Form 10-K

As of
December 31,

Customer A

Customer B

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ¨ No x

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

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

As of June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates, computed by reference to the closing price for the common stock as quoted by the Nasdaq National Stock Market as of that date, was approximately $104,688,787. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of the close of business on March 24, 2006, the registrant had 13,930,246 shares of common stock outstanding.

Part III incorporates information by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be filed within 120 days after the end of the fiscal year covered by this report. The registrant may also file an amendment to the Form 10-K within 120 days after the end of the fiscal year covered by this report to include the information required by Part III of this Form 10-K.

This Annual Report on Form 10-K (the “Annual Report”) contains certain forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements contained in this Annual Report include, among others, statements regarding (1) our acquisition of Ulead Systems, Inc. and the anticipated impact on our business, operations and financial condition, (2) research and development expenses, (3) sales and marketing expenses, (4) other operating and capital expenditures, (5) anticipated growth of operations, personnel and infrastructure, (6) exercise prices of future option grants, (7) the sufficiency of our capital resources, (8) future sources of revenue, (9) growth, decline and seasonality of revenue, (10) deferrals of revenue, (11) interest income, (12) competition and competitive pressures, (13) general market and economic outlook, (14) product sales and prices, (15) our efforts to improve our internal controls, (16) settlement of intellectual property claims, (17) stock-based compensation expenses, (18) general and administrative expenses, and (19) the utility of certain products. Factors that could cause actual results to differ materially from those included herein include, but are not limited to, the information contained under the captions “Part I, Item 1. Business,” “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.” The Company disclaims any obligation to update information in any forward-looking statement.

We are a provider of DVD software, video editing and DVD burning software, television viewing and recording software and InterVideo InstantON software that allows personal computer (“PC”) users to quickly access multimedia content and devices without requiring booting into traditional operating systems such as Microsoft Windows. We have developed a technology platform from which we have created a broad suite of integrated multimedia software products. These products span the digital video cycle by allowing users to capture, edit, author, distribute, burn and play digital video. Our multimedia software products bring the functionality of popular consumer electronics (“CE”) products such as the DVD player and the digital video recorder, or DVR (also known as a PVR), to PCs. Our software is also used to enhance the functionality of next-generation CE devices. We now offer our multimedia products to manufacturers of handheld devices such as mobile telephones and digital still cameras.

Our software is bundled with products sold by PC and CE original equipment manufacturers (“OEMs”) and is also sold to CE manufacturers. We also sell our products to PC peripherals manufacturers worldwide and offer our software in up to 27 languages. In addition, we sell our products through retail channels, including over 5,000 U.S. retail stores, and directly to consumers through our websites, which currently operate in 12 languages. We have historically derived a substantial portion of our revenue from sales of our flagship product, WinDVD, a DVD player software, to PC OEMs. In the future, we expect to derive an increasing percentage of our revenue from sales of products other than WinDVD, including: WinDVD Creator, a video editing, DVD authoring and burning application; InterVideo DVD Copy, an application to copy and backup DVDs and CDs; InterVideo Home Theater, a media center suite for the viewing and management of digital media content; MediaOne, an all-in-one package of our most popular applications such as WinDVD, WinDVD Creator, Disc Master, PhotoAlbum and others; Linux-based versions of our DVD and DVR software designed for Linux-based PCs and CE devices; and InterVideo InstantOn, an embedded system infrastructure that provides PCs with capabilities similar to those of CE devices, allowing PC users to access multimedia assets and devices without requiring

booting into traditional operating systems such as Microsoft Windows; as well as Ulead Systems, Inc. (“Ulead”) product offerings including Ulead DVD MovieFactory, a consumer DVD authoring software; VideoStudio, a video editing software; and PhotoImpact, an image editing software.

We have developed the core technologies and products that enable rapid migration of our products to CE devices in addition to multiple PC platforms. We intend to continue developing our intellectual property portfolio and expanding our product offerings to include additional digital multimedia features, such as the ability to deliver digital video and audio through a home network and to wireless electronics devices.

We were incorporated in California in April 1998 and reincorporated in Delaware in May 2002. We maintain executive offices and principal facilities at 46430 Fremont Blvd., Fremont, CA 94538, and we have additional offices in Taiwan, China, Japan and India. Ulead maintains executive offices and principal facilities in Taiwan and has additional offices in Japan, Germany, the United States, China and the Philippines. Our telephone number is 510-651-0888. We also maintain a web site at www.intervideo.com. The contents of this website are not incorporated in or otherwise to be regarded as part of this annual report on Form 10-K. Copies of this and other annual reports, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports are available free of charge on our website as soon as reasonably practicable after such documents are filed electronically with the Securities and Exchange Commission (“SEC”). Any materials that the Company files with the SEC can be read at the SEC’s website on the Internet at http://www.sec.gov or read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) 732-0330.

InterVideo, WinDVD, WinDVD Creator, LinDVD, LinDVR, WinDVR, WinProducer and InterVideo Instant-On are registered U.S. trademarks of InterVideo. Ulead, VideoStudio, PhotoImpact, Ulead DVD MovieFactory, DVD Workshop, MediaStudio, MediaStudio Pro, Ulead DVD PictureShow and Cool 3D are among the registered U.S. trademarks of Ulead.

On April 20, 2005, InterVideo, Inc. and its wholly-owned subsidiary, InterVideo Digital Technology Corp. (together referred to as “InterVideo”) acquired 33,284,395 shares of Ulead Systems, Inc. (“Ulead”) at 30 NT (US$0.95) per share pursuant to InterVideo’s previously-announced tender offer for the issued shares of Ulead and pursuant to stock purchase agreements with Microtek International Inc. and certain other shareholders of Ulead. Also on April 20, 2005, InterVideo acquired an additional 1,000,000 shares of Ulead at a purchase price of 30 NT (US$0.95) per share through its acquisition of a holding company, Strong Ace Limited. The aggregate purchase price for the 34,284,395 shares of Ulead acquired by InterVideo was US $32.6 million and was paid in cash. Together with the shares of Ulead that InterVideo purchased prior to the tender offer, InterVideo now owns a total of 48,817,395 shares of Ulead, or approximately 63% of the issued shares of Ulead with total cash payments of US$42.0 million. Ulead’s results of operations and balance sheet have been consolidated into our financial statements subsequent to the date of acquisition. Further details are discussed in Note 3, under Part II, Item 8, Notes to Consolidated Financial Statements of this Form 10-K.

We believe that our investment in Ulead strengthens our technology offering and allows us to provide a more comprehensive digital media solution to both retail and OEM customers. Ulead’s strengths in professional DVD authoring, video editing and still image processing complement our tools and provide enhanced opportunities for addressing emerging and rapidly growing markets including multimedia home networking, high definition and Blu-ray DVD and multimedia mobile phones. Ulead’s complementary product offerings, strong engineering resources and broad retail presence have provided significant opportunities for synergies.

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

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

WinDVD has been certified by Microsoft’s Windows Hardware Quality Lab, or WHQL, as a Motion Video Device on PC hardware and software configurations. In addition, our software is compatible with a broad range of multimedia hardware products, including specialized graphics chips, audio cards and DVD drives from various suppliers and in various configurations.

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

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

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

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

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

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

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

WinDVR also enables PC users to watch high definition digital television, or HDTV, digital video broadcast, or DVB, or other digital video and audio input. With a digital TV tuner card and our WinDVR software, users can watch digital broadcasts on a PC or on a DTV-ready television set. WinDVR supports all 18 ATSC, or American Television Systems Committee, formats and DVB formats used in Europe and Asia.

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

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

Our Disc Master software allows users to transfer their data, music and other files from their hard drive to a CD-RW drive or DVD-recordable drive.

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

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

InterVideo InstantON technology provides an embedded system infrastructure that provides PCs with capabilities similar to those of CE devices, allowing PC users to access multimedia assets and devices without requiring booting into traditional operating systems such as Microsoft Windows. InterVideo InstantON allows

PCs to function with a remote control in a manner familiar to users that are comfortable accessing CE devices. We believe that this infrastructure improves the system reliability, human interface, power management, noise control, mean time between failures (MTBF), and glitch-free audio/video playback. InterVideo InstantON allows PC users to access multimedia assets, such as music, photos and videos, and multimedia devices, such as DVD drives or TV tuners, much more quickly than is possible using conventional operating systems and their applications.

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

InterVideo iMobi provides the multimedia codec widely used by smartphones, car entertainment systems, portable media player devices, OEM’s and original device manufacturers (ODM’s) to enhance music and movie enjoyment, any place and anytime.

Ulead’s PhotoImpact is an image editing software known for the broad range of creative effects it offers and the speed with which users can complete complex effects.

Ulead’s VideoStudio is a video editing software that enables home users to quickly and easily turn rough home video footage into finished productions complete with titles, transitions, voiceover narration and background music.

Ulead DVD MovieFactory is a consumer DVD authoring software that offers easy disc authoring, an expanded range of creative options and future-ready support for both HD DVD and Blu-ray disc formats.

Our modular and layered design approach enhances product expandability and component reusability. Because we arrange modular components in layered structures, we can quickly and efficiently add new features

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

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

Our customer base consists primarily of PC OEMs, CE manufacturers and manufacturers of PC peripherals that incorporate our software into their products. For the year ended December 31, 2005, our two largest customers, Hewlett-Packard (“HP”) and Toshiba, accounted for 35% of our revenue. Our license agreements with customers are typically for a term of one or two years and do not contain any minimum volume commitments.

Consumers may purchase products and product upgrades directly through our Internet commerce sites. We also use distributors to sell our products to consumers through retail distribution channels. Our products are sold in more than 5,000 U.S. retail stores. Our products are also sold by leading online retailers. Revenue derived from our websites and retail channel accounted for 24% of our revenue in the year ended December 31, 2005.

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

We believe the technical assistance that we provide to OEMs represents an important part of our competitive advantage in maintaining strong relationships with these OEMs. We have built a customer assistance

infrastructure composed of sales staff, program managers and quality assurance engineers. We have also created an efficient, cost-effective internet-based system for the delivery of software and technical support to OEMs. This infrastructure reduces duplication of effort and fosters better communication channels between the OEMs and ourselves. This infrastructure enables us to provide technical assistance to OEMs with a relatively small staff and has been a key factor in our ability to maintain and grow our OEM customer base.

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

Total sales and marketing expenses for the year ended December 31, 2005 were $18.9 million. As of December 31, 2005, we had 165 sales, marketing and technical support personnel residing in our offices in the United States, Taiwan, Japan, China, India, Germany and the Philippines. A summary of revenue by sales channel, geographic region and product is presented under Part II, Item 8, Note 7, Segment and Geographic Information.

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

We believe that interaction with our OEM customers throughout the product design process enables us to anticipate technology trends and focus our research and development efforts on addressing emerging customer needs. We design products to meet our OEM and CE manufacturing customers’ specifications and current industry standards and will continue to support emerging standards that are complementary to our product strategy.

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

As of December 31, 2005, we employed 505 research and development personnel. For the year ended December 31, 2005, our research and development expenditures totaled $20.2 million. We intend to recruit, hire and retain highly qualified engineers and technicians to support our further research and development efforts. To improve the quality of our developer base and to lower our overall developer costs, we intend to increase the number of developers in Taiwan and China.

Our industry is intensely competitive, and we expect competition to intensify in the future. Our competitors include software companies that offer digital video or audio applications, companies offering hardware or semiconductor solutions as alternatives to our software products and operating system providers that may develop and integrate applications into their products.

Additional competitors are likely to enter our industry in the future. We also face competition from the internal research and development departments of other software companies and PC and CE manufacturers,

including some of our current customers. Some of our customers have the capability to integrate their operations vertically by developing their own software-based digital and audio solutions or by acquiring our competitors or the rights to develop competitive products or technologies, which may allow these customers to reduce their purchases or cease purchasing from us completely. Operating system providers with an established customer base, such as Microsoft, already offer products in the digital video and audio software markets. Some video and audio capabilities are built directly into their operating systems or are offered as upgrades to those operating systems at no additional charge. If Microsoft or other operating system providers develop or license digital video and audio solutions that compete directly with ours and incorporate the solutions into their operating systems, our products could lose market share.

We expect our current competitors to introduce improved products at lower prices, and we will need to do the same to remain competitive. We may not be able to compete successfully against either current or future competitors with respect to new or improved products. We believe that competitive pressures may result in price reductions, reduced margins and our loss of market share.

Many of our current competitors and potential competitors have longer operating histories and significantly greater financial, technical, sales and marketing resources or greater name recognition than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, our competitors that have large market capitalizations or cash reserves are in a better position to acquire other companies in order to gain new technologies or products that may displace our products. Any of these potential acquisitions could give our competitors a strategic advantage. In addition, some of our current competitors and potential competitors have more extensive customer base, more developed distribution channels and broader product offerings, than we do. These companies can use their broader customer base and product offerings, or adopt aggressive pricing policies, to gain market share. Increased competition in the market may result in price reductions, decreased customer orders, reduced profit margins and loss of market share, any of which could harm our business.

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

Our success depends upon our ability to protect our proprietary rights. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as license and confidentiality agreements with our employees, customers, strategic partners and others, to establish and protect our proprietary rights. The protection of patentable inventions is important to our competitive position. We currently have or own the rights to 36 issued U.S. patents, 100 patents issued in foreign jurisdictions, and we have 277 pending patent applications in various jurisdictions, comprised of 111 U.S. patent applications and 166 foreign patent applications.

Existing patent, copyright, trademark and trade secret laws and license and confidentiality agreements afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and detecting and preventing the unauthorized use of our products is difficult. Any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in the loss of revenue and some of our competitive advantage. As discussed in Item 3, Legal Proceedings, we have filed a district court action against Dell and have pending ITC investigation against Dell and Cyberlink for infringement of our U.S Patent No. 6,765,788, which patent is currently under reexamination in the Patent and Trademark Office. Infringement claims and lawsuits to protect our proprietary rights would likely be expensive to resolve and would require management’s time and resources, and, therefore, could harm our business.

