10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


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

for the quarterly period ended September 30, 2008


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

for the transition period from to

Commission File Number 0-22982

NAVARRE CORPORATION

(Exact name of registrant as specified in its charter)


Minnesota (State or other jurisdiction of incorporation or organization)		41-1704319 (IRS Employer Identification No.)

7400 49th Avenue North, New Hope, MN 55428
(Address of principal executive offices)

Registrant’s telephone number, including area code (763) 535-8333

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

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


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

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


Class		Outstanding at November 7, 2008

Common Stock, No Par Value		36,229,856 shares

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

NAVARRE CORPORATION

Consolidated Balance Sheets

(In thousands, except share amounts)


	September 30,			March 31,
	2008			2008
	(Unaudited)			(Note)
Assets:
Current assets:
Cash and cash equivalents	$	—		$	4,445
Marketable securities		1,211			1,506
Accounts receivable, less allowance for doubtful accounts and sales reserves of $15,432 at September 30, 2008 and $15,417 at March 31, 2008		94,689			76,806
Inventories		49,632			32,654
Prepaid expenses and other current assets		14,459			12,118
Income tax receivable		825			937
Deferred tax assets — current		9,401			9,100

Total current assets		170,217			137,566
Property and equipment, net of accumulated depreciation of $15,520 and $14,484, respectively		17,949			17,181
Assets held for sale, net of accumulated depreciation of $194 at March 31, 2008		—			1,428
Other assets:
Marketable securities		1,333			2,667
Goodwill		8,285			81,697
Intangible assets, net of amortization of $23,625 and $21,180, respectively		7,952			9,984
License fees, net of amortization of $18,104 and $19,595, respectively		26,578			20,515
Production costs, net of amortization of $9,064 and $7,439, respectively		9,216			7,316
Deferred tax assets — non-current		23,051			—
Other assets		4,224			5,108

Total assets	$	268,805		$	283,462


Liabilities and shareholders’ equity:
Current liabilities:
Note payable — line of credit	$	45,597		$	31,314
Note payable — short term		—			150
Capital lease obligation — short term		50			59
Accounts payable		120,432			92,199
Checks written in excess of cash balance		527			—
Deferred compensation		2,110			2,080
Accrued expenses		16,195			16,118

Total current liabilities		184,911			141,920
Long-term liabilities:
Note payable — long-term		—			9,594
Capital lease obligation — long-term		34			60
Deferred compensation		1,757			3,491
Deferred tax liabilities — non-current		—			3,106
Income taxes payable		1,059			880

Total liabilities		187,761			159,051
Commitments and contingencies (Note 20)
Shareholders’ equity:
Common stock, no par value:
Authorized shares — 100,000,000; issued and outstanding shares — 36,237,486 at September 30, 2008 and 36,227,886 at March 31, 2008		160,617			160,103
Accumulated deficit		(79,573	)		(35,692	)

Total shareholders’ equity		81,044			124,411

Total liabilities and shareholders’ equity	$	268,805		$	283,462

Note: The balance sheet at March 31, 2008 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements.

See accompanying notes to consolidated financial statements.

NAVARRE CORPORATION

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net sales	$	170,296		$	143,715		$	312,321		$	280,737
Cost of sales (exclusive of depreciation and amortization)		146,066			121,654			265,965			234,693

Gross profit		24,230			22,061			46,356			46,044
Operating expenses:
Selling and marketing		7,206			6,665			12,921			13,600
Distribution and warehousing		3,046			3,344			5,930			6,056
General and administrative		8,181			8,074			16,634			15,534
Bad debt expense		200			30			200			85
Depreciation and amortization		2,376			2,323			4,697			4,541
Goodwill impairment		73,412			—			73,412			—

Total operating expenses		94,421			20,436			113,794			39,816

Income (loss) from operations		(70,191	)		1,625			(67,438	)		6,228
Other income (expense):
Interest expense		(833	)		(1,405	)		(2,448	)		(3,079	)
Interest income		14			56			29			124
Other income (expense), net		(223	)		148			(321	)		371

Income from continuing operations before income tax		(71,233	)		424			(70,178	)		3,644
Income tax benefit (expense)		26,725			(202	)		26,297			(1,516	)

Net income (loss) from continuing operations		(44,508	)		222			(43,881	)		2,128
Discontinued operations, net of tax
Gain (loss) on sale of discontinued operations		—			(3	)		—			4,644
Loss from discontinued operations		—			(594	)		—			(1,703	)

Net income (loss)	$	(44,508	)	$	(375	)	$	(43,881	)	$	5,069


Basic earnings (loss) per common share:
Continuing operations	$	(1.23	)	$	.01		$	(1.21	)	$	.06
Discontinued operations		—			(.02	)		—			.08

Net income (loss)	$	(1.23	)	$	(.01	)	$	(1.21	)	$	.14

Diluted earnings (loss) per common share:
Continuing operations	$	(1.23	)	$	.01		$	(1.21	)	$	.06
Discontinued operations		—			(.02	)		—			.08

Net income (loss)	$	(1.23	)	$	(.01	)	$	(1.21	)	$	.14

Weighted average shares outstanding:
Basic		36,191			36,110			36,188			36,048
Diluted		36,191			36,303			36,188			36,289

See accompanying notes to consolidated financial statements.

NAVARRE CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended
	September 30,
	2008			2007
Operating activities:
Net income (loss)	$	(43,881	)	$	5,069
Adjustments to reconcile net income to net cash used in operating activities:
Loss from discontinued operations		—			1,703
Gain on sale of discontinued operations		—			(4,644	)
Depreciation and amortization		4,697			4,580
Amortization of license fees		1,776			2,747
Amortization of production costs		1,625			1,213
Write-off of debt acquisition costs		490			—
Goodwill impairment		73,412			—
Change in deferred revenue		617			242
Share-based compensation expense		501			567
Deferred income taxes		(26,458	)		619
Other		81			188
Changes in operating assets and liabilities:
Accounts receivable		(17,883	)		(13,468	)
Inventories		(16,978	)		(22,401	)
Prepaid expenses		(2,341	)		(1,926	)
Income taxes receivable		112			254
Other assets		487			696
Production costs		(3,525	)		(2,257	)
License fees		(7,839	)		(6,309	)
Accounts payable		28,260			23,870
Income taxes payable		179			540
Accrued expenses		(540	)		(861	)

Net cash used in operating activities		(7,208	)		(9,578	)
Investing activities:
Purchases of property and equipment		(3,020	)		(4,596	)
Purchases of intangible assets		(413	)		(717	)
Sale of marketable equity securities		1,654			—
Proceeds from sale of assets held for sale		1,353			—
Purchases of marketable equity securities		—			(4,000	)

Net cash used in investing activities		(426	)		(9,313	)
Financing activities:
Proceeds from note payable, line of credit		112,386			84,601
Payments on note payable, line of credit		(98,103	)		(80,508	)
Repayments of note payable		(9,744	)		(5,180	)
Payment of deferred compensation		(1,654	)		—
Checks written in excess of cash		527			6,057
Debt acquisition costs		(200	)		—
Other		(23	)		(123	)

Net cash provided by financing activities		3,189			4,847

Net decrease in cash from continuing operations		(4,445	)		(14,044	)
Discontinued operations:
Net cash provided by operating activities		—			6,578
Net cash provided by investing activities, proceeds from sale of discontinued operations		—			6,500

Net decrease in cash		(4,445	)		(966	)
Cash at beginning of period		4,445			966

Cash at end of period	$	—		$	—


Supplemental cash flow information:

Cash paid for (received from):
Interest	$	2,129		$	2,887
Income taxes, net of refunds		(90	)		468

See accompanying notes to consolidated financial statements.

NAVARRE CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 — Organization and Basis of Presentation

Navarre Corporation (the “Company” or “Navarre”), publishes and distributes physical and digital home entertainment and multimedia products, including PC software, DVD video, video games and accessories. The business is divided into two business segments — Publishing and Distribution. Through these segments, the Company maintains and leverages strong relationships throughout the publishing and distribution chain. The publishing business consists of Encore Software, Inc. (“Encore”), BCI Eclipse Company, LLC (“BCI”), and FUNimation Productions, Ltd. and animeOnline, Ltd. (together, “FUNimation”).

The accompanying unaudited consolidated financial statements of Navarre Corporation have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements.

All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Because of the seasonal nature of the Company’s business, the operating results and cash flows for the three and six months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in Navarre Corporation’s Annual Report on Form 10-K for the year ended March 31, 2008.

Certain prior year amounts have been reclassified to conform to the fiscal year 2009 presentation.

Basis of Consolidation

The consolidated financial statements include the accounts of Navarre Corporation and its wholly-owned subsidiaries (collectively referred to herein as the “Company”).

Revenue Recognition

Revenue on products shipped, including consigned products, is recognized when title and risk of loss transfers, delivery has occurred, the price to the buyer is determinable and collectability is reasonably assured. Service revenues are recognized upon delivery of the services. Service revenues represented less than 10% of total net sales for the three and six months ended September 30, 2008 and 2007. The Company, under specific conditions, permits its customers to return products. The Company records a reserve for sales returns and allowances against amounts due in order to reduce the net recognized receivables to the amounts the Company reasonably believes will be collected. These reserves are based on the application of the Company’s historical or anticipated gross profit percent against average sales returns, sales discounts percent against average gross sales and specific reserves for marketing programs.

The Company’s publishing business at times provides certain price protection, promotional monies, volume rebates and other incentives to customers. The Company records these amounts as reductions in revenue.

The Company’s distribution customers at times qualify for certain price protection benefits from the Company’s vendors. The Company serves as an intermediary to settle these amounts between vendors and customers. The Company accounts for these amounts as reductions of revenue with corresponding reductions in cost of sales.

FUNimation’s revenue is recognized upon meeting the recognition requirements of American Institute of Certified Public Accountants Statement of Position 00-2 (“SOP 00-2”), Accounting by Producers or Distributors of Films. Revenues from home video distribution are recognized, net of an allowance for estimated returns, in the period in which the product is available for sale by the Company’s customers (generally upon shipment to the customer and in the case of new releases, after “street date” restrictions lapse). Revenues from broadcast licensing and home video sublicensing are recognized when the programming is available to the licensee and other recognition requirements of SOP 00-2 are met. Revenues received in advance of availability are deferred until revenue recognition

requirements have been satisfied. Royalties on sales of licensed products are recognized in the period earned. In all instances, provisions for uncollectible amounts are provided for at the time of sale.

Recently Issued Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We will adopt FSP APB 14-1 beginning in the first quarter of fiscal 2010, and this standard must be applied on a retrospective basis. We are evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated financial position and results of operations.

Note 2 — Discontinued Operations

On May 31, 2007, the Company sold, to an unrelated third party, its wholly-owned subsidiary, Navarre Entertainment Media, Inc. (“NEM), which operated the Company’s independent music distribution activities. The Company has presented the independent music distribution business as discontinued operations. As part of this transaction, the Company recorded a gain in the first quarter of fiscal 2008 of $6.1 million ($4.6 million net of tax), which included severance and legal costs of $339,000 and other direct costs to sell of $842,000. The gain is included in “Gain on sale of discontinued operations” in the Consolidated Statements of Operations. This transaction divested the Company of all its independent music distribution activities.

