As filed with the Securities and Exchange Commission on January 11, 2002
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTERVIDEO, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 7372 94-3300070
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of IndustrialClassification Identification Number)
Incorporation or Code Number)
Organization)
47350 Fremont Boulevard
Fremont, California 94538
(510) 651-0888
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Steve Ro
Chief Executive Officer
InterVideo, Inc.
47350 Fremont Boulevard
Fremont, California 94538
(510) 651-0888
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Matthew W. Sonsini, Esq. Timothy R. Curry, Esq.
Craig D. Norris, Esq. Evan B. Sloves, Esq.
Christine S. Wong, Esq. Christine DeSanze, Esq.
Ritu K. Tariyal, Esq. Brent D. Johnson, Esq.
Barbara A. Wiseman, Esq. Brobeck, Phleger & Harrison LLP
Wilson Sonsini Goodrich & Rosati, P.C. Two Embarcadero Place
650 Page Mill Road 2200 Geng Road
Palo Alto, CA 94304 Palo Alto, CA 94303
(650) 493-9300 (650) 424-0160
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Aggregate Amount of
Title of Each Class of Securities to be Registered Offering Price (1) Registration Fee
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Common Stock $0.001 par value..................... $51,750,000 $12,369
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
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The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment that specifically states that this registration statement
shall then become effective in accordance with Section 8(a) of the Securities
Act of 1933, or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to Section
8(a), may determine.

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The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS
(Subject to Completion) January 11, 2002
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[LOGO] "Inter Video"

Common Stock

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We are selling shares of our common stock. This is our initial public
offering of shares of our common stock. No public market currently exists for
any shares of our capital stock. We currently estimate that the initial public
offering price of our common stock will be between $ and $ per share.

We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "IVDO."

Before buying any shares you should read the discussion of material risks of
investing in our common stock in "Risk factors" beginning on page 5.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Per Share Total
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to us $ $
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The underwriters may also purchase up to shares of our common stock from us
at the public offering price, less underwriting discounts and commissions,
within 30 days from the date of this prospectus. The underwriters may exercise
this option only to cover over-allotments, if any.

The underwriters are offering our common stock on a firm commitment basis as
described under "Underwriting." Delivery of the shares will be made on or about
, 2002.

UBS Warburg CIBC World Markets

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Through and including , 2002 (25 days after the date of this prospectus),
all dealers selling shares of our common stock, whether or not participating in
this offering, may need to deliver a prospectus. This delivery requirement is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

TABLE OF CONTENTS
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Prospectus summary..................... 1 Business.................................. 34
The offering........................... 3 Management................................ 46
Summary consolidated financial data.... 4 Related party transactions................ 56
Risk factors........................... 5 Principal stockholders.................... 58
Forward-looking information............ 19 Description of capital stock.............. 59
Use of proceeds........................ 19 Shares eligible for future sale........... 62
Dividend policy........................ 19 Underwriting.............................. 64
Capitalization......................... 20 Legal matters............................. 66
Dilution............................... 21 Experts................................... 66
Selected consolidated financial data... 22 Where you can find more information....... 66
Management's discussion and analysis of Index to consolidated financial statements F-1
financial condition and results of
operations........................... 24

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Prospectus summary

This summary highlights the information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk factors."

OUR BUSINESS

Our software is bundled with products sold by eight of the top ten PC original
equipment manufacturers, or OEMs, ranked in terms of sales by IDC. Our OEM
customers include Compaq Computer Corporation, Dell Products L.P., Fujitsu
Limited, Fujitsu Siemens Computers GmbH, Hewlett-Packard Company, Medion AG,
Sony Corporation and Toshiba Corporation. We sell our products to PC OEMs and
PC peripherals manufacturers worldwide and offer our software in up to 26
languages.

MARKET OPPORTUNITY

Advances in digital technology enable the PC to serve as a versatile,
feature-rich and reasonably priced digital entertainment platform. All PC
multimedia hardware components require software to operate. As a result,
multimedia software not only has become a necessary component of the PC, but
also serves as an opportunity for OEMs to add value to their products, improve
margins and differentiate their products from those of their competitors. As
consumer electronics manufacturers migrate from dedicated hardware solutions to
a PC architecture in order to provide lower cost and greater flexibility, we
expect the market opportunity for multimedia software to grow in this market
segment as well. We believe that all of these factors will create market
opportunities for a complete multimedia software solution.

THE INTERVIDEO SOLUTION

We provide advanced digital video and audio multimedia software products that
enable PC OEMs, consumer electronics manufacturers and PC peripherals
manufacturers to add value to their products, improve margins and differentiate
their products from those of their competitors. Key elements of our solution
include the following:

. A broad multimedia software solution for the PC. Our broad suite of
software provides OEMs and consumers with a single source for a variety of
multimedia functions. PCs running our integrated multimedia software can
replace several expensive, dedicated hardware components such as separate
DVD players, digital video recorders, or DVRs, MP3 players, compact disc,
or CD, players and digital TV set-top boxes.

. Core technology that operates on a variety of platforms. Our core
technology is based on a layered architecture that allows our suite of
products to operate on a variety of hardware and software platforms. WinDVD
has been certified by Microsoft's Windows Hardware Quality Lab, or WHQL, as
a Motion Video Device on more than 800 PC hardware and software
configurations, which is more than any other PC DVD software provider. We
believe that our approach also enables OEMs to offer their customers highly
customized PCs with lower customer service costs.

. Layered architecture that we have adapted to new technologies and upgraded
to incorporate new features. Our layered architecture enables us to respond
and adapt to new technologies in an industry characterized by rapid change.
Because our architecture has allowed us to efficiently develop new products
incorporating additional functionality, such as digital video recording, we
have provided our customers with the ability to increase the functionality
of their products at a low cost and with relative ease, which has enabled
them to differentiate their products from competitors' product offerings.

OUR STRATEGY

Our goal is to be the leading global provider of advanced digital video and
audio multimedia software solutions for PCs, consumer electronics devices, PC
peripherals, home networks and other emerging markets. Key elements of our
strategy include the following:

. Increase market penetration of our multimedia software. We will seek to
increase our market share by aggressively pursuing additional OEM
relationships, entering into creative marketing arrangements and exploiting
new sales channels. We have recently implemented marketing arrangements
with select OEMs under which we share revenue and intend to enter into
similar arrangements with other OEMs. We also intend to expand the sale of
our products through retail channels and through our Internet commerce
sites.

. Leverage existing and prospective OEM relationships to promote adoption of
our new products. We plan to leverage our strong market position and
integrated product suite to encourage our PC OEM customers to license
additional software products and to encourage prospective PC OEMs to adopt
our products. We have begun implementing this strategy with two of our
largest customers, both of which first installed our WinDVD product on
their PCs and have now added our WinDVR product.

. Capitalize on emerging product markets. We intend to closely monitor
evolving technologies and to identify additional markets for our products.
We believe that we can adapt our technology effectively for use in a
variety of emerging consumer electronics and network devices, such as cable
and satellite TV set-top boxes, devices being developed for use within home
networks and MPEG-4 wireless devices.

. Maintain and enhance strategic relationships, and acquire complementary
companies and technologies. We have established strategic relationships
with several technology and market leaders, including Microsoft and Nvidia.
We also intend to pursue acquisitions of complementary products,
technologies and companies.

. Continue to expand global presence. A substantial portion of our sales
come from outside the United States, and we believe that significant
revenue growth opportunities exist in Europe, Asia and elsewhere. We
intend to continue to target OEMs and end users outside the United States
to capitalize on this opportunity.

COMPANY INFORMATION

We were incorporated in California in April 1998 and intend to reincorporate in
Delaware prior to the completion of this offering. Unless otherwise noted, the
information in this prospectus assumes that the reincorporation has been
completed.

Our principal executive offices are located at 47350 Fremont Blvd., Fremont, CA
94538. Our telephone number is (510) 651-0888. Our web site is
www.intervideo.com. The information found on our website is not a part of this
prospectus.

The offering

Common stock we are offering........... shares

Common stock to be outstanding after this
offering........................... shares

Proposed Nasdaq National Market symbol. IVDO

Use of proceeds........................ For general corporate purposes,
including working capital, marketing,
research and development and capital
expenditures. In addition, we may use
a portion of the net proceeds to
acquire or invest in complementary
businesses or products or to obtain
the right to use complementary
technologies. See "Use of proceeds."

Except as otherwise indicated, whenever we present the number of shares of our
common stock outstanding, we have:

. based this information on the shares outstanding as of December 31, 2001,
excluding;

. as of December 31, 2001, 5,367,700 shares of common stock issuable upon
exercise of outstanding options at a weighted average exercise price of
$0.61 per share;

. as of December 31, 2001, 2,364,838 shares of common stock available for
issuance under our existing stock option plan; and

. an additional 800,000 shares of common stock reserved for issuance under
our stock option plan and employee stock purchase plan adopted in
connection with this offering;

. given effect to the automatic conversion of our outstanding preferred stock
into common stock upon completion of this offering;

. assumed no exercise of options after December 31, 2001; and

. assumed no exercise of the underwriters' over-allotment option.

InterVideo and WinDVD are registered trademarks and WinDVR, WinProducer, WinDTV
and WinRip are trademarks or service marks of InterVideo. This prospectus also
contains brand names, trademarks and service marks of companies other than
InterVideo, and these brand names, trademarks and service marks are the
property of their respective holders.

Summary consolidated financial data

Our summary consolidated financial data is presented in the following table to
aid you in your analysis of a potential investment in our common stock. You
should read this data in conjunction with "Management's discussion and analysis
of financial condition and results of operations," our consolidated financial
statements and the notes to those consolidated financial statements appearing
elsewhere in this prospectus. Pro forma net loss per share applicable to common
stockholders reflects the conversion of all outstanding preferred stock into
common stock from the beginning of the period presented or at the date of
original issuance, if later. The as adjusted balance sheet data reflects our
receipt of the estimated net proceeds from the sale of shares of our common
stock in this offering at an assumed initial public offering price of $ per
share after deducting the estimated underwriting discounts and commissions and
the estimated expenses of this offering.

Year ended Nine months ended
December 31, September 30,
Period from inception ---------------- ----------------
Consolidated statement of operations to December 31,
data 1998(1) 1999(1) 2000(1) 2000(1) 2001
(in thousands, except per share data) (unaudited)
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Revenue................................ $ -- $ 3,036 $15,426 $ 9,761 $23,673
Gross profit........................... -- 1,918 10,237 6,498 14,792
Operating expenses:
Research and development............ 328 1,300 6,876 4,489 7,307
Sales and marketing................. -- 1,194 5,033 3,129 6,422
General and administrative.......... 199 773 2,667 1,645 2,225
Stock compensation (2).............. -- 53 1,411 906 1,612
Special charges (3)................. -- -- -- -- 3,068
Total operating expenses............... 527 3,320 15,987 10,169 20,634
Loss from operations................... $(527) $(1,402) $(5,750) $(3,671) $(5,842)
Net loss............................... $(525) $(1,434) $(5,745) $(3,750) $(5,908)
Net loss per common share, basic and
diluted............................... $ -- $ (2.57) $ (2.19) $ (1.45) $ (1.70)
Pro forma net loss per common share,
basic and diluted (unaudited)......... $ (0.43) $ (0.25) $(0.38 )
Weighted average common shares
outstanding, basic and diluted........ -- 559 2,625 2,593 3,472
Pro forma weighted average common
shares outstanding, basic and diluted
(unaudited)........................... 13,456 14,782 15,661

As of September 30, 2001
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Actual As adjusted
Consolidated balance sheet data (unaudited) (in thousands)
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Cash and cash equivalents.......................... $11,596 $
Working capital.................................... 5,625
Total assets....................................... 20,050
Long-term obligations, net of current portion...... --
Total stockholders' equity......................... 10,712

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(1)Excludes the results of operations of the Audio Visual Products Division of
Formosoft International Inc., or AVPD, prior to our acquisition on June 7,
2000. See the financial statements of AVPD included elsewhere in this
Prospectus, as well as the related unaudited pro forma condensed combined
statement of operations of InterVideo for the year ended December 31, 2000
as if the acquisition of AVPD had been completed on January 1, 2000.

(2)Stock compensation is allocated among the operating expense classifications
as follows:

Year ended Nine months ended
December 31, September 30,
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1999 2000 2000 2001
(unaudited)
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Research and development............... $14 $ 546 $341 $ 633
Sales and marketing.................... 3 521 358 398
General and administrative............. 36 344 207 581
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$53 $1,411 $906 $1,612
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(3) See "Management's discussion and analysis of financial condition and
results of operations" for further discussion of the special charges
recorded in the nine months ended September 30, 2001.

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Risk factors

You should carefully consider the risks described below together with all of
the other information included in this prospectus before making an investment
decision. The risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties that we are unaware of, or that
we may currently deem immaterial, may become important factors that harm our
business. If any of the following risks actually occurs, our business could be
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

We have a history of losses, and we may never achieve profitability.
We have incurred losses since our inception and have not achieved
profitability. As of September 30, 2001, we had an accumulated deficit of $13.6
million. We expect to incur significant operating expenses over the next
several years in connection with the continued development and expansion of our
business. We may continue to lose money in future periods. Our expenses include
research and development and marketing expenses relating to products that will
not be introduced and will not generate revenue until later periods, if at all.
Our future profitability will depend on generating increased revenue, and we
may never achieve profitability. In addition, even if we achieve profitability,
we may not sustain or increase profitability on a quarterly or annual basis in
the future.

Our limited operating history and the rapidly evolving nature of our industry
make the forecasting of our future results difficult.
We were incorporated in April 1998 and began shipping our products in February
1999. Prior to February 1999, our operations consisted primarily of research
and development efforts. As a result of our limited operating history, our
historical financial and operating information is of limited value in
predicting our future operating results. In addition, any evaluation of our
business and prospects must be made in light of the risks and difficulties
encountered by companies offering products or services in new and rapidly
evolving markets. The license of software-based digital video and audio
solutions for incorporation in products in the PC and consumer electronics
industries is new, and it may be difficult to forecast the future growth rate,
if any, or size of the market for our products. We may be unable to accurately
forecast customer behavior and recognize or respond to emerging trends,
changing preferences or competitive factors facing us. Our current and future
expense levels are based largely on our investment plans and estimates of
future revenue and are, to a large extent, fixed. As a result, we may fail to
make accurate financial forecasts and adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall, which would harm our operating
results.

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

. fluctuations in demand for, and sales of, our products and the PCs and
consumer electronics devices with which our products are bundled;

. timely and accurate reporting to us by our OEM customers of units shipped,
which determines the timing and level of revenue received from these
customers;

. changes in the timing of orders or the completion of customer contracts
with significant OEM customers;

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Risk factors
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. competitive factors, including introductions of new products, product
enhancements and the introduction of new technologies by our competitors
and the entry of new competitors into the digital video and audio software
markets;

. changes in consumer demand for our products due to the marketing of
alternative technologies by our OEM customers;

. declines in selling prices of our products to our OEM customers or other
customers;

. market acceptance of new products developed by us;

. changes in the relative portion of our revenue represented by our various
products and customers;

. the mix of international and U.S. revenue;

. the costs of litigation and intellectual property protection; and

. economic conditions specific to the PC, consumer electronics and related
industries.

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

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

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

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

. MPEG LA. DVD specifications include technology known as "MPEG-2" that
governs the process of storing video input in digital form. A group of
companies, comprised primarily of consumer electronics manufacturers, has
formed a consortium known as "MPEG LA, LLC" to enforce the proprietary
rights of member companies in patents covering certain aspects of MPEG-2
technology. MPEG LA, and certain members of the consortium, have notified
us that they believe that our products infringe on patents owned by members
of the consortium. In addition, MPEG LA, and certain members of the
consortium, have notified a number of PC OEMs, including some of our
customers, that they believe MPEG LA members' patents are infringed when
those PC OEMs distribute products that incorporate MPEG-2 technology.

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Risk factors
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. 6C. Another group of companies has formed a consortium known as "6C,"
formerly the DVD Patent License Program, to enforce the proprietary rights
of holders of patents covering some aspects of DVD technology. 6C has
notified us that we may need a license so that our products that
incorporate DVD technology do not infringe patents owned by members of the
consortium. In addition, 6C may demand that PC OEMs or other companies
manufacturing or licensing DVD-related products, including our customers,
pay license fees.

We may be subject to additional third-party claims that our products violate
the intellectual property rights of those parties. In addition to the claims
described above, we may receive notices of claims of infringement of other
parties' proprietary rights. Many companies aggressively use their patent
portfolios to bring infringement claims against competitors and other parties.
As a result, we may become a party to litigation in the future as a result of
an alleged infringement of the intellectual property rights of others,
including MPEG LA or 6C. In addition, we are aware that a consortium of
companies, known as "3C," has been formed for the purpose of asserting the
patent rights of its members covering some aspects of DVD technology. 3C may
demand that PC OEMs or other companies manufacturing or licensing DVD-related
products, including us and our customers, pay license fees and damages for the
use of the technology covered by the 3C patents. Similarly, other parties have
alleged that aspects of MPEG-2 and other multimedia technologies infringe upon
patents held by them. We may be required to pay license fees and damages in the
future if it is determined that our products infringe on patents owned by these
third parties. In addition, other companies may form consortia in the future,
similar to MPEG LA, 6C and 3C, to enforce their proprietary rights and these
consortia may seek to enforce their patent rights against us and our customers.

We may be required to pay substantial damages and may be restricted or
prohibited from selling our products if it is proven that we violate the
intellectual property rights of others. If MPEG LA, 6C, 3C or another third
party proves that our technology infringes its proprietary rights, we may be
required to pay substantial damages for past infringement and may be required
to pay license fees or royalties on future sales of our products. MPEG LA has
requested that we obtain a license from MPEG LA for the use of the technology
covered by the MPEG LA patents. The MPEG LA license would require us to pay
license fees when we sell our products directly to consumers or other end-user
customers but not to our customers, such as PC OEMs, that incorporate those
products into their own products. If we are required to pay license fees in the
amounts that are currently published by, for example, MPEG LA and 6C for past
sales to our large PC OEM customers, because such PC OEMs were not themselves
licensed, such fees would exceed the revenue we have received from those
customers. In addition, if it were proven that we willfully infringed on a
third party's proprietary rights, we may be held liable for three times the
amount of damages we would otherwise have to pay. In addition, intellectual
property litigation may require us to:

. stop selling, incorporating or using our products that use the infringed
intellectual property;

. obtain a license to make, sell or use the relevant technology from the
owner of the infringed intellectual property, which license may not be
available on commercially reasonable terms, if at all; and

. redesign our products so as not to use the infringed intellectual property,
which may not be technically or commercially feasible.

Furthermore, the defense of infringement claims and lawsuits, regardless of
their outcome, would likely be expensive to resolve and could require a
significant portion of management's time. In addition, rather than litigating
an infringement matter, we may determine that it is in our best interests to
settle the matter. Terms of a settlement may include the payment of damages and
our agreement to license

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Risk factors
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technology in exchange for a license fee and ongoing royalties. These fees may
be substantial. If we are forced to take any of the actions described above,
defend against any claims from third parties or pay any license fees or
damages, our business could be harmed.

We may be liable to some of our customers for damages that they incur in
connection with intellectual property claims. Some of our license agreements,
including many of the agreements we have entered into with our large PC OEM
customers, contain warranties of non-infringement and commitments to indemnify
our customers against liability arising from infringement of third-party
intellectual property, which may include such as the patents held by members of
MPEG LA, 6C and 3C. These commitments may require us to indemnify or pay
damages to our customers for all or a portion of any license fees or other
damages, including attorneys' fees, they are required to pay or agree to pay
these or other third parties. We have received notices asserting rights under
the indemnification provisions and warranty provisions of our license
agreements from several customers, including Acer Incorporated, Compaq, Dell,
Gateway and Micron Electronics, Inc. Although MPEG LA has stated that some of
our customers, including Compaq, Dell, Fujitsu Limited, Gateway, Inc.,
Hewlett-Packard, Sony and Toshiba, are currently MPEG LA licensees, not all of
our PC OEM customers are current MPEG LA licensees. Even with respect to those
PC OEM customers that may have become licensees, we may have liability to those
customers for prior infringement and future royalty payments. If we are
required to pay damages to our customers or indemnify our customers for damages
they incur, our business could be harmed. If our customers are required to pay
license fees in the amounts that are currently published by some claimants, and
we are required to pay damages to our customers or indemnify our customers for
such amounts, such payments would exceed our revenue from these customers. Even
if a particular claim falls outside of our indemnity or warranty obligations to
our customers, our customers may be entitled to additional contractual remedies
against us. Furthermore, even if we are not liable to our customers, our
customers may attempt to pass on to us the cost of any license fees or damages
owed to third parties, by reducing the amounts they pay for our products. These
price reductions could harm our business.

We have accrued, and expect to continue to accrue, for liabilities relating to
royalty and related intellectual property claims. Our actual liability may
exceed the amount we have accrued or accrue in the future, which could harm our
business.

Because there is a small number of large PC OEMs, we have only a limited number
of potential new large OEM customers for our WinDVD product, which will likely
cause our revenue to grow at a slower rate than in recent periods.
Our revenue growth has been achieved in large part due to sales of our WinDVD
product to new, large PC OEM customers. Our software is bundled with products
sold by eight of the top ten PC OEMs ranked in terms of sales by IDC. Because
there is only a limited number of potential new, large PC OEM customers for our
WinDVD product, we must derive any future revenue growth principally from
increased sales of WinDVD or other products to existing PC OEMs and PC
peripherals manufacturers and from sales to smaller regional PC OEMs and
directly to consumers through retail channels and our websites. Because some of
these other revenue opportunities are more fragmented than the PC OEM market
and will take more time and effort to penetrate, we expect that our revenue
will grow at a slower rate than in recent periods.

We depend substantially on our relationships with a small number of PC OEMs,
and our failure to maintain or expand these relationships would harm our
business.
The PC industry is highly concentrated, and we have derived a substantial
portion of our revenue from sales of our products to a small number of PC OEMs.
For the nine months ended September 30, 2001,

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Risk factors
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our four largest customers accounted for a majority of our revenue, with Dell
accounting for 31% and Fujitsu accounting for 12%. Compaq and Hewlett-Packard,
which have announced an agreement to merge, together accounted for more than
10% of our revenue during that period. We expect that a small number of
customers will account for a majority of our revenue and gross profit, if any,
for the foreseeable future. If the PC industry continues to consolidate, the
number of customers accounting for the majority of our revenue could decrease
further. Our agreements with our customers typically do not contain minimum
purchase commitments and are of limited duration or are terminable with little
or no notice. The loss of any of these customers, or a material decrease in
revenue from these customers, would harm our business.

If our competitors offer our OEM customers more favorable terms than we do or
if our competitors are able to take advantage of their existing relationships
with these OEMs, then these OEMs may decline to include our software with their
PCs. If we are unable to maintain or expand our relationships with PC OEMs, our
business will suffer.

As a result of our dependency on a small number of large PC OEMs, any problems
those customers experience, or their failure to promote products that contain
our software, may harm our business.
As a result of our concentrated customer base, problems that our PC OEM
customers experience may harm our business. Some of the factors that affect the
business of our PC OEM customers, all of which are beyond our control, include:

. the competition these customers face and the market acceptance of their
products;

. the engineering, marketing and management capabilities of these customers
and the technical challenges that they face in developing their products;

. the financial and other resources of these customers;

. new governmental regulations or changes in taxes or tariffs applicable to
these customers; and

. the failure of third parties to develop and introduce content for DVD and
other digital media applications in a timely fashion.

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

We have derived a substantial majority of our revenue from the sale of our
WinDVD product to PC OEMs, and these customers may not continue to purchase
this product or we may fail to attract new customers for this product.
We have derived a substantial majority of our revenue from the sale of our
WinDVD product to PC OEMs. We expect that revenue from the sale of our WinDVD
product to PC OEMs will continue to account for a substantial portion of our
revenue for the foreseeable future. Accordingly, our business will suffer if
our existing PC OEM customers do not continue to incorporate our WinDVD product
into the PCs they sell or if we are unable to obtain new PC OEM customers for
our WinDVD product.

Continued slow growth, or negative growth, in the PC industry could harm our
business.
Our revenue depends in large part on the demand for our products by PC OEMs.
The PC industry is currently experiencing slow or negative growth due to a
general economic slowdown, market saturation and other factors. If slow or
negative growth in the PC industry continues, demand for our products may

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decrease. Furthermore, if a reduction in demand for our products were to occur,
we may not be able to reduce expenses commensurately, due in part to the
continuing need for research and development. Accordingly, continued slow
growth or negative growth in the PC industry could harm our business.

Our success in generating revenue depends on the growth of the use of software
solutions in the PC and consumer electronics industries.
Our continued success in generating revenue depends on growth in the use of
software solutions to add features and functionality to PCs and consumer
electronics devices. Our software is currently used primarily in PCs, and we
expect it to be useful for consumer electronics products. These markets are
rapidly evolving, and it is difficult to predict their potential size or future
growth rate. In addition, we are uncertain as to the extent to which products
such as ours will be used in these markets in the future. Their market
acceptance may be impacted by the performance, cost and availability of
semiconductors that perform similar functions and the level of copy protection
that can be attained and maintained in software products. Our success in
generating revenue in these markets will depend on increased adoption of
software solutions based on the same standards as ours. If the PC and consumer
electronics markets adopt software solutions more slowly than we expect, or if
content providers are dissatisfied with the level of copy protection available
in software products, our growth would not likely continue, and our business
would likely suffer.

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

Competition in our industry is intense and is likely to continue to increase,
which could harm our business.
Our industry is intensely competitive, and we expect competition to intensify
in the future. Our competitors include:

. software companies that offer digital video or audio applications;

. companies offering hardware or semiconductor solutions as alternatives to
our software products; and

. operating system providers that may develop and integrate applications into
their products.

Additional competitors are likely to enter our industry in the future. We also
face competition from the internal research and development departments of
other software companies and PC and consumer electronics manufacturers,
including some of our current customers. Some of our customers have the
capability to integrate their operations vertically by developing their own
software-based digital and audio solutions or by acquiring our competitors or
the rights to develop competitive products or technologies, which may allow
these customers to reduce their purchases or cease purchasing

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from us completely. Operating system providers with an established customer
base, such as Microsoft, already offer products in the digital video and audio
software markets. Some video and audio capabilities are built directly into
their operating systems or are offered as upgrades to those operating systems
at no additional charge. If Microsoft or other operating system providers
develop or license digital video and audio solutions that compete directly with
ours, and incorporate the solutions into their operating systems, our business
could be harmed.

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

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

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

Our ability to achieve profitability will suffer if we fail to manage our
growth effectively.
Our success depends on our ability to manage effectively the growth of our
operations. During 2000 and the first half of 2001, we experienced significant
headcount growth, which exceeded the level that our revenue could support. In
June 2001, we reduced our headcount by approximately 25%. We cannot be certain
that our current cost structure is appropriate for the level of revenue that we
generate. Furthermore, we expect to increase the scope of our operations for
the foreseeable future. To manage the actual and expected growth of our
operations and personnel, we will need to improve our operational and financial
systems, procedures and controls. Our current and planned systems, procedures
and controls may not be adequate to support our future operations and expected
growth. For example, we have recently purchased sophisticated software to
manage our financial systems, which may disrupt our operations if not
implemented in an orderly manner. Delays or problems associated with any
improvement or expansion of

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our operational systems and controls could harm our relationships with
customers, reputation and brand and could also result in errors in our
financial and other reporting.

We license technology from third parties for use in our WinDVD and other
standards-based products, and our business will suffer if we fail to maintain
these license arrangements.
We license technology for use in our WinDVD product, our WinRip product and
other existing and planned products from third parties under agreements, some
of which have a limited duration. For example, we have a license agreement with
Dolby Laboratories for its audio technology and logo, a license agreement with
the DVD Copy Control Association, Inc. for the content scrambling system
designed to prevent the copying of DVDs, and various other license agreements
relating to patents, know-how and trademarks that are important to various
aspects of the development, marketing and sale of our products. If we fail to
maintain these license arrangements, we might not be able to ship our products
in their present forms and our business could be harmed.

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

Our products may have defects or may be incompatible with other software or
components contained in our customers' products, which could cause us to lose
customers, damage our reputation and create substantial costs.
Defects, referred to in the software industry as "bugs," have been found in our
products in the past, and may be found in the future. In addition, our products
may fail to meet our customers' design specifications or be incompatible with
other software or components contained in our customers' products, or our
customers may change their design specifications or add additional third-party
software or components after the production of our product. We may be required
to devote significant financial resources and personnel to correct any defects.
A failure to meet our customers' design specification often results in a loss
of sales due to the length of time required to redesign the product. Our
products may also be required to interface with defective third party software
or components. If we are unable to detect or fix errors, or meet our customers'
design specifications, our business and results of operations would suffer.