Our digital video and audio solutions comply with various industry standard specifications. Some third parties have claimed that various aspects of DVD technology incorporated into our and our customers’ products infringe upon patents held by them, including MPEG LA, a consortium formed to enforce the proprietary rights of certain holders of patents covering certain aspects of MPEG-2 technology and a consortium known as “DVD 6C,” formed by a separate group of companies to enforce the proprietary rights of certain holders of patents covering some aspects of DVD technology. In March 2002, we entered into a license agreement with MPEG LA pursuant to which we obtained a license, retroactive to our inception, to MPEG LA’s patents related to the MPEG-2 standard in exchange for a cash payment and our agreement to make ongoing royalty payments. This license requires that we pay a royalty to MPEG LA for our sales to end users and that we notify the OEMs to whom we sell our products that they are obligated to obtain a license from MPEG LA for any use of our products that comply with the MPEG-2 standard.

We may receive notices of claims of infringement of other parties’ proprietary rights, including Nissim, AT&T, DVD 6C or 4C, another consortium formed to enforce the proprietary rights of certain holders of patents covering some aspects of DVD technology. Many companies aggressively use their patent portfolios to bring infringement claims against competitors and other parties. As a result, we may become a party to litigation in the future as a result of an alleged infringement of the intellectual property rights of others, including DVD 6C, 4C, Nissim or AT&T. Similarly, other parties have alleged that aspects of MPEG-2, MPEG-4 and other multimedia technologies infringe upon patents held by them. We may be required to pay license fees and damages or be prohibited from selling our products in the future if it is determined that our products infringe on patents owned by these third parties. In addition, other companies may form consortia in the future, similar to MPEG LA, DVD 6C and 4C, to enforce their proprietary rights and these consortia may seek to enforce their patent rights against us and our customers. If DVD 6C, 4C, Nissim, AT&T or another third party proves that our technology infringes its patents, we may be required to pay substantial damages for past infringement and may be required to pay license fees or royalties on future sales of our products. If we are required to pay license fees in the amounts that are currently published by, for example, DVD 6C, for past sales to our large PC OEM customers, because such PC OEMs were not themselves licensed, such fees would exceed the revenue we have received from those PC OEM customers. In addition, if it were proven that we willfully infringed on a third party’s proprietary rights, we may be held liable for three times the amount of damages we would otherwise have to pay. In addition, intellectual property litigation may require us to stop selling our products, obtain a license from the owner of the infringed intellectual property or redesign our products.

Our license agreements, including the agreements we have entered into with our large PC OEM customers, generally contain warranties of non-infringement and commitments to indemnify our customers against liability arising from infringement of third-party intellectual property rights. Examples of third-party intellectual property rights include the patents held by Nissim, AT&T and by members of MPEG LA, DVD 6C and 4C. These commitments may require us to indemnify or pay damages to our customers for all or a portion of any license fees or other damages, including attorneys’ fees, our customers are required to pay, or agree to pay, these or other third parties. If we are required to pay damages to our customers or indemnify our customers for damages they incur, our business could be harmed. If our customers are required to pay license fees in the amounts that are currently published by some claimants, and we are required to pay damages to our customers or indemnify our customers for such amounts, such payments would exceed our revenue from these customers. Even if a particular claim falls outside of our indemnity or warranty obligations to our customers, our customers may be entitled to additional contractual remedies against us. Furthermore, even if we are not liable to our customers, our customers may attempt to pass on to us the cost of any license fees or damages owed to third parties by reducing the amounts they pay for our products. Notwithstanding that we have signed a license agreement with MPEG LA, we may continue to be liable to some of our customers for amounts that those customers pay or have paid to MPEG LA in settlement of any claims of infringement brought by MPEG LA against those customers.

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

If any of the licenses for the technologies and software described above terminate and are not renewed on commercially reasonable terms, we could be prevented from shipping products using the MPEG-2, MPEG-4 or other standards and our revenue could decline.

We believe we have been successful in recruiting and retaining qualified employees. Our employee distribution by entity/location and department as of December 31, 2005 is as follows:

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

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

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

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

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

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

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

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

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

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

We did not achieve profitability until our fiscal year ended December 31 2002. As of December 31, 2005, we had retained earnings of $10.1 million. We expect to incur significant operating expenses over the next

several years in connection with the continued development and expansion of our business. These expenses include research and development and marketing expenses relating to products that may not be introduced and will not generate revenue until later periods, if at all. We may also incur significant operating expenses associated with the enforcement of our intellectual property rights. Further, our recent acquisition of Ulead makes it more difficult for us to predict profitability on a quarterly or annual basis. We may not achieve profitability on a quarterly or annual basis in the future.

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

On April 20, 2005, we acquired, directly and though one of our wholly owned subsidiaries, 33,284,395 shares of Ulead Systems, Inc. (“Ulead”) a publicly traded Taiwanese company at 30 NT (US$0.95) per share pursuant to our previously-announced tender offer for the issued shares of Ulead and pursuant to stock purchase agreements with certain shareholders of Ulead. Also on April 20, 2005, we acquired an additional 1,000,000 shares of Ulead at a purchase price of 30 NT (US$0.95) per share through the acquisition of a holding company, Strong Ace Limited. The aggregate purchase price for the 34,284,395 shares of Ulead was US $32.6 million and was paid in cash. Together with the shares that we purchased prior to the tender offer, we now own a total of 48,817,395 shares of Ulead, or approximately 63% of the issued shares of Ulead.

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

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

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

Microsoft currently offers products in the digital video and audio software markets. Some video and audio capabilities are built directly into their operating systems or are offered as upgrades to those operating systems at no additional charge. During the second quarter of 2005, we granted to Microsoft, Inc. a worldwide right and license to use, copy, create derivative works of, publicly perform or display, import, broadcast, transmit, offer to sell, sell, have sold, rent, lease, lend, transfer or otherwise distribute certain key components of our DVD, audio and video decoding technology. If Microsoft develops or licenses digital video and audio solutions that compete directly with ours and incorporates the solutions into its operating system, or otherwise changes its operating system to render our products incompatible, our revenue could decline significantly and our business could be harmed.

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

We license technology for use in our WinDVD, WinDVD Creator and InterVideo Home Theater products and other existing and planned products from third parties under agreements, some of which have a limited duration. For example, we have a license agreement with Dolby Laboratories for its audio technology and logo, a license agreement with the DVD Copy Control Association, Inc. for the content scrambling system designed to prevent the copying of DVDs, licenses with MPEG-LA for its MPEG-2 video technology and MPEG-4 related

technologies, a license from Thomson Licensing S.A. for its MP3 audio technology and various other license agreements relating to patents, know-how and trademarks that are important to various aspects of the development, marketing and sale of our products. We are obligated to pay royalties under each of the Dolby, DVD Copy Control Association, MPEG-LA and Thomson Licensing S.A. agreements, and Dolby, DVD Copy Control Association, MPEG LA and Thomson Licensing may each terminate its license if we breach any material provision of the license or if other events occur, as specified in the license agreement. If we fail to maintain these license arrangements, we might not be able to ship our products in their present forms and our revenue could decline.

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

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

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

The PC industry is highly concentrated, and we have derived a substantial portion of our revenue from sales of our products to HP and a small number of PC OEMs. For the year ended December 31, 2005, our two largest OEM customers accounted for 35% of our revenue, with HP accounting for 25% and Toshiba accounting for 10% of our revenue during that period. However, our revenue from HP has declined beginning in the fourth quarter of 2005 and into 2006 because we have been informed by HP that they will not incorporate certain of our products into certain future HP notebook models. A significant decrease in revenue from HP, or the loss of any of our large customers without an offsetting increase in sales from other customers, would reduce our revenue and gross profit and otherwise harm our business.

We expect that a small number of customers will continue to account for a majority of our revenue, gross profit and accounts receivables for the foreseeable future because of the concentrated nature of our client base. If the PC industry continues to consolidate, the number of customers accounting for the majority of our revenue could decrease further. Our agreements with our customers typically do not contain minimum purchase commitments and are of limited duration or are terminable with little or no notice. The loss of any of these customers, or a significant decrease in revenue from any of these customers, including HP would reduce our revenue and gross profit or otherwise harm our business. If our customers dispute the accounts receivables or are otherwise unable to pay the balance, our income from operations could decline.

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

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

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

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

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

Effective disclosure and internal controls are necessary for us to provide reliable and accurate financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002 requires that we assess, and our independent registered public accounting firm attest to, the design and operating effectiveness of our controls over financial reporting. If we cannot provide reliable and accurate financial reports and prevent fraud, our business and operating results, as well as our stock price, could be harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. The material weaknesses in our internal control over financial reporting that we identified at December 31, 2005, as well as our remediation efforts to date, are more fully discussed in this Annual Report under Part II, Item 9A, Controls and Procedures.

While we have taken steps to remediate the identified material weaknesses, we cannot be certain that any remedial measures we take will ensure that we design, implement, and maintain adequate disclosure and internal controls over our financial processes and reporting in the future or will be sufficient to address and eliminate the material weaknesses. Remedying the material weaknesses that have been identified, and any additional deficiencies, significant deficiencies or material weaknesses that we or our independent registered public accounting firm may identify in the future, could require us to incur significant costs, expend significant time and management resources or make other changes. As of December 31, 2005, we are required to report in our Annual Report on this Form 10-K filed with the Securities and Exchange Commission that material weaknesses in our internal controls over financial reporting continue to exist. We restated our consolidated financial statements for the period ended June 30, 2005 and September 30, 2005 due to the material weakness related to our incorrect application of Statement of Financial Accounting Standards No. 141 “Business Combinations.” During the preparation of our consolidated financial statements during 2005, management noted a material weakness in obtaining from Ulead timely and accurate financial results based on U.S. Generally Accepted Accounting Principles (US GAAP). The material weakness in oversight of the Ulead financial reporting process result in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work. Any delay or failure to design and

implement new or improved controls, or difficulties encountered in their implementation or operation, could harm our operating results, cause us to fail to meet our financial reporting obligations, or prevent us from providing reliable and accurate financial reports or avoiding or detecting fraud. Disclosure of our material weaknesses or our failure to remediate such material weaknesses in a timely fashion could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.

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

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

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

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

In addition to the claims described above, we may receive notices of claims of infringement of other parties’ proprietary rights. Many companies aggressively use their patent portfolios to bring infringement claims against

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

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

If DVD 6C, 4C, Nissim, AT&T or another third party proves that our technology infringes its patents, we may be required to pay substantial damages for past infringement and may be required to pay license fees or royalties on future sales of our products. If we are required to pay license fees in the amounts that are currently published by, for example, DVD 6C for past sales to our large PC OEM customers, such fees would exceed the revenue we have received from those PC OEM customers. In addition, if it were proven that we willfully infringed on a third party’s patents, we may be held liable for three times the amount of damages we would otherwise have to pay. In addition, intellectual property litigation may require us to:

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

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

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

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

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

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

Our industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights. We are subject to the ongoing risks of claims of violation of third party intellectual properties. In addition, we may find it necessary use litigation to enforce our intellectual property rights. Such litigation matters, such as the pending ITC investigation against Dell and Cyberlink, are very costly. Our management team could be required to devote so much time, effort and energy to the legal proceedings that the rest of our business may suffer. Until our litigation matters are resolved, we will continue to incur substantial legal expenses that vary with the level of activity in the legal proceedings. This level of activity is not within our control as we may need to respond to legal actions by the opposing parties or scheduling decisions by the judges. Consequently, we may find it difficult to predict our general and administrative expenses for any given quarter, which will impair our ability to forecast our results of operations for that quarter. In addition, the ‘788 patent at issue in these lawsuits is subject to reexamination in the Patent and Trademark office (“PTO”). As discussed in Part I, Item 3, Legal Proceedings, the patent reexamination remains uncertain. Despite the financial and management resources required in any lawsuit, our efforts to enforce our intellectual property rights may ultimately prove unsuccessful.

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

We derived 46% of our revenue for the year ended December 31, 2005 from sales of our WinDVD product, primarily to PC OEMs. We expect that revenue from sales of our WinDVD product to PC OEMs will continue to account for a significant portion of our revenue for the foreseeable future. Accordingly, our business will suffer if our existing PC OEM customers do not continue to incorporate our WinDVD product into the PCs they sell or if we are unable to obtain new PC OEM customers for our WinDVD product.

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

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

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

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

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

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

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

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

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

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

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

Our primary competitors are Adobe Systems Incorporated, Cyberlink Corporation, RealNetworks, Inc and Sonic Solutions, Inc. Additional competitors are likely to enter our industry in the future. We also face competition from the internal research and development departments of other software companies and PC and CE manufacturers, including some of our current customers. Some of our customers have the capability to integrate their operations vertically by developing their own software-based digital and audio solutions or by

acquiring our competitors or the rights to develop competitive products or technologies, which may allow these customers to reduce their purchases or cease purchasing from us completely. Operating system providers with an established customer base, such as Microsoft, already offer products in the digital video and audio software markets. Some video and audio capabilities are built directly into their operating systems or are offered as upgrades to those operating systems at no additional charge. During the second quarter of 2005, we granted to Microsoft, Inc. a worldwide right and license to use, copy, create derivative works of, publicly perform or display, import, broadcast, transmit, offer to sell, sell, have sold, rent, lease, lend, transfer or otherwise distribute certain key components of our DVD, audio and video decoding technology. If Microsoft or other operating system providers develop or license digital video and audio solutions that compete directly with ours and incorporate the solutions into their operating systems, our products could lose market share.

We expect our current competitors to introduce similar or improved products at lower prices, and we will need to do the same to remain competitive. For example, our revenues from Dell and HP have declined compared to prior periods, because we have lost portions of our business to our competitors. We also expect our revenue from HP to decrease significantly into 2006 because we have been informed by HP that they will not incorporate certain of our products into certain future HP notebook models. We may not be able to compete successfully against either current or future competitors with respect to new or improved products. We believe that competitive pressures may result in price reductions, reduced margins and our loss of market share.

Many of our current competitors and potential competitors have longer operating histories and significantly greater financial, technical, sales and marketing resources or greater name recognition than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, our competitors that have large market capitalizations or cash reserves are in a better position to acquire other companies in order to gain new technologies or products that may displace our products. Any of these potential acquisitions could give our competitors a strategic advantage. In addition, some of our current competitors and potential competitors have greater brand name recognition, a more extensive customer base, more developed distribution channels and broader product offerings than we do. These companies can use their broader customer base and product offerings, or adopt aggressive pricing policies, to gain market share. Increased competition in the market may result in price reductions, decreased customer orders, reduced profit margins and loss of market share, any of which could harm our business.

