OEM customers, sales of its
products are tied to OEM product sales.




A
substantial portion of the Company’s revenue is derived from sales through OEM
customers who bundle copies of its software with their
products.  Temporary fluctuations in the pricing and availability of
the OEM customers’ products could negatively impact sales of Company products,
which could in turn harm its business, financial condition and results of
operations.  Moreover, sales of Company OEM products depend in large
part on consumer acceptance and purchase of DVD players, BD players, DVD
recorders, television sets and other digital media devices marketed by the
Company’s OEM customers in PCs, CE devices, or on a stand-alone
basis.  Consumer acceptance of these digital media devices depends
significantly on the price and ease of use of these devices, among other
factors.  If the demand for these devices is impaired, the Company’s
OEM sales will suffer a corresponding decline.




The
Company sells its products to OEMs pursuant to individual supplements or other
attachments to standard terms and conditions the Company has negotiated with
each of these customers.  These terms and conditions include
provisions relating to the delivery of Company products, the customer’s
distribution of these products, representations by the Company with respect to
the quality of the products and its ownership of the products, its obligations
to comply with law, confidentiality obligations, and indemnifications by the
Company.  The agreements are non-exclusive and do not contain any
minimum purchase obligations or similar commitments.  The underlying
agreements generally renew for one year periods, subject to annual termination
by either party or termination for breach and, in certain cases, the ability to
terminate without cause with no or short notice.  Under each
agreement, the customer has the sole discretion to decide whether to purchase
any of the Company products.  Although the Company has maintained
relationships with many of its OEMs for many years, if an OEM agreement with a
major customer were terminated and the Company was unable to replace such
relationship, its business and results of operations would suffer.




In
addition, the Company relies on reports prepared by OEM customers to determine
the results of sales of products through these OEM customers.  If the
OEM customers prepare inaccurate or substandard sales reports, the Company may
be required to take corrective actions, including auditing current and prior
reports.  Such corrective actions may result in a negative impact on
its business or reported results.




Changes
in requirements or business models of the Company’s OEM customers may affect
negatively its financial results.




OEM
customers can be demanding with respect to the features they demand in software
products they bundle, quality and testing requirements, and economic
terms.  Because there are a relatively small number of significant OEM
customers, if they demand reduced prices, the Company may not be in a position
to refuse such demands, which would adversely impact revenues and results of
operations.  If particular OEMs demand products or product features
that the Company is unable to deliver, or if they impose higher quality
requirements than the Company is able to satisfy, it could lose those
relationships, which would adversely impact its revenues and results of
operations.  Also, if the Company’s competitors offer its OEM
customers more favorable terms than the Company does or if its competitors are
able to take advantage of their existing relationships with OEMs, then these
OEMs may not include the Company’s software with their products.  The
Company’s business will suffer if it is unable to maintain or expand its
relationships with OEMs.




The
Company depends on a limited number of customers for a significant portion of
its revenue, and the loss of one or more of these customers could materially
harm its operating results, business and financial condition.




During
the fiscal year ended March 31, 2010, approximately 13% and 11% of the Company’s
net revenue were received from various OEM divisions of Dell and
Hewlett-Packard, respectively, and approximately 7% and 22% of the Company’s net
revenue for fiscal year 2010 were received from the Company’s two largest
distributors, Ingram and Navarre, respectively.  In addition, during
fiscal year 2010, approximately 23% of the Company’s net revenue consisted of
online web store revenue received through Digital River.  The Company
anticipates that the relationships with Dell, Hewlett-Packard, Navarre, Digital
River and, to a lesser extent, Ingram, will continue to account for a
significant portion of its revenue in the future.  Any adverse changes
in the Company’s relationships with any of these companies could seriously harm
its operating results, business, and financial condition if the Company was
unable to replace that relationship.




The
Company’s web-based revenue is vulnerable to third party operational problems
and other risks.




The
Company makes its products and services available through web-based retail sites
operated by third party resellers.  Under these arrangements, the
Company’s reseller partners typically utilize co-branded sites, provide the
infrastructure to handle purchase transactions through their secure web sites,
and deliver the product (whether via web download or physical
fulfillment).  The Company’s web store operations are subject to
numerous risks, including unanticipated operating problems, reliance on third
party computer hardware and software providers, system failures and the need to
invest in additional computer systems, diversion of sales from other channels,
rapid technological change, liability for online content, credit card fraud, and
issues relating to the use and protection of customer
information.  The Company relies on the third party resellers who
operate these web stores for their smooth operation.  Any interruption
of these web stores could have a negative effect on the Company’s
business.  If the Company’s web store resellers were to withdraw from
this business or change their terms of service in ways that were unfavorable to
the Company, there might not be a ready alternative outsourcing organization
available to the Company, and it might be unprepared to assume operation of the
web stores.  If any of these events occurs, the Company’s results of
operations would be harmed.


12




Changes
in the Company’s product and service offerings could cause it to defer the
recognition of revenue, which could harm its operating results and adversely
impact its ability to forecast revenue.




The
Company’s products contain advanced features and functionality that may require
it to provide increased levels of end user support, and its services require the
Company to continue to provide various benefits during the applicable service
terms.  To the extent that the Company offers a greater degree of
customer support and ongoing services, it may be required to defer a greater
percentage of revenues into future periods, which could harm short term
operating results.




The
Company’s reliance on a limited number of suppliers for its manufacturing makes
it vulnerable to supplier operational problems.




The
Company outsources the manufacturing of its consumer software products to two
primary suppliers, who provide services such as parts procurement, parts
warehousing, product assembly and supply chain services.  Any
disruption in the operations of these suppliers, or any product shortages or
quality assurance problems could increase the costs of manufacturing and
distributing the Company’s products and could adversely impact its operating
results.  Moreover, although the Company believes there is significant
competition in the manufacture of consumer software products, if these suppliers
cease to perform or fail to perform as the Company expects, the Company could
face potentially significant delays in engaging substitute suppliers and
negotiating terms and conditions acceptable to the Company.




The
Company’s product prices may continue to decline, which could harm its operating
results.




The
market for the Company’s software is intensely competitive.  It is
likely that prices for the Company’s OEM products, particularly in the DVD area,
will continue to decline due to competitive pricing pressures from other
software providers, competition in the PC and CE industries and continuing
concentration among OEM customers.  In addition, the Company derives a
substantial portion of its revenue from retail sales, which also are subject to
significant competitive pricing pressures.  The Company may also
experience pricing pressures in other parts of its business.  These
trends could make it more difficult for the Company to increase or maintain its
revenue and could adversely affect its operating results.




Revenues
derived from the Company’s consumer DVD products have declined in recent years
and will likely continue to decline.




The
Company has experienced declines in consumer products revenue relating to the
DVD format, and absent the introduction and market acceptance of new formats
such as BD or new business and service models, including online services, such
declines could continue, adversely impacting the Company’s results of
operations.




Qualifying
and supporting the Company’s products on multiple computer platforms is time
consuming and expensive.




The
Company devotes significant time and resources to qualify and support its
software products on various PC and CE platforms, including Microsoft and Apple
operating systems.  To the extent that any qualified and supported
platform is modified or upgraded, or the Company needs to qualify and support a
new platform, it could be required to expend additional engineering time and
resources, which could add significantly to its development expenses and
adversely affect its operating results.




Failure
to complete the DivX Acquisition could have a negative impact on the
Company.




On June
1, 2010 the Company entered into the Merger Agreement with DivX pursuant to
which DivX will become a wholly owned subsidiary of the Company.  The
DivX Acquisition is expected to close by September 30, 2010.  Closing
of the DivX Acquisition is subject to a number of customary closing conditions,
and the closing may not occur if any of these conditions is not satisfied or
waived.  Other risks associated with the DivX Acquisition
include:




·
            the
      parties may not obtain the requisite shareholder or regulatory approvals
      for the DivX Acquisition;




·
            the
      operational and financial benefits and synergies that the Company expects
      from the DivX Acquisition may not be
realized;




·
            the
      parties may not be able to retain key personnel;
  and




13




·
            the
      impact of general economic conditions on the businesses and results of
      operations of the two companies, as which conditions are further described
      in these “Risk Factors.”




While as
of March 31, 2010, the Company has not incurred substantial expenses in
connection with the DivX Acquisition, since that date, the Company has incurred
substantial expenses and expects to incur additional significant expenses prior
to any closing.





The DivX
Merger Agreement does not contain any post-closing indemnification
provisions.  Therefore, any claims for known or unknown DivX
liabilities, whether related to intellectual property ownership, infringement or
otherwise, would be the responsibility of the consolidated Company post-DivX
Acquisition.  Any such claim, with or without merit, could be time
consuming to defend, result in costly litigation and divert management’s
attention.





Furthermore,
if the acquisition is not completed, the Company may be subject to a number of
adverse consequences.  For example, the market price of the Company’s
common stock may decline to the extent that the current market price reflects a
market assumption that the DivX Acquisition will be completed and will be
successful.




Integrating
DivX into the Company’s existing operations will dilute the Company’s existing
shareholders’ ownership percentages, involve considerable risks and may not be
successful.




The
integration of DivX into the Company’s existing operations business may be a
complex, time-consuming and expensive process and may disrupt the Company’s
existing operations if it is not completed in a timely and efficient
manner.  If the Company’s management is unable to minimize the
potential disruption to its business during the integration process, the Company
may not realize the anticipated benefits of the DivX
acquisition.  Realizing the benefits of the acquisition will depend in
part on the integration of technology, operations, and personnel while
maintaining adequate focus on the Company’s core businesses.  The
Company may encounter substantial difficulties, costs and delays in integrating
DivX, including the following, any of which could seriously harm its results of
operations, business, financial condition and/or the price of its
stock:




·
            issuance
      of equity securities that will dilute the Company’s current shareholders’
      percentages of ownership;




·
            conflicts
      between business cultures;




·
            difficulties
      and delays in the integration of operations, personnel, technologies,
      products, services, business relationships and information and other
      systems of the acquired businesses;




·
            the
      diversion of management’s attention from normal daily operations of the
      business;




·
            large
      one-time write-offs;




·
            the
      incurrence of debt and contingent
liabilities;




·
            contractual
      and/or intellectual property
disputes;




·
            problems,
      defects or other issues relating to acquired products or technologies that
      become known to the Company only after the closing of DivX
      Acquisition;




·
            conflicts
      in distribution, marketing or other important relationships, or poor
      acceptance by resellers of the acquired
  products;




·
            difficulties
      caused by entering geographic and business markets in which the Company
      has no or only limited experience;




·
            acquired
      products and services that may not attract
  customers;




·
            loss
      of key employees and disruptions among employees that may erode employee
      morale;




·
            inability
      to implement uniform standards, controls, policies and
      procedures;




·
            failure
      to achieve anticipated levels of revenue, profitability or productivity;
      and




·
            poor
      acceptance of the Company’s revised business model and
      strategies.




14




The
Company’s operating expenses may increase significantly over the near term due
to the increased headcount, expanded operations and changes related to the DivX
Acquisition.  To the extent that the expenses increase but revenues do
not, there are unanticipated expenses related to the integration process, or
there are significant costs associated with presently unknown liabilities, the
combined Company’s business, operating results and financial condition may be
adversely affected.  Failure to minimize the numerous risks associated
with the post-acquisition integration strategy also may adversely affect the
trading price of the Company’s common stock.





The
Company’s failure to manage its global operations effectively may adversely
affect its business and operating results.




As of
March 31, 2010, the Company had seven major locations (defined as a location
with more than 15 employees) and employed 268 employees outside the United
States.  The Company faces challenges inherent in efficiently managing
employees over large geographic distances, including the need to implement
appropriate systems, controls, policies, benefits and compliance
programs.  The Company’s inability to successfully manage its global
organization could have a material adverse effect on its business and results of
operations.




The
Company is subject to risks associated with its international
operations.




Revenue
derived from international customers accounted for approximately 22%, 28% and
18% of the Company’s net revenues in fiscal years 2010, 2009 and 2008,
respectively.  The Company expects that international sales will
continue to account for a significant portion of its net revenues for the
foreseeable future.  As a result, the occurrence of adverse
international political, economic or geographic events could result in
significant revenue shortfalls, which could harm the Company’s business,
financial condition and results of operations.  Areas of risk
associated with the Company’s international operations include:




·
            import
      and export restrictions and duties, including tariffs, quotas, and other
      barriers;




·
            difficulties
      in obtaining export licenses for certain
  technology;




·
            foreign
      regulatory requirements, such as safety or radio frequency emissions
      regulations;




·
            liquidity
      problems in various foreign
markets;




·
            uncertainties
      and liabilities associated with foreign tax
  laws;




·
            burdens
      of complying with foreign laws, including consumer and data protection
      laws;




·
            changes
      in, or impositions of, foreign legislative or regulatory
      requirements;




·
            difficulties
      in coordinating the activities of geographically dispersed and culturally
      diverse operations;




·
            difficulties
      in staffing, managing, and operating its international
      operations;




·
            potential
      loss of proprietary information due to misappropriation or laws that are
      less protective of the Company’s intellectual property rights than U.S.
      law;




·
            political
      and economic instability in the countries in which the Company operates or
      sells products;




·
            changes
      in diplomatic and trade relationships;
and




·
            other
      factors beyond its control including terrorism, war, natural disasters and
      diseases, particularly in areas in which it has
  facilities.




Certain
political, economic and social considerations relating to China could adversely
affect the Company.




In
addition to other risks associated with the Company’s global business, it faces
risks due to the substantial operations it conducts in China, which could be
adversely affected by political, economic and social uncertainties in China. As
of March 31, 2010, the Company had 206 employees in China, primarily carrying
out research and development activities.  China has implemented
economic reforms as a way to introduce a stronger market economy, but it is
possible that these economic reforms of recent years could be slowed or
reversed.  In addition, many of the laws and regulations impacting the
Company in China are relatively new, the Chinese legal system is still evolving,
the interpretation of laws and regulations is not always uniform and enforcement
of these laws and regulations involve uncertainties, all of which may limit the
remedies available in the event of any claims or disputes with third
parties.


15




The
Company faces increasing competition for online sales from smaller software
providers.




The
Internet enables smaller software providers to distribute products with minimal
upfront costs or resources.  In the past, a substantial barrier to
entry into the packaged software market for small-scale providers was the need
to manufacture, package and distribute software through a retail or commercial
distribution chain.  To the extent consumers increasingly purchase
software over the Internet, the Company expects to face increased competition
from small software development companies and programmers
worldwide.  New entrants that have business models focused on Internet
distribution may have more favorable cost structures than the companies that
employ a multi-channel distribution network, which could give those competitors
cost savings, pricing and profitability advantages.




The
Company has had limited experience with online premium content services, and
cannot assure you when or if its RoxioNow Service will have a positive impact on
the Company’s profitability.




During
fiscal year 2009, the Company acquired substantially all of the assets of
CinemaNow, Inc., an online movie download and streaming business, which the
Company now operates as part of its RoxioNow Service.  There is no
assurance that consumers will widely adopt the Company’s RoxioNow Service
offerings or that they will become profitable.  The Company has
invested, and will continue to invest, significant time and money in building
and organizing the premium content business, and its success could be
jeopardized by difficulties in implementing and maintaining premium content
information technology systems and infrastructure and/or by increased operating
expenses and capital expenditures required to in connection with online premium
content offerings.  Because the Company has limited experience with
online premium content offerings, it cannot assure you that it will be
successful or profitable.




The
Company depends on studios to license its content for its RoxioNow
Service.




The
Company’s ability to provide its RoxioNow Service depends on studios licensing
content for online delivery.  The studios have great discretion
whether to license their content, and the license periods and the terms and
conditions of such licenses vary by studio.  If studios change their
terms and conditions, are no longer willing or able to provide the Company
licenses, or if the Company is otherwise unable to obtain premium content on
terms that are acceptable, the ability to provide the RoxioNow Service will be
adversely affected, which could harm its business and operating
results.




The
Company relies on a number of third parties to deliver its RoxioNow
Service.




The
Company’s RoxioNow Service is embedded in various PC and CE platforms and
devices, which are then distributed through multiple retail
channels.  If the Company is not successful in establishing and
maintaining appropriate OEM and distribution relationships, or if it encounters
technological, content licensing or other impediments, the Company’s ability to
grow its RoxioNow Service could be adversely impacted, which could harm its
business and operating results.




If
the Company’s customers select titles or formats that are more expensive for the
Company to acquire and deliver more frequently, the Company’s expenses may
increase.




Certain
titles cost the Company more to acquire or result in greater revenue-sharing
expenses.  If customers select these titles more often on a
proportional basis compared to all titles selected, the Company’s costs and
margins could be adversely affected.  In addition, films released in
high-definition formats may be more expensive for the Company to acquire and
deliver, and if customers select these formats more frequently on a proportional
basis, the Company’s costs and margins could be adversely affected.




The
Company could be liable for substantial damages if there is unauthorized
duplication of the content it sells.




The
Company believes that it is able to license premium content through its RoxioNow
Service in part because the service has been designed to reduce the risk of
unauthorized duplication and playback of this content.  If these
security measures fail, studios and other content providers may terminate their
agreements with the Company and, in addition, the Company could be liable for
substantial damages.  Security breaches might also discourage other
content providers from entering into agreements with the Company.  The
Company may be required to expend substantial money and other resources to
protect against the threat of security breaches or to alleviate problems caused
by security breaches.




The
Company’s executive
officers and other key personnel are critical to its business, and because there
is significant competition for personnel in the Company’s industry, it may not
be able to attract and retain qualified personnel.




The
Company’s success depends on the continued contributions of its executive
management team and its technical, marketing, sales, customer support and
product development personnel.  The loss of key individuals or
significant numbers of such personnel could significantly harm the Company’s
business, financial condition and results of operations.  The Company
does not have any life insurance or other insurance covering the loss of any of
its key employees.


16




Some
of the Company’s competitors possess greater technological and financial
resources, may produce better or more cost-effective products or services and
may be more effective than the Company, in marketing and promoting their
products and services.




There is
a substantial risk that competing companies will produce better or more
cost-effective products or services or will be better equipped than the Company
is to promote products or services in the marketplace.  A number of
companies offer products and services that compete with the Company’s products,
either directly or indirectly.  Many of these companies have greater
financial and technological resources than the Company does.




Errors
in Company products and services may result in loss of or delay in market
acceptance, which could adversely impact the Company’s reputation and
business.




The
Company’s products and services may contain undetected errors, especially when
first introduced or as new versions are released, and the Company may need to
make significant modifications to correct these errors.  Failure to
achieve acceptance could result in a delay in, or inability to, receive payment,
a rejection of products and services, damage to the Company’s reputation, as
well as lost revenues, diverted development resources, increased service and
warranty costs and related litigation expenses and potential liability to third
parties, any of which could harm the Company’s business.




The
Company is vulnerable to earthquakes, labor issues and other unexpected
events.




The
Company’s corporate headquarters, as well as the majority of its research and
development activities, are located in California and China, both of which are
areas known for seismic activity.  An earthquake or other disaster
could result in an interruption in the Company business.  The
Company’s business also may be impacted by labor issues related to its
operations and/or those of its suppliers, distributors or
customers.  Such an interruption could harm its operating
results.  The Company is not likely to have sufficient insurance to
compensate adequately for lost revenues and losses that it may sustain as a
result of any natural disasters or other unexpected events.




If
the Company fails to protect its intellectual property rights it may not be able
to market its products and services successfully.




Unlicensed
copying and use of the Company’s intellectual property or illegal infringements
of its intellectual property rights represent losses of revenue to the
Company.  The Company’s products and services are based in large part
on proprietary technology, which it has sought to protect with patents,
trademarks, copyrights and trade secrets.  Effective intellectual
property protection may not be available in every country in which the Company’s
products and services may be manufactured, marketed, distributed, sold or
used.  Moreover, despite the Company’s efforts, these measures only
provide limited protection.  Third parties may try to copy or reverse
engineer portions of the Company’s products or services or otherwise obtain and
use its intellectual property without authorization.  The Company
cannot assure you that the protection of its proprietary rights will be adequate
or that its competitors will not develop independently similar technology,
duplicate the Company’s products or services or design around any of its patents
or other intellectual property rights.




The
Company may become involved in costly and time-consuming patent
litigation.




Third
parties could claim that the Company’s products or services infringe their
patents, trademarks or other intellectual property rights.  As new
standards and technologies evolve, the Company believes that it may face an
increasing number of third party claims relating to alleged patent
infringements.  Intellectual property litigation is time consuming and
costly, diverts management resources and could result in the invalidation or
impairment of the Company’s intellectual property rights.  If
litigation results in an unfavorable outcome, the Company could be subject to
substantial damage claims and/or be required to cease production of infringing
products, terminate its use of the infringing technology, develop non-infringing
technology and/or obtain a license agreement to continue using the technology at
issue.  Such license agreements might not be available to the Company
on acceptable terms, resulting in serious harm to its business.




The
Company may be liable to some of its customers for damages that they incur in
connection with intellectual property claims.




Although
the Company attempts to limit its exposure to liability arising from
infringement of third-party intellectual property rights in the Company’s
license agreements with customers, it does not always succeed in obtaining the
limitations it seeks.  If the Company is required to pay damages to or
incur liability on behalf of its customers, its business could be
harmed.  Moreover, even if a particular claim falls outside of the
Company indemnity or warranty obligations, its customers may be entitled to
additional contractual remedies against the Company, which could harm its
business.  Furthermore, even if the Company is not liable to its
customers, its customers may stop buying its products or attempt to pass on to
the Company the cost of any license fees or damages owed to third parties by
reducing the amounts they pay for the Company’s products.  Any of
these results could harm the Company’s business.


17


The
Company may incur losses associated with currency fluctuations and may not
effectively reduce its exposure.




The
Company’s operating results are subject to volatility resulting from
fluctuations in foreign currency exchange rates, including:




·
            currency
      movements in which the U.S. dollar becomes stronger with respect to
      foreign currencies, thereby reducing relative demand for its products and
      services outside the United States;
and




·
            currency
      movements in which a foreign currency in which the Company has incurred
      expenses becomes stronger in relation to the U.S. dollar, thereby raising
      the Company’s expenses for the same level of operating
      activity.




The
Company’s stock price has been volatile, is likely to continue to be volatile,
and could decline substantially.




The price
of the Company’s common stock is likely to continue to be highly
volatile.  The price of its common stock could fluctuate significantly
for any of the following reasons, among others:




·
            fluctuations
      in the U.S. or world economy or general market conditions, as well as
      those specific to specific to the PC, CE and related
      industries;




·
            future
      announcements concerning the Company or its
  competitors;




·
            earnings
      announcements, quarterly variations in operating results, including
      variations due to one-time payments and other non-recurring revenues or
      costs that may result from certain customer relationships, as well as
      variations due to the timing of revenue recognition, including deferrals
      of revenue;




·
            charges,
      amortization and other financial effects relating to any future
      acquisitions or divestitures;




·
            introduction
      of new products or services or changes in product or service pricing
      policies by the Company or its competitors, or the entry of new
      competitors into the markets for digital media software or the digital
      distribution of premium content;




·
            acquisition
      or loss of significant customers, distributors or
    suppliers;




·
            changes
      in earnings estimates by the Company or by independent analysts who cover
      it;




·
            delay
      in delivery to market or acceptance of new products and
      services;




·
            disclosure
      of material weaknesses in the Company’s internal control over financial
      reporting or its disclosure controls and procedures or of other corporate
      governance issues; and/or




·
            costs
      of litigation and intellectual property
claims.




In
addition, stock markets in general, and those for technology stocks in
particular, have experienced extreme price and volume fluctuations in recent
years, which frequently have been unrelated to the operating performance of the
affected companies.  These broad market fluctuations may impact
adversely the market price of the Company’s common stock.




Item
1B.  Unresolved Staff Comments




None.


18




Item
2.  Properties




The
Company’s corporate headquarters is located in Novato, California, where it
occupies approximately 12,465 square feet under a lease expiring in February 28,
2013.  During fiscal 2010, the Company decreased its leased corporate
headquarters property by 59% or 18,104 square feet from 30,569 leased in fiscal
2009.  The Company and its foreign subsidiaries lease additional space
in various locations in the United States and abroad for local sales and product
development.  The Company believes that the existing facilities are in
good condition and adequate to meet its requirements for the foreseeable
future.  For additional information related to leases, see Part II,
Item 8, Note 3, “Commitments and Contingencies,” to the Consolidated Financial
Statements included in this Annual Report.




Item
3.  Legal Proceedings




Litigation
Matters




On
October 4, 2007, a putative shareholder class action was filed in the United
States District Court for the Northern District of California against the
Company and various of its executive officers and directors, premised on
allegations concerning the granting of stock options by the Company and the
alleged filing of false and misleading financial statements.  On March
21, 2008, plaintiffs filed a consolidated amended complaint on behalf of a
proposed class of plaintiffs comprised of persons that purchased the Company’s
shares between October 23, 2002 and May 17, 2007.  On May 27, 2008,
plaintiffs filed a “corrected” consolidated amended complaint which alleges
various violations of the Securities Exchange Act of 1934 and the rules
thereunder.  In July 2009, the parties reached an agreement in
principle to settle this action, and on October 15, 2009, the parties executed a
stipulation of settlement providing for the creation of a settlement fund of $5
million to satisfy claims submitted by class members and to pay any attorneys
fees awarded by the Court.  As part of the settlement, the Company’s
Directors and Officers (“D&O”) liability insurers agreed to fund the
settlement amount.  On April 8, 2010, this settlement was formally
approved and a final judgment and order of dismissal with prejudice was
entered.  The Company’s D&O liability insurance has covered the
legal fees and costs associated with the above legal action, including payment
of legal fees of $0.7 million during fiscal 2010.




Indemnification
Obligations




In the
normal course of business, the Company provides indemnifications of varying
scopes, including limited product warranties and indemnification of customers
against claims of intellectual property infringement made by third parties
arising from the use of its products or services.  The Company accrues
for known indemnification issues if a loss is probable and can be reasonably
estimated.  Historically, costs related to these indemnifications have
not been significant, but because potential future costs are highly variable,
the Company is unable to estimate the maximum potential impact of these
indemnifications on its future results of operations.  As permitted
under California law and in accordance with its Bylaws and certain other
commitments and agreements, the Company indemnifies its officers, directors and
members of its senior management against certain claims and liabilities, subject
to certain limits, while they serve at its request in such
capacity.  The maximum amount of potential indemnification is unknown
and potentially unlimited; however, the Company has D&O liability insurance
that enables it to recover a portion of future indemnification claims paid,
subject to retentions, conditions and limitations of those
policies.




Item
4.  (Removed and Reserved)


19


PART
II




Item
5.  Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.




The
Company’s common stock is currently traded on The Nasdaq Global Select Market
under the SNIC ticker
symbol.  The low price and high prices of its common stock during
fiscal 2010 and fiscal 2009 are as follows:




Fiscal Year 2010
                  
                  Low Price
                  
                  
                  High Price
                  
                  Fiscal Year 2009
                  
                  LowPrice
                  
                  
                  HighPriceQuarter
      ended 6/30/2009
                  
                  $
                  1.14
                  
                  
                  $
                  3.88
                  
                  Quarter
      ended 6/30/2008
                  
                  $
                  5.61
                  
                  
                  $
                  10.33Quarter
      ended 9/30/2009
                  
                  $
                  2.57
                  
                  
                  $
                  6.60
                  
                  Quarter
      ended 9/30/2008
                  
                  $
                  3.31
                  
                  
                  $
                  6.84Quarter
      ended 12/31/2009
                  
                  $
                  4.65
                  
                  
                  $
                  12.90
                  
                  Quarter
      ended 12/31/2008
                  
                  $
                  0.61
                  
                  
                  $
                  4.67Quarter
      ended 3/31/2010
                  
                  $
                  7.50
                  
                  
                  $
                  12.23
                  
                  Quarter
      ended 3/31/2009
                  
                  $
                  0.57
                  
                  
                  $
                  2.03




As of
March 31, 2010, the last reported sale price on the Nasdaq Global Select Market
for the Company’s common shares was $9.37 per share.




Record
Holders




As of
March 31, 2010, there were approximately 107 registered holders of the Company’s
common stock.  The Company believes, however, that many beneficial
holders of its common stock have registered their shares in nominee or street
name, and that there are substantially more than 107 beneficial
owners.




Dividend
Policy




The
Company has never declared or paid any cash dividends on its common stock and
does not expect to do so in the foreseeable future.  It is presently
the policy of the board of directors to retain earnings for use in expanding and
developing the Company’s business.  Accordingly, the Company does not
anticipate paying any cash dividends on its common stock in the foreseeable
future.




Equity
Compensation Plans




Information
relating to the securities authorized for issuance under equity compensation
plans is set forth below (in thousands except per share data):




Plan Category
                            
                            Number of securities to be
                              issued upon exercise of
                              outstanding options and RSUs
                              (#)
                            
                            
                            Weighted-average
                              exercise price of
                              outstanding options
                              ($)
                            
                            
                            Number of securities
                              remaining available for
                              future issuance underequity
                              compensation plans
                              (#)Equity
      compensation plans approvedby
      shareholders
                            
                            
                            5,435
                            
                            
                            $
                            4.96
                            
                            
                            
                            1,8412004
      Equity Compensation Plan not approved by shareholders (1)(2)
                            
                            
                            219
                            
                            
                            $
                            6.84
                            
                            
                            
                            -2005
      Foreign Compensation Plan not approved by shareholders (1)(2)
                            
                            
                            139
                            
                            
                            $
                            15.93
                            
                            
                            
                            -Total
                            
                            
                            5,793
                            
                            
                            $
                            5.31
                            
                            
                            
                            1,841




(1)
            For
      information and description of the Company’s stock plans, see Part II,
      Item 8, Note 4, “Shareholders’ Equity,” to the Consolidated Financial
      Statements included in this Annual
Report.




(2)
            During
      the fourth quarter of fiscal 2010, the Company discontinued the 2004
      Equity Compensation Plan and the 2005 Foreign Compensation Plan
      (non-shareholder approved plans).  No additional grants will be
      made under these discontinued Plans and the termination of these plans
      will not affect any awards outstanding on the date of
      termination.  For additional information, see Part II, Item 8,
      Note 4, “Shareholders' Equity - Discontinued Plans,” to the Consolidated
      Financial Statements included in this Annual
  Report.




20




Stock
Performance Graph




The
following Stock Performance Graph compares the cumulative total shareholder
return on the Company’s common stock with the cumulative total return of the
Standard and Poor’s 500 Index and the Standard and Poor’s Information Technology
Index.  The total shareholder return reflects the change in share
price during the period, assuming an investment of $100 on March 31, 2005 plus
the reinvestment of dividends, if any.  No dividends were paid on the
Company’s common stock during the period shown.  The stock price
performance shown below is not necessarily indicative of future stock
performance.









Measurement
      Period
                      (Fiscal
      Year Covered)
                    
                    Sonic
                      Solutions
                    
                    
                    S&P
      500
                      Index
                    
                    
                    S&P
                      Information
                      TechnologyFYE
      03/05
                    
                    $
                    100.00
                    
                    
                    $
                    100.00
                    
                    
                    $
                    100.00FYE
      03/06
                    
                    $
                    120.33
                    
                    
                    $
                    111.73
                    
                    
                    $
                    113.53FYE
      03/07
                    
                    $
                    93.69
                    
                    
                    $
                    124.95
                    
                    
                    $
                    117.05FYE
      03/08
                    
                    $
                    64.12
                    
                    
                    $
                    118.60
                    
                    
                    $
                    116.55FYE
      03/09
                    
                    $
                    7.97
                    
                    
                    $
                    73.43
                    
                    
                    $
                    81.51FYE
      03/10
                    
                    $
                    62.26
                    
                    
                    $
                    109.97
                    
                    
                    $
                    128.79




21


Item
6.  Selected Financial Data




The
following data should be read in conjunction with the Company’s Consolidated
Financial Statements, the notes thereto, and Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” included
elsewhere in this Annual Report.  The consolidated statements of
operations data for fiscal years 2010, 2009 and 2008, and the selected
consolidated balance sheet data as of March 31, 2010 and 2009, are derived from,
and are qualified by reference to, the audited consolidated financial statements
that are included in this Annual Report.  The consolidated statements of
operations data for fiscal years 2007 and 2006 and the consolidated balance
sheet data as of March 31, 2008, 2007 and 2006 are derived from audited
consolidated financial statements that are not included in this Annual
Report.




Years
      Ended March 31,Consolidated
      Statements of Operations Data:
                          
                          2010
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006(In
      thousands, except share and share data)Net
      revenue(1)
                          
                          $
                          104,345
                          
                          
                          $
                          119,958
                          
                          
                          $
                          132,874
                          
                          
                          $
                          148,649
                          
                          
                          $
                          147,608Cost
      of revenue
                          
                          
                          31,856
                          
                          
                          
                          32,901
                          
                          
                          
                          33,151
                          
                          
                          
                          34,389
                          
                          
                          
                          34,132Impairment
      of intangibles (2)
                          
                          
                          -
                          
                          
                          
                          19,579
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Gross
      profit
                          
                          
                          72,489
                          
                          
                          
                          67,478
                          
                          
                          
                          99,723
                          
                          
                          
                          114,260
                          
                          
                          
                          113,476Operating
      expenses:Marketing
      and sales(1)(3)
                          
                          
                          29,975
                          
                          
                          
                          35,810
                          
                          
                          
                          36,186
                          
                          
                          
                          33,304
                          
                          
                          
                          35,606Research
      and development(3)
                          
                          
                          24,696
                          
                          
                          
                          39,250
                          
                          
                          
                          44,511
                          
                          
                          
                          44,513
                          
                          
                          
                          44,157General
      and administrative (3)
                          
                          
                          17,669
                          
                          
                          
                          24,160
                          
                          
                          
                          27,310
                          
                          
                          
                          20,487
                          
                          
                          
                          22,214Acquired
      in-process technology
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,400
                          
                          
                          
                          -Abandoned
      acquisition
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,016
                          
                          
                          
                          -Business
      integration
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          336Restructuring(4)
                          
                          
                          513
                          
                          
                          
                          3,947
                          
                          
                          
                          3,152
                          
                          
                          
                          -
                          
                          
                          
                          -Impairment
      of goodwill(2)
                          
                          
                          -
                          
                          
                          
                          56,174
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Total
      operating expenses
                          
                          
                          72,853
                          
                          
                          
                          159,341
                          
                          
                          
                          111,159
                          
                          
                          
                          102,720
                          
                          
                          
                          102,313Operating
      income (loss)
                          
                          
                          (364
                          )
                          
                          
                          (91,863
                          )
                          
                          
                          (11,436
                          )
                          
                          
                          11,540
                          
                          
                          
                          11,163Interest
      income
                          
                          
                          75
                          
                          
                          
                          687
                          
                          
                          
                          2,768
                          
                          
                          
                          2,845
                          
                          
                          
                          1,271Interest
      expense
                          
                          
                          (146
                          )
                          
                          
                          (767
                          )
                          
                          
                          (1,479
                          )
                          
                          
                          (2,024
                          )
                          
                          
                          (1,846
                          )Other
      income (expense), net
                          
                          
                          (319
                          )
                          
                          
                          (1,020
                          )
                          
                          
                          356
                          
                          
                          
                          (40
                          )
                          
                          
                          (431
                          )Income
      (loss) before income taxes
                          
                          
                          (754
                          )
                          
                          
                          (92,963
                          )
                          
                          
                          (9,791
                          )
                          
                          
                          12,321
                          
                          
                          
                          10,157Provision
      (benefit) for income taxes
                          
                          
                          459
                          
                          
                          
                          25,160
                          
                          
                          
                          (4,254
                          )
                          
                          
                          6,071
                          
                          
                          
                          (9,177
                          )Net
      income (loss)
                          
                          $
                          (1,213
                          )
                          
                          $
                          (118,123
                          )
                          
                          $
                          (5,537
                          )
                          
                          $
                          6,250
                          
                          
                          $
                          19,334Basis
      and diluted net loss per share:Net
      income (loss) per share - basic
                          
                          $
                          (0.04
                          )
                          
                          $
                          (4.46
                          )
                          
                          $
                          (0.21
                          )
                          
                          $
                          0.24
                          
                          
                          $
                          0.78Net
      income (loss)  per share - diluted
                          
                          $
                          (0.04
                          )
                          
                          $
                          (4.46
                          )
                          
                          $
                          (0.21
                          )
                          
                          $
                          0.23
                          
                          
                          $
                          0.74Shares
      used in per share calculation - basic
                          
                          
                          27,792
                          
                          
                          
                          26,535
                          
                          
                          
                          26,247
                          
                          
                          
                          25,982
                          
                          
                          
                          24,750Shares
      used in per share calculation - diluted
                          
                          
                          27,792
                          
                          
                          
                          26,535
                          
                          
                          
                          26,247
                          
                          
                          
                          27,431
                          
                          
                          
                          26,234Balance
      Sheet Data (at period end)Working
      capital
                          
                          $
                          39,439
                          
                          
                          $
                          1,296
                          
                          
                          $
                          36,828
                          
                          
                          $
                          35,789
                          
                          
                          $
                          41,923Total
      assets
                          
                          $
                          95,410
                          
                          
                          $
                          66,737
                          
                          
                          $
                          210,049
                          
                          
                          $
                          217,029
                          
                          
                          $
                          214,336Total liabilities
      (5)
                          
                          $
                          32,807
                          
                          
                          $
                          40,093
                          
                          
                          $
                          65,447
                          
                          
                          $
                          66,196
                          
                          
                          $
                          76,854Shareholders'
      equity
                          
                          $
                          62,603
                          
                          
                          $
                          26,644
                          
                          
                          $
                          144,602
                          
                          
                          $
                          150,833
                          
                          
                          $
                          137,482




(1)
            Warrant
      share-based expense of $0.7 million and $1.1 million for fiscal 2010 is
      included in contra-revenue and marketing and sales operating expense,
      respectively.




(2)
            See
      Note 1, “Business and Summary of Significant Accounting Policies” to the
      Consolidated Financial Statements included in this Annual Report for
      additional details regarding impairment of intangibles and
      goodwill.




