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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
---------------------

FORM 10-K
---------------------

<Table>

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

FOR THE TRANSITION PERIOD FROM TO .
</Table>

COMMISSION FILE NUMBER 0-21126

SONICblue INCORPORATED
(Exact name of Registrant as specified in its charter)

<Table>

DELAWARE 77-0204341
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)

2841 MISSION COLLEGE BOULEVARD 95054
SANTA CLARA, CALIFORNIA (Zip Code)
(Address of principal executive offices)
</Table>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(408) 588-8000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE
SERIES A PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS

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

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

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $298 million as of March 26, 2002, based upon the
closing price on the Nasdaq National Market reported for such date. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purpose.

95,694,707 shares of the Registrant's Common Stock, $0.0001 par value, were
outstanding at March 26, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting
Compliance), 11 and 12 of Part III incorporate by reference information from the
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
2002 Annual Meeting of Stockholders to be held on May 22, 2002.
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SONICBLUE INCORPORATED

FORM 10-K

INDEX

<Table>
<Caption>
PAGE
----

PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Consolidated Financial Data........................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 40
Item 8. Financial Statements and Supplementary Data................. 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 73
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 73
Item 11. Executive Compensation...................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 74
Item 13. Certain Relationships and Related Transactions.............. 74
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 74
SIGNATURES............................................................ 79
</Table>

PART I

ITEM 1. BUSINESS

When used in this Report, the words "expects," "anticipates," "estimates,"
"believes," "plans," and similar expressions are intended to identify
forward-looking statements. These are statements that relate to future periods
and include statements as to the Company's expected net losses, expected
expenditure levels and rate of growth of expenditures, expected cash flows, the
adequacy of capital resources, growth in operations, sources of revenues,
backlog, our ability to compete, growth of competition, our investments in
research and development, our dependence on personnel, our efforts to license
our technology to other companies, our ability to increase product and service
offerings and market penetration in targeted markets and channels, our efforts
to develop and maintain strategic relationships and the expected benefits of
those relationships, the ability to commercialize products under development,
strategic business transactions, ability to realize gains on our investments,
the impact and timing of current and future litigation, our strategy with regard
to protecting our proprietary technology, our ability to compete and respond to
rapid technological change and the features, benefits, performance and utility
of our current and future products and services. Forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, those risks discussed below, as well as risks relating to
development of new products and services and their use by our potential
customers, our ability to work with our strategic partners and OEMs, our ability
to retain and obtain customers, suppliers and manufacturing capacity, our
ability to protect our proprietary rights, the cost of accessing or acquiring
technologies or intellectual property, the impact of alternative technological
advances and competition, our ability to integrate acquired businesses and in a
timely manner, the costs of integrating acquired businesses and technologies;
and the risks set forth below under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors That May
Affect Our Results." These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.

All references to "SONICblue," "we," "us," "our" or the "Company" mean
SONICblue Incorporated and its subsidiaries, except where it is made clear that
the term means only the parent company.

SONICblue, RioVolt and RioRiot, are trademarks of SONICblue Incorporated.
ReplayTV is a registered trademark of ReplayTV, Inc. Go-Video is a registered
trademark of Sensory Science Corporation. Rio is a registered trademark of
RioPort, Inc. and is used by SONICblue under license from RioPort, Inc. Other
trademarks referenced herein are the property of their respective owners.

GENERAL

SONICblue is a leader in the converging Internet, digital media,
entertainment and consumer electronics markets. Working with partners that
include some of the better-known brands in consumer electronics, such as
Motorola, Panasonic and Samsung, SONICblue creates and markets products designed
to let consumers enjoy all the benefits of a digital home and connected
lifestyle. SONICblue's products include Rio digital audio players; Go-Video
Dual-Deck VCRs and integrated DVD+VCRs; and ReplayTV personal television
technology and software solutions.

Rio. Since introducing the industry's first portable MP3 player in 1998,
SONICblue has introduced an extensive array of portable and home audio
solutions. SONICblue's most recent Rio portable products include Rio 800 flash
players, the RioVolt line of CD-based players and the Rio Riot hard drive-based
player. SONICblue's most recent Rio home audio product is the Rio Central: The
Advanced Digital Audio Center.

Go-Video. SONICblue's Go-Video family of consumer electronics products
centers around its innovative "dual" video products that include its line of
Dual-Deck VCRs and Dual-Deck DVD/VCRs. Recently, SONICblue expanded its Go-Video
product family beyond "dual" products to include all-in-one home theater
systems, as well as stand-alone DVD players.
2

ReplayTV. SONICblue's ReplayTV family includes multiple digital video
recorder ("DVR") products, including a broadband and network-enabled DVR. In
addition to products and services, SONICblue also licenses its ReplayTV
technology and software to other companies seeking to implement DVR solutions.

SONICblue sells its products through retailers, distributors, e-commerce
websites, including its own on-line e-store, mail order catalogs and national
reseller organizations. Headquartered in Santa Clara, California, SONICblue has
sales, marketing, customer care and technical facilities in several locations
including Oregon, Arizona, France, Germany, Japan and the U.K.

SONICblue was incorporated as S3 Incorporated on January 9, 1989, in the
State of Delaware and changed its name to SONICblue Incorporated in November
2000. SONICblue operates in one principal industry segment.

BACKGROUND

Within the last year, SONICblue has made several strategic investments and
alliances with businesses that offer technologies and/or services that drive the
Company's emergence as a leader in the digital media arena. The recent
acquisitions of Sensory Science and ReplayTV enable SONICblue to offer a broad
array of digital audio and video-based products, applications and services.
Prior to the transfer in January 2001 of its graphics chips business to S3
Graphics Co., Ltd., SONICblue was a supplier of graphics and multimedia
accelerator subsystems for personal computers, or PCs, for more than ten years.

On August 1, 2001, SONICblue completed the acquisition of ReplayTV, Inc., a
developer of personal television technology. The acquisition was accounted for
as a purchase. At closing, SONICblue issued 10.4 million shares of common stock
and assumed an aggregate of 5.1 million options and warrants to purchase shares
of SONICblue common stock in exchange for all of ReplayTV's outstanding equity,
and ReplayTV became a wholly owned subsidiary of SONICblue. Prior to closing the
acquisition, SONICblue made loans to ReplayTV in the amount of $20.0 million,
which became part of the purchase price.

On June 27, 2001, SONICblue completed the acquisition of Sensory Science
Corporation, a developer of consumer electronics products, including dual deck
videocassette player/recorders and DVD players. The acquisition was accounted
for as a purchase. At closing, SONICblue issued approximately 1.3 million shares
of SONICblue common stock to Sensory Science stockholders in exchange for the
common stock of Sensory Science outstanding on June 27, 2001, and Sensory
Science became a wholly owned subsidiary of SONICblue. Prior to closing the
acquisition, SONICblue made loans to Sensory Science in the amount of $9.8
million, which became part of the purchase price.

In March 2001, SONICblue completed the sale to ATI Technologies, Inc.
("ATI") of its professional graphics division, based in Starnberg, Germany,
which produced the Fire GL line of graphics accelerators. Under the terms of an
Asset Purchase Agreement, SONICblue has received $7.9 million in cash through
December 31, 2001, and is eligible to receive further financial consideration of
up to $2.1 million, contingent upon the Fire GL graphics business, as operated
by ATI, achieving future performance targets.

In January 2001, SONICblue completed the transfer of its graphics chips net
assets, other than its shares of common stock of S3-VIA, Inc. ("S3-VIA"), to S3
Graphics Co., Ltd. ("S3 Graphics"), a joint venture between VIA Technologies,
Inc. ("VIA") and a wholly owned subsidiary of SONICblue. The joint venture
manufactures and distributes semiconductor products and conducts related
research and development activities. Pursuant to the joint venture agreement
with VIA, SONICblue received 13 million shares of SONICblue common stock in
return for a reduction of its economic interest in the future operations of the
joint venture to 0.1%. Under the joint venture agreement, SONICblue will also
receive earn-out payments if the new venture meets specified profitability
goals.

In November 2000, SONICblue acquired United Kingdom digital audio equipment
manufacturer Empeg Limited at an initial purchase price of $1.9 million. In
November 2001, a purchase price adjustment of $1.1 million was recorded
resulting in a total purchase price of $3.0 million.

In August 2000, SONICblue shut down its Diamond Multimedia-branded graphics
add-in board business. The shutdown did not extend to SONICblue's professional
graphics division, headquartered in Germany, which continued to develop and
market its line of Fire GL graphics accelerators until, as discussed above,
SONICblue sold its professional graphics division to ATI Technologies.

In November 1999, SONICblue established a 50.1% majority-owned corporate
joint venture, S3-VIA, with VIA to bring high-performance integrated graphics
and core logic chip sets to the volume OEM desktop and notebook PC markets.
S3-VIA has exclusive access to both companies' technology and distribution
rights for developed products between SONICblue and VIA. SONICblue consolidated
the accounts of S3-VIA in its consolidated financial statements through the
third quarter of 2001. In the fourth quarter of 2001, the Company terminated its
participation in S3-VIA. As a result, SONICblue wrote off the net assets of the
joint venture, which resulted in an unrecognized gain of $0.7 million. Since the
actual process of withdrawing from the venture will continue and ultimately be a
part of other negotiations that are on-going with VIA, SONICblue has deferred
recognition of any gain until a comprehensive settlement of all outstanding
issues is reached with VIA.

In September 1999, SONICblue made a significant strategic shift by merging
with Diamond Multimedia Systems, Inc. ("Diamond"), an established PC original
equipment manufacturer, or OEM, and retail provider of communications and home
networking solutions, PC graphics and audio add-in boards and digital audio
players. The transaction was accounted for as a purchase and, accordingly, the
results of operations of Diamond and the estimated fair value of assets acquired
and liabilities assumed as of September 24, 1999, are included in SONICblue's
consolidated financial statements.

PRODUCTS

Rio Digital Audio Players. SONICblue's Rio digital audio players allow
users to enjoy high-quality audio in the most common compressed digital audio
formats, including MP3 and Windows Media Audio (WMA). SONICblue's portable Rio
players include the flash memory-based Rio 600 and Rio 800, Rio One; the
CD-based RioVolt SP90, RioVolt SP100 and RioVolt SP250 and the hard drive-based
RioRiot, which allows users to store up to 20 gigabytes of digital audio.

In addition to its portable players, SONICblue offers the Rio Central, a
home stereo component that allows users to play and store up to 40 gigabytes of
digital music, write or "burn" CDs with stored digital audio tracks and load
digital audio onto portable Rio players. SONICblue's Rio Receiver is a network
client that allows users to enjoy music stored on a PC or Rio Central. SONICblue
also markets and sells a variety of Rio product accessories.

Go-Video. SONICblue's Go-Video products include dual-deck VCRs and
integrated DVD/VCRs. The Go-Video DVR4000, an integrated DVD/VCR, allows users
to watch a DVD while recording a television program, without the need or space
for two separate components. SONICblue holds patents related to dual-deck
technology and licenses this technology to other manufacturers for inclusion in
their consumer devices.

In addition to its Go-Video dual-deck and integrated products, SONICblue
recently introduced the Go-Video DVP850, a stand-alone DVD player, and the
Go-Video DHT7100, an "all-in-one" home theater system consisting of a DVD
player, 270-watt amplifier, Dolby Digital decoder, 30-channel pre-set am/fm
receiver, five satellite speakers, and a subwoofer.

ReplayTV. SONICblue designs, develops, and markets DVR products and
services under the ReplayTV brand. SONICblue's ReplayTV 4000 DVR connects to a
home network and a broadband Internet connection, allowing users to view
recorded programming content stored on another networked ReplayTV 4000 device in
their own home and allows users to send recorded programming content to friends
4

and family members who also use ReplayTV 4000 devices. The ReplayTV 4000
features Commercial Advance technology that, if enabled by the user,
automatically skips through recorded commercial advertising content. SONICblue's
top ReplayTV 4000 model holds up to 320 hours of recorded video programming.

SONICblue licenses its ReplayTV technology and software to other companies
seeking to implement DVR solutions, such as Motorola and Matsushita. In
addition, SONICblue is examining the inclusion of ReplayTV technology in future
Go-Video and Rio devices.

Modems. SONICblue develops and markets analog modems under the
Supra/Diamond brand name.

SONICblue's development, manufacture and marketing of its current and
future products are subject to a number of risks discussed in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors That May Affect Our Results."

SONICBLUE'S INVESTMENTS

In 1995, SONICblue entered into a joint foundry venture with United
Microelectronics Corporation, or UMC, to build United Semiconductor Corporation,
or USC, a semiconductor manufacturing facility in Taiwan, R.O.C. In January
2000, USC merged with UMC and, as a result of the merger; SONICblue received 252
million UMC shares in exchange for its USC shares. SONICblue recorded a gain on
the transfer of the shares of $884.2 million to recognize the difference in the
carrying value of its investment in USC and the fair market value of the UMC
shares. SONICblue also received stock dividends of approximately 50 and 32
million shares of UMC stock, in April 2000 and August 2001, respectively. The
Company sold 15 million shares of UMC stock in 2000 and sold 191 million shares
in 2001 on the Taiwan Stock Exchange.

Under the terms of the USC merger with UMC, a portion of the original
number of UMC shares received by SONICblue are subject to restrictions on their
sale that lapse over a three-year period from the date of the merger. At
December 31, 2001, approximately 76 million shares were subject to restrictions
that will lapse in one year or more and are recorded at adjusted cost as a
long-term investment. The unrestricted shares and shares where the restrictions
will lapse in one year or less are recorded as a current asset and are
marked-to-market value through other comprehensive income.

As of December 31, 2001, SONICblue's 128 million UMC shares were worth
approximately $186 million, based on the closing price of UMC shares on the
Taiwan Stock Exchange and the prevailing U.S. dollar to New Taiwan Dollar
exchange rate on that date. SONICblue's available-for-sale portion of the
investment, 52 million shares valued at $75.9 million, will be marked-to-market
through other comprehensive income for changes in market value subsequent to
December 31, 2001, unless a further decline in market value is considered to be
other than temporary. If any further decline is considered to be other than
temporary, the decrease in value of both the available-for-sale and long-term
portions of our UMC investment will be recorded as an expense in the statement
of operations.

At December 31, 2001, SONICblue also held minority investment interests in
the following privately held companies: RioPort, Inc., CyberPIXIE.com, Inc.,
DataPlay, Inc., and Intellon Corporation. All investments are accounted for on a
cost basis with the exception of RioPort, which is accounted for by the equity
method.

MARKETS AND STRATEGY

SONICblue's business strategy is to create large-scale opportunities for
the Company within rapidly growing areas of the consumer electronics market.
SONICblue has the proven ability to deliver innovative technology to these
markets and compel consumers to convert to new technology and set higher
technology expectations within the market category. SONICblue seeks to exploit
and expand its technology lead in these markets by offering numerous new
entertainment-based products and services. SONICblue also seeks to license its
technology to other companies looking to join and help further expand these new
markets. In each new market, the end goal for SONICblue is to affect significant
market conversion to new technology by making this new technology easier to use
and more pervasive. This strategy can be seen across SONICblue's current product
lines with the creation and expansion of digital audio technology under its Rio
brand, the creation and expansion of digital video/TV technology under its
ReplayTV brand and the creation and expansion of "dual" video playback under its
Go-Video brand.

SONICblue's objectives for 2002 include: mass market penetration for its
ReplayTV technology with additional product and service offerings, new
partnerships and broad licensing deals; continued leadership in portable digital
audio through new flash, optical and hard drive-based Rio portable offerings;
expansion of the Rio brand in the home audio market; wider retail availability
for, and the addition of new digital video features to its Go-Video Dual Deck
product offerings; and the expansion of the Go-Video brand into new market
segments including home theater systems and stand-alone DVD players.

SALES, MARKETING, DISTRIBUTION AND CUSTOMER SUPPORT

SONICblue sells products directly to retailers, mass merchants and other
resellers and through independent domestic and international distributors. We
also sell our retail products in the United States through e-commerce web sites,
including our own on-line estore, mail order catalogs and national reseller
organizations. SONICblue is currently seeking to expand its penetration of
e-commerce, retail and mass-merchant consumer electronics channels.

A majority of the Company's trade receivables result from sales to
retailers in the consumer electronics industry. Costco and Best Buy accounted
for 13% and 12%, respectively, of net sales in 2001, excluding the net sales of
S3-VIA, Inc. Three resellers accounted for 60% of the Company's gross accounts
receivable balance at December 31, 2001. One reseller and one distributor
accounted for 43% of the Company's gross accounts receivable balance at December
31, 2000.

SONICblue has been making significant efforts to expand its retail sales
channels through international penetration in Europe and the Asia-Pacific
region, including Japan. The requirements of these regions are, however,
substantially different from one another and from the North American market. The
inability of SONICblue to successfully penetrate any of these channels or to
manage them on a profitable basis could have a material adverse effect on future
operating results.

International sales accounted for 24%, 56% and 70% of net sales in 2001,
2000 and 1999, respectively. Sales of our products are primarily in the U.S. and
to a lesser extent in Europe and Asia. Prior to the transfer in January 2001 of
our graphics chips business to VIA and the shutdown of our graphics boards
business in August 2000, a significant percentage of our sales were to
international original equipment manufacturers. Our efforts to expand
international distribution of current products continue to subject SONICblue to
the risks of conducting business internationally, including those set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Factors That May Affect Our Results -- SONICblue Has
Significant Exposure to International Markets."

SONICblue maintains a customer service and technical support organization
focused on providing value to customers beyond the purchase of SONICblue's
products. In this regard, SONICblue provides on-line customer service and
technical support to retail customers via e-mail and telephone. SONICblue
supports the online community through its presence on the Internet, where
technical support, frequently asked questions and a searchable knowledge base
can be found.

RESEARCH AND DEVELOPMENT

SONICblue believes that continued investment in research and development is
critical to its ability to introduce, on a timely basis and at competitive
prices, new and innovative products incorporating the latest technology and
addressing emerging market needs. SONICblue's research and development staff
consisted of 103 employees at December 31, 2001. SONICblue's engineers are
engaged in the development of new products such as new generations of audio and
video hardware products and related software. Research and development expenses
were $28.7 million, $83.4 million and $73.9 million in the years ended December
31, 2001, 2000 and 1999, respectively.

SONICblue also endeavors to work closely with third parties that are
strategic to SONICblue's business. Specifically, we work with suppliers of audio
and video chipsets in an effort to select the appropriate advanced components
for SONICblue's new digital media products. SONICblue seeks to develop in a
timely manner the software required to incorporate these chipsets into
SONICblue's products and our products into the evolving architecture and
capabilities of the PC and the Internet. SONICblue also works with leading
operating system providers and software applications suppliers in an effort to
stay abreast of emerging opportunities and new standards in the market. There
can be no assurance that SONICblue's development efforts will be successful or
that SONICblue will be able to introduce competitive new products into the
marketplace in a timely manner.

MANUFACTURING METHODOLOGY

SONICblue uses an international network of independent electronics assembly
subcontractors, principally located in Asia, to assemble and test its products.
SONICblue generally procures its current hardware products on a turnkey basis
from its subcontract-manufacturing suppliers. SONICblue packages certain of the
assembled products its receives from its subcontractors with software, manuals
and additional hardware components, placing such materials in retail packaging
for the retail and mass-merchant channel. While SONICblue uses several
electronics assembly subcontractors to minimize the risk of business
interruption, there can be no assurance that a problem will not arise with one
or more of these suppliers that could adversely affect operating results.
Accordingly, there can be no assurance that SONICblue will obtain sufficient
sources of supply of product to meet customer demand in the future.

Although SONICblue extensively tests its software and hardware products
prior to their introduction, it is possible that design errors may be discovered
after initial product sampling, resulting in delays in volume production or
recall of products sold. The occurrence of any such errors could have a material
adverse effect on SONICblue's reputation, product introduction schedule and
operating results.

COMPETITION

The markets in which SONICblue operates are extremely competitive, and
SONICblue expects that competition will increase. SONICblue competes directly
against a large number of suppliers of portable audio players, home audio and
video subsystems, digital video recorders, integrated DVD/VCR players and
digital technology licensing and service providers.

In the digital audio player market, competitors include Creative Technology
under the name of Creative Labs, Compaq, Panasonic, Apple, Samsung, Philips,
Sony and Thomson Multimedia. Additional competitors in the digital audio players
market include manufactures of digital audio player add-ons to PDAs, handheld
consumer electronics, digital audio player mobile telephones and CD MP3 players,
such as Handspring, Motorola, Samsung and TDK, respectively. In the home digital
audio market, competitors include Compaq, Gateway, HP, Kenwood and Philips. In
the digital video recorders market, competitors include TiVo, RCA, Sony,
Philips, Panasonic and Microsoft. In the DVD/VCR players market, competitors
include Panasonic and Samsung. In the home theatre-in-a-box solutions market,
competitors include Philips, Sony, Pioneer and many others. In the analog modems
market, competitors include Creative Labs and 3Com.

SONICblue believes that its ability to compete successfully depends upon a
number of factors both within and outside of its control, including product
performance, product features, product availability, price,

brand strength, quality, timing of new product introductions by SONICblue and
its competitors, the emergence of new digital audio and video standards,
customer support and industry and general economic trends. SONICblue believes
that it competes favorably with respect to these factors. There can be no
assurance that SONICblue will have the financial resources, technical expertise
or marketing, distribution and support capabilities to compete successfully.
SONICblue's future success will be highly dependent upon the successful
development and introduction of new products that are responsive to market
needs. There can be no assurance that SONICblue will be able to successfully
develop or market any such products.

LICENSES, PATENTS AND TRADEMARKS

SONICblue, when appropriate, files United States patent applications for
its technology. SONICblue has also built its patent portfolio through
acquisitions, including patent purchases and cross-licenses as well as through
its acquisition of Diamond, Sensory Science and ReplayTV. SONICblue currently
has 102 United States patents. SONICblue attempts to protect its trade secrets
and other proprietary information through agreements with its customers,
suppliers, employees and consultants, and through other security measures.
Although SONICblue intends to protect its rights vigorously, there can be no
assurance that these measures will be successful or that any issued patents will
provide SONICblue with adequate protection with respect to the covered products,
technology or processes.

SONICblue has applied to the United States Patent and Trademark Office for
registration of a number of trademarks and also holds common law rights in a
number of trademarks. SONICblue has also applied for trademark registration of
some of its trademarks in certain foreign jurisdictions. There can be no
assurance that SONICblue will obtain the registrations for which it has applied.
If SONICblue's use of a registered or unregistered trademark were found to
violate a third party's common law or statutory trademark rights, SONICblue's
business could be adversely affected.

In addition, the laws of certain countries in which SONICblue's products
are or may be developed, manufactured or sold, including China, Japan and
Taiwan, may not protect SONICblue's products and intellectual property rights to
the same extent as the laws of the United States.

BACKLOG

Sales of SONICblue's products are often made pursuant to standard purchase
orders that are cancelable without significant penalties. In addition, purchase
orders are subject to price renegotiations and to changes in quantities of
products and delivery schedules in order to reflect changes in customers'
requirements and manufacturing availability. SONICblue's business, and to a
large and growing extent that of the entire consumer electronics industry, is
characterized by seasonality, short lead time orders and quick delivery
schedules. In addition, SONICblue's actual shipments depend on the manufacturing
capacity of SONICblue's suppliers and the availability of products from such
suppliers. As a result of these factors, SONICblue does not believe that its
backlog at any given time is a meaningful indicator of future sales.

EMPLOYEES

At December 31, 2001, SONICblue employed 368 individuals including both 337
full time employees and 31 contractors, of whom 103 were employed in research
and development, 97 in operations and technical support, 84 in sales and
marketing and 84 in administration and other support functions. Competition for
personnel in the Internet, digital media, entertainment and consumer electronics
industries is intense, as is competition for all categories of personnel in the
Silicon Valley where many of SONICblue's employees are located. SONICblue
believes that its future success will depend, in part, on its ability to
continue to attract, train, motivate, retain and manage highly skilled
technical, marketing and management personnel.

None of SONICblue's employees are represented by a labor union or are
subject to a collective bargaining agreement. SONICblue believes that its
relations with its employees are good.

ITEM 2. PROPERTIES

Our principal administrative, sales, marketing, research and development
facility in Santa Clara, California consists of one building of approximately
150,000 square feet of space, which is leased through January 2008. We relocated
to our Santa Clara facility in 1997, at which time we leased and occupied both
our current space and an adjacent building also consisting of approximately
150,000 square feet. In October 1998, we sublet one of the buildings for the
remaining term of the lease.

SONICblue also leases administrative, sales, marketing, research and
development facilities of 44,000 square feet in Tigard, Oregon, expiring in June
2008, and 39,000 square feet in Scottsdale, Arizona expiring in December 2006.
SONICblue leases international sales, distribution or technical support offices
in the United Kingdom, Germany, France, Japan, and South Korea. Additionally, we
lease warehouse and logistics facilities in California, Arizona, Germany and
Hong Kong. The Company believes that its current facilities are adequate to meet
its future growth expectations.

ITEM 3. LEGAL PROCEEDINGS

The Internet, digital media, entertainment and consumer electronics
industries are characterized by frequent litigation, including litigation
regarding patent and other intellectual property rights. SONICblue is party to
various legal proceedings that arise in the ordinary course of business. While
we currently believe that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
the Company's financial position or overall trends in results of operations,
litigation is subject to inherent uncertainties. There can be no assurance that
an adverse result or settlement with regard to these lawsuits would not have a
material adverse effect on SONICblue's financial condition or results of
operations.

Since November 1997, a number of complaints have been filed in federal and
state courts seeking unspecified damages on behalf of an alleged class of
persons who purchased shares of SONICblue's common stock at various times
between April 18, 1996, and November 3, 1997. The complaints name as defendants
SONICblue, certain of its officers and former officers, and certain directors of
SONICblue, and Deloitte & Touche, the company's former auditors, and assert that
they violated federal and state securities laws by misrepresenting and failing
to disclose certain information about SONICblue's business. In addition, certain
stockholders have filed derivative actions in the state courts of California and
Delaware seeking recovery on behalf of SONICblue, alleging, among other things,
breach of fiduciary duties by such individual defendants. The plaintiffs in the
derivative action in Delaware have not taken any steps to pursue their case. The
derivative cases in California State court have been consolidated, and
plaintiffs have filed a consolidated amended complaint. The court has entered a
stipulated order in those derivative cases suspending court proceedings and
coordinating discovery in them with discovery in the class actions in California
State courts. In late 2001, the derivative plaintiffs gave notice terminating
that stay, and the parties have stipulated that a second amended consolidated
complaint may be filed in April 2002. On plaintiffs' motion, the federal court
has dismissed the federal class actions without prejudice. The class actions in
California State court have been consolidated, and plaintiffs have filed a
consolidated amended complaint. SONICblue has answered that complaint. Discovery
is proceeding. On January 22, 2001, four of the insurance carriers which issued
directors and officers insurance to SONICblue filed suit against all parties
named as defendants in the securities litigation, claiming that the carriers
have no obligation to provide coverage under the California Insurance Code. In
May 2001, the court entered an order staying the insurance action pending
resolution of the securities litigation.

