EXECUTIVE OVERVIEW

Our Company

We are a leading provider of digital media content-creation solutions for film, video, audio and broadcast professionals, as well as artists and home enthusiasts. Our mission is to inspire passion, unleash creativity and enable our customers to realize their dreams in a digital world. Anyone who enjoys movies, television or music has almost certainly experienced the work of content creators who use our solutions to bring their creative visions to life. Around the globe, feature films, primetime television shows, commercials and chart-topping music hits are made using one or more of our solutions.

We have customers throughout the world who rely on us to develop products tailored to their unique needs and requirements that will allow their businesses to succeed. For their long-term success and our own, we committed in 2008 to becoming a more efficient, innovative and customer-centric company. We initiated a significant transformation of our business that included, among other things, establishing a new management team, developing a new corporate strategy, restructuring our internal organization, improving operational efficiencies, divesting non-core product lines and reducing the size of our workforce. We have established a strategic and organizational foundation from which we are positioned to build momentum in our core business and expand our operating margins with the ultimate goal of sustainable growth.

We have traditionally operated our company as three business units, Professional Video, Audio and Consumer Video, with each corresponding to a reportable segment. As part of our transformation, we transitioned to a new business unit and reporting model on January 1, 2009. This new model, which includes a single customer-facing organization, better aligns us with the realities of many of our customers who either depend on, or would benefit from, an integrated solution that encompasses multiple Avid product and brand families. It also enables us to leverage our deep domain expertise, brand recognition and technology synergies across customer market segments. Although this transition represents a significant change to the way we operate our business, because we did not fully implement it until the beginning of 2009, we are reporting our financial results in this annual report with reference to our three traditional reportable segments to reflect the way we operated in 2008. Our full assessment of the reporting model to be used starting in 2009 is not yet complete.

Financial Summary



The following table sets forth certain items from our consolidated statements of
operations as a percentage of net revenues for the periods indicated:



                                                    For the Year Ended December 31,
                                                  2008              2007          2006
Product revenues                                  84.5 %            86.7 %       88.8 %
Services revenues                                 15.5 %            13.3 %       11.2 %
Total revenues                                   100.0 %           100.0 %      100.0 %

Cost of revenues                                  53.6 %            51.7 %       51.2 %
Gross profit                                      46.4 %            48.3 %       48.8 %
Operating expenses:
Research and development                          17.6 %            16.2 %       15.5 %
Marketing and selling                             24.7 %            22.7 %       22.4 %
General and administrative                         9.3 %             8.3 %        6.9 %
Amortization of intangible assets                  1.5 %             1.5 %        1.6 %
Impairment of goodwill and intangible assets      15.4 %               -          5.8 %
Restructuring costs, net                           3.0 %             1.0 %        0.3 %
In-process research and development                  -                 -          0.1 %
Gain on sale of assets                            (1.6 %)              -            -
Total operating expenses                          69.9 %            49.7 %       52.6 %
Operating loss                                   (23.5 %)           (1.4 %)      (3.8 %)
Interest and other income (expense), net           0.3 %             0.8 %        0.8 %
Loss before income taxes                         (23.2 %)           (0.6 %)      (3.0 %)
Provision for income taxes                         0.3 %             0.3 %        1.7 %
Net loss                                         (23.5 %)           (0.9 %)      (4.7 %)

Total net revenues for the year ended December 31, 2008 were $844.9 million, a decrease of $84.7 million, or 9%, compared to the year ended December 31, 2007. Compared to 2007, Professional Video revenues decreased 10%, Audio revenues decreased 8% and Consumer Video revenues decreased 10%. The revenues of each business unit are discussed in further detail in the section titled "Results of Operations" below.

For the year ended December 31, 2008, we incurred a net loss of $198.2 million, compared to a net loss of $8.0 million for 2007. The net loss for 2008 includes charges of $130.0 million for impairment of acquisition-related goodwill and intangible assets, $20.4 million of acquisition-related costs for intangible asset amortization expenses and $27.3 million of restructuring costs. The net loss for 2007 includes $30.6 million of acquisition-related intangible amortization costs and $13.7 million of restructuring costs. The increases in impairment and restructuring costs in 2008 were partially offset by gains totaling $13.3 million related to product line divestitures.