(3)
            Includes
      share-based compensation expense as
follows:




Years
      Ended March 31,2010
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Marketing
      and sales
                      
                      $
                      840
                      
                      
                      $
                      842
                      
                      
                      $
                      766
                      
                      
                      $
                      1,284
                      
                      
                      $
                      3,846Research
      and development
                      
                      
                      294
                      
                      
                      
                      292
                      
                      
                      
                      530
                      
                      
                      
                      740
                      
                      
                      
                      3,460General
      and administrative
                      
                      
                      1,423
                      
                      
                      
                      1,057
                      
                      
                      
                      249
                      
                      
                      
                      742
                      
                      
                      
                      2,928Total
      share-based compensation expense
                      
                      $
                      2,557
                      
                      
                      $
                      2,191
                      
                      
                      $
                      1,545
                      
                      
                      $
                      2,766
                      
                      
                      $
                      10,234




(4)
            See
      Note 8, “Restructuring” to the Consolidated Financial Statements included
      in this Annual Report for additional details regarding the Company’s
      restructuring plans.




22




(5)
            Prior
      fiscal years 2009 and 2006 amounts include prior disclosed non-current
      portion of long term capital lease amounts of $0.2 million and $30.0
      million.




Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations




The
following discussion and analysis of the Company’s financial condition and
results of operations should be read in conjunction with its Consolidated
Financial Statements and the related notes included elsewhere in this Annual
Report.  In addition to historical consolidated financial information,
the following discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions as described under the
“Forward-Looking Statements” section that appears earlier in this Annual
Report.  The Company’s actual results could differ materially from
those anticipated by these forward-looking statements as a result of many
factors, including those discussed under Item 1A, “Risk Factors,” and
elsewhere in this Annual Report.




Overview
of Business




The
Company is a leading developer of products and services that enable the
creation, management, and enjoyment of digital media content across a wide
variety of technology platforms.  The Company’s products and services
offer innovative technologies to consumers, OEMs, businesses, high-end
professional DVD authoring experts and developers.  The Company
distributes its products and services through retailers and distributors, PC and
CE OEMs, Internet websites including www.roxio.com, and other
channels.  The Company also licenses core technology and intellectual
property to other software companies and technology manufacturers for
integration into their own products and services.  Sonic software is
intended for use with Microsoft Windows and Apple Mac operating systems, as well
as some Linux environments and proprietary platforms.




Sonic
products and services are used to accomplish a wide variety of tasks, including
creating and distributing digital audio and video content in a variety of
formats; renting, purchasing and enjoying Hollywood movies and other premium
content; producing digital media photo and video shows for sharing online and
via television, PCs and CE devices; recording and playback of digital content on
DVD, BD, other storage media and portable devices; managing digital media on PCs
and CE devices; and backing up and preserving digital information, both to local
storage devices and on the Internet.




The
Company differentiates between digital media content that is created by
consumers (sometimes referred to herein as “personal” content) and digital
content that is professionally created for mass consumption (sometimes referred
to herein as “premium” content).  Accordingly, the Company organizes
its business into two reportable operating segments targeted at these different
forms of content:  the “Roxio Consumer Products” segment, which offers
products and services related to personal content, and the “Premium Content”
segment, which offers products and services related to premium
content.  These segments reflect the Company’s internal organizational
structure, as well as the processes by which management makes operating
decisions, allocates resources and assesses performance.




Roxio
Consumer Products Segment




The Roxio
Consumer Products segment creates software and services that enable consumers to
easily create, manage, and share personal digital media content on and across a
broad range of connected devices.  A wide array of leading technology
companies and developers rely on Roxio products, services and technologies to
bring innovative digital media functionality to PCs and next-generation CE
devices and platforms.  The Roxio Consumer Products segment offers
products and services under a variety of names, including BackonTrack, Backup
MyPC, CinePlayer, Crunch, Easy LP to MP3, Easy VHS to DVD, Just!Burn, MyDVD,
MyTV To Go, PhotoShow, PhotoSuite, Popcorn, RecordNow, Roxio Burn, Roxio Copy
& Convert, Roxio Creator, Toast, VideoWave, WinOnCD, and
others.  These products are sold in a number of different versions and
languages.  The Company distributes these products through various
channels, including “bundling” arrangements with OEMs, volume licensing
programs, its web store, and third party web-based and “bricks and mortar”
retail stores.  The Company also markets the core technology that
powers Roxio products to other companies who wish to build their own PC software
products.




Premium
Content Segment




The
Premium Content segment offers a range of products and services related to the
creation, distribution and enjoyment of premium content.  As part of
this segment, the Company also sells, rents and distributes premium
entertainment content to consumers over the Internet under RoxioNow branding (in
this Annual Report, this service may be referred to as the “RoxioNow
Service”).  Also within this segment, the Professional Products Group
offers software under the Scenarist, CineVision, and DVDit product names as well
as under the Sonic and Roxio Professional brands to major motion picture
studios, high-end authoring houses and other professional
customers.  The Company also develops software components that it
licenses to CE companies to enable their devices to offer premium content to
consumers, and licenses intellectual property, including patents.




23




Recent
Trends & Events




Due to
the proliferation of computer technology, broadband Internet connectivity and
personal electronic devices of all kinds, digital media content is now
everywhere.  The Company’s products and services enable people to
create, manage, enjoy and distribute premium and personal digital content,
allowing them to organize and share their digital lives and memories in new and
innovative ways.  The Company’s strategy is to utilize its technology,
expertise and competitive positioning to deliver exciting products and services
to enhance the value of digital media in people’s lives.  The Company
faces evolving trends in the technology industry that can provide opportunities
as well as potential risks, including:




·
            Optical Disc Playback
      Evolution – Optical disc technologies have enjoyed tremendous
      growth and extremely widespread consumer adoption, but they tend to
      evolve, mature and change rapidly.  For example, multiple DVD
      playback units (including set-top players, game consoles and PCs) are
      present in most households, but DVD sales are now falling as consumers
      have begun to embrace online alternatives, as well as new formats such as
      BD.  Sales of BD units and players have been growing at a rate
      comparable to that of standard definition DVD during the equivalent time
      periods in its life cycle, implying that BD is positioned to grow
      dramatically over the next several years, but the growth of the BD format
      has not yet fully compensated for the recent drop in DVD
      sales.  Other technological trends and events can also impact
      the demand for the Company’s digital media products and
      services.  For example, as new operating systems are introduced
      (for example, Windows 7 in October 2009), consumers are offered new tools
      for editing, formatting and burning digital media, and there are
      opportunities for software vendors such as the Company to provide products
      that are complementary to the new operating
  systems.




·
            Growth of Digital Distribution
      of Premium Content – Content owners, such as Hollywood studios, are
      increasingly offering sell-through and rental of premium content through
      digital distribution.  Simultaneously, a growing number of
      consumers are enjoying and taking advantage of the benefits of digital
      distribution of premium content.  As more Internet-enabled
      electronic devices offer delivery of premium content, the rate of adoption
      and number of title offerings should continue to
  increase.




·
            Digital Phone, Portable and
      Gaming Devices – Consumer usage of mobile phones, gaming consoles
      and portable CE devices, particularly those with high-end digital media
      capabilities, continues to increase worldwide.  The growing
      popularity of portable devices leads to greater demand for software
      products and services, such as those offered by the Company, that provide
      digital media management and
functionality.




·
            Growth of Online Social
      Networks – Online social networks, such as Facebook and MySpace,
      increasingly feature personal digital photo, video and audio content, and
      these networks function as distribution platforms for sharing and enjoying
      digital media content.  The rising popularity of these networks
      and their platforms creates an increased demand for products and services
      that can capture, create, edit and manage digital
  media.




During
fiscal 2009, the Company acquired the assets of Simple Star, Inc., a software
and online service provider, and the assets of CinemaNow, Inc., an online
entertainment provider.  The Company has utilized the Simple Star
assets to further its initiative to embrace web services as an important part of
its consumer business, while the addition of the CinemaNow assets has assisted
the Company in expanding its premium content product and service offerings and
implementing the RoxioNow Service.




During
fiscal 2009, the Company initiated restructuring plans to reorganize operations,
optimize its engineering and development efforts, reduce workforce, consolidate
divisions into a single reporting segment, unifying its OEM licensing efforts,
and eliminate organizational redundancies. For more information see Note 8,
“Restructuring,” to the Consolidated Financial Statements included in this
Annual Report.




Strategic
Objectives




Enable Consumers to Buy and Play
Premium Content Anywhere and at Anytime.  The Company believes
that digital distribution of premium content will grow dramatically over the
next few years, and that ultimately industry revenue from the digital
distribution of premium content may surpass revenue from the sale and rental of
premium content on optical media such as DVD and BD.  The Company has
put substantial effort into its RoxioNow Service initiatives, as it believes
that this area may offer a strong opportunity for counterbalancing the recent
decline in DVD sales and the adverse impact of that trend on the Company’s
operating results.  As the digital content ecosystem continues to
expand and evolve, the Company aims to make its products and services available
through an increasing range of platforms, devices and partners, with the goal
that the Company’s technology will represent a symbol of compatibility and a
common point of interaction for consumers who want to enjoy Hollywood movies and
other premium digital content anywhere and anytime.




24




Develop and strengthen Roxio-branded
products and services.  The Company seeks to build on the brand
strength of its Roxio products and services by strengthening its relationships
with OEMs and retail partners, while deepening its relationship with consumers
by adding new products and services.  The Company continues to utilize
its knowledge and expertise to develop and introduce products and services
relating to new formats such as BD, and believes that these efforts will assist
it in offsetting price pressure and declining sales associated with the DVD
format.  Additionally, the Company plans to continue to enhance its
Web-based offerings, add innovative solutions to its consumer product portfolio
and extend the reach of the Roxio brand to a new audience of online
users.




Outlook




While the
continuing global economic downturn and the maturation of the DVD format have
adversely impacted the Company’s business and financial results during recent
periods, the Company believes that the digital distribution of premium content
is poised to enjoy commercial success, and that its RoxioNow Service initiatives
provide it with a strategic opportunity to grow its business rapidly in this
area.  The Company further believes that it is well positioned to
capitalize on its strong brand name, consumer market position, and OEM
relationships as digital media formats such as BD continue to
evolve.  The Company made significant strategic and financial progress
during fiscal 2010 to bring costs in line with revenues while positioning the
Company for revenue growth and margin improvement.




Critical
Accounting Policies and Estimates




The
Company prepares its Consolidated Financial Statements in conformity with U.S.
generally accepted accounting principles (“GAAP”).  In preparing its
Consolidated Financial Statements, the Company makes estimates, judgments, and
assumptions that can significantly affect the amounts reported in its
consolidated financial statements.  The Company bases its estimates on
historical experience and various other assumptions that it believes to be
reasonable under the circumstances. Actual results could differ from these
estimates.  The Company regularly evaluates its estimates, judgments,
and assumptions and makes changes accordingly.  The Company believes
the following accounting policies and estimates are the most critical and
significant to understanding and evaluating its financial condition and results
of operations.




In June
2009, the Financial Accounting Standards Board (“FASB”) approved the FASB
Accounting Standards Codification (“ASC”) as the single source of authoritative
nongovernmental GAAP.  ASC does not change current GAAP, but
simplifies user access to all authoritative GAAP by providing all the
authoritative literature related to a particular topic in one
place.  All existing accounting standards documents was superseded and
all other accounting literature not included in the ASC is considered
non-authoritative.  The Company adopted the ASC in June 2009 and
discloses the ASC prescribed topic numbering references on a primary
basis.




Use
of estimates




On an
ongoing basis, the Company evaluates estimates used.  The following
accounting policies require management to make estimates, judgments and
assumptions and are critical in fully understanding and evaluating the Company’s
reported financial results:




·
            Revenue
      recognition




·
            Allowances
      for sales returns and doubtful
accounts




·
            Share-based
      compensation




·
            Valuation
      of acquired businesses, assets and
liabilities




·
            Goodwill,
      intangible assets and other long-lived
assets




·
            Share-based
      compensation




·
            Accrued
      liabilities




·
            Contingencies




·
            Income
      tax and deferred tax asset
valuation




25




Revenue
Recognition




The
Company derives its revenue primarily from licenses of its software products,
software development agreements and maintenance and support.  The
Company also sells and licenses patents and patented technology.  The
Company recognizes revenue when the following criteria have been
met:




·
            Persuasive
      evidence of an arrangement exists;




·
            Delivery
      has occurred or services have been
rendered;




·
            The
      arrangement fees are fixed or determinable;
and




·
            Collection
      is considered probable.




If the
Company determines that any of the above criteria has not been met, the Company
will defer recognition of the revenue until all the criteria have been
met.




The
Company generally considers arrangements with payment terms longer than six
months from the time of delivery not to be fixed or determinable, and recognizes
the related revenue as payments become due from the customer, provided all other
revenue recognition criteria have been met.  If the Company determines
that collection of a fee is not probable, it will defer the fees and recognize
revenue upon cash receipt, provided all other revenue recognition criteria have
been met.




Generally,
the Company records revenue at gross and records costs related to a sale in cost
of revenue.  In those cases where the Company is not the primary
obligor or merchant of record and/or does not bear credit risk, or where it
earns a fixed transactional fee, the Company records revenue under the net
method.  When the Company records revenues at net, revenue is reported
at the net amount received and retained by the Company.




Multiple Element Arrangements -In arrangements that include multiple elements (e.g., software, specified
upgrades, support services, installation services, and/or training), the Company
allocates the total revenue to be earned under the arrangement to the elements
based on their relative fair value, as determined by vendor-specific objective
evidence of fair value (“VSOE”).  VSOE is generally the price charged
when that element is sold separately or, in the case of support services, annual
renewal rates.




In
arrangements where VSOE exists only for the undelivered elements, the Company
uses the “residual method” under which it defers the full fair value of the
undelivered elements and recognizes the difference between the total arrangement
fee and the amount deferred for undelivered items as revenue.  If VSOE
does not exist for all elements but the only undelivered element is maintenance
and support, the Company recognizes revenue from the arrangement ratably over
the maintenance and support period.  If VSOE does not exist for
undelivered elements that are specified products or upgrades, the Company defers
revenue until the earlier of the delivery of all elements or the point at which
it determines VSOE for these undelivered elements.




Product Sales -Except in the
case of consignment arrangements, the Company recognizes revenue from the sale
of its packaged software products when title transfers to the distributor or
retailer.  When the Company sells packaged software products to
distributors and retailers on a consignment basis, it recognizes revenue upon
sell through to an end customer.




The
Company’s distributor arrangements often provide distributors with certain
product rotation rights.  The Company estimates returns based on its
historical return experience and other factors such as channel inventory levels
and the introduction of new products.  These allowances are recorded
as a reduction of revenues and as an offset to accounts receivable to the extent
the Company has legal right of offset, otherwise they are recorded in accrued
expenses and other current liabilities.  If future returns patterns
differ from past returns patterns, for example due to reduced demand for the
Company’s product, it may be required to increase these allowances in the future
and may be required to reduce future revenues.




The
Company accounts for cash consideration (such as sales incentives) that it gives
to its customers or resellers as a reduction of revenue rather than as an
operating expense unless the Company receives a benefit that is separate from
the customer’s purchase from the Company and for which it can reasonably
estimate the fair value.




Software License Arrangements -Provided all other revenue recognition criteria have been met, the
Company recognizes revenue from software licensing arrangements upon delivery,
or, in the case of per-unit royalty arrangements, upon sell through to an end
user as evidenced by the receipt of a customer royalty report.




26




Software Development Arrangements -For arrangements that include development or other services that are
essential to the functionality of the licensed software, the Company recognizes
revenue using the percentage-of-completion method.  Under the
percentage-of-completion method, management estimates the number of hours needed
to complete a particular project, and revenues are recognized as the contract
progresses to completion.  Changes in estimates are recognized in the
period in which they are known.




In
certain instances, a development agreement may include additional undelivered
elements, such as maintenance and support, or a specified upgrade or other
deliverable, and VSOE of fair value may not exist for the undelivered elements,
or the Company may not have sufficient experience with either the type of
project or the customer involved to be able to make reliable estimates towards
completion.  If the Company cannot reliably estimate total
profitability under the agreement but is reasonably assured that no loss will be
realized on the agreement, the Company recognizes revenue using the zero gross
margin method.  Under the zero gross margin method, revenue recognized
under the contract equals costs incurred under the contract and any profit is
deferred until development is complete.  The Company recognizes the
deferred gross profit over the remaining contractual service period (for
example, the initial maintenance period).




In
addition, the Company receives prepayments of certain usage-based services and
offers certain products and services on a subscription
basis.  Subscription revenue is recognized ratably over the related
subscription period.  Prepaid revenue is deferred and recognized over
the usage period.




Content and Services–Premium content revenue
includes RoxioNow Service content sales.  When purchased on an
individual transaction basis, the Company recognizes revenue from the sale of
individual content titles in the period when the content is purchased and
delivered.  The Company generally recognizes revenue from the sale of
content subscriptions pro rata over the term of the subscription
period.




Allowance
for Sales Returns and Doubtful Accounts




The
Company’s distributors and retail arrangements provide for certain product
rotation rights and permit certain product returns.  The Company
estimates reserves for these rights of return based on historical return rates,
timing of new product releases, and channel inventory levels.




The
Company maintains an allowance for doubtful accounts to reserve for potentially
uncollectible accounts based on past collection history and specific risks
identified in its portfolio of receivables.  If the financial
condition of the Company’s distributors or other customers deteriorates,
resulting in an impairment of their ability to make payments, or if payments
from distributors or other customers are significantly delayed, additional
allowances may be required.




Goodwill,
Intangible Assets and Long-Lived Assets




Intangible
assets are classified into three categories:  (1) intangible assets
with definite lives subject to amortization; (2) intangible assets with
indefinite lives not subject to amortization; and
(3) goodwill.  For goodwill and intangible assets with definite
lives, tests for impairment must be performed if conditions exist that indicate
the carrying value may not be recoverable.  For intangible assets with
indefinite lives and goodwill, tests for impairment must be performed at least
annually or more frequently if events or circumstances indicate that assets
might be impaired.




The
Company tests for impairment at least annually, in the Company’s fourth fiscal
quarter, or more frequently if events and circumstances warrant.




The
Company evaluates goodwill and indefinite life intangible assets for impairment
by comparing the fair value of each of its reporting units to its carrying value
including the goodwill allocated to that reporting unit.  A reporting
unit is an operating segment or one level below an operating
segment.  To determine the reporting unit’s fair value, the Company
uses the income approach under which it evaluates estimated discounted future
cash flows of that unit.  The Company bases its cash flow assumptions
on historical and forecasted revenue and operating costs.




The
Company has reviewed the criteria necessary to evaluate the number of reporting
units that exist.  Based on its review, the Company has determined it
operates in two reporting segments, Roxio Consumer and Premium
Content.




A
detailed determination of the fair value of a reporting unit may be carried
forward from one year to the next if all of the following criteria have been
met:




a.
            The
      assets and liabilities that make up the reporting unit have not changed
      significantly since the most recent fair value
    determination.




27




b.
            The
      most recent fair value determination resulted in an amount that exceeded
      the carrying amount of the reporting unit by a substantial
      margin.




c.
            Based
      on an analysis of events that have occurred and circumstances that have
      changed since the most recent fair value determination, the likelihood
      that a current fair value determination would be less than the current
      carrying amount of the reporting unit is
remote.




Long-lived
assets are reviewed for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.  The Company evaluates long-lived assets, including
intangible assets with finite useful lives, for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable.  The determination of recoverability of long-lived assets
and intangible assets with finite lives is based on an estimate of the
undiscounted future cash flows resulting from the use of that asset and its
eventual disposition.




Based on
a combination of factors occurring during fiscal 2009, including the economic
environment, market conditions and decline of the Company’s stock value, the
Company determined that indicators for impairment of goodwill and intangible
assets existed.  Accordingly, during the third quarter of fiscal 2009,
the Company performed an impairment analysis and recorded impairment charges of
$19.6 million and $56.2 million for its intangible assets and goodwill,
respectively, related to its Roxio Consumer reporting segment.




Share-Based
Compensation




The
Company measures compensation cost for share-based awards at fair
value.  Share-based compensation cost is measured at the grant date
based on the fair value of the award and will be recognized over the requisite
service period, which is generally the vesting period.  The Company
uses the Black-Scholes-Merton (“Black Scholes”) option pricing model to
determine the fair value of stock option shares.  The determination of
the fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by the Company’s stock price as well as
assumptions regarding a number of complex and subjective
variables.  These variables include the Company’s expected stock price
volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected
dividends.  The fair value of RSUs is equivalent to the market price
of the Company’s common stock on the grant date.




Income
Tax and Deferred Tax Asset Valuation




The
provision for income taxes is calculated using the liability method of
accounting.  Under the liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases.  Deferred tax assets
and liabilities are measured using the tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.  In assessing net deferred tax assets,
management considers whether it is more likely than not that some or all of the
deferred tax assets will not be realized.  When the Company does not
believe realization of a deferred tax asset is likely, it records a valuation
allowance.  The valuation allowance is evaluated at the end of each
year, considering positive and negative evidence about whether the deferred tax
assets will be realized.




The
Company is subject to income taxes in the U.S. and certain foreign
jurisdictions.  Significant judgment is required in evaluating the
Company’s uncertain tax positions and determining its provision for income
taxes.  Accounting for income tax uncertainties requires a two-step
approach to recognize and measure uncertain tax positions.  The first
step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any.  The second step is to measure the tax
benefit as the largest amount that is more than fifty percent likely of being
realized upon settlement.




The
Company adjusts these reserves in light of changing facts and circumstances,
such as the closing of a tax audit or the refinement of an
estimate.  To the extent that the final tax outcome of these matters
is different than the amounts recorded, such differences will impact the
provision for income taxes in the period in which such determination is
made.  The provision for income taxes includes the impact of reserve
provisions as well as related interest and penalties.




Recent
Accounting Pronouncements




The
following represents a summary of recent authoritative pronouncements that could
impact or have impacted the Company’s accounting, reporting, and/or disclosure
of financial information.




28




In
September 2009, the Emerging Issues Task Force (“EITF”) issued its final
consensus for Accounting Standards Update (“ASU”) 2009-13 (formerly “EITF
08-1”), Revenue Arrangements
with Multiple Deliverables, which will supersede the guidance in ASC
605-25 (previous authoritative guidance:  EITF 00-21, Revenue Arrangements with Multiple
Deliverables).  ASU 2009-13 retains the criteria from ASC 605-5
for when delivered items in a multiple-deliverable arrangement should be
considered separate units of accounting, but removes the previous separation
criterion under ASC 605-25 that objective and reliable evidence of fair value of
any undelivered items must exist for the delivered items to be considered a
separate unit or separate units of accounting.  ASU 2009-13 introduces
a selling price hierarchy for multiple deliverable arrangements and allows for
management selling price estimates in cases where no vendor specific objective
evidence or third party evidence is available.  Additionally, this
guidance eliminates the residual method of allocation.  ASU 2009-13 is
effective for fiscal years beginning on or after June 15, 2010.  The
Company is currently evaluating ASU 2009-13 and the impact, if any, that it may
have on its results of operations or financial position.




In
September 2009, the EITF issued its final consensus for ASU 2009-14 (formerly
“EITF 09-3”), Applicability of
SOP 97-2 to Certain Arrangements that Include Software Elements,which
amends the prior guidance to exclude tangible products that contain software and
non-software components that function together to deliver the products’
“essential functionality” from the guidance on software revenue
recognition.  The guidance is effective for fiscal years beginning
after June 15, 2010; however, early adoption is permitted as of the beginning of
an entity’s fiscal year.  Entities are required to adopt ASU 2009-13
and ASU 2009-14 concurrently.  The Company is in the process of
determining the effect of the adoption of ASU 2009-14 and the impact, if any,
that it may have on its results of operations or financial
position.




In
January 2010, the FASB issued ASU 2010-06.  The ASU amends ASC 820,
Fair Value Measurements and
Disclosures,to
add new requirements for disclosures about transfers into and out of Levels 1
and 2 and separate disclosures about purchases, sales, issuances, and
settlements relating to Level 3 measurements.  It also clarifies
existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value.  The
amendment is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value
measurements, which are effective for fiscal years beginning after
December 15, 2010.  The Company does not expect the adoption will have
any impact on its results of operations or financial position.




RESULTS
OF OPERATIONS




The
following table sets forth certain items from the Company’s statements of
operations as a percentage of net revenue for the three fiscal years 2008
through 2010 (in percentages):




Fiscal
      Years Ended March 31,2010
                          
                          
                          2009
                          
                          
                          2008Net
      revenue
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %
                          
                          
                          100.0
                          %Cost
      of revenue
                          
                          
                          30.5
                          %
                          
                          
                          27.4
                          %
                          
                          
                          24.9
                          %Impairment
      of intangibles
                          
                          
                          -
                          
                          
                          
                          16.3
                          %
                          
                          
                          -Gross
      profit
                          
                          
                          69.5
                          %
                          
                          
                          56.3
                          %
                          
                          
                          75.1
                          %Operating
      expenses:Marketing
      and sales
                          
                          
                          28.7
                          %
                          
                          
                          29.9
                          %
                          
                          
                          27.2
                          %Research
      and development
                          
                          
                          23.7
                          %
                          
                          
                          32.7
                          %
                          
                          
                          33.5
                          %General
      and administrative
                          
                          
                          16.9
                          %
                          
                          
                          20.1
                          %
                          
                          
                          20.6
                          %Restructuring
                          
                          
                          0.5
                          %
                          
                          
                          3.3
                          %
                          
                          
                          2.4
                          %Impairment
      of goodwill
                          
                          
                          -
                          
                          
                          
                          46.8
                          %
                          
                          
                          -Total
      operating expenses
                          
                          
                          69.8
                          %
                          
                          
                          132.8
                          %
                          
                          
                          83.7
                          %Operating
      loss
                          
                          
                          (0.3
                          )%
                          
                          
                          (76.6
                          )%
                          
                          
                          (8.6
                          )%Other
      income (expense)
                          
                          
                          (0.4
                          )%
                          
                          
                          (0.9
                          )%
                          
                          
                          1.2
                          %Provision
      (benefit) for income taxes
                          
                          
                          0.4
                          %
                          
                          
                          21.0
                          %
                          
                          
                          (3.2
                          )%Net
      loss
                          
                          
                          (1.1
                          )%
                          
                          
                          (98.5
                          )%
                          
                          
                          (4.2
                          )%




Net
Revenue




During
the fourth quarter of fiscal 2009, the Company reclassified certain revenue
segment information in prior period financial tables to conform to the
reorganization of the Company’s reportable business segments.  For
additional information, see Note 6, “Significant Customer Information, Segment
Reporting and Geographic Information” to the Consolidated Financial Statements
included in this Annual Report.  The revenue reclassifications had no
effect on the Company’s consolidated balance sheets, consolidated statements of
operations, consolidated statements of shareholders’ equity and comprehensive
income (loss) and consolidated statements of cash flows for the prior periods
presented.


29




The
following table is a comparison of net revenues by segment based on the current
reportable business segments (in thousands other than percentages):




Years
      Ended March 31,
                    
                    
                    2010
      to 2009
                    
                    
                    2009
      to 2008Net
      Revenue
                    
                    2010
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    Increase
                      (Decrease)
                    
                    
                    %
      Change
                    
                    
                    Increase
                      (Decrease)
                    
                    
                    %
      ChangeRoxio
      Consumer Products
                    
                    $
                    90,077
                    
                    
                    $
                    104,074
                    
                    
                    $
                    122,691
                    
                    
                    $
                    (13,997
                    )
                    
                    
                    (13
                    )%
                    
                    $
                    (18,617
                    )
                    
                    
                    (15
                    )%Premium
      Content
                    
                    
                    14,268
                    
                    
                    
                    15,884
                    
                    
                    
                    10,183
                    
                    
                    
                    (1,616
                    )
                    
                    
                    (10
                    )%
                    
                    
                    5,701
                    
                    
                    
                    56
                    %Total
      net revenue
                    
                    $
                    104,345
                    
                    
                    $
                    119,958
                    
                    
                    $
                    132,874
                    
                    
                    $
                    (15,613
                    )
                    
                    
                    (13
                    )%
                    
                    $
                    (12,916
                    )
                    
                    
                    (10
                    )%




Fiscal
2010 compared to Fiscal 2009




Net
revenue decreased by $15.6 million or 13% to $104.3 million for fiscal 2010,
from $120.0 million for fiscal 2009.  The fiscal year 2010 decrease in
net revenue included a decrease of $14.0 million or 13% in Roxio Consumer
Products and a decrease of $1.6 million or 10% in Premium Content net
revenue.  The Roxio Consumer Products segment experienced a $6.5
million reduction in OEM bundling revenue due to changes in product mixes,
per-unit pricing pressure, and lower unit volumes, plus a $2.9 million reduction
in technology licensing revenue from PC manufacturers caused by fewer pre-paid
license renewals during fiscal year 2010.  Also contributing to the
decrease within the Roxio Consumer Product segment revenue was a $2.3 million
reduction in volume licensing revenue and a $2.3 million reduction in sales
through the Company’s web store and retail channels as a result of global
economic weakness affecting corporate spending and consumer demand.




The
decrease in Premium Content net revenue included a $3.7 million reduction in
professional products revenue resulting from a $2.7 million professional
development arrangement in Japan during fiscal year 2009 for which there was no
corresponding amount during fiscal year 2010, along with the continued global
economic weakness affecting consumer demand and corporate
spending.  Also contributing to the decrease in Premium Content
revenue was a $1.3 million reduction in technology licensing revenue from CE
manufacturers caused by fewer development contracts and license renewals during
fiscal year 2010.  The decrease in Premium Content net revenue was
partially offset by $3.1 million generated through RoxioNow services and an
increase of $0.3 million in content revenue related to the timing of the
CinemaNow asset acquisition.




Fiscal
2009 compared to Fiscal 2008




Net
revenue decreased by $12.9 million or 10% to $120.0 million for fiscal year
2009, from $132.9 million for fiscal year 2008.  The decrease in net
revenue included a decrease of $18.6 million or 15% in Roxio Consumer Product
revenues offset by an increase of $5.7 million or 56% in Premium Content
revenue.  The Roxio Consumer Products segment included a $19.6 million
reduction in OEM bundling revenue due to changes in product mixes, per-unit
pricing pressure, and lower unit volumes.  The decrease in Roxio
Consumer Products net revenue was partially offset by $1.0 million generated
through volume licensing pursuant to a governmental contract.




Premium
Content net revenue increased due to a $3.3 million increase in professional
products revenue driven by a $2.7 million development contract recorded in
fiscal year 2009, for which there was no corresponding amount during fiscal year
2008.  Also contributing to the increase in Premium Content revenue
was $1.3 million in technology licensing revenue from Qflix and CE manufacturers
under development contracts and license renewals during fiscal year
2009.  Premium Content revenue also increased due to $0.9 million in
content revenue related to the timing of the CinemaNow asset acquisition and
$0.2 million generated through RoxioNow services.




Geographical
Revenue and Customer Concentration




The
following tables set forth a comparison of net revenues geographically (in
thousands other than percentages):


30




Fiscal
      Years Ended March 31,
                                
                                
                                2010
      to 2009
                                
                                
                                2009
      to 2008Net
      revenue
                                
                                2010
                                
                                
                                2009
                                
                                
                                2008
                                
                                
                                Increase
                                  (Decrease)
                                
                                
                                %
                                
                                
                                Increase
                                  (Decrease)
                                
                                
                                %United
      States
                                
                                $
                                81,403
                                
                                
                                $
                                86,818
                                
                                
                                $
                                108,604
                                
                                
                                $
                                (5,415
                                )
                                
                                
                                (6
                                )%
                                
                                $
                                (21,786
                                )
                                
                                
                                (20
                                )%ExportCanada
                                
                                
                                877
                                
                                
                                
                                1,573
                                
                                
                                
                                1,407
                                
                                
                                
                                (696
                                )
                                
                                
                                (44
                                )%
                                
                                
                                166
                                
                                
                                
                                12
                                %France
                                
                                
                                696
                                
                                
                                
                                1,422
                                
                                
                                
                                1,076
                                
                                
                                
                                (726
                                )
                                
                                
                                (51
                                )%
                                
                                
                                346
                                
                                
                                
                                32
                                %Germany
                                
                                
                                2,721
                                
                                
                                
                                4,429
                                
                                
                                
                                2,978
                                
                                
                                
                                (1,708
                                )
                                
                                
                                (39
                                )%
                                
                                
                                1,451
                                
                                
                                
                                49
                                %United
      Kingdom
                                
                                
                                3,138
                                
                                
                                
                                3,287
                                
                                
                                
                                3,629
                                
                                
                                
                                (149
                                )
                                
                                
                                (5
                                )%
                                
                                
                                (342
                                )
                                
                                
                                (9
                                )%Europe:
      Other
                                
                                
                                2,179
                                
                                
                                
                                2,910
                                
                                
                                
                                3,874
                                
                                
                                
                                (731
                                )
                                
                                
                                (25
                                )%
                                
                                
                                (964
                                )
                                
                                
                                (25
                                )%Japan
                                
                                
                                7,721
                                
                                
                                
                                14,207
                                
                                
                                
                                5,948
                                
                                
                                
                                (6,486
                                )
                                
                                
                                (46
                                )%
                                
                                
                                8,259
                                
                                
                                
                                139
                                %Singapore
                                
                                
                                3,212
                                
                                
                                
                                3,599
                                
                                
                                
                                3,446
                                
                                
                                
                                (387
                                )
                                
                                
                                (11
                                )%
                                
                                
                                153
                                
                                
                                
                                4
                                %Taiwan
                                
                                
                                869
                                
                                
                                
                                281
                                
                                
                                
                                73
                                
                                
                                
                                588
                                
                                
                                
                                209
                                %
                                
                                
                                208
                                
                                
                                
                                285
                                %Other
      Pacific Rim
                                
                                
                                945
                                
                                
                                
                                887
                                
                                
                                
                                1,362
                                
                                
                                
                                58
                                
                                
                                
                                7
                                %
                                
                                
                                (475
                                )
                                
                                
                                (35
                                )%Other
      International
                                
                                
                                584
                                
                                
                                
                                545
                                
                                
                                
                                477
                                
                                
                                
                                39
                                
                                
                                
                                7
                                %
                                
                                
                                68
                                
                                
                                
                                14
                                %Total
      net revenue
                                
                                $
                                104,345
                                
                                
                                $
                                119,958
                                
                                
                                $
                                132,874
                                
                                
                                $
                                (15,613
                                )
                                
                                
                                (13
                                )%
                                
                                $
                                (12,916
                                )
                                
                                
                                (10
                                )%




Fiscal
2010 compared to Fiscal 2009




Domestic
sales accounted for $81.4 million, or 78%, of the Company’s net revenue in
fiscal year 2010, compared to $86.8 million or 72% of net revenue in fiscal year
2009.  The decrease in domestic revenue included a reduction in OEM
bundling revenue of $4.7 million due to changes in product mixes, per-unit
pricing pressure, and lower unit volumes, as well as a $1.6 million reduction in
Qflix and technology licensing revenue from CE and PC manufacturers caused by
fewer development contracts and license renewals during fiscal year
2010.  A $1.4 million reduction in volume licensing revenue, a $1.2
million reduction in sales through the Company’s web store, and a $0.8 reduction
in the professional channels as a result of global economic weakness affecting
corporate spending and consumer demand also contributed to the decrease in
domestic revenue.  This decrease was partially offset by $3.1 million
generated through RoxioNow services, a $0.8 million increase in the retail
channel due to the sales of the Company’s Easy VHS to DVD product, and an
increase of $0.3 million in content revenue related to the timing of the
CinemaNow asset acquisition.




International
sales accounted for $22.9 million, or 22%, of the Company’s net revenue in
fiscal year 2010, compared to $33.1 million or 28% of its net revenue in fiscal
year 2009.  The decrease in international sales partially resulted
from a $2.7 million professional development arrangement in Japan during fiscal
year 2009 for which there was no corresponding amount during fiscal year 2010, a
$2.6 million reduction in technology licensing revenue from PC manufacturers due
to one customer changing from a pre-paid to an “as-used” royalty contract, along
with the Company’s performance of fewer development contracts during fiscal year
2010.  Also contributing to the decrease in international sales was a $1.0
million reduction in web service sales from a German-based web store reseller
upon the launch of the Company’s own online services offering.




Fiscal
2009 compared to Fiscal 2008




Domestic
sales accounted for $86.8 million, or 72%, of the Company’s net revenue in
fiscal year 2009, compared to $108.6 million or 82% of its net revenue in fiscal
year 2008.  The decrease in domestic revenue included a reduction in
OEM bundling revenue of $22.4 million due to changes in product mixes, per-unit
pricing pressure, and lower unit volumes, a $2.6 million reduction in sales
through the Company’s web store and retail channels as a result of global
economic weakness affecting consumer demand, partly offset by sales of products
acquired as part of the Simple Star asset acquisition.  This decrease
was partly offset by $1.4 million generated through volume licensing, $0.9
million in content revenue related to the timing of the CinemaNow asset
acquisition, and $0.8 in Qflix and technology licensing revenue from CE and PC
manufacturers caused by more development contracts and license
renewals.




International
sales accounted for $33.1 million, or 28%, of the Company’s net revenue in
fiscal year 2009, compared to $24.3 million or 18% of its net revenue in fiscal
year 2008.  Japan revenue increased primarily due to a returns and
allowance charge of $2.0 million posted in the first quarter of fiscal 2008,
$2.7 million in fiscal year 2009 revenue from a professional development
arrangement for which there was no corresponding amount during fiscal year 2008,
along with an increase in technology licensing revenue from CE and PC
manufacturers caused by more development contracts and license
renewals.  German revenue increased due to the use of a new web store
reseller upon the acquisition of the Simple Star assets.




