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 14 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- and six-month periods ended June 30, 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 June 30, 2009 were $150.5 million, a decrease of 32% compared to the same period last year. By business unit, Video revenues decreased 40% and Audio revenues decreased 18%. Our revenues for the six months ended June 30, 2009 were $302.2 million, a decrease of 28% compared to the same period last year. By business unit, Video revenues decreased 35% and Audio revenues decreased 15%.

Of the $96.4 million decrease in Video revenues during the first six months of 2009, decreases of $30.1 million and $3.3 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 and second quarter 2009 Video and Audio revenues when compared to the same periods of 2008. The revenues of each business unit are discussed in further detail in the section titled "Results of Operations" below.

Our gross margins for the three- and six-month periods ended June 30, 2009 improved to 51.5% and 49.9%, respectively, from 48.6% and 47.7% for the comparable periods in 2008. These improvements were largely the result of our transition to a single company-wide production and delivery organization, the divestiture of lower margin products and the favorable adjustment of a royalty accrual.

Our operating expenses for the three- and six-month periods ended June 30, 2009 were $92.9 million and $186.4 million, respectively, compared to $118.0 million and $233.2 million for the same periods in 2008. These decreases were primarily the result of our business transformation, including our product line divestitures and the initiation of restructuring plans in 2008.

In the fourth quarter of 2008, we initiated a restructuring plan that has resulted in a reduction in force of more than 500 positions, including employees associated with our product line divestitures, and the closure of all or parts of some of our worldwide facilities. In connection with this plan, we have incurred or expect to incur total restructuring charges of approximately $33 million, which primarily represent cash expenditures. During the fourth quarter of 2008, the first quarter of 2009 and the second quarter of 2009, we recorded restructuring charges under this plan of $22.8 million, $5.0 million and $5.1 million, respectively. We expect annual cost savings of approximately $55 million to result from actions taken under this restructuring plan. Cash expenditures resulting from restructuring obligations totaled approximately $16.7 million in the first six months 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 maintenance contracts.

                                         Three Months Ended June 30, 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        $ 60,902          40.4%       $114,571          51.4%   ($53,669)       (46.8%)
Services revenues         27,797          18.5%         32,977          14.8%     (5,180)       (15.7%)
Total                     88,699          58.9%        147,548          66.2%    (58,849)       (39.9%)

Audio:
Product revenues          61,010          40.5%         74,545          33.4%    (13,535)       (18.2%)
Services revenues            834           0.6%            770           0.4%         64          8.3%
Total                     61,844          41.1%         75,315          33.8%    (13,471)       (17.9%)

Total net revenues:     $150,543         100.0%       $222,863         100.0%   ($72,320)       (32.5%)

                                          Six Months Ended June 30, 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        $121,457          40.2%       $210,266          49.9%    ($88,809)       (42.2%)
Services revenues         54,744          18.1%         62,309          14.8%      (7,565)       (12.1%)
Total                    176,201          58.3%        272,575          64.7%     (96,374)       (35.4%)

Audio:
Product revenues         124,096          41.1%        147,025          34.9%     (22,929)       (15.6%)
Services revenues          1,875           0.6%          1,529           0.4%         346         22.6%
Total                    125,971          41.7%        148,554          35.3%     (22,583)       (15.2%)

Total net revenues:     $302,172         100.0%       $421,129         100.0%   ($118,957)       (28.2%)

The decreases in Video product revenues for the three- and six-month periods ended June 30, 2009, compared to the same periods in 2008, included decreases of $14.2 million and $30.1 million, respectively, due to divested or exited product lines. For both periods, Video product revenues were down in all geographic regions, compared to the same periods in 2008, but the decreases were most significant in Europe, which we believe was largely attributable to a decrease in spending by broadcasters. In all regions, we believe unfavorable macroeconomic conditions were a significant factor in our decreases in revenues for both periods. Internationally, changes in currency exchange rates also contributed to the decreases in our Video product revenues for the periods.