We may experience seasonality in our business, which could cause our operating
results to fluctuate.
Our financial condition and results of operations are likely to be affected by
seasonality in the future. Historically, PC OEMs have experienced their highest
volume of sales during the year end holiday season. Because of the timing of
our recognition of revenue associated with the sale of our products to OEMs, we
expect to experience our highest revenue and operating income in the first
quarter of each calendar year, followed by lower revenue and operating income
in the second quarter of that year. To the extent our retail sales increase as
a percentage of our revenue, we expect that revenue from retail sales in the
fourth quarter will increase relative to other quarters.

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The market for our products is new and constantly changing. If we do not
respond to changes in a timely manner, our products likely will no longer be
competitive.
The market for our products is characterized by rapid technological change, new
and improved product introductions, changes in customer requirements and
evolving industry standards. Our future success will depend to a substantial
extent on our ability to develop, introduce and support cost-effective new
products and technologies on a timely basis. If we fail to develop and deploy
new cost-effective products and technologies or enhancements of existing
products on a timely basis, or if we experience delays in the development,
introduction or enhancement of our products and technologies, our products will
no longer be competitive and our business will suffer.

The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. We may not be able to identify, develop,
manufacture, market or support new or enhanced products on a timely basis, if
at all. Furthermore, our new products may never gain market acceptance, and we
may not be able to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Our failure to respond to
product announcements, technological changes or changes in industry standards
would likely prevent our products from gaining market acceptance and harm our
business.

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

If we do not successfully establish strong brand identity in the PC and
consumer electronics market, we may be unable to achieve widespread acceptance
of our products.
We believe that establishing and strengthening the InterVideo brand is critical
to achieving widespread acceptance of our products and to establishing key
strategic partnerships. The importance of brand recognition will increase as
current and potential competitors enter the market with competing products. Our
ability to promote and position our brand depends largely on the success of our
marketing efforts and our ability to provide high quality products and customer
support. These activities are expensive and we may not generate a corresponding
increase in customers or revenue to justify these costs. If we fail to
establish and maintain our brand, or if our brand value is damaged or diluted,
we may be unable to attract new customers and compete effectively.

Historically, we have relied primarily on a limited direct sales force,
supported by third party manufacturers' representatives and distributors, to
sell our products. Our sales strategy focuses primarily on our corporate
customers bundling our products with their hardware and distributing our
products through their own distribution channels. We rely on our customers'
sales forces, marketing budgets and

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brand images to promote sales of bundled products. If our corporate customers
fail to successfully market and sell their products bundled with our products,
or if our relationship with our corporate customers are terminated, we may be
unable to effectively market and distribute our products and services.

We rely upon patents, trademarks, copyrights, trade secrets and license
agreements to protect our proprietary rights, which afford only limited
protection.
Our success depends upon the ability to protect our proprietary rights. We rely
on a combination of patent, copyright, trademark and trade secret laws, as well
as license and confidentiality agreements with our employees, customers,
strategic partners and others to establish and protect our proprietary rights.
The protection of patentable inventions is important to our future
opportunities. We currently have one patent issued in Taiwan, and we have
fifteen pending patent applications in various jurisdictions. It is possible
that:

. our pending patent applications may not result in the issuance of patents;

. we may not apply for or obtain effective patent protection in every country
in which we do business;

. our patents may not be broad enough to protect our proprietary rights;

. any issued patent could be successfully challenged by one or more third
parties, which could result in our loss of the right to prevent others from
using the inventions claimed in those patents;

. we may be required to grant cross-licenses to our patents in accordance
with the terms of the agreements we enter into with customers or strategic
partners;

. for business reasons we may choose not enforce our patents against certain
third parties; and

. current and future competitors may independently develop similar
technology, duplicate our products or design new products in a way that
circumvents our patents.

Existing copyright, trademark and trade secret laws and license and
confidentiality agreements afford only limited protection. In addition, the
laws of some foreign countries do not protect our proprietary rights to the
same extent as do the laws of the United States, and policing the unauthorized
use of our products is difficult. Any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in the loss of some of our competitive advantage and a
decrease in our revenue. Infringement claims and lawsuits would likely be
expensive to resolve and would require management's time and resources and,
therefore, could harm our business.

Our success depends on retaining our key personnel, including our executive
officers, the loss of any of whom could harm our business.
Our success depends on the continued contributions of our senior management and
other key engineering, sales and marketing and operations personnel.
Competition for employees in our industry can be intense. We do not have
employment agreements with, or key man life insurance policies covering, any of
our executives. In addition, significant portions of the capital stock and
options held by the members of our management are fully vested. There can be no
assurance that we will retain our key employees or be able to hire
replacements. Our loss of any key employee or an inability to replace lost key
employees and add new key employees as we grow could harm our business.

We rely on the accuracy of our customer's sales reports for collecting and
reporting revenue. If these reports are not accurate, our reported revenue will
be inaccurate.
A substantial majority all of our revenue is generated by our PC OEM customers
that pay us a license fee based upon the number of copies of our software they
load onto the PCs that they sell. In collecting these

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fees, preparing our financial reports, projections and budgets and in directing
our sales efforts and product development, we rely on our customers to
accurately report the number of units licensed. We have never audited any of
our customers to verify the accuracy of their reports or payments. Most of our
license agreements permit us to audit our customers, but audits are expensive
and time consuming and could harm our customer relationships. From time to
time, customers have provided us with inaccurate reports, which resulted in us
underreporting revenue for the associated period and recording a one-time
credit in a future period. If any of our customer reports are inaccurate, the
revenue we collect and report will be inaccurate and we may be required to make
an adjustment to our revenue for a subsequent period, which could harm our
business and credibility in the financial community.

Our international operations may expose us to regulatory, financial and
operational risks.
Because we sell our products worldwide, our business is subject to risks
associated with doing business internationally. International sales accounted
for 44% of our revenue in the nine months ended September 30, 2001, and we
expect to continue to derive a significant portion of our revenue from sales
outside of the United States. We intend to expand our international operations
in the future. Significant management attention and financial resources are
needed to develop our international sales, support and distribution channels
and manufacturing. We may not be able to maintain international market demand
for our products. Our future results could be harmed by a variety of factors
related to international operations, including:

. foreign currency exchange rate fluctuations;

. seasonal fluctuations in sales;

. changes in a specific country's or region's political or economic
condition, particularly in emerging markets;

. unusual or burdensome foreign laws or regulatory requirements or unexpected
changes to those laws or requirements;

. trade protection measures and import or export licensing requirements;

. potentially adverse tax consequences;

. longer accounts receivable collection cycles and difficulties in collecting
accounts receivables;

. difficulty in managing widespread sales, development and manufacturing
operations; and

. less effective protection of intellectual property.

Currently, most of our international sales are denominated in U.S. dollars.
Therefore, a strengthening of the dollar could make our products less
competitive in foreign markets. Our current distribution agreements shift
foreign exchange risk to our foreign distributors. This exchange risk may harm
the businesses of those distributors or make their engagement prohibitively
expensive. We do not use derivative instruments to hedge foreign exchange risk.
In the future, a portion of our international revenue and expenses may be
denominated in foreign currencies. Accordingly, we could experience the risks
of fluctuating currencies and may choose to engage in currency hedging
activities. In addition, if we conduct sales in local currencies, we may engage
in hedging activities, which may not be successful and could expose us to
additional risks.

In addition, we and certain of our OEM customers maintain significant
operations in Asia. Any kind of economic, political or environmental
instability in this region of the world can have a severe negative impact on
our operating results due to the large concentration of production and sales
activities in this region. We are also greatly impacted by the political,
economic and military conditions in Taiwan.

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Taiwan and China are continuously engaged in political disputes and both
countries have continued to conduct military exercises in or near the other's
territorial waters and airspace. These disputes may continue and even escalate,
resulting in an economic embargo, a disruption in shipping or even military
hostilities.

Our business and future operating results are subject to a broad range of
uncertainties arising out of the recent terrorist attacks on the United States.
Our business and operating results are subject to uncertainties arising out of
the recent terrorist attacks in New York City and Washington, D.C. These
uncertainties include the potential worsening or extension of the current
global economic slowdown and the economic consequences of military action or
additional terrorist activities. Any similar activity of this nature or even
rumors of such activity in the future could harm our operating results and
stock price.

We may not be successful in overcoming problems encountered in connection with
any acquisitions we may undertake, which could harm our business.
In the past, we have made acquisitions. We expect to continue to review
opportunities to buy or make investments in other businesses, products or
technologies that would enhance our technical capabilities, complement our
current products or expand the breadth of our markets or that may otherwise
offer growth opportunities. Our continued acquisitions of businesses or
technologies will require significant commitment of resources. We may be
required to pay for any acquisitions with cash, but we cannot be certain that
additional capital will be available to us on favorable terms, if at all. In
lieu of paying cash, we could issue stock as consideration for an acquisition
that would dilute existing stockholders' percentage ownership, incur
substantial debt or assume contingent liabilities. We have limited experience
in acquiring other businesses and technologies. Potential and completed
acquisitions and investments also involve numerous risks, including:

. problems assimilating the purchased operations, technologies or products;

. problems maintaining uniform standards, procedures, controls and policies;

. unanticipated costs associated with the acquisition;

. diversion of management's attention from our core business;

. adverse effects on existing business relationships with suppliers and
customers;

. risks associated with entering markets in which we have no or limited prior
experience; and

. potential loss of key employees of purchased organizations.

We may require substantial additional capital, which may not be available on
acceptable terms or at all.
Our capital requirements will depend on many factors, including:

. acceptance of, and demand for, our products;

. the costs of developing new products;

. the need to license new technology or to enter into license agreements for
existing technology;

. the extent to which we invest in new technology and research and
development projects;

. the number and timing of acquisitions; and

. the costs associated with our expansion.

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To the extent the proceeds of this offering and our existing sources of cash
and cash flow from operations are not sufficient to fund our activities, we may
need to raise additional funds. If we issue additional stock to raise capital,
your percentage ownership in us would be reduced. Additional financing may not
be available when needed and, if such financing is available, it may not be
available on terms acceptable to us. If we raise funds through debt financing,
we will have to pay interest and may be subject to restrictive covenants, which
could limit our ability to take advantage of future opportunities, respond to
competitive pressures or unanticipated industry changes. If we cannot raise
necessary additional capital on acceptable terms, we may not be able to develop
or enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated industry changes, any of which could
have a negative impact on our business.

RISKS RELATED TO THIS OFFERING

There has been no prior public market for our common stock, and a public market
may not develop.
Prior to this offering, there has been no public market for our common stock.
We cannot assure you that an active trading market will develop or be sustained
or that the market price of our common stock will not decline. The initial
public offering price for the shares of our common stock will be determined by
us and the representatives of the underwriters and may not be indicative of
prices that will prevail in the trading market. We do not know the extent to
which investor interest will lead to the development of an active public
market. The lack of an active market may impair your ability to sell your
shares at the time you wish to sell them or at a price which you consider
reasonable. The lack of an active market may also reduce the fair market value
of your shares. An inactive market may also impair our ability to raise capital
by selling shares and may impair our ability to acquire other companies or
technology by using our shares as consideration.

We expect our stock price to be volatile.
The price at which our common stock will trade after this offering is likely to
be highly volatile and may fluctuate substantially due to many factors, some of
which are:

. actual or anticipated fluctuations in our results of operations;

. changes in securities analysts' expectations or our failure to meet those
expectations;

. developments with respect to intellectual property rights;

. announcements of technological innovations or significant contracts by us
or our competitors;

. introduction of new products by us or our competitors;

. commencement of or our involvement in litigation;

. our sale of common stock or other securities in the future;

. conditions and trends in technology industries;

. changes in market valuation or earnings of our competitors;

. the trading volume of our common stock;

. changes in the estimation of the future size and growth rate of our
markets; and

. general economic conditions.

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

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We have implemented anti-takeover provisions that could discourage a third
party from acquiring us and consequently decrease the market value of your
investment.
Our certificate of incorporation and bylaws contain provisions that may have
the effect of delaying or preventing a change of control or changes in
management that a stockholder might consider favorable. The certificate and
bylaws, among other things, provide for a classified board of directors,
require that stockholder actions occur at duly called meetings of the
stockholders, limit who may call special meetings of stockholders and require
advance notice of stockholder proposals and director nominations. These
provisions, along with the provisions of the Delaware General Corporation Law,
such as Section 203, prohibiting certain business combinations with an
interested stockholder, may delay or impede a merger, tender offer or proxy
contest involving us. Any delay or prevention of a change of control
transaction or changes in management could cause the market price of our common
stock to decline. For more information about particular anti-takeover
provisions, see "Description of capital stock."

Because of their significant stock ownership, our officers and directors will
be able to exert significant influence over our future direction.
Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately % of our outstanding common stock
following the completion of this offering. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. See "Principal
stockholders."

Management will have broad discretion over the use of proceeds from this
offering.
The net proceeds from this offering will be used for working capital and other
general corporate purposes. In particular, we intend to use the net proceeds of
the offering for working capital, marketing, research and development, and
capital expenditures. We may also use certain of the proceeds to acquire other
products, technology or businesses that would complement our existing products,
enhance our technological capabilities or expand our market coverage. We have
not reserved or allocated the net proceeds for any specific transaction, and we
cannot specify with certainty how we will use the net proceeds. Accordingly,
our management will have considerable discretion in the application of the net
proceeds, and you will not have the opportunity, as part of your investment
decision, to assess whether the proceeds are being used appropriately. The net
proceeds may be used for corporate purposes that do not increase our operating
results or market value. Until the net proceeds are used, they may be placed in
investments that do not produce income or that lose value.

Sales of substantial amounts of our common stock could harm the market price of
our stock.
A substantial amount of our shares will be eligible for sale shortly after this
offering. If our stockholders sell substantial amounts of common stock in the
public market soon after the lock-up period ends, the market price of our
common stock could fall. Based on shares outstanding as of December 31, 2001,
upon completion of this offering, we will have shares of common stock
outstanding. Of these shares, the shares sold in this offering will be
freely tradable. Another 16,119,962 shares will be eligible for sale in the
public market 180 days from the date of this prospectus, substantially all of
which are subject to lock-up agreements. UBS Warburg LLC may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. The remaining 555,000 shares will be
restricted securities that will become eligible for sale in the public market
pursuant to Rule 144 at various dates in the future. The sale of a significant
number of these shares could cause the price of our common stock to decline.
See "Shares eligible for future sale" for more detailed information.

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

- --------------------------------------------------------------------------------
Forward-looking information

This prospectus contains forward-looking statements. When used in this
prospectus, the words "anticipate," "believe," "estimate," "will," "intend" and
"expect" and similar expressions identify forward-looking statements. Although
we believe that our plans, intentions and expectations reflected in those
forward-looking statements are reasonable, we can give no assurance that these
plans, intentions or expectations will be achieved. Our actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied, by the forward-looking statements contained in this
prospectus. Important factors that could cause actual results to differ
materially from our forward-looking statements are set forth in this
prospectus, including under the heading "Risk factors." All forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements set forth in this
prospectus. Other than as required by federal securities laws, we are under no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise.

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell and seeking offers to buy
shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

Use of proceeds

We estimate that we will receive net proceeds of approximately $ million, or
$ million if the underwriters exercise their over-allotment option in full,
from this offering of our common stock, based on an assumed initial public
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. We expect to use the
net proceeds of the offering for general corporate purposes, including working
capital, marketing, research and development and capital expenditures. In
addition, we may use a portion of the net proceeds to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. We have no commitments with respect to any
acquisition or investment, and we are not involved in any negotiations with
respect to any similar transaction. The amounts and timing of our actual
expenditures will depend on numerous factors, including the status of our
product development efforts, sales and marketing activities, technological
advances, amount of cash generated or used by our operations and competition.
We may find it necessary or advisable to use the net proceeds for other
purposes, and we will have broad discretion in the application of the balance
of the net proceeds. Pending the uses described above, we intend to invest the
net proceeds in short-term, interest-bearing, investment grade securities.

Dividend policy

We have never declared or paid any cash dividends on our capital stock and do
not intend to pay dividends in the foreseeable future. We anticipate that we
will retain any earnings to support operations and to finance the growth and
development of our business.

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

Capitalization

Our capitalization as of September 30, 2001 is set forth in the following table:

. on an actual basis;

. on a pro forma basis to reflect the conversion of all outstanding preferred
stock into shares of our common stock; and

. on the same pro forma basis as adjusted to give effect to the receipt of
the estimated net proceeds from this offering, at an assumed initial public
offering price of $ per share.

The table does not include options outstanding as of September 30, 2001 to
purchase 5,616,221 shares of our common stock with a weighted average exercise
price of $0.65 per share. You should read this table in conjunction with
"Management's discussion and analysis of financial condition and results of
operations," our financial statements and the notes to those financial
statements and "Description of capital stock."

September 30, 2001
---------------------------------
Pro forma
Actual Pro forma as adjusted
(in thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------

Stockholders' equity:
Convertible preferred stock, 13,000,000 shares authorized, 12,188,750 shares
issued and outstanding, actual; 5,000,000 shares authorized, pro forma and
pro forma as adjusted; no shares issued and outstanding, pro forma and pro
forma as adjusted.......................................................... $ 21,186 $ -- $ --
-------- -------- ------
Common stock, 25,000,000 shares authorized, 4,312,483 shares issued and
outstanding, actual; 150,000,000 shares authorized, pro forma and pro forma
as adjusted; 16,501,233 shares issued and outstanding, pro forma;
shares authorized, pro forma as adjusted; shares issued and outstanding,
pro forma as adjusted...................................................... 6,098 27,284
Notes payable from employee................................................. (496) (496)
Deferred stock compensation................................................. (2,310) (2,310)
Accumulated other comprehensive loss........................................ (152) (152)
Accumulated deficit......................................................... (13,614) (13,614)
-------- -------- ------
Total stockholders' equity................................................ 10,712 10,712
-------- -------- ------
Total capitalization.................................................... $ 10,712 $ 10,712 $
======== ======== ======

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

Dilution

Our pro forma net tangible book value as of September 30, 2001 was
approximately $ per share of our common stock. Our net tangible book value
per share represents the amount of our total tangible assets reduced by the
amount of our total liabilities and divided by the total number of shares of
our common stock outstanding as of September 30, 2001. After giving effect to
our sale in this offering of shares of our common stock at an assumed initial
public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses, our pro
forma net tangible book value as of September 30, 2001 would have been $ per
share of our common stock. This represents an immediate increase in net
tangible book value of $ per share to our existing stockholders and an
immediate dilution of $ per share to you. The following table illustrates
this per share dilution:

Assumed initial public offering price per share...................... $
Pro forma net tangible book value per share before this offering.... $
Increase attributable to investors in this offering.................
---
Pro forma net tangible book value per share after this offering...... ----
Dilution per share to investors in this offering..................... $
====

The differences between our existing stockholders and investors with respect to
the number of shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid for both common and preferred
stock is summarized on a pro forma basis, as of September 30, 2001 before
underwriters' discount and offering expenses in the following table. The
following table does not include 5,616,221 shares of common stock issuable upon
the exercise of outstanding options with a weighted average exercise price of
$0.65 per share as of September 30, 2001. To the extent that outstanding
options are exercised, there will be further dilution to new investors.

Shares purchased Total consideration Average
---------------- ----------------- price per
Number Percent Amount Percent share
(in thousands)
--------------------------------------------------------------------------

Existing shareholders..... % $ % $
New investors.............
---- --- -- --- --
Total.................... % $ 100% $
==== === == === ==

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

Selected consolidated financial data

The selected consolidated financial data set forth below should be read in
conjunction with our consolidated financial statements and related notes
thereto and "Management's discussion and analysis of financial condition and
results of operations" included elsewhere in this prospectus. The selected
income statement data and balance sheet data are derived from our audited
financial statements. The unaudited information has been prepared on the same
basis as our audited financial statements and, in the opinion of management,
contains all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of our operating results for these periods
and our financial condition as of these dates. The pro forma data and the pro
forma share and earnings per share data for September 30, 2001 gives effect to
the conversion of all outstanding shares of preferred stock into common stock.

Year ended Nine months ended
December 31, September 30,
Period from inception ---------------- ----------------
April 28, 1998 to 1999(1) 2000(1) 2000(1) 2001
December 31, 1998(1) ------- ------- ------- -------
Consolidated statement of operations data (in thousands, except per share data) (unaudited)
- ----------------------------------------------------------------------------------------------------------

Revenue....................................... $ -- $ 3,036 $15,426 $ 9,761 $23,673
Cost of revenue............................... -- 1,118 5,189 3,263 8,881
----- ------- ------- ------- -------
Gross profit.............................. -- 1,918 10,237 6,498 14,792
Operating expenses:
Research and development.................. 328 1,300 6,876 4,489 7,307
Sales and marketing....................... -- 1,194 5,033 3,129 6,422
General and administrative................ 199 773 2,667 1,645 2,225
Stock compensation (2).................... -- 53 1,411 906 1,612
Special charges (3)....................... -- -- -- -- 3,068
----- ------- ------- ------- -------
Total operating expenses............... 527 3,320 15,987 10,169 20,634
----- ------- ------- ------- -------
Loss from operations.......................... (527) (1,402) (5750) (3,671) (5,842)
Other income (expense), net................... 2 32 557 303 443
----- ------- ------- ------- -------
Loss before provision for income taxes........ (525) (1,370) (5,193) (3,368) (5,399)
Provision for income taxes.................... -- 64 552 382 509
----- ------- ------- ------- -------
Net loss.................................. $(525) $(1,434) $(5,745) $(3,750) $(5,908)
===== ======= ======= ======= =======
Net loss per common share, basic and diluted.. $ -- $ (2.57) $ (2.19) $ (1.45) $ (1.70)
===== ======= ======= ======= =======
Pro forma net loss per common share, basic and
diluted (unaudited).......................... $ (0.43) $ (0.25) $ (0.38)
======= ======= =======
Weighted average common shares outstanding,
basic and diluted............................ -- 559 2,625 2,593 3,472
===== ======= ======= ======= =======
Pro forma weighted average common shares
outstanding, basic and diluted (unaudited)... 13,456 14,782 15,661
======= ======= =======

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

Selected consolidated financial data
- --------------------------------------------------------------------------------

As of December 31, As of
--------------------- September 30,
1998 1999 2000 2001
Consolidated balance sheet data (in thousands) (unaudited)
- --------------------------------------------------------------------------------------

Cash and cash equivalents........................ $ 195 $2,628 $14,668 $11,596
Working capital.................................. (190) 1,907 10,419 5,625
Total assets..................................... 362 3,817 22,134 20,050
Long-term obligations, net of current portion.... -- -- -- --
Convertible preferred stock...................... 488 4,476 21,286 21,186
Total stockholders' equity....................... (36) 2,634 15,189 10,712

- --------
(1) Excludes the results of operations of AVPD prior to its acquisition on June
7, 2000. See the financial statements of AVPD included elsewhere in this
Prospectus, as well as the related unaudited pro forma condensed combined
statement of operations of the Company for the year ended December 31, 2000
as if the acquisition of AVPD had been completed on January 1, 2000.

(2) Stock compensation is allocated among the operating expense classifications
as follows:

Year ended Nine months ended
December 31, September 30,
------------ ------------------
1999 2000 2000 2001
(in thousands) (unaudited)
- ----------------------------------------------------------------------------------

Research and development......................... $14 $ 546 $ 341 $ 633
Sales and marketing.............................. 3 521 358 398
General and administrative....................... 36 344 207 581
--- ------- ------ ------
$53 $ 1,411 $ 906 $1,612
=== ======= ====== ======

(3) See Management's discussion and analysis of financial condition and results
of operations for further discussion of the special charges recorded in the
nine months ended September 30, 2001.

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

Management's discussion and analysis of financial condition and results of
operations

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with "Selected consolidated financial
data" and our consolidated financial statements and related notes appearing
elsewhere in this prospectus. In addition to historical information, this
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to, those set forth under "Risk factors" and
elsewhere in this prospectus.

OVERVIEW

We are a leading provider of DVD software and offer a broad suite of advanced
digital video and audio multimedia software products that allow users to
record, edit, author, distribute and play digital multimedia content on PCs and
consumer electronics devices. We derive a substantial majority of our revenue
from sales of our WinDVD product, a software DVD player for PCs. Our other
major products include WinDVR, a digital video recorder, WinProducer, a video
recording and editing software application, and WinRip, a digital music
recorder and player. We began operations in 1998 and shipped our first products
in 1999. Our software is bundled with products sold by eight of the top ten PC
OEMs ranked in terms of sales by IDC. Our OEM customers include Compaq, Dell,
Fujitsu, Fujitsu Siemens, Hewlett-Packard, Medion, Sony and Toshiba. We sell
our products to PC OEMs and PC peripherals manufacturers worldwide and offer
our software in up to 26 languages. In addition, we sell our products directly
to consumers through our websites, which currently operate in English, Japanese
and Chinese, and through retail channels.

We derive revenue primarily from the sale of software licenses to OEMs, which
install our software onto PCs prior to delivery to consumers. We also derive
revenue from the license of our software to manufacturers of PC peripherals
that incorporate our products into their own products for distribution as well
as sales directly to users through retail channels and our website. We
recognize revenue generated from sales to OEMs, PC peripherals manufacturers
and end users in accordance with Statement of Position (SOP) 97-2, "Software
Revenue Recognition," as amended, under which revenue is recognized when
evidence of an arrangement exists, delivery of the software has occurred, the
fee is fixed and determinable and collection is probable. Most OEMs pay a
license fee based on the amount of licensed software included in the products
sold to their customers. OEMs pay these fees on a per unit basis, and we record
associated revenue when we receive notification of the OEMs' sales of the
licensed software to the user. The terms of our license agreements generally
require the OEMs to notify us of sales of their products within 30 to 45 days
after the end of the month or quarter in which the sales occur. As a result, we
generally recognize revenue in the month or quarter following the sale of the
product to the OEMs' customers.

We expect prices for our products to decline over the next few years. Because
of competition from other software providers, competition in the PC industry
and diminishing margins experienced by PC OEMs as a result of decreased selling
prices and lower unit sales, we have reduced the prices we charge PC OEMs for
our WinDVD product. We expect this trend to continue, which will make it more
difficult to increase or maintain our revenue and may cause a decline in our
gross margins even if our WinDVD unit sales increase.

Our revenue growth has been achieved in large part due to sales of our WinDVD
product to new, large PC OEM customers. Because there is only a limited number
of potential new, large PC OEM customers

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

Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------

for our WinDVD product, we must derive any future revenue growth principally
from increased sales of WinDVD or other products to existing PC OEMs and PC
peripherals manufacturers and from sales to smaller regional PC OEMs and
directly to consumers through retail channels and our websites. Because some of
these other revenue opportunities are more fragmented than the PC OEM market
and will take more time and effort to penetrate, we expect that our revenue
will grow at a slower rate than in recent periods.

Due to concentration in the PC OEM industry, we derive a substantial portion of
our revenue from a small number of customers. For the nine months ended
September 30, 2001, our four largest customers accounted for a majority of our
revenue. During that period, Dell and Fujitsu each accounted for more than 10%
of our revenue. We expect that a small number of customers will continue to
account for a majority of our revenue and gross profit for the foreseeable
future.

International sales accounted for 44% of our revenue in the nine months ended
September 30, 2001. We expect to continue to derive a significant portion of
our revenue from sales outside of the United States. Currently, most of our
international sales are denominated in U.S. dollars. Therefore, a strengthening
of the dollar could make our products less competitive in foreign markets. Our
current distribution agreements shift foreign exchange risk to our foreign
distributors. We do not use derivative instruments to hedge foreign exchange
risk. In the future, a portion of our international revenue and expenses may be
denominated in foreign currencies.

In 2000, we started an Internet commerce sales initiative that allows users to
purchase products from our website. For the nine months ended September 30,
2001, we derived 7% of our revenue from sales on our website. To increase our
web-based sales in the future, we intend to increase investments in associated
selling and marketing, capital equipment and research and development.

Cost of revenue consists primarily of royalties paid or accrued for payment to
third parties for technologies incorporated into our products as well as
expenses incurred to manufacture, package and distribute our software products.
Cost of revenue also includes estimated accruals for royalties due on
technology for which we have no license and related intellectual property
claims. We may adjust the rate at which we accrue these amounts in the future.
Our gross profit is affected by many factors, including competitive pricing
pressures, fluctuations in unit volumes, changes in third party license fees
and changes in the mix of products sold and in our mix of distribution
channels. Over the next several quarters, we expect our cost of revenue to
increase as a percentage of revenue due to lower selling prices.

Research and development expenses consist primarily of personnel and related
costs, consulting expenses associated with the development of new products,
technology license fees and quality assurance and testing. To date, we have not
capitalized any research and development expenses.

