A new category of consumer electronics devices, which are referred to as personal media players, is rapidly emerging, taking advantage of the growing supply of digital media content, falling costs for storage technology and improved device functionality and performance. Personal media players are battery-powered, portable devices that allow individuals to capture, store and play digital media. Today, digital media includes both audio and photos, and in the future, it is expected to include video.

Advances in digital technology have enabled audio, photo and video content to be digitized, transmitted, stored and catalogued. With the growth of personal computers, the availability of digital media content for mainstream consumers has substantially increased. As the accessibility of digital media content continues to proliferate, demand has increased for a range of new digital consumer devices. For example, digital imaging technology has already revolutionized the photography and cellular phone industries. According to IDC, digital cameras will increase from 48.8 million units in 2003 to more than 100 million in 2008. IDC also estimates mobile phones with embedded digital cameras will grow from 79.5 million units in 2003 to 642.2 million units in 2008.

Broadband penetration is increasing the use of the Internet as a method of accessing and distributing digital media content.

Early content distribution began as peer-to-peer file trading networks of millions of downloadable MP3 songs. In April 2003, Apple launched its iTunes Music Store, allowing consumers to download music for a modest fee per song. Similarly, Internet-based photo services, such as Ofoto, Shutterfly and Snapfish, allow consumers to store, share and print their digital photos online.

Increased storage capacity continues to facilitate the capture, storage and playback of digital media content. Greater capacity is required to store the increasing size of personal digital audio libraries and digital photo collections.

The Company’s firmware development kits, or FDKs, include the embedded firmware code, tools and documentation necessary to develop personal media player products. The Company’s most recent FDK is the Photo Edition, which extends the Company’s audio platform to include a suite of imaging functionality and camera connectivity capabilities.

The Company’s software development kit, or SDK, helps the customers build applications that enable users to easily manage the audio and photo files stored on their personal media player using feature-rich, PC user interfaces. The Company’s SDK provides developers with the components, tools, sample code and documentation to create a custom digital media management application for personal media players.

The Company sells its platforms primarily to OEMs and ODMs. Many of the Company’s customers in turn sell to branded OEMs, who sell end products that incorporate the Company’s platform solutions.

Cost of revenue increased from $5.7 million in 2002 to $12.3 million in 2003, a 116% increase.

Gross margin was 35.2% in 2002 and 41.4% in 2003.

Research and development expense decreased from $16.6 million in 2002 to $11.1 million in 2003, a 33% decrease.

Selling, general and administrative expense decreased from $8.6 million in 2002 to $5.1 million in 2003, a 41% decrease.