The Company’s consolidated financial statements have been reclassified to segregate the assets, liabilities and operating results of the discontinued operations for all periods presented. Prior to reclassification, the discontinued operations were reported in the distribution operating segment. The summary of operating results from discontinued operations for the three and six months ended September 30, 2007 is as follows:


	Three Months			Six Months
	Ended			Ended
	September 30,			September 30,
	2007			2007
Net sales	$	18		$	5,088
Loss from discontinued operations, before income tax		(970	)		(2,835	)
Income tax benefit		376			1,132

Net loss from discontinued operations	$	(594	)	$	(1,703	)

No interest expense was allocated to the operating results of discontinued operations.

There were no assets or liabilities of discontinued operations as of September 30, 2008 and March 31, 2008.

Note 3 — Marketable Securities

Marketable securities at September 30, 2008 consist of government agency and corporate bonds and a money market fund. The Company classifies these securities as available-for-sale and records these at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from income and are reported as a separate component of shareholders’ equity until realized. A decline in the market value of any available-for-sale security below cost, that is deemed other than temporary, is charged to income, resulting in the establishment of a new cost basis for the security.

The fair value of securities is determined by quoted market prices. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in income and are derived using the specific identification method for determining the cost of the securities sold.

Available-for-sale securities consisted of the following (in thousands):


	As of September 30, 2008
			Gross		Gross
	Estimated fair		unrealized		unrealized
	value		holding gains		holding losses
Available-for-sale:
Government agency and corporate bonds	$	607	$	1	$	1
Money market fund		1,937		—		—

	$	2,544	$	1	$	1


	As of March 31, 2008
			Gross		Gross
	Estimated fair		unrealized		unrealized
	value		holding gains		holding losses
Available-for-sale:
Government agency and corporate bonds	$	410	$	—	$	—
Money market fund		3,763		—		—

	$	4,173	$	—	$	—

The marketable securities are held in a Rabbi trust which was established for the future payment of deferred compensation (see further discussion in Note 21) for a former Chief Executive Officer. The marketable securities are classified in the Consolidated Balance Sheets as current and non-current in accordance with the scheduled payout of the deferred compensation and are restricted to use only for the settlement of the deferred compensation liability. As of September 30, 2008, $1.2 million and $1.3 million were classified as current and non-current marketable securities, respectively. Contractual maturities of available-for-sale debt securities at September 30, 2008 ranged between February 2009 and June 2009.

Effective April 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. The adoption of SFAS 157 did not have a material impact on the Company’s financial condition or results of operations.

SFAS 157 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also describes three levels of inputs that may be used to measure fair value:

	•		Level 1 — quoted prices in active markets for identical assets and liabilities.

	•		Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.

	•		Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The Company classifies the investments in marketable securities as available-for sale. The marketable equity securities are measured at fair value using quoted market prices. They are classified using Level 1 inputs as they are traded in an active market for which closing prices are readily available.

In February 2008, the Financial Accounting Standards Board (FASB) issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company will adopt SFAS 157 for non-financial assets and non-financial liabilities on April 1, 2009, its anticipated effective date, and does not anticipate this adoption will have a material impact on the financial statements.

Effective April 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements

designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. We have adopted SFAS 159 and have elected not to measure any additional financial instruments and other items at fair value.

Note 4 — Share-Based Compensation

The Company has two equity compensation plans: the Navarre Corporation 1992 Stock Option Plan and the Navarre Corporation 2004 Stock Plan (collectively, “the Plans”). The 1992 Plan expired on July 1, 2006, and no further grants are allowed under this Plan, however, there are outstanding options. The 2004 Plan provides for equity awards, including stock options, restricted stock and restricted stock units. These Plans are described in detail in the Company’s Annual Report filed on Form 10-K for the fiscal year ended March 31, 2008.

Stock Options

Option activity for the Plans for the six months ended September 30, 2008 is summarized as follows:


						Weighted
				Weighted		average
				average		remaining		Aggregate
	Number of			exercise		contractual		intrinsic
	options			price		term		value
Options outstanding, beginning of period:		3,132,499		$	6.78
Granted		103,000			1.76
Exercised		(9,600	)		1.26
Canceled		(206,866	)		8.42

Options outstanding, end of period		3,019,033		$	6.50		5.6	$	—


Options exercisable, end of period		2,153,437		$	7.70		4.4	$	—


Shares available for future grant, end of period		1,822,167

The total intrinsic value of stock options exercised during the six months ended September 30, 2008 and 2007 was $5,000 and $536,000, respectively. The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $1.44 as of September 30, 2008, which theoretically could have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of September 30, 2008 and 2007 was zero and 300,000 options, respectively.

As of September 30, 2008, total compensation cost related to non-vested stock options not yet recognized was $1.1 million, which is expected to be recognized over the next 1.22 years on a weighted-average basis.

During the six months ended September 30, 2008 and 2007, the Company received cash from the exercise of stock options totaling $12,000 and $169,000, respectively. There was no excess tax benefit recorded for the tax deductions related to stock options during the six months ended September 30, 2008 and 2007.

Restricted Stock

Restricted stock granted to employees typically has a vesting period of three years and expense is recognized on a straight-line basis over the vesting period, or when the performance criteria have been met. The value of the restricted stock is established by the market price on the date of grant or if based on performance criteria, on the date it is determined the performance criteria will be met. Restricted stock awards vesting is based on service criteria or achievement of performance targets. All restricted stock awards are settled in shares of common stock.

A summary of the Company’s restricted stock activity as of September 30, 2008 and of changes during the six months ended September 30, 2008 is summarized as follows:


						Weighted
				Weighted		average
				average		remaining
				grant date		contractual
	Shares			fair value		term
Unvested, beginning of period:		171,917		$	3.02		9.34
Granted		—			—		—
Vested		—			—		—
Forfeited		(1,000	)		2.41		—

Unvested, end of period		170,917		$	3.02		8.83

The total fair value of shares vested during the six months ended September 30, 2008 and 2007 was zero and $188,000, respectively.

As of September 30, 2008 total compensation cost related to non-vested restricted stock awards not yet recognized was $334,000 which is expected to be recognized over the next 1.33 years on a weighted-average basis. There was no excess tax benefit recorded for the tax deductions related to restricted stock during the six months ended September 30, 2008 and 2007.

Restricted Stock — Performance Based

On April 1, 2006, the Company awarded restricted stock units to certain key employees. Receipt of the stock units is contingent upon the Company meeting a Total Shareholder Return (“TSR”) target relative to an external market condition and meeting the service condition. The restricted stock units’ calculated estimated fair value is based upon the closing market price on the last trading day preceding the date of award and is charged to earnings on a straight-line basis over the three year period. After vesting, the restricted stock units will be settled by the issuance of Company common stock certificates in exchange for the restricted stock units. Each participant was granted a base number of units. The units, as determined at the end of the performance year (fiscal 2007), will be issued at the end of the third year (fiscal 2009) if the Company’s average TSR target is achieved for the fiscal period 2007 through 2009. The total number of base units granted for fiscal 2007 was 66,000. The amount recorded for the six months ended September 30, 2008 and 2007 was a $25,000 recovery and $56,000 expense, respectively, based upon the number of units granted. During the second quarter of fiscal 2009 the Company adjusted the forfeiture rate and reduced stock based compensation expense by $75,000 based on actual terminations of recipients.

Share-Based Compensation Valuation and Expense Information

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the three and six months ended September 30, 2008 and 2007 were calculated using the following assumptions:


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Expected life (in years)		5.0			5.0			5.0			5.0
Expected volatility		64	%		64	%		64	%		67	%
Risk-free interest rate		2.87	%		4.07-4.57	%		2.65-2.87	%		4.07-5.02	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

Expected life uses historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. The Company believes this historical data is currently the best estimate of the expected term of a new option. The Company uses a weighted-average expected life for all awards and has identified one employee population. Expected volatility uses the Company stock’s historical volatility for the same period of time as the expected life. The Company has no reason to believe its future volatility will differ from the past. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant for the same period of time as the expected life. Expected dividend yield is zero, as the Company historically has not paid dividends.

Share-based compensation expense related to employee stock options, restricted stock and restricted stock units, net of estimated forfeitures, for the three and six months ended September 30, 2008 was $213,000 and $501,000, respectively and $279,000 and $567,000 for the three and six months ended September 30, 2007, respectively. These amounts are included in general and administrative expenses in the Consolidated Statements of Operations. No amount of share-based compensation was capitalized.

Note 5 — Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share:


	Three Months Ended					Six Months Ended
	September 30,					September 30,
(In thousands, except per share data)	2008			2007		2008			2007
Numerator:
Net income (loss) from continuing operations	$	(44,508	)	$	222	$	(43,881	)	$	2,128

Denominator:
Denominator for basic earnings per share—weighted-average shares		36,191			36,110		36,188			36,048
Dilutive securities: Employee stock options and warrants		—			193		—			241

Denominator for diluted earnings per share—adjusted weighted-average shares		36,191			36,303		36,188			36,289

Net earnings (loss) per share from continuing operations:
Basic earnings (loss) per share	$	(1.23	)	$	.01	$	(1.21	)	$	.06

Diluted earnings (loss) per share	$	(1.23	)	$	.01	$	(1.21	)	$	.06

Approximately 3.1 million and 3.2 million of the Company’s stock options and restricted stock awards were excluded from the calculation of diluted earnings per share for the three and six months ended September 30, 2008 since their inclusion would have been anti-dilutive. Share-based compensation awards of 2.8 million and 2.9 million shares for the three and six months ended September 30, 2007, respectively, were also excluded from the diluted earnings per share calculation as they were anti-dilutive.

In addition, the effect of the inclusion of warrants for the three and six months ended September 30, 2008 and 2007 would have been anti-dilutive. Approximately 1.6 million warrants were excluded for the three and six months ended September 30, 2008 and 2007, respectively because the exercise prices of the warrants was greater than the average price of the Company’s common stock and therefore their inclusion would have been anti-dilutive.

Note 6 — Shareholders’ Equity

The Company has 10,000,000 shares of preferred stock, no par value, which is authorized. No preferred shares are issued or outstanding.

The Company did not repurchase any shares during the three and six months ended September 30, 2008 and 2007.

Note 7 — Accounts Receivable

Accounts receivable consisted of the following (in thousands):


	September 30,		March 31,
	2008		2008
Trade receivables	$	106,021	$	87,801
Vendor receivables		3,008		2,575
Other receivables		1,092		1,847

		110,121		92,223
Less: allowance for doubtful accounts and sales discounts		5,291		6,067
Less: allowance for sales returns, net margin impact		10,141		9,350

Total	$	94,689	$	76,806

Note 8 — Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):


	September 30,		March 31,
	2008		2008
Prepaid royalties	$	13,628	$	11,297
Other		831		821

Total	$	14,459	$	12,118

Note 9— Inventories

Inventories, net of reserves, consisted of the following (in thousands):


	September 30,		March 31,
	2008		2008
Finished products	$	41,100	$	23,545
Consigned inventory		2,097		2,569
Raw materials		6,435		6,540

Total	$	49,632	$	32,654

Consigned inventory represents the Company’s inventory at customers where revenue recognition criteria have not been met.