Sales and marketing expenses consist primarily of personnel and related costs,
including salaries and commissions, travel expenses, commissions paid to
third-party sales representatives and costs associated with trade shows,
advertising and other marketing efforts, as well as technical support costs.
Customer service and technical support costs include the costs associated with
answering customer inquires and providing telephone assistance. In connection
with the sale of some products, we provide a limited amount of free telephone
support service to customers. This free service, also referred to as
post-contract customer support, is included in sales and marketing expenses. We
do not defer the recognition of any revenue associated with sales of these
products, because the cost of providing this free support is insignificant. The
support is provided within 90 days after the associated revenue is recognized,
and enhancements are minimal and infrequent.

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

Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------

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

We recorded deferred stock compensation of $1.6 million for the nine months
ended September 30, 2001, $3.5 million for the year ended December 31, 2000 and
$218,000 for the year ended December 31, 1999. Deferred stock compensation
represents the difference between the deemed fair market value of our common
stock at the time of option grants during these periods and the exercise prices
of these options. We amortize deferred stock compensation using a multiple
option award valuation approach over the vesting periods of the applicable
options, which is generally four years. See Note 8 of notes to consolidated
financial statements. The amortization of deferred stock compensation for
options granted through September 30, 2001 for the next four years totals
$452,000 in the remaining three months of 2001, $1.1 million in 2002, $455,000
in 2003 and $132,000 in 2004.

Interest income and other, net consists primarily of interest earned on our
cash, cash equivalent and short-term investment balances, offset by other
expenses.

RESULTS OF OPERATIONS

Year ended Nine months ended
December 31, September 30,
----------- -------------
1999 2000 2000 2001
(unaudited)
---------------------------------------------------------------------------

As a percentage of revenue:
Revenue................................... 100% 100% 100% 100%
Cost of revenue........................... 37 34 33 38
--- --- --- ---
Gross margin........................... 63 66 67 62
--- --- --- ---
Operating expenses:
Research and development............... 43 45 46 31
Sales and marketing.................... 39 33 32 27
General and administrative............. 25 17 17 9
Stock compensation..................... 2 9 9 7
Special charges........................ -- -- -- 13
--- --- --- ---
Total operating expenses............ 109 104 104 87
--- --- --- ---
Operating loss...................... (46) (38) (37) (25)
Other income (expense), net............... 1 4 3 2
--- --- --- ---
Loss before provision for income taxes.... (45) (34) (34) (23)
Provision for income taxes................ 2 4 4 2
--- --- --- ---
Net loss............................ (47)% (38)% (38)% (25)%
=== === === ===

Comparison of nine months ended September 30, 2001 and 2000

Revenue
Revenue increased 142% to $23.7 million for the nine months ended September 30,
2001 from $9.8 million for the nine months ended September 30, 2000. The growth
in revenue resulted primarily from increased sales of our WinDVD product.

Gross margin
Gross margin decreased to 62% of revenue in the nine months ended September 30,
2001 from 67% in the nine months ended September 30, 2000. This decrease
primarily resulted from decreased selling

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

Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------

prices of our products, which was partially offset by a decrease in the average
royalty unit cost owed to third parties for incorporation of their technology
into our products.

Research and development
Research and development expenses increased to $7.3 million, or 31% of revenue,
for the nine months ended September 30, 2001 from $4.5 million, or 46% of
revenue, for the nine months ended September 30, 2000. The increase in absolute
dollars resulted primarily from increased personnel and consulting costs,
facilities-related expenses and outside professional fees, which increase was
partially offset by a special in-process research and development charge
resulting from our acquisition of the Audio Visual Products Division of
Formosoft International Inc., or AVPD, a developer of audio and video data, in
2000, as well as amortization expenses for goodwill and its related intangible
assets recorded in the first nine months of 2000. We believe that a significant
level of research and development expenses will be required to remain
competitive, and, as a result, we intend to increase these expenses in absolute
dollars in the future.

Sales and marketing
Sales and marketing expenses increased to $6.4 million, or 27% of revenue, for
the nine months ended September 30, 2001 compared to $3.1 million, or 32% of
revenue, for the nine months ended September 30, 2000. The increase in absolute
dollars was primarily attributable to increased personnel costs, including
hiring of additional sales and marketing personnel, as well as increased
commission costs paid to third-party sales representatives, promotional
expenses, consulting costs and facilities-related expenses to support our
higher level of sales. We intend to actively market, sell and promote our
products and further develop our brand name. Therefore, we expect expenses
related to these programs to continue to increase in absolute dollars in the
future.

General and administrative
General and administrative expenses increased to $2.2 million, or 9% of
revenue, for the nine months ended September 30, 2001 from $1.6 million, or 17%
of revenue, for the nine months ended September 30, 2000. The increase in
absolute dollars was primarily attributable to increased personnel costs and
professional services. We expect selling, general and administrative expenses
to continue to increase in absolute dollars as we build our infrastructure to
support our anticipated growth and operations as a public company.

Stock-based compensation
Stock-based compensation expenses increased to $1.6 million for the nine months
ended September 30, 2001 from $906,000 for the nine months ended September 30,
2000. The stock-based compensation charges for the issuance of stock options
will be amortized on an accelerated basis over the next four years.

Special charges
We incurred special charges of $3.1 million in the first nine months of 2001.
Of the total charges, $850,000 related to a restructuring of our business,
including severance and office closure costs, and was charged in the second
quarter. The remaining $2.2 million was charged in the third quarter. Of this
amount, $700,000 related to costs incurred in connection with our preparation
for an initial public offering that we delayed for several months and $1.5
million related to advance licensing and promotional payments for which there
will be no future benefit.

Other income (expense), net
Other income (expense), net primarily consists of interest income, offset by
loss on fixed assets disposal and other expense, if any. Other income
(expense), net increased to $443,000 for the nine months ended

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

Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------

September 30, 2001 from $303,000 for the nine months ended September 30, 2000.
Interest income decreased to $405,000 for the nine months ended September 30,
2001 compared to $447,000 for the nine months ended September 30, 2000. This
decrease in interest income was offset by a higher increase in non-operating
expenses during the nine months ended September 30, 2000. This increase in
non-operating expense was primarily due to recording a $134,000 loss on fixed
assets disposed of during this period. No fixed assets were disposed of in the
nine months ended September 30, 2001.

Provision for income taxes
The provision for income taxes increased to $509,000 in the nine months ended
September 30, 2001 from $382,000 in the nine months ended September 30, 2000
due to higher foreign sales. Although we have not generated taxable income in
the United States, we are subject to foreign withholding taxes in Japan and
Taiwan.

Comparison of years ended December 31, 2000 and 1999

Revenue
Revenue increased 408% to $15.4 million for the year ended December 31, 2000
from $3.0 million for the year ended December 31, 1999. The growth in revenue
resulted primarily from increased sales of our WinDVD product. Product sales in
the years ended December 31, 2000 and 1999 were highly concentrated, with 49%
of revenue in the year ended December 31, 2000 coming from five customers and
60% of revenue in the year ended December 31, 1999 coming from five customers.

Gross margin
Gross margin increased to 66% of revenue for the year ended December 31, 2000
compared to 63% for the year ended December 31, 1999. This was primarily due to
a decrease in the average royalty unit cost owed to third parties for
incorporation of their technology into our products, partially offset by a
slight decrease in average selling prices.

Research and development
Research and development expenses increased to $6.9 million, or 45% of revenue,
for the year ended December 31, 2000 from $1.3 million, or 43% of revenue, for
the year ended December 31, 1999. This increase primarily resulted from
additional personnel costs, higher consulting and professional fees, facilities
related expenses, depreciation, travel costs and the licensing of certain
software, all associated with our continued research and development efforts.
In connection with the purchase of AVPD in 2000, we recorded a special
in-process research and development charge of $700,000 as well as $292,000 of
amortization expenses for goodwill and the related intangible assets. The value
of the acquired in-process technology was computed using a discounted cash flow
analysis rate of 35% on the anticipated income stream of the related product
revenue. The discounted cash flow analysis was based on an estimate of relevant
market sizes and growth factors, expected trends in technology and the nature
and expected timing of new product introductions.

Sales and marketing
Sales and marketing expenses increased to $5.0 million, or 33% of revenue, for
the year ended December 31, 2000 from $1.2 million, or 39% of revenue, for the
year ended December 31, 1999. The increase in absolute dollars was primarily
attributable to increased personnel costs, including hiring of additional sales
and marketing personnel, as well as increased promotional expenses, including
trade shows and advertising, higher outside commission costs, professional
fees, facilities-related expenses and travel expenses related to our higher
level of sales.

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

Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------

General and administrative
General and administrative expenses increased to $2.7 million, or 17% of
revenue, for the year ended December 31, 2000 compared to $773,000, or 25% of
revenue, for the year ended December 31, 1999. This increase was primarily
attributable to increased personnel costs and professional fees.

Stock-based compensation
Stock-based compensation expenses increased to $1.4 million for the year ended
December 31, 2000 compared to $53,000 for the year ended December 31, 1999.

Other income (expense), net
Other income (expense), net increased to $557,000 for the year ended December
31, 2000 from $32,000 for the year ended December 31, 1999. This increase was
primarily attributable to an increase in interest income resulting from higher
cash balances received from the sale of our preferred stock, which was
partially offset by a disposal of fixed assets.

Provision for income taxes
Although we have not generated taxable income in the United States, our revenue
from Japan and Taiwan is subject to withholding taxes in those countries. The
provision for income taxes increased to $552,000 for the year ended December
31, 2000 from $64,000 for the year ended December 31, 1999. This increase was
due to greater foreign sales.

Comparison of years ended December 31, 1999 and 1998

Revenue
We recognized revenue in the amount of $3.0 million for the year ended December
31, 1999 compared to $0 for the year ended December 31, 1998. This increase was
due to the commencement of sales of our first product, WinDVD, in 1999.

Gross margin
Gross margin was 63% of revenue in the year ended December 31, 1999.

Research and development
Research and development expenses increased to $1.3 million for the year ended
December 31, 1999 compared to $328,000 for the year ended December 31, 1998.
This increase was primarily due to the hiring of additional engineers.

Sales and marketing
Sales and marketing expenses increased to $1.2 million for the year ended
December 31, 1999 compared to $0 for the year ended December 31, 1998. This
increase was primarily due to the hiring of sales and marketing personnel,
outside commission costs, marketing activities, travel and trade shows.

General and administrative
General and administrative expenses increased to $773,000 for the year ended
December 31, 1999 compared to $199,000 for the year ended December 31, 1998.
This increase was due to higher personnel costs, facilities-related expenses
and outside professional costs.

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

Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth unaudited consolidated statements of operations
data for the eight quarters ended September 30, 2001. The unaudited
consolidated information for each of these quarters has been prepared on
substantially the same basis as the audited consolidated financial statements
included elsewhere in this prospectus and, in our opinion, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for these periods. Historical
results are not necessarily indicative of the results to be expected in the
future, and results of the interim periods are not necessarily indicative of
our results of operations for the entire year.

Three months ended
------------------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1999 2000 2000 2000 2000 2001 2001 2001
(unaudited) (in thousands)
- --------------------------------------------------------------------------------------------------------------------

Revenue........................ $1,725 $2,445 $ 3,171 $ 4,145 $ 5,665 $ 7,722 $ 7,725 $ 8,226
Cost of revenue................ 606 778 1,065 1,421 1,925 3,030 2,886 2,965
------ ------ ------- ------- ------- ------- ------- -------
Gross profit................. 1,119 1,667 2,106 2,724 3,740 4,692 4,839 5,261
Operating expenses:
Research and development.... 494 700 1,826 1,964 2,386 2,593 2,491 2,223
Sales and marketing......... 622 808 1,126 1,194 1,905 2,042 2,248 2,132
General and administrative.. 407 451 737 456 1,023 675 777 773
Stock compensation.......... 32 235 297 375 504 541 502 569
Special charges............. -- -- -- -- -- -- 850 2,218
------ ------ ------- ------- ------- ------- ------- -------
Total operating expenses... 1,555 2,194 3,986 3,989 5,818 5,851 6,868 7,915
------ ------ ------- ------- ------- ------- ------- -------
Loss from operations........... (436) (527) (1,880) (1,265) (2,078) (1,159) (2,029) (2,654)
Other income (expense), net.... 10 (80) 199 185 253 178 114 151
------ ------ ------- ------- ------- ------- ------- -------
Loss before income taxes....... (426) (607) (1,681) (1,080) (1,825) (981) (1,915) (2,503)
Provision for income taxes..... 41 117 97 168 170 151 269 89
------ ------ ------- ------- ------- ------- ------- -------
Net loss................... $ (467) $ (724) $(1,778) $(1,248) $(1,995) $(1,132) $(2,184) $(2,592)
====== ====== ======= ======= ======= ======= ======= =======

Over the eight quarters presented, our quarterly revenue grew to $8.2 million
for the quarter ended September 30, 2001 from $1.7 million for the quarter
ended December 31, 1999. Revenue has increased in each successive quarter as we
have increased OEM sales of our products and expanded our product line. In the
quarter ended June 30, 2001, revenue remained relatively constant compared to
the prior quarter at $7.7 million due to lower average selling prices offset by
increased unit sales. The growth over the periods presented was primarily the
result of increased sales of our WinDVD product.

Our gross profit has increased in absolute dollars in each successive quarter.
Our gross margin fluctuated between quarters but generally decreased to 64% for
the quarter ended September 30, 2001 from 65% for the quarter ended December
31, 1999. This decrease primarily resulted from declining selling prices
partially offset by higher margin sales in Japan and decreased accruals for
royalties on technology for which we have no license in 2001 for royalties owed
to third parties.

Our total operating expenses have increased in absolute dollars in each
successive quarter referred to in the table above, except for the quarters
ended September 30, 2000 and March 31, 2001, when total operating expenses
remained relatively constant. The increases primarily resulted from increased
research and development expenses to introduce new products and enhance
existing products, increased selling and marketing costs associated with higher
revenue levels, increased general and administrative expenses primarily
associated with the hiring of key management and other personnel. The decrease
in general and

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Management's discussion and analysis of financial condition and results of
operations
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administrative expenses from the second to the third quarter of 2000 was
primarily due to a decline in professional and other miscellaneous expenses
including communications expenses and bad debt. The increase in general and
administrative expenses from the third to the fourth quarter of 2000 was
primarily due to higher personnel expense from bonuses and outside professional
fees, including fees paid to outside recruiters. The decrease in general and
administrative expenses from the fourth quarter of 2000 to the first quarter of
2001 was primarily due to decreases in personnel expense and professional fees.
The decrease in research and development expenses from the first quarter of
2001 to the second quarter of 2001 was primarily attributable to lower
consulting expenses due to the completion of WinRip. In the second quarter of
2001, the company enacted a corporate restructuring and took a special charge
of $850,000 associated with it. Excluding the special charge and stock
compensation expense in the third quarter of 2001, research and development and
sales and marketing declined and general and administrative remained constant
due to the restructuring in the previous quarter.

We expect our operating results to fluctuate on an annual and quarterly basis
in the future due to a variety of factors, many of which are outside our
control. The license of software-based digital video and audio solutions for
incorporation in products in the PC and consumer electronics industries is new,
and it may be difficult to predict the future growth rate, if any, or size of
the market for our products. We may be unable to accurately forecast customer
behavior and recognize or respond to emerging trends, changing preferences or
competitive factors facing us. Our current and future expense levels are based
largely on our investment plans and estimates of future revenue and are, to a
large extent, fixed. As a result, we may fail to make accurate financial
forecasts and adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall, which would harm our operating results. Due to
these and other factors, quarter-to-quarter comparisons of our operating
results may not be meaningful, and you should not rely on our results for any
one quarter as an indication of our future performance.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through private
sales of convertible preferred stock, which generated gross proceeds of $21.2
million, and the sale of our products. At September 30, 2001, we had cash and
cash equivalents of $11.6 million.

Net cash used in operating activities was $1.5 million for the nine months
ended September 30, 2001 and $1.7 million for the nine months ended September
30, 2000. Net cash used in operating activities was $330,000 in 2000, $573,000
in 1999 and $135,000 in 1998. Cash used in operating activities resulted
primarily from net losses from operations in each period.

Net cash used in investing activities was $1.6 million for the nine months
ended September 30, 2001 and $4.2 million for the nine months ended September
30, 2000. Of the $1.6 million expended in 2001, $1.0 million was the final
payment for the purchase of AVPD and the remainder was property and equipment
purchases. Net cash used in investing activities was $4.4 million in 2000,
$657,000 in 1999, and $159,000 in 1998. Of the $4.4 million used in 2000, $2.2
million was partial payment for the purchase of AVPD and $2.2 million was
purchases of property and equipment. Cash used in investing activities in 1999
and 1998 was due to the purchases of property and equipment. Cash provided by
financing activities for the nine months ended September 30, 2001 was $80,000,
primarily due to the issuance of common stock upon the exercise of stock
options. Cash provided by financing activities for the nine months ended
September 30, 2000 was $16.9 million, primarily due to cash received from the
sale of preferred stock.

Cash provided by financing activities was $16.8 million in 2000, $3.7 million
in 1999 and $489,000 in 1998. Cash provided by financing activities in 2000,
1999 and 1998 was primarily due to sales of

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operations
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convertible preferred stock and, to a lesser extent, the issuance of common
stock upon the exercise of stock options.

We currently have no significant commitments for capital expenditures. We
anticipate that we will increase our capital expenditures consistent with our
anticipated growth in personnel and infrastructure, including facilities and
systems.

On June 7, 2000, we completed an acquisition of AVPD for approximately $3.2
million. AVPD was founded in 1997 and released is first product, GAMUT98, in
August 1998. AVPD's second-generation product, GAMUT2000, was released in
February 2000. The transaction was accounted for as a purchase. We paid $2.2
million during 2000 and an additional $1.0 million during 2001. We recorded
approximately $2.5 million of goodwill and other identifiable intangible assets
in connection with the acquisition, which are being amortized over a five-year
period. In connection with implementing SFAS No. 142 (discussed below), we will
cease amortization of the goodwill component of these assets commencing on
January 1, 2002 and will perform an annual test of for impairment of the
goodwill, as required by the standard.

We believe that the net proceeds from the sale of common stock in this
offering, together with our current cash and cash equivalents, will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months. To the extent the proceeds of this offering and
our existing sources of cash and cash flow from operations are not sufficient
to fund our activities, we will need to raise additional funds. If we issue
additional stock to raise capital, your percentage ownership in us would be
reduced. Additional financing may not be available when needed and, if such
financing is available, it may not be available on terms acceptable to us. If
we raise funds through debt financing, we will have to pay interest and may be
subject to restrictive covenants, which could limit our ability to take
advantage of future opportunities, respond to competitive pressures or
unanticipated industry changes. In addition, although we have no present
understandings, commitments or agreements with respect to any acquisitions of
other businesses, services, products and technologies, we may from time to time
evaluate potential acquisitions. These acquisitions may increase our capital
requirements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk
To date, all of our revenue has been denominated in U.S. dollars. We expect,
however, to begin denominating revenue from selected international markets in
the currency of the applicable market. As a result, our operating results may
become subject to significant fluctuations based upon changes in the exchange
rates of some currencies in relation to the U.S. dollar. Although we will
continue to monitor our exposure to currency fluctuations and, when
appropriate, may use financial hedging techniques to minimize the effect of
these fluctuations, exchange rate fluctuations may harm our financial results.

Interest Rate Risk
We have limited exposure to financial market risks, including changes in
interest rates. Our interest income is sensitive to changes in the general
level of U.S. interest rates, particularly because the majority of our
investments are in short-term instruments. Due to the short-term nature of our
investments, we believe that we are not exposed to any material market risk.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement No. 133
of Financial Accounting Standards, "Accounting for Derivative Instruments and
Hedging Activities," which requires

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operations
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companies to record derivative financial instruments on their balance sheets as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
In July 1999, the Financial Accounting Standards Board issued Statement No. 137
of Financial Accounting Standards, "Accounting For Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
which deferred the effective date of Statement No. 133 to the first fiscal
quarter ending June 30, 2000. We will adopt Statement No. 133, as amended, in
the first quarter of 2001. We do not believe that the adopting of this
statement will have a material impact on our results of operations or financial
position.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the Securities and
Exchange Commission. SAB No. 101 outlines the basic criteria that must be met
to recognize revenue and provides guidance for disclosures related to revenue
recognition policies. We believe we have complied with the guidance in SAB No.
101.

In March 2000, the Financial Accounting Standards Board issued interpretation
No. 44. "Accounting for Certain Transactions involving Stock Compensation--an
interpretation of APB Opinion No. 25," or FIN 44. This interpretation clarifies
the definition of employee for purposes of applying Accounting Practice Board
Opinion No. 25. "Accounting for Stock issued to Employees," the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation
awards in a business combination. This interpretation is effective July 1,
2000, but certain conclusions in this interpretation cover specific events that
occur after either December 15, 1998 or January 12, 2000. We believe that the
impact of FIN 44 will not have a material effect on our financial position or
results of operations.

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. These new standards are
effective for fiscal years beginning after December 15, 2001. Under the new
standards, goodwill will no longer be amortized, but will be subject to an
annual impairment test. The standards also promulgate, among other things, new
requirements for accounting for other intangible assets. We do not believe that
these new standards will have a material impact on our financial position and
results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. This new
standard is effective for fiscal years beginning after December 15, 2001. This
new standard affirms and clarifies certain accounting for long-lived assets and
broadens the application of discontinued operations treatment. We do not
believe that these new standards will have a material impact on our financial
position and results of operations.

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Business

COMPANY OVERVIEW

Our software is bundled with products sold by eight of the top ten PC OEMs
ranked in terms of sales by IDC. Our OEM customers include Compaq, Dell,
Fujitsu, Fujitsu Siemens, Hewlett-Packard, Medion, Sony and Toshiba. We sell
our products to PC OEMs and PC peripherals manufacturers worldwide and offer
our software in up to 26 languages. In addition, we sell our products directly
to consumers through retail channels and our websites, which currently operate
in English, Japanese and Chinese.

We intend to expand our product offerings to include additional digital
multimedia features, such as the ability to deliver digital video and audio
through a home network and to wireless electronic devices. We believe that we
have developed our core technologies and products to enable rapid migration to
future consumer devices.

INDUSTRY BACKGROUND

Adoption and growth of digital technologies for multimedia content
Consumers have rapidly adopted digital technologies for recording, editing,
authoring, distributing and playing multimedia content, beginning with the CD
and continuing with DVD technology. Manufacturers have incorporated these
digital technologies into PCs and consumer electronics devices to meet this
growing demand. According to the Consumer Electronics Association, the DVD
player, which can be used for playing both CDs and DVDs, is the fastest growing
consumer electronics product of all time. According to Adams Media Research,
the penetration of all DVD players, including those on PCs, is expected to
reach approximately 55% of U.S. households by the end of 2002.

The functionality of multimedia hardware and software for the PC continues to
grow. Users increasingly consider multimedia hardware and software to be
necessary components of a PC. For instance, a large percentage of new PCs
include DVD drives or other multimedia functionality. The Gartner Group
estimates that the total market for PC DVD drives, combination DVD-ROM and
CD-RW drives as well as DVD-writeable drives will grow from approximately 35
million units in 2000 to approximately 150 million units in 2005, a compound
annual growth rate of approximately 34%. All of these hardware PC components or
peripheral devices require software to function and must share operating
standards with other components of the PC.

The establishment of common standards by government and private organizations
has helped drive the growth of digital technologies for multimedia content. The
consumer electronic, computer, broadcast and telecommunications industries have
recognized that broad consumer acceptance of products embodying new digital
technologies depends upon the adoption of industry-wide technical and
performance standards. The standards that have driven, and we believe will
continue to drive, the growth of digital technologies for multimedia content
include:

. DVD format--digital encoding of high quality digital video and audio
content on optically readable discs, with multiple language options,
subtitle options and other navigation and entertainment features;

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. MPEG-1--compression of still images and real-time, low-cost compression and
decompression of moving images;

. MPEG-2--compression of video and audio data for broadcast and playback
applications used in DVD and HDTV;

. MP3--compression of audio data for playback applications, technically
referred to as MPEG-1 Layer 3;

. MPEG-4--a developing standard for compression of video and audio under low
transmission rates particularly used in wireless applications; and

. Dolby Digital and Digital Theater Systems, or DTS--compression of audio for
use in multi-channel digital surround sound systems.

The personal computer as a digital multimedia platform
PCs are well suited for high-quality multimedia entertainment and have emerged
as a pervasive platform for digital multimedia technologies primarily due to
improvements in storage technology and advances in microprocessor technology.
In the mid-1980s, consumer electronics companies pioneered digital multimedia
technologies, such as CD technology, which paved the way for the growth of high
quality multimedia content. In recent years, DVD technology has emerged as an
important format for portable distribution of high quality video and audio.
DVDs can store up to 18 gigabytes of compressed data on a single disc. In
comparison to hard disk drives, DVDs and DVD drives also offer a cost effective
means of storing and playing professional broadcast-quality video and audio
content. In addition, the increased capacity of hard disk drives and
corresponding decrease in the cost of storage have enabled consumers to use the
PC as a tool to manage multimedia content, which often requires large amounts
of storage capacity. At the same time, the advent of high-powered, low-cost
microprocessors has enabled consumers to record, edit, author, distribute and
play high quality digital video and audio on PCs at a more reasonable cost.

With the continuing improvements of PC performance relative to price, the PC is
an increasingly attractive platform for digital multimedia. According to
Gartner Dataquest, desktop PC configurations will include 3.5 GHz
microprocessors, 512 MB of random access memory and 300GB of hard disk space by
the end of 2002, and PCs with 2 GHz microprocessors will be considered low end
by the end of 2002. The following are some of the specific benefits of using
the PC as a universal platform for digital multimedia:

. Ability to play multiple media formats. A single PC with the proper
hardware and software can play most media formats, including movies, MP3s,
CDs, games, television and streaming media. Because PCs can be bundled with
complementary applications, the total cost to the user can be lower than
buying each consumer electronics device separately.

. Broad range of multimedia functionality. A PC can provide a variety of
advanced multimedia hardware and software components. For instance, PCs not
only can record and play digital multimedia content, but they can also be
used to edit, author and distribute digital multimedia content.

. Cost-effectiveness and convenience. As new multimedia features emerge,
consumers can often simply download software upgrades, which are more
cost-effective and convenient than purchasing a dedicated hardware device.
In addition, software solutions enable PCs to perform the capabilities of
several different media products on a single hardware platform.

The proliferation of digital multimedia consumer electronics devices
In addition to the rapid growth in popularity of PCs offering full-featured
digital multimedia functionality, demand for consumer electronics devices that
provide digital multimedia functions is also

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growing rapidly. For instance, DVRs, also known as personal video recorders, or
PVRs, which record and time shift television programming, are growing in
popularity. According to IDC, the total PVR installed base will reach nearly 30
million by the end of 2005 from slightly over one million in 2001, representing
a compound annual growth rate of 130%. As home networking becomes more popular,
many of the functions of these dedicated devices may be incorporated into the
PC and distributed through home consumer electronics devices called set-top
boxes, which can receive signals from the central home computer acting as the
home multimedia entertainment gateway.

Market opportunity for a complete multimedia software solution
Advances in digital technology enable the PC to serve as a versatile,
feature-rich and reasonably priced digital entertainment platform. All PC
multimedia hardware components require software to operate. As a result,
multimedia software not only has become a necessary component of the PC, but
also serves as an opportunity for OEMs to add value to their products, improve
margins and differentiate their products from those of their competitors. As
consumer electronics manufacturers migrate from dedicated hardware solutions to
a PC architecture in order to provide lower cost and greater flexibility, we
expect the market opportunity for multimedia software to grow in this market
segment as well. We believe that all of these factors will create market
opportunities for a complete multimedia software solution that:

. consists of an integrated and interoperable suite of multimedia software
products providing broad functionality;

. works with a variety of PC operating systems and multimedia devices,
thereby reducing costs and improving time to market for OEMs; and

. can be upgraded rapidly to incorporate new features, technologies and
products, thereby reducing development time and costs and mitigating the
risk of obsolescence for consumers.

THE INTERVIDEO SOLUTION

We are a leading provider of DVD software, and we offer a broad suite of
advanced digital video and audio multimedia software products that allow users
to record, edit, author, distribute and play digital multimedia content on PCs
and consumer electronics devices. We help PC OEMs, consumer electronics
manufacturers and PC peripherals manufacturers add value to their products,
improve margins and differentiate their products from those of their
competitors.

Key elements of our solution include the following:

A broad multimedia software solution for the PC
Our broad software suite provides OEMs and consumers with a single source for a
variety of multimedia functions. PCs running our integrated multimedia software
can replace several expensive dedicated hardware components such as separate
DVD players, DVRs, MP3 players, CD players and digital television set-top
boxes. Our multimedia software solution is compatible with a broad variety of
highly customized PC configurations. Our products have a common look and feel
and allow users to toggle quickly and seamlessly between multimedia functions,
such as viewing TV and listening to music.