Significant
Customers




The
following table reflects sales to significant customers as a percentage of total
net revenue and the related accounts receivable as a percentage of total
receivables:




31




Percent
      of Total Net Revenue
                  
                  
                  Percent
      of Total Accounts
                    ReceivableFiscal
      Years Ended March 31,
                  
                  
                  Fiscal
      Years Ended March 31,Customer
      Name
                  
                  2010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2010
                  
                  
                  2009Digital
      River
                  
                  
                  23
                  %
                  
                  
                  22
                  %
                  
                  
                  23
                  %
                  
                  
                  15
                  %
                  
                  
                  11
                  %Navarre
                  
                  
                  22
                  %
                  
                  
                  16
                  %
                  
                  
                  13
                  %
                  
                  
                  19
                  %
                  
                  
                  20
                  %Dell
                  
                  
                  13
                  %
                  
                  
                  14
                  %
                  
                  
                  26
                  %
                  
                  
                  5
                  %
                  
                  
                  5
                  %Hewlett-Packard
                  
                  
                  11
                  %
                  
                  
                  11
                  %
                  
                  
                  13
                  %
                  
                  
                  17
                  %
                  
                  
                  2
                  %Ingram
                  
                  
                  7
                  %
                  
                  
                  6
                  %
                  
                  
                  10
                  %
                  
                  
                  8
                  %
                  
                  
                  8
                  %




No other
customer accounted for more than 10% of the Company’s revenue for fiscal years
2010, 2009 and 2008.  The Company sells products to Dell and
Hewlett-Packard pursuant to individual supplements, exhibits or other
attachments that are appended to the standard terms and conditions the Company
has negotiated with each of these customers.  These standard terms and
conditions include provisions relating to the delivery of the Company’s
products, the customer’s distribution of these products, representations by the
Company with respect to the quality of the products and the Company’s ownership
of the products, obligations by the Company to comply with law, confidentiality
obligations, and indemnification by the Company for breach of its
representations or obligations.  The underlying agreements generally
renew for one year periods, subject to annual termination by either party or
termination for breach.  Under each agreement, the OEM has the sole
discretion to decide whether to purchase any of the Company’s
products.  The agreements are non-exclusive and do not contain any
minimum purchase obligations or similar commitments.  The loss of
Dell, Hewlett-Packard, or any other major customer, would have a material
adverse effect on the Company, if it were unable to replace that
customer.




Revenue
recognized from Digital River was pursuant to a reseller arrangement, and
revenue recognized from Navarre was pursuant to distribution
arrangement.  The Digital River agreement covers the electronic
delivery of Company software and the creation and maintenance of the shopping
cart process for the Company’s online stores; the Navarre agreement provides for
both physical and electronic delivery, and under both consignment and direct
sale models.  The Company provides products to Digital River and
Navarre pursuant to agreements with standard terms and conditions including
provisions relating to the delivery of the Company’s products, distribution of
these products, representations by the Company with respect to the quality of
the products and the Company’s ownership of the products, obligations by the
Company to comply with law, confidentiality obligations, and indemnification by
the Company for breach of its representations or obligations.  The
agreements generally renew for one-year periods, subject to annual termination
by either party as well as other termination provisions, such as termination for
breach.  The agreements are non-exclusive and do not contain any
minimum purchase obligations or similar commitments.




It is
impracticable for the Company to report the net revenues by significant customer
per business segment for fiscal years ended March 31, 2010, 2009 and 2008, as
some of the these customers may be in both segments.




Cost
of Revenue




Cost of
revenue consists mainly of third party licensing expenses, employee salaries and
benefits for personnel directly involved in the production and support of
revenue-generating products and services, packaging and distribution costs, if
applicable, and amortization of acquired and internally-developed software and
intangible assets.  In the case of consumer software distributed in
retail channels, cost of revenue also includes the cost of packaging, if any,
and certain distribution costs.  The following table reflects cost of
revenue as a percentage of net revenue (in thousands other than
percentages):




Years
      Ended March 31,
                    
                    
                    2010
      to 2009
                    
                    
                    2009
      to 20082010
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    Increase
                      (Decrease)
                    
                    
                    %
      Change
                    
                    
                    Increase
                      (Decrease)
                    
                    
                    %
      ChangeRoxio
      Consumer Products
                    
                    $
                    23,572
                    
                    
                    $
                    27,994
                    
                    
                    $
                    29,239
                    
                    
                    $
                    (4,422
                    )
                    
                    
                    (16
                    )%
                    
                    $
                    (1,245
                    )
                    
                    
                    (4
                    )%Premium
      Content
                    
                    
                    8,284
                    
                    
                    
                    4,907
                    
                    
                    
                    3,912
                    
                    
                    
                    3,377
                    
                    
                    
                    69
                    %
                    
                    
                    995
                    
                    
                    
                    25
                    %Cost
      of revenue
                    
                    
                    31,856
                    
                    
                    
                    32,901
                    
                    
                    
                    33,151
                    
                    
                    
                    (1,045
                    )
                    
                    
                    (3
                    )%
                    
                    
                    (250
                    )
                    
                    
                    (1
                    )%




Fiscal
2010 compared to Fiscal 2009




The
Company’s overall cost of revenue as a percentage of net revenue increased to
31% of net revenue for fiscal year 2010 from 27% for fiscal year
2009.  Roxio Consumer Products cost of revenue as a percentage of
Roxio Consumer Products net revenue decreased to 26% for fiscal year 2010 from
27% for fiscal year 2009. The lower cost of revenue percentages were driven
by a 3% decrease in cost of revenue caused by lower purchased technology
amortization as a result of the $19.6 million impairment of intangibles recorded
in the third quarter of fiscal 2009. This was partly offset by a 2%
increase in cost of revenue resulting from higher product costs, which included
changes in retail packaging, along with bundling certain promotional items with
the Company’s products.


32





Premium
Content cost of revenue as a percentage of Premium Content net revenue increased
to 58% for fiscal year 2010 from 31% for fiscal year 2009. The increase was
due to $4.4 million additional operational, royalty, and content costs
associated with the acquired CinemaNow business. This increase was
partially offset by $0.8 million in lower professional costs in royalties,
product costs, technical support, and operations due to the Company’s
restructuring activities and lower sales.  Development costs also decreased
$0.3 million due to the Company’s performance of fewer development contracts
during fiscal year 2010.





Fiscal
2009 compared to Fiscal 2008





The
Company’s overall cost of revenue as a percentage of net revenue increased to
27% of net revenue for fiscal year 2009 from 25% for fiscal year
2008.  Roxio Consumer products cost of revenues as a percentage of net
revenue increased to 27% for fiscal year 2009 from 24% for fiscal year
2008.  The increase in cost of revenue percentages included a 3%
increase in costs of revenue resulting from higher product costs and royalties,
which was driven by changes in retail packaging, along with bundling certain
promotional items with the Company’s products and adding additional features in
the software.





Premium
Content cost of revenues as a percentage of net revenue decreased to 31% for
fiscal year 2009 from 38% for fiscal year 2008.  The decrease in cost
of revenue percentages were driven by a 6% reduction in technical support costs
as a result of the Company’s restructuring activities.





Marketing
and Sales




Marketing
and sales expenses include salaries, benefits, sales commissions and share-based
compensation expense for marketing and sales employees, promotions and incentive
programs aimed to generate revenue such as advertising, trade shows, travel
related costs, and facility costs related to marketing and sales
personnel.  The following table reflects the Company’s marketing and
sales operating expenses (in thousands other than percentages):




Years
      Ended March 31,
                  
                  
                  2010
      to 2009
                  
                  
                  2009
      to 20082010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  %
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  %Marketing
      and sales
                  
                  $
                  29,975
                  
                  
                  $
                  35,810
                  
                  
                  $
                  36,186
                  
                  
                  $
                  (5,835
                  )
                  
                  
                  (16
                  )%
                  
                  $
                  (376
                  )
                  
                  
                  (1
                  )%Percentage
      of net revenue
                  
                  
                  29
                  %
                  
                  
                  30
                  %
                  
                  
                  27
                  %




Fiscal
2010 compared to Fiscal 2009




Marketing
and sales expenses decreased by 16% to $30.0 million for fiscal year
2010, from $35.8 million for fiscal year 2009.  As a percentage
of net revenue, marketing and sales expenses represented 29% and 30% of net
revenue for fiscal years 2010 and 2009, respectively.  The decrease in
marketing and sales expenses for fiscal 2010 of $5.8 million, as compared to the
same period in the prior year, is due to the restructuring activities
implemented during fiscal 2009 and the first quarter of fiscal 2010 related to
headcount reductions and office closures and downsizing, as well as ongoing cost
containment efforts.  The decreases experienced during fiscal 2010
compared to the prior year reflect a reduction in personnel related expenses of
$3.5 million, a reduction in outside services of $1.0 million, a reduction in
travel and entertainment expenses of $0.7 million, and a reduction in
advertising and promotional expenses of $1.7 million, which reductions were
partially offset by a $1.1 million non-recurring increase in promotional expense
as a result of the issuance of a warrant during the fiscal quarter ending
December 31, 2009.




On
October 29, 2009, the Company issued a warrant to purchase 668,711 shares of its
common stock to a third party in connection with the entry of the Company and
the third party into a strategic relationship agreement.  Under the
terms of the warrant, which vested 50% upon execution on of the strategic
relationship agreement, 25% upon the first anniversary and 25% upon the second
anniversary, the holder is entitled to purchase shares of the Company’s common
stock at $4.98 per share (the closing price of the Company’s common stock on the
date of the warrant issuance).  During the three months ended December
31, 2009, the Company recorded the value representing the initial 50% vesting of
the warrant, to equity and a promotional expense within Marketing and Sales
operating expense.  At the time of signing, no revenue had been earned
from the contract.  The Company valued this portion of the warrant at
$1.1 million using the Black Scholes valuation model at the time of the signing
of the agreement.  The Black-Scholes valuation assumptions included an
expected term of 5 years, volatility of 80.20%, and a risk free rate of
2.44%.


33




The
remaining 50% of the warrant subject to vesting will be remeasured at each
reporting period until vested and recognized ratably over the associated vesting
period of the warrant with the related expense recorded as contra
revenue.  At March 31, 2010, the Company valued the unvested portion
of the warrant at $1.6 million using the Black Scholes valuation model and
recorded $0.7 million against revenue during fiscal year 2010.  The
Black-Scholes valuation assumptions included an expected term of 4.6 years,
volatility of 84.83%, and a risk free rate of 2.31%.




Sales and
marketing headcount decreased to 99 at March 31, 2010 from 102 at March 31,
2009.  The Company expects to continue to invest in marketing and
sales of its products and services to develop market opportunities and promote
its offerings while continuing to monitor its needs to reduce operating expenses
to align with the Company’s financial condition.




Fiscal
2009 compared to Fiscal 2008




Marketing
and sales expenses decreased by 1% to $35.8 million for fiscal year 2009, from
$36.2 million for fiscal year 2008.  As a percentage of net revenue,
marketing and sales expenses represented 30% and 27% of net revenue for fiscal
years 2009 and 2008, respectively.  The decrease in marketing and
sales expenses for fiscal 2009, as compared to fiscal 2008, is due to the
restructuring activities implemented during fiscal 2009 related to headcount
reductions and office closures and downsizing, as well as ongoing cost
containment efforts.  The decrease in marketing and sales expenses for
the fiscal year ended 2009 of $0.4 million, as compared to fiscal 2008, reflects
a reduction in personnel related expenses of $1.2 million and a reduction in
travel and entertainment of $0.4 million.  These decreases were in part
offset by a $1.0 million increase in advertising and promotions along with an
increase in outside services of $0.2 million during fiscal 2009 as compared to
fiscal 2008.  The decrease in personnel related expenses and travel and
entertainment in fiscal 2009 resulted from the Company’s cost containment
efforts, including the restructuring activities implemented during fiscal 2009.
 The increase in advertising and promotion, as well as outside services,
were attributable to an overall increase of targeted spending on broadcast
creative production, OEM brand marketing, market research, and packaging
development related to the launch of Toast during fiscal 2009.  Sales
and marketing headcount decreased to 102 at March 31, 2009 from 127 at March 31,
2008.




Research
and Development




Research
and development expenses include salaries, benefits, share-based compensation
expenses for engineers, contracted development efforts, facility costs related
to engineering personnel, and expenses associated with equipment used for
development.  The following table reflects the Company’s research and
development operating expenses (in thousands other than
percentages):




Years
      Ended March 31,
                  
                  
                  2010
      to 2009
                  
                  
                  2009
      to 20082010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  %
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  %Research
      and development
                  
                  $
                  24,696
                  
                  
                  $
                  39,250
                  
                  
                  $
                  44,511
                  
                  
                  $
                  (14,554
                  )
                  
                  
                  (37
                  )%
                  
                  $
                  (5,261
                  )
                  
                  
                  (12
                  )%Percentage
      of net revenue
                  
                  
                  24
                  %
                  
                  
                  33
                  %
                  
                  
                  34
                  %




Fiscal
2010 compared to Fiscal 2009




Research
and development expenses decreased by 37% to $24.7 million for fiscal year
2010, from $39.3 million for fiscal 2009.  As a percentage of net
revenue, research and development expenses represented 24% and 33% of net
revenue for fiscal years 2010 and 2009, respectively.  The decrease
for fiscal 2010, as compared to fiscal 2009, was a result of the Company’s cost
containment efforts, including the restructuring activities implemented during
fiscal 2009 and the first quarter of fiscal 2010.  The $14.6 million
decrease for the fiscal year ended 2010 compared to fiscal 2009, includes a
reduction in personnel related expenses of $11.0 million, a reduction in
facility costs of $1.3 million, a reduction in travel and entertainment expenses
of $0.8 million, a reduction in outside services of $0.7 million, and a
reduction in associated research and development costs of $0.7
million.  Research and development headcount decreased to 290 at March
31, 2010 from 314 at March 31, 2009.  The Company expects research and
development costs to remain consistent as a percentage of net revenue during
fiscal 2011.




Fiscal
2009 compared to Fiscal 2008




Research
and development expenses decreased by 12% to $39.3 million for fiscal year 2009,
from $44.5 million for fiscal year 2008.  Research and development
expenses represented 33% and 34% of net revenue for fiscal years 2009 and 2008,
respectively.  The decrease in research and development expense of
$5.3 million during fiscal 2009, as compared to fiscal 2008, was due to lower
personnel-related costs of $4.4 million, and a reduction in associated research
and development costs of $0.9 million.  These decreases were a result
of the Company’s restructuring activities.  Research and development
headcount decreased to 314 at March 31, 2009 from 446 at March 31,
2008.




34




General
and Administrative




General
and administrative expenses include salaries, benefits, share-based
compensation, outside consulting services, travel expenses, legal costs
including loss contingency reserves, facility costs for finance, facilities,
human resources, legal, information services and executive
personnel.  The following table reflects the Company’s general and
administrative operating expenses (in thousands other than
percentages):




Years
      Ended March 31,
                  
                  
                  2010
      to 2009
                  
                  
                  2009
      to 20082010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  %
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  %General
      and administrative
                  
                  $
                  17,669
                  
                  
                  $
                  24,160
                  
                  
                  $
                  27,310
                  
                  
                  $
                  (6,491
                  )
                  
                  
                  (27
                  )%
                  
                  $
                  (3,150
                  )
                  
                  
                  (12
                  )%Percentage
      of net revenue
                  
                  
                  17
                  %
                  
                  
                  20
                  %
                  
                  
                  21
                  %




Fiscal
2010 compared to Fiscal 2009




General
and administrative expenses decreased by 27% to $17.7 million for fiscal year
2010, from $24.2 million for fiscal year 2009.  As a percentage
of net revenue, general and administrative expenses represented 17% and 20% of
net revenue for fiscal years 2010 and 2009, respectively.  The
decrease for fiscal 2010 of $6.5 million, as compared to fiscal 2009, was a
result of the following factors:  (1) the Company’s cost containment
efforts, including the restructuring activities implemented during fiscal 2009
and the first quarter of fiscal 2010, which contributed to a reduction in
personnel related expenses of $2.4 million and a decrease of $1.2 million in
general and administrative expenses such as travel, office supplies, and
depreciation; (2) a reversal of penalties and interest in the amount of $1.4
million as a result of an abatement related to payroll taxes associated with the
Company’s voluntary stock option review; (3) the absence of stock option review
expenses as compared to $0.5 million in fiscal year 2009; (4) a decrease in loss
contingency reserves related to legal settlements of $0.7 million; and (5) a
reduction in outside service fees of $0.3 million




General
and administrative headcount remained relatively constant between March 31, 2010
and March 31, 2009.  Headcount was 101 at March 31, 2010 compared to
102 at March 31, 2009.  The Company expects general and administrative
expenses will remain consistent as a percentage of net revenue during fiscal
2011.




Fiscal
2009 compared to Fiscal 2008




General
and administrative expenses decreased 12% to $24.2 million for fiscal year 2009,
from $27.3 million for fiscal year 2008.  General and administrative
expenses represented 20% and 21% of net revenue for fiscal years 2009 and 2008,
respectively.  The decrease in general and administrative expense of
$3.2 during fiscal 2009, as compared to the prior year, was due to a decrease of
stock option review expenses of $7.6 million for fiscal 2009 compared to fiscal
2008.  The Company completed its voluntary review of historical stock
option grant practices and related accounting by late fiscal 2008.  The
decrease in stock option review expenses was partially offset by a loss
contingency reserve related to a legal settlement in the amount of $1.0 million
related to an ordinary course of business claim, an increase in personnel
related expenses of $1.1 million due to the hire of certain senior level
positions, an increase in share-based compensation expense of $0.8 million, and
an increase in rent expense of $1.0 million due to additions of new offices as a
result of acquisitions made during fiscal 2009 and the expansion of the
Company’s China office.  Additionally, there was an increase in
penalties of approximately $0.5 million during fiscal 2009 compared to fiscal
2008.  In 2008, there was a reversal of penalties as a result of the
expiration of the statute of limitations related to payroll taxes associated
with the stock option review.  There were no expirations in fiscal
2009.




General
and administrative headcount decreased to 102 at March 31, 2009 from 110 at
March 31, 2008.




Restructuring
Expense




Restructuring
expenses consist primarily of one-time termination benefits such as severance
and other employee related costs, contract termination costs related to facility
expenses, and other associated costs.




Restructuring
expense decreased 87% to $0.5 million for fiscal 2010, from $3.9 million for
fiscal 2009.  The decrease in restructuring expenses for fiscal 2010
is due to the Company having completed several restructuring programs that it
had implemented during fiscal 2009.  At each reporting period, the
Company evaluates its accruals for vacated facilities, exit costs and employee
separation costs to ensure the accruals are still appropriate.  During
the first quarter of fiscal 2010, the Company adjusted its accrual by $0.3
million due to changes in its estimates regarding applicable office subleasing
markets and made minor adjustments during the second and third quarters of
fiscal 2010 to its estimates related to one-time termination benefits, resulting
in a non-material decrease in overall restructuring expenses.




35




Restructuring
expense increased 25% to $3.9 million for fiscal year 2009, from $3.2 million
for fiscal year 2008.  The increase in restructuring expenses for
fiscal year 2009 was primarily due to the Company engaging in several
restructuring programs during fiscal year 2009.  Restructuring
expenses incurred for fiscal year 2008 consisted primarily of expenses
associated with the closure of the Company’s Richmond Hill Canada office
facility in December 2007.




Interest
Income, Interest Expense, and Other Expenses, Net




Interest
income was approximately $75 thousand, $0.7 million and $2.8 million for fiscal
years 2010, 2009 and 2008, respectively.  The decline in interest
income is related to a decrease in cash and cash equivalents held by the Company
prior to the receipt of net cash proceeds from the issuance of common stock on
December 16, 2009, as well as lower interest rates.




Interest
expense was approximately $0.1 million, $0.8 million and $1.5 million for fiscal
years 2010, 2009 and 2008, respectively.  Interest expense during
fiscal 2010 relates to the finalization of a California sales tax audit while
the decrease in fiscal 2009 as compared to fiscal 2008 was due to the repayment
of the Company’s Union Bank of California credit facility during fiscal
2009




Other
expenses for fiscal years 2010, 2009 and 2008 included foreign currency
transaction gains and losses.




Provision
for Income Taxes




The
provision for income tax represents taxes payable in certain domestic and
foreign jurisdictions.  Income tax provision was $0.5 million in
fiscal 2010.  The fiscal year 2010 tax provision is related to taxes
on profitable foreign subsidiaries and state franchise
taxes.  Generally, the Company’s effective tax rate differs from the
statutory rates because it has recorded approximately 100% valuation allowance
related to its deferred tax assets as the Company does not consider the
generation of taxable income to realize their tax benefits to be more likely
than not.




The
Company recorded an income tax provision in the amount of $25.2 million in
fiscal year 2009 and an income tax benefit of $4.3 million in fiscal year
2008.  ASC 740-10 defines the threshold for recognizing the benefits
of tax return positions in the financial statements as “more-likely-than-not” to
be sustained by the taxing authority.  Upon adoption of ASC 740-10,
the Company recorded cumulative adjustments to the beginning balances of
additional paid-in capital of $0.8 million, accumulated deficit of $0.6 million
and goodwill of $0.1 million.  At March 31, 2008, the Company had $4.9
million of gross unrecognized tax benefits, $2.0 million of which would affect
its effective tax rate if recognized.  The Company recognized $0.1
million of interest and penalties related to uncertain tax positions in income
tax expense for fiscal 2008.




Impairment
of Goodwill and Intangibles




No
goodwill or intangible impairments were recorded in fiscal 2010.  The
Company recorded an impairment of goodwill and intangibles of $56.2 million and
$19.6 million in the third quarter of fiscal 2009 related to the Roxio Consumer
reporting unit based on a preliminary impairment analysis.  The
Company finalized the impairment analysis in the fourth quarter of fiscal 2009
and determined there was no further impairment.  The carrying value of
goodwill is based on fair value estimates on projected financial information
which management believes to be reasonable.  The valuation methodology used
to estimate the fair value of the Company and its reporting units considers the
market capitalization of the Company, requires inputs and assumptions that
reflect market conditions as well as management judgment.




Acquisitions




The
Company did not complete or enter into any acquisitions during fiscal
2010.  The following acquisitions occurred during fiscal 2009 and
2008:




uMedia
Digital Technology Corporation




During
the fourth quarter of fiscal 2008, the Company entered into an Asset Purchase
Agreement with uMedia Digital Technology Corporation (“uMedia”), a Chinese
software development company, whereby it acquired substantially all of the
assets for a purchase price of approximately $0.5 million.  In
connection with the acquisition, the Company acquired seven
employees.  uMedia’s expertise lies in developing video and audio
compression and decompression technology, which has now been incorporated into
the Company’s core audio and video technology.




36




Simple
Star Acquisition




During
the first quarter of fiscal 2009, the Company entered into an Asset Purchase
Agreement to purchase certain assets from Simple Star, Inc. (“Simple
Star”).  These assets included PhotoShow, a multimedia storytelling
platform and online community that enables consumers to turn photos and video
clips into shows that can be viewed and shared on PCs, TVs, and handheld
devices, or published to social media sites on the Internet.  In
connection with the acquisition, the Company acquired 25
employees.  The Simple Star purchase price of approximately $6.0
million consisted of $5.0 million in cash due upon closing and $1.0 million plus
accrued interest due on the first anniversary of closing.  During the
first quarter of fiscal 2010, the Company paid the acquisition hold back of $1.0
million.




CinemaNow
Acquisition




During
the fourth quarter of fiscal 2009, the Company entered into an Asset Purchase
Agreement to purchase certain assets and liabilities from CinemaNow, Inc.,
(“CinemaNow”) a digital video distributor.  The CinemaNow assets,
which now form part of the RoxioNow Service, facilitate digital distribution of
premium video content, including Hollywood movies, TV shows, and music videos,
to users across multiple platforms.  The CinemaNow purchase price of
approximately $3.2 million was comprised of approximately $0.9 million in cash,
assumed liabilities not to exceed $1.7 million, $0.2 million in direct costs and
$0.5 million for a general holdback payable 180 days after the
closing.  The Company hired approximately 30 former CinemaNow
employees as a result of the acquisition.  During the third quarter of
fiscal 2010, the Company settled its obligation to pay the $0.5 million
acquisition holdback.




Proposed
DivX Acquisition





In
addition to the completed acquisitions, on June 1, 2010, the Company executed a
Merger Agreement with DivX, as described above under Item I, Business –
“Proposed Acquisition of DivX.”  The Company currently expects to
close the DivX Acquisition in September 2010, subject to the conditions
described above.  The Merger Agreement does not contain a condition
that allows the Company not to close if it does not obtain financing, as the
Company expects to finance the cash portion of the consideration for the DivX
Acquisition from the financial resources of DivX.  As of March 31,
2010, the Company had not incurred any significant expenses in connection with
the DivX Acquisition.  The Company has incurred substantial expenses
since such date and expects to incur additional expenses before the expected
closing exclusive of any costs relating to integration of DivX
operations.




LIQUIDITY
AND CAPITAL RESOURCES




Cash
and Cash Equivalents (in thousands other than percentages):




Fiscal
      Years Ended March 31,
                    
                    
                    2010
      to 20092010
                    
                    
                    2009
                    
                    
                    Inc
      (Dec)
                    
                    
                    %Working
      capital
                    
                    $
                    39,439
                    
                    
                    $
                    1,296
                    
                    
                    $
                    38,143
                    
                    
                    
                    2943
                    %Cash
      and cash equivalents
                    
                    $
                    54,536
                    
                    
                    $
                    19,864
                    
                    
                    $
                    34,672
                    
                    
                    
                    175
                    %




Working
capital increased $38.1 million for fiscal 2010, from $1.3 million at the end of
fiscal 2009.  The increase in working capital in fiscal 2010 was
primarily due to an increase in cash balances.  Cash and cash
equivalents consist of cash and money market funds.  Cash and cash
equivalents increased by $34.7 million or 175% for fiscal 2010 compared, from
$19.9 at the end of fiscal 2009.  The increase in working capital
includes an increase in net cash proceeds from a public offering.  On
December 16, 2009, the Company issued 3,450,000 shares of common stock in an
underwritten public offering at a per-share public offering price of
$9.70.  The Company received approximately $31.4 million in net cash
proceeds after underwriting discounts, commissions and offering
expenses.  The following table summarizes cash inflows and/or outflows
by category (in thousands other than percentages):




37




Fiscal
      Years Ended March 31,
                  
                  
                  2010
      to 2009
                  
                  
                  2009
      to 20082010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Inc
      (Dec)
                  
                  
                  %
                  
                  
                  Inc
      (Dec)
                  
                  
                  %Net
      cash provided by (used in) operating activities
                  
                  $
                  4,623
                  
                  
                  $
                  (15,178
                  )
                  
                  $
                  1,288
                  
                  
                  $
                  19,801
                  
                  
                  
                  (130
                  )%
                  
                  $
                  (16,466
                  )
                  
                  
                  (1278
                  )%Net
      cash provided by (used in) investing activities
                  
                  $
                  (2,123
                  )
                  
                  $
                  (8,019
                  )
                  
                  $
                  43,168
                  
                  
                  $
                  5,896
                  
                  
                  
                  (74
                  )%
                  
                  $
                  (51,187
                  )
                  
                  
                  (119
                  )%Net
      cash provided by (used in) financing activities
                  
                  $
                  32,733
                  
                  
                  $
                  (19,866
                  )
                  
                  $
                  568
                  
                  
                  $
                  52,599
                  
                  
                  
                  (265
                  )%
                  
                  $
                  (20,434
                  )
                  
                  
                  (3598
                  )%




Net cash
provided by operating activities was $4.6 million for fiscal 2010 compared to
net cash used in operating activities of $15.2 million for the fiscal year
2009.  The significant increase in net cash flows from operating
activities during fiscal year 2010 compared to fiscal year 2009 is due to the
improvement from a $42.3 million net loss, excluding non-cash impairments of
intangible assets of $19.6 million and $56.2 million for goodwill, for fiscal
2009 to a $1.2 million net loss for fiscal 2010.  The overall
improvement in operating income is largely due to the Company’s efforts to
reduce operating expenses to align expenditures with reduced
revenues.




Net cash
used in operating activities was $15.2 million for fiscal 2009 compared to net
cash provided by operating activities of $1.3 million for the fiscal year ended
2008.  The $15.2 million increase in net cash used in operating
activities was primarily attributable to a decline in net revenues and the
payment of restructuring costs as further described above in “Results of
Operations.”




Net cash
used in investing activities was $2.1 million for fiscal 2010 compared to net
cash used in investing activities of $8.0 million for the fiscal year
2009.  Net cash used during fiscal 2009 was higher due to the
Company’s acquisitions of Simple Star and CinemaNow assets during that period;
no comparable acquisitions occurred during fiscal 2010.




Net cash
used in investing activities was $8.0 million for fiscal 2009 compared to net
cash provided by investing activities of $43.2 million for the fiscal
year 2008.  The $51.2 million change was primarily attributable
to a decline in net redemptions of short-term investments.  In fiscal
year 2008, the Company redeemed $46.2 million, net, in short-term investments
compared to $1.1 million in fiscal year 2009.  The acquisitions of
Simple Star for $5.0 million and CinemaNow for $2.6 million also contributed to
the decline in net cash used in investing activities in fiscal 2009 as compared
to fiscal 2008.




Net cash
provided by financing activities was $32.7 million for fiscal 2010 compared to
net cash used in financing activities of $19.9 million for the fiscal year
2009.  The increase is attributable to the Company’s offering and sale
of 3,450,000 shares of its common stock during the third quarter of fiscal
2010.  The Company recorded net proceeds (after deducting the
underwriting discounts, commissions and offering expenses) of $31.4
million.  The
shares of common stock were offered and sold pursuant to a base prospectus and
related prospectus supplement, which have been filed with the
SEC.




Net cash
used in financing activities was $19.9 million in fiscal year 2009 compared to
net cash provided by financing activities of $0.6 million for fiscal year ended
2008.  The $20.5 million increase in net cash used by financing
activities was primarily attributable to the repayment of the $20 million
balance on the Company’s Union Bank of California credit facility paid in full
on September 29, 2008.




The
Company believes its cash balances and cash flows generated by operations will
be sufficient to satisfy its anticipated cash needs for working capital and
capital expenditures for at least the next 12 months.  The Company
expects that its actions to reduce operating expenses will allow it to generate
operating cash flows sufficient to sustain operations, and to offset, in whole
or in part, the potential impact of a decrease in future
revenues.  However, the Company may require additional cash to fund
acquisitions or investment opportunities.  In these instances, the
Company may seek to raise such additional funds through public, private equity,
debt financing, or from other sources.  The Company may not be able to
obtain adequate or favorable financing at that time.  Any equity
financing the Company may obtain may dilute existing ownership interests and any
debt financing could contain covenants that impose limitations on the conduct of
its business.




Contractual
Obligations and Commitments




The
following table summarizes the Company’s known contractual obligations to make
future payments at March 31, 2010 (in thousands):




38




Payments
      Due by PeriodContractual
      Obligations
                      
                      Total
                      
                      
                      Less
      Than 1
                        Year
                      
                      
                      2
      Years
                      
                      
                      3-5
      Years
                      
                      
                      More
      Than 5
                        YearsOperating
      and capital leases (1)
                      
                      $
                      6,466
                      
                      
                      $
                      4,159
                      
                      
                      $
                      1,868
                      
                      
                      $
                      439
                      
                      
                      $
                      -Purchase
      obligations (2)
                      
                      
                      1,050
                      
                      
                      
                      550
                      
                      
                      
                      500
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      7,516
                      
                      
                      $
                      4,709
                      
                      
                      $
                      2,368
                      
                      
                      $
                      439
                      
                      
                      $
                      -




(1)
            Operating
      and capital leases include the Company’s rent obligations on its leased
      facilities and copiers.




(2)
            For
      the purposes of this table, purchase obligations for the purchase of goods
      or services are defined as agreements that are enforceable, non-cancelable
      and legally binding and that specify all significant terms, including:
      fixed or minimum quantities to be purchased; fixed, minimum or variable
      price provisions; and the approximate timing of the
      transaction.  The expected timing of payment of the obligations
      discussed above was estimated based on information available as of March
      31, 2010.  Timing of payments and actual amounts paid may be
      different depending on the time of receipt of goods or services or changes
      to agreed-upon amounts for some
obligations.




The
Company may be required to make significant cash outlays related to its
unrecognized tax benefits (“UTBs”). However, due to the uncertainty of the
timing of future cash flows associated with its UTBs, the Company is unable to
make a reasonably reliable estimate of the period of cash settlement, if any,
with the respective taxing authorities.  As such, UTBs of $6.0 million
at March 31, 2010 have been excluded from the contractual obligations table
above.  For further information related to UTBs, see Note 5, “Income
Taxes,” to the Consolidated Financial Statements included in this Annual
Report.




The
Company sells its software licenses and services to its customers under software
license agreements.  Each software license agreement contains the
relevant terms of the contractual arrangement with the customer, and generally
includes provisions that address indemnification of the customer against losses,
expenses, and liabilities from damages that may be awarded against the customer
in the event the Company’s software is found to infringe upon a third-party
patent, copyright, trademark, or other proprietary right.  The
Company’s standard software license agreement generally limits the scope of and
remedies for such indemnification obligations in a variety of industry-standard
respects, including, but not limited to, certain time and geography-based scope
limitations, limits on aggregate liability, and a right to replace an infringing
product.




The
Company believes its internal development processes and other policies and
practices limit its exposure related to the indemnification provisions of the
software license agreements.  To date, the Company has not had to
reimburse any of its customers for any losses related to these indemnification
provisions and is not aware of any material claims.




Concentration
of Credit Risk and Off-Balance Sheet Arrangements




ASC
825-10,Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk,requires
disclosure of any significant off-balance-sheet and credit risk
concentrations.  Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of cash and cash
equivalent and accounts receivable.  The Company does not have any
credit risk such as foreign exchange contracts, option contracts or other
hedging arrangements.  The Company maintains its cash, cash
equivalents balances with highly rated credit institutions.  Although
the Company tries to limit the amount of credit exposure with any one financial
institution, it does in the normal course of business maintain cash balances in
excess of federally insured limits.




The
Company does not have any off-balance sheet arrangements, as such term is
defined by applicable SEC rules, that have or are reasonably likely to have a
current or future effect on its financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.




Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk




The
Company’s results of operations are subject to both currency transaction risk
and currency translation risk, which risks may be material with respect to
certain currencies.  The Company incurs currency transaction risk when
it enters into either a purchase or sale transaction using a currency other than
its functional currency. With respect to currency translation risk, the
Company’s financial condition and results of operations are measured and
recorded in the relevant domestic currency then translated into U.S. dollars at
the balance sheet date for inclusion in its consolidated financial
statements.




39


The
Company held cash and cash equivalents denominated in Euros that amounted to
approximately €2.2 million (U.S. $2.9 million) at each of March 31, 2010 and
March 31, 2009.  Due to the weakening of the U.S. dollar in fiscal
2010, the currency rate increase of the Euro from March 31, 2009 to March 31,
2010 was 1.9%.  One hundred Euro was equal to approximately $135
at March 31, 2010; $143 at December 31, 2009; $146 at September 30, 2009; $140
at June 30, 2009; and $132 at March 31, 2009.  A hypothetical 10%
increase or decrease in the U.S. dollar versus the Euro as of March 31, 2010
would have resulted in an approximately $0.3 million change in the Company’s net
revenues during fiscal 2010.




The
Company held cash and cash equivalents denominated in Great Britain Pounds
Sterling (“GBP”) that amounted to approximately £0.6 million (U.S. $1.0 million)
at March 31, 2010, compared to approximately £0.7 million (U.S. $0.9
million) at March 31, 2009.  Due to the weakening of the U.S. dollar
in fiscal 2010, the currency rate increase of the GBP from March 31, 2009 to
March 31, 2010 was 6%.  One hundred GBP was equal to
approximately $151 at March 31, 2010; $159 at December 31, 2009; $159 at
September 30, 2009; $1.65 at June 30, 2009; and $142 at March 31,
2009.  A hypothetical 10% increase or decrease in the U.S. dollar
versus the GBP as of March 31, 2010 would have resulted in an approximately $0.2
million change in the Company’s net revenues during fiscal 2010.




The
Company held cash and cash equivalents denominated in Japanese Yen that amounted
to approximately ¥168 million (U.S. $1.8 million) at March 31, 2010, compared to
approximately ¥176 million (U.S. $1.7 million) at March 31,
2009.  Due to the weakening of the U.S. dollar in fiscal 2010, the
currency rate increase of the Japanese Yen from March 31, 2009 to March 31, 2010
was 5.2%.  One hundred Japanese Yen was equal to approximately $1.08
at March 31, 2010; $1.08 at December 31, 2009; $1.11 at September 30, 2009;
$1.05 at June 30, 2009; and $1.03 at March 31, 2009. A hypothetical 10%
increase or decrease in the U.S. dollar versus the Japanese Yen as of March 31,
2010 would have resulted in an approximately $0.4 million change in the
Company’s net revenues during fiscal 2010.




The
Company’s market risk sensitive instruments were all entered into for
non-trading purposes.  The Company does not engage in any hedging
activities and does not use derivatives or equity investments for cash
investment purposes.




Item
8.  Financial Statements and Supplementary Data




The
reports of Independent Registered Public Accounting Firm, Consolidated Financial
Statements and Notes to Consolidated Financial Statements
follow.


40




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The
Board of Directors and Shareholders, Sonic Solutions




We have
audited the accompanying consolidated balance sheet of Sonic Solutions and
subsidiaries (“the Company”) as of March 31, 2010, and the related consolidated
statements of operations, shareholders’ equity and comprehensive loss, and cash
flows for the year ended March 31, 2010.  We also have audited the
Company’s internal control over financial reporting as of March 31, 2010, based
on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  Our audit also included the financial
statement schedule listed in the Index at Part IV, Item 15.  The
Company’s management is responsible for these financial statements and schedule,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management Report on Internal Control Over
Financial Reporting, appearing under Item 9A.  Our responsibility is
to express an opinion on these financial statements and schedule and an opinion
on the Company’s internal control over financial reporting based on our
audit.




We
conducted our audit 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 and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audit of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audit also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our
opinions.




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




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March 31,
2010, and the results of its operations and its cash flows for the year ended
March 31, 2010 in conformity with accounting principles generally accepted in
the United States of America.  Also, in our opinion, the related
financial statement schedule for the year ended March 31, 2010, when considered
in relation to the consolidated financial statements as a whole, presents fairly
in all material respects the information set forth therein.  Also in
our opinion, the Company’s maintained, in all material respects, effective
internal control over financial reporting as of March 31, 2010, based on
criteria established in Internal Control—Integrated
Framework issued by COSO.





/s/
Armanino McKenna, LLP




San
Ramon, California


June 4,
2010


41




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 The Board
of Directors and Shareholders of Sonic Solutions:
 
 We have
audited the accompanying consolidated balance sheet of Sonic Solutions and
subsidiaries as of March 31, 2009 and the related consolidated statements of
operations, shareholders’ equity and comprehensive income (loss) and cash flows
for each of the two years in the period ended March 31, 2009.  In
connection with our audits of the financial statements, we have also audited the
schedule listed in the accompanying index.  These consolidated
financial statements and the schedule is the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements and the schedule 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 audits 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 Sonic Solutions and
subsidiaries as of March 31, 2009 and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.
 
