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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

or



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

For the transition period from ________ to ________

Commission file number: 000-22023

Macrovision Corporation

(Exact name of registrant as specified in its charter)



|                                                              |  |                                     
|------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                      |  | 77-0156161                          
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                             
|2830 De La Cruz Boulevard, Santa Clara, CA 95050             
|(Address of principal executive offices) (Zip Code)          

(408) 562-8400

(Registrants telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer.

Large accelerated filer  x        Accelerated filer ̈Non-accelerated filer ̈

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                               |  |                                   
|------------------------------ |  | ----------------------------------
|Class                          |  | Outstanding as of November 1, 2007
|Common stock, $0.001 par value |  | 53,618,434                        



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MACROVISION CORPORATION

FORM 10-Q

INDEX



|                               |  |                                                                                                             |  |     
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                             |  | Page
|PART I - FINANCIAL INFORMATION |  |                                                                                                            
|                               |  |                                                                                                            
|Item 1.                        |  | Financial Statements                                                                                        |  |     
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006                        |  | 1   
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006 |  | 2   
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006       |  | 3   
|                               |  |                                                                                                            
|                               |  | Notes to Condensed Consolidated Financial Statements                                                        |  | 4   
|                               |  |                                                                                                            
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 18  
|                               |  |                                                                                                            
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                                  |  | 28  
|                               |  |                                                                                                            
|Item 4.                        |  | Controls and Procedures                                                                                     |  | 29  
|PART II - OTHER INFORMATION    |  |                                                                                                            
|                               |  |                                                                                                            
|Item 1.                        |  | Legal Proceedings                                                                                           |  | 30  
|                               |  |                                                                                                            
|Item 1A.                       |  | Risk Factors                                                                                                |  | 30  
|                               |  |                                                                                                            
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |  | 30  
|                               |  |                                                                                                            
|Item 3.                        |  | Defaults Upon Senior Securities                                                                             |  | 30  
|                               |  |                                                                                                            
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                         |  | 30  
|                               |  |                                                                                                            
|Item 5.                        |  | Other Information                                                                                           |  | 31  
|                               |  |                                                                                                            
|Item 6.                        |  | Exhibits                                                                                                    |  | 31  
|                               | 
|Signatures                     |  | 32                                                                                                         



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

MACROVISION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                               |  |                   |          |   |                  |   |         |  
|---------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | ------- | -
|                                               |  | September 30,2007 |          |   | December 31,2006 |  
|ASSETS                                         |  |                   |          |   |                  |   |         |  
|Current assets:                                |  |                   |          |   |                  |   |         |  
|Cash and cash equivalents                      |  | $                 | 180,234  |   |                  | $ | 159,666 |  
|Advance payments for acquisition of Mediabolic |  |                   |         |   |                  |   | 40,241  |  
|Short-term investments                         |  |                   | 231,913  |   |                  |   | 121,559 |  
|Accounts receivable, net                       |  |                   | 62,059   |   |                  |   | 66,723  |  
|Deferred tax assets                            |  |                   | 3,156    |   |                  |   |        |  
|Taxes receivable                               |  |                   | 1,064    |   |                  |   |        |  
|Prepaid expenses and other current assets      |  |                   | 10,416   |   |                  |   | 14,402  |  
|                                               |  |                   |          |   |                  |   |         |  
|Total current assets                           |  |                   | 488,842  |   |                  |   | 402,591 |  
|Long-term marketable investment securities     |  |                   | 98,841   |   |                  |   | 175,165 |  
|Restricted cash                                |  |                   | 12,000   |   |                  |   | 12,000  |  
|Deferred tax assets                            |  |                   | 43,102   |   |                  |   | 28,730  |  
|Property and equipment, net                    |  |                   | 15,038   |   |                  |   | 21,818  |  
|Other intangibles from acquisitions, net       |  |                   | 23,927   |   |                  |   | 25,368  |  
|Patents and other assets                       |  |                   | 21,491   |   |                  |   | 17,894  |  
|Goodwill                                       |  |                   | 171,674  |   |                  |   | 136,049 |  
|                                               |  |                   |          |   |                  |   |         |  
|Total assets                                   |  | $                 | 874,915  |   |                  | $ | 819,615 |  
|                                               |  |                   |          |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY           |  |                   |          |   |                  |   |         |  
|Current liabilities:                           |  |                   |          |   |                  |   |         |  
|Accounts payable                               |  | $                 | 5,178    |   |                  | $ | 4,378   |  
|Accrued expenses                               |  |                   | 25,762   |   |                  |   | 34,073  |  
|Income taxes payable                           |  |                   |         |   |                  |   | 37,632  |  
|Deferred revenue                               |  |                   | 30,619   |   |                  |   | 33,831  |  
|                                               |  |                   |          |   |                  |   |         |  
|Total current liabilities                      |  |                   | 61,559   |   |                  |   | 109,914 |  
|Convertible senior notes                       |  |                   | 240,000  |   |                  |   | 240,000 |  
|Taxes payable, non-current                     |  |                   | 44,576   |   |                  |   |        |  
|Other non current liabilities                  |  |                   | 1,213    |   |                  |   | 3,559   |  
|                                               |  |                   |          |   |                  |   |         |  
|Total liabilities                              |  |                   | 347,348  |   |                  |   | 353,473 |  
|Stockholders equity:                          |  |                   |          |   |                  |   |         |  
|Common stock                                   |  |                   | 61       |   |                  |   | 57      |  
|Treasury stock                                 |  |                   | (138,448 | ) |                  |   | (88,448 | )
|Additional paid-in capital                     |  |                   | 459,261  |   |                  |   | 372,412 |  
|Accumulated other comprehensive income         |  |                   | 13,254   |   |                  |   | 10,974  |  
|Retained earnings                              |  |                   | 193,439  |   |                  |   | 171,147 |  
|                                               |  |                   |          |   |                  |   |         |  
|Total stockholders equity                     |  |                   | 527,567  |   |                  |   | 466,142 |  
|                                               |  |                   |          |   |                  |   |         |  
|Total liabilities and stockholders equity     |  | $                 | 874,915  |   |                  | $ | 819,615 |  
|                                               |  |                   |          |   |                  |   |         |  

See the accompanying notes to the unaudited condensed consolidated financial statements.



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MACROVISION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)



|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|------------------------------------------------------- |  | ------------------------------- | ------ | ---- | ------------------------------ | ------ | ---- |  | ---- | ------- |  | - | -------
|                                                        |  | Three Months EndedSeptember 30, |        |      | Nine Months EndedSeptember 30,
|                                                        |  | 2007                            |        | 2006 |                                |        | 2007 |  | 2006
|Net Revenues:                                           |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Licenses                                                |  | $                               | 62,424 |      | $                              | 44,357 |      |  | $    | 151,520 |  | $ | 132,726
|Services                                                |  |                                 | 14,347 |      |                                | 13,790 |      |  |      | 47,519  |  |   | 40,788 
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Total revenues                                          |  |                                 | 76,771 |      |                                | 58,147 |      |  |      | 199,039 |  |   | 173,514
|Cost of revenues:                                       |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|License fees                                            |  |                                 | 1,612  |      |                                | 2,838  |      |  |      | 5,429   |  |   | 7,768  
|Service fees*                                           |  |                                 | 8,533  |      |                                | 7,996  |      |  |      | 28,344  |  |   | 22,483 
|Amortization of intangibles from acquisitions           |  |                                 | 3,584  |      |                                | 3,150  |      |  |      | 10,795  |  |   | 9,883  
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Total cost of revenues                                  |  |                                 | 13,729 |      |                                | 13,984 |      |  |      | 44,568  |  |   | 40,134 
|Gross profit                                            |  |                                 | 63,042 |      |                                | 44,163 |      |  |      | 154,471 |  |   | 133,380
|Operating expenses:                                     |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Research and development*                               |  |                                 | 13,365 |      |                                | 13,268 |      |  |      | 41,243  |  |   | 39,598 
|Selling and marketing*                                  |  |                                 | 16,342 |      |                                | 16,851 |      |  |      | 51,727  |  |   | 50,169 
|General and administrative*                             |  |                                 | 11,323 |      |                                | 9,562  |      |  |      | 30,495  |  |   | 26,855 
|Restructuring and asset impairment charges              |  |                                 | 8,069  |      |                                |       |      |  |      | 13,139  |  |   |       
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Total operating expenses                                |  |                                 | 49,099 |      |                                | 39,681 |      |  |      | 136,604 |  |   | 116,622
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Operating income                                        |  |                                 | 13,943 |      |                                | 4,482  |      |  |      | 17,867  |  |   | 16,758 
|Interest and other income, net                          |  |                                 | 4,890  |      |                                | 2,245  |      |  |      | 11,105  |  |   | 6,400  
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Income before income taxes                              |  |                                 | 18,833 |      |                                | 6,727  |      |  |      | 28,972  |  |   | 23,158 
|Income taxes                                            |  |                                 | 4,741  |      |                                | (470   | )    |  |      | 6,680   |  |   | 6,713  
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Net income                                              |  | $                               | 14,092 |      | $                              | 7,197  |      |  | $    | 22,292  |  | $ | 16,445 
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Basic net earnings per share                            |  | $                               | 0.26   |      | $                              | 0.14   |      |  | $    | 0.42    |  | $ | 0.32   
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Shares used in computing basic net earnings per share   |  |                                 | 54,401 |      |                                | 51,913 |      |  |      | 53,342  |  |   | 51,956 
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Diluted net earnings per share                          |  | $                               | 0.26   |      | $                              | 0.14   |      |  | $    | 0.41    |  | $ | 0.31   
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|Shares used in computing diluted net earnings per share |  |                                 | 55,060 |      |                                | 52,717 |      |  |      | 54,344  |  |   | 52,695 
|                                                        |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|                                                        |  |                                 |        |     
|*  Equity-based compensation by category is as follows: |  |                                 |        |      |                                |        |      |  |      |         |  |   |        
|                                                        |  |                                 |        |     
|Cost of revenues  Service fees                         |  | $                               | 273    |      | $                              | 451    |      |  | $    | 971     |  | $ | 1,365  
|Research and development                                |  |                                 | 503    |      |                                | 1,363  |      |  |      | 2,348   |  |   | 4,669  
|Selling and marketing                                   |  |                                 | 1,270  |      |                                | 1,802  |      |  |      | 3,360   |  |   | 5,766  
|General and administrative                              |  |                                 | 1,804  |      |                                | 1,639  |      |  |      | 4,976   |  |   | 4,696  

See the accompanying notes to the unaudited condensed consolidated financial statements.