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

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

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

Our success depends on our ability to effectively manage the growth of our operations, including successfully integrating the operations of Ulead. We cannot be certain that our current cost structure is appropriate for the level of revenue that we generate. Furthermore, we expect to increase the scope of our operations in the future. To manage the growth of our operations and personnel, we will need to improve our

operational and financial systems, procedures and controls as well as hire additional qualified personnel. Our current and planned systems, procedures and controls may not be adequate to support our future operations and expected growth. Delays or problems associated with any improvement or expansion of our operational systems and controls could harm our relationships with customers, reputation and brand.

The loss of any of our strategic relationships would make it more difficult to design competitive products and keep pace with evolving industry standards, which could reduce demand for our products and harm our business.

We must design our software products to interoperate effectively with a variety of hardware and software products, including operating system software, graphics chips, DVD drives, PCs and PC chipsets. We depend on strategic relationships with software developers and manufacturers of these products, particularly Microsoft and Intel, to achieve our design objectives, to produce products that interoperate successfully, to provide us with information concerning customer preferences and evolving industry standards and trends, and to assist us in distributing our products to users. For example, we have been able to learn about future product lines being developed by some of our OEM customers in advance so that we were able to more efficiently design products that our customers, and the ultimate end users, find valuable. However, we generally do not have any agreements with these third parties to ensure that such information will be provided to us, and these relationships may not continue in the future. The loss of any one of these relationships could reduce demand for our products and harm our business.

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

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

We expect to continue to review opportunities to buy or make investments in other businesses, products or technologies that would enhance our technical capabilities, complement our current products or expand the breadth of our markets or that may otherwise offer growth opportunities.

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

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

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

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

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

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

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

We believe that establishing and strengthening the InterVideo brand is critical to achieving widespread acceptance of our products and to establishing key strategic relationships. The importance of brand recognition will increase as current and potential competitors enter the market with competing products. Our ability to promote and position our brand depends largely on the success of our marketing efforts and our ability to provide high quality products and customer support. These activities are expensive and we may not generate a

corresponding increase in customers or revenue to justify these costs. If we fail to establish and maintain our brand, or if our brand value is damaged or diluted, we may be unable to attract new customers and compete effectively. Historically, we have relied primarily on a limited direct sales force, supported by third-party manufacturers’ representatives and distributors, to sell our products. Our sales strategy focuses primarily on our corporate customers bundling our products with their hardware and distributing our products through their own distribution channels. We rely on our customers’ sales forces, marketing budgets and brand images to promote sales of bundled products. If our corporate customers fail to successfully market and sell their products bundled with our products, or if our relationship with our corporate customers are terminated, we may be unable to effectively market and distribute our products and services.

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

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

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

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

Our international operations accounted for 50% of our revenue for the year ended December 31, 2005 and 47% of our revenue for the year ended December 31, 2004, which may expose us to political, regulatory, economic, foreign exchange and operational risks.

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

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

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

We are an international company, and we derived approximately 50%, 47% and 44% of our 2005, 2004 and 2003 revenues from products sold in, and services performed from, our facilities located outside the United States, primarily in Asia and Europe. We also have substantial assets located outside of the United States, and a large portion of our sales and service revenues are denominated in foreign currencies. We recently augmented our international operations with the purchase of a majority interest in Ulead Systems, Inc., a publicly traded Taiwanese company. Our substantial international assets and operations subject us to the risk of adverse foreign currency fluctuations which could negatively impact our results of operations.

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

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

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

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

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

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

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

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

As of December 31, 2005, we had 19 premise leases. The table below lists our principal and active facilities:

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

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

On December 6, 2005, InterVideo Digital Technology Corporation, a subsidiary of InterVideo, filed a complaint with the U.S. International Trade Commission (ITC) under Section 337 of the Tariff Act of 1930 asserting that its U.S. Patent No. 6,765,788 is infringed by certain imported personal computer/consumer electronic convergent devices, components thereof, and products containing such devices and components of Dell, Inc. of Round Rock, Texas and WinBook Computer Company of Columbus, Ohio that contain technology and software supplied by Cyberlink Corporation of Taipei, Taiwan and Cyberlink.com Corporation of Fremont California. The complaint requests an exclusion order prohibiting continued importations into the United States of infringing products, including laptop computers of Dell and WinBook, as well as certain Cyberlink components of those computers, as well as a cease and desist order against certain commercial activities involving previously imported computers. On January 4, 2006, the ITC instituted an investigation into whether those companies are in violation of Section 337 and delegated the investigation to an administrative law judge. On February 1, 2006, the administrative law judge set April 4, 2007 as the target date for completion of the investigation and issuance of any remedial orders. On February 7, 2006, the ITC investigation was temporarily

stayed until April 19, 2006 in view of an on-going reexamination of the ‘788 patent by the U.S. Patent and Trademark Office. On February 24, 2006, the U.S Patent and Trademark Office issued a final office action rejecting all the claims in the ‘788 patent. On March 22, 2006, we met with the patent examiner to discuss the final rejection of the claims of the ‘788 patent. At this stage of the investigation, merits of the Company’s request for relief have not yet been determined.

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

Our common stock is traded on the Nasdaq National Market under the symbol “IVII.” On March 20, 2006, there were 33 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The following table sets forth the high and low sales price per share of our common stock during the last eight quarters.

In June, 2004, we announced a stock repurchase program pursuant to which we may purchase up to $10 million, or 700,000 shares, of our outstanding common stock from time to time. The duration of the repurchase program is open-ended. Under the program, we may purchase shares of common stock through open market transactions at prices deemed appropriate by management. In March, 2006, the Board of Directors of InterVideo approved to repurchase additional 35,900 shares under its stock repurchase program.

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

The following table summarizes the stock repurchase transactions that occurred during the year ended December 31, 2005.

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

Our Insider Trading Policy allows our directors, officers and other employees covered under the policy to establish, under limited circumstances contemplated by Rule 10b5-1 under the Exchange Act of 1934, written trading plans that permit programmatic trading of our common stock. On November 30, 2004, Randall Bambrough, our Chief Financial Officer and Honda Shing, our Chief Technology Officer, adopted Rule 10b5-1 trading plans that became effective on February 23, 2005. On August 26, 2005, Chinn Chin, our VP of Engineering, and Mike Ling, our Vice President of Sales and Marketing, adopted Rule 10b5-1 trading plans that became effective on November 17, 2005. We believe that additional directors, officers and employees may establish such trading plans in the future.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, information contained under the caption “Part I, Item 1. Business,” as well as information contained in “Part I, Item 1A. Risk Factors” in this Annual Report on Form 10-K (the “Annual Report”), contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. These risks, uncertainties and other factors include, among others, those identified under “Part I, Item 1A. Risk Factors.” Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements contained in this Annual Report include, among others, statements regarding (1) our acquisition of Ulead Systems, Inc. and the impact on our business, operations and financial condition, (2) research and development expenses, (3) sales and marketing expenses, (4) other operating and capital expenditures, (5) anticipated growth of operations, personnel and infrastructure, (6) exercise prices of future option grants, (7) the sufficiency of our capital resources, (8) future sources of revenue, (9) growth, decline and seasonality of revenue, (10) deferrals of revenue, (11) interest income, (12) competition and competitive pressures, (13) general market and economic outlook, (14) product sales and prices, (15) our efforts to improve internal controls, (16) settlement of intellectual property claims, (17) stock-based compensation expenses, (18) general and administrative expenses, and (19) the utility of certain products. The Company disclaims any obligation to update information in any forward-looking statement.

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

Historically, sales of our WinDVD product, a software DVD player for PCs, to PC OEMs have accounted for a substantial portion of our revenue. We derived 46% of our revenue for the year ended December 31, 2005 from sales of our WinDVD product, primarily to PC OEMs, as compared to 71% and 82% of our revenue in the years ended December 31, 2004 and December 31, 2003, respectively. We expect that revenue from sales of our WinDVD product to PC OEMs will continue to account for a substantial portion of our revenue. However, in the future, we expect to derive an increasing percentage of our revenue from sales of other products, including WinDVD Creator, InterVideo InstantON, InterVideo Home Theater, InterVideo DVD Copy, MediaOne and Linux-based versions of our DVD and DVR software designed for Linux-based PCs and CE devices, products sold through our retail and web-based sales channels as well as Ulead product offerings including DVD MovieFactory, VideoStudio and PhotoImpact.

Our software is generally bundled with products sold by PC OEMs. Our PC OEM customers include, among others, Hewlett-Packard, Toshiba, Microsoft, NEC, Softbank Commerce, Fujitsu, Fujitsu Siemens and IBM. Due to a concentration in the PC OEM industry, we derive a substantial portion of our revenue from a small number

of customers. For the year ended December 31, 2005, our two largest customers accounted for 35% of our revenue, with Hewlett-Packard accounting for 25% of our revenue and Toshiba accounting for 10% of our revenue. We expect that a small number of customers will continue to account for a majority of our revenue and gross profit for the foreseeable future, although the identity of those customers may change from period to period. Because there are only a limited number of potential new, large PC OEM customers for our WinDVD product, we must derive any future revenue growth principally from increased unit sales of WinDVD or other products to existing PC OEMs, CE manufacturers, PC peripherals manufacturers, smaller PC OEMs and to consumers through retail channels and our websites. Because some of these other revenue opportunities are more fragmented than the PC OEM market and will require more time and effort to penetrate, our revenue may decline or grow at a slower rate than in prior periods.

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

We have an internet commerce sales initiative that allows users to purchase products from our websites. We also continue to expand our retail channels. For the year ended December 31, 2005, we derived 24% of our revenue from web and retail sales. To increase our web and retail sales in the future, we intend to increase investments in associated selling and marketing programs. The gross profits associated with our products sold through our websites are generally higher than those associated with our OEM sales. Accordingly, fluctuations in our web and retail revenue as a percentage of total revenue will impact our gross profits.

We derive and expect to continue to derive a significant portion of our revenue from sales outside of the United States. Sales outside of the United States accounted for 50% of our revenue for the year ended December 31, 2005. Currently, most of our international sales are denominated in U.S. dollars. Therefore, a strengthening dollar could make our products less competitive in foreign markets. Our current distribution agreements shift foreign exchange risk to our foreign distributors. In the future, an increasing portion of our international revenue may be denominated in foreign currencies and we may use derivative instruments to hedge foreign exchange risk.

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

We base the discussions and analysis of our financial condition and results of operations upon our consolidated financial statements, which we prepare in accordance with United States generally accepted accounting principles. In preparing these financial statements, we must make estimates and judgments that affect

the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experiences and various other assumptions we believe are reasonable under the circumstances. Our actual results may differ from these estimates.

The accounting policies that most frequently require us to make estimates and judgments, and therefore are critical to understanding the results of our operations are:

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

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

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

End-user sales are made directly through our websites and third party websites. We generally do not offer specified upgrade rights to any class of customer, and there are no unspecified upgrade rights associated with

end-user sales. We recognize revenue from sales through these websites upon delivery of product and the receipt of payment by means of an authorized credit card. End users who purchase our software from our websites have limited rights of return for products for up to 14 days which we currently reserve for based upon historical return percentages.

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

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

Accounting for acquisitions requires management to make judgments and estimates in determining the purchase price, the fair value of the assets and liabilities acquired and merger-related and restructuring expenses. In recording the Ulead acquisition during 2005, significant judgment was required in estimating:

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

Due to the existence of the non-controlling interest in Ulead after this acquisition, our management’s review of the purchase accounting method under SFAS No. 141, Business Combinations, has resulted in a determination to apply the partial goodwill method to our acquisition of Ulead. The application of the partial goodwill method requires the Company to record its share of Ulead’s assets, liabilities and resulting intangible assets, including goodwill, at the proportionate share acquired based upon the purchase price.

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

On December 16, 2004, the Financial Accounting Standard Board (“FASB”)issued Statement No. 123 (revised 2004) (“SFAS No. 123R”), Share Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires companies to expense the fair value of employee stock options and similar awards, including purchases made under an Employee Stock Purchase Plan. SFAS No. 123R applies to all outstanding and unvested share-based payment awards at adoption.

As discussed in Part II, Item 8, Note 2, Stock-based compensation expense, we currently account for stock-based compensation related to employee stock-based compensation plans using the intrinsic value method prescribed by APB No. 25. Had we accounted for stock-based compensation related to employee stock-based compensation plans using the fair value method as prescribed by aforementioned SFAS No. 123, our stock-based compensation expenses would have been in the amounts of $5.0 million, $5.3 million and $2.6 million in fiscal years 2005, 2004 and 2003, respectively. As prescribed by SFAS 123(R) issued in December 2004, we will be required to recognize the compensation costs relating to share-based payment transactions in our financial statements, using the fair value method and recognize such costs in our consolidated statements of income, starting from January 1, 2006. We expect the adoption of SFAS 123(R) will increase our share-based compensation expense significantly and thus reduce our gross margin, net income and earnings per share due to the allocation of stock-based compensation costs to cost of revenue and operating expenses; however, we cannot accurately quantify the amount of such impact at this time.

Revenue: Revenue is primarily derived from fees paid under software licenses granted to PC OEMs, CE manufacturers, manufacturers of PC peripherals and other software and internet companies that incorporate our software into their own products for distribution, retail distributors, retail customers and directly to end users or businesses.

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

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

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

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

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

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

Other income, net: Other income, net consists primarily of interest earned on our cash and cash equivalent balances, rental income, foreign currency translation gains and losses and realized gains and losses on investments offset by other expenses.