 Also in
our opinion, the related schedule for 2009 and 2008, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects the information set forth therein.
 
 /s/ BDO
Seidman, LLP
 
 San
Francisco, California
 May 29,
2009


42




CONSOLIDATED
FINANCIAL STATEMENTS


SONIC
SOLUTIONS


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share data)





March 31,2010
                
                
                2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                54,536
                
                
                $
                19,408Restricted
      cash
                
                
                -
                
                
                
                456Accounts
      receivable, net of allowances of $2,511 and $2,072 at March 31, 2010 and
      2009, respectively
                
                
                11,270
                
                
                
                14,874Inventory
                
                
                1,941
                
                
                
                1,086Prepaid
      expenses and other current assets
                
                
                3,497
                
                
                
                4,504Deferred
      tax benefits
                
                
                -
                
                
                
                41Total
      current assets
                
                
                71,244
                
                
                
                40,369Fixed
      assets, net
                
                
                1,670
                
                
                
                2,851Purchased
      and internally developed software costs, net
                
                
                165
                
                
                
                448Goodwill
                
                
                4,628
                
                
                
                4,628Acquired
      intangibles, net
                
                
                16,174
                
                
                
                16,556Deferred
      tax benefits, net
                
                
                66
                
                
                
                21Other
      assets
                
                
                1,463
                
                
                
                1,864Total
      assets
                
                $
                95,410
                
                
                $
                66,737LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                3,892
                
                
                $
                5,104Accrued
      expenses and other current liabilities
                
                
                21,916
                
                
                
                26,964Deferred
      revenue
                
                
                5,874
                
                
                
                6,875Capital
      lease
                
                
                123
                
                
                
                130Total
      current liabilities
                
                
                31,805
                
                
                
                39,073Other
      long term liabilities, net of current portion
                
                
                889
                
                
                
                724Deferred
      revenue, net of current portion
                
                
                76
                
                
                
                135Capital
      lease, net of current portion
                
                
                37
                
                
                
                161Total
      liabilities
                
                
                32,807
                
                
                
                40,093Commitments
      and contingencies (Note 3)Shareholders'
      equity:Convertible
      preferred stock, no par value, 10,000,000 shares authorized; 0 shares
      issued and outstanding at March 31, 2010 and 2009.
                
                
                -
                
                
                
                -Common
      stock, no par value, 100,000,000 shares authorized; 30,610,102 and
      26,593,647 shares issued and outstanding at March 31, 2010 and
      2009.
                
                
                200,375
                
                
                
                163,121Accumulated
      deficit
                
                
                (136,289
                )
                
                
                (135,076
                )Accumulated
      other comprehensive loss
                
                
                (1,483
                )
                
                
                (1,401
                )Total
      shareholders' equity
                
                
                62,603
                
                
                
                26,644Total
      liabilities and shareholders' equity
                
                $
                95,410
                
                
                $
                66,737





See
Accompanying Notes to Consolidated Financial Statements.


43


SONIC
SOLUTIONS


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except share data)





Years Ended March 31,2010
                
                
                2009
                
                
                2008Net
      revenue
                
                $
                104,345
                
                
                $
                119,958
                
                
                $
                132,874Cost
      of revenue
                
                
                31,856
                
                
                
                32,901
                
                
                
                33,151Impairment
      of intangibles
                
                
                -
                
                
                
                19,579
                
                
                
                -Gross
      profit
                
                
                72,489
                
                
                
                67,478
                
                
                
                99,723Operating
      expenses:Marketing
      and sales
                
                
                29,975
                
                
                
                35,810
                
                
                
                36,186Research
      and development
                
                
                24,696
                
                
                
                39,250
                
                
                
                44,511General
      and administrative
                
                
                17,669
                
                
                
                24,160
                
                
                
                27,310Restructuring
                
                
                513
                
                
                
                3,947
                
                
                
                3,152Impairment
      of goodwill
                
                
                -
                
                
                
                56,174
                
                
                
                -72,853
                
                
                
                159,341
                
                
                
                111,159Operating
      loss
                
                
                (364
                )
                
                
                (91,863
                )
                
                
                (11,436
                )Interest
      income
                
                
                75
                
                
                
                687
                
                
                
                2,768Interest
      expense
                
                
                (146
                )
                
                
                (767
                )
                
                
                (1,479
                )Other
      expense
                
                
                (319
                )
                
                
                (1,020
                )
                
                
                356Loss
      before income taxes
                
                
                (754
                )
                
                
                (92,963
                )
                
                
                (9,791
                )Provision
      (benefit) for income taxes
                
                
                459
                
                
                
                25,160
                
                
                
                (4,254
                )Net
      loss
                
                $
                (1,213
                )
                
                $
                (118,123
                )
                
                $
                (5,537
                )Net
      loss per share:Basic
                
                $
                (0.04
                )
                
                $
                (4.46
                )
                
                $
                (0.21
                )Diluted
                
                $
                (0.04
                )
                
                $
                (4.46
                )
                
                $
                (0.21
                )Shares
      used in computing net loss per share:Basic
                
                
                27,792
                
                
                
                26,535
                
                
                
                26,247Diluted
                
                
                27,792
                
                
                
                26,535
                
                
                
                26,247




See
Accompanying Notes to Consolidated Financial Statements.


44


SONIC
SOLUTIONS


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS


(In
thousands)





AccumulatedOther
                  
                  
                  TotalCommon Stock
                  
                  
                  Accumulated
                  
                  
                  Comprehensive
                  
                  
                  Shareholders’
                  
                  
                  ComprehensiveShares
                  
                  
                  Amount
                  
                  
                  Deficit
                  
                  
                  Loss
                  
                  
                  Equity
                  
                  
                  LossBalances
      at March 31, 2007
                  
                  
                  26,197
                  
                  
                  $
                  162,565
                  
                  
                  $
                  (10,815
                  )
                  
                  $
                  (917
                  )
                  
                  $
                  150,833Cumulative
      effect upon adoption of FIN 48
                  
                  
                  -
                  
                  
                  
                  (788
                  )
                  
                  
                  (600
                  )
                  
                  
                  -
                  
                  
                  
                  (1,388
                  )Exercise
      of common stock options and release of RSUs
                  
                  
                  186
                  
                  
                  
                  570
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  570Share-based
      compensation expense
                  
                  
                  -
                  
                  
                  
                  1,557
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,557Tax
      provision from employee stock option plans
                  
                  
                  -
                  
                  
                  
                  (653
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (653
                  )Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (780
                  )
                  
                  
                  (780
                  )
                  
                  
                  (780
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,537
                  )
                  
                  
                  -
                  
                  
                  
                  (5,537
                  )
                  
                  
                  (5,537
                  )Balances
      at March 31, 2008
                  
                  
                  26,383
                  
                  
                  $
                  163,251
                  
                  
                  $
                  (16,952
                  )
                  
                  $
                  (1,697
                  )
                  
                  $
                  144,602
                  
                  
                  $
                  (6,317
                  )Exercise
      of common stock options and release of RSUs
                  
                  
                  211
                  
                  
                  
                  318
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  318Share-based
      compensation expense
                  
                  
                  -
                  
                  
                  
                  2,113
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,113Tender
      offer payment
                  
                  
                  -
                  
                  
                  
                  (94
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (94
                  )Tax
      provision from employee stock option plans
                  
                  
                  -
                  
                  
                  
                  (2,467
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,467
                  )Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  296
                  
                  
                  
                  296
                  
                  
                  
                  296Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (118,124
                  )
                  
                  
                  -
                  
                  
                  
                  (118,124
                  )
                  
                  
                  (118,124
                  )Balances
      at March 31, 2009
                  
                  
                  26,594
                  
                  
                  $
                  163,121
                  
                  
                  $
                  (135,076
                  )
                  
                  $
                  (1,401
                  )
                  
                  $
                  26,644
                  
                  
                  $
                  (117,828
                  )Exercise
      of common stock options and release of RSUs
                  
                  
                  566
                  
                  
                  
                  1,420
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,420Shares
      issued in stock offering
                  
                  
                  3,450
                  
                  
                  
                  31,444
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  31,444Share-based
      compensation expense
                  
                  
                  -
                  
                  
                  
                  2,557
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,557Warrant
      issued
                  
                  
                  -
                  
                  
                  
                  1,833
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,833Tax
      provision from employee stock option plans
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Foreign
      currency translation adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (82
                  )
                  
                  
                  (82
                  )
                  
                  
                  (82
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,213
                  )
                  
                  
                  -
                  
                  
                  
                  (1,213
                  )
                  
                  
                  (1,213
                  )Balances
      at March 31, 2010
                  
                  
                  30,610
                  
                  
                  $
                  200,375
                  
                  
                  $
                  (136,289
                  )
                  
                  $
                  (1,483
                  )
                  
                  $
                  62,603
                  
                  
                  $
                  (1,295
                  )




See
Accompanying Notes to Consolidated Financial Statements.


45


SONIC
SOLUTIONS


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)





Years
      Ended March 31,2010
                    
                    
                    2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (1,213
                    )
                    
                    $
                    (118,123
                    )
                    
                    $
                    (5,537
                    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                    
                    
                    2,322
                    
                    
                    
                    5,883
                    
                    
                    
                    7,693Impairment
      of intangibles
                    
                    
                    -
                    
                    
                    
                    19,579
                    
                    
                    
                    -Impairment
      of investments
                    
                    
                    585
                    
                    
                    
                    -
                    
                    
                    
                    -Deferred
      income taxes
                    
                    
                    54
                    
                    
                    
                    23,774
                    
                    
                    
                    (5,527
                    )Impairment
      of goodwill
                    
                    
                    -
                    
                    
                    
                    56,174
                    
                    
                    
                    -Provision
      for returns and doubtful accounts, net of write-offs
                    
                    
                    (68
                    )
                    
                    
                    (602
                    )
                    
                    
                    2,031Share-based
      compensation
                    
                    
                    2,557
                    
                    
                    
                    2,191
                    
                    
                    
                    1,557Fair
      value of vested warrant shares issued for strategic
      relationship
                    
                    
                    1,833
                    
                    
                    
                    -
                    
                    
                    
                    -Decrease
      (increase) in restricted cash
                    
                    
                    456
                    
                    
                    
                    (2
                    )
                    
                    
                    (454
                    )Loss
      on disposition of assets
                    
                    
                    59
                    
                    
                    
                    9
                    
                    
                    
                    77Changes
      in operating assets and liabilities, netAccounts
      receivable
                    
                    
                    3,672
                    
                    
                    
                    1,194
                    
                    
                    
                    2,959Inventory
                    
                    
                    (855
                    )
                    
                    
                    (56
                    )
                    
                    
                    (392
                    )Prepaid
      expenses and other current assets
                    
                    
                    1,007
                    
                    
                    
                    874
                    
                    
                    
                    (231
                    )Other
      assets
                    
                    
                    (184
                    )
                    
                    
                    (345
                    )
                    
                    
                    347Accounts
      payable
                    
                    
                    (1,212
                    )
                    
                    
                    (1,076
                    )
                    
                    
                    192Accrued
      expenses and other current liabilities
                    
                    
                    (3,330
                    )
                    
                    
                    (4,104
                    )
                    
                    
                    (2,764
                    )Deferred
      revenue
                    
                    
                    (1,060
                    )
                    
                    
                    (548
                    )
                    
                    
                    1,337Net
      cash provided by (used in) operating activities
                    
                    
                    4,623
                    
                    
                    
                    (15,178
                    )
                    
                    
                    1,288Cash
      flows from investing activities:Purchase
      of fixed assets
                    
                    
                    (586
                    )
                    
                    
                    (1,788
                    )
                    
                    
                    (2,134
                    )Additions
      to purchased software
                    
                    
                    (37
                    )
                    
                    
                    (185
                    )
                    
                    
                    (356
                    )Acquisition
      of Simple Star Inc., net
                    
                    
                    (1,000
                    )
                    
                    
                    (5,046
                    )
                    
                    
                    -Acquisition
      of CinemaNow Inc., net
                    
                    
                    (500
                    )
                    
                    
                    (2,050
                    )
                    
                    
                    -Acquisition
      of uMedia, net of cash acquired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (543
                    )Purchase
      of short term investment instruments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (19,174
                    )Redemption
      of long term investment instruments
                    
                    
                    -
                    
                    
                    
                    900
                    
                    
                    
                    -Redemption
      of short term investment instruments
                    
                    
                    -
                    
                    
                    
                    150
                    
                    
                    
                    65,375Net
      cash provided by (used in) investing activities
                    
                    
                    (2,123
                    )
                    
                    
                    (8,019
                    )
                    
                    
                    43,168Cash
      flows from financing activities:Share-based
      compensation
                    
                    
                    -
                    
                    
                    
                    (94
                    )
                    
                    
                    -Proceeds
      from exercise of common stock options
                    
                    
                    1,420
                    
                    
                    
                    318
                    
                    
                    
                    570Proceeds
      from stock offering
                    
                    
                    31,444
                    
                    
                    
                    -
                    
                    
                    
                    -Payments
      on bank credit facility
                    
                    
                    -
                    
                    
                    
                    (20,000
                    )
                    
                    
                    -Principal
      payments on capital leases
                    
                    
                    (131
                    )
                    
                    
                    (90
                    )
                    
                    
                    (2
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    32,733
                    
                    
                    
                    (19,866
                    )
                    
                    
                    568Effect
      of exchange rate changes on cash and cash equivalents
                    
                    
                    (105
                    )
                    
                    
                    517
                    
                    
                    
                    (159
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    35,128
                    
                    
                    
                    (42,546
                    )
                    
                    
                    44,865Cash
      and cash equivalents at beginning of year
                    
                    
                    19,408
                    
                    
                    
                    61,955
                    
                    
                    
                    17,090Cash
      and cash equivalents at end of year
                    
                    $
                    54,536
                    
                    
                    $
                    19,409
                    
                    
                    $
                    61,955Supplemental
      disclosure of cash flow information:Interest
      paid during year
                    
                    $
                    146
                    
                    
                    $
                    641
                    
                    
                    $
                    1,398Income
      taxes paid during year, net of refunds
                    
                    $
                    51
                    
                    
                    $
                    786
                    
                    
                    $
                    730Supplemental
      disclosure of non-cash transactionsOriginal
      cost of fully depreciated fixed assets written off
                    
                    $
                    2,646
                    
                    
                    $
                    -
                    
                    
                    $
                    4,981Cash
      holdback and remaining assumed liabilities owed related to CinemaNow,
      Inc., acquisition
                    
                    $
                    (111
                    )
                    
                    $
                    -
                    
                    
                    $
                    -Cumulative
      effect upon adoption of FIN 48
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    788




See
Accompanying Notes to Consolidated Financial Statements.


46


SONIC
SOLUTIONS


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Three
Years ended March 31, 2010




NOTE
1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Business




The
Company is a leading developer of products and services that enable the
creation, management, and enjoyment of digital media content across a wide
variety of technology platforms.  The Company’s products and services
offer innovative technologies to consumers, OEMs, businesses, high-end
professional optical disc authoring experts and developers.  The
Company distributes its products and services through retailers and
distributors, personal computer (“PC”) and consumer electronics (“CE”) OEMs,
Internet websites including www.roxio.com, and other channels.  The
Company also licenses core technology and intellectual property to other
software companies and technology manufacturers for integration into their own
products and services.  Sonic software is intended for use with a wide
range of PC and CE operating systems, development environments, and proprietary
platforms.




Sonic
products and services are used to accomplish a wide variety of tasks, including
creating and distributing digital audio and video content in a variety of
formats; renting, purchasing and enjoying Hollywood movies and other premium
content; producing digital media photo and video shows for sharing online and
via television, PCs and CE devices; recording and playback of digital content on
DVD, Blu-ray Disc (“BD”), other storage media and portable devices; managing
digital media on PCs and CE devices; and backing up and preserving digital
information, both to local storage devices and on the Internet.




Basis
of Presentation




The
Company prepares its financial statements in conformity with U.S. generally
accepted accounting principles (“GAAP”).




Quantities
or results referred to as “to date” or “as of this date” mean as of or to March
31, 2010, unless otherwise specifically noted.  References to “FY” or
“fiscal year” refer to our fiscal year ending on March 31 of the designated
year. For example, “FY 2010” and “fiscal year 2010” each refer to the fiscal
year ending March 31, 2010.  Other references to “years” mean calendar
years.




This
Annual Report on Form 10-K (“Annual Report”) includes references to certain of
the Company’s trademarks and registered trademarks. Products or service names of
other companies mentioned in this Annual Report may be trademarks or registered
trademarks of their respective owners.




Reclassifications




Certain
prior year amounts in the Consolidated Financial Statements and notes thereto
have been reclassified to conform to the current year presentation.




Significant
Accounting Policies




In
preparing its consolidated financial statements, the Company makes estimates,
judgments, and assumptions that can significantly affect the amounts reported in
its consolidated financial statements.  The Company bases its
estimates on historical experience and various other assumptions that it
believes to be reasonable under the circumstances. Actual results could differ
from these estimates.  The Company regularly evaluates its estimates,
judgments, and assumptions and makes changes accordingly.  The Company
believes the following accounting policies and estimates are the most critical
and significant to understanding and evaluating its financial condition and
results of operations.




In June
2009, the Financial Accounting Standards Board (“FASB”) approved the FASB
Accounting Standards Codification (“ASC”) as the single source of authoritative
nongovernmental GAAP.  ASC does not change current GAAP, but
simplifies user access to all authoritative GAAP by providing all the
authoritative literature related to a particular topic in one
place.  All existing accounting standards documents was superseded and
all other accounting literature not included in the ASC is considered
non-authoritative.  The Company adopted the ASC in June 2009 and
discloses the ASC prescribed topic numbering references on a primary
basis.


47




Principles
of Consolidation




The
accompanying consolidated financial statements include Sonic Solutions and its
wholly-owned subsidiaries.  All significant intercompany accounts and
transactions have been eliminated.




Use
of estimates




On an
ongoing basis, the Company evaluates estimates used.  The following
accounting policies require management to make estimates, judgments and
assumptions and are critical in fully understanding and evaluating the Company’s
reported financial results:




·
            Revenue
      recognition




·
            Allowances
      for sales returns and doubtful
accounts




·
            Share-based
      compensation




·
            Valuation
      of acquired businesses, assets and
liabilities




·
            Goodwill,
      intangible assets and other long-lived
assets




·
            Accrued
      liabilities




·
            Contingencies




·
            Income
      tax and deferred tax asset
valuation




Foreign
Currency Translation




The
functional currency of the Company’s foreign subsidiaries is the local
currency.  Assets and liabilities are translated into U.S. dollars at
the exchange rate on the balance sheet date.  Revenues and expenses
are translated at the average exchange rate prevailing during the
period.  The related gains and losses from translation are recorded in
accumulated other comprehensive income (loss) in the balance
sheet.  Foreign currency transaction gains and losses are included in
“Other income (expense).”




Cash
Equivalents




Cash and
cash equivalents consist of short-term, highly-liquid investments with original
maturities of three months or less and are stated at cost, which approximates
market value.




Short
Term Investments




During
fiscal 2009, short term investments included highly-rated (AAA/Aaa) select
auction variable rate securities (“ARS”).  Short-term investments are
reported at fair value and are subject to periodic impairment review with any
unrealized gains or losses recorded in other comprehensive income
(loss).  No impairment charges were recorded on any short-term
investments during the year ended March 31, 2009.  As of November 20,
2008, the Company redeemed the remaining ARS that it previously held for $0.9
million, which comprised the full carrying value plus interest.




Fair
Value Measurements




Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability, otherwise known as the “exit price,” in an orderly
transaction between market participants at the measurement date. The Company
uses the three tier fair value hierarchy as a basis for its
assumptions.  The hierarchy of inputs used for measuring fair value
are as follows:  Level 1 – observable inputs such as quoted prices in
active markets; Level 2 – inputs other than quoted prices in active markets that
are observable either directly or indirectly in active markets; Level 3 –
unobservable inputs in which there is little or no market data and as a result,
management assumptions are developed.




The
Company’s money market funds are considered a Level 1 financial asset where the
fair value is based on unadjusted quoted market prices and the account balance
approximates its fair value due to its short term nature.  The primary
objective of the Company’s investment in money market funds is to preserve
capital for the purpose of funding operations and is not for trading or
speculative purposes.  The following table presents the Company’s
assets or liabilities are measured at fair value on a recurring basis at March
31, 2010 (in thousands):


48




FairValueMeasurementsatReportingDateFairValueasof
                                                March31,2010
                                              
                                              
                                              QuotedPricesin
                                                ActiveMarketsfor
                                                IdenticalAssets(Level 1)AssetsMoney
      market accounts (1)
                                              
                                              $
                                              41,507
                                              
                                              
                                              $
                                              41,507Total
                                              
                                              $
                                              41,507
                                              
                                              
                                              $
                                              41,507(1)Included in "Cash and cash equivalents" in the Balance
      Sheet.




Fair Value Measurements at Reporting
      DateFair Value as of
                                                March 31, 2009
                                              
                                              
                                              Quoted Prices in
                                                Active Markets for
                                                Identical Assets(Level 1)AssetsMoney
      market accounts (1)
                                              
                                              $
                                              15,737
                                              
                                              
                                              $
                                              15,737Total
                                              
                                              $
                                              15,737
                                              
                                              
                                              $
                                              15,737(1)Included in "Cash and cash equivalents" in the Balance
      Sheet.




Accounts
Receivable and Allowance for Product Returns and Doubtful Accounts




Accounts
receivable is presented net of allowance for product returns, discounts and
doubtful accounts of $2.5 million and $2.1 million at March 31, 2010 and 2009,
respectively.  The Company’s distributor and retail arrangements
provide for certain discounts, product rotation rights and permit certain
product returns.  The Company estimates reserves for these rights of
return based on historical return rates, timing of new product releases, and
channel inventory levels.




The
Company maintains an allowance for doubtful accounts to reserve for potentially
uncollectible accounts based on past collection history and specific risks
identified in its portfolio of receivables.  If the financial
condition of the Company’s distributors or other customers deteriorate resulting
in an impairment of their ability to make payments, or if payments from
distributors or other customers are significantly delayed, additional allowances
may be required.




Inventory




Inventory
stated at the lower of cost (first-in, first-out method) or market (estimated
net realizable value) and consisted of the following at March 31, 2010 and 2009
(in thousands):





March 31,2010
                    
                    
                    2009Raw
      materials
                    
                    $
                    142
                    
                    
                    $
                    -Finished
      goods
                    
                    
                    1,799
                    
                    
                    
                    1,086$
                    1,941
                    
                    
                    $
                    1,086




Reserves
for excess and obsolete inventory are established based on an analysis of
products on hand and sales trends.  Inventory is presented net of
reductions for excess and obsolescence of $0.5 million at March 31, 2010 and
2009, respectively.  Inventory held on consignment at March 31, 2010
and 2009 was $1.8 million and $1.0 million, respectively.




Fixed
Assets, Net




Fixed
assets consist primarily of furniture, equipment, and leasehold
improvements.  Fixed assets are stated at cost less accumulated
depreciation and amortization.  The Company depreciates furniture and
equipment using the straight-line method over the estimated useful lives of the
respective assets which are generally three to five years.  Leasehold
improvements are amortized on a straight-line basis over the lesser of their
estimated useful lives or the term of the lease.  Fixed assets consist
of (in thousands):


49




March 31,2010
                  
                  
                  2009Equipment,
      furniture and fixtures
                  
                  $
                  10,264
                  
                  
                  $
                  12,214Less:
      accumulated depreciation
                  
                  
                  (8,594
                  )
                  
                  
                  (9,363
                  )$
                  1,670
                  
                  
                  $
                  2,851




Impairment
of Goodwill, Intangible Assets and Other Long-Lived Assets




Intangible
assets are classified into three categories:  (1) intangible assets
with definite lives subject to amortization; (2) intangible assets with
indefinite lives not subject to amortization; and
(3) goodwill.  For goodwill and intangible assets with definite
lives, tests for impairment must be performed if conditions exist that indicate
the carrying value may not be recoverable.  For intangible assets with
indefinite lives and goodwill, tests for impairment must be performed at least
annually or more frequently if events or circumstances indicate that assets
might be impaired.




The
Company tests for impairment at least annually, in the Company’s fourth fiscal
quarter, or more frequently if events and circumstances warrant.




The
Company evaluates goodwill and indefinite life intangible assets for impairment
by comparing the fair value of each of its reporting units to its carrying value
including the goodwill allocated to that reporting unit.  A reporting
unit is an operating segment or one level below an operating
segment.  To determine the reporting unit’s fair value, the Company
uses the income approach under which it evaluates estimated discounted future
cash flows of that unit.  The Company bases its cash flow assumptions
on historical and forecasted revenue and operating costs.




The
Company has reviewed the criteria necessary to evaluate the number of reporting
units that exist.  Based on its review, the Company has determined it
operates in two reporting segments, Roxio Consumer and Premium
Content.




Long-lived
assets are reviewed for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.  The Company evaluates long-lived assets, including
intangible assets with finite useful lives, for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable.  The determination of recoverability of long-lived assets
and intangible assets with finite lives is based on an estimate of the
undiscounted future cash flows resulting from the use of that asset and its
eventual disposition.




Based on
a combination of factors occurring during fiscal 2009, including the economic
environment, market conditions and decline of the Company’s stock value, the
Company determined that indicators for impairment of goodwill and intangible
assets existed.  Accordingly, during the third quarter of fiscal 2009,
the Company performed an impairment analysis and recorded impairment charges of
$19.6 million and $56.2 million for its intangible assets and goodwill,
respectively, related to its Roxio Consumer reporting segment.




There are
inherent uncertainties and management judgment required in an analysis of
goodwill intangibles and other long-lived asset impairment.  Fair
values were determined based upon market conditions, a blended market and income
approach which utilized cash flow projections, and other
factors.  Future adverse changes in these or other unforeseeable
factors could result in an impairment charge that could materially impact future
results of operations and financial position in the reporting period
identified.  The results of the analysis indicated that there would be
$4.6 million remaining carrying value attributable to goodwill for the Premium
Content segment, $2.1 million attributable to acquired intangibles for Premium
Content segment and $14.5 million attributable to acquired intangibles for the
Roxio Consumer Products segment as of December 31, 2008.  During the
fourth quarter ended March 31, 2009, the Company determined there were no
further impairments to record for fiscal 2009.  There were no
impairments of goodwill or acquired intangibles in fiscal 2010.




Goodwill
and identified intangible asset balances are summarized as follows (in
thousands):


50




March 31, 2010
                          
                          
                          March 31, 2009Useful
                          
                          
                          Gross
                          
                          
                          
                          
                          
                          Net
                          
                          
                          Gross
                          
                          
                          
                          
                          
                          NetLife
      in
                          
                          
                          Carrying
                          
                          
                          Accumulated
                          
                          
                          Carrying
                          
                          
                          Carrying
                          
                          
                          Accumulated
                          
                          
                          CarryingYears
                          
                          
                          Amount
                          
                          
                          Amortization
                          
                          
                          Amount
                          
                          
                          Amount
                          
                          
                          Amortization
                          
                          
                          AmountGoodwill
                          
                          Indefinite
                          
                          
                          $
                          4,628
                          
                          
                          $
                          -
                          
                          
                          $
                          4,628
                          
                          
                          $
                          4,628
                          
                          
                          $
                          -
                          
                          
                          $
                          4,628Purchased
      software
                          
                          3
                          
                          
                          
                          3,584
                          
                          
                          
                          (3,419
                          )
                          
                          
                          165
                          
                          
                          
                          3,518
                          
                          
                          
                          (3,070
                          )
                          
                          
                          448Internally
      developed software
                          
                          3
                          
                          
                          
                          9,804
                          
                          
                          
                          (9,804
                          )
                          
                          
                          -
                          
                          
                          
                          9,776
                          
                          
                          
                          (9,776
                          )
                          
                          
                          -Acquired
      technology
                          
                          3-5
                          
                          
                          
                          14,520
                          
                          
                          
                          (14,277
                          )
                          
                          
                          243
                          
                          
                          
                          14,520
                          
                          
                          
                          (14,210
                          )
                          
                          
                          310Customer
      lists / contracts
                          
                          2-15
                          
                          
                          
                          16,870
                          
                          
                          
                          (15,040
                          )
                          
                          
                          1,830
                          
                          
                          
                          16,870
                          
                          
                          
                          (14,727
                          )
                          
                          
                          2,143Trademarks
                          
                          3
                          
                          
                          
                          250
                          
                          
                          
                          (249
                          )
                          
                          
                          1
                          
                          
                          
                          250
                          
                          
                          
                          (247
                          )
                          
                          
                          3Brand
      name
                          
                          Indefinite
                          
                          
                          
                          14,100
                          
                          
                          
                          -
                          
                          
                          
                          14,100
                          
                          
                          
                          14,100
                          
                          
                          
                          -
                          
                          
                          
                          14,100$
                          63,756
                          
                          
                          $
                          (42,789
                          )
                          
                          $
                          20,967
                          
                          
                          $
                          63,662
                          
                          
                          $
                          (42,030
                          )
                          
                          $
                          21,632




The
following tables present the activity for goodwill and intangibles for the 2010
and 2009 fiscal years (in thousands):




March 31,
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      March 31,2009
                      
                      
                      Additions
                      
                      
                      Adjustments
                      
                      
                      Amortization(1)
                      
                      
                      2010Goodwill
                      
                      $
                      4,628
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      4,628Purchased
      software
                      
                      
                      448
                      
                      
                      
                      37
                      
                      
                      
                      (8
                      )
                      
                      
                      (312
                      )
                      
                      
                      165Internally
      developed software
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Acquired
      technology
                      
                      
                      310
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (67
                      )
                      
                      
                      243Customer
      lists/contracts
                      
                      
                      2,143
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (313
                      )
                      
                      
                      1,830Trademarks
                      
                      
                      3
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2
                      )
                      
                      
                      1Brand
      name
                      
                      
                      14,100
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      14,100$
                      21,632
                      
                      
                      $
                      37
                      
                      
                      $
                      (8
                      )
                      
                      $
                      (694
                      )
                      
                      $
                      20,967




(1)
            Amortization
      of intangibles is included in “Cost of Revenue” in the Company’s
      Consolidated Statements of
Operations.




March
      31,
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  March
      31,2008
                  
                  
                  Additions(1)
                  
                  
                  Adjustments(2)
                  
                  
                  Amortization(3)
                  
                  
                  2009Goodwill
                  
                  $
                  55,456
                  
                  
                  $
                  5,305
                  
                  
                  $
                  (56,133
                  )
                  
                  $
                  -
                  
                  
                  $
                  4,628Purchased
      software
                  
                  
                  671
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (223
                  )
                  
                  
                  448Internally
      developed software
                  
                  
                  33
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (33
                  )
                  
                  
                  -Acquired
      technology (4)
                  
                  
                  3,073
                  
                  
                  
                  1,910
                  
                  
                  
                  (2,673
                  )
                  
                  
                  (2,000
                  )
                  
                  
                  310Customer
      lists/contracts
                  
                  
                  6,729
                  
                  
                  
                  2,100
                  
                  
                  
                  (5,248
                  )
                  
                  
                  (1,438
                  )
                  
                  
                  2,143Brand
      name
                  
                  
                  25,700
                  
                  
                  
                  70
                  
                  
                  
                  (11,658
                  )
                  
                  
                  (9
                  )
                  
                  
                  14,103$
                  91,662
                  
                  
                  $
                  9,385
                  
                  
                  $
                  (75,712
                  )
                  
                  $
                  (3,703
                  )
                  
                  $
                  21,632




(1)
            Includes
      amounts capitalized in connection with the Simple Star and CinemaNow
      acquisitions completed in fiscal
2009.





(2)
            Adjustments
      include goodwill impairment of $56.2 million and intangible impairment of
      $19.6 million in fiscal 2009.





(3)
            Amortization
      of intangibles is included in “Cost of Revenue” in the Company’s
      Consolidated Statements of
Operations.




(4)
            A
      portion ($46,000) for fiscal 2008 ending balance for acquired technology
      and customer lists/contracts was reclassified between the
      intangibles.




The
acquired intangibles with finite lives are being amortized using accelerated and
straight-line methods over their estimated useful lives.  Amortization
of acquired intangibles was $0.4 million, $3.4 million and $4.8 million for the
years ended March 31, 2010, 2009 and 2008, respectively.  The future
annual amortization expense is expected to be as follows (in
thousands):


51




AmortizationYearEndingMarch31,
                    
                    Expense2011
                    
                    $
                    3912012
                    
                    
                    3252013
                    
                    
                    2102014
                    
                    
                    2452015
                    
                    
                    187Thereafter
                    
                    
                    716$
                    2,074




Other
Comprehensive Loss




The
Company classifies items of comprehensive loss by their nature in the
consolidated financial statements and display the accumulated balance of other
comprehensive loss separately from accumulated deficit and additional paid-in
capital in the equity section of the consolidated balance sheets. Other
comprehensive loss items have no impact on the Company’s net loss as presented
in its Consolidated Statements of Operations.  The Company’s other
comprehensive loss is composed primarily of foreign currency translation
adjustments.  See “Statement of Shareholders’ Equity and Comprehensive
Loss.”




Revenue
Recognition




The
Company derives its revenue primarily from licenses of its software products,
software development agreements and maintenance and support.  The
Company also sells and licenses patents and patented technology.  The
Company recognizes revenue when the following criteria have been
met:




·
            Persuasive
      evidence of an arrangement exists;




·
            Delivery
      has occurred or services have been
rendered;




·
            The
      arrangement fees are fixed or determinable;
and




·
            Collection
      is considered probable.




If the
Company determines that any of the above criteria has not been met, the Company
will defer recognition of the revenue until all the criteria have been
met.




The
Company generally considers arrangements with payment terms longer than six
months from the time of delivery to have fees which are not fixed or
determinable, and recognizes the related revenue as payments become due from the
customer, provided all other revenue recognition criteria have been
met.  If the Company determines that collection of a fee is not
probable, it will defer the fees and recognize revenue upon cash receipt,
provided all other revenue recognition criteria have been met.




Generally,
the Company records revenue at gross and records costs related to a sale in cost
of revenue.  In those cases where the Company is not the primary
obligor or merchant of record and/or does not bear credit risk, or where it
earns a fixed transactional fee, the Company records revenue under the net
method.  When the Company records revenues at net, revenue is reported
at the net amount received and retained by the Company.




Multiple Element Arrangements -In arrangements that include multiple elements (e.g., software, specified
upgrades, support services, installation services, and/or training), the Company
allocates the total revenue to be earned under the arrangement to the elements
based on their relative fair value, as determined by vendor-specific objective
evidence of fair value (“VSOE”).  VSOE is generally the price charged
when that element is sold separately or, in the case of support services, annual
renewal rates.




In
arrangements where VSOE exists only for the undelivered elements, the Company
uses the “residual method” under which it defers the full fair value of the
undelivered elements and recognizes the difference between the total arrangement
fee and the amount deferred for undelivered items as revenue.  If VSOE
does not exist for all elements but the only undelivered element is maintenance
and support, the Company recognizes revenue from the arrangement ratably over
the maintenance and support period.  If VSOE does not exist for
undelivered elements that are specified products or upgrades, the Company defers
revenue until the earlier of the delivery of all elements or the point at which
it determines VSOE for these undelivered elements.


52




Product Sales -Except in the
case of consignment arrangements, the Company recognizes revenue from the sale
of its packaged software products when title transfers to the distributor or
retailer.  When the Company sells packaged software products to
distributors and retailers on a consignment basis, it recognizes revenue upon
sell through to an end customer.




The
Company’s distributor arrangements often provide distributors with certain
product rotation rights.  The Company estimates returns based on its
historical return experience and other factors such as channel inventory levels
and the introduction of new products.  These allowances are recorded
as a reduction of revenues and as an offset to accounts receivable to the extent
the Company has legal right of offset, otherwise they are recorded in accrued
expenses and other current liabilities.  If future returns patterns
differ from past returns patterns, for example due to reduced demand for the
Company’s product, the Company may be required to increase these allowances in
the future and may be required to reduce future revenues.




The
Company accounts for cash consideration (such as sales incentives) that it gives
to its customers or resellers as a reduction of revenue rather than as an
operating expense unless the Company receives a benefit that is separate from
the customer’s purchase from the Company and for which it can reasonably
estimate the fair value.




Software License Arrangements -Provided all other revenue recognition criteria have been met, the
Company recognizes revenue from software licensing arrangements upon delivery,
or, in the case of per-unit royalty arrangements, upon sell through to an end
user as evidenced by the receipt of a customer royalty report.




Software Development Arrangements -For arrangements that include development or other services that are
essential to the functionality of the licensed software, the Company recognizes
revenue using the percentage-of-completion method.  Under the
percentage-of-completion method, management estimates the number of hours needed
to complete a particular project, and revenues are recognized as the contract
progresses to completion.  Changes in estimates are recognized in the
period in which they are known.




In
certain instances, a development agreement may include additional undelivered
elements, such as maintenance and support, or a specified upgrade or other
deliverable, and VSOE of fair value may not exist for the undelivered elements,
or the Company may not have sufficient experience with either the type of
project or the customer involved to be able to make reliable estimates towards
completion.  If the Company cannot reliably estimate total
profitability under the agreement but is reasonably assured that no loss will be
realized on the agreement, the Company recognizes revenue using the zero gross
margin method.  Under the zero gross margin method, revenue recognized
under the contract equals costs incurred under the contract and any profit is
deferred until development is complete.  The Company recognizes the
deferred gross profit over the remaining contractual service period (for
example, the initial maintenance period).




In
addition, the Company receives prepayments of certain usage-based services and
offers certain products and services on a subscription
basis.  Subscription revenue is recognized ratably over the related
subscription period.  Prepaid revenue is deferred and recognized over
the usage period.




Content and Services–Premium content revenue
includes RoxioNow Service content sales.  When purchased on an
individual transaction basis, the Company recognizes revenue from the sale of
individual content titles in the period when the content is purchased and
delivered.  The Company generally recognizes revenue from the sale of
content subscriptions pro rata over the term of the subscription
period.




