MACROVISION CORP, 424A, 1998-06-05

MACROVISION CORP
424A, 1998-06-05
ALLIED TO MOTION PICTURE DISTRIBUTION

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<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 2, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
1,500,000 SHARES

[LOGO]

COMMON STOCK

Of the 1,500,000 shares of Common Stock offered hereby, 1,140,000 shares are
being sold by Macrovision Corporation ("Macrovision" or the "Company") and
360,000 shares are being sold by the Selling Stockholders. The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
See "Principal and Selling Stockholders."

The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol MVSN. On June 1, 1998, the last reported sale price of the Company's
Common Stock was $21.75 per share. See "Price Range of Common Stock."
--------------

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
-------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total (3)......................... $ $ $ $
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $500,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 225,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."

--------------

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.

HAMBRECHT & QUIST

NATIONSBANC MONTGOMERY SECURITIES LLC

COWEN & COMPANY

, 1998
<PAGE>
HOLLYWOOD KNOWS A GREAT PICTURE WHEN THEY SEE ONE.

[PICTURE OF TELEVISION SCREEN WITH A VERY POOR QUALITY PICTURE]

[MACROVISION LOGO]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."

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AND MACROVISION, EXPERTS IN VIDEO SECURITY,
KNOWS HOW TO PROVIDE IT.
[SAME PICTURE AS PREVIOUS PAGE, OF A TELEVISION SCREEN
WITH A VERY POOR QUALITY PICTURE]

The above graphic represents the picture quality of an unauthorized recording of
a copy protected digital PPV program or Digital Versatile Disc

Macrovision Corporation develops and markets a range of technologies and
products, many of which are proprietary, that address the video security needs
of Hollywood studios and other video rights owners.

TYPES OF MACROVISION LICENSEES

<TABLE>
<S> <C>
- -Hollywood Studios -Direct Broadcast Satellite Operators
- -Independent Video Producers -Cable TV Multiple System Operators
- -Commercial Video Duplicators -Digital Set-Top Decoder Manufacturers
- -Telephone Companies
</TABLE>

The Company's two primary technologies are "Copy Protection" and "Video
Scrambling." In most applications, Macrovision licenses its technologies and
receives unit- or transaction-based royalties.

COPY PROTECTION

Designed to deter VCR owners from unauthorized COPYING of prerecorded or
electronically transmitted programming, Macrovision's copy protection
technologies provide security for a variety of media.

<TABLE>
<S> <C> <C> <C>
VIDEOCASSETTES DIGITALLY DELIVERED DIGITAL VERSATILE DISC [Bar graph showing
Over 2.0 billion cassettes PAY-PER- VIEW (PPV) (DVD) number of copy protected
worldwide have been copy Because PPV programs can be Macrovision's technology video cassettes]
protected by Macrovision, easily copied, deters consumers from 1993 234 million
the majority of which are Macrovision's copy making high quality 1994 344 million
Hollywood releases. protection technology will videocassette copies of 1995 367 million
be essential to protect movies on DVDs. 1996 451 million
studios' home video, repeat 1997 462 million
PPV and pay TV revenues by EVERY YEAR MORE AND MORE
deterring VCR owners from VIDEOCASSETTES ARE
making copies. PROTECTED BY MACROVISION'S
COPY PROTECTION TECHNOLOGY,
SIGNIFICANTLY REDUCING
UNAUTHORIZED CONSUMER
COPYING.
</TABLE>

VIDEO SCRAMBLING

Designed to prevent unauthorized VIEWING of an electronically transmitted movie
or program,
Macrovision's video scrambling technologies offer a variety of solutions in
different markets.

<TABLE>
<S> <C> <C>
CABLE TV SATELLITE TV NETWORKS LAW ENFORCEMENT/GOVERNMENT
High security, low cost VES-TM- products help secure video VES-TM-TM- is a portable, hand-held,
PhaseKrypt-Registered Trademark- programs transmitted via satellite point- to-point scrambling system
scrambling technology is licensed to or land- based networks for for law enforcement and broadcast
emerging international pay TV corporate, educational or broadcast applications.
set-top decoder manufacturers. television applications.
</TABLE>

Logo
<PAGE>
PROSPECTUS SUMMARY

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"). WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS,"
"BELIEVES," "SEEKS," "ESTIMATES," AND SIMILAR EXPRESSIONS IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED. FACTORS
THAT MAY CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE UNDER "RISK FACTORS" AND THOSE APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

The Company designs, develops and markets video security technologies and
products that provide copy protection and video scrambling for motion pictures
and other proprietary video materials that are stored on videocassettes, digital
versatile discs ("DVDs") or other media or are transmitted by means of cable,
satellite or microwave transmission. The Company's two primary technologies,
copy protection and video scrambling, are distinct in their application, but can
be complementary in their ability to protect copyright holders' video
programming. The Company has recently broadened its focus to include copy
protection of other media, including multimedia CD-ROMs and Internet-delivered
software products.

All of the Motion Picture Association of America ("MPAA") studios have used
the Company's copy protection technology to protect some or all of their
videocassettes in one or more countries around the world. Studios such as
Disney, Columbia, PolyGram and Paramount have signed agreements to apply the
Company's copy protection technologies to substantially all of the motion
pictures that they release in videocassette and DVD format in the United States.
The Company's technology has been used to copy protect more than 2 billion
videocassettes worldwide since 1985. The Company believes that its video copy
protection technologies are accepted as the DE FACTO standard for preventing
digital and analog video from being copied by consumer VHS videocassette
recorders.

The Company has developed an enhanced version of its videocassette copy
protection technology for the digital Pay-Per-View ("PPV") networks that are
being developed and deployed by direct broadcast satellite, cable and digital
terrestrial television operators, and for the DVD format. The expected future
growth of digital PPV and DVD, coupled with the high picture quality of a copy
made from such formats and the relative ease of copying digital PPV and DVD
content using analog videocassette recorders, may increase the need for
effective consumer copy protection in these applications.

The Company has licensed its copy protection technology for digital PPV to
41 set-top decoder manufacturers, including General Instrument Corporation, Pace
Micro Technology, Scientific-Atlanta and Thomson Consumer Electronics (RCA
brand), and 13 digital PPV system operators, including British Sky Broadcasting
Limited, DIRECTV, Hong Kong Telecom, Galaxy Latin America, Sky Latin America and
Sky Perfect. The Company's copy protection technology is embedded in
approximately seven million digital set-top decoders currently in use in the
United States, Japan, Europe and a number of countries in Latin America.
Currently four digital PPV program providers in Japan and one system operator in
Hong Kong have activated copy protection for digital PPV programming. To date,
82 companies that manufacture DVD players or DVD-ROM drives have signed
agreements with the Company to incorporate the Company's DVD copy protection
technology in their hardware.

The Company's video scrambling technologies prevent unauthorized viewing of
video programming. These technologies are licensed to manufacturers of analog
set-top decoders for sale to cable television system operators in developing
markets to enable cost-effective and secure transmission of video signals. The
Company has also developed products implementing video scrambling technologies
that serve growing niche markets, such as law enforcement and private networks.

The Company licenses its technologies primarily by means of a royalty-based
model. Copyright holders and videocassette duplicators typically license the
Company's videocassette copy protection technology for a per unit fee. Set-top
decoder manufacturers license the Company's copy protection technologies for an
up-front fee and a per unit hardware royalty. The Company's agreements with
digital PPV system operators entitle the Company to transaction-based royalty
payments at such time as copy protection for digital PPV programming is
activated. For the DVD market, the Company offers licenses to consumer
electronics and personal computer manufacturers and charges rights owners a per
unit fee similar to its videocassette copy protection licensing model. Video
scrambling technologies either are licensed or are sold in hardware products and
components.

To facilitate the development of copy protection offerings for other media,
the Company has entered into arrangements with certain other companies that have
developed copy protection technologies. The Company has entered into a joint
development arrangement with Digimarc Corporation ("Digimarc") for a video
watermarking solution to protect DVD and other digital distribution media from
being copied by digital recording devices. In addition, the Company has an
exclusive marketing agreement with C-Dilla Limited ("C-Dilla") for copy
protection technology for CD-ROM software products in the consumer multimedia
market.

The Company's objective is to maintain and enhance its position as a leading
provider of video security technologies and products by implementing a strategy
that includes the following key elements: (i) pursue a royalty-based licensing
model that results in a high margin, transaction-oriented business with
recurring revenues; (ii) leverage key customer relationships to broaden the use
of existing applications for the Company's technologies; (iii) increase market
penetration of the Company's copy protection business; (iv) introduce new
product applications and technologies; and (v) aggressively pursue protection of
the Company's patents.

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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company................... 1,140,000 shares
Common Stock offered by the Selling Stockholders...... 360,000 shares
Common Stock to be outstanding after the offering..... 8,413,254 shares (1)
Use of proceeds....................................... For general corporate purposes,
including working capital. See "Use
of Proceeds."
Nasdaq National Market symbol......................... MVSN
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)

<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
AS ADJUSTED
ACTUAL (3)
--------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................................... $ 11,607 $ 34,476
Working capital....................................................................... 13,064 35,933
Total assets.......................................................................... 30,436 53,305
Long-term obligations, net of current portion......................................... 160 160
Total stockholders' equity............................................................ 24,863 47,732
</TABLE>

- --------------------------

(1) Based on shares outstanding as of March 31, 1998. Does not include 821,776
shares of Common Stock issuable upon the exercise of options outstanding as
of such date at a weighted average exercise price of $6.80 per share. Also
does not include 687,958 additional shares reserved for future grants or
issuances under the Company's stock option and stock purchase plans. See
"Capitalization" and Note 5 of Notes to Consolidated Financial Statements.

(2) Net income from continuing operations applicable to common stock is
calculated by deducting preferred stock dividends from net income from
continuing operations. Shares used in computing basic and diluted earnings
per share do not include convertible preferred stock. For an explanation of
the determination of the number of shares used in computing earnings per
share, see Note 1 of Notes to Consolidated Financial Statements.

(3) Adjusted to reflect the sale of the 1,140,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $21.75 per
share and after deducting the estimated underwriting discount and offering
expenses. See "Capitalization" and "Use of Proceeds."

--------------------------

EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."

4
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RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER
OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.

FLUCTUATIONS IN FUTURE OPERATING RESULTS; SEASONALITY. The Company's
operating results have fluctuated in the past, and are expected to continue to
fluctuate in the future, on an annual and quarterly basis as a result of a
number of factors. Such factors include, but are not limited to, the timing of
release of popular motion pictures on videocassettes or DVDs or by digital PPV
transmission, the degree of acceptance of the Company's copy protection
technologies by major motion picture studios, the mix of products sold and
technologies licensed, any change in product or license pricing, the seasonality
of revenues, changes in the Company's operating expenses, personnel changes, the
development of the Company's direct and indirect distribution channels, foreign
currency exchange rates and general economic conditions. The Company may choose
to reduce prices or increase spending in response to competition or new
technologies or elect to pursue new market opportunities. If new competitors,
technological advances in the industry or by existing or new competitors or
other competitive factors require the Company to invest significantly greater
resources in research and development or marketing efforts, the Company's future
operating results may be adversely affected. Because a high percentage of the
Company's operating expenses is fixed, a small variation in the timing of
recognition of revenues can cause significant variations in operating results
from period to period.

The Company has experienced significant seasonality in its business, and the
Company's financial condition and results of operations are likely to be
affected by seasonality in the future. The Company has typically experienced its
highest revenues in the fourth quarter of each calendar year followed by lower
revenues and operating income in the first quarter, and at times in subsequent
quarters, of the next year. The Company believes that this trend has been
principally due to the tendency of certain of the Company's customers to release
their more popular motion pictures on videocassettes and DVDs during the
year-end holiday shopping season. The Company anticipates that revenues, if any,
from multimedia CD-ROM copy protection will also reflect this seasonal trend. In
addition, revenues have tended to be lower in the summer months, particularly in
Europe.

Based upon the factors enumerated above, the Company believes that its
quarterly and annual revenues, expenses and operating results could vary
significantly in the future and that period-to-period comparisons should not be
relied upon as indications of future performance. There can be no assurance that
the Company will be able to grow in future periods or that it will be able to
sustain its level of net revenues or its rate of revenue growth on a quarterly
or annual basis. It is likely that, in some future quarter, the Company's
operating results will be below the expectations of stock market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected. Further, the Company may not be in a position to
anticipate a decline in revenues in any quarter until late in the quarter, due
primarily to the delay inherent in revenue reporting from licensees and
replicators, resulting in a potentially more significant level of volatility in
the price of the Company's Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results of
Operations."

DEPENDENCE ON VIDEOCASSETTE COPY PROTECTION TECHNOLOGY AND ADVOCACY BY MAJOR
MOTION PICTURE STUDIOS. The Company currently derives a substantial majority of
its net revenues and operating income from fees for the application of its
patented video copy protection technology to prerecorded videocassettes of
motion pictures and other copyrighted materials that are sold or rented to
consumers. Such fees represented 75.4%, 62.0% and 60.9% of the Company's net
revenues during 1996, 1997 and the first three months of 1998, respectively. The
Company expects these fees to account for a majority of the Company's net
revenues and operating income at least through 1998. This portion of the
Company's business has not grown significantly in recent years, and there can be
no assurance that revenues from such fees will grow significantly or at all. Any
future growth in revenues

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from such fees will depend on the use of the Company's copy protection
technology on a larger number of videocassettes. In order to increase or
maintain its market penetration, the Company must continue to persuade rights
owners that the cost of licensing the technology is outweighed by the increase
in revenues that the rights owners and retailers would achieve as a result of
using copy protection, such as revenues from the release of the copy protected
material and/or subsequent revenues from other venues. In this regard, the
Company's copy protection technologies are intended to deter consumer copying
and are not effective against professional duplication and video processing
equipment.

In the event that the major motion picture studios or other customers of the
Company's copy protection technology were to determine that the benefits of
using the Company's technology did not justify the cost of licensing the
technology, demand for the Company's technology would decline. Any factor that
results in a decline in demand for the Company's copy protection technology,
including a change of copy protection policy by the major motion picture studios
or a decline in sales of prerecorded videocassettes that are encoded with the
Company's copy protection technology, would have a material adverse effect on
the Company's business, financial condition and results of operations. Moreover,
the ability of the Company to expand its markets in additional home
entertainment venues such as digital PPV and DVDs will depend in large part on
the support of the major motion picture studios in advocating the incorporation
of copy protection into the hardware and network infrastructure required to
distribute such video programming. In the event that the motion picture industry
withdraws its support for the Company's copy protection technologies or
otherwise determines not to copy protect a significant portion of prerecorded
video on videocassettes or DVD or digital PPV programs, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business-- Industry Background" and
"Business--Technologies and Products."

DEPENDENCE ON KEY CUSTOMERS. The Company's customer base is highly
concentrated among a limited number of customers, primarily due to the fact that
the MPAA studios dominate the motion picture industry. Historically, the Company
has derived a substantial majority of its net revenues from relatively few
customers. During 1996, revenues from the Company's three largest customers
represented 37% of the Company's net revenues and each accounted for more than
10% of the Company's net revenues. For 1997, one customer accounted for 11% of
the Company's net revenues. For the first three months of 1998, revenues from
the Company's two largest customers represented 22% of the Company's net
revenues, and each accounted for more than 10% of the Company's net revenues.
The MPAA studios as a group accounted for 47.1%, 38.6% and 41.7% of the
Company's net revenues in 1996, 1997 and the first three months of 1998,
respectively. The Company expects that revenues from the MPAA studios will
continue to account for a substantial portion of the Company's net revenues for
the foreseeable future. The Company has agreements with three of the MPAA
studios and PolyGram for copy protection of substantially all of their packaged
media in the United States, which agreements expire at various times ranging
from December 1998 to June 2000. The failure of any of these customers to renew
their contracts or enter into new contracts with the Company on terms that are
favorable to the Company would likely result in a substantial decline in the
Company's net revenues and operating income, and would have a material adverse
effect on the Company's business, financial condition and results of operations.
Most of the Company's other videocassette copy protection customers license the
Company's technology on an annual contract basis or title-by-title or
month-by-month. There can be no assurance that the Company's current customers
will continue to use the Company's technology at current or increased levels, if
at all, or that the Company will be able to obtain new customers. The loss of,
or any significant reduction in revenues from, a key customer would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Technologies and Products,"
"Business--Customers" and Note 1 of Notes to Consolidated Financial Statements.

EVOLVING MARKET FOR DVD AND DIGITAL PPV COPY PROTECTION. The Company's
future growth and operating results will depend to a large extent on the
successful introduction, marketing and commercial viability of DVDs and digital
PPV programming that utilize the Company's copy protection technologies. A
number of factors will affect the Company's ability to derive revenues from DVD
and digital PPV copy protection. These factors include the cost and
effectiveness of the Company's copy protection technology in its various
applications, the

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<PAGE>
development of alternative technologies or standards for DVD copy protection,
the uncertainty in the marketplace engendered by alternative standards for DVD
and for DVD recordable devices, the ability of the Company to obtain commitments
from the motion picture studios to require copy protection on DVD media and
digital PPV transmissions and the relative ease of copying, as well as the
quality of the copies of, unprotected video materials distributed in new digital
formats. Because of their early stages of development, demand for and market
acceptance of DVD and digital PPV, as well as demand for associated copy
protection, are subject to a high level of uncertainty. Much of the DVD and
digital PPV technology and infrastructure is unproven, and it is difficult to
predict with any assurance whether, or to what extent, these evolving markets
will grow. In this regard, the Company's future growth would be adversely
affected if DVD players and digital PPV set-top decoders that do not include the
Company's copy protection components achieve market acceptance.

While the Company's copy protection capability is embedded in approximately
seven million digital set-top decoders manufactured by certain of the leading
set-top decoder manufacturers, only four programmers on one direct broadcast
satellite network in Japan and one system operator in Hong Kong have activated
copy protection for digital PPV programming. The four programmers in Japan
distribute adult PPV programming, and the Japanese government has required that
all such programming be copy protected. There can be no assurance that any of
the MPAA studios will require copy protection for any of their PPV motion
pictures or that PPV system operators will activate such copy protection in
other digital PPV networks outside of Japan or Hong Kong. Moreover, consumers
may react negatively to copy protected PPV programming because, to date, they
have routinely copied for later viewing analog cable and satellite-delivered
subscription television ("Pay TV") and PPV programs, as well as free broadcast
programming. In addition, there can be no assurance that certain television sets
or combinations of VCRs and television sets will not exhibit impaired pictures
while displaying a copy protected DVD or digital PPV program. If there is
consumer dissatisfaction that cannot be managed, or if there are technical
compatibility problems, the Company's business, financial condition and results
of operations would be materially adversely affected. If the market for DVD or
digital PPV copy protection fails to develop or develops more slowly than
expected, or if the Company's solution does not achieve or sustain market
acceptance, the Company's business, financial condition and results of
operations would be materially adversely affected.

The Company seeks to expand its copy protection business through licensing
arrangements and strategic investments. The Company and Digimarc are jointly
developing a digital media copy protection solution to address the
digital-to-digital copying issues associated with the next generation of DVD and
digital videocassette recording devices. They have submitted their proposed
solution to the Copy Protection Technical Working Group ("CPTWG"). At least six
other companies have also submitted proposals to the CPTWG. The company whose
digital media copy protection solution is selected by the CPTWG will have a
significant advantage in licensing its technology to video rights owners
worldwide and in working with consumer electronics manufacturers, PC platform
companies and their suppliers to implement digital-to-digital copy protection.
The IEEE 1394 transmission protocol has also been proposed as a
digital-to-digital copy protection solution. If the solution being developed by
the Company and Digimarc is not the selected solution or otherwise is not widely
adopted by studios or consumer electronics manufacturers, the Company and
Digimarc will be at a competitive disadvantage in marketing their solution.
There can be no assurance that the solution being developed by the Company and
Digimarc will be selected as the standard by the CPTWG or that such solution
will achieve market acceptance as the market and the standards for
digital-to-digital copy protection evolve. See "Business-- Technologies and
Products."

ENTRANCE INTO NEW MARKET. The Company has an exclusive marketing agreement
with C-Dilla for copy protection technology for CD-ROM software products in the
consumer multimedia market. The market for copy protection of CD-ROMs is
unproven. For the Company to be successful in entering this new market,
producers of multimedia CD-ROMs must accept copy protection generally and also
adopt the solution developed by C-Dilla and marketed by the Company. There can
be no assurance that copy protection of multimedia CD-ROMs will be accepted. For
example, consumers may react negatively to the introduction of copy protected
CD-ROMs if they are prohibited from copying the content of their favorite
applications or if copy protection impairs the playability of the CD-ROM.
Moreover, copy protection may not be effective on all hardware platforms or
configurations or may be easily circumvented. A number of competitors and
potential competitors are developing CD-ROM copy protection solutions. Many of
these competitors and potential competitors have substantially

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greater name recognition and financial, technical and marketing resources than
the Company. There can be no assurance that there will be demand for CD-ROM copy
protection or that the solution marketed by the Company will achieve or sustain
market acceptance under emerging industry standards or will meet, or continue to
meet, the changing demands of multimedia software providers. See
"Business--Strategic Investments."

DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily
dependent upon its proprietary technologies. The Company relies on a combination
of patent, trademark, copyright and trade secret laws, nondisclosure and other
contractual provisions, and technical measures to protect its intellectual
property rights. The Company holds 38 United States patents and has 41 United
States patent applications pending. In addition, the Company has 123 foreign
patents and 211 foreign patent applications pending. There can be no assurance
that any patent, trademark or copyright owned by the Company will not be
challenged and invalidated or circumvented, that patents will issue from any of
the Company's pending or future patent applications or that any claims in issued
patents or pending patent applications will be of sufficient scope or strength
or be issued in all countries where the Company's products can be sold or its
technologies can be licensed to provide meaningful protection or any commercial
advantage to the Company. There can be no assurance that the expiration of any
of the Company's patents will not have a material adverse effect on the
Company's business, financial condition and results of operations. Further,
there can be no assurance that others will not develop technologies that are
similar or superior to the Company's technologies, duplicate the Company's
technologies or design around the patents owned by the Company. Effective
intellectual property protection may be unavailable or limited in certain
foreign countries. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or otherwise use aspects of the
Company's processes and devices that the Company regards as proprietary.
Policing unauthorized use of the Company's proprietary information is difficult,
and there can be no assurance that the steps taken by the Company will prevent
misappropriation of its technologies. In the event that the Company's
intellectual property protection is insufficient to protect the Company's
intellectual property rights, the Company could face increased competition in
the market for its products and technologies, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

From time to time, the Company has received claims from third parties that
the Company's technologies and products infringe the intellectual property
rights of such third parties. Krypton Co., Ltd., a Japanese company, has filed
an invalidation claim against one of the Company's anti-copy patents in Japan.
After consultation with Japanese patent counsel, the Company believes that this
claim is without merit and will aggressively contest the claim in the Japanese
Patent Office. In the event of an adverse ruling on such claim, the Company may
incur legal competition from clones of its own copy protection technology in
Japan and a corresponding decline in demand for such technology from the
Company, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, as the Company
acquires or licenses a portion of the technology included in its products from
third parties, its exposure to infringement actions may increase because the
Company must rely upon such third parties for information as to the origin and
ownership of such acquired or licensed technology. Although the Company intends
to obtain representations as to the origins and ownership of such acquired or
licensed software and obtain indemnification to cover any breach of any such
representations, there can be no assurance that such representations will be
accurate or that such indemnification will provide adequate compensation for any
breach of such representations. The Company and C-Dilla have received
communications from Ablex Audio Video Ltd. and its subsidiary, Pan Technologies,
notifying them that these companies assert rights to the technology that C-Dilla
licenses to the Company and claiming that the Company's agreements with C-Dilla
violate understandings that these companies had allegedly reached with C-Dilla.
The Company has been informed that a number of potential customers for the
CD-ROM copy protection solution to be marketed by the Company have received
similar communications. The Company believes that these assertions and claims
are without merit. If, as threatened, these companies commence litigation
against the Company or C-Dilla, uncertainty could develop as to the Company's
rights to the CD-ROM copy protection technology, which could impair the
Company's ability to market the technology and have a material adverse effect on
the Company's business, financial condition and results of operations. To the
extent that these or any other similar communications create uncertainty in the
marketplace, acceptance of the technology to be marketed by the Company would be
delayed, which could have

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a material adverse effect on the Company's business, financial condition and
results of operations. These and any other such claims of infringement, with or
without merit, could be time consuming to defend, result in costly litigation,
cause product shipment delays or require the Company to cease utilizing the
infringing technology unless it can enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms acceptable
to the Company, or at all, which could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company has eight United States and 20 foreign patents covering a number
of processes and devices that unauthorized parties could use to circumvent the
Company's copy protection technologies. The Company uses these patents to limit
the proliferation of devices intended to circumvent the Company's copy
protection technologies. The Company has initiated a number of patent
infringement disputes against manufacturers and distributors of such devices.
The Company has one lawsuit of this type pending to require the defendants to
discontinue the sale of devices that circumvent the Company's copy protection
technologies and infringe one or more of the Company's circumvention patents. In
the event of an adverse ruling in this litigation or in any similar litigation,
the Company might suffer from the legal availability of such a circumvention
device or obtain rights to the offending devices. The legal availability of
circumvention devices could result in the increased proliferation of devices
that defeat the Company's copy protection technology and a decline in demand for
the Company's technologies, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There is
legislation before the United States Congress and certain foreign legislative
bodies that would make such circumvention devices illegal. The Company is
supporting the legislative effort to make such circumvention devices illegal
irrespective of any patent position held by the Company.

Additional litigation may be necessary in the future to limit the sale of
circumvention technologies, to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. There can be no assurance
that any such litigation will be successful. Such litigation could result in
substantial costs, including indemnification of customers, and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations, whether or not such litigation is
determined adversely to the Company. In the event of an adverse ruling in any
such litigation, the Company might be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringed
technology. The failure of the Company to develop or license a substitute
technology could have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Risks of Circumvention
Technologies," "Business--Research and Development" and "Business--Intellectual
Property Rights."

RAPID TECHNOLOGICAL CHANGE. The video security industry in which the
Company competes, and in which its technologies and products are utilized, is
characterized by rapid technological change, frequent product introductions and
enhancements, changes in customer demands and evolving industry standards. The
emergence of new industry standards and the introduction of new technologies or
products embodying new technologies can render existing technologies or products
obsolete and unmarketable. For example, new industry standards for VCRs or
television sets could adversely affect the effectiveness or transparency of the
Company's copy protection technology. The Company's videocassette copy
protection technology exploits the automatic gain control ("AGC") circuit in VHS
videocassette recorders. While most VCR manufacturers use a standard AGC circuit
that responds to the Company's copy protection process, there can be no
assurance that VCR manufacturers will not use alternative AGC circuits that do
not respond to the Company's copy protection technology, thereby lessening the
effectiveness of the Company's consumer copy protection solution over time as
new VCRs are sold into the market. Moreover, there can be no assurance that
television manufacturers will continue to design television sets that are
transparent to the Company's copy protection technologies when they display
original, copy protected videocassettes, DVDs and digital PPV programming.

The success of the Company's PhaseKrypt video scrambling technology will
depend upon the growth of analog cable Pay TV networks in the Pacific Rim, South
America and other developing areas and the ability of the Company's licensees to
sell into those markets. The financial crisis in Southeast Asia has delayed
expected cable television system upgrades in that region and, consequently, has
adversely affected the ability of the

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Company's licensees to sell addressable set-top decoders that include the
Company's PhaseKrypt video scrambling technology. The development of lower cost
digital video scrambling systems could result in a transition from analog to
digital scrambling systems in the developing cable Pay TV markets and a
reduction in demand for the Company's PhaseKrypt video scrambling technology.

The Company's future success will depend in large part on its ability to
enhance its current technologies and products in a timely, cost-effective manner
and to develop new technologies and products that meet changing market
conditions, which include emerging industry standards, changing customer
demands, new competitive product offerings and changing technology. There can be
no assurance that the Company will be successful in developing and marketing, on
a timely and cost-effective basis or at all, fully functional and integrated
product enhancements or new technologies or products that respond to
technological change, updates or enhancements to other consumer electronics
products, changes in customer requirements or evolving industry standards; that
the Company will not experience difficulties that delay or prevent the
successful development, introduction and license or sale of such enhancements,
technologies or products; or that any such enhancements, technologies or
products will adequately meet the requirements of the marketplace and achieve
market acceptance. Any failure by the Company to anticipate or to respond
adequately to changing market conditions, or any significant delays in
technology or product development or introduction, could cause customers to
delay or decide against licensing or purchasing the Company's technologies or
products and would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Research and
Development" and "Business--Legislative and Technology Initiatives."

RISKS OF CIRCUMVENTION TECHNOLOGIES. Attempts by third parties to
circumvent the Company's copy protection technologies have been and are expected
to be a persistent problem. To anticipate such attempts, the Company has
developed and patented a number of processes and devices in the videocassette
and DVD fields that could be used by unauthorized parties to circumvent its copy
protection technologies. The Company has then attempted to use these patents as
barriers to the manufacture and sale of such devices by others. The Company has
no such patents specifically directed to the digital-to-digital or CD-ROM copy
protection fields. Notwithstanding the Company's patent position, a number of
devices have been available, and currently are available, that circumvent copy
protection. Moreover, the Company's copy protection technologies are not
effective against professional duplication and video processing equipment. There
can be no assurance that third parties will not be able to develop circumvention
technologies that do not infringe the Company's patents or that the Company will
be able to obtain patents on circumvention technologies developed in the future.
A number of factors could cause copyright holders to choose not to use the
Company's copy protection technology, including a perception that the inability
of the Company's technology to deter professional pirates renders the Company's
technology less useful, the interference with legitimate consumer use of the
original copyrighted product, the commercial availability of products that
circumvent the Company's copy protection technology, or any significant
reduction in the effectiveness of the Company's copy protection technology in
deterring consumer copying. Any reduction in demand for the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Dependence on Proprietary
Technology," "Business--Technology," "Business--Research and Development" and
"Business--Intellectual Property Rights."

RISKS ASSOCIATED WITH STRATEGIC INVESTMENTS. The Company has recently
expanded its technological base in current as well as new markets through
strategic investments in companies with complementary or compatible technologies
or products. The Company currently holds minority equity interests in Command
Audio Corporation, Digimarc and C-Dilla. Such investments, which total $8.4
million and represented 27.6% of the Company's total assets at March 31, 1998,
involve a number of risks. The negotiation, creation and management of these
strategic relationships typically involve a substantial commitment of management
time and resources by the Company, and there can be no assurance that the
Company will ever recover the cost of such management resources. Because these
companies are privately held, there is no active trading market for their
securities, and the Company's investments in them are illiquid. There may never
be an opportunity for the Company to realize a return on its investment in any
of these companies, and the Company may in the future be required to write off
all or part of one or more of these investments. The write-off of all or part of
one or more of these investments could have a material adverse affect on the
Company's business, financial condition and results of operations.

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The Company's strategic investments typically involve joint development or
marketing efforts or technology licensing. There can be no assurance that any
joint development efforts will result in the successful introduction of new
products by the Company or a third party, or that any joint marketing efforts
will result in increased demand for the Company's products. Further, there can
be no assurance that any current or future strategic investments by the Company
will allow the Company to enter and compete effectively in new markets or
improve the Company's performance in current markets. See "Business--Strategic
Investments."

DEPENDENCE ON SUPPLIERS AND THIRD-PARTY MANUFACTURERS. The Company depends
upon third-party manufacturers and suppliers for components, subassemblies and
printed circuit boards used in its VES products, PhaseKrypt encoders, PhaseKrypt
decoder components and videocassette copy protection processors. The Company's
product designs are proprietary but generally incorporate industry-standard
hardware components that are obtainable from multiple sources. The Company's
ability to deliver its products in a timely manner depends upon the availability
of quality components and subassemblies used in these products and, in part, on
the ability of subcontractors to manufacture, assemble and deliver certain items
in a timely and satisfactory manner. The Company obtains certain electronic
components and subassemblies from a single source or a limited number of
sources. For example, Atmel Corporation is currently the Company's sole source
of integrated circuits for the Company's PhaseKrypt decoders. The reliance on
third-party manufacturers and sole or limited suppliers involves a number of
risks, including a potential inability to obtain an adequate supply of required
components, subassemblies and printed circuit boards and reduced control over
pricing, quality and timely delivery of components, subassemblies and printed
circuit boards. A significant interruption in the delivery of any such items or
any other circumstance that would require the Company to seek alternative
sources of supply could result in the inability of the Company to deliver
certain of its products on a timely basis, which in turn could result in a
deterioration of the Company's customer relationships and have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing."

NEED TO ESTABLISH AND MAINTAIN LICENSING RELATIONSHIPS. The Company's
future success will depend in part upon its ability to establish and maintain
licensing relationships with companies in related business fields, including
videocassette duplicators, international distributors of videocassettes, DVD
authoring facilities and replicators, semiconductor and equipment manufacturers,
operators of digital PPV systems, consumer electronics hardware manufacturers
and CD-ROM mastering facilities and replicators. The Company believes that these
current and future relationships can allow the Company greater access to
manufacturing, sales and distribution resources. However, the amount and timing
of resources to be devoted to these activities by such other companies are not
within the Company's control. There can be no assurance that the Company will be
able to maintain its existing relationships or enter into beneficial
relationships in the future, that other parties will perform their obligations
as expected or that the Company's reliance on others for the development,
manufacturing and distribution of its technologies and products will not result
in unforeseen problems. Substantially all of the Company's license agreements
are non-exclusive, and therefore such licensees are free to enter into similar
agreements with third parties, including the Company's current or potential
competitors. There can be no assurance that the Company's licensees will not
develop or pursue alternative technologies either on their own or in
collaboration with others, including the Company's competitors, as a means of
developing or marketing products targeted by the collaborative programs and by
the Company's products. The failure of any of the Company's current or future
collaboration efforts could have a material adverse effect on the Company's
ability to introduce new products or applications and therefore could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Technologies and Products" and
"Business--Customers."

COMPETITION. The Company believes that it has had no significant
videocassette copy protection competitor for the last five years other than
companies that have occasionally developed hardware based on the Company's
technology in foreign countries where the Company does not have patents issued.
It is possible, however, that a competitive copy protection technology could be
developed in the future. For example, the Company's customers could attempt to
promote competition by supporting the development of alternative copy protection
technologies or solutions, including solutions that deter professional
duplication. Increased competition would be likely to result in price reductions
and loss of market share, either of which could materially adversely affect the
Company's business, financial condition and results of operations.

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The Company and Digimarc are jointly developing a digital media copy
protection solution to address the digital-to-digital copying issues associated
with the next generation of DVD and digital videocassette recording devices.
They have submitted their proposed solution to the CPTWG. The Company and
Digimarc are competing with at least six other companies that have submitted
similar proposals to the CPTWG. Certain of these companies have substantially
greater name recognition and significantly greater financial, technical,
marketing and other resources than the Company and Digimarc. There can be no
assurance that the Company and Digimarc will be able to compete successfully in
presenting their proposal to the CPTWG. The company whose digital media copy
protection solution is selected by the CPTWG will have a significant advantage
in licensing its technology to video rights owners worldwide and in working with
consumer electronics manufacturers, PC platform companies and their suppliers to
implement digital-to-digital copy protection. If the solution being developed by
the Company and Digimarc is not the selected solution or otherwise is not widely
adopted by studios or consumer electronics manufacturers, the Company and
Digimarc will be at a competitive disadvantage in marketing their solution. If
the CPTWG adopts the Company's and Digimarc's solution, there can be no
assurance that other companies will elect not to compete in this market.

The market for video scrambling products and technologies is highly
competitive. The Company, as a recent entrant into these markets, competes
directly or through licensed manufacturers with many companies, including
General Instrument Corporation, Pioneer Electronic Corporation,
Scientific-Atlanta, Inc., Tandberg Cryptovision A.S., VTech-HYH Broadcast
Systems and Zenith Electronics Corporation. These companies have substantially
greater name recognition, larger installed customer bases and market share and
significantly greater financial, technical, marketing and other resources than
the Company and its licensees, many of which are manufacturing and selling
addressable set-top decoders for the first time. There can be no assurance that
the Company and its licensees will be able to compete successfully in the video
scrambling systems markets, that the Company will be able to make technological
advances necessary to improve or even maintain its competitive position or that
the Company's products will achieve market acceptance. In addition, there can be
no assurance that technological changes or development efforts by the Company's
competitors will not render the Company's video scrambling products obsolete or
uncompetitive.

RISKS ASSOCIATED WITH INTERNATIONAL AND EXPORT SALES. In 1996, 1997 and the
first three months of 1998, international and export sales together represented
37.9%, 46.5% and 50.0%, respectively, of the Company's net revenues. The Company
expects that such sales will continue to represent a substantial portion of its
net revenues for the foreseeable future. The Company's future growth will depend
to a large extent on worldwide deployment of addressable analog cable television
systems, as well as digital PPV programming and DVDs and the use of copy
protection in these media. To the extent that foreign governments impose
restrictions on importation of programming, technology or components from the
United States, the requirement for copy protection and video scrambling in these
markets would diminish. Any limitation on the growth of these markets or the
Company's ability to sell its products or license its technologies into these
markets would have a material adverse effect on the Company's business,
financial condition and results of operations. In particular, the net revenues
that the Company derives from video scrambling decreased 20.2% from the first
three months of 1997 to the first three months of 1998, due to decreased demand
for analog decoding equipment primarily due to the financial crisis in Southeast
Asia. In addition, this crisis has delayed expected cable television system
upgrades in that region and, consequently, has adversely affected the ability of
the Company's licensees to sell addressable set-top decoders that include the
Company's PhaseKrypt video scrambling technology. In addition, the laws of
certain foreign countries may not protect the Company's intellectual property
rights to the same extent as do the laws of the United States, which increases
the risk of unauthorized use of the Company's technologies and the ready
availability or use of circumvention technologies. Such laws also may not be
conducive to copyright protection of video materials and digital media, which
reduces the need for the Company's copy protection and video scrambling
technologies.

Due to its reliance on international and export sales, the Company is
subject to the risks of conducting business internationally, including foreign
government regulation and general geopolitical risks such as political and
economic instability, potential hostilities and changes in diplomatic and trade
relationships. International and export sales are subject to other risks, such
as changes in, or imposition of, regulatory requirements, decision making
control to use the Company's products by studio headquarters operations, tariffs
or taxes and other trade

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barriers and restrictions, foreign government regulations, fluctuations in
currency exchange rates, interpretations or enforceability of local patent or
other intellectual property laws, longer payment cycles, difficulty in
collecting accounts receivable, potentially adverse tax consequences, the
burdens of complying with a variety of foreign laws, difficulty in staffing and
managing foreign operations and political and economic instability. For example,
under the United States Export Administration Act of 1979, as amended, and
regulations promulgated thereunder, encryption algorithms such as those used in
the Company's video scrambling technologies are classified as munitions and
subject to stringent export controls. Any changes to the statute or the
regulations with respect to export of encryption technologies could require the
Company to redesign its products or technologies or prevent the Company from
selling its products and licensing its technologies internationally. While
international and export sales are typically denominated in United States
dollars, fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in that country. There
can be no assurance that the Company's future results of operations will not be
materially adversely affected by currency fluctuations. The Company's business
and operating results could be materially adversely affected if foreign markets
do not continue to develop, or if the Company does not receive additional orders
to supply its technologies or products for use in foreign prerecorded video, PPV
and Pay TV networks and other applications requiring the Company's video
security solutions. See "Business--Sales, Marketing and Customer Support" and
Note 9 of Notes to Consolidated Financial Statements.

MANAGEMENT OF GROWTH. The growth of the Company's business has placed, and
is expected to continue to place, significant demands on the Company's
personnel, management and other resources. The Company's future results of
operations will depend in part on the ability of its officers and other key
employees to continue to implement and expand its operational, customer support
and financial control systems and to expand, train and manage its employee base.
In order to manage its future growth, if any, successfully, the Company will be
required to hire additional personnel and to augment its existing financial and
management systems or to implement new such systems. There can be no assurance
that management will be able to augment or to implement such systems efficiently
or on a timely basis, and the failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to manage any future
expansion successfully, and any inability to do so would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company typically receives license fees for videocassette and DVD copy
protection based upon the number of copy protected videocassettes and DVDs that
are produced by the MPAA studios or other rights holders. Information relating
to the number of copy protected units may not be reported to the Company until
one to three months after the period of actual usage. As a result, the Company
recognizes revenue based upon estimates of historical usage, recent trends,
market information and specific customer communications. While to date the
Company's estimates have been reasonably accurate, as the Company's product
offerings expand, and if the revenues generated from copy protection of PPV
programming and DVDs, as well as royalties from digital set-top decoders,
increase, deriving such estimates will become more complex. There can be no
assurance that, in a future period, the Company's estimates as to the usage of
its copy protection technology will be accurate. Adjustments to record the
difference between estimated and actual revenue could have a material adverse
effect on the Company's business, financial condition and results of operations
for the period in which the adjustment is recorded.

DEPENDENCE ON KEY PERSONNEL. Because of the specialized nature of the
Company's business, the Company's future performance is highly dependent upon
the continued service of members of the Company's senior management and other
key research and development and sales and marketing personnel. The loss of any
of such persons could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not have
employment contracts for a fixed term with any of its employees in the United
States. The Company believes that its future success will depend upon its
continuing ability to identify, attract, train and retain other highly skilled
managerial, technical, sales and marketing personnel, particularly as the
Company enters new markets. Hiring for such personnel is competitive. There can
be no assurance that the Company will be able to continue to attract, assimilate
and retain the qualified personnel necessary for the development of its
business. The failure to recruit additional key personnel in a timely manner, or
the failure to

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retain new or current personnel, would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Employees" and "Management."

TRANSACTIONS WITH COMPANY AFFILIATES. The Company is a party to a number of
transactions with affiliated entities. Victor Company of Japan, Limited ("JVC"),
the parent of a principal stockholder of the Company, licenses and utilizes
various technologies of the Company pursuant to several agreements. Matsushita
Electric Industrial Co., Ltd., which owns approximately 52% of JVC, also is a
party to four agreements with the Company. In addition, the Company has certain
agreements with a former subsidiary, Command Audio Corporation, in which it
currently has a 19.8% interest. See Note 4 of Notes to Consolidated Financial
Statements.

SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock (including shares issued upon the exercise of stock options) in the public
market following this offering by current holders of the Company's Common Stock
and stock options exercisable therefor, or the perception that such sales might
occur, could adversely affect the market price of the Common Stock and the
Company's ability to raise additional equity capital. The Selling Stockholders
and the Company's executive officers and directors have agreed with the
Underwriters not to sell, offer, contract to sell, transfer the economic risk of
ownership in or otherwise dispose of (including without limitation in a short
sale), for a period of 90 days after the effective date of the Registration
Statement of which this Prospectus is a part (the "lock-up period"), any shares
of Common Stock of the Company or any options to purchase any shares of Common
Stock of the Company now owned or hereafter acquired by them or with respect to
which they have the power of disposition, without the prior written consent of
Hambrecht & Quist LLC. As a result, 3,018,016 shares of Common Stock or
securities exercisable or exchangeable for Common Stock within 60 days after
March 31, 1998 are restricted during the lock-up period. The Company also has
agreed with the Underwriters that, subject to certain limited exceptions, it
will not offer to sell, contract to sell or otherwise sell or issue any shares
of Common Stock for 90 days after the effective date of the Registration
Statement of which this Prospectus is a part, without the prior written consent
of Hambrecht & Quist LLC. See "Principal and Selling Stockholders" and
"Underwriting."

CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS. Immediately
following this offering, the Company's principal stockholders, officers,
directors and their affiliates will, in the aggregate, beneficially own
approximately 35.0% of the Company's outstanding Common Stock (34.1% if the
Underwriters' over-allotment option is exercised in full). As a result, such
persons, acting together, will have the ability to control the vote on all
matters submitted to the stockholders of the Company for approval (including
election of directors and any merger, consolidation or sale of all or
substantially all of the Company's assets) and to control the management and
affairs of the Company. Accordingly, such concentration of ownership may have
the effect of delaying, deferring or preventing a change in control of the
Company, impede a merger, consolidation, takeover or other business combination
involving the Company or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of the Company. In addition, JVC
has the right to purchase a pro rata portion (proportionate to its ownership
interest in the Company) of any equity securities offered by the Company,
subject to certain exceptions. Such right could have the effect of making it
more difficult for the Company to effect financing transactions in the future.
See "Management" and "Principal and Selling Stockholders."

MANAGEMENT'S DISCRETION OVER PROCEEDS OF THE OFFERING. The Company expects
to use the net proceeds of this offering, over time, for general corporate
purposes, including working capital. However, the Company has no current
specific plans for the net proceeds of this offering. As a result, the Company's
management will have the discretion to allocate the net proceeds to uses that
stockholders may not deem desirable. There can be no assurance that the net
proceeds can or will be invested to yield a significant return. See "Use of
Proceeds."

LITIGATION RISKS. In October 1995, Joseph Swyt, a former officer and
director of the Company, filed suit against the Company in the Superior Court of
the State of California alleging monetary damages suffered as a result of
alleged fraud, misrepresentation and other malfeasance in connection with the
Company's grant of stock options to him. Mr. Swyt maintains that the Company
induced him to accept employment by falsely representing to him that the options
granted to him eventually would have substantial value. Between August 1990 and
December 1993, the Company granted to him options to purchase approximately
200,000 shares with

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per-share exercise prices of $2.25 or $2.70. Substantially all of these options
expired unexercised within three months following his departure from the Company
in June 1995. In December 1996, the court ordered this matter to binding
arbitration in accordance with a written agreement between the Company and Mr.
Swyt. The arbitration agreement contains limitations on the types of damages
available to Mr. Swyt and expressly precludes punitive damages. Mr. Swyt filed
his claim in arbitration for this matter with the American Arbitration
Association in June 1997 and arbitration hearings are scheduled for October
1998. The Company believes that the case is without merit and intends to contest
it vigorously. However, it is not possible to determine with precision the
probable outcome or the amount of liability, if any, under this lawsuit. A
decision against the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.