On February 19, 2002, the California Superior Court for Santa Clara County
entered its preliminary approval of an agreement to settle the consolidated
state court class action lawsuit. On February 20, 2002, SONICblue announced that
it had reached an agreement-in-principle to settle the related California
derivative litigation. If the Court gives final approval on the class action
settlement, SONICblue will contribute 2,401,501 shares of SONICblue common stock
and Deloitte & Touche will contribute up to $250,000 in full settlement of all
claims. The derivative settlement calls for the defendants to contribute to the
settlement their respective benefits under certain directors and officers
insurance policies in an amount of approximately $4.6 million which, net of
attorneys' fees and litigation costs, would be paid to SONICblue. Both
settlements are contingent on satisfying certain conditions, including court
approval. The total net cost of

these settlements to SONICblue, net of insurance, is expected to approximate
$8.6 million. These charges were recorded in SONICblue's fourth fiscal 2001
quarter ended December 31, 2001.

SONICblue has also been defending several putative class action lawsuits
naming Diamond, which were filed in June and July 1996 and June 1997 in the
California Superior Court for Santa Clara County and the U.S. District Court for
the Northern District of California. The plaintiffs alleged that Diamond and the
other defendants made various material misrepresentations and omissions during
the class period. The parties have tentatively agreed to settle this matter,
subject to final documentation and court approval, for a payment of $15.0
million. SONICblue funded $4.5 million of the settlement on November 1, 2000.
SONICblue previously accrued this amount in connection with the merger with
Diamond. SONICblue believes that Diamond's insurance covers the remaining $10.5
million of the settlement; Diamond's insurers have funded that amount into the
settlement, although one of these insurers has served a notice of arbitration
disputing its obligation to pay $3 million of the $10.5 million. The contesting
insurer maintains that indemnification of its share of the settlement is barred
by virtue of a recent California appellate decision. SONICblue has been
defending the arbitration vigorously. The matter is being briefed, and a
preliminary conference is scheduled for April 2002.

C3 Sales, Inc. filed suit against SONICblue on October 6, 1999, in the
Harris County (Houston), Texas District Court. The petition sought a judicial
declaration that a Sales Representative Agreement entered into between C3 and
SONICblue on May 19, 1999, was a valid contract that governed the relationship
between the two parties. In December 1999, SONICblue filed a summary judgment
motion seeking judgment against C3 on the grounds that no issues of material
fact remain to be determined regarding the declaratory judgment sought by C3. C3
responded by filing an amended petition alleging that the Sales Representative
Agreement applied to Diamond products, and that certain commissions due under
the agreement were not paid. The parties settled this matter in October 2001 for
$3.1 million, which was adequately reserved by the Company.

In October and November, 2001, a group of 28 entertainment companies
including, among others, Paramount Pictures Corporation, Disney Enterprises,
Inc. and the three major television networks filed four lawsuits against
SONICblue and its ReplayTV, Inc. subsidiary in the U.S. District Court in Los
Angeles, California. The lawsuits allege that the Company's planned manufacture
and sale of the ReplayTV 4000, which allows users to skip commercials and to use
the Internet to send recorded material to other ReplayTV 4000 users, constitutes
copyright infringement, among other claims. The plaintiffs in the lawsuits are
seeking an injunction prohibiting the Company from including these features in
its video products. Although one of the lawsuits originally alleged that the
Company's Go-Video VCRs featuring the commercial skipping technology similarly
violate the copyright laws, in their amended complaint plaintiffs eliminated
these claims in November 2001. The parties have commenced discovery and the
District Court has preliminarily scheduled a consolidated trial in August 2002.
SONICblue intends to dispute the plaintiffs' claims and defend this action
vigorously.

On June 19, 2000, an individual, Valentin Pepelea, filed a lawsuit against
ReplayTV, Inc. in Santa Clara County Superior Court alleging that ReplayTV and
its founders misappropriated trade secrets allegedly disclosed by Mr. Pepelea in
discussions with the founders in the spring of 1997, and that he had been
promised a founder's share in ReplayTV. On January 17, 2001, Mr. Pepelea amended
his complaint to seek licensing royalties as a remedy. The parties entered into
a written settlement agreement in this matter in March 2002 pursuant to which
Mr. Pepelea will dismiss his complaint.

preferred stockholders. The complaint seeks "at least $7,249,990.50" in damages.
In its merger agreement with ReplayTV, SONICblue agreed to indemnify ReplayTV
and its former directors against this type of lawsuit, among other things. On
February 15, 2002, ReplayTV and the former ReplayTV directors filed their
answer. SONICblue and ReplayTV intend to dispute the plaintiffs' claims and
vigorously defend these actions.

On December 12, 2001, SONICblue filed a complaint for patent infringement
against TiVo, Inc. in the United States District Court for the Northern District
of California. SONICblue's complaint generally alleges that TiVo is infringing
one of its patents by licensing and offering to license its DVR technology and
offering its program guide service. In response, TiVo filed a counter-complaint
against SONICblue which generally alleges that SONICblue is infringing one of
TiVo's patents by making, selling, offering to sell its ReplayTV DVRs. TiVo
filed a separate complaint with substantially the same allegations in the same
court on January 23, 2002. SONICblue intends to vigorously defend itself against
the allegations made in TiVo's complaint and counter complaint.

On November 28, 2001, Techsearch, LLC filed a complaint for patent
infringement against a number of consumer electronics companies, including
SONICblue, in the United States District Court for the Northern District of
Illinois. Techsearch's complaint generally alleges that SONICblue is infringing
one of its patents by making, selling, and offering to sell its Rio Volt CD
players that are capable of playing CDs encoded with audio tracks in the MP3
format. SONICblue intends to dispute the plaintiff's claims and vigorously
defend itself against the allegations made in Techsearch's complaint.

On February 14, 2000, Robert C. Price filed a purported class action
lawsuit in the Circuit Court of Monroe County, State of Indiana against the
Company and Diamond alleging violations of the California Business and
Professions Code section 17200 and the California Song-Beverly Act, which covers
consumer warranties. The lawsuit alleges that certain of the Company's Rio 300
MP3 player retail boxes, which were discontinued in approximately 1999, are
misleading because the boxes indicate that computer software included in the
package allows the purchaser to convert audio tracks on CDs to the MP3 audio
format, but the software included with the product permitted only 50
conversions. The Company answered the complaint on April 27, 2000, denying
plaintiff's allegations. A status conference was conducted on July 26, 2000, and
a further status conference was held on January 10, 2001. Discovery has
commenced. No class has been certified, but a further status conference to set a
timetable for resolution of class certification issues has been scheduled for
April 17, 2002. SONICblue intends to contest the certification of the purported
class, dispute the lawsuit's allegations and defend this action vigorously.

On or about November 27, 2001, Pac Tec, a division of La France
Corporation, filed a civil action against SONICblue and one of its suppliers,
Manufacturer' Services Limited, in the United States District Court for the
Eastern District of Pennsylvania, alleging claims against both defendants
jointly for breach of contract and promissory estoppel. In the complaint, the
plaintiff prays for damages in excess of $2.5 million, plus prejudgment interest
and costs of suit. On or about February 15, 2002, the Company filed a motion to
dismiss the complaint or for a more definite statement. Opposition to the motion
has not yet been served, nor has a date for hearing or other disposition of the
motion been set. SONICblue intends to vigorously dispute the plaintiff's claims
and defend itself against this action.

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

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the Nasdaq National Market under the symbol
"SBLU." SONICblue was incorporated as S3 Incorporated on January 9, 1989, and
changed its name to SONICblue Incorporated in November 2000. Through November
14, 2000, our common stock was traded on the Nasdaq National Market under the
symbol "SIII." The following table indicates the range of the high and low sales
prices on Nasdaq as reported in its consolidated transaction reporting system.

<Table>
<Caption>
HIGH LOW
------ ------

2001
First Quarter............................................. $ 8.25 $ 4.11
Second Quarter............................................ 5.45 3.01
Third Quarter............................................. 3.30 1.00
Fourth Quarter............................................ 4.20 0.81
2000
First Quarter............................................. 24.44 11.16
Second Quarter............................................ 19.75 12.06
Third Quarter............................................. 14.81 8.22
Fourth Quarter............................................ 10.50 3.63
</Table>

As of March 26, 2002, there were approximately 2,469 holders of record of
the Company's common stock. The Company has never declared or paid cash
dividends on its capital stock and does not anticipate paying any cash dividends
in the foreseeable future. The Company currently intends to retain future
earnings for the development of its business.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
--------- ---------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)

STATEMENT OF OPERATIONS DATA
Net sales........................... $ 213,823 $ 536,704 $ 352,583 $ 224,639 $436,359
Gross profit (loss)................. (61,755) (11,912) 45,422 (2,072) 135,174
Research and development expenses... 28,706 83,433 73,896 78,566 78,612
Selling, marketing and
administrative expenses........... 102,910 126,852 52,832 41,926 55,879
Restructuring expense and impairment
charge............................ 130,323 6,694 -- 33,335 17,180
In-process research and
development....................... 5,078 -- 6,700 8,000 --
Amortization of goodwill,
intangibles and deferred
compensation...................... 33,686 44,440 12,156 -- --
Loss from operations................ (362,458) (273,331) (100,162) (163,899) (16,497)
Net income (loss)(2)................ (756,249) 312,828 (30,780) $(113,204) $ 8,878
Earnings (loss) per share amounts:
Basic............................. $ (8.81) $ 3.46 $ (0.52) $ (2.22) $ 0.18
Diluted(1)........................ $ (8.81) $ 3.13 $ (0.52) $ (2.22) $ 0.17
Shares used in computing per share
amounts:
Basic............................. 85,855 90,390 59,244 51,078 49,519
Diluted(1)........................ 85,855 101,150 59,244 51,078 51,740

</Table>

BALANCE SHEET DATA
Cash and cash equivalents........... $ 15,251 $ 36,582 $ 45,825 $ 31,022 $ 90,484
Short-term investments.............. 82,737 237,690 58,918 88,553 27,186
Working capital..................... (36,335) 167,301 100,149 152,244 209,993
Total assets........................ 413,507 1,099,305 722,647 325,801 492,854
Long-term obligations............... 22,764 4,040 12,010 13,837 27,070
Convertible subordinated notes...... 103,300 103,300 103,500 103,500 103,500
Stockholders' equity................ 93,560 671,653 382,633 163,530 270,840
</Table>

- ---------------

(1) Diluted earnings (loss) per share includes the effect of incremental shares
issuable upon the conversion of the convertible subordinated notes, the
dilutive effect of outstanding options and an adjustment to net income for
the interest expense (net of income taxes) related to the notes unless the
impact of such conversion is anti-dilutive. The effect of the conversion was
anti-dilutive in 2001, 1999 and 1998.

(2) Our comparative financial results have been affected by equity investments,
impairment of intangibles, exiting the chip and board businesses, and our
UMC investment.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and
related Notes included elsewhere in this Report.

When used in this discussion, the words "expects," "anticipates,"
"believes," "estimates" and similar expressions are intended to identify
forward-looking statements. These statements, which include statements as to
sources of revenues, development of technology and products, product mix, the
percentage of net sales represented by any particular new or current product,
customer concentration, trends in average selling prices, seasonality and trends
in shipment levels, the percentage of export sales, trends in net loss, net
income, gross margins and cash flow, expected expense levels and plans to reduce
expenses, improve supply chain management and focus on higher volume and margin
products, the availability and cost of products from the Company's suppliers,
investments in research and development, capital expenditures, capital
requirements and adequacy of capital resources, expected stock dividends from
our UMC stock, plans regarding future financing alternatives, are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are not limited
to, those risks discussed below, as well as risks relating to SONICblue's
ability to develop and timely introduce products that address market demands,
manufacturing difficulties, the ability of the Company to obtain and retain
customers, the impact of alternative technological advances and competitive
products, market fluctuations, developments in and expenses relating to
litigation, SONICblue's ability to integrate acquired businesses and in a timely
manner, the costs of integrating acquired businesses and technologies, and the
matters discussed in "Factors That May Affect Our Results." These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any statement is based.

OVERVIEW

SONICblue designs, develops and markets products for the converging
Internet, digital media, entertainment and consumer electronics markets. Our
products include Rio digital audio players, ReplayTV personal television
technology and software solutions; and Go-Video Dual-Deck VCRs and integrated
DVD+VCRs. Prior to the transfer in January 2001 of our graphics chips business
to S3 Graphics Co., Ltd., we were a supplier of graphics and multimedia
accelerator subsystems for PCs for over ten years.

ACQUISITIONS AND DIVESTITURES

On June 27, 2001, SONICblue completed the acquisition of Sensory Science
Corporation, a developer of consumer electronics products, including dual deck
videocassette player/recorders and DVD players. The acquisition was accounted
for as a purchase. At closing, SONICblue issued approximately 1.3 million shares
of SONICblue common stock to Sensory Science stockholders in exchange for the
common stock of Sensory Science outstanding, and Sensory Science became a wholly
owned subsidiary of SONICblue. Prior to closing the acquisition, SONICblue made
loans to Sensory Science in the amount of $9.8 million, which became part of the
purchase price.

On February 1, 2000, the Company completed the acquisition of substantially
all of the assets of Number Nine Visual Technology Corporation ("Number Nine").
The purchase price of $5.3 million included $5.1 million of cash and $0.2
million in estimated expenses of the transaction. The purchase price was
allocated as follows: $0.7 million to the estimated fair value of Number Nine
net assets, $0.5 million to workforce-in-place and $4.1 million to goodwill.
Goodwill was recorded as a result of consideration paid in excess of the fair
value of net tangible and intangible assets acquired. Goodwill and identified
acquisition related intangible assets have been amortized on a straight-line
basis over 5 years.

SONICblue has deferred recognition of any gain until a comprehensive settlement
of all outstanding issues is reached with VIA.

In September 1999, SONICblue made a significant strategic shift by merging
with Diamond Multimedia Systems, Inc. ("Diamond"), an established PC original
equipment manufacturer or OEM and retail provider of communications and home
networking solutions, PC graphics and audio add-in boards and digital audio
players. The transaction was accounted for as a purchase and, accordingly, the
results of operations of Diamond and the estimated fair value of assets acquired
and liabilities as of September 24, 1999, assumed are included in SONICblue's
consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate these estimates, including those
related to revenue recognition, impairment of long-lived assets, inventories,
legal contingencies, allowance for doubtful accounts and impairment of goodwill
and intangible assets. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

We believe that of the significant accounting policies used in the
preparation of our consolidated financial statements (see Note 1 to the
Consolidated Financial Statements), the following are critical accounting
policies, which may involve a higher degree of judgment, complexity and
estimates.

Revenue Recognition -- We record estimated reductions to revenue for
customer programs and incentive offerings, including price protection,
promotions and special pricing agreements. If a different number of customers
redeem incentives than estimated, adjustments to revenue may be required.
Accruals for estimated sales returns are recorded at the time of the sale. These
estimates are based on historical sales returns, analysis of credit memo data
and other known factors. If the historical data used to calculate these
estimates is not representative of future returns, additional adjustments to
revenue may be required.

Impairment of Long-lived Assets -- Our long-lived assets include a
long-term investment in UMC. The recorded value of the long-term investment in
UMC is dependent upon the economic conditions in the semiconductor industry and
the economy in general. If there is a decline in value that is considered to be
other than temporary, we will be required to decrease the value of our long-term
investment in UMC, which will be recorded as expense in the period of the
decline. We analyze our UMC investment at least quarterly. The short-term
portion of the investment represents the unrestricted shares or "available for
sale" shares. These shares are recorded as a current asset and are
marked-to-market value quarterly. Any holding gain or loss is recognized as a
separate component of stockholders' equity as required by SFAS 115. The
restricted or long-term portion of the investment is recorded at adjusted cost
as a long-term investment. These shares are marked-to-market value only if a
decline in value is deemed to be other than temporary or a permanent impairment.
In the event of a permanent impairment, the decrease in value of the short and
long-term portions of the UMC investment are recorded as expense in the
statement of operations.

Inventories -- We record inventory at the lower of cost or market. Our
products typically experience short life cycles and in determining market value,
we make assumptions about future demand and market

conditions. We utilize a 3-month rolling forecast to identify potential excess
and obsolete or slow moving inventory. We may apply judgment to the amounts thus
identified in establishing the reserve requirements. If actual conditions are
less favorable than the assumptions used, additional inventory write-downs may
be required.

Legal Contingencies -- We are currently involved in certain legal
proceedings. Where we believe it is probable an obligation exists we have
accrued an estimate of the costs for the resolution of these claims. This
estimate has been developed in consultation with outside counsel and is based
upon an analysis of potential results, assuming a combination of litigation and
settlement strategies. We do not believe these proceedings will have a material
adverse effect on our consolidated financial position. It is possible, however,
that future results of operations for any particular quarterly or annual period
could be materially affected by changes in our assumptions, or the effectiveness
of our strategies, related to these proceedings.

Allowance for Doubtful Accounts -- We evaluate the collectibility of our
accounts receivable based on a combination of factors. In circumstances where we
are aware of a specific customer's inability to meet its financial obligations
to us (e.g., bankruptcy filings, substantial down-grading of credit scores), we
record a specific reserve for bad debts against amounts due to reduce the net
recognized receivable to the amount we reasonably believe will be collected. For
all other customers, we recognize reserves for bad debts based on the length of
time the receivables are past due ranging from 0.5% for current amounts to
100.0% for amounts more than 90 days past due. If circumstances change (i.e.,
higher than expected defaults or an unexpected material adverse change in a
major customer's ability to meet its financial obligations to us), our estimates
of the recoverability of amounts due us could be reduced by a material amount.

Impairment of Goodwill and Intangible Assets -- In assessing the
recoverability of our goodwill and intangible assets we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. Assets are tested for impairment on a quarterly
basis. We use several impairment indicators such as operating losses,
significant adverse changes in the legal and economic climate, and changes in
the manner in which an asset is used. During 2001, we recorded an impairment
charge of $114.5 million. Effective January 1, 2002, we will adopt Statement of
Financial Standards No. 142, "Goodwill and Other Intangible Assets," and will be
required to analyze our goodwill for impairment issues during the first three
months of 2002, and then on a periodic basis thereafter.

RESULTS OF OPERATIONS

The following table sets forth for the years indicated certain financial
data as a percentage of net sales:

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------
2001 2000 1999
------ ----- -----

Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 128.9 102.2 87.1
------ ----- -----
Gross profit (loss)......................................... (28.9) (2.2) 12.9
Operating expenses:
Research and development.................................. 13.4 15.5 21.0
Selling, marketing and administrative..................... 48.1 23.6 15.0
Restructuring expense and impairment charge............... 60.9 1.3 --
In-process research and development....................... 2.4 -- 1.9
Amortization of goodwill, intangibles and deferred
compensation........................................... 15.8 8.3 3.4
------ ----- -----
Total operating expenses............................. 140.6 48.7 41.3
------ ----- -----
Loss from operations........................................ (169.5) (50.9) (28.4)
Gain (loss) on UMC investment............................. (262.7) 162.0 --
Loss on other investments................................. (12.8) (1.1) --
Gain on sale of manufacturing joint venture............... -- 2.7 6.4
Interest expense.......................................... (5.1) (1.7) (2.1)
Other income (expense), net............................... 1.6 (0.3) 1.8
------ ----- -----
Income (loss) before income taxes........................... (448.5)% 110.7% (22.3)%
Income tax expense (benefit)................................ (94.8) 52.4 (13.6)
------ ----- -----
Net income (loss)........................................... (353.7)% 58.3% (8.7)%
====== ===== =====
</Table>

NET SALES

Our current products are used in, and our business is dependent upon, the
converging Internet, digital media, entertainment and consumer electronics
markets. Sales of our products are primarily in the United States and to a
lesser extent in Europe and Asia. Prior to the transfer in January 2001 of our
graphics chips business to S3 Graphics and the shutdown of our graphics board
business beginning in August 2000, a significant percentage of our sales were to
international OEMs.

The following table summarizes our net sales by product line ($s in
millions):

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------

Consumer Electronics....................................... $153.1 $ 65.6 $ 15.7
Modems..................................................... 19.7 53.8 34.6
Chips (S3-VIA)............................................. 23.4 240.4 196.6
Boards..................................................... 14.3 173.9 103.8
Other...................................................... 3.3 3.0 1.9
------ ------ ------
Total.................................................... $213.8 $536.7 $352.6
====== ====== ======
</Table>

Net sales were $213.8 million in 2001, a decrease of 60.2% from $536.7
million in 2000. This decrease was due to the transfer of the graphics chips
business to S3 Graphics in January 2001, the sale of the professional graphics
division to ATI Technologies in March 2001 and the shutdown of the multimedia
board business in the third quarter of fiscal 2000. This was partially offset by
the sales of Go-Video dual-deck

VCRs and integrated DVD/VCRs, which was acquired by SONICblue through the
acquisition of Sensory Science in June 2001. More than 80% of our net sales in
2001 consisted of consumer electronics products and Diamond brand modems. We
expect that consumer electronics and modem products will represent our core
technology for the foreseeable future.

Net sales were $536.7 million in 2000, an increase of 52% from $352.6
million in 1999. This increase was due to the acquisition of Diamond in 1999 and
the inclusion of Diamond product sales in revenues beginning on September 24,
1999. Net sales in 2000 consisted primarily of graphics chips, Diamond brand
graphics add-in cards, modem and communications products and Rio digital audio
players. In 2000 our consumer electronics and modem products represented 22% of
net sales as we exited the graphics business. Net sales for 1999 consisted
primarily of graphics chip and board products. In 1999 our consumer electronics
and modem products represented 14% of net sales.

We expect that the percentage of net sales represented by any one product
or type of product may change significantly from period to period as new
products are introduced and existing products reach the end of their life
cycles. We anticipate that the majority of our revenues will continue to be
generated from our consumer electronics and modem product lines. No further
revenues are anticipated from chips and boards. We have experienced significant
year over year revenue growth in our core technology products of consumer
electronics and modems. This core revenue grew 45% to $172.8 million in 2001
from $119.4 million in 2000, and 137% to $119.4 million in 2000 from $50.3
million in 1999. Due to competitive price pressures, our products experience
declining average selling prices over time, which at times can be substantial.

Sales of our products are primarily in the United States and to a lesser
extent in Europe and Asia. International sales accounted for 24% in 2001, 56% in
2000 and 70% in 1999 of net sales, excluding the net sales of S3-VIA. Although
there can be no assurances that international sales as a percentage of net sales
will remain at current levels, we expect such sales will continue to represent a
consistent percentage of net sales. All sales transactions are denominated in
U.S. dollars.

Costco and Best Buy accounted for 13% and 12% of net sales in 2001,
excluding the net sales of S3-VIA. One customer accounted for 21% of net sales
in 2000 excluding the net sales of S3-VIA. Two customers accounted for 19% and
10% of net sales in 1999. We expect a significant portion of our future sales to
remain concentrated within a limited number of strategic customers. Sales to any
particular customer may fluctuate significantly from quarter to quarter.

GROSS MARGIN

We had a negative gross margin of 29% in 2001, a negative gross margin of
2% in 2000 and a positive gross margin of 13% in 1999. The decrease in margin in
2001 was primarily the result of costs associated with exiting the graphics
board and chip businesses as well as $58.9 million in production cancellation
costs and write-downs of tooling and obsolete inventory associated with
restructuring activities. The negative gross margin in 2000 was primarily the
result of a high sales mix of lower margin MP3 players and modem products, and a
$3.4 million charge for the write-down of inventory relating to the shutdown of
the Diamond Multimedia branded graphics add-in board business. Another factor
resulting in decreased 2000 gross margin was the highly competitive pricing
pressures in the market for mainstream and entertainment graphics accelerators.
This was partially offset by improving margins on our desktop chips and
communications products. Gross margin in 1999 was favorably affected by an
increase in average selling prices and an increase in sales of products with
higher margins, partially offset by charges for excess and obsolete inventory
and lower of cost or market provisions made in 1999.

During the quarter ended December 31, 2001, we had a positive gross margin
of 18%. This was primarily the result of adding the Sensory Science product
lines and supply chain management efficiencies as well as our focus on higher
volume and higher margin products. In the future, our gross margin percentages
may be affected by increased competition and related decreases in the unit
average selling prices particularly with respect to older generation products,
timing and volume of shipments of new products, the availability and cost of
products from our suppliers, changes in the mix of products sold and the extent
to which we incur or obtain additional licensing fees. Although there can be no
assurances, we expect gross margin improvements in the
18

upcoming year due to continuing efforts to improve supply chain management and
our focus on higher volume and higher margin products.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist primarily of salaries, related
benefits, and fees for consulting services. Research and development expenses
were $28.7 million in 2001, $83.4 million in 2000 and $73.9 million in 1999.
Research and development expenses decreased 66% from 2000 to 2001, primarily due
to reduced headcount and related personnel costs resulting from the shutdown of
our multimedia board business and the transfer of our graphics chips business.
Research and development expenses increased by 13% from 1999 to 2000 as a result
of the increased headcount and related expenses associated with the Diamond
acquisition.

We have made and intend to continue to make significant investments in
research and development to remain competitive by developing new and enhanced
products. We intend to continue to focus on core technology and products while
concentrating on efforts to reduce overhead, headcount and related costs.

SELLING, MARKETING AND ADMINISTRATIVE EXPENSES

Selling, marketing and administrative expenses consist primarily of
salaries, related benefits, selling costs, facilities costs and fees for
professional services, such as legal and accounting services. Selling, marketing
and administrative expenses were $102.9 million in 2001, $126.9 million in 2000
and $52.8 million in 1999. Selling, marketing and administrative expenses
decreased 19% from 2000 to 2001 primarily due to reduced headcount and related
personnel costs resulting from the shutdown of the multimedia board business and
the transfer of our graphics chips business and restructuring activities in
2001. This decrease was partially offset by the cost of settling securities
litigation, totaling $8.6 million in 2001.