Share-Based
Compensation




The
Company measures compensation cost for share-based awards at fair
value.  Share-based compensation cost is measured at the grant date
based on the fair value of the award and will be recognized over the requisite
service period, which is generally the vesting period.  The Company
uses the Black-Scholes-Merton (“Black Scholes”) option pricing model to
determine the fair value of stock option shares.  The determination of
the fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by the Company’s stock price as well as
assumptions regarding a number of complex and subjective
variables.  These variables include the Company’s expected stock price
volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected
dividends.  The fair value of restricted stock units (“RSUs”) is
equivalent to the market price of the Company’s common stock on the grant
date.


53


Income
Tax and Deferred Tax Asset Valuation




The
provision for income taxes is calculated using the liability method of
accounting.  Under the liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases.  Deferred tax assets
and liabilities are measured using the tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.  In assessing net deferred tax assets,
management considers whether it is more likely than not that some or all of the
deferred tax assets will not be realized.  When the Company does not
believe realization of a deferred tax asset is likely, it records a valuation
allowance.  The valuation allowance is evaluated at the end of each
year, considering positive and negative evidence about whether the deferred tax
assets will be realized.




The
Company is subject to income taxes in the U.S. and certain foreign
jurisdictions.  Significant judgment is required in evaluating the
Company’s uncertain tax positions and determining its provision for income
taxes.  Accounting for income tax uncertainties requires a two-step
approach to recognize and measure uncertain tax positions.  The first
step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any.  The second step is to measure the tax
benefit as the largest amount that is more than fifty percent likely of being
realized upon settlement.




The
Company adjusts these reserves in light of changing facts and circumstances,
such as the closing of a tax audit or the refinement of an
estimate.  To the extent that the final tax outcome of these matters
is different than the amounts recorded, such differences will impact the
provision for income taxes in the period in which such determination is
made.  The provision for income taxes includes the impact of reserve
provisions as well as related interest and penalties.




Earnings
(Loss) Per Share




The
Company reports Earnings (Loss) per Share (“EPS”), both basic and diluted, on
the Consolidated Statements of Operations.  Basic EPS is computed
using the weighted average number of common shares
outstanding.  Diluted EPS is computed using the weighted average
number of common shares outstanding and dilutive potential shares of common
stock outstanding, except when their effect is
anti-dilutive.  Dilutive potential shares of common stock primarily
consist of employee stock options, RSUs and warrants.  Diluted shares
outstanding include the dilutive effect of in-the-money options, calculated
based on the average share price for each period using the treasury stock
method.




The
following table sets forth the computation of basic and diluted income (loss)
per share (in thousands, except per share data):




YearsEndedMarch31,2010
                    
                    
                    2009
                    
                    
                    2008Numerator:Net
      loss applicable to common shareholders
                    
                    $
                    (1,213
                    )
                    
                    $
                    (118,123
                    )
                    
                    $
                    (5,537
                    )Denominator:Weighted
      average number of common shares outstanding (1)
                    
                    
                    27,792
                    
                    
                    
                    26,535
                    
                    
                    
                    26,247Diluted
      weighted average number of common sharesoutstanding
                    
                    
                    27,792
                    
                    
                    
                    26,535
                    
                    
                    
                    26,247Basic
      and diluted net loss per share
                    
                    $
                    (0.04
                    )
                    
                    $
                    (4.46
                    )
                    
                    $
                    (0.21
                    )Potentially
      dilutive securities (2)
                    
                    
                    4,121
                    
                    
                    
                    5,819
                    
                    
                    
                    5,732




(1)
            Weighted
      average number of common shares outstanding excludes unvested stock
      options, restricted stock units, and
warrants.




(2)
            The
      potentially dilutive securities are excluded from the computation of
      diluted net loss per share for fiscal years 2010, 2009 and 2008 because
      their effect would have been
anti-dilutive.





Accounting
Standards Adopted in Fiscal 2010





In
December 2007, the FASB broadened the provisions of Statement of Financial
Accounting Standards (“SFAS”) 141 with the passage of SFAS 141 (revised
2007), Business Combinations (SFAS 141R), which is now referred to as FASB ASC
805.  ASC 805 establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, including goodwill, the liabilities assumed and any
non-controlling interest in the acquiree.  ASC 805 also establishes
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  ASC 805
is effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The impact of adopting ASC 805 will be
dependent on the future business combinations that the Company may pursue after
its effective date.


54




In April
2009, the FASB issued FASB Staff Positions intended to provide additional
application guidance and enhance disclosures regarding fair value measurements
and impairments of securities:  (i) ASC Topic 820,Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions that Are Not Orderly, provides
guidelines for making fair value measurements more consistent with the
principles presented in ASC Topic 820,Fair Value Measurements and
Disclosures; (ii) ASC Topic 825, Interim Disclosures about Fair Value
of Financial Instruments, enhances consistency in financial reporting by
increasing the frequency of fair value disclosures; and (iii) ASC Topic
320,Recognition and
Presentation of Other-Than-Temporary Impairments, provides additional
guidance designed to create greater clarity and consistency in accounting for
and presenting impairment losses on securities.  ASC Topics 820, 825,
and 320 are effective for interim and annual periods ending after June 15,
2009.  All three ASC Topics must be adopted in conjunction with each
other.  The Company adopted all three ASC Topics for the period ended
June 30, 2009.  The adoption of these ASC Topics had no material
impact on the Company’s consolidated financial position, results of operations
or cash flows.




In April
2009, the FASB issued guidance now codified as ASC Topic 805,Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise From
Contingencies.  ASC Topic 805 addresses issues raised by
preparers, auditors and members of the legal profession regarding initial
recognition and measurement, subsequent measurement, accounting and disclosure
of assets and liabilities arising from contingencies in business
combinations.  ASC Topic 805 is effective for assets or liabilities
arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008.  The impact of ASC Topic 805 on the
Company’s consolidated financial position, results of operations and cash flows
will be dependent upon the nature, term and the size of any acquired
contingencies.




In May
2009, the FASB issued guidance now codified as ASC Topic 855,Subsequent
Events.  ASC Topic 855 establishes standards for the disclosure
of events that occur after the balance sheet date, but before financial
statements are issued or are available to be issued.  ASC Topic 855
introduces the concept of financial statements being “available to be
issued.”  It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that
date.  The disclosure should alert all users of financial statements
that an entity has not evaluated subsequent events after that date in the set of
financial statements being presented.  The Company adopted ASC Topic
855 for the period ended June 30, 2009.  The adoption of ASC Topic 855
had no material impact on the Company’s consolidated financial position, results
of operations or cash flows.




Recently
Issued Accounting Pronouncements




The
following represents a summary of recent authoritative pronouncements that could
impact the Company’s accounting, reporting, and/or disclosure of financial
information.




In
September 2009, the Emerging Issues Task Force (“EITF”) issued its final
consensus for Accounting Standards Update (“ASU”) 2009-13 (formerly “EITF
08-1”), Revenue Arrangements
with Multiple Deliverables, which will supersede the guidance in ASC
605-25 (previous authoritative guidance:  EITF 00-21, Revenue Arrangements with Multiple
Deliverables).  ASU 2009-13 retains the criteria from ASC 605-5
for when delivered items in a multiple-deliverable arrangement should be
considered separate units of accounting, but removes the previous separation
criterion under ASC 605-25 that objective and reliable evidence of fair value of
any undelivered items must exist for the delivered items to be considered a
separate unit or separate units of accounting.  ASU 2009-13 introduces
a selling price hierarchy for multiple deliverable arrangements and allows for
management selling price estimates in cases where no vendor specific objective
evidence or third party evidence is available.  Additionally, this
guidance eliminates the residual method of allocation.  ASU 2009-13 is
effective for fiscal years beginning on or after June 15, 2010.  The
Company is currently evaluating ASU 2009-13 and the impact, if any, that it may
have on its results of operations or financial position.




In
September 2009, the EITF issued its final consensus for ASU 2009-14 (formerly
“EITF 09-3”), Applicability of
SOP 97-2 to Certain Arrangements that Include Software Elements,which
amends the prior guidance to exclude tangible products that contain software and
non-software components that function together to deliver the products’
“essential functionality” from the guidance on software revenue
recognition.  The guidance is effective for fiscal years beginning
after June 15, 2010; however, early adoption is permitted as of the beginning of
an entity’s fiscal year.  Entities are required to adopt ASU 2009-13
and ASU 2009-14 concurrently.  The Company is in the process of
determining the effect of the adoption of ASU 2009-14 and the impact, if any,
that it may have on its results of operations or financial
position.


55




In
January 2010, the FASB issued ASU 2010-06.  The ASU amends ASC 820,
Fair Value Measurements and
Disclosures,to
add new requirements for disclosures about transfers into and out of Levels 1
and 2 and separate disclosures about purchases, sales, issuances, and
settlements relating to Level 3 measurements.  It also clarifies
existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value.  The
amendment is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value
measurements, which are effective for fiscal years beginning after
December 15, 2010.  The Company does not expect the adoption will have
any impact on its results of operations or financial position.




NOTE
2 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES




Accrued
expenses and other current liabilities consist of (in thousands):




March 31,2010
                  
                  
                  2009Commissions
      payable
                  
                  $
                  543
                  
                  
                  $
                  461Accrued
      compensation and benefits
                  
                  
                  2,761
                  
                  
                  
                  3,353Accrued
      professional services
                  
                  
                  1,146
                  
                  
                  
                  1,901Accrued
      marketing costs
                  
                  
                  927
                  
                  
                  
                  686Accrued
      sales returns and discounts
                  
                  
                  2,124
                  
                  
                  
                  2,382Accrued
      royalties
                  
                  
                  2,629
                  
                  
                  
                  3,137Accrued
      restructuring costs
                  
                  
                  385
                  
                  
                  
                  910Income
      tax liability
                  
                  
                  2,729
                  
                  
                  
                  2,686Other
      tax liabilities
                  
                  
                  7,134
                  
                  
                  
                  8,410Other
      accrued expense
                  
                  
                  1,538
                  
                  
                  
                  3,038Total
      accrued expenses and other current liabilities
                  
                  $
                  21,916
                  
                  
                  $
                  26,964




NOTE
3 – COMMITMENTS AND CONTINGENCIES




Operating
Leases




The
Company leases certain facilities and equipment under non-cancelable operating
and capital leases.  Operating leases include leased facilities and
capital leases include leased equipment.  Rent expense under operating
and capital leases was approximately $4.5 million, $5.0 million and $4.5 million
for the fiscal years ended March 31, 2010, 2009 and 2008,
respectively.  The facilities leases generally provide that the
Company pay property taxes, insurance and maintenance.




Future
payments under various operating and capital leases that have initial remaining
non-cancelable lease terms in excess of one year are as follows (in
thousands):




Years Ending March31,
                  
                  Operating
                    Leases
                  
                  
                  Capital Leases
                  
                  
                  TotalLease
                    Obligations2011
                  
                  $
                  4,036
                  
                  
                  $
                  123
                  
                  
                  $
                  4,1592012
                  
                  
                  1,836
                  
                  
                  
                  32
                  
                  
                  
                  1,8682013
                  
                  
                  381
                  
                  
                  
                  2
                  
                  
                  
                  3832014
                  
                  
                  53
                  
                  
                  
                  3
                  
                  
                  
                  56Thereafter
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  6,306
                  
                  
                  $
                  160
                  
                  
                  $
                  6,466




Litigation
Matters




On
October 4, 2007, a putative shareholder class action was filed in the United
States District Court for the Northern District of California against the
Company and various of its executive officers and directors, premised on
allegations concerning the granting of stock options by the Company and the
alleged filing of false and misleading financial statements.  On March
21, 2008, plaintiffs filed a consolidated amended complaint on behalf of a
proposed class of plaintiffs comprised of persons that purchased the Company’s
shares between October 23, 2002 and May 17, 2007.  On May 27, 2008,
plaintiffs filed a “corrected” consolidated amended complaint which alleges
various violations of the Securities Exchange Act of 1934 and the rules
thereunder.  In July 2009, the parties reached an agreement in
principle to settle this action, and on October 15, 2009, the parties executed a
stipulation of settlement providing for the creation of a settlement fund of $5
million to satisfy claims submitted by class members and to pay any attorneys
fees awarded by the Court.  As part of the settlement, the Company’s
Directors and Officers (“D&O”) liability insurers agreed to fund the
settlement amount.  On April 8, 2010, this settlement was formally
approved and a final judgment and order of dismissal with prejudice was
entered.


56




The
Company’s D&O liability insurance has covered the legal fees and costs
associated with the above legal action, including payment of legal fees of $0.7
million during fiscal 2010.




Indemnification
Obligations




In the
normal course of business, the Company provides indemnifications of varying
scopes, including limited product warranties and indemnification of customers
against claims of intellectual property infringement made by third parties
arising from the use of its products or services.  The Company accrues
for known indemnification issues if a loss is probable and can be reasonably
estimated.  Historically, costs related to these indemnifications have
not been significant, but because potential future costs are highly variable,
the Company is unable to estimate the maximum potential impact of these
indemnifications on its future results of operations.  As permitted
under California law and in accordance with its Bylaws and certain other
commitments and agreements, the Company indemnifies its officers, directors and
members of its senior management against certain claims and liabilities, subject
to certain limits, while they serve at its request in such
capacity.  The maximum amount of potential indemnification is unknown
and potentially unlimited; however, the Company has D&O liability insurance
that enables it to recover a portion of future indemnification claims paid,
subject to retentions, conditions and limitations of those
policies.




Credit
Facilities




On
September 29, 2008, the Company paid off its $20 million credit facility
with the Union Bank of California, N.A. in accordance with its
terms.




Purchase
Commitments




The
Company in the normal course of business enters into various purchase
commitments for goods and services. Total non-cancellable purchase commitments
as of March 31, 2010 and March 31, 2009 were approximately $1.1 million and $1.4
million, respectively.  The purchase commitments are mainly associated
to contracts with royalties related to the Company’s Roxio Consumer products and
RoxioNow.




Other




The
Company sponsors a 401(k) savings plan that covers most of the Company’s U.S.
employees.  Participants may contribute a portion of their
compensation to the plan subject to IRS limits.  In fiscal years 2009
and 2008, the Company made $0.9 million and $1.3 million in matching
contributions to the plan, respectively.  There were no contributions
during fiscal 2010.  The Company stopped matching contributions in the
third quarter of fiscal 2009 as a cost cutting measure.




During
fiscal 2009, the Company entered into certain Asset Purchase Agreements that
contained holdback provisions.  The holdbacks related to the Simple
Star, Inc. and CinemaNow, Inc. acquisitions totaled $1.5
million.  These were paid in fiscal 2010.




NOTE
4 - SHAREHOLDERS’ EQUITY




Stock
Options




Current
Plans




The
Company grants stock options and other share-based awards to employees and
directors under various equity incentive plans:




·
            2000
      Stock Option Plan




·
            2004
      Equity Compensation Plan




57


In 2000,
the Company adopted the Sonic Solutions 2000 Stock Option Plan (the “2000
Plan”).  The 2000 Plan covers 3.0 million shares of Common Stock with
an annual increase in the number of shares available for issuance under the 2000
Plan on the last day of each fiscal year, provided that the total number of
shares issuable under the plan shall not exceed 3.75 million
shares.  Under this plan, stock options are granted annually at the
fair market value of the Company’s common stock on the date of
grant.  The 2000 Plan provides for issuing both incentive stock
options, which must be granted at fair market value at the date of grant, and
nonqualified stock options, which must be granted at not less than 85% of fair
market value of the stock.  Options under the 2000 Plan generally vest
over four years from the date of grant.  The options generally expire
ten years from the date of grant and are canceled three months after termination
of employment.  The Company’s Board of Directors and Compensation
Committee administer the 2000 Plan.  Upon the completion of the
Company’s voluntary review of stock option grant practices, it was determined
that some grants from this plan were issued at less than fair market value and
have been restated.  On April 1, 2010, the number of shares available
for issuance under the 2000 Plan increased by 750,000 pursuant to the Plan’s
“evergreen” provision.




In June
2004, the Company adopted the Sonic Solutions 2004 Equity Compensation Plan (the
“2004 Plan”) and the shareholders approved the 2004 Plan in September,
2004.  The 2004 Plan provides for the grant of stock options,
restricted stock, restricted stock units, stock appreciation rights and dividend
equivalent rights (collectively referred to as “awards”).  Stock
options granted under the 2004 Plan may be either incentive stock options under
the provisions of Section 422 of the Internal Revenue Code (“Code”), or
nonqualified stock options.  Incentive stock options may be granted
only to employees.  Awards other than incentive stock options may be
granted to employees, directors and consultants.  Options under the
2004 Plan generally vest over four years from the date of grant.  The
options generally expire ten years from the date of grant and are canceled three
months after termination of employment.  The Company’s Board of
Directors and Compensation Committee administer the 2004 Plan.  Upon
the completion of the Company’s voluntary review of stock option grant
practices, it was determined that some grants from this plan were issued at less
than fair market value and have been restated.




Discontinued
Plans




Effective
March 31, 2010, the Company terminated and discontinued the making of grants
under its 2004 Stock Incentive Plan and 2005 Stock Incentive Plan, which had
allowed for the granting of “inducement” stock options and other share-based
awards and which had not required shareholder approval.  While no
additional grants will be made under these discontinued Plans,
previously-granted awards under these Plans remain in full force and effect in
accordance with their original terms.




Equity
Issuance




On
October 29, 2009, the Company issued a warrant to purchase 668,711 shares of its
common stock to a third party in connection with the entry of the Company and
the third party into a strategic relationship agreement.  Under the
terms of the warrant, which vested 50% upon execution on of the strategic
relationship agreement, 25% upon the first anniversary and 25% upon the second
anniversary, the holder is entitled to purchase shares of the Company’s common
stock at $4.98 per share (the closing price of the Company’s common stock on the
date of the warrant issuance).  During the three months ended December
31, 2009, the Company recorded the value representing the initial 50% vesting of
the warrant, to equity and a promotional expense within Marketing and Sales
operating expense.  At the time of signing, no revenue had been earned
from the contract.  The Company valued this portion of the warrant at
$1.1 million using the Black-Scholes valuation model at the time of the signing
of the agreement.  The Black-Scholes valuation assumptions included an
expected term of 5 years, volatility of 80.20%, and a risk free rate of
2.44%.




The
remaining 50% of the warrant subject to vesting will be remeasured at each
reporting period until vested and recognized ratably over the associated vesting
period of the warrant with the related expense recorded as contra
revenue.  At March 31, 2010, the Company valued the unvested portion
of the warrant at $1.6 million using the Black-Scholes valuation model and
recorded $0.7 million against revenue during fiscal year 2010.  The
Black-Scholes valuation assumptions included an expected term of 4.6 years,
volatility of 84.83%, and a risk free rate of 2.31%.




On
December 17, 2009, the Company issued 3,450,000 shares of common stock in an
underwritten offering at a per share public offering price of
$9.70.  The Company received approximately $31.4 million in net cash
proceeds after underwriting discounts and commissions and expenses, which will
be used for working capital and general corporate purposes.




Tender
Offer




On
November 26, 2008, the Company filed a Tender Offer Statement on Schedule TO
with the SEC to repurchase and cancel certain stock options with high exercise
prices and to reprice, repurchase and cancel certain other options that were
potentially subject to adverse taxation under Code Section
409A.  During the third quarter of fiscal 2009, the Company purchased
options to acquire approximately 2.8 million eligible shares and paid
approximately $0.1 million in the fourth quarter of fiscal 2009.




58




A summary
of the Company’s stock option activity is presented below:




Number of
                              Shares
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price Per
                              Share
                            
                            
                            WeightedAverage
                              Remaining
                              Contractual Life
                              (Years)
                            
                            
                            Aggregate
                              IntrinsicValue
                              (Inthousands)Outstanding
      at March 31, 2007
                            
                            
                            6,619,275
                            
                            
                            $
                            13.72
                            
                            
                            
                            6.38
                            
                            
                            $
                            17,584Options
      granted
                            
                            
                            -
                            
                            
                            $
                            -Options
      exercised
                            
                            
                            (186,158
                            )
                            
                            $
                            2.56Options
      forfeited or expired
                            
                            
                            (21,233
                            )
                            
                            $
                            15.01Outstanding
      at March 31, 2008
                            
                            
                            6,411,884
                            
                            
                            $
                            14.09
                            
                            
                            
                            5.04
                            
                            
                            $
                            7,917Options
      granted
                            
                            
                            4,055,427
                            
                            
                            $
                            3.02Options
      exercised
                            
                            
                            (100,234
                            )
                            
                            $
                            3.20Tendered
      options
                            
                            
                            (2,805,829
                            )
                            
                            $
                            15.38Options
      forfeited or expired
                            
                            
                            (1,926,191
                            )
                            
                            $
                            15.38Outstanding
      at March 31, 2009
                            
                            
                            5,635,057
                            
                            
                            $
                            5.25
                            
                            
                            
                            7.78
                            
                            
                            $
                            15Options
      granted
                            
                            
                            865,050
                            
                            
                            $
                            6.28Options
      exercised
                            
                            
                            (524,784
                            )
                            
                            $
                            2.89Options
      forfeited or expired
                            
                            
                            (360,386
                            )
                            
                            $
                            9.89Outstanding
      at March 31, 2010
                            
                            
                            5,614,937
                            
                            
                            $
                            5.31
                            
                            
                            
                            7.51
                            
                            
                            $
                            28,079Vested
      and expected to vest
                            
                            
                            5,325,856
                            
                            
                            $
                            5.41
                            
                            
                            
                            7.43
                            
                            
                            $
                            26,377Exercisable
      at March 31, 2010
                            
                            
                            2,937,354
                            
                            
                            $
                            6.91
                            
                            
                            
                            6.29
                            
                            
                            $
                            12,430




The
intrinsic value of options exercised is calculated as the difference between the
exercise price of the option and the market value of the stock on the last
trading day of the fiscal period.  The closing market value of the
stock was $9.37 on March 31, 2010.  The total intrinsic value of
options exercised in fiscal 2010, 2009 and 2008 was approximately $2.6 million,
$0.2 million and $1.2 million respectively. The
weighted average grant date fair value per share of options granted was $3.97.
$1.13 and $0 for the fiscal years ended 2010, 2009, and 2008,
respectively. Stock
options were not granted during fiscal 2008 due to the voluntary stock option
review.  As of March 31, 2010, total compensation expense related to
non-vested options not yet recognized, including estimated forfeitures, was $4.1
million.  The cost is expected to be recognized over a remaining
weighted average period of 2.68 years.




The
following table summarizes information about stock options outstanding and
exercisable at March 31, 2010:




Options Outstanding
                          
                          
                          Options ExercisableRange of Exercise Price
                          
                          Number of
                            Shares
                          
                          
                          Weighted
                            Average
                            Remaining
                            Contractual
                            Term
                            (Years)
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price Per
                            Share
                          
                          
                          Number of
                            Shares
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price$0.92
      to $1.17
                          
                          
                          196,646
                          
                          
                          
                          2.31
                          
                          
                          $
                          1.14
                          
                          
                          
                          179,771
                          
                          
                          $
                          1.16$1.23
      to $1.23
                          
                          
                          2,296,588
                          
                          
                          
                          8.71
                          
                          
                          
                          1.23
                          
                          
                          
                          795,177
                          
                          
                          
                          1.23$1.25
      to $6.33
                          
                          
                          976,697
                          
                          
                          
                          6.49
                          
                          
                          
                          4.35
                          
                          
                          
                          494,146
                          
                          
                          
                          4.03$6.60
      to $6.60
                          
                          
                          4,844
                          
                          
                          
                          1.96
                          
                          
                          
                          6.60
                          
                          
                          
                          4,844
                          
                          
                          
                          6.60$6.89
      to $6.89
                          
                          
                          1,128,634
                          
                          
                          
                          8.20
                          
                          
                          
                          6.89
                          
                          
                          
                          724,573
                          
                          
                          
                          6.89$6.92
      to $20.86
                          
                          
                          1,011,528
                          
                          
                          
                          6.17
                          
                          
                          
                          14.54
                          
                          
                          
                          738,843
                          
                          
                          
                          16.39$0.92
      to $20.86
                          
                          
                          5,614,937
                          
                          
                          
                          7.53
                          
                          
                          $
                          5.31
                          
                          
                          
                          2,937,354
                          
                          
                          $
                          6.91




Restricted
Stock Units (“RSUs”)




During
fiscal year 2008 no RSUs were granted, and during fiscal years 2010 and 2009 the
Company granted RSUs under the 2004 Equity Compensation Plan.  A
summary of RSU activity is presented below:




59




Number
                                of Shares
                              
                              
                              Weighted
                                Average
                                Remaining
                                Term
                                (Years)
                              
                              
                              Aggregate
                                Intrinsic Value
                                (in thousands)Outstanding
      at March 31, 2007
                              
                              
                              354,700
                              
                              
                              
                              1.88
                              
                              
                              $
                              5,001RSUs
      granted
                              
                              
                              -RSUs
      forfeited or canceled
                              
                              
                              (68,352
                              )Outstanding
      at March 31, 2008
                              
                              
                              286,348
                              
                              
                              
                              1.38
                              
                              
                              $
                              2,763RSUs
      prior period release(1)
                              
                              
                              (171,448
                              )RSUs
      granted
                              
                              
                              75,750RSUs
      forfeited or canceled
                              
                              
                              (46,771
                              )Outstanding
      at March 31, 2009
                              
                              
                              143,879
                              
                              
                              
                              0.97
                              
                              
                              $
                              173RSUs
      released
                              
                              
                              (63,937
                              )RSUs
      granted
                              
                              
                              111,700RSUs
      forfeited or canceled
                              
                              
                              (13,359
                              )Outstanding
      at March 31, 2010
                              
                              
                              178,283
                              
                              
                              
                              1.36
                              
                              
                              $
                              1,671Vested
      and expected to vest at March 31, 2010
                              
                              
                              159,231
                              
                              
                              
                              1.25
                              
                              
                              $
                              1,492




(1)
            Includes
      adjustment for RSU releases that vested in previous quarters but were not
      released due to the voluntary stock option review blackout
      period.





RSUs are
not considered outstanding common stock at the time of grant.  Upon
vesting the Company settles RSUs with the issuance of common stock. Shares
issued were net of shares traded for the payment of taxes of 22,226 and 61,315
for fiscal years ended March 31, 2010 and 2009, respectively. The total
intrinsic value of outstanding RSUs as of March 31, 2010 was $0.4 million based
on the closing price of $9.37 per share.  The weighted average grant
date fair value per share of RSU granted during fiscal years 2010 and 2009 was
$9.46 and $6.89, respectively.  There were no RSUs granted during
fiscal 2008.  The weighted average grant date fair value is determined
based on the closing market price of the Company’s common stock on the date of
the award.  The grant date fair value of RSU awards is recognized as
compensation cost, on a straight-line basis over the four-year vesting
period.  The total unamortized share-based compensation expense
related to unvested RSUs, including estimated forfeitures, at March 31, 2010 was
$1.3 million.  The cost is expected to be recognized over a remaining
weighted average period of 2.59 years.





Share-Based
Compensation




The
Company uses the Black-Scholes-Merton option pricing model to determine the fair
value of stock option shares.  The determination of the fair value of
share-based payment awards on the date of grant using an option-pricing model is
affected by the Company’s stock price as well as assumptions regarding a number
of complex and subjective variables.  These variables include the
Company’s expected stock price volatility over the term of the awards, actual
and projected employee stock option exercise behaviors, risk-free interest rate
and expected dividends.




The
weighted-average fair value of options granted and the related assumptions used
are as follows (in percentages):




Years Ended March 31,2010
                    
                    
                    2009
                    
                    
                    2008Weighted-average
      fair value of options granted
                    
                    $
                    3.97
                    
                    
                    $
                    1.13
                    
                    
                    $
                    -Risk-free
      interest rate
                    
                    
                    2.1
                    %
                    
                    
                    1.9
                    %
                    
                    
                    -Expected
      volatility
                    
                    
                    80
                    %
                    
                    
                    50
                    %
                    
                    
                    -Expected
      life (in years)
                    
                    
                    4.7
                    
                    
                    
                    3.3
                    
                    
                    
                    -Expected
      dividend
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -




The
following table summarizes share-based compensation expense related to employee
stock options and restricted stock unit grants for fiscal 2010, 2009 and 2008
(in thousands):




60


Years Ended March 31,2010
                  
                  
                  2009
                  
                  
                  2008Marketing  and
      sales
                  
                  $
                  840
                  
                  
                  $
                  842
                  
                  
                  $
                  766Research
      and development
                  
                  
                  294
                  
                  
                  
                  292
                  
                  
                  
                  530General
      and administrative
                  
                  
                  1,423
                  
                  
                  
                  1,057
                  
                  
                  
                  249$
                  2,557
                  
                  
                  $
                  2,191
                  
                  
                  $
                  1,545




Share-based
expense for fiscal 2008 included a charge of $0.3 million attributable to the
extension of exercise periods for vested options for employees terminated
between November 15, 2006 and March 31, 2008.




NOTE 5 - INCOME TAXES




Income
tax expense (benefit) for the year ended March 31, 2010 consists of (in
thousands):




Current
                  
                  
                  Deferred
                  
                  
                  TotalU.S.
      Federal
                  
                  $
                  (200
                  )
                  
                  $
                  36
                  
                  
                  $
                  (164
                  )State
      and Local
                  
                  
                  28
                  
                  
                  
                  7
                  
                  
                  
                  35Foreign
                  
                  
                  577
                  
                  
                  
                  11
                  
                  
                  
                  588$
                  405
                  
                  
                  $
                  54
                  
                  
                  $
                  459




Income
tax expense (benefit) for the year ended March 31, 2009 consists of (in
thousands):




Current
                  
                  
                  Deferred
                  
                  
                  TotalU.S.
      Federal
                  
                  $
                  (103
                  )
                  
                  $
                  17,579
                  
                  
                  $
                  17,476State
      and Local
                  
                  
                  (208
                  )
                  
                  
                  5,886
                  
                  
                  
                  5,678Foreign
                  
                  
                  1,685
                  
                  
                  
                  321
                  
                  
                  
                  2,006$
                  1,374
                  
                  
                  $
                  23,786
                  
                  
                  $
                  25,160




Income
tax expense (benefit) for the year ended March 31, 2008 consists of (in
thousands):




Current
                  
                  
                  Deferred
                  
                  
                  TotalU.S.
      Federal
                  
                  $
                  -
                  
                  
                  $
                  (4,836
                  )
                  
                  $
                  (4,836
                  )State
      and Local
                  
                  
                  23
                  
                  
                  
                  (1,268
                  )
                  
                  
                  (1,245
                  )Foreign
                  
                  
                  1,250
                  
                  
                  
                  577
                  
                  
                  
                  1,827$
                  1,273
                  
                  
                  $
                  (5,527
                  )
                  
                  $
                  (4,254
                  )




The
differences between income taxes computed using the 35% statutory federal income
tax rate and the Company’s effective tax rate are summarized as follows (in
thousands):




Years Ended March 31,2010
                  
                  
                  2009
                  
                  
                  2008Computed
      tax at statutory rate
                  
                  $
                  (264
                  )
                  
                  $
                  (32,537
                  )
                  
                  $
                  (3,427
                  )State
      taxes, net of federal benefit
                  
                  
                  35
                  
                  
                  
                  5,678
                  
                  
                  
                  (887
                  )Net
      change in valuation allowance
                  
                  
                  1,338
                  
                  
                  
                  47,872
                  
                  
                  
                  -Goodwill
      impairment
                  
                  
                  -
                  
                  
                  
                  3,871
                  
                  
                  
                  -Research
      and development credits
                  
                  
                  -
                  
                  
                  
                  (816
                  )
                  
                  
                  (259
                  )Foreign
      rate differential
                  
                  
                  92
                  
                  
                  
                  1,228
                  
                  
                  
                  347Foreign
      investment in U.S. property
                  
                  
                  337
                  
                  
                  
                  462
                  
                  
                  
                  1,029Foreign
      tax credits
                  
                  
                  (487
                  )
                  
                  
                  (816
                  )
                  
                  
                  (923
                  )Prior
      year federal tax refunds
                  
                  
                  (166
                  )
                  
                  
                  -
                  
                  
                  
                  -Penalties
                  
                  
                  (491
                  )
                  
                  
                  19
                  
                  
                  
                  (260
                  )Nondeductible
      expenses
                  
                  
                  54
                  
                  
                  
                  51
                  
                  
                  
                  58Other
      permanent differences
                  
                  
                  11
                  
                  
                  
                  148
                  
                  
                  
                  68Income
      tax expense (benefit)
                  
                  $
                  459
                  
                  
                  $
                  25,160
                  
                  
                  $
                  (4,254
                  )




The other
permanent differences consist of provision to return true up adjustments and
income from foreign branches.


61


The
components of deferred taxes are as follows (in thousands):




March 31,2010
                  
                  
                  2009
                  
                  
                  2008Deferred
      tax assets:Accounts
      receivable
                  
                  $
                  17
                  
                  
                  $
                  83
                  
                  
                  $
                  75Inventories
                  
                  
                  208
                  
                  
                  
                  215
                  
                  
                  
                  399Tax
      credit carryforwards
                  
                  
                  16,408
                  
                  
                  
                  15,649
                  
                  
                  
                  13,379Net
      operating losses
                  
                  
                  21,360
                  
                  
                  
                  17,532
                  
                  
                  
                  8,581Accrued
      vacation pay
                  
                  
                  684
                  
                  
                  
                  729
                  
                  
                  
                  922Commissions
      and bonuses
                  
                  
                  31
                  
                  
                  
                  24
                  
                  
                  
                  38Fixed
      assets
                  
                  
                  (450
                  )
                  
                  
                  (349
                  )
                  
                  
                  178Intangible
      assets
                  
                  
                  20,804
                  
                  
                  
                  23,750
                  
                  
                  
                  -Research
      and experimental expenses
                  
                  
                  99
                  
                  
                  
                  115
                  
                  
                  
                  -Other
      reserves
                  
                  
                  4,284
                  
                  
                  
                  4,381
                  
                  
                  
                  5,072Stock
      option compensation
                  
                  
                  3,525
                  
                  
                  
                  3,645
                  
                  
                  
                  5,384Gross
      deferred tax assets
                  
                  
                  66,970
                  
                  
                  
                  65,774
                  
                  
                  
                  34,028Valuation
      allowance
                  
                  
                  (66,904
                  )
                  
                  
                  (65,712
                  )
                  
                  
                  (3,113
                  )Total
      deferred tax assets, net of valuation allowance
                  
                  
                  66
                  
                  
                  
                  62
                  
                  
                  
                  30,915Deferred
      tax liabilities: (1)Intangible
      assets
                  
                  
                  (57
                  )
                  
                  
                  -
                  
                  
                  
                  (1,822
                  )State
      income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,818
                  )Research
      and experimental expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  68Gross
      deferred tax assets
                  
                  
                  (57
                  )
                  
                  
                  -
                  
                  
                  
                  (4,572
                  )Total
      deferred tax liability
                  
                  
                  (57
                  )
                  
                  
                  -
                  
                  
                  
                  (4,572
                  )Net
      deferred taxes
                  
                  $
                  9
                  
                  
                  $
                  62
                  
                  
                  $
                  26,343




(1)
            Deferred
      tax liability is included in “Long Term Liabilities” in the Company’s
      Consolidated Balance Sheet.




At March
31, 2010, the Company had gross deferred tax assets for net operating loss
carryforwards (“NOLs”) of $21.4 million including $2.3 million related to the
Company’s acquisition of InterActual Technologies, Inc. in 2004.  The
loss carryforwards expire between 2020 and 2030.  To the extent NOLs
realized on tax returns relate to non-qualified stock option deductions, the
excess benefits will be credited to shareholders’ equity when
realized.




At March
31, 2010, the Company had cumulative unused federal and California research and
development (“R&D”) tax credits of approximately $4.8 million and $5.4
million, respectively, that can be used to reduce federal and California income
taxes.  The federal R&D credits expire from 2017 through 2030;
California credits carry forward indefinitely.  As of March 31, 2010,
the Company had cumulative accrued foreign tax credits of approximately $5.8
million that expire from 2013 through 2020.  In addition, the Company
had alternative minimum tax credit carryforwards of approximately $0.3 million
available to offset regular income tax over an indefinite period and $0.1
million of California manufacturing investment credits that expire in
2010.




In
assessing the net deferred tax assets, management considers whether it is more
likely than not that some or all of the deferred tax assets will not be
realized.  As of March 31, 2008, the Company’s $3.1 million valuation
allowance consisted of $1.7 million for acquired InterActual NOLs that may not
be utilized primarily due to an annual limitation under Code Section 382 and
$1.4 million for Canadian deferred tax assets that are unlikely to be
realized.




The
Company evaluates the valuation allowance at the end of each fiscal year,
considering positive and negative evidence about whether the deferred tax assets
will be realized.  At March 31, 2009, the Company believed it would
more likely than not be unable to realize a significant portion of its deferred
tax assets as a result of cumulative losses in fiscal year 2008 and
2009.  As such, the Company established a valuation allowance of
approximately $65.7 million on its deferred tax assets as of March 31,
2009.  Due to the Company’s loss in fiscal year 2010, the Company
increased the valuation allowance at March 31, 2010 to $66.9
million.





For tax
benefits to be recognized, a tax position must be more-likely-than-not to be
sustained upon examination by taxing authorities.  The amount
recognized is measured as the largest amount of benefit that is greater than 50
percent likely of being realized upon ultimate settlement.





At March
31, 2010, the Company had $6.0 million of gross unrecognized tax benefits
(“UTBs”), $1.5 million of which would affect its effective tax rate if
recognized.  The Company does not anticipate a significant increase or
decrease to the total UTBs during fiscal year 2011.  The Company
recognizes interest and penalties related to uncertain tax positions in income
tax expense.




62


The
Company files its income tax returns in the U.S. federal jurisdiction, various
U.S. states and foreign jurisdictions.  The Company is no longer
subject to U.S. federal and state income tax examination by tax authorities for
years prior to 2004.  Foreign income tax matters for significant
foreign jurisdictions have been concluded for years through 2003.




The
reconciliation of the total gross amounts of UTBs for the fiscal year ended
March 31, 2010 is as follows (in thousands):




Balance
      at April 1, 2008
                  
                  $
                  4,930Additions
      based on tax provisions related to the current year
                  
                  
                  873Balance
      at March 31, 2009
                  
                  $
                  5,803Additions
      based on tax provisions related to the current year
                  
                  
                  208Balance
      at March 31, 2010
                  
                  $
                  6,011


Interest and penalties related to UTBs are
classified as a component of the Company’s provision for income
taxes.  The Company recognized approximately $84,000 and $85,000 in
interest and penalties through the income tax provision in the consolidated
statements of income as of March 31, 2010 and 2009,
respectively.  There was approximately $0.3 million and $0.2 million
of accrued interest and penalties associated with UTBs as of March 31, 2010 and
2009, respectively.