Note 10 — License Fees

License fees consisted of the following (in thousands):


	September 30,		March 31,
	2008		2008
License fees	$	44,682	$	40,110
Less: accumulated amortization		18,104		19,595

Total	$	26,578	$	20,515

Amortization of license fees for the three and six months ended September 30, 2008 was $724,000 and $1.8 million, respectively and for the three and six months ended September 30, 2007 was $1.1 million and $2.7 million, respectively. These amounts have been included in royalty expense in cost of sales in the accompanying Consolidated Statements of Operations.

License fees represent advance license/royalty payments made to program suppliers for exclusive distribution rights. A program supplier’s share of distribution revenues (“participation/royalty cost”) is retained by the Company until the share equals the license fees paid to the program supplier plus recoupable production costs. Thereafter, any excess is paid to the program supplier.

License fees are amortized as recouped by the Company which equals participation/royalty costs earned by the program suppliers. Participation/royalty costs are accrued/expensed in the same ratio that current period revenue for a title or group of titles bear to the estimated remaining unrecognized ultimate revenue for that title, as defined by SOP 00-2. When estimates of total revenues and costs indicate that an individual title will result in an ultimate loss, an impairment charge is recognized to the extent that license fees and production costs exceed estimated fair value, based on cash flows, in the period when estimated.

Note 11 — Production Costs

Production costs consisted of the following (in thousands):


	September 30,		March 31,
	2008		2008
Production costs	$	18,280	$	14,755
Less: accumulated amortization		9,064		7,439

Total	$	9,216	$	7,316

Amortization of production costs for the three and six months ended September 30, 2008 was $844,000, and $1.6 million, respectively and for the three and six months ended September 30, 2007 was $632,000 and $1.2 million, respectively. These amounts have been included in cost of sales in the accompanying Consolidated Statements of Operations.

Production costs represent unamortized costs of films and television programs, which have been produced by the Company or for which the Company has acquired distribution rights. Costs of produced films and television programs include all production costs, which are expected to be recovered from future revenues. Amortization of production costs is determined based on the ratio that current revenue earned from the films and television programs bear to the ultimate future revenue, as defined by American Institute of Certified Public Accountants Statement of Position 00-2 (“SOP 00-2”), Accounting by Producers or Distributors of Films.

When estimates of total revenues and costs indicate that an individual title will result in an ultimate loss, an impairment charge is recognized to the extent that license fees and production costs exceed estimated fair value, based on discounted cash flows, in the period when estimated.

Note 12 — Property and Equipment

Property and equipment consisted of the following (in thousands):


	September 30,		March 31,
	2008		2008
Furniture and fixtures	$	1,342	$	1,332
Computer and office equipment		18,571		14,944
Warehouse equipment		9,604		9,564
Production equipment		1,272		917
Leasehold improvements		2,080		2,060
Construction in progress		600		2,848

Total		33,469		31,665
Less: accumulated depreciation and amortization		15,520		14,484

Net property and equipment	$	17,949	$	17,181

Note 13 — Assets Held for Sale

At March 31, 2008, the Company was in the market to sell real estate and related assets located in Decatur, Texas, due to the move of FUNimation’s inventory to the Minnesota distribution center. The assets remaining at March 31, 2008 were no longer being depreciated and were carried at their net book value as of the date of discontinued use as assets held for sale on the Consolidated Balance Sheets. In September 2008, the Company completed the sale of the real estate and related assets to an unrelated party for proceeds of $1,353,000. The Company recognized a loss of $48,000, net of costs paid by the purchaser at closing.

Note 14 — Goodwill and Intangible Assets

Goodwill

The Company recognizes the excess cost of an acquired entity over the net amount assigned to the fair value of the assets acquired and liabilities assumed as goodwill. The Company reviews goodwill for potential impairment annually for each reporting unit, or when events or changes in circumstances indicate that the carrying value of the goodwill might exceed its current fair value. Factors which may cause impairment include negative industry or economic trends and significant underperformance relative to historical or projected future operating results. The Company determines fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analysis. The amount of impairment loss would be recognized as the excess of the asset’s carrying value over its fair value.

In the second quarter of fiscal 2009, the Company concluded that indicators of potential impairment were present due to the sustained decline in the Company’s share price which resulted in the market capitalization of the Company being less than its book value. The Company conducted an impairment test during the second quarter of fiscal 2009 based on present facts and circumstances and its current business strategy in light of present industry and economic conditions, as well as taking into consideration future expectations.

Under SFAS No. 142, the measurement of impairment of goodwill consists of two steps. In the first step, the Company compares the fair value of each reporting unit to its carrying value. At the end of the second quarter, management completed a valuation of the fair value of its reporting units which incorporated existing market-based considerations as well as a discounted cash flow methodology based on current results and projections. Based on this evaluation, it was determined that the fair value of the Company’s FUNimation and BCI reporting units was less than their carrying value. Following this assessment, SFAS No. 142 requires the Company to perform a second step in order to determine the implied fair value of each reporting unit’s goodwill, as compared to carrying value. The activities in the second step include hypothetically valuing all of the tangible and intangible assets of the impaired reporting unit as if the reporting unit had been acquired in a business combination. A review of the goodwill was completed and considered in measuring the estimated impairment charge recorded during the second quarter of fiscal 2009 given present facts and circumstances. The estimates and assumptions used in making the assessment of the fair value are inherently subject to uncertainty. Accordingly, further impairment charges could be required during the third quarter of fiscal 2009 if facts and circumstances and analysis at that time indicate a further charge is appropriate. Any such further charge could be material.

Accordingly, at September 30, 2008, the Company recorded a non-cash goodwill impairment charge of $73.4 million. This charge had no impact on the Company’s compliance with the financial covenants in its credit agreement. Our publishing segment had a goodwill balance of $8.3 million and $81.7 million as of September 30, 2008 and March 31, 2008, respectively. We have no goodwill associated with our distribution segment.

Information regarding goodwill by reporting unit and changes in balances since year end is presented below:


	Publishing		Distribution		Total
Balance at March 31, 2008	$	81,697	$	3	$	81,697
Impairment charge		73,412		—		73,412

Balance at September 30, 2008	$	8,285	$	—	$	8,285

Intangible assets

Identifiable intangible assets, with zero residual value, are being amortized (except for the trademarks which have an indefinite life) over useful lives ranging from between three and seven and one half years and are as follows (in thousands):


	As of September 30, 2008
	Gross carrying		Accumulated
	amount		amortization		Net
Masters	$	9,861	$	7,621	$	2,240
License relationships		20,078		15,981		4,097
Domain name		70		23		47
Trademarks (not amortized)		1,568		—		1,568

	$	31,577	$	23,625	$	7,952


	As of March 31, 2008
	Gross carrying		Accumulated
	amount		amortization		Net
Masters	$	9,448	$	6,550	$	2,898
License relationships		20,078		14,612		5,466
Domain name		70		18		52
Other (not amortized)		1,568		—		1,568

	$	31,164	$	21,180	$	9,984

Aggregate amortization expense for the three and six months ended September 30, 2008 was $1.2 million and $2.4 million, respectively and for the three and six months ended September 30, 2007 was $900,000 and $2.2 million, respectively.

Based on the intangibles in service as of September 30, 2008, estimated future amortization expense is as follows (in thousands):


Remainder of fiscal 2009	$	2,428
2010		2,638
2011		754
2012		264
2013		303
Thereafter		—

Debt issuance costs

Debt issuance costs are amortized over the life of the related debt and are included in “Other assets”. Debt issuance costs totaled $739,000 and $1.2 million at September 30, 2008 and March 31, 2008, respectively. Accumulated amortization amounted to approximately $244,000 and $338,000 at September 30, 2008 and March 31, 2008, respectively. Amortization expense is included in interest expense in the accompanying Consolidated Statements of Operations. During fiscal year 2009, the Company wrote-off $490,000 in debt acquisition costs, which is included in interest expense, related to previous debt agreements.

Note 15 — Accrued Expenses

Accrued expenses consisted of the following (in thousands):


	September 30,		March 31,
	2008		2008
Compensation and benefits	$	4,208	$	3,818
Royalties		7,545		7,830
Rebates		1,958		1,955
Deferred revenue		738		121
Interest		215		495
Other		1,531		1,899

Total	$	16,195	$	16,118

Note 16 — Bank Financing and Debt

At March 31, 2008, the Company was a party to a credit agreement which provided for a senior secured three-year $95.0 million revolving credit facility (the “GE Facility”). The revolving facility was available for working capital and general corporate needs and was subject to a borrowing base requirement. The revolving facility was secured by a first priority security interest in all of the Company’s assets, as well as the capital stock of its subsidiary companies. At March 31, 2008 the Company had $31.3 million outstanding under this facility.

At March 31, 2008, the Company was also a party to a credit agreement which provided for a four-year $15.0 million Term Loan facility which was to expire on March 22, 2011. The Term Loan facility called for monthly installments of $12,500, annual excess cash flow payments and final payment of $9.4 million on March 22, 2011. The facility was secured by a second priority security interest in all of the assets of the Company. At March 31, 2008 the Company had $9.7 million outstanding on the Term Loan facility which was paid in full on June 12, 2008 in connection with the Third Amendment to the GE revolving facility.

On June 12, 2008, the Company entered into a Third Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the “Third Amendment”) with General Electric Capital Corporation (“GE”). The Third Amendment, among other things, revised the terms of the GE Facility as follows: (i) permitted the Company to pay off the remaining $9.7 million balance of the term loan facility with Monroe Capital Advisors, LLC; (ii) created a $6.0 million tranche of borrowings subject to interest at the index rate plus 6.25%, or LIBOR plus 7.5%; (iii) modified the interest rate payable in connection with borrowings to range from an index rate of 0.75% to 1.75%, or LIBOR plus 2.0% to 3.0%, depending upon borrowing availability during the prior fiscal quarter; (iv) extended the term of the GE Facility to March 22, 2012; (v) modified the prepayment penalty to 1.5% during the first year following the date of the Third Amendment, 1% during the second year following the date of the Third Amendment, and 0.5% during the third year following the date of the Third Amendment; and (vi) modified certain financial covenants as of March 31, 2008.

On October 30, 2008, the Company entered into a Fourth Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the “Fourth Amendment”) with GE. The Fourth Amendment revised the terms of the Fourth Amended and Restated Credit Agreement (the “GE Facility”) as follows: effective as of September 30, 2008, the Fourth Amendment (i) clarified that the calculation of “EBITDA” under the credit agreement to indicate that it will not be impacted by any non-cash charges to earnings related to goodwill impairment; and (ii) revised the definition of “Index Rate” to indicate that the interest rate for non-LIBOR borrowings will not be less than the LIBOR rate for an interest period of three months.

At September 30, 2008 the Company had $45.6 million outstanding related to the amended revolving credit facility and, based on the facility’s borrowing base and other requirements, excess availability of approximately $20.0 million. In association with the revolving credit facility, the Company also pays certain facility and agent fees. Additionally, the credit agreement requires the Company to pay a prepayment penalty of 1.5% of the outstanding balance. Interest under the revolving facility was at the index rate plus 1.5% and LIBOR plus 2.75% at September 30, 2008 (6.5% and 6.2%, respectively) and at the index rate plus .75% and LIBOR plus 2.00% at March 31, 2008 (6.0% and 4.6%, respectively) and is payable monthly. Interest under the Term Loan facility was at LIBOR plus 7.5% (10.6% at March 31, 2008).

