EXECUTIVE OVERVIEW

Our Company

We create digital audio and video technology used to make the most listened to, most watched and most loved media in the world - from the most prestigious and award-winning feature films, music recordings, television shows, live concert tours and news broadcasts, to music and movies made at home. Some of our most influential and pioneering solutions include Media Composer, Pro Tools, Avid Unity, Interplay, Oxygen 8, Sibelius and Pinnacle Studio. 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.

We operate our business based on the following five customer-centric strategic principles:

• Drive customer success. We are committed to making each and every customer successful. Period. It's that simple.

• From enthusiasts to the enterprise. Whether performing live or telling a story to sharing a vision or broadcasting the news - we create products to support our customers at all stages.

• Fluid, dependable workflows. Reliability. Flexibility. Ease of Use. High Performance. We provide best-in-class workflows to make our customers more productive and competitive.

• Collaborative support. For the individual user, the workgroup, a community or the enterprise, we enable a collaborative environment for success.

• Avid optimized in an open ecosystem. Our products are innovative, reliable, integrated and best-of-breed. We work in partnership with a third-party community resulting in superior interoperability.

We are deeply committed to the long-term success of our company and that of our customers. In 2008, 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.

As part of this transformation, on January 1, 2009 we transitioned to a new business structure that combined our previous Professional Video and Consumer Video business units into a single Video reporting segment and features a single customer-facing organization. The transition to 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. See Note 13 to our unaudited condensed consolidated financial statements included in Item 1 of this report for a summary of our revenues and contribution margin by reportable segment for the three-month periods ended March 31, 2009 and 2008.

We routinely post important information for investors on the Investors page of our website at www.avid.com.

Our revenues for the three months ended March 31, 2009 were $151.6 million, a decrease of 24% compared to the same period last year. By business unit, Video revenues decreased 30% and Audio revenues decreased 12%. Of the $37.5 million decrease in Video revenues, decreases of $15.9 million and $1.6 million for Video product revenues and Video services revenues, respectively, were attributable to divested or exited product lines. Unfavorable currency exchange rates and macroeconomic conditions had a significant negative impact on our first quarter 2009 Video and Audio revenues when compared to the first quarter of 2008. The revenues of each business unit are discussed in further detail in the section titled "Results of Operations" below.

Improvements in our gross margins, coupled with decreased operating expenses, resulted in an improvement in our net loss for the three-month period ended March 31, 2009, compared to the same period in 2008. Our gross margins improved to 48.3% from 46.7% for the same period last year. For the same comparable periods, our overall reduction in operating expenses of $21.7 million, coupled with the improved gross margins, allowed us to reduce our operating loss by 10%. The decrease in our operating expenses was primarily the result of our business transformation, including our product line divestitures and the initiation of a restructuring plan in the fourth quarter of 2008.

The restructuring plan includes a reduction in force of approximately 500 positions, including employees related to our product line divestitures, and the closure of all or parts of some of our worldwide facilities. The restructuring plan is intended to improve operational efficiencies. In connection with this plan, we have incurred or expect to incur total restructuring charges of approximately $30 million, which primarily represent cash expenditures. During the fourth quarter of 2008, we recorded restructuring charges of $22.8 million related to this plan. During the first quarter of 2009, we recorded new restructuring charges totaling $3.6 million under the plan, of which $2.8 million related to the closure of all or part of six facilities and $0.8 million, recorded in cost of revenues, related to the write-down of PCTV inventory. Also during the first quarter of 2009, we recorded revisions to previously recorded restructuring estimates totaling $1.4 million. We expect annual cost savings of approximately $50 million to result from actions taken under this restructuring plan. Cash expenditures resulting from restructuring obligations totaled approximately $9.9 million in the first quarter of 2009.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. However, actual results may differ from these estimates.

We believe that our critical accounting policies are 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, inventories, business combinations, goodwill and intangible assets, divestitures, fair value measurements, and income tax assets. We believe these policies are critical because they are important to the portrayal of our financial condition and results of operations, and they require us to make judgments and estimates about matters that are inherently uncertain. Our critical accounting policies may be found in our 2008 Annual Report on Form 10-K in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Policies and Estimates."

Net Revenues

Our net revenues are derived mainly from sales of computer-based digital, nonlinear media-editing and finishing systems and related peripherals, including shared-storage systems, software licenses, and related professional services and software maintenance contracts.