The 140% increase in selling, marketing and administrative expenses from
1999 to 2000 was due primarily to the integration and combination of selling,
marketing and administrative headcount and related expenses associated with the
acquisition of Diamond and Empeg Limited. Other factors that affected marketing
expenses were costs associated with the refocusing of our business including our
name change and image in November 2000.

We expect a further reduction of selling, marketing and administrative
expenses in 2002 due to our on going cost containment efforts and as we fully
realize the benefits of our 2001 restructuring activities.

RESTRUCTURING EXPENSE AND IMPAIRMENT CHARGE

In April 2001, we adopted a restructuring plan relating to our long-term
strategy and focus on changes in the market, technology, customer demands, and
methods of distribution. We continued the restructuring activities in both the
third and fourth quarters of 2001. Specific actions included reducing our
worldwide workforce by approximately 200 employees, consolidating facilities,
discontinuing unprofitable products and closing offices in unprofitable
locations. Restructuring expenses of $130.3 million in 2001 primarily included
the write-off of goodwill and other intangibles ($110.2 million), facilities
closure expenses ($8.9 million), personnel severance compensation and related
expenses ($6.0 million) and contract termination and other costs ($5.2 million).
As part of the restructuring, we also expensed approximately $59.8 million in
inventory and related charges, through cost of sales.

Due to the circumstances created by the significant downturns in the
digital media markets, we recorded an impairment charge against the goodwill and
intangibles associated with our acquisitions of Diamond Multimedia and Empeg
Limited. These downturns negatively affected the forecasted revenues and cash
flows from the Diamond and Empeg Limited businesses acquired in 1999 and 2000.
In accordance with our policy, undiscounted cash flows indicated that the assets
were impaired. We calculated the impairment charge by comparing the expected
discounted future cash flows to the carrying amount of the related intangible
assets. This resulted in a $110.2 million impairment write-down of goodwill and
other intangibles during 2001.

In August 2000, we adopted a restructuring plan relating to the shutdown of
our Diamond Multimedia-branded add-in board business to reflect our long-term
strategy and focus. Specific actions taken included the write-off of intangibles
($4.4 million), facilities closure expenses ($0.8 million) and personnel
severance compensation and related expenses ($1.5 million). As part of the
restructuring, we also expensed $3.4 million in inventory, through cost of
sales.

The related accrued restructuring and impairment charges activity was as
follows (in thousands):

<Table>
<Caption>
SEVERANCE REDUNDANT
COMPENSATION AND FACILITIES GOODWILL AND CONTRACT AND
RELATED EXPENSES RELATED COSTS INTANGIBLES OTHER COSTS TOTAL
---------------- ------------- ------------ ------------ ---------

Restructuring and Impairment
Charges.................... $1,506 -- $ 4,376 $ 812 $ 6,694
Cash Payments................ (266) -- -- -- (266)
Non-Cash Charges............. -- -- (4,376) -- (4,376)
------ ------- --------- ------- ---------
BALANCE DECEMBER 31, 2000.... $1,240 -- -- $ 812 $ 2,052
Restructuring and Impairment
Charges.................... 5,969 8,856 110,162 5,336 130,323
Cash Payments................ (4,566) (928) -- (1,131) (6,625)
Non-Cash Charges............. -- (1,365) (110,162) (3,630) (115,157)
------ ------- --------- ------- ---------
BALANCE DECEMBER 31, 2001.... $2,643 $ 6,563 -- $ 1,387 $ 10,593
====== ======= ========= ======= =========
</Table>

IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES

In-process research and development expenses in 2001 included a write-off
of acquired technologies of $0.9 million related to the purchase of Sensory
Science Corporation and $4.2 million related to the purchase of ReplayTV, Inc.
In-process research and development expenses in 1999 included a write-off of
acquired technologies of $6.7 million related to the purchase of Diamond
Multimedia Systems, Inc.

The $0.9 million and $4.2 million of in-process research and development
charges represents the value, using a discounted cash flow methodology, to be
attributable to the in-process research and development of Sensory Science
Corporation and ReplayTV, Inc. based on a valuation analysis of such research
and development. These amounts were determined through valuation techniques
generally used by appraisers in the high-technology industry and were
immediately expensed in the period of acquisition because technological
feasibility had not been established and no alternative use had been identified.
Management believes that the allocation of the purchase price to in-process
research and development is appropriate given the future potential of this
research and development to contribute to our operations.

AMORTIZATION OF GOODWILL, INTANGIBLES AND DEFERRED COMPENSATION

Amortization of goodwill and intangibles was $32.8 million in 2001, $44.4
million in 2000 and $12.2 million in 1999. The decrease in 2001 is due to the
write off of approximately $110.2 million of goodwill and other intangibles in
2001, partially offset by the increased amortization associated with goodwill
and intangibles recorded in conjunction with the acquisition of Sensory Science.
Deferred compensation expense was $0.9 million in 2001 resulting from the
amortization of the $4.8 million of deferred compensation recorded in
conjunction with the acquisition of ReplayTV, Inc., and deferred compensation
expense was zero in 2000 and 1999.

Amortization of goodwill and intangibles increased $32.2 million from 1999
to 2000 primarily due to the full year of amortization of goodwill and
intangibles recorded as a result of the Diamond acquisition. The Diamond
acquisition was effective in September 1999, at which time the amortization
began.

Amortization charges should decrease further in 2002 due to the full year
impact of the 2001 write off noted above and the implementation of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 142 requires that goodwill and intangible assets with

indefinite useful lives no longer be amortized. Intangible assets with finite
useful lives will continue to be amortized over their respective useful lives.
Amortization of goodwill alone was $22.5 million in 2001, $37.0 million in 2000
and $9.7 million in 1999.

GAIN (LOSS) ON UMC INVESTMENT

The Company sold 191 million shares of UMC stock in 2001 and sold 15
million shares in 2000 on the Taiwan Stock Exchange, resulting in realized
losses of $93.3 million and $10.8 million respectively.

At December 31, 2000, the market value of the investment in UMC had
declined to an amount significantly below its original basis. We determined at
that point that this decline was related to the downturn in the semiconductor
industry as a whole and was temporary in nature due to the historically cyclical
nature of the industry. During the first half of 2001, we concluded that the
downturn in the semiconductor industry and the economy in general was more
severe than previously anticipated and that there was a great deal of
uncertainty regarding when the semiconductor industry would recover from this
down cycle. Because we concluded that the decline in value of UMC was other than
temporary, we reported an unrealized loss on the UMC investment of $468.3
million, based on the market value at June 30, 2001.

GAIN (LOSS) ON OTHER INVESTMENTS

During 2001 we recognized a loss of $27.4 million primarily related to the
write-down of certain equity investments. During 2000 we recognized a loss of
$5.5 million and during 1999 a loss of $0.1 million related to these
investments. The downturn in the economy, particularly in the high technology
sector, contributed to the decline in the market value of these securities.

GAIN ON SALE OF MANUFACTURING JOINT VENTURE

On December 31, 1997, we entered into an agreement with UMC, to sell to UMC
80 million shares of stock of USC, for a price of approximately $68.0 million.
We received the sales price in January 1998 upon closing. The gain on the sale
of stock in USC recorded in 1998 was $26.6 million. In June 1999, we amended our
agreement with UMC. Under the terms of the amended agreement, UMC agreed to pay
us approximately $37.1 million in cash and we agreed to release UMC from certain
contingencies associated with the USC stock sale and to grant a license to UMC
for certain patents for products manufactured by UMC. We recognized the gain on
this transaction over five fiscal quarters beginning in the quarter ended June
30, 1999, as payments were received. In 1999, the gain recognized on the sale of
the stock in USC was $22.4 million. In 2000, the gain recognized on the sale of
stock in USC was $14.7 million. No gain was recognized during 2001 as payments
have ceased under the agreement.

INTEREST EXPENSE

Interest expense increased to $10.9 million in 2001 up from $9.2 million in
2000 up from $7.2 million in 1999, primarily due to increased interest and bank
fees associated with lines of credit and increased borrowings. During the fourth
quarter of 2001, we paid off our remaining loan balance with China Trust. We
expect to continue to incur significant interest charges associated with our
convertible subordinated debt and, to a lesser extent, interest and fees
associated with our line of credit.

OTHER INCOME (EXPENSE), NET

Other income (expense) net was $3.4 million, $(1.9) million and $6.3
million in 2001, 2000 and 1999, respectively. The other income increase from
2000 to 2001 was primarily due to proceeds received from ATI upon reaching
certain milestones associated with the sale of our professional graphics
division and on the mark-to-market impact of our call option collars. We
obtained the call option collars in connection with the sale of a portion of our
UMC holdings in 2001. The other income decrease from 1999 to 2000 was primarily
due to foreign currency losses in 2000. The other income in 1999 consisted
primarily of foreign currency gains.

INCOME TAXES

Our effective tax benefit rate was 21.1% for 2001 as compared to an
effective tax rate of 47.4% for 2000, and a tax benefit rate of 60.9% for 1999.
Our effective tax benefit rate for 2001 reflects the expected benefits of
current year and prior year net operating loss and tax credit carryovers, offset
by valuation allowances related to our net tax assets. The effective tax rate
for 2000 reflects the effects of the gain on the UMC shares and the inability to
use the goodwill amortization and foreign losses to reduce taxable income. The
benefit tax rate for 1999 reflects the expected benefits of current year and
prior year net operating loss and tax credit carryovers. Due to uncertainty
associated with our prospective ability to realize the benefits of our tax
assets, we have fully reserved the value of our net deferred tax assets and do
not expect to record any tax benefit or provision associated with any further
operating losses in the near future dependent upon results from foreign
operations and unrealized gains from investments, including UMC shares.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased approximately $21.3 million to $15.3
million in 2001 from $36.6 million in 2000. This decrease was primarily due to
cash used in operations of $142.0 million, and repayments of notes payable and
other financing activities of $65.8 million, partially offset by cash provided
from sales of UMC and other investing activities of $186.5 million.

Cash used for operating activities was $142.0 million in 2001. This amount
was far less than our $756.2 million net loss because our net loss included
several charges that did not use cash such as the loss on our UMC investment of
$561.6 million, the decrease in deferred income taxes of $202.8 million and the
charges related to the impairment of long-lived assets of $115.5 million.

Cash used for operating activities was $221.2 million in 2000 and consisted
primarily of net income of $312.8 million, which included a non-cash gain on our
UMC investment of $869.4 million. This was partially offset by non-cash charges
including a decrease of deferred income taxes of $278.2 million and amortization
and depreciation of $64.8 million.

Investing activities provided cash of $186.5 million in 2001 and consisted
primarily of $228.6 million received from sales and maturities of short-term
investments including cash received from the sale of 191 million UMC shares on
the Taiwan Stock Exchange, offset by funding provided to ReplayTV and Sensory
Science, in connection with our acquisitions of those companies.

Investing activities provided cash of $29.5 million in 2000 and consisted
primarily of sales and maturities of short-term investments of $170.2 million,
including a portion of our UMC investment, partially offset by purchases of
short-term investments and equity investments in technology companies of $140.2
million.

Financing activities used cash of $65.8 million in 2001 and consisted of
repayments of notes payable partially offset by sales of common stock. Financing
activities provided cash of $182.5 million in 2000 and consisted of sales of
common stock of $162.0 million, including proceeds from the private sale of
stock to VIA, and borrowings under notes payable totaling $20.5 million.

We had a working capital deficit of $36.3 million at December 31, 2001, and
positive working capital of $167.3 million at December 31, 2000. The decrease in
working capital is primarily attributable to the significant degradation in the
value of our available-for-sale UMC holdings, combined with continued operating
losses and our investments in Sensory Science and ReplayTV. We funded our 2001
operating losses and investment activities primarily through the sale of a
portion of our holdings in UMC.

A portion of the UMC shares received by SONICblue are subject to
restrictions on their sale that lapse over a three-year period. At December 31,
2001, approximately 76 million shares were subject to restrictions that will
lapse in more than one year and are recorded at adjusted cost as a long-term
investment. The 52 million unrestricted shares includes shares where the
restrictions will lapse in one year or less. These shares are recorded as a
current asset and are marked-to-market value through other comprehensive income.
In addition, we expect to receive a declared stock dividend of 15 million shares
of available for sale and freely tradable stock in August 2002.

Sensory Science Corporation, a wholly owned subsidiary of SONICblue, has
loans under a line of credit with Congress Financial Corporation, which has a
maturity date of March 25, 2003. The maximum line of credit is $25.0 million
with a borrowing limit of $22.5 million, limited by a borrowing base determined
by specific inventory and receivable balances of Sensory Science and an
availability block of $5.0 million. The line of credit is collateralized by
assets of Sensory Science Corporation and by a guarantee of SONICblue.

During 2001, we sold a portion of our UMC holdings, aggregating
approximately 38.9 million shares, in a derivative transaction. In connection
with the sales of these UMC holdings, we purchased a series of call option
collars on UMC stock with an aggregate notional amount of 38.9 million shares.
These transactions provided us funds from the sale of the shares while allowing
us to participate in future increases in the value of UMC shares, if any,
through this series of call option collars.

We have incurred significant losses and expect such losses to continue for
at least the next twelve months. Our net loss for the year ended December 31,
2001 was $756.2 million. As of December 31, 2001, we had an accumulated deficit
of $487.6 million and cash, cash equivalents, and short-term investments of
$98.0 million. We expect to experience negative cash flow from operations for at
least the next few quarters and believe that sufficient funds will be available
to support planned operations through December 2002. Our future cash
requirements will depend on a number of factors including:

- the rate at which customers accept and purchase our existing and future
products;

- the rate at which we invest in engineering, development and intellectual
property with respect to existing and future products;

- the level of marketing required to acquire and maintain a competitive
position in the marketplace;

- the operational costs that we incur to continue to develop our business
as a whole;

- our ability to sell our UMC shares, when needed, and at reasonable
prices;

- receipt, in August 2002, of the declared stock dividend of 15 million UMC
shares;

- use of financial instruments to allow us to monetize our long-term UMC
share holdings;

- the willingness of the creditors of our legacy businesses to accept
extended payment terms; and

- pending litigation as discussed in Item 3 "Legal Proceedings."

We recognize the desirability for the infusion of cash during fiscal 2002
and are actively pursuing various options. However, there can be no assurance
that we will be able to raise additional funds on favorable terms or at all.

In addition, we may wish to selectively pursue possible acquisitions of, or
investments in businesses, technologies or products complementary to ours in
order to expand our geographic presence, broaden our product offerings, and
achieve operating efficiencies. We may not have sufficient liquidity, or we may
be unable to obtain additional financing on favorable terms or at all, in order
to finance such an acquisition or investment.

An adverse business or legal development may require us to raise additional
financing. We recognize that we may be required to raise such additional
capital, at times and in amounts, which are uncertain, especially under the
current capital market conditions. If we are unable to acquire additional
capital or are required to raise it on terms that are less satisfactory than we
desire, it may have a material adverse effect on our financial condition, which
could require additional restructuring of our company. If necessary, we may be
required to consider curtailing our operations significantly or to seek
arrangements with strategic partners or other parties that may require us to
relinquish significant rights to products, technologies or markets.

Our contractual obligations and commitments, which are described elsewhere
in our financial statements have been summarized in the table below:

<Table>
<Caption>
PAYMENTS DUE IN
BALANCE AS OF --------------------------------------------
CONTRACTUAL OBLIGATIONS DECEMBER 31, 2001 2002 2003-2004 2005-2006 AFTER 2006
----------------------- ----------------- ------- --------- --------- ----------
(DOLLARS IN THOUSANDS)

Lease commitments................... $ 82,919 $13,605 $ 24,368 $20,317 $24,629
Long-term debt...................... 103,300 -- 103,300 -- --
</Table>

<Table>
<Caption>
AMOUNTS EXPIRING IN
BALANCE AS OF --------------------------------------------
COMMITMENTS DECEMBER 31, 2001 2002 2003-2004 2005-2006 AFTER 2006
- ----------- ----------------- ------- --------- --------- ----------
(DOLLARS IN THOUSANDS)

Financial guarantees................ $ 662 $ -- $ -- $ -- $ --
Lines of credit..................... 15,321 -- -- -- --
</Table>

Under lease commitments we have included total future minimum rent expense
under non-cancelable leases for both current and abandoned facilities.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141
requires that all business combinations be accounted for by the purchase method
of accounting and changes the criteria for recognition of intangible assets
acquired in a business combination. The provisions of SFAS 141 apply to all
business combinations initiated after June 30, 2001. We do not expect that the
adoption of SFAS 141 will have a material effect on our consolidated financial
position or results of operations.

SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized; however, these assets must be reviewed at
least annually for impairment. Intangible assets with finite useful lives will
continue to be amortized over their respective useful lives. The standard also
establishes specific guidance for testing for impairment of goodwill and
intangible assets with indefinite useful lives. The provisions of SFAS 142 will
be effective for our fiscal year 2002. However, goodwill and intangible assets
associated with the acquisition of ReplayTV in August 2001 were subject to the
non-amortization provisions of SFAS 142 during 2001. Amortization of goodwill
alone was $22.5 million in 2001, $37.0 million in 2000 and $9.7 million in 1999.
Based upon acquisitions completed as of June 30, 2001, application of the
goodwill non-amortization provisions is expected to result in a decrease in
amortization of goodwill and intangible assets of approximately $18.2 million
for 2002 from $32.8 million to $14.6 million.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. The provisions of SFAS 144 will be
effective for our fiscal year 2002 and will be applied prospectively. We are
currently in the process of evaluating the potential impact that the adoption of
SFAS 144 will have on our consolidated financial position and results of
operations.

FACTORS THAT MAY AFFECT OUR RESULTS

BECAUSE SONICBLUE'S LARGEST FINANCIAL ASSET IS ITS SHARES OF UNITED
MICROELECTRONICS CORPORATION, THE VOLATILITY OF SONICBLUE COMMON STOCK AND
AVAILABLE CASH MAY BE INFLUENCED BY THE VOLATILITY OF UMC'S STOCK PRICE.
SONICBLUE'S ABILITY TO SELL ITS UMC SHARES IS SUBJECT TO LOCKUP AND PLEDGE
RESTRICTIONS.

SONICblue's largest financial asset is its UMC shares. The market price of
UMC's stock is subject to volatility due to general market conditions as well as
actual or anticipated changes in UMC's business prospects or quarterly or yearly
operating results. Because the UMC shares are SONICblue's largest asset, when
the price per share of UMC's stock increases or declines, the price of
SONICblue's common stock on

the Nasdaq National Market tends to follow changes in UMC's stock price.
Fluctuations in the price of SONICblue common stock caused by changes in UMC's
stock price may or may not reflect SONICblue's actual or anticipated business
prospects or quarterly results. Also, fluctuations in UMC's stock price may
cause fluctuations in SONICblue's stock price when there is no material news
regarding SONICblue or any change in its results.

In addition, due to Taiwan governmental restrictions, as of December 31,
2001, approximately 126 million of SONICblue's UMC shares are subject to lockup
restrictions, which are being released over a three-year period ending in
January 2004. As a result, SONICblue's ability to sell its UMC shares is
limited.

SONICBLUE EXPERIENCED NET OPERATING LOSSES IN THE PAST AND MAY EXPERIENCE NET
OPERATING LOSSES AGAIN IN THE FUTURE.

SONICblue had a net loss of $756.2 million for the year ended December 31,
2001, primarily resulting from the recognition of a loss of $561.6 million
related to the decline in value of its UMC shares. SONICblue had net income of
$312.8 million for the year ended December 31, 2000, primarily from recognizing
a gain of $869.4 million on the UMC shares but not as a result of income from
operations. SONICblue had a net loss of $30.8 million for 1999. With the
completion of the transfer of SONICblue's graphics chips business, SONICblue's
ability to achieve operating profitability depends primarily on its success in
refocusing its business resources and in executing its business plan for its
refocused business. In addition, SONICblue must achieve positive gross margins
at a level sufficient to offset its operating expenses. SONICblue experienced
negative gross margins in 2000 and in the first six months of 2001 and could
continue to experience negative gross margins. SONICblue cannot assure you that
it will be able to maintain the positive gross margins it achieved in the last
six months of 2001, nor can SONICblue assure you that it will be able to achieve
operating profitability. If SONICblue is unable to achieve operating
profitability or incurs future losses and negative cash flow, its stock price
would likely decline.

SONICBLUE HAS RECENTLY CHANGED THE FOCUS OF ITS BUSINESS AND MAY BE UNSUCCESSFUL
OR EXPERIENCE DIFFICULTIES IN IMPLEMENTING THIS CHANGE. IF THIS OCCURS,
SONICBLUE MAY NOT BE ABLE TO ACHIEVE OPERATING PROFITABILITY.

In January 2001, SONICblue completed the transfer of its graphics chips
business to S3 Graphics Co., Ltd., a joint venture between VIA Technologies,
Inc. and a wholly owned subsidiary of SONICblue. Concurrently, SONICblue
realigned its resources to focus on the converging Internet, digital media,
entertainment and consumer electronics markets. To that end, SONICblue recently
completed acquisitions of Sensory Science Corporation and ReplayTV, Inc., both
of which are in the consumer electronics and digital media industries. SONICblue
has a limited operating history with these markets, and its shift in focus may
prove to be unsuccessful. In connection with this shift in focus, it may be
necessary to implement new business processes and internal controls. In
addition, the convergence of these industries is new and continually evolving.
SONICblue must compete with larger, more established competitors in these
markets, and SONICblue may be unable to achieve market success. SONICblue's
profitability depends on its ability to successfully implement its new business
strategy.

SONICBLUE DEVELOPS AUDIO PRODUCTS FOR A NEW MARKET, WHICH MAY NOT DEVELOP IF
CONSUMERS DO NOT ACCEPT DIGITAL AUDIO AS THEIR PREFERRED METHOD OF LISTENING TO
MUSIC. SIMILARLY, THE MARKET FOR REPLAYTV DIGITAL VIDEO RECORDERS MAY NOT
DEVELOP IF CONSUMERS DO NOT ACCEPT PERSONAL TELEVISION.

The market for digital audio products is new and evolving. SONICblue's
digital audio products play music that consumers download from the Internet or
CDs. The success of SONICblue's digital audio products depends in part on
consumers using the Internet, rather than using solely traditional sources, such
as record stores where they buy CDs or cassette tapes, as a source of music. If
consumers do not access music on the Internet, or from their CDs, and download
it for use on SONICblue's digital audio products, a market for SONICblue's
digital audio products may not develop or may be limited. ReplayTV digital video
recorders are part of a new and largely untested market for personal television.
If television viewers do not accept and demand ReplayTV products and services,
the market for ReplayTV products will be limited.
25

A REDUCTION IN THE AVAILABILITY OR EASE OF DOWNLOADING MUSIC FROM THE INTERNET
WILL HURT THE SALES OF SONICBLUE'S PRODUCTS.

SONICblue's digital audio products play music downloaded from the Internet
and CDs. Currently, a variety of litigation is pending that could decrease the
availability of downloadable music available on the Internet. For example, the
five major record companies have sued Napster.com, an Internet service that
allows its users to swap songs. The lawsuits maintain that the swapping of music
between different users free of charge is a violation of the copyright laws in
the United States. If the record companies prevail in the litigation, and
Napster or companies offering similar services are forced to limit the selection
of music available for download or are forced to go out of business, there would
be a reduction in the amount of music available to consumers on the Internet. In
March 2001, the court issued an injunction that ordered Napster to prevent users
from trading copyrighted songs on its web site. Napster suspended its file
transfer services in July 2001, and while Napster reached a preliminary
settlement with the National Music Publishers Association, litigation continues
with respect to copyright infringement claims. Napster has announced plans to
launch a subscription-based service for digital music. Members of the music and
film industries have filed lawsuits against other web sites that offer file
transfer services similar to those previously offered by Napster.

Some web sites and record companies are working to provide fee-based
downloading of copyright-protected music files. If these web sites are
unsuccessful in providing copyright-protected music files or if consumers find
the downloading too difficult or expensive, acceptance of the Internet as a
source of music would decline. In addition, the rate at which the major record
companies make their music available for digital purchases may discourage the
use of digital audio players or reduce SONICblue's sales. Some record companies
and Internet companies are distributing, or have announced plans to create, CDs
or digital music that cannot be copied or can only be copied a limited number of
times, which would also limit the ability of users to download music from their
own CD collections or share their music with others. New copyright protection
measures, such as these, increased fees associated with making multiple copies
of music from personal collections, or changes in copyright laws, could diminish
the ability of consumers to download music to SONICblue's digital audio
products. Reductions in the availability or ease of downloading music from the
Internet, or limitations on copying from personal CDs, could also impair the use
and sale of SONICblue's digital audio products.

SONICBLUE HISTORICALLY HAS HAD SIGNIFICANT PRODUCT CONCENTRATION AND CURRENTLY
DEPENDS ON THE HEALTH OF THE CONSUMER ELECTRONICS MARKET. THIS MEANS THAT A
DECLINE IN DEMAND FOR A SINGLE PRODUCT, OR IN THE CONSUMER ELECTRONICS MARKET IN
GENERAL, COULD SEVERELY AFFECT SONICBLUE'S OVERALL REVENUES AND FINANCIAL
RESULTS.

SONICblue's revenues have historically been dependent on the markets for
graphics/video chips for PCs and on its ability to compete in those markets.
With the completion of the transfer of the graphics chips assets to a joint
venture between VIA and a wholly owned subsidiary of SONICblue, SONICblue's
remaining businesses continue to have significant product concentration.
SONICblue is dependent on the markets for digital audio players, digital and
analog video products, modems, and other consumer electronics products.
SONICblue's business would be materially harmed if it were unsuccessful in
selling digital audio players, including its Rio players, its Go Video VCRs and
DVD players or its ReplayTV digital video recorders. A decline in demand or
average selling prices for these products would have a material adverse effect
on SONICblue's sales and operating results.

SONICBLUE'S BUSINESS IS DEPENDENT ON THE INTERNET AND THE DEVELOPMENT OF THE
INTERNET INFRASTRUCTURE.