Krypton Co., Ltd., a Japanese company, has filed an invalidation claim
against one of the Company's anti-copy patents in Japan. After consultation with
Japanese patent counsel, the Company believes that this claim is without merit
and will aggressively contest the claim in the Japanese Patent Office. From time
to time, the Company has received claims from third parties that the Company's
technologies and products infringe the intellectual property rights of such
third parties. Any such claims, with or without merit, could be time consuming
to defend, result in costly litigation, cause product shipment delays or require
the Company to cease utilizing the infringing technology unless it can enter
into royalty or licensing agreements. Such royalty or licensing agreements might
not be available on terms acceptable to the Company, or at all, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.

The Company now has pending one patent infringement lawsuit to require the
defendants to discontinue the sale of devices that circumvent the Company's copy
protection technologies and infringe one or more of the Company's circumvention
patents. In the event of an adverse ruling in this litigation, the Company might
suffer from the legal availability of such a circumvention device or obtain
rights to the offending devices. The Company and C-Dilla have received
communications from Ablex Audio Video Ltd. and its subsidiary, Pan Technologies,
notifying them that these companies assert rights to the technology that C-Dilla
licenses to the Company and claiming that the Company's agreements with C-Dilla
violate understandings that these companies had allegedly reached with C-Dilla.
The Company has been informed that a number of potential customers for the
CD-ROM copy protection solution to be marketed by the Company have received
similar communications. The Company believes that these assertions and claims
are without merit. If, as threatened, these companies commence litigation
against the Company or C-Dilla, uncertainty could develop as to the Company's
rights to the CD-ROM copy protection technology, which could impair the
Company's ability to market the technology and have a material adverse effect on
the Company's business, financial condition and results of operations. To the
extent that these or any other similar communications create uncertainty in the
marketplace, acceptance of the technology to be marketed by the Company would be
delayed, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business-- Intellectual
Property Rights," "Business--Legal Proceedings" and Note 8 of Notes to
Consolidated Financial Statements.

YEAR 2000 ISSUES. Certain organizations anticipate that they will
experience operational difficulties at the beginning of the Year 2000 as a
result of computer programs being written using two digits rather than four to
define the applicable year. The Company's plan for the Year 2000 calls for
compliance verification with external vendors supplying the Company software,
testing in-house engineering and manufacturing software tools, testing software
in the Company's products for the Year 2000 and communication with significant
suppliers to determine the readiness of third parties' remediation of their own
Year 2000 issues. To date, the Company has not encountered any material Year
2000 issues concerning its respective computer programs. The Company plans to
complete its Year 2000 research and testing by the end of 1998. All costs
associated with carrying out the Company's plan for the Year 2000 problem are
being expensed as incurred. The costs associated with preparation for the Year
2000 are not expected to have a material adverse effect on the Company's
business, financial condition and results of operations. Nevertheless, there is
uncertainty concerning the potential costs and effects associated with any Year
2000 compliance. Any Year 2000 compliance problems of the Company or its
customers or suppliers could have a material adverse effect on the Company's
business, financial condition and results of operations. During the past three
years, the Company completed an effort to convert its financial

15
<PAGE>
applications to commercial products that, according to their suppliers, are Year
2000 compliant. The Company has received confirmations from its primary
suppliers indicating that they are either Year 2000 compliant or have plans in
place to ensure readiness. As part of the Company's assessment, it is evaluating
the level of validation it will require of third parties to ensure their Year
2000 readiness.

EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Board of Directors has
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may delay,
defer or prevent a change in control of the Company. The Company has no present
plans to issue shares of Preferred Stock. Additionally, the Company's charter
documents contain a provision eliminating the ability of the Company's
stockholders to take action by written consent. This provision is designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal,
to maintain independent ownership and control of the Company's copy protection
technologies and to render the use of stockholder written consent unavailable as
a tactic in a proxy fight. However, such provision could have the effect of
discouraging others from making tender offers for the Company's shares, thereby
inhibiting increases in the market price of the Company's shares that could
result from actual or rumored takeover attempts. Such provision also may have
the effect of preventing changes in the management of the Company. Further, the
Company's Bylaws limit the ability of stockholders of the Company to raise
matters at a meeting of stockholders without giving advance notice thereof. In
addition, Section 203 of the Delaware General Corporation Law, to which the
Company is subject, restricts certain business combinations with any "interested
stockholder" as defined by such statute. The statute may delay, defer or prevent
a change in control of the Company.

Pursuant to the terms of a Copy Protection Technology Agreement (the
"Technology Agreement") between the Company and Victor Company of Japan, Limited
("JVC"), the Company has agreed to continue to license its copy protection
technologies to third parties in the event of the acquisition of the Company by
a party other than JVC. Further, the Company has granted to JVC the right to
sublicense the Company's copy protection technologies in the event that the
Company fails to make its copy protection technologies generally available for
licensing to third parties following an acquisition of the Company. The
Technology Agreement could have the effect of making the Company less attractive
to third parties as an acquisition candidate.

POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock has been and in the future could be significantly affected by
factors such as actual or anticipated fluctuations in the Company's operating
results, announcements of technical innovations, new products or new contracts
by the Company, its competitors or their customers, governmental regulatory
action, developments with respect to patents or proprietary rights, changes in
financial estimates by securities analysts, general market conditions and other
factors, certain of which could be unrelated to, or outside the control of, the
Company. In addition, announcements by the CPTWG, the MPAA or its members,
satellite television operators, cable television operators or others regarding
motion picture distribution, business combinations, evolving industry standards
or other developments could cause the market price of the Company's Common Stock
to fluctuate substantially. The stock market has from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stocks of technology companies and that often have
been unrelated or disproportionate to the operating performance of such
companies. Further, the trading prices of the stocks of many technology
companies, including the Company, are at or near historical highs and reflect
price/earnings ratios substantially above historical levels. There can be no
assurance that these trading prices and price/ earnings ratios will be
sustained. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has been initiated
against such company. There can be no assurance that such litigation will not
occur in the future with respect to the Company. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Any settlement or adverse
determination in such litigation could also subject the Company to significant
liability, which could have a material adverse effect on the Company's business,
financial condition and results of operations. These market price fluctuations,
as well as general economic, political and market conditions such as recessions
or international currency fluctuations, may adversely affect the market price of
the Common Stock.

16
<PAGE>
THE COMPANY

The Company was incorporated in California in January 1983. It operated as a
corporation until 1985 and as a limited partnership from 1985 until its
incorporation as Macrovision Corporation in 1987. The Company reincorporated in
Delaware in February 1997. As used in this Prospectus, references to the
"Company" and "Macrovision" refer to Macrovision Corporation, its predecessors
and its consolidated subsidiaries. The Company's principal executive offices are
located at 1341 Orleans Drive, Sunnyvale, California 94089. The Company's
telephone number is (408) 743-8600.

Macrovision-Registered Trademark-, PhaseKrypt-Registered Trademark- and
Protecting Your Image-Registered Trademark- are registered trademarks of the
Company. CineGuard-TM-, Colorstripe-TM-, VES-TM- and VES-TM-TM- are trademarks
of the Company. SafeDisc-TM- is a trademark held jointly by the Company and
C-Dilla. All other trademarks or trade names referred to in this Prospectus are
the property of their respective owners.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,140,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$22.9 million ($27.5 million if the Underwriters' over-allotment option is
exercised in full), assuming a public offering price of $21.75 per share and
after deducting the estimated underwriting discount and offering expenses. The
Company expects to use the net proceeds for general corporate purposes,
including working capital. However, the Company has not allocated any specific
portion of the net proceeds to such purposes and management will have the
ability to allocate such proceeds at its discretion. From time to time in the
ordinary course of business, the Company evaluates opportunities for strategic
investments, licensing arrangements, joint ventures and acquisitions of
products, businesses and technologies that complement the Company's business,
for which a portion of the net proceeds may be used. Currently, however, the
Company does not have any agreements with respect to any such opportunities.
Pending use of the net proceeds for the above purposes, the Company intends to
invest such funds in short-term, interest-bearing, investment-grade securities.
The Company will not receive any proceeds from the sale of shares by the Selling
Stockholders. See "Risk Factors--Management's Discretion Over Proceeds of the
Offering."

PRICE RANGE OF COMMON STOCK

The Company's initial public offering occurred on March 13, 1997 at a price
to the public of $9.00 per share. Since that date, the Company's Common Stock
has been quoted on the Nasdaq National Market under the symbol MVSN. The
following table sets forth for the periods indicated the high and low sale
prices per share of the Common Stock.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997
First Quarter (commencing March 13, 1997)............................. $ 9.000 $ 8.000
Second Quarter........................................................ 14.750 8.250
Third Quarter......................................................... 18.125 12.750
Fourth Quarter........................................................ 17.125 12.750
1998
First Quarter......................................................... 19.313 14.250
Second Quarter (through June 1, 1998)................................. 26.125 17.500
</TABLE>

On June 1, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $21.75 per share. As of March 20, 1998, there were
123 stockholders of record of the Common Stock.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends on its Common Stock
since 1994. The Company currently anticipates that it will retain all future
earnings for use in its business and does not anticipate that it will pay any
cash dividends in the foreseeable future. The payment of any future dividends
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements and
the general financial condition of the Company, general business conditions and
contractual restrictions on payment of dividends, if any.

The Company paid or declared a cash dividend of $0.135 per share of Series A
Preferred Stock in every quarter from the third quarter of 1991 through 1996,
and paid a cash dividend of $0.075 per share of Series A Preferred Stock for the
first quarter of 1997 until March 17, 1997 when the Series A Preferred Stock
converted into Common Stock.

17
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company, as of
March 31, 1998: (i) on an actual basis and (ii) as adjusted to give effect to
the sale by the Company of the 1,140,000 shares of Common Stock offered by the
Company hereby at an assumed public offering price of $21.75 per share and after
deducting the estimated underwriting discount and offering expenses. This table
should be read in conjunction with the consolidated financial statements of the
Company and the notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)

<S> <C> <C>
Capital lease obligations, net of current portion......................................... $ 160 $ 160
--------- -----------
--------- -----------

Stockholders' equity:
Preferred stock, par value $0.001 per share:
Authorized, 5,000,000 shares; no shares issued and outstanding........................ -- --
Common stock, par value $0.001 per share:
Authorized, 50,000,000 shares; issued and outstanding, 7,273,254 shares (8,413,254
shares as adjusted) (1)............................................................. 7 8
Additional paid-in capital.............................................................. 23,534 46,402
Stockholder notes receivable............................................................ (131) (131)
Deferred stock compensation............................................................. (61) (61)
Accumulated other comprehensive income.................................................. (214) (214)
Retained earnings....................................................................... 1,728 1,728
--------- -----------
Total stockholders' equity.......................................................... 24,863 47,732
--------- -----------
Total capitalization.............................................................. $ 25,023 $ 47,892
--------- -----------
--------- -----------
</TABLE>

- ------------------------

(1) The numbers of shares of Common Stock issued and outstanding do not include
821,776 shares of Common Stock issuable at a weighted average exercise price
of $6.80 per share upon exercise of stock options outstanding as of March
31, 1998 under the Company's Stock Option Plan, 1996 Equity Incentive Plan
and 1996 Directors Stock Option Plan, 131,103 additional shares reserved for
future grants under the 1996 Equity Incentive Plan, 45,000 shares reserved
for future grants under the 1996 Directors Stock Option Plan or 111,855
shares reserved for future issuance under the 1996 Employee Stock Purchase
Plan. They also do not include 400,000 additional shares reserved for
issuance under the 1996 Equity Incentive Plan in April 1998. See Note 5 of
Notes to Consolidated Financial Statements.

18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus. The selected consolidated
financial data presented below as of and for the years ended December 31, 1996
and 1997 have been derived from the audited consolidated financial statements
audited by KPMG Peat Marwick LLP, independent auditors, and included elsewhere
in this Prospectus. The selected consolidated financial data presented below as
of and for the years ended December 31, 1993, 1994, and 1995 have been derived
from audited consolidated financial statements not included herein. The
consolidated balance sheet data as of March 31, 1998 and the consolidated
statement of income data for the three months ended March 31, 1997 and 1998 are
derived from unaudited consolidated financial statements included elsewhere in
this Prospectus. The unaudited consolidated financial statements have been
prepared on substantially the same basis as the audited consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. Historical results
are not necessarily indicative of the results to be expected in the future and
results of interim periods are not necessarily indicative of results for the
entire year.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net revenues..................................... $ 9,549 $ 13,330 $ 14,189 $ 17,080 $ 20,340 $ 4,564 $ 5,178
Costs and expenses:
Cost of revenues............................... 1,578 2,067 2,457 2,579 2,422 681 398
Research and development....................... 1,639 2,355 2,161 2,527 2,248 557 623
Selling and marketing.......................... 2,848 3,637 4,270 5,090 5,765 1,548 1,526
General and administrative..................... 1,913 2,467 3,118 3,566 4,149 879 1,159
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses..................... 7,978 10,526 12,006 13,762 14,584 3,665 3,706
--------- --------- --------- --------- --------- --------- ---------
Operating income from continuing operations...... 1,571 2,804 2,183 3,318 5,756 899 1,472
Interest and other income (expense), net......... (462) (417) (433) (260) 478 24 131
--------- --------- --------- --------- --------- --------- ---------
Income from continuing operations before
income taxes............................... 1,109 2,387 1,750 3,058 6,234 923 1,603
Income taxes..................................... 444 886 694 1,223 2,413 369 609
--------- --------- --------- --------- --------- --------- ---------
Income from continuing operations............ 665 1,501 1,056 1,835 3,821 554 994

Loss from discontinued operations, net of tax
benefit (1).................................... -- -- (125) (827) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income................................... $ 665 $ 1,501 $ 931 $ 1,008 $ 3,821 $ 554 $ 994
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per share:
Continuing operations:
Basic........................................ $ 0.33 $ 0.57 $ 0.09 $ 0.14
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted...................................... $ 0.29 $ 0.53 $ 0.08 $ 0.13
Diluted discontinued operations (1)............ (0.19) -- -- --
--------- --------- --------- ---------
Net income................................... $ 0.10 $ 0.53 $ 0.08 $ 0.13
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing earnings (loss) per
share (2)
Basic.......................................... 3,787 6,476 4,490 7,244
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted........................................ 4,280 6,960 4,903 7,735
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $ 3,397 $ 3,851 $ 3,486 $ 2,409 $ 12,555 $ 11,607
Working capital................................. 3,599 3,860 3,848 2,225 15,266 13,064
Total assets.................................... 7,076 9,240 10,943 11,953 28,856 30,436
Convertible note................................ 3,038 3,038 3,038 -- -- --
Long-term obligations, net of current portion
(3)........................................... -- -- 554 296 188 160
Total stockholders' equity...................... 1,867 2,388 2,846 6,072 23,577 24,863
</TABLE>

- ------------------------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) For an explanation of the determination of the number of shares used in
computing basic and diluted earnings (loss) per share, see Note 1 of Notes
to Consolidated Financial Statements.
(3) See Note 7 of Notes to Consolidated Financial Statements.

19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER
OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.

OVERVIEW

Macrovision was founded in 1983 to develop video security solutions for
major motion picture studios and independent video producers. Since that time,
the Company has derived most of its revenues and operating income from licensing
its video copy protection technologies, primarily for videocassettes and, more
recently, for DVD and digital PPV applications. Copy protection revenues
represented 87.5%, 85.6% and 85.0% of the Company's net revenues in 1996, 1997
and the first three months of 1998, respectively. The Company expects such
license fees to account for a majority of the Company's net revenues and
operating income at least through 1998. The Company's videocassette copy
protection customers have included the home video divisions of the seven members
of the MPAA. The Company also has a variety of special interest videocassette
copy protection customers, including more than 125 videocassette duplication
companies and a number of rights holders, such as independent producers of
exercise, sports and educational videocassettes. The Company typically receives
license fees for videocassette copy protection based upon the number of copy
protected videocassettes that are produced by MPAA studios or other rights
holders. License fees from MPAA studios represented a majority of such fees in
1996, 1997 and the first three months of 1998.

In 1993, the Company began licensing its digital PPV video copy protection
technologies to satellite and cable television system operators and to the
equipment manufacturers that supply the satellite and cable television
industries. These manufacturers include in their digital set-top decoders
integrated circuits incorporating the Company's copy protection technologies
that can be activated to apply video copy protection to digital PPV
transmissions. The Company's digital PPV copy protection revenues have been
derived from up-front license fees, hardware royalties and, in 1997 and
thereafter, limited PPV programming royalties. Digital PPV up-front license
fees, hardware royalties and PPV programming royalties were 12.2%, 18.2% and
13.2% of the Company's net revenues in 1996, 1997 and the first three months of
1998, respectively. The Company's agreements with digital PPV system operators
entitle the Company to transaction-based royalty payments subsequent to the
activation of copy protection for digital PPV programming.

In 1994, the Company began licensing and selling its PhaseKrypt video
scrambling technology to manufacturers of analog set-top decoders for sale to
cable television system operators in developing cable television markets. The
Company also sells other analog scrambling systems to television broadcasters
for securing incoming contribution circuits to network control centers and
outbound rebroadcast circuits to affiliate and regional stations. Finally, the
Company sells specialized analog video scrambling systems in the government,
military and law enforcement markets, primarily for covert surveillance
applications. Video scrambling revenues increased from 12.1% of the Company's
net revenues in 1996 to 13.5% in 1997 and 15.0% in the first three months of
1998. Gross margins on sales of the Company's video scrambling products have
been significantly lower than on its licenses of copy protection or video
scrambling technologies because of the hardware product costs associated with a
more traditional manufacturing environment. The Company expects this margin
differential to continue for the foreseeable future.

In 1997, the Company derived its first revenues from royalties and hardware
license fees associated with DVD copy protection. The initial customers
implementing such protection have been MPAA studios. Revenues from DVD royalties
in 1997 were not significant, but the Company expects revenues from DVD copy
protection to increase in 1998 as market acceptance of DVD players increases and
more MPAA studios release their motion pictures in DVD format.

20
<PAGE>
developed during 1994 and 1995. This technology does not involve copy protection
or video scrambling, but rather digitally stores broadcast audio programs so
that a user can listen to these programs at his or her convenience. In August
1996, the Company divested itself of all but 19.8% of its ownership in CAC. As a
result, the financial results of CAC have been treated as discontinued
operations. During 1997, the Company maintained its 19.8% ownership in CAC with
an additional cash investment of approximately $2.0 million in connection with
various rounds of third-party financing obtained by CAC. In the future, the
Company may also elect to purchase additional stock in CAC to maintain its 19.8%
equity ownership in CAC. Additionally, in 1996, the Company assigned to CAC all
rights in certain technology and released its reversion rights in technology
that the Company had previously assigned to CAC. In consideration of such
assignment and release, CAC agreed to pay to the Company royalties equal to 2.0%
of CAC's gross revenues for 12 years, beginning when CAC has operating revenues
from certain sources or, at the election of the Company, at any time prior
thereto. See "--Results of Operations--Loss from Discontinued Operations."

In December 1997, the Company invested $1.5 million in Digimarc in exchange
for shares of Digimarc's preferred stock that represent a 6.8% ownership on an
as-converted basis. Digimarc is a private company that was founded in 1995. The
Company and Digimarc are jointly developing a digital media copy protection
solution to address the digital-to-digital copying issues associated with the
next generation of DVD and digital videocassette recording devices. They have
presented their proposed solution to the CPTWG and are currently working on
prototype systems.

In February 1998, Macrovision purchased 247,500 shares (approximately 19.8%)
of the common stock of C-Dilla, for a purchase price of L2,121,212
(approximately $3.6 million) and prepaid $1.0 million of royalties. C-Dilla is a
private company founded in 1991. C-Dilla provides rights management software for
high value-added information and software publishers. In February 1998, the
Company and C-Dilla also entered into a Software Marketing License and
Development Agreement under which the Company has, for an initial five-year
term, the worldwide exclusive license to market C-Dilla's proprietary copy
protection technology for CD-ROM software products in the consumer multimedia
market.

The Company's cost of revenues consists primarily of manufacturing costs
associated with the Company's video scrambling product revenues, service fees
paid to licensed duplicators that apply the Company's videocassette copy
protection whenever rights owners license the technology directly from the
Company, and costs associated with equipment used in applying the copy
protection process at the licensed duplicators. Also included in cost of
revenues are patent amortization costs and legal costs associated with the
Company's efforts to prevent the sale of devices that attempt to circumvent the
Company's video copy protection technologies. See "Risk Factors--Risks of
Circumvention Technologies" and "--Dependence on Proprietary Technology." The
Company's research and development expenses are comprised primarily of employee
compensation and benefits, consulting fees, tooling and supplies and an
allocation of facilities costs. The Company's selling and marketing expenses are
comprised primarily of employee compensation and benefits, consulting and
recruiting fees, travel, advertising and an allocation of facilities costs. The
Company's general and administrative expenses are comprised primarily of
employee compensation and benefits, consulting and recruiting fees, travel,
professional fees and an allocation of facilities costs.

21
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth selected consolidated statement of income
data expressed as a percentage of net revenues for the periods indicated:

<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues................................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues............................................. 15.1 11.9 14.9 7.7
Research and development..................................... 14.8 11.1 12.2 12.0
Selling and marketing........................................ 29.8 28.3 33.9 29.5
General and administrative................................... 20.9 20.4 19.3 22.4
--------- --------- --------- ---------
Total costs and expenses................................... 80.6 71.7 80.3 71.6
--------- --------- --------- ---------
Operating income from continuing operations................ 19.4 28.3 19.7 28.4
Interest and other income (expense), net....................... (1.5) 2.4 0.5 2.6
--------- --------- --------- ---------
Income from continuing operations before income taxes...... 17.9 30.7 20.2 31.0
Income taxes................................................... 7.2 11.9 8.1 11.8
--------- --------- --------- ---------
Net income from continuing operations...................... 10.7 18.8 12.1 19.2
Loss from discontinued operations.............................. (4.8) -- -- --
--------- --------- --------- ---------
Net income................................................. 5.9% 18.8% 12.1% 19.2%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

The following information provides revenue information by general product
lines for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------ -------------------------------
1996 % 1997 % 1997 % 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Copy protection.................................. $ 14,953 87.5 $ 17,412 85.6 $ 3,555 77.9 $ 4,403
Video scrambling................................. 2,068 12.1 2,739 13.5 971 21.3 775
Other............................................ 59 .4 189 .9 38 .8 --
--------- --------- --------- --------- --------- --------- ---------
Total........................................ $ 17,080 100.0 $ 20,340 100.0 $ 4,564 100.0 $ 5,178
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------

%
---------
<S> <C>
Copy protection.................................. 85.0
Video scrambling................................. 15.0
Other............................................ --
---------
Total........................................ 100.0
---------
---------
</TABLE>

COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1998

NET REVENUES. The Company's net revenues increased 13.5% from $4.6 million
in the first three months of 1997 to $5.2 million in the first three months of
1998. The Company's copy protection revenues are derived from videocassette, DVD
and digital PPV copy protection. Copy protection revenues increased 23.9% from
$3.6 million to $4.4 million due to higher volumes of videocassettes from
studios and increases in DVD revenues, including licensing fees from DIVX and PC
subassembly manufacturers, as well as license fees from DVD rights owners. The
Company's video scrambling revenues are made up of sales of VES products and
sales and licenses of components that use the PhaseKrypt technology. Video
scrambling revenues decreased 20.2% from $971,000 to $775,000 due to decreased
demand for analog decoding equipment primarily due to the financial crisis in
Southeast Asia. In addition, this crisis has delayed expected cable television
system upgrades in that region and, consequently, has adversely affected the
ability of the Company's licensees to sell addressable set-top decoders that
include the Company's PhaseKrypt video scrambling technology.