The 2008 charges of $130.0 million for impairment of acquisition-related goodwill and intangible assets was composed of goodwill impairment losses of $54.6 million and $64.3 million for our Consumer Video and Audio segments, respectively, and impairment losses for Consumer Video intangible assets of $11.1 million. See Note G to our Consolidated Financial Statements in Item 8 for further information regarding our 2008 impairment losses.

In November 2008, we sold our Softimage 3D animation product line, which was part of our Professional Video segment, to Autodesk, Inc. We received $26.5 million of the $33.5 million dollar purchase price in the fourth quarter of 2008, with the remaining balance to be held in escrow with scheduled distribution dates in 2009 and 2010. We recognized a gain of approximately $11.5 million as a result of this transaction, which does not include the proceeds held in escrow. This product line accounted for approximately $10.7 million of our 2008 revenues.

During 2008, we initiated restructuring plans that included reductions in force of approximately 600 positions, including employees related to our divested product lines, and the closure of five small facilities. The restructuring plan is intended to improve operational efficiencies. In connection with these plans, we recorded restructuring charges of $24.4 million related to employee termination costs and $0.7 million for the facilities closures. In addition, as a result of our decision to divest our PCTV product line, we recorded a non-cash restructuring charge of $1.9 million in cost of revenues related to the write-down of inventory. We expect annual cost savings of approximately $55 million to result from actions taken under these restructuring plans.

During the first quarter of 2008, we used $93.2 million in cash to repurchase 4,254,397 shares of our common stock. No additional shares of our common stock were repurchased during the remainder of 2008. At December 31, 2008, we had authorization from our board of directors for additional repurchases of up to $80.3 million.

We derive a significant percentage of our revenues from sales to customers outside the United States. International sales accounted for 61% of our consolidated net revenues in 2008, compared to 58% and 57% of our consolidated net revenues for 2007 and 2006, respectively. Our international business is, for the most part, transacted through international subsidiaries and generally in the currency of the customers. Changes in foreign currency exchange rates could materially affect, either positively or adversely, our revenues, net income and cash flow.

A significant portion of our operating expenses are fixed in the short term, and we plan our expense run rate based on our expectations of future revenues. In addition, a significant percentage of our sales transactions are completed during the final weeks or days of each quarter, and, therefore, we generally do not know whether revenues have met our expectations until after the end of the quarter. If we have a shortfall in revenues in any given quarter, there is an immediate effect on our overall earnings.

See "Risk Factors" in Item 1A of this annual report for additional risk factors that may cause our future results to differ materially from our current expectations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We regularly reevaluate our estimates and judgments, including those related to revenue recognition and allowances for product returns and exchanges; stock-based compensation; allowances for bad debts and reserves for recourse under financing transactions; the valuation of inventories, business combinations, and goodwill and other intangible assets; divestitures; fair value measurements; and income tax assets. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and involve our most difficult and subjective estimates and judgments.

We generally recognize revenues from sales of software and software-related products upon receipt of a signed purchase order or contract and product shipment to distributors or end users, provided that collection is reasonably assured, the fee is fixed or determinable and all other revenue recognition criteria of Statement of Position, or SOP, 97-2, Software Revenue Recognition, as amended, are met. We often receive multiple purchase orders or contracts from a single customer or a group of related parties that are evaluated to determine if they are, in effect, parts of a single arrangement. If they are determined to be parts of a single arrangement, revenues are recorded as if a single multiple-element arrangement exists. In addition, for certain transactions where our services are non-routine or essential to the delivered products, we record revenues upon satisfying the criteria of SOP 97-2 and obtaining customer acceptance. Within our Professional Video segment, our Consumer Video segment and much of our Audio segment, we follow the guidance of SOP 97-2 for revenue recognition because our products and services are software or software-related. However, for certain offerings in our Audio segment, software is incidental to the delivered products and services. For these products, we record revenues based on satisfying the criteria in Securities and Exchange Commission Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, and Emerging Issues Task Force, or EITF, Issue 00-21, Revenue Arrangements with Multiple Deliverables.