Under the revolving credit facility the Company is required to meet certain financial and non-financial covenants. The financial covenants included a variety of financial metrics that were used to determine the Company’s overall financial stability and included limitations on the Company’s capital expenditures, a minimum ratio of EBITDA to fixed charges, minimum EBITDA, and a maximum of indebtedness to EBITDA and a borrowing base availability requirement. The Company was in compliance with all the covenants related to the revolving credit facility as of September 30, 2008.

Letters of Credit

The Company is party to letters of credit totaling $250,000 related to a vendor at both September 30, 2008 and March 31, 2008. In the Company’s past experience, no claims have been made against these financial instruments.

Note 17 — Private Placement Warrants

As of September 30, 2008 and March 31, 2008, the Company had 1,596,001 warrants outstanding related to a private placement completed March 21, 2006, which includes a warrant to purchase 171,000 shares issued by the Company to its agent in the private placement, Craig-Hallum Capital Group, LLC. The warrants, which were issued together with the common stock, have a term of five years, are exercisable at $4.50 per share, and provide the investors the option to require the Company to repurchase the warrants for a purchase price, payable in cash within five (5) business days after such request, equal to the Black-Scholes value of any unexercised warrant shares, but only if, while the warrants are outstanding, the Company initiates the following change in control transactions: (i) the Company effects any merger or consolidation, (ii) the Company effects any sale of all or substantially all of its assets, (iii) any tender offer or exchange offer is completed whereby holders of the Company’s common stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) the Company effects any reclassification of the Company’s common stock whereby it is effectively converted into or exchanged for other securities, cash or property. In addition, the Company has the right to require exercise of the warrants if, among other things, the volume weighted average price of the Company’s common stock exceeds $8.50 per share for each of 30 consecutive trading days.

Note 18 — Income Taxes

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”) on April 1, 2007. FIN 48 defines the threshold for recognizing the benefits of tax positions in the financial statements as “more-likely-than-not” to be sustained upon examination. The interpretation also provides guidance on the de-recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also requires expanded disclosure at the end of each annual reporting period including a tabular reconciliation of unrecognized tax benefits.

The adoption of FIN 48 resulted in no impact to retained earnings for the Company. At adoption, the Company had approximately $417,000 of gross unrecognized income tax benefits (“UTB’s”) as a result of the implementation of FIN 48 and approximately $327,000 of UTB’s, net of federal and state income tax benefits, related to various federal and state matters, that would impact the effective tax rate if recognized. The Company recognizes interest accrued related to UTB’s in the provision for income taxes. As of April 1, 2008, interest accrued was approximately $56,000, which was net of federal and state tax benefits and total UTB’s net of deferred federal and state tax benefits that would impact the effective tax rate if recognized, were $734,000. During the six months ended September 30, 2008 an additional $140,000 of UTB’s were accrued, which was net of $40,000 of deferred federal and state income tax benefits. As of September 30, 2008, interest accrued was $103,000 and total UTB’s, net of deferred federal and state income tax benefits were $874,000.

The Company’s federal income tax returns for tax years ending in 2004 through 2007 remain subject to examination by tax authorities. The Company files in numerous state jurisdictions with varying statues of limitations. The Company’s unrecognized state tax benefits are related to state returns that remain subject to examination by tax authorities from tax years ending in 2003 through 2008. The Company does not anticipate that the total unrecognized tax benefits will significantly change prior to March 31, 2009.

For the three months ended September 30, 2008 and 2007, the Company recorded income taxes from continuing operations of a benefit of $26.7 million and an expense of $202,000, respectively. The effective income tax rate for the three months ended September 30, 2008 was 37.5%, compared to 47.6% for the three months ended September 30, 2007. For the six months ended September 30, 2008 and 2007, the Company recorded income taxes from continuing operations of a benefit of $26.3 million and an expense of $1.5 million, respectively. The effective tax rate for the six months ended September 30, 2008 was 37.5%, compared to 41.6% for the six months ended September 30, 2007.

For the three months ended September 30, 2008 and 2007, the Company recorded income tax benefit from discontinued operations of zero and $377,000, respectively. The effective income tax rate for the three months ended September 30, 2008 was 0.0%, compared to 38.8% for the three months ended September 30, 2007. For the six months ended September 30, 2008 and 2007, the Company recorded income tax expense from discontinued operations of zero and $354,000, respectively. The effective income tax rate for the six months ended September 30, 2008 was 0.0%, compared to 10.8% for the six months ended September 30, 2007. The Company reversed its $1.0 million valuation allowance related to its capital loss carryforward in the first quarter of fiscal 2008. The sale of the Company’s discontinued operations resulted in a net capital gain, which allowed for the utilization of prior capital losses. The reversal of the valuation allowance is reflected in discontinued operations in the Consolidated Statements of Operations.

The Company’s overall effective tax rate, including both continuing and discontinued operations, was 37.5% for the three months ended September 30, 2008 compared to 31.8% for the same period last year. The Company’s overall effective tax rate was 37.5% for the six months ended September 30, 2008, compared to 26.1% for the same period last year.

It has been determined, based on expectations of future taxable income, that a valuation reserve for deferred tax assets is not required. Management has determined that it is more likely than not that the results of the Company’s future operations will generate sufficient taxable income to realize the deferred tax assets.

Note 19 — License and Distribution Agreement

The Company has a license and distribution agreement (“Agreement”) with a vendor that includes provisions creating minimum royalty fee obligations. The Company will incur royalty expense for the license fee payable, which is based on product sales for the year. License fee royalties were $1.0 million and $2.1 million for the three and six months ended September 30, 2008, respectively, and $900,000 and $2.4 million for the three and six months ended September 30, 2007, respectively, and are reflected in cost of sales in the Consolidated Statements of Operations. As of September 30, 2008 and March 31, 2008, $2.8 million and $2.4 million, respectively, unrecouped license fees paid are reflected in prepaid assets in the Consolidated Balance Sheets. These minimum royalty fees are non-refundable, but are calculated based on prior year product sales and are offset by royalties incurred in order to recoup the payments.

The Company monitors these prepaid assets for potential impairment based on sales activity of products provided to it under this Agreement.

Note 20 — Commitments and Contingencies

Litigation and Proceedings

In the normal course of business, the Company is involved in a number of litigation/arbitration and administrative/regulatory matters that, other than the matter described immediately below, are incidental to the operation of the Company’s business. Those proceedings generally include, among other things, various matters with regard to products distributed by the Company and the collection of accounts receivable owed to the Company. The Company does not currently believe that the resolution of any of those pending matters will have a material adverse effect on the Company’s financial position or liquidity, but an adverse decision in more than one of these matters could be material to the Company’s consolidated results of operations. Because of the preliminary status of the Company’s various legal proceedings, as well as the contingencies and uncertainties associated with these types of matters, it is difficult, if not impossible, to predict the exposure to the Company, if any.

SEC Investigation

On February 17, 2006, the Company received an inquiry from the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) requesting certain documents and information relating to the Company’s restatements of previously-issued financial statements, certain write-offs, reserve methodologies, and revenue recognition practices. In connection with this formal non-public investigation, the Company has cooperated fully with the SEC’s requests.

Note 21 — Related Party Transactions

Employment/Severance Agreements

The Company entered into an employment agreement with its former Chief Executive Officer (“CEO”) in 2001, which expired on March 31, 2007. Pursuant to the deferred compensation portion of this agreement, the Company agreed to pay over three years, beginning April 1, 2008, approximately $2.4 million plus interest at approximately 8% per annum. The Company expensed $78,000 and $159,000 for this obligation during the three and six months ended September 30, 2008, respectively and $124,000 and $245,000 during the three and six months ended September 30, 2007, respectively. At September 30, 2008 and March 31, 2008, $1.2 million and $1.6 million, respectively, had been accrued in the consolidated financial statements. The employment agreement also contains a deferred compensation component that was earned by the former CEO upon the stock price achieving certain targets, which may be forfeited in the event that he does not comply with certain non-compete obligations. In April 2007, the Company deposited $4.0 million into a Rabbi trust, under the required terms of the agreement. Beginning April 1, 2008, the Company began to pay this amount, plus interest at 8%, over three years. At September 30, 2008 and March 31, 2008, $2.7 million and $4.0 million, respectively, had been accrued in the consolidated financial statements.

The Company entered into a separation agreement with a former Chief Financial Officer (“CFO”) in fiscal 2004. The Company was required to pay approximately $597,000 over a period of four years beginning May 2004. The continued payout was contingent upon the individual complying with a non-compete agreement. This amount was accrued and expensed in fiscal year 2005. The Company paid zero and $22,000 during the three and six months ended September 30, 2008, respectively and $33,000 and $66,000 during the three and six months ended September 30, 2007, respectively. The Company has no further obligation under this agreement as of September 30, 2008.

Employment Agreement — FUNimation

In connection with the FUNimation acquisition, the Company entered into an employment agreement with a key FUNimation employee providing for his employment as President and Chief Executive Officer of FUNimation Productions, Ltd. (“the FUNimation CEO”). Among other items, the agreement provides the FUNimation CEO with the ability to earn two performance-based bonuses in the event that certain financial targets are met by the FUNimation business during the fiscal years ending March 31, 2006-2010. If the total earnings before interest and tax (“EBIT”) of the FUNimation business is in excess of $60.0 million during the period consisting of the fiscal years ending March 31, 2009 and 2010, the FUNimation CEO is entitled to receive a bonus payment in an amount equal to 5% of the EBIT that exceeds $60.0 million; however, this bonus payment shall not exceed $4.0 million. No amounts have been expensed or paid under this agreement as the targets have not been achieved.

Note 22 — Business Segments

The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance. On this basis, the Company has determined it has two reportable business segments: publishing and distribution.

Financial information by reportable business segment is included in the following summary (in thousands):


	Publishing			Distribution		Eliminations			Consolidated
Three months ended September 30, 2008
Net sales	$	28,794		$	158,458	$	(16,956	)	$	170,296
Income (loss) from operations *		(70,305	)		114		—			(70,191	)
Income (loss) from continuing operations, before income tax *		(71,404	)		171		—			(71,233	)
Depreciation and amortization expense		1,399			977		—			2,376
Capital expenditures		149			427		—			576
Total assets *	$	91,149		$	175,931	$	1,725		$	268,805


	Publishing		Distribution		Eliminations			Consolidated
Three months ended September 30, 2007
Net sales	$	27,043	$	133,391	$	(16,719	)	$	143,715
Income from operations		1,248		377		—			1,625
Income from continuing operations, before income tax		177		247		—			424
Depreciation and amortization expense		1,579		744		—			2,323
Capital expenditures		158		1,633		—			1,791
Total assets	$	174,921	$	264,362	$	(126,485	)	$	312,798


	Publishing			Distribution			Eliminations			Consolidated
Six months ended September 30, 2008
Net sales	$	56,212		$	291,553		$	(35,444	)	$	312,321
Income (loss) from operations *		(66,861	)		(577	)		—			(67,438	)
Income (loss) from continuing operations, before income tax *		(68,973	)		(1,205	)		—			(70,178	)
Depreciation and amortization expense		2,785			1,912			—			4,697
Capital expenditures		391			2,629			—			3,020
Total assets *	$	91,149		$	175,931		$	1,725		$	268,805


	Publishing		Distribution		Eliminations			Consolidated
Six months ended September 30, 2007
Net sales	$	56,666	$	257,281	$	(33,210	)	$	280,737
Income from operations		4,277		1,951		—			6,228
Income from continuing operations, before income tax		2,153		1,491		—			3,644
Depreciation and amortization expense		3,113		1,428		—			4,541
Capital expenditures		266		4,330		—			4,596
Total assets	$	174,921	$	264,362	$	(126,485	)	$	312,798


*		Includes a goodwill impairment charge during the second quarter of fiscal 2009 of $73.4 million. See Note 14.