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MACROVISION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                  |  |                                |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |         
|                                                                                  |  | 2007                           |          |   | 2006 |  
|Cash flows from operating activities:                                             |  |                                |          |   |      |   |          |  
|Net income                                                                        |  | $                              | 22,292   |   |      | $ | 16,445   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |          |   |      |   |          |  
|Depreciation and amortization                                                     |  |                                | 7,734    |   |      |   | 6,694    |  
|Amortization of intangibles from acquisitions                                     |  |                                | 10,795   |   |      |   | 9,883    |  
|Amortization of note issuance costs                                               |  |                                | 1,083    |   |      |   | 176      |  
|Equity-based compensation                                                         |  |                                | 12,496   |   |      |   | 16,496   |  
|Asset impairment charges                                                          |  |                                | 7,428    |   |      |   |         |  
|Deferred taxes from equity-based compensation                                     |  |                                |         |   |      |   | (3,630   | )
|Tax benefit from stock options exercises                                          |  |                                |         |   |      |   | 3,942    |  
|Excess tax benefits from equity-based compensation                                |  |                                |         |   |      |   | (554     | )
|Changes in operating assets and liabilities:                                      |  |                                |          |   |      |   |          |  
|Accounts receivable, net                                                          |  |                                | 4,698    |   |      |   | 728      |  
|Deferred revenue                                                                  |  |                                | (4,548   | ) |      |   | 6,254    |  
|Deferred tax assets                                                               |  |                                | (1,489   | ) |      |   | (3,941   | )
|Other assets                                                                      |  |                                | (1,932   | ) |      |   | (4,739   | )
|Other liabilities                                                                 |  |                                | (1,073   | ) |      |   | 12,835   |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                                | 57,484   |   |      |   | 60,589   |  
|Cash flows from investing activities:                                             |  |                                |          |   |      |   |          |  
|Purchases of long and short-term investments                                      |  |                                | (993,788 | ) |      |   | (600,224 | )
|Sales or maturities of long and short-term investments                            |  |                                | 960,494  |   |      |   | 378,661  |  
|Payments made relating to the acquisition of eMeta, net of cash acquired          |  |                                | (900     | ) |      |   | (35,189  | )
|Payments made relating to the acquisition of Mediabolic, net of cash acquired     |  |                                | (1,392   | ) |      |   |         |  
|Acquisition of property and equipment                                             |  |                                | (5,514   | ) |      |   | (10,688  | )
|Payments for patents                                                              |  |                                | (1,127   | ) |      |   | (1,158   | )
|                                                                                  |  |                                |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                | (42,227  | ) |      |   | (268,598 | )
|Cash flows from financing activities:                                             |  |                                |          |   |      |   |          |  
|Principal payment under capital lease obligation                                  |  |                                | (1,084   | ) |      |   | (585     | )
|Proceeds from issuance of convertible senior notes, net of issuance costs         |  |                                |         |   |      |   | 233,248  |  
|Purchase of convertible bond hedge                                                |  |                                |         |   |      |   | (46,149  | )
|Proceeds from issuance of warrants                                                |  |                                |         |   |      |   | 30,347   |  
|Purchase of treasury stock                                                        |  |                                | (50,000  | ) |      |   | (49,998  | )
|Proceeds from issuance of common stock from options and stock purchase plans      |  |                                | 55,948   |   |      |   | 24,147   |  
|Excess tax benefits from equity-based compensation                                |  |                                |         |   |      |   | 554      |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                                | 4,864    |   |      |   | 191,564  |  
|Effect of exchange rate changes on cash and cash equivalents                      |  |                                | 447      |   |      |   | 443      |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                              |  |                                | 20,568   |   |      |   | (16,002  | )
|Cash and cash equivalents at beginning of period                                  |  |                                | 159,666  |   |      |   | 135,625  |  
|                                                                                  |  |                                |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                              | 180,234  |   |      | $ | 119,623  |  
|                                                                                  |  |                                |          |   |      |   |          |  

See the accompanying notes to the unaudited condensed consolidated financial statements.



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MACROVISION CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Macrovision Corporation and its
subsidiaries (the Company) in accordance with the rules and regulations of the Securities and Exchange Commission (SEC.) Certain information and footnote disclosures, normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted in accordance with such rules and regulations. However, the Company believes the disclosures are adequate to make the
information not misleading. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are
considered necessary to present fairly the results for the periods presented. This quarterly report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto and other disclosures, including those items
disclosed under the caption Risk Factors contained in our 2006 Annual Report on Form 10-K.

The consolidated results of
operations for the interim periods presented are not necessarily indicative of the results expected for the entire year ending December 31, 2007, for any future year, or for any other future interim period.

In May 2007, the Companys board of directors approved an organizational structure change that included a reduction in headcount and the creation of
four new segments. See Notes 6 and 12, respectively, for further discussion.

The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48) effective January 1, 2007. FIN 48 prescribes a new recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon its adoption, the Company applied the
provisions of FIN 48 to all income tax positions. The cumulative effect of applying the provisions of FIN 48 have been reported as an adjustment to the opening balance of Additional Paid-in- Capital in the Condensed Consolidated Balance
Sheet as of the beginning of 2007. See Note 10 for further discussion.

The Company adopted the provisions of Emerging Issues Task Force,
or EITF, Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation), effective January 1, 2007. EITF
No. 06-03 allows companies to choose either the gross basis or net basis of income statement presentation for taxes collected from customers and remitted to governmental authorities and requires companies to disclose such policy. The Company
applies the net basis presentation for taxes collected from customers and remitted to governmental authorities.



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NOTE 2  EQUITY-BASED COMPENSATION

Stock Options

Currently, the Company
grants options from the 2000 Equity Incentive Plan (2000 Plan) and the 1996 Directors Stock Option Plan (the Directors Plan). The 2000 Equity Incentive Plan succeeded the 1996 Equity Incentive Plan (1996 Plan) in
August 2000.

Restricted Stock

Restricted stock awards are issued from the 2000 Plan and generally vest annually over four years. Restricted stock awards are considered outstanding at the time of the grant, as the stockholders are entitled to dividends and voting rights.
As of September 30, 2007, the number of shares awarded but unvested was 1,306,629.

As of September 30, 2007, the Company had
18.6 million shares reserved and 4.2 million shares remained available for issuance under the 2000 Plan. The 2000 Plan provides for the grant of stock options, stock appreciation rights, and restricted stock awards by the Company to
employees, officers, directors, consultants, independent contractors, and advisers of the Company. The 2000 Plan permits the grant of either incentive or nonqualified stock options at the then current market price. Option vesting periods are
generally three years under the 2000 Plan where one-sixth vests in the first year, one-third vests in the second year and the remainder vests in the third year. Option grants have contractual terms ranging from five to ten years.

As of September 30, 2007, the Company had 1.0 million shares reserved under the Directors Plan and 0.2 million shares remained available
for issuance. The Directors Plan provides for the grant of stock options to non-employee directors of the Company. The Directors Plan permits the grant of nonqualified stock options at the then current market price. Option vesting periods are
generally one year under the Directors Plan. Option grants have terms ranging from five to ten years.

Employee Stock Purchase Plan

The Companys 1996 Employee Stock Purchase Plan (the ESPP) allows eligible employee participants to purchase shares of the
Companys common stock at a discount through payroll deductions. The ESPP consists of twenty-four-month offering periods with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of
the market value of the Companys common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower.

As of September 30, 2007, the Company had reserved 4.3 million shares of common stock for issuance under the ESPP and 2.2 million shares remained available for future issuance.

Valuation and Assumptions

The
Company uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The fair value of equity-based payment awards on the date of grant is determined by an option-pricing model
using a number of complex and subjective variables. These variables include 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 Company determines the fair value of its restricted stock awards as the difference between the market value of the awards on the date of grant less the par value of the awards granted.

Estimated volatility of the Companys common stock for new grants is determined by using a combination of historical volatility and implied
volatility in market traded options. The expected term of options granted is determined by calculating the average term from historical stock option exercise experience. The risk-free interest rate used in the option valuation model is from U.S.
Treasury zero-



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coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the foreseeable
future and therefore uses an expected dividend yield of zero in the option valuation model. In accordance with SFAS 123(R), the Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual
forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record equity-based compensation expense only for those awards that are expected to vest. The assumptions used to value
equity-based payments are as follows:



|                        |  |                                 |   |  |                                |   |  |           |   |  |           |  
|----------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | --------- | - |  | --------- | -
|                        |  | Three months endedSeptember 30, |   |  | Nine Months endedSeptember 30, |  
|                        |  | 2007                            |   |  | 2006                           |   |  | 2007      |   |  | 2006      |  
|Option Plans:           |  |                                 |   |  |                                |   |  |           |   |  |           |  
|Dividends               |  | None                            |   |  | None                           |   |  | None      |   |  | None      |  
|Expected term           |  | 3.1 years                       |   |  | 3.4 years                      |   |  | 3.1 years |   |  | 3.3 years |  
|Risk free interest rate |  | 4.6                             | % |  | 4.9                            | % |  | 4.7       | % |  | 4.8       | %
|Volatility rate         |  | 39                              | % |  | 40                             | % |  | 37        | % |  | 41        | %
|                        |  |                                 |   | 
|ESPP Plan:              |  |                                 |   |  |                                |   |  |           |   |  |           |  
|Dividends               |  | None                            |   |  | None                           |   |  | None      |   |  | None      |  
|Expected term           |  | 1.2 years                       |   |  | 1.3 years                      |   |  | 1.2 years |   |  | 1.3 years |  
|Risk free interest rate |  | 4.7                             | % |  | 4.9                            | % |  | 4.9       | % |  | 4.8       | %
|Volatility rate         |  | 39                              | % |  | 40                             | % |  | 36        | % |  | 41        | %

As of September 30, 2007, there was $33.2 million of unrecognized compensation cost, adjusted
for estimated forfeitures, related to non-vested equity-based payments granted to employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average
period of 2.5 years.

The weighted average fair value of options granted during the three and nine months ended September 30, 2007 was
$8.57 and $8.25, respectively. The weighted average fair value of options granted during the three and nine months ended September 30, 2006 was $7.38 and $7.10, respectively. The weighted average grant date fair value of an employee purchase
share right granted during the three and nine months ended September 30, 2007 was $4.52 and $7.80, respectively. The weighted average grant date fair value of an employee purchase share right granted during the three and nine months ended
September 30, 2006 was $6.46 and $4.92, respectively. The weighted average fair value of a restricted stock award granted during the three and nine months ended September 30, 2007 was $24.77 and $24.86, respectively. The weighted average fair
value of a restricted stock award granted during the three and nine months ended September 30, 2006 was $21.41 for both periods.

The total
intrinsic value of options exercised during the three and nine months ended September 30, 2007 was $2.1 million and $21.6 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of
exercise and the exercise price of the shares.

NOTE 3  BUSINESS COMBINATION AND ASSET PURCHASES

Mediabolic, Inc.

In January 2007, the
Company acquired Mediabolic, Inc. (Mediabolic), a privately held company based in San Mateo, California, for $43.4 million of cash consideration, of which $40.2 million was paid in 2006 and $3.2 million was paid in 2007. Mediabolic is a
provider of software solutions for connected consumer electronics devices, such as televisions, set-top boxes and digital video recorders. The acquisition of Mediabolic extends the Companys capabilities in the delivery and enhancement of
digital content to a wide variety of connected consumer electronics devices for the digital home. Mediabolics results have been included in the Companys Embedded Solutions segment. The condensed consolidated financial statements include
the results of operations of Mediabolic since January 1, 2007, the effective date of the acquisition.