                                        Three Months Ended March 31, 2009 and 2008
                                                  (dollars in thousands)
                                       % of                          % of
                        2009       Consolidated       2008       Consolidated                % Change
                    Net Revenues   Net Revenues   Net Revenues   Net Revenues    Change     in Revenues
Video:
Product revenues        $ 60,555          39.9%       $ 95,696          48.3%   ($35,141)       (36.7%)
Services revenues         26,947          17.8%         29,331          14.8%     (2,384)        (8.1%)
Total                     87,502          57.7%        125,027          63.1%    (37,525)       (30.0%)

Audio:
Product revenues          63,086          41.6%         72,480          36.5%     (9,394)       (13.0%)
Services revenues          1,041           0.7%            759           0.4%        282         37.2%
Total                     64,127          42.3%         73,239          36.9%     (9,112)       (12.4%)

Total net revenues:     $151,629         100.0%       $198,266         100.0%   ($46,637)       (23.5%)

The decrease in Video product revenues for the three-month period ended March 31, 2009, compared to the same period in 2008, included a decrease of $15.9 million due to divested or exited product lines. Although Video product revenues were down in all geographic regions, revenues from our European Video business decreased significantly in the first quarter, which we believe was largely attributable to a decrease in spending by broadcasters due to unfavorable macroeconomic conditions. Changes in currency exchange rates also contributed to the decrease in our Video product revenues.

Video services revenues are derived primarily from maintenance contracts, professional and installation services, and training. The decrease in Video services revenues was largely attributable to a decrease of $1.6 million in services revenues related to divested product lines.

The decrease in Audio product revenues for the three-month period ended March 31, 2009, compared to the same period in 2008, was primarily the result of decreased revenues from our higher-end audio product lines and decreased revenues from foreign sources. Our Audio product revenues were down significantly in Europe, which we believe was largely attributable to unfavorable macroeconomic conditions and changes in currency exchange rates. Overall, our Pro Tools upgrade sales were strong, but sales of our ICON and VENUE product lines were down, primarily, we believe, as a result of decreased capital expenditure budgets for our customers of these high-end products.

Net revenues derived through indirect channels were 67% of our net revenues for the three-month period ended March 31, 2009, compared to 73% for the same period in 2008.

International sales accounted for 55% of our net revenues for the three-month period ended March 31, 2009, compared to 60% for the same period in 2008.

Cost of revenues consists primarily of costs associated with:

• the procurement of components;

• the assembly, testing and distribution of finished products;

• warehousing;

• customer support costs related to maintenance contract revenues and other services; and

• royalties for third-party software and hardware included in our products.

Cost of revenues also includes amortization of technology, which represents the amortization of developed technology assets acquired in business combinations. Amortization of technology is described further in the "Amortization of Intangible Assets" section below. Cost of revenues for the three-month period ended March 31, 2009 included a charge of $0.8 million for the write-down of inventory related to the divestiture of the PCTV in the fourth quarter of 2008.

Gross margins fluctuate based on factors such as the mix of products and services sold, the cost and proportion of third-party hardware and software included in the products sold, the offering of product upgrades, price discounts and other sales promotion programs, the distribution channels through which products are sold, the timing of new product introductions and currency exchange rate fluctuations.

                                    Three Months Ended March 31, 2009 and 2008
                                              (dollars in thousands)
                                                                             Gross Margin
                           2009     Gross Margin     2008     Gross Margin     % Change
Cost of products
revenues                 $ 61,248      50.5%       $ 85,073      49.4%           1.1%
Cost of services
revenues                   15,839      43.4%         17,387      42.2%           1.2%
Amortization of
intangible assets             520        -            3,254        -              -
Restructuring costs           799        -                -        -              -
Total                     $78,406      48.3%       $105,714      46.7%           1.6%

Our transition to a single company-wide production and delivery organization and the divestiture of lower margin product lines were significant contributing factors to our improved product gross margins for the three-month period ended March 31, 2009, compared to the same period last year. These improvements were partially offset by the impact on revenues of changes in foreign currency exchange rates.

The increase in services gross margin was primarily the result of improved efficiencies from our creation of a single customer-facing organization.

Research and Development

Research and development expenses include costs associated with the development of new products and the enhancement of existing products, and consist primarily of employee salaries and benefits, facilities costs, depreciation, costs for consulting and temporary employees, and prototype and other development expenses.

                                   Three Months Ended March 31, 2009 and 2008
                                             (dollars in thousands)
                                   2009          2008
                                 Expenses      Expenses       Change     % Change
Research and development           $31,051       $38,510      ($7,459)    (19.4%)

As a percentage of net revenues      20.5%         19.4%          1.1%

Marketing and Selling

Marketing and selling expenses consist primarily of employee salaries and benefits for selling, marketing and pre-sales customer support personnel; commissions; travel expenses; advertising and promotional expenses; and facilities costs.