Revenue increased 47% to $109.2 million for the year ended December 31, 2005 from $74.5 million for the year ended December 31, 2004 with Ulead accounting for 67% of the increase. OEM product sales increased 32% to $83.0 million for the year ended December 31, 2005 from $62.9 million for the year ended December 31, 2004 with Ulead accounting for 39% of the increase. Included in OEM revenues for the year ended December 31, 2005 was $8.0 million or 7% of total revenue from two previously announced agreements with Microsoft. Web and retail sales increased 128% to $26.2 million for the year ended December 31, 2005 from $11.5 million for the year ended December 31, 2004 with Ulead accounting for virtually all of the increase. OEM product sales accounted for 76% of total revenue for the year ended December 31, 2005 as compared to 85% of total revenue for the year ended December 31, 2004 of which Ulead accounted for 39% of the increase. We derived a substantial portion of our revenue from a small number of customers. For the year ended December 31, 2005, our two largest customers accounted for 35% of our revenue, with Hewlett-Packard accounting for 25% and Toshiba accounting for 10% of our revenue. In the year ended December 31, 2004, our two largest customers accounted for 38% of our revenue with Hewlett-Packard accounting for 25% and Toshiba accounting for 13% of our revenue. Sales outside the United States accounted for 50% of our revenue for the year ended December 31, 2005 as compared to 47% for the year ended December 31, 2004 of which Ulead accounted for virtually all of the revenue. Overall, WinDVD continues to represent a significant portion of our revenue, accounting for 46% of total revenue for the year ended December 31, 2005 compared to 71% of total revenue for the prior year. Additionally, increased sales of our non-WinDVD products which include WinDVD Creator, InterVideo Home Theater, InterVideo DVD Copy, InterVideo InstantON and Ulead products such as PhotoImpact, VideoStudio, and Ulead DVD MovieFactory accounted for 54% of revenue for the year ended December 31, 2005, as compared to 29% for the year ended December 31, 2004 with Ulead products accounting for 63% of the growth. We expect the primary drivers of future revenue growth to be Ulead products as well as InterVideo’s existing

products. As a result of this expected growth in Ulead and InterVideo’s other products, we expect that WinDVD will continue to decline as a % of total revenue.

Cost of revenue increased 21% to $40 million, or 37% of revenue, for the year ended December 31, 2005 from $32.9 million, or 44% of revenue, for the year ended December 31, 2004 with Ulead accounting for 83% of the increase. The increase in absolute dollars was primarily due to cost of revenue from Ulead operations, overall increased royalties resulting from increased unit sales and increased amortization of intangible assets in the amount of $897,000 due to the Ulead acquisition. The decrease as a percentage of revenue was due primarily to the lower per unit costs as a percentage of revenue on Ulead product sales offset somewhat by a decline in average selling prices of our WinDVD products by 4% from 2004 without a corresponding decrease in per unit royalty costs. Cost of revenue in absolute dollars will continue to be impacted by per-unit costs of royalties which are impacted by sales volume and product mix. We expect that cost of revenue as a percentage of revenue will be impacted by the increased sales of higher margin products including Ulead products, offset somewhat by continued price erosion in our WinDVD sales to our OEM customers.

Gross profits were 63% of revenue for the year ended December 31, 2005 as compared to 56% for the year ended December 31, 2004 with Ulead accounting for 63% of the increase. The increase reflects the sale of higher margin Ulead products and an increase in revenue from other products that typically have higher gross margins. The increase was offset by lower average selling prices of our WinDVD and other products to our major OEM customers without a proportional decrease in third party royalties and the amortization of intangible assets associated with the acquisition of Ulead, which we expect will remain constant over future periods. We expect that the continued integration of the Ulead products in the product mix and further shift in product mix toward higher margin products will continue to have a favorable impact on gross profits. However, increased revenue through OEM channels and from the sale of our products through other software and internet companies at lower margins will somewhat offset these higher margins. We expect gross profits as a % of revenue to remain in the 60% range for 2006, but this may vary based upon our product mix as well as possible continued erosion of our current product prices including, in particular, the price of our WinDVD product.

Research and development expenses were $20.2 million, or 19% of revenue, for the year ended December 31, 2005 and $10.0 million, or 14% of revenue, for the year ended December 31, 2004. The increase

in absolute dollars and as a percentage of revenue reflects an increase of $6.6 million associated with the Ulead research and development expense including payroll and payroll related expenses, $2.6 million in increased payroll and payroll related expenses mainly due to the Company’s Taiwan and China subsidiaries’ increased research and development headcount, increased travel expenses of $409,000 and other operating expenses of $734,000. These increases were partially offset up by a decrease in legal fees of $177,000.

Included in the Ulead research and development expense increase of $6.6 million for the year ended December 31, 2005 is $329,000 related to reduction in force activities in conjunction with the acquisition.

We believe that a significant level of research and development expenses will be required to remain competitive, and, as a result, we expect these expenses to increase in absolute dollars and such expenses may increase as a percentage of revenue in the future.

Sales and marketing expenses increased to $18.9 million, or 17% of revenue, for the year ended December 31, 2005 from $10.2 million, or 14% of revenue, for the year ended December 31, 2004. The increase is primarily due to the sales and marketing expenses of $8.0 million from Ulead as a result of the acquisition including $467,000 reduction in force activities. Other changes included an increase in payroll and payroll related expenses, outside consulting fees and travel expenses of $645,000 and an increase in value added/consumption taxes (“VAT”) of $677,000 offset by a decrease in commission paid to outside representatives and trade show expenses of $585,000. Included in the VAT expenses for the year ended December 31, 2005 is $700,000 for historical international Web sales and related interest and penalties.

We intend to actively market, sell and promote our products and take actions to further develop our brand name and retail presence. Therefore, we expect sales and marketing expenses to increase in absolute dollars and that such expenses may increase as a percentage of revenue in the future as we seek to further establish our retail presence.

General and administrative expenses increased to $16.2 million or 15% of revenue, for the year ended December 31, 2005 from $9.1 million, or 12% of revenue, for the year ended December 31, 2004. The increase is primarily due to the general and administrative expenses of $3.9 million from Ulead as a result of the acquisition including $287,000 in relation to reduction in force activities. Other changes included increases of $1.3 million of payroll and payroll related expenses primarily due to increased headcount in Taiwan operations, $1.6 million increase in audit, Sarbanes-Oxley compliance and other consulting fees and $379,000 in legal fees associated with the protection of our intellectual property positions offset by a decrease in other operating expenses of $521,000 primarily due to $780,000 in legal and administrative expenses associated with the pursuit of strategic transactions incurred during the year ended December 31, 2004.

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

Stock-based compensation expenses decreased to $76,000 for the year ended December 31, 2005 compared with $271,000 for the year ended December 31, 2004. The decrease in stock-based compensation was primarily due to the effects of accelerated amortization and forfeitures as a result of employee terminations.

During the nine months ended September 30, 2005, a $2.6 million charge to operating expenses was incurred, in connection with the Ulead acquisition, because we identified research projects in areas for which technological feasibility had not been established and no alternative future uses existed.

Net other income decreased from $910,000 for the year ended December 31, 2004 to a net loss of $1.0 million for the year ended December 31, 2005. This decrease is primarily due to the $672,000 long-term investment write-off of the Master Integrated Appliances Co., Ltd., net realized/unrealized currency loss of $2.0 million offset by a net increase in rental income, interest and other income of $712,000. Included in the net realized/unrealized currency loss of $2.0 million is an unrealized currency loss of $1.6 million triggered by depreciation of one particular foreign currency against U.S. dollar during the fiscal year in relation to an intercompany loan from the Company to one of its foreign subsidiaries in order to purchase Ulead shares as part of the Ulead acquisition process. Foreign currency risk is further discussed in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk.

We recorded a provision for income taxes for the period ended December 31, 2005 of $7.1 million on income before income taxes of $10.4 million, compared to a provision for income taxes of $4.1 million on

income before income taxes of $12.9 million for the period ended December 31, 2004. Our 2005 income tax expense differs from the expected provision derived by applying the applicable U.S. federal statutory rate to the income from operations primarily due to a combination of state taxes, foreign withholding taxes with no benefit, foreign losses with no benefit, the write off of purchased in-process research and development and certain other adjustments offset by release of certain foreign valuation allowances, various credits, export sales benefit and stock compensation benefit previously charged. Our 2004 income tax expense differs from the expected provision derived by applying the applicable U.S. federal statutory rate to the income from operations primarily due to the benefit from a release of remaining valuation allowance on certain deferred tax assets provided in prior years, previous un-benefited stock option compensation, current year research and experimental credits and export sales activities, offset by state income tax expenses, foreign income taxes net of foreign tax credits and foreign losses with no benefit. See Part II, Item 8, Note 6, Income Taxes, for further details.

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

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

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

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

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

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

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

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

We recorded a provision for income taxes for the period ended December 31, 2004 of $4.1 million on income before income taxes of $12.9 million, compared to a provision for income taxes of $4.2 million on income before income taxes of $12.0 million for the period ended December 31, 2003. Our 2004 income tax expense differs from the expected provision derived by applying the applicable U.S. federal statutory rate to the income from operations primarily due to the benefit from a release of remaining valuation allowance on certain

deferred tax assets provided in prior years, previous un-benefited stock option compensation, current year research and experimental credits and export sales activities, offset by state income tax expenses, foreign income taxes net of foreign tax credits and foreign losses with no benefit. Our 2003 income tax expense was the same as the expected provision derived by applying the applicable U.S. federal statutory rate to the income from operations after taking into consideration non-deductible amortization of deferred compensation and state income tax expenses, offset by benefits from research and experimental credits, export sales activities and other credits.

As of December 31, 2005, we had cash, cash equivalents and short-term investments of $75.2 million representing 56% of our total assets, compared to $74.6 million or 73% of total assets, as of December 31, 2004. Our cash and cash equivalents are highly liquid investments with an original maturity of 90 days or less at the date of purchase and totaled $31.2 million at December 31, 2005 and $22.6 million at December 31, 2004. Short-term investments consist principally of United States Treasury obligations and direct obligations of the U.S. Government agencies, state and municipal notes/bonds, corporate bonds, auction rate securities, corporate securities and mutual funds. As discussed in more detail in Note 4 of the Notes to the Condensed Consolidated Financial Statements included in Part II, Item 8, Short-term investments, of this Form 10-K, certain auction rate securities have been reclassified from cash and cash equivalents to short-term investments as of December 31, 2004 in order to conform to the 2005 presentation which has affected the cash balance as of 2004 as well as net cash flow used in investing activities.

Net cash provided by operating activities in 2005 was $12.2 million. Net income of $3.6 million was adjusted for non-cash charges for unrealized currency adjustments of $1.7 million, depreciation and amortization of $2.7 million, non-cash investment loss of $823,000, the write-off of acquired in-process research and development of $2.6 million, provision for deferred taxes of $75,000, tax benefits from stock option transactions of $650,000, provision for doubtful accounts of $372,000 and other net non-cash credits totaling $46,000 including a credit of $284,000 for minority interests in losses of subsidiary. Additionally, cash provided from operating activities was impacted by increases in accounts payable of $226,000, accrued liabilities and tax payable of $757,000 and deferred revenue of $700,000. These amounts were offset by increases in accounts receivable of $1.7 million and prepaid expenses and other current and long term assets of $276,000. The adjustment for depreciation and amortization includes $902,000 for amortization of intangible assets arising primarily as a result of the Ulead acquisition. The unrealized currency adjustment of $1.7 million was primarily due to an exchange loss triggered by depreciation of one particular foreign currency against the U.S. dollar during the fiscal year related to an intercompany loan agreement with one of our subsidiaries for purposes of acquiring Ulead shares The non-cash investment loss of $823,000 includes a $672,000 write-off of a long term investment. The write-off of acquired in-process research and development represents a charge to operating expenses in conjunction with the Ulead acquisition whereby we identified research projects in areas for which technological feasibility had not been established and no alternative future uses existed. The increase in accounts receivable is primarily due to the Microsoft outstanding invoice as of December 31, 2005, offset by the timing of other cash collections in the normal course of business. The increase in deferred revenue is primarily due to increased Ulead sales activity since the acquisition with the revenue deferred due to specified upgrades and PCS for the undelivered elements prior to December 31, 2005. The increase in accrued liabilities and income taxes payable includes an increase in income taxes payable of $1.2 million due to a higher effective tax rate for 2005 offset by a decrease in royalty and cost accruals of $467,000.

Net cash provided by operating activities in 2004 was $14.5 million, primarily comprised of $8.8 million of net income adjusted for non-cash charges for depreciation and amortization of $1.3 million, deferred taxes of $526,000, tax benefits derived from stock option activity of $1.2 million, stock-based compensation of $271,000 and other non-cash charges and credits, a net increase in accounts payable, accrued liabilities and taxes payable of $2.4 million

and an increase in deferred revenue of $547,000, offset by increases in accounts receivable, prepaid expenses and other assets of $624.000. The non-cash adjustment for tax benefits derived from stock option activity results primarily from disqualified disposition of incentive stock option and non-qualified stock option exercises. The net increase in accounts payable, accrued liabilities and taxes payable is primarily due to increases in accrued license royalties of $1.4 million as a result of increased unit shipments as well as an increase in the per unit cost of these royalties, increases in accrued payroll and bonuses of $1.1 million due to increased headcount and increases in accruals for outside consulting and external audit fees of $600,000 largely due to Sarbanes-Oxley Section 404 compliance efforts offset by a $1.2 million decrease in taxes payable due to the lower effective tax rate. The increase in deferred revenue is primarily due to growth in retail sales in North America and Europe for which revenue with certain customers has been deferred until evidence of sell-through to the end user is obtained. These increases were partially offset by the recognition of previously deferred revenue as a result of changes in certain contractual arrangements.

Net cash used in investing activities was $1.6 million in 2005, primarily due to proceeds from the sale and maturities of short-term investments in the amount of $55.7 million, net of purchases of short-term investments in the amount of $33.4 million. This amount was offset by the use of $22.7 million, net of $13.6 million in cash acquired, to execute the Ulead tender offer. Additionally, we used $1.5 million for the purchase of property and equipment.

Net cash used in investing activities was $38.2 million in 2004, which included the purchase of property and equipment of $1.4 million including the implementation of our new ERP system and expanded operations in Asia and net purchases of short-term investments of $29.3 million. Additionally, we invested $1.7 million in two private companies in Taiwan and invested $5.7 million for the acquisition of shares of common stock of Ulead.

Net cash used in financing activities in 2005 was $1.6 million as a result of proceeds from the issuance of common stock under our stock option and employee stock purchase plans of $3.4 million, including $979,000 attributable to Ulead stock plan, and proceeds from the repayment of employee notes receivables of $402,000 offset by the use of $5.5 million for the repurchase of common stock.