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The following is a summary of the estimated fair values of the tangible assets acquired and liabilities
assumed at the date of the acquisition (in thousands):



|                                       |  |                      |        |  
|-------------------------------------- |  | -------------------- | ------ | -
|                                       |  | As ofJanuary 1, 2007 |       
|Cash and cash equivalents              |  | $                    | 2,005  |  
|Accounts receivable                    |  |                      | 35     |  
|Other assets                           |  |                      | 590    |  
|                                       |  |                      |        |  
|Total tangible assets acquired         |  |                      | 2,630  |  
|                                       |  |                      |        |  
|Accounts payable & accrued liabilities |  |                      | (1,312 | )
|Deferred revenue                       |  |                      | (1,341 | )
|                                       |  |                      |        |  
|Total liabilities assumed              |  |                      | (2,653 | )
|                                       |  |                      |        |  
|Net liabilities assumed                |  | $                    | (23    | )
|                                       |  |                      |        |  

The following is a summary of goodwill and identifiable intangible assets acquired in the
acquisition of Mediabolic (in thousands):



|                                              |  |   |       
|--------------------------------------------- |  | - | ------
|Cash paid                                     |  | $ | 43,638
|Net liabilities assumed                       |  |   | 23    
|                                              |  |   |       
|Total goodwill and intangible assets acquired |  | $ | 43,661
|                                              |  |   |       



|                        |  |        |        |                             |               
|----------------------- |  | ------ | ------ | --------------------------- | --------------
|Intangible Assets       |  | Amount |        | AmortizationPeriod in Years
|Existing technology     |  | $      | 6,996  |                             | 4             
|Core technology         |  |        | 1,011  |                             | 3             
|Customer Relationships  |  |        | 979    |                             | 5             
|Covenant Not to compete |  |        | 358    |                             | 1             
|Goodwill                |  |        | 34,317 |                             | Not Applicable
|                        |  |        |        |                             |               
|Total                   |  | $      | 43,661 |                             |               
|                        |  |        |        |                             |               

As of September 30, 2007, the amount allocated to goodwill may be further adjusted during the
year as a result of changes in deferred tax assets. The weighted average amortization period for amortizable Mediabolic intangible assets is 3.9 years.



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The amortization schedule for Mediabolic intangibles is as follows (in thousands):



|                  |  |   |      
|----------------- |  | - | -----
|Year ending:      |  | $
|Remainder of 2007 |  | $ | 660  
|2008              |  |   | 2,282
|2009              |  |   | 2,282
|2010              |  |   | 1,945
|2011              |  |   | 195  
|                  |  |   |      
|Total             |  | $ | 7,364
|                  |  |   |      

eMeta Corporation

In February 2006, the Company acquired eMeta Corporation (eMeta), a privately held company based in New York, for $36.1 million of purchase
consideration. eMeta provided software solutions that enable companies to manage and sell digital goods and services online. During 2006, the Company had paid $35.2 million in cash consideration. During the first quarter of 2007, the Company paid
the remaining $0.9 million to shareholders, which was included in the original purchase price.

NOTE 4  GOODWILL AND OTHER ACQUIRED INTANGIBLE
ASSETS

The following table summarizes the Companys goodwill activity (in thousands):



|                                               |  |   |        
|---------------------------------------------- |  | - | -------
|Goodwill, net at December 31, 2006             |  | $ | 136,049
|Acquisition of Mediabolic, Inc.                |  |   | 34,317 
|Changes due to foreign currency exchange rates |  |   | 1,308  
|                                               |  |   |        
|Goodwill, net at September 30, 2007            |  | $ | 171,674
|                                               |  |   |        

In connection with the reorganization of segments discussed in Note 12, the Company is in the
process of completing an assessment of its reporting units and expects to complete such assessment by December 31, 2007. Based on information available, the Company did not identify any goodwill impairment.

The Companys intangible assets from acquisitions subject to amortization as of December 31, 2006 and September 30, 2007 are as follows
(in thousands):



|                       |  |                   |        |                         |   |         |     |  |   |       
|---------------------- |  | ----------------- | ------ | ----------------------- | - | ------- | --- |  | - | ------
|                       |  | December 31, 2006
|                       |  | Gross Costs       |        | AccumulatedAmortization |   |         | Net
|Amortized intangibles: |  |                   |        |                         |   |         |     |  |   |       
|Existing technology    |  | $                 | 45,039 |                         | $ | (28,956 | )   |  | $ | 16,083
|Existing contracts     |  |                   | 13,725 |                         |   | (9,231  | )   |  |   | 4,494 
|Patents and trademarks |  |                   | 9,663  |                         |   | (4,872  | )   |  |   | 4,791 
|                       |  |                   |        |                         |   |         |     |  |   |       
|                       |  | $                 | 68,427 |                         | $ | (43,059 | )   |  | $ | 25,368
|                       |  |                   |        |                         |   |         |     |  |   |       



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|                       |  |                    |        |                         |   |         |     |  |   |       
|---------------------- |  | ------------------ | ------ | ----------------------- | - | ------- | --- |  | - | ------
|                       |  | September 30, 2007
|                       |  | Gross Costs        |        | AccumulatedAmortization |   |         | Net
|Amortized intangibles: |  |                    |        |                         |   |         |     |  |   |       
|Existing technology    |  | $                  | 53,085 |                         | $ | (36,874 | )   |  | $ | 16,211
|Existing contracts     |  |                    | 15,212 |                         |   | (11,002 | )   |  |   | 4,210 
|Patents and trademarks |  |                    | 9,765  |                         |   | (6,259  | )   |  |   | 3,506 
|                       |  |                    |        |                         |   |         |     |  |   |       
|                       |  | $                  | 78,062 |                         | $ | (54,135 | )   |  | $ | 23,927
|                       |  |                    |        |                         |   |         |     |  |   |       

As of September 30, 2007, the Company estimates its amortization expense in future periods to
be as follows (in thousands):



|                           |  |                      |       
|-------------------------- |  | -------------------- | ------
|                           |  | Amortization Expense
|Remainder of 2007          |  | $                    | 3,545 
|2008                       |  |                      | 10,985
|2009                       |  |                      | 6,221 
|2010                       |  |                      | 2,991 
|2011 and thereafter        |  |                      | 185   
|                           |  |                      |       
|Total amortization expense |  | $                    | 23,927
|                           |  |                      |       

NOTE 5  STRATEGIC INVESTMENTS

As of September 30, 2007 and December 31, 2006, the adjusted cost of the Companys strategic investments totaled $23.2 million and $22.7
million, respectively. The Companys strategic investments include public and non-public companies. Investments in public and non-public companies are classified on the condensed consolidated balance sheets in Long-term
marketable investment securities and Patents and other assets, respectively.

As of September 30, 2007, the adjusted
cost of the Companys strategic investments consisted of its investment in Digimarc, a publicly traded company, and its investment in a privately-held digital watermarking company.

The investment in Digimarc has been classified on the balance sheet as Long-term marketable investment securities. The investment in the
privately-held digital watermarking company, in which the Company invested $5.0 million in 2006, is classified on the balance sheet under Patents and other assets.

The Company holds investments in other privately-held companies, which had no carrying value as of September 30, 2007.

There were no impairment charges related to the Companys strategic investments during the three and nine months ended September 30, 2007 and
2006.

NOTE 6  RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

In August 2007, the Company abandoned the development of a new distribution and commerce platform. The Company began this project in early 2006 and invested significant resources during its development
stage. During the third quarter of 2007, the Distribution and



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Commerce business unit focused on improving its financial performance and determined to reduce costs by abandoning the development project. The result of
abandoning this project resulted in a total charge of $8.1 million, comprised of an asset impairment charge of $7.4 million, $0.4 million in contract termination costs, and $0.3 million in workforce reduction costs. All affected employees were
notified of their termination prior to August 30, 2007.

In May 2007, the Companys board of directors approved an organizational
structure change which included the creation of four new segments. The organizational realignment is designed to enable the Company to increase its focus on long-term growth, market opportunities and meeting customer needs. The reorganization
included a workforce reduction in headcount of approximately eight percent, resulting in a charge of $2.9 million. All affected employees were notified of their termination prior to June 30, 2007. See Note 12 for further discussion on the four
segments.

In January 2007, the Companys board of directors approved a restructuring program, which included a workforce reduction, a
restructuring of certain business functions and an abandonment of certain facilities. The workforce reduction resulted in a charge of $1.3 million. All affected employees were notified of their termination prior to March 31, 2007. The
restructuring of certain business functions included the cancellation of certain service contracts and asset losses, resulting in a charge of $0.5 million. The abandonment of certain leased facilities resulted in a charge of $0.4 million.

A summary of restructuring activities for the three and nine months ended September 30, 2007 follows (in thousands):



|                                            |  |                     |        |   |                      |   |      |                          |  |   |                 |   |  |       |        |   |  |   |        |  
|------------------------------------------- |  | ------------------- | ------ | - | -------------------- | - | ---- | ------------------------ |  | - | --------------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                            |  | TerminationBenefits |        |   | ContractTerminations |   |      | Abandonmentof Facilities |  |   | AssetImpairment |   |  | Total |       
|Charged in Quarter Ended March 31, 2007     |  | $                   | 1,302  |   |                      | $ | 302  |                          |  | $ | 371             |   |  | $     | 201    |   |  | $ | 2,176  |  
|Cash Payments                               |  |                     | (1,119 | ) |                      |   | (49  | )                        |  |   | (65             | ) |  |       |       |   |  |   | (1,233 | )
|Asset impairment charges                    |  |                     |       |   |                      |   |     |                          |  |   |                |   |  |       | (201   | ) |  |   | (201   | )
|                                            |  |                     |        |   |                      |   |      |                          |  |   |                 |   |  |       |        |   |  |   |        |  
|Accrual Balance as of March 31, 2007        |  |                     | 183    |   |                      |   | 253  |                          |  |   | 306             |   |  |       |       |   |  |   | 742    |  
|Charged in Quarter Ended June 30, 2007      |  |                     | 2,894  |   |                      |   |     |                          |  |   |                |   |  |       |       |   |  |   | 2,894  |  
|Cash Payments                               |  |                     | (1,350 | ) |                      |   | (253 | )                        |  |   | (58             | ) |  |       |       |   |  |   | (1,661 | )
|Non-cash equity-based compensation          |  |                     | (841   | ) |                      |   |     |                          |  |   |                |   |  |       |       |   |  |   | (841   | )
|                                            |  |                     |        |   |                      |   |      |                          |  |   |                 |   |  |       |        |   |  |   |        |  
|Accrual Balance as of June 30, 2007         |  |                     | 886    |   |                      |   |     |                          |  |   | 248             |   |  |       |       |   |  |   | 1,134  |  
|Charged in Quarter Ended September 30, 2007 |  |                     | 245    |   |                      |   | 396  |                          |  |   |                |   |  |       | 7,428  |   |  |   | 8,069  |  
|Cash Payments                               |  |                     | (920   | ) |                      |   |     |                          |  |   | (67             | ) |  |       |       |   |  |   | (987   | )
|Asset impairment charges                    |  |                     |       |   |                      |   |     |                          |  |   |                |   |  |       | (7,428 | ) |  |   | (7,428 | )
|                                            |  |                     |        |   |                      |   |      |                          |  |   |                 |   |  |       |        |   |  |   |        |  
|Accrual Balance as of September 30, 2007    |  |                     | 211    |   |                      |   | 396  |                          |  |   | 181             |   |  |       |       |   |  |   | 788    |  
|                                            |  |                     |        |   |                      |   |      |                          |  |   |                 |   |  |       |        |   |  |   |        |  

The Company has accounted for its restructuring charges and accruals in accordance with SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities and its asset impairment charges in accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets.