The
Company did not provide for U.S. corporate income taxes on a cumulative total of
approximately $1.3 million of undistributed net foreign earnings for all
non-U.S. subsidiaries.  The Company intends to indefinitely reinvest
these funds in their respective operations outside the U.S.





NOTE
6 - SIGNIFICANT CUSTOMER INFORMATION, SEGMENT REPORTING AND GEOGRAPHIC
INFORMATION





The
Company reports certain information about its operating segments.  An
operating segment is a component of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.  The Company’s chief executive officer (“CEO”) is its
chief operating decision maker.




The
Company differentiates between digital media content that is created by
consumers (sometimes referred to herein as “personal” content) and digital
content that is professionally created for mass consumption (sometimes referred
to herein as “premium” content). Accordingly, the Company organizes its
business into two reportable operating segments targeted at these different
forms of content: the “Roxio Consumer Products” segment, which offers
products and services related to personal content, and the “Premium Content”
segment, which offers products and services related to premium
content. These segments reflect the Company’s internal organizational
structure, as well as the processes by which management makes operating
decisions, allocates resources and assesses performance.




Net Revenue




The
following table reflects net revenue by segment (in thousands):




Years Ended March 31,Net Revenue
                  
                  2010
                  
                  
                  2009
                  
                  
                  2008Roxio
      Product Group
                  
                  $
                  90,077
                  
                  
                  $
                  104,074
                  
                  
                  $
                  122,691Premium
      Content Group
                  
                  
                  14,268
                  
                  
                  
                  15,884
                  
                  
                  
                  10,183Total
      net revenue
                  
                  $
                  104,345
                  
                  
                  $
                  119,958
                  
                  
                  $
                  132,874




Operating
Income (Loss):




The
following table reflects operating income (loss) by segment (in
thousands):




Years Ended March 31,Operating loss
                  
                  2010
                  
                  
                  2009
                  
                  
                  2008Roxio
      Product Group
                  
                  $
                  28,061
                  
                  
                  $
                  (54,981
                  )
                  
                  $
                  31,906Premium
      Content Group
                  
                  
                  (10,286
                  )
                  
                  
                  (8,690
                  )
                  
                  
                  (12,744
                  )Unallocated
      operating expenses
                  
                  
                  (18,139
                  )
                  
                  
                  (28,192
                  )
                  
                  
                  (30,598
                  )Total
      operating loss
                  
                  $
                  (364
                  )
                  
                  $
                  (91,863
                  )
                  
                  $
                  (11,436
                  )


63


Revenues
by Geographic Location (in thousands):




Years Ended March 31,Revenue by region
                  
                  2010
                  
                  
                  2009
                  
                  
                  2008United
      States
                  
                  $
                  81,403
                  
                  
                  $
                  86,818
                  
                  
                  $
                  108,604ExportCanada
                  
                  
                  877
                  
                  
                  
                  1,573
                  
                  
                  
                  1,407France
                  
                  
                  696
                  
                  
                  
                  1,422
                  
                  
                  
                  1,076Germany
                  
                  
                  2,721
                  
                  
                  
                  4,429
                  
                  
                  
                  2,978United
      Kingdom
                  
                  
                  3,138
                  
                  
                  
                  3,287
                  
                  
                  
                  3,629Europe:
      Other
                  
                  
                  2,179
                  
                  
                  
                  2,910
                  
                  
                  
                  3,874Japan
                  
                  
                  7,721
                  
                  
                  
                  14,207
                  
                  
                  
                  5,948Singapore
                  
                  
                  3,212
                  
                  
                  
                  3,599
                  
                  
                  
                  3,446Taiwan
                  
                  
                  869
                  
                  
                  
                  281
                  
                  
                  
                  73Other
      Pacific Rim
                  
                  
                  945
                  
                  
                  
                  887
                  
                  
                  
                  1,362Other
      International
                  
                  
                  584
                  
                  
                  
                  545
                  
                  
                  
                  477Total
      net revenue
                  
                  $
                  104,345
                  
                  
                  $
                  119,958
                  
                  
                  $
                  132,874




The
Company sells its products to customers categorized geographically by each
customer’s country of domicile.




Long-lived Assets (excluding goodwill and other
intangible assets) by country (in thousands):




March 31,Assets by geography
                    
                    2010
                    
                    
                    2009
                    
                    
                    2008United
      States
                    
                    $
                    1,094
                    
                    
                    $
                    1,652
                    
                    
                    $
                    1,922Japan
                    
                    
                    47
                    
                    
                    
                    111
                    
                    
                    
                    154Canada
                    
                    
                    3
                    
                    
                    
                    6
                    
                    
                    
                    7China
                    
                    
                    465
                    
                    
                    
                    1,007
                    
                    
                    
                    810Other
      International
                    
                    
                    61
                    
                    
                    
                    75
                    
                    
                    
                    66Total
      long-lived assets
                    
                    $
                    1,670
                    
                    
                    $
                    2,851
                    
                    
                    $
                    2,959




Significant
Customer Information:




Percent of Total Net Revenue
                    
                    
                    Percent of Total
                      Accounts ReceivableYears Ended March 31,
                    
                    
                    March 31,Customer Name
                    
                    2010
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2010
                    
                    
                    2009Digital
      River
                    
                    
                    23
                    %
                    
                    
                    22
                    %
                    
                    
                    23
                    %
                    
                    
                    15
                    %
                    
                    
                    11
                    %Navarre
                    
                    
                    22
                    %
                    
                    
                    16
                    %
                    
                    
                    13
                    %
                    
                    
                    19
                    %
                    
                    
                    20
                    %Dell
                    
                    
                    13
                    %
                    
                    
                    14
                    %
                    
                    
                    26
                    %
                    
                    
                    5
                    %
                    
                    
                    5
                    %Hewlett-Packard
                    
                    
                    11
                    %
                    
                    
                    11
                    %
                    
                    
                    13
                    %
                    
                    
                    17
                    %
                    
                    
                    2
                    %Ingram
                    
                    
                    7
                    %
                    
                    
                    6
                    %
                    
                    
                    10
                    %
                    
                    
                    8
                    %
                    
                    
                    8
                    %




Revenue
recognized from Digital River was pursuant to a reseller arrangement, and
revenue recognized from Navarre was pursuant to distribution
arrangement.  The Digital River agreement covers the electronic
delivery of Company software and the creation and maintenance of the shopping
cart process for the Company’s online stores; the Navarre agreement provides for
both physical and electronic delivery, and under both consignment and direct
sale models.  The Company provides products to Digital River and
Navarre pursuant to agreements with standard terms and conditions including
provisions relating to the delivery of the Company’s products, distribution of
these products, representations by the Company with respect to the quality of
the products and the Company’s ownership of the products, obligations by the
Company to comply with law, confidentiality obligations, and indemnification by
the Company for breach of its representations or obligations.  The
agreements generally renew for one-year periods, subject to annual termination
by either party as well as other termination provisions, such as termination for
breach.  The agreements are non-exclusive and do not contain any
minimum purchase obligations or similar commitments.


64


NOTE
7 - ACQUISITIONS




uMedia
Acquisition




During
the fourth quarter of fiscal 2008, the Company entered into an Asset Purchase
Agreement with uMedia, a Chinese software development company whereby it
acquired substantially all the assets of uMedia for a purchase price of
approximately $0.5 million.  In connection with the acquisition the
Company acquired seven employees.  The uMedia team was integrated into
the Company’s Roxio Consumer Products division to further enhance its core audio
and video technology.




The
Company allocated the purchase price to assets purchased based on their relative
fair values with the excess recorded as goodwill.  Based on evaluation
and review of the assets, the amounts and components of the purchase price along
with the allocation of the purchase price are as follows (in
thousands):




Cash
                      
                      $
                      432Transaction
      costs
                      
                      
                      111Total
      purchase price
                      
                      $
                      543Customer
      relationships
                      
                      $
                      130Goodwill
                      
                      
                      413Net
      assets acquired
                      
                      $
                      543


The
transaction costs of approximately $0.1 million were for professional services,
including legal, tax, audit and advisory services.  Results for uMedia
have been included in the Company’s consolidated results beginning on March 1,
2008.




Simple Star Acquisition




During
the first quarter of fiscal 2009, the Company entered into an Asset Purchase
Agreement to purchase certain assets from Simple Star, Inc.  These
assets included PhotoShow, a multimedia storytelling platform and online
community that enables consumers to turn photos and video clips into shows that
can be viewed and shared on PCs, TVs, handheld devices, or published to social
media sites on the Internet.  In connection with the acquisition, the
Company acquired 25 employees.  The Simple Star purchase price of
approximately $6.0 million consisted of $5.0 million in cash due upon closing
and $1.0 million plus accrued interest due on the first anniversary of
closing.  The following table summarizes the adjusted fair value for
the assets acquired (in thousands):




Cash
                  
                  $
                  5,000Holdback
      contingency
                  
                  
                  1,000Transaction
      costs
                  
                  
                  46Total
      purchase price
                  
                  $
                  6,046Unbilled
      accounts receivable
                  
                  $
                  137Fixed
      assets
                  
                  
                  12Prepaid
      assets
                  
                  
                  25Intangible
      assets
                  
                  
                  2,570Goodwill
                  
                  
                  3,660Deferred
      revenue
                  
                  
                  (358
                  )Net
      assets acquired
                  
                  $
                  6,046




During
the first quarter of fiscal 2010, the Company paid approximately $1.0 million
related to the Simple Star acquisition holdback.




CinemaNow
Acquisition




During
the third quarter of fiscal 2009, the Company entered into an Asset Purchase
Agreement to purchase certain assets and liabilities from CinemaNow, Inc., a
privately held digital video distributor.  The CinemaNow assets, which
now comprise part of the Roxio Now Service, facilitate digital distribution of
premium video content, including Hollywood movies, TV shows, and music videos,
to users across multiple platforms.  The CinemaNow purchase price of
approximately $3.2 million was comprised of $0.8 million in cash, assumed
liabilities not to exceed $1.7 million, $0.2 million in direct costs and $0.5
million for a general holdback payable 180 days after the
closing.  The Company hired approximately thirty former CinemaNow
employees as a result of the acquisition.  The following table
summarizes the adjusted fair value for the assets acquired (in
thousands):


65




Cash
                  
                  $
                  850Holdback
      contingency
                  
                  
                  500Assumed
      liabilities
                  
                  
                  1,650Transaction
      costs
                  
                  
                  236Total
      purchase price
                  
                  $
                  3,236Accounts
      receivable
                  
                  $
                  82Prepaid
      expenses and other assets
                  
                  
                  30Fixed
      assets
                  
                  
                  14Other
      assets
                  
                  
                  237Intangibles
                  
                  
                  1,510Goodwill
                  
                  
                  1,645Deferred
      revenue
                  
                  
                  (282
                  )Net
      assets acquired
                  
                  $
                  3,236




During
the third quarter of fiscal 2010, the Company paid approximately $0.5 million
related to the CinemaNow acquisition holdback.




NOTE 8 - RESTRUCTURING




Each
reporting period, the Company evaluates its accruals for vacated facilities,
exit costs and employee separation costs to ensure the accruals are still
appropriate.  The associated accruals may be adjusted upward or
downward upon the occurrence of future triggering events.  Triggering
events may include, but are not limited to, changes in estimated time to
sublease, sublease terms, rates, and income.  Due to extended
contractual obligations of certain leases and the volatility of commercial real
estate markets, the Company could make future adjustments to these
accruals.  The following table summarizes the restructuring liability
activity (in thousands):





June 2009
                    
                    
                    January 2009
                    
                    
                    October 2008
                    
                    
                    June 2008
                    
                    
                    October 2007Restructuring
                    
                    
                    Restructuring
                    
                    
                    Restructuring
                    
                    
                    Restructuring
                    
                    
                    RestructuringSeverance
                      & Related
                      Costs
                    
                    
                    Other
                      Charges
                    
                    
                    Severance
                      & Related
                      Costs
                    
                    
                    Other
                      Charges
                    
                    
                    Severance
                      & Related
                      Costs
                    
                    
                    Other
                      Charges
                    
                    
                    Severance
                      & Related
                      Costs
                    
                    
                    Other
                      Charges
                    
                    
                    Severance
                      & Related
                      Costs
                    
                    
                    Other
                      Charges
                    
                    
                    TotalBalances,
      March 31, 2007
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,692
                    
                    
                    $
                    1,233
                    
                    
                    $
                    2,925Restructure
      Accrual
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,662
                    )
                    
                    
                    (672
                    )
                    
                    
                    (2,334
                    )Payments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Impact
      of exchange rate
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Adjustments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balances,
      March 31, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    30
                    
                    
                    
                    561
                    
                    
                    
                    591Restructure
      Accrual
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    764
                    
                    
                    
                    701
                    
                    
                    
                    898
                    
                    
                    
                    127
                    
                    
                    
                    1,327
                    
                    
                    
                    224
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,041Payments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (587
                    )
                    
                    
                    (52
                    )
                    
                    
                    (883
                    )
                    
                    
                    (70
                    )
                    
                    
                    (1,108
                    )
                    
                    
                    (61
                    )
                    
                    
                    (6
                    )
                    
                    
                    (346
                    )
                    
                    
                    (3,113
                    )Impact
      of exchange rate
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1
                    
                    
                    
                    (7
                    )
                    
                    
                    (1
                    )
                    
                    
                    (209
                    )
                    
                    
                    (50
                    )
                    
                    
                    (6
                    )
                    
                    
                    (215
                    )
                    
                    
                    (487
                    )Adjustments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12
                    
                    
                    
                    (116
                    )
                    
                    
                    (18
                    )
                    
                    
                    -
                    
                    
                    
                    (122
                    )Balances,
      March 31, 2009
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    177
                    
                    
                    
                    650
                    
                    
                    
                    8
                    
                    
                    
                    56
                    
                    
                    
                    22
                    
                    
                    
                    (3
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    910Restructure
      Accrual
                    
                    
                    329
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    329Payments
                    
                    
                    (258
                    )
                    
                    
                    -
                    
                    
                    
                    (200
                    )
                    
                    
                    (561
                    )
                    
                    
                    (9
                    )
                    
                    
                    (48
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,076
                    )Impact
      of exchange rate
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    23
                    
                    
                    
                    8
                    
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    4
                    
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    40Adjustments
                    
                    
                    (72
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    288
                    
                    
                    
                    -
                    
                    
                    
                    (8
                    )
                    
                    
                    (26
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    182Balances,
      March 31, 2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    385
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    385




During
the third quarter of fiscal 2008, the Company initiated a restructuring plan to
reorganize its operations, optimize its engineering and development efforts, and
reduce its workforce by closing its office in Richmond Hill,
Canada.  The reorganization was completed and the Richmond Hill office
was closed by December 31, 2007.  The Company incurred severance and
other one-time restructuring charges in connection with this closing, and
eliminated approximately 84 positions.  The Company also accrued
approximately $0.5 million related to the lease for this office, which expired
in December 2008.  During the third quarter of fiscal 2009, the
Company paid out the remaining site closure costs and completed this
restructuring plan.


66




During
the first quarter of fiscal 2009, the Company initiated a restructuring plan to
reorganize its operations, optimize its engineering and development efforts, and
reduce its workforce by the end of the 2008 calendar year.  Additional
initiatives included establishing certain operations closer in location to the
Company’s global customers and reducing the Company’s overhead costs, resulting
in a restructuring charge of $1.5 million related to severance, the closing of
the Company’s office in Germany and related costs.




During
the third quarter of fiscal 2009, the Company initiated a restructuring plan to
further reorganize and improve its operations, and reduce its
workforce.  This plan resulted in a restructuring charge of $1.1
million related to one-time termination benefits, other associated costs and
costs related to building and office consolidations.




During
the fourth quarter of fiscal 2009, the Company initiated a restructuring of the
Company’s workforce and closure of certain leased facilities.  The
workforce restructuring reduced worldwide headcount by approximately 75
positions and resulted in a restructuring charge of approximately $1.1 million
related to building and office consolidations and associated
charges.  During the first quarter of fiscal 2010, the Company
adjusted its accrual by $0.3 million due to changes in its estimates regarding
applicable office subleasing markets.




During
the first quarter of fiscal 2010, the Company initiated a restructuring plan to
reduce its workforce and resulted in a restructuring charge of approximately
$0.3 million related to one-time termination benefits.  During the
second and third quarters of fiscal 2010, the Company made minor changes to its
estimates related to one-time termination benefits on its June 2009
restructuring accrual.




NOTE 9 - QUARTERLY FINANCIAL DATA
(Unaudited)




Summarized
quarterly financial information for fiscal years 2010 and 2009 is as follows (in
thousands, except per share amounts):




Three Months EndedMarch 31,
                          
                          
                          December 31,
                          
                          
                          September 30,
                          
                          
                          June 30,
                          
                          
                          March 31,
                          
                          
                          December 31,
                          
                          
                          September 30,
                          
                          
                          June 30,2010
                          
                          
                          2009
                          
                          
                          2009
                          
                          
                          2009
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          2008
                          
                          
                          2008Net
      revenue
                          
                          $
                          26,370
                          
                          
                          $
                          26,392
                          
                          
                          $
                          26,056
                          
                          
                          $
                          25,527
                          
                          
                          $
                          32,244
                          
                          
                          $
                          26,525
                          
                          
                          $
                          31,076
                          
                          
                          $
                          30,114Gross
      Profit
                          
                          
                          18,519
                          
                          
                          
                          18,348
                          
                          
                          
                          17,980
                          
                          
                          
                          17,642
                          
                          
                          
                          23,622
                          
                          
                          
                          (278
                          )
                          
                          
                          21,726
                          
                          
                          
                          22,408Operating
      income (loss)
                          
                          
                          1,132
                          
                          
                          
                          (540
                          )
                          
                          
                          542
                          
                          
                          
                          (1,498
                          )
                          
                          
                          (890
                          )
                          
                          
                          (81,745
                          )
                          
                          
                          (3,938
                          )
                          
                          
                          (7,068
                          )Net
      income (loss)
                          
                          
                          1,168
                          
                          
                          
                          (344
                          )
                          
                          
                          (206
                          )
                          
                          
                          (1,831
                          )
                          
                          
                          328
                          
                          
                          
                          (111,116
                          )
                          
                          
                          (3,694
                          )
                          
                          
                          (3,640
                          )Basic
      income (loss) per share
                          
                          $
                          0.04
                          
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.07
                          )
                          
                          $
                          0.01
                          
                          
                          $
                          (4.27
                          )
                          
                          $
                          (0.14
                          )
                          
                          $
                          (0.14
                          )Basic
      shares used in computing per share amounts
                          
                          
                          30,553
                          
                          
                          
                          27,317
                          
                          
                          
                          26,686
                          
                          
                          
                          26,611
                          
                          
                          
                          26,591
                          
                          
                          
                          25,997
                          
                          
                          
                          26,533
                          
                          
                          
                          26,443Diluted
      income (loss) per share
                          
                          $
                          0.04
                          
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.01
                          )
                          
                          $
                          (0.07
                          )
                          
                          $
                          0.01
                          
                          
                          $
                          (4.27
                          )
                          
                          $
                          (0.14
                          )
                          
                          $
                          (0.14
                          )Diluted
      shares used in computing per share amounts
                          
                          
                          32,652
                          
                          
                          
                          27,317
                          
                          
                          
                          26,686
                          
                          
                          
                          26,611
                          
                          
                          
                          26,835
                          
                          
                          
                          25,997
                          
                          
                          
                          26,533
                          
                          
                          
                          26,443





NOTE
10 – SUBSEQUENT EVENTS





Payroll
Tax Penalty Waiver




In April
2010, the Company and the Internal Revenue Service (“IRS”) reached an agreement
in principle related to certain payroll tax liabilities related to stock options
grants and exercises in 2004, 2005 and 2006, for which the Company has recorded
reserves, and the Company executed two closing agreements reflecting this
agreement in principle.  Pursuant to the terms of the closing
agreements, the IRS agreed to waive $1.4 million in penalties related to the
payroll tax liabilities, and the Company paid $0.4 million and $1.8 million in
payroll taxes on April 15, 2010 and April 21, 2010,
respectively.  Also pursuant to the terms of the closing agreements,
the Company submitted certain corrected payroll tax forms by April 30, 2010 and
May 31, 2010.  As of March 31, 2010, the Company recorded this penalty
abatement as a reduction of estimated penalties previously
accrued.  This adjustment is included as a reduction of General and
Administrative expenses.  As of June 4, 2010, the Company had not
received the counter-signed closing agreements from the IRS.




Proposed
DivX Acquisition




On June 1, 2010, the Company and DivX,
Inc. (“DivX”) entered into an Agreement and Plan of Merger (the “Merger
Agreement”), pursuant to which DivX and the Company will combine their
businesses through the merger of DivX with a newly formed, wholly owned
subsidiary of the Company (the “DivX Acquisition”).At the
effective time of the DivX Acquisition (the “Effective Time”), each share of
DivX common stock issued and outstanding immediately prior to the Effective Time
will be converted into the right to receive 0.514 shares of the Company’s common
stock and $3.75 in cash.The Merger Agreement contains customary
representations, warranties and covenants of the Company and DivX including,
among others, covenants (1) to use commercially reasonable efforts to
conduct their respective businesses in the ordinary course during the interim
period between the execution of the Merger Agreement and consummation of the
DivX Acquisition, (2) not to engage in specified types of transactions
during such period, and (3) not to solicit proposals relating to
alternative business combination transactions or, subject to specified
exceptions, enter into discussions or provide confidential information in
connection with proposals for alternative business combination
transactions.


67


The
Company’s and DivX’s obligations to consummate the DivX Acquisition are subject
to the satisfaction or waiver of customary conditions, including
(1) requisite approvals of their respective shareholders, (2) the
absence of any law or order prohibiting the consummation of the DivX
Acquisition, (3) the declaration by the U.S. Securities and Exchange
Commission (the “SEC”) of the effectiveness of the registration statement
relating to the shares of Sonic Solutions common stock to be issued to DivX
stockholders pursuant to the Merger Agreement, (4) the expiration or
termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and (5) the absence of any material
adverse effect with respect to either party during the interim period between
the execution of the Merger Agreement and consummation of the DivX Acquisition.
In addition, each party’s
obligation to consummate the DivX Acquisition is subject to other specified
customary conditions, including (a) the accuracy of the representations and
warranties of the other party, subject to an overall material adverse effect
qualification, and (b) material compliance by the other party with its
covenants.The Merger Agreement provides each of the Company
and DivX with specified termination rights.  If the Merger Agreement
is terminated under circumstances specified in the Merger Agreement, DivX will
be required to pay the Company a termination fee of $8.35 million.




As of
March 31, 2010, the Company had not incurred any significant expenses in
connection with the DivX Acquisition.  The Company cannot currently
estimate the financial effect of the DivX Acquisition, but has incurred
substantial expenses since March 31, 2010, and expects to incur additional
expenses before the expected closing exclusive of any costs relating to
integration of DivX operations.




No
Other Subsequent Events




The
Company evaluated all subsequent event activity through the issue date of this
Annual Report and concluded that no additional subsequent events have occurred
that would require recognition in the financial statements or disclosure in the
notes to the financial statements.





Item
9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure





The
Company changed its accountants in September 2009 as disclosed in Form 8-K filed
with the SEC on September 30, 2009.  There were no disagreements
between the Company and its accountants regarding any matter or accounting
principles or practice or financial statement disclosures.





Item
9A.  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures




The
Company’s CEO and CFO (the “Certifying Officers”) have conducted an evaluation
of the Company’s disclosure controls and procedures as of March 31, 2010, the
end of the period covered by this Annual Report.  As defined under
Sections 13a-15(e) and 15d-15(e) of the Exchange Act, the term “disclosure
controls and procedures” means controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.  Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer’s
management, including the issuer’s Certifying Officers, to allow timely
decisions regarding required disclosure.  Based on their evaluation,
for the reasons set forth below, the Certifying Officers have concluded that, as
of March 31, 2010, the Company’s disclosure controls and procedures were
effective.




Management’s
Report on Internal Control over Financial Reporting




The
Company’s management, under the supervision of the Certifying Officers, is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Exchange
Act.  An internal control system is designed to provide reasonable
assurance regarding the preparation and fair presentation of published financial
statements.  Management has assessed the effectiveness of the
Company’s internal control over financial reporting as of March 31,
2010.  In making its assessment of internal control over financial
reporting, management used the criteria set forth by the Committee of Sponsoring
Organizations (“COSO”) of the Treadway Commission in its report entitled
“Internal Control — Integrated Framework.”


68


Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP. Internal
control over financial reporting includes those policies and procedures
that:




(1)
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the Company’s transactions and dispositions of the
      assets;




(2)
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with GAAP, and that the
      Company’s receipts and expenditures are being made only in accordance with
      authorizations of its management and Board of Directors;
    and




(3)
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.




Based on
its assessment, management concluded that the Company’s internal control over
financial reporting as of March 31, 2010 was effective.




Armanino
McKenna, LLP has issued its report on the Company’s internal control over
financial reporting, which report appears on page 41 of this Annual
Report.




Changes
in Internal Control over Financial Reporting




There
have been no changes in the Company’s internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
year ended March 31, 2010 that materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.




Item 9B.  Other
Information




None.


69


PART
III




Item 10.  Directors, Executive Officers and
Corporate Governance




The following sets forth certain information regarding
executive officers and the members of the Company’s Board of Directors as of May
24, 2010:




Name
                
                Age
                
                PositionRobert
      J. Doris
                
                57
                
                Chairman
      of the Board of DirectorsMary
      C. Sauer
                
                57
                
                Director
      & SecretaryRobert
      M. Greber
                
                72
                
                DirectorPeter
      J. Marguglio
                
                63
                
                DirectorR.
      Warren Langley
                
                67
                
                DirectorDavid
      C. Habiger
                
                41
                
                Chief
      Executive Officer and PresidentA.
      Clay Leighton
                
                53
                
                Chief
      Operating OfficerMark
      Ely
                
                41
                
                Executive
      Vice President of StrategyPaul
      F. Norris
                
                48
                
                Executive
      Vice President, Chief Financial Officer and General
  CounselMatthew
      S. DiMaria
                
                49
                
                Executive
      Vice President, General Manager Roxio Products
  Group




Mr. Doris
is married to Ms. Sauer.  There are no other family relationships between
any director and Executive Officer of the Company.




Robert J.
Doris.Mr. Doris co-founded the
Company in 1986 and has served as Chairman of the Board since 1986, as Chief
Executive Officer from 1986 to September 2005, and as President from 1986 to
April 2005.  In September 2005 Mr. Doris became the non-executive
Chairman of the Board, and all services performed by Mr. Doris since that time
have been in his capacity as a Board member.  Prior to 1986, Mr. Doris
held the positions of President of The Droid Works, a subsidiary of Lucasfilm
Ltd., Vice President of Lucasfilm, and General Manager of the Lucasfilm Computer
Division. Mr. Doris received B.A., J.D. and M.B.A. degrees from Harvard
University.




Mary C.
Sauer.  Ms. Sauer
co-founded the Company in 1986 and served as a vice president from 1986 to
September 26, 2005, including as Senior Vice President of Marketing and Sales
from February 1993 to September, 2005, and has served as a director from 1986
until the present.  Since September 2005, all services performed by
Ms. Sauer have been in her capacity as a Board member.  Since December
2009, Ms. Sauer has been a member of the board of directors of YesVideo, Inc., a
private corporation in which the Company holds a minority equity
interest.  Prior to 1986, Ms. Sauer was Vice President of Marketing
for The Droid Works, and prior to joining The Droid Works, Ms. Sauer was
Director of Marketing for the Lucasfilm Computer Division.  Ms. Sauer
received a B.F.A. from Washington University in St. Louis and an M.B.A. in
Finance and Marketing from the Wharton School of the University of
Pennsylvania.




Robert M.
Greber.  Mr. Greber has
served as a director of the Company since August 1993.  Mr. Greber
served as President and Chief Operating Officer of The Pacific Stock Exchange
from 1990 to 1995. From 1996, until his retirement in 1999, Mr. Greber was
Chairman and Chief Executive Officer of The Pacific Stock Exchange. From 1985 to
1987, Mr. Greber was President and Chief Executive Officer of Diagnostic
Networks, Inc., a network of Magnetic Resonance Imaging Centers which was merged
into NMR America in 1987.  From 1982 to 1985, Mr. Greber was President
and Chief Executive Officer of Lucasfilm Ltd.  Before joining
Lucasfilm, Mr. Greber was associated with the firm of Merrill Lynch where he was
Vice President and Manager of the Los Angeles Institutional
Office.  Mr. Greber holds a B.S. in Finance from Temple
University.




Peter J.
Marguglio.  Mr. Marguglio has
served as a director of the Company since 1986.  Mr. Marguglio worked
at Eatec Corporation, a software company, where he was President and a director,
from 1990 and until February 19, 2008, when Eatec was sold to Agilysys,
Inc.  Mr. Marguglio retired in April of 2008.  Prior to
joining Eatec, Mr. Marguglio was President of Resource Marketing, Inc., an
equipment leasing firm he founded in 1981.  Mr. Marguglio holds a
Mechanical Engineering degree from the University of Washington and an M.B.A.
degree from Stanford University.




R. Warren
Langley.  Mr. Langley has
served as a director of the Company since 2001.  Mr. Langley has been
a consultant and the Managing Principal of the GuruWizard Fund, LLC, a venture
capital firm that emphasizes social investing, since 2000.  Mr.
Langley also has been on the Board of Advisors of Sun Trading LLC, a privately
held partnership, since October 2007.  From 1996 until 1999, Mr.
Langley served as President and Chief Operating Officer of The Pacific Stock
Exchange. From 1987 to 1998, he was a Principal and Chief Operating Officer of
Hull Trading, a proprietary derivatives trading firm. Mr. Langley has also
worked as Director of Operations Research and Industrial Engineering at United
Airlines and in several capacities in thesoftware, energy, and
defense consulting industries after serving in the United States Air Force for
15 years.  Mr. Langley holds a B.S. degree in Engineering Science from
the United States Air Force Academy, an S.M. degree in Astronautical Engineering
from Massachusetts Institute of Technology, and a Ph.D. in Operations Research
from Georgia Institute of Technology.


70


David C.
Habiger.Mr. Habiger
joined the Company in 1993 as a regional manager.  From 1993 until
2000 Mr. Habiger served in a number of sales and marketing management roles at
the Company.  Mr. Habiger was Senior Vice President and General
Manager from 2002 to 2003 and then General Manager from 2003 to April 2005 of
the Roxio Division, where he played a key role in the development of the
Company’s original equipment manufacturer and retail markets for consumer
software.  In April 2005 Mr. Habiger was appointed President and Chief
Operating Officer.  In September 2005, Mr. Habiger was appointed
President and Chief Executive Officer.  Mr. Habiger received a B.B.A.
from St. Norbert College and an M.B.A. from the University of
Chicago.  He is a member of the National Association of Corporate
Directors and as well as the Center for Corporate Innovation.




Paul F.
Norris.  Mr. Norris joined
the Company in 2005 as Senior Vice President and General Counsel.  In
February 2008, Mr. Norris became the Company’s Executive Vice President, Acting
Chief Financial Officer and General Counsel and in October 2009, he was
appointed as the Company’s permanent Chief Financial Officer.  Prior
to joining the Company, from 2000 to 2005, Mr. Norris was a partner at Steiner
Norris PLLC, a law firm he co-founded in Seattle, Washington.  Mr. Norris
received a B.A. from Yale University and a J.D. from Harvard Law
School.




A. Clay
Leighton.  Mr. Leighton
joined the Company in 1993 as Vice President of Finance.  In 1999, Mr.
Leighton was named Senior Vice President of Worldwide Operations and Finance and
Chief Financial Officer.  In September 2005, Mr. Leighton was named
Executive Vice President and Chief Financial Officer.  In February
2008, Mr. Leighton was named Executive Vice President and Chief Operating
Officer.  Prior to joining the Company, from 1990 to 1992, he was Vice
President, Finance and Chief Financial Officer for RESNA Industries Inc., an
environmental services firm.  From 1988 to 1989 he was Vice President,
Finance and Chief Financial Officer for Command Data Systems, a software company
specializing in software for the public safety market.  Previously,
Mr. Leighton worked as strategy consultant for the Boston Consulting
Group.  Mr. Leighton received a B.A. from Wesleyan University and an
M.B.A. from the Amos Tuck School of Business Administration at Dartmouth
College.




Mark
Ely.  Mr. Ely joined
the Company in 1992 as a Customer Service Representative.  Over the
years, Mr. Ely was promoted to Product Marketing Manager, Director of Marketing,
General Manager Desktop Products and, in 2004, Senior Vice President of
Strategic Planning.  In September 2005, Mr. Ely was named Executive
Vice President of Strategy.  Mr. Ely received a B.A. from Middlebury
College and an M.B.A. from the UCLA Anderson School of Management.




Matthew S.
DiMaria.  Mr. DiMaria
joined the Company in 2007 as Chief Marketing Officer.  Mr. DiMaria
assumed the position of Executive Vice President and General Manager of the
Roxio Products Group in October 2009.  Prior to joining the Company,
Mr. DiMaria served as Senior Vice President of Worldwide Marketing at Serena
Software from 2005 to 2007.  From 2001 to 2005, he served as Senior
Vice President of Marketing and Business Development for Everypath
Inc.  Earlier in his career, Mr. DiMaria held executive positions with
Symantec Corporation and ASK Computer Systems.  He obtained his BS
degree in Information Systems Management from the University of
Maryland.




Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Exchange Act requires the Company’s directors and executive
officers, and persons who own more than 10% of its common stock, to file reports
of ownership and reports of changes in ownership of its common stock with the
SEC.  Executive officers, directors and owners of greater than 10% of
its stock are required by SEC regulations to furnish the Company with copies of
all Section 16(a) reports they file.




Based
solely upon a review of the filings in respect of the fiscal year ended March
31, 2010 furnished pursuant to Rule 16a-3(e) promulgated under the Exchange Act
or advice that no filings were required, the Company is not aware of any late
Section 16(a) filings for such fiscal year.




Audit
Committee




The
Company has a separately designated Audit Committee of its Board of Directors
(“Board”) that is comprised of Messrs. Greber, Langley and
Marguglio.  The Company’s Board has determined that Mr. Greber
qualifies as a financial expert according to the SEC’s
regulations.  See “Committees” below for a statement regarding Mr.
Greber’s independence in accordance with applicable regulations and
standards.


71


Changes
in Procedure for Shareholder Recommendations for Director Nominees




The
Nominating Committee of the Board has no formal policy with respect to
consideration of shareholder recommended director candidates and will consider
potential candidates for director that are brought to the Nominating Committee’s
attention by shareholders.  The Company’s Board believes it is
appropriate not to establish a formal policy in light of the absence of any
shareholder recommended director candidates in the past.  There have
been no changes to this process.




Code
of Business Conduct and Ethics




The
Company’s Code of Business Conduct and Ethics covers all employees, officers and
directors, including its principal executive, financial and accounting
officers.  A copy of the Company’s Code of Business Conduct and Ethics
can be found on its corporate website, www.sonic.com.Any amendments
to the Code of Business Conduct and Ethics will be posted on the corporate
website.




Director
Independence




The
Company’s Board has determined that, without limitation, Messrs. Greber, Langley
and Marguglio, are “independent” as that term is defined in Rule 5605(a)(2) of
the Nasdaq Listing Rules.  In making this determination, the Board
considered transactions and relationships between each of these director or his
immediate family and the Company and its subsidiaries.  The purpose of
this review was to determine whether any such relationships or transactions were
material and, therefore, inconsistent with a determination that the director is
independent.  As a result of this review, the Board affirmatively
determined, based on its understanding of such transactions and relationships,
that these directors are independent and, therefore, a majority of the members
of the Board are independent pursuant to applicable Nasdaq rules.




Committees




The Board
held a total of seven meetings during the fiscal year ended March 31, 2010, and
each director participated in 100% of the total number of meetings of the Board
and all meetings of committees of the Board, if any, upon which such director
served.  The members of the Audit Committee meet separately on a
regular basis without any non-independent members of the Board or members of
management present.  The chairman of the Audit Committee acts as the
chairman of such meeting of the independent directors.




During
the fiscal year ended March 31, 2010, and currently, the Audit Committee has
consisted solely of independent directors, namely, Messrs. Marguglio, Greber and
Langley, with Mr. Greber serving as chairman.  After considering
transactions and relationships between each member of the Audit Committee or his
immediate family and the Company and its subsidiaries and reviewing the
qualifications of the members of the Audit Committee, the Board has determined
that all current members of the Audit Committee are independent as defined by
the Exchange Act and Nasdaq Listing Rules, and are financially
literate.  The Board also determined that Mr. Greber qualifies as an
“audit committee financial expert,” as defined by the applicable rules of the
Exchange Act, due to, among other things, his experience with The Pacific Stock
Exchange in various capacities, including Chairman, Chief Executive Officer and
Chief Operating Officer, and his position as Chief Executive Officer of
Diagnostic Network, Inc.




The Audit
Committee, pursuant to its charter, is directly responsible for the appointment,
compensation, retention and oversight of the Company’s independent
auditors.  In addition, the Audit Committee is responsible for
approving the audit and non-audit services performed by the independent
auditors; consulting with the independent auditors about the scope of the audit
and reviewing with them the results of their examination and reviewing the
Company’s financial control procedures and personnel.  The Audit
Committee also has established procedures for (a) the receipt, retention and
treatment of complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and (b) the confidential, anonymous
submission by the Company’s employees of concerns regarding questionable
accounting or auditing matters.  The Audit Committee held five
meetings during the fiscal year ended March 31, 2010.




During
fiscal year 2010, the Board adopted changes to the charter of the Audit
Committee, clarifying the role of the chairman of the Audit
Committee.  More specifically, under the revised charter, the Audit
Committee chairman is to:  (a) advise the Chairman of the Board
as to an appropriate schedule of Board meetings and provide input as to the
preparation of agendas for Board and Committee meetings; (b) advise the
Chairman of the Board as to the quality, quantity and timeliness of the flow of
information from the Company’s management that is necessary for the independent
directors to effectively and responsibly perform their duties; (c) act as a
principal liaison between independent directors and the Chairman of the Board on
sensitive issues; and (d) conduct executive sessions, when appropriate, to
discuss matters among the independent directors, including matters relating to
the Company beyond the scope of the Audit Committee charter.