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

Starting in fiscal year 2006, in accordance with SFAS 123(R), a part of the tax benefit related to share-based payments will be classified as cash flows from financing activities, instead of cash flows from operating activities. As a result, our cash flows from operating activities are expected to decrease, offset by an increase in cash flows from financing activities.

We anticipate our operating expenses will grow in absolute dollars and in line with total revenue for the foreseeable future, and we intend to fund our operating expenses through cash flows from operations. We currently have no significant commitments for capital expenditures, but we expect to spend approximately $2 to $3 million on capital expenditures in 2006, which includes the upgrading and expansion of our world-wide facilities. We anticipate that we will increase our capital expenditures consistent with our anticipated growth in personnel and infrastructure, including facilities and systems. We have future lease commitments for buildings under non-cancelable operating leases through 2013. We have no other debt obligations.

We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We have used a total of $42.8 million to acquire a controlling interest in Ulead, including $32.6 million in April 2005, and we may continue to spend more cash to acquire additional shares of Ulead or to fund other acquisition activities. To the extent that our existing sources of cash and cash flow from operations are not sufficient to fund our activities, we

will need to raise additional funds. If we raise funds through debt financing, we will have to pay interest and may be subject to restrictive covenants, which could limit our ability to take advantage of future opportunities or respond to competitive pressures or unanticipated industry changes. If we raise funds through an equity financing, it may have a dilutive effect on our existing stockholders. Additional financing may not be available when needed and, even if such financing is available, it may not be available on terms acceptable to us. In addition, although we have no present understandings, commitments or agreements with respect to any acquisitions of other businesses, services, products or technologies, we may from time to time evaluate potential acquisitions. These acquisitions may increase our capital requirements and reduce shareholders’ percentage ownership in us.

We lease certain of our facilities under non-cancelable operating leases, which expire at various dates through 2013. Some of these facility lease agreements generally provide base rental rates which increase at various times during the terms of the leases and also provide for renewal options at fair market rental value.

Total operating lease expense, including month-to-month rentals as well as future minimum commitments under operating leases are presented as follows (in thousands):

We generally make purchases under cancelable purchase orders and do not enter into long term supply agreements. We have no contractual obligations or commercial commitments that are not already accrued for in our financial statements.

As of December 31, 2005, we had no off balance sheet arrangements as defined in Item 303(a) (4) of the Securities and Exchange Commission’s Regulation S-K.

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

To date, most of our revenue has been denominated in U.S. dollars. The acquisition of Ulead increased our international sales and increased our exposures to foreign exchange rate fluctuations. Although a majority of sales are currently denominated in U.S. dollars, portions of our revenue and operating expenses are denominated in foreign currencies. Accordingly, our operation results are affected by exchange rate fluctuations between the U.S. dollars and those foreign currencies. Any future adverse change in those currencies against the U.S. dollar could negatively impact our operating results by decreasing our net income which is measured in U.S. dollars. As of December 31, 2005, the potential decrease in revenue and net assets primarily from Ulead operations, based

on a hypothetical 10% adverse change in foreign currency exchange rates would be $2 million and $4.6 million, respectively. We do not hedge operating translation risks because cash flows from international operations are generally reinvested locally.

In addition, as of December 31, 2005, the Company has an intercompany loan arrangement denominated in foreign currency with one of its subsidiaries. The Company could incur unrealized gains or losses on the loan as the value of the particular foreign currency appreciates or depreciates against U.S. dollars and recognize such gains or losses through cumulative translation adjustment in the stockholders’ equity. The potential loss in relation to the aforementioned loan as of December 31, 2005 would be $3.2 million based on a hypothetically 10% adverse change in foreign currency exchange rates.

The sensitivity analysis presented assumes a parallel shift in foreign currency exchange rates yet exchange rates rarely move in the same direction. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.

We do not currently engage in any hedging or other transactions intended to manage the risks relating to foreign currency exchange rate fluctuations, other than natural hedges that occur as a result of holding both assets and liabilities denominated in foreign currencies. We may, in the future, undertake hedging or other such transactions, should we determine that it is necessary to offset exchange rate risks.

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

We have audited the accompanying consolidated balance sheet of InterVideo, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the period then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of InterVideo, Inc. as of December 31, 2005, and the consolidated results of its operations and its cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the effectiveness of InterVideo, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 31, 2006, expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.

We have audited management’s assessment, included in the accompanying InterVideo, Inc. Management’s Report on Internal Control Over Financial Reporting, that InterVideo, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, because of the effect of the material weakness identified in management’s assessment, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). InterVideo, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment:

In our opinion, management’s assessment that InterVideo, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, InterVideo, Inc. has not maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The Company has excluded from its evaluation the internal controls over financial reporting for the results of operations and cash flows resulting from the acquisition of its controlling interest in Ulead Systems, Inc. (Ulead) on April 20, 2005. As of and for the period from April 20, 2005 through December 31, 2005, Ulead’s total assets and total revenues represented approximately 18% and 21%, respectively, of the Company’s consolidated total assets and total revenue for the year ended December 31, 2005. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the results of operations and cash flows resulting from the acquisition of the controlling interest in Ulead Systems, Inc. on April 20, 2005.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of InterVideo, Inc. as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the period then ended and our report dated March 31, 2006 expressed an unqualified opinion on those financial statements.

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

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

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

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

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

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

As discussed in further detail in Note 3, Acquisition of Ulead Systems, Inc. (“Ulead”), the Company acquired a controlling interest in Ulead on April 20, 2005 which has expanded the products of the Company to include PhotoImpact, VideoStudio, Ulead DVD MovieFactory, DVD Workshop and Media Studio Pro. The Company’s software is bundled with products sold by PC OEMs. The Company sells its products to PC OEMs, CE manufacturers and PC peripherals manufacturers worldwide. In addition, the Company sells products through retail channels and directly to consumers through its websites. InterVideo’s acquisition of Ulead has allowed the Company to expand these channels with a broader range of product offerings and the combined marketing efforts of the two companies. Ulead has business operations in Taiwan, Japan, Germany, the United States, China and the Philippines.

The accompanying condensed consolidated financial statements include the accounts of InterVideo and its majority and wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All international subsidiaries of the Company except for Ulead have established a month end cut-off period that is three working days prior to the end of any given month.

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for annual financial information and with the instructions to Form 10K and Article 5, Commercial and Industrial Companies, of Regulation S-X.

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

As discussed in more detail in Note 4, Short-term investments, auction rate securities are reclassified as short-term investments as of December 31, 2005. The corresponding amounts in the 2004 financial statements have been reclassified to correct an error in presentation.

Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every 7, 28 or 35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer. Interest paid during a given period is based upon the interest rate determined during the prior auction. Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided through the interest rate reset. Based on the Company’s ability either to liquidate the holdings or to roll the investment over to the next reset period, the Company had historically classified some or all of these instruments as cash and cash equivalents if the period between interest rate resets was 90 days or less.

The Company accounts for our marketable securities in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Such investments are classified as “available for sale” and are reported at fair value in the Company’s balance sheets. The short-term nature and structure, the frequency with which the interest rate resets, and the ability to sell auction rate securities at par and at our discretion indicates that such securities should more appropriately be classified as short-term investments with the intent of meeting the Company’s short-term working capital requirements.

Based upon the re-evaluation of these securities, the Company has classified the auction rate securities as short term investments. This resulted in a reclassification from cash and cash equivalents to short-term investments of $4.8 million on the December 31, 2004 consolidated balance sheets. In addition, purchases and sales of short-term investments included in the consolidated statements of cash flows have been revised to reflect the purchase and sale of auction rate securities during the periods presented. This resulted in net cash decrease in the change of cash and cash equivalent of $4.8 million and an increase in cash used in investing activities by the same amount for the year ended December 31, 2004. These reclassifications had no impact on the previously reported net income or cash flows from operations. The Company has no auction rate securities in 2003; accordingly, no applicable reclassification is required.

The functional currency of the Company’s subsidiaries is the local currency. Accordingly, all assets and liabilities are translated into U.S. dollars at the current exchange rate at the applicable balance sheet date. The effects of these translation adjustments are recorded in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Revenue and expenses are translated at the average exchange rate prevailing during the period and exchange gains (losses) arising from transactions denominated in a currency other than the functional currency of an entity are included in other income, net. We are exposed to the impact of changes in foreign currency exchange rates.

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

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

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

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

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

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

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

Below is a summary of the changes in the Company’s allowance for doubtful accounts for the years ended December 31, 2005, 2004 and 2003.

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

The Company accounts for goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets which requires that intangible assets with an indefinite life should not be amortized until their life is determined to be finite. SFAS No. 142 also requires that goodwill not be amortized but instead tested for impairment at least annually and more frequently upon the occurrence of certain are incurred.

The Company tests goodwill for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by SFAS No. 142. Consistent with the Company’s determination that it has only one operating segment, the Company has determined that it has only one reporting unit. Goodwill is tested for impairment annually, in the fourth quarter, in a two-step process. First, the Company determines if the carrying amount of its reporting unit exceeds the “fair value” of the reporting unit, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, the Company compares the “implied fair value” of the goodwill, as defined by SFAS No. 142, to its carrying amount to determine if there is an impairment loss. Since the fair value of the reporting unit exceeds its net book value as of December 31, 2005, there is no goodwill impairment for the year.

The Company accounts for intangible assets with finite lives in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. In accordance with SFAS 144, when events and circumstances warrant a review, the Company evaluates the carrying value of long-lived assets to be held and used. The carrying value of an asset is considered impaired when the anticipated undiscounted cash flow from such an asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds its fair value. Fair value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner except that fair values are reduced by the cost to dispose of such assets.

The Company from time to time acquires certain equity investments for the promotion of business and strategic objectives. Non-marketable equity investments are accounted for using the equity method if the Company has significant influence over operating and financial policies of the investee, or using the cost method if the Company cannot assert significant influence over the investee. Marketable equity investments are accounted for as available-for-sale securities with unrealized gains and losses included in other comprehensive income in equity. Such investments are also subjected to periodic impairment review. If there are no liquid markets to provide information for valuing such securities, the impairment analysis involves significant judgment on the part of management. In performing an impairment assessment, the Company considers the following factors, among others, in connection with the businesses in which investments have been made: the implicit valuation of the business indicated by recently completed financial statements and determine if there’s significant adverse change in company’s asset value or if there has been an accumulation of costs significantly in excess of

the investment amounts as well as the business’ current solvency. Should the Company determine that a decline in the securities’ fair value is considered to be other than temporary, a write-down is recorded in other income, net.

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

The Company recognizes revenue generated from these sales in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, under which revenue is recognized when evidence of an arrangement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectibility is probable. However, determining whether or not these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. Deferred revenue consists of amounts billed to or collected from customers for products and services that have not met the criteria for revenue recognition.

Under the Company’s revenue recognition policy for OEM customers, the Company recognizes revenue based on the evidence of products sold by our OEM customers to end customers or to the OEM’s sales channel partners. Under certain agreements where post contract support (“PCS”) is granted to OEM for a period greater than a year, revenue is recognized ratably over the shorter of the contractual PCS period or the estimated life of the product. Typically, the Company’s OEM customers do not have the right to claim a credit or refund for returns from an OEM’s sales channel partners or end customers back to the OEM. However, in the few instances where InterVideo has granted its OEM customers with the right to claim a refund or credit to a certain capped percentage of the contract amount, the Company defers revenue based on the contractual return cap until it is able to establish a reasonable returns estimate based on historical return activity, that is specific to the respective sales channel, product line or country.

The Company sells its products to retailers and retail distributors either on a consignment or non-consignment basis. For non-consignment sales, title of ownership passes to the distributors and for consignment, the Company retains title of ownership until the product is sold to the end users. Certain distributors and retailers have limited rights to return products that were purchased within the last six months. These distributors have no rights to product upgrades. The Company generally recognizes revenue, net of contractually obligated return rights and any additional required rebate or pricing reserves, upon completion of shipment to these distributors and retailers. Other distributors and retailers, primarily in the United States and Europe, have unlimited rights of return. The Company generally recognizes revenue upon receipt of evidence that the distributors and retailers have sold our products through to end users, less any required rebate or net of returns. Certain distributors and retailers of Ulead, primarily in Japan, have unlimited rights of return. For these customers, the Company has established a returns reserve based on a historical return rates.

End-user sales are made directly through the Company’s websites without upgrades. Websales revenue is recognized, net of returns, upon the delivery of the product and the receipt of payment by credit card.

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

Under SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” costs incurred in the research and development of software are expensed as incurred until technological feasibility has been established. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general marketability of the products are capitalized. The Company defines establishment of technological feasibility as the completion of a working model. The establishment of technological feasibility and the ongoing assessment of recoverability of these costs require considerable judgment by management. Because the period of time between development of a working model and the product’s general release is short, the Company generally views technological feasibility as the point in time that the software is released. Accordingly, the Company expenses software development costs as they incur.

Costs related to software acquired, developed or modified solely to meet our internal requirements and for which there are no substantive plans to market are capitalized in accordance with the provisions of AICPA Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Costs incurred after the preliminary planning stage of the project and after management has authorized and committed funds to the project are capitalized. Costs capitalized for computer software developed or obtained for internal use are included in Property and Equipment, Net on the Consolidated Balance Sheets.

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

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

The following are potential common shares not included in the denominator used in the dilutive net income per share calculation, because to do so would be antidilutive for the periods presented (in thousands):

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

The following table illustrates the effect on net income and net income per share had the Company applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation to employees:

The Company accounts for income taxes using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain.

Comprehensive income is the total of net income and all other non-owner changes in stockholders’ equity. The Company’s components of other comprehensive income are foreign currency translation adjustments and unrealized gain or loss on available-for-sale investments. Such amounts are excluded from net income and are reported in accumulated other comprehensive income in the accompanying condensed consolidated financial statements.

The company reclassified $295,000 in 2005 from unrealized holding gains and loss on marketable securities to realized losses included in Other income (expense) in the accompanying Consolidated Statements of Operations. The company has not recorded any realized gain and loss in 2004 and 2003 respectively.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs—an amendment of ARB No. 43, Inventory Pricing, to clarify the accounting for abnormal amounts of facility expense, freight, handling costs and wasted materials (spoilage) to require them to be recognized as current-period charges. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Adoption of this statement is not expected to have a material impact on the Company’s results of operations or financial condition.