COST OF REVENUES. Cost of revenues as a percentage of revenues declined
from 14.9% in the first three months of 1997 to 7.7% in the first three months
of 1998. This decrease resulted from a shift in product mix to increased license
fees and higher margin videocassette and DVD royalties from lower margin video
scrambling product sales. In the event that revenues from video scrambling
products increase as a percentage of net revenues, cost of revenues as a
percentage of net revenues will increase.

22
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$66,000 or 11.8% from the first three months of 1997 to the first three months
of 1998 primarily due to increased compensation and benefit expenses for
research and development personnel and increased depreciation expenses resulting
from equipment purchased in the second half of 1997. Research and development
expenses remained essentially constant as a percentage of net revenues,
representing 12.2% in the first three months of 1997 and 12.0% in the first
three months of 1998. The Company believes that the dollar amount of research
and development expenses will increase in the future, but may continue to
decline as a percentage of net revenues. There can be no assurance, however,
that net revenues will grow at a more rapid rate than research and development
expenses.

SELLING AND MARKETING. Selling and marketing expenses decreased by $22,000
or 1.4% from the first three months of 1997 to the first three months of 1998
primarily due to reduced consulting fees offset by higher compensation and
benefit expenses from additional personnel. As a result, selling and marketing
expenses declined from 33.9% of net revenues to 29.5% between the comparison
periods. The Company believes that the dollar amount of selling and marketing
expenses will increase in the future as the Company incurs the additional costs
related to new business development, but may continue to decline as a percentage
of net revenues. There can be no assurance, however, that net revenues will grow
at a more rapid rate than selling and marketing expenses.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $280,000 or 31.9% from the first three months of 1997 to the first three
months of 1998 and increased as a percentage of net revenues from 19.3% to
22.4%. These increases were due to increased legal, consulting fees and
accounting expenses relating to the evaluation of investment opportunities,
increased expenses associated with being a public company and higher
compensation and benefit expenses associated with increased personnel. The
Company believes that the dollar amount of general and administrative expenses
will increase in the future as the Company evaluates new business opportunities,
but may decline as a percentage of net revenues. There can be no assurance,
however, that net revenues will grow at a more rapid rate than general and
administrative expenses.

INTEREST AND OTHER INCOME, NET. Interest and other income, net, increased
from $24,000 in the first three months of 1997 to $131,000 in the first three
months of 1998, primarily as a result of investing the proceeds from the
Company's initial public offering (the "IPO") in March 1997.

INCOME TAXES. The Company's effective rate of taxation was 40.0% in the
first three months of 1997 and 38.0% in the first three months of 1998. The
lower rate in 1998 was primarily due to increases in tax-free interest income.

COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997

NET REVENUES. The Company's net revenues increased 19.1% from $17.1 million
in 1996 to $20.3 million in 1997. Videocassette and DVD copy protection revenues
increased $823,000 or 6.4% from $12.8 million in 1996 to $13.7 million in 1997
principally due to copy protection royalty revenue from replication of DVDs and
license fees from PC and DVD-ROM manufacturers. In addition, digital PPV
revenues increased $1.6 million or 78.8% from 1996 to 1997 as a result of
increased shipments of set-top decoders from licensed manufacturers. The
Company's video scrambling revenues increased $671,000 or 32.4% from 1996 to
1997. VES product revenues decreased $441,000 or 36.8% from $1.2 million in 1996
to $756,000 in 1997 as a result of a decline in orders from various government
law enforcement agencies. Revenues from PhaseKrypt-related royalties and
components sales to licensed cable TV equipment manufacturers in 1997 increased
$1.1 million or 127.8% from 1996 to 1997. This increase was due primarily to the
sale of addressable set-top converters into Brazil by one of the Company's
licensees, which included royalties from the Company's PhaseKrypt scrambling
technology. Due primarily to the growth in the Company's digital PPV copy
protection and video scrambling businesses, videocassette copy protection
revenues from the MPAA studios in the United States declined as a percentage of
net revenues from 33.4% in 1996 to 27.3% in 1997.

23
<PAGE>
In 1996 and 1997, the Company's international and export revenues totaled
$6.5 million and $9.5 million, respectively, representing 37.9% and 46.5%,
respectively, of the Company's net revenues during those periods. International
and export revenues grew primarily as a result of increased usage of
videocassette copy protection technology by the MPAA studios in international
markets, overseas shipments of copy protection enabled digital PPV set-top
decoders from manufacturers and increased growth in PhaseKrypt component sales
and licensing fees from new geographic areas. The Company expects that
international and export revenues will continue to represent a significant
portion of its net revenues and that the Company's future growth will depend to
a large extent on continued increases in international and export opportunities.
See "Risk Factors--Risks Associated with International and Export Sales,"
"Business--Sales, Marketing and Customer Support" and Note 9 of Notes to
Consolidated Financial Statements.

COST OF REVENUES. Cost of revenues as a percentage of net revenues declined
from 15.1% in 1996 to 11.9% in 1997. This decrease was primarily due to changes
in revenue mix between product sales, which have a relatively high cost of
revenues, and licensing revenues, which have a relatively low cost of revenues.
In addition, rates paid by the Company to videocassette duplicators were
reduced, but the effect of this reduction was offset by increased patent-related
expenses and equipment costs for processors purchased for duplicators. See Note
1 of Notes to Consolidated Financial Statements.

RESEARCH AND DEVELOPMENT. Research and development expenses were $2.5
million and $2.2 million, which represented 14.8% and 11.1% of net revenues, in
1996 and 1997, respectively. The dollar and percentage decreases from 1996 to
1997 were principally due to a decrease in consulting fees and project supplies
associated with the completion of hardware development of VES products and the
Company's Colorstripe technology for use in DVD and digital PPV applications in
1996. One of the major projects started by the Company in 1997 was the joint
development effort with Digimarc to develop a video watermarking solution to
protect DVD and other digital distribution media from being copied by digital
recording devices.

SELLING AND MARKETING. Selling and marketing expenses were $5.1 million and
$5.8 million, which represented 29.8% and 28.3% of net revenues, in 1996 and
1997, respectively. The increase in absolute dollars from 1996 to 1997 was
primarily a result of the hiring of additional employees for PPV and
international business development, increased compensation and benefits, and
external consulting costs associated with digital PPV and international
marketing.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.6
million and $4.1 million, representing 20.9% and 20.4% of net revenues, in 1996
and 1997, respectively. The increase in absolute dollars from 1996 to 1997 was
primarily related to the additional administrative expenses required in managing
a public company compared to a private company, increased compensation and
benefits, legal fees associated with the Swyt arbitration proceeding and an
increase in bad debt expense.

INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other expense
consists primarily of interest expense on a convertible note and capitalized
equipment leases. Interest and other expense was $327,000 and $35,000 in 1996
and 1997, respectively. The decrease in interest expense from 1996 to 1997 was
principally attributable to the conversion of a $3.0 million convertible note
into Preferred Stock in July 1996 and subsequently into common stock upon
completion of the IPO. Interest income was $67,000 and $513,000 in 1996 and
1997, respectively. The increase from 1996 to 1997 was a result of interest
earned on cash and cash equivalents, short term investments and long-term
marketable investment securities primarily from the proceeds of the IPO. See
Notes 2 and 3 of Notes to Consolidated Financial Statements.

INCOME TAXES. The Company's effective rate of taxation on continuing
operations was 40.0% and 38.7% in 1996 and 1997, respectively. Income taxes
consist primarily of federal income taxes, state taxes and international taxes
withheld on foreign revenue. The decrease in such rate from 1996 to 1997 was
primarily due to an increase in tax credits and an increase in tax exempt
interest. See Note 6 of Notes to Consolidated Financial Statements.

24
<PAGE>
LOSS FROM DISCONTINUED OPERATIONS. The loss from discontinued operations
was $827,000 in 1996, net of income tax benefit. Information related to
discontinued operations is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Costs and expenses............................................................................. $ (1,081)
-------
Operating loss............................................................................... (1,081)
Other income, net.............................................................................. 5
-------
Loss before income taxes..................................................................... (1,076)
Income tax benefit, net........................................................................ 249
-------
Net loss..................................................................................... $ (827)
-------
-------
</TABLE>

Included in income tax benefit, net for 1996 is a write-off of the deferred
tax asset attributable to CAC of $203,000.

The costs and expenses in the above table represent the administration and
development costs of CAC, which was incorporated as a wholly-owned subsidiary of
the Company in October 1995, to commercialize a distinct and new audio-on-demand
technology. In connection with the incorporation of CAC, the Company contributed
to CAC the patents that related to the CAC technology. The underlying technology
of CAC is distinct from the copy protection and video scrambling technologies
that underlie the Company's core business. The employees of CAC have been
exclusively involved in the CAC operation since they were hired. None of these
employees was involved in the technology development underlying the Company's
core business or any other aspect of the Company's business. From its inception
until separation, CAC generated no revenues and concentrated exclusively on
research and development activities. In the third quarter of 1996, the Company
divested itself of all but 19.8% of its ownership in CAC. Additionally, in 1996,
the Company assigned to CAC all rights in certain technology and released its
reversion rights in technology that the Company had previously assigned to CAC.
In consideration of such assignment and release, CAC agreed to pay to the
Company royalties equal to 2.0% of CAC's gross revenues for 12 years, beginning
when CAC has operating revenues from certain sources or, at the election of the
Company, at any time prior thereto. See Note 4 of Notes to Consolidated
Financial Statements.

25
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain quarterly unaudited consolidated
financial data for the periods indicated, as well as the percentage of the
Company's net revenues represented by such data. These data have been derived
from the Company's unaudited consolidated financial statements that, in the
opinion of management, have been prepared on substantially the same basis as the
audited consolidated financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such data. Such data should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. The results of operations for any quarter are not
necessarily indicative of the results to be expected for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------
1996 1997 1998
----------------------------------------- ----------------------------------------- --------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 3,583 $ 3,737 $ 4,380 $ 5,381 $ 4,564 $ 4,722 $ 5,040 $ 6,014 $ 5,178
Costs and expenses:
Cost of revenues.............. 594 707 525 752 681 697 444 600 398
Research and development...... 642 679 594 612 557 516 549 626 623
Selling and marketing......... 1,241 1,296 1,280 1,273 1,548 1,378 1,472 1,367 1,526
General and administrative.... 601 875 1,016 1,074 879 1,018 1,021 1,231 1,159
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses.... 3,078 3,557 3,415 3,712 3,665 3,609 3,486 3,824 3,706
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income from
continuing operations..... 505 180 965 1,669 899 1,113 1,554 2,190 1,472
Interest and other income
(expense), net................. (120) (109) (13) (19) 24 149 138 167 131
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes....... 385 71 952 1,650 923 1,262 1,692 2,357 1,603
Income taxes.................... 192 62 331 638 369 505 644 895 609
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations................ 193 9 621 1,012 554 757 1,048 1,462 994
Loss from discontinued
operations..................... (195) (632) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ (2) $ (623) $ 621 $ 1,012 $ 554 $ 757 $ 1,048 $ 1,462 $ 994
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>

<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues............... 16.6 18.9 12.0 14.0 14.9 14.8 8.8 10.0 7.7
Research and development....... 17.9 18.2 13.6 11.4 12.2 10.9 10.9 10.4 12.0
Selling and marketing.......... 34.6 34.7 29.2 23.6 33.9 29.2 29.2 22.7 29.5
General and administrative..... 16.8 23.4 23.2 20.0 19.3 21.5 20.3 20.5 22.4
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses..... 85.9 95.2 78.0 69.0 80.3 76.4 69.2 63.6 71.6
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income from
continuing operations...... 14.1 4.8 22.0 31.0 19.7 23.6 30.8 36.4 28.4
Interest and other income
(expense), net.................. (3.3) (2.9) (0.3) (0.3) 0.5 3.2 2.8 2.8 2.6
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes...................... 10.8 1.9 21.7 30.7 20.2 26.7 33.6 39.2 31.0
Income taxes..................... 5.4 1.7 7.5 11.9 8.1 10.7 12.8 14.9 11.8
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations................. 5.4 0.2 14.2 18.8 12.1 16.0 20.8 24.3 19.2
Loss from discontinued
operations...................... (5.4) (16.9) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............ (0.0)% (16.7)% 14.2% 18.8% 12.1% 16.0% 20.8% 24.3% 19.2%
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>

26
<PAGE>
22.9% from the third quarter of 1996 to the fourth quarter of 1996 primarily as
a result of a $900,000 increase in digital PPV set-top decoder royalties.
Revenues increased 19.3% from the third quarter of 1997 to the fourth quarter of
1997 as a result of revenue increases in all technology and product categories,
particularly Pay TV components and licenses.

The Company's cost of revenues is subject not only to seasonal and quarterly
fluctuations due to changes in net revenues but also to fluctuations resulting
from shifts in revenue mix between the Company's product sales and licensing
revenues. In the second quarter of 1996, the Company experienced a higher cost
of revenues as a percentage of revenues due to a writedown of certain obsolete
inventory. In the last two quarters of 1997 and the first quarter of 1998, cost
of revenues as a percentage of revenues was lower than previous quarters as
video scrambling products represented a smaller proportion of the Company's net
revenues.

The Company's research and development expenses fluctuate quarterly
depending on the stages of various projects, the use of consultants and
temporary employees, and the utilization of prototype materials.

The increase in selling and marketing expenses from the fourth quarter of
1996 to the first quarter of 1997 was primarily due to increased sales efforts
in PPV and video scrambling.

General and administrative expenses in 1996 fluctuated principally due to
bad debt reserves and bonuses. General and administrative expenses in 1997
increased as a result of costs associated with being a public company as well as
additional bad debt reserves recorded in the fourth quarter of 1997.

Interest expense decreased in the third quarter of 1996 primarily due to the
conversion of a convertible note into Series A Preferred Stock in July 1996. The
Company began earning interest income in the first quarter of 1997 as a result
of investing the proceeds from the IPO.

The Company's operating results have fluctuated in the past, and are
expected to continue to fluctuate in the future, on an annual and quarterly
basis as a result of a number of factors. Such factors include, but are not
limited to, the timing of release of popular motion pictures on videocassettes
or DVDs or by digital PPV transmission, the degree of acceptance of the
Company's copy protection technologies by major motion picture studios, the mix
of products sold and technologies licensed, any change in product or license
pricing, the seasonality of revenues, changes in the Company's operating
expenses, personnel changes, the development of the Company's direct and
indirect distribution channels, foreign currency exchange rates and general
economic conditions. The Company may choose to reduce prices or increase
spending in response to competition or new technologies or elect to pursue new
market opportunities. If new competitors, technological advances in the industry
or by existing or new competitors or other competitive factors require the
Company to invest significantly greater resources in research and development or
marketing efforts, the Company's future operating results may be adversely
affected. Because a high percentage of the Company's operating expenses is
fixed, a small variation in the timing of recognition of revenues can cause
significant variations in operating results from period to period.

Based upon the factors enumerated above, the Company believes that its
quarterly and annual revenues, expenses and operating results could vary
significantly in the future and that period-to-period comparisons should not be
relied upon as indications of future performance. There can be no assurance that
the Company will be able to grow in future periods or that it will be able to
sustain its level of net revenues or its rate of revenue growth on a quarterly
or annual basis. It is likely that, in some future quarter, the Company's
operating results will be below the expectations of stock market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected. Furthermore, the Company may not be in a position
to anticipate a decline in revenues in any quarter until late in the quarter,
due primarily to the delay inherent in revenue reporting from licensees and
replicators, resulting in a potentially more significant level of volatility in
the price of the Company's Common Stock.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations primarily from cash generated by
continuing operations. The Company's continuing operations provided net cash of
$2.9 million, $2.4 million and $2.5 million in 1996, 1997 and the first three
months of 1998, respectively. In 1996, net cash was provided primarily by net
income (before

27
<PAGE>
depreciation and amortization) and increases in accounts payable, accrued
liabilities and deferred revenue, partially offset by increases in accounts
receivable. In 1997, net cash was provided primarily by net income (before
depreciation and amortization) and increases in income taxes payable and
deferred revenue, partially offset by increases in accounts receivable. In the
first three months of 1998, net cash was provided primarily by net income
(before depreciation and amortization), a decrease in accounts receivable and an
increase in deferred revenue.

Investing activities provided net cash of $48,000 in 1996 and used net cash
of $17.5 million in 1997 and $1.3 million in the first three months of 1998. In
1996, cash from sales or maturities of short-term investments was almost
completely offset by purchases of equipment, payments for patents and other
intangibles and expenses paid on behalf of CAC. In 1997, net cash used in
investing activities resulted primarily from purchases of short and long-term
marketable investment securities and investments of $1.5 million in Digimarc and
approximately $2.0 million in CAC. In the first three months of 1998, net cash
used in investing activities was primarily an investment of $3.6 million in
C-Dilla and approximately $1.0 million of prepaid royalties to C-Dilla, offset
in part by sales and maturities of marketable securities. See Note 2 of Notes to
Consolidated Financial Statements.

Net cash used in financing activities was $1.6 million in 1996, primarily to
repay long-term debt and to pay cash dividends on Preferred Stock then
outstanding. Net cash provided by financing activities was $13.9 million in
1997, almost all of which resulted from the Company's initial public offering.
Net cash provided by financing activities was $230,000 in the first three months
of 1998, primarily from sales of stock under the Company's employee stock option
and stock purchase plans.

At March 31, 1998, the Company had $2.8 million in cash and cash
equivalents, $8.8 million in short-term investments and $751,000 in long-term
marketable investment securities. The Company has no material commitments for
capital expenditures but anticipates that capital expenditures for the next 12
months will aggregate approximately $400,000. The Company also has future
minimum lease payments of approximately $1.8 million under operating leases and
approximately $300,000 under capital leases. In the future, the Company may also
elect to purchase additional stock in CAC to maintain its 19.8% equity ownership
in CAC.

The Company believes that its existing cash, cash equivalents and short-term
investments, cash provided by operating activities and the proceeds of this
offering will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. To the extent that the Company
experiences growth in the future, the Company anticipates that its operating and
investing activities may use cash. Consequently, any such growth may require the
Company to obtain additional equity or debt financing. There can be no assurance
that any necessary additional financing will be available to the Company on
commercially reasonable terms, if at all. Management intends to invest the
Company's excess cash in short-term and long-term, interest bearing, investment
grade securities. Although there are no present agreements with respect to any
acquisition of other businesses, products or technologies, from time to time in
the ordinary course of business, the Company evaluates opportunities for
strategic investments, licensing arrangements, joint ventures and acquisitions
of businesses, products or technologies that are complementary to those of the
Company and may in the future use a portion of the Company's cash to acquire or
invest in complementary businesses or products or obtain the right to use
complementary technologies.

YEAR 2000 ISSUES

28
<PAGE>
Company's plan for the Year 2000 problem are being expensed as incurred. The
costs associated with preparation for the Year 2000 are not expected to have a
material adverse effect on the Company's business, financial condition and
results of operations. Nevertheless, there is uncertainty concerning the
potential costs and effects associated with any Year 2000 compliance. Any Year
2000 compliance problems of the Company or its customers or suppliers could have
a material adverse effect on the Company's business, financial condition and
results of operations. During the past three years, the Company completed an
effort to convert its financial applications to commercial products that,
according to their suppliers, are Year 2000 compliant. The Company has received
confirmations from its primary suppliers indicating that they are either Year
2000 compliant or have plans in place to ensure readiness. As part of the
Company's assessment, it is evaluating the level of validation it will require
of third parties to ensure their Year 2000 readiness.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "REPORTING
COMPREHENSIVE INCOME." SFAS No. 130 establishes standards of reporting and
display of comprehensive income and its components of net income and "other
comprehensive income" in a full set of general purpose financial statements.
"Other comprehensive income" refers to revenues, expenses, gains and losses that
are not included in net income but rather are recorded directly in stockholders'
equity. SFAS No. 130 is effective for annual and interim periods beginning after
December 15, 1997 and for periods ended before that date when presented for
comparative purposes. SFAS No. 130 was adopted by the Company in its quarter
ended March 31, 1998 and for prior comparative periods. The Company has not yet
determined the format it will use to display the information required by SFAS
No. 130 in the annual financial statements for the year ended December 31, 1998.
Total comprehensive income was $496,000 and $994,000 for the three months ended
March 31, 1997 and 1998, respectively, and $991,000 and $3,742,000 for the years
ended December 31, 1996 and 1997, respectively. The primary components of other
comprehensive income include unrealized gains and losses resulting from the
translation of the Company's foreign subsidiaries which have a local functional
currency and unrealized holding gains and losses related to the Company's
available-for-sale investments.

In June 1997, the FASB issued SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION." SFAS No. 131 establishes standards of
reporting information about operating segments in annual financial statements by
public business enterprises and requires such enterprises to report selected
information about operating segments in interim financial reports. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, and for periods
ended before that date when presented for comparative purposes. The required
interim disclosures are not required to be made in the initial year of
application, but the information for the interim periods for the initial year is
required as comparative information in the second year of application. As such,
the Company intends to display the information required by SFAS No. 131 in the
interim and annual financial statements for the year ending December 31, 1999.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

The statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical are
forward-looking statements. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statements including those factors identified in "Risk Factors." Results
actually achieved thus may differ materially from expected results included in
these statements.

29
<PAGE>
BUSINESS

The Company designs, develops and markets video security technologies and
products that provide copy protection and video scrambling for motion pictures
and other proprietary video materials that are stored on videocassettes, DVDs or
other media or are transmitted by means of cable, satellite or microwave
transmission. The Company's two primary technologies, copy protection and video
scrambling, are distinct in their application, but can be complementary in their
ability to protect copyright holders' video programming. The Company has
recently broadened its focus to include copy protection of other media,
including multimedia CD-ROMs and Internet-delivered software products.

The Company's copy protection technologies enable consumers to view
programming stored on prerecorded videocassettes and DVDs or transmitted as
digital PPV programs via cable and satellite, but deter unauthorized consumer
copying of such programming. The Company believes that approximately one-third
of all commercial videocassettes produced worldwide during 1997 were copy
protected, and that substantially all of those copy protected videocassettes
incorporated the Company's technology. All of the MPAA studios have used the
Company's copy protection technology to protect some or all of their
videocassettes in one or more countries around the world. Studios such as
Disney, Columbia, PolyGram and Paramount have signed agreements to apply the
Company's copy protection technologies to substantially all of the motion
pictures that they release in videocassette and DVD format in the United States.
The Company believes that its video copy protection technologies are accepted as
the DE FACTO standard for preventing digital and analog video from being copied
by consumer VHS videocassette recorders. The Company does not license and has no
plans to license its technology for use in deterring consumer copying of free
television broadcasts.

The Company's video scrambling technologies are used by cable and satellite
television system operators in connection with analog PPV and Pay TV
programming, as well as by businesses, governments and other organizations to
provide for the secure transmission of video signals.