In connection with many of our product sale transactions, customers may purchase a maintenance and support agreement. We recognize revenues from maintenance contracts on a ratable basis over their term. We recognize revenues from training, installation or other services as the services are performed.

We use the residual method to recognize revenues when an order includes one or more elements to be delivered at a future date and evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered element, typically professional services or maintenance, is deferred and the remaining portion of the total arrangement fee is recognized as revenues related to the delivered element. If evidence of the fair value of one or more undelivered elements does not exist, we defer all revenues and only recognize them when delivery of those elements occurs or when fair value can be established. Fair value is typically based on the price charged when the same element is sold separately to customers. However, in certain transactions, fair value of maintenance is based on the renewal price that is offered as a contractual right to the customer, provided that the renewal price is substantive. Our current pricing practices are influenced primarily by product type, purchase volume, term and customer location. We review services revenues sold separately and corresponding renewal rates on a periodic basis and update, when appropriate, the fair value for services used for revenue recognition purposes to ensure that it reflects our recent pricing experience.

In most cases, the products we sell do not require significant production, modification or customization of software. Installation of the products is generally routine, requires minimal effort and is not typically performed by us. However, certain transactions for our Professional Video products, typically complex solution sales that include a significant number of products and that may involve multiple customer sites, require us to perform an installation effort that we deem to be complex and non-routine. In these situations, we do not recognize revenues for either the products shipped or the installation services until the installation is complete. In addition, if these orders include a customer acceptance provision, no revenues are recognized until the customer's acceptance of the products and services has been received or the acceptance period has lapsed.

Technical support, enhancements and unspecified upgrades typically are provided at no additional charge during the product's initial warranty period (generally between 30 days and twelve months), which precedes commencement of the maintenance contracts. We defer the fair value of this support period and recognize the related revenues ratably over the initial warranty period. We also from time to time offer certain customers free upgrades or specified future products or enhancements. For each of these elements that is undelivered at the time of product shipment, and provided that we have vendor-specific objective evidence of fair value for the undelivered element, we defer the fair value of the specified upgrade, product or enhancement and recognize those revenues only upon later delivery or at the time at which the remaining contractual terms relating to the upgrade have been satisfied.

In 2008, approximately 70% of our revenues were derived from indirect sales channels, including authorized resellers and distributors. Within our Professional Video segment, our resellers and distributors are generally not granted rights to return products to us after purchase, and actual product returns from them have been insignificant to date. However, distributors of our Media Composer software and Avid Mojo products have a contractual right to return a percentage of

A portion of our revenues from sales of consumer products is derived from transactions with channel partners who have unlimited return rights and from whom payment is contingent upon the product being sold through to their customers. Accordingly, revenues for these channel partners is recognized when the products are sold through to the customer instead of being recognized at the time products are shipped to the channel partners.

From time to time, we offer rebates on purchases of certain products or based on purchasing volume that are accounted for as reductions to revenues upon shipment or expected achievement of purchasing volumes. In accordance with EITF Issue 01-09, Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor's Products), consideration given to customers or resellers under the rebate program is recorded as a reduction to revenues because we do not receive an identifiable benefit that is sufficiently separable from the sale of our products.

At the time of a sales transaction, we make an assessment of the collectibility of the amount due from the customer. Revenues are recognized only if it is probable that collection will occur in a timely manner. In making this assessment, we consider customer credit-worthiness and historical payment experience. If it is determined from the outset of the arrangement that collection is not probable based on our credit review process, revenues are recognized on a cash-collected basis to the extent that the other criteria of SOP 97-2 and SAB No. 104 are satisfied. At the outset of the arrangement, we assess whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. In assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction, our collection experience in similar transactions without making concessions, and our involvement, if any, in third-party financing transactions, among other factors. If the fee is not fixed or determinable, revenues are recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. If a significant portion of the fee is due after our normal payment terms, which are generally 30 days, but can be up to 90 days, after the invoice date, we evaluate whether we have sufficient history of successfully collecting past transactions with similar terms. If that collection history is successful, then revenues are recognized upon delivery of the products, assuming all other revenue recognition criteria are satisfied.