The decreases in Audio product revenues for the three- and six-month periods ended June 30, 2009, compared to the same periods in 2008, were primarily the result of lower revenues from our higher-end audio product lines and decreased revenues from sales to international customers. For both periods, 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. Revenues from our higher-end audio product lines were down, primarily, we believe, as a result of decreased capital expenditure budgets for our customers of these high-end products. During the three months ended June 30, 2009, revenues from our live-sound product lines increased, compared to the same period in 2008, as a result of strong sales of the newly introduced Venue SC48 live-sound console.

Net revenues derived through indirect channels were 65% and 66% of our net revenues for the three- and six-month periods ended June 30, 2009, respectively, compared to 68% and 70% for the same periods in 2008.

Sales to customers outside the United States accounted for 56% and 55% of our net revenues for the three- and six-month periods ended June 30, 2009, respectively, compared to 61% and 60% for the same periods in 2008.

Gross Profit

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 six-month period ended June 30, 2009 included a charge of $0.8 million for the write-down of inventory related to the divestiture of our PCTV product line 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 June 30, 2009 and 2008
                                              (dollars in thousands)
                                                                             Gross Margin
                           2009     Gross Margin     2008     Gross Margin      Change
Cost of products
revenues                  $58,429      52.1%       $ 92,628      51.0%           1.1%
Cost of services
revenues                   14,090      50.8%         19,629      41.8%           9.0%
Amortization of
intangible assets             426        -            2,270        -              -
Total                     $72,945      51.5%       $114,527      48.6%           2.9%

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                                      Six Months Ended June 30, 2009 and 2008
                                              (dollars in thousands)
                                                                              Gross Margin
                           2009     Gross Margin     2008      Gross Margin      Change
Cost of products
revenues                 $119,677      51.3%       $ 177,701      50.3%           1.0%
Cost of services
revenues                   29,929      47.1%          37,016      42.0%           5.1%
Amortization of
intangible assets             946        -             5,524        -              -
Restructuring costs           799        -                 -        -              -
Total                    $151,351      49.9%        $220,241      47.7%           2.2%

Our transition to a single company-wide production and delivery organization and the divestiture of lower margin product lines were contributing factors to our improved product gross margins for the three- and six-month periods ended June 30, 2009, compared to the same periods last year. In addition, a favorable adjustment of $2.1 million to a royalty accrual was a significant contributing factor to the improvement in each period. These improvements were partially offset by the impact on revenues of changes in foreign currency exchange rates.

The increases in services gross margin were 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 June 30, 2009 and 2008
                                            (dollars in thousands)
                                   2009          2008
                                 Expenses      Expenses      Change    % Change
Research and development           $30,661       $38,972    ($8,311)    (21.3%)

As a percentage of net revenues      20.4%         17.5%        2.9%

                                   Six Months Ended June 30, 2009 and 2008
                                           (dollars in thousands)
                                  2009         2008
                                Expenses     Expenses     Change     % Change
Research and development          $61,712      $77,482   ($15,770)    (20.4%)

As a percentage of net revenues     20.4%        18.4%        2.0%

The decreases in research and development expenses for the three- and six-month periods ended June 30, 2009, compared to the same periods in 2008, were primarily due to decreased personnel-related costs of $7.5 million and $13.4 million, respectively, both resulting from reduced headcount. The increases in research and development expenses as a percentage of revenues for both the three- and six-month periods ended June 30, 2009 were the result of the decreases in revenues for the periods compared to the same periods in 2008.

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 June 30, 2009 and 2008
                                            (dollars in thousands)
                                   2009          2008
                                 Expenses      Expenses     Change     % Change
Marketing and selling              $41,994       $55,259   ($13,265)    (24.0)%

As a percentage of net revenues      27.9%         24.8%        3.1%

                                   Six Months Ended June 30, 2009 and 2008
                                           (dollars in thousands)
                                  2009         2008
                                Expenses     Expenses     Change     % Change
Marketing and selling             $82,775     $105,586   ($22,811)    (21.6)%