In December 2004, the FASB issued two FASB Staff Positions (FSPs) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 that was signed into law on October 22, 2004. FSP SFAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, states that the manufacturers’ deduction provided for under this legislation should be accounted for as a special deduction instead of a tax rate change. The Company has analyzed and properly recorded this deduction in accordance with FSP SFAS 109-1. FSP SFAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, allows a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. The Company currently has no plans to repatriate foreign earnings.

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets—an amendment of APB 29, which amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar

productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Adoption of this statement is not expected to have a material impact on the Company’s results of operations or financial condition.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on alternative fair value models. The share-based compensation cost will be measured based on the fair value of the equity or liability instruments issued. This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R was originally effective for reporting periods that began after June 15, 2005. In April 2005, the SEC announced the adoption of a new rule allowing companies to implement SFAS No. 123R at the beginning of their next fiscal year that begins after June 15, 2005. Under SFAS No. 123 and APB 25, InterVideo currently discloses pro forma compensation expense quarterly and annually by calculating the stock option grants’ fair value using the Black-Scholes model. Upon adoption of SFAS No. 123R, pro forma disclosure will no longer be an alternative. InterVideo will begin to apply SFAS No. 123R using the most appropriate fair value model beginning January 1, 2006. Currently, the Company can not accurately estimate the financial impact of the adoption as such costs will fluctuate as the fair market value of our common stock fluctuates. However, the Company expects the adoption to have a significant adverse impact on its results of operations such as reducing the Company’s gross margin and net income due to the allocation of stock-based compensation costs to cost of revenue and operating expenses.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which will require entities that make a voluntary change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes APB 20, which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application”, which applies adjustments to prior periods as a result of the change of an accounting principle, and the “restatement” of financial statements to reflect the correction of an error. Under SFAS No. 154, if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. The Company believes the adoption of SFAS No. 154 will not have a material impact on its financial position, results of operations or cash flows.

On November 3, 2005, the FASB issued Financial Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-1-a (renamed as FSP Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments) which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The Company will adopt FSP FAS 115-1 and SFAS 124-1 as of January 1, 2006.

The Company has included the financial results of Ulead in the consolidated financial statements beginning April 20, 2005, the date the Company acquired a majority interest in Ulead (the “Acquisition Date”).

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

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

The fair value of intangible assets was based, in part, on a valuation completed by an independent third-party appraiser using both an income and a cost approach and estimates and assumptions provided by management when estimating the fair value. Their analysis was performed in accordance with SFAS No.141 and other appropriate accounting and valuation guidelines. The rates utilized to discount net cash flows to their present values were based on our weighted average cost of capital and the internal rate of return. The discount rates ranged from 25% to 50%. The following table sets forth the components of intangible assets associated with the acquisition on April 20, 2005:

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

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

In connection with the purchase price allocation, the Company has estimated the fair value of the support obligation to provide upgrades related to the deferred revenue assumed from Ulead in connection with the acquisition. The Company based its determination of the fair value of the obligation, in part, on a valuation completed by an independent third party appraiser using estimates and assumptions provided by management. The estimated fair value of the support obligation was determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligation plus a normal profit margin. The estimated costs to fulfill the support obligation were based on the historical direct costs related to providing the support services and costs associated with research and development. As a result, in allocating the acquisition purchase price, the Company recorded an adjustment to reduce the carrying value of Ulead’s April 20, 2005 deferred support revenue from $1.9 million to $806,000 which represents the Company’s estimate of the fair value of the support obligation assumed.

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

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

The Company accounts for investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. These investments are classified as available for sale, and are recorded

on the balance sheet at fair market value as of the balance sheet date with unrealized gains or losses reported as other comprehensive income (loss) in stockholders’ equity until realized. The Company classified auction rate securities as available-for-sale short-term investments. Auction rate securities are reported at cost, which approximates fair market value due to the interest rate reset feature of these securities. As such, no gains or losses related to these securities were realized during the years ended December 31, 2005, 2004 and 2003. See Note 2, Reclassification, for information regarding prior period reclassification of auction rate securities.

In accordance with FASB Staff Position Nos. SFAS 115-1 and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP SFAS 115-1”), the following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2005 (in thousands):

In 2004, the available-for-sale securities have been in unrealized loss position for less than one year. The unrealized losses on part of the Company’s investments in direct obligations of the U.S. Government agencies

and state municipal bonds were caused by rising interest rates. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because InterVideo has the ability to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2005. The contractual maturities of available-for-sale securities at December 31, 2005 ranged from 2006 to 2008 and at December 31, 2004 ranged from 2005 to 2007.

As of December 31, 2005, $19.6 million of land and building is classified as held for sale assets since it met the criteria of FASB SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. The land and building is owned by Ulead. Its board of directors has resolved to dispose of the building and has been actively pursuing a buyer to sell the asset. The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The sale is expected to take place within one year.

Depreciation expense for property and equipment was $1.5 million, $1.1 million, and $574,000 for the years ended December 31, 2005, 2004 and 2003 respectively.

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

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

The aggregate annual amortization of the purchased intangible assets for 2005 was $3.6 million including in-process research and development of $2.6 million acquired through the Ulead Acquisition. The annual amortization amount for 2004 was $200,000. The estimated amortization expense for each of the next four years from 2006 through 2009 is $1.3 million, $1.1 million for 2010 and $831,000 thereafter.

The Company has invested in the following privately-held companies in Taiwan: Appro Photoelectron Inc. and Master Integrated Appliances Co., Ltd. These investments have been accounted for under the equity method of accounting because the Company has significant influence over the investees. The Company records its proportionate share of the investees’ net income or loss on a one-quarter lag since it is not practical to obtain financial information from the investees prior to the issuance of the current quarter’s and annual financial statements.

As discussed in further detail in Note 3, InterVideo has included the financial results of Ulead in its consolidated financial statements beginning April 20, 2005, the date the Company acquired a majority interest in Ulead (the “Acquisition Date”) and consequently eliminated the Ulead available-for-sale securities from the long-term investment in 2005. Additionally, Ulead has invested in various non-marketable equity securities with its shareholding percentage less than 10% of each company. Ulead has no significant influence over the investees and accordingly uses the cost method to account for and disclose such investments in accordance with paragraph 18 of FSPs SFAS 115-1 and SFAS 124-1.

In performing an impairment assessment in accordance with EITF 03-1, the Company considered the following factors, among others, in connection with the businesses in which investments have been made: the implicit valuation of the business indicated by recently completed financial statements and determined if there is significant adverse change in company’s asset value or if there has been an accumulation of costs significantly in excess of the amount originally expected for investment as well as the business’ current solvency. During the quarter ended June 30, 2005, Master Integrated Appliances Co., Ltd. terminated their business operations and employees due to a lack of funding and, as a result, the Company assessed its equity investment in Master Integrated Appliances Co., Ltd. and determined there was an other-than temporary, or permanent loss in the value of the carrying amount in the amount of $672,000. The investment balance of $672,000 was written off and charged against other income, net in the consolidated statement of operations during the quarter ended June 30, 2005. The Company has also performed an impairment analysis on the total non-marketable securities and charged an other-than temporary loss of $90,000, net of minority interest, against other income, net in the consolidated statement of operations during the quarter ended September 30, 2005.

The following table summaries the long-tem investments which are included in other assets in the consolidated balance sheet as of December 31, 2005 (amounts in thousands):

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

As of December 31, 2005, the Company had reserved shares of authorized but unissued common stock for the following (in thousands):

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

During the year ended December 31, 2005, $5.5 million of common stock, or 536,000 shares, were repurchased and retired.

During 1998, the Company established the 1998 Stock Option Plan covering employees, consultants and directors of the Company. Under the terms of the 1998 Stock Option Plan, as amended, incentive and nonstatutory stock options may be granted for up to 5,412,000 shares of the Company’s authorized but unissued common stock. Options issued under the 1998 Stock Option Plan generally have a maximum term of 10 years and vest over schedules determined by the Board of Directors. Options issued under the 1998 Stock Option Plan

to stockholders owning 10% of the total combined voting power of all classes of stock shall have a maximum term of five years from the date of grant.

Nonqualified stock options may be granted to employees, consultants and directors at no less than 85% of the fair market value of the common stock as determined by the Board of Directors at the date of grant. Incentive stock options may be granted only to employees at the fair market value of the common stock at the date of the grant. Stock options granted to a person owning more than 10% of the total combined voting power of all classes of stock of the Company must be granted with exercise prices equal to at least 110% of the fair market value of the common stock on the day of grant.

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

The 2003 Stock Plan authorized the grant of a total of 216,000 shares of common stock plus (a) any shares that have been reserved but not issued under the 1998 Stock Option Plan as of the effective date of the IPO and (b) any shares returned to the 1998 Stock Option Plan on or after the effective date of the IPO as a result of termination of options or the repurchase of unvested restricted shares issued under the 1998 Stock Option Plan. In addition, the 2003 Stock Plan provides for annual increases in the number of shares available for issuance under the 2003 Stock Plan on the first day of each fiscal year, beginning with the fiscal year 2004, equal to the lesser of (i) 5% of the Company’s outstanding shares of common stock on the first day of the applicable fiscal year, (ii) 1,082,000 shares or (iii) another amount as the Board of Directors may determine. The administrator determines the exercise price of options granted under the 2003 Stock Plan, but with respect to nonstatutory stock options intended to qualify as “performance-based compensation” within the meaning of Section 162(m) and all incentive stock options, the exercise price must be at least equal to the fair market value of the Company’s common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns 10% of the voting power of all classes of the Company’s outstanding capital stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator determines the term of all other options. The terms of the 2003 Stock Plan allow the administrator to grant options at exercise prices that are below, equal to or above market.

The following is a summary of stock option activities for all the plans for the three years ended December 31, 2005 (in thousands, except per share amounts):

As of December, 2004 and 2003, options for 1,948,000 and 2,550,000 shares respectively, were exercisable at a weighted average price of $2.23 and $1.54 per share, respectively. The following table summarizes the stock options outstanding and exercisable as of December 31, 2005 (in thousands, except price per share amounts):

The weighted average fair value of options granted to employees in the three years ended December 31, 2005 is summarized in the following table, and were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

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

The Company has established the 2003 Employee Stock Purchase Plan (“ESPP”) after the IPO. The 2003 ESPP was adopted by the Board of Directors in January 2002 and the stockholders in April 2002, and was amended by the Board of Directors in January 2003.

A total of 216,000 shares of common stock were made available-for-sale under the 2003 ESPP. In addition, the plan provides for annual increases in the number of shares available for issuance under the plan on the first day of each fiscal year, beginning with the fiscal year 2004, equal to the lesser of (i) 1.5% of the outstanding shares of InterVideo’s common stock on the first day of the applicable fiscal year, (ii) 216,000 shares or (iii) another amount as the Board of Directors may determine.

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

The 2003 ESPP has an overlapping 24-month offering period and includes four 6-month purchase periods. Purchases are to be made twice a year, in the months of May and November. The plan permits participants to purchase common stock at 85% of the lower of the fair market value of common stock at the beginning of an offering period, or at the end of purchase period, through payroll deduction of up to 15% of their eligible compensation. If the fair market value of common stock at the end of a purchase period is less than the fair market value at the beginning of the offering period, participants will be withdrawn from the current offering period following their purchase of shares on the purchase date and will be automatically re-enrolled in a new offering period. Participants may end their participation at any time during an offering period and will be refunded their payroll deduction to date. The weighted average fair value of each purchase option granted for the year ended December 31, 2005 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

In connection with the grant of certain stock options to employees for the years ended December 31, 2005, 2004 and 2003, the Company recorded deferred stock compensation within stockholders’ equity of ($17,000), ($165,000) and ($171,000), respectively, representing forfeitures of stock compensation related to cancelled options in 2005, 2004 and 2003. Such amount is presented as a reduction of stockholders’ equity and is amortized over the vesting period of the applicable options using an accelerated method of amortization under FASB Interpretation No 28.

In March 2001, the Company granted a senior executive an option to purchase 162,000 shares of common stock. This option was early exercised with a promissory note at the time of grant, and the Company recorded the note receivable and as a reduction in stockholder’s equity. The note bears interest at 5.07% per annum and was fully paid on March 22, 2006. The note is secured by the underlying stock and is with full recourse. The Company records interest income as interest accrues on the promissory note. All interest is due upon maturity of the note. The shares issued are subject to a repurchase right at the option of the Company. The repurchase right lapses over a four-year period in accordance with the vesting terms of the original option. As of December 31, 2005 and 2004, 1,390 and 31,000 shares respectively, were still subject to repurchase by the Company.

In June 2001, the Company granted to each of two directors of the Company options to purchase 27,000 shares of common stock. These options were early exercised with promissory notes in December 2001. The notes bear interest at 5.07% per annum and become payable in full upon the earlier of December 11, 2006 or the first anniversary of the termination of services with the Company. The notes are secured by the underlying stock and are full recourse. The Company records interest income as interest accrues on the promissory notes. The shares issued are subject to a repurchase right at the option of the Company. The repurchase right lapses in accordance with the vesting terms of the original options. As of December 31, 2005 and 2004, 775 and 7,000 shares respectively, were still subject to repurchase by the Company. During the year ended December 31, 2004, one director repaid the promissory note amount in full.

Pursuant to the Amended and Restated Certificate of Incorporation filed June 17, 2003, each share of convertible preferred stock was convertible, at the option of the holder, into 0.54 shares of common stock. Upon completion of the Company’s IPO in July 2003, all convertible preferred stock was converted into common stock, totaling 6,948,000 shares of common stock.

The significant components of income tax expense (benefit) for the years ended December 31, 2005, 2004 and 2003 are as follows (in thousands):

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

As of December 31, 2005, the Company has U.S. foreign tax credit carryforwards of $3.8 million that expire starting 2006, research and experimentation credits in foreign jurisdictions of $7.9 million and net operating loss carryforwards of $3.5 million from its foreign operations.