INDUSTRY BACKGROUND

Motion picture studios generally release major motion pictures to various
venues (E.G., theaters, hotels/ airlines or home video) in a series of "release
windows" in order to maximize revenues from each venue. The chart below
indicates the studios' aggregate United States revenues from each venue in 1997,
as estimated by entertainment media analyst Paul Kagan Associates, Inc. ("Paul
Kagan"), and shows the typical major motion picture release windows in the
United States.

[CHART]

In the past few years, home video has surpassed the theatrical box office as
the largest source of revenues for the motion picture industry. With production
costs continually growing, studio profitability has become increasingly
dependent on the development of new venues, such as home video and digital PPV.
The studios typically release motion pictures on network television in the
United States approximately 24 months after theatrical box office release.
Theatrical box office release in foreign countries generally follows theatrical
box office release in the United States by at least four months. In foreign
countries, PPV releases generally follow home video releases by approximately
six months and Pay TV releases generally follow PPV releases by approximately
six months.

30
<PAGE>
COPY PROTECTION

Copyright holders wish to maximize the economic value from each feature film
or other video program over its copyright life, currently 75 years. When
consumers make copies of motion pictures, whether from hotel, airline, home
video or PPV releases, independent studies show that studios and video retailers
lose video sales and rental revenues. Paul Kagan estimates that 34.8 million
households in the United States (approximately 43% of all households with VCRs)
owned two or more VCRs in December 1997, and thus were capable of making
unauthorized copies of prerecorded videocassettes. Based on a 1996
Macrovision-sponsored national survey, the Company estimates that consumer video
piracy costs the industry approximately $370 million in annual lost revenues. To
protect their revenues in the home video and subsequent release venues, many
studios are attempting to prevent unauthorized copies of motion pictures from
entering the marketplace. Recently, studios have begun to participate in the
revenue stream from the rental of motion pictures on videocassettes through
agreements with video rental businesses. The Company believes that revenue
sharing could provide further incentive for the studios to support videocassette
copy protection. Other copyright holders, such as independent video producers,
governments, businesses and institutions, also benefit from preventing
unauthorized copying of special interest, educational and other prerecorded
video programming.

Emerging trends in the PPV market are also increasing the need for effective
copy protection technologies. PPV television, which enables consumers to view
motion pictures and other programming in their homes via their existing cable or
satellite television systems for an additional fee for each viewing, has
generated to date only a small fraction of the revenues generated by home video.
However, motion picture studios typically receive revenue each time a consumer
views a motion picture on PPV, which results in higher profit margins than home
video. Analog cable television systems provide few PPV channels, which limits
the number of available motion pictures and the frequency of viewing times. In
addition, the studios, in an effort to protect their home video revenues,
typically release a motion picture on PPV one to three months after it is
released on videocassette. Digital PPV, however, provides consumers with the
benefits of more channels, a greater variety of motion pictures and more
frequent motion picture viewing times. However, viewers can copy PPV movies in
their homes with a single VCR. When the transmission is digital, copy quality is
better than that of copies made from videocassettes or analog cable television.
It is not economically feasible to retrofit the analog cable television systems
currently in place in the United States with copy protection technology. As a
result, the opportunity to introduce effective copy protection for PPV is
expected to grow only to the extent that digital PPV replaces existing analog
PPV systems.

DVD hardware and media became commercially available in the United States in
1997, and approximately 500,000 DVD players had been shipped by manufacturers as
of March 31, 1998. The introduction of DVDs presents serious concerns to the
studios. Without effective copy protection, any one of the approximately 425
million VCRs throughout the world, when combined with a DVD player, can make
unlimited videocassette copies of a non-copy protected DVD that are nearly equal
in quality to a professionally prerecorded videocassette. Because of their
superior picture quality, lower manufacturing cost, relative ease of use and
smaller size, DVDs are expected to supplant videocassettes over time as the
preferred home video distribution medium. As a result, the need for reliable
copy protection is expected to become more important as DVDs become more
available.

VIDEO SCRAMBLING

Cable and satellite television system operators require secure video
scrambling technology to prevent unauthorized viewing of PPV and Pay TV
programming. Unauthorized or "pirate" descramblers for existing analog PPV and
Pay TV scrambling systems are readily available to consumers at low cost,
allowing them to view programming without paying the system operator. Based on a
1992 survey of cable television system operators, the National Cable Television
Association's Office of Cable Signal Theft reported that unauthorized viewing of
cable television premium channels and PPV translated into an estimated $4.7
billion per year in potentially lost revenues to system operators and motion
picture studios. However, the substantial installed base of analog set-top
decoders makes the cost of providing a new, more secure analog scrambling system
in the United States prohibitive.

Although system operators in the United States and Western Europe are
upgrading their networks with digital compression, analog cable and microwave
Pay TV systems continue to be built, particularly in developing countries,
because analog systems are far less expensive to build than digital systems and
these emerging

31
<PAGE>
markets do not require the range of programming and channel capacity that
digital compression provides. Industry publications have projected that the
market for addressable analog Pay TV decoders will be approximately $2 billion
annually by the year 2000. MPAA studios are increasingly requiring international
cable operators to install effective and secure scrambling systems as a
precondition to receiving their motion pictures. International system operators
now offer premium and PPV channels that require new addressable analog systems
that provide security against signal theft, are cost effective, can support a
variety of program tiers and can be authorized remotely by the system operator.

CD-ROM/MULTIMEDIA COPY PROTECTION

The Interactive Digital Software Association estimates that computer
software and video game companies based in the United States lost $3.2 billion
worldwide in 1997 due to software piracy, primarily professional counterfeiting.
Recently CD recordable drives have been introduced in the consumer electronics
industry that are priced as low as $300 and are expected to become standard
features in personal computers in the near future. In addition, blank CD-ROM
disks can be purchased for less than $1 in the United States. As a result,
computer software and video game companies may soon face an additional threat of
lost revenues due to consumer copying of CD-ROM software.

THE MACROVISION SOLUTION

Macrovision offers copy protection and video scrambling technologies and
products that address the video security needs of motion picture studios and
other copyright holders, program distributors, cable and satellite Pay TV and
PPV system operators, governments, businesses and equipment manufacturers. The
Company also intends to offer copy protection for CD-ROM and Internet-delivered
software products in the consumer multimedia market through its relationship
with C-Dilla.

COPY PROTECTION

The Company's copy protection technologies allow consumers to view
programming stored on prerecorded videocassettes or DVDs or transmitted as
digital PPV programs via cable or satellite, but deter unauthorized consumer
copying of such programming. Videocassettes are encoded with the Company's copy
protection process as they are manufactured. In digital PPV and DVD
applications, the Company's copy protection is activated by a copy protection
signal generator circuit embedded within the cable or satellite digital set-top
decoder or the DVD player. The diagram below illustrates the various means of
implementing the Company's copy protection technologies.

[GRAPHIC]

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<PAGE>
VIDEO SCRAMBLING

The Company's video scrambling technologies prevent unauthorized viewing of
video programming unless the viewer has paid for, or otherwise has been granted,
the right to view such programming. The video signals are scrambled using a
combination of analog video scrambling and digital encryption. This provides a
high level of security against signal theft while maintaining low decoder cost.
For cable, satellite and microwave television applications of the Company's
PhaseKrypt technology, the cost of decoding the scrambled picture is minimized
by using a secure analog technology that partially relies on the electronics of
the television set to make the image viewable. The Company has also developed
products implementing other video scrambling technologies that serve growing
niche markets, such as law enforcement and private networks. The diagram below
illustrates implementation of the Company's video scrambling technologies in a
transmission environment.

[GRAPHIC]

CD-ROM/MULTIMEDIA COPY PROTECTION

Under an agreement with C-Dilla, the Company has the exclusive marketing
rights for consumer multimedia applications of certain software copy protection
technologies developed by C-Dilla for CD-ROM and Internet-delivered software
products. The Company and C-Dilla have recently demonstrated their CD-ROM copy
protection technology, called SafeDisc. SafeDisc is in final customer acceptance
testing and is expected to be available before the end of 1998. The Company
believes that its expertise in marketing video copy protection technology and
its reputation for providing high quality copy protection solutions will give
the Company an advantage in marketing CD-ROM copy protection technology. There
can be no assurance that the CD-ROM copy protection solution marketed by the
Company will achieve or sustain market acceptance. See "Risk Factors--Entrance
Into New Market."

THE MACROVISION STRATEGY

The Company is dedicated to providing advanced video security technologies
and products to its customers. The Company intends to maintain and enhance its
position as a leading provider of these technologies and products by focusing on
the following key strategies:

PURSUE ROYALTY-BASED LICENSING MODEL. The Company is pursuing a
royalty-based licensing model that results in a high margin,
transaction-oriented business with recurring revenues. As the sole provider of
copy protection for prerecorded videocassettes to the MPAA studios, the Company
typically licenses its technology pursuant to volume-based pricing schedules.
Royalties and other fees are currently paid by copyright holders, commercial
duplicators, hardware manufacturers and program distributors. The Company
intends whenever feasible to continue to license its technologies to third
parties for volume or transaction-based royalties and fees.

33
<PAGE>
LEVERAGE KEY CUSTOMER RELATIONSHIPS. Over the past ten years, the Company
has developed strong relationships with its customers, including the major
Hollywood studios and key members of the video duplication industry, as well as
the cable and satellite television system operators and the equipment
manufacturers that serve these customers. The Company attempts to develop
strategic relationships with its customers, to broaden the use of existing
applications for its technologies and to enhance the security and future sales
opportunities of its customers' video properties.

INCREASE MARKET PENETRATION OF COPY PROTECTION BUSINESS. The Company
estimates that it has penetrated approximately one-third of the worldwide
videocassette copy protection market, which leaves a large potential
opportunity, even as digital PPV and DVDs begin to displace analog
videocassettes. The Company licenses its technology to DVD hardware
manufacturers and provides favorable terms to DVD hardware manufacturers that
ensure that the VCRs they manufacture respond to the Company's copy protection
technologies. The Company intends to make its copy protection technology
available and affordable to all video copyright holders in all prerecorded
packaged media and digital PPV venues and seeks to have its technology specified
by all PPV system operators, digital set-top decoder manufacturers and DVD
hardware manufacturers.

INTRODUCE NEW PRODUCT APPLICATIONS AND TECHNOLOGIES. The Company intends to
continue to expand its technological base, primarily in intellectual property
copy protection, in current as well as new markets, through internal
development, strategic investments, licensing arrangements, joint ventures or
potential acquisitions of products, technologies or companies. In addition to
its internally-developed video copy protection technology, the Company has
recently entered into agreements with Digimarc and C-Dilla to develop and
license, respectively, products for DVD, DVD-ROM and CD-ROM copy protection.

PROTECT PATENT POSITION. The Company believes that its future success will
depend, in part, on the continued protection of its proprietary technologies.
The Company has obtained patents to protect its copy protection and video
scrambling technologies and intends to continue to pursue patent protection
aggressively. The Company has invested substantial resources in developing and
obtaining patents covering a number of processes and devices that unauthorized
parties could use to circumvent the Company's consumer copy protection
technologies. The Company uses these patents to limit the proliferation of such
devices and has initiated a number of disputes relating to infringement of these
patents. The Company intends to continue to protect and defend its patented
technologies aggressively through further technological innovation, legal action
and support of further legislative initiatives to protect rights owners.

TECHNOLOGIES AND PRODUCTS

The Company's technologies are either licensed or sold, depending upon the
particular application or product. For videocassette copy protection, copyright
holders and licensed duplicators typically pay the Company a per unit licensing
fee for the right to apply the Company's technology. In addition, copyright
holders typically pay the Company a per unit license fee to apply copy
protection to DVDs. For digital PPV, cable and satellite television system
operators pay the Company a one-time license fee for the right to incorporate
the Company's copy protection technology into their networks and have entered
into agreements with the Company pursuant to which the Company is entitled to
transaction-based royalty payments at such time as copy protection for digital
PPV programming is activated. Set-top decoder manufacturers also license the
Company's copy protection and video scrambling technologies for an up-front fee
and a per unit hardware royalty. In addition, semiconductor manufacturers pay
the Company a small one-time service fee to verify proper implementation of the
Company's copy protection technologies in integrated circuits for set-top
decoders. For the DVD market, the Company offers licenses to consumer
electronics and personal computer manufacturers and charges rights owners a per
unit fee similar to the Company's videocassette copy protection licensing model.
In the video scrambling business, the Company both licenses its PhaseKrypt
technology on a per-decoder or per-encoder basis, and sells PhaseKrypt decoder
components and PhaseKrypt encoders. The Company also sells a line of products
based on its various video scrambling technologies for applications in
television broadcasting and niche markets such as law enforcement and private
networks. For the CD-ROM copy protection business, the Company intends to pursue
the same business model that it established for videocassette copy protection.
See "Risk Factors--Need to Establish and Maintain Licensing Relationships."

34
<PAGE>
COPY PROTECTION TECHNOLOGIES

The Company's copy protection technologies are designed to allow motion
picture studios and other copyright holders to protect their copyrighted and
proprietary video material from unauthorized consumer copying. The Company's
copy protection technologies for videocassettes and DVDs generally are priced as
low as a few pennies per unit, depending upon such factors as the term of the
contract and the annual volume commitment made by the copyright holder. The
Company believes that copyright holders justify the decision to pay for the
Company's technology through a combination of increased videocassette sales,
increased revenues from downstream venues, stronger relationships with retailers
and a favorable return on investment compared to equivalent advertising
expenditures.

The Company's copy protection technology is "applied" electronically to
videocassettes at the time of duplication at over 230 commercial duplication
facilities in 34 countries. Company-owned copy protection equipment is installed
and maintained by the Company in each duplication facility. The Company licenses
commercial duplicators to act as distributors and sales agents in return for a
share of the copy protection fees duplicators receive from their customers. In
cases in which the rights owner licenses the technology directly from the
Company, the Company pays service fees to the commercial duplicators. The
Company's copy protection technology has been applied to more than 2 billion
videocassettes worldwide since 1985, and was applied to more than 460 million
videocassettes in 1997. All MPAA studios use the Company's copy protection
technologies to protect some or all of their videocassettes in one or more
countries around the world. In 1996 and 1997, three of these studios applied the
Company's technology to a majority of the videocassettes they produced. In
addition, the Company believes that more than 1,500 corporate, educational and
special interest copyright holders have contracted with the Company's licensed
duplicators to apply the Company's copy protection process to their
videocassettes. See "Risk Factors--Dependence on Key Customers."

The Company has developed an enhanced version of its videocassette copy
protection technology for the DVD format and for the digital PPV networks that
are being developed and deployed by direct broadcast satellite and cable
television operators. This enhanced copy protection technology is "applied" by
an integrated circuit that is embedded within the DVD player or digital set-top
decoder and that can later be activated by copy protection control codes in the
video program or PPV network access control system. Upon activation, the
embedded integrated circuit generates the Company's copy protection signal and
applies it to the program material at the analog output port of the DVD player
or digital set-top decoder. This copy protection signal inhibits customers from
using a DVD player or a digital set-top decoder to make commercial quality
videocassette copies of the DVD or PPV program. See "Risk Factors--Evolving
Market for DVD and Digital PPV Copy Protection."

The Company has licensed its copy protection technology for digital PPV to
41 set-top decoder manufacturers and 13 digital PPV system operators. As of
March 31, 1998, four digital PPV program providers in Japan and one system
operator in Hong Kong had activated copy protection for digital PPV programming.
The Company's copy protection technology is embedded in approximately seven
million digital set-top decoders currently in use in the United States, Japan,
Europe and a number of countries in Latin America, for which the Company has
received license fees and royalties from the digital set-top decoder
manufacturers.

In October 1996, a multi-industry technical working group comprised of major
motion picture studios, consumer electronics manufacturers and personal computer
hardware and software companies adopted a set of copy protection principles that
established prerequisites for commercial availability of DVD hardware and media.
The Company believes that its copy protection technology is currently the only
digital-to-analog copy protection solution that satisfies these principles. As
of March 31, 1998, 82 companies that manufacture DVD players or DVD-ROM drives
had signed agreements with the Company to incorporate the Company's DVD copy
protection technology in their hardware.

Copy protection represented 87.5%, 85.6% and 85.0% of the Company's net
revenues in 1996, 1997 and the first three months of 1998, respectively.

VIDEO SCRAMBLING TECHNOLOGIES AND PRODUCTS

The Company's video scrambling technologies are used to prevent unauthorized
viewing of video content during analog video transmissions from one location to
another location. These technologies are used in PPV, Pay

35
<PAGE>
TV, business television and other private networks, broadcast television and
government, military and law enforcement markets.

The Company's PhaseKrypt video scrambling technology is a relatively secure,
easy to use, low cost alternative to other widely used analog scrambling
systems. PhaseKrypt is intended for use in Pay TV and PPV applications in
developing cable television markets such as South America, South Korea, Taiwan,
the People's Republic of China and the Philippines. Analog set-top decoder
manufacturers either license PhaseKrypt for an up-front fee and a per unit
hardware royalty or purchase encoder hardware and decoder components from the
Company. Cable television operators purchase PhaseKrypt-enabled set-top decoders
and encoder hardware from Macrovision licensees for installation in their
systems.

The Company's video encryption system ("VES") technology is incorporated
into a variety of professional and near-professional broadcast quality
scrambling products that the Company sells rather than licenses. One of the VES
systems is a professional, broadcast-quality video scrambling system that is
available in NTSC and PAL versions. Primary applications include broadcast
television distribution to network affiliate stations and retransmission
facilities, programming delivery to cable television head-ends, programming
contribution circuits and backhauls. The Company has also developed two
miniaturized DC-powered scrambling systems that are used primarily for covert
law enforcement, military surveillance and broadcast television news gathering
applications. A miniaturized multiplexer product is also available that combines
two video signals for transmission over single channel video links.

Video scrambling represented 12.1%, 13.5% and 15.0% of the Company's net
revenues in 1996, 1997 and the first three months of 1998, respectively.

CINEGUARD

CineGuard utilizes the Company's PhaseKrypt video scrambling technology to
distribute motion pictures on Super VHS videocassettes primarily to small
theaters in rural towns in international markets. The Company's PhaseKrypt
technology allows motion pictures to be recorded on videocassettes in a
scrambled state and descrambled by the Company's decoder integrated into the
video projector located at the CineGuard theater. This deters unauthorized
parties from copying the motion picture from the videocassette. As a result,
studios would be able to distribute motion pictures to small theaters
concurrently with their release to major film exhibitors at a cost of
approximately $40 per videocassette compared to approximately $1,500 for a film
print. In 1997, the Company discontinued its CineGuard operations in Poland,
Ireland and South Africa due to lack of demand from local exhibitors. The
Company has an existing master licensee in the Philippines and will continue to
license CineGuard to interested parties. Neither the revenues nor the costs for
CineGuard are expected to have a material impact on the business or financial
condition of the Company in 1998.

CD-ROM/MULTIMEDIA COPY PROTECTION

The Company and C-Dilla have recently demonstrated their CD-ROM copy
protection technology, called SafeDisc. The Company has an exclusive license
from C-Dilla to market and license SafeDisc for consumer multimedia
applications. SafeDisc is comprised of an authenticating digital signature on
the CD-ROM, encryption of the software content and authentication instructions
that preclude decryption unless the authentication digital signature is found.
The Company believes that SafeDisc will provide a relatively secure, low cost
means of protecting CD-ROM software from consumer copying without adversely
affecting the consumer's use of the CD-ROM content. There can be no assurance
that SafeDisc will be successfully introduced, that it will provide its intended
benefits or that it will achieve or sustain market acceptance with multimedia
software publishers or consumers. See "Risk Factors--Entrance Into New Market."

CUSTOMERS

COPY PROTECTION LICENSEES

The Company's packaged media copy protection technology for videocassettes
and DVDs is used by the following major motion picture studios and other home
video suppliers and by the following commercial

36
<PAGE>
videocassette duplicators, each of which accounted for at least $75,000 of the
Company's net revenues during 1997:

<TABLE>
<CAPTION>
COMMERCIAL VIDEOCASSETTE
HOME VIDEO SUPPLIERS DUPLICATORS
- -------------------------------------------------------- ----------------------------------
<S> <C>
BMG Entertainment Allied Digital Technologies
Buena Vista Home Video, Inc. (Disney) Vaughn Communications, Inc.
Columbia House
Columbia TriStar Home Video (Sony Pictures
Entertainment)
HBO Home Video
New Line Home Video
Paramount Pictures
Twentieth Century Fox Home Entertainment, Inc.
Universal Studios Home Video
Warner Home Video
</TABLE>

During 1996, revenues from the Company's three largest customers represented
37% of the Company's net revenues and each accounted for more than 10% of the
Company's net revenues. For 1997, one customer accounted for 11% of the
Company's net revenues. For the first three months of 1998, revenues from the
Company's two largest customers represented 22% of the Company's net revenues
and each accounted for more than 10% of the Company's net revenues. The MPAA
studios as a group accounted for 47.1%, 38.6% and 41.7% of the Company's net
revenues in 1996, 1997 and the first three months of 1998, respectively. The
Company expects that revenues from the MPAA studios will continue to account for
a substantial portion of the Company's net revenues for the foreseeable future.
The loss of, or any significant reduction in revenues from, any of these
customers would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Dependence on
Key Customers" and Note 1 of Notes to Consolidated Financial Statements.

The Company also licenses its videocassette copy protection technology to
special interest customers that include independent video producers and
corporations. Licensed commercial duplicators act as distributors of the
Company's videocassette copy protection technology to special interest
customers. Revenues from special interest customers accounted for approximately
17.2%, 12.1% and 12.9% of the Company's copy protection revenues in 1996, 1997
and the first three months of 1998, respectively.

CONSUMER ELECTRONICS AND HARDWARE MANUFACTURERS

The Company has licensed its copy protection technology for digital PPV to
41 set-top decoder manufacturers, including the following:

Echostar Communications Corporation
General Instrument Corporation
Nokia Satellite Systems, A.B.
Pace Micro Technology, Ltd.
Philips Consumer Electronics
Scientific-Atlanta, Inc.
Sony Corporation
Thomson Consumer Electronics (RCA brand)

The Company generally receives an up-front fee and a per unit royalty from
each digital set-top decoder manufacturer that licenses its technology. The
Company has also authorized 40 companies to incorporate the Company's digital
PPV and DVD copy protection technologies in their semiconductor designs. These
companies include Analog Devices Corporation, Brooktree Division of Rockwell
Corporation, Crystal Semiconductor, Inc., GEC Plessey Semiconductors, Inc.,
Mitsubishi Electric Corporation, Motorola, Inc., NEC Corporation, OKI Electric
Industry, Co., Ltd., Philips Semiconductors International, B.V., Raytheon
Company, Samsung Electronics Co., Ltd., Sony Electronics Inc., Texas Instruments
and VLSI Technology, Inc. These companies generally pay a small one-time service
fee for verification of proper implementation of the Company's copy protection
technology in digital-to-analog application specific integrated circuits
("ASICs") that are embedded in digital set-top decoders and DVD players. They
are authorized to sell the Macrovision-capable ASICs to

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<PAGE>
Macrovision-licensed DVD hardware manufacturers and to Macrovision-licensed
digital set-top decoder manufacturers.