Note 23 — Subsequent Event

Subsequent to the close of the quarter ended September 30, 2008, Circuit City Stores, Inc. filed Chapter 11 bankruptcy on November 10, 2008. The Company is evaluating the situation and its alternatives; however, the Company presently believes it has adequate reserves at September 30, 2008 to cover outstanding obligations from this retailer.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Executive Summary

Consolidated net sales for the second quarter of fiscal 2009 increased 18.5% to $170.3 million compared to $143.7 million for the second quarter of fiscal 2008. The increase in net sales was due to strong distribution sales resulting from certain major video game and software releases, as well as significant increases in sales of anime content in the publishing business. Our gross profit was $24.2 million or 14.2% of net sales in the second quarter fiscal 2009 compared with $22.1 million or 15.4% of net sales for the same period in fiscal 2008. The increase in gross profit was primarily due to the sales volume increase. The decrease in gross profit margin percentage was due to strong sales in lower margin productivity and utility software, as well as a significant increase in the sale of lower margin video games.

Total operating expenses for the second quarter of fiscal 2009 were $94.4 million or 55.4% of net sales, compared with $20.4 million or 14.3% of net sales in the same period for fiscal 2008. This increase was primarily due to a non-cash goodwill impairment charge of $73.4 million, which was recorded in the second quarter of fiscal 2009. The charge primarily reflects the sustained decline in the Company’s share price which resulted in the Company’s market capitalization being less than its book value. An additional impairment charge may be required during the third quarter of fiscal 2009 as the Company continues to evaluate relevant facts and circumstances. The additional increase in total operating expenses was due to variable selling and marketing expenses which fluctuate with sales volumes. Net income (loss) from continuing operations for the second quarter fiscal 2009 was a loss of $44.5 million or $1.23 per diluted share compared to income of $222,000 or $0.01 per diluted share from continuing operations for the same period last year.

Consolidated net sales for the six months ended September 30, 2008 increased 11.3% to $312.3 million compared to $280.7 million for the first six months of fiscal 2008. The increase in net sales was due to strong distribution sales resulting from increased sales of new major video game and software releases, as well as significant increases in sales of anime content in the publishing business. Our gross profit was $46.4 million or 14.8% of net sales for the first six months of fiscal 2009, compared with $46.0 million or 16.4% of net sales for the same period in fiscal 2008. The increase in gross profit was primarily due to the sales volume increase. The decrease in gross profit margin percentage was due to strong sales in lower margin productivity and utility software, as well as a significant increase in the sale of lower margin video games.

Total operating expenses for the six months ended September 30, 2008 were $113.8 million or 36.4% of net sales, compared with $39.8 million or 14.2% of net sales in the same period for fiscal 2008. This increase was primarily due to a non-cash goodwill impairment charge of $73.4 million, which was recorded in the second quarter of fiscal 2009. The charge primarily reflects the sustained decline in the Company’s share price which resulted in the Company’s market capitalization being less than its book value. An additional impairment charge may be required during the third quarter of fiscal 2009 as the Company continues to evaluate relevant facts and circumstances. Net income (loss) from continuing operations for the six months ended September 30, 2008 was a loss of $43.9 million or $1.21 per diluted share compared to income of $2.1 million or $0.06 per diluted share from continuing operations for the same period last year.

Goodwill

As described in our financial statements, the Company annually reviews goodwill for potential impairment for each reporting unit, or when events or changes in circumstances indicate the carrying value of the goodwill might exceed its current fair value. One of the indicators of impairment is the sustained decline in a company’s share price. A decline in the Company’s share price began following the release of our financial results in the quarter ended September 30, 2007. During the quarter ended September 30, 2008, the Company experienced additional declines in its stock price as the market reacted to the overall worsening of the economy and the “credit crisis” among major lending institutions. During the quarter ended September 30, 2008, the Company determined that the fair value of two of its reporting units was less than their carrying values, and accordingly, an impairment of goodwill in the amount of $73.4 million was recorded. Factors which may cause impairment include negative industry or economic trends and significant underperformance relative to historical or projected future operating results. The Company determines fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analysis.

Under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), the measurement of impairment of goodwill consists of two steps. In the first step, the Company compares the fair value of each reporting unit to its carrying value. At the end of the second quarter, management completed a valuation of the fair value of its reporting units which incorporated existing market-based considerations as well as a discounted cash flow methodology based on current results and projections. Based on this evaluation, it was determined that the fair value of the Company’s FUNimation and BCI reporting units was less than their carrying value. Following this assessment, SFAS No. 142 requires the Company to perform a second step in order to determine the implied fair value of each reporting unit’s goodwill, as compared to carrying value. The activities in the second step include performing an analysis in which the fair values of the assets and liabilities of the reporting units are determined as if the reporting units had been acquired in a current business combination. This analysis has not been finalized as of the filing date of the September 30, 2008 financial statements, and as allowed by SFAS 142, the Company has recorded an estimate of impairment in the September 30, 2008 financial statements. This analysis will be finalized during the quarter ended December 31, 2008, and any change in the estimate of impairment will be recorded in the December 31, 2008 financial statements.

The estimates and assumptions used in making the assessment of the fair value are inherently subject to uncertainty. Accordingly, an adjustment to the estimated impairment charge may be required when the Company finalizes its second step of the SFAS No. 142 analysis. Any such adjustment to the carrying value of goodwill could be material, but will be non-cash. In its step two estimate of impairment, the Company has analyzed the fair values of the assets and liabilities of its reporting units where impairment had occurred. Specifically, the Company estimated the fair value of its Licensor and Distributor Relationships in the reporting units based on a projected income and historical cost approaches. These estimates in value, as well as that for trademarks and tradenames at FUNimation, will be finalized during the quarter ended December 31, 2008.

The goodwill impairment charge had no impact on the Company’s compliance with the financial covenants in its credit agreement. We anticipate that this charge will have no significant effects on the Company’s liquidity or cash flows.

Discontinued Operations

On May 31, 2007, we sold all of the outstanding capital stock of our wholly-owned subsidiary, Navarre Entertainment Media, Inc. (“NEM”) to an outside party and we have presented the independent music distribution business as discontinued operations. The Company received $6.5 million in cash proceeds from the sale, plus the assignment to the Company of the trade receivables related to this business. The consolidated financial statements were reclassified to segregate the assets, liabilities and operating results of the discontinued operations for all periods presented. Prior to reclassification, discontinued operations were reported in the distribution segment.

As part of this transaction, we recorded a gain in the first quarter of fiscal 2008 of $6.1 million ($4.6 million net of tax), which included severance and legal costs of $339,000 and other direct costs to sell of $842,000. The gain is included in “Gain on sale of discontinued operations” in the Consolidated Statements of Operations.

Net sales from discontinued operations for the three months ended September 30, 2008 and 2007 were zero and $18,000, respectively. Net loss from discontinued operations for the second quarter of fiscal 2009 was zero compared to net loss from discontinued operations of $597,000 or $0.02 per diluted share from discontinued operations for the same period last year.

Net sales from discontinued operations for the six months ended September 30, 2008 and 2007 were zero and $5.1 million, respectively. Net income from discontinued operations for the six months ended September 30, 2008 was zero compared to net income from discontinued operations of $2.9 million or $0.08 per diluted share from discontinued operations for the same period last year.

Working Capital and Debt

Our business requires significant levels of working capital primarily to finance accounts receivable and inventories. We have relied on trade credit from vendors, amounts received on accounts receivable and our revolving credit facility for our working capital needs. At March 31, 2008, we were a party to a credit agreement (the “GE Facility”) which provided for a senior secured three-year $95.0 million revolving credit facility. The revolving facility was available for working capital and general corporate needs and was subject to a borrowing base requirement. The revolving facility was secured by a first priority security interest in all of our assets, as well as the capital stock of its subsidiary companies. At March 31, 2008 we had $31.3 million outstanding under this facility.

At March 31, 2008, we were also a party to a credit agreement which provided for a four-year $15.0 million Term Loan facility which was to expire on March 22, 2011. The Term Loan facility called for monthly installments of $12,500, annual excess cash flow payments and final payment of $9.4 million on March 22, 2011. The facility was secured by a second priority security interest in all of our assets. At March 31, 2008 we had $9.7 million outstanding on the Term Loan facility which was paid in full on June 12, 2008 in connection with the Third Amendment to the GE revolving facility.

On June 12, 2008, we entered into a Third Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the “Third Amendment”) with GE. The Third Amendment, among other things, revised the terms of the GE Facility as follows: (i) permitted us to pay off the remaining $9.7 million balance of the term loan facility with Monroe; (ii) created a $6.0 million tranche of borrowings subject to interest at the index rate plus 6.25%, or LIBOR plus 7.5%; (iii) modified the interest rate payable in connection with borrowings to range from an index rate of 0.75% to 1.75%, or LIBOR plus 2.0% to 3.0%, depending upon borrowing availability during the prior fiscal quarter; (iv) extended the term of the GE Facility to March 22, 2012; (v) modified the prepayment penalty to 1.5% during the first year following the date of the Third Amendment, 1% during the second year following the date of the Third Amendment, and 0.5% during the third year following the date of the Third Amendment; and (vi) modified certain financial covenants as of March 31, 2008.

At September 30, 2008 and March 31, 2008 we had $45.6 million and $31.3 million, respectively, outstanding on the revolving facility and, based on the facility’s borrowing base and other requirements, approximately $20.0 million and $12.0 million, respectively, was available. At March 31, 2008 we had $9.7 million outstanding related to our Term Loan facility, which was paid in full on June 12, 2008 in connection with the Third Amendment to the GE revolving facility.

Interest under the revolving facility was at the index rate plus 1.5% and LIBOR plus 2.75% at September 30, 2008 (6.5% and 6.2%, respectively) and at the index rate plus .75% and LIBOR plus 2.00% at March 31, 2008 (6.0% and 4.6%, respectively) and is payable monthly. At March 31, 2008, interest under the Term Loan facility was at LIBOR plus 7.5% (10.6%).

Overview

We are a publisher and distributor of physical and digital home entertainment and multimedia products, including PC software, DVD video, video games and accessories. Our business is divided into two business segments — publishing and distribution. We believe our established relationships throughout the supply chain, our broad product offering and our distribution facility permit us to offer industry-leading home entertainment and multimedia products to our retail customers and to provide access to attractive retail channels for the publishers of such products. Our broad base of customers includes: (i) wholesale clubs, (ii) mass merchandisers, (iii) other third-party distributors, (iv) computer specialty stores, (v) discount retailers, (vi) book stores, (vii) office superstores, and (viii) electronic superstores.

Through our publishing business, which generally has higher gross margins than our distribution business, we own or license various PC software, DVD video titles and other related merchandising and broadcasting rights. Our publishing segment packages, brands, markets and sells directly to retailers, third-party distributors and our distribution business. Our publishing segment currently consists of Encore, BCI and FUNimation. Encore licenses and publishes personal productivity, genealogy, utility, education and interactive gaming PC products. BCI is a provider of niche DVD video products. FUNimation is the leading provider of anime home video products in the United States.