Core technology that operates on a variety of platforms
Our core technology is based on a layered architecture that allows our suite of
products to operate on a variety of hardware and software platforms. Over 90%
of our code is platform independent, which allows us to quickly port our
existing products to new operating systems or hardware platforms. Our "single
build" approach allows the current version of our software to be used with
multiple Windows operating systems, including Windows 95, 98, NT4.0, 2000, ME
and XP editions. We have also

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developed versions of our key products for the Linux operating system. WinDVD
has been certified by Microsoft's Windows Hardware Quality Lab, or WHQL, as a
Motion Video Device on more than 800 PC hardware and software configurations,
which is more than any other PC DVD software provider. In addition, our
software is compatible with a broad range of multimedia hardware products,
including specialized graphics chips, audio cards and DVD drives from various
suppliers and in various configurations. We believe this is a significant
benefit to OEMs because they do not have to undertake as time-consuming and
cost-intensive a qualification process for each new combination of multimedia
software and hardware. We believe that our approach also enables OEMs to offer
their customers highly customized PCs with lower customer service costs than
would be required if they had to support multiple builds.

Layered architecture that we have adapted to new technologies and upgraded to
incorporate new features
Our layered architecture enables us to respond and adapt to new technologies in
an industry characterized by rapid change. Because our modular components are
arranged in layered structures, we can add new features to a product and create
new products by plugging in new components into appropriate layers. For
example, our WinDTV product reuses the WinDVD architecture with the addition of
only a few components. Because we generally customize only a small portion of
code in order to develop a new product, we have been able to meet OEM demand
for a variety of new products efficiently. Moreover, because our architecture
has allowed us to efficiently develop new products incorporating additional
functionality, such as digital video recording, we have provided our customers
with the ability to increase the functionality of their products at a low cost
and with relative ease, which has enabled them to differentiate their products
from competitors' product offerings. Our proprietary layered architecture also
generally enables consumers to update or upgrade multimedia features and
capabilities without replacing hardware components, which decreases the risk of
obsolescence.

OUR STRATEGY

Increase market penetration of our multimedia software
We will seek to increase our market share by aggressively pursuing additional
OEM relationships, entering into creative marketing arrangements and exploiting
new sales channels. With eight of the world's top ten PC OEMs ranked in terms
of sales by IDC currently using WinDVD or our other products, we intend to
target smaller OEMs that are leaders in their regional markets. We have
recently implemented marketing arrangements with select OEMs under which we
share revenue generated by user upgrades or new product purchases and intend to
enter into similar arrangements with other OEMs. We also intend to expand the
sale of our products through retail channels and through our Internet commerce
sites.

Leverage existing and prospective OEM relationships to promote adoption of new
products
We plan to leverage our strong market position and integrated product suite to
encourage our PC OEM customers to license additional software products and to
encourage prospective PC OEMs to adopt our products. We have begun implementing
this strategy with two of our largest customers, both of which first installed
our WinDVD product on their PCs and have now added our WinDVR product. We
believe that existing and prospective OEM customers will find our broad suite
of integrated products with similar user interfaces more attractive than
discrete products with different user interfaces, because the similarity of the
user interfaces allows end users to learn how to use the software more quickly
and easily. We believe this reduces customer support calls to our OEMs, which,
in turn, reduces their costs.

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Capitalize on emerging product markets
We believe that our flexible product design architecture allows us to respond
rapidly to changes in technology, adapt our products to new hardware platforms
and operating systems and develop new products in a cost-effective manner. We
intend to closely monitor evolving technologies and to identify additional
markets for our products. We believe that we can adapt our technology
effectively for use in a variety of emerging consumer electronics and network
devices, such as cable and satellite TV set-top boxes, devices being developed
for use within home networks and MPEG-4 wireless devices. We are developing a
home networking product that would allow the PC to be used as the central
multimedia entertainment gateway for an entire household, eliminating the need
for consumers to purchase redundant consumer electronics devices.

Maintain and enhance strategic relationships, and acquire companies and
technologies
We have established strategic relationships with several technology and market
leaders, including Microsoft and Nvidia. Under our arrangement with Microsoft,
consumers are prompted automatically to download WinDVD when they upgrade from
older Windows operating systems to the new Windows XP operating system. In
addition, we licensed our WinDVD, WinDVR and WinRip solutions to Nvidia as the
primary underlying multimedia software platform for Nvidia's Personal Cinema
product. We intend to maintain existing and pursue additional strategic
relationships with technology providers, such as providers of operating
systems, microprocessors and graphic chips. We believe these relationships will
continue to enable us to achieve our design objectives, produce interoperable
products and provide information concerning customer preferences and evolving
industry standards and trends. In addition, we intend to pursue acquisitions of
complementary products, technologies and companies to gain further OEM
penetration, capitalize on emerging product markets, maintain and extend our
technology leadership and expand our global presence and distribution channels.

Continue to expand global presence
For the nine months ended September 30, 2001, more than 44% of our sales came
from outside the United States. We believe that significant revenue growth
opportunities exist in Europe, Asia and elsewhere. Accordingly, we intend to
continue to target OEMs and end users outside the United States. We have
established a presence in Taiwan and intend to open other regional offices in
strategic locations to support our international marketing efforts. In
addition, we expect to continue to develop foreign language software interfaces
for our products and intend to increase our marketing efforts in Asia and
Europe. We are also creating additional websites in different languages to
facilitate direct sales to end users outside of the United States.

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PRODUCTS

We offer a broad suite of advanced digital video and audio software solutions.
Our products are based on industry standards and incorporate a graphical user
interface with a common look and feel.

The following table lists the products that we currently license to OEMs, PC
peripherals manufacturers and end users:

Product Function Compatible Operating Systems Introduction
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WinDVD DVD player software Windows 95, February 1999
98 Second Edition (SE),
Millennium Edition (ME),
NT 4.0, 2000, XP, Linux

WinDVR Digital video recorder Windows 98SE, ME, 2000, XP September 2000
software

WinCoder Real-time video encoder Windows 98SE, ME, 2000, XP March 2001

WinProducer Digital video editing, Windows 98SE, ME, 2000, XP July 2001
distribution and DVD
authoring software

WinRIP MP3 audio player, Windows 98SE, ME, 2000, XP February 2001
organizer and encoder

WinDTV Digital TV software Windows 98SE, ME, 2000, XP July 2001

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

WinDVD has been Microsoft WHQL certified as a Motion Video Device on more than
800 PC hardware and software configurations, which is more than any other PC
DVD software provider. We have localized WinDVD in 26 different languages,
including the most common languages in Europe, South America and Asia,
including Japanese, Korean and both traditional and simplified Chinese.

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

WinCoder--Our real-time video encoder
Our WinCoder software permits PC users to record and edit digital video and
audio feeds from video cameras, webcams, camcorders, DV camcorders and other
PC-based video and audio input devices. WinCoder captures and compresses the
video and audio from these sources into a standard format, MPEG-2, so that the
content consumes far less space on the PC's hard drive or other storage medium.

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WinProducer -- Our digital editing software
WinProducer enables users to edit and create video clips and digital audio
files. WinProducer provides an easy-to-use user interface using a drag-and-drop
scheme combined with powerful video editing functions including transition
effects, filters, scene change detection, overlays, text titling and music
sound tracks. The software includes an integrated video capture capability that
allows users to easily transfer external video materials to the PC from various
devices including VCRs, camcorders, DV camcorders and webcams. Users can also
edit and enhance home movies and transfer them to DVDs or Video CDs. In 2002,
we expect to extend WinProducer to enable the transfer of video data to CD-RW
or DVD writeable devices.

WinRip -- Our audio player and encoder
Our audio player and encoder software, WinRip, enables PC users to play and
record MP3, Windows Media Audio, or WMA, format and WAV audio content and to
play WMA and Musical Instrument Digital Interface, or MIDI, clips and audio
CDs. WinRip provides the ability to move music from CDs to digital files, to
access an online music database to automatically add information, such as
artist and track names, to the "ripped" music files, and to turn digital music
into audio CDs or to output files to portable devices.

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

INTERVIDEO TECHNOLOGY PLATFORM

Our technology platform incorporates the following principles:

. Modular and layered design for greater expandability and reusability;

. Generic design and portable implementation for greater platform
independence; and

. Utilization of industry standards whenever possible to promote market
acceptance of our products.

Our modular and layered design approach enhances product expandability and
component reusability. Because we arrange modular components in layered
structures, we can more quickly and efficiently add new features to a product
by plugging in new components into appropriate layers. For example, we
incorporated the Video CD feature into our WinDVD product with the addition of
only a few new components. Similarly, we created our WinDTV product by reusing
components of WinDVD. Because of component reusability, these products were
developed with fewer resources and less time than would have been required to
design them using entirely new components. As a result, we have been able to
develop new products such as WinDVR, WinCoder, WinProducer and WinRip more
efficiently and with less development time.

Our flexible design approach and portable implementation allow our software to
support a significant number of PC platforms and to work with a broad variety
of PC configurations. Over 90% of the code that is used to implement our
products is platform independent. As a result, we can efficiently port an
existing product to a new operating system or hardware platform and
cost-effectively support many customers and varied product lines.

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Business
- --------------------------------------------------------------------------------

CUSTOMERS

Our customer base consists primarily of PC OEMs and manufacturers of PC
peripherals that incorporate our software into their products. The following PC
and peripherals manufacturers each contributed more than $400,000 in revenue
for the nine months ended September 30, 2001:

Canopus Co., Ltd.
Compaq Computer Corporation
Dell Products, L.P.
Fujitsu Limited
Fujitsu Siemens Computers GmbH
Hewlett-Packard Company
Medion AG
Sony Corporation
Toshiba Corporation

Our software is bundled with products sold by eight of the top ten PC OEMs
ranked in terms of sales by IDC. For the nine months ended September 30, 2001,
our four largest customers accounted for a majority of our revenue, with Dell
accounting for 31% and Fujitsu accounting for 12%. Compaq and Hewlett-Packard,
which have announced an agreement to merge, together accounted for more than
10% of our revenue during that period. Our license agreements with customers
are typically for a term of one or two years and do not contain any minimum
volume commitments.

Consumers may purchase products and product upgrades directly through our
Internet commerce sites. Revenue derived from our Internet commerce sites
accounted for 7% of our revenue in the first nine months of 2001. We also
license our products to distributors that sell our products to consumers
through retail distribution channels.

SALES, MARKETING AND TECHNICAL SUPPORT

Our sales and marketing strategy focuses on establishing and maintaining
license arrangements with PC, peripherals and consumer electronics
manufacturers. We license our digital multimedia solutions on a non-exclusive
worldwide basis to PC, peripherals and consumer electronics manufacturers that
sell products incorporating these technologies to end users. Members of our
sales force, located in China, Japan, the Netherlands, Taiwan and the United
States, work closely with our OEM customers to define and customize products,
conduct on-site testing and provide engineering and field application
engineering support. We have also established a network of independent sales
representatives and manufacturing representatives in the United States, Asia
and Europe to assist in OEM sales. We supplement our distribution channels
through the Internet to increase direct contact with our customers, facilitate
electronic sales of our products and sell associated products directly to
consumers. We also distribute free trial versions of our software through
consumer distribution channels, including media and computer magazines,
corporate, educational and training DVD titles and on our Internet commerce
site.

We believe the technical support that we provide to OEMs represents an
important part of our competitive advantage in maintaining strong relationships
with these OEMs. We have built a customer support infrastructure composed of
sales staff, program managers and quality assurance engineers. We have also
created an efficient, cost-effective Internet-based system for the delivery of
software and software fixes to OEMs. This infrastructure reduces duplication of
effort and fosters better communication channels between the OEMs and
ourselves. This infrastructure reduces our support costs by enabling us to
provide customer support with a relatively small staff.

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

As of December 31, 2001, we had 40 sales, marketing and technical support
personnel residing in our offices in Fremont, California; Taipei, Taiwan;
Shenzhen, China; and Tokyo, Japan.

RESEARCH AND DEVELOPMENT

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

We believe that interaction with our OEM customers throughout the product
design process enables us to anticipate technology trends and focus our
research and development efforts on addressing these emerging needs. We design
products to meet our OEM customers' specifications and current industry
standards and will continue to support emerging standards that are
complementary to our product strategy. For example, we meet regularly with the
Intel microprocessor architecture team, and they provide details about upcoming
products and give us source code libraries of new microprocessor instructions
that can help us anticipate future market trends and improve the performance
and the capabilities of our multimedia software.

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

As of December 31, 2001, we employed 86 research and development personnel in
three offices. For the nine months ended September 30, 2001, our research and
development expenditures totaled $7.3 million. Of the 69 research and
development personnel who are engineers, 12 hold PhDs. We intend to recruit,
hire and retain highly qualified engineers and technicians to support our
further research and development efforts.

COMPETITION

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

Additional competitors are likely to enter our industry in the future. We also
face competition from the internal research and development departments of
other software companies and personal computer and consumer electronics
manufacturers, including some of our current customers. Some of our customers
have the capability to integrate their operations vertically by developing
their own software-based digital and audio solutions or by acquiring our
competitors or the rights to develop competitive products or

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

Business
- --------------------------------------------------------------------------------

technologies, which may allow these customers to reduce their purchases or
cease purchasing from us completely. Operating system providers with an
established customer base, such as Microsoft, already offer products in the
digital video and audio software markets. Some video and audio capabilities are
built directly into their operating systems or are offered as upgrades to those
operating systems at no additional charge. If Microsoft or other operating
system providers developed or licensed digital video and audio solutions that
compete directly with ours, and incorporate the solutions into their operating
systems, our business could be harmed.

We believe the primary competitive factors impacting our business are the
quality and reputation of products; the quality of the program management team;
relationships with OEMs; compatibility with emerging industry standards; scope
and responsiveness of service and technical support; ability to offer
cost-effective products that balance performance and cost; timeliness and
relevance of new product introductions; timeliness and quality of modifications
and enhancements to existing products to comply with new and evolving hardware
and software; technical innovation; breadth of product offerings; and price
structure and business model characteristics. Although we believe our products
compete favorably with respect to each of these factors, the market for our
products is rapidly evolving, and we may not be able to maintain our
competitive position against current and potential competitors, especially
those with greater resources.

INTELLECTUAL PROPERTY

Our success depends upon our ability to protect our proprietary rights. We rely
on a combination of patent, copyright, trademark and trade secret laws, as well
as license and confidentiality agreements with, our employees, customers,
strategic partners and others to establish and protect our proprietary rights.
The protection of patentable inventions is important to our future
opportunities. We currently have one patent issued in Taiwan, and we have
fifteen pending patent applications in various jurisdictions, three of which
are provisional.

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

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Business
- --------------------------------------------------------------------------------

advantage and a decrease in our revenue. Infringement claims and lawsuits would
likely be expensive to resolve and would require management's time and
resources, and, therefore, could harm our business.

Our digital video and audio solutions comply with industry DVD specifications.
Some third parties have claimed that various aspects of DVD technology
incorporated into our and our customers' products infringe upon patents held by
them, including MPEG LA, a consortium formed to enforce the proprietary rights
of certain holders of patents covering certain aspects of MPEG-2 technology,
and a consortium known as "6C," formed by separate groups of companies to
enforce the proprietary rights of certain holders of patents covering some
aspects of DVD technology. In addition to these claims, we may receive notices
of claims of infringement of other parties' proprietary rights, including 3c,
another consortium formed to enforce the proprietary rights of certain holders
of patents covering some aspects of DVD technology. Many companies aggressively
use their patent portfolios to bring infringement claims against competitors
and other parties. As a result, we may become a party to litigation in the
future as a result of an alleged infringement of the intellectual property
rights of others, including MPEG LA, 6C or 3C. Similarly, other parties have
alleged that aspects of MPEG-2 and other multimedia technologies infringe upon
patents held by them. We may be required to pay license fees and damages in the
future if it is determined that our products infringe on patents owned by these
third parties. In addition, other companies may form consortia in the future,
similar to MPEG LA, 6C and 3C, to enforce their proprietary rights and these
consortia may seek to enforce their patent rights against us and our customers.
If MPEG LA, 6C, 3C or another third party proves that our technology infringes
its proprietary rights, we may be required to pay substantial damages for past
infringement and may be required to pay license fees or royalties on future
sales of our products. In addition, if it were proven that we actually
infringed on a third party's proprietary rights, we may be held liable for
three times of amount of damages we would otherwise have to pay. Intellectual
property litigation may require us to stop selling our products, obtain a
license from the owner of the infringed intellectual property or redesign our
products.

Some of our license agreements, including many of the agreements we have
entered into with our large PC OEM customers, contain warranties of
non-infringement and commitments to indemnify our customers against liability
arising from infringement of third-party intellectual property which may
include such as the patents held by members of MPEG LA, 6C and 3C. These
commitments may require us to indemnify or pay damages to our customers for all
or a portion of any license fees or other damages, including attorneys' fees,
they are required to pay or agree to pay these or other third parties. If we
are required to pay damages to our customers or indemnify our customers for
damages they incur, our business could be harmed. See "Risk factors--We have
received notice of claims, and may receive additional notices of claims in the
future, regarding the alleged infringement of third parties intellectual
properly rights that may result in restrictions or prohibitions on the sale of
our products and cause us to pay license fees and damages."

We license technology from Dolby Laboratories for the audio format that is used
in all DVD-related products. We pay a royalty to Dolby on a lump-sum and
per-unit shipped basis. The technology is comprised of Dolby Pro Logic, Dolby
Digital AC-3, Virtual Technology, MLP Lossless, Dolby Digital AC-3 Audio
System, Dolby Headphone System and other related technologies which create
"theater quality" sound by routing audio signals from a DVD to different
speakers in a multi-speaker setup. This technology from Dolby Laboratories is
part of the industry standard DVD specification.

We license encryption software technology from the DVD Copy Control
Association, Inc. This technology is designed to provide protection for content
encoded onto DVD discs. We pay DVD Copy Control Association, Inc. an annual
license fee for this technology.

If any of the licenses for the technologies and software described above
terminate and are not renewed on commercially reasonable terms, our business
could be harmed, and we could be prevented from shipping products using the
MPEG2 standards.

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Business
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EMPLOYEES

As of December 31, 2001, we employed 156 people, of whom 73 worked in the
United States and 83 worked in our various international locations. Of the U.S.
employees, 18 were in sales and marketing, 38 were in research and development
and 17 were in general and administration. Of the international employees, 22
were in sales and marketing, 48 were in research and development and 13 were in
general and administration.

FACILITIES

We currently lease the following properties:

Location Primary Use Square Footage Date Lease Expires
- ---------------------------------------------------------------------------------------------------

Fremont, California Corporate/Research and Development/Sales 19,395 October 30, 2003
Tokyo, Japan Sales and Marketing 2,428 September 30, 2003
Shenzhen, China Research and Development/Sales and Marketing 6,058 May 31, 2003
Taipei, Taiwan Research and Development/Sales and Marketing 4,625 June 14, 2003

We believe that our existing space is adequate for our current operations. We
believe that suitable replacement and additional space will be available in the
future on commercially reasonable terms.

LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

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Management

EXECUTIVE OFFICERS AND DIRECTORS

Set forth below is information concerning our directors and executive officers
as of December 31, 2001.

Name Age Position(s)
- --------------------------------------------------------------------------------

Steve Ro................... 44 President, Chief Executive Officer and Director
Randall Bambrough.......... 46 Chief Financial Officer
Honda Shing................ 39 Chief Technology Officer
Chinn Chin................. 41 Vice President of Engineering
Raul Diaz.................. 39 Vice President of Marketing
Jesse Lechuga.............. 42 Vice President of Sales
George Haber(2)............ 48 Director
Joseph Liu(1)(2)........... 50 Director
Henry Shaw(1)(2)........... 47 Director
Eli Sternheim(1)........... 56 Director

- --------
(1) Member of our compensation committee.

(2) Member of our audit committee.

Steve (Sencuo) Ro has served on our board of directors since July 1998 and has
served as our President and Chief Executive Officer since April 1999. From
April 1998 to November 2000, Mr. Ro served as Chairman and Chief Executive
Officer of Rosun Technologies, Inc., a manufacturer of ADSL chipsets, and
served as a director of Rosun Technologies until March 2001. Rosun Technologies
filed for bankruptcy in November 2001. Mr. Ro was the co-founder of LuxSonor
Semiconductors, a company that designs VCD and DVD semiconductors for the PC
and consumer markets. Mr. Ro served as Vice President of Marketing and Sales at
LuxSonor from August 1995 to April 1998. Prior to LuxSonor, Mr. Ro served as
the Director of Sales and Marketing at NexGen Microsystems, Inc., a
manufacturer of CPU chipsets, from January 1988 to August 1995. Mr. Ro holds an
MBA from National University in San Jose, California and an MS in computer
science from California State University at Chico.

Randall Bambrough joined us in March 2001 as Chief Financial Officer. Prior to
joining us, Mr. Bambrough was Chief Financial Officer at ViewGraphics,
Incorporated (which was acquired by Optibase Ltd.), a provider of digital media
transmission devices from June 2000 to March 2001. From January 1999 to June
2000, Mr. Bambrough was Chief Financial Officer at Decide.com, a company that
sold consumer telecommunications products. Mr. Bambrough served as Chief
Financial Officer and Secretary from August 1995 to January 1999 and in various
senior financial management roles from June 1992 to July 1995 at Castelle, a
manufacturer of specialized network devices. Mr. Bambrough earned a BS degree
in business management from Brigham Young University, another BS in accounting
from Weber State University and also holds an MBA from Utah State University.

Honda Shing joined us in July 1998 as our Chief Technology Officer. From
December 1995 to April 1998, Dr. Shing worked as an independent consultant
developing tools for the rapid development of application software systems.
From May 1992 to November 1995, Dr. Shing served as Senior Software Engineer at
Unisys Corporation, a company that develops and markets computer hardware,
software and services. Dr. Shing earned his PhD in computer science from
Michigan State University.

Chinn Chin has served as our Vice President of Engineering since July 1998. Mr.
Chin was the Director of Software Engineering for LuxSonor Semiconductors from
July 1996 to July 1998, where he was in

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Management
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charge of firmware, chip verification and driver and application development.
Mr. Chin holds a BS in computer engineering from National Chiao Tung University
and an MS in computer science from California State University at Chico.

Raul Diaz has served as our Vice President of Marketing since June 2001. He
served as our Vice President of Business Development from September 1999 to
June 2001. Mr. Diaz was the Senior Director of the Advanced Technology Lab
Group, responsible for research and development relating to multimedia
products, at STMicroelectronics, a semiconductor company, from July 1998 to
September 1999. From June 1996 to June 1998, Mr. Diaz was the Director of
Marketing at LuxSonor Semiconductors. From October 1988 to June 1996, Mr. Diaz
served in many capacities at
STMicroelectronics, most recently as the Director of Strategic Programs, where
he was responsible for research and development relating to DVD products. Mr.
Diaz earned his BS in electrical engineering from Yale University.

Jesse Lechuga has served as our Vice President of Worldwide Sales since June
2001. Prior to that, Mr. Lechuga served as our Vice President of North America
OEM Sales from November 2000 to June 2001. Prior to joining us, Mr. Lechuga
served as the Vice President of Worldwide Sales at Rosun Technologies from May
2000 to November 2000. Rosun Technologies filed for bankruptcy in November
2001. Mr. Lechuga was Vice President of Business Development at Harman
Multimedia, a company that specializes in audio products, where he was in
charge of worldwide business development for JBL, Infinity and Harman/Kardon
multimedia speakers, from October 1998 to May 2000. From August 1996 to
September 30, 1998 Mr. Lechuga was Vice President of Sales and Marketing at
Lite-On Peripherals, Inc., a company specializing in computer peripherals,
where he was responsible for the sale and marketing of computer keyboards. Mr.
Lechuga earned his BS in industrial engineering from California Polytechnic
State University.

George Haber has served on our board of directors since June 2001. Mr. Haber is
the chairman of Mobilygen, a company that specializes in digital hardware and
software development for the wireless communications and digital TV markets. In
August 1997, Mr. Haber founded GigaPixel, a provider of
3-D graphics technology, and served as its President and Chief Executive
Officer from August 1997 to September 2000. GigaPixel was subsequently acquired
by 3Dfx. In 1993, Mr. Haber co-founded CompCore Multimedia, a provider of
technology for multimedia compression, and served as its President and Chief
Executive Officer from 1993 to 1996. CompCore Multimedia was subsequently
merged with Zoran Corporation. From 1992 to 1993, he managed the SGI-Toshiba
project which culminated in the 3-D engine for SGI's INDY-2 professional
workstation. From 1989 to 1992, Mr. Haber was with Sun Microsystems as a
project manager responsible for the design and integration of the
floating-point unit in the UltraSPARC chip. Mr. Haber serves on the board of
directors of Mobilygen. Mr. Haber received his BSEE from Technion Israel
Institute of Technology.

Joseph Liu has served on our board of directors since June 2001. Mr. Liu is one
of the founders of Oplink Communications Inc., a company that manufactures
fiber optic networking components and integrated optical modules, and served as
its Chief Executive Officer from September 1999 to November 2001, Mr. Liu also
served as Chairman of the Board of Oplink Communications from 1995 to May 2000
and from November 2001 to the present. From 1994 to August 1999, Mr. Liu was
the General Partner of Techlink Technology Ventures. Prior to 1994, Mr. Liu
spent ten years as Chairman and Chief Executive Officer of Techlink
Semiconductor and Equipment Corp., a semiconductor equipment and technology
company. In addition to serving on the boards of directors of Oplink
Communications and Syscan, Inc., Mr. Liu also serves as a director for several
privately-held companies involved in semiconductor integrated circuit

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Management
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design and manufacturing. Mr. Liu received his BS from Chinese Cultural
University in Taiwan and his MS from California State University, Chico.

Henry Shaw has served on our board of directors since September 2000. Since
August 1996, Mr. Shaw has served as the Executive Vice President of TCW/YFY
Investment Partners (Taiwan), Ltd., which specializes in venture capital
investment, where Mr. Shaw is responsible for assessing potential investments.
Mr. Shaw was Vice President of Tanspac Capital Pte. Ltd., which specializes in
regional equity investment, from 1993 to 1996 and the Chief Financial Officer
of Mosel-Vitelic Inc., a publicly listed semiconductor memory company in
Taiwan, from 1984 to 1993. Mr. Shaw serves on the board of directors of a
number of companies in Taiwan, including Amtran Technology Co., Ltd, ABIT
Computer Corporation, Taiwan Memory Technology Inc., and Prolink Microsystems
Corporation. Mr. Shaw received his MBA from National Cheng-Chi University in
Taiwan in 1978.

Eliezer Sternheim has served on our board of directors since October 1999. Dr.
Sternheim has investments in a portfolio of high tech startups and joined
Redwood Venture Partners as venture partner in November 1999. Since June 1999,
Dr. Sternheim has served as Chief Executive Officer of Elyon Inc., a provider
of investment consulting services. Dr. Sternheim served as scientist at Avant!,
a company specializing in electronic design automation software, from June 1998
to June 1999 where he was responsible for research and development. In 1991,
Dr. Sternheim co-founded interHDL, an electronic design automation software
company where he served as President and Chief Executive Officer from June 1996
to June 1997, and as its Chief Technology Officer from June 1997 to June 1998.
In November 1998, interHDL was acquired by Avant! Corporation, a company
specializing in electronic design automation software. Dr. Sternheim serves on
the board of directors of Sparta Systems, Phonetact and Safetopia Corporation.
Dr. Sternheim holds a PhD in electrical engineering from Carnegie Mellon
University.

BOARD COMPOSITION

Our board of directors is composed of five members, including four directors
who are not employees and who are otherwise independent. Following this
offering, the directors will be divided into three classes, each serving
staggered three year terms. Dr. Sternheim has been designated a Class I
director whose term expires at the 2003 annual meeting of stockholders. Messrs.
Haber and Shaw have been designated Class II directors whose terms expire at
the 2004 annual meeting of stockholders. Messrs. Liu and Ro have been
designated Class III directors whose terms expire at the 2005 annual meeting of
stockholders. This classification of our board of directors may delay or
prevent a change in control of our company or a change in our management.

BOARD COMMITTEES

. Audit committee--The audit committee of our board of directors is composed
of Messrs. Haber, Liu and Shaw. The audit committee oversees and monitors
our management and independent auditors and their activities with respect
to our financial management and financial reporting process and reports to
and advises our board of directors on financial matters.