We record as revenues all amounts billed to customers for shipping and handling costs and record the actual shipping costs as a component of cost of revenues. We record reimbursements received from customers for out-of-pocket expenses as revenues, with related costs recorded as cost of revenues. We present revenues net of any taxes collected from customers and remitted to a government authority.

Stock-Based Compensation

We account for stock-based compensation in accordance with, SFAS No. 123 (revised 2004), or SFAS 123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. During 2008 and 2007, we granted both restricted stock units and stock options as part of our key performer stock-based compensation program, as well as stock options, restricted stock units and restricted stock to newly hired employees. The vesting of stock option grants may be based on time, performance or market conditions. In the future, we may grant stock awards, options, or other equity-based instruments allowed by our stock-based compensation plans, or a combination thereof, as part of our overall compensation strategy.

The fair values of restricted stock awards with time-based vesting, including restricted stock and restricted stock units, are generally based on the intrinsic values of the awards at the date of grant. As permitted under SFAS No. 123 and SFAS 123(R), we generally use the Black-Scholes option pricing model to estimate the fair value of stock option grants. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. Our assumed

We estimate forfeiture rates at the time awards are made based on historical turnover rates and apply these rates in the calculation of estimated compensation cost. For all stock-based awards for the year ended December 31, 2006 and for most stock-based awards for the year ended December 31, 2007, we applied a 6.5% estimated forfeiture rate. We review historical turnover rates quarterly and update estimated forfeiture rates to be applied to employee classes for the calculation of stock-based compensation. In 2007, based on historical turnover rates, we segregated our non-employee directors into a separate class, and in 2008, we determined that the executive management staff should be segregated from the rest of our employees into a separate class for the calculation of stock-based compensation. As of December 31, 2008, our annualized estimated forfeiture rates were 0% for non-employee director awards, 9% for executive management staff and 10% for all other employee awards. Then-current revised forfeiture rates are also applied quarterly to all outstanding stock options and non-vested restricted stock awards, which may result in a revised estimate of compensation costs related to these stock-based grants. As a result of the application of the changes in forfeiture rates in 2008, we recorded in our results of operations cumulative adjustments that reduced previously recorded stock-based compensation expense of approximately $1.9 million.

In December 2007, we granted a stock option to purchase 625,000 shares of our common stock to our chief executive officer that has vesting based on market conditions or a combination of performance and market conditions. During 2008, we issued to executives additional stock options to purchase 830,000 shares of our common stock and 27,200 restricted stock units, which also have vesting based on market conditions or a combination of performance and market conditions. The compensation costs and derived service periods for all grants with vesting based on market conditions or a combination of performance and market conditions were estimated using the Monte Carlo valuation method. For stock option grants with vesting based on a combination of performance and market conditions, the compensation costs were also estimated using the Black-Scholes valuation method. For restricted stock grants with vesting based on a combination of performance and market conditions, the compensation costs were also estimated using the intrinsic value on the date of grant factored for probability. Compensation costs for these stock option and restricted stock unit grants were recorded based on the higher estimate for each vesting tranche.

If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods, or if we decide to use a different valuation model, the stock-based compensation expense we recognize in future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and earnings per share. It may also result in a lack of comparability with other companies that use different models, methods and assumptions. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. These characteristics are not present in our option grants. Existing valuation models, including the Black-Scholes and Monte Carlo models, may not provide reliable measures of the fair values of our stock-based compensation. See Note B to our Consolidated Financial Statements in Item 8 for further information regarding stock-based compensation.

Allowance for Bad Debts and Reserves for Recourse under Financing Transactions

We maintain allowances for estimated bad debt losses resulting from the inability of our customers to make required payments for products or services. When evaluating the adequacy of the allowances, we analyze accounts receivable balances, historical bad debt experience, customer concentrations, customer credit worthiness and current economic trends. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

We provide third-party lease financing options to some of our customers. We are not generally a party to the leases; however, during the terms of these leases, which are generally three years, we may remain liable for any unpaid principal balance upon default by the customer, but such liability is limited in the aggregate. We record revenues from these transactions upon the shipment of our products because we believe that our collection experience with similar