NOTE 7  EARNINGS PER SHARE

Basic net
earnings per share (EPS) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive common equivalent shares outstanding
during the period except for periods of operating loss for which no common share equivalents are included because their effect would be anti-dilutive.



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|                                                                                                |  |                                 |  |                                |  |        |  |       
|----------------------------------------------------------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ------ |  | ------
|                                                                                                |  | Three months endedSeptember 30, |  | Nine months endedSeptember 30,
|                                                                                                |  | 2007                            |  | 2006                           |  | 2007   |  | 2006  
|                                                                                                |  | (in thousands)                  |  | (in thousands)                
|Basic EPS  weighted average number of common shares outstanding                                |  | 54,401                          |  | 51,913                         |  | 53,342 |  | 51,956
|Effect of dilutive common equivalent shares                                                     |  | 659                             |  | 804                            |  | 1,002  |  | 739   
|                                                                                                |  |                                 |  |                                |  |        |  |       
|Diluted EPS  weighted average number of common shares and common equivalent shares outstanding |  | 55,060                          |  | 52,717                         |  | 54,344 |  | 52,695
|                                                                                                |  |                                 |  |                                |  |        |  |       

The following weighted average potential common shares were excluded from the computation of
diluted net earnings per share as their effect would have been anti-dilutive:



|                                                                                            |  |                                 |  |                                |  |       |  |      
|------------------------------------------------------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ----- |  | -----
|                                                                                            |  | Three months endedSeptember 30, |  | Nine months endedSeptember 30,
|                                                                                            |  | 2007                            |  | 2006                           |  | 2007  |  | 2006 
|                                                                                            |  | (in thousands)                  |  | (in thousands)                
|Stock options (1)                                                                           |  | 2,215                           |  | 5,514                          |  | 1,647 |  | 6,307
|Restricted stock (1)                                                                        |  | 110                             |  | 54                             |  | 37    |  | 18   
|Warrants (1)                                                                                |  | 7,955                           |  | 3,447                          |  | 7,955 |  | 1,136
|Convertible senior notes (2)                                                                |  |                                |  |                               |  |      |  |     
|                                                                                            |  |                                 |  |                                |  |       |  |      
|Total weighted average potential common shares excluded from diluted net earnings per share |  | 10,280                          |  | 9,015                          |  | 9,639 |  | 7,461
|                                                                                            |  |                                 |  |                                |  |       |  |      



|(1) | These potential common share units were excluded from the computation of diluted net earnings per share because their impact is anti-dilutive.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Potential common shares related to the convertible senior notes were excluded from the computation of diluted net income per share because the effective conversion price was higher
than the average market price of our common stock during the period, and therefore the effect was anti-dilutive.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 8  COMPREHENSIVE INCOME

The components of comprehensive income, net of taxes, are as follows (in thousands):



|                                         |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|---------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | ---- | ------ |  | - | ------
|                                         |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                         |  | 2007                            |        |                                | 2006 |   | 2007   |  | 2006
|Net income                               |  | $                               | 14,092 |                                |      | $ | 7,197  |  | $    | 22,292 |  | $ | 16,445
|Other comprehensive income:              |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Unrealized gains (losses) on investments |  |                                 | (582   | )                              |      |   | 2,081  |  |      | 435    |  |   | 2,428 
|Foreign currency translation adjustments |  |                                 | 1,421  |                                |      |   | 929    |  |      | 1,845  |  |   | 3,005 
|                                         |  |                                 |        |                                |      |   |        |  |      |        |  |   |       
|Comprehensive income                     |  | $                               | 14,931 |                                |      | $ | 10,207 |  | $    | 24,572 |  | $ | 21,878
|                                         |  |                                 |        |                                |      |   |        |  |      |        |  |   |       

NOTE 9  RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that
unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for the Company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The
Company is currently evaluating the impact that SFAS 159 will have on its consolidated financial statements.

In September 2006, the FASB
issued Statement No. 157, Fair Value (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 is effective in 2008. The Company is evaluating the impact of this pronouncement on its financial statements.

NOTE 10
 INCOME TAXES

The Company recorded income tax expense of $4.7 million for the three months ended September 30, 2007 and an
income tax benefit of $0.5 million for the same period in 2006. For the nine months ended September 30, 2007 and 2006, the Company recorded income tax expense of $6.7 million during each respective period. Income tax expense is based upon
an annual effective tax rate forecast, including estimates and assumptions that could change during the year, including the amount of foreign reinvested earnings. A discrete tax benefit of $0.5 million was recorded during the third quarter of
2007 from disqualifying dispositions of shares issued under the Companys employee stock purchase plan and incentive stock options.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, as well as tax planning strategies.

Based on projections of future taxable income over the periods in which the deferred tax assets are deductible and the history of the Companys profitability, the Company believes that it is more likely than not
that the benefits of these deductible differences, net of valuation allowances as of September 30, 2007, will be realized. There were no adjustments to the valuation allowance balance or deferred taxes in the three or nine months ended
September 30, 2007.

The Company adopted FIN 48 effective January 1, 2007. As a result of adopting FIN 48, the Company recorded a
credit of approximately $16.3 million to additional paid-in-capital as of January 1, 2007. As of the adoption date, the Company had gross tax effected unrecognized tax benefits of $35.6 million which, if recognized, would affect the effective
tax rate. Also as of the adoption date, the Company had accrued interest expense related to unrecognized tax benefits of $4.5 million. During the first quarter of



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2007, the Company reclassified $40.1 million from current taxes payable to non-current taxes payable. The Company recognizes accrued interest related to
unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.

The
Company conducts business globally and, as a result, files U.S. federal, state and foreign income tax returns in various jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the
world, including Japan, the Netherlands, the United Kingdom and the U.S. With few exceptions, the Company is no longer subject to income tax examinations for years before 2003. The Company is currently under audit by the Internal Revenue Service
(IRS) for the 2003 and 2004 tax years. As part of the audit, the Company has responded to IRS information requests regarding Company stock option granting practices.

NOTE 11  STOCK REPURCHASE PROGRAM

In May 2002, the Board of Directors authorized a stock
repurchase program, which allowed the Company to purchase up to 5.0 million shares in the open market from time-to-time at prevailing market prices, through block trades or otherwise, or in negotiated transactions off the market, at the
discretion of Company management. In 2002, the Company repurchased 3.0 million shares of common stock under this program, which was recorded as treasury stock and resulted in a reduction of stockholders equity.

In August 2006, the Board of Directors authorized the purchase of up to $100.0 million of the Companys common stock, which subsumed the
aforementioned stock repurchase program. In the year ended December 31, 2006, the Company repurchased approximately 2.3 million shares of common stock for $50.0 million. In August and September 2007, the Company repurchased the remaining
$50.0 million authorized under the program, or approximately 2.1 million shares of common stock. These repurchases were recorded as treasury stock and resulted in a reduction of stockholders equity. As of September 30, 2007 and
December 31, 2006, treasury stock consisted of 7.4 million shares and 5.3 million shares, respectively, of common stock that had been repurchased, with a cost basis of approximately $138.4 million and $88.5 million, respectively.

In September 2007, the Board of Directors authorized a stock repurchase program, which allows the Company to purchase up to $60.0 million
of the Companys common stock in the open market from time to time at prevailing market prices or otherwise, as conditions warrant. As of September 30, 2007, no shares of common stock have been repurchased under this program.

NOTE 12  SEGMENT AND GEOGRAPHIC INFORMATION

In June 2007, the Company announced an organizational structure change which included the creation of four new segments: Embedded Solutions, Entertainment, Software and Distribution and Commerce. The organizational realignment enables the
Company to increase its focus on long-term growth, market opportunities and meeting customer needs. Segment information is presented based upon the Companys management organization structure, in place beginning June 5, 2007, and has
reclassified prior periods segment data to reflect the four new segments. Future changes to this internal financial structure may result in changes to the segments disclosed. Prior to June 2007, the Companys two segments were
Entertainment Technologies and Software Technologies.

Each segment contains closely related products that are unique to the particular
segment. Segment operating income is determined based upon internal performance measures used by the President and CEO.

The Company
derives its segment results from its internal management reporting system. Management measures the performance of each reportable segment based upon several metrics including net revenue and segment operating income. Management uses these results to
evaluate the performance of,



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and to assign resources to, each of the reportable segments. The Company does not allocate to its segments certain operating expenses, which it manages
separately at the corporate level. These unallocated costs include equity-based compensation, amortization of intangibles, corporate marketing and general and administrative expenses. In addition, the Company does not allocate to its segments
restructuring and asset impairment charges. Management has excluded such expenses from segment operating income since they are not used to measure segment performance.

The Embedded Solutions segment focuses on consumer electronics manufacturers with solutions enabling them to protect and enhance digital content in digital set top boxes for cable/satellite TV and a variety of PC and
consumer electronics video playback and record devices, including the Companys analog copy protection (ACP) technology and middleware platform. Prior to June 2007, these products were formerly part of the Entertainment Technologies segment.

The Entertainment segment focuses on the Companys worldwide entertainment and studio customers, including the continuing
relationships with the Motion Picture Association of America (MPAA) and Independent studios. The Entertainment solutions include various digital content protection and enhancement products and services for digital content owners and system
operators. Prior to June 2007, these products were formerly part of the Entertainment Technologies segment.

The Software segment focuses
on independent software vendors and enterprise IT departments with solutions including the FLEXnet suite of electronic license management, electronic license delivery, and software asset management products; Installer Products; and Admin Studio.
Prior to June 2007, these products were formerly part of the Software Technologies segment.

The Distribution and Commerce segment focuses
on serving the digital distribution and managed content requirements of providers of digital goods. The Distribution and Commerce unit includes solutions targeted at digital distribution services for games and other content areas, as well as the
Companys RightAccess and RightCommerce solutions. Prior to June 2007, these products were formerly part of both the Entertainment and Software Technologies segments.