                                   Three Months Ended March 31, 2009 and 2008
                                             (dollars in thousands)
                                   2009          2008
                                 Expenses      Expenses       Change     % Change
Marketing and selling              $40,781       $50,327      ($9,546)    (19.0)%

As a percentage of net revenues      26.9%         25.4%          1.5%

The decrease in marketing and selling expenses for the three-month period ended March 31, 2009, compared to the same period in 2008, was largely due to lower personnel-related costs; decreased advertising, tradeshow and other promotional expenses; lower corporate facility and information technology infrastructure allocations; and favorable foreign exchange translations, partially offset by increased bad debt expenses. Personnel-related costs decreased $4.7 million, primarily due to decreased headcount; advertising, tradeshow and other promotional expenses decreased $1.5 million; and corporate facility and infrastructure allocations decreased by $1.0 million. Also, net foreign exchange gains (specifically, remeasurement gains and losses on net monetary assets denominated in foreign currencies, offset by hedging gains and losses), which are included in marketing and selling expenses, were $1.8 million, compared to net foreign exchange gains of $0.8 million in the comparable 2008 period. Bad debt expense increased $1.0 million, primarily due to increased lease defaults. The increase in marketing and selling expenses as a percentage of revenues was the result of the decrease in revenues for the period compared to the same period in 2008.

General and Administrative

General and administrative expenses consist primarily of employee salaries and benefits for administrative, executive, finance and legal personnel; audit, legal and strategic consulting fees; and insurance, information systems and facilities costs. Information systems and facilities costs reported within general and administrative expenses are net of allocations to other expenses categories.

                                   Three Months Ended March 31, 2009 and 2008
                                             (dollars in thousands)
                                   2009          2008
                                 Expenses      Expenses       Change     % Change
General and administrative         $15,113       $21,943      ($6,830)    (31.1%)

As a percentage of net revenues      10.0%         11.1%        (1.1%)

The decrease in general and administrative expenses for the three-month period ended March 31, 2009, compared to the same period in 2008, was due to decreased consulting and outside services costs of $3.2 million and lower personnel-related costs of $2.5 million. The decrease in consulting and outside services costs was largely the result of the absence of consulting costs, present in the first quarter of 2008, related to the strategic review and transformation of our business. The lower personnel-related costs were the result of reduced headcount. The decrease in general and administrative expenses as a percentage of revenues for the three-month period ended March 31, 2009 was the result of the decrease in expenses for the period compared to the same period in 2008.

Intangible assets result from acquisitions and include developed technology, customer-related intangibles, trade names and other identifiable intangible assets with finite lives. With the exception of developed technology, these intangible assets are amortized using the straight-line method. Developed technology is amortized over the greater of (1) the amount calculated using the ratio of current quarter revenues to the total of current quarter and anticipated future revenues over the estimated useful life of the developed technology, and (2) the straight-line method over each developed technology's remaining useful life. Amortization of developed technology is recorded within cost of revenues. Amortization of customer-related intangibles, trade names and other identifiable intangible assets is recorded within operating expenses.

                                                                           Three Months Ended March 31, 2009 and 2008
                                                                                     (dollars in thousands)
                                                                          2009         2008         Change      % Change
Amortization of intangible assets recorded in cost of revenues               $520       $3,254       ($2,734)     (84.0%)
Amortization of intangible assets recorded in operating expenses            2,375        3,387        (1,012)     (29.9%)
Total amortization of intangible assets                                    $2,895       $6,641       ($3,746)     (56.4%)

Total amortization of intangible assets as a percentage of net revenues      1.9%         3.3%         (1.4%)

For the three-month period ended March 31, 2009, compared to the same period in 2008, the decrease in amortization of intangible assets recorded in cost of revenues was primarily the result of the completion during 2008 of the amortization of certain developed technologies related to our acquisitions of Pinnacle and M-Audio. The decrease in amortization recorded in operating expenses was primarily the result of the impairments of intangible assets recorded in the third and fourth quarters of 2008.