Through our distribution business, we distribute and provide fulfillment services in connection with a variety of finished goods that are provided by our vendors, which include PC software, DVD video, video games, accessories and independent music labels (through May 2007). These vendors provide us with products which we, in turn, distribute to our retail customers. Our distribution business focuses on providing vendors and retailers with a range of value-added services including: vendor-managed inventory, Internet-based ordering, electronic data interchange services, fulfillment services and retailer-oriented marketing services.

Forward-Looking Statements / Important Risk Factors

We make written and oral statements from time to time regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are 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. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the SEC, including this Report on Form 10-Q, news releases, written or oral presentations made by officers or other representatives made by us to analysts, shareholders, investors, news organizations and others and discussions with management and other representatives of us. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of us speaks only as of the date on which such statement is made. Our forward-looking statements are based on assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by or on behalf of us.

In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by or on behalf of us. Some of these important factors, but not necessarily all important factors, include the following: the Company’s revenues being derived from a small group of customers; the Company’s dependence on significant vendors and manufacturers and the popularity of their products; pending litigation or regulatory investigation may subject the Company to significant costs; pending SEC investigation or litigation could subject the Company to significant costs, judgments or penalties and could divert management’s attention; some revenues are dependent on consumer preferences and demand; the seasonality and variability in the Company’s business and that decreased sales during peak season could adversely affect its results of operations; the Company’s dependence on a small number of licensed property and licensors in the anime genre; some revenues are substantially dependent on television exposure; technological developments, particularly in the electronic downloading arena which could adversely impact sales, margins and results of operations; increased counterfeiting or piracy which could negatively affect demand for the Company’s products; the Company may not be able to protect its intellectual property; the loss of key personnel could effect the depth, quality and effectiveness of the management team; the Company’s ability to meet its significant working capital requirements or if working capital requirements change significantly; product returns or inventory obsolescence could reduce sales and profitability or negatively impact the Company’s liquidity; the potential for inventory values to decline; adjustments to the recorded goodwill impairment charge or additional impairment in the carrying value of goodwill or other assets could negatively affect our consolidated results of operations and net worth; future performance of our businesses could result in impairment to our other tangible and intangible assets; the Company’s credit exposure due to reseller arrangements or negative trends which could cause credit loss; the Company’s ability to adequately and timely adjust cost structure for decreased demand; the Company’s ability to compete effectively in distribution and publishing, which are highly competitive industries; the Company’s dependence on third-party shipping of its product; the Company’s dependence on information systems; the acquisition strategy of the Company could disrupt other business segments and/or management; interruption of the Company’s business or catastrophic loss at a facility which could curtail or shutdown its business; the potential for future terrorist activities to disrupt operations or harm assets; increased costs related to legislative actions, insurance costs and new accounting pronouncements could impact results of operations; the level of indebtedness could adversely affect the Company’ s financial condition; a change in interest rates on our variable rate debt could adversely impact the Company’s operations; the Company may be unable to generate sufficient cash flow to service debt obligations; the Company may incur additional debt, which could exacerbate the risks associated with current debt levels; the Company’s debt agreements limit our operating and financial flexibility; fluctuations in stock price could adversely affect the Company’s ability to raise capital or make our securities undesirable; the exercise of outstanding warrants and options adversely affecting stock price; the Company’s anti-takeover provisions,

its ability to issue preferred stock and its staggered board may discourage take-over attempts beneficial to shareholders; the Company does not plan to pay dividends on common stock, thus shareholders should not expect a return on investment through dividend payments; and the Company’s directors may not be personally liable for certain actions which may discourage shareholder suits against them.

A detailed statement of risks and uncertainties is contained in our reports to the SEC, including, in particular, our Annual Report on Form 10-K for the year ended March 31, 2008 and other public filings and disclosures. Investors and shareholders are urged to read these documents carefully.

Critical Accounting Policies

We consider our critical accounting policies to be those related to revenue recognition, production costs and license fees, allowance for doubtful accounts, goodwill and intangible assets, impairment of long-lived assets, inventory valuation, share-based compensation, income taxes, and contingencies and litigation. There have been no material changes to these critical accounting policies since March 31, 2008, as discussed in greater detail under this heading in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended March 31, 2008.

As described in our financial statements, the Company reviews goodwill for potential impairment annually for each reporting unit, or when events or changes in circumstances indicate the carrying value of the goodwill might exceed its current fair value. As described above, during the quarter ended September 30, 2008, the Company determined that the fair value of two of its reporting units was less than their fair values, and accordingly, an impairment of goodwill was recorded. In determining the amount of impairment, SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), requires the Company to perform an analysis in which the fair values of the assets and liabilities of the reporting units are determined as if the reporting units had been acquired in a current business combination. This analysis has not been finalized as of the filing date of the September 30, 2008 financial statements, and as allowed by SFAS 142, the Company has recorded an estimate of impairment in the September 30, 2008 financial statements. This analysis will be finalized during the quarter ended December 31, 2008, and any change in the estimate of impairment will be recorded in the December 31, 2008 financial statements.

Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations

In evaluating our financial performance and operating trends, management considers information concerning net sales before inter-company eliminations of sales. Management believes these non-GAAP measures are useful because they provide supplemental information that facilitates comparisons to prior periods and for the evaluation of financial results. Management uses these non-GAAP measures to evaluate financial results, develop budgets and manage expenditures. The method we use to produce non-GAAP results is likely to differ from the methods used by other companies and should not be regarded as a replacement for corresponding GAAP measures. Net sales before inter-company eliminations has limitations as a supplemental measure, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

The following table represents a reconciliation of GAAP net sales to net sales before inter-company eliminations:


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	(Unaudited)						(Unaudited)
(In thousands)	2008			2007			2008			2007
Net sales:
Publishing	$	28,794		$	27,043		$	56,212		$	56,666
Distribution		158,458			133,391			291,553			257,281

Net sales before inter-company eliminations		187,252			160,434			347,765			313,947
Inter-company sales		(16,956	)		(16,719	)		(35,444	)		(33,210	)

Net sales as reported	$	170,296		$	143,715		$	312,321		$	280,737

Publishing Segment

The publishing segment includes Encore, BCI and FUNimation.

Fiscal 2009 Second Quarter Results Compared With Fiscal 2008 Second Quarter

Net Sales

Net sales for the publishing segment were $28.8 million (before inter-company eliminations) for the second quarter fiscal 2009 compared to $27.0 million (before inter-company eliminations) for the second quarter fiscal 2008. The 6.5% increase in net sales over the prior year quarter was primarily due to a strong release schedule of anime content. The Company believes sales results in the future will be dependent upon its ability to continue to add new, appealing content and upon the strength of the retail environment.

Gross Profit

Gross profit for the publishing segment was $10.6 million or 36.9% of net sales for the second quarter of fiscal 2009 compared to $8.7 million or 32.1% of net sales for the second quarter of fiscal 2008. The increase in gross profit was primarily a result of a sales volume increase as well as product sales mix. We expect gross profit rates to fluctuate depending principally upon the make-up of product sales each quarter.

Operating Expenses

Total operating expenses increased for the publishing segment to $80.9 million or 281.0% of net sales, for the second quarter of fiscal 2009, from $7.4 million or 27.5% of net sales, for the second quarter of fiscal 2008.

Selling and marketing expenses for the publishing segment were $3.2 million or 11.1% of net sales for the second quarter of fiscal 2009 compared to $3.4 million or 12.7% of net sales for the second quarter of fiscal 2008. The decrease was principally due to a reduction in travel, convention costs and personnel savings.

General and administrative expenses for the publishing segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administrative expenses for the publishing segment were $2.9 million or 10.1% of net sales for the second quarter of fiscal 2009 compared to $2.4 million or 8.9% of net sales for the second quarter of fiscal 2008. The increase was primarily due to increased legal, professional and personnel costs.

Depreciation and amortization for the publishing segment was $1.4 million for the second quarter of fiscal 2009 compared to $1.6 million for the second quarter of fiscal 2008. The decrease was primarily due to a reduction in amortization expense related to acquisition related intangibles.

Goodwill impairment for the publishing segment was $73.4 million for the second quarter of fiscal 2009 compared to zero for the second quarter of fiscal 2008, due to the sustained decline in the Company's share price which resulted in the Company's market capitalization being less than its book value. An additional impairment charge may be required during the third quarter of fiscal 2009 as the Company continues to evaluate relevant facts and circumstances.

Operating Income (Loss)

The publishing segment had net operating loss from continuing operations of $70.3 million for the second quarter of fiscal 2009 compared to net operating income of $1.2 million for the second quarter of fiscal 2008.

Fiscal 2009 Six Months Results Compared With Fiscal 2008 Six Months

Net Sales

Net sales for the publishing segment were $56.2 million (before inter-company eliminations) for the six month period of fiscal 2009 compared to $56.7 million (before inter-company eliminations) for the same period of fiscal 2008. The Company believes sales results in the future will be dependent upon its ability to continue to add new, appealing content and upon the strength of the retail environment.

Gross Profit

Gross profit for the publishing segment was $20.9 million or 37.2% of net sales for the six month period of fiscal 2009 compared to $20.0 million or 35.4% of net sales for the six month period of fiscal 2008. The increase in gross profit was primarily a result of product sales mix. We expect gross profit rates to fluctuate depending principally upon the make-up of product sales.

Operating Expenses

Total operating expenses increased $71.9 million for the publishing segment to $87.7 million or 156.1% of net sales, for the six month period of fiscal 2009, from $15.8 million or 27.8% of net sales, for the six month period of fiscal 2008.

Selling and marketing expenses for the publishing segment were $6.0 million or 10.8% of net sales for the six month period of fiscal 2009 compared to $7.3 million or 12.9% of net sales for the six month period of fiscal 2008. The decrease was principally due to a reduction of marketing and advertising program expense, travel and personnel cost savings.

General and administrative expenses for the publishing segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administrative expenses for the publishing segment were $5.5 million or 9.8% of net sales for the six month period of fiscal 2009 compared to $5.3 million or 9.4% of net sales for the six month period of fiscal 2008. The increase was primarily due to primarily to increased legal and professional costs.

Depreciation and amortization for the publishing segment was $2.8 million for the six month period of fiscal 2009 compared to $3.1 million for the six month period of fiscal 2008. The decrease was primarily due to a reduction in amortization expense related to acquisition related intangibles.

Goodwill impairment for the publishing segment was $73.4 million for the six month period of fiscal 2009 compared to zero for the six month period of fiscal 2008, due to the sustained decline in the Company's share price which resulted in the Company's market capitalization being less than book value. An additional impairment charge may be required during the third quarter of fiscal 2009 as the Company continues to evaluate relevant facts and circumstances.

Operating Income (Loss)

The publishing segment had net operating loss from continuing operations of $66.9 million for the six month period of fiscal 2009 compared to net operating income of $4.3 million for the six month period of fiscal 2008.

Distribution Segment

The distribution segment distributes PC software, DVD video, video games, accessories, and independent music (through May 2007).