The acceptance and sale of SONICblue's products could decrease if the
infrastructure of the Internet, particularly the development of broadband
Internet access, does not continue to be developed and maintained. For example,
if consumers do not have the necessary speed and data capacity for downloading
music, rendering the Internet too slow of a method for obtaining music,
consumers may choose not to download music, which will decrease demand for
SONICblue's digital audio products. Similarly, SONICblue's ReplayTV 4000 digital
video recorders rely or will rely on high-speed access to the Internet to
provide compelling content or, to access television programming information and
send recorded programs to friends.
26

In addition, SONICblue's success will depend in large part on increased use of
the Internet, which in turn can increase demand for high-speed communications
products and the products that benefit from high-speed connections. SONICblue's
success will also depend on businesses and consumers using the Internet more
frequently for applications that use multimedia content and that require high
bandwidth. Recent growth in Internet use has caused frequent periods of
performance degradation. Any perceived degradation in the performance of the
Internet as a whole could undermine the benefits of SONICblue's connectivity and
digital media products, such as Rio digital audio players and ReplayTV 4000
products. The performance of SONICblue's products depends on the speed and
reliability of the Internet infrastructure itself. As a result, the emergence
and growth of the market for SONICblue's products will depend on improvements
being made to the entire Internet infrastructure.

THE JOINT VENTURE WITH VIA WILL REQUIRE SONICBLUE TO PAY SPECIFIED LIQUIDATED
DAMAGES IF CERTAIN EVENTS OCCUR, AND EARN-OUT PAYMENTS TO SONICBLUE FROM THE
JOINT VENTURE ARE SUBJECT TO THE JOINT VENTURE MEETING AGGRESSIVE PROFITABILITY
GOALS.

The investment agreement between SONICblue, VIA and S3 Graphics provides
that under certain circumstances, SONICblue may be required to pay VIA
significant liquidated damages if, unless as a result of certain acts or
omissions on the part of either VIA or S3 Graphics, S3 Graphics is prevented by
court order from utilizing SONICblue's patent cross-license with Intel
Corporation or if SONICblue enters into a settlement agreement with Intel such
that S3 Graphics can no longer operate under the patent cross-license. In
September 2001, Intel filed a patent infringement lawsuit against S3 Graphics
and VIA. SONICblue is not a party to the lawsuit. The lawsuit is in early
stages. Any liquidated damages that SONICblue might be required to pay to VIA
under the investment agreement may under certain circumstances be reduced by
amounts paid by SONICblue to Intel in connection with any lawsuit and amounts
owed to SONICblue by either VIA or S3 Graphics. An adverse result or settlement
with regard to these proceedings could have a material adverse effect on
SONICblue's financial condition or results of operations.

SONICblue will receive earn-out payments if S3 Graphics meets aggressive
profitability goals specified in the joint venture agreement between the
parties. There can be no assurance that S3 Graphics will be able to meet these
profitability goals.

SONICBLUE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE THE GROWTH AND EXPANSION OF ITS
BUSINESS.

In the past two years, particularly following its merger with Diamond and
with its recent acquisitions of Sensory Science and ReplayTV, SONICblue has
experienced a significant expansion in the overall level of its business and the
scope and changed nature of its operations, including manufacturing, research
and development, marketing, technical support, customer service, sales and
logistics. This expansion has resulted in significant challenges, and a need for
substantial investment in, infrastructure, process development and information
systems, including:

- attracting, integrating and retaining key employees;

- integration of management information, product data management, internal
control, accounting, telecommunications and networking systems;

- establishment of a significant worldwide web and e-commerce presence;

- consolidation of geographically dispersed manufacturing and distribution
facilities;

- coordination of suppliers, rationalization of distribution channels,
establishment and documentation of business processes and procedures; and

- integration of various functions and groups of employees.

SONICblue may not successfully address these challenges. SONICblue's future
operating results will depend in large measure on its ability to implement
operating, manufacturing and financial procedures and controls, that not only
address the expansion of its operations but also the change in focus of its
business from

graphics chips and boards to consumer electronic products, improve communication
and coordination among the different operating functions, integrate functions
such as sales, procurement and operations, strengthen management information and
telecommunications systems, and continue to hire additional qualified personnel
in key areas. SONICblue may be unable to manage these activities and implement
these additional procedures, controls and systems successfully. Any failure to
do so could cause SONICblue's short-term and long-term operating results to
suffer.

SONICBLUE'S QUARTERLY AND ANNUAL OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS
CAUSED BY MANY FACTORS, ANY OF WHICH COULD RESULT IN SONICBLUE'S FAILURE TO
ACHIEVE ITS REVENUE OR PROFITABILITY EXPECTATIONS.

SONICblue's quarterly and annual results of operations have varied
significantly in the past and are likely to continue to vary in the future due
to a number of factors, many of which are beyond SONICblue's control. Any one or
more of the factors listed below or other factors could cause SONICblue to fail
to achieve its revenue or profitability expectations. The failure to meet market
expectations would likely cause a decline in SONICblue's stock price. These
factors include:

- SONICblue's ability to develop, introduce, produce in volume quantities
and market successfully new or enhanced products;

- SONICblue's ability to introduce and market products in accordance with
market demand and short design cycles;

- changes in the relative volume of sales of various products with
sometimes significantly different margins;

- market acceptance of and changes in demand for SONICblue's products;

- rapid changes in electronic commerce on which SONICblue or its customers
may not capitalize or which erode SONICblue's current business base;

- gains or losses of significant customers, distributors or strategic
relationships;

- unpredictable volume and timing of customer orders;

- the availability, pricing and timeliness of delivery of components for
SONICblue's products, including flash memory;

- substantial disruption in SONICblue's suppliers' operations, either as a
result of natural disaster, equipment failure or other cause;

- fluctuations in the availability of manufacturing capacity or
manufacturing yields and related manufacturing costs;

- the timing of new technological advances, product announcements or
introductions by SONICblue or by its competitors;

- product obsolescence and the management of product transitions and
inventory;

- production delays;

- decreases in the average selling prices of products;

- rates of product return in excess of those forecasted or expected;

- seasonal fluctuations in sales;

- general consumer electronics industry conditions, including changes in
demand and associated effects on inventory and inventory practices; and

- general economic conditions, including economic conditions in North
America, Europe and Asia in particular, that could affect the timing of
customer orders and capital spending and result in order cancellations or
rescheduling.

Some or all of these factors could adversely affect demand for SONICblue's
products and its future operating results. Most of SONICblue's operating
expenses are relatively fixed in the short-term. SONICblue may be unable to
rapidly adjust spending to compensate for any unexpected sales shortfall, which
could harm its quarterly operating results. Because the lead times of firm
orders are typically short in the consumer products industry, SONICblue does not
have the ability to predict future operating results with any certainty. Because
of the above factors, you should not rely on period-to-period comparisons of
results of operations as an indication of future performance.

THE DEMAND FOR SONICBLUE'S PRODUCTS HAS HISTORICALLY BEEN WEAKER IN CERTAIN
QUARTERS, WHICH MAKES IT DIFFICULT TO COMPARE ITS QUARTERLY RESULTS.

Due to industry seasonality, demand for video, digital audio and other
consumer electronic products is strongest during the fourth quarter of each year
and is generally slower in the period from March through August. This
seasonality may become more pronounced and material in the future to the extent
that:

- a greater proportion of SONICblue's sales consist of sales into the
retail/mass merchant channel;

- SONICblue's net revenues become increasingly based on
entertainment-related products, including products such as its Rio
digital audio players, Sensory Science dual-deck VCRs and combination
DVD/VCR units and ReplayTV digital video recorders; or

- to the extent SONICblue expands its European sales, it may experience
relatively weak demand in the third calendar quarter due to historically
weak summer sales in Europe.

In addition, SONICblue generally ships more products in the third month of
each quarter than in either of the first two months of the quarter, with levels
of shipment in the third month being higher towards the end of the month. This
pattern is likely to continue and makes future quarterly operating results less
predictable. Because the consumer products market experiences substantial
seasonal fluctuations, with more sales occurring toward the end of the year,
SONICblue's quarterly results will be difficult to compare.

GENERAL ECONOMIC CONDITIONS AND POLITICAL AND MILITARY CONDITIONS ASSOCIATED
WITH CURRENT WORLDWIDE CONFLICTS AND SIMILAR EVENTS MAY PREVENT CONSUMERS FROM
PURCHASING SONICBLUE'S PRODUCTS, WHICH WOULD HARM ITS REVENUES.

Sales of consumer electronic products have historically been dependent upon
discretionary spending by consumers, which may be adversely affected by general
economic conditions. The slowdown in the United States economy may cause
consumers to defer decisions to purchase SONICblue's products. Some analysts
have predicted a further decline in the United States economy will result from
the terrorist attacks in the United States and any related conflicts or similar
events worldwide. If the economy continues to decline as a result of recent
economic, political and social turmoil, consumers may reduce discretionary
spending and may not purchase SONICblue's products.

THE MARKETS IN WHICH SONICBLUE OPERATES ARE INTENSELY AND INCREASINGLY
COMPETITIVE, AND IF IT IS UNABLE TO COMPETE SUCCESSFULLY, ITS REVENUES COULD
DECLINE.

The converging Internet, digital media, entertainment and consumer
electronics markets in which SONICblue competes are intensely competitive and
are likely to become more competitive in the future. Because of this
competition, SONICblue faces a constant and increasing risk of losing customers
to its competitors. The competitive environment also creates downward pressure
on prices and requires higher spending to address the competition, both of which
tend to keep gross margins lower. SONICblue believes that the principal
competitive factors for its products are:

- performance and quality;

- ability to conform and adapt to, or upgrade for, current and evolving
industry standards, including audio formats;

- access to customers and distribution channels;
29

- reputation for quality and strength of brand;

- manufacturing capabilities and cost of manufacturing;

- price;

- product support; and

- ability to bring new products to the market in a timely manner.

Many of SONICblue's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources. Some of these competitors may also have greater name recognition and
market presence, longer operating histories, greater market power and product
breadth, lower cost structures and larger customer bases. As a result, these
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, some of SONICblue's principal
competitors may have the advantage of producing their own component parts, and,
therefore, benefit from capacity, cost and technical advantages.

In some markets where SONICblue is a relatively new entrant, including
digital audio or Internet music players and digital video products, it faces
dominant competitors that include Apple (digital audio players), Compaq (home
digital audio players and digital audio players), 3Com (modems), Creative
Technology under the name Creative Labs (modems and digital audio players),
Handspring (digital audio player add-ons to PDAs), Gateway (home network digital
audio players), HP (home digital audio players), Kenwood (home digital audio
players), Microsoft (digital video recorders), Motorola (handheld consumer
electronics), Panasonic (digital audio players, digital video recorders and
combination TV/DVD/VCR players), Philips (digital audio players, home digital
audio players, digital video recorders and home theater-in-a-box solutions),
Pioneer (home theater-in-a-box solutions), RCA (digital video recorders),
Samsung (digital audio players, digital audio player mobile telephones and
combination DVD/VCR players), Sony (home theater-in-a-box solutions, consumer
electronic music, digital audio players and digital video recorders), Thompson
Multimedia (digital audio players), TDK (CD MP3 players) and TiVo (digital video
recorders). Some of SONICblue's products face a variety of competitive sources.
For example, digital audio players compete against traditional stereos and CD
players. In addition, the markets in which SONICblue competes are expected to
become increasingly competitive as PC products support increasingly more robust
multimedia functions and companies that previously supplied products providing
distinct functions (for example, companies today primarily in the sound, modem,
microprocessor or motherboard markets) emerge as competitors across broader or
more integrated product categories.

SONICBLUE OPERATES IN MARKETS THAT ARE HIGHLY CYCLICAL AND VULNERABLE TO SHARP
DECLINES IN DEMAND AND AVERAGE SELLING PRICES.

SONICblue operates in the digital media and consumer electronics markets.
These markets have in the past experienced, and may in the future experience,
significant downturns. In the event of an extensive downturn, SONICblue would
likely experience significantly reduced demand for its products and may be
pressured to reduce average selling prices. Although SONICblue is changing its
focus to concentrate on its digital media and consumer electronics businesses,
substantially all of its revenues during 1999 and 2000 were derived from
products sold for use in or with personal computers. In the near term, SONICblue
expects to derive most of its revenues from the sale of digital audio products,
such as Rio players, and video products, such as Go Video dual-deck VCR's and
combination DVD/VCR units and ReplayTV digital video recorders. Changes in
demand in digital media and consumer electronics markets could be large and
sudden. Since retailers often build inventories during periods of anticipated
growth, they may be left with excess inventories if market growth slows or if
they have incorrectly forecasted product transitions. In these cases, the
retailers may abruptly stop purchasing additional inventory from suppliers like
SONICblue until the excess inventory has been used. This suspension of purchases
or any reduction in demand for SONICblue's products would negatively impact its
revenues and financial results. SONICblue may experience substantial
period-to-period fluctuations in results of operations due to these general
industry conditions.

IF SONICBLUE IS UNABLE TO CONTINUE TO DEVELOP AND MARKET NEW AND ENHANCED
PRODUCTS, ITS AVERAGE SELLING PRICES AND GROSS MARGINS WILL LIKELY DECLINE.

SONICblue must continue to develop new products in order to maintain
average selling prices and gross margins. As the markets for its products
develop and competition increases, SONICblue anticipates that product life
cycles will shorten and average selling prices will decline. In particular,
average selling prices and, in some cases, gross margins, for each of its
products will decline as products mature. A decline in selling prices may cause
the net sales in a quarter to be lower than those of a preceding quarter or
corresponding quarter in a prior year, even if more units were sold during that
quarter than in the preceding or corresponding quarter of a prior year. To
minimize the effect of declining average selling prices, SONICblue must
successfully identify new product opportunities and develop and bring new
higher-end and higher-margin products to market in time to meet market demand.
The availability of new products is typically restricted in volume early in a
product's life cycle. If customers choose to wait for the new version of a
product instead of purchasing the current version, SONICblue's ability to secure
the manufacture of sufficient volumes of these new products to meet customer
demand will be limited. If this happens, SONICblue's revenues and operating
margins could be harmed.

IF SONICBLUE FAILS TO IDENTIFY NEW PRODUCT OPPORTUNITIES OR DEVELOP AND MARKET
NEW AND ENHANCED PRODUCTS, IT WILL NOT BE ABLE TO COMPETE SUCCESSFULLY.

The markets for which SONICblue's products are designed are intensely
competitive and are characterized by rapidly changing technology, evolving
industry standards and short product life cycles. For example, the life cycles
of the Rio audio players typically range from 12 to 18 months. If SONICblue
fails to introduce new products successfully within a given time frame,
SONICblue could lose revenues and market share. Further, continued failure to
develop, introduce and market competitive new products that meet customer
demands on time could also damage SONICblue's brand name, reputation and
relationships with its customers and cause longer-term harm to its financial
condition. SONICblue may not successfully enter the various product markets that
it identifies. In addition, the sale of new products may not become significant
or profitable. To succeed in this environment, SONICblue must anticipate the
features and functionality that customers will demand. SONICblue must then
incorporate those features and functionality into products that meet the design,
performance, quality and pricing requirements of the digital media and consumer
electronics markets in which it competes and the timing requirements of retail
selling seasons. SONICblue believes this will require continued significant
expenditures for research and development activities. SONICblue has in the past
experienced delays in completing the development and introduction of new
products and may experience similar delays in the future. In the past,
SONICblue's business was seriously harmed when it developed products that failed
to achieve significant market acceptance, and, therefore, was unable to compete
successfully in its markets. This type of failure could occur again in the
future.

SONICBLUE MUST MANAGE PRODUCT TRANSITIONS SUCCESSFULLY IN ORDER TO REMAIN
COMPETITIVE.

The introduction of a new product or product line is a complex task,
involving significant expenditures in research and development, training,
promotion and channel development, and management of existing product
inventories to reduce the cost associated with returns and slow moving channel
inventory. As new products are introduced, SONICblue attempts to monitor closely
the inventory of products to be replaced, and to phase out their manufacture in
a controlled manner. There can be no assurance that product transitions will be
executed without harming SONICblue's operating results. Failure to develop
products with required features and performance levels or any delay in bringing
a new product to market could significantly reduce SONICblue's revenues and harm
SONICblue's competitive position.

SONICBLUE DEPENDS ON A LIMITED NUMBER OF SUPPLIERS FROM WHOM IT DOES NOT HAVE A
GUARANTEE OF ADEQUATE SUPPLIES, INCREASING THE RISK THAT A LOSS OF OR PROBLEMS
WITH A SINGLE SUPPLIER COULD RESULT IN IMPAIRED MARGINS, REDUCED PRODUCTION
VOLUMES, STRAINED CUSTOMER RELATIONS AND LOSS OF BUSINESS.

SONICblue obtains several of the components used in its products, including
flash memory for its Rio players and semiconductors, hard drives, program guide
data and set-top box compatibility information for its
31

ReplayTV digital video recorders and service from single or limited sources. If
component manufacturers do not allocate a sufficient supply of components to
meet its needs or if current suppliers do not provide components of adequate
quality or compatibility, SONICblue may have to obtain these components from
distributors or on the spot market at a higher cost. SONICblue rarely has
guaranteed supply arrangements with its suppliers, and suppliers may not be able
to meet its current or future component requirements. If SONICblue is forced to
use alternative suppliers of components, it may have to alter its product
designs to accommodate these components. Alteration of product designs to use
alternative components could cause significant delays and reduce its production
of the related products. In addition, from time to time, SONICblue has
experienced difficulty meeting certain product shipment dates to customers for
various reasons. These reasons include component delivery delays, component
shortages and component quality deficiencies. Delays in the delivery of
components, component shortages and supplier product quality deficiencies will
likely continue to occur in the future. These delays or problems have in the
past and could in the future result in impaired margins, reduced production
volumes, strained customer relations and loss of business.

Also, in an effort to avoid actual or perceived component shortages,
SONICblue may purchase more of certain components than it may otherwise require.
Excess inventory resulting from over-purchases, obsolescence or a decline in the
market value of such inventory could result in inventory write-offs, which would
have a negative effect on SONICblue's financial results.

IF SONICBLUE IS UNABLE TO PREDICT MARKET DEMAND FOR ITS INDIVIDUAL PRODUCTS, AND
FOCUS ITS INVENTORIES AND DEVELOPMENT EFFORTS TO MEET MARKET DEMAND, IT COULD
LOSE SALES OPPORTUNITIES AND EXPERIENCE DECLINES IN REVENUES.

SONICblue offers a variety of products within each product line or
division. In order to arrange for the manufacture of sufficient quantities of
products and avoid excess inventories, SONICblue needs to accurately predict
market demand for each product. For example, if SONICblue predicted that
consumers would purchase the Rio Volt and plans its manufacturing accordingly,
but instead consumer demand is for the Rio 800, SONICblue would have excess
inventory of the Rio Volt and lost sales opportunities for the Rio 800, as well
as lost market share and brand confidence. SONICblue expects that it will become
even more difficult to forecast demand as it introduces and supports multiple
products and product lines and as competition in the market for its products
intensifies. Significant unanticipated fluctuations in demand could cause
problems in SONICblue's operations. SONICblue may not be able to accurately
predict market demand in order to properly allocate its manufacturing and
distribution resources among its products. As a result, SONICblue may experience
declines in its revenues and lose, or fail to gain, market share.

DEMAND FOR SONICBLUE'S DIGITAL AUDIO AND VIDEO PRODUCTS MAY DECREASE IF THE SAME
CAPABILITIES PROVIDED BY ITS PRODUCTS BECOME AVAILABLE IN OR AS ADD-ONS TO OTHER
PERSONAL ELECTRONICS PRODUCTS.

A substantial portion of SONICblue's net sales in 2001 was derived from the
sale of digital audio players. There is a trend within the personal electronics
industry for functionality from individual products to be integrated with other
personal electronics products. For example, Samsung, Fuji, Handspring and others
have developed or announced plans to develop personal electronic products, such
as mobile telephones, digital cameras or PDA plug-ins that integrate digital
audio functions, and in the digital video market, Panasonic offers combination
TV/DVD/VCR players, DirectTV offers satellite receiver set top boxes with TiVo
software installed, and Sony and Creative Labs have announced hardware and
software products that would give PCs some DVR functionality. These products
could significantly reduce the demand for SONICblue's products. As a result of
these trends of technology migration and product integration, SONICblue's
success largely depends on its ability to continue to develop products that
incorporate new and rapidly evolving technologies into its products.

SONICblue must continue to expand the scope of its research and development
efforts to provide the latest in digital audio and video technology products,
which will require that it hire and retain engineers skilled in these areas and
promote additional coordination among its design and engineering groups.
Alternatively, SONICblue may find it necessary or desirable to license or
acquire technology to enable it to provide these
32

functions. This technology may not be available for license or purchase on terms
acceptable to SONICblue, if at all.

SONICBLUE DEPENDS ON THIRD PARTIES FOR THE MANUFACTURE OF ITS PRODUCTS.

SONICblue relies on independent subcontractors to manufacture, assemble
and/or test its products. SONICblue procures its components, assembly and test
services and assembled products through purchase orders, and it does not have
specific volume purchase agreements with each of its subcontractors. Most of its
subcontractors could cease supplying the services, products or components at any
time with limited or no penalty. If SONICblue needs to replace a key
subcontractor, it could incur significant manufacturing set-up costs and delays.
Also, SONICblue may be unable to find suitable replacement subcontractors.
SONICblue's emphasis on maintaining low internal and channel inventory levels
may exacerbate the effects of any shortage that may result from the use of
sole-source subcontractors during periods of tight supply or rapid order growth.
Further, some of SONICblue's subcontractors are located outside the United
States, which may present heightened process control, quality control,
political, infrastructure, transportation, tariff, regulatory, legal, import,
export, economic or supply chain management risks.

SONICblue faces competition for access to manufacturers and manufacturing
capacity. Many of the companies competing with SONICblue for this capacity have
longer operating histories and greater financial and market resources than
SONICblue. SONICblue may not be able to maintain access to adequate capacity of
high quality manufacturing if its subcontractors choose to offer their services
to other companies who can negotiate better terms due to their market presence,
pay higher prices, engage more manufacturing capacity or offer other incentives.
As SONICblue develops new products, it will require manufacturing capacity to
produce quantities to meet market demand. If SONICblue is unable to obtain and
maintain access to high quality manufacturing capacity for its existing and
future products, it will not be able to fill distributor or customer orders, and
its revenues will decline.

SONICBLUE'S PRODUCTS COULD HAVE DEFECTS OR COMPATIBILITY ISSUES, WHICH COULD BE
COSTLY TO CORRECT AND COULD RESULT IN THE REJECTION OF ITS PRODUCTS AND DAMAGE
TO ITS REPUTATION, AS WELL AS LOST REVENUES, DIVERTED DEVELOPMENT RESOURCES AND
INCREASED SERVICE COSTS AND WARRANTY CLAIMS.

SONICblue's products could have design defects that could cause them to
malfunction. Product components may contain undetected errors or "bugs" when
first supplied to SONICblue that, despite testing by SONICblue, are discovered
only after SONICblue's products have been installed and used by customers. From
time to time, SONICblue has become aware of problems with components, product
designs and other defects. Errors or defects in SONICblue's products may arise
in the future, and, if significant or perceived to be significant, could result
in rejection of SONICblue's products, product returns or recalls, damage to
SONICblue's reputation, lost revenues, diverted development resources and
increased customer service and support costs and warranty claims. Errors or
defects in SONICblue's products could also result in product liability claims.

SONICblue includes, or bundles, internally developed and third party
software, including operating systems, with its hardware products. For example,
the software included in its ReplayTV digital video recorders is responsible for
the products' user interface and directs certain product functions. Also,
SONICblue includes software with its Rio players that the purchaser may use to
download and store MP3 or WMA files on the player. The software products and
SONICblue's hardware products are complex and may contain undetected errors or
failures when first introduced or as new versions are released. SONICblue has
distributed updates to Rio players in the past when required to improve sound
quality or to correct minor audio problems and to its ReplayTV digital video
recorders to improve functionality. SONICblue generally provides warranties for
its retail products allowing the return or repair of defective products. Despite
testing by SONICblue, its suppliers or current or potential customers, errors
may be found in new products after commencement of commercial shipments. These
errors could result in loss of or delay in market acceptance or product
acceptance or in warranty returns. Losses, delays or damage to SONICblue's
reputation due to product defects would likely harm SONICblue's business,
financial condition and results of operations.

Additionally, new versions or upgrades to operating systems, independent
software vendor titles or applications may require upgrades to the personal
computer software products SONICblue bundles with its hardware products, or the
software products that purchasers of SONICblue's products may obtain from other
sources such as the Internet, to maintain compatibility with the new versions or
upgrades. The sources for the software SONICblue bundles, or the other sources
for purchasers of SONICblue's products to obtain software, may not be successful
in developing new versions, upgrades or enhancements to their software products.
If producers of software experience delays or are unable to maintain
compatibility with new audio formats, operating systems and independent software
vendor titles or applications, the demand for SONICblue's products and
SONICblue's reputation could suffer. Loss of sales and damaged reputation could
harm SONICblue's revenues and profitability.

SONICBLUE IS SUBJECT TO RISKS RELATING TO PRODUCT RETURNS AND PRICE PROTECTION,
WHICH COULD LIMIT SONICBLUE'S REVENUES.

SONICblue often grants limited rights to customers and distributors to
return unsold inventories of its products in exchange for new products, also
known as "stock rotation." Also, some of SONICblue's retail customers may accept
returned products from their own retail customers. These products are then
returned to SONICblue for credit. SONICblue has in the past experienced a
significant percentage of returns of its Rio players. SONICblue estimates stock
rotation, warranty and other returns and accrues reserves for such costs at the
time of sale. SONICblue also often grants price protection on unsold inventory,
which allows customers to receive a price adjustment on existing inventory when
its published price is reduced. In an environment of slower demand and abundant
supply of products, price declines and channel promotional expenses are more
likely to occur and, should they occur, are more likely to have a significant
impact on SONICblue's operating results. Further, in this environment, high
channel inventory levels may result in substantial price protection charges.
These price protection charges have the effect of reducing gross sales and gross
margin. Consequently, in taking steps to bring its channel inventory levels down
to a more desirable level, SONICblue may cause a shortfall in net sales during
one or more accounting periods. These efforts to reduce channel inventory might
also result in price protection charges if prices are decreased to move product
out to final consumers, having a further adverse impact on operating results.
Any estimates, reserves or accruals may be insufficient and any future price
reductions or product returns may seriously harm its operating results.