SYSTEM OPERATORS

The Company has licensed its digital PPV copy protection technology for
incorporation into the networks of 13 system operators, including British Sky
Broadcasting Limited, DIRECTV, Galaxy Latin America, Hong Kong Telecom, the
Kirsch Group, Sky Latin America and Sky Perfect. These system operators have
paid a one-time license fee to the Company and have entered into agreements with
the Company pursuant to which the Company is entitled to transaction-based
royalty payments at such time as copy protection for digital PPV programming is
activated. Another 13 system operators require Macrovision-capable set-top
decoders in their networks or have signed agreements with the Company to test
its digital PPV copy protection technology on a limited basis. These system
operators include Comcast Corporation, Cox Enterprises, Inc., PRIMESTAR
Partners, L.P., TeleCommunications, Inc. and Time Warner Inc.

VIDEO SCRAMBLING CUSTOMERS

The Company's customers for video scrambling Pay TV components and licenses
are cable television system hardware manufacturers that sell their products to
cable operators in developing markets. These customers purchase encoder hardware
and decoder components from the Company or pay the Company a volume-based
royalty for encoder and decoder components when they manufacture such components
under license from the Company. The following is a representative list of the
Company's video scrambling customers, each of which accounted for at least
$25,000 of the Company's net revenues during 1997:

<TABLE>
<CAPTION>
VES CUSTOMERS PAY TV COMPONENTS AND LICENSES
- ---------------------------------------- ------------------------------------------------------------
<S> <C>
Integrated Telecommunications Systems Eastern Electronics Co., Ltd. (Taiwan)
(Canada) Efforts Development International, Ltd. (Hong Kong)
News Sports Microwave, Inc. Pacific Satellite International, Ltd. (Hong Kong)
SIM Security and Electronic (Germany) Tae Kwang Industrial (South Korea)
Skehan Televideo Service Inc. Taihan Electric Wire Co., Ltd. (South Korea)
Wood & Douglas LTD (United Kingdom)
</TABLE>

SALES, MARKETING AND CUSTOMER SUPPORT

The Company markets its videocassette copy protection and digital PPV and
DVD copy protection technologies directly to the MPAA studios and certain major
independent rights owners and video producers. The Company also provides ongoing
technical support to the three major duplicators that manufacture most of the
videocassettes for the MPAA studios. The Company supplements its direct sales
efforts with a variety of marketing initiatives, including trade show
participation, trade advertisements, industry education and newsletters. The
Company provides technical support to its licensed duplicators, including
hardware installation assistance and quality control. In addition, the Company
supports licensed duplicator sales personnel by providing sales training and
sales incentive programs and literature and by participating in trade shows.

The Company markets its video scrambling technologies through a combination
of direct sales, distributors, sales representatives and licensing in the United
States and internationally. The Company has a total of 18 distributors, sales
representatives and licensees serving 29 countries that sell products based on
the Company's video scrambling technologies. VES scrambling products are sold
directly or through distributors to end users. The Company licenses its
PhaseKrypt technology and sells encoder hardware and decoder components directly
to manufacturers of cable television set-top decoders. Technical support is
provided from the Company's Sunnyvale headquarters.

The Company markets its copy protection technologies internationally from
its Sunnyvale headquarters, through its subsidiaries in Japan and the United
Kingdom and through exclusive licensing arrangements with third parties in
Egypt, Hungary and South Korea. International and export sales together
represented 37.9%, 46.5% and 50.0% of net revenues in 1996, 1997 and the first
three months of 1998, respectively. The increase in 1997 reflects the increased
international opportunities for the Company's Pay TV video scrambling business,
the

38
<PAGE>
emergence of the PPV business and sales efforts from the Company's subsidiaries.
The Company expects that international and export sales will continue to
represent a substantial portion of its net revenues for the foreseeable future.
Due to its reliance on international and export sales, the Company is subject to
the risks of conducting business internationally. See "Risk Factors--Risks
Associated with International and Export Sales" and Note 9 of Notes to
Consolidated Financial Statements.

As of March 31, 1998, the Company employed 25 sales and marketing personnel
and eight additional employees assisted in customer technical support. The
Company believes that its ability to attract, train and retain qualified sales
and marketing personnel is essential to the success of its business. The market
for such personnel is highly competitive, and the Company's sales and marketing
activities could be adversely affected if the Company were unsuccessful in
attracting, training and retaining skilled personnel. See "Risk Factors--
Dependence on Key Personnel."

TECHNOLOGY

COPY PROTECTION

Effective copy protection systems are difficult to develop because of the
need to address the dual requirements of playability and effectiveness.
Consumers must be able to view the copy protected content using a consumer VCR
and a television set without the need for any intervening devices, while, at the
same time, the quality of an unauthorized copy must be reduced to such an extent
that it loses its entertainment value. The extent to which the entertainment
value is reduced varies, depending on the VCR model and the VCR and television
combination that plays the unauthorized copy. To prevent VCRs from making good
copies, the copy protected video must differ in some manner from the standard
video signal because, by design, all VCRs will make good copies from standard
video signals. Television sets are designed to play standard or near-standard
video signals. As a result, there is a risk that making a video signal
non-standard in order to prevent copying will decrease playability by causing
some television sets to generate impaired or distorted pictures. In the tradeoff
between effectiveness and playability, designers of copy protection systems must
favor playability while maintaining effectiveness.

The Company's videocassette copy protection technology involves the patented
technique of inserting a series of electronic pulses in the vertical blanking
interval ("VBI") of a standard video signal. The VBI is the blank space between
the video fields on television sets that are refreshed at a rate of 60 fields
per second. The copy protection pulses are embedded electronically in the
prerecorded content of the videocassettes in the process of videocassette
manufacturing. The electronic pulses are not visible in the television picture.
The pulses are intended to affect the automatic gain control ("AGC") circuit in
the recording system of most VHS videocassette recorders, but not to affect a
similar circuit in the television set. Therefore, when the consumer plays a copy
protected prerecorded videocassette, the picture is clean and crisp, but when
the consumer plays an unauthorized consumer-made copy of that same
videocassette, the picture typically has substantially reduced entertainment
value. The Company's copy protection technology is effective against most
consumer copying, but generally does not deter professional pirates who use
professional duplication and video processing equipment. In the event that the
major motion picture studios or other rights holders determine that the
inability of the Company's technology to deter professional piracy renders the
Company's technology less useful, demand for the Company's copy protection
products could decline, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Risks of Circumvention Technologies."

The DVD and digital PPV versions of the Company's copy protection
technologies employ both the electronic pulses used in videocassettes and a
second patented copy protection process called Colorstripe. Colorstripe affects
the color playback circuit of a VCR causing colored horizontal stripes to appear
in the picture of an unauthorized copy. The combination of the two processes
provides a higher level of effectiveness than that provided by either process
alone. In addition, Colorstripe is more effective against circumvention by
currently available professional duplication equipment. Copy protection is
implemented in DVD and digital PPV applications by embedding a copy protection
signal generator integrated circuit within the DVD player or digital set-top
decoder. The integrated circuit is activated by copy protection control codes,
which are integrated into the DVD media or the PPV transmission. Once the
integrated circuit is activated, it adds the copy protection signal

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<PAGE>
to the analog output of the DVD player or digital set-top decoder. As with
videocassette copy protection, consumers are able to see a clear picture on
their television sets, but generally cannot make a usable videocassette copy on
a VCR.

VIDEO SCRAMBLING

The Company's PhaseKrypt technology utilizes a combination of digital
encryption techniques and analog video scrambling to scramble video signals. The
resulting scrambled picture oscillates at random rates, which makes it almost
impossible to watch. Because the encoding or scrambling technique is digitally
controlled, the level of security against signal theft can be increased by
increasing the number of bits that are used in the encryption algorithm. The
Company's technology uses the largest number of bits currently allowable by law
for export products. The scrambled picture is decoded using the secure
PhaseKrypt analog technology that partially relies on the electronics of the
television set to make the image viewable. The combination of the digital
encoding process, which provides security, and the analog decoding technology,
which is inexpensive, makes PhaseKrypt a cost-effective solution for
analog-based cable and satellite television set-top decoders in developing
countries. PhaseKrypt video scrambling is often accompanied by one of
Macrovision's patented audio scrambling technologies.

CD-ROM/MULTIMEDIA COPY PROTECTION

C-Dilla's recently developed SafeDisc technology seeks to prevent the
copying of CD-ROMs by using encryption-protected content, an authenticating
digital signature and "anti-hacking" software. Each CD-ROM published with the
SafeDisc technology is premastered with encrypted content, containing
authenticating instructions and a unique SafeDisc digital signature. The
authentication software must detect the digital signature before it decrypts the
contents of the CD-ROM. The digital signature and authentication process is
transparent to the user. If a consumer or pirate uses a CD-recordable device or
professional mastering equipment to duplicate a CD-ROM, SafeDisc is designed to
inhibit the transmission of the digital signature. Because decryption will not
take place without the digital signature, the copy will not run. SafeDisc also
contains anti-hacking technology to prevent the compromise of its security
features. The anti-hacking technology is designed to deter consumer and
commercial copying. See "Risk Factors--Entrance Into New Market."

RESEARCH AND DEVELOPMENT

The Company's research and development efforts are focused on developing
enhancements to existing products, new applications for the Company's current
technologies and new patentable technologies related to the video security
market. The Company's core technological competencies are in video engineering,
which involves the generation and modification of electronic signals in both
digital and analog form and the transformation of such signals between digital
and analog forms, and in ASIC design. Such technologies are primarily hardware
based. The Company also has expertise in developing software security codes,
which are used to restrict access to encoding and decoding devices.

For its copy protection technologies, the Company supports the efforts of
television, VCR and DVD hardware manufacturers to design hardware that is
compatible with the Company's technologies. The Company also assists
semiconductor manufacturers in incorporating the Company's copy protection
technologies into digital video-based ASICs for digital to analog converters.
The Company regularly tests the effectiveness and transparency of its copy
protection technologies on representative samples of consumer televisions and
VCRs to determine whether modifications or enhancements may be necessary. For
its video scrambling technologies, the Company's primary focus is the
development of enhancements to its PhaseKrypt-based Pay TV encoder and decoder
products.

In September 1997, the Company and Digimarc agreed to develop a digital
video watermarking solution to address the digital-to-digital copying issues
associated with the next generation of DVD and digital videocassette recording
devices. Digital watermarks embedded in motion pictures and other video material
act as an invisible identity providing basic copyright identification
information as well as various directions either to allow or to disallow
playback, viewing and copying onto another digital device. The new technology
will be based upon the Company's patented play control technology and Digimarc's
patented watermarking technology, which can survive numerous transformations
(e.g., from digital to analog and back to digital, or from one video format to
another). The digital watermarks are designed to be imperceptible to the viewer,
but to be read easily

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by special purpose decoders that can be built into software or semiconductors.
This jointly developed technology is intended to protect motion pictures and
other video content from unauthorized reproduction using digital recording
devices.

In February 1998, the Company purchased approximately 19.8% of the common
stock of C-Dilla and entered into a Software Marketing License and Development
Agreement with C-Dilla. Under this agreement, the Company has, for an initial
five-year term, the worldwide exclusive license to market C-Dilla's proprietary
copy protection technology for CD-ROM software products in the consumer
multimedia market. See "-- Strategic Investments--C-Dilla Ltd."

As of March 31, 1998, the Company's research and development staff consisted
of 15 engineers and technicians. The Company believes that its ability to
attract, train and retain qualified development personnel is essential to the
success of its development programs. The market for such personnel is highly
competitive, and the Company's development activities could be adversely
affected if the Company were unsuccessful in attracting, training and retaining
skilled engineering personnel. In 1996, 1997 and the first three months of 1998,
the Company's expenses for research and development were $2.5 million, $2.2
million and $623,000, respectively. See "Risk Factors--Dependence on Key
Personnel."

The video security industry in which the Company competes, and in which its
technologies and products are utilized, is characterized by rapid technological
change, frequent product introductions and enhancements, changes in customer
demands and evolving industry standards. The emergence of new industry standards
and the introduction of new technologies or products embodying new technologies
can render existing technologies or products obsolete and unmarketable. The
Company's future success will depend in large part on its ability to enhance its
current technologies and products in a timely, cost-effective manner and to
develop new technologies and products that meet changing market conditions,
which include emerging industry standards, changing customer demands, new
competitive product offerings and changing technology. Any failure by the
Company to anticipate or to respond adequately to changing market conditions, or
any significant delays in technology or product development or introduction,
could cause customers to delay or decide against licensing or purchasing the
Company's technologies or products and would have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors--Rapid Technological Change."

INTELLECTUAL PROPERTY RIGHTS

The Company holds 38 United States patents and has 41 United States patent
applications pending. Of the issued United States patents, 23 relate to the
Company's copy protection technologies, 11 relate to video scrambling and four
relate to audio scrambling. The Company's issued United States patents expire
between June 2000 and March 2015. The earliest of the Company's core
videocassette and DVD copy protection patents expires in 2005; however, the
Company has filed applications for improvement patents which, if issued, will
extend such expiration dates beyond 2010. The Company also has 123 foreign
patents and 211 foreign patent applications pending in 40 countries. Of the
issued foreign patents, 73 relate to the Company's copy protection technologies,
49 relate to video scrambling and one relates to audio scrambling. Included in
the patents related to the Company's copy protection technologies are eight
United States and 20 foreign patents covering a number of processes and devices
that unauthorized parties could use to circumvent the Company's copy protection
technologies. The Company uses these patents to limit the proliferation of
devices intended to circumvent the Company's copy protection technologies.

The Company's success is heavily dependent upon its proprietary
technologies. The Company relies on a combination of patent, trademark,
copyright and trade secret laws, nondisclosure and other contractual provisions,
and technical measures to protect its intellectual property rights. There can be
no assurance that any patent, trademark or copyright owned by the Company will
not be challenged and invalidated or circumvented, that patents will issue from
any of the Company's pending or future patent applications or that any claims in
issued patents or pending patent applications will be of sufficient scope or
strength or be issued in all countries where the Company's products can be sold
or its technologies can be licensed to provide meaningful protection or any
commercial advantage to the Company. There can be no assurance that the
expiration of any of the Company's patents will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, there can be no assurance that others will not develop technologies
that are similar or superior to the Company's technologies, duplicate the
Company's technologies or design around the patents

41
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owned by the Company. Effective intellectual property protection may be
unavailable or limited in certain foreign countries. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy or otherwise use aspects of the Company's processes and devices that the
Company regards as proprietary. Policing unauthorized use of the Company's
proprietary information is difficult, and there can be no assurance that the
steps taken by the Company will prevent misappropriation of its technologies. In
the event that the Company's intellectual property protection is insufficient to
protect the Company's intellectual property rights, the Company could face
increased competition in the market for its products and technologies, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company has eight United States and 20 foreign patents covering a number
of processes and devices that unauthorized parties could use to circumvent the
Company's copy protection technologies. The Company uses these patents to limit
the proliferation of devices intended to circumvent the Company's copy
protection technologies. The Company has initiated a number of patent
infringement disputes against manufacturers and distributors of such devices.
The Company has one lawsuit of this type pending to require the defendants to
discontinue the sale of devices that circumvent the Company's copy protection
technologies and infringe one or more of the Company's circumvention patents. In
the event of an adverse ruling in this litigation or in any similar litigation,
the Company might suffer from the legal availability or such a circumvention
device or obtain rights to the offending devices. The legal availability of
circumvention devices could result in the increased proliferation of devices
that defeat the Company's copy protection technology and a decline in demand for
the Company's technologies, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There is
legislation before the United States Congress and certain foreign

42
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legislative bodies that would make such circumvention devices illegal. The
Company is supporting the legislative effort to make such circumvention devices
illegal irrespective of any patent position held by the Company.

COMPETITION

COPY PROTECTION

The Company believes that it has had no significant videocassette copy
protection competitor for the last five years other than companies that have
occasionally developed hardware based on the Company's technology in foreign
countries where the Company does not have patents issued. The Company's copy
protection technologies are proprietary and have broad international patent
coverage. As a result, none of the Company's competitors has been successful in
the past. It is possible, however, that a competitive copy protection technology
could be developed in the future. For example, the Company's customers could
attempt to promote competition by supporting the development of alternative copy
protection technologies or solutions, including solutions that deter
professional duplication. Increased competition would be likely to result in
price reductions and loss of market share, either of which could materially
adversely affect the Company's business, financial condition and results of
operations.

The Company and Digimarc are jointly developing a digital media copy
protection solution to address the digital-to-digital copying issues associated
with the next generation of DVD and digital videocassette recording devices.
They have submitted their proposed solution to the Copy Protection Technical
Working Group ("CPTWG"). The Company and Digimarc are competing with at least
six other companies that have submitted similar proposals to the CPTWG. Certain
of these companies have substantially greater name recognition and significantly
greater financial, technical, marketing and other resources than the Company and
Digimarc. There can be no assurance that the Company and Digimarc will be able
to compete successfully in presenting their proposal to the CPTWG. The company
whose digital media copy protection solution is selected by the CPTWG will have
a significant advantage in licensing its technology to video rights owners
worldwide and in working with consumer electronics manufacturers, PC platform
companies and their suppliers to implement digital-to-digital copy protection.
If the solution being developed by the Company and Digimarc is not the selected
solution or otherwise is not widely adopted by studios or consumer electronics
manufacturers, the Company and Digimarc will be at a competitive disadvantage in
marketing their solution. If the CPTWG adopts the Company's and Digimarc's
solution, there can be no assurance that other companies will elect not to
compete in this market.

VIDEO SCRAMBLING

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position or that the Company's products will achieve market acceptance. In
addition, there can be no assurance that technological changes or development
efforts by the Company's competitors will not render the Company's video
scrambling products obsolete or uncompetitive. The Company believes that the
principal competitive factors affecting these markets include the level of
security provided, price, quality, product reputation, customer service and
support, the effectiveness of sales and marketing efforts and company
reputation. There can be no assurance that the Company or its licensees can
compete successfully against current and potential competitors, especially
against those with significantly greater financial, marketing, service, support,
technical and other resources.

MANUFACTURING

The Company's preferred manufacturing strategy is to license its
technologies to third parties that manufacture products incorporating those
technologies. The Company generates royalty revenues from these licenses,
generally in the form of an up-front fee and a per unit royalty. For example,
licensees of the Company's PhaseKrypt technology can either manufacture
PhaseKrypt decoder components or purchase such components from the Company.

The Company's manufacturing operations are limited to low volume products
that require significant quality control efforts by the Company, such as the VES
products, PhaseKrypt encoders and videocassette copy protection processors used
by commercial videocassette duplicators. These manufacturing operations consist
primarily of component procurement, final assembly and test, and quality control
of subassemblies and systems. The Company generally uses domestic independent
contractors to manufacture and assemble printed circuit boards, which enables
the Company to configure the hardware and software in combinations to meet a
wide variety of customer requirements. The Company installs its software into
electronically programmable read-only memory to maintain quality control and
security. The Company utilizes "burn-in" procedures, functional and system
integration testing and comprehensive inspections to assure quality and
reliability of its products.

The Company depends upon third-party manufacturers and suppliers for
components, subassemblies and printed circuit boards used in its VES products,
PhaseKrypt encoders, PhaseKrypt decoder components and videocassette copy
protection processors. The Company's product designs are proprietary but
generally incorporate industry-standard hardware components that are obtainable
from multiple sources. The Company's ability to deliver its products in a timely
manner depends upon the availability of quality components and subassemblies
used in these products and, in part, on the ability of subcontractors to
manufacture, assemble and deliver certain items in a timely and satisfactory
manner. The Company obtains certain electronic components and subassemblies from
a single source or a limited number of sources. For example, Atmel Corporation
is currently the Company's sole source of integrated circuits for the Company's
PhaseKrypt decoders. The reliance on third-party manufacturers and sole or
limited suppliers involves a number of risks, including a potential inability to
obtain an adequate supply of required components, subassemblies and printed
circuit boards and reduced control over pricing, quality and timely delivery of
components, subassemblies and printed circuit boards. A significant interruption
in the delivery of any such items or any other circumstance that would require
the Company to seek alternative sources of supply could result in the inability
of the Company to deliver certain of its products on a timely basis, which in
turn could result in a deterioration of the Company's customer relationships and
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors--Dependence on Suppliers and
Third-Party Manufacturers."

LEGISLATIVE AND TECHNOLOGY INITIATIVES

The Company has been an active participant in the DVD technical working
group that is comprised of representatives from the following associations and
their respective member companies: MPAA, Consumer Electronics Manufacturers
Association, Information Technology Industries Council, Business Software
Alliance, Recording Industry Association of America, Home Recording Rights
Coalition, Interactive Multimedia Association and DVD Manufacturers Consortium.
In 1996, the technical working group adopted a set of copy protection principles
that established prerequisites for commercial availability of DVD hardware and
media. Adoption of these principles has resulted in worldwide digital-to-analog
copy protection standards for DVD players and media. The Company believes that
its copy protection technology is currently the only digital-to-

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analog copy protection solution that satisfies these principles. The technical
working group is continuing to evaluate digital-to-digital copy protection
solutions, in anticipation of the introduction of digital videocassette
recorders and DVD recorders. The Company's joint development project with
Digimarc is directed to this opportunity. The technical working group is also
supporting legislation pending before the United States Congress and certain
foreign legislative bodies that would support various copy protection solutions
for digital media and would also outlaw copy protection circumvention devices.
Such legislation, if introduced and enacted into law, would assist the Company
in controlling proliferation of circumvention devices and in achieving
widespread adoption of its digital-to-analog copy protection solutions. However,
there can be no assurance that such legislation will ever be enacted, or that
all DVD and PC manufacturers will follow industry design principles and
applicable technology-based copy protection schemes.

STRATEGIC INVESTMENTS

The Company seeks to continue to expand its technological base in current as
well as new markets, through the following strategic investments in companies
with complementary or compatible technologies or products.

COMMAND AUDIO CORPORATION (REDWOOD SHORES, CALIFORNIA)

In October 1995, Command Audio Corporation ("CAC") was incorporated as a
wholly-owned subsidiary of the Company to commercialize a distinct and new
audio-on-demand technology. In June 1996, the Board of Directors of the Company
approved the discontinuation of the Company's involvement in CAC. In August
1996, the Company divested itself of all but 19.8% of the outstanding stock of
CAC. CAC is developing an audio-on-demand system consisting of a program center
that provides continuously updated news and information on a subscription basis
and a hand-held portable receiver that stores the information. The system allows
consumers to control the timing and content of the program playback. The Company
has no plans to increase its ownership above the 19.8% minority position, but
does have a right of first refusal to acquire additional stock to maintain its
19.8% ownership if and when CAC offers additional stock, subject to certain
exceptions. During 1997, the Company maintained its 19.8% ownership in CAC with
the additional cash investment of approximately $2.0 million in connection with
various rounds of third-party financing obtained by CAC, bringing the Company's
total investment in CAC to $2.3 million. Additionally, in 1996, the Company
assigned to CAC all rights in certain technology and released its reversion
rights in technology that the Company had previously assigned to CAC. In
consideration of such assignment and release, CAC agreed to pay to the Company
royalties equal to 2.0% of CAC's gross revenues for 12 years, beginning when CAC
has operating revenues from certain sources or, at the election of the Company,
at any time prior thereto.