Fiscal 2009 Second Quarter Results Compared With Fiscal 2008 Second Quarter

Net Sales

Net sales for the distribution segment increased 18.8% to $158.5 million (before inter-company eliminations) for the second quarter of fiscal 2009 compared to $133.4 million (before inter-company eliminations) for the second quarter of fiscal 2008. Net sales increased in the software product group to $120.0 million for the second quarter of fiscal 2009 from $110.1 million for the same period last year due to increased sales of new releases of productivity and utility software. DVD video net sales remained flat at $14.9 million for the second quarter of fiscal 2009 compared to $15.0 million for the second quarter of fiscal 2008. Video games net sales increased to $23.6 million for the second quarter of fiscal 2009 from $8.2 million for the same period last year, due to increased sales of new product releases. The Company believes future sales results will be dependent on the Company’s ability to continue to add new, appealing content and upon the strength of the retail environment.

Gross Profit

Gross profit for the distribution segment was $13.6 million or 8.6% of net sales for the second quarter fiscal 2009 compared to $13.4 million or 10.0% of net sales for second quarter fiscal 2008. The increase in gross profit was primarily due to the sales volume increase. The decrease in gross profit margin percentage was due to strong sales in lower margin productivity and utility software, as well as a significant increase in lower margin video games. We expect gross profit rates to fluctuate depending principally upon the make-up of product sales each quarter.

Operating Expenses

Total operating expenses for the distribution segment were $13.5 million or 8.4% of net sales for the second quarter of fiscal 2009 compared to $13.0 million or 9.7% of net sales for the second quarter of fiscal 2008. Overall general and administrative and distribution and warehouse expenses decreased, which partially offset the increases in selling and marketing, bad debt expense and depreciation and amortization expenses.

Selling and marketing expenses for the distribution segment increased to $4.0 million or 2.5% of net sales for the second quarter of fiscal 2009 compared to $3.2 million or 2.4% of net sales for the second quarter of fiscal 2008 primarily related to variable expenses.

Distribution and warehousing expenses for the distribution segment were $3.0 million or 1.9% of net sales for the second quarter of fiscal 2009 compared to $3.3 million or 2.5% of net sales for the second quarter of fiscal 2008.

General and administrative expenses for the distribution segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administrative expenses for the distribution segment were $5.3 million or 3.3% of net sales for the second quarter of fiscal 2009 compared to $5.7 million or 4.2% of net sales for the second quarter of fiscal 2008. The decrease in the second quarter of fiscal 2009 was primarily a result of reduced enterprise resource planning (“ERP”) expenses from those incurred during the prior year.

Bad debt expense for the distribution segment was $200,000 for the second quarter of fiscal 2009 compared to zero in the same period last year due to an increase in reserves for a retail customer.

Depreciation and amortization for the distribution segment was $977,000 for the second quarter of fiscal 2009 compared to $744,000 for the second quarter of fiscal 2008. This increase was primarily due to the depreciation of the new ERP system.

Operating Income

Net operating income from continuing operations for the distribution segment was $114,000 for the second quarter of fiscal 2009 compared to net operating income of $377,000 for the second quarter of fiscal 2008.

Fiscal 2009 Six Months Results Compared With Fiscal 2008 Six Months

Net Sales

Net sales for the distribution segment increased 13.3% to $291.6 million (before inter-company eliminations) for the six month period of fiscal 2009 compared to $257.3 million (before inter-company eliminations) for the six month period of fiscal 2008. Net sales increased in the software product group to $225.5 million for the six month period of fiscal 2009 from $216.6 million for the same period last year due primarily to increased sales of new releases of productivity and utility software. DVD video net sales increased to $28.6 million for the six month period of fiscal 2009 from $26.5 million for the six month period of fiscal 2008, due primarily to an increase in sales resulting from a vendor managed inventory program with a major electronics retailer. Video games net sales increased to $37.5 million for the six month period of fiscal 2009 from $14.2 million for the same period last year, due to increased sales of new product releases. The Company believes future sales results will be dependent on the Company’s ability to continue to add new, appealing content and upon the strength of the retail environment.

Gross Profit

Gross profit for the distribution segment was $25.5 million or 8.7% of net sales for the six month period of fiscal 2009 compared to $26.0 million or 10.1% of net sales for the six month period of fiscal 2008. The decrease in gross profit margin percentage was due to strong sales in lower margin productivity and utility software, as well as a significant increase in the sale of lower margin video games. We expect gross profit rates to fluctuate depending principally upon the make-up of product sales each quarter.

Operating Expenses

Total operating expenses for the distribution segment were $26.0 million or 8.9% of net sales for the six month period of fiscal 2009 compared to $24.1 million or 9.3% of net sales for the same period of fiscal 2008. Overall expenses for distribution and warehouse decreased, which partially offset the increases in selling and marking expenses, general and administrative, bad debt and depreciation and amortization.

Selling and marketing expenses for the distribution segment increased to $6.9 million or 2.4% of net sales for the six month period of fiscal 2009 compared to $6.3 million or 2.4% of net sales for the six month period of fiscal 2008 primarily due to variable expenses which fluctuate with sales volumes.

Distribution and warehousing expenses for the distribution segment were $5.9 million or 2.0% of net sales for the six month period of fiscal 2009 compared to $6.1 million or 2.3% of net sales for the same period of fiscal 2008.

General and administrative expenses for the distribution segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administrative expenses for the distribution segment were $11.1 million or 3.8% of net sales for the six month period of fiscal 2009 compared to $10.2 million or 4.0% of net sales for the six month period of fiscal 2008. The increase was primarily a result of ERP expenses related to the final phase of our implementation.

Bad debt expense for the distribution segment was $200,000 for the six month period of fiscal 2009 compared to zero in the same period last year due to an increase in reserves for a retail customer.

Depreciation and amortization for the distribution segment was $1.9 million for the six month period of fiscal 2009 compared to $1.4 million for the six month period of fiscal 2008. This increase was primarily due to the depreciation of the new ERP system.

Operating Income (Loss)

Net operating loss from continuing operations for the distribution segment was $577,000 for the six month period of fiscal 2009 compared to net operating income of $2.0 million for the same period of fiscal 2008.

Consolidated Other Income and Expense

Interest expense was $833,000 for second quarter of fiscal 2009 compared to $1.4 million for second quarter of fiscal 2008. Interest expense was $2.4 million for six month period of fiscal 2009 compared to $3.1 million for same period of fiscal 2008. The decrease in interest expense for second quarter and six month period of fiscal 2009 was a result of a reduction in debt and effective interest rates offset by the write-off of debt acquisition fees and prepayment penalty fees. Interest income, which primarily relates to interest on available cash balances, was $14,000 for the second quarter of fiscal 2009 compared to $56,000 for the same period last year. Interest income was $29,000 for the six month period of fiscal 2009 compared to $124,000 for the same period last year. Other income (expense), net, for the second quarter fiscal 2009 was net expense of $223,000 and related primarily to foreign exchange loss of $174,000 and loss on disposal of assets held for sale of $48,000. Other income (expense), net, for the second quarter of fiscal 2008 was net income of $148,000 and consisted primarily of foreign currency gains. Other income (expense), net, for the six month period fiscal 2009 was net expense of $321,000 and related primarily to foreign exchange loss of $272,000 and loss on assets held for sale of $48,000. Other income (expense), net, for the six month period of fiscal 2008 was net income of $371,000 and consisted primarily of foreign currency gains.

Consolidated Income Tax Benefit (Expense) from Continuing Operations

We recorded consolidated income tax benefit for the second quarter of fiscal 2009 of $26.7 million or an effective tax rate of 37.5% compared to expense of $202,000 or an effective tax rate of 47.6% for second quarter of fiscal 2008. We recorded consolidated income tax benefit for the six month period of fiscal 2009 of $26.3 million or an effective tax rate of 37.5% compared to expense of $1.5 million or an effective tax rate of 41.6% for six month period of fiscal 2008.

The Company adopted the provisions of FIN 48 on April 1, 2007 which had no impact to retained earnings. At adoption, the Company had approximately $417,000 of gross unrecognized income tax benefits (“UTB’s”) and approximately $327,000 of UTB’s, net of deferred federal and state income tax benefits related to various federal and state matters, that would impact the effective tax rate if recognized. The Company recognizes interest accrued related to UTB’s in the provision for income taxes. As of April 1, 2008, interest accrued was approximately $56,000, which was net of federal and state tax benefits and total UTB’s net of deferred federal and state tax benefits that would impact the effective tax rate if recognized, were $734,000. During the six months ended September 30, 2008 an additional $140,000 of UTB’s were accrued, which was net of $40,000 of deferred federal and state income tax benefits. As of September 30, 2008, interest accrued was $103,000 and total UTB’s, net of deferred federal and state income tax benefits were $874,000.

Consolidated Net Income (Loss) from Continuing Operations

For the second quarter of fiscal 2009, we recorded net loss of $44.5 million, compared to net income of $222,000 for the same period last year. For the six month period of fiscal 2009, we recorded net loss of $43.9 million, compared to net income of $2.1 million for the same period last year.

Discontinued Operations

For the second quarter of fiscal 2008, we recorded net loss from discontinued operations of $594,000, net of tax and a loss on sale of discontinued operations of $3,000, net of tax. For the six month period of fiscal 2008, we recorded net loss from discontinued operations of $1.7 million, net of tax and a gain on sale of discontinued operations of $4.6 million, net of tax.

Consolidated Net Income (Loss)

For the second quarter of fiscal 2009, we recorded net loss of $44.5 million, compared to net loss of $375,000 for the same period last year. For the six month period of fiscal 2009, we recorded net loss of $43.9 million, compared to net income of $5.1 million for the same period last year.

Market Risk

As of September 30, 2008 we had $45.6 million of indebtedness, which was subject to interest rate fluctuations. Based on these borrowings, which are subject to interest rate fluctuations, a 100-basis point change in LIBOR or index rate would cause the Company’s annual interest expense to change by $456,000.

The Company has a limited number of customers in Canada, where the sales and purchasing activity results in receivables and accounts payables denominated in Canadian dollars. When these transactions are translated into U.S. dollars at the effective exchange rate in effect at the time of each transaction, gain or loss is recognized. These gains and/or losses are reported as a separate component within other income and expense.

During the three and six months ended September 30, 2008 the Company had foreign exchange loss of $174,000 and $272,000, respectively compared to foreign exchange income of $116,000 and $282,000 during the three and six months ended September 30, 2007, respectively. Gain or loss on these activities is a function of the change in the foreign exchange rate between the sale or purchase date and the collection or payment of cash. Though the change in the exchange rate is out of the Company’s control, the Company periodically monitors its Canadian activities and can reduce exposure from the exchange rate fluctuations by limiting these activities or taking other actions, such as exchange rate hedging, which the Company has not done to date.

Seasonality and Inflation

Quarterly operating results are affected by the seasonality of our business. Specifically, our third quarter (October 1–December 31) typically accounts for our largest quarterly revenue figures and a substantial portion of our earnings. As a distributor of products ultimately sold to retailers, our business is affected by the pattern of seasonality common to other suppliers of retailers, particularly during the holiday selling season. Inflation is not expected to have a significant impact on our business, financial condition or results of operations since we can generally offset the impact of inflation through a combination of productivity gains and price increases.