. Compensation committee--The compensation committee of our board of
directors is composed of Messrs. Liu and Shaw and Dr. Sternheim. The
compensation committee is responsible for designing, reviewing and
recommending compensation arrangements for our directors, executive
officers and employees, for administering various incentive compensation
and benefit plans. Prior to the formation of a compensation committee,
compensation decisions were be made by our entire board of directors.

Our board of directors may establish other committees to facilitate the
management of our business.

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

We did not have a compensation committee or other board committee performing
equivalent functions in fiscal year 2001. Compensation for our executive
officers was determined by the entire board of directors. All members of our
board of directors, including Mr. Ro, who served as an executive officer in
fiscal year 2001, participated in deliberations concerning executive officer
compensation during fiscal year 2001. No interlocking relationship exists in
connection with this offering, or has existed in the past, between our board of
directors and the board of directors or compensation committee of any other
company.

DIRECTOR COMPENSATION

We do not currently compensate our directors in cash for their service as
members of our board of directors. Employee and non-employee directors are
eligible to receive option grants under our 2002 Stock Option Plan as
determined by our board of directors. In June 2001, we granted an option to
purchase 50,000 shares of our common stock to Mr. Haber, an option to purchase
50,000 shares of our common stock to Mr. Liu and options to purchase 10,000
shares of our common stock to Mr. Shaw for their services as directors. Each of
these options has an exercise price of $2.00 per share and vested immediately
as to 50% of the shares subject to the option with the remainder vesting over a
period of four years. All unvested shares will accelerate in the event of a
change of control. In addition, Dr. Sternheim was paid $25,000 in consulting
fees during each of the last two fiscal years under a contract that has since
terminated.

Our 2002 Stock Option Plan will also provide for the automatic grant of options
to our non-employee directors. After the completion of this offering each new
non-employee director will receive an initial option to purchase shares
upon appointment to the board, except for those directors who become
non-employee directors by ceasing to be employee directors. In addition,
beginning in 2003, non-employee directors who have been directors for at least
six months will receive a subsequent option to purchase shares following
each annual meeting of our stockholders. All options granted under the
automatic grant provisions will have a term of ten years and an exercise price
equal to fair market value on the date of grant. Each initial option becomes
exercisable as to of the shares subject to the option on the anniversary
of the date of grant and becomes exercisable as to of the shares each full
month thereafter, provided the non-employee director remains a service provider
on such dates. Each subsequent option becomes exercisable as to 100% of the
shares subject to the option on the first anniversary of the date of grant,
provided the non-employee director remains a service provider on such date.

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Management
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EXECUTIVE COMPENSATION

Summary of cash and other compensation
The following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal year ended December 31, 2001 by our Chief
Executive Officer and the four other most highly compensated executive officers
whose total compensation exceeded $100,000 on an annualized basis during the
fiscal year ended December 31, 2001. These individuals are referred to as the
"named executive officers."

Summary compensation table

Long-term
compensation
------------
Awards
------------
Securities
Annual compensation underlying All other
Name and Principal Position Salary Bonus options compensation (1)
- ------------------------------------------------------------------------------------------

Steve Ro............................... $150,000 $ -- -- $3,714
President and Chief Executive Officer
Honda Shing............................ 150,000 3,000 -- 290
Chief Technology Officer
Raul Diaz.............................. 140,000 20,000 -- 357
Vice President of Marketing
Chinn Chin............................. 150,000 -- -- 300
Vice President of Engineering
Jesse Lechuga.......................... 140,000 16,000 80,000 255
Vice President of Sales

- --------
(1) Represents life insurance premiums paid by us for policies under which we
are not the beneficiary.

Option grants in last fiscal year
The following table sets forth information regarding options granted to our
named executive officers during the fiscal year ended December 31, 2001. We
have never granted any stock appreciation rights. All options were granted
pursuant to the 1998 Stock Option Plan.

Individual grants
--------------------------------------------------------
Potential realizable
Number of Percent of value at assumed annual
shares of total options rates of stock
common stock granted to price appreciation
underlying employees for option term (4)
options in fiscal Exercise price Expiration -----------------------
Name granted year (2) per share (3) date 5% 10%
- -----------------------------------------------------------------------------------------------------

Jesse Lechuga...... 80,000(1) 7.5% $2.00 1/5/11 $100,623 $254,999

- --------
(1) These options vest as to 25% of the shares at the end of Mr. Lechuga's
first year of employment and as to 1/48 of the shares at the end of each
successive month of employment.

(2) The percentage of total options granted is based on an aggregate of
1,071,200 options granted by us during the fiscal year ended December 31,
2001 to our employees.

(3) Options were granted with an exercise price per share equal to the fair
market value of our common stock on the date of grant, as determined by our
board of directors.

(4) The potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical
gains that could be achieved for the respective options if exercised at the
end of the option term. The 5% and 10% assumed annual rates of compounded
stock price appreciation are mandated by rules of the Securities and
Exchange Commission and do not represent our estimate or projection of our
future common stock prices. These amounts represent assumed rates of
appreciation in the value of our common stock from the fair market value on
the date of grant. Actual gains, if any, on stock option exercises are
dependent on the future performance of our common stock and overall stock
market conditions and the option holders continued service through the
vesting period.

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Management
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Aggregate option exercises during fiscal year 2001 and values at December 31,
2001
The following table sets forth the number of options exercised during the
fiscal year ended December 31, 2001 and the value of unexercised options held
by our named executive officers on December 31, 2001.

Number of shares of
common stock underlying Value of unexercised
unexercised options at in-the-money options
Shares December 31, 2001 at December 31, 2001
acquired on Value ------------------------- -------------------------
Name exercise realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------

Steve Ro................ -- $ -- 400,000 -- $ 304,000 $ --
Honda Shing............. -- -- 89,583 10,417 173,791 20,209
Raul Diaz............... -- -- 148,333 91,667 266,749 161,251
Chinn Chin.............. 100,000 195,000 1,583,333 166,667 3,087,499 325,001
Jesse Lechuga........... -- -- 26,666 53,334 -- --

- --------
(1) The value realized reflects the fair market value of our common stock
underlying the option on the date of exercise, as determined by our board
of directors, minus the exercise price of the option.

(2) The value of unexercised in-the-money options is based on a value of $2.00
per share, the fair market value of our common stock as most recently
determined by our board of directors prior to December 31, 2001.

1998 Stock Option Plan

Our 1998 Stock Option Plan was adopted by our board of directors and approved
by our stockholders in June 1998. Our 1998 Stock Option Plan provides for the
grant of incentive stock options, within the meaning of Section 422 of the
Internal Revenue Code, to our employees, and for the grant of nonstatutory
stock options to our employees, directors and consultants. As of December 31,
2001, options to purchase 5,307,700 shares of common stock were outstanding and
2,364,838 shares were available for future grant under the plan. We will not
grant any additional options under our 1998 Stock Option Plan following this
offering. Instead we will grant options under our 2002 Stock Option Plan. The
1998 Stock Option Plan provides that in the event of a merger, consolidation or
reorganization in which our company is not the surviving corporation, the
successor corporation may assume all outstanding options or, after giving 30
days notice to the optionees, the options will terminate. Following a
dissolution, liquidation or the sale of substantially all of the assets of our
company, outstanding options will terminate upon an optionee's termination of
employment with us.

2002 Stock Option Plan

In connection with this offering, our board of directors intends to adopt the
2002 Stock Option Plan subject to the approval of our stockholders. Our 2002
Stock Option Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code, to our employees, and for
the grant of nonstatutory stock options and stock purchase rights to our
employees, directors and consultants.

Number of Shares of Common Stock Available under the 2002 Stock Option Plan. We
have reserved a total of 400,000 shares of our common stock for issuance
pursuant to the 2002 Stock Option Plan plus (a) any shares which have been
reserved but not issued under our 1998 Stock Option Plan as of the effective
date of this offering, and (b) any shares returned to our 1998 Stock Option
Plan on or after the effective date of this offering as a result of termination
of options or the repurchase of unvested shares issued under the 1998 Stock
Option Plan. In addition, our 2002 Stock Option Plan provides for annual
increases in the number of shares available for issuance under our 2002 Stock
Option Plan on the first day of each fiscal year, beginning with our fiscal
year 2003, equal to the lesser of (i) 5% of the

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Management
- --------------------------------------------------------------------------------

outstanding shares of our common stock on the first day of the applicable
fiscal year, (ii) 2,000,000 shares, or (iii) another amount as our board may
determine.

Administration of the 2002 Stock Option Plan. Our board of directors or, with
respect to different groups of optionees, different committees appointed by our
board, will administer the 2002 Stock Option Plan. In the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the committee will consist of two
or more "outside directors" within the meaning of Section 162(m). The
administrator has the power to determine the terms of the options and stock
purchase rights granted, including the exercise price (which may be changed by
the administrator after the date of grant), the number of shares subject to
each option or stock purchase right, the exercisability of the options and
stock purchase rights and the form of consideration payable upon exercise. The
administrator has the authority to institute an option exchange program by
which outstanding options are surrendered in exchange for options with a lower
exercise price.

Options. The administrator determines the exercise price of options granted
under the 2002 Stock Option Plan, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) and all incentive stock options, the exercise price
must be at least equal to the fair market value of our common stock on the date
of grant. The term of an incentive stock option may not exceed ten years,
except that with respect to any participant who owns 10% of the voting power of
all classes of our outstanding capital stock, the term must not exceed five
years and the exercise price must equal at least 110% of the fair market value
on the grant date. The administrator determines the term of all other options.
The terms of 2002 Stock Option Plan allows the administrator to grant options
at exercise prices that are below, equal to or above market.

No optionee may be granted an option to purchase more than 2,000,000 shares in
any fiscal year. In connection with his or her initial service as an employee,
an optionee may be granted an additional option to purchase up to 1,000,000
shares.

After termination of one of our employees, directors or consultants, he or she
may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.

Stock Purchase Rights. Stock purchase rights, which represent the right to
purchase our common stock, may be issued under our 2002 Stock Option Plan. The
administrator determines the purchase price of stock purchase rights granted
under our 2002 Stock Option Plan. Unless the administrator determines
otherwise, a restricted stock purchase agreement, an agreement between us and
an optionee which governs the terms of stock purchase rights, will grant us a
repurchase option that we may exercise upon the voluntary or involuntary
termination of the purchaser's service with us for any reason, including death
or disability. The purchase price for shares we repurchase will generally be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The administrator determines the rate at
which our repurchase option will lapse. The terms of our 2002 Stock Option Plan
allows the administrator to issue stock purchase rights at purchase prices
which are below, equal to or above market .

Automatic Option Grants to Outside Directors. Our 2002 Stock Option Plan also
provides for the automatic grant of options to our non-employee directors. Each
non-employee director appointed to the board after the completion of this
offering will receive an initial option to purchase shares upon such
appointment except for those directors who become non-employee directors by
ceasing to be

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Management
- --------------------------------------------------------------------------------

employee directors. In addition, beginning in 2003, non-employee directors who
have been directors for at least six months will receive a subsequent option to
purchase 10,000 shares following each annual meeting of our stockholders.

All options granted under the automatic grant provisions have a term of ten
years and an exercise price equal to fair market value on the date of grant.
Each initial option becomes exercisable as to of the shares subject to the
option on the anniversary of the date of grant and becomes exercisable as to
of the shares each full month thereafter, provided the non-employee director
remains a service provider on such dates. Each subsequent option becomes
exercisable as to 100% of the shares subject to the option on the anniversary
of the date of grant, provided the non-employee director remains a service
provider on such date.

Transferability of Options and Stock Purchase Rights. Our 2002 Stock Option
Plan generally doesn't allow for the transfer of options or stock purchase
rights and only the optionee may exercise an option or stock purchase right
during his or her lifetime.

Adjustments upon Change in Control. Our 2002 Stock Option Plan provides that in
the event of a change of control, the successor corporation will assume or
substitute each option or stock purchase right. If the outstanding options or
stock purchase rights are not assumed or substituted, the administrator will
provide notice to the optionee that he or she has the right to exercise the
option or stock purchase right as to all of the shares subject to the option or
stock purchase right, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option or
stock purchase right will terminate upon the expiration of the 15-day period.
In the event an outside director is terminated following a change in control,
other than pursuant to a voluntary resignation, his or her options will fully
vest and become immediately exercisable.

Amendment and Termination of our 2002 Stock Option Plan. Our 2002 Stock Option
Plan will automatically terminate in 2012, unless we terminate it sooner. In
addition, the administrator has the authority to amend, suspend or terminate
the 2002 Stock Option Plan provided such amendment does not impair the rights
of any optionee.

2002 Employee Stock Purchase Plan

Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan. The 2002 Employee Stock Purchase Plan was adopted by our board
in January 2002, subject to the approval of our stockholders.

Number of Shares of Common Stock Available under the Plan. A total of 400,000
shares of our common stock will be made available for sale under the 2002
Employee Stock Purchase Plan. In addition, the plan provides for annual
increases in the number of shares available for issuance under the plan on the
first day of each fiscal year, beginning with our fiscal year 2003, equal to
the lesser of (i) 1 1/2% of the outstanding shares of our common stock on the
first day of the applicable fiscal year, (ii) 400,000 shares, or (iii) another
amount as our board may determine.

Administration of the Plan. Our board of directors or a committee established
by our board will administer the 2002 Employee Stock Purchase Plan. Our board
of directors or its committee has full and exclusive authority to interpret the
terms of the plan and determine eligibility.

Eligibility to Participate. Our employees and employees of designated
subsidiaries are eligible to participate in the 2002 Employee Stock Purchase
Plan if they are customarily employed for at least

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Management
- --------------------------------------------------------------------------------

20 hours per week and more than five months in any calendar year. However, an
employee may not be granted an option to purchase stock under the 2002 Employee
Stock Purchase Plan if:

. the employee immediately after grant owns stock possessing 5% or more of
the total combined voting power or value of all classes of our capital
stock, or

. if the employee's rights to purchase stock under all of our employee stock
purchase plans accrues at a rate that exceeds $25,000 worth of stock for
each calendar year.

Offering Periods and Contributions. Our 2002 Employee Stock Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code and contains
consecutive, overlapping 24-month offering periods. Each offering period
includes four six-month purchase periods. The offering periods generally start
on the first trading day on or after May 1 and November 1 of each year, except
for the first such offering period which will commence on the first trading day
on or after the effective date of this offering and will most likely end on the
last trading day on or before May 1, 2004 and the second offering period which
will commence on November 1, 2002. All eligible employees will be automatically
enrolled in the first offering period, but payroll deductions and continued
participation in the first offering period will not be determined until after
the effective date of the Form S-8 registration statement which is intended to
register the shares reserved for issuance under the plan.

The plan permits participants to purchase common stock through payroll
deductions of up to 15% of their eligible compensation which includes a
participant's base salary and commissions, but excludes all other compensation.
A participant may purchase a maximum of 10,000 shares during a six-month
purchase period.

Purchase of Shares. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair market value of our
common stock at the beginning of an offering period or at the end of a purchase
period. If the fair market value at the end of a purchase period is less than
the fair market value at the beginning of the offering period, participants
will be withdrawn from the current offering period following their purchase of
shares on the purchase date and will be automatically re-enrolled in a new
offering period. Participants may end their participation at any time during an
offering period, and will be paid their payroll deductions to date.
Participation ends automatically three months following termination of
employment with us.

Transferability of Rights. A participant may not transfer rights granted under
the 2002 Employee Stock Purchase Plan other than by will, the laws of descent
and distribution or as otherwise provided under the plan.

Adjustments upon Change in Control. In the event of a change of control, a
successor corporation may assume or substitute each outstanding option. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set. In such event, the administrator will provide notice
of the new exercise date to each optionee at least ten business days before the
new exercise date.

Amendment and Termination of the plan. The administrator has the authority to
amend or terminate our plan, except that, subject to certain exceptions
described in the 2002 Employee Stock Purchase Plan, no such action may
adversely affect any outstanding rights to purchase stock under the plan.

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Management
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EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS

We entered into an agreement with Dr. Honda Shing that provides for full
acceleration of all unvested shares of restricted common stock held by Dr.
Shing in the event of a change of control. A change of control means the merger
or consolidation of our company, or the sale of all or substantially all of our
assets or stock, where less than 51% of the capital stock of the successor
corporation is owned by persons who are holders of shares of our capital stock
immediately before such merger, consolidation or sale.

Under an agreement with Randall Bambrough, if Mr. Bambrough's employment is
terminated without cause, or Mr. Bambrough leaves his employment for good
reason, we are required to pay his base salary and benefits for a period of
twelve (12) months. In addition, if such termination occurs prior to a change
of control, the vesting of Mr. Bambrough's stock options will accelerate as to
50% of the unvested shares. If such termination occurs within twelve months
after a change of control, all remaining unvested stock options will
immediately vest. Change of control means a sale of substantially all our
assets, a merger or consolidation in which we are not the surviving corporation
or any transaction involving the transfer of greater than 50% of our voting
power.

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

Related party transactions

Other than compensation agreements and other arrangements, which are described
as required in "Management," and the transactions described below, since
January 1, 1999, there has not been, and there is not currently proposed, any
transaction or series of similar transactions to which we were or will be a
party; in which the amount involved exceeded or will exceed $60,000; and in
which any director, executive officer, holder of 5% or more of any class of our
voting stock or any member of their immediate family had or will have a direct
or indirect material interest.

INVESTORS RIGHTS AGREEMENT

We have entered into an agreement with the holders of our preferred stock,
including entities with which certain of our directors are affiliated, that
provides the holders of the preferred stock certain rights relating to the
registration of their shares of common stock issuable upon conversion of the
preferred stock. These rights will survive this offering and will terminate at
such time as all holders' securities can be sold within a six month period
without compliance with the registration requirements of the Securities Act
pursuant to Rule 144, but in any event no later than July 2, 2007.

INDEMNIFICATION AGREEMENTS

We expect to enter into an indemnification agreement with each of our directors
and officers prior to completing this offering. The indemnification agreements
and our certificate of incorporation and bylaws require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law.

RECENT OPTION GRANTS

Since January 1, 1999, we have granted stock options to the following executive
officers and directors:

Shares
Date of underlying Exercise Term of
Name grant options price option
- -----------------------------------------------------------------------------

Eli Sternheim.......................... 3/15/99 50,000 $ .05 10 years
Raul Diaz.............................. 3/15/99 40,000 .05 10 years
Honda Shing............................ 3/15/99 100,000 .055 5 years
Chinn Chin............................. 3/15/99 2,100,000 .05 10 years
Steve Ro............................... 3/15/99 800,000 .055 5 years
Eli Sternheim.......................... 6/1/99 100,000 .05 10 years
Henry Shaw............................. 6/1/99 30,000 .05 10 years
Steve Ro............................... 8/30/99 200,000 .275 5 years
Raul Diaz.............................. 1/10/00 200,000 .25 10 years
Henry Shaw............................. 7/1/00 40,000 2.00 10 years
Steve Ro............................... 10/1/00 200,000 2.20 5 years
Jesse Lechuga.......................... 1/5/01 80,000 2.00 10 years
Randall Bambrough...................... 3/21/01 300,000 2.00 10 years
George Haber........................... 6/15/01 50,000 2.00 10 years
Joseph Liu............................. 6/15/01 50,000 2.00 10 years
Henry Shaw............................. 6/15/01 10,000 2.00 10 years

Options for employees generally vest over four years. Options for directors
generally vest immediately as to 50% of the shares with the remainder vesting
over four years.

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Related party transactions
- --------------------------------------------------------------------------------

PRIVATE PLACEMENT FINANCINGS

In July 1999, a trust for the benefit of Eli Sternheim, one of our directors,
purchased 400,000 shares of Series C Preferred Stock at a price of $2.00 per
share in connection with our Series C financing. In April 2000, a trust for the
benefit of Dr. Sternheim purchased 162,500 shares of our Series D Preferred
Stock at a price of $4.00 per share in connection with our Series D financing.
These prices were the same as those paid by unaffiliated investors.

INDEBTEDNESS OF MANAGEMENT

In March 2001, in connection with the purchase by Randall Bambrough, our Chief
Financial Officer, of 300,000 shares of our common stock, we loaned Mr.
Bambrough $600,000 at an interest rate of 5.07%. This note is secured by the
shares purchased and is full recourse. Principal and interest on the note
become due and payable on the earlier of March 22, 2006 or the first
anniversary of the termination of his employment.

In December 2001, in connection with the purchase by each of George Haber and
Joe Liu, two of our directors, of 50,000 shares of our common stock, we loaned
each of Mr. Haber and Mr. Liu $100,000 at an interest rate of 5.07%. These
notes are secured by the shares purchased and are full recourse. Principal and
interest on the notes become due and payable on December 11, 2006 or the first
anniversary of the termination of their service.

It is our current policy that all transactions between us and our officers,
directors, 5% stockholders and their affiliates will be entered into only if
these transactions are approved by a majority of the disinterested directors,
are on terms no less favorable to us than could be obtained from unaffiliated
parties and are reasonably expected to benefit us.

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

Principal stockholders

The following table sets forth information regarding the beneficial ownership
of our common stock as of December 31, 2001, as adjusted to reflect the sale of
additional shares of our common stock in this offering and the automatic
conversion of all shares of our preferred stock to shares of our common stock
prior to the completion of this offering, for each of the following persons:

. all named executive officers;

. all directors; and

. each person who is known by us to own beneficially five percent or more of
our common stock assuming conversion of our preferred stock prior to this
offering.

Unless otherwise indicated, the address of each beneficial owner listed below
is InterVideo, Inc., 47350 Fremont Boulevard, Fremont, CA 94538.

Percentage of shares
beneficially owned (1)
----------------------
Number of shares Before After
Name of Beneficial Owner beneficially owned offering offering
- ------------------------------------------------------------------------------------------------------------------

Executive Officers and Directors
Steve Ro (2)................................................... 1,200,000(2) 7.0%
Honda Shing (3)................................................ 2,095,833(3) 12.5
Chinn Chin (4)................................................. 1,833,333(4) 10.0
Raul Diaz (5).................................................. 159,166(5) *
Jesse Lechuga (6).............................................. 30,000(6) *
Eli Sternheim (7).............................................. 562,500(7) 3.4
Henry Shaw (8)................................................. 56,666(8) *
George Haber (9)............................................... 50,000(9) *
Joe Liu (10)................................................... 50,000(10) *
All directors and executive officers as a group (10 persons)... 6,145,830(11) 33.2

Other 5% Stockholders
Spot Master Investment Limited................................. 3,850,000 23.1
6F, #16 Mucha St. Alley 9, Section 4
Mucha Wenshan District
Taipei, Taiwan ROC

- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of common stock subject to options held by that person that
are currently exercisable or become exercisable within 60 days of December
31, 2001 are considered to be beneficially owned by such person. Those
shares, however, are not deemed outstanding for the purpose of computing
the percentage ownership of any other person. Each stockholder's
percentage ownership in the following table is based upon 16,674,962
shares of common stock outstanding as of December 31, 2001 and shares
of common stock outstanding immediately after the offering, in each case
assuming conversion of all outstanding shares of preferred stock into
common stock. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power
with respect to the shares set forth opposite the stockholder's name. The
(*) indicates less than one percent ownership.

(2) Includes 400,000 shares of our common stock issuable under options
exercisable within 60 days of December 31, 2001.

(3) Includes 95,833 shares of our common stock issuable under options
exercisable within 60 days of December 31, 2001.

(4) Includes 1,683,333 shares of our common stock issuable under options
exercisable within 60 days of December 31, 2001.

(5) Represents 159,166 shares of our common stock issuable under options
exercisable within 60 days of December 31, 2001.

(6) Includes 30,000 shares of our common stock issuable under options
exercisable within 60 days of December 31, 2001.

(7) Represents 562,500 shares held by the Sternheim Trust UDT 12/22/98.

(8) Includes 26,666 shares of our common stock issuable under options
exercisable within 60 days of December 31, 2001.

(9) Includes 21,875 shares of our common stock subject to the Company's right
of repurchase as of December 31, 2001.

(10) Includes 21,875 shares of our common stock subject to the Company's right
of repurchase as of December 31, 2001.

(11) Includes 2,394,998 shares of our common stock issuable under options
exercisable within 60 days of December 31, 2001 and 275,000 shares subject
to the Company's right of repurchase as of December 31, 2001.

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

Description of capital stock

Upon completion of this offering, our authorized capital stock will consist of
150,000,000 shares of common stock, $0.001 par value and 5,000,000 shares of
preferred stock, $0.001 par value. As of December 31, 2001 there were
16,674,962 shares of our common stock outstanding, as adjusted to reflect the
conversion of all outstanding shares of our preferred stock into common stock
on the closing of this offering, that were held of record by approximately 177
stockholders, and options to purchase 5,367,700 shares of common stock were
outstanding. We will have a total of shares of common stock outstanding
following this offering.

The following description assumes the filing of an amended and restated
certificate of incorporation and the conversion of all our preferred stock into
common stock upon the closing of this offering. This description is only a
summary. You should also refer to our certificate of incorporation and bylaws,
both of which have been filed with the SEC as exhibits to our registration
statement, of which this prospectus forms a part.

COMMON STOCK

Subject to preferences that may apply to shares of preferred stock outstanding
at the time, the holders of outstanding shares of common stock are entitled to
receive dividends out of assets legally available therefor at the times and in
the amounts as our board of directors may from time to time determine. All
dividends are non-cumulative. In the event of the liquidation, dissolution or
winding up of our company, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to the
prior distribution rights of preferred stock, if any, then outstanding. Each
stockholder is entitled to one vote for each share of common stock held on all
matters submitted to a vote of stockholders. Cumulative voting for the election
of directors is not provided for in our certificate of incorporation, which
means that the holders of a majority of the shares voted can elect all of the
directors then standing for election. Our board of directors is divided into
three classes, with each director serving a three-year term and one class being
elected at each year's annual meeting of stockholders. The common stock is not
entitled to preemptive rights and is not subject to conversion or redemption.
There are no sinking fund provisions applicable to our common stock. Each
outstanding share of common stock is, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.

PREFERRED STOCK

Pursuant to our certificate of incorporation, our board of directors has the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the designations,
powers, preferences, privileges, and relative participating, optional or
special rights as well as the qualifications, limitations or restrictions of
the preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which
may be greater than the rights of the common stock. Our board of directors,
without stockholder approval, can issue preferred stock with voting, conversion
or other rights that could adversely affect the voting power and other rights
of the holders of common stock. Preferred stock could thus be issued quickly
with terms calculated to delay or prevent a change in control or make removal
of management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of our common stock, and may
adversely affect the voting and other rights of the holders of common stock. At
present, we have no plans to issue any preferred stock following this offering.

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

Description of capital stock
- --------------------------------------------------------------------------------

REGISTRATION RIGHTS

Holders of 12,188,750 shares of our common stock are entitled to certain rights
with respect to the registration of their shares under the Securities Act.
Specifically, at any time that we plan to register our securities, these
holders have a right to require that we include their securities in the
registration at our expense, subject to specified limitations. Furthermore,
under the terms of the agreement between us and these stockholders, to the
extent that we are qualified under applicable SEC rules to register our shares
for public resale on Form S-3 or a similar short form registration, if holders
of at least 2% of our common stock request that their securities be registered,
and provided that that the value of the securities requested to be registered
is at least $500,000, we have agreed to use our best efforts to register such
securities on Form S-3, subject to specified limitations. All fees, costs and
expenses of the registrations mentioned above will be borne by us and all
selling expenses, including underwriting discounts, selling commissions and
stock transfer taxes, will be borne by the holders of the securities being
registered. These registration rights terminate at such time as all such
holders' securities can be sold within a six- month period without compliance
with the registration requirements of the Securities Act pursuant to Rule 144
or on July 2, 2007.

DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS

Delaware Statute. We are subject to the provisions of Section 203 of the
Delaware General Corporation Law. In general, this statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date
that the person became an interested stockholder unless (with certain
exceptions) the business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed manner. Generally,
an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock. These provisions may have the effect of delaying,
deferring or preventing a change in control of us without further action by our
stockholders.

Charter Provisions. Our amended and restated certificate of incorporation and
bylaws contain provisions that could have the effect of discouraging potential
acquisition proposals or making a tender offer or delaying or preventing a
change in control of our company, including changes a stockholder might
consider favorable. These could have the effect of decreasing the market price
of our common stock. In particular, our amended and restated certificate of
incorporation and bylaws, as applicable, among other things, will:

. divide our board of directors into three separate classes serving staggered
three-year terms;

. provide that special meetings of stockholders can only be called by our
board of directors, chairman of the board, chief executive officer or
president (in the absence of a chief executive officer). In addition, the
business permitted to be conducted at any special meeting of stockholders
is limited to the business specified in the notice of such meeting to the
stockholders;

. provide for an advance notice procedure with regard to business to be
brought before a meeting of stockholders;

. eliminate the right of stockholders to act by written consent;

. provide that vacancies on our board of directors may be filled by a
majority of directors in office, although less than a quorum; and

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

Description of capital stock
- --------------------------------------------------------------------------------

. allow our board of directors to issue shares of preferred stock with rights
senior to those of the common stock and that otherwise could adversely
affect the rights and powers, including voting rights, of the holders of
common stock, without any further vote or action by the stockholders.