SONICBLUE DEPENDS ON SALES THROUGH DISTRIBUTORS AND RETAILERS. IF RELATIONSHIPS
WITH OR SALES THROUGH DISTRIBUTORS OR RETAILERS DECLINE, ITS OPERATING RESULTS
WILL BE HARMED.

SONICblue sells its products through a network of domestic and
international distributors, and directly to major retailers/mass merchants.
SONICblue's future success is dependent on the continued viability and financial
stability of its customer base. Retail channels historically have been
characterized by rapid change, including periods of widespread financial
difficulties and consolidation and the emergence of alternative sales channels,
such as direct mail order, telephone sales and electronic commerce on the
worldwide web. SONICblue may be unable to retain its retailers or distributors.
In addition, sales to any particular retailer or distributor may fluctuate
significantly from quarter to quarter. The loss of, or a reduction in, sales to
any of SONICblue's key retail or distribution customers as a result of changing
market conditions, competition or customer credit problems could materially and
adversely affect its operating results. Likewise, changes in distribution
channel patterns, such as increased electronic commerce via the Internet and
increased use of mail-order catalogues, could affect SONICblue in ways not yet
known.

SONICBLUE'S ABILITY TO MARKET AND DISTRIBUTE ITS PRODUCTS DEPENDS IN PART UPON
ITS CURRENT AND FUTURE RELATIONSHIPS WITH ORIGINAL EQUIPMENT MANUFACTURERS, OR
OEMS, AND OTHER STRATEGIC PARTNERS TO MARKET AND DISTRIBUTE SONICBLUE'S PRODUCTS
UNDER THEIR OWN BRAND NAMES.

In addition to direct distributors of SONICblue's products, SONICblue also
depends upon OEMs and other strategic partners to market and distribute its
products. For example, SONICblue has licensed the ReplayTV technology to
Panasonic, which has incorporated the technology into its ShowStopper DVRs. If

SONICblue is unable to obtain and maintain relationships with OEMs and strategic
partners, it may not be able to increase sales of its products and achieve
market acceptance, and its revenues may decline.

SONICBLUE RELIES ON INTELLECTUAL PROPERTY AND OTHER PROPRIETARY INFORMATION THAT
MAY NOT BE ADEQUATELY PROTECTED AND THAT MAY BE EXPENSIVE TO PROTECT.

The markets in which SONICblue competes are characterized by vigorous
protection and pursuit of intellectual property rights. SONICblue relies on a
combination of patent, trademark, copyright, and trade secret laws, employee and
third-party nondisclosure agreements and licensing arrangements to protect its
intellectual property. If SONICblue is unable to adequately protect its
intellectual property, its business may suffer from the piracy of its technology
and the associated loss of sales. Also, the protection provided to SONICblue's
proprietary technology by the laws of foreign jurisdictions, many of which offer
less protection than the United States, may not be sufficient to protect its
technology. It is common in the personal electronics and Internet device
industries for companies to assert intellectual property infringement claims
against other companies. Therefore, SONICblue's products may also become the
target of infringement claims. These infringement claims or any future claims
could cause SONICblue to spend significant time and money to defend its
products, redesign its products or develop or license a substitute technology.
SONICblue may be unsuccessful in acquiring or developing substitute technology
and any required license may be unavailable on commercially reasonable terms, if
at all. In addition, an adverse result in litigation could require SONICblue to
pay substantial damages, cease the manufacture, use, sale, offer for sale and
importation of infringing products, or discontinue the use of certain processes.
Any of these events could materially harm SONICblue's business.

Litigation by or against SONICblue could result in significant expense and
could divert the efforts of its technical and management personnel, regardless
of the outcome of such litigation. However, even if claims do not have merit,
SONICblue may be required to dedicate significant management time and expense to
defending itself if it is directly sued, or assisting its customers in their
defense of these or other infringement claims pursuant to indemnity agreements.
This could have a negative effect on SONICblue's financial results.

SONICBLUE MAY NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH
MAY PREVENT IT FROM SUCCEEDING.

SONICblue may not be able to retain its key personnel or attract other
qualified personnel in the future. SONICblue's success will depend upon the
continued service of key management personnel. The loss of services of any of
the key members of SONICblue's management team or its failure to attract and
retain other key personnel could disrupt operations and have a negative effect
on employee productivity and morale, decreasing production and harming its
financial results. In addition, the competition to attract, retain and motivate
qualified technical personnel, such as engineers, as well as qualified sales and
operations personnel, is intense. SONICblue has at times experienced difficulty
recruiting qualified software and hardware development engineers.

SONICBLUE DEPENDS ON A LIMITED NUMBER OF THIRD PARTY DEVELOPERS AND PUBLISHERS
THAT DEVELOP SOFTWARE PRODUCTS THAT WILL OPERATE WITH AND FULLY UTILIZE THE
CAPABILITIES OF ITS RIO PLAYERS.

Only a limited number of software developers are producing software that
enables the download and use of digital audio players. SONICblue does not create
the software that is required to download or convert from CDs music to run on
its players but bundles third party software with its players. If SONICblue is
not able to license and bundle the software, or if users are not otherwise able
to obtain software free of charge or at an acceptable price, then demand for
SONICblue's digital audio players will decline. Likewise, difficult to use or
defective software could negatively impact SONICblue's product sales and
revenues.

SONICBLUE HAS EXPOSURE TO INTERNATIONAL MARKETS.

International sales accounted for 24% of SONICblue's net sales. In
addition, a substantial proportion of SONICblue's products are manufactured,
assembled and tested by independent third parties in Asia. As a result,
SONICblue is subject to the risks of conducting business internationally,
including:

- unexpected changes in, or impositions of, legislative or regulatory
requirements;

- fluctuations in the U.S. dollar, which could increase the price in local
currencies of SONICblue's products in foreign markets or increase the
cost of components purchased by SONICblue;

- delays resulting from difficulty in obtaining export licenses for certain
technology;

- tariffs and other trade barriers and restrictions;

- potentially longer payment cycles;

- greater difficulty in accounts receivable collection;

- potentially adverse tax treatment; and

- the burdens of complying with a variety of foreign laws.

In the past, SONICblue has experienced an adverse impact associated with
the economic downturn in Asia that contributed to decreases in net sales. In
addition, SONICblue's international operations are subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships. The People's Republic of China and Taiwan
have in the past experienced and are currently experiencing strained relations,
and a worsening of relations or the development of hostilities between them
could disrupt operations at the manufacturing facilities of SONICblue's
subcontractors and affect its Asian customers.

SONICBLUE HAS A SIGNIFICANT LEVEL OF DEBT, WHICH MAY HARM ITS ABILITY TO OBTAIN
ADDITIONAL FINANCING OR ADVERSELY AFFECT ITS LIQUIDITY. IF THE COMPANY IS UNABLE
TO GENERATE OR OTHERWISE OBTAIN SUFFICIENT FUNDS, ITS FINANCIAL CONDITION AND
OPERATIONS MAY BE HARMED.

At December 31, 2001, SONICblue had total debt and other liabilities
outstanding of $320 million. The degree to which SONICblue is leveraged could
harm its ability to obtain additional financing for working capital or other
purposes and could make SONICblue more vulnerable to economic downturns and
competitive pressures. SONICblue's significant leverage could also adversely
affect its liquidity, as a substantial portion of available cash from operations
may have to be applied to meet debt service requirements. In the event of a cash
shortfall, SONICblue could be forced to reduce other expenditures to be able to
meet such debt service requirements.

If SONICblue is unable to raise sufficient funds for working capital needs,
it may not be able to fund product development and expansion, take advantage of
future opportunities, meet its existing debt obligations or respond to
competitive pressures or unanticipated events or needs. SONICblue may also be
required to consider curtailing its operations significantly or to seek
arrangements with strategic partners or other parties that may require SONICblue
to relinquish significant rights to products, technologies or markets.

MINORITY INVESTMENTS COULD ADVERSELY AFFECT SONICBLUE'S LIQUIDITY AND EARNINGS.

SONICblue holds minority interests in companies having operations or
technology in areas within its strategic focus. Some of these investments are in
research and development, start-up or development stage companies or companies
where operations are not yet sufficient to establish them as going concerns. As
a result, SONICblue may be called upon under contractual or other terms to
provide funding for operations of these companies and may share in their losses.
Further adverse changes in market conditions or poor operating results of
underlying investments could result in SONICblue incurring additional losses or
an inability to recover the carrying value of its investments.

SONICBLUE MAY PURSUE STRATEGIC ACQUISITIONS AND COULD FAIL TO SUCCESSFULLY
INTEGRATE ACQUIRED BUSINESSES.

SONICblue has engaged in acquisitions in the past, including its recent
acquisitions of Sensory Science and ReplayTV, and expects to evaluate
acquisition opportunities in the future that could provide additional product or
services offerings, technologies or additional industry expertise. Any proposed
or future acquisition could result in difficulties assimilating acquired
operations and products, diversion of capital and management's attention away
from other business issues and opportunities and amortization of acquired
intangible assets. Integration of acquired companies may result in problems
related to integration of technology and management teams. SONICblue could fail
to integrate the operations, personnel or products that it may acquire in the
future. If SONICblue fails to successfully integrate acquisitions or achieve any
anticipated benefits of an acquisition, its operations and business could be
harmed.

SYSTEM FAILURES, INTERRUPTIONS TO THE REPLAYTV SERVICE OR PRODUCT DEFECTS MAY
HAVE A NEGATIVE IMPACT ON SONICBLUE'S REVENUES, DAMAGE ITS REPUTATION AND
DECREASE ITS ABILITY TO ATTRACT NEW VIEWERS.

SONICblue's ability to provide high quality products, service and customer
support is critical to its success because consumers of television-related
products are not accustomed to, and may not accept, interruptions in their
television service. SONICblue's network, communications hardware and other
operating systems for the ReplayTV service are vulnerable to damage or
interruption from earthquakes, floods, fires, power loss, telecommunication
failures and similar events. They are also subject to break-ins, sabotage,
intentional acts of vandalism and similar misconduct. These types of
interruptions in the ReplayTV service may reduce SONICblue's revenues and
profits. In addition to placing increased burdens on SONICblue's engineering
staff, service outages will create numerous customer questions and complaints
that must be responded to by SONICblue's or its partners' customer support
personnel. Any frequent or persistent system failures could irreparably damage
SONICblue's reputation and brand.

In addition, any delivery by SONICblue of products or upgrades with
undetected material product defects or software errors could harm SONICblue's
credibility. For example, the hard disk used in the ReplayTV-enabled digital
video recorder was originally designed for use in personal computers, and as a
result exhibits behaviors that are viewed as typical and minimally disruptive
when using a personal computer, but may result in the viewer momentarily facing
a black television screen when using the ReplayTV service. Any errors and
product defects can result in delays in releasing new versions of ReplayTV
digital video recorders, affect system uptime, result in returns and significant
warranty and repair costs and cause customer relations problems. Correcting
errors in software and hardware design requires significant time and resources,
which could delay future product releases and affect market acceptance of
ReplayTV digital video recorders.

SONICBLUE NEEDS TO SAFEGUARD THE SECURITY AND PRIVACY OF REPLAYTV VIEWERS'
CONFIDENTIAL DATA, AND ANY INABILITY TO DO SO MAY HARM SONICBLUE'S REPUTATION
AND BRAND AND COULD RESULT IN LAWSUITS.

The ReplayTV digital video recorder collects and stores viewer preferences
and other data that viewers may consider confidential. Any compromise or breach
of the encryption and other security measures that SONICblue uses to protect
this data could harm SONICblue's reputation and expose it to potential
liability. Advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments could compromise or breach the
systems SONICblue uses to protect its viewers' confidential information.
SONICblue may be required to make significant expenditures to protect against
security breaches or to remedy problems caused by any breaches.

Viewers may be concerned about the use of personal information gathered by
the ReplayTV digital video recorder. SONICblue does not release this data to
third parties, and SONICblue is committed to complying with all privacy laws and
to protecting the confidentiality of its viewers. Privacy concerns, however,
could create uncertainty in the marketplace for personal television and ReplayTV
products. In addition, privacy concerns or breaches, or consumers'
dissatisfaction with any privacy policy SONICblue may adopt, could reduce demand
for ReplayTV products, increase the cost of doing business as a result of
litigation costs or increased service delivery costs, or otherwise harm
SONICblue's reputation and business.

ONE OF SONICBLUE'S RECENTLY ANNOUNCED PRODUCTS IS THE SUBJECT OF A COPYRIGHT
INFRINGEMENT CLAIM. IF THIS OR FUTURE CLAIMS AGAINST SONICBLUE'S PRODUCTS ARE
DECIDED AGAINST SONICBLUE, SALES OF SONICBLUE'S PRODUCTS AND ITS REVENUES COULD
DECREASE.

In October and November 2001, a group of entertainment companies filed suit
against SONICblue to prevent shipment of the ReplayTV 4000 so long as the
product includes features that those companies allege would result in violations
of the entertainment companies' video programming copyrights. Litigation may be
costly and can divert the efforts of management. Furthermore, SONICblue may be
forced to delay the release, or eliminate certain features of, the ReplayTV
4000, which could result in decreased sales of the product and a negative impact
on SONICblue's revenues.

Sensory Science, acquired by SONICblue in June 2001, has designed and
markets its dual-deck VCRs and combination DVD/VCRs for use as full-featured
videocassette recorders. The marketing literature and owner manuals caution
consumers that the dual-deck VCR should not be used in a manner that infringes
on the rights of owners of copyrighted material. However, SONICblue cannot
predict the likelihood that distribution of current or future dual-deck VCRs or
DVD/VCR models will be challenged. Federal legislation affecting all VCRs was
passed in October 1998, commonly referred to as The Digital Millennium Copyright
Act. As a result, Sensory Science modified the operations of its dual-deck VCRs
sold after April 2000, so that the VCRs would recognize a type of anticopying
signal to prevent consumers from making a usable copy of videotapes with that
type of signal. However, models purchased prior to April 2000 continued to
operate as originally designed for the lifetime of the VCR. SONICblue is unable
to determine what the effect of this or future required modifications may be on
future sales of dual-deck VCRs or combination DVD/VCRs.

SONICBLUE IS A PARTY TO LEGAL PROCEEDINGS THAT COULD HAVE A NEGATIVE FINANCIAL
IMPACT ON SONICBLUE.

these settlements to SONICblue, net of insurance, is expected to approximate
$8.6 million. These charges were recorded in SONICblue's fourth fiscal 2001
quarter ended December 31, 2001.

On November 16, 2001, four former holders of ReplayTV preferred shares
filed a petition for appraisal in the Chancery Court in the State of Delaware
asserting their dissenters rights of appraisal and seeking the fair value of
their ReplayTV shares in cash in lieu of the SONICblue shares to be issued to
them as provided in SONICblue's merger agreement with ReplayTV. On December 18,
2001, ReplayTV filed its response to petition for appraisal. In addition, on
December 13, 2001, the same four former holders of ReplayTV preferred shares
filed a complaint in the Chancery Court in the State of Delaware asserting that
ReplayTV and its former directors breached their fiduciary duty in connection
with Replay's merger by engaging in self-dealing, failing to make appropriate
disclosures to shareholders and failing to maximize the value for them in the
merger, resulting in an allocation of an insufficient amount of the merger
consideration to the ReplayTV preferred stockholders. The complaint seeks "at
least $7,249,990.50" in damages. In its merger agreement with ReplayTV,
SONICblue agreed to indemnify ReplayTV and its former directors against this
type of lawsuit, among other things. On February 15, 2002, ReplayTV and the
former ReplayTV directors filed their answer. SONICblue and ReplayTV intend to
dispute the plaintiffs' claims and vigorously defend these actions.

January 23, 2002. SONICblue intends to vigorously defend itself against the
allegations made in TiVo's complaint and counter complaint.

On or about November 27, 2001, Pac Tec, a division of La France
Corporation, filed a civil action against SONICblue and one of its suppliers,
Manufacturer' Services Limited, in the United States District Court for the
Eastern District of Pennsylvania, alleging claims against both defendants
jointly for breach of contract and promissory estoppel. In the complaint, the
plaintiff prays for damages in excess of $2.5 million, plus prejudgment interest
and costs of suit. On or about February 15, 2002, the Company filed a motion to
dismiss the complaint or for a more definite statement. Opposition to the motion
has not yet been served, nor has a date for hearing or other disposition of the
motion been set. SONICblue intends to dispute the plaintiff's claims and
vigorously defend itself against this action.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

SONICblue's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and its convertible subordinated notes.
Our investment portfolio principally consists of short-term fixed income
securities and derivative holdings. The primary objective of our investment
activities is to maintain the safety of principal and preserve liquidity while
maximizing yields without significantly increasing risk. This is accomplished by
investing in marketable investment grade securities, and by limiting exposure to
any one issue or issuer. SONICblue does not use derivative financial instruments
in its investment portfolio (except as related to its UMC shares, as discussed
below) and due to the nature of its investments, does not expect its operating
results or cash flows to be significantly affected by potential changes in
interest rates. At December 31, 2001, the market value of these investments,
which were all classified as cash equivalents, approximated cost. Our cash and
cash equivalents of $15.3 million at December 31, 2001, consisted of
approximately $3.0 million in cash and $12.3 million invested in short-term
money market accounts that yield between 2% and 6% interest.

In September 1996, we completed a private placement of $103.5 million
aggregate principal amount of convertible subordinated notes. The notes mature
in October 2003. Interest is payable semi-annually at 5.75% per annum. The notes
are convertible at the option of the note holders into SONICblue's common stock
at an initial conversion price of $19.22 per share, subject to adjustment.
During 2000, $0.2 million in notes were converted into common stock. The notes
are redeemable at the option of SONICblue at a redemption price of 100% of their
principal amount. The market value of the convertible subordinated notes at
December 31, 2001, and 2000 was approximately $70.6 million and $70.9 million,
respectively.
40

EQUITY PRICE RISK

SONICblue's largest financial asset is its investment in UMC shares, which
are traded on the Taiwan Stock Exchange. The market price of UMC's stock is
subject to volatility due to general market conditions, including changes in the
semiconductor industry and the Taiwanese market, as well as actual or
anticipated changes in UMC's business prospects or quarterly or yearly operating
results. Because the UMC shares are SONICblue's largest asset, when the price
per share of UMC's stock increases or declines, the price of SONICblue's common
stock on the Nasdaq National Market tends to follow changes in UMC's stock
price. Fluctuations in the price of SONICblue common stock caused by changes in
UMC's stock price may or may not reflect SONICblue's actual or anticipated
business prospects or quarterly results. Also, fluctuations in UMC's stock price
may cause fluctuations in SONICblue's stock price when there is no material news
regarding SONICblue or any change in its results. Future fluctuations in the
value of SONICblue's UMC shares could negatively affect SONICblue's financial
condition.

During 2001, we sold a portion of our UMC holdings, aggregating
approximately 38.9 million shares, in several derivative transactions. In
connection with the sales of those UMC holdings, we purchased a series of call
option collars on UMC stock with an aggregate notional amount of 38.9 million
shares. These transactions provided SONICblue funds from the sale of the shares
while allowing us to participate in future increases in the value of UMC shares,
if any, through a series of call option collars. The fair value of these
instruments was $6.8 million as of December 31, 2001, and is included in
short-term investments. These instruments are marked-to-market. These
instruments have terms between one and three years and have a maximum potential
value totaling $11.7 million.

FOREIGN CURRENCY EXCHANGE RATE RISK

SONICblue invoices its customers in U.S. dollars for all products.
SONICblue is exposed to foreign exchange rate fluctuations as the financial
results of its foreign subsidiaries are translated into U.S. dollars in
consolidation. The foreign subsidiaries maintain their accounts in the local
currency of the foreign location in order to centralize the foreign exchange
risk with the parent company. To date this risk has not been material. The
effect of foreign exchange rate fluctuations on the Company's financial
statements for fiscal 2001 and 2000 was not material.

The Company has not entered into hedging transactions or activities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF SONICBLUE INCORPORATED

<Table>
<Caption>
PAGE
----

Report of Ernst & Young LLP, Independent Auditors........... 43
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... 44
Consolidated Balance Sheets as of December 31, 2001, and
2000...................................................... 45
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999.............. 46
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... 47
Notes to Consolidated Financial Statements.................. 48
Selected Quarterly Consolidated Financial Data
(Unaudited)............................................... 72
</Table>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
SONICblue Incorporated

We have audited the accompanying consolidated balance sheets of SONICblue
Incorporated and its subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the index at
item 14(a)(2). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SONICblue
Incorporated and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

San Jose, California

January 31, 2002,
except for Note 16, as to which the date is
February 19, 2002

SONICBLUE INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales to unaffiliated customers....................... $ 192,271 $ 523,195 $ 352,583
Net sales to related party (Note 4)....................... 21,552 13,509 --
--------- --------- ---------
Total net sales................................. 213,823 536,704 352,583
Cost of sales............................................. 275,578 548,616 307,161
--------- --------- ---------
Gross profit (loss)............................. (61,755) (11,912) 45,422
Operating expenses:
Research and development................................ 28,706 83,433 73,896
Selling, marketing and administrative................... 102,910 126,852 52,832
Restructuring expense and impairment charge............. 130,323 6,694 --
In-process research and development..................... 5,078 -- 6,700
Amortization of goodwill, intangibles and deferred
compensation......................................... 33,686 44,440 12,156
--------- --------- ---------
Total operating expenses........................ 300,703 261,419 145,584
--------- --------- ---------
Loss from operations...................................... (362,458) (273,331) (100,162)
Gain (loss) on UMC investment........................... (561,610) 869,401 --
Loss on other investments............................... (27,413) (5,456) (54)
Gain on sale of manufacturing joint venture............. -- 14,738 22,433
Interest expense........................................ (10,895) (9,181) (7,205)
Other income (expense), net............................. 3,369 (1,865) 6,292
--------- --------- ---------
Income (loss) before income taxes......................... (959,007) 594,306 (78,696)
Income tax expense (benefit)............................ (202,758) 281,478 (47,916)
--------- --------- ---------
Net income (loss)......................................... $(756,249) $ 312,828 $ (30,780)
========= ========= =========
Earnings (loss) per share amounts:
Basic................................................... $ (8.81) $ 3.46 $ (0.52)
Diluted................................................. $ (8.81) $ 3.13 $ (0.52)
Shares used in computing per share amounts:
Basic................................................... 85,855 90,390 59,244
Diluted................................................. 85,855 101,150 59,244
</Table>

See accompanying notes to consolidated financial statements.
44

SONICBLUE INCORPORATED

CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
DECEMBER 31,
----------------------------
2001 2000
------------ -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,251 $ 36,582
Investment -- UMC......................................... 75,907 228,673
Short-term investments.................................... 6,830 9,017
Accounts receivable (net of allowances of $10,023 in 2001
and $7,790 in 2000)..................................... 30,986 56,018
Accounts receivable from related party (Note 4)........... -- 10,194
Inventories............................................... 20,571 86,727
Prepaid expenses and other................................ 8,003 35,262
--------- ----------
Total current assets............................... 157,548 462,473
Property and equipment -- net............................... 7,218 24,761
Investment -- UMC........................................... 86,886 406,363
Deferred income taxes....................................... 15,197 --
Goodwill and intangible assets.............................. 128,426 162,381
Other assets................................................ 18,232 43,327
--------- ----------
Total.............................................. $ 413,507 $1,099,305
========= ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 68,590 $ 99,296
Notes payable............................................. 15,826 72,672
Accrued liabilities....................................... 94,270 53,641
Deferred income taxes..................................... 15,197 69,563
--------- ----------
Total current liabilities.......................... 193,883 295,172
Deferred income taxes....................................... -- 25,140
Other liabilities........................................... 22,764 4,040
Convertible subordinated notes.............................. 103,300 103,300
--------- ----------
Total liabilities.................................. 319,947 427,652
--------- ----------
Commitments and contingencies (Notes 8 and 12)
Stockholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares
authorized; none outstanding............................ -- --
Common stock, $.0001 par value; 175,000,000 shares
authorized; 93,464,528 and 93,054,332 shares outstanding
in 2001 and 2000, respectively.......................... 9 9
Additional paid-in capital................................ 583,922 602,557
Unearned stock based compensation......................... (3,801) --
Accumulated other comprehensive gain (loss)............... 993 (199,599)
Retained earnings (accumulated deficit)................... (487,563) 268,686
--------- ----------
Total stockholders' equity......................... 93,560 671,653
--------- ----------
Total.............................................. $ 413,507 $1,099,305
========= ==========
</Table>

See accompanying notes to consolidated financial statements.
45

SONICBLUE INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<Table>
<Caption>
ACCUMULATED RETAINED
COMMON STOCK ADDITIONAL OTHER EARNINGS UNEARNED
-------------------- PAID-IN COMPREHENSIVE (ACCUMULATED STOCK-BASED
SHARES AMOUNT CAPITAL GAIN (LOSS) DEFICIT) COMPENSATION TOTAL
----------- ------ ---------- ------------- ------------ ------------ ---------
(IN THOUSANDS, EXCEPT SHARES)