Liquidity and Capital Resources

Operating Activities

Cash used in operating activities for the six months of fiscal 2009 was $7.2 million and was $9.6 million for the same period last year. The net cash used in operating activities for the six months of fiscal 2009 mainly reflected our net loss, combined with various non-cash charges, including depreciation and amortization of $8.1 million, write-off of debt acquisition costs of $490,000, goodwill impairment of $73.4 million, share-based compensation of $501,000, deferred income taxes of $26.5 million and a change in deferred revenue of $617,000, offset by our working capital demands. The following are changes in the operating assets and liabilities for the six months ended September 30, 2008: accounts receivable increased by $17.9 million, reflecting the timing of sales and cash receipts; inventories

increased by $17.0 million, primarily reflecting higher inventories in anticipation of our third quarter operating needs; prepaid expenses increased by $2.3 million, primarily reflecting royalty advances in the publishing segment; production costs and license fees increased $3.5 million and $7.8 million, respectively, due to content acquisitions; income taxes receivable decreased $112,000 primarily due to timing of required tax payments and tax refunds, other assets decreased $487,000 due to amortization and recoupments; accounts payable increased $28.3 million, primarily as a result of timing of disbursements and increased inventories; and accrued expenses decreased $540,000 a result of the timing of disbursements primarily related to property taxes and accrued interest.

The net cash used in operating activities for the six months of fiscal 2008 of $9.6 million was primarily the result of net income, combined with various non-cash charges, including depreciation and amortization of $8.5 million, share-based compensation of $567,000, deferred income taxes of $619,000 and a change in deferred revenue of $242,000, offset by our working capital demands.

Investing Activities

Cash flows used in investing activities totaled $426,000 for the six months of fiscal 2009 and $9.3 million for the same period last year. Acquisition of property and equipment and acquisition of intangible assets totaled $3.0 million and $413,000, respectively, for the six months of fiscal 2009. The sale of marketable securities held in a Rabbi trust was $1.7 million and proceeds from sale of assets held for sale were $1.4 million for the six months of fiscal 2009. Purchases of property and equipment and acquisition of intangible assets for the six months of fiscal 2008 were $4.6 million and $717,000, respectively. Purchases of marketable equity securities totaled $4.0 million for the six months of fiscal 2008, related to the funding of a Rabbi trust formed for purposes of funding future deferred compensation payments to our former CEO.

Financing Activities

Cash flows provided by financing activities totaled $3.2 million for the six months of fiscal 2009 and cash flows provided by financing activities totaled $4.8 million for the six months of fiscal 2008. The Company had proceeds from notes payable-line of credit of $112.4 million, repayments of notes payable-line of credit of $98.1 million, repayments on notes payable of $9.7 million, payment of deferred compensation of $1.7 million, checks written in excess of cash of $527,000 and debt acquisition costs of $200,000 for the six months of fiscal 2009. The Company had proceeds from notes payable-line of credit of $84.6 million, repayments of notes payable-line of credit of $80.5 million, repayments of notes payable of $5.2 million and checks written in excess of cash of $6.1 million for the six months of fiscal 2008. The Company recorded proceeds from the exercise of common stock options and warrants of $12,000 and $169,000 for the six months of fiscal 2009 and 2008, respectively.

Discontinued Operations

Cash flows provided by operating activities of discontinued operations were $6.6 million and proceeds from the sale of discontinued operations were $6.5 million for the six months of fiscal 2008.

Capital Resources

In October 2001, we entered into a credit agreement (the “GE Facility”) with General Electric Capital Corporation (“GE”). The credit agreement was amended and restated on May 11, 2005 in order to provide the Company with funding to complete the FUNimation acquisition and was amended and restated on June 1, 2005 and again on March 22, 2007. The credit agreement provided for a senior secured three-year $95.0 million revolving credit facility. The revolving facility was available for working capital and general corporate needs and was subject to a borrowing base requirement. The revolving facility was secured by a first priority security interest in all of our assets, as well as the capital stock of our subsidiary companies. At March 31, 2008 we had $31.3 million outstanding and $11.9 million available on the revolving facility.

The Company entered into a four-year $15.0 million term loan facility with Monroe Capital Advisors, LLC as administrative agent, agent and lender on March 22, 2007. The Term Loan facility called for monthly installments of $12,500, annual excess cash flow payments and final payment on March 22, 2011. The facility was secured by a second priority security interest in all of the assets of the Company. At March 31, 2008, we had $9.7 million outstanding on the Term Loan facility, which was paid in full on June 12, 2008 in connection with the Third Amendment to the GE revolving facility.

On June 12, 2008, the Company entered into a Third Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the “Third Amendment”) with GE. The Third Amendment, among other things, revised the terms of the GE Facility as follows: (i) permitted the Company to pay off the remaining $9.7 million balance of the term loan facility with Monroe Capital Advisors, LLC; (ii) created a $6.0 million tranche of borrowings subject to interest at the index rate plus 6.25%, or LIBOR plus 7.5%; (iii) modified the

interest rate payable in connection with borrowings to range from an index rate of 0.75% to 1.75%, or LIBOR plus 2.0% to 3.0%, depending upon borrowing availability during the prior fiscal quarter; (iv) extended the term of the GE Facility to March 22, 2012; (v) modified the prepayment penalty to 1.5% during the first year following the date of the Third Amendment, 1% during the second year following the date of the Third Amendment, and 0.5% during the third year following the date of the Third Amendment; and (vi) modified certain financial covenants as of March 31, 2008.

In association with the credit agreement, the Company also pays certain facility and agent fees. Interest under the revolving facility was at the index rate plus 1.5% and LIBOR plus 2.75% (6.5% and 6.2%, respectively, at September 30, 2008) and is payable monthly.

Under the revolving credit facility the Company is required to meet certain financial and non-financial covenants. The financial covenants include a variety of financial metrics regarding our overall financial stability and include limitations on our capital expenditures, a minimum ratio of EBITDA to fixed charges, minimum EBITDA, a maximum of indebtedness to EBITDA and a borrowing base availability requirement. We were in compliance with all the covenants related to the revolving credit facility as of September 30, 2008.

Liquidity

We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources. We plan for potential fluctuations in accounts receivable, inventory and payment of obligations to creditors and unbudgeted business activities that may arise during the year as a result of changing business conditions or new opportunities. In addition to working capital needs for the general and administrative costs of our ongoing operations, we have cash requirements for among other things: (1) investments in our publishing segment in order to license content; (2) investments in our distribution segment in order to sign exclusive distribution agreements; (3) equipment needs for our operations; and (4) amounts payable to our former Chief Executive Officer for post-retirement benefits. During the first six months of fiscal 2009, we invested approximately $13.9 million, before recoveries, in connection with the acquisition of licensed and exclusively distributed product in our publishing and distribution segments. Additionally, we had cash outlays of $3.3 million in connection with the licensing and implementation of our ERP system during the six months of fiscal 2009. We do not anticipate any future cash outlays in connection with the ERP system implementation for the remainder of fiscal 2009.

At September 30, 2008 and March 31, 2008 we had $45.6 million and $31.3 million, respectively, outstanding on the revolving facility and, based on the facility’s borrowing base and other requirements, approximately $20.0 million and $12.0 million, respectively, was available. At March 31, 2008 we had $9.7 million outstanding related to our Term Loan facility, which was paid in full during June 2008 in connection with the Third Amendment.

We currently believe cash and cash equivalents, funds generated from the expected results of operations and funds available under our existing credit facility will be sufficient to satisfy our working capital requirements, other cash needs and to finance expansion plans and strategic initiatives in the foreseeable future, absent significant acquisitions. Any growth through acquisitions would likely require the use of additional equity or debt capital, some combination thereof, or other financing.

Contractual Obligations

The following table presents information regarding contractual obligations as of September 30, 2008 by fiscal year (in thousands).


			Less						More
			than 1		2 – 3		4 – 5		than 5
	Total		Year		Years		Years		Years
Operating leases	$	25,598	$	1,353	$	5,354	$	5,102	$	13,789
Capital leases		281		50		161		70		—
License and distribution agreements		18,759		6,655		9,354		2,750		—
Deferred compensation		3,867		1,718		2,149		—		—

Total	$	48,505	$	9,776	$	17,018	$	7,922	$	13,789

We have excluded our FIN 48 liabilities from the table above because we are unable to make a reasonably reliable estimate of the period of cash settlement with the respective taxing authorities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information with respect to disclosures about market risk is contained in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk” in this Form 10-Q.

Item 4. Controls and Procedures

(a) Controls and Procedures

We maintain disclosure controls and procedures (“Disclosure Controls”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation.

(b) Change in Internal Controls over Financial Reporting

There were no changes, except as noted below, in the Company’s internal control over financial reporting during its most recently completed quarter that have materially affected or are reasonably likely to materially affect its internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

During fiscal year 2009, the Company completed the final phase of the ERP implementation. As appropriate, the Company has modified the design and documentation of its internal control processes and procedures to reflect these changes and to supplement and complement existing internal control over financial reporting. Based on management’s evaluation, the necessary steps have been taken to monitor and maintain appropriate internal control over financial reporting during this period.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Litigation and Proceedings discussion in Note 20 to the Company’s consolidated financial statements included herein.

Item 1A. Risk Factors

Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements / Important Risk Factors” in Part 1 — Item 2 of this Form 10-Q and in Part 1 — Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2008.

The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K under Part I. — Item 1A. “Risk Factors.” Except as presented below, there have been no material changes from the risk factors described in our Form 10-K.

An impairment in the carrying value of goodwill or other assets could negatively affect our consolidated results of operations and net worth.

We recorded an estimated goodwill impairment charge in the quarter ended September 30, 2008 in accordance with certain accounting standards that require consideration of current market capitalization. Although our analysis regarding the fair value of the remaining goodwill indicates that it exceeds its carrying value, materially different assumptions regarding the future performance of our businesses or significant declines in our stock price could result in additional goodwill impairment losses.


Names	Votes For		Votes Withheld
Eric H. Paulson		27,892,349		4,125,651
Cary L. Deacon		28,088,144		3,929,856
Kathleen P. Iverson		28,194,774		3,823,226

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)

32.1		Certification of the Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

32.2		Certification of the Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)


	Navarre Corporation (Registrant)
Date: November 10, 2008	/s/ Cary L. Deacon
	Cary L. Deacon
	President and Chief Executive Officer (Principal Executive Officer)


Date: November 10, 2008	/s/ J. Reid Porter
	J. Reid Porter
	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, 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;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

	d)		Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, 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;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

	d)		Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements. (Unaudited)			3
Consolidated Balance Sheets — September 30, 2008 and March 31, 2008 (Audited)			3
Consolidated Statements of Operations — Three and Six Months ended September 30, 2008 and 2007			4
Consolidated Statements of Cash Flows — Six Months ended September 30, 2008 and 2007			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures about Market Risk			32
Item 4. Controls and Procedures			32
PART II. OTHER INFORMATION			32
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3. Defaults Upon Senior Securities			33
Item 4. Submission of Matters to a Vote of Security Holders			34
Item 5. Other Information			34
Item 6. Exhibits			34
SIGNATURES			35
EX-31.1
EX-31.2
EX-32.1
EX-32.2

1.		I have reviewed this quarterly report on Form 10-Q of Navarre Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



	By /s/ Cary L. Deacon
	Cary L. Deacon
	President and Chief Executive Officer



	By /s/ J. Reid Porter
	J. Reid Porter
	Executive Vice President and Chief Financial Officer

1.		The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.		The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.