Information regarding the Companys segments for the three and nine months ended September 30, 2007 and 2006 is as follows:

Segment data:

The following tables summarize segment
revenue and operating results for each segment. Segment operating income is based on the segments revenue less the respective segments cost of revenues, selling and marketing, and research and development expenses. Operating results for
each segment is further reconciled to operating income:



|                          |  |                                  |        |                                 |   |        |  |      |         |  |   |        
|------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                          |  | Three months ended September 30, |        | Nine months ended September 30,
|                          |  | 2007                             |        | 2006                            |   | 2007   |  | 2006
|                          |  | (in thousands)                  
|Segment Revenue:          |  |                                  |       
|Embedded Solutions        |  | $                                | 33,352 |                                 | $ | 11,445 |  | $    | 67,251  |  | $ | 33,267 
|Entertainment             |  |                                  | 12,106 |                                 |   | 14,695 |  |      | 35,416  |  |   | 43,822 
|Software                  |  |                                  | 26,488 |                                 |   | 26,517 |  |      | 81,221  |  |   | 81,882 
|Distribution and Commerce |  |                                  | 4,825  |                                 |   | 5,490  |  |      | 15,151  |  |   | 14,543 
|                          |  |                                  |        |                                 |   |        |  |      |         |  |   |        
|Total segment revenue     |  | $                                | 76,771 |                                 | $ | 58,147 |  | $    | 199,039 |  | $ | 173,514
|                          |  |                                  |        |                                 |   |        |  |      |         |  |   |        



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|                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                |  | 2007                            |         |   | 2006                           |   |         | 2007 |  |   | 2006    |  
|                                |  | (in thousands)                  |        
|Segment Operating Results:      |  |                                 |         |  
|Embedded Solutions              |  | $                               | 29,013  |   |                                | $ | 10,665  |      |  | $ | 55,944  |   |  | $ | 30,990  |  
|Entertainment                   |  |                                 | 8,362   |   |                                |   | 7,627   |      |  |   | 21,890  |   |  |   | 22,452  |  
|Software                        |  |                                 | 8,425   |   |                                |   | 8,238   |      |  |   | 30,374  |   |  |   | 27,266  |  
|Distribution and Commerce       |  |                                 | (3,735  | ) |                                |   | (1,803  | )    |  |   | (17,478 | ) |  |   | (4,583  | )
|                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Segment operating income        |  |                                 | 42,065  |   |                                |   | 24,727  |      |  |   | 90,730  |   |  |   | 76,125  |  
|Unallocated costs               |  |                                 | (20,053 | ) |                                |   | (20,245 | )    |  |   | (59,724 | ) |  |   | (59,367 | )
|Restructuring and other charges |  |                                 | (8,069  | ) |                                |   |        |      |  |   | (13,139 | ) |  |   |        |  
|                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating income                |  | $                               | 13,943  |   |                                | $ | 4,482   |      |  | $ | 17,867  |   |  | $ | 16,758  |  
|                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

Information on Revenue by Geographic Areas:



|              |  |                                 |        |                                |   |        |  |      |         |  |   |        
|------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|              |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|              |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|              |  | (in thousands)                 
|United States |  | $                               | 45,266 |                                | $ | 30,773 |  | $    | 108,926 |  | $ | 95,912 
|International |  |                                 | 31,505 |                                |   | 27,374 |  |      | 90,113  |  |   | 77,602 
|              |  |                                 |        |                                |   |        |  |      |         |  |   |        
|              |  | $                               | 76,771 |                                | $ | 58,147 |  | $    | 199,039 |  | $ | 173,514
|              |  |                                 |        |                                |   |        |  |      |         |  |   |        

Geographic area information is based upon country of destination for products shipped and country
of contract holder for royalties and license fees.

NOTE 13  COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases its facilities
and certain equipment pursuant to noncancelable operating lease agreements expiring through 2017. The Companys corporate headquarters are located in Santa Clara, California and such leases expire in January 2017. The Company also leases office
space, including those located in Illinois, San Francisco, New York, the United Kingdom and Japan, which expire at various dates from 2008 through 2016. The Company has recorded rent expense on a straight-line basis based on contractual lease
payments. Allowances from lessors for tenant improvements have been included in the straight-line rent expense for applicable locations. Tenant improvements are capitalized and depreciated over the remaining life of the applicable lease. The Company
also leases certain computer software and equipment under capital lease agreements which expire on March 1, 2009. The current and long-term portions of the capital lease have been recorded in Accrued expenses and Other non
current liabilities, respectively, on the condensed consolidated balance sheet as of September 30, 2007. Depreciation of assets recorded under the capital lease is included in depreciation expense.



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Future minimum lease payments pursuant to these leases as of September 30, 2007 were as follows (in
thousands):



|                                                          |  |                  |        |               |   |        |  
|--------------------------------------------------------- |  | ---------------- | ------ | ------------- | - | ------ | -
|                                                          |  | Operating Leases |        | Capital Lease |  
|Remainder 2007                                            |  | $                | 2,043  |               | $ | 407    |  
|2008                                                      |  |                  | 7,614  |               |   | 1,625  |  
|2009                                                      |  |                  | 6,260  |               |   | 406    |  
|2010                                                      |  |                  | 6,240  |               |   |       |  
|2011                                                      |  |                  | 6,349  |               |   |       |  
|Thereafter                                                |  |                  | 31,419 |               |   |       |  
|                                                          |  |                  |        |               |   |        |  
|Total minimum lease payments                              |  | $                | 59,925 |               | $ | 2,438  |  
|                                                          |  |                  |        |               |   |        |  
|Less: Amounts representing interest                       |  |                  |        |               |   | (123   | )
|                                                          |  |                  |        |               |   |        |  
|Present value of minimum lease payments                   |  |                  |        |               |   | 2,315  |  
|Less: current portion of obligations under capital leases |  |                  |        |               |   | (1,520 | )
|                                                          |  |                  |        |               |   |        |  
|Long-term portion of obligations under capital leases     |  |                  |        |               | $ | 795    |  
|                                                          |  |                  |        |               |   |        |  

Indemnifications

In the normal course of business, the Company provides indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of the
Companys products. The Company has been sued by a customer seeking indemnity for third-party claims of intellectual property infringement. The Company believes that it has meritorious defenses to the asserted claims and intends to defend the
litigation vigorously. While the Company cannot predict the outcome of these proceedings or estimate the possible range of losses that may affect the Companys results of operations or cash flows in a given period, the Company does not believe
that an adverse award in such lawsuit would have a material impact on the Companys consolidated financial position. Historically, costs related to these indemnification provisions have not been significant and the Company is not able to
estimate the maximum potential impact of these indemnification provisions on its future results of operations.

Restricted Cash and Investments

For one of our products, the Company has offered a maximum indemnity of $12.0 million to a collective group of customers under current
contracts. Funds totaling $12.0 million have been segregated from the rest of the Companys cash and investments and are restricted to use for customer claims under such indemnification provisions.

Legal Proceedings

The Company has not been required
to pay a penalty to the Internal Revenue Service (IRS) for failing to make disclosures required with respect to any transaction that has been identified by the IRS as abusive or that has a significant tax avoidance purpose.

InstallShield Software Corporation Liquidating Trust vs. Macrovision

On October 27, 2005, the Company received notice of an arbitration proceeding filed by InstallShield Software Corporation Liquidating Trust (the Trust). The Trust has demanded arbitration of certain
disputes between the Trust and Macrovision pursuant to the Asset Purchase Agreement dated June 16, 2004 by and among InstallShield Software Corporation, Macrovision Corporation, Macrovision Europe Limited, and Macrovision International Holding
L.P. (the Agreement). Under the Agreement, the



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Company could have been required to make an additional contingent payment of up to $20 million based on post-acquisition revenue performance through
June 30, 2005. Based upon the revenue results through June 30, 2005, the Company concluded that no additional payment was required under the terms of the Agreement. The Trust alleges that the post-acquisition revenue performance targets
were not reached due to the Companys conduct in violation of the Agreement, and therefore is seeking the contingent payment in an amount exceeding $15 million. The Company denies these allegations and intends to vigorously defend itself in the
arbitration proceeding. The parties are engaged in discovery. A hearing is scheduled to begin on February 25, 2008.

As of
September 30, 2007, for all the abovementioned matters, it was not possible to estimate the liability, if any, in connection with the pending matters. Accordingly, no accruals for these contingencies have been recorded.

From time to time, the Company has been involved in other disputes and legal actions arising in the ordinary course of business. In managements
opinion, none of these other disputes and legal actions is expected to have a material impact on the Companys consolidated financial position, results of operations or cash flows.

NOTE 14  SUBSEQUENT EVENT

On November 6, 2007, the Company announced it had signed a
definitive agreement to acquire All Media Guide Holdings, Inc. (AMG), for $82 million in cash. This acquisition is subject to customary closing conditions and is expected to close by the end of the year. AMG is a meta data content
company that provides descriptive content covering video, music and games and is designed to help in further expanding on the Companys middleware platform and enhancing the Companys CE offering.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The
following commentary should be read in conjunction with the financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the SEC.

Overview

Macrovision Corporation provides a broad
set of solutions that enable businesses to protect, enhance and distribute their digital goods to consumers across multiple channels. Macrovision solutions are deployed by companies in the entertainment, consumer electronics, gaming, software,
information publishing and corporate IT markets to solve industry-specific challenges and bring greater value to their customers.

In June
2007, we announced an organizational structure change which included the creation of four new segments: Embedded Solutions, Entertainment, Software and Distribution and Commerce. The organizational realignment is designed to enable us to increase
our focus on long-term growth, market opportunities and meeting customer needs.

The Embedded Solutions segment focuses on consumer
electronics manufacturers with solutions enabling them to protect and enhance digital content in digital set top boxes for cable/satellite TV and a variety of PC and consumer electronics video playback and record devices, including our analog copy
protection (ACP) technology and digital living network platform (DLNP). Prior to June 2007, these products were formerly part of the Entertainment Technologies segment.

The Entertainment segment focuses on our worldwide entertainment and studio customers, including the continuing relationships with the Motion Pictures Association of America (MPAA) and Independent studios. The
Entertainment solutions include various digital content protection and enhancement products and services for digital content owners and system operators. Prior to June 2007, these products were formerly part of the Entertainment Technologies
segment.

The Software segment focuses on independent software vendors and enterprise IT departments with solutions including the FLEXnet
suite of electronic license management, electronic license delivery, and software asset management products; Installer Products; and Admin Studio. Prior to June 2007, these products were formerly part of the Software Technologies segment.

The Distribution and Commerce segment focuses on serving the digital distribution and managed content requirements of providers of digital
goods. The Distribution and Commerce unit includes solutions targeted at digital distribution services for games and other content areas, as well as our RightAccess and RightCommerce solutions. Prior to June 2007, these products were formerly part
of both the Entertainment and Software Technologies segments.