BALANCE AT DECEMBER 31, 1998........ 51,716,171 $ 5 $191,642 $(14,755) $ (13,362) -- $ 163,530
Comprehensive loss:
Net loss........................ -- -- -- -- (30,780) (30,780)
Other comprehensive income, net
of tax:
Change in unrealized gain
(loss) on investments....... -- -- -- 3,132 -- -- 3,132
Change in foreign currency
translation adjustment...... -- -- -- 4,060 -- -- 4,060
---------
Other comprehensive income...... 7,192
---------
Comprehensive loss................ (23,588)
Private issuance.................. 3,423,000 1 34,438 -- -- -- 34,439
Exercise of stock options......... 3,390,645 -- 18,155 -- -- -- 18,155
Employee stock purchase plan...... 895,491 -- 2,294 -- -- -- 2,294
Diamond acquisition............... 18,714,438 2 183,923 -- -- -- 183,925
Sale of warrant................... -- -- 990 -- -- -- 990
Tax benefit of stock option
transactions.................... -- -- 2,888 -- -- -- 2,888
----------- ---- -------- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1999........ 78,139,745 8 434,330 (7,563) (44,142) -- 382,633
Comprehensive income:
Net income...................... -- -- -- -- 312,828 -- 312,828
Other comprehensive income, net
of tax:
Change in unrealized gain
(loss) on investments....... -- -- -- (192,000) -- -- (192,000)
Change in foreign currency
translation adjustment...... -- -- -- (36) -- -- (36)
---------
Other comprehensive loss........ (192,036)
---------
Comprehensive income.............. 120,792
Private issuance.................. 10,775,000 1 145,462 -- -- -- 145,463
Exercise of warrants.............. 429,477 -- -- -- -- -- --
Stock issued for acquisition...... 108,000 -- 1,067 -- -- -- 1,067
Exercise of stock options and
conversion of subordinated
notes........................... 3,089,403 -- 14,136 -- -- -- 14,136
Employee stock purchase plan...... 512,707 -- 2,554 -- -- -- 2,554
Tax benefit of stock option
transactions.................... -- -- 5,008 -- -- -- 5,008
----------- ---- -------- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 2000........ 93,054,332 9 602,557 (199,599) 268,686 -- 671,653
Comprehensive loss:
Net loss........................ -- -- -- -- (756,249) -- (756,249)
Other comprehensive income, net
of tax:
Change in unrealized gain
(loss) on investments....... -- -- -- 200,586 -- -- 200,586
Change in foreign currency
translation adjustment...... -- -- -- 6 -- -- 6
---------
Other comprehensive income...... 200,592
---------
Comprehensive loss................ (555,657)
Via transaction and stock
repurchases..................... (13,159,000) (1) (61,053) -- -- -- (61,054)
Stock issued for acquisitions..... 11,759,099 1 37,903 -- -- (4,816) 33,088
Stock issued in exchange for
services........................ 423,058 -- 699 -- -- -- 699
Exercise of stock options......... 1,197,285 -- 3,279 -- -- -- 3,279
Employee stock purchase plan...... 189,754 -- 537 -- -- -- 537
Deferred compensation amortization
and adjustments................. -- -- -- -- -- 1,015 1,015
----------- ---- -------- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 2001........ 93,464,528 $ 9 $583,922 $ 993 $(487,563) $(3,801) $ 93,560
=========== ==== ======== ======== ========= ======= =========
</Table>

See accompanying notes to consolidated financial statements.
46

SONICBLUE INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)

OPERATING ACTIVITIES
Net income (loss)....................................... $(756,249) $ 312,828 $ (30,780)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Deferred income taxes................................ (202,758) 278,160 (61,669)
Depreciation......................................... 5,661 19,420 19,530
Amortization......................................... 33,686 45,364 12,156
Write-off acquired in-process research and
development........................................ 5,078 -- 6,700
Impairment of long-lived assets...................... 115,509 4,376 --
(Gain) loss on UMC investment........................ 561,610 (869,401) --
Loss on other investments............................ 27,193 5,818 54
Gain on sale of shares of manufacturing joint
venture............................................ -- (14,738) (22,433)
Changes in assets and liabilities:
Accounts receivable................................ 17,548 (8,586) 3,921
Inventories........................................ 27,399 12,166 (34,704)
Prepaid expenses and other assets.................. 1,269 21,046 3,655
Accounts payable................................... (8,397) (18,634) 5,919
Accrued liabilities and other liabilities.......... 30,484 (9,050) 30,132
--------- --------- ---------
Net cash used for operating activities.......... (141,967) (221,231) (67,519)
--------- --------- ---------
INVESTING ACTIVITIES
Property and equipment purchases........................ (1,365) (8,912) (6,614)
Purchases of short-term investments..................... (5,463) (85,387) (107,747)
Sales and maturities of short-term investments.......... 228,603 170,172 148,937
Sale of manufacturing joint venture..................... -- 14,738 22,433
Acquisitions, net of cash acquired...................... (27,575) (12,429) (22,521)
Equity investment in technology companies............... -- (48,689) --
Other................................................... (7,746) -- 4,170
--------- --------- ---------
Net cash from (used for) investing activities... 186,454 29,493 38,658
--------- --------- ---------
FINANCING ACTIVITIES
Sale of common stock.................................... 3,852 161,952 57,779
Net borrowing (repayments) of notes payable............. (69,627) 20,579 (20,752)
Other................................................... (49) -- 990
--------- --------- ---------
Net cash provided by (used for) financing
activities.................................... (65,824) 182,531 38,017
--------- --------- ---------
Effect of exchange rate changes........................... 6 (36) 5,647
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (21,331) (9,243) 14,803
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......... 36,582 45,825 31,022
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 15,251 $ 36,582 $ 45,825
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................................... $ 11,237 $ 9,497 $ 7,524
Income taxes paid (refunded), net....................... $ 828 $ 417 $ (20,022)
Stock issued for acquisitions........................... $ 37,903 $ 1,067 $ 183,925
</Table>

See accompanying notes to consolidated financial statements.
47

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

SONICblue Incorporated ("SONICblue" or the "Company"), which was
incorporated on January 9, 1989, designs, develops and markets products for the
converging Internet, digital media, entertainment and consumer electronics
markets. The Company, formerly S3 Incorporated, changed its named to SONICblue
Incorporated in November 2000. Its sales are primarily in the United States,
Europe and Asia.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of SONICblue and
its wholly and majority owned subsidiaries. All significant inter-company
balances and transactions have been eliminated. Investments in entities in which
the Company does not have control, but has the ability to exercise significant
influence over operating and financial policies, are accounted for by the equity
method.

We have incurred significant losses and expect such losses to continue for
at least the next twelve months. Our net loss for the year ended December 31,
2001 was $756.2 million. As of December 31, 2001, we have an accumulated deficit
of $487.6 million and cash, cash equivalents, and short-term investments balance
of $98.0 million. We expect to experience negative cash flow from operations for
at least the next few quarters and believe that sufficient funds will be
available to support planned operations through December 2002. Our future cash
requirements will depend on a number of factors including:

- the rate at which customers accept and purchase our existing and future
products;

- the rate at which we invest in engineering, development and intellectual
property with respect to existing and future products;

- the level of marketing required to acquire a competitive position in the
marketplace;

- the operational costs that we incur to continue to develop our business
as a whole;

- our ability to sell our UMC shares, when needed, and at reasonable
prices;

- receipt, in August 2002, of the declared stock dividend of 15 million UMC
shares;

- use of financial instruments to allow us to monetize our long-term UMC
share holdings;

- the forbearance of the creditors of our legacy businesses to accept
extended payment terms; and

- pending litigation.

We recognize the desirability for the infusion of cash during fiscal 2002
and is actively pursuing various options. However, there can be no assurance
that we will be able to raise additional funds on favorable terms or at all.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consider curtailing our operations significantly or to seek arrangements with
strategic partners or other parties that may require us to relinquish
significant rights to products, technologies or markets.

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern; however, the above conditions raise
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result should the Company be unable to
continue as a going concern.

RELATED PARTY TRANSACTIONS

A portion of our revenues (approximately 10% in 2001 and 3% in 2000) is
generated by sales to affiliated entities, RioPort and S3-VIA, in which we have
equity investments of 32.0% to 50.1%, respectively. Our affiliates package our
products in various quantities and sell our products, as well as third party
products, to distributors and end users that are not otherwise associated with
our affiliates or us. Our affiliates are substantive entities that are otherwise
unrelated to and not controlled by us. We believe the terms of our sales to our
affiliates approximate arms length transactions.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include revenue recognition and related
reserves, impairment of long-lived assets, inventories, legal contingencies,
allowance for doubtful accounts and impairment of goodwill and intangible
assets. Actual results could differ from those estimates, and such differences
may be material to the financial statements.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with a remaining
maturity of 90 days or less at the time of purchase to be cash equivalents. Cash
equivalents are carried at cost, which approximates fair value. The Company's
short-term investments, other than the derivative UMC financial instruments
discussed below, primarily comprise readily marketable debt and equity
securities with remaining maturities of more than 90 days at the time of
purchase.

The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are classified as cash
equivalents or short-term investments and are stated at fair value with
unrealized gains and losses included in accumulated other comprehensive income
(loss). The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
are included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary are included in other income (expense). The
cost of securities sold is based upon specific identification.

DERIVATIVE FINANCIAL INSTRUMENTS

As of January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, and its amendments Statement 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB No.
133 and Statement 138, Accounting for Derivative Instruments and Certain Hedging
Activities, respectively (collectively referred to as Statement 133).

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As a result of the adoption of Statement 133, the Company recognizes all
derivative financial instruments in the consolidated financial instruments at
fair value regardless of the purpose or the intent for holding the instrument.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or in stockholders' equity as a component of
comprehensive income depending on whether the derivative financial instrument
qualifies for hedging accounting, and if so, whether it qualifies as a fair
value hedge or cash flow hedge. Generally, changes in fair values of derivatives
accounted for as fair value hedges are recorded in income along with the
portions of the changes in the fair values of the hedged items that relate to
the hedged risk. Changes in fair values of derivatives accounted for as cash
flow hedges, to the extent they are effective as hedges, are recorded in other
comprehensive income net of deferred taxes. Changes in fair value of derivatives
used as hedges of the net investment in foreign operations are reported in other
comprehensive income as part of the cumulative translation adjustment. Changes
in the fair value of derivatives not qualifying as hedges are reported in
income. The Company estimates the fair values of derivatives based on quoted
market prices or pricing models using current market rates.

INVENTORIES

Inventories consist of raw materials, work in process and finished goods
and are stated at the lower of cost (first-in, first-out) or market. The
Company's products are manufactured, assembled and tested by contract
manufacturers. In determining market value, SONICblue makes assumptions about
future demand and market conditions. We utilize a 3-month rolling forecast to
determine excess and obsolete or slow moving inventory reserve requirements. We
may apply judgment to the amounts thus identified in establishing the reserve
requirements. If actual conditions are less favorable than the assumptions used,
additional inventory write-downs may be required.

Inventories consist of:

<Table>
<Caption>
DECEMBER 31,
-----------------
2001 2000
------- -------
(IN THOUSANDS)

Raw materials............................................... $ 2,819 $41,734
Work in process............................................. 1,188 14,222
Finished goods.............................................. 16,564 30,771
------- -------
Total............................................. $20,571 $86,727
======= =======
</Table>

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to seven years for
machinery and equipment and five to seven years for furniture and fixtures.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the assets' useful lives.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property and equipment consist of:

<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

Machinery and equipment..................................... $ 33,466 $ 89,621
Furniture and fixtures...................................... 3,674 8,480
Leasehold improvements...................................... 1,630 9,707
-------- --------
Total............................................. 38,770 107,808
Accumulated depreciation and amortization................... (31,552) (83,047)
-------- --------
Property and equipment, net................................. $ 7,218 $ 24,761
======== ========
</Table>

GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets are stated at cost. Amortization is computed
using the straight-line method over estimated useful lives of two to seven
years.

Goodwill and intangible assets consist of:

<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

Purchased technology........................................ $ 25,239 $ 6,800
Trade names................................................. 10,765 9,600
Workforce-in-place.......................................... 4,067 3,500
Distribution channel relationships.......................... 16,549 11,500
Patents..................................................... -- 32,000
Non-compete covenants....................................... 19,500 --
Goodwill.................................................... 138,584 186,331
-------- --------
Total............................................. 214,704 249,731
Accumulated amortization.................................... (86,278) (87,350)
-------- --------
Goodwill and intangible assets, net......................... $128,426 $162,381
======== ========
</Table>

IMPAIRMENT OF GOODWILL, INTANGIBLES AND OTHER INVESTMENTS

Goodwill, intangibles and other investments are reviewed for impairment
periodically. Assets are tested for impairment on an interim basis if an event
or circumstance occurs between annual tests that might reduce the fair value of
the asset. We use several impairment indicators such as operating losses,
significant adverse changes in the legal and economic climate, and changes in
the manner in which an asset is used. In assessing potential impairment, the
Company must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or their related assumptions change in the future, the Company may be required
to record impairment charges for these assets.

FOREIGN CURRENCY TRANSLATION

The Company translates the accounts of its foreign subsidiaries using the
local currency as the functional currency. Consequently, the assets and
liabilities of the Company's subsidiaries and joint venture are translated into
U.S. dollars at current exchange rates and revenues and expenses are translated
at average

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

monthly exchange rates. The resulting translation adjustments are recorded as a
separate component of accumulated other comprehensive income (loss).

REVENUE RECOGNITION

In the fourth quarter of 2000, the Company implemented Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," or SAB 101,
retroactively to January 1, 2000. SAB 101 requires (a) persuasive evidence that
an arrangement exists, (b) delivery has occurred or services have been rendered,
(c) the seller's price to the buyer is fixed or determinable, and (d)
collectibility is reasonably assured before revenues can be recorded. There was
no cumulative effect associated with implementing SAB 101.

Revenue for product sales to customers where the above criteria are met is
recognized upon product shipment. Revenue for product sales to customers where
one or more of the above criteria are not initially met is deferred until such
criteria have been met. SONICblue recognizes revenue on all Rio brand players
and Diamond brand modems sold through distributor channels on a sell-through
basis deferring all revenues until product is sold to the final customer.
Revenue from our ReplayTV branded products is not significant to date.

SONICblue records estimated reductions to revenue for customer programs and
incentive offerings, including price protection, promotions and special pricing
agreements. If a different number of customers redeem incentives than estimated,
additional adjustments to revenue may be required. Accruals for estimated sales
returns are recorded at the time of the sale. These estimates are based on
historical sales returns, analysis of credit memo data and other known factors.
If the historical data used to calculate these estimates is not representative
of future returns, additional adjustments to revenue may be required.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, trade accounts receivable and foreign exchange contracts. The
Company invests only in high credit quality short-term debt instruments and
limits the amount of credit exposure to any one entity. A majority of the
Company's trade receivables result from sales to retailers in the consumer
electronics industry. Three customers collectively accounted for 60% and 43% of
the Company's gross accounts receivable balance at December 31, 2001, and 2000,
respectively. The Company performs ongoing credit evaluations of its customers'
financial condition, and limits the amount of credit extended when deemed
necessary, but generally requires no collateral. The Company maintains reserves
for potential credit losses, and all such losses to date have been within
management's expectations.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development is expensed as incurred.

SHIPPING AND HANDLING

Costs related to shipping and handling are included in cost of sales for
all periods presented.

ADVERTISING EXPENSES

The Company accounts for advertising costs as an expense in the period in
which it is incurred. Total advertising expenses were $3.5 million, $14.0
million and $3.7 million for each of the years ending December 31, 2001, 2000
and 1999, respectively.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK-BASED COMPENSATION

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with the
intrinsic value method because the Company believes the alternative fair value
accounting requires the use of option valuation models that were not developed
for use in valuing employee stock options. Under the intrinsic value method no
compensation expense is recognized when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant.

RECENTLY ISSUED ACCOUNTING STANDARDS

SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized; however, these assets must be reviewed at
least annually for impairment. Intangible assets with finite useful lives will
continue to be amortized over their respective useful lives. The standard also
establishes specific guidance for testing for impairment of goodwill and
intangible assets with indefinite useful lives. The provisions of SFAS 142 will
be effective for fiscal year 2002. However, goodwill and intangible assets
associated with the acquisition of ReplayTV in August 2001, were subject to the
non-amortization provisions of SFAS 142 during 2001. Amortization of goodwill
alone was $22.5 million in 2001, $37.0 million in 2000 and $9.7 million in 1999.
Based upon acquisitions completed as of June 30, 2001, application of the
goodwill non-amortization provisions is expected to result in a decrease in
amortization of approximately $18.2 million for 2002 from $32.8 million to $14.6
million.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. The provisions of SFAS 144 will be
effective for fiscal year 2002 and will be applied prospectively. We are
currently in the process of evaluating the potential impact that the adoption of
SFAS 144 will have on our consolidated financial position and results of
operations.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year presentation. Such reclassifications had no effect on net income (loss) or
stockholders' equity. Reclassifications include, but are not limited to,
non-trade accounts receivable with vendors and subcontract manufacturers,
classified as prepaid expenses and other which were previously classified as
trade receivables.

2. ACQUISITIONS AND DIVESTITURES

PURCHASE OF REPLAYTV

On August 1, 2001, SONICblue completed the acquisition of ReplayTV, Inc., a
developer of personal television technology. The acquisition was accounted for
as a purchase. At closing, SONICblue issued 10.4 million shares of common stock
and assumed an aggregate of 5.1 million options and warrants to purchase shares
of SONICblue common stock in exchange for all of ReplayTV's outstanding equity,
and ReplayTV became a wholly owned subsidiary of SONICblue. In connection with
the acquisition of ReplayTV, SONICblue had made loans to ReplayTV in the amount
of $20.0 million, which became part of the purchase price.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The purchase price of $50.1 million includes $26.5 million of stock, $2.8
million of stock option costs, cash paid to ReplayTV of $20.0 million and $0.8
million in estimated expenses of the transaction. The purchase price was
allocated as follows: $(43.5) million to the estimated fair value of the
ReplayTV net tangible assets (liabilities) purchased, $4.2 million to purchased
in-process research and development, $17.5 million to purchased existing and
core technology, $19.5 million to non-compete agreements, $4.8 million to
deferred compensation and $47.6 million to goodwill. Goodwill is recorded as a
result of consideration paid in excess of the fair value of net tangible and
intangible assets acquired, principally due to estimated synergies of the
acquisition and the value of the workforce acquired. Goodwill will not be
amortized, but will be reviewed periodically for potential impairment, in
accordance with SFAS 142. The identified acquisition related intangible assets
are amortized on a straight-line basis, generally over a 5-year period. The
allocation of the purchase price to intangibles and the related amortization
periods were based upon a third party appraisal. The purchase price and the
related allocation are subject to further refinement and change over the
12-month period following the acquisition. Certain elements of the purchase
price allocation are still open to valuation, such as facilities costs and
payables.

REPLAYTV, INC. CONDENSED BALANCE SHEET

<Table>
<Caption>
AUGUST 1, 2001
--------------
(IN MILLIONS)

Cash........................................................ $ 0.4
Accounts receivable (net)................................... 0.2
Inventory................................................... 0.1
Prepaid expenses and other current assets................... 0.2
Property and equipment, net................................. 0.4
Other assets................................................ 0.7
Accounts payable............................................ (13.2)
Accrued liabilities......................................... (32.3)
------
Net tangible assets/(liabilities)......................... $(43.5)
======
</Table>

PURCHASE OF SENSORY SCIENCE

On June 27, 2001, SONICblue completed the acquisition of Sensory Science
Corporation, a developer of consumer electronics products, including dual deck
videocassette player/recorders and DVD players. The acquisition was accounted
for as a purchase. At closing, SONICblue issued approximately 1.3 million shares
of SONICblue common stock to Sensory Science stockholders in exchange for the
common stock of Sensory Science outstanding, and Sensory Science became a wholly
owned subsidiary of SONICblue. In connection with the acquisition of Sensory
Science, SONICblue had made loans to Sensory Science in the amount of $9.8
million, which became part of the purchase price.

The purchase price of $21.7 million includes $7.2 million of stock, $0.3
million of stock option costs, cash paid to Sensory Science of $9.8 million and
$4.4 million in estimated expenses of the transaction. The purchase price was
allocated as follows: $(2.5) million to the estimated fair value of the Sensory
Science net tangible assets (liabilities) purchased, $0.9 million to purchased
in-process research and development, $0.9 million to purchased existing
technology, $1.2 million to trade names, $1.1 million to workforce-in-place,
$5.0 million to distribution channel relationships and $15.1 million to
goodwill. Goodwill is recorded as a result of consideration paid in excess of
the fair value of net tangible and intangible assets acquired, principally due
to estimated synergies of the acquisition. Goodwill and identified acquisition
related intangible assets are amortized on a straight-line basis, generally over
a 5-year period. The allocation of the purchase price to intangibles was based
upon management's estimates. The purchase price and the related allocation are
subject

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to further refinement and change over the 12-month period following the
acquisition. Certain elements of the purchase price allocation are still open to
valuation, such as inventory costs and Cal Audio product lines held for sale at
December 31, 2001.

SENSORY SCIENCE CORPORATION AND SUBSIDIARIES CONDENSED BALANCE SHEET

<Table>
<Caption>
JUNE 27, 2001
-------------
(IN MILLIONS)

Cash and cash equivalents................................... $ 3.1
Receivables -- less allowances.............................. 11.5
Inventories................................................. 4.6
Prepaid expenses and other current assets................... 0.7
Net equipment............................................... 1.0
Other assets and investments................................ 0.1
Accounts payable............................................ (7.2)
Accrued expenses............................................ (2.1)
Line of credit.............................................. (12.8)
Other liabilities........................................... (1.4)
--------
Net tangible assets/(liabilities)......................... $ (2.5)
========
</Table>

SALE OF PROFESSIONAL GRAPHICS DIVISION TO ATI TECHNOLOGIES

In March 2001, SONICblue completed the sale to ATI Technologies, Inc. of
its professional graphics division, based in Starnberg, Germany, which produced
the Fire GL line of graphics accelerators. Under the terms of an Asset Purchase
Agreement, SONICblue has received $7.9 million in cash through December 31, 2001
and is eligible to receive further financial consideration of up to $2.1
million, contingent upon the Fire GL graphics business, as operated by ATI,
achieving future performance targets.

TRANSFER OF ASSETS TO S3 GRAPHICS CO., LTD.

In January 2001, SONICblue completed the transfer of its graphics chips net
assets, other than its shares of common stock of S3-VIA, to S3 Graphics Co.,
Ltd. ("S3 Graphics"), a joint venture between VIA and a wholly owned subsidiary
of SONICblue. The joint venture manufactures and distributes semiconductor
products and conducts related research and development activities. Pursuant to
the joint venture agreement with VIA, SONICblue received 13 million shares of
SONICblue common stock held by VIA in return for a reduction of its economic
interest in the future operations of the joint venture to 0.1%. At closing,
SONICblue granted a wholly owned subsidiary of VIA a warrant to purchase 2
million shares of SONICblue common stock at an exercise price of $10.00 per
share. Under the joint venture agreement, SONICblue will also receive earn-out
payments if the new venture meets specified profitability goals.

PURCHASE OF EMPEG LIMITED

In November 2000, SONICblue acquired United Kingdom digital audio equipment
manufacturer Empeg Limited, one of the first companies to design and bring to
market digital audio players for automobiles, at an initial purchase price of
$1.9 million. In November 2001, a purchase price adjustment of $1.1 million was
recorded resulting in a total purchase price of $3.0 million.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PURCHASE OF ASSETS OF NUMBER NINE

PURCHASE OF DIAMOND MULTIMEDIA SYSTEMS

On September 24, 1999, the Company completed the acquisition of all of the
outstanding common stock of Diamond Multimedia Systems, Inc. ("Diamond").
Approximately 18.7 million shares of SONICblue common stock were issued to
Diamond shareholders and 1.3 million options were assumed. At the time of the
acquisition, Diamond designed, developed, manufactured and marketed multimedia
and connectivity products for personal computers. The transaction was accounted
for as a purchase.

The purchase price of approximately $215 million included $172 million of
stock, $12 million in stock option costs at fair value, cash payment of $20
million and approximately $11 million in expenses of the transaction. The
purchase price was allocated as follows: $1.2 million to the estimated fair
value of Diamond net liabilities assumed, $6.7 million to purchased in-process
research and development, $6.8 million to purchased existing technology, $11.4
million to trade names, $5.5 million to workforce-in-place, $12.5 million to
Diamond distribution channel relationships and $173.8 million to goodwill.
Goodwill was recorded as a result of consideration paid in excess of the fair
value of net tangible and intangible assets acquired. Goodwill and identified
acquisition related intangible assets have been amortized on a straight-line
basis over 2 to 7 years.

PRO FORMA OPERATING RESULTS

The pro forma unaudited results of operations for the years ended December
31, 2001 and 2000, assuming the acquisitions of ReplayTV and Sensory Science and
the disposition of the graphics chips assets had occurred as of January 1, 2000,
and includes the effect of amortization of goodwill and other identified
intangibles from that date. The impact of changes for in-process research and
development has been excluded. This is presented for informational purposes only
and is not necessarily indicative of the results of future operations or results
that would have been achieved had the acquisitions and disposition taken place
at the beginning of 2001 and 2000.

<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
2001 2000
---------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)

Revenues.................................................... $ 236,866 $381,675
Net income (loss)........................................... $(800,188) $150,294
Net earnings (loss) per common share:
Basic..................................................... $ (8.32) $ 1.69
Diluted................................................... $ (8.32) $ 1.50
</Table>

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. FINANCIAL INSTRUMENTS

The following is a summary of available-for-sale securities:

<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2000
------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- --------
(IN THOUSANDS)

Corporate Debt Securities:
Money market mutual funds.................. $ 6,274 $ 6,274 $ 13,753 $ 13,753
Corporate bonds............................ -- -- 2,312 2,324
------- ------- -------- --------
Total Corporate Debt Securities.... 6,274 6,274 16,065 16,077
Corporate Equity Securities.................. 65,457 82,737 525,905 232,369
U.S. Government Securities................... -- -- 3,004 2,997
------- ------- -------- --------
$71,731 $89,011 $544,974 $251,443
======= ======= ======== ========
Included in UMC and short-term investments... $65,457 $82,737 $531,221 $237,690
Included in cash and cash equivalents........ 6,274 6,274 13,753 13,753
------- ------- -------- --------
$71,731 $89,011 $544,974 $251,443
======= ======= ======== ========
</Table>

Gross unrealized gains were $17.3 million in 2001 and $12,000 in 2000.
Gross unrealized losses were zero in 2001 and $293.5 million in 2000. Gross
unrealized gains and losses on available-for-sale securities are included in
comprehensive income. All debt securities had a maturity of less than one year
at December 31, 2001, and 2000.

During 2001, the Company sold a portion of its UMC holdings, aggregating
approximately 38.9 million shares. In connection with the sale of those UMC
holdings, the Company purchased a series of call option collars on UMC stock
with an aggregate notional amount of 38.9 million shares. These transactions
provided SONICblue funds from the sale of the shares while allowing the Company
to participate in future increases in the value of UMC shares, if any, through a
series of call option collars. The fair value of these instruments was $6.8
million as of December 31, 2001 and is included in short-term investments. These
instruments are marked-to-market in accordance with SFAS 115. These instruments
have terms between one and three years and have a maximum potential value
totaling $11.7 million. These instruments are not accounted for as hedges and
any change in the market value of these derivatives is recognized as a gain or
loss in the income statement. There were no such hedging instruments outstanding
at December 31, 2000.

The Company's convertible subordinated notes had a carrying value of
$(103.3) million as of December 31, 2001, and 2000. The estimated fair values
were $(70.6) million and $(70.9) million as of December 31, 2001, and 2000,
respectively.