SFAS No. 109, requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all positive and negative evidence needs to be considered, including the Company’s current and past performance, the market environments in which the Company operates, the utilization of past tax credits, length of carryback and carryforward periods, existing contracts that will result in future profits, as well as tax planning strategies implemented by the Company. The Company has provided valuation allowance against those deferred tax assets that do not meet the standards to be realized under SFAS No. 109, most of which relate to deferred tax assets from the Company’s foreign subsidiaries. The changes in valuation allowance from December 31, 2004 to December 31, 2005 and from December 31, 2003 to December 31, 2004 are an increase of $14.5 million and a decrease of $593,000, respectively.

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

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

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

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

As of December 31, 2005, future minimum commitments under operating leases are as follows (in thousands) and the Company does not have further material contractual obligations:

Total operating lease expense, including month-to-month rentals, was approximately $1.9 million, $745,000 and $924,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

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

During the year ended December 31, 2004, the Company invested $765,000 in Appro Photoelectron Inc., (“Appro Photoelectron”), one of the Company’s customers. As of December 31, 2004, the Company’s investment totaled 6.4% ownership interest in Appro Photoelectron. During the year ended December 31, 2004, the Company derived revenue from Appro Photoelectron in the normal course of business and all transactions were on an arm-length basis. In 2004, total revenue earned from Appro Photoelectron were $155,000 and there was no revenue earned in 2003 or 2005.

In March, 2006, the Ulead Board of Directors approved the treasury stock repurchase program pursuant to which it may purchase up to 5 million shares between March 13, 2006 and May 12, 2006. Under the program, Ulead could purchase shares through open market transactions at prices deemed appropriate by management. The potential repurchase action may change outstanding issued shares of Ulead and the percentage ownership by InterVideo, accordingly.

In March, 2006, the Board of Directors of InterVideo approved to repurchase additional 35,900 shares under its stock repurchase program.

A promissory note that the Company granted to a senior executive to purchase 162,000 shares of common stock was fully repaid on March 23, 2006.

On June 10, 2005, KPMG LLP informed us of its resignation as our independent registered public accounting firm effective as of that date.

In connection with the audits of the two fiscal years ended December 31, 2004, and the subsequent interim period through June 10, 2005, there were: (1) no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement, and (2) no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K, except that KPMG LLP advised us of three material weaknesses identified in management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004. Those material weaknesses were previously disclosed in our annual report on Form 10-K/A for the year ended December 31, 2004 and in the Form 8-K filed in connection with the resignation of KPMG LLP on June 16, 2005.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives. During the course of our evaluation, we identified a material weakness in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2005 due to the material weakness identified in Management’s Report on Internal Control over Financial Reporting, below.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the reliability, preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. We have excluded from our evaluation the internal control over financial reporting of Ulead Systems, Inc. (“Ulead”), which we acquired on April 20, 2005. As of and for the period from April 20, 2005 through December 31, 2005, total assets and total revenue subject to Ulead’s internal control over financial reporting represented 18% and 21% of the Company’s consolidated total assets and total revenue as of and for the year ended December 31, 2005.

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

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment of internal control over financial reporting, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.

Management identified a material weakness in our internal control over financial reporting as of December 31, 2005 related to our incorrect application of Statement of Financial Accounting Standards No. 141, “Business Combinations” resulting from the acquisition of a majority interest in Ulead Systems, Inc. The financial statements incorrectly included amortization of intangible assets attributable to the minority interest holders. Due to this error, on March 10, 2006, we restated the Company’s consolidated financial statements for the periods ended June 30, 2005, and September 30, 2005. The consolidated financial statements for the year ended December 31, 2005 included in Item 8 of this Annual Report on Form 10-K reflect the correction of this error.

As a result of the material weakness described above, management has concluded the Company did not maintain effective internal control over financial reporting as of December 31, 2005. Our independent registered public accounting firm has issued an auditor’s report on management’s assessment of our internal control over financial reporting as of December 31, 2005, which is included in this Annual Report on Form 10-K.

While we are not required to include in our management’s report on internal control over financial reporting an evaluation of the internal control over financial reporting of Ulead, management noted a material weakness in obtaining from Ulead timely and accurate financial results based on U.S. Generally-Accepted Accounting Principles (US GAAP). The material weakness in oversight of the Ulead financial reporting process result in more than a remote likelihood that a material misstatement of the financial statements that is more than inconsequential will not be prevented or detected on a timely basis by employees in the normal cause of their work.

During the first quarter of 2006 we have taken the following actions to remediate the material weakness described above:

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

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

The information required by this item concerning the Company’s directors, the executive officers, the audit committee, the audit committee financial expert, changes to the procedures by which security holders may recommend nominees and Section 16(a) beneficial ownership reporting compliance is incorporated by reference from the section captioned “Election of Directors” and “Executive Officers” contained in our Definitive Proxy Statement to be filed not later than 120 days following the close of the fiscal year (the “Definitive Proxy Statement”) or in an amendment to this Form 10-K.

The information required by this item regarding executive compensation is incorporated herein by reference from the section captioned “Compensation of Directors and Executive Officers” contained in our Definitive Proxy Statement or in an amendment to this Form 10-K.

The information required by this item regarding the Company’s equity compensation plan, beneficial ownership of the Company’s capital stock and changes in control is incorporated herein by reference from the sections captioned “Equity Compensation Plan Information,” “Security Ownership of Certain Beneficial Owners and Management,” and “Change-in-Control Agreements” contained in our Definitive Proxy Statement or in an amendment to this Form 10-K.

Information required by this item regarding certain relationships and related party transactions is incorporated herein by reference from the section entitled “Certain Relationships and Related Transactions” contained in our Definitive Proxy Statement or in an amendment to this Form 10-K or in an amendment to this Form 10-K.

The information required by this item regarding accounting fees and services and audit committee pre-approval policies is incorporated herein by reference from the report of the Audit Committee of the Board of Directors in our Definitive Proxy Statement.

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

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

(2) Index to Financial Statement Schedules. The following Consolidated Financial Statement Schedule of InterVideo, Inc. and its subsidiaries for each of the years ended December 31, 2005, 2004 and 2003 are filed as part of this Form 10-K:

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

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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2006.


INTERVIDEO, INC.

By:		/s/ Steve Ro
		Steve Ro
		President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steve Ro and Randall Bambrough, and each or any one of them, each with the power of substitution, his or her attorney-in-fact, to sign any amendments to this report, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


		Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	27
Item 3.	Legal Proceedings	27
Item 4.	Submission of Matters to a Vote of Security Holders	28
Part II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	29
Item 6.	Selected Financial Data	31
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 8.	Financial Statements and Supplementary Data	48
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	80
Item 9A.	Controls and Procedures	81
Item 9B.	Other Information	82
Part III
Item 10.	Directors and Executive Officers of the Registrant	83
Item 11.	Executive Compensation	83
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
Item 13.	Certain Relationships and Related Transactions	83
Item 14.	Principal Accountant Fees and Services	83
Part IV
Item 15.	Exhibits and Financial Statement Schedules	84
Signatures		85


Location	InterVideo	Ulead	Total
United States	83	10	93
International	390	320	710

Total employees	473	330	803

Department	United States	International	Total
Research and Development	38	467	505
Sales and Marketing	26	139	165
General & Administration	29	104	133

Total employees	93	710	803


Location	Primary Use	Square Feet	Date Lease Expires
Fremont, California	Corporate/Research and Development/Sales and Marketing	35,069	December 2010

Kanagawa, Japan	Sales and Marketing	3,417	April 2008

Shanghai, China	Research and Development/Sales and Marketing	16,258	August 2007

Taipei, Taiwan	Research and Development/Sales and Marketing	24,167	January 2009

Taipei, Taiwan	Ulead Corporate and InterVideo Research and Development/Sales and Marketing	51,000	July 2013

Bangalore, India	Research and Development/Sales and Marketing	5,500	July 2006

Kaarst, Germany	Sales and Marketing	4,455	July 2006


	Price Range *
	High	Low
Fiscal year 2005:
First Quarter ended March 31, 2005	13.96	10.57
Second Quarter ended June 30, 2005	16.61	9.50
Third Quarter ended September 30, 2005	16.10	9.41
Fourth Quarter ended December 31, 2005	11.25	9.06

Fiscal year 2004:
First Quarter ended March 31, 2004	15.00	9.81
Second Quarter ended June 30, 2004	13.90	10.49
Third Quarter ended September 30, 2004	12.50	10.42
Fourth Quarter ended December 31, 2004	13.23	10.63


	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced program	Maximum number of shares that may yet be purchased under the program
March 1, 2005 through March 31, 2005	61,500	$	10.18	61,500	—

August 1, 2005 through August 31, 2005	281,100	$	10.18	281,100	—

September 1, 2005 through September 30, 2005	32,500	$	9.55	32,500	—

November 1, 2005 through November 30, 2005	160,600	$	10.04	160,600	—


Large accelerated filer ¨		Accelerated filer x		Non-accelerated filer ¨


	Year Ended December 31,
(in thousands, except per share data)	2005 ⁽¹⁾		2004		2003 ⁽²⁾		2002			2001
Revenue	$	109,229	$	74,460	$	57,078	$	45,494		$	33,763
Cost of revenue		39,887		32,878		23,849		16,879			17,895
Gross profit		69,342		41,582		33,229		28,615			15,868
Income (loss) from operations		11,407		11,972		11,426		5,153			(8,298	)
Income (loss) before provision (benefit) for income taxes		10,398		12,882		11,989		5,320			(7,760	)
Provision (benefit) for income taxes		7,099		4,056		4,196		(2,409	)		924
Net income (loss)		3,583		8,826		7,793		7,729			(8,684	)
Net income (loss) per common share, basic	$	0.26	$	0.66	$	1.07	$	3.15		$	(4.61	)

Net income (loss) per common share, diluted	$	0.23	$	0.58	$	0.57	$	0.65		$	(4.61	)

Number of shares used in per share calculation (see Note 2):
Basic		13,932		13,409		7,273		2,456			1,885

Diluted		15,313		15,337		13,723		11,945			1,885


	December 31,
(in thousands)	2005 ⁽¹⁾		2004		2003 ⁽²⁾		2002		2001
Cash, cash equivalents and short-term investments	$	75,157	$	74,587	$	69,737	$	21,241	$	14,348
Working capital		88,401		64,521		63,760		15,684		3,955
Total assets		134,245		101,775		87,919		34,716		22,153
Total long-term liabilities		871		—		—		—		—
Total stockholders’ equity		86,732		83,213		72,416		22,441		8,467


	Year Ended December 31, 2005		% Change 2004 to 2005		Year Ended December 31, 2004
Cost of revenue (in thousands)	39,887		21	%	32,878
Percentage of total revenue	37	%			44	%


	Year Ended December 31, 2005		% Change 2004 to 2005	Year Ended December 31, 2004
In-process research and development (in thousands)	2,574		N/A	—
Percentage of total revenue	2	%		—	%


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


In the year ending December 31,
2006	$	2,332
2007		1,905
2008		1,545
2009		1,283
2010		1,290
Thereafter		2,377

	$	10,732


		Page
Report of Independent Registered Public Accounting Firm and Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting		49
Consolidated Balance Sheets		53
Consolidated Statements of Income		54
Consolidated Statements of Cash Flows		55
Consolidated Statements of Stockholders’ Equity and Comprehensive Income		56
Notes to Consolidated Financial Statements		57


	As of December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	31,169		$	22,566
Short-term investments		43,988			52,021
Accounts receivable, net of allowance for doubtful accounts of $746 and $215, respectively		12,939			5,660
Deferred tax assets		1,034			256
Prepaid expenses and other current assets		6,470			2,580
Held for sale assets		19,611			—

Total current assets		115,211			83,083
Property and equipment, net		3,414			2,606
Goodwill		1,018			1,018
Other purchased intangible assets		7,130			83
Deferred tax assets		3,965			5,446
Other assets		3,507			9,539

Total assets	$	134,245		$	101,775

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,219		$	1,098
Accrued liabilities		19,087			13,129
Income taxes payable		1,566			333
Deferred revenue		3,938			4,002

Total current liabilities		26,810			18,562

Long term liabilities:
Other long term liabilities		871			—
Minority interest		19,832			—

Stockholders’ equity:
Common stock, $0.001 par value: 150,000 shares authorized; 13,850 and 13,661 shares issued and outstanding, respectively		14			14
Additional paid-in capital		74,123			76,498
Notes receivable from stockholders		(456	)		(830	)
Deferred stock-based compensation		(2	)		(95	)
Accumulated other comprehensive income		2,965			1,121
Retained earnings		10,088			6,505

Total stockholders’ equity		86,732			83,213

Total liabilities and stockholders’ equity	$	134,245		$	101,775


	Convertible Preferred Stock					Common Stock				Additional Paid-in Capital			Notes Receivable from Stock- holders			Deferred Stock- based Compen- sation			Accumu- lated Other Compre- hensive Income/ (Loss)			Retained Earnings/ (Accum- ulated Deficit)			Total Stock- holders’ Equity			Compre- hensive Income
	Shares		Amount			Shares		Amount		Additional Paid-in Capital			Notes Receivable from Stock- holders			Deferred Stock- based Compen- sation			Accumu- lated Other Compre- hensive Income/ (Loss)			Retained Earnings/ (Accum- ulated Deficit)			Total Stock- holders’ Equity			Compre- hensive Income
BALANCE, December 31, 2002	12,839		$	13		2,644		$	3	$	35,197		$	(864	)	$	(1,614	)	$	(180	)	$	(10,114	)	$	22,441
Issuance of common stock in Initial Public Offering, net of offering cost of $4,713	—			—		3,220			3		40,364			—			—			—			—			40,367
Conversion of preferred stock to common stock	(12,839	)		(13	)	6,948			7		6			—			—			—			—			—
Issuance of common stock under stock option and stock purchase plans	—			—		158			—		199			—			—			—			—			199
Interest income on notes receivable from stockholders	—			—		—			—		—			(41	)		—			—			—			(41	)
Deferred stock-based compensation	—			—		—			—		(171	)		—			171			—			—			—
Amortization of deferred stock-based compensation expense	—			—		—			—		—			—			912			—			—			912
Tax benefits from stock options transactions	—			—		—			—		688			—			—			—			—			688
Foreign currency translation adjustment	—			—		—			—		—			—			—			83			—			83		$	83
Unrealized loss on available-for-sale investments, no tax	—			—		—			—		—			—			—			(26	)		—			(26	)		(26	)
Net income	—			—		—			—		—			—			—			—			7,793			7,793			7,793