DIGIMARC CORPORATION (PORTLAND, OREGON)

In December 1997, the Company invested $1.5 million in Digimarc in exchange
for shares of Digimarc's preferred stock that represents a 6.8% ownership on an
as-converted basis. Digimarc is a private company that was founded in 1995. The
Company and Digimarc are jointly developing a digital media copy protection
solution to address the digital-to-digital copying issues associated with the
next generation of DVD and digital videocassette recording devices. They have
presented their proposed solution to the CPTWG and are currently working on
prototype systems.

C-DILLA LTD. (WOODLEY, UNITED KINGDOM)

In February 1998, Macrovision purchased 247,500 shares (approximately 19.8%)
of the common stock of C-Dilla, for a purchase price of L2,121,212
(approximately $3.6 million). C-Dilla is a private company founded in 1991.
C-Dilla provides rights management software for high value-added information and
software publishers.

In February 1998, the Company and C-Dilla also entered into a Software
Marketing License and Development Agreement (the "Agreement") under which the
Company has, for an initial five-year term, the worldwide exclusive license to
market C-Dilla's proprietary copy protection technology for CD-ROM software
products in the consumer multimedia market. Under the Agreement, the Company
paid L606,060 (approximately $1.0 million) in up-front license fees subject to
offset against future royalties and will pay royalties to C-Dilla of between 30%
to 45% of revenues from sales of software products incorporating C-Dilla's
technology. In the event that the

45
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Company fails to reach minimum royalty levels of $2.0 million in the third year
of the Agreement, $5.0 million in the fourth year, or $10.0 million in the fifth
year, the license becomes a non-exclusive license for the term of the Agreement.
Additionally, in connection with C-Dilla's granting of licenses for certain of
its products outside of the markets for which the Company has been granted
rights under the Agreement, C-Dilla will pay to the Company royalties of between
7.5% to 30% of revenues from such licenses. The Company has the option to extend
the initial term of the Agreement for an additional five-year period upon
payment of an option fee of $1.0 million and an additional license fee of $5.0
million, which fee may be paid through future increased royalty payments. Under
the terms of the Agreement, the Company and C-Dilla also agreed to develop
jointly certain other proprietary copy protection technologies for CD-ROM,
DVD-ROM and other digital delivery methods.

EMPLOYEES

As of March 31, 1998, the Company had 81 employees, including eight in
manufacturing, 15 in research, engineering and development, eight in technical
support, 25 in sales and marketing and 25 in general and administrative
capacities. Twelve of these employees are based outside of the United States.
None of the Company's employees is covered by a collective bargaining agreement
or is represented by a labor union with respect to employment by the Company.
The Company has not experienced any organized work stoppages and considers its
relations with its employees to be good.

The Company's future performance is highly dependent upon the continued
service of members of the Company's senior management and other key research and
development and sales and marketing personnel. The Company believes that its
future success will also depend upon its continuing ability to identify,
attract, train and retain other highly skilled managerial, technical, sales and
marketing personnel. Hiring for such personnel is competitive, and there can be
no assurance that the Company will be able to retain its key employees or
attract, assimilate or retain the qualified personnel necessary for the
development of its business. See "Risk Factors--Dependence on Key Personnel."

FACILITIES

The Company's principal operations are located in a 43,960 square foot
building in Sunnyvale, California. The Company's lease for this building expires
on June 30, 2002 and the Company has the right to renew the lease for two
additional terms of five years each. The Company also leases space for sales,
marketing and technical support operations near London, England and in Tokyo,
Japan. The Company believes that its existing facilities are adequate to meet
its current needs. See Note 7 of Notes to Consolidated Financial Statements.

LEGAL PROCEEDINGS

In October 1995, Joseph Swyt, a former officer and director of the Company,
filed suit against the Company in the Superior Court of the State of California
alleging monetary damages suffered as a result of alleged fraud,
misrepresentation and other malfeasance in connection with the Company's grant
of stock options to him. Mr. Swyt maintains that the Company induced him to
accept employment by falsely representing to him that the options granted to him
eventually would have substantial value. Between August 1990 and December 1993,
the Company granted to him options to purchase approximately 200,000 shares with
per-share exercise prices of $2.25 or $2.70. Substantially all of these options
expired unexercised within three months following his departure from the Company
in June 1995. In December 1996, the court ordered this matter to binding
arbitration in accordance with a written agreement between the Company and Mr.
Swyt. The arbitration agreement contains limitations on the types of damages
available to Mr. Swyt and expressly precludes punitive damages. Mr. Swyt filed
his claim in arbitration for this matter with the American Arbitration
Association in June 1997 and arbitration hearings are scheduled for October
1998. The Company believes that the case is without merit and intends to contest
it vigorously. However, it is not possible to determine with precision the
probable outcome or the amount of liability, if any, under this lawsuit. A
decision against the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company is involved in legal proceedings related to certain of its
intellectual property rights. See "Business--Intellectual Property Rights."

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages and
positions as of June 1, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
John O. Ryan............................. 52 Chairman of the Board of Directors, Chief Executive
Officer and Secretary

William A. Krepick....................... 52 President, Chief Operating Officer and Director

Victor A. Viegas......................... 41 Vice President, Finance and Administration and Chief
Financial Officer

Richard S. Matuszak...................... 54 Vice President, Special Interest Copy Protection and
Director

Mark S. Belinsky......................... 41 Senior Vice President, Worldwide Theatrical and
Pay-Per-View Copy Protection

Patrice J. Capitant...................... 49 Vice President, Engineering

Brian R. Dunn............................ 41 Vice President, Business Development

Whit T. Jackson.......................... 38 Vice President, Video Encryption Technologies

Carl S. Jorgensen........................ 42 Vice President of Operations

Donna S. Birks (1)....................... 42 Director

William N. Stirlen (1)................... 59 Director

Thomas Wertheimer (1).................... 59 Director
</TABLE>

- ------------------------

(1) Member, Audit Committee and Compensation Committee.

MR. RYAN is a co-founder of the Company and an inventor of its core copy
protection and video scrambling technologies. He has served as Chairman of the
Board of Directors and Secretary of the Company since June 1991 and Chief
Executive Officer of the Company since June 1995. He has been a director of the
Company since June 1987 and served as Vice-Chairman of the Board of Directors
from 1987 until June 1991. He also served as General Partner of the partnership
predecessor of the Company from 1985 to 1987 and as President and Secretary of
the corporate predecessor of the Company from 1983 to 1985. Prior to founding
Macrovision, Mr. Ryan was Director of Research and Development of Ampex
Corporation's broadcast camera group. Mr. Ryan holds more than 46 patents and
has 11 patent applications pending in the fields of video copy protection, video
scrambling and television camera technology. Mr. Ryan took undergraduate courses
in Physics and Math at the University of Galway in Ireland and received a Full
Technological Certificate in Telecommunications from the City and Guilds
Institute of London. Mr. Ryan is also a director of Command Audio Corporation.

MR. KREPICK has served as a director of the Company since November 1995 and
as President and Chief Operating Officer of the Company since July 1995. He has
been with the Company since November 1988, and served as Vice President, Sales
and Marketing of the Company until June 1992 and Senior Vice President,
Theatrical Copy Protection from July 1992 to June 1995. Prior to joining
Macrovision, Mr. Krepick held several executive marketing management positions
over a ten-year period with ROLM Corporation, a telecommunications equipment
manufacturing company. He holds a B.S. degree in Mechanical Engineering from
Rensselaer Polytechnic Institute and an M.B.A. from Stanford University.

MR. VIEGAS has served as Vice President, Finance and Administration and
Chief Financial Officer of the Company since June 1996. From October 1986 to
June 1996, he served as Vice President of Finance and Chief Financial Officer at
Balco Incorporated, a manufacturer of advanced automotive service equipment,
and, since

47
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May 1991, a subsidiary or division of Snap-On Tools. He holds a B.S. degree in
Accounting and an M.B.A. from Santa Clara University. Mr. Viegas is also a
certified public accountant.

MR. MATUSZAK has served as Vice President, Special Interest Copy Protection
of the Company since June 1992, and as a director of the Company since May 1992.
He joined the Company in August 1985 and held various sales and marketing
positions from August 1985 to June 1992. From June 1984 to August 1985, Mr.
Matuszak was a Sales Manager for the Broadcast Products Division of Hitachi
Corporation. He holds an Associate degree in Applied Technologies and
Electronics from DeVry Institute of Technology.

MR. BELINSKY has served as Senior Vice President, Worldwide Theatrical and
Pay-Per-View Copy Protection of the Company since October 1997. He was Vice
President, Worldwide Theatrical and Pay-Per-View Copy Protection of the Company
from October 1995 to October 1997. Between June and September 1995, he was a
consultant to various companies in the Internet services and electronic commerce
fields, and, between June 1995 and August 1995, he was Chief Operating Officer
of the McKinley Group, Inc., an Internet directory services company. From May
1993 to June 1995, Mr. Belinsky was Vice President and General Manager of the
Electronic Marketplace Systems Division of International Data Group, a developer
of online shopping malls for personal computer and software products. He was an
independent consultant between February and May 1993, and, from October 1988 to
January 1993, he was Vice President and General Manager of the Interop Company,
a division of Ziff-Davis Publishing Company. He holds a B.A. degree in Business
Administration from Wayne State University and an M.B.A. from Harvard Business
School. Mr. Belinsky is an observer on the Digimarc Corporation Board of
Directors.

DR. CAPITANT has served as Vice President, Engineering of the Company since
October 1996. He joined the Company in October 1995 as Director of Engineering.
He served as Manager of Video Engineering at Radius, Inc., a computer equipment
manufacturer, from December 1994 to September 1995. Dr. Capitant held
engineering positions at Compression Labs, Inc., a telecommunications equipment
manufacturer, from September 1993 to December 1994 and Sony Corporation of
America, Advanced Video Technology Center, from September 1989 to September
1993. He completed his undergraduate and post graduate work in engineering and
automatic control at Institut Industrial du Nord, Lille, France and University
of Lille. He holds a Ph.D. degree in Electrical Engineering from Stanford
University.

MR. DUNN has served as Vice President, Business Development of the Company
since January 1995. From January 1989 to December 1994, he served as Vice
President, Operations, Corporate Counsel and Chief Financial Officer of Phase 2
Automation, a factory automation company. Mr. Dunn holds a B.A. degree in
Accounting from the University of Notre Dame and a J.D. degree from Santa Clara
University School of Law. He is a certified public accountant and a member of
the California bar. Mr. Dunn is also a director of C-Dilla Limited.

MR. JACKSON has served as Vice President, Video Encryption Technologies of
the Company since September 1992. He joined the Company in August 1990 as Sales
Manager for the Company's line of encryption products. From January 1989 to
August 1990, Mr. Jackson managed the satellite service business for the Galaxy/
Westar satellite fleet of Hughes Communications, Inc., a satellite
communications company. He holds a B.A. degree in International Relations from
Northwestern University and an M.B.A. from the J.L. Kellogg Graduate School of
Management at Northwestern University.

MR. JORGENSEN joined Macrovision in July 1990 to head up the newly created
Manufacturing Department. He currently serves as Vice President of Operations.
Mr. Jorgensen has over 19 years experience in the commercial and consumer
electronics industry. Immediately prior to joining Macrovision, he was the
Manufacturing/Engineering Manager at Digital F/X, Inc. He has held various
management positions in the manufacturing/engineering field at companies such as
Gould Electronics, Inc., Atlas Electronics (where he set up their facility in
Malaysia), Ampex Corporation and Underwriters Laboratories. Mr. Jorgensen holds
a B.S. degree with honors in Electronics from San Jose State University and has
taken numerous post graduate courses in computer electronics.

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MS. BIRKS has served as a director of the Company since May 1997. Since
December 1997, she has served as Executive Vice President and Chief Financial
Officer at California Microwave, Inc., a satellite and wireless communications
company, and from August 1994 to June 1997, she served as Vice President,
Finance and Administration and Chief Financial Officer at ComStream. She has
also held senior management positions at the Company, GTE Spacenet and Contel
ASC. Ms. Birks holds a B.A. degree in Business Administration from George Mason
University in Fairfax, Virginia and an M.S. degree in Finance from American
University in Washington, D.C. She is a certified public accountant.

MR. STIRLEN has served as a director of the Company since May 1997. He has
held various executive offices with Open Text Corporation, an intranet software
company headquartered in Waterloo, Ontario, since June 1996, serving as Chief
Financial Officer until October 1997 and as Executive Vice President of
Corporate Development since October 1997. Mr. Stirlen was a consultant to
technology companies from February 1994 to June 1996. From March 1993 to
February 1994, he served as Chief Financial Officer of Supercuts Inc. He has
also held senior management positions at Computer Consoles Inc., and Trimble
Navigation Ltd. Mr. Stirlen holds a B.A. degree from Yale University and an
M.B.A. in Finance from Northwestern University in Evanston, Illinois.

MR. WERTHEIMER has served as a director of the Company since July 1997. He
has served as a consultant to Universal Studios since January 1996. From 1992 to
January 1996, Mr. Wertheimer served as Executive Vice President and Chairman of
the Home Video and Television Groups of MCA, Inc. He is a member of 4MC Corp.
Board of Directors and of the Columbia Law School Board of Visitors. He also
serves as President of the KCRW Foundation. Mr. Wertheimer holds a B.A. degree
from Princeton University and an L.L.B. from Columbia University School of Law.

Each director holds office until the next annual meeting of stockholders of
the Company or until his successor is duly elected and qualified. Officers are
chosen by, and serve at the discretion of, the Board of Directors. There are no
family relationships among the directors and officers of the Company.

49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of March 31,
1998, and as adjusted to reflect the sale of the shares of Common Stock offered
hereby, by: (i) each person known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock; (ii) each of the Company's
directors; (iii) each of the Company's executive officers; (iv) all executive
officers and directors as a group; and (v) each Selling Stockholder.

<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR TO THE OWNERSHIP AFTER THE
OFFERING(1) NUMBER OF OFFERING(1)(2)
------------------------- SHARES BEING -------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------------------------------------- ---------- ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Victor Company of Japan, Limited (3)............. 1,975,488 27.2% 250,000 1,725,488 20.5%

John O. Ryan (4)................................. 678,006 9.3 50,000 628,006 7.5

The TCW Group Inc. (5)........................... 637,900 8.8 -- 637,900 7.6

Carol Ann Farrow-Draxton (6)..................... 372,722 5.1 50,000 322,722 3.8

William A. Krepick (7)........................... 120,056 1.6 10,000 110,056 1.3

Richard S. Matuszak (8).......................... 68,932 * -- 68,932 *

Victor A. Viegas (9)............................. 64,657 * -- 64,657 *

Whit T. Jackson (10)............................. 45,499 * -- 45,499 *

Carl S. Jorgensen (11)........................... 23,777 * -- 23,777 *

Brian R. Dunn (12)............................... 18,610 * -- 18,610 *

William N. Stirlen (13).......................... 3,507 * -- 3,507 *

Donna S. Birks (14).............................. 3,248 * -- 3,248 *

Patrice J. Capitant (15)......................... 2,102 * -- 2,102 *

Thomas Wertheimer (16)........................... 937 * -- 937 *

Mark S. Belinsky (17)............................ 475 * -- 475 *

All executive officers and directors as a group
(12 persons) (18).............................. 1,029,806 13.8 60,000 969,806 11.2
</TABLE>

- ------------------------

* Less than 1%.

(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options that are currently exercisable or
exercisable within 60 days of March 31, 1998 are deemed to be outstanding
and to be beneficially owned by the person holding such options for the
purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage ownership
of any other person.

(2) Assumes that the Underwriters' over-allotment option to purchase up to
225,000 shares from the Company is not exercised.

(3) These shares are held of record by Pacific Media Development Inc., an
indirect, wholly owned subsidiary of JVC. The address of JVC is 12, 3-chome,
Moriya-cho, Kanagawa-ku, Yokohama 221, Japan.

(4) Represents 535,555 shares held of record by a trust of which Mr. Ryan and
his wife are the trustees, 103,289 shares held of record by Mr. Ryan, 16,330
shares held of record by Mr. Ryan as custodian for various family members,
11,666 shares held of record by his son and 11,166 shares held of record by
his daughter. The 50,000 shares to be sold in the offering are being sold by
the trust. Mr. Ryan is the Chairman of the Board of Directors, Chief
Executive Officer and Secretary of the Company. His address is 1341 Orleans
Drive, Sunnyvale, California 94089.

50
<PAGE>
(5) According to a Schedule 13G filed with the Securities and Exchange
Commission on February 12, 1998, these shares are held of record by The TCW
Group Inc., a Nevada corporation, and by an individual, Robert Day, who may
be deemed to control The TCW Group Inc. The address of The TCW Group Inc. is
865 South Figueroa Street, Los Angeles, California 90017. The address of Mr.
Day is 200 Park Avenue, Suite 2200, New York, New York 10166.

(6) Represents shares held of record by Ms. Farrow-Draxton as Trustee of the
Farrow Trust U/T/D December 18, 1990. The address of Ms. Farrow-Draxton is
P.O. Box 789, Geyserville, California 95441.

(7) Includes 90,750 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Krepick is President, Chief Operating Officer and a
director of the Company.

(8) Represents 18,835 shares held of record by Mr. Matuszak, 15,766 shares as
to which Mr. Matuszak shares beneficial ownership and 34,331 shares subject
to options exercisable within 60 days of March 31, 1998. Mr. Matuszak is
Vice President, Special Interest Copy Protection and a director of the
Company.

(9) Includes 3,704 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Viegas is Vice President, Finance and Administration and
Chief Financial Officer of the Company.

(10) Includes 37,499 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Jackson is Vice President, Video Encryption Technologies
of the Company.

(11) Includes 19,444 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Jorgensen is Vice President of Operations of the
Company.

(12) Represents shares subject to options exercisable within 60 days of March
31, 1998. Mr. Dunn is Vice President, Business Development of the Company.

(13) Includes 2,507 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Stirlen is a director of the Company.

(14) Includes 1,248 shares subject to options exercisable within 60 days of
March 31, 1998. Ms. Birks is a director of the Company.

(15) Mr. Capitant is Vice President, Engineering of the Company.

(16) Represents shares subject to options exercisable within 60 days of March
31, 1998. Mr. Wertheimer is a director of the Company.

(17) Mr. Belinsky is Senior Vice President, Worldwide Theatrical and
Pay-Per-View Copy Protection of the Company.

(18) Represents the shares referenced in footnote (4) and footnotes (7) through
(17).

51
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, Hambrecht
& Quist LLC, NationsBanc Montgomery Securities LLC and Cowen & Company (the
"Underwriters") have severally agreed to purchase from the Company and the
Selling Stockholders the following respective number of shares of Common Stock.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC.............................................................
NationsBanc Montgomery Securities LLC.............................................
Cowen & Company...................................................................
----------
Total............................................................................. 1,500,000
----------
----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.

The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
public offering of the shares, the offering price and other selling terms may be
changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.

Certain stockholders of the Company, including the Selling Stockholders and
the executive officers and directors of the Company, who will own in the
aggregate 2,808,986 shares of Common Stock after the offering, have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
directly or indirectly sell, offer, contract to sell, transfer the economic risk
of ownership in, make any short sale, pledge or otherwise dispose of any shares
of Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock, during the
90-day period after the effective date of the Registration Statement of which
this Prospectus is a part. In addition, the Company has agreed not to offer,
sell, grant any option to purchase or otherwise dispose of any shares of Common
Stock during the 90-day period after the effective date of the Registration
Statement of which this Prospectus is a part without the prior approval of
Hambrecht & Quist LLC, except that the Company may issue, and grant options to
purchase, shares of Common Stock pursuant to its existing stock option and stock
purchase plans and under currently outstanding options.

52
<PAGE>
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Company's Common Stock during the "cooling off" period
immediately preceding the commencement of sales in the offering. The Commission
has, however, adopted exemptions from these rules that permit passive market
making under certain conditions. These rules permit an underwriter to continue
to make a market subject to the conditions, among others, that its bid not
exceed the highest bid by a market maker not connected with the offering and
that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, certain Underwriters, selling group members (if
any) and their respective affiliates intend to engage in passive market making
in the Company's Common Stock during the cooling off period.

Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Company's Common Stock at levels above those which might otherwise prevail
in the open market, including by entering stabilizing bids or effecting
syndicate covering transactions. A stabilizing bid means the placing of any bid
or effecting of any purchase, for the purpose of pegging, fixing or maintaining
the price of the Company's Common Stock. A syndicate covering transaction means
the placing of any bid on behalf of the underwriting syndicate or the effecting
of any purchase to reduce a short position created in connection with the
offering. Such transactions may be effected on the Nasdaq National Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company and the Selling Stockholders by Fenwick &
West LLP, Palo Alto, California. Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich &
Rosati, P.C., Palo Alto, California.

EXPERTS

The consolidated financial statements of the Company as of and for the years
ended December 31, 1996 and 1997 have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents previously filed with the Commission are
incorporated by reference into this Prospectus:

(1) The Company's Annual Report on Form 10-KSB for the year ended December
31, 1997.

(2) The Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1998.

(3) The Company's Current Report on Form 8-K dated February 17, 1998.

(4) The description of the Company's capital stock contained in the
Company's Registration Statement on Form 8-A filed on January 22, 1997.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act following the date of this Prospectus and prior to the
termination of the offering contemplated hereby shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and documents.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus and the Registration Statement of which it
is a part to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus and the Registration Statement of which
it is a part.

53
<PAGE>
AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy and information statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as the regional offices of the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information filed electronically with
the Commission. This Web site can be accessed at http://www.sec.gov. The
Company's Common Stock is quoted on the Nasdaq National Market and reports,
proxy statements and other information concerning the Company also may be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and the exhibits thereto. Statements
contained in this Prospectus about any contract or other document are not
necessarily complete and, in each instance in which a copy of such contract or
document is filed with, or incorporated by reference in, the Registration
Statement as an exhibit, reference is made to such copy, and each such statement
shall be deemed qualified in all respects by such reference. Copies of the
Registration Statement, including all exhibits thereto, may be obtained from the
Commission's principal office in Washington, D.C. upon payment of the fees
prescribed by the Commission, or may be examined without charge at the offices
of the Commission described above.

The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus is delivered, upon written or oral request of any
such person, a copy of any and all of the information that has been or may be
incorporated by reference in this Prospectus, other than exhibits to such
documents that are not incorporated by reference into such documents. Requests
for such copies should be directed to Victor A. Viegas, Macrovision Corporation,
1341 Orleans Drive, Sunnyvale, California 94089, Phone: (408) 743-8600.