The carrying value of cash and cash equivalents, short-term investments and
notes payable approximates fair value. The fair values of convertible
subordinated notes are estimated based on quoted market prices.

4. INVESTMENTS

INVESTMENT IN UMC

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

USC and the fair market value of the UMC shares. The Company also received stock
dividends of approximately 50 and 32 million shares of UMC stock, in April 2000
and August 2001, respectively. The Company sold 191 million shares of UMC stock
in 2001 and 15 million shares in 2000 on the Taiwan Stock Exchange, resulting in
realized losses of $93.3 and $10.8 million, respectively.

At December 31, 2000, the market value of the investment in UMC had
declined to an amount significantly below its original basis. It was determined
at that point that this decline was related to the downturn in the semiconductor
industry as a whole and was temporary in nature due to the historically cyclical
nature of the industry. During the first half of 2001, the Company concluded
that the downturn in the semiconductor industry and the economy in general was
more severe than previously anticipated and that there was a great deal of
uncertainty regarding when the semiconductor industry would recover from this
down cycle. Because SONICblue concluded that the decline in value of UMC was
other than temporary, we reported an unrealized loss on the UMC investment of
$468.3 million, based on the market value at June 30, 2001. Under the terms of
the USC merger with UMC, a portion of the original number of UMC shares received
by SONICblue are subject to restrictions on their sale that lapse over a
three-year period from the date of the merger. At December 31, 2001,
approximately 76 million shares were subject to restrictions that will lapse in
one year or more and are recorded at adjusted cost as a long-term investment.
The unrestricted shares and shares where the restrictions will lapse in one year
or less, 52 million shares, are recorded as a current asset and are
marked-to-market value through other comprehensive income.

As of December 31, 2001, SONICblue's 128 million UMC short and long-term
shares were worth approximately $186 million, based on the closing price of UMC
shares on the Taiwan Stock Exchange and the prevailing U.S. dollar to New Taiwan
Dollar exchange rate on that date. The Company's available-for-sale portion of
the investment will be marked-to-market through other comprehensive income for
changes in market value subsequent to December 31, 2001, unless a further
decline in market value is considered to be other than temporary. If any further
decline is considered to be other than temporary, the decrease in value of both
the available-for-sale and long-term portions of the Company's UMC investment
will be recorded as an expense in the statement of operations.

INTEREST IN REAL ESTATE PARTNERSHIP

In 1995, the Company entered into a limited partnership arrangement (the
"partnership") with a developer to obtain a ground lease and develop and operate
the Company's current Santa Clara facilities. The Company invested $2.1 million
for a 50% limited partnership interest. On June 29, 1999, the Company entered
into an agreement to assign to the general partner the Company's entire interest
in the partnership for $7.8 million. The gain on the assignment of the Company's
partnership interest is being recognized over the term of the facilities lease,
which expires in 2008.

INVESTMENT IN RIOPORT

In October 1999, SONICblue caused RioPort, Inc. (formerly RioPort.com,
Inc.), which was a wholly owned subsidiary of SONICblue, to sell shares of its
preferred stock to third party investors. RioPort is developing an integrated
platform for acquiring, managing and experiencing music and spoken audio
programming from the Internet. As a result, SONICblue retains a minority
investment in RioPort and accounts for its investment using the equity method.
In addition, in November 1999, SONICblue received $10.9 million for the sale to
RioPort of OneStep, LLC, a software development company. In June 2000, RioPort
sold additional preferred stock to third party investors. As part of this
financing, the Company invested an additional $10.7 million in RioPort,
maintaining its percentage ownership of RioPort. In the fourth quarter of 2000,
RioPort sold additional preferred stock to third party investors. As of December
31, 2001, the Company held approximately 32% of RioPort's outstanding stock. The
Company recorded its equity in the loss of RioPort of $0.1 million in 2001,
$11.4 million in 2000 and $4.6 million in 1999. As of December 31, 2001,

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company was a guarantor of RioPort's $2 million bank line of credit, and as
a result may be required to repay the bank line of credit upon default by
RioPort.

INVESTMENT IN S3-VIA, INC.

In November 1999, the Company established a 50.1% majority-owned corporate
joint venture with VIA to bring certain high-performance integrated graphics and
core logic chip sets to the volume OEM desktop and notebook PC markets. S3-VIA
has exclusive access to both companies' technology and distribution rights for
developed products between SONICblue and VIA The Company consolidated the
accounts of S3-VIA in its consolidated financial statements through the third
quarter of 2001. VIA, acting as S3-VIA's exclusive distributor, orders product
from S3-VIA upon VIA's receipt of a third-party order. Revenue is recognized by
S3-VIA upon shipment to VIA. Net sales by S3-VIA to VIA and receivables between
S3-VIA and VIA are classified as related party revenues and receivables in the
Company's consolidated financial statements.

In the fourth quarter of 2001, the Company terminated its participation in
the management of S3-VIA. As a result, the Company wrote off the net assets of
the joint venture, which resulted in an unrecognized gain of $0.7 million. Since
the actual process of withdrawing from the venture will continue and ultimately
be a part of other negotiations that are on-going with VIA, the Company has
deferred recognition of any gain until a comprehensive settlement of all
outstanding issues is reached with VIA.

5. CONVERTIBLE SUBORDINATED NOTES

In September 1996, the Company completed a private placement of $103.5
million of convertible subordinated notes. The notes mature in October 2003.
Interest is payable semi-annually at 5.75% per annum. The notes are convertible
at the option of the holders into the Company's common stock at an initial
conversion price of $19.22 per share, subject to adjustment. During 2000, $0.2
million in notes were converted into common stock. The notes are redeemable at
the option of the Company at a redemption price of 100% of their principal
amount. Offering costs of approximately $0.8 million, net of accumulated
amortization are included in other assets and are amortized on a straight-line
basis over the term of the notes.

6. LINE OF CREDIT AND NOTES PAYABLE

Sensory Science Corporation, a wholly owned subsidiary of SONICblue, has
loans under a line of credit with a financial institution, which has a maturity
date of March 25, 2003. The maximum line of credit is $25.0 million with a
borrowing limit of $22.5 million, limited by a borrowing base determined by
specific inventory and receivable balances of Sensory Science and an
availability block of $5.0 million. The line of credit is collateralized by
assets of Sensory Science Corporation and by a guarantee of SONICblue. Interest
is charged at prime plus 1.0%. Borrowings were $15.3 million under this facility
at December 31, 2001. As of December 31, 2001, SONICblue is in compliance with
all debt covenants on this line of credit.

7. STOCKHOLDERS' EQUITY

PREFERRED STOCK

The preferred stock may be issued from time to time in one or more series.
The Board of Directors is authorized to provide rights, preferences, privileges
and restrictions of the shares of such series. As of December 31, 2001, and
2000, no shares of preferred stock had been issued.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCKHOLDER RIGHTS PLAN

On May 14, 1997, the Board adopted a Stockholder Rights Plan. To implement
the plan, SONICblue's Board declared a dividend of one preferred stock purchase
right (a "Right") for each outstanding share of SONICblue common stock held of
record on June 1, 1997. Each Right represents a contingent right to purchase,
under certain circumstances, a fractional share of SONICblue Series A
Participating Preferred Stock. The Rights would become exercisable and trade
independently from SONICblue common stock upon the public announcement of the
acquisition by a person or group of 15% or more of SONICblue's common stock, or
ten days after commencement of a tender or exchange offer for SONICblue common
stock that would result in the acquisition of 15% or more of SONICblue's common
stock. In the event one of the limited conditions is triggered, each Right
entitles the registered holder to purchase one one-thousandth of a share of
preferred stock at an exercise price of $85.00 per Right. The Board of Directors
may redeem the Rights at $0.01 per Right pursuant to the plan. The Rights expire
May 14, 2007.

EMPLOYEE STOCK PURCHASE PLAN

The Company's 1993 Employee Stock Purchase Plan permits eligible employees,
through payroll deductions of up to 10% of compensation, to purchase shares of
Company common stock up to a maximum of 2,000 shares at a price equal to 85% of
the lower of the fair market value at the beginning or end of the purchase
period. At December 31, 2001, 3.2 million shares have been issued under the plan
and 1.6 million shares have been reserved for future issuance.

STOCK OPTION PLANS

The 1989 Stock Plan was established for the grant of incentive or
nonstatutory stock options and the direct award or sale of shares to employees,
directors and consultants. Incentive stock options must be granted at not less
than fair market value at the date of grant. The exercise price of nonstatutory
options and the share price for shares sold generally may be no less than 85% of
fair market value at the date of the grant or sale. In connection with the
mergers with Diamond, empeg, Sensory Science and ReplayTV, each outstanding
stock option was assumed by SONICblue and converted into an option to acquire
shares of SONICblue common stock on the same terms and conditions (including any
provisions for acceleration) as were applicable to that stock option under the
applicable stock option plan in effect prior to the merger. At December 31,
2001, 45.5 million shares of common stock have been authorized for issuance,
24.4 million shares of common stock are reserved for issuance and 5.4 million
shares were available for future grant under the plans.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of stock option activity under the plans is as follows (shares in
thousands except per share amounts):

<Table>
<Caption>
NUMBER WEIGHTED AVERAGE
OF SHARES PRICE PER SHARE
--------- ----------------

BALANCE, DECEMBER 31, 1998.................................. 15,043 $ 4.86
Options granted and assumed................................. 7,920 8.50
Options exercised........................................... (3,391) 5.24
Options cancelled........................................... (2,368) 6.51
------
BALANCE, DECEMBER 31, 1999.................................. 17,204 6.22
Options granted............................................. 4,249 13.90
Options exercised........................................... (3,089) 5.38
Options cancelled........................................... (3,329) 8.90
------
BALANCE, DECEMBER 31, 2000.................................. 15,035 7.93
Options granted and assumed................................. 11,454 2.86
Options exercised........................................... (1,197) 2.76
Options cancelled........................................... (6,282) 7.85
------
BALANCE, DECEMBER 31, 2001.................................. 19,010 5.21
======
</Table>

Options generally vest over a period of four years and generally become
exercisable beginning either six months or one year from the date of employment
or grant. Options generally expire ten years from the date of grant. Options to
purchase 9.8 million, 7.0 million and 6.7 million shares were vested and
exercisable at December 31, 2001, 2000 and 1999, respectively, with a weighted
average exercise price of $5.53, $6.03 and $5.24, respectively.

COMMON SHARES RESERVED FOR ISSUANCE

The Company has reserved shares of common stock for future issuance at
December 31, 2001, as follows:

<Table>
<Caption>
(IN THOUSANDS)

Shares reserved for Stock Option Plans...................... 5,364
Shares reserved for Employee Stock Purchase Plan............ 1,636
Outstanding warrants........................................ 2,028
Shares reserved for conversion of convertible subordinated
notes..................................................... 5,375
------
Total common stock reserved for future issuance... 14,403
======
</Table>

SHARES ISSUED FOR SERVICES

During 2001, SONICblue granted stock awards for an aggregate of 423,058
shares valued at $0.7 million in consideration for legal services.

STOCK-BASED COMPENSATION

Under the intrinsic value method, the Company generally recognizes no
compensation expense with respect to stock-based awards to employees. The
Company is required to present pro forma information regarding net income (loss)
and net income (loss) per share, as if the Company had accounted for its stock-
based awards to employees under the fair value method. The fair value of the
Company's stock-based awards to employees was estimated using the Black-Scholes
option valuation model. The Black-Scholes option

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. The
Black-Scholes model requires the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock-based
awards to employees have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based awards to employees.

The following table summarizes the ranges of outstanding and exercisable
options at December 31, 2001:

<Table>
<Caption>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- -------------- ----------- -------- -------------- --------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)

$0.01 - $ 2.42.. 5,115 9.17 $ 1.27 2,228 $ 1.00
2.48 - 3.16... 5,364 7.28 2.98 2,859 3.15
3.44 - 8.94... 4,850 7.19 5.65 2,682 5.70
8.95 - 41.08... 3,681 7.76 13.36 1,983 13.80
------ -----
0.01 - 41.08... 19,010 7.86 5.21 9,752 5.53
====== =====
</Table>

The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:

<Table>
<Caption>
STOCK OPTION PLAN EMPLOYEE STOCK PURCHASE PLAN
------------------------------ ------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------

Expected life from vest date 0.5 yrs. 0.5 yrs. 0.5 yrs. 0.0 0.0 yrs. 0.0 yrs.
yrs.....
Volatility.................... 90% 81% 83% 90% 81% 83%
Risk-free interest rate....... 3.4% 6.2% 5.4% 4.2% 5.8% 4.9%
</Table>

The weighted-average estimated fair value of stock options granted during
2001, 2000 and 1999 was $1.93, $7.80 and $4.95 per share, respectively. The
weighted-average estimated fair value of shares purchased under the Employee
Stock Purchase Plan during 2001, 2000 and 1999 was $2.69, $3.08 and $2.87 per
share, respectively.

For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is generally amortized over the vesting period
of four years (for options) and the offering period (for stock purchases under
the Employee Stock Purchase Plan). The pro forma information is as follows:

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Pro forma net income (loss)......................... $(765,062) $297,286 $(42,178)
Pro forma earnings per share amounts:
Basic............................................. $ (8.91) $ 3.29 $ (0.71)
Diluted........................................... $ (8.91) $ 3.15 $ (0.71)
</Table>

WARRANTS

In January 2001, SONICblue granted a wholly owned subsidiary of VIA a
warrant to purchase 2 million shares of SONICblue common stock at an exercise
price of $10.00 per share. The warrant expires on

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

January 3, 2005, unless terminated earlier pursuant to its terms. In December
1998, the Company entered into an agreement pursuant to which it issued Intel
Corporation a warrant to purchase 1 million shares of the Company's common stock
at an exercise price of $9.00 per share. The purchase price for the warrant was
$1.0 million. Intel exercised this warrant in February 2000 on a cashless basis
for a net issuance of 429,477 shares.

8. LEASES AND COMMITMENTS

OPERATING LEASES

The Company occupies facilities in several countries including the United
States, France, Germany, Japan, Korea and the United Kingdom and is obligated
under leases expiring through 2008. Under the leases, the Company is responsible
for insurance, maintenance and property taxes.

Future minimum annual payments under operating leases are as follows:

<Table>
<Caption>
OPERATING LEASES
-------------------------------------------------
RENT EXPENSE SUBLEASE INCOME NET RENT EXPENSE
------------ --------------- ----------------
(IN THOUSANDS)

2002...................................... $ 7,279 $ (4,159) $ 3,120
2003...................................... 7,282 (4,247) 3,035
2004...................................... 7,195 (4,335) 2,860
2005...................................... 7,102 (4,423) 2,679
2006...................................... 6,943 (4,511) 2,432
Thereafter................................ 22,114 (15,029) 7,085
------- -------- -------
Total minimum lease payments............ $57,915 $(36,704) $21,211
======= ======== =======
</Table>

Total future minimum payments due under operating leases, net of related
sublease income, for abandoned facilities related to restructuring costs is
$20.4 million as of December 31, 2001. These amounts will be paid out through
2010 and are included in accrued liabilities and other long-term liabilities in
the consolidated balance sheet as of December 31, 2001.

Rent expense for 2001, 2000 and 1999, was $7.4 million, $10.9 million and
$10.1 million, respectively. Sublease income for 2001, 2000 and 1999 was $3.7
million, $4.1 million and $4.4 million, respectively. Net rent expense for 2001,
2000, and 1999 was $3.7 million, $6.8 million and $5.7 million, respectively.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES

The provision (benefit) for income taxes consists of:

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- -------- --------
(IN THOUSANDS)

CURRENT TAX EXPENSE:
Federal........................................... $ -- $ -- $ --
State............................................. -- -- --
Foreign........................................... -- 88 618
--------- -------- --------
-- 88 618
--------- -------- --------
DEFERRED TAX EXPENSE:
Federal........................................... (164,007) 210,620 (43,173)
State............................................. (38,751) 70,770 (5,361)
Foreign........................................... -- -- --
--------- -------- --------
(202,758) 281,390 (48,534)
--------- -------- --------
Total..................................... $(202,758) $281,478 $(47,916)
========= ======== ========
</Table>

Loss from foreign operations was $35.5 million, $31.0 million, and nil in
2001, 2000 and 1999, respectively. The tax benefits resulting from disqualifying
dispositions of shares acquired under the Company's incentive stock option plan
and from the exercise of non-qualified stock options reduced taxes payable as
shown by nil, $5.0 million and $2.9 million in 2001, 2000 and 1999,
respectively, which amounts are included in additional paid-in capital.

The difference between the provision for taxes on income and the amount
computed by applying the federal statutory income tax rate to income before
taxes is explained below:

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- -------- --------
(IN THOUSANDS)

Tax computed at 35%................................. $(335,652) $208,007 $(27,544)
Nondeductible goodwill.............................. 50,770 15,554 4,269
State income taxes, net of federal effect........... (25,188) 46,000 --
Tax credits......................................... -- (3,000) --
Equity loss of investee............................. -- 3,981 2
Losses not benefited (benefited).................... 106,940 10,150 (24,643)
Other............................................... 372 786 --
--------- -------- --------
Provision for income taxes.......................... $(202,758) $281,478 $(47,916)
========= ======== ========
Effective tax rate.................................. 21.1% 47.4% 60.9%
========= ======== ========
</Table>

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the Company's deferred income tax asset are as
follows:

<Table>
<Caption>
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(IN THOUSANDS)

Deferred tax assets:
Reserves not currently deductible......................... $ 9,457 $ 14,555
Accrued liabilities....................................... 8,851 --
Deferred revenue.......................................... 1,482 489
Compensation expense not currently deductible............. 2,155 3,106
Depreciation/amortization................................. 9,117 16,151
Foreign net operating loss carryforwards.................. 7,184 7,300
Federal net operating loss carryforwards.................. 258,616 159,825
State net operating loss carryforwards.................... 12,566 13,400
Federal credit carryforwards.............................. 9,745 10,293
State credit carryforwards................................ 6,724 4,662
Unrealized loss on investments............................ 9,595 --
Other..................................................... 7,233 11,728
--------- ---------
Total deferred tax assets......................... 342,725 241,509
Valuation allowance for deferred tax assets............... (265,080) (80,568)
--------- ---------
Net deferred tax assets........................... 77,645 160,941
--------- ---------
Deferred tax liabilities:
Investment in UMC......................................... (55,345) (243,754)
Purchased intangibles..................................... (22,300) (6,984)
Other..................................................... -- (4,906)
--------- ---------
Total deferred tax liabilities.................... (77,645) (255,644)
--------- ---------
Net deferred tax liability........................ $ -- $ (94,703)
========= =========
</Table>

The foreign net operating loss carryforwards do not expire. The federal net
operating loss and credit carryforwards expire beginning in 2005 and 2002,
respectively. The state net operating loss and credit carryforwards expire
beginning in 2002 and 2005, respectively. Utilization of the net operating loss
and credit carryforwards may be subject to a substantial annual limitation due
to the ownership change limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. The annual limitation may result
in the expiration of net operating loss carryforwards before utilization.

The change in the valuation allowance was $184.5 million, $19.7 million and
$20.1 million in 2001, 2000 and 1999, respectively. Approximately $125.7 million
of the valuation allowances at December 31, 2001, relates to tax carryforwards
of purchased subsidiaries, the realization of which will first reduce goodwill,
then other non-current intangible assets related to the acquisitions. In
addition, $1.0 million of the valuation allowance shown above relates to tax
benefits from stock option deductions that will be credited to equity when
realized.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. EMPLOYEE BENEFIT PLANS

Under terms of the Company's non-qualified cash profit sharing plan, all
employees, including officers, are eligible to receive, an annual cash bonus
based on pretax profits, prorated for service with the Company. No payments were
made under this plan in 2001, 2000 or 1999.

The Company has a 401(k) tax-deferred savings plan whereby all employees
meeting certain age and service requirements may contribute up to 20% of their
eligible compensation (up to the maximum allowed under IRS rules). The Company,
at the discretion of the Board of Directors, may make contributions. No
contributions by the Company have been made to the plan since its inception.

11. PRODUCT LINES, INTERNATIONAL SALES AND SIGNIFICANT CUSTOMERS

The Company reports financial and descriptive information in one segment
for which financial information is made available to and evaluated regularly by
the chief operating decision maker, its Chief Executive Officer ("CEO"). During
2001, the CEO reviewed financial information presented on a consolidated basis
for purposes of making operating decisions and assessing financial performance.
Net sales by product line for 2001, 2000 and 1999 were as follows:

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
(AMOUNTS IN MILLIONS)

The Company's primary operations are located in the United States. The
Company sells its products into the consumer electronics market primarily in the
United States, Europe and Asia. Excluding the net sales of S3-VIA, Inc.,
international sales accounted for 24%, 56% and 70% of net sales in 2001, 2000
and 1999, respectively. Two customers accounted for 13% and 12%, respectively,
of net sales in 2001. One customer accounted for 21% of net sales in 2000. Two
customers accounted for 19% and 10%, respectively, of net sales in 1999. Sales
of our products are primarily in the United States and to a lesser extent in
Europe and Asia. Prior to the transfer in January 2001 of our graphics chips
business to S3 Graphics and the shutdown of our graphics boards business in
August 2000, a significant percentage of our sales were to international
original equipment manufacturers.

12. CONTINGENCIES

Since November 1997, a number of complaints have been filed in federal and
state courts seeking unspecified damages on behalf of an alleged class of
persons who purchased shares of SONICblue's common

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock at various times between April 18, 1996, and November 3, 1997. The
complaints name as defendants SONICblue, certain of its officers and former
officers, and certain directors of SONICblue, and Deloitte & Touche, the
company's former auditors, and assert that they violated federal and state
securities laws by misrepresenting and failing to disclose certain information
about SONICblue's business. In addition, certain stockholders have filed
derivative actions in the state courts of California and Delaware seeking
recovery on behalf of SONICblue, alleging, among other things, breach of
fiduciary duties by such individual defendants. The plaintiffs in the derivative
action in Delaware have not taken any steps to pursue their case. The derivative
cases in California State court have been consolidated, and plaintiffs have
filed a consolidated amended complaint. The court has entered a stipulated order
in those derivative cases suspending court proceedings and coordinating
discovery in them with discovery in the class actions in California State
courts. In late 2001, the derivative plaintiffs gave notice terminating that
stay, and the parties have stipulated that a second amended consolidated
complaint may be filed in April 2002. On plaintiffs' motion, the federal court
has dismissed the federal class actions without prejudice. The class actions in
California State court have been consolidated, and plaintiffs have filed a
consolidated amended complaint. SONICblue has answered that complaint. Discovery
is proceeding. On January 22, 2001, four of the insurance carriers which issued
directors and officers insurance to SONICblue filed suit against all parties
named as defendants in the securities litigation, claiming that the carriers
have no obligation to provide coverage under the California Insurance Code. In
May 2001, the court entered an order staying the insurance action pending
resolution of the securities litigation (refer to Note 16 of the Consolidated
Financial Statements).

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

technology similarly violate the copyright laws, in their amended complaint
plaintiffs eliminated these claims in November 2001. The parties have commenced
discovery and the District Court has preliminarily scheduled a consolidated
trial in August 2002. SONICblue intends to dispute the plaintiffs' claims and
defend this action vigorously.

On February 14, 2000, Robert C. Price filed a purported class action
lawsuit in the Circuit Court of Monroe County, State of Indiana against the
Company and Diamond alleging violations of the California Business and
Professions Code section 7200 and the California Song-Beverly Act, which covers
consumer warranties. The lawsuit alleges that certain of the Company's Rio 300
MP3 player retail boxes, which were discontinued in approximately 1999, are
misleading because the boxes indicate that computer software included in the
package allows the purchaser to convert audio tracks on CDs to the MP3 audio
format, but the software included with the product permitted only 50
conversions. The Company answered the complaint on April 27, 2000, denying
plaintiff's allegations. A status conference was conducted on July 26, 2000, and
a further status conference was held on January 10, 2001. Discovery has
commenced. No class has been certified, but a further status conference to set a
timetable for resolution of class certification issues has been

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

scheduled for April 17, 2002. SONICblue intends to contest the certification of
the purported class, dispute the lawsuit's allegations and defend this action
vigorously.

On or about November 27, 2001, Pac Tec, a division of La France
Corporation, filed a civil action against SONICblue and one of its suppliers,
Manufacturer' Services Limited, in the United States District Court for the
Eastern District of Pennsylvania, alleging claims against both defendants
jointly for breach of contract and promissory estoppel. In the complaint, the
plaintiff prays for damages in excess of $2.5 million, plus prejudgment interest
and costs of suit. On or about February 15, 2002, the Company filed a motion to
dismiss the complaint or for a more definite statement. Opposition to the motion
has not yet been served, nor has a date for hearing or other disposition of the
motion been set. SONICblue intends to dispute the plaintiff's claims and
vigorously defend itself against this action.

The investment agreement between SONICblue, VIA and S3 Graphics provides
that under certain circumstances, SONICblue may be required to pay VIA
significant liquidated damages if, unless as a result of certain acts or
omissions on the part of either VIA or S3 Graphics, S3 Graphics is prevented by
court order from utilizing SONICblue's patent cross-license with Intel
Corporation or if SONICblue enters into a settlement agreement with Intel such
that S3 Graphics can no longer operate under the patent cross-license. In
September 2001, Intel filed a patent infringement lawsuit against S3 Graphics
and VIA. SONICblue is not a party to the lawsuit. The lawsuit is in early
stages. Any liquidated damages that SONICblue might be required to pay to VIA
under the investment agreement may under certain circumstances be reduced by
amounts paid by SONICblue to Intel in connection with any lawsuit and amounts
owed to SONICblue by either VIA or S3 Graphics. While we currently believe that
the ultimate outcome of these proceedings will not have a material adverse
effect on the Company's financial position or overall trends in results of
operations, litigation is subject to inherent uncertainties. An adverse result
or settlement with regard to these proceedings could have a material adverse
effect on SONICblue's financial condition or results of operations.

13. RESTRUCTURING EXPENSE AND IMPAIRMENT CHARGE

In April 2001, the Company adopted a restructuring plan relating to the
change in its business strategy to address changes in the market due to
technology changes, customer demands, and methods of distribution to reflect its
long-term strategy and focus. The Company continued the restructuring activities
in both the third and fourth quarters of 2001. Specific actions include reducing
the Company's workforce worldwide by approximately 200 employees affecting all
functional groups throughout the organization, consolidating facilities,
discontinuing unprofitable products and closing offices in unprofitable
locations. As part of the restructuring, the Company also expensed approximately
$59.8 million in inventory and related charges, through cost of sales.