These provisions may have the effect of discouraging a third party from
acquiring us, even if doing so would be beneficial to our stockholders. These
provisions are intended to enhance the likelihood of continuity and stability
in the composition of our board of directors and in the policies formulated by
them, and to discourage some types of transactions that may involve an actual
or threatened change in control of our company. These provisions are designed
to reduce our vulnerability to an unsolicited acquisition proposal and to
discourage some tactics that may be used in proxy fights. We believe that the
benefits of increased protection of our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
our company outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in an
improvement of their terms. However, these provisions could have the effect of
discouraging others from making tender offers for our shares that could result
from actual or rumored takeover attempts. These provisions also may have the
effect of preventing changes in our management.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is .

NASDAQ NATIONAL MARKET QUOTATION

We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "IVDO."

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

Shares eligible for future sale

Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices.

Upon completion of this offering, we will have outstanding shares of our
common stock. Of these shares, the shares sold in the offering (plus any
shares issued upon exercise of the underwriters' over-allotment option) will be
freely tradable without restriction under the Securities Act, unless purchased
by our "affiliates" as that term is defined in Rule 144 under the Securities
Act (generally, our officers, directors and 10% stockholders). Shares purchased
by affiliates may generally only be sold pursuant to an effective registration
statement under the Securities Act or in compliance with limitations of Rule
144 as described below.

The remaining 16,674,962 shares outstanding are "restricted securities" within
the meaning of Rule 144 under the Securities Act. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. All of these shares are subject
to lock-up agreements pursuant to which the stockholder has agreed not to
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
the underwriting agreement related to this offering without the prior written
consent of UBS Warburg LLC. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold
until such agreements expire or are waived by UBS Warburg LLC. Taking into
account the lock-up agreements, and assuming UBS Warburg LLC does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:

. beginning on the effective date of the offering, only the shares sold in
this offering will be immediately available for sale in the public market;

. an additional 16,119,962 shares will become eligible for sale pursuant to
Rule 144 beginning on , 2002, 180 days after the date of the underwriting
agreement related to this offering. Shares eligible to be sold by
affiliates pursuant to Rule 144 are subject to volume restrictions as
described below; and

. an additional 555,000 shares will become eligible for sale in the public
market pursuant to Rule 144 at various dates in the future.

Immediately after the completion of this offering, we intend to file a
registration statement on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our
stock option plans and our stock purchase plan. Based upon the number of shares
subject to outstanding options as of December 31, 2001 and currently reserved
for issuance under our stock plans, this registration statement would cover
approximately 6,167,700 shares in addition to annual increases in the number of
shares available under the stock option plans and stock purchase plan pursuant
to the terms of such plans. Shares registered under the registration statement
will generally be available for sale in the open market immediately after the
180-day lock-up agreements expire or earlier in UBS Warburg LLC's sole
discretion.

Holders of 12,188,750 shares of our common stock will be entitled to rights
with respect to registration of these shares for sale in the public market. See
"Description of Capital Stock--Registration Rights." Registration of these
shares under the Securities Act would result in these shares becoming freely
tradable without restriction under the Securities Act immediately upon
effectiveness of the registration.

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

Shares eligible for future sale
- --------------------------------------------------------------------------------

Rule 144.

In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements, a person (or persons whose shares are
aggregated) who has beneficially owned
restricted shares for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of: one
percent of the number of shares of common stock then outstanding (which will
equal approximately shares immediately after the offering) or the average
weekly trading volume of the common stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have
been an affiliate of us at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.

Rule 701
Beginning 90 days after the effective date, any employee, officer or director
of or consultant to us who purchased shares pursuant to a written compensatory
plan or contract may be entitled to rely on the resale provisions of Rule 701.
Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144
without complying with the holding period requirements of Rule 144. Rule 701
further provides that non-affiliates may sell such shares in reliance on Rule
144 without having to comply with the holding period, public information,
volume limitation or notice provisions of Rule 144.

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

Underwriting

We and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC and CIBC World Markets
Corp. are the representatives of the underwriters.

Underwriter Number of Shares
- -----------------------------------------------------------------------------

UBS Warburg LLC............................................
CIBC World Markets Corp....................................
--------
Total................................................
========

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above. The
following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up
to an additional shares.

No Exercise Full Exercise
- ----------------------------------------------------------------------------

Per share........................................ $ $
Total............................................ $ $

We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $ .

Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms. The underwriters have informed us that they do not expect
discretionary sales to exceed 5% of the shares of common stock to be offered.

We, each of our directors and officers, stockholders holding shares and each
of our optionholders have agreed with the underwriters not to offer, sell,
contract to sell, hedge or otherwise dispose of, directly or indirectly, or
file with the SEC a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of the
underwriting agreement without the prior written consent of UBS Warburg LLC.
Among the factors that UBS Warburg LLC may consider in consenting to an early
release of shares from this lock-up are the condition of the securities markets
in general and the market price and trading activity of our common stock and
the personal requirements of the subject stockholder in particular. UBS Warburg
LLC has advised us that they have no present intention to release any of the
shares subject to the lock-up agreements prior to the expiration of the lock-up
period.

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

Underwriting
- --------------------------------------------------------------------------------

Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be negotiated by us and the
representatives. The principal factors to be considered in determining the
initial public offering price will include:

. the information set forth in this prospectus and otherwise available to the
representatives;

. the history and the prospects for the industry in which we compete;

. the ability of our management;

. our prospects for future earnings, the present state of our development and
our current financial position;

. the general condition of the securities markets at the time of this
offering; and

. recent market prices of, and demand for, publicly traded common stock of
comparable companies.

In connection with the offering, the underwriters may purchase and sell shares
of our common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. "Naked" short sales are any
sales in excess of the overallotment option. The underwriters must close out
any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering.

Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of our common stock while
the offering is in progress. The underwriters also may impose a penalty bid.
This occurs when a particular underwriter repays to the underwriters a portion
of the underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of that underwriter in
stabilizing or short covering transactions. These activities by the
underwriters may stabilize, maintain or otherwise affect the market price of
our common stock. As a result, the price of our common stock may be higher than
the price that otherwise might exist in the open market. If these activities
are commenced, they may be discontinued by the underwriters at any time. These
transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.

We have agreed to indemnify the several underwriters against liabilities,
including liabilities under the Securities Act and to contribute to payments
that the underwriters may be required to make in respect thereof.

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

Legal matters

Wilson Sonsini Goodrich & Rosati, a professional corporation, Palo Alto,
California, will pass for us on the validity of the common stock offered
hereby. Brobeck, Phleger & Harrison LLP, Palo Alto, California, is acting as
counsel for the underwriters in connection with selected legal matters relating
to the shares of common stock offered by this prospectus.

Experts

The consolidated balance sheets of InterVideo, Inc. as of December 31, 1999 and
2000 and the related consolidated statements of operations, shareholders'
equity and cash flows for the period from inception (April 28, 1998) to
December 31, 1998 and for the years ended December 31, 1999 and 2000 included
in this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving such reports.

The balance sheets of Audit/Video Products Division of Formosoft International
Inc. as of December 31, 1998 and 1999, and the related statements of operations
and comprehensive loss, and cash flows for the period from April 14, 1998 (date
of incorporation) to December 31, 1998 and for the year ended December 31, 1999
included in this prospectus have been audited by TN Soong & Co., a member firm
of Andersen Worldwide, SC, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving such reports.

Where you can find more information

We filed a registration statement on Form S-1 under the Securities Act with the
SEC to register the shares of our common stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits to the registration statement. You
should refer to the registration statement and the exhibits to the registration
statement for more information about us and our common stock. Our statements in
this prospectus concerning the contents of any document are not necessarily
complete, and in each instance, we refer you to the copy of the document filed
as an exhibit to the registration statement. Each statement about those
documents is qualified in its entirety by this reference.

Following the offering, we will become subject to the reporting requirements of
the Securities Exchange Act of 1934. In accordance with that law, we will be
required to file reports and other information with the SEC. The registration
statement and exhibits, as well as those reports and other information when we
file them, may be inspected without charge at the Public Reference Room
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
Public Reference Room. Copies of all or any part of the registration statement
may be obtained from the SEC's offices upon payment of fees prescribed by the
SEC. The SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC. The address of the site is http://www.sec.gov.

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

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The following financial statements are filed as part of this report:

CONSOLIDATED FINANCIAL STATEMENTS OF INTERVIDEO, INC.

Report of Independent Public Accountants................................... 2

Consolidated Balance Sheets................................................ 3

Consolidated Statements of Operations...................................... 4

Consolidated Statements of Shareholders' Equity............................ 5

Consolidated Statements of Cash Flows...................................... 6

Notes to Consolidated Financial Statements................................. 7

FINANCIAL STATEMENTS OF AUDIO/VISUAL PRODUCTS DIVISION OF FORMOSOFT
INTERNATIONAL, INC.

Report of Independent Public Accountants................................... 24

Balance Sheets............................................................. 25

Statements of Operations and Comprehensive Loss............................ 26

Statements of Cash Flows................................................... 27

Notes to Financial Statements.............................................. 28

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Basis of Presentation...................................................... 34

Unaudited Pro Forma Condensed Combined Statement of Operations............. 34

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

F-1

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
InterVideo, Inc.:

We have audited the accompanying consolidated balance sheets of InterVideo,
Inc. (the Company), a California corporation, as of December 31, 1999 and 2000,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the period from inception (April 28, 1998) to December 31, 1998,
and for the years ended December 31, 1999 and 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 financial position of InterVideo, Inc. as of
December 31, 1999 and 2000, and the results of its operations and its cash
flows for the period from inception (April 28, 1998) to December 31, 1998, and
for the years ended December 31, 1999 and 2000, in conformity with accounting
principles generally accepted in the United States.

\s\ ARTHUR ANDERSEN LLP

San Francisco, California
May 23, 2001

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

F-2

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

As of December 31, As of
----------------- September 30,
1999 2000 2001
- --------------------------------------------------------------------------------------------------------------
(unaudited)

ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 2,628 $14,668 $ 11,596
Accounts receivable, net of allowance for doubtful accounts of $42,
$152 and $247, respectively........................................... 383 2,413 2,716
Prepaid expenses and other current assets.............................. 79 283 651
------- ------- --------
Total current assets................................................ 3,090 17,364 14,963
Property and equipment, net................................................ 596 1,991 1,863
Other assets............................................................... 131 2,779 3,224
------- ------- --------
Total assets........................................................ $ 3,817 $22,134 $ 20,050
======= ======= ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 131 $ 484 $ 223
Accrued liabilities.................................................... 1,052 6,434 8,683
Deposits............................................................... -- 27 432
------- ------- --------
Total liabilities................................................... 1,183 6,945 9,338
------- ------- --------
Shareholders' equity:
Convertible preferred stock, no par value: aggregate liquidation
preference of $21,355 at December 31, 2000; 13,000,000 shares
authorized; 8,000,000, 12,213,750, and 12,188,750 shares issued and
outstanding, respectively............................................. 4,476 21,286 21,186
Common stock, no par value: 25,000,000 shares authorized; 2,546,683
and 3,702,392, and 4,312,483 shares issued and outstanding,
respectively.......................................................... 282 3,897 6,098
Notes receivable from officer.......................................... -- -- (496)
Deferred stock compensation............................................ (165) (2,206) (2,310)
Accumulated other comprehensive loss................................... -- (84) (152)
Accumulated deficit.................................................... (1,959) (7,704) (13,614)
------- ------- --------
Total shareholders' equity.......................................... 2,634 15,189 10,712
------- ------- --------
Total liabilities and shareholders' equity.......................... $ 3,817 $22,134 $ 20,050
======= ======= ========

The accompanying notes are an integral part of these consolidated financial
statements.

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

F-3

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)

Period from Year ended Nine months ended
inception December 31 September 30
(April 28, 1998) to ---------------- ----------------
December 31, 1998 1999 2000 2000 2001
- -----------------------------------------------------------------------------------------------------------
(unaudited)

Revenue.......................................... $ -- $ 3,036 $15,426 $ 9,761 $23,673
Cost of revenue.................................. -- 1,118 5,189 3,263 8,881
----- ------- ------- ------- -------
Gross profit................................. -- 1,918 10,237 6,498 14,792
Operating expenses:
Research and development (1)................. 328 1,300 6,876 4,489 7,307
Sales and marketing (1)...................... -- 1,194 5,033 3,129 6,422
General and administrative (1)............... 199 773 2,667 1,645 2,225
Stock compensation........................... -- 53 1,411 906 1,612
Special charges.............................. -- -- -- -- 3,068
----- ------- ------- ------- -------
Total operating expenses.................. 527 3,320 15,987 10,169 20,634
----- ------- ------- ------- -------
Loss from operations............................. (527) (1,402) (5,750) (3,671) (5,842)
Other income (expense), net...................... 2 32 557 303 443
----- ------- ------- ------- -------
Loss before provision for income taxes........... (525) (1,370) (5,193) (3,368) (5,399)
Provision for income taxes....................... -- 64 552 382 509
----- ------- ------- ------- -------
Net loss..................................... $(525) $(1,434) $(5,745) $(3,750) $(5,908)
===== ======= ======= ======= =======
Net loss per common share, basic and diluted..... -- $ (2.57) $ (2.19) $ (1.45) $ (1.70)
===== ======= ======= ======= =======
Pro forma net loss per common share, basic and
diluted (unaudited)............................. $ (0.43) (0.25) $ (0.38)
======= ======= =======
Weighted average common shares outstanding, basic
and diluted..................................... -- 559 2,625 2,593 3,472
===== ======= ======= ======= =======
Pro forma weighted average common shares
outstanding, basic and diluted (unaudited)...... 13,456 14,782 15,661
======= ======= =======

- --------
(1)Stock compensation is allocated among the operating expense classifications
as follows:

Year ended Nine months ended
December 31, September 30,
------------- -------------------
1999 2000 2000 2001
(in thousands) (unaudited)
- ------------------------------------------------------------------------------------

Research and development......................... $14 $ 546 $341 $ 633
Sales and marketing.............................. 3 521 358 398
General and administrative....................... 36 344 207 581
--- ------ ---- ------
$53 $1,411 $906 $1,612
=== ====== ==== ======

The accompanying notes are an integral part of these consolidated financial
statements.

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

F-4

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)

Convertible
Preferred Stock Common stock
------------------ ----------------

Note Deferred stock
Shares Amount Shares Amount Receivable Compensation
- ---------------------------------------------------------------------------------------------------------------------------------

BALANCE, Inception (April 28, 1998)........................... -- $ -- -- $ -- -- $ --
Issuance of common stock..................................... -- -- 2,000,000 1 -- --
Issuance of Series A convertible preferred stock at $0.05 per
share, net of issuance cost of $5,000....................... 5,000,000 245 -- -- -- --
Issuance of Series B convertible preferred stock at $0.25 per
share, net of issuance cost of $7,000....................... 1,000,000 243 -- -- -- --
Net loss..................................................... -- -- -- -- -- --
---------- ------- --------- ------ ---- -------
BALANCE, December 31, 1998.................................... 6,000,000 488 2,000,000 1 -- --
Issuance of Series C convertible preferred stock at $2.00 per
share, net of issuance cost of $12,000...................... 2,000,000 3,988 -- -- -- --
Exercise of common stock options............................. -- -- 546,683 25 -- --
Issuance of common stock options to consultants and other
nonemployees................................................ -- -- -- 38 -- --
Deferred stock compensation.................................. -- -- -- 218 -- (218)
Amortization of deferred stock compensation expense.......... -- -- -- -- -- 53
Net loss..................................................... -- -- -- -- -- --
---------- ------- --------- ------ ---- -------
BALANCE, December 31, 1999.................................... 8,000,000 4,476 2,546,683 282 -- (165)
Issuance of Series D convertible preferred stock at $4.00 per
share, net of issuance cost of $45,000...................... 4,213,750 16,810 -- -- -- --
Exercise of common stock options............................. -- -- 1,155,709 94 -- --
Issuance of common stock options to consultants and other
nonemployees................................................ -- -- -- 69 -- --
Deferred stock compensation.................................. -- -- 3,452 -- (3,452)
Amortization of deferred stock compensation expense.......... -- -- -- -- -- 1,411
Accumulated translation adjustment........................... -- -- -- -- -- --
Net loss..................................................... -- -- -- -- -- --
---------- ------- --------- ------ ---- -------
BALANCE, December 31, 2000.................................... 12,213,750 21,286 3,702,392 3,897 -- (2,206)
Exercise of common stock options............................. -- -- 310,091 80 --
Redemption Series D from AVPD Purchase....................... 25,000 (100) -- -- --
Issuance of common stock options to consultants and other
nonemployees................................................ -- -- -- 15 --
Note Receivable from Officer................................. -- -- 300,000 600 (467) (133)
Interest income for note receivable.......................... (29)
Deferred stock compensation.................................. -- -- -- 1622 -- (1622)
Amortization of deferred stock compensation expense.......... -- -- -- (118) -- 1,651
Accumulated translation adjustment........................... -- -- -- -- --
Net loss..................................................... -- -- -- -- --
---------- ------- --------- ------ ---- -------
BALANCE, September 30, 2001 (unaudited)....................... 12,188,750 $21,186 4,312,483 $6,098 (496) $(2,310)
========== ======= ========= ====== ==== =======

Accumulated
Other Total
Comprehensive Accumulated Shareholders'
Loss Deficit Equity (Deficit)
- -----------------------------------------------------------------------------------------------------------

BALANCE, Inception (April 28, 1998)........................... $ -- $ -- $ --
Issuance of common stock..................................... -- -- 1
Issuance of Series A convertible preferred stock at $0.05 per
share, net of issuance cost of $5,000....................... -- -- 245
Issuance of Series B convertible preferred stock at $0.25 per
share, net of issuance cost of $7,000....................... -- -- 243
Net loss..................................................... -- (525) (525)
----- -------- -------
BALANCE, December 31, 1998.................................... -- (525) (36)
Issuance of Series C convertible preferred stock at $2.00 per
share, net of issuance cost of $12,000...................... -- -- 3,988
Exercise of common stock options............................. -- -- 25
Issuance of common stock options to consultants and other
nonemployees................................................ -- -- 38
Deferred stock compensation.................................. -- -- --
Amortization of deferred stock compensation expense.......... -- -- 53
Net loss..................................................... -- (1,434) (1,434)
----- -------- -------
BALANCE, December 31, 1999.................................... -- (1,959) 2,634
Issuance of Series D convertible preferred stock at $4.00 per
share, net of issuance cost of $45,000...................... -- -- 16,810
Exercise of common stock options............................. -- -- 94
Issuance of common stock options to consultants and other
nonemployees................................................ -- -- 69
Deferred stock compensation.................................. --
Amortization of deferred stock compensation expense.......... -- -- 1,411
Accumulated translation adjustment........................... (84) -- (84)
Net loss..................................................... -- (5,745) (5,745)
----- -------- -------
BALANCE, December 31, 2000.................................... (84) (7,704) 15,189
Exercise of common stock options............................. 80
Redemption Series D from AVPD Purchase....................... (100)
Issuance of common stock options to consultants and other
nonemployees................................................ 15
Note Receivable from Officer................................. --
Interest income for note receivable.......................... (29)
Deferred stock compensation.................................. --
Amortization of deferred stock compensation expense.......... 1,535
Accumulated translation adjustment........................... (68) (68)
Net loss..................................................... (5,908) (5,908)
----- -------- -------
BALANCE, September 30, 2001 (unaudited)....................... $(152) $(13,614) $10,712
===== ======== =======

The accompanying notes are an integral part of these consolidated financial
statements.

- --------------------------------------------------------------------------------
F-5

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Period from
inception Nine months
(April 28, 1998) Year ended ended
to December 31, December 31, September 30,
---------------- ---------------- -----------------
1998 1999 2000 2000 2001
- --------------------------------------------------------------------------------------------------------------------------
(unaudited)

Cash flows from operating activities:
Net loss....................................................... $(525) $(1,434) $(5,745) $(3,750) $(5,908)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 15 89 746 453 918
Long term investment reserve................................ -- -- -- -- 100
In-process research and development......................... -- -- 700 700 --
Deferred stock compensation................................. -- 53 1,411 986 1,612
Allowance for doubtful accounts............................. -- 42 110 50 95
Loss from disposal of assets................................ -- 16 112 134 109
Other....................................................... 38 69 -- (28)
Changes in assets and liabilities:
Inventory................................................ -- -- -- (6) (14)
Accounts receivable...................................... -- (425) (2,149) (2,281) (398)
Prepaid expenses and other current assets................ (13) (66) (204) (290) (354)
Other assets............................................. (10) (21) (252) (78) (911)
Accounts payable......................................... 8 123 353 260 (258)
Accrued liabilities...................................... 40 1,012 4,492 2,117 3,224
Deposits................................................. 350 -- 27 36 336
----- ------- ------- -------- -------
Net cash used in operating activities................. (135) (573) (330) (1,669) (1,477)
----- ------- ------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment............................. (159) (557) (1,976) (1,785) (617)
Purchase of Audio Visual Products Division (AVPD).............. -- -- (2,200) (2,200) (1,000)
Purchase of long-term investments.............................. -- (100) (200) (200) --
----- ------- ------- -------- -------
Net cash used in investing activities................. (159) (657) (4,376) (4,185) (1,617)
----- ------- ------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of Series A preferred stock, net........ 245 -- -- -- --
Proceeds from issuance of Series B preferred stock, net........ 243 -- -- -- --
Proceeds from issuance of Series C preferred stock, net........ -- 3,638 -- -- --
Proceeds from issuance of Series D preferred stock, net........ -- -- 16,710 16,810 --
Proceeds from exercise of common stock options................. 1 25 94 61 80
----- ------- ------- -------- -------
Net cash provided by financing activities............. 489 3,663 16,804 16,871 80
----- ------- ------- -------- -------
Effect of change in exchange rates on cash........................ -- -- (58) (8) (58)
Net increase in cash and cash equivalents......................... 195 2,433 12,040 11,009 (3,072)
Cash and cash equivalents, beginning of Period.................... -- 195 2,628 2,628 14,668
----- ------- ------- -------- -------
Cash and cash equivalents, end of period.......................... $ 195 $ 2,628 $14,668 $13,637 $11,596
===== ======= ======= ======== =======
Supplementary disclosures of noncash investing and financing
Activities:
Conversion of deposit to Series C convertible preferred
stock......................................................... -- $ 350 -- $ -- $ --
Issuance (repurchase) of Series D convertible preferred stock.. -- -- 100 -- (100)
Note receivable................................................ -- -- -- -- 496

The accompanying notes are an integral part of these consolidated financial
statements.

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

F-6

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(information as of September 30, 2000 and 2001, is unaudited)

1. ORGANIZATION AND OPERATIONS:

InterVideo, Inc. (the Company) is a leading provider of DVD software and offers
a broad suite of advanced digital video and audio multimedia software products
that allow users to record, edit, author, distribute and play digital
multimedia content on personal computers, or PCs, and consumer electronics
devices. The Company currently derives a substantial majority of its revenue
from sales of its WinDVD product, a software DVD player for PCs. The Company's
other major products include WinDVR, a digital video recorder, WinProducer, a
video recording and editing software application, and WinRip, a digital music
recorder and player.

During the first quarter of 2000, the Company created wholly owned subsidiaries
to market its products in Japan and Taiwan. The Taiwan subsidiary includes the
business and assets acquired in June 2000 from the Audio Visual Products
Division (AVPD) of Formosoft International, Inc., as discussed in Notes 4 and
14.

In 1998, the Company was considered to be in the development stage, as it did
not generate any revenues. It emerged from the development stage in 1999 and
began to earn revenues from licensed software. The Company is subject to a
number of risks associated with technology companies, including, but not
limited to, a history of net losses; limited operating history; fluctuating
operating results; third-party intellectual property claims; potential
competition from larger more established companies; and dependence on key
employees.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

Foreign currency translation
The functional currency of the Company's subsidiaries is the local currency.
Accordingly, all assets and liabilities are translated into U.S. dollars at the
current exchange rate at the applicable balance sheet date. Revenues and
expenses are translated at the average exchange rate prevailing during the
period. Gains and losses resulting from the translation of the financial
statements are reported as a separate component of shareholders' equity.
Foreign currency transaction gains and losses are included in other income
(expense). Through December 31, 2000, such transactions have not been material.

Unaudited interim financial statements
The accompanying consolidated financial statements as of September 30, 2001,
and for the nine months ended September 30, 2000 and 2001, are unaudited, but
in the opinion of management include all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of results for the
interim periods. Certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been omitted, although the Company
believes that the disclosures included are adequate to make the information
presented not misleading. Results for the nine months ended September 30, 2001,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001.

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

F-7

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

Unaudited pro forma presentation
The unaudited pro forma basic and diluted net loss per common share and pro
forma basic and diluted weighted average common shares outstanding, reflect the
automatic conversion of all outstanding shares of convertible preferred stock
into 12,188,750 shares of common stock, which will occur upon the closing of
the Company's proposed initial public offering.

Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Comprehensive income (loss)
Comprehensive income is the total of net (loss) and all other nonowner changes
in shareholders' equity. The Company's only component of other comprehensive
income is net loss attributed to accumulated foreign currency translation
adjustments. Such amounts are excluded from net loss and are reported in
accumulated other comprehensive loss in the accompanying statements of
shareholders' equity.

Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 and its amendments establish
accounting and reporting standards for derivatives and similar instruments,
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Company
implemented SFAS No. 133 on January 1, 2001. Since the Company does not engage
in derivatives or hedging activities, SFAS No. 133 will not have a material
impact on the Company's financial position or results of operations.

In December 1998, the AICPA issued Statement of Position (SOP) 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the
deferral of the application of certain provisions of SOP 97-2 amended by SOP
98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. This statement did not have a material
impact on the financial condition or results of the Company's operations.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB 101 provides the
SEC staff's views in applying accounting principles generally accepted in the
United States to various revenue recognition issues. Management believes that
the Company's revenue recognition policies are in compliance with the
guidelines provided in SAB 101, and therefore the adoption of SAB 101 has not
significantly affected the Company's results of operations.

In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for
Certain Stock Transactions Involving Stock Compensation, an Interpretation of
APB Opinion No. 25." FIN 44 provides guidance for certain issues that arise in
applying Opinion 25. Management believes that the Company's policies are in
compliance with the guidelines of FIN 44, and therefore the adoption of FIN 44
has not significantly affected the Company's results of operations.

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

F-8

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

In June 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. These new standards are effective for fiscal years beginning
after December 15, 2001. Under the new standards, goodwill will no longer be
amortized, but will be subject to an annual impairment test. The standards also
promulgate, among other things, new requirements for accounting for other
intangible assets. Management believes these new standards will not
significantly affect the Company's results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. This new standard is effective for fiscal years
beginning after December 15, 2001. This new standard affirms and clarifies
certain accounting for long-lived assets and broadens the application of
discontinued operations treatment. Management does not believe that these new
standards will have a material impact on the Company's financial position and
results of operations.

Cash and cash equivalents
For purposes of the consolidated balance sheets and statements of cash flows,
the Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Cash and cash equivalents
consist of cash in banks and money market accounts.

Significant concentrations
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. The Company performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral. Three customers comprised approximately 46 percent
of the accounts receivable at December 31, 1999. Five customers comprised
approximately 53 percent of the accounts receivable at December 31, 2000.

In 1999, certain customers individually accounted for 23 percent, 12 percent,
and 12 percent of revenue. In 2000, one individual customer accounted for 21
percent of revenue. No other customers accounted for more than 10 percent of
revenues in any period.

Valuation accounts
Below is a summary of the changes in the Company's allowance for doubtful
accounts for the nine months ended September 30, 2001 and for the years ended
December 31, 2000, and 1999.

Balance at Balance
Allowance for Beginning of the at End of
Doubt ful Accounts Period Additions Period
------------------ ---------------- ------------- ---------
(amounts
in thousands)

December 31, 1999............. $ -- $ 42 $ 42
December 31, 2000............. $ 42 $110 $152
September 30, 2001 (unaudited) $152 $ 95 $247

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

F-9

INTERVIDEO, INC.

