Media content has traditionally been created, stored and distributed using analog processes. Analog technology is still used to process the majority of photo, video and music content today. However, analog technology is expensive and requires specialized equipment as well as professional service providers, which allows little flexibility in the creation, editing, storage, presentation and distribution of media content. As a result, there has been a significant increase in consumer and business demand for digital technologies that can perform these functions more efficiently and cost-effectively. For example, In-Stat/MDR expects the digital still camera market to grow approximately 229% from approximately 24.8 million units in 2002 to approximately 81.7 million units in 2007. While PCs have traditionally served as the primary platform for digital media technologies, the increased capacity and performance and decreased size and cost of hard disk drives and microprocessors has enabled users to access digital media content on smaller devices, such as mobile phones and personal digital assistants, or PDAs, and share information among various devices. Communication between these devices requires enabling technologies that can support all forms of digital media content, including photo, video and audio.

Digital media offers significant advantages over analog media, such as easy and inexpensive editing and special effects, Internet-based accessibility and distribution, flexible formatting, durable storage, personalization, easy duplication and rapid wired or wireless transmission without loss of quality. For these reasons, digital technology has become the preferred means of creating, editing, storing, presenting and distributing media for both consumers and professionals. Consumers are increasingly expecting cost-effective, easy-to-use software solutions to be bundled with, or embedded in, devices instead of having to select, purchase and install complex, expensive software products from a retail store. Providing comprehensive solutions requires core fundamental technologies and features that address the spectrum of the digital media lifecycle, which have traditionally been difficult for any single software developer to provide.

The Company’s firmware products are designed to allow the OEM customers to expand the functionality of their devices by embedding the Company’s core technologies, enabling these devices for advanced photo, video and audio capabilities.

The Company’s codec technologies are based on open standards and provide an enabling platform for its OEM customers to enhance their products. The Company’s codecs are designed to provide digital devices with the ability to play audio, video, voice and playback.

The Company’s products are engineered for digital media devices in four main categories, including PCs and PC-peripherals, mobile devices, consumer electronics and home entertainment devices.

Cost of product revenue increased from $2.4 million, or 16.4% of product revenue in fiscal year ended June 30, 2003 to $3.9 million, or 20.7% of product revenue in fiscal year ended June 30, 2004.

Cost of internet services revenue decreased from $2.7 million, or 64.5% of internet services revenue in fiscal year ended June 30, 2003 to $1.9 million, or 61.7% of internet services revenue in fiscal year ended June 30, 2004.

Engineering and development expense was $6.6 million in fiscal year ended June 30, 2003 and increased 2.7% to $6.8 million in fiscal year ended June 30, 2004.

Selling and marketing expense decreased from $4.9 million in fiscal year ended June 30, 2003 and increased 23.1% to $6.1 million in fiscal year ended June 30, 2004.