BALANCE, December 31, 2003	—			—		12,970			13		76,283			(905	)		(531	)		(123	)		(2,321	)		72,416		$	7,850

Repurchase of common stock	—			—		(200	)		—		(2,596	)		—			—			—			—			(2,596	)
Issuance of common stock under stock option and stock purchase plans	—			—		891			1		1,755			—			—			—			—			1,756
Interest income on notes receivable from stockholders	—			—		—			—		—			(38	)		—			—			—			(38	)
Repayment of notes receivable from stockholders	—			—		—			—		—			113			—			—			—			113
Deferred stock-based compensation	—			—		—			—		(165	)		—			165			—			—			—
Amortization of deferred stock-based compensation expense	—			—		—			—		—			—			271			—			—			271
Tax benefits from stock options transactions	—			—		—			—		1,221			—			—			—			—			1,221
Foreign currency translation adjustment	—			—		—			—		—			—			—			30			—			30		$	30
Unrealized gain on available-for-sale investments, no tax	—			—		—			—		—			—			—			1,214			—			1,214			1,214
Net income	—			—		—			—		—			—			—			—			8,826			8,826			8,826

BALANCE, December 31, 2004	—			—		13,661			14		76,498			(830	)		(95	)		1,121			6,505			83,213		$	10,070

Repurchase of common stock	—			—		(536	)		—		(5,474	)		—			—			—			—			(5,474	)
Issuance of common stock under stock option and stock purchase plans	—			—		725					2,466			—			—			—			—			2,466
Interest income on notes receivable from stockholders	—			—		—			—		—			(28	)		—			—			—			(28	)
Repayment of notes receivable from stockholders	—			—		—			—		—			402			—			—			—			402
Deferred stock-based compensation	—			—		—			—		(17	)		—			17			—			—			—
Amortization of deferred stock-based compensation expense	—			—		—			—		—			—			76			—			—			76
Tax benefits from stock options transactions	—			—		—			—		650			—			—			—			—			650
Foreign currency translation adjustment	—			—		—			—		—			—			—			2,685			—			2,685		$	2,685
Unrealized loss on available-for-sale investments, no tax	—			—		—			—		—			—			—			(841	)		—			(841	)		(841	)
Net income	—			—		—			—		—			—			—			—			3,583			3,583			3,583

BALANCE, December 31, 2005	—		$	—		13,850		$	14	$	74,123		$	(456	)	$	(2	)	$	2,965		$	10,088		$	86,732		$	5,427


Allowance for Doubtful Accounts	Balance at beginning of the Year		Provisions		Write-offs			Balance at end of the Year
December 31, 2005	$	215	$	616	$	(85	)	$	746
December 31, 2004	$	254	$	46	$	(85	)	$	215
December 31, 2003	$	205	$	75	$	(26	)	$	254


(in thousands, except per share amounts)	Year ended December 31,
	2005			2004			2003
Net income, as reported	$	3,583		$	8,826		$	7,793
Add: Stock-based employee compensation expenses included in reported net income, net of related tax effects		76			46			912
Deduct: Total stock-based employee compensation expenses determined under fair value method, net of related tax effects		(5,007	)		(5,349	)		(2,570	)

Pro forma net income	$	(1,348	)	$	3,523		$	6,135

Net income per share
Basic – as reported	$	0.26		$	0.66		$	1.07

Basic – pro forma	$	(0.10	)	$	0.26		$	0.84

Diluted – as reported	$	0.23		$	0.58		$	0.57

Diluted – pro forma	$	(0.10	)	$	0.23		$	0.45


	Year ended December 31, 2005
	Foreign currency translation			Unrealized gain (loss) of available-for-sale investments			Accumulated other comprehensive income
Beginning balance	$	(49	)	$	1,169		$	1,120
Current year change		2,685			(841	)		1,844

Ending balance	$	2,636		$	328		$	2,964


Cash consideration	$	42,012
Estimated direct transaction costs		843

Total purchase price	$	42,855


Current assets	$	36,854
Property, plant and equipment		20,556
Intangible assets		7,942
In-process research and development		2,543
Other non-current assets		2,865

Total assets		70,760

Current liabilities		(6,895	)
Long term liabilities		(1,852	)
Minority interest		(19,158	)

Total liabilities and minority interest		(27,905	)

Net assets	$	42,855

Total purchase price		42,855


Intangible Assets (in thousands)	Fair Value		Accumulated Amortization			Net Book Value as of December 31, 2005		Useful Life
Existing technology – Photo, Video & DVD	$	3,804	$	(437	)	$	3,367	5&6 years
Customer contracts and related relationships		2,019		(153	)		1,866	8 years
Trade name		2,119		(222	)		1,897	6 years

Total intangible assets	$	7,942	$	(812	)	$	7,130


	12 months ended, December 31,
	2005		2004
Total revenue	$	118,644	$	113,134
Net income	$	2,643	$	1,602
Basic net income per share	$	0.19	$	0.12
Diluted net income per share	$	0.17	$	0.10


	As of December 31, 2005
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair market value
Available-for-sale securities:
U.S. government debt securities	$	4,001	$	—	$	(20	)	$	3,981
State and municipal notes/bonds		5,829		—		(16	)		5,813
Auction rate securities		16,850		—		—			16,850
Mutual fund securities		15,549		29		—			15,578
Corporate securities		508		1,258		—			1,766

Total short-term investments	$	42,737	$	1,287	$	(36	)	$	43,988


	As of December 31, 2004
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair market value
Available-for-sale securities:
U.S. government debt securities	$	22,799	$	—	$	(157	)	$	22,642
State and municipal notes/bonds		10,213		—		(28	)		10,185
Auction rate securities		16,950		—		—			16,950
Corporate bonds		1,500		—		—			1,500
Time deposit		744		—		—			744

Total short-term investments	$	52,206	$	—	$	(185	)	$	52,021


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Government debt securities	$	1,989	$	(12	)	$	1,992	$	(8	)	$	3,981	$	(20	)
State and municipal notes/bonds		5,813		(16	)		—		—			5,813		(16	)

Total	$	7,802	$	(28	)	$	1,992	$	(8	)	$	9,794	$	(36	)


		2005					2004
Name of the Investees	Country	Shareholding %		Carrying value of investment			Shareholding %		Carrying value of investment		Accounting Methods
Master Integrated Appliances Co., Ltd.	Taiwan	—		$	—		35	%	$	795	Equity method
Appro Photoelectron Inc.	Taiwan	6	%		843	%	6	%		825	Equity method
Ulead Systems, Inc.	Taiwan	—			—		12	%		7,061	Available-for-sale
Aggregate non-marketable equity securities	Various	various			918		—			—	Cost method

				$	1,761				$	8,681


	Shares Available for Grant		Option Activity		Option Activity Outside of the Plans		Total Outstanding Options		Weighted Average Exercise Price
December 31, 2002	807		3,129		32		3,161		$	2.11
Authorized	216		—		—		—			—
Options Granted	(186	)	186		—		186		$	13.57
Options Exercised	—		(149	)	—		(149	)	$	0.65
Options Cancelled	122		(122	)	—		(122	)	$	6.86

December 31, 2003	959		3,044		32		3,076		$	2.68
Authorized	648		—		—		—			—
Options Granted	(1,026	)	1,026		—		1,026		$	13.58
Options Exercised	—		(827	)	(32	)	(859	)	$	1.70
Options Cancelled	157		(157	)	—		(157	)	$	11.87

December 31, 2004	738		3,086		—		3,086		$	6.11
Authorized	683		—		—		—			—
Options Granted	(786	)	786		—		786		$	11.30
Options Exercised	—		(684	)	—		(684	)	$	3.11
Options Cancelled	197		(197	)	—		(197	)	$	12.30

December 31, 2005	832		2,991		—		2,991		$	7.75


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options Outstanding at December 31, 2005	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Options Exercisable as of December 31, 2005	Weighted Average Exercise Price
$ 0.09 – 0.09	779	3.20	$	0.09	779	$	0.09
0.46 – 0.51	135	3.74		0.50	135		0.50
3.70 – 7.39	432	5.24		5.41	423		5.39
9.24 – 12.00	665	9.08		10.29	117		11.13
12.20 – 12.50	83	8.86		12.39	9		12.28
12.80 – 16.99	897	8.20		14.31	342		14.30

$ 0.09 – 16.99	2,991	6.48	$	7.75	1,805	$	4.84


	Three months ended
	Dec 31, 2005			Sep 30, 2005			Jun 30, 2005			Mar 31, 2005			Dec 31, 2004			Sep 30, 2004			Jun 30, 2004			Mar 31, 2004
Revenue	$	30,717		$	29,002		$	27,606		$	21,904		$	20,425		$	18,510		$	16,704		$	18,821
Cost of revenue		10,367			9,654			10,694			9,172			8,930			8,295			7,719			7,934

Gross profit		20,350			19,348			16,912			12,732			11,495			10,215			8,985			10,887

Operating expenses:
Research and development		5,477			6,272			5,427			3,010			2,726			2,380			2,608			2,288
Sales and marketing		5,509			5,367			5,306			2,751			2,458			2,299			2,713			2,759
General and administrative		5,317			4,019			3,941			2,889			2,344			3,085			1,975			1,704
Acquired in-process research and development		—			—			2,574			—			—			—			—			—
Stock-based compensation		6			3			27			40			45			77			74			75

Total operating expenses		16,309			15,661			17,275			8,690			7,573			7,841			7,370			6,826

Income (loss) from operations		4,041			3,687			(363	)		4,042			3,922			2,374			1,615			4,061
Other income (loss), net		(1,128	)		831			(1,010	)		298			265			211			262			172

Income (loss) before income taxes		2,913			4,518			(1,373	)		4,340			4,187			2,585			1,877			4,233
Provision for income taxes		(2,462	)		(2,205	)		(761	)		(1,671	)		(404	)		(1,275	)		(747	)		(1,630	)
Minority interests		(236	)		224			296			—			—			—			—			—

Net income (loss)	$	215		$	2,537		$	(1,838	)	$	2,669		$	3,783		$	1,310		$	1,130		$	2,603

Net income per share
Basic	$	0.02		$	0.18		$	(0.13	)	$	0.19		$	0.28		$	0.10		$	0.08		$	0.20
Diluted	$	0.01		$	0.16		$	(0.13	)	$	0.17		$	0.25		$	0.09		$	0.07		$	0.17


		Form 10-K Page No.
Report of Independent Registered Public Accounting Firm		49
Consolidated Balance Sheets		53
Consolidated Statements of Income		54
Consolidated Statements of Cash Flows		55
Consolidated Statements of Stockholders’ Equity and Comprehensive Income		56
Notes to Consolidated Financial Statements		57


Signature	Title	Date

/s/ Steve Ro Steve Ro	Chairman, President and Chief Executive Officer (Principal Executive Officer)	March 31, 2006

/s/ Randall Bambrough Randall Bambrough	Chief Financial Officer (Principal Financial and Accounting Officer)	March 31, 2006

/s/ Joseph Liu Joseph Liu	Director	March 31, 2006

/s/ George Haber George Haber	Director	March 31, 2006

/s/ Joseph Zaelit Joseph Zaelit	Director	March 31, 2006

/s/ Henry Shaw Henry Shaw	Director	March 31, 2006


Exhibit Number		Description

2.1⁴		Tender Offer Filing and Tender Offer Circular.

3.1¹		Amended and Restated Certificate of Incorporation, as currently in effect.

3.2¹		Bylaws, as currently in effect.

10.1¹		Registrant’s 1998 Stock Option Plan and form of option agreement.

10.2¹		Registrant’s 2003 Stock Plan and form of option agreement.

10.3¹		Registrant’s 2003 Employee Stock Purchase Plan and form of subscription agreement.

10.4¹		Form of Directors and Officers’ Indemnification Agreement with Steve Ro, Randall Bambrough, Honda Shing, Chinn Chin, Raul Diaz, Mike Ling, Christine Wong, George Haber, Joseph Liu, Henry Shaw and Joseph Zaelit.

10.5¹		Investor Rights Agreement dated July 2, 1999, as amended, by and among the registrant and the parties who are signatories thereto.

10.6⁵⁺⁺		Dolby System License Agreement between the registrant and Dolby Laboratories Licensing Corporation dated May 20, 2004.

10.7⁶⁺⁺		DVD Playback Technology License Agreement with Microsoft Corporation dated June 28, 2005.

10.8⁵		Lease Agreement between the registrant and CarrAmerica Realty Corporation dated October 6, 2003.

10.9¹		Employment offer letter with Randall Bambrough.

10.10¹		Form of Nonstatutory Stock Option Agreement for grants to Joseph Liu and George Haber.

10.11¹		Nonstatutory Stock Option Agreement for Henry Shaw.

10.12¹		Form of Promissory Notes issued by George Haber, Joseph Liu and Randall Bambrough.

10.13¹		Common Stock Purchase Agreement with Honda Shing dated May 15, 1998.

10.14⁷		Management Bonus Plan.

10.15¹		Form of Change of Control Agreement with Steve Ro and Chinn Chin.

10.16¹⁺		Software License Agreement between the registrant and Hewlett-Packard Company, dated February 25, 2000, as amended.

10.17²		Offer Letter with Christine Wong.

10.18³		Stock Purchase Agreement dated as of March 12, 2005 among Strong Tops Limited and Strong Ace Limited and InterVideo Digital Technology Corp.

10.19³		Tender Agreement dated as of March 12, 2005 between Microtek International Inc. and InterVideo Digital Technology Corp.

10.20³		Tender Agreement dated as of March 12, 2005 between certain persons named in Schedule 1 of the Agreement and International Digital Technology Corp.

21.1		Subsidiaries of the registrant.

23.1		Consent of Grant Thornton LLP, independent registered public accounting firm.


Exhibit Number		Description
23.2		Consent of KPMG LLP, independent registered public accounting firm.

31.1		Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes–Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes–Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.