Restructuring Costs, Net

In October 2008, we initiated a company-wide restructuring plan that included a reduction in force of approximately 500 positions, including employees related to our product line divestitures, and the closure of all or parts of some of our worldwide facilities. The restructuring plan is intended to improve operational efficiencies. In connection with the plan, during the fourth quarter of 2008, we recorded restructuring charges of $20.4 million related to employee termination costs and $0.5 million for the closure of three small facilities. In addition, as a result of the decision to sell the 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. During the first quarter of 2009, we recorded new restructuring charges totaling $3.6 million under the plan, of which $2.8 million was related to the closure of all or part of six facilities and $0.8 million, recorded in cost of revenues, related to the write-down of PCTV inventory. Also during the first quarter of 2009, we recorded revisions to previously recorded restructuring estimates of $1.3 million and $0.1 million, respectively, for severance and facility obligations related to the plan. We expect annual cost savings of approximately $50 million to result from actions taken under this restructuring plan.

During the first quarter of 2008, we initiated restructuring plans within our Video business unit and corporate operations to eliminate duplicative business functions and improve operational efficiencies. During the first quarter of 2008, we recorded restructuring charges of $1.2 million under these plans related to employee termination costs for 20 employees, primarily in the marketing and selling teams and general and administrative teams. During the second quarter of 2008, we recorded restructuring charges of $1.0 million under these plans primarily related to employee termination costs for 26 employees, primarily in the research and development teams and sales and marketing teams. During the third quarter of 2008, we recorded restructuring charges of $2.0 million under these plans primarily related to employee termination costs for 45 employees, primarily in the research and development teams and general and administrative teams.

Interest and Other Income (Expense), Net



Interest and other income (expense), net, generally consists of interest income
and interest expense.



                                             Three Months Ended March 31, 2009 and 2008
                                                       (dollars in thousands)
                                          2009       2008          Change         % Change
Interest and other income (expense), net   $153       $1,481        ($1,328)         (89.7%)

As a percentage of net revenues            0.1%         0.7%          (0.6%)

The decrease in interest and other income (expense), net for the three-month period ended March 31, 2009, compared to the same period in 2008, was primarily the result of lower interest rates paid on cash balances, as well as lower average cash balances.

Benefit from Income Taxes, Net



                                  Three Months Ended March 31, 2009 and 2008
                                            (dollars in thousands)
                                     2009            2008            Change
Benefit from income taxes, net        ($2,889)          ($49)          ($2,840)

As a percentage of net revenues         (1.9%)         (0.0%)            (1.9%)

Our effective tax rate, which represents a tax benefit as a percentage of loss before income taxes, was 14% and 0%, respectively, for the three-month periods ended March 31, 2009 and 2008. Our increased tax benefit was the result of a foreign operating loss for the three-month period ended March 31, 2009, compared to a foreign operating profit for the same period in 2008. Additionally, in the three-month period ended March 31, 2009 there was a discrete tax benefit of $0.4 million resulting from the utilization of unused research and development tax credits. No tax benefit is provided for the losses generated in the United States due to the full valuation allowance on our U.S. deferred tax assets.

Excluding the impact of our valuation allowance, our effective tax rates would have been 41% and 68%, respectively, for the three-month periods ended March 31, 2009 and 2008. These rates may differ from the federal statutory rate of 35% due to the net benefits recorded for discrete tax items, the impact of permanent differences in the United States and the mix of income and losses in foreign jurisdictions, which have tax rates that differ from the statutory rate.

LIQUIDITY AND CAPITAL RESOURCES

Current Cash Flows and Commitments

We have funded our operations in recent years through cash flows from operations and stock option exercises. As of March 31, 2009, our principal sources of liquidity included cash, cash equivalents and marketable securities totaling $131.7 million.

Net cash used in operating activities was $10.8 million for the three months ended March 31, 2009, compared to $22.2 million provided by operating activities for the same period in 2008. For the three months ended March 31, 2009, net cash used in operating activities primarily reflected our net loss adjusted for depreciation and amortization and stock-based compensation expense, as well as changes in working capital items, in particular decreases in accrued liabilities and accounts payable, partially offset by decreases in accounts receivable and prepaid expenses. The decrease in accrued liabilities during the first quarter of 2009 was the result of cash expenditures of $9.9 million related to restructuring obligations, as well as payments for other obligations accrued at December 31, 2008, including taxes, tariffs and royalties. For the three months ended March 31, 2008, net cash provided by operating activities primarily reflected our net loss adjusted for depreciation and amortization and stock-based compensation, as well as changes in working capital items, in

Accounts receivable decreased by $23.2 million to $80.3 million at March 31, 2009 from $103.5 million at December 31, 2008. These balances are net of allowances for sales returns, bad debts and customer rebates, all of which we . . .