Due to the circumstances created by the significant downturns in the
digital media markets, the Company recorded an impairment charge against the
goodwill and intangibles associated with its acquisitions of Diamond Multimedia,
RioPort, and Empeg Limited. These downturns negatively affected the forecasted
revenues and cash flows from the Diamond and Empeg Limited businesses acquired
in 1999 and 2000. In accordance with the Company's policy, undiscounted cash
flows indicated that the assets were impaired. The Company calculated the
impairment charge by comparing the expected discounted future cash flows to the
carrying amount of the related intangible assets.

In August 2000, the Company adopted a restructuring plan relating to the
shutdown of its Diamond Multimedia-branded add-in board business to reflect its
long-term strategy and focus. Specific actions included the write-off of
intangibles, consolidating facilities and a reduction in the Company's
workforce. As part of the restructuring, the Company also expensed $3.4 million
in inventory, through cost of sales.

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The related accrued restructuring and impairment charges activity was as
follows (in thousands):

<Table>
<Caption>
SEVERANCE REDUNDANT
COMPENSATION AND FACILITIES RELATED GOODWILL AND CONTRACT AND
RELATED EXPENSES COSTS INTANGIBLES OTHER COSTS TOTAL
---------------- ------------------ ------------ ------------------ ---------

Restructuring and
Impairment Charges...... $ 1,506 -- $ 4,376 $ 812 $ 6,694
Cash Payments............. (266) -- -- -- (266)
Non-Cash Charges.......... -- -- (4,376) -- (4,376)
------- ------- --------- ------- ---------
BALANCE DECEMBER 31,
2000.................... $ 1,240 -- -- $ 812 $ 2,052
Restructuring and
Impairment Charges...... 5,969 8,856 110,162 5,336 130,323
Cash Payments............. (4,566) (928) -- (1,131) (6,625)
Non-Cash Charges.......... -- (1,365) (110,162) (3,630) (115,157)
------- ------- --------- ------- ---------
BALANCE DECEMBER 31,
2001.................... $ 2,643 $ 6,563 -- $ 1,387 $ 10,593
======= ======= ========= ======= =========
</Table>

Restructuring charges for severance compensation and related expenses will
be paid through 2003, redundant facilities and related costs will be paid
through 2010, and contracts and other costs will be paid through 2006.

14. EARNINGS (LOSS) PER SHARE

Basic and diluted earnings per share are calculated using the weighted
average number of shares of common stock outstanding during the period, less
shares subject to repurchase. Diluted earnings per share include the impact of
potentially dilutive securities. At December 31, 2001, and 1999, approximately
26,413,000 and 22,589,000 of the Company's potentially dilutive securities
(stock options, warrants, and convertible note), respectively, were
anti-dilutive and have been excluded from the computation of weighted-average
shares used in computing diluted net loss per share for the years then ended.

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

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NUMERATOR
Net Income (Loss)
Basic............................................. $(756,249) $312,828 $(30,780)
Interest expense of convertible notes (net of
tax)........................................... -- 3,864 --
--------- -------- --------
Diluted........................................... $(756,249) $316,692 $(30,780)
========= ======== ========
DENOMINATOR
Denominator for basic earnings per share.......... $ 85,855 $ 90,390 $ 59,244
Common stock equivalents -- options and
warrants....................................... -- 5,375 --
Common stock equivalents -- convertible notes..... -- 5,385 --
--------- -------- --------
Denominator for diluted earnings per share........ $ 85,855 $101,150 $ 59,244
========= ======== ========
Basic earnings (loss) per share..................... $ (8.81) $ 3.46 $ (0.52)
Diluted earnings (loss) per share................... $ (8.81) $ 3.13 $ (0.52)
</Table>

SONICBLUE INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. COMPREHENSIVE INCOME

The following are the components of accumulated other comprehensive income
(loss), net of tax:

<Table>
<Caption>
DECEMBER 31,
----------------------------
2001 2000 1999
------ --------- -------
(IN THOUSANDS)

Unrealized gain (loss) on investments (net of tax)..... $9,390 $(191,197) $ 803
Foreign currency translation adjustments............... (8,397) (8,402) (8,366)
------ --------- -------
Accumulated other comprehensive income (loss)........ $ 993 $(199,599) $(7,563)
====== ========= =======
</Table>

The following schedule of other comprehensive income (loss) shows the gross
current-period gain (loss) and the reclassification adjustment, net of tax.

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
-------- --------- ------
(IN THOUSANDS)

Unrealized gain (loss) on investments
Unrealized gain (loss) on available-for-sale
securities (net of tax)............................. $ 10,287 $(196,096) $3,076
Less: reclassification adjustment for (gain) loss
realized in net income (net of tax).............. 190,299 4,096 56
-------- --------- ------
Net unrealized gain (loss) on investments (net of
tax)................................................ 200,586 (192,000) 3,132
Foreign currency translation adjustments.............. 6 (36) 4,060
-------- --------- ------
Other comprehensive income (loss)..................... $200,592 $(192,036) $7,192
======== ========= ======
</Table>

16. SUBSEQUENT EVENT

SECURITIES LITIGATION SETTLEMENT

SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

The following table presents selected unaudited consolidated financial
results for each of the eight quarters in the two-year period ended December 31,
2001. In the Company's opinion, this unaudited information has been prepared on
the same basis as the audited information and includes all adjustments
(consisting of only normal recurring adjustments) necessary for a fair statement
of the financial information for the period presented.

<Table>
<Caption>
FOURTH THIRD SECOND FIRST
QUARTER(4) QUARTER(1) QUARTER QUARTER
---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31, 2001
Net sales....................................... $ 79,646 $ 54,783 $ 29,508 $ 49,886
Gross profit (loss)............................. 14,314 8,211 (67,511) (16,769)
Loss from operations(2)......................... (22,183) (34,490) (242,331) (63,454)
Net income (loss)(3)............................ (52,649) (55,290) (312,541) (335,769)
Earnings (loss) per share amounts:
Basic(5)...................................... $ (0.57) $ (0.62) $ (3.88) $ (4.16)
Diluted(5).................................... $ (0.57) $ (0.62) $ (3.88) $ (4.16)
YEAR ENDED DECEMBER 31, 2000
Net sales....................................... $ 99,205 $ 139,960 $ 135,820 $ 161,719
Gross profit (loss)............................. (6,668) (23,652) 5,004 13,404
Loss from operations(2)......................... (77,362) (93,713) (54,815) (47,441)
Net income (loss)(3)............................ (67,509) (75,648) (36,258) 492,243
Earnings (loss) per share amounts:
Basic......................................... $ (0.72) $ (0.82) $ (0.40) $ 5.84
Diluted....................................... $ (0.72) $ (0.82) $ (0.40) $ 5.04
</Table>

- ---------------

(1) Gross profit (loss) for the third quarter of 2000 was restated from the
amounts presented in the Quarterly Report on Form 10-Q for the period ended
September 30, 2000, to reflect the reclassification of an inventory
write-down which was previously classified as restructuring expense. The
reclassification had no impact on loss from operations and net income
(loss).

(2) Loss from operations for 2001 includes restructuring and impairment charges
of $122.2 million, $7.2 million and $0.9 million in the second, third and
fourth quarters, respectively. Loss from operations for 2001 also includes
in-process research and development charges of $0.9 million and $4.2 million
in the second and third quarters, respectively. Loss from operations for
2000 includes restructuring and impairment charges of $9.0 million and $1.1
million in the third and fourth quarters, respectively.

(3) Net income (loss) for 2001 includes gain (loss) on UMC investment of
$(458.0) million, $(69.9) million, $(17.7) million and $(15.9) million in
the first, second, third and fourth quarters, respectively. Net income
(loss) for 2000 includes gain (loss) on UMC investment of $880.2 million,
$(6.4) million and $(4.3) million in the first, third and fourth quarters,
respectively.

(4) Net income (loss) for the fourth quarter of 2001 includes an $8.6 million
litigation settlement charge.

(5) Reflects the effective cancellation in the first quarter of 2001 of 875,000
shares acquired in connection with the transfer of our chip and board
business to S3 Graphics Co., Ltd. The adjustment increased loss per share by
$0.05 and $0.05 in the quarters ended June 30, 2001 and March 31, 2001,
respectively.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable

PART III

Certain information required by Part III is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 2002 Annual Meeting of Stockholders (the "Proxy Statement") to be held
on May 22, 2002.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this section (with respect to directors) is
incorporated by reference from the information in the section entitled "Proposal
1 -- Election of Directors" in the Proxy Statement.

Item 405 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated herein by reference.

The executive officers of the Company are as follows:

Kenneth F. Potashner, age 43, has served as Chief Executive Officer,
President and Chairman of the Board of SONICblue since November 1998. Mr.
Potashner has been a director of Maxwell Technologies, Inc. since April 1996 and
became Chairman of the Board of Maxwell Technologies in April 1997. From the
time he joined Maxwell Technologies in April 1996 until October 1998, Mr.
Potashner served as the President, Chief Executive Officer and Chief Operating
Officer. From 1994 to April of 1996, he served as Executive Vice President,
Operations, for Conner Peripherals, Inc. From 1991 through 1994, Mr. Potashner
was Vice President, Product Engineering, for Quantum Corporation. Mr. Potashner
is also a member of the Board of Directors of Newport Corporation.

John J. Todd, age 40, is SONICblue's Executive Vice President, Chief
Operating Officer, Interim Chief Financial Officer and Secretary. Mr. Todd
joined SONICblue in May 2001 as Vice President, Chief Financial Officer, Chief
Operating Officer and Secretary, was promoted to Executive Vice President and
Chief Operating Officer in February 2002 and in March 2002, Mr. Todd was named
Interim Chief Financial Officer. From October 1998 to January 2001, Mr. Todd was
the Senior Vice President and Chief Financial Officer at Gateway, Inc. where he
had responsibility for operational finance, tax, audit, treasury, financial
systems and reporting. From 1997 to October 1998, Mr. Todd was employed by
Allied Signal, Inc., most recently as Chief Financial Officer, Allied Signal
Engines. From 1996 to 1997, Mr. Todd was Chief Financial Officer of the Boston
Market operations of Boston Chicken, Inc. In October 1998, Boston Chicken, Inc.
and its Boston Market related subsidiaries filed voluntary petitions under
Chapter 11 of the Federal Bankruptcy Code. From 1988 to 1996, Mr. Todd was
employed by Pepsico, Inc., most recently as Vice President -- Portfolio
Management, Pizza Hut, Inc.

Roger Hackett, age 51, has been SONICblue's Senior Vice President,
International Sales since August 2001. Prior thereto, Mr. Hackett was the
President and Chief Operating Officer of Sensory Science since January 1993 and
Chief Executive Officer and Chairman since March 1994. Mr. Hackett also serves
as a director of Microtest, Inc., a producer of network test and measurement
products and network storage and application servers.

Andrew L. Wolfe, age 38, SONICblue's Senior Vice President and Chief
Technical Officer. Mr. Wolfe joined SONICblue in June 1997, became Chief
Technical Officer in May 1999, and was promoted to Senior Vice President and
Chief Technical Officer in August 2000. From September 1991 to 1997 he was an
Assistant Professor at Princeton University where he taught Electrical
Engineering.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this section is incorporated by reference from
the information in the sections entitled "Directors' Compensation" and
"Executive Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this section is incorporated by reference from
the information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this section is incorporated by reference from
the information in the section entitled "Certain Relationships and Related Party
Transactions" in the Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

(1) Financial Statements:

Reference is made to the Index to Consolidated Financial Statements of
SONICblue Incorporated under Item 8 in Part II of this Form 10-K.

(2) Financial Statement Schedules:

The following financial statement schedule of SONICblue Incorporated for
the years ended December 31, 2001, 2000 and 1999 is filed as part of this Report
and should be read in conjunction with the Consolidated Financial Statements of
SONICblue Incorporated.

<Table>
<Caption>
REFERENCE
PAGE
---------

Schedule II -- Valuation and Qualifying Accounts............ 78
</Table>

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

(3) Exhibits:

The exhibits listed below are required by Item 601 of Regulation S-K. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K has been identified.

<Table>
<Caption>
EXHIBIT
NUMBER NOTES DESCRIPTION OF DOCUMENT
- ------- ----- -----------------------

10.5* (9) 1992 Stock Plan of Diamond Multimedia Systems, Inc.
("Diamond") and form of Stock Option Agreement.
10.6* (9) 1994 Stock Plan of Diamond and form of Stock Option
Agreement.
10.7* (9) 1995 Director Option Plan of Diamond and form of Stock
Option Agreement.
10.8* (10) 1998 Stock Plan of Diamond and form of Stock Option
Agreement.
10.9 (1) Form of Indemnification Agreement between the Registrant and
its directors.
10.10 (4) Lease between Mission Real Estate, L.P. and Registrant dated
November 29, 1995.
10.11+ (3) Foundry Venture Agreement among Registrant, Alliance
Semiconductor Corporation and United Microelectronics
Corporation dated as of July 8, 1995.
10.12 (9) Lease dated November 19, 1999, between Diamond and Montague
LLC.
10.13 (9) Lease dated December 26, 1995, between NL Properties, Inc.
and Diamond.
10.14 (11) Sublease dated May 12, 1998, between Reed Elsevier, Inc. and
Diamond.
10.15* (7) Employment Agreement between Registrant and Terry N. Holdt
dated December 18, 1997.
10.16* (27) Employment Agreement between Registrant and Kenneth F.
Potashner, dated June 21, 2001.
10.17*# Employment Transition and Separation Agreement between
Registrant and Paul G. Franklin, dated October 25, 2001.
10.18* (9) Involuntary Termination Agreement between Registrant and
Andy Wolfe, dated September 22, 1998.
10.19 (12) Form of Promissory Note and Security Agreement between each
of Messrs. Lee, Holdt, Santoro and Schraith and the
Registrant.
10.20 (12) Form of Promissory Note and Security Agreement between each
of Messrs. Lee, Holdt, Santoro and Schraith and the
Registrant.
10.21 (16) Joint Venture Agreement, dated as of January 3, 2001,
between the Registrant, Sonica3, Inc. and VIA Technologies,
Inc.
10.22 (17) Amended and Restated Investor Rights Agreement, dated as of
January 3, 2001, between the Registrant and VIABASE, Inc.
10.23 (18) Class A Share Option Agreement, dated as of January 3, 2001,
between Sonica3, Inc. and VIA Technologies, Inc.
10.24 (14) Investment Agreement, dated as of August 28, 2000, among the
Registrant, VIA Technologies, Inc. and JV.
10.25 (15) Common Stock Purchase Warrant of the Registrant, dated
January 3, 2001, issued in the name of VIABASE, Inc. (BVI).
10.26 (19) Rules of the Empeg Limited Company Share Option Plan 1999.
10.27 (20) Go-Video, Inc. 1987 Nonstatutory Stock Option Plan.
10.28 (21) Go-Video, Inc. 1989 Nonstatutory Stock Option Plan.
10.29 (22) Go-Video, Inc. 1991 Employee Stock Option Plan.
10.30 (23) Go-Video, Inc. 1991 Nonstatutory Directors' Stock Option
Plan.
10.31 (24) Sensory Science Corporation 1993 Employee Stock Option Plan.
10.32 (25) Sensory Science Corporation Nonemployee Directors' Stock
Option Plan.
10.33 (28) ReplayTV, Inc. 1997 Stock Plan.
10.34 (29) ReplayTV, Inc. 1999 Stock Plan.
10.35 (31) Amendment to the 1993 Employee Stock Purchase Plan of
SONICblue Incorporated.
10.36# Employment Offer Letter to Roger Hackett dated April 6,
2001.
10.37# Employment Offer Letter to John J. Todd dated April 16,
2001.
</Table>

<Table>
<Caption>
EXHIBIT
NUMBER NOTES DESCRIPTION OF DOCUMENT
- ------- ----- -----------------------

21.1# Significant subsidiaries of Registrant.
23.1# Consent of Ernst and Young LLP, Independent Auditors (San
Jose, California).
24.1# Power of Attorney (see page 79 of this Form 10-K).
</Table>

- ---------------

# Filed herewith.

* Indicates management contract or compensatory plan or arrangement.

+ Confidential treatment has been granted with respect to certain portions of
this agreement.

(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-57114).

(2) Incorporated by reference to Exhibit 10.15 to the Registrant's Registration
Statement on Form S-8 (File No. 33-65186).

(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K filed July 25, 1995.

(4) Incorporated by reference to Exhibit 10.14 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.

(5) Incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.

(6) Incorporated by reference to Exhibit 4.4 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.

(7) Incorporated by reference to Exhibit 10.14 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.

(8) Incorporated by reference to the Exhibit 3(I).2 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.

(9) Incorporated by reference to Diamond's Registration Statement on Form S-1
(File No. 33-89386).

(10) Incorporated by reference to Diamond's Registration Statement on Form S-8
(File No. 333-61147).

(11) Incorporated by reference to Exhibit 10.17 Diamond's Annual Report on Form
10-K for the year ended December 31, 1998.

(12) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.

(13) Incorporated by reference to the exhibit of the same number to the
Registrant's Registration Statement on Form S-4 (File No. 333-59258).

(14) Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K filed January 18, 2001.

(15) Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report
on Form 8-K filed January 18, 2001.

(16) Incorporated by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K filed January 18, 2001.

(17) Incorporated by reference to Exhibit 99.2 to the Registrant's Current
Report on Form 8-K filed January 18, 2001.

(18) Incorporated by reference to Exhibit 99.3 to the Registrant's Current
Report on Form 8-K filed January 18, 2001.

(19) Incorporated by reference to Exhibit 99.1 of the same number to the
Registrant's Registration Statement on Form S-8 (333-59866).

(20) Incorporated by reference to Exhibit 4-A to Go-Video, Inc.'s Registration
Statement on Form S-8 (File No. 33-18428).

(21) Incorporated by reference to Exhibit 10-C(2) to Go-Video, Inc.'s
Registration Statement on Form S-2 (File No. 33-33033).

(22) Incorporated by reference to Exhibit 28.1 to Go-Video, Inc.'s Registration
Statement on Form S-8 (File No. 33-49926).

(23) Incorporated by reference to Exhibit 28.1 to Go-Video, Inc.'s Registration
Statement on Form S-8 (File No. 33-49924).

(24) Incorporated by reference to Exhibit 10.24 to Go-Video, Inc.'s Transition
Report on Form 10-K for the year ended December 31, 1995.

(25) Incorporated by reference to Exhibit 99 to Sensory Science Corporation's
Registration Statement on Form S-8 (File No. 333-51578).

(26) Incorporated by reference to Exhibit 3(ii).1 of the same number to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.

(27) Incorporated by reference to Exhibit 10.1 of the same number to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.

(28) Incorporated by reference to Exhibit 99.1 of the same number to the
Registrant's Registration Statement on Form S-8 (333-67280).

(29) Incorporated by reference to Exhibit 99.2 of the same number to the
Registrant's Registration Statement on Form S-8 (333-67280).

(30) Incorporated by reference to Exhibit 10.1 of the same number to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2001.

(31) Incorporated by reference to Exhibit 10.2 of the same number to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2001.

(b) Reports on Form 8-K:

On October 15, 2001, SONICblue filed on Amendment No. 1 to Form 8-K
reporting under Item 7 the financial statements relating to its acquisition of
ReplayTV, Inc.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
BALANCE AT CHARGED TO REVERSALS TO BALANCE AT
BEGINNING COSTS AND COSTS AND (DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES EXPENSES AND OTHER) PERIOD
- ----------- ---------- ---------- ------------ ----------- ----------
(IN THOUSANDS)

Allowance for doubtful accounts:
2001................................. $ 3,301 $ 771 $ (372) $ 142 $ 3,842
2000................................. 3,562 1,857 (438) (1,680) 3,301
1999................................. 2,296 2,699 (384) (1,049) 3,562
Sales returns and allowances:
2001................................. $ 4,489 $34,644 $(32,078) $ (874) $ 6,181
2000................................. 15,736 6,751 (16,860) (1,138) 4,489
1999................................. 4,229 24,850 (10,665) (2,678) 15,736
</Table>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 29, 2002.

SONICBLUE INCORPORATED
(Registrant)

By: /s/ KENNETH F. POTASHNER

--------------------------------------
Kenneth F. Potashner
President
Chief Executive Officer
Chairman of the Board

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kenneth F. Potashner, John J. Todd, and
Terry Holdt, and each of them, his or her true and lawful attorneys-in-fact,
each with full power of substitution, for him or her in any and all capacities,
to sign any amendments to this report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:

<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----

/s/ KENNETH F. POTASHNER President, Chief Executive March 29, 2002
- --------------------------------------------------- Officer and Chairman of the
Kenneth F. Potashner Board

/s/ JOHN J. TODD Executive Vice President, Chief March 29, 2002
- --------------------------------------------------- Operating Officer and Interim
John J. Todd Chief Financial Officer
(Principal Financial and
Accounting Officer)

/s/ TERRY N. HOLDT Vice Chairman of the Board March 29, 2002
- ---------------------------------------------------
Terry N. Holdt

/s/ EDWARD M. ESBER, JR. Director March 29, 2002
- ---------------------------------------------------
Edward M. Esber, Jr.

/s/ ROBERT P. LEE Director March 29, 2002
- ---------------------------------------------------
Robert P. Lee

/s/ CARMELO J. SANTORO Director March 29, 2002
- ---------------------------------------------------
Carmelo J. Santoro

/s/ JAMES T. SCHRAITH Director March 29, 2002
- ---------------------------------------------------
James T. Schraith
</Table>

EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER NOTES DESCRIPTION OF DOCUMENT
- ------- ----- -----------------------

3(i) (12) Restated Certificate of Incorporation.
3(ii) (26) Amended and Restated Bylaws.
4.1 (13) Specimen common stock certificate.
4.2 (5) Indenture, dated as of September 12, 1996, between
Registrant and State Street Bank and Trust Company of
California, N.A., as Trustee, including form of Note.
4.3 (6) Rights Agreement dated as of May 14, 1997, between S3
Incorporated and The First National Bank of Boston, Rights
Agent.
10.1* (30) 1989 Stock Plan of SONICblue Incorporated (Amended and
Restated as of May 16, 2001) (the "1989 Plan").
10.2* (8) Form of Incentive Stock Option Agreement under the 1989
Plan.
10.3* (1) Form of Common Stock Purchase Agreement under the 1989 Plan.
10.4* (2) S3 Incorporated 1993 Employee Stock Purchase Plan.
10.5* (9) 1992 Stock Plan of Diamond Multimedia Systems, Inc.
("Diamond") and form of Stock Option Agreement.
10.6* (9) 1994 Stock Plan of Diamond and form of Stock Option
Agreement.
10.7* (9) 1995 Director Option Plan of Diamond and form of Stock
Option Agreement.
10.8* (10) 1998 Stock Plan of Diamond and form of Stock Option
Agreement.
10.9 (1) Form of Indemnification Agreement between the Registrant and
its directors.
10.10 (4) Lease between Mission Real Estate, L.P. and Registrant dated
November 29, 1995.
10.11+ (3) Foundry Venture Agreement among Registrant, Alliance
Semiconductor Corporation and United Microelectronics
Corporation dated as of July 8, 1995.
10.12 (9) Lease dated November 19, 1999, between Diamond and Montague
LLC.
10.13 (9) Lease dated December 26, 1995, between NL Properties, Inc.
and Diamond.
10.14 (11) Sublease dated May 12, 1998, between Reed Elsevier, Inc. and
Diamond.
10.15* (7) Employment Agreement between Registrant and Terry N. Holdt
dated December 18, 1997.
10.16* (27) Employment Agreement between Registrant and Kenneth F.
Potashner, dated June 21, 2001.
10.17*# Employment Transition and Separation Agreement between
Registrant and Paul G. Franklin, dated October 25, 2001.
10.18* (9) Involuntary Termination Agreement between Registrant and
Andy Wolfe, dated September 22, 1998.
10.19 (12) Form of Promissory Note and Security Agreement between each
of Messrs. Lee, Holdt, Santoro and Schraith and the
Registrant.
10.20 (12) Form of Promissory Note and Security Agreement between each
of Messrs. Lee, Holdt, Santoro and Schraith and the
Registrant.
10.21 (16) Joint Venture Agreement, dated as of January 3, 2001,
between the Registrant, Sonica3, Inc. and VIA Technologies,
Inc.
10.22 (17) Amended and Restated Investor Rights Agreement, dated as of
January 3, 2001, between the Registrant and VIABASE, Inc.
10.23 (18) Class A Share Option Agreement, dated as of January 3, 2001,
between Sonica3, Inc. and VIA Technologies, Inc.
10.24 (14) Investment Agreement, dated as of August 28, 2000, among the
Registrant, VIA Technologies, Inc. and JV.
10.25 (15) Common Stock Purchase Warrant of the Registrant, dated
January 3, 2001, issued in the name of VIABASE, Inc. (BVI).
</Table>

<Table>
<Caption>
EXHIBIT
NUMBER NOTES DESCRIPTION OF DOCUMENT
- ------- ----- -----------------------

10.26 (19) Rules of the Empeg Limited Company Share Option Plan 1999.
10.27 (20) Go-Video, Inc. 1987 Nonstatutory Stock Option Plan.
10.28 (21) Go-Video, Inc. 1989 Nonstatutory Stock Option Plan.
10.29 (22) Go-Video, Inc. 1991 Employee Stock Option Plan.
10.30 (23) Go-Video, Inc. 1991 Nonstatutory Directors' Stock Option
Plan.
10.31 (24) Sensory Science Corporation 1993 Employee Stock Option Plan.
10.32 (25) Sensory Science Corporation Nonemployee Directors' Stock
Option Plan.
10.33 (28) ReplayTV, Inc. 1997 Stock Plan.
10.34 (29) ReplayTV, Inc. 1999 Stock Plan.
10.35 (31) Amendment to the 1993 Employee Stock Purchase Plan of
SONICblue Incorporated.
10.36# Employment Offer Letter to Roger Hackett dated April 6,
2001.
10.37# Employment Offer Letter to John J. Todd dated April 16,
2001.
21.1# Significant subsidiaries of Registrant.
23.1# Consent of Ernst and Young LLP, Independent Auditors (San
Jose, California).
24.1# Power of Attorney (see page 79 of this Form 10-K).
</Table>