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The following tables provide revenue and operating income information by segment for the periods
indicated (dollars in thousands):



|                               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|------------------------------ |  | -------------------------------- | ------- | - | ---- | - | ------- | -------- |  | - | -------- | - |  | ---- | -
|                               |  | Three months ended September 30, |        
|                               |  | 2007                             |         |   | 2006 |   |         | $ Change |  |   | % Change |  
|Segment Revenue:               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Embedded Solutions             |  | $                                | 33,352  |   |      | $ | 11,445  |          |  | $ | 21,907   |   |  | 191  | %
|Entertainment                  |  |                                  | 12,106  |   |      |   | 14,695  |          |  |   | (2,589   | ) |  | -18  | %
|Software                       |  |                                  | 26,488  |   |      |   | 26,517  |          |  |   | (29      | ) |  | 0    | %
|Distribution and Commerce      |  |                                  | 4,825   |   |      |   | 5,490   |          |  |   | (665     | ) |  | -12  | %
|                               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Total segment revenue          |  | $                                | 76,771  |   |      | $ | 58,147  |          |  | $ | 18,624   |   |  | 32   | %
|                               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Segment Operating Income:      |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Embedded Solutions             |  | $                                | 29,013  |   |      | $ | 10,665  |          |  | $ | 18,348   |   |  | 172  | %
|Entertainment                  |  |                                  | 8,362   |   |      |   | 7,627   |          |  |   | 735      |   |  | 10   | %
|Software                       |  |                                  | 8,425   |   |      |   | 8,238   |          |  |   | 187      |   |  | 2    | %
|Distribution and Commerce      |  |                                  | (3,735  | ) |      |   | (1,803  | )        |  |   | (1,932   | ) |  | -107 | %
|                               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Total segment operating income |  | $                                | 42,065  |   |      | $ | 24,727  |          |  | $ | 17,338   |   |  | 70   | %
|                               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|                               | 
|                               |  | Nine Months ended September 30,  |        
|                               |  | 2007                             |         |   | 2006 |   |         | $ Change |  |   | % Change |  
|Segment Revenue:               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Embedded Solutions             |  | $                                | 67,251  |   |      | $ | 33,267  |          |  | $ | 33,984   |   |  | 102  | %
|Entertainment                  |  |                                  | 35,416  |   |      |   | 43,822  |          |  |   | (8,406   | ) |  | -19  | %
|Software                       |  |                                  | 81,221  |   |      |   | 81,882  |          |  |   | (661     | ) |  | -1   | %
|Distribution and Commerce      |  |                                  | 15,151  |   |      |   | 14,543  |          |  |   | 608      |   |  | 4    | %
|                               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Total segment revenue          |  | $                                | 199,039 |   |      | $ | 173,514 |          |  | $ | 25,525   |   |  | 15   | %
|                               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Segment Operating Income:      |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Embedded Solutions             |  | $                                | 55,944  |   |      | $ | 30,990  |          |  | $ | 24,954   |   |  | 81   | %
|Entertainment                  |  |                                  | 21,890  |   |      |   | 22,452  |          |  |   | (562     | ) |  | -3   | %
|Software                       |  |                                  | 30,374  |   |      |   | 27,266  |          |  |   | 3,108    |   |  | 11   | %
|Distribution and Commerce      |  |                                  | (17,478 | ) |      |   | (4,583  | )        |  |   | (12,895  | ) |  | -281 | %
|                               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  
|Total segment operating income |  | $                                | 90,730  |   |      | $ | 76,125  |          |  | $ | 14,605   |   |  | 19   | %
|                               |  |                                  |         |   |      |   |         |          |  |   |          |   |  |      |  

Segment operating income excludes equity-based compensation, amortization of intangibles,
corporate marketing and general and administrative expenses. Segment operating income also excludes restructuring and asset impairment charges.

Embedded Solutions

Revenues from our Embedded Solutions segment increased from the third quarter of 2006 to the comparable
period in 2007 as well as from the nine months ended September 30, 2006 to the comparable period in 2007. Operating income from our Embedded Solutions segment increased from the third quarter of 2006 to the comparable period in 2007 as well as
from the nine months ended September 30, 2006 to the comparable period in 2007. The increases in revenue and operating income from Embedded Solutions were primarily due to a significant set top box licensing transaction completed in the third
quarter, the proliferation of digital set top boxes and other CE devices using our technology, and the inclusion of Mediabolic since January 1, 2007.



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We actively engage in activities focused on identifying third parties who did not report to us the amount
of royalties owed under license agreements with us. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. We cannot predict the amount or timing
of such revenues.

We anticipate that on an annual basis, future revenues and operating income from our Embedded Solutions segment will
continue to increase in absolute terms, but may vary as a percentage of our total revenues.

Entertainment

Revenues from our Entertainment segment decreased from the third quarter of 2006 to the same period in 2007 as well as from the nine months ended
September 30, 2006 to the same period in 2007. Operating income from our Entertainment segment increased from the third quarter of 2006 to the same period in 2007. Operating income from our Entertainment segment was consistent from the nine
months ended September 30, 2006 to the same period in 2007. The decreases in revenue from our Entertainment segment were primarily from a decline in royalty volumes and the loss of an MPAA customer. The increase in quarterly operating income
was due to lower research and development costs as a result of the restructuring actions in 2007, a decline in service costs related to our Hawkeye offering and lower replicator costs commensurate with the decline in DVD royalty volumes.

We actively engage in activities focused on identifying studios who have misreported to us the amount of royalties owed under license agreements with
us. As a result, from time to time, we may not receive timely replicator reports, and therefore, we may recognize revenues that relate to activities from prior periods. These royalty recoveries may cause revenues to be higher or lower than expected
during a particular reporting period and may not occur in subsequent periods. We cannot predict the amount or timing of such revenues.

We
anticipate that future revenues and operating income from our Entertainment segment will continue to be a significant part of our revenues, but may vary as a percentage of our total revenues.

Software

Revenues from our Software segment
increased slightly from the third quarter of 2006 to the same period in 2007. Revenues slightly decreased from the nine months ended September 30, 2006 to the same period in 2007. The quarterly increase in our Software revenue is primarily
related to an increase in license revenue from installation products and support revenue as our customer base continues to grow. The year to date decrease was primarily due to a decline in significant licensing arrangements from the prior year
partially offset by increases in support revenue from the growth of our customer base.

Operating income from our Software segment
increased from the third quarter of 2006 to the same period in 2007 as well as from the nine months ended September 30, 2006 to the same period in 2007. The overall increase in operating income, despite the decline in year to date revenue, was
primarily due to reduced research and development costs in the comparable periods.

We believe that revenues and operating income
from our Software segment will increase in the future in absolute terms, but may vary as a percentage of our total revenues.



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Distribution and Commerce

Revenues from the Distribution and Commerce segment decreased from the third quarter of 2006 to the same period in 2007 primarily due to the decline in volume from our digital distribution products. Revenues from the
Distribution and Commerce segment increased from the nine months ended September 30, 2006 to the same period in 2007 primarily due to the inclusion of eMeta for the full 2007 period.

Operating loss from the Distribution and Commerce segment increased from the third quarter of 2006 to the same period in 2007 as well as from the nine
months ended September 30, 2006 to the same period in 2007. These increases were primarily due to significant investments in the infrastructure in addition to the decline in revenues from our digital distribution products. In August 2007, we
abandoned the development of a new distribution and commerce platform. We began this project in early 2006 and invested significant resources during its development stage. During the third quarter of 2007, the Distribution and Commerce
business focused on improving its financial performance and determined to reduce costs by abandoning the development project. The result of abandoning this project resulted in a total charge of $8.1 million, comprised of an asset impairment charge
of $7.4 million, $0.4 million in contract termination costs, and $0.3 million in workforce reduction costs. All affected employees were notified of their termination prior to August 30, 2007.

We believe that revenues and operating income from our Distribution and Commerce segment will vary in the future in absolute terms and as a percentage of
our total revenues.

Seasonality of Business

We have experienced significant seasonality in our business, and our consolidated financial condition and results of operations are likely to be affected by seasonality in the future. We have typically experienced our highest revenues in
the fourth quarter of each calendar year. We believe that this trend has been principally due to the tendency of certain of our customers to manufacture and release new video and games titles during the year-end holiday shopping season, while our
operating expenses are incurred more evenly throughout the year. We have also found that typical software and enterprise customers tend to spend up to one-third of their annual capital budgets in the fourth calendar quarter.

Costs and Expenses

Our cost of revenues consists
primarily of service costs, replicator fees, patent amortization and other related costs. Service costs include customer support, professional services costs, hosting, bandwidth and equipment maintenance costs. Cost of revenues also includes
amortization of intangibles from acquisitions. Our research and development expenses are comprised primarily of employee compensation and benefits, tooling and supplies and an allocation of overhead and facilities costs. Our selling and marketing
expenses are comprised primarily of employee compensation and benefits, travel, advertising and an allocation of overhead and facilities costs. Our general and administrative expenses are comprised primarily of employee compensation and benefits,
travel, accounting and tax fees and an allocation of overhead and facilities costs.

Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These condensed
consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and



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liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, equity-based
compensation, valuation of strategic investments, goodwill and intangible assets, impairment of long lived assets and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates.

Other than the critical accounting policy described below, there
have been no significant changes in our critical accounting estimates during the three and nine months ended September 30, 2007 as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

Income Taxes

We
account for income taxes using the asset and liability method of SFAS 109, Accounting for Income Taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for
deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entitys financial statements or tax returns. We account for uncertainty in income taxes using the cumulative probability method under
FIN48. Management must make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset, and for unrecorded
tax benefits resulting from uncertain tax positions. Our judgments, assumptions and estimates relative to the current provision take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future
audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amount provided for income taxes in our consolidated
financial statements.



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Results of Operations

The following tables present our condensed consolidated statements of income compared to the prior year periods (in thousands).



|                                              |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|--------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | -------- |  | - | -------- | - |  | ----- | -
|                                              |  | Three Months EndedSeptember 30, |        |      |   |        |          |  |  
|                                              |  | 2007                            |        | 2006 |   |        | $ Change |  |   | % Change |  
|Net Revenues:                                 |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|Licenses                                      |  | $                               | 62,424 |      | $ | 44,357 |          |  | $ | 18,067   |   |  | 41    | %
|Services                                      |  |                                 | 14,347 |      |   | 13,790 |          |  |   | 557      |   |  | 4     | %
|                                              |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|Total revenues                                |  |                                 | 76,771 |      |   | 58,147 |          |  |   | 18,624   |   |  | 32    | %
|Cost of revenues:                             |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|License fees                                  |  |                                 | 1,612  |      |   | 2,838  |          |  |   | (1,226   | ) |  | -43   | %
|Service fees                                  |  |                                 | 8,533  |      |   | 7,996  |          |  |   | 537      |   |  | 7     | %
|Amortization of intangibles from acquisitions |  |                                 | 3,584  |      |   | 3,150  |          |  |   | 434      |   |  | 14    | %
|                                              |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|Total cost of revenues                        |  |                                 | 13,729 |      |   | 13,984 |          |  |   | (255     | ) |  | -2    | %
|Gross profit                                  |  |                                 | 63,042 |      |   | 44,163 |          |  |   | 18,879   |   |  | 43    | %
|Operating expenses:                           |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|Research and development                      |  |                                 | 13,365 |      |   | 13,268 |          |  |   | 97       |   |  | 1     | %
|Selling and marketing                         |  |                                 | 16,342 |      |   | 16,851 |          |  |   | (509     | ) |  | -3    | %
|General and administrative                    |  |                                 | 11,323 |      |   | 9,562  |          |  |   | 1,761    |   |  | 18    | %
|Restructuring and asset impairment charges    |  |                                 | 8,069  |      |   |       |          |  |   | 8,069    |   |  | 100   | %
|                                              |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|Total operating expenses                      |  |                                 | 49,099 |      |   | 39,681 |          |  |   | 9,418    |   |  | 24    | %
|                                              |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|Operating income                              |  |                                 | 13,943 |      |   | 4,482  |          |  |   | 9,461    |   |  | 211   | %
|Interest and other income, net                |  |                                 | 4,890  |      |   | 2,245  |          |  |   | 2,645    |   |  | 118   | %
|                                              |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|Income before income taxes                    |  |                                 | 18,833 |      |   | 6,727  |          |  |   | 12,106   |   |  | 180   | %
|Income taxes                                  |  |                                 | 4,741  |      |   | (470   | )        |  |   | 5,211    |   |  | -1109 | %
|                                              |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  
|Net income                                    |  | $                               | 14,092 |      | $ | 7,197  |          |  | $ | 6,895    |   |  | 96    | %
|                                              |  |                                 |        |      |   |        |          |  |   |          |   |  |       |  