72


In
September 2005, the Company’s Board appointed a Compensation
Committee.  The Compensation Committee is comprised entirely of
independent directors, namely, Messrs. Marguglio, Greber and Langley, with Mr.
Greber serving as chairman.  Pursuant to its charter, the Compensation
Committee’s functions include assisting the Board in determining the
compensation for its executive officers, including its Chief Executive Officer;
administering and delegating the administration of certain aspects of its stock
option plans, and assisting the Board in other matters as
appropriate.




In
September 2005, the Company’s Board also appointed a Nominating
Committee.  The Nominating Committee is comprised entirely of
independent directors, namely, Messrs. Marguglio, Greber and Langley, with Mr.
Greber serving as chairman.  Pursuant to its charter, the Nominating
Committee’s functions include assisting the Board in monitoring the size and
composition of the Board; considering and making recommendations to the Board
with respect to the nominations or elections of directors; and assisting the
Board in other duties as the Board shall from time to time
prescribe.




Currently,
the same directors serve on the Audit Committee, Compensation Committee and
Nominating Committees, as the size of the Board is relatively small, all
directors serving on these committees have significant experience in operating
companies of approximately the Company’s size, all are financially
sophisticated, and all have evidenced willingness to devote time and attention
to Board and board committee activities.  In the future, depending on
possible changes in the size and composition of the Board, the Board may vary
its current practices relative to Board committees.




Board’s
Role in Risk Oversight




As a part
of its oversight function, the Board monitors how management operates the
Company, in part via its committee structure.  When granting authority
to management, approving strategies and receiving management reports, the Board
considers, among other things, the risks and vulnerabilities the Company
faces.  The Audit Committee considers risk issues associated with the
Company’s overall financial reporting and disclosure process and legal
compliance.  In addition to its regularly scheduled meetings, the
Audit Committee meets with the independent registered public accounting firm in
periodic executive sessions as determined from time to time by the Audit
Committee, and the Audit Committee chairman meets regularly with the Company’s
CFO/General Counsel regularly to discuss Company operations and
risks.




Item 11.  Executive
Compensation




Compensation
Discussion and Analysis




Core
Compensation Philosophy




The
Company’s compensation philosophy is to pay its executive officers competitive
levels of compensation that best reflect their individual responsibilities and
contributions to the Company, while providing incentives to achieve its business
and financial objectives.  The Company’s principal objectives for its
executive compensation program include the following:




•
            To
      provide competitive salary and total compensation packages that attract,
      retain, and motivate highly qualified key employees who can be
      instrumental to the Company’s long-term
success.




•
            To
      emphasize sustained performance by aligning rewards with shareholder
      interests.




•
            To
      motivate executives and employees to achieve the Company’s annual and
      long-term business goals and encourage behavior toward the fulfillment of
      those objectives without incurring excessive
  risk.




The
Compensation Committee, which consists entirely of independent Board members,
controls the executive compensation program for the Company’s executive officers
covered by the disclosure requirements for executive compensation in Item 402(c)
of Regulation S-K (the “Executive Officers”).




Fiscal
Year 2010 Highlights




Certain
specific areas to note regarding compensation matters in fiscal year 2010
included:




•
            In
      September 2009, the Board adopted a recoupment or “clawback” policy under
      which, in the event of a restatement of the Company’s audited financial
      statements involving Executive Officer misconduct, a committee of the
      Board, excluding participation of any officer(s) whose conduct is under
      review, will consider whether the Executive Officer engaged in intentional
      financial accounting misconduct, and if so, the responsible person(s)
      shall disgorge any net option exercise profits or cash bonuses
      attributable to the intentional
misconduct.


73


•
            In
      March 2010, the Board terminated and cancelled the Company’s 2005 Stock
      Incentive Plan (Non-U.S. Employees) and 2004 Stock Incentive Plan (without
      impacting previously-made grants under such
  Plans).




•
            No
      Executive Officer received an increase in base salary during fiscal
      2010.




Elements
of the Company’s Compensation Program




The
Company’s executive compensation program consists of the following:




•
            Base
      salary.




•
            Bonus
      compensation.




•
            Long-term
      equity incentives.




•
            Health
      and other benefits available to all Company
  employees.




The
Company does not have a formulaic method for weighting the different elements of
compensation or for allocating between long-term and short-term compensation or
between cash and non-cash compensation, has not engaged compensation consultants
in connection with executive compensation, and does not benchmark its executive
compensation against that of other companies.  The Company considers
and makes executive compensation decisions annually, typically at the Board
meeting immediately following the Company’s annual shareholders’
meeting.  Although objective factors, such as Company performance and
competitive compensation practices, influence the Company’s executive
compensation decisions, more subjective individual considerations also impact
compensation decisions.  For example, the Compensation Committee may
take into account individual job performance, experience, retention concerns,
and an executive’s ability to impact future results for the
Company.




Base
Salary




The Board
sets base salaries for the Company’s Executive Officers annually based on input
provided by the Compensation Committee.  The Compensation Committee
and Board determine the base salaries of the Company’s Executive Officers
annually by subjectively evaluating the responsibilities and strategic
importance of their positions, as well as the experience, skills and performance
of each individual.  The amount of each executive’ salary is
determined based on a number of factors including:




•
            An
      assessment of individual contribution as judged by the CEO (other than
      with respect to his own salary), as well as the Compensation Committee
      and/or Board.




•
            The
      relationship to the salaries of other executives at the Company and at
      comparable companies.




•
            The
      Company’s overall financial
results.




In
October 2009, at its meeting immediately after the Company’s fiscal 2009
shareholders meeting, the Board and Compensation Committee established the
following base salaries for the Company’s Executive Officers:




Executive Officer
                  
                  October 2009
                    Base Salary
                    ($)
                  
                  
                  Percentage Change
                    from Prior Salary
                    (%)Dave
      C. Habiger (1)
                  
                  
                  350,000
                  
                  
                  
                  0
                  %Paul
      F. Norris (2)
                  
                  
                  300,000
                  
                  
                  
                  0
                  %A.
      Clay Leighton (3)
                  
                  
                  300,000
                  
                  
                  
                  0
                  %Mark
      Ely (4)
                  
                  
                  300,000
                  
                  
                  
                  0
                  %Matthew
      S. DiMaria (5)
                  
                  
                  250,000
                  
                  
                  
                  0
                  %




(1)
            Mr.
      Habiger’s base salary has not been changed since he assumed the position
      of President and Chief Executive Officer in September
  2005.


74


(2)
            Mr.
      Norris’s base salary has not been changed since he assumed the position of
      Executive Vice President, Acting CFO and General Counsel in February
      2008.




(3)
            Except
      as described in the next sentence, Mr. Leighton’s base salary has not been
      changed since September 2005.  From May 2008 to January 2009,
      Mr. Leighton voluntarily agreed to reduce this base salary by $45,888 in
      connection with re-priced stock options due to the Company’s stock option
      review during fiscal 2008.




(4)
            Mr.
      Ely’s base salary has not been changed since he assumed the position of
      Executive Vice President, Strategy, in September
  2005.




(5)
            Mr.
      DiMaria first became an Executive Officer in October 2009.  His
      base salary is $250,000.




Due to
the difficult economic environment and the Company’s decision to freeze the
salaries of most of its non-executive employees in 2008, the Compensation
Committee and Board did not grant any salary increases to Executive Officers in
2009, although it did take note of the Company’s improved financial and business
performance during the course of the 2009 calendar year.  In
considering base compensation, the Compensation Committee and Board specifically
considered the following factors relating to the individual Executive
Officers:




•
            Mr.
      Habiger continued to bear the most significant responsibility for
      executing on the Company’s strategy, including the development and
      strengthening of its Roxio consumer products and services, and successful
      execution of the Company’s premium content
  initiatives.




•
            Mr.
      Norris retained responsibility for two critical positions as the Company’s
      CFO and general counsel.  He continued to oversee the Company’s
      legal affairs, including litigation, and he managed the Company’s
      accounting and compliance affairs.




•
            Mr.
      Leighton played a pivotal role in strategically managing the Company’s
      financial operations and budgeting initiatives, enabling the Company to
      bring its costs in line with revenues while positioning the Company for
      revenue growth and margin
improvement.




•
            Mr.
      Ely provided key strategic guidance and directed the successful
      integration of the Company’s CinemaNow acquisition and its RoxioNow
      premium content initiative.




•
            Mr.
      DiMaria was responsible for managing the Company’s Roxio Consumer Products
      Segment, operating the business profitably during a difficult economic
      environment, strengthening the Company’s relationships with key OEMs and
      retail partners, expanding and improving product lines, and enabling the
      Company to invest in its RoxioNow premium content
      initiative.  The Compensation Committee and Board also noted
      that Mr. DiMaria, in contrast to the other Executive Officers, received
      variable compensation in the form of management by objective (“MBO”)
      pay.




Taking
into account these factors, the Compensation Committee and Board concluded that
the relative mix of base salaries among the Executive Officers was appropriate,
as it offered fair compensation and recognized responsibilities, experience,
skills and performance of each individual.  The Compensation Committee
and Board further continued to feel that the relatively similar base
compensation levels fostered a collegial spirit among the Executive Officers,
increasing teamwork and leading to a collaborative and productive
decision-making environment.




Bonus
Compensation.




Executive Bonus
Plan.




On
September 25, 2008, the Compensation Committee recommended and the Board
approved, the 2008 Executive Bonus Plan (the “Plan”), which became effective on
October 1, 2008.  The Plan provides for cash bonus payments to Plan
participants, including the Executive Officers, in each fiscal quarter, unless
otherwise determined by the Board (the “Performance Period”), based on
performance metrics designated by the Board and dependent on the number of bonus
sharing units, or points, allocated to each participant in accordance with the
terms of the Plan (the “Bonus Units”).  The purpose of the Plan is to
increase shareholder value and the success of the Company by (a) aligning
the compensation of executive management to key financial drivers,
(b) increasing the competitiveness of executive pay without increasing
fixed costs, making bonus payments contingent upon organizational success, and
(c) creating internal consistency and standard guidelines among the
executive peer group.


75


For each
Performance Period, the Board designates the performance metrics, the number of
participants (or a range in the number of participants), the number of Bonus
Units, or a range of Bonus Units, to be administered under the Plan, and the
specific number of Bonus Units to be allocated to each of the Executive
Officers.  The Board may make or modify any of these determinations at
any time up to the date the bonus amount is paid to participants for a
particular Performance Period.  For each Performance Period, the
Company’s CEO and/or Chief Operating Officer (“COO”) designate the specific
non-Executive Officer employees who will be participants, and the specific
number of Bonus Units to be allocated to each of the non-Executive Officer
employees, provided that the total number of participants and Bonus Units must
equal to the aggregate number or within the range set by the
Board.  Subject to the Board’s discretion, the CEO and COO may make or
modify any of these determinations at any time up to the date the bonus amount
under the Plan is paid to participants for a particular Performance
Period.




Since the
adoption of the Plan, the Board has chosen “Adjusted EBITDA” as the performance
metric to be used under the Plan, and allocated a total of 4.0% of Adjusted
EBITDA to be granted under the Plan.  For Plan purposes, Adjusted
EBITDA is defined to be the Company’s earnings before interest, taxes,
depreciation and amortization, adjusted for amounts payable under the plan and
non-recurring, non-operational and transitional cost items, and calculated in a
manner that is generally consistent with the Company’s public disclosures
regarding non-GAAP financial measures, as such measures are described from time
to time in the Company’s earnings releases.  If Adjusted EBITDA for a
Performance Period is negative, then no amounts are paid under the Plan for that
Performance Period.  In addition, the Board has designated, based on
its subjective judgment, that there may be a total of up to 22 participants
during a Performance Period, and that the total available Bonus Units will range
between 1,000 and 1,050.  The Board has allocated the following Bonus
Units to the individual Executive Officers, which resulted in Executive Officer
compensation as set forth below during fiscal 2010:




ExecutiveOfficer
                  
                  BonusUnits
                    (#)
                  
                  
                  Fiscal2010
                    Compensation
                    UnderPlan
                    ($)Dave
      C. Habiger
                  
                  
                  200
                  
                  
                  
                  56,753Paul
      F. Norris
                  
                  
                  125
                  
                  
                  
                  35,741A.
      Clay Leighton
                  
                  
                  125
                  
                  
                  
                  35,471Mark
      Ely
                  
                  
                  100
                  
                  
                  
                  28,377Matthew
      S. DiMaria
                  
                  
                  100
                  
                  
                  
                  28,377


Pending
any different decisions that may be made at the Board meeting immediately
following the Company’s 2010 annual shareholders’ meeting, the Board has made
the same Bonus unit allocations for fiscal 2011.




The
Compensation Committee and Board believe that Adjusted EBITDA is a key driver of
shareholder value, as it corresponds closely to the cash operating income
generated from the Company’s core operations by excluding significant non-cash
operating expenses that do not arise out of core ongoing operating
activities.  Moreover, the Company’s management uses Adjusted EBITDA
as a primary internal metric for evaluating the performance of the Company’s
business and that of its Executive Officers and employees.  Because of
the relatively modest levels of Adjusted EBITDA generated and projected by the
Company during recent periods, the Board has not set any specific financial
thresholds (other than positive Adjusted EBITDA) that must be achieved before
bonuses can be awarded under the Plan.




In
establishing performance metrics and making individual Bonus Unit allocations to
the individual Executive Officers, the Compensation Committee and Board
considered many of the same factors as it did with respect to base compensation,
as described above.  In general, the Compensation Committee and Board
sought to set levels under the Plan that would provide meaningful incentives for
the Executive Officers to focus on the overall financial success of the Company,
without providing disproportionate compensation that might encourage excessive
risk-taking.




Management
By Objective (MBO) Bonuses




In
addition to his participation in the Plan, during fiscal year 2010 Mr. DiMaria
was also earned $41,250 under an individual Management by Objective (“MBO”),
which was originally established prior to his becoming an Executive
Officer.  Under his MBO plan, Mr. DiMaria was entitled to earn $7,500
per quarter based on the financial performance of the Roxio Consumer Products
division, plus an additional unspecified amount in the fourth quarter based on
the division’s performance over the course of the entire fiscal
year.  Mr. DiMaria received bonus payments equal to $7,500 for each of
the first three quarters and the balance of his $41,250 in MBO compensation for
the final quarter of fiscal year 2010.  Mr. DiMaria’s MBO plan does
not contain any set formulas or percentage-based mechanisms for awarding
bonuses, but rather is administered based on internal financial and budgeting
expectations and subjective divisional performance assessments by the Company’s
CEO and Chief Operating Officer.


76


Other
Bonuses




From time
to time, the Compensation Committee and Board may elect to award individual
“spot” bonuses to Executive Officers based on specific facts and circumstances,
including extraordinary individual contributions.  During fiscal years
2010 and 2009, the Compensation Committee and Board did not make any spot bonus
awards.  During fiscal year 2008, Mr. Norris and Mr. Ely were each
awarded bonuses of $50,000.  Mr. Norris was awarded his bonus when he
assumed the position of Executive Vice President, Acting CFO and General Counsel
in February 2008, and Mr. Ely was awarded his bonus in July 2007 in connection
with additional responsibilities he assumed.




Equity-Based
Incentives




The
Compensation Committee and Board strongly believe that it is important for key
employees who have primary responsibility for the management, growth, and future
success of its company to have significant equity ownership interest in the
Company and to have the potential to gain financially from the Company’s stock
price increases.  The interests of shareholders, executives and
employees should thereby be more closely aligned.  The Compensation
Committee and Board seek to provide such ownership interest to executives and
key employees by grants of RSUs or grants of options to purchase shares of the
Company’s common stock in the future at a price equal to fair market value at
the date of grant.  The Board determines the amounts of long-term
incentive awards after considering cost and dilution impact, market trends
relating to long-term incentive compensation, the individual’s position with the
Company, remaining availability under its stock option plans and other any other
factors it deems relevant.  The Company believes the term and vesting
schedule of its stock options and RSUs provide additional incentive to
management to focus on long-term growth and market performance of its
stock.




In
October 2009, following the Board’s review of the vested and unvested long-term
equity awards held by Executive Officers and pursuant to the Compensation
Committee’s recommendation, the Board made the following option grants to
Executive Officers:




ExecutiveOfficer
                  
                  Options
                    (#)
                  
                  
                  ExercisePrice
                    ($)
                  
                  
                  GrantDateFairValue
                    (assumingfullyvested)
                    ($)Dave
      C. Habiger
                  
                  
                  125,000
                  
                  
                  
                  4.82
                  
                  
                  
                  379,313Paul
      F. Norris
                  
                  
                  65,000
                  
                  
                  
                  4.82
                  
                  
                  
                  197,243A.
      Clay Leighton
                  
                  
                  95,000
                  
                  
                  
                  4.82
                  
                  
                  
                  288,278Mark
      Ely
                  
                  
                  65,000
                  
                  
                  
                  4.82
                  
                  
                  
                  197,243Matthew
      S. DiMaria
                  
                  
                  50,000
                  
                  
                  
                  4.82
                  
                  
                  
                  151,725








In making
these grants, the Compensation Committee and Board considered many of the same
factors as it did with respect to base compensation, as described above, and
additionally took into the account certain extraordinary efforts made by Mr.
Leighton during the year as the Company focused on regaining
profitability.




Under the
Company’s stock option plans, shares of its common stock may be purchased at the
option grant price.  All grants must be exercised according to the
provisions of the Company’s stock option plans.  Over the past three
years, the minimum vesting period for options granted to Executive Officers has
been three years.  All outstanding options expire on the earlier of
ten years after the date of grant or 90 days after an option holder’s
termination of service with the Company.  Under the Company’s current
RSU program, the minimum vesting period has been set at four years.




Stock
Ownership Guidelines




The
Company has adopted a “no margin” and “no short” rule prohibiting any officer,
director or board member or employee from borrowing against Company shares all
selling them short.  The policy further prohibits buying or selling
put or call options in the Company’s shares, or trading in options in the
Company’s shares (except for employee stock options according to their
terms).




Other
Benefits




The
Company provides standard employee benefits to all of its employees, including
Executive Officers.  Benefits available to executive and non-executive
employees include health insurance, vacation, disability insurance, life
insurance and participation in its 401(k) plan.  The Company does not
offer any supplemental executive health and welfare or retirement programs, or
provide any other supplemental benefits or perquisites, to its
executives.  The Company does not provide its Executive Officers with
any tax gross-up payments in connection with any benefits or
perquisites.


77


Change
in Control Provisions




As
further described under “Employment Agreements,” in the event of a Change in
Control (as defined) the Executive Officers are entitled to specified
percentages of their annual base salaries then in effect and the immediate
vesting in all of their outstanding unvested stock options, RSUs, or other
equity compensation.  The change in control provisions in these
agreements are designed to offer protection to these employees to recognize
their many years of commitment to the Company and its continuing
success.  The Company does not provide its Executive Officers with any
tax gross-up payments in connection with any change in control payments or
benefits.




Impact
of Tax and Accounting on Compensation Decisions




Section
162(m) of the Code limits the deductibility of compensation paid to certain
executive officers in excess of $1 million unless the compensation is
performance based.  When determining amounts of equity grants to
executives and employees under the Company’s equity incentive program, the
Compensation Committee considers the compensation charges associated with the
grants.  Beginning on April 1, 2006, the Company began accounting for
share-based compensation in accordance with the requirements of ASC
718.  Under ASC 718, grants of stock options result in compensation
expense equal to the fair value of the options, which is calculated using a
Black-Scholes-Merton option pricing model.  The fair value of RSUs is
equivalent to the market price of the Company’s common stock on the grant
date.  The expense is recognized over the vesting period.




Compensation
Committee Report




The
members of the Compensation Committee have reviewed and discussed the
Compensation Discussion and Analysis contained herein with the Company’s
management and, based on the review and discussion, have recommended to the
Board that the Compensation Discussion and Analysis be included in this Annual
Report.




Submitted
by the Compensation Committee


Robert M.
Greber, Chairman


R. Warren
Langley


Peter J.
Marguglio




Summary
Compensation




The
following table shows for the fiscal years ended March 31, 2010, 2009 and 2008,
compensation awarded to, paid to, or earned by, the Company’s Executive
Officers:




Name andPrincipalPosition
                                          
                                          Year
                                          
                                          Salary
                                            ($)
                                          
                                          
                                          Stock
                                              Awards
                                              ($) (1)
                                          
                                          
                                          Option
                                            Awards
                                            ($) (2)
                                          
                                          
                                          Non-Equity
                                            Incentive Plan
                                            Compensation
                                            ($) (3)
                                          
                                          
                                          All Other
                                            Compensation
                                            ($) (4)
                                          
                                          
                                          Total
                                            ($) (5)David
      C. Habiger,
                                          
                                          2010
                                          
                                          
                                          350,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          379,313
                                          
                                          
                                          
                                          56,753
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          786,066Chief
      Executive Officer
                                          
                                          2009
                                          
                                          
                                          350,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,114,875
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          9,700
                                          (6)
                                          
                                          
                                          1,474,5752008
                                          
                                          
                                          350,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          12,250
                                          
                                          
                                          
                                          362,250Paul
      F. Norris
                                          
                                          2010
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          197,243
                                          
                                          
                                          
                                          35,471
                                          
                                          
                                          
                                          1,705
                                          
                                          
                                          
                                          534,419Executive
      Vice President, Chief Financial
                                          
                                          2009
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          444,277
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          7,050
                                          (6)
                                          
                                          
                                          751,327Officer
      and General Counsel
                                          
                                          2008
                                          
                                          
                                          259,615
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          50,000
                                          
                                          
                                          
                                          7,400
                                          
                                          
                                          
                                          317,015A. Clay Leighton
      (7)
                                          
                                          2010
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          288,278
                                          
                                          
                                          
                                          35,471
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          623,749Chief
      Operating Officer
                                          
                                          2009
                                          
                                          
                                          254,112
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          678,215
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          10,200
                                          (6)
                                          
                                          
                                          942,5272008
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          18,000
                                          
                                          
                                          
                                          318,000Mark
      Ely
                                          
                                          2010
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          197,243
                                          
                                          
                                          
                                          28,377
                                          
                                          
                                          
                                          440
                                          
                                          
                                          
                                          526,060Executive
      Vice President of Strategy
                                          
                                          2009
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          344,500
                                          
                                          
                                          
                                          69,675
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          12,289
                                          (6)
                                          
                                          
                                          726,4642008
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          50,000
                                          
                                          
                                          
                                          1,000
                                          
                                          
                                          
                                          351,000Matthew S.
      DiMaria(8)
                                          
                                          2010
                                          
                                          
                                          250,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          151,725
                                          
                                          
                                          
                                          69,627
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          471,352Executive
      Vice President and General Manager of Roxio Product Group


78


(1)
            The
      amount in this column represents the aggregate grant date fair value of
      RSUs computed and does not reflect compensation actually received by the
      Executive Officers.  The Company did not issue any stock awards
      containing performance conditions.  No stock awards were issued
      during fiscal 2010 or 2008.  See
      Note 4, “Shareholders’ Equity,” to the Consolidated Financial
      Statements included in this Annual Report, for the assumptions used by the
      Company in calculating these
amounts.




(2)
            The
      amounts in this column represent the aggregate grant date fair value of
      stock option awards computed and do not reflect compensation actually
      received by the Executive Officers.  The Company did not issue
      any options containing performance conditions.  No stock options were
      granted during fiscal 2008.  See
      Note 4, “Shareholders’ Equity,” to the Consolidated Financial
      Statements included in this Annual Report, for the assumptions used by the
      Company in calculating these
amounts.




(3)
            The
      amounts in this column consist of cash earned during fiscal 2010 under the
      2008 Executive Bonus Plan, which is described in more detail in the
      Compensation Discussion and Analysis section under the heading “Elements
      of Compensation – Bonus Compensation.”  Additional amounts paid
      to Mr. DiMaria under this heading were under his management by object
      (MBO) plan.




(4)
            The
      amounts in this column consist of matching contributions made under the
      Company’s 401(k) plan and gym reimbursements made during fiscal 2010, 2009
      and 2008.




(5)
            Total
      compensation includes cash and non-cash elements.  The most
      significant non-cash element is the fair value of stock options and RSUs
      calculated on a grant date basis.  These amounts do not reflect
      whether the recipient has actually realized a financial benefit from the
      awards.  The following table shows the breakdown between cash
      and non-cash Executive Officer compensation for the periods indicated
      below :




Name
                                          
                                          Fiscal
                                            Year
                                          
                                          Total Compensation
                                            (including non-cash)
                                            ($)
                                          
                                          
                                          Non-cash
                                            ($)
                                          
                                          
                                          Cash
                                            ($)David
      C. Habiger
                                          
                                          2010
                                          
                                          
                                          786,066
                                          
                                          
                                          
                                          379,313
                                          
                                          
                                          
                                          406,7532009
                                          
                                          
                                          1,474,575
                                          
                                          
                                          
                                          1,114,875
                                          
                                          
                                          
                                          359,7002008
                                          
                                          
                                          362,250
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          362,250Paul
      F. Norris
                                          
                                          2010
                                          
                                          
                                          534,419
                                          
                                          
                                          
                                          197,243
                                          
                                          
                                          
                                          337,1762009
                                          
                                          
                                          751,327
                                          
                                          
                                          
                                          444,277
                                          
                                          
                                          
                                          307,0502008
                                          
                                          
                                          317,015
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          317,015A.
      Clay Leighton
                                          
                                          2010
                                          
                                          
                                          623,749
                                          
                                          
                                          
                                          288,278
                                          
                                          
                                          
                                          335,4712009
                                          
                                          
                                          942,527
                                          
                                          
                                          
                                          678,215
                                          
                                          
                                          
                                          264,3122008
                                          
                                          
                                          318,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          318,000Mark
      Ely
                                          
                                          2010
                                          
                                          
                                          526,060
                                          
                                          
                                          
                                          197,243
                                          
                                          
                                          
                                          328,8172009
                                          
                                          
                                          726,464
                                          
                                          
                                          
                                          414,175
                                          
                                          
                                          
                                          312,2892008
                                          
                                          
                                          351,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          351,000Matthew
      S. DiMaria
                                          
                                          2010
                                          
                                          
                                          471,352
                                          
                                          
                                          
                                          151,725
                                          
                                          
                                          
                                          319,627




(6)
            Other
      Compensation for the Executive Officers includes cash received for
      tendered options in fiscal 2009:




Name
                                          
                                          Shares Tendered (#)
                                          
                                          
                                          Tender Offer Price
                                            Per Share ($)
                                          
                                          
                                          Cash
                                            Received ($)David
      C. Habiger
                                          
                                          
                                          400,000
                                          
                                          
                                          $
                                          0.01
                                          
                                          
                                          $
                                          4,000Paul
      F. Norris
                                          
                                          
                                          75,000
                                          
                                          
                                          
                                          0.02
                                          
                                          
                                          
                                          1,500A.
      Clay Leighton
                                          
                                          
                                          100,000
                                          
                                          
                                          
                                          0.02
                                          
                                          
                                          
                                          2,000200,000
                                          
                                          
                                          
                                          0.01
                                          
                                          
                                          
                                          2,000Mark
      Ely
                                          
                                          
                                          40,000
                                          
                                          
                                          
                                          0.01
                                          
                                          
                                          
                                          40080,000
                                          
                                          
                                          
                                          0.02
                                          
                                          
                                          
                                          1,6004,379
                                          
                                          
                                          
                                          0.30
                                          
                                          
                                          
                                          1,314




(7)
            From
      May 2008 to January 2009, Mr. Leighton voluntarily agreed to reduce his
      base salary by $45,888 in connection with re-priced stock options
      resulting from the Company’s stock option
  review.


79


(8)
            In
      October 2009, Mr. DiMaria became an executive officer of the Company and
      assumed the position of Executive Vice President and General Manager of
      Roxio Products.  The above figures for Mr. DiMaria reflect
      compensation earned during part of 2010 as a non-executive officer for the
      Company.




Grants
of Plan-Based Awards




The
following table sets forth certain information with respect to grants of
plan-based awards in fiscal year 2010 to the Company’s Executive Officers,
including cash awards and equity awards.  The stock options granted to
the Company’s Executive Officers in fiscal 2010 were granted under the 2004
Equity Compensation Plan and 2000 Stock Option Plan.




Name
                        
                        GrantDate(1)
                        
                        Estimated Future PayoutsUnder
                          Non-Equity IncentivePlan
                          Awards(2)
                        
                        
                        AllOther
                          Awards:
                          Numberof
                          Securities
                          Underlying
                          Options
                          (#)
                        
                        
                        Exerciseor
                          BasePrice
                          ofOption
                          Awards
                          ($/Sh)(3)
                        
                        
                        GrantDate
                          FairValueof
                          Stockand
                          Option
                          Awards
                          ($)(4)David
      C. Habiger
                        
                        10/28/2009
                        
                        
                        -
                        
                        
                        
                        125,000
                        
                        
                        
                        4.82
                        
                        
                        
                        379,313Paul
      F. Norris
                        
                        10/28/2009
                        
                        
                        -
                        
                        
                        
                        65,000
                        
                        
                        
                        4.82
                        
                        
                        
                        197,243A.
      Clay Leighton
                        
                        10/28/2009
                        
                        
                        -
                        
                        
                        
                        95,000
                        
                        
                        
                        4.82
                        
                        
                        
                        288,278Mark
      Ely
                        
                        10/28/2009
                        
                        
                        -
                        
                        
                        
                        65,000
                        
                        
                        
                        4.82
                        
                        
                        
                        197,243Matthew
      S.  DiMaria
                        
                        10/28/2009
                        
                        
                        -
                        
                        
                        
                        50,000
                        
                        
                        
                        4.82
                        
                        
                        
                        151,725




(1)
            Grants
      on October 28, 2009 vest monthly over four years beginning on the date of
      grant.  All options are subject to change in control vesting per
      the applicable Executive Officer employment
  agreement.




(2)
            On
      September 25, 2008, the Board approved the 2008 Executive Bonus Plan
      (“Plan”).  As described in more detail in the Compensation
      Discussion and Analysis section under the heading “Elements of
      Compensation – Bonus Compensation – Executive Bonus Plan,” the Plan does
      not currently include any threshold, target or maximum payment
      provisions.




(3)
            The
      amount in this column represents the closing price of the Company’s common
      stock on the date of grant.




(4)
            The
      amounts represent share-based payments based on the grant date fair value
      of the option awards on the grant date utilizing the assumptions discussed
      Note 4, “Shareholders’ Equity,” to the Consolidated Financial
      Statements included in this Annual
Report.




Outstanding Equity Awards at Fiscal Year
End




The
following table provides information about unexercised options and unvested RSUs
for each of the Company’s Executive Officers as of March 31,
2010.


80


Option Awards
                                                    
                                                    
                                                    Stock AwardsName
                                                    
                                                    Number of
                                                      Securities
                                                      Underlying
                                                      Unexercised
                                                      Options (#)
                                                      Exercisable
                                                    
                                                    
                                                    Number of
                                                      Securities
                                                      Underlying
                                                      Unexercised
                                                      Options (#)
                                                      Unexercisable
                                                    
                                                    
                                                    Option
                                                      Exercise
                                                      Price
                                                      ($)
                                                    
                                                    
                                                    Option
                                                      Expiration
                                                      Date
                                                    
                                                    
                                                    Numberof
                                                      Sharesor
                                                      UnitsNot
                                                      Vested
                                                      (#)
                                                    
                                                    
                                                    Maket Value
                                                      ofShares or
                                                      UnitsNot
                                                      Vested
                                                      ($)David
      C. Habiger
                                                    
                                                    
                                                    218,750
                                                    
                                                    
                                                    
                                                    156,250
                                                    (1)
                                                    
                                                    
                                                    6.89
                                                    
                                                    
                                                    6/12/18
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -93,750
                                                    
                                                    
                                                    
                                                    206,250
                                                    (2)
                                                    
                                                    
                                                    1.23
                                                    
                                                    
                                                    12/15/18
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -13,021
                                                    
                                                    
                                                    
                                                    111,979
                                                    (2)
                                                    
                                                    
                                                    4.82
                                                    
                                                    
                                                    10/28/19Paul
      F. Norris
                                                    
                                                    
                                                    84,000
                                                    
                                                    
                                                    
                                                    60,000
                                                    (1)
                                                    
                                                    
                                                    6.89
                                                    
                                                    
                                                    6/12/18
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -46,875
                                                    
                                                    
                                                    
                                                    103,125
                                                    (2)
                                                    
                                                    
                                                    1.23
                                                    
                                                    
                                                    12/15/18
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -6,771
                                                    
                                                    
                                                    
                                                    58,229
                                                    (2)
                                                    
                                                    
                                                    4.82
                                                    
                                                    
                                                    10/28/19
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    3,500
                                                    
                                                    
                                                    
                                                    32,795
                                                    (3)A.
      Clay Leighton
                                                    
                                                    
                                                    36,608
                                                    
                                                    
                                                    
                                                    -
                                                    (1)
                                                    
                                                    
                                                    1.17
                                                    
                                                    
                                                    10/25/11
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -66,392
                                                    
                                                    
                                                    
                                                    -
                                                    (1)
                                                    
                                                    
                                                    1.17
                                                    
                                                    
                                                    10/25/11
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -48,060
                                                    
                                                    
                                                    
                                                    -
                                                    (1)
                                                    
                                                    
                                                    6.33
                                                    
                                                    
                                                    3/11/13
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -51,940
                                                    
                                                    
                                                    
                                                    -
                                                    (1)
                                                    
                                                    
                                                    3.97
                                                    
                                                    
                                                    3/11/13
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -131,250
                                                    
                                                    
                                                    
                                                    93,750
                                                    (1)
                                                    
                                                    
                                                    6.89
                                                    
                                                    
                                                    6/12/18
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -62,500
                                                    
                                                    
                                                    
                                                    137,500
                                                    (2)
                                                    
                                                    
                                                    1.23
                                                    
                                                    
                                                    12/15/18
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -9,896
                                                    
                                                    
                                                    
                                                    85,104
                                                    (2)
                                                    
                                                    
                                                    4.82
                                                    
                                                    
                                                    10/28/19
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Mark
      Ely
                                                    
                                                    
                                                    7,500
                                                    
                                                    
                                                    
                                                    -
                                                    (2)
                                                    
                                                    
                                                    3.97
                                                    
                                                    
                                                    3/11/13
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -46,875
                                                    
                                                    
                                                    
                                                    103,125
                                                    (2)
                                                    
                                                    
                                                    1.23
                                                    
                                                    
                                                    12/15/18
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -6,771
                                                    
                                                    
                                                    
                                                    58,229
                                                    (2)
                                                    
                                                    
                                                    4.82
                                                    
                                                    
                                                    10/28/19
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    18,750
                                                    
                                                    
                                                    
                                                    175,688
                                                    (3)Matthew
      S. DiMaria
                                                    
                                                    
                                                    81,250
                                                    
                                                    
                                                    
                                                    18,750
                                                    (1)
                                                    
                                                    
                                                    6.89
                                                    
                                                    
                                                    6/12/18
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -1,300
                                                    
                                                    
                                                    
                                                    68,750
                                                    (2)
                                                    
                                                    
                                                    1.23
                                                    
                                                    
                                                    12/15/18
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -5,208
                                                    
                                                    
                                                    
                                                    44,792
                                                    (2)
                                                    
                                                    
                                                    4.82
                                                    
                                                    
                                                    10/28/19
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -




(1)
            Unvested
      options vest in equal installments monthly for three years beginning on
      the date of grant date and expire in ten years.  All options are
      subject to change in control vesting per the applicable Executive
      Officer’s employment agreement.




(2)
            Unvested
      options vest in equal installments monthly for four years beginning on the
      date of grant and expire in ten years.  All options are subject
      to change in control vesting per the applicable Executive Officer’s
      employment agreement.




(3)
            RSU
      valuation was determined by multiplying the total number of shares by
      $9.37, the closing price of the Company’s common stock on March 31,
      2010.  RSUs vest 12.5% every six months for four years after the
      vesting commencement date.  All RSUs are subject to change in
      control vesting per the applicable Executive Officer’s employment
      agreement.




Options
Exercised




The
following provides information for each of the Company’s Executive Officers, the
amounts received upon exercise of options and the vesting of RSUs, during the
fiscal year ended March 31, 2010 (in thousands, except share data):




81




Option Awards
                    
                    
                    Stock VestedName
                    
                    Number of Shares
                      Acquired on
                      Exercise (#)
                    
                    
                    Value
                      Realized on
                      Exercise ($)
                    
                    
                    Number of
                      Shares
                      Acquired on
                      Vesting (#)
                    
                    
                    Value
                      Realized on
                      Vesting ($)David
      C. Habiger
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Paul
      F. Norris
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,500
                    
                    
                    
                    19,950A.
      Clay Leighton
                    
                    
                    20,000
                    
                    
                    
                    158,600
                    
                    
                    
                    -
                    
                    
                    
                    -Mark
      Ely
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,500
                    
                    
                    
                    71,250Matthew
      S. DiMaria
                    
                    
                    18,250
                    
                    
                    
                    131,086
                    
                    
                    
                    -
                    
                    
                    
                    -




(1)
            RSU
      valuation was determined by multiplying the total number of shares by the
      closing price of the Company’s common stock on the date of
      release.




Employment
Agreements




Each of
the Company’s Executive Officers has entered into an executive employment
arrangement with the Company.  The specific terms of these
arrangements are set forth below in this section, and estimates of the
compensation that would have been payable under these arrangements in the event
of termination and change in control are set forth in the section entitled
“Potential Payments upon Termination or Change in Control” below.




Mr.
Habiger’s arrangement, which was approved by the Board on January 23, 2007 (the
“Habiger Agreement”), provides for a base salary of $350,000, and the right to
participate in any long term or annual incentive plans maintained by the Company
for its executives.  The Habiger Agreement provides that (i) if
Mr. Habiger’s employment is terminated without Cause or if Mr. Habiger
terminates his employment for Good Reason, unless such termination occurs within
180 days of a Change in Control, the Company will make a lump sum payment to Mr.
Habiger equal to 175% of his annual base salary at the level in effect
immediately prior to his termination; and (ii) in the event of a Change in
Control, all of Mr. Habiger’s outstanding unvested stock options, RSUs, or other
equity compensation will immediately vest in full and the Company will make a
lump sum payment equal to 175% of his annual base salary at the level in effect
at the time of the Change in Control.