Property and equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method based on estimated useful lives of between three and seven
years. Depreciation expense for property and equipment was $86,000, $416,000,
and $547,000 for the years ended December 31, 1999 and 2000, and for the nine
months ended September 30, 2001, respectively. Property and equipment consists
of the following as of December 31, 1999 and 2000, and September 30, 2001 (in
thousands):

December 31,
-------------
1999 2000
-------------------------------------------------------

Equipment.............................. $ 308 $1,121
Furniture and fixtures................. 187 506
Purchased software..................... 202 682
Leasehold improvements................. -- 153
Construction in Process................ -- --
Other.................................. -- 46
----- ------
697 2,508
Less: Accumulated depreciation......... (101) (517)
----- ------
Property and equipment, net..... $ 596 $1,991
===== ======

Goodwill and other intangible assets
In connection with the acquisition of the business and assets of AVPD, the
Company acquired certain intangible assets, including developed technology, an
assembled work force, and goodwill.

The purchase price of $3.0 million plus $200,000 in related costs was allocated
to intangible assets acquired, based on their relative fair values. In
connection with the allocation, a one-time in-process research and development
charge of $700,000 was recorded. The remaining $2.5 million was allocated as
follows: $1,000,000 to developed technology, $150,000 to the assembled work
force, and $1,350,000 to goodwill. All of these intangibles are being amortized
over five years. In performing this allocation, the Company considered, among
other factors, AVPD's technology research and development projects in process
at the date of acquisition. With regard to the in-process research and
development projects, the Company considered factors such as the overall
objectives of the project, progress towards the objectives at the time of
acquisition, the uniqueness of the development projects, and contributions from
existing technology and projects. The analysis of the assembled work force
primarily considered the replacement cost associated with recruiting and
training a work force with comparable experience and qualifications.

The income approach was the primary technique utilized in valuing the purchased
research and development. Each of the in-process research and development
projects was identified and valued through detailed interviews and analysis of
product development data provided by management concerning developmental
projects, their respective stages of development, the time and resources needed
to complete the projects, their expected income-generating ability and
associated risks.

Revenue projections used to value the developed technology and in-process
research and development were based on estimates of relevant market sizes and
growth factors, expected trends in technology and the nature and expected
timing of new product introductions by AVPD. The discount rate selected for
developed and in-process technology was 30 percent and 35 percent, respectively.

F-10

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

The Company believes that the foregoing assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate sales, development costs or
profitability, or the events associated with such projects, will transpire as
estimated. For these reasons, actual results may vary from projected results.

The most significant and uncertain assumptions relating to the in-process
projects relate to the projected timing of completion and revenues attributable
to each project.

The Company performs a review of the value of its goodwill and intangible
assets whenever events and circumstances indicate that impairment may have
occurred. Indicators of impairment of such assets include, among other things,
a failure to integrate the related products into our existing products or use
the acquired assets as a basis to further develop the Company's product
offerings. The Company does not believe that an impairment of any of its
goodwill and intangible assets has occurred. In 2002, the Company will modify
its impairment measurement policy to comply with SFAS No. 142, discussed above.

Total amortization expense from June 7, 2000 (date of acquisition), to December
31, 2000, was $292,000.

Revenue recognition
The Company's revenue is derived from fees paid under software licenses granted
primarily to OEMs and directly to end-users. The Company records revenue
generated from these sales in accordance with SOP 97-2, "Software Revenue
Recognition," as amended, under which revenue is recognized when evidence of an
arrangement exists, delivery of the software has occurred, the fee is fixed and
determinable, and collection is probable.

Most OEMs pay a license fee based on the number of copies of licensed software
included in the products sold to their customers. OEMs pay these fees on a
per-unit basis, and the Company records associated revenue when it receives
notification of the OEMs' sales of the licensed software to the end users. The
terms of the license agreements generally require the OEMs to notify the
Company of sales of their products within 30 to 45 days after the end of the
month or quarter in which the sales occur. As a result, the Company generally
recognizes revenue in the month or quarter following the sale of the product to
the OEMs' customers.

Cost of revenue
Cost of revenue consists primarily of royalties paid to third parties for
technologies incorporated into the Company's products as well as expenses
incurred to manufacture, package and distribute the Company's software
products. These amounts are accrued in the period of the related sales and are
recorded as accrued liabilities.

Software development costs
Under SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," costs incurred in the research and development
of software are expensed as incurred until technological feasibility has been
established. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general
marketability of the products are capitalized. The Company defines
establishment of technological feasibility as the completion of a working
model. The establishment of technological feasibility and the ongoing
assessment of recoverability of these costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross product revenues, estimated

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

F-11

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

economic life, and changes in software and hardware technologies. Amounts that
were capitalizable under SFAS No. 86 were insignificant, and therefore no costs
have been capitalized to date.

Customer service and technical support
Customer service and technical support costs include the costs associated with
answering customer inquires and providing telephone assistance. In connection
with the sale of certain products, the Company provides a limited amount of
free telephone support service to customers. This free service, also referred
to as post-contract customer support, is included in sales and marketing
expenses. The Company does not defer the recognition of any revenue associated
with sales of these products, because the cost of providing this free support
is insignificant. The support is provided within 90 days after the associated
revenue is recognized, and enhancements are minimal and infrequent.

Net loss per share
Basic net loss per common share is calculated by dividing net loss by the
weighted average common shares outstanding during the period, less shares
subject to repurchase. Diluted income per share is calculated by dividing the
net income by the weighted average common shares outstanding, adjusted for all
potential common shares, which includes shares issuable upon the exercise of
outstanding common stock options, convertible preferred stock, warrants, and
other contingent issuances of common stock. The Company has losses for all
periods presented and, accordingly, has excluded all convertible preferred
stock, outstanding stock options, and shares subject to repurchase from the
calculation of diluted net loss per common share because all such securities
are antidilutive for all periods presented.

Nine months ended
Years ended December 31, September 30,
------------------------------------- ------------------------
1998 1999 2000 2000 2001
- --------------------------------------------------------------------------------------------------------------
(unaudited)

Net loss (in thousands)..................... $ (525) $ (1,434) $ (5,745) $ (3,750) $ (5,908)
=========== =========== =========== =========== ===========
Basic and diluted:
Weighted average shares of
common stock outstanding............... 2,000,000 2,155,508 3,581,208 3,565,653 4,233,825
Less: Weighted average shares
subject to repurchase............... (2,000,000) (1,596,918) (956,056) (972,223) (761,426)
----------- ----------- ----------- ----------- -----------
Weighted average shares
used in computing basic
and diluted net loss per
common share..................... -- 558,590 2,625,152 2,593,430 3,472,399
=========== =========== =========== =========== ===========
Basic and diluted net loss per common
share...................................... -- $ (2.57) $ (2.19) $ (1.45) $ (1.70)
=========== =========== =========== =========== ===========
Shares used above to compute basic and
diluted net loss per common share.......... 558,590 2,625,152 2,593,430 3,472,399
=========== =========== =========== ===========
Pro forma adjustment to reflect weighted
average effect of assumed conversion
of convertible preferred stock
(unaudited)................................ 10,830,615 12,188,750 12,188,750
=========== =========== ===========
Shares used in computing pro forma
basic and diluted net loss per common
share (unaudited).......................... 13,455,767 14,782,180 15,661,149
=========== =========== ===========
Pro forma basic and diluted net loss per
common share (unaudited)................... $ (0.43) (0.25) (0.38)
=========== =========== ===========

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

F-12

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

Potentially dilutive securities include the following:

As of December 31 As of
------------------------------- September 30
1998 1999 2000 2001
- -------------------------------------------------------------------------------------
(unaudited)

Common stock subject to repurchase..... 2,000,000 1,596,918 956,056 595,833
Options to purchase common stock....... -- 5,322,000 6,250,000 5,616,221
Series A preferred stock............... 5,000,000 5,000,000 5,000,000 5,000,000
Series B preferred stock............... 1,000,000 1,000,000 1,000,000 1,000,000
Series C preferred stock............... -- 2,000,000 2,000,000 2,000,000
Series D preferred stock............... -- -- 4,213,750 4,188,750
--------- ---------- ---------- ----------
Total............................ 8,000,000 14,918,918 19,419,806 18,400,804
========= ========== ========== ==========

The common stock subject to repurchase was issued to a founder of the Company.

Pursuant to SEC Staff Accounting Bulletin No. 98, convertible preferred stock
and common stock issued or granted for nominal consideration prior to the
anticipated effective date of an initial public offering must be included in
the calculation of basic and diluted net loss per common share as if they had
been outstanding for all periods presented. To date, the Company has not had
any issuances or grants for nominal consideration.

Pro forma net loss per share (unaudited)
The calculation of pro forma net loss per share assumes that all series of
convertible shares have been converted into common stock as of the original
issuance date.

3. SIGNIFICANT CONCENTRATIONS

Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. The Company performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral. Three customers comprised of approximately 55% of
the accounts receivable at December 31, 1999. Five customers comprised
approximately 54% of the accounts receivable at December 31, 2000.

In 1999, certain customers individually accounted for 23%, 12% and 12% of the
revenue, respectively. In 2000, four customers accounted for 46% of sales. One
individual customer accounted for 21% of sales. No other customers accounted
for more than 10% of revenues in any period.

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

F-13

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

4. OTHER ASSETS:

Other assets consist of the following (in thousands):

As of
December 31,
-----------
1999 2000
- ---------------------------------------------------------------

Deposit.......................................... $ 31 $ 218
Investments...................................... 100 300
Assembled work force............................. -- 150
Purchased developed technology................... -- 1,000
Goodwill......................................... -- 1,339
Other............................................ -- 62
Less: Accumulated amortization................... -- (290)
---- ------
$131 $2,779
==== ======

Goodwill arose from the acquisition of AVPD as discussed in Note 14.

5. ACCRUED LIABILITIES:

Accrued liabilities consist of the following (in thousands):

As of December 31, As of
------------------- September 30,
1999 2000 2001
- -----------------------------------------------------------------------
(unaudited)

Accrued payroll and related benefits $ 222 $ 927 $ 617
Royalties........................... 786 3,504 5,185
AVPD acquisition price payable...... - 900 --
Other............................... 44 1,103 2,881
-------- ---------- ------
Total........................ $ 1,052 $ 6,434 $8,683
======== ========== ======

The Company accrued royalties of $3.5 million and $5.2 million (unaudited) as
of December 31, 2000 and September 30, 2001, respectively. Approximately $2.6
million and $3.2 (unaudited), respectively, is for signed agreements. The
remainder of approximately $900,000 at December 2000 and $2.0 (unaudited) at
September 30, 2001 represents the amount of royalties payable based upon units
sold under arrangements where it believes that it has a legal obligation and
royalty amounts that the relevant patent holders have published. Should the
final arrangements result in royalty rates significantly different from these
assumptions, the business, operating results and financial condition of the
Company could be materially and adversely affected.

The Company has received notices of claims, and may receive notices of claims
in the future, regarding the alleged infringement of third parties'
Intellectual property rights that may result in restrictions or prohibitions on
the sale of its products and cause it to pay license fees and damages. Some
third parties claim to hold patents covering various aspects of DVD technology.
Some third parties have claimed that various aspects of DVD technology
incorporated into the Company and it's customers' products infringe upon
patents held by them.

The Company may be subject to additional third-party claims that its products
violate the intellectual property rights of those parties. In addition to the
claims described above, the Company may receive notices of claims of
infringement of other parties' proprietary rights. Many companies aggressively
use

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

F-14

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

their patent portfolios to bring infringement claims against competitors and
other parties. As a result, the Company may become a party to litigation in the
future as a result of an alleged infringement of the intellectual property of
others. The Company may be required to pay license fees and damages in the
future if it is determined that its products infringe on patents owned by these
third parties.

The Company may be required to pay substantial damages and may be restricted or
prohibited from selling its products if it is proven that it has violated the
intellectual property rights of others. If a third party proves that the
Company's technology infringes its proprietary rights, the Company may be
required to pay substantial damages for past infringement and may be required
to pay license fees or royalties on future sales of our products. In addition,
if it were proven that the Company willfully infringed on a third party's
proprietary rights, it may be held liable for three times the amount of damages
it would otherwise have to pay. Intellectual property litigation may require
the Company to: stop selling, incorporating or using its products that use the
infringed intellectual property; obtain a license to make, sell or use the
relevant technology from the owner of the infringed intellectual property,
which license may not be available on commercially reasonable terms, if at all;
and redesign its products so as not to use the infringed intellectual property,
which may not be technically or commercially feasible.

The defense of infringement claims and lawsuits, regardless of their outcome,
would likely be expensive to resolve and could require a significant portion of
management's time. Rather than litigating an infringement matter, the Company
may determine that it is in its best interests to settle the claim. Terms of a
settlement could include the payment of damages and an agreement to license
technology in exchange for a license fee and ongoing royalties. These fees may
be substantial. If the Company is forced to take any of the actions described
above, defend against any claims from third parties or pay any license fees or
damages, its business and financial position could be materially adversely
affected.

The Company may be liable to some of its customers for damages that they incur
in connection with intellectual property claims. Some of its license
agreements, including many of the agreements it has entered into with its large
PC OEM customers, contain warranties of non-infringement and commitments to
indemnify our customers against liability arising from infringement of
third-party intellectual property. These commitments may require the Company to
indemnify or pay damages to its customers for all or a portion of any license
fees or other damages, including attorneys' fees, they are required to pay or
agree to pay these or other third parties. The Company has received notices
asserting rights under the indemnification provisions and warranty provisions
of our license agreements with several customers. If the Company is required to
pay damages to its customers or indemnify its customers for damages they incur,
its business could be harmed. If customers are required to pay license fees in
the amounts that are currently published by claimants, and the Company is
required to pay damages to its customers or indemnify our customers for such
amounts, such payments would exceed its revenue from such customers. Even if a
particular claim falls outside of an indemnity or warranty obligation to its
customers, the customers may be entitled to additional contractual remedies
against the Company. Furthermore, even if the Company is not liable to its
customers, they may attempt to pass on to the Company the cost of any license
fees or damages owed to third parties, by reducing the amounts they pay for the
Company's products. These price reductions could harm the Company's business.

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

F-15

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

6. COMMITMENTS AND CONTINGENCIES:

Lease commitments
As of September 30, 2001, future minimum commitments under operating leases are
as follows (in thousands):

Fiscal Year Lease
----------------------------------------------------------- ------

Three months ended December 31, 2001 (unaudited)........... $ 221
2002....................................................... 851
2003....................................................... 607
2004....................................................... -
------
$1,679
======

Rent expense was $26,000, $113,000, $347,000, and $686,000 for the period from
inception (April 28, 1998) to December 31, 1998, for the years ended December
31, 1999 and 2000, and for the nine months ended September 30, 2001
(unaudited), respectively, and is included in operating expenses on the
accompanying statements of operations.

7. CONVERTIBLE PREFERRED STOCK:

As of December 31, 2000, convertible preferred stock consists of the following,
net of issuance costs (in thousands, except share amounts):

December 31,
-------------- September 30,
1999 2000 2001
- ----------------------------------------------------------------------------------------------------
(unaudited)

Series A:
Authorized--5,000,000 shares......................................
Outstanding--5,000,000 shares; liquidation preference of $250..... $ 245 $ 245 $ 245
Series B:
Authorized--1,000,000 shares......................................
Outstanding--1,000,000 shares; liquidation preference of $250..... 243 243 243
Series C:
Authorized--2,000,000 shares......................................
Outstanding--2,000,000 shares; liquidation preference of $4,000... 3,988 3,988 3,988
Series D:
Authorized--5,000,000 shares......................................
Outstanding--4,213,750 shares; liquidation preference of
$16,855.......................................................... 16,810 16,710
------ ------- -------
$4,476 $21,286 $21,186
====== ======= =======

The rights, restrictions, and preferences of the convertible preferred stock
are as follows:

. Each share of convertible preferred stock is convertible, at the option of
the holder, into such number of fully paid and nonassessable shares of
common stock as is determined by dividing the number of shares outstanding
by the initial conversion price of $0.05 per Series A, $0.25 per Series B,
$2.00 per Series C, and $4.00 per Series D. Such initial conversion price
shall be subject to adjustment.

. Each share of convertible preferred stock will be automatically converted
into shares of common stock at the then-effective conversion price on the
effective date of a firm commitment to underwrite the public offering of
the Company's common stock.

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

F-16

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

. The holders of convertible preferred stock are entitled to the number of
votes equal to the number of shares of common stock into which their shares
of preferred stock would convert.

. Each preferred stockholder is entitled to receive annual dividends at a
rate of $0.005 per Series A shares, $0.025 per Series B shares, $0.20 per
Series C shares, and $0.4 per Series D shares, when and if declared by the
Board of Directors, prior to payment of dividends on common stock.
Dividends are noncumulative. No dividends have been declared to date.

. In the event of liquidation, dissolution, or winding up of the affairs of
the Company, the holders of Series A, Series B, Series C, and Series D
convertible preferred stock are entitled to receive a liquidation
preference of $0.05 per Series A share, $0.25 per Series B share, $2.00 per
Series C share, and $4.00 per Series D share, prior to any distribution to
the holders of the common stock. After this distribution, all remaining
assets of the Company will be distributed to all shareholders on a share
for share basis.

8. COMMON STOCK:

In May 1998, the Company issued 2,000,000 shares of common stock to one
employee of the Company, all of which were subject to repurchase rights at the
option of the Company. The shares are repurchasable at $.0005 per share in the
event of termination of employment for any reason. The repurchase rights began
to lapse 12 months after the vesting commencement date (May 15, 1998).
Beginning on May 15, 1999, the remaining shares vest ratably each month over
the remaining 36 months of the term. At December 31, 1999 and 2000, and for the
nine months ended September 30, 2001, 792,000, 1,292,000 and 1,667,000 shares,
respectively, had vested.

In February 1999, the Board of Directors approved a two-for-one stock split of
all common and preferred stock. All share and per share information has been
retroactively adjusted to reflect the stock split.

As of December 31, 2000, the Company had reserved shares of authorized but
unissued common stock for the following:

Conversion of Series A preferred stock..................... 5,000,000
Conversion of Series B preferred stock..................... 1,000,000
Conversion of Series C preferred stock..................... 2,000,000
Conversion of Series D preferred stock..................... 5,000,000
1998 Stock Option Plan..................................... 8,297,608
----------
Total shares reserved................................ 21,297,608
==========

9. STOCK OPTIONS:

During 1998, the Company established the 1998 Stock Option Plan (the Plan)
covering key employees and consultants of the Company. Under the terms of the
Plan, incentive and nonstatutory stock options and stock purchase rights may be
granted for up to 2,000,000 shares of the Company's authorized but unissued
common stock. In 1999, the Company amended the Plan to grant up to 8,000,000
shares of the Company's authorized but unissued common stock. In 2000, the
Company amended the Plan to grant up to 10,000,000 shares of the Company's
authorized but unissued common stock. Options issued under the Plan generally
have a maximum term of 10 years and vest over schedules determined by the Board
of Directors. Options issued under the Plan to shareholders owning 10 percent
of the total combined voting power of all classes of stock shall have a maximum
term of five years from the date of grant.

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

F-17

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

Nonstatutory stock options may be granted to employees and consultants at no
less than 85 percent of the fair market value of the stock as determined by the
Board of Directors at the date of grant. Incentive stock options may be granted
only to employees at the fair market value of the stock at the date of the
grant. Stock options granted to a person owning more than 10 percent of the
total combined voting power of all classes of stock of the Company must be
issued at 110 percent of the fair market value of the stock on the day of grant.

During 2000, one employee was granted options to purchase 150,000 of common
stock that are exercisable immediately after a change in control of the Company.

Option activity is as follows:

Options Option
Shares Issued Total activity
Available for under Outstanding outside of
Grant the Plan Options the Plan
- ----------------------------------------------------------------------------

December 31, 1998....... 2,000,000 -- -- --
Authorized.......... 6,000,000 -- -- 158,000
Options granted..... (5,882,000) 5,822,000 5,880,000 58,000
Options exercised... -- (518,000) (547,000) (29,000)
Options canceled.... 11,000 (11,000) (11,000) --
---------- ---------- ---------- -------
December 31, 1999....... 2,189,000 5,293,000 5,322,000 29,000
Authorized.......... 2,000,000 -- -- --
Options granted..... (2,211,000) 2,211,000 2,311,000 100,000
Options exercised... -- (1,156,000) (1,156,000) --
Options canceled.... 227,000 (227,000) (227,000) --
---------- ---------- ---------- -------
December 31, 2000....... 2,205,000 6,121,000 6,250,000 129,000
========== ========== ========== =======

The following table summarizes the stock options outstanding and exercisable as
of December 31, 2000:

Number of Options Weighted Average Options
Range Outstanding at Remaining Weighted Exercisable as of
of Exercise December 31, Contractual Life Average December 31,
Prices 2000 (Years) Exercise Price 2000
- --------------------------------------------------------------------------------

$0.05 3,912,000 8.20 $0.05 2,499,000
0.25 916,000 9.00 0.25 485,000
2.00 1,222,000 9.50 2.00 20,000
2.20 200,000 4.75 2.20 200,000
- --------------------------------------------------------------------------------
$0.05-2.20 6,250,000 8.62 $0.53 3,204,000
- --------------------------------------------------------------------------------

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

SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a
fair-value-based method of accounting for stock-based compensation plans and
requires additional disclosures for those companies that elect not to adopt the
new method of accounting. In accordance with the provision of SFAS No. 123, the
Company has elected to apply APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Had compensation cost for the plans been
determined consistent

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

F-18

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

with SFAS No. 123, the Company's net loss would have been $525,000, $1,447,000
and $6,464,000 for the period from inception (April 28, 1998) to December 31,
1998, for the years ended December 31, 1999, and 2000.

The weighted average fair value of options granted during 1999 and 2000 was
$.06 and $1.47, respectively. The fair value of each option granted was
estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions used for grants in 1999 and 2000: risk-free
interest rates ranging from 5.6 percent to 6.4 percent; expected dividend
yields of zero; expected lives of four years beyond grant date; and expected
volatility of 0 percent. Because the Black-Scholes option valuation model
requires the input of subjective assumptions, the resulting pro forma
compensation cost may not be representative of that to be expected in future
periods.

The Company also issues options to consultants and other nonemployees. Stock
options issued to consultants and other nonemployees are valued under the
provisions of SFAS No. 123. The fair value of each option granted was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants in 1999 and 2000: risk-free interest
rates ranging from 5.6 percent to 6.5 percent; expected dividend yields of
zero; expected lives of four years beyond grant date; and expected volatility
of 70 percent. Because the Black-Scholes option valuation model requires the
input of subjective assumptions, the resulting pro forma compensation cost may
not be representative of that to be expected in future periods. The
compensation expense related to these options was $0, $38,000, $65,000 and
$15,000 in 1998, 1999, 2000 and for the nine months ended September 30, 2001,
respectively, and is included in operating expenses in the accompanying
statements of operations.

Deferred stock compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," and its related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of employee stock options is less than the market price
of the underlying stock on the date of grant, compensation expense is recorded
for the difference between
market value and the exercise price. Expense associated with stock-based
compensation is being amortized over the vesting period of the individual award
consistent with the method described in FASB Interpretation No. 28.

The value of warrants, options, or stock exchanged for services is expensed
over the period benefited. To calculate the expense, the Company uses the more
objectively determinable method between the fair value of the equity instrument
based on the Black-Scholes pricing model or the value of the services.

In connection with the grant of certain stock options to employees for the nine
months ended September 30, 2001 and for the years ended December 31, 2000 and
1999, the Company recorded deferred stock compensation within shareholders'
equity of $218,000 and $3,452,000, respectively, representing the difference
between the estimated fair value of the common stock for accounting purposes
and the option exercise price of those options at the date of grant. Such
amount is presented as a reduction of shareholders' equity and will be
amortized over the vesting period of the applicable options using an
accelerated method of amortization under FASB Interpretation No 28. The Company
recorded amortization of deferred compensation expense of $53,000 and
$1,411,000 for the years ended December 31, 1999 and 2000, respectively.
Approximately $1,824,000 was expensed during the nine months ended September
30, 2001.

10. 401(K) PLAN:

The Company has a defined contribution savings plan under Section 401(k) of the
Internal Revenue Code. The plan provides for tax-deferred salary deductions and
after-tax employee contributions. There have been no contributions made by the
Company to date.

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

F-19

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

11. Income Taxes:

The Company applies the asset and liability approach to accounting for income
taxes under which deferred income taxes are provided based upon enacted tax
laws and rates applicable to the periods in which the taxes become payable.

The net deferred income tax asset consists of the following (in thousands):

December 31,
--------------
1999 2000
- ----------------------------------------------------------------------------

Deferred income tax assets:
Federal net operating loss carryforwards................ $ 423 $ 1,412
State net operating loss carryforwards.................. 73 242
Start-up costs capitalized for tax...................... 143 110
Research and development credit......................... 18 500
Depreciation and amortization........................... (41) 150
Other temporary differences............................. 140 180
Other tax credits....................................... -- 627
----- -------
756 3,221
Valuation allowance..................................... (756) (3,221)
----- -------
Net deferred income tax asset........................... $ -- $ --
===== =======

All deferred tax assets carried a 100% valuation allowance at September 30,
2001.

Federal and state net operating loss carryforwards at December 31, 2000, were
approximately $4,152,000 and $4,149,000, respectively. The federal net
operating loss carryforwards expire on various dates through 2020, while the
state net operating loss carryforwards expire beginning in 2006. The Company
also has federal and state research and development tax credit carryforwards of
approximately $251,000 and $249,000, respectively. The federal tax credit
carryforwards expire on various dates through 2020, while the state tax credits
carry forward indefinitely. The Company has provided an offsetting valuation
allowance for the amount of these deferred income tax assets because of the
uncertainty surrounding the realizability of such amounts.

The Internal Revenue Code contains provisions that may limit the net operating
losses and tax credit carryforward to be used in any given year upon the
occurrence of certain events, including a significant change in ownership
interest.

The provision for income taxes from the expected tax benefit amount computed by
applying the statutory federal income tax rate of 34 percent to loss before
taxes is as follows:

December 31,
------------
1999 2000
--------------------------------------------------------------------------

Federal statutory rate..................................... 34.0% 34.0%
State taxes, net of federal benefit........................ 5.8 5.8
Foreign tax rates.......................................... 0.1 9.0
Change in valuation allowance.............................. (39.9) (39.8)
----- -----
Total................................................ 0.0% 9.0%
===== =====

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

F-20

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

The significant components of income tax expense for 1999 are as follows (in
thousands):

Current Deferred Total
- ---------------------------------------------------------------

Federal.............................. $-- $(316) $(316)
State................................ -- (82) (82)
Foreign.............................. 64 -- 64
Valuation allowance.................. -- 398 398
--- ----- -----
Total income tax expense...... $64 $ -- $ 64
=== ===== =====

The significant components of income tax expense for 2000 are as follows (in
thousands):

Current Deferred Total
- -----------------------------------------------------------------

Federal.............................. $ -- $(2,007) $(2,007)
State................................ 1 (459) (458)
Foreign.............................. 552 -- 552
Valuation allowance.................. -- 2,465 2,465
---- ------- -------
Total income tax expense...... 553 (1) $ 552
==== ======= =======

The Company has recorded a foreign income tax expense of $64,000 and $552,000
for the years ended December 31, 1999 and 2000, respectively.

12. RELATED-PARTY TRANSACTIONS:

Prior to November 1999, the Company received limited administrative and
accounting services from an affiliated company in which the Company's chief
executive officer and his spouse (who is also a member of the Company's Board
of Directors) have been significant shareholders. No amounts were charged to
the Company by the affiliate for the services provided during the period from
April 1998 to November 1999, and the Company has not recorded a charge for the
fair value of the services received.

13. SEGMENT AND GEOGRAPHIC INFORMATION:

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

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

F-21

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

The Company has one operating segment: multimedia software. Sales of licenses
to this software occur in three geographic locations. International revenues
are based on the country in which the end-user is located. The following is a
summary of international license by geographic region (in thousands):

Year ended Nine months
December 31, ended
---------------- September 30,
1999 2000 2001
-----------------------------------------------------------------------
(unaudited)

Americas............................... $1,398 $ 6,959 $13,242
Europe................................. 265 2,388 2,183
Asia:
Japan............................... 543 2,931 5,676
Other Asia.......................... 830 3,148 2,572
------ --------- -------
Total............................ $3,036 $15,426 $23,673
====== ========= =======

14. ACQUISITION OF AVPD:

On June 7, 2000, the Company completed the acquisition of the business and
assets of AVPD, a developer of audio and video software products. AVPD was
founded in 1998 and released its first product, GAMUT98, in August 1998. Its
second-generation product, GAMUT2000, was released in February 2000. This
purchase is intended to result in the combination of technological assets that
will accelerate the Company's development and introduction of multimedia
software products. The results of operations of AVPD are included in the
consolidated statements of operations for the period from June 7, 2000, to
December 31, 2000.