As a percentage of net revenues     27.4%        25.1%        2.3%

The decrease in marketing and selling expenses for the three-month period ended June 30, 2009, compared to the same period in 2008, was largely due to lower personnel-related costs; decreased advertising, tradeshow and other promotional expenses; lower travel and entertainment expenses; and decreased outside services and consulting costs, partially offset by unfavorable foreign exchange translations. Personnel-related costs decreased $6.5 million, primarily due to decreased headcount; advertising, tradeshow and other promotional expenses decreased $3.8 million; travel and entertainment expenses decreased $1.2 million; and outside services and consulting costs were lower by $0.9 million. Net foreign exchange losses (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 $0.2 million for the three months ended June 30, 2009, compared to net foreign exchange gains of $0.9 million in the comparable 2008 period.

The decrease in marketing and selling expenses for the six-month period ended June 30, 2009, compared to the same period in 2008, was largely due to lower personnel-related costs; decreased advertising, tradeshow and other promotional expenses; and lower travel and entertainment expenses. Personnel-related costs decreased $11.2 million, primarily due to decreased headcount; advertising, tradeshow and other promotional expenses decreased $5.8 million; and travel and entertainment expenses decreased $2.5 million.

The increases in marketing and selling expenses as a percentage of revenues for both the three- and six-month periods ended June 30, 2009 were the result of the decreases in revenues for the periods compared to the same periods 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.

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                                   Three Months Ended June 30, 2009 and 2008
                                            (dollars in thousands)
                                   2009          2008
                                 Expenses      Expenses      Change    % Change
General and administrative         $12,559       $19,492    ($6,933)    (35.6%)

As a percentage of net revenues       8.3%          8.7%      (0.4%)

                                   Six Months Ended June 30, 2009 and 2008
                                           (dollars in thousands)
                                  2009         2008
                                Expenses     Expenses     Change     % Change
General and administrative        $27,672      $41,435   ($13,763)    (33.2%)

As a percentage of net revenues      9.2%         9.8%      (0.6%)

The decreases in general and administrative expenses for both the three- and six-month periods ended June 30, 2009, compared to the same periods in 2008, were due to lower personnel-related costs and decreases in consulting and outside services expenses. The personnel-related costs were lower by $5.0 million and $7.5 million, respectively, for the three- and six-month periods and were the result of reduced headcount. The decreases in consulting and outside services expenses for the three- and six-month periods were $1.9 million and $4.6 million, respectively, and were largely the result of the absence of consulting costs, present in the second quarter of 2008, related to the strategic review and transformation of our business.

The decreases in general and administrative expenses as a percentage of revenues for both the three- and six-month periods ended June 30, 2009, compared to the same periods in 2008, were the result of proportionally larger decreases in expenses than the decreases in revenues for the 2009 periods.

Amortization of Intangible Assets

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 June 30, 2009 and 2008
                                                                                      (dollars in thousands)
                                                                          2009         2008         Change       % Change
Amortization of intangible assets recorded in cost of revenues             $  426       $2,270       ($1,844)      (81.2%)
Amortization of intangible assets recorded in operating expenses            2,622        3,323          (701)      (21.1%)
Total amortization of intangible assets                                    $3,048       $5,593       ($2,545)      (45.5%)

Total amortization of intangible assets as a percentage of net revenues      2.0%         2.5%         (0.5%)

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                                                                            Six Months Ended June 30, 2009 and 2008
                                                                                     (dollars in thousands)
                                                                          2009         2008         Change     % Change
Amortization of intangible assets recorded in cost of revenues             $  946      $ 5,524      ($4,578)     (82.9%)
Amortization of intangible assets recorded in operating expenses            4,997        6,710       (1,713)     (25.5%)
Total amortization of intangible assets                                    $5,943      $12,234      ($6,291)     (51.4%)

Total amortization of intangible assets as a percentage of net revenues      2.0%         2.9%        (0.9%)

For both the three- and six-month periods ended June 30, 2009, compared to the same periods in 2008, the decreases in amortization of intangible assets recorded in cost of revenues were 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 decreases in amortization recorded in operating expenses for the same periods were 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 . . .