Mr.
Norris’s arrangement, which was approved by the Board effective February 26,
2008 (the “Norris Agreement”), provides for a base salary of $300,000, and the
right to participate in any long term or annual incentive plans maintained by
the Company for its executives.  The Norris Agreement provides that
(i) if Mr. Norris’s employment is terminated without Cause or if Mr. Norris
terminates his employment for Good Reason, unless such termination occurs within
180 days of a Change in Control, the Company will make a lump sum payment to Mr.
Norris equal to 100% of his annual base salary at the level in effect
immediately prior to his termination; and (ii) in the event of a Change in
Control, all of Mr. Norris’s outstanding unvested stock options, restricted
stock units and other equity compensation will immediately vest in full and the
Company will make a lump sum payment to Mr. Norris equal to 100% of his annual
base salary at the level in effect at the time of the Change in
Control.




Mr.
Leighton’s arrangement, which was approved by the Board on January 23, 2007 (the
“Leighton Agreement”), provides for a base salary of $300,000, and the right to
participate in any long term or annual incentive plans maintained by the Company
for its executives.  The Leighton Agreement provides that (i) if
Mr. Leighton’s employment is terminated without Cause or if Mr. Leighton
terminates his employment for Good Reason, unless such termination occurs within
180 days of a Change in Control, the Company will make a lump sum payment to Mr.
Leighton equal to 100% of his annual base salary at the level in effect
immediately prior to his termination; and (ii) in the event of a Change in
Control, all of Mr. Leighton’s outstanding unvested stock options, RSUs, or
other equity compensation will immediately vest in full and the Company will
make a lump sum payment equal to 100% of his annual base salary at the level in
effect at the time of the Change in Control.




Mr. Ely’s
arrangement, which was approved by the Board on January 23, 2007 (the “Ely
Agreement”), provides for a base salary of $300,000 and the right to participate
in any long term or annual incentive plans maintained by the Company for its
executives.  The Ely Agreement provides that (i) if Mr. Ely’s
employment is terminated without Cause or if Mr. Ely terminates his employment
for Good Reason, unless such termination occurs within 180 days of a Change in
Control, the Company will make a lump sum payment to Mr. Ely equal to 100% of
his annual base salary at the level in effect immediately prior to his
termination; and (ii) in the event of a Change in Control, all of Mr. Ely’s
outstanding unvested stock options, RSUs, or other equity compensation will
immediately vest in full and the Company will make a lump sum payment equal to
100% of his annual base salary at the level in effect at the time of the Change
in Control.


82




Each of
the above arrangements contains the following terms:




•
            Cause
      is defined as (i) the executive’s conviction of any felony under
      federal or state law, or any fraud, misappropriation or embezzlement, or
      (ii) the executive’s breach of a fiduciary duty owed to Company or
      commission of a material violation of Section 4 of the applicable
      agreement (relating to confidential
  information).




•
            Good
      Reason is defined to mean (i) a material adverse change in the
      Executive Officer’s position causing it to be of materially less stature
      or responsibility without his written consent, and such a materially
      adverse change shall in all events be deemed to occur if he no longer
      serves in his position, unless he consents in writing to such change; (ii)
      a reduction, without his written consent, in his level of compensation
      (including base salary and fringe benefits); (c) a relocation of his
      principal place of employment by more than 50 miles, or (d) failure to
      cure a material breach by Company (or its successor) of the applicable
      agreement within thirty (30) days after written notice to the Company
      identifying such breach.




•
            “Change
      in Control” is defined to have the same meaning as a “Corporate
      Transaction” under the Company’s 2004 Equity Compensation
      Plan.




Mr.
DiMaria’s arrangement, as reflected in his original offer letter and a Change in
Control Agreement entered into on March 18, 2009 (collectively, the “DiMaria
Agreement”) provides for a base salary of $250,000 and the right to participate
in any long term or annual incentive plans maintained by the Company for its
executives.  The DiMaria Agreement provides that (i) in the event
of a Change in Control, all unvested stock options, restricted stock units, or
other equity compensation held by Mr. DiMaria at the time of such Change in
Control immediately vest in full; and (ii) if Mr. DiMaria is terminated
without Cause or if he terminates his employment for Good Reason within 180 days
of a Change in Control, the Company will make a lump sum payment equal to 50% of
his annual base salary at the level in effect at the time of the
termination.  For purposes of the DiMaria Agreement, (a) Cause
means failure to meet performance standards, being convicted of any felony under
federal or state law, any fraud, misappropriation or embezzlement, or violation
of the Company’s Proprietary Information and Inventions Agreement or Code of
Business Conduct; (b) Change in Control means a transaction or series of
related transactions that results in a sale of all or substantially all of the
assets of either the Company as a whole, or the Roxio Consumer Products segment
as a unit, to a third party, the transfer of 50% or more of the outstanding
voting power of the Company to a third party, or the acquisition by a third
party, by reason of any contractual arrangement or understanding with one or
more persons or entities, of the right or power to appoint or cause to be
appointed a majority of the directors or officers of the Company; and
(c) Good Reason means a material adverse change in Mr. DiMaria’s authority,
duties, or responsibilities, unless Mr. DiMaria consents in writing to such
change, a reduction in his level of base salary, or a relocation of his
principal place of employment by more than 50 miles.




In
considering the executive employment arrangements of the Company’s Executive
Officers, the Compensation Committee and Board determined that the “single
trigger” acceleration and payment provisions were appropriate, since having the
Executive Officers’ full attention and commitment through to the closing of a
change in control is of paramount importance to the ultimate success of the
transaction.




Potential Payments upon Termination or Change in
Control




The
following table summarizes the Company’s estimated cost of severance payments
had the executive’s employment terminated without cause or if he had terminated
his employment for good reason as of March 31, 2010 (in
thousands):


83




Before Change of Control
                                                                        
                                                                        
                                                                        Within 6 months of
                                                                          Change of ControlName
                                                                        
                                                                        TypeofBenefit
                                                                        
                                                                        Terminationwithout
                                                                          CauseorforGoodReason($)
                                                                        
                                                                        
                                                                        Terminationwithout
                                                                          CauseorforGoodReason
                                                                          ($)David C. Habiger
                                                                        
                                                                        Severance Value (1)
                                                                        
                                                                        
                                                                        612,500
                                                                        
                                                                        
                                                                        
                                                                        612,500Value of accelerated
      options(2)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        2,575,879Value of accelerated
      RSUs(3)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Total
      Value:
                                                                        
                                                                        
                                                                        612,500
                                                                        
                                                                        
                                                                        
                                                                        3,188,379Paul F. Norris
                                                                        
                                                                        Severance Value (1)
                                                                        
                                                                        
                                                                        300,000
                                                                        
                                                                        
                                                                        
                                                                        300,000Value of accelerated
      options(2)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        1,253,179Value of accelerated
      RSUs(3)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        32,795Total
      Value:
                                                                        
                                                                        
                                                                        300,000
                                                                        
                                                                        
                                                                        
                                                                        1,585,974A. Clay Leighton
                                                                        
                                                                        Severance Value (1)
                                                                        
                                                                        
                                                                        300,000
                                                                        
                                                                        
                                                                        
                                                                        300,000Value of accelerated
      options(2)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        1,775,973Value of accelerated
      RSUs(3)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Total
      Value:
                                                                        
                                                                        
                                                                        300,000
                                                                        
                                                                        
                                                                        
                                                                        2,075,973Mark Ely
                                                                        
                                                                        Severance Value (1)
                                                                        
                                                                        
                                                                        300,000
                                                                        
                                                                        
                                                                        
                                                                        300,000Value of accelerated
      options(2)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        886,786Value of accelerated
      RSUs(3)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        175,688Total
      Value:
                                                                        
                                                                        
                                                                        300,000
                                                                        
                                                                        
                                                                        
                                                                        1,362,474Matthew S. DiMaria
                                                                        
                                                                        Severance Value (1)
                                                                        
                                                                        
                                                                        125,000
                                                                        
                                                                        
                                                                        
                                                                        125,000Value of accelerated
      options(2)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Value of accelerated
      RSUs(3)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Total
      Value:
                                                                        
                                                                        
                                                                        125,000
                                                                        
                                                                        
                                                                        
                                                                        125,000




(1)
            See
      the section above entitled “Employment Agreements” for a description of
      the material terms of each of the Executive Officer’s employment
      agreements.  All salary calculations were made as of March 31,
      2010, using current salary figures for each Executive
    Officer.




(2)
            Represents
      the value of the accelerated vesting of outstanding stock options,
      calculated as the difference between the March 31, 2010 closing stock
      price of $9.37 and the exercise price for each option.  See the
      table “Outstanding Equity Awards” include
above.




(3)
            Represents
      the value of the accelerated vesting of RSUs, based on the March 31, 2010
      closing stock price of $9.37.




Director
Compensation




On
January 23, 2007, the Company’s Board approved the Board of Directors
Compensation Policy (the “Policy”). Pursuant to the Policy, the Board reviews
the annual compensation targets, including cash compensation target percentage,
at each annual meeting of the Board for the “independent” Board members (each,
an “Outside Director” and each Outside Director who serves as chairman of either
the Board or a standing committee of the Board (each, a
“Chairman”).  At the June 12, 2008 annual Board meeting, the Board
reviewed the Policy, and after considering survey information regarding industry
practices and other factors, approved amendments to the Policy providing for an
annual compensation target of $120,000 for each Board member and for each such
member serving as chairman of the Board or one of its standing committees, an
annual compensation target equal to 125% of the annual compensation target for
the non-chairman members.  Under the revised Policy, the annual
compensation target for all members is to be paid in equal parts cash and equity
compensation, provided that in the event the annual organizational meeting of
the Board is scheduled later than October 1 in any year, then, in light of the
inability to calculate the next year’s annual equity compensation target
percentage as contemplated under the Policy until such meeting is held, the
Policy provides that effective on October 1 of that year the equity compensation
target percentage shall be shall be reduced to 0% and the cash compensation
target percentage shall be increased to 100%, each until the occurrence of such
annual organizational meeting.


84




In
addition, the Company’s Board and Compensation Committee (excluding Mr. Doris
and Ms. Sauer) considered the level of involvement of Mr. Doris and Ms. Sauer in
providing strategic guidance to the Company’s executive officers and management
team as well as the standard level of director compensation provided pursuant to
the Board Compensation Policy and determined that Mr. Doris shall receive
additional cash compensation at the rate of $37,500 per quarter and Ms. Sauer
shall receive additional cash compensation at the rate of $20,000 per quarter,
until such time as either Mr. Doris or Ms. Sauer report that they are no longer
providing such extra involvement, or until such time as the Board directs
otherwise.




The
following table sets forth information regarding director compensation for
fiscal 2010:




Name
                  
                  Fees Earnedor
                    Paid inCash
                    ($)
                  
                  
                  Option
                    Awards
                    ($)(1)
                  
                  
                  Total
                    ($)Robert J. Doris (2) (3)
                  
                  
                  217,590
                  
                  
                  
                  74,649
                  
                  
                  
                  292,239Mary
      C. Sauer(2)
      (4)
                  
                  
                  134,941
                  
                  
                  
                  59,780
                  
                  
                  
                  194,721Robert
      M. Greber (5)
                  
                  
                  75,000
                  
                  
                  
                  74,649
                  
                  
                  
                  149,649Peter
      J. Marguglio(6)
                  
                  
                  60,000
                  
                  
                  
                  59,780
                  
                  
                  
                  119,780R.
      Warren Langley(7)
                  
                  
                  60,000
                  
                  
                  
                  59,780
                  
                  
                  
                  119,780




(1)
            The
      amounts in this column represent the aggregate grant date fair value of
      stock option awards.  Amount does not reflect compensation
      actually received by the Directors.  The Company did not issue
      any options containing performance conditions. No stock options were
      granted during fiscal 2008.  See
      Note 4, “Shareholders’ Equity,” to the Consolidated Financial
      Statements included in this Annual Report, for the assumptions used by the
      Company in calculating these
amounts.




(2)
            As
      noted above, in addition to amounts payable pursuant to the Policy, Mr.
      Doris and Ms. Sauer received certain amounts in consideration of their
      providing advisory services to the Company’s executive officers and
      management and participate in the Company’s standard health and benefit
      package.




(3)
            As
      of March 31, 2010, Mr. Doris held vested options to purchase an aggregate
      of 173,217 shares of the Company’s Common Stock and held 14,350 unvested
      options.




(4)
            As
      of March 31, 2010, Ms. Sauer held vested options to purchase an aggregate
      of 109,235 shares of the Company’s Common Stock and held 11,492 unvested
      options.




(5)
            As
      of March 31, 2010, Mr. Greber held vested options to purchase an aggregate
      of 131,550 shares of the Company’s Common Stock, and held 14,350 unvested
      options.




(6)
            As
      of March 31, 2010, Mr. Marguglio held vested options to purchase an
      aggregate of 157,308 shares of the Company’s Common Stock, and held 11,492
      unvested options.




(7)
            As
      of March 31, 2010, Mr. Langley held vested options to purchase an
      aggregate of 99,308 shares of the Company’s Common Stock, and held 11,492
      unvested options.




Evaluation
of Compensation Policies and Practices as They Relate to Risk
Management




The
Company has reviewed its compensation policies as generally applicable to its
employees and believes that these policies do not encourage excessive and
unnecessary risk-taking, and that the level of risk that they do encourage is
not reasonably likely to have a material adverse effect on the
Company.  The Company believes that the design of its compensation
policies encourage employees to remain focused on both the short-and long-term
goals of the Company.  For example, while cash bonus plans may measure
performance on a quarterly or annual, basis, equity awards typically vest over a
number of years, which the Company believes encourages employees to focus on
sustained stock price appreciation, thus limiting the potential value of
excessive risk-taking.




Compensation
Committee Interlocks and Insider Participation




During
fiscal year 2010, no Executive Officer of the Company served as a board member
or compensation committee member for any other entity, one of whose executive
officers served as a director or Compensation Committee member of the
Company.


85




Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters




The
following table sets forth certain information regarding beneficial ownership of
the common stock as of June 3, 2010 (i) by each person who is known by the
Company to beneficially own more than 5% of the outstanding shares of the
Company’s common stock, (ii) by each of its directors, (iii) by each of its
Executive Officers, and (iv) by all directors and executive officers as a
group.


In
connection with the DivX Acquisition, each of the executive officers and
directors has executed a voting agreement (collectively, the “Voting
Agreements”) with DivX pursuant to which each of them has granted an irrevocable
proxy (an “Irrevocable Proxy”) in favor of DivX and certain representatives of
DivX and irrevocably appointed such representatives as his or her attorney and
proxy to vote all of the shares of the Company’s Common Stock beneficially owned
by him or her or that will be owned by him or her before the termination of the
Voting Agreements in favor of approval and adoption of the transactions
contemplated by the Merger Agreement and other matters that could reasonably be
expected to facilitate the DivX Acquisition, and against the adoption of any
Adverse Proposal (as defined in the Voting Agreements).  The
obligations of each director and executive officer under the Voting Agreements
will terminate upon the earliest to occur of: (i) the Effective Time (as defined
in the Merger Agreement), (ii) the date on which the Merger Agreement is
terminated by DivX pursuant to Section 7.1 thereof and (iii) such date and time
as any amendment or change to the Merger Agreement is effected without such
stockholder’s consent that increases the Exchange Ratio or the Merger Cash
Consideration (each as defined in the Merger Agreement) above the values set
forth in the Merger Agreement.  The Voting Agreements also limit the
right of each executive officer and director to Transfer (as defined in the
Voting Agreements) shares of Company Common Stock owned by him or her except for
Permitted Transfers.  “Permitted Transfer” means a Transfer of shares
(i) made pursuant to, and in compliance with, a written plan that meets the
requirements of Rule 10b5-1 under the Securities Exchange Act of 1934
established prior to the date of the Voting Agreements; (ii) with respect to
certain executive officers and directors, in connection with the exercise of any
option to purchase Common Stock that would otherwise expire prior to the
expiration of the Voting Agreements; (iii) to any member of the immediate family
of the executive officer or director or to a trust for the benefit of the
executive officer or director or any member of such person's immediate family;
or (iv) upon the death of such person; provided, however, that other in the case
of a Permitted Transfer effected pursuant to subsection (iii), a Permitted
Transfer shall be permitted only if, as a precondition to such Permitted
Transfer, the transferee agrees in a writing to be bound by all of the terms of
the applicable Voting Agreement. A corrected form of Voting Agreement
substantially in the form signed by the executive officers and directors is
attached as Exhibit 10.25 to this Annual Report.  Except as set forth
in this paragraph, each of the executive officers and directors has the
beneficial ownership of the shares of Common Stock set forth opposite his or her
name as described in the table below.


Name and Address (1)
                                                  
                                                  Number of Shares
                                                    Beneficially Owned(2)
                                                  
                                                  
                                                  Percentage of Shares
                                                    Beneficially Owned(2)NorthPointe Capital,
      LLC (3)101
      W. Big Beaver, Suite 745Troy,
      MI 48084
                                                  
                                                  
                                                  1,508,825
                                                  
                                                  
                                                  
                                                  4.92
                                                  %William Blair &
      Company, L.L.C. (4)222
      W AdamsChicago,
      IL 60606
                                                  
                                                  
                                                  1,402,105
                                                  
                                                  
                                                  
                                                  4.58
                                                  %Waddell & Reed
      Financial, Inc. (5)Waddell
      & Reed Financial Services, Inc.Waddel
      & Reed, Inc.Waddell
      & Reed Investment Management CompanyIvy
      Investment Company6300
      Lamar AvenueOverland
      Park, KS 66202
                                                  
                                                  
                                                  2,314,242
                                                  
                                                  
                                                  
                                                  7.55
                                                  %Directors
      and Officers   Robert J. Doris (6)
                                                  
                                                  
                                                  2,496,754
                                                  
                                                  
                                                  
                                                  8.07
                                                  %Mary C. Sauer (7)
                                                  
                                                  
                                                  2,496,754
                                                  
                                                  
                                                  
                                                  8.07
                                                  %Peter Marguglio
      (8)
                                                  
                                                  
                                                  352,318
                                                  
                                                  
                                                  
                                                  1.14
                                                  %Robert M.
      Greber(9)
                                                  
                                                  
                                                  162,250
                                                  
                                                  
                                                  
                                                  *R. Warren
      Langley(10)
                                                  
                                                  
                                                  105,875
                                                  
                                                  
                                                  
                                                  *David C. Habiger
      (11)
                                                  
                                                  
                                                  411,605
                                                  
                                                  
                                                  
                                                  1.42
                                                  %A. Clay Leighton
      (12)
                                                  
                                                  
                                                  535,730
                                                  
                                                  
                                                  
                                                  1.72
                                                  %Mark Ely (13)
                                                  
                                                  
                                                  126,770
                                                  
                                                  
                                                  
                                                  *Paul Norris (14)
                                                  
                                                  
                                                  214,660
                                                  
                                                  
                                                  
                                                  *Matt DiMaria (15)
                                                  
                                                  
                                                  124,458
                                                  
                                                  
                                                  
                                                  *All
      directors and executive officers as a group (10 persons)
                                                  
                                                  
                                                  4,530,420
                                                  
                                                  
                                                  
                                                  13.99
                                                  %




86




*
              Less
      than 1%.





1
              Unless
      otherwise indicated, the address of each person is c/o Sonic Solutions,
      7250 Redwood Blvd., Suite 300, Novato, CA
94945.





2
              Table
      is based upon information supplied by directors, officers and principal
      shareholders.  Applicable percentage ownership for each
      shareholder is based on 30,636,131 shares of common stock outstanding as
      of June 3, 2010, together with applicable options for such
      shareholders.  Beneficial ownership is determined in accordance
      with Securities Exchange Commission ("SEC") rules and generally includes
      voting or investment power with respect to securities, subject to
      community property laws where applicable. Shares of common stock subject
      to options are deemed outstanding for the purpose of computing the
      percentage ownership of the person holding such options, but are not
      treated as outstanding for computing the percentage ownership of any other
      person. Reference
      is also made to the description of the Voting Agreements to which each
      executive officer and director is a party, as described above in this
      section.





3
              The
      information is based solely on Schedule 13G filed with the SEC by
      NorthPointe Capital, LLC, on April 7,
2010.





4
              The
      information is based solely on Schedule 13G filed with the SEC by William
      Blair & Company, L.L.C. on February 5,
2010.





5
              The
      information is based solely on Schedule 13G filed with the SEC by Waddell
      & Reed, Inc. on February 12,
2010.





6
              Includes
      720,531 shares owned by Mr. Doris, 181,417 shares issuable upon exercise
      of options which will be exercisable within 60 days of June 3, 2010,
      1,261,009 owned by the Doris-Sauer Revocable Trust u/a/d 5 Nov 2004,
      217,995 shares owned by Ms. Sauer, and 115,802 shares issuable upon
      exercise of Ms. Sauer's options which will be exercisable within 60 days
      of June 3, 2010.  The revocable trust established by Robert
      Doris and Mary Sauer, husband and wife.  Each of Mr. Doris and
      Ms. Sauer are joint trustees of the Trust and each person has the power to
      vote and dispose of any and all securities held by the
      Trust.  Both Mr. Doris and Ms. Sauer disclaims beneficial
      ownership of the shares and options owned by the
  other.





7
              Includes
      217,995 shares owned by Ms. Sauer, 115,802 shares issuable upon exercise
      of options which will be exercisable within 60 days of June 3, 2010,
      1,261,009 owned by the Doris-Sauer Revocable Trust u/a/d 5 Nov 2004,
      720,531 shares owned by Mr. Doris, and 181,417 shares issuable upon
      exercise of Ms. Sauer's options which will be exercisable within 60 days
      of June 3, 2010.  The revocable trust established by Mary Sauer
      and Robert, wife and husband.  Each of Ms. Sauer and Mr. Doris
      are joint trustees of the Trust and each person has the power to vote and
      dispose of any and all securities held by the Trust.  Both Ms.
      Sauer and Mr. Doris disclaims beneficial ownership of the shares and
      options owned by the other.





8
              Includes
      188,443 shares owned by Mr. Marguglio, and 163,875 shares issuable upon
      exercise of options which will be exercisable within 60 days of June 3,
      2010.





9
              Includes
      10,000 shares owned by Mr. Greber, 12,500 shares owned directly by a trust
      whose sole trustee and beneficary is Mr. Greber's will and 139,750
      issuable upon exercise of options which will be exercisable within 60 days
      of June 3, 2010.





10
              Includes
      105,875 shares issuable upon exercise of options which will be exercisable
      within 60 days of June 3,
2010.





11
              Includes
      9,000 shares owned by Mr. Habiger and 402,605 shares issuable upon
      exercise of options which will be exercisable within 60 days of June 3,
      2010.





12
              Includes
      79,500 shares owned by Mr. Leighton and 456,230 shares issuable upon
      exercise of options which will be exercisable within 60 days of June 3,
      2010.





13
              Includes
      35,207 shares owned by Mr. Ely, 12,500 unvested RSUs which vest every six
      months and 79,063 shares issuable upon exercise of options which will be
      exercisable within 60 days of June 3,
2010.





14
              Includes
      41,337 shares owned by Mr. Norris, 1,750 unvested RSUs which vest every
      six months and 171,573 shares issuable upon exercise of options which will
      be exercisable within 60 days of June 3,
2010.





15
              Includes
      124,458 shares issuable upon exercise of options which will be exercisable
      within 60 days of June 3,
2010.




Item
13.  Certain Relationships, Related Transactions and Director
Independence




The
Company has agreed to indemnify each of its directors and executive officers to
the fullest extent permitted by California law.  All transactions
between the Company and its officers, directors, principal shareholders and
affiliates have been and will be approved by a majority of its Board, including
a majority of the disinterested, non-employee directors, and have been or will
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.  The Board has no formal policies in place
with respect to such review or the approval of such transactions.




Director
Independence




See Part
III, Item 10, “Directors, Executive Officers and Corporate Governance-Director
Independence”included in this Annual
Report.


87




Item
14.  Principal Accounting Fees and Services




The
following table sets forth the aggregate amount of various professional fees
billed by the Company’s principal accountants (in thousands):





Year Ended
                    March 31, 2010Armanino McKenna, LLP(5)Audit
      fees(1)
                  
                  $
                  557Audit
      related fees(2)
                  
                  
                  30Tax
      fees (3)
                  
                  
                  5All
      other fees (4)
                  
                  
                  -Total
      fees
                  
                  $
                  593




(1)
            Audit
      fees are for professional services for audit of the Company’s financial
      statements and its internal controls over financial reporting, the reviews
      of its interim financial statements included in its quarterly reports on
      Form 10-Q for the second and third quarter of fiscal
  2010.




(2)
            Audit-related
      fees are for assurance and related services and review of other SEC
      filings by that are reasonably related to the performance of the audit or
      review of the Company’s financial
statements.




(3)
            Tax
      fees are for professional services with respect to tax compliance, tax
      advice and tax planning.




(4)
            All
      other fees are for permissible work that does not fall within any of the
      other fee categories above.




(5)
            All
      audit fees are approved by the board of directors.  For the
      fiscal year ended March 31, 2009, BDO Seidman, LLP served as the Company’s
      independent accountant.  As previously disclosed on Form 8-K
      filed with the SEC on September 30, 2009, the Company discharged BDO
      Seidman, LLP and appointed Armanino McKenna, LLP as our new independant
      account for the fiscal year ended March 31,
  2010.





Pre-Approval
Policy




Under the
Sarbanes-Oxley Act, all audit and non-audit services performed by Armanino
McKenna, LLP must be approved in advance by the Company’s Audit Committee to
assure that such services do not impair the auditors’ independence from the
Company.  In accordance with its pre-approval policies and procedures,
the Company’s Audit Committee pre-approved all audit and non-audit services
prior to them being performed by Armanino McKenna, LLP during the fiscal year
ended March 31, 2010.


88


PART
IV




Item
15.  Exhibits and Financial Statement Schedules




(a)    1. Financial
Statements.




See Item
8 included in this Annual Report.




(a)    2. Financial Statements
Schedule.




Schedule II — Valuation and Qualifying
Accounts




All other
schedules are omitted because they are not required, or are not applicable, or
the information is included in the financial statements.




h        (a)     3.
Exhibits:


89




Exhibit
                  
                  Note
                  
                  Title2.1
                  
                  (21)
                  
                  Agreement and
      Plan of Merger, dated as of June 1, 2010, by and among the
      Registrant, Siracusa Merger Corporation, a Delaware corporation and a
      direct wholly owned subsidiary of Registrant, Siracusa Merger LLC, a
      Delaware limited liability company and a direct wholly owned subsidiary of
      Registrant and DivX, Inc., a Delaware corporation3.1
                  
                  (1)
                  
                  Restated
      Articles of Incorporation3.2
                  
                  (1)
                  
                  Amended
      and Restated By-Laws3.3
                  
                  (7)
                  
                  Certificate
      of Amendment of Restated Articles of Incorporation4.1
                  
                  (1)
                  
                  Specimen
      Common Stock Certificate10.1
                  
                  (2)
                  
                  Lease
      Agreement between Golden Gate Plaza and Registrant, dated January 26,
      199510.2
                  
                  (13)
                  
                  Amendment
      to Lease Agreement between Golden Gate Plaza and Registrant, dated
      November 20, 200010.3
                  
                  (12)
                  
                  Tri-Partite
      Agreement between Roxio, Inc., Registrant and Entrust, Inc., dated
      December 17, 200410.4
                  
                  (12)
                  
                  Third
      Amendment to Lease between C&B Ventures-Napa Two LLC and Registrant,
      dated February 4, 200510.5
                  
                  (4)
                  
                  Distribution
      Agreement between Registrant and Daikin Industries, Ltd., dated February
      27, 200110.6
                  
                  (1)
                  
                  Form
      of Indemnity Agreement10.7
                  
                  (3)
                  
                  1998
      Stock Option Plan (compensatory plan)10.8
                  
                  (9)
                  
                  Sonic
      Solutions 2004 Equity Compensation Plan10.9
                  
                  (9)
                  
                  Sonic
      Solutions 2004 Equity Compensation Plan Notice of Stock Option Award for
      Robert J. Doris and Stock Option Award Agreement10.10
                  
                  (9)
                  
                  Sonic
      Solutions 2004 Equity Compensation Plan Notice of Stock Option Award for
      Mary C. Sauer and Stock Option Award Agreement10.11
                  
                  (9)
                  
                  Sonic
      Solutions 2004 Equity Compensation Plan Notice of Stock Option Award for
      Robert Greber and Stock Option Award Agreement10.12
                  
                  (9)
                  
                  Sonic
      Solutions 2004 Equity Compensation Plan Notice of Stock Option Award for
      Peter Marguglio and Stock Option Award Agreement10.13
                  
                  (9)
                  
                  Sonic
      Solutions 2004 Equity Compensation Plan Notice of Stock Option Award for
      Warren R. Langley and Stock Option Award Agreement10.14
                  
                  (10)
                  
                  Sonic
      Solutions 2004 Stock Incentive Plan10.15
                  
                  (14)
                  
                  Sonic
      Solutions 2005 Stock Incentive Plan (Non-U.S.
Employees)10.16
                  
                  (15)
                  
                  Third
      Sublease Amending Agreement between Entrust, Inc. and Sonic Solutions
      dated July 5, 200610.17
                  
                  (16)
                  
                  Executive
      Employment Agreement, effective as of January 23, 2007, by and between
      Sonic Solutions and David C. Habiger10.18
                  
                  (16)
                  
                  Executive
      Employment Agreement, effective as of January 23, 2007, by and between
      Sonic Solutions and A. Clay Leighton10.19
                  
                  (16)
                  
                  Executive
      Employment Agreement, effective as of January 23, 2007, by and between
      Sonic Solutions and Mark Ely10.20
                  
                  (17)
                  
                  Amended
      and Restated Executive Employment Agreement, effective as of February 25,
      2008 hereof, by and between Sonic Solutions and Paul F.
    Norris10.21
                  
                  (18)
                  
                  Board
      of Directors Compensation Policy, effective as of June 12,
      200810.22
                  
                  (19)
      ‡
                  
                  General
      Terms and Conditions entered into as of August 18, 2005 between Registrant
      and Digital River, Inc.,Reseller Agreement
      effective as of August 18, 2005 between Registrant and Digital River,
      Inc., ‡, and Amendment No. 2 to Digital River Reseller Agreement entered
      into as of January 1, 2007 between Registrant and Digital River, Inc.
      ‡




90




Exhibit
                      
                      Note
                      
                      Title10.23
                      
                      (20)
      ‡
                      
                      Distribution
      Agreement entered into as of March 28, 2002 between Registrant and Navarre
      Distribution Services, Inc. , Letter dated December 17, 2004 from
      Registrant to Navarre Distribution Services, Inc., Letter dated December
      7, 2006 from Navarre Distribution Services, Inc. to Registrant, General
      Terms and Conditions for Consignment Programs Rider dated September 11,
      2007 to Computer Software Distribution Agreement between Registrant and
      Navarre Distribution Services,Inc. and General
      Terms and Conditions for Digital Distribution Rider dated March 28, 2002
      to Distribution Agreement between Registrant and Navarre Distribution
      Services, Inc. ‡10.24
                      
                      *
                      
                      Executive
      Employment Agreement, effective as of March 18, 2008, by and between Sonic
      Solutions and Matthew DiMaria.10.25
                      
                      *
                      
                      Form
      of Voting Agreement made as of June 1, 2010, by and among Registrant,
      DivX, Inc. and the shareholder of Parent.10.26
                      
                      (21)
                      
                      Form
      of Voting Agreement made as of June 1, 2010, by and among Registrant,
      DivX, Inc. and the shareholder of DivX, Inc21.1
                      
                      *
                      
                      List
      of subsidiaries23.1
                      
                      *
                      
                      Consent
      of Armanino McKenna, LLP, Independent Registered Public Accounting
      Firm23.2
                      
                      *
                      
                      Consent
      of BDO Seidman, LLP, Independent Registered Public Accounting
      Firm31.1
                      
                      *
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
                      
                      *
                      
                      Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
                      
                      *
                      
                      Section
      1350 Certification of Chief Executive Officer32.2
                      
                      *
                      
                      Section
      1350 Certification of Chief Financial
Officer




91




Note
              
              Title‡
              
              Confidential
      treatment has been requested for portions of this
  exhibit.*
              
              Filed
      herewith.(1)
              
              Incorporated
      by reference to exhibits to Registration Statement on Form S-1 effective
      February 10, 1994.(2)
              
              Incorporated
      by reference to exhibits to Annual Report on Form 10-K for the fiscal year
      ended March 31, 1996.(3)
              
              Incorporated
      by reference to Appendix A to the Registrant s Definitive Proxy Statement
      filed on July 21, 1998.(4)
              
              Incorporated
      by reference to exhibits to Current Report on Form 8-K filed on March 14,
      2001.(5)
              
              Incorporated
      by reference to exhibits to Current Report on Form 8-K filed on December
      19, 2001.(6)
              
              Incorporated
      by reference to exhibits to Current Report on Form 8-K filed on November
      20, 2002.(7)
              
              Incorporated
      by reference to Exhibit 3.5 to Report on Form 10-Q filed on November 12,
      2003.(8)
              
              Incorporated
      by reference to Exhibit 99.1 to Current Report on Form 8-K filed on March
      1, 2004.(9)
              
              Incorporated
      by reference to exhibits to Current Report on Form 8-K filed on September
      13, 2004.(10)
              
              Incorporated
      by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2004.(11)
              
              Incorporated
      by reference to Exhibit 2.1 to Current Report on Form 8-K filed December
      23, 2004.(12)
              
              Incorporated
      by reference to exhibits to Quarterly Report on Form 10-Q for the quarter
      ended December 31, 2004.(13)
              
              Incorporated
      by reference to exhibits to Registration Statement on Form S-1 effective
      May 21, 2001.(14)
              
              Incorporated
      by reference to Exhibit 10.21 to Annual Report on Form 10-K for the year
      ended March 31, 2005.(15)
              
              Incorporated
      by reference to Exhibit 10.1 to Report on Form 10-Q filed on August 14,
      2006.(16)
              
              Incorporated
      by reference to exhibits to Current Report on Form 8-K filed on January
      24, 2007.(17)
              
              Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed on
      February 25, 2008.(18)
              
              Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed on June
      16, 2008.(19)
              
              Incorporated
      by reference to Exhibit 10.22 to Annual Report on Form 10-KA for the
      fiscal year ended March 31, 2009 filed on February 5,
  2010.(20)
              
              Incorporated
      by reference to Exhibit 10.23 to Annual Report on Form 10-KA for the
      fiscal year ended March 31, 2009 filed on February 5,
  2010.(21)
              
              Incorporated
      by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-k
      filed on June 2, 2010.




92


SCHEDULE
II




FINANCIAL
STATEMENT SCHEDULE


SONIC
SOLUTIONS


VALUATION
AND QUALIFYING ACCOUNTS


Years
Ended March 31, 2010, 2009 and 2008


(In
thousands)




Sales
discounts, returns and allowances are recorded as a reduction of revenues and as
an offset to accounts receivable to the extent the Company has legal right of
offset otherwise they are recorded in accrued expenses and other current
liabilities.  At March 31, 2010, 2009 and 2008, $2,469, $1,874 and
$3,720, respectively, were offset against accounts receivable.




Balance at
                      Beginning
                      of Period
                    
                    
                    Charged
                      to Costs
                      and
                      Expenses
                    
                    
                    Charged
                      to Other
                      Accounts
                    
                    
                    Deductions
                    
                    
                    Balance at
                      End of
                      PeriodAllowance
      for doubtful accountsYear
      ended March 31, 2010
                    
                    $
                    198
                    
                    
                    $
                    (68
                    )
                    
                    $
                    17
                    
                    
                    $
                    (105
                    )
                    
                    $
                    42Year
      ended March 31, 2009
                    
                    
                    181
                    
                    
                    
                    77
                    
                    
                    
                    -
                    
                    
                    
                    (60
                    )
                    
                    
                    198Year
      ended March 31, 2008
                    
                    
                    664
                    
                    
                    
                    (228
                    )
                    
                    
                    -
                    
                    
                    
                    (255
                    )
                    
                    
                    181Sales
      discounts, returns and allowancesYear
      ended March 31, 2010
                    
                    $
                    4,256
                    
                    
                    $
                    -
                    
                    
                    $
                    13,975
                    
                    
                    $
                    (13,638
                    )
                    
                    $
                    4,593Year
      ended March 31, 2009
                    
                    
                    6,629
                    
                    
                    
                    -
                    
                    
                    
                    11,169
                    
                    
                    
                    (13,542
                    )
                    
                    
                    4,256Year
      ended March 31, 2008
                    
                    
                    4,114
                    
                    
                    
                    -
                    
                    
                    
                    16,937
                    
                    
                    
                    (14,422
                    )
                    
                    
                    6,629




93


SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto,
duly authorized on June 4, 2010.




SONIC
      SOLUTIONSBy:
                /s/ David C. HabigerDavid
      C. HabigerPresident
      and Chief Executive
Officer




Pursuant
to the requirements of the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.




Signature
                        
                        Title
                        
                        Date/s/
      David C. Habiger
                        
                        President
      and Chief Executive Officer
                        
                        June
      4, 2010David
      C. Habiger
                        
                        (Principal
      Executive Officer)/s/
      Robert J. Doris
                        
                        Director
                        
                        June
      4, 2010Robert
      J. Doris/s/
      Robert M. Greber
                        
                        Director
                        
                        June
      4, 2010Robert
      M. Greber/s/
      Peter J. Marguglio
                        
                        Director
                        
                        June
      4, 2010Peter
      J. Marguglio/s/
      R. Warren Langley
                        
                        Director
                        
                        June
      4, 2010R.
      Warren Langley/s/
      Mary C. Sauer
                        
                        Director
      & Secretary
                        
                        June
      4, 2010Mary
      C. Sauer/s/
      Paul F. Norris
                        
                        Executive
      Vice President, Chief Financial
                        
                        June
      4, 2010Paul
      F. Norris
                        
                        Officer
      and General Counsel (PrincipalFinancial/Accounting
      Officer)




94