The purchase cost of the acquisition was approximately $3.2 million and was
accounted for as a purchase. Approximately $1,350,000 of the purchase price has
been allocated to goodwill, $700,000 to in-process research and development,
$150,000 to the assembled work force, and $1 million to developed technology.
The Company recorded approximately $2.5 million of goodwill and other
identifiable assets in connection with the acquisition, which are being
amortized over a five-year period. The quarterly amortization expense will be
approximately $125,000 in future periods. The Company paid $2.2 million during
2000 and accrued $1 million for payment in stock, with tentative delivery of
25,000 shares of common stock at the closing. In January 2001, in accordance
with the provisions of the purchase agreement, the seller returned these shares
and elected to redeem these shares and receive $1 million in U.S. dollars.

Following is unaudited pro forma combined consolidated financial information,
as though the acquisition had occurred on January 1, 1999, (amounts in
thousands, except per share data):

Year ended
December 31,
----------------
1999 2000
------------------------------------------------------------------------------

Net revenues............................................... $ 3,218 $15,575
Net loss................................................... $(2,252) $(6,553)
Basic and diluted weighted average net loss per share...... $ (0.30) $ (0.49)

The pro forma net losses include amortization of goodwill and purchased
intangibles of approximately $500,000 and $208,000 for each of the years ended
December 31, 1999 and 2000, respectively. This

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

F-22

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

unaudited pro forma combined consolidated financial information is presented
for illustrative purposes only and is not necessarily indicative of the
consolidated results of operations in future periods or the results that
actually would have been realized.

15. SUBSEQUENT EVENT (UNAUDITED):

In March 2001, the Company granted a senior executive an option to purchase
300,000 shares of common stock exercisable with a promissory note. These
options were exercised at the time of grant and the Company recorded a note
receivable and a reduction in shareholder's equity. The note bears interest at
5.07% per annum and is due on the earlier of March 22, 2006 or the first
anniversary of the termination of services. The note is secured by the
underlying stock and is with full recourse. The Company has imputed interest on
the note in excess of the stated interest rate and has recorded a corresponding
discount. This imputed interest will be recognized over the four year vesting
term of the stock (which is subject to a right of repurchase) as additional
compensation expense. The deemed market rate on the note is 10%. The Company
records interest income at the deemed market rate. All interest is due upon
maturity of the note. In June 2001, the Company granted to two directors of the
Company options to purchase 50,000 shares of common stock exercisable with a
promissory note. These options were exercised in December 2001. The notes bear
interest at 5.07 percent per annum and become payable in full upon the earlier
of December 11, 2006 or the first anniversary of the termination of services
with the Company. These notes will be accounted for at the same deemed market
rate and in the same manner as the note received in March 2000.

In March 2001, the Company entered into an agreement with an Internet music
service provider for exclusive marketing and promotion space. The agreement
requires the Company to pay $1.1 million over 12 months and provide a $600,000
standby line of credit. In September 2001, the Company expensed $550,000 as
they do not believe the asset to be realizable.

In June 2001, the Company restructured the business and incurred $850,000 in
severance and office closures costs. As of September 30, 2001 $449,000 has been
accrued for future expenses related to the restructuring.

As of
As of June 30, September 30,
2000 2001
-------------------------------------------------------------------------------
(unaudited) (unaudited)

Severance........................................ $ 31 $ 2
Office Closures.................................. 488 447
---- ----
Total...................................... $519 $449
==== ====

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

F-23

INTERVIDEO, INC.
- --------------------------------------------------------------------------------

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
Formosoft International Inc.:

We have audited the accompanying balance sheets of the Audio/Video Products
Division of Formosoft International Inc. as of December 31, 1998 and 1999, and
the related statements of operations and comprehensive loss and cash flows for
the period from April 14, 1998 (date of incorporation), to December 31, 1998,
and for the year ended December 31, 1999. These financial statements are the
responsibility of the Formosoft International Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Audio/Video Products
Division of Formosoft International, Inc.as of December 31, 1998 and 1999, and
the results of its operations and comprehensive loss and its cash flows for the
period from April 14, 1998 (date of incorporation), to December 31, 1998, and
for the year ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.

TN SOONG & CO.
A Member Firm of Andersen Worldwide, SC

Taipei, Taiwan, the Republic of China,
March 19, 2001

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

F-24

AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC.
- --------------------------------------------------------------------------------

BALANCE SHEETS
(in thousands of U.S. dollars)

December 31,
------------ June 7,
1998 1999 2000
- -----------------------------------------------------------------------------------
ASSETS (unaudited)

Current Assets:
Accounts receivable................................ $ 24 $ -- $ 20
Related-party receivable: Formosa.................. -- 47 26
Inventory.......................................... 15 4 3
----- ----- -----
Total current assets............................ 39 51 49
Computer Equipment, net................................ 15 17 19
OTHER ASSETS: Deferred pension cost.................... 3 -- --
----- ----- -----
Total assets.................................... $ 57 $ 68 $ 68
===== ===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes and accounts payable......................... $ 7 $ 22 $ 10
Accrued expenses and other current liabilities..... 34 68 59
----- ----- -----
Total current liabilities....................... 41 90 69
Accrued Pension Cost................................... 3 6 10
Parent's Equity In Division............................ 174 464 600
----- ----- -----
Total liabilities............................... 218 560 679
----- ----- -----
Shareholders' Equity:
Foreign currency translation adjustments........... (6) (19) (30)
Accumulated deficit................................ (155) (473) (581)
----- ----- -----
Total shareholders' equity...................... (161) (492) (611)
----- ----- -----
Total liabilities and shareholders' equity...... $ 57 $ 68 $ 68
===== ===== =====

The accompanying notes are an integral part of these statements.

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

F-25

AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC.
- --------------------------------------------------------------------------------

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands of U.S. dollars)

For the period
from
April 14,1998, For the year For the period
to ended from
December 31, December 31, January 1, 2000,
1998 1999 to June 7, 2000
- ---------------------------------------------------------------------------------------------------

Sales............................................. $ 27 $ 182 $ 149
Cost of Sales..................................... -- (13) (1)
----- ----- -----
Gross profit............................... 27 169 148
----- ----- -----
Operating Expenses:
Research and development...................... 102 275 138
Selling, general, and administrative.......... 114 211 116
----- ----- -----
Total operating expenses................... 216 486 254
----- ----- -----
Loss from operations....................... (189) (317) (106)
----- ----- -----
Nonoperating Income (Loss):
Foreign currency exchange loss................ -- (1) (2)
Subsidy income................................ 34 -- --
----- ----- -----
Total nonoperating income (loss), net...... 34 (1) (2)
----- ----- -----
Net loss................................ (155) (318) (108)
Other Comprehensive Loss:
Foreign currency translation adjustments...... (6) (13) (11)
----- ----- -----
Comprehensive loss......................... $(161) $(331) $(119)
===== ===== =====

The accompanying notes are an integral part of these statements.

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

F-26

AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC.
- --------------------------------------------------------------------------------

STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)

For the period For the period
from For the year from
April 14, 1998, ended January 1,2000,
to December 31, December 31, to June 7, 2000
1998 1999 (unaudited)
- ----------------------------------------------------------------------------------------------------------------------

Operating Activities:
Net loss......................................................... $(155) $(318) $(108)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.................................................. 3 8 9
Accrued pension cost.......................................... -- 6 4
Changes in operating assets and liabilities:
Accounts receivable........................................ (24) 24 (20)
Accounts receivable: related parties....................... -- (47) 21
Inventories................................................ (15) 11 1
Notes and accounts payable................................. 7 15 (12)
Accrued expenses and other current liabilities............. 34 34 (9)
----- ----- -----
Net cash used in operating activities................... (150) (267) (114)
----- ----- -----
Investing and Financing Activities:
Working capital from owner....................................... 174 290 136
Acquisitions of computer equipment............................... (17) (12) (10)
----- ----- -----
Net cash provided by investing and financing
activities............................................. 157 278 126
----- ----- -----
Effects of Change in Exchange Rate on Cash........................... $ (7) $ (11) $ (12)
===== ===== =====
Net Change in Cash................................................... $ -- $ -- $ --
===== ===== =====

The accompanying notes are an integral part of these statements.

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

F-27

AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC.
- --------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS

1. GENERAL:

Business
On June 7, 2000, InterVideo Inc. acquired theAudio/Video Products Division
(AVPD) of Formosoft International Inc. (Formosoft) in Taiwan in exchange for a
cash payment of $3.2 million. The acquisition consisted of AVPD's business,
including information equipment, intellectual property rights and products, and
customers. AVPD's business was integrated with the businesses of Formosoft;
consequently, the financial statements have been derived from the financial
statements and accounting records of Formosoft and reflect significant
assumptions and allocations. Moreover, AVPD relied on Formosoft and its other
businesses for administrative, management, research, and other services.
Accordingly, the financial statements do not necessarily reflect the financial
position, results of operations, and cash flows of AVPD had it been a
stand-alone company.

AVPD is a developer of audio and video coding and decoding technologies. It
develops and sells software that encodes, transcodes, and decodes digital audio
and video data on a real-time basis. AVPDwas established at the same time when
Formosoft was incorporated on April 14, 1998, and released its first software,
GAMUT98, in August 1998, then its second-generation product, GAMUT2000, in
February 2000.

2. BASIS OF PRESENTATION:

AVPD's financial statements were "carved out" from the financial statements and
accounting records of Formosoft using the historical results of operations and
historical basis of assets and liabilities of AVPD's business activities.
Management believes that the assumptions underlying the financial statements
are reasonable. However, the financial statements included herein may not
necessarily reflect what AVPD's results of operations, financial position, and
cash flows would have been had AVPD been a stand-alone company during the
periods presented. Because a direct ownership relationship did not exist among
all the various divisions comprising Formosoft, Formosoft's net investment in
AVPD is shown as "working capital from owner" in lieu of shareholders' equity
in the financial statements.

The financial statements include allocations of certain Formosoft expenses,
assets, and liabilities, including the items described below.

Costs of centralized general expenses
Centralized general expenses are allocated based on headcounts for the
respective periods and are reflected in selling, general and administrative,
and research and development expenses. The general corporate expense allocation
is primarily for cash management, rent, utilities, accounting, insurance,
public relations, advertising, human resources, and data services. Management
believes that costs of these services charged to AVPD are a reasonable
representation of the costs that would have been incurred if AVPD had performed
these functions as a stand-alone company.

Basic research
Research and development expenses were allocated based on the number of
individuals conducting the research and development for AVPD. Management
believes that the costs of this research charged to AVPD are a reasonable
representation of the costs that would have been incurred if AVPD had performed
this research as a stand-alone company. Following the acquisition by
InterVideo, Inc., AVPD will satisfy its basic research requirements using its
own resources or through purchased services.

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

F-28

AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC.
- --------------------------------------------------------------------------------

Sales and cost of sales
Sales and costs of sales are clearly identifiable as applicable to AVPD's
business.

Income tax
Income taxes are calculated as if AVPD was a stand-alone legal entity.

Pension costs
These costs are allocated based on AVPD's active employee population for each
of the years presented.

Cash and accounts receivable and payable
Formosoft uses a centralized approach to cash management. As a result,
Formosoft's cash, cash equivalents, or short-term investments have not been
allocated in AVPD's financial statements. Receivables and payables in the
financial statements are directly related to sales and purchases made by AVPD.
No allowance for doubtful accounts was recorded in any period presented.
Changes in investing and financing activities represent any funding required
from Formosoft for working capital and acquisition or capital expenditure
requirements.

3. ACCOUNTING POLICIES:

Unaudited interim financial statements
The interim financial information contained herein for the period from January
1, 2000, to June 7, 2000, is unaudited but, in the opinion of management,
reflects all adjustments that are necessary for a fair presentation of the
financial position, results of operations, and cash flows for the period
presented. All adjustments are of a normal, recurring nature. Results of
operations for interim periods presented herein are not necessarily indicative
of results of operations for the entire year.

Use of estimates
Formosoft maintains its accounting books and records in conformity with
accounting principles generally accepted in the Republic of China (ROC). The
accompanying financial statements of AVPD have been "carved out" from the
financial statements and accounting records of Formosoft and were then prepared
to reflect its financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States,
which require management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.

Concentration of credit risk
Financial instruments that potentially subject AVPD to a concentration of
credit risk consist primarily of accounts receivable. To mitigate this risk,
AVPD performs ongoing credit evaluations of its customers' financial condition
and maintains an allowance for doubtful accounts receivable based upon review
of the expected collectibility of individual accounts receivable.

Fair value of financial instruments
AVPD's financial instruments, including accounts receivable and notes and
accounts payable, are carried at cost, which approximates fair value because of
the short-term maturity of these instruments.

Inventories
Inventories consist solely of finished goods and are stated at the lower of
weighted-average cost or market value. Market value represents net realizable
value.

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

F-29

AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC.
- --------------------------------------------------------------------------------

Computer equipment
Computer equipment is stated at cost less accumulated depreciation. The
equipment is depreciated using the straight-line method based on estimated
useful lives of over three years.

Asset impairment
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,"
requires recognition of impairment of long-lived assets in the event the net
book value of these assets exceeds the future undiscounted cash flows
attributable in use to these assets. Management reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. No impairment losses have been recorded
in any period presented.

Revenue recognition
AVPD generates software revenues mainly from product licensing fees. Revenue
from products licensed to original equipment manufacturers (OEMs) based on the
number of sales by the OEMs is recorded when the OEMs ship the licensed
products. Revenue from periodic software licenses, under which fees are paid on
a recurring, periodic basis, is generally recognized ratably over the
respective license periods. Revenue from packaged product sales to and through
distributors and resellers is recorded when related products are shipped,
provided that the license agreement has been signed, there are no uncertainties
surrounding product acceptance, the fees are fixed and determinable, and
collection is considered probable.

In December 1999, the United States Securities Exchange Commission (U.S. SEC)
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements.'' SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria for when revenue is generally realized and
earned. AVPD's revenue recognition policies are fully compliant with SAB No.
101 for all periods presented.

Research and development
Research and development costs are expensed as incurred. In accordance with
SFAS No. 86, AVPD has evaluated the establishment of technological feasibility
of its various products during the development phase. Due to dynamic changes in
the market, AVPD has concluded that it cannot determine, with any reasonable
degree of accuracy, technological feasibility until the development phase of
the project is nearly complete. The time period during which costs could be
capitalized from the point of reaching technological feasibility until the time
of general product release is generally very short, and consequently, the
amount that could be capitalized pursuant to SFAS No. 86 is not material to
AVPD's financial position or results of operations. Therefore, AVPD charges all
research and development expenses to operations in the period incurred.

Pension costs
Employees of AVPD are included in the Formosoft defined benefit pension plan.
The plan covers all regular employees, and provides benefits based on length of
service and salary levels upon retirement. Pension costs, including services
costs, interest costs, projected return on plan assets, and amortization, are
recorded on the basis of actuarial calculations in accordance with SFAS No. 87,
"Employers' Accounting for Pension." Under SFAS No. 87, Formosoft recognizes a
minimum pension liability equivalent to the unfunded accumulated benefit
obligation. AVPD has been allocated its share of this pension liability based
upon its employee population.

Advertising costs
Advertising costs are expensed as incurred. Advertising expense was $8,000 in
1998, $15,000 in 1999, and $160 (unaudited) for theperiod ended June 7, 2000.

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

F-30

AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC.
- --------------------------------------------------------------------------------

Income tax
Formosoft is subject to income tax in the ROC. Therefore, the income tax of
AVPD was calculated based on a separate tax return basis subject to income tax
in the ROC. The asset and liability approach is used to recognize deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities. A valuation allowance was provided for these deferred income tax
assets because of the uncertainty surrounding the realizability of such amounts.

Subsidy income
AVPD received subsidy income from the Institute for Information Industry (III),
a bureau of the ROC government, for qualified software development projects
upon review and approval by III. The subsidy contract period was from July 1,
1998, to November 30, 1998. AVPD recognized subsidy income ratably over the
term of the agreement. All related income was received in 1998.

Foreign currency translations
The functional currency of AVPD is the local currency, the New Taiwan dollar.
Thus, foreign currency transactionsare recorded in New Taiwan dollars at the
rates of exchange in effect when the transactionsoccur. Gains or losses,
resulting from the application of different foreign exchange rates when cash in
a foreign currency is converted into New Taiwan dollars or when foreign
currency receivables and payables are settled, are credited or charged to
income in the year of conversion or settlement. At year-end, the balances of
foreign currency assets and liabilities are restated based on prevailing
exchange rates, and any resulting gains or losses are credited or charged to
income.

The financial statements of AVPD are translated into U.S. dollars at the
following exchange rates: (a) assets and liabilities--current rate and (b)
income and expenses--weighted-average rate during the year. The resulting
translation adjustment is recorded as a separate component of shareholders'
equity.

Comprehensive loss
AVPD adopted the provisions of SFAS No. 130 "Reporting Comprehensive Income."
Comprehensive income, as defined, includes all changes in equity during a
period from nonowner sources. To date, a foreign currency translation
adjustment is the only income component required to be reported in other
comprehensive loss for AVPD.

4. COMPUTER EQUIPMENT, NET
(amounts in thousands of US dollars):

December 31,
------------ June 7,
1998 1999 2000
- ---------------------------------------------------------------------------
(unaudited)

Computer equipment
Cost.......................................... $18 $28 $36
Accumulated depreciation...................... 3 11 17
--- --- ---
$15 $17 $19
=== === ===

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

F-31

AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC.
- --------------------------------------------------------------------------------

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
(amounts in thousands of U.S. dollars):

December 31,
------------ June 7,
1998 1999 2000
- ---------------------------------------------------------------------------
(unaudited)

Salaries and bonus............................... $34 $65 $58
Others........................................... -- 3 1
--- --- ---
$34 $68 $59
=== === ===

6. RETIREMENT PLAN:

Employees of AVPD are included in the Formosoft defined benefit pension plan.
The plan covers substantially all of the employees in AVPD. Future retirement
payments are based on the employee's salary level upon retirement and length of
service with Formosoft. At the end of each year, an actuarial calculation is
prepared in accordance with SFAS No. 87, "Employers' Accounting for Pensions."
Based on this calculation, Formosoft transferred funds to the Central Trust of
China, a government institution, equal to the projected benefit obligation. The
plan was not funded at June 7, 2000. Accordingly, pension costs of $6,000 and
$4,000 (unaudited) attributable to AVPD wererecorded for the year ended 1999
and for the period ended June 7, 2000, respectively.

7. INCOME TAX:

No provision for income taxes has been recorded for any period presented, as
AVPD has incurred net operating losses for tax purposes.

Deferred tax assets and liabilities consist of the following (amounts in
thousands of U.S. dollars):

December 31,
----------- June 7,
1998 1999 2000
- ----------------------------------------------------------------------------
(unaudited)

Net operating loss carryforwards................. $ 31 $ 95 $ 116
Valuation allowance.............................. (31) (95) (116)
---- ---- -----
$ -- $ -- $ --
==== ==== =====

AVPD provides a valuation allowance for deferred tax assets when it is more
likely than not that some portion or all of the net deferred tax assets will
not be realized. Based on a number of factors (a lack of a history of profits;
the market in which AVPD competes is intensely competitive; the industry is
characterized by rapidly changing technology), management believes that there
is sufficient uncertainty regarding the realization of deferred tax assets that
a full valuation allowance is appropriate.

These operating loss carryforwards are available to offset future taxable
income and expire from 2003 to 2005 as if AVPD was a stand-alone legal entity.

8. RELATED-PARTY TRANSACTIONS:

Sales made by AVPD to Formosa Industrial Computing, Inc. (Formosa), a
shareholder and director of Formosoft, for the year ended December 31, 1999,
and for the period ended June 7, 2000, amounted to $117,000 and $49,000
(unaudited), respectively. Since no other bundle contracts were signed by AVPD
other than Formosa, market prices are not available for comparison.

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

F-32

AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC.
- --------------------------------------------------------------------------------

9. SEGMENT INFORMATION:

AVPD is engaged in a single industry segment--the development and marketing of
audio and video coding and decoding software products. AVPD's revenues are all
from ROC. Major customers that accounted for more than 10 percent of total
revenues are as follows (amounts in thousands of U.S. dollars):

Years ended December 31,
------------------------------ Period ended
1998 1999 June 7, 2000
-------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------
(unaudited)

Customers:
Softchina................. $22 79% $ 22 12% $20 13%
Formosa................... -- -- 117 64 49 33
Hsing-Tech................ -- -- 30 16 78 52

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

F-33

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

Unaudited Pro Forma Condensed Combined Financial Statements

Basis of Presentation

In the opinion of our management, all adjustments necessary to fairly present
this pro forma information have been made. The unaudited Pro Forma Condensed
Combined Financial Statements are based upon, and should be read in connection
with, the historical financial statements of InterVideo, Inc. and AVPD, and the
respective notes to such financial statements presented elsewhere in this
Prospectus.

AVPD was acquired by InterVideo, Inc. on June 7, 2000 in a transaction
accounted for as a purchase. The unaudited Pro Forma Condensed Combined
Statements of Operations for the year ended
December 31, 2000 are presented as if InterVideo, Inc. had completed the
acquisition of AVPD as of January 1, 2000.

Year Ended December 31, 2000
- ---------------------------------------------------------------------------------------------------------
InterVideo, Inc.
Unaudited Pro Forma Condensed Combined Statement InterVideo, Pro Forma Pro Forma
of Operations Inc. AVPD Adjustments (a) Combined
- ---------------------------------------------------------------------------------------------------------
(amounts in thousands, except share and per share data)

Revenue................................ 15,426 149 15,575
Cost of revenue........................ (5,189) (1) (5,190)
Gross profit........................... 10,237 148 10,385
Operating expenses:
Research and development............ 6,876 138 208 7,222
Selling and marketing............... 5,033 5,033
General and administrative........... 2,667 116 2,783
Stock Compensation.................. 1,411 1,411
Special Charges..................... -- --
Total operating expense................ 15,987 254 208 16,449
Loss from operations................... (5,750) (106) (208) (6,064)
Other income (expense)................. (557) (2) (555)
Income taxes........................... (552) (552)
Net loss............................... (5,745) (108) (208) (6,061)
Net loss per share:
Basic and diluted...................... (2.19) (2.31)
Weighted average number of
common shares outstanding:
Basic and diluted...................... 2,625 2,625

- --------
(a) Represents the amortization of goodwill of $208 that would have been
recorded for the period from January 1, 2000 to June 7, 2000, if the
acquisition of AVPD occurred on January 1, 2000. Goodwill is amortized on a
straight-line basis over a period of five years. No other significant fair
value purchase price adjustments were recorded in connection with the
acquisition of AVPD.

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

F-34

Part II
- --------------------------------------------------------------------------------

INFORMATION NOT REQUIRED IN PROSPECTUS

Unless otherwise defined, all capitalized terms contained in this Part II shall
have the meanings ascribed to them in the prospectus which forms a part of this
registration statement. InterVideo is sometimes referred to in this Part II as
the "registrant."

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by the registrant in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.

Securities and Exchange Commission registration fees....... $12,369
NASD filing fee............................................ 5,675
Printing and engraving expenses............................
Legal fees and costs.......................................
Accounting fees and costs..................................
Nasdaq National Market listing fees........................
Transfer agent and registrar fees and expenses.............
Miscellaneous expenses.....................................
-------
Total................................................... $
=======

Item 14. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article IX of the registrant's
Amended and Restated Certificate of Incorporation (Exhibit 3.2 hereto) and
Article IX of the registrant's Amended and Restated Bylaws (Exhibit 3.4 hereto)
provide for indemnification of the registrant's directors, officers, employees
and other agents to the extent and under the circumstances permitted by the
Delaware General Corporation Law. The registrant intends to enter into
agreements with its directors and officers that will require the registrant,
among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as director or officers to the
fullest extent not prohibited by law. The underwriting Agreement (Exhibit 1.1)
provides for indemnification by the underwriters of the registrant, its
directors and officers, and by the registrant of the underwriters, for certain
liabilities, including liabilities arising under the Act and affords certain
rights of contribution with respect thereto.

Item 15. Recent Sales of Unregistered Securities.

Since December 31, 1998, we have sold and issued the following unregistered
securities:

(1) From March 1999 to December 2001, we have granted stock options to purchase
an aggregate of 9,043,400 shares of common stock at exercise prices ranging
from $0.05 to $2.20 per share to employees, consultants, directors and other
service providers pursuant to our 1998 Plan and pursuant to options granted
outside of the 1998 Plan, which options total 218,750 shares. The options
issued outside of the 1998 Plan were issued at exercise prices ranging from
$0.05 to $0.25 per share to consultants to us.

(2) From May to August 1999, we sold an aggregate of 2,000,000 shares of Series
C preferred stock to 39 outside investors at a price of $2.00 per share for an
aggregate purchase price of $4,000,000.

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

II-1

Part II
- --------------------------------------------------------------------------------

(3) From April 2000 to May 2000, we sold an aggregate of 4,188,750 shares of
Series D preferred stock to 70 outside investors at a price of $4.00 per share
for an aggregate purchase price of $16,655,000. All shares of the preferred
stock are convertible into shares of common stock at the rate of one share of
common stock for each share of preferred stock outstanding.

The sales and issuances of securities described in paragraph (1) above were
exempt from registration under Section 4(2) of the Securities Act by virtue of
Rule 701 promulgated thereunder in that they were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701. The sale and
issuance of securities described in paragraphs (2) and (3) above were exempt
from registration under the Securities Act by virtue of Section 4(2) of the
Securities Act, Regulation D and Regulation S promulgated thereunder.

Item 16. Exhibits and Financial Statements Schedules.

(a) Exhibits

Exhibit
Number Description
- ----------------------------------------------------------------------------------------------------------------

1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation, to be effective upon the reincorporation.
3.2* Amended and Restated Certificate of Incorporation, to be effective upon consummation of this offering.
3.3* Bylaws, to be effective upon the reincorporation.
3.4* Amended and Restated Bylaws, to be effective upon consummation of this offering.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati.
10.1 Registrant's 1998 Stock Option Plan and form of option agreement.
10.2* Registrant's 2002 Stock Plan and form of option agreement.
10.3* Registrant's 2002 Employee Stock Purchase Plan and form of subscription agreement.
10.4* Form of Directors and Officers' Indemnification Agreement.
10.5 Investor Rights Agreement, dated July 2, 1999, as amended, by and among the Registrant and the parties
who are signatories thereto.
10.6*+ Digital Audio System License Agreement between the Registrant and Dolby Laboratories Licensing
Corporation dated March 4, 1999.
10.7*+ CSS License Agreement between the Registrant and DVD Copy Control Association dated December 22,
2000.
10.8 Lease Agreement between the registrant and ProLogis Limited Partnership-1, dated December 7, 2000.
10.9 Employment offer letter with Randy Bambrough.
10.10 Form of Nonstatutory Stock Option Agreement for grants to Joe Liu and George Haber.
10.11 Nonstatutory Stock Option Agreement for Henry Shaw.
10.12* Form of Promissory Notes issued by George Haber, Joe Liu and Randall Bambrough.
10.13* Common Stock Purchase Agreement with Honda Shing, dated May 15, 1998.
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen.
23.2 Consent of TN Soong & Co.
23.3* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
24.1 Power of Attorney. Reference is made to Page II-4.

- --------
* To be filed by amendment.
+ Confidential treatment to be requested for a portion of this agreement.

(b) Financial Statement Schedules.

Schedules other than those referred to above have been omitted because they are
not applicable or not required or because the information is included elsewhere
in the Financial Statements or the notes thereto.

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

II-2

Part II
- --------------------------------------------------------------------------------

Item 17. Undertakings.

The undersigned registrant hereby undertakes to provide to the underwriters at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

The undersigned hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

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

II-3

Part II
- --------------------------------------------------------------------------------

Signatures

Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, State of
California, on January 11, 2002.

INTERVIDEO, INC.

By: /S/ STEVE RO
-----------------------------------
Steve Ro, President

Power of Attorney

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Steve Ro and Randall Bambrough, or either of
them, his or her true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Registration
Statement, and any registration statement relating to the offering covered by
this Registration Statement and filed pursuant to Rule 462(b) under the
Securities Act of 1933 and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons on January 11, 2002 in the capacities
indicated.

Signature Title
-----------------------------------------------------------------------

/S/ STEVE RO President, Chief Executive Officer and Director
--------------------- (Principal Executive Officer)
Steve Ro

/S/ RANDALL BAMBROUGH Chief Financial Officer (Principal Financial and
--------------------- Accounting Officer)
Randall Bambrough

/S/ HENRY SHAW Director
---------------------
Henry Shaw

/S/ ELI STERNHEIM Director
---------------------
Eli Sternheim

/S/ GEORGE HABER Director
---------------------
George Haber

/S/ JOSEPH LIU Director
---------------------
Joseph Liu

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

II-4

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

Exhibit index

Exhibit
Number Description
- ---------------------------------------------------------------------------------------------------------------

- --------
* To be filed by amendment.
+ Confidential treatment to be requested for a portion of this agreement.

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