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|                                              |  |                                |         |      |   |          |  |   |          |   |  |     |  
|--------------------------------------------- |  | ------------------------------ | ------- | ---- | - | -------- |  | - | -------- | - |  | --- | -
|                                              |  | Nine Months EndedSeptember 30, |         |      |   |          |  |  
|                                              |  | 2007                           |         | 2006 |   | $ Change |  |   | % Change |  
|Net Revenues:                                 |  |                                |         |      |   |          |  |   |          |   |  |     |  
|Licenses                                      |  | $                              | 151,520 |      | $ | 132,726  |  | $ | 18,794   |   |  | 14  | %
|Services                                      |  |                                | 47,519  |      |   | 40,788   |  |   | 6,731    |   |  | 17  | %
|                                              |  |                                |         |      |   |          |  |   |          |   |  |     |  
|Total revenues                                |  |                                | 199,039 |      |   | 173,514  |  |   | 25,525   |   |  | 15  | %
|Cost of revenues:                             |  |                                |         |      |   |          |  |   |          |   |  |     |  
|License fees                                  |  |                                | 5,429   |      |   | 7,768    |  |   | (2,339   | ) |  | -30 | %
|Service fees                                  |  |                                | 28,344  |      |   | 22,483   |  |   | 5,861    |   |  | 26  | %
|Amortization of intangibles from acquisitions |  |                                | 10,795  |      |   | 9,883    |  |   | 912      |   |  | 9   | %
|                                              |  |                                |         |      |   |          |  |   |          |   |  |     |  
|Total cost of revenues                        |  |                                | 44,568  |      |   | 40,134   |  |   | 4,434    |   |  | 11  | %
|Gross profit                                  |  |                                | 154,471 |      |   | 133,380  |  |   | 21,091   |   |  | 16  | %
|Operating expenses:                           |  |                                |         |      |   |          |  |   |          |   |  |     |  
|Research and development                      |  |                                | 41,243  |      |   | 39,598   |  |   | 1,645    |   |  | 4   | %
|Selling and marketing                         |  |                                | 51,727  |      |   | 50,169   |  |   | 1,558    |   |  | 3   | %
|General and administrative                    |  |                                | 30,495  |      |   | 26,855   |  |   | 3,640    |   |  | 14  | %
|Restructuring and asset impairment charges    |  |                                | 13,139  |      |   |         |  |   | 13,139   |   |  | 100 | %
|                                              |  |                                |         |      |   |          |  |   |          |   |  |     |  
|Total operating expenses                      |  |                                | 136,604 |      |   | 116,622  |  |   | 19,982   |   |  | 17  | %
|                                              |  |                                |         |      |   |          |  |   |          |   |  |     |  
|Operating income                              |  |                                | 17,867  |      |   | 16,758   |  |   | 1,109    |   |  | 7   | %
|Interest and other income, net                |  |                                | 11,105  |      |   | 6,400    |  |   | 4,705    |   |  | 74  | %
|                                              |  |                                |         |      |   |          |  |   |          |   |  |     |  
|Income before income taxes                    |  |                                | 28,972  |      |   | 23,158   |  |   | 5,814    |   |  | 25  | %
|Income taxes                                  |  |                                | 6,680   |      |   | 6,713    |  |   | (33      | ) |  | 0   | %
|                                              |  |                                |         |      |   |          |  |   |          |   |  |     |  
|Net income                                    |  | $                              | 22,292  |      | $ | 16,445   |  | $ | 5,847    |   |  | 36  | %
|                                              |  |                                |         |      |   |          |  |   |          |   |  |     |  

License Revenues. Our license revenues increased from the third quarter of 2006 to the
third quarter of 2007 as well as from the nine months ended September 30, 2006 to the same period in 2007. These increases were primarily due to the increase in Embedded Solutions revenue, partially offset by the decline in studio royalty
volumes and software license arrangements. The increases in revenue from Embedded Solutions were primarily due to a significant set top box licensing transaction completed in the third quarter, the proliferation of digital set top boxes and other CE
devices using our technology, and the inclusion of Mediabolic since January 1, 2007.

Service Revenues. Our service revenues
increased from the third quarter of 2006 to the third quarter of 2007 as well as from the nine months ended September 30, 2006 to the same period in 2007. These increases were primarily due to higher software support revenue driven by a growing
customer base.

Cost of Revenues  License Fees. Cost of revenues from license fees as a percentage of license revenues
decreased from 6% in the third quarter 2006 to 3% for the same period in 2007, and from 6% for the nine months ended September 30, 2006 to 4% for the same period in 2007. The declines in cost of revenues from license fees as a percentage of
revenues were primarily due to the growth in Embedded Solutions licensing products which have higher gross margins. Cost of revenues from license fees decreased from the third quarter of 2006 to the third quarter of 2007 as well as from the nine
months ended September 30, 2006 to the same period in 2007. The decrease in costs are primarily due to a decline in service costs related to our Hawkeye offering and lower replicator costs.

We anticipate our cost of revenues from license fees may increase as we continue to increase activity in our licensing products and expand our customer
base.



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Cost of Revenues  Service Fees. Cost of revenues from service fees as a percentage of
service revenues increased from 58% in the third quarter of 2006 to 59% for same period in 2007, and from 55% for the nine months ended September 30, 2006 to 60% for the same period in 2007. Cost of revenues from service fees increased from the
third quarter of 2006 to the third quarter of 2007 as well as from the nine months ended September 30, 2006 to the same period in 2007. These increases in cost of revenues from service fees are primarily due to costs related to the Mediabolic
services business which was acquired on January 1, 2007.

We anticipate our cost of revenues from service fees may increase as we
continue to increase activity in our service products and expand our customer base.

Cost of Revenues  Amortization of Intangibles
from Acquisitions. Cost of revenues from amortization of intangibles increased from the three and nine months ended September 30, 2006 to the comparable periods in 2007, respectively, primarily due to the amortization of intangibles from
the acquisition of Mediabolic in January 2007.

Research and Development.Research and development expenses increased slightly from
the third quarter of 2006 to the third quarter of 2007, as well as from the nine months ended September 30, 2006 to the same period in 2007. The increase in costs was primarily due to the inclusion of Mediabolic since January 1, 2007,
partially offset by lower equity-based compensation charges. Research and development expenses decreased as a percentage of net revenues from 23% in the third quarter of 2006 to 17% in the same period in 2007 and from 23% for the nine months ended
September 30, 2006 to 21% for the same period in 2007.

We expect research and development expenses to increase in absolute terms as a
result of expected increases in research and development activity to support our new technologies, but vary as a percentage of net revenues.

Selling and Marketing.Selling and marketing expenses slightly decreased from the third quarter of 2006 to the same period in 2007 and slightly increased from the nine months ended September 30, 2006 to the same period in 2007.
Selling and marketing expenses, as a percentage of net revenues, decreased from 29% in the third quarter of 2006 to 21% in the third quarter of 2007 and decreased from 29% for the nine months ended September 30, 2006 to 26% in the same period
in 2007. The quarter decrease in selling and marketing expenses was primarily due to lower equity-based compensation costs. The increase in selling and marketing expenses for the year to date period was primarily due to the inclusion of Mediabolic
costs since its acquisition on January 1, 2007, partially offset by lower equity-based compensation charges.

We expect selling and
marketing expenses to increase in absolute terms and vary as a percentage of total revenues as we continue our efforts to increase our market share and grow our business.

General and Administrative. General and administrative expenses increased from the third quarter of 2006 to the same quarter in 2007 as well as from the nine months ended September 30, 2006 to the same
period in 2007. General and administrative expenses as a percentage of net revenues decreased slightly from 16% for the third quarter of 2006 to 15% for the same quarter in 2007 and was consistent for both the nine months ended September 30,
2006 and 2007 at 15%. The increases in absolute terms were primarily due to additional headcount to support the overall growth of the business and higher equity-based compensation charges.

We expect our general and administrative expenses to increase in absolute terms and decrease as a percentage of total revenues as we continue our efforts
to grow our business.



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Restructuring and asset impairment charges. In August 2007, we abandoned the development of a new
distribution and commerce platform. We began this project in early 2006 and invested significant resources during its development stage. During the third quarter of 2007, the Distribution and Commerce business unit focused on improving its
financial performance and determined to reduce costs by abandoning the development project. The result of abandoning this project resulted in a total charge of $8.1 million, comprised of an asset impairment charge of $7.4 million, $0.4 million in
contract termination costs, and $0.3 million in workforce reduction costs. All affected employees were notified of their termination prior to August 30, 2007.

In June 2007, we announced an organizational structure change which included the creation of four segments. The organizational realignment enables us to increase our focus on long-term growth, market opportunities and
meeting customer needs. The reorganization included a workforce reduction in headcount of approximately eight percent, resulting in a charge of $2.9 million. All affected employees were notified of their termination prior to June 30, 2007.

In January 2007, our board of directors approved a restructuring program, which included a workforce reduction, a restructuring of certain
business functions and an abandonment of certain facilities. The workforce reduction resulted in a charge of $1.3 million. All affected employees were notified of their termination prior to March 31, 2007. The restructuring of certain business
functions included the cancellation of certain service contracts and asset losses, resulting in a charge of $0.5 million. The abandonment of certain leased facilities resulted in a charge of $0.4 million.

Interest and Other Income, Net. Net interest and other income increased from the third quarter of 2006 to the same quarter of 2007 as well as from
the nine months ended September 30, 2006 to the same period in 2007. In August 2006, we issued $240 million in principal amount of 2.625% convertible senior notes due 2011. Proceeds from the convertible senior notes resulted in higher invested
balances and increased interest income, partially offset by an increase in interest expense related to the senior notes.

Income
Taxes. We recorded income tax expense of $4.7 million for the third quarter of 2007 and an income tax benefit of $0.5 million for the third quarters of 2006. Income tax expense recorded in each of the nine months ended September 30, 2007
and 2006 was $6.7 million. Our effective tax rate was 25% and (7)% for the third quarters of 2007 and 2006, respectively. The change in effective tax rate in the third quarter of 2007 compared to the third quarter of 2006 was primarily due to
the change in the proportion of profit generated by certain foreign operations which we plan to indefinitely reinvest outside of the U.S. and for which no U.S. tax was provided, as well as a discrete tax benefit of $0.9 million during the third
quarter of 2006 to reflect a change in estimate of income tax accrual for various income tax returns filed during that quarter.



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Liquidity and Capital Resources

We have financed our operations primarily from cash generated by operations. Our operating activities provided net cash of $57.5 million and $60.6 million in the nine months ended September 30, 2007 and 2006,
respectively. Cash provided by operating activities decreased $3.1 million from the nine months ended September 30, 2006 to the same period in 2007, primarily due to the timing of receivables collections. The availability of cash generated by
our operations in the future could be affected by other business risks including, but not limited to, those factors set forth under the caption Risk Factors contained in this Quarterly Report in Item 1A.

We used $226.4 million less cash for investing activities in the first nine months of 2007 than for the same period in 2006, primarily due to sales and
maturities of long- and short-term marketable investment securities. To a lesser extent, the decrease was also due to lower payments made for acquisitions.

Net cash provided by financing activities decreased $186.7 million from the prior year period primarily due to net proceeds of $187.1 million from the issuance of convertible senior notes in August 2006.

In May 2002, our Board of Directors authorized a stock repurchase program, which allowed us to purchase up to 5.0 million shares of common stock
in the open market from time-to-time at prevailing market prices, through block trades or otherwise, or in negotiated transactions off the market, at the discretion of our management. In 2002, we repurchased 3.0 million shares of common stock
under this program, which were recorded as treasury stock and resulted in a reduction of stockholders equity.

In August 2006, our
Board of Directors authorized the purchase of up to $100 million of our common stock from time-to-time (which subsumed the stock repurchase program mentioned above). We completed this program in September 2007. In the year ended December 31,
2006, we repurchased approximately 2.3 million shares of common stock for $50.0 million. In August and September 2007, we repurchased the remaining $50.0 million authorized under the program, or approximately 2.1 million shares of common
stock. These repurchases were recorded as treasury stock and resulted in a reduction of stockholders equity. As of September 30, 2007, treasury stock consisted of 7.4 million shares of common stock that we had repurchased, with a
cost basis of approximately $138.4 million.

In September 2007, the Board of Directors authorized a stock repurchase program, which allows
us to purchase up to $60.0 million of our common stock in the open market from time to time at prevailing market prices or otherwise, as conditions warrant. As of September 30, 2007, no shares of common stock have been repurchased under this
program.

On November 6, 2007, we announced we had signed a definitive agreement to acquire All Media Guide Holdings, Inc.
(AMG), for $82 million in cash. This acquisition is subject to customary closing conditions and is expected to close by the end of the year. AMG is a meta data content company that provides descriptive content covering video, music and
games and is designed to help in further expanding on our middleware platform and enhancing our CE offering.

As of September 30,
2007, we had $180.2 million in cash and cash equivalents, $231.9 million in short-term investments, and $98.8 million in long-term marketable investment securities, which includes $18.2 million in fair market value of our holdings in
Digimarc. We anticipate that capital expenditures to support the growth of our business and strengthen our operations infrastructure will not exceed $7 million for the remainder of the year.

We have future minimum lease payments of approximately $62.4 million under operating and capital leases. We believe that the current available funds and
cash flows generated from operations will be sufficient to meet our working capital and capital expenditure requirements for the foreseeable future. We may also use cash to acquire or invest in additional businesses or to obtain the rights to use
certain technologies in the future.



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During the first quarter of 2007, the Company adopted FIN 48 effective January 1, 2007 and
reclassified $40.1 million from current taxes payable to non-current taxes payable.

In February 2007, the Financial Accounting
Standards Board (the FASB) issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to
measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for us
beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS 159 will have on our consolidated financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value (SFAS 157). SFAS 157 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective in 2008. We are evaluating the impact of this pronouncement on our financial
statements.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We are exposed to financial market
risks, including changes in interest rates, foreign currency exchange rates and security investments. Changes in these factors may cause fluctuations in our earnings and cash flows. We evaluate and manage the exposure to these market risks as
follows:

Fixed Income Investments. We have an investment portfolio of fixed income securities, including those classified as cash
equivalents, short-term investments and long-term marketable investment securities of $418.1 million as of September 30, 2007. Most of these securities are subject to interest rate fluctuations. An increase in interest rates could adversely
affect the market value of our fixed income securities.

We do not use derivative financial instruments in our investment portfolio to
manage interest rate risk. We limit our exposure to interest rate and credit risk, however, by establishing and strictly monitoring clear policies and guidelines for our fixed income portfolios. The primary objective of these policies is to preserve
principal while at the same time maximizing yields, without significantly increasing risk. A hypothetical 50 basis point increase in interest rates would result in an approximate $0.8 million decrease (approximately 0.2%) in the fair value of our
fixed income available-for-sale securities as of September 30, 2007.

Foreign Currency Exchange Rates. Due to our
reliance on international and export sales, we are subject to the risks of fluctuations in currency exchange rates. Because a substantial majority of our international and export revenues, as well as expenses, are typically denominated in U.S.
dollars, fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Many of our subsidiaries operate in
their local currency, which mitigates a portion of the exposure related to the respective currency collected.

Strategic
Investments. We currently hold interests in a number of companies. These investments, at book value totaling $23.2 million and $22.7 million, represented 2.7% and 2.8% of our total assets as of September 30, 2007 and
December 31, 2006, respectively. In 2006, we made a $5.0 million investment in a privately-held digital watermarking company for strategic purposes. As of September 30, 2007, the adjusted cost of our strategic investments consisted of our
investment in Digimarc, a publicly traded company, and our investment in the privately-held digital watermarking company. In addition, we hold investments in a number of other privately held companies, which have no carrying value as of
September 30, 2007. Digimarc is subject to price fluctuations based on the public market. Because there is no active trading market for the securities of privately held companies, our investments in them are illiquid. As such, we may never have
an opportunity to realize a return on our investment in these private companies, and we may in the future be required to write off all or part of one or more of these investments.



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Long-term Debt.The fair market value of the 2.625% convertible senior notes is subject to
interest rate market price risk and equity risk due to the convertible feature of the notes and other factors. Generally the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The
fair market value of the notes will also increase as the market price of our stock rises and decrease as the market price of our stock falls. Interest rate and market value changes affect the fair market value of the notes but do not impact our
financial position, cash flows or results of operations.

The notes may be converted, under certain circumstances, based on an initial
conversion rate of 35.3571 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $28.28 per share), into an aggregate of 8.5 million shares. Prior to June 15, 2011,
holders may convert their notes into cash and our common stock, at the applicable conversion rate, under any of the following circumstances: 1) during any fiscal quarter after the calendar quarter ending September 30, 2006, if the last reported
sale price of our common stock for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 120% of the applicable conversion price in
effect on the last trading day of the immediately preceding fiscal quarter; 2) during the five business-day period after any ten consecutive trading-day period (the measurement period) in which the trading price per note for each day of
such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; or 3) upon the occurrence of specified corporate transactions, as defined in the indenture. On and
after June 15, 2011 until the close of business on the scheduled trading day immediately preceding the maturity date of August 15, 2011, holders may convert their notes into cash and shares of our common stock, if any, at the applicable
conversion rate, at any time, regardless of the foregoing circumstances. In addition, in the event of a significant change in our corporate ownership or structure, the holders may require us to repurchase all or any portion of their notes for
100.00% of the principal amount.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures. As of the
end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls over Financial Reporting. During the quarter ended September 30, 2007, there have been no changes in our
internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.



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##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

We have not been required to pay a penalty to the Internal Revenue Service
(IRS) for failing to make disclosures required with respect to any transaction that has been identified by the IRS as abusive or that has a significant tax avoidance purpose.

InstallShield Software Corporation Liquidating Trust vs. Macrovision

On October 27, 2005, we
received notice of an arbitration proceeding filed by InstallShield Software Corporation Liquidating Trust (the Trust). The Trust has demanded arbitration of certain disputes between the Trust and Macrovision pursuant to the Asset
Purchase Agreement dated June 16, 2004 by and among InstallShield Software Corporation, Macrovision Corporation, Macrovision Europe Limited, and Macrovision International Holding L.P. (the Agreement). Under the Agreement, we could
have been required to make an additional contingent payment of up to $20 million based on post-acquisition revenue performance through June 30, 2005. Based upon the revenue results through June 30, 2005, we concluded that no additional
payment was required under the terms of the Agreement. The Trust alleges that the post-acquisition revenue performance targets were not reached due to our conduct in violation of the Agreement, and therefore is seeking the contingent payment in an
amount exceeding $15 million. We deny these allegations and intend to vigorously defend ourselves in the arbitration proceeding. The parties are engaged in discovery. A hearing is scheduled to begin on February 25, 2008.

As of September 30, 2007, for all the abovementioned matters, it was not possible to estimate the liability, if any, in connection with the pending
matters. Accordingly, no accruals for these contingencies have been recorded.

From time to time, we have been involved in other disputes
and legal actions arising in the ordinary course of business. In managements opinion, none of these other disputes and legal actions is expected to have a material impact on the Companys consolidated financial position, results of
operations or cash flows.



|Item 1A. | Risk Factors
|-------- | ------------

A description of the risk factors
associated with our business is included under Risk Factors contained in Item 1A. of our 2006 Annual Report on Form 10-K and is incorporated herein by reference. There have been no material changes in our risk factors since the
filing of our 2006 Annual Report on Form 10-K.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



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##### Table of Contents

|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------



|              |  |                                                                                                                                                                                          |  |                           |  |      |  |        |  |              
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---- |  | ------ |  | -------------
|              |  |                                                                                                                                                                                          |  | Incorporated by Reference |  |     
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                      |  | Form                      |  | Date |  | Number |  | FiledHerewith
|              |  |                                                                                                                                                                                          |  |                           | 
|31.01         |  | Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     |  |                           |  |      |  |        |  | X            
|              |  |                                                                                                                                                                                          |  |                           | 
|31.02         |  | Certification of the Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |  |                           |  |      |  |        |  | X            
|              |  |                                                                                                                                                                                          |  |                           | 
|32.01         |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                    |  |                           |  |      |  |        |  | X            
|              |  |                                                                                                                                                                                          |  |                           | 
|32.02         |  | Certification of the Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                |  |                           |  |      |  |        |  | X            



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SIGNATURES

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



|                                                              |  |  |  |     |  |                       |  |                        
|------------------------------------------------------------- |  |  |  | --- |  | --------------------- |  | -----------------------
|Macrovision Corporation                                       |  |  |  |    
|Authorized Officer:                                           |  |  |  |    
|                                                              |  |  | 
|Date: November 7, 2007                                        |  |  |  | By: |  | /s/ Alfred J. Amoroso
|                                                              |  |  |  |     |  |                       |  | Alfred J. Amoroso      
|                                                              |  |  |  |     |  |                       |  | Chief Executive Officer
|Principal Financial Officer and Principal Accounting Officer:
|                                                              |  |  | 
|Date: November 7, 2007                                        |  |  |  | By: |  | /s/ James Budge      
|                                                              |  |  |  |     |  |                       |  | James Budge            
|                                                              |  |  |  |     |  |                       |  | Chief Financial Officer



32