54
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2

Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31,
1998 (unaudited)........................................................ F-3

Consolidated Statements of Income for the years ended December 31, 1996
and 1997 and for the three-month periods ended March 31, 1997 and 1998
(unaudited)............................................................. F-4

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1997 and for the three-month period ended March
31, 1998 (unaudited).................................................... F-5

Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1997 and for the three-month periods ended March 31, 1997 and
1998 (unaudited)........................................................ F-6

Notes to Consolidated Financial Statements................................ F-7
</TABLE>

F-1
<PAGE>
Report of KPMG Peat Marwick LLP, Independent Auditors

The Board of Directors and Stockholders
Macrovision Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Macrovision
Corporation and subsidiaries (the Company) as of December 31, 1996 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Macrovision
Corporation and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

KPMG Peat Marwick LLP

Mountain View, California
February 6, 1998

F-2
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- --------- MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 2,409 $ 1,314 $ 2,784
Short-term investments......................................................... -- 11,241 8,823
Accounts receivable, net of allowance for doubtful accounts of $267, $684 and
$681 as of December 31, 1996 and 1997 and March 31, 1998, respectively....... 3,376 5,240 4,118
Inventories.................................................................... 550 433 545
Receivable from related party.................................................. -- 279 279
Deferred tax assets............................................................ 929 1,336 1,418
Prepaid expenses and other current assets...................................... 186 430 438
--------- --------- -----------
Total current assets......................................................... 7,450 20,273 18,405
Property and equipment, net...................................................... 2,017 1,722 1,614
Patents and other intangibles, net of accumulated amortization of $401, $796 and
$885 as of December 31, 1996 and 1997 and March 31, 1998, respectively......... 1,161 1,098 1,132
Receivable from related party.................................................... 329 -- --
Long-term marketable investment securities....................................... -- 1,763 751
Investments in and advances to investee companies................................ 357 3,837 8,405
Other assets..................................................................... 639 163 129
--------- --------- -----------
$ 11,953 $ 28,856 $ 30,436
--------- --------- -----------
--------- --------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 1,318 $ 919 $ 888
Accrued expenses............................................................... 2,468 2,190 1,740
Deferred revenue............................................................... 749 944 1,705
Income taxes payable........................................................... 585 846 899
Current portion of capital lease obligations................................... 105 108 109
--------- --------- -----------
Total current liabilities.................................................... 5,225 5,007 5,341
Capital lease obligations, net of current portion................................ 296 188 160
Deferred tax liabilities......................................................... 360 84 72
--------- --------- -----------
5,881 5,279 5,573

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized; 1,376,432
shares, none and none issued and outstanding as of December 31, 1996 and 1997
and March 31, 1998, respectively............................................. 1 -- --
Common stock, $.001 par value; 100,000,000, 50,000,000 and 50,000,000 shares
authorized as of December 31, 1996 and 1997 and March 31, 1998, respectively;
3,951,759, 7,215,195 and 7,273,254 shares issued and outstanding as of
December 31, 1996 and 1997 and March 31, 1998, respectively.................. 4 7 7
Additional paid-in capital..................................................... 9,530 23,277 23,534
Stockholder notes receivable................................................... (157) (131) (131)
Deferred stock compensation.................................................... (240) (96) (61)
Accumulated other comprehensive income......................................... (135) (214) (214)
Retained earnings (accumulated deficit)........................................ (2,931) 734 1,728
--------- --------- -----------
Total stockholders' equity................................................... 6,072 23,577 24,863
--------- --------- -----------
$ 11,953 $ 28,856 $ 30,436
--------- --------- -----------
--------- --------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................................................... $17,080 $20,340 $4,564 $5,178
---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues............................................. 2,579 2,422 681 398
Research and development..................................... 2,527 2,248 557 623
Selling and marketing........................................ 5,090 5,765 1,548 1,526
General and administrative................................... 3,566 4,149 879 1,159
---------- ---------- ---------- ----------
Total costs and expenses................................... 13,762 14,584 3,665 3,706
---------- ---------- ---------- ----------
Operating income from continuing operations.................... 3,318 5,756 899 1,472
Interest and other income (expense), net....................... (260) 478 24 131
---------- ---------- ---------- ----------
Income from continuing operations before income taxes...... 3,058 6,234 923 1,603
Income taxes................................................... 1,223 2,413 369 609
---------- ---------- ---------- ----------
Income from continuing operations.......................... 1,835 3,821 554 994
Discontinued operations:
Loss from operations of CAC business, net of income tax
benefit of $204............................................ (663) -- -- --
Provision for operating losses during holding period, net of
income tax benefit of $45.................................. (164) -- -- --
---------- ---------- ---------- ----------
Net income..................................................... $ 1,008 $ 3,821 $ 554 $ 994
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Computation of basic and diluted earnings per share:
Income from continuing operations............................ $ 1,835 $ 3,821 $ 554 $ 994
Preferred stock dividends.................................... (587) (156) (156) --
---------- ---------- ---------- ----------
Adjusted income from continuing operations................... 1,248 3,665 398 994
Discontinued operations...................................... (827) -- -- --
---------- ---------- ---------- ----------
Earnings applicable to common stock.......................... $ 421 $ 3,665 $ 398 $ 994
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share:
Continuing operations........................................ $ .33 $ .57 $ .09 $ .14
Discontinued operations...................................... (.22) -- -- --
---------- ---------- ---------- ----------
Net income................................................. $ .11 $ .57 $ .09 $ .14
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing basic earnings per share.............. 3,787,000 6,476,000 4,490,000 7,244,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations........................................ $ .29 $ .53 $ .08 $ .13
Discontinued operations...................................... (.19) -- -- --
---------- ---------- ---------- ----------
Net income................................................. $ .10 $ .53 $ .08 $ .13
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing diluted earnings per share............ 4,280,000 6,960,000 4,903,000 7,735,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER
---------------------- ---------------------- PAID-IN NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
--------- ----------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1995................. 833,333 $ 1 3,632,719 $ 4 $ 5,058 $ --
Issuance of common stock upon exercise of
options...................................... -- -- 66,263 -- 171 --
Issuance of common stock in exchange for
stockholder note receivable.................. -- -- 58,333 -- 157 (157)
Issuance of common stock in connection with
recapitalization of Command Audio
Corporation.................................. -- -- 194,444 -- 875 --
Conversion of note into 543,099 shares of
Series A preferred stock..................... 543,099 -- -- -- 3,038 --
Cash dividends of $.405 per share paid on
833,333 shares of preferred stock, $.117 per
share paid on 543,099 shares of preferred
stock, and $.135 per share declared on
1,376,432 shares of preferred stock.......... -- -- -- -- -- --
Deferred stock compensation related to stock
option grants................................ -- -- -- -- 231 --
Spin-off of Command Audio Corporation,
including deferred stock compensation........ -- -- -- -- -- --
Amortization of deferred stock compensation.... -- -- -- -- -- --
Translation adjustment......................... -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
--------- --- --------- --- ----------- -----
Balances as of December 31, 1996................. 1,376,432 1 3,951,759 4 9,530 (157)
Conversion of preferred stock to common
stock........................................ (1,376,432) (1) 1,376,432 1 -- --
Issuance of common stock in initial public
offering, net of issuance costs of $1,531.... -- -- 1,764,016 2 13,232 --
Issuance of common stock upon exercise of
options...................................... -- -- 111,342 -- 288 --
Issuance of common stock under stock purchase
plan......................................... -- -- 11,646 -- 89 --
Cash dividends of $.075 per share paid on
1,376,432 shares of preferred stock.......... -- -- -- -- -- --
Payment on stockholder note receivable......... -- -- -- -- -- 26
Amortization of deferred stock compensation.... -- -- -- -- -- --
Tax benefit associated with stock plans........ -- -- -- -- 138 --
Translation adjustment......................... -- -- -- -- -- --
Unrealized gain on investments................. -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
--------- --- --------- --- ----------- -----
Balances as of December 31, 1997................. -- -- 7,215,195 7 23,277 (131)
Issuance of common stock upon exercise of
options (unaudited).......................... -- -- 41,560 -- 126 --
Issuance of common stock under stock purchase
plan (unaudited)............................. -- -- 16,499 -- 131 --
Amortization of deferred stock compensation
(unaudited).................................. -- -- -- -- -- --
Translation adjustment (unaudited)............. -- -- -- -- -- --
Unrealized gain on investments (unaudited)..... -- -- -- -- -- --
Net income (unaudited)......................... -- -- -- -- -- --
--------- --- --------- --- ----------- -----
Balance as of March 31, 1998 (unaudited)......... -- $ -- 7,273,254 $ 7 $ 23,534 $ (131)
--------- --- --------- --- ----------- -----
--------- --- --------- --- ----------- -----

<CAPTION>
(ACCUMULATED
ACCUMULATED OTHER DEFICIT) TOTAL
DEFERRED STOCK COMPREHENSIVE RETAINED STOCKHOLDERS'
COMPENSATION INCOME EARNINGS EQUITY
--------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1995................. $ -- $ (118) $ (2,099) $ 2,846
Issuance of common stock upon exercise of
options...................................... -- -- -- 171
Issuance of common stock in exchange for
stockholder note receivable.................. -- -- -- --
Issuance of common stock in connection with
recapitalization of Command Audio
Corporation.................................. -- -- -- 875
Conversion of note into 543,099 shares of
Series A preferred stock..................... -- -- -- 3,038
Cash dividends of $.405 per share paid on
833,333 shares of preferred stock, $.117 per
share paid on 543,099 shares of preferred
stock, and $.135 per share declared on
1,376,432 shares of preferred stock.......... -- -- (587) (587)
Deferred stock compensation related to stock
option grants................................ (231) -- -- --
Spin-off of Command Audio Corporation,
including deferred stock compensation........ (189) -- (1,253) (1,442)
Amortization of deferred stock compensation.... 180 -- -- 180
Translation adjustment......................... -- (17) -- (17)
Net income..................................... -- -- 1,008 1,008
----- ----- ------------- -------------
Balances as of December 31, 1996................. (240) (135) (2,931) 6,072
Conversion of preferred stock to common
stock........................................ -- -- -- --
Issuance of common stock in initial public
offering, net of issuance costs of $1,531.... -- -- -- 13,234
Issuance of common stock upon exercise of
options...................................... -- -- -- 288
Issuance of common stock under stock purchase
plan......................................... -- -- -- 89
Cash dividends of $.075 per share paid on
1,376,432 shares of preferred stock.......... -- -- (156) (156)
Payment on stockholder note receivable......... -- -- -- 26
Amortization of deferred stock compensation.... 144 -- -- 144
Tax benefit associated with stock plans........ -- -- -- 138
Translation adjustment......................... -- (83) -- (83)
Unrealized gain on investments................. -- 4 -- 4
Net income..................................... -- -- 3,821 3,821
----- ----- ------------- -------------
Balances as of December 31, 1997................. (96) (214) 734 23,577
Issuance of common stock upon exercise of
options (unaudited).......................... -- -- -- 126
Issuance of common stock under stock purchase
plan (unaudited)............................. -- -- -- 131
Amortization of deferred stock compensation
(unaudited).................................. 35 -- -- 35
Translation adjustment (unaudited)............. -- (5) -- (5)
Unrealized gain on investments (unaudited)..... -- 5 -- 5
Net income (unaudited)......................... -- -- 994 994
----- ----- ------------- -------------
Balance as of March 31, 1998 (unaudited)......... $ (61) $ (214) $ 1,728 $ 24,863
----- ----- ------------- -------------
----- ----- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 1,008 $ 3,821 $ 554 $ 994
Adjustments to reconcile net income to net cash provided by continuing
operations:
Depreciation and amortization.......................................... 1,002 1,156 252 266
Deferred income taxes.................................................. (451) (683) (380) (94)
Amortization of deferred stock compensation............................ 180 144 36 35
Loss on disposal of fixed assets....................................... -- 105 -- --
Tax benefit from employee stock option plan............................ -- 138 -- --
Change in provision for accounts and notes receivable.................. 13 467 154 (3)
Discontinued operations................................................ 827 -- -- --
Changes in operating assets and liabilities:
Accounts receivable, inventories, and other current assets........... (590) (2,408) (690) 1,005
Accounts payable, accrued liabilities, deferred revenue, and income
taxes payable...................................................... 916 (221) 1,136 333
Other................................................................ (17) (83) (55) 12
--------- --------- --------- ---------
Net cash provided by continuing operations......................... 2,888 2,436 1,007 2,548
Net cash used in discontinued operations........................... (1,227) -- -- --
--------- --------- --------- ---------
Net cash provided by operating activities.......................... 1,661 2,436 1,007 2,548
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of long-term marketable investment securities................ -- (1,763) -- --
Sales or maturities of long-term marketable investment securities...... -- -- -- 1,013
Purchases of short-term investments.................................... -- (51,737) (9,766) (3,197)
Sales or maturities of short-term investments.......................... 1,200 40,500 -- 5,619
Acquisition of property and equipment.................................. (476) (571) (165) (86)
Payments for patents and other intangibles............................. (343) (332) (31) (123)
Receivable from related party.......................................... (329) -- -- --
Investment in Command Audio Corporation and Digimarc Corporation....... -- (3,480) -- --
Investment in C-Dilla Limited.......................................... -- -- -- (3,553)
Prepaid future royalties to C-Dilla Limited............................ -- -- -- (1,015)
Other, net............................................................. (4) (67) (108) 34
--------- --------- --------- ---------
Net cash (used in) provided by investing activities................ 48 (17,450) (10,070) (1,308)
--------- --------- --------- ---------
Cash flows from financing activities:
Payments on capital lease obligations.................................. (117) (105) (27) (27)
Payments on long-term debt............................................. (696) -- -- --
Proceeds from issuance of common stock upon exercise of options........ 171 288 33 126
Proceeds from issuance of common stock under employee stock purchase
plan................................................................. -- 89 -- 131
Payment of stockholder note receivable................................. -- 26 -- --
Proceeds from sale of common stock, net of issuance costs and payments
of deferred offering costs........................................... (543) 13,777 11,031 --
Cash dividends......................................................... (401) (156) (156) --
--------- --------- --------- ---------
Net cash (used in) provided by financing activities................ (1,586) 13,919 10,881 230
--------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents..................... 123 (1,095) 1,818 1,470
Cash and cash equivalents at beginning of year/period.................... 2,286 2,409 2,409 1,314
--------- --------- --------- ---------
Cash and cash equivalents at end of year/period.......................... $ 2,409 $ 1,314 $ 4,227 $ 2,784
--------- --------- --------- ---------
--------- --------- --------- ---------
Cash paid during the year/period:
Interest............................................................... $ 296 $ 12 $ 2 $ 5
--------- --------- --------- ---------
--------- --------- --------- ---------
Income taxes........................................................... $ 1,446 $ 2,364 $ 273 $ 581
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Macrovision Corporation (the "Company"), was formed in 1983 and designs,
develops, and markets video security technologies and products that provide copy
protection and video scrambling for motion pictures, multimedia software, and
other proprietary video materials. The Company is headquartered in Sunnyvale,
California and has subsidiaries in the United Kingdom and Japan.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.

UNAUDITED INTERIM FINANCIAL STATEMENTS

The accompanying unaudited interim financial statements as of March 31,
1998, and for the three months ended March 31, 1997 and 1998, have been prepared
on substantially the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein.

CASH, CASH EQUIVALENTS, AND INVESTMENTS

The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks, money market funds and mutual
funds. All other liquid investments with maturities over three months and less
than 12 months are classified as short-term investments. Short-term investments
consisted of auction rate preferred stock, government bonds and government
agency securities. All marketable securities with maturities over one year are
classified as long-term marketable investment securities.

Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. As of December 31, 1997 and 1996, all investment securities
were designated as "available-for-sale." Available-for-sale securities are
carried at fair value based on quoted market prices, with unrealized gains and
losses, if material, reported in stockholders' equity.

Realized gains and losses and declines in value judged to be
other-than-temporary for available-for-sale securities are included in the
consolidated statements of income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included in interest income.

F-7
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a summary of available-for-sale securities (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Cash equivalents--money market funds.................................................. $ 803 $ 622
--- ---------
Investments:
Auction rate preferred stock certificates........................................... -- 3,400
Government bonds.................................................................... -- 9,604
--- ---------
-- 13,004
--- ---------
$ 803 $ 13,626
--- ---------
--- ---------
</TABLE>

As of December 31, 1997, government bond securities totaling $1,763,000 were
classified as long-term marketable investment securities in the accompanying
consolidated balance sheet.

As of December 31, 1997, the difference between the fair value and the
amortized cost of available-for-sale securities was $4,000 of unrealized gains
related to short-term government bonds that has been recorded as a component in
stockholders' equity. As of December 31, 1997, the weighted average portfolio
duration and contractual maturity was approximately six months.

INVENTORIES

Inventories are stated at the lower of first-in, first-out basis cost or
market.

PROPERTY AND EQUIPMENT

Property and equipment, including significant improvements, are carried on
the consolidated balance sheet at cost. The Company computes depreciation for
all property and equipment using the straight-line method. The estimated useful
lives of assets range from three to five years. Amortization of equipment
recorded under capital leases is computed over the shorter of the lease term or
the estimated useful life of the equipment.

PATENTS

Patent application costs of $604,000 and $868,000 as of December 31, 1996
and 1997, respectively, are included in patents and other intangibles and, upon
the granting of the related patent, are amortized using the straight-line method
over the shorter of the estimated useful life of the patent or 10 years. Prior
to January 1, 1997, the Company amortized the patents over the shorter of the
estimated useful life of the patent or 17 years. This change in estimate did not
have a material affect on the consolidated financial statements for the year
ended December 31, 1997.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to

F-8
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.

INVESTMENTS IN AND ADVANCES TO INVESTEE COMPANIES

The Company owns a minority interest in Command Audio Corporation ("CAC"), a
developer of audio-on-demand technology, Digimarc Corporation, a developer of
proprietary digital watermarking technology, and C-Dilla, Limited, a developer
of copy protection for consumer multimedia software, and carries such
investments at the lower of cost or net realizable value. Other-than-temporary
declines in the fair value of these investments are included in the consolidated
statements of income. See Note 2 of Notes to Consolidated Financial Statements.

REVENUE RECOGNITION

Advanced license fees attributable to minimum copy quantities or shared
revenues are deferred until earned. Revenue from the duplication of
videocassettes and the replication of digital versatile discs ("DVDs") is earned
based upon reported or estimated volume of each or, in the case of agreements
with minimum guaranteed payments with no specified volume, on a straight-line
basis over the life of the agreement. Retroactive rebate credits on certain
agreements that contain volume pricing adjustments or return provisions are
accrued based upon anticipated unit volume. Nonrefundable technology licensing
revenue, which applies principally to DVD and PC subassembly manufacturers,
digital pay-per-view ("PPV") cable and satellite system operators and set-top
decoder manufacturers, is recognized upon contract signing and performance of
all significant obligations. Royalty revenue associated with technology licenses
is recognized when earned based upon reported unit sales, transaction based
fees, or box office receipts. Revenues from the sales of encoders, decoders, and
systems incorporating the Company's video copy protection and scrambling
technologies are recognized upon shipment provided that the Company has no
significant additional performance obligations.

COST OF REVENUES

The Company has agreements with certain licensed duplicators utilized by
customers of the Company's video copy protection technology. The Company has
agreed to pay these duplicators a specified service fee per unit duplicated
utilizing the Company's video copy protection technology to help offset the cost
of operating the Company's copy protection equipment and reporting the volume of
copy protected videocassettes. Such amounts are charged to cost of revenues when
incurred and were $596,000 and $362,000 for 1996 and 1997, respectively.

Video copy protection technology has stimulated the development of "black
boxes" to defeat the video copy protection process. The Company owns patents
that it believes are infringed by these "black box" manufacturers. The Company
has successfully settled legal actions against a number of companies that
produced and distributed "black boxes." As part of the legal settlement, these
companies have agreed to cease and desist from manufacturing, distributing,
and/or selling the infringing products. The outside legal costs associated with
protecting these patents amounted to $30,000 and $70,000 during 1996 and 1997,
respectively, and are included

F-9
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in cost of revenues as incurred. Not included in these patent costs are the
costs associated with in-house legal staffing and engineering support. Cost of
revenues also includes amortization of patents.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The measurement of deferred tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits of which future realization is
uncertain.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The functional currency for the Company's foreign subsidiaries is the
applicable local currency. The translation of foreign currency denominated
financial statements into U.S. dollars is performed for balance sheet accounts
using current exchange rates in effect at the balance sheet date and for
revenues and expense accounts using a weighted average exchange rate for the
respective periods. Adjustments resulting from such translation are included in
stockholders' equity. Gains or losses resulting from foreign currency
transactions included in the consolidated statements of income were not material
in any of the periods presented.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

BUSINESS AND CONCENTRATION OF CREDIT RISK

The Company sells its video scrambling products and licenses its video copy
protection and video scrambling technologies to customers in the home
videocassette, DVD, pay-per-view, cable, satellite, and corporate communication
markets primarily in United States, Europe, Japan, and the Far East. Most of the
Company's business is attributed to the licensing of its video copy protection
technology through Motion Picture Association of America movie studios and other
rights owners. The Company also licenses its digital PPV video copy protection
technologies to satellite and cable television operators and to the equipment
manufacturers that supply the satellite and cable television industries. The
Company's video scrambling technology is licensed to manufacturers of analog
cable Pay TV set-top decoders in developing cable television markets. The
Company sells encoders and decoders that incorporate other scrambling
technologies to private analog satellite networks for business communications,
education, and special interest entertainment. The Company also sells
specialized video scrambling systems in the government, military, and law
enforcement markets.

F-10
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments, trade accounts receivable and long-term investments. The
Company places its cash and cash equivalents and short-term investments in
deposits and money market funds with various high credit quality financial
institutions. The carrying value of the Company's financial instruments
approximates fair market value due to the relatively short maturities of those
instruments or recency of entering into such instruments as in the case of the
Company's investments in CAC and Digimarc.

The Company performs ongoing credit evaluations of its customers and to date
has not experienced any material losses. Revenues from three significant
customers aggregated 37% for the year ended December 31, 1996. Revenue from one
customer accounted for 11% of net revenue for the year ended December 31, 1997.
At December 31, 1997, receivables from one customer represented 25% of net
accounts receivable.

YEAR 2000

Certain organizations anticipate that they will experience operational
difficulties at the beginning of the Year 2000 as a result of computer programs
being written using two digits rather than four to define the applicable year.
The Company's plan for the Year 2000 calls for compliance verification with
external vendors supplying the Company software, testing in-house engineering
and manufacturing software tools, testing software in the Company's products for
the Year 2000 and communication with significant suppliers to determine the
readiness of third parties' remediation of their own Year 2000 issues. To date,
the Company has not encountered any material Year 2000 issues concerning its
respective computer programs. The Company plans to complete its Year 2000
research and testing by the end of 1998. All costs associated with carrying out
the Company's plan for the Year 2000 problem are being expensed as incurred. The
costs associated with preparation for the Year 2000 are not expected to have a
material adverse effect on the Company's business, financial condition and
results of operations. Nevertheless, there is uncertainty concerning the
potential costs and effects associated with any Year 2000 compliance. Any Year
2000 compliance problems of the Company or its customers or suppliers could have
a material adverse effect on the Company's business, financial condition and
results of operations. During the past three years, the Company completed an
effort to convert its financial applications to commercial products that,
according to their suppliers, are Year 2000 compliant. The Company has received
confirmations from its primary suppliers indicating that they are either Year
2000 compliant or have plans in place to ensure readiness. As part of the
Company's assessment, it is evaluating the level of validation it will require
of third parties to ensure their Year 2000 readiness.

NET INCOME PER SHARE

In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, EARNINGS PER SHARE ("EPS"). In accordance with SFAS No. 128,
basic EPS is computed using the weighted average number of common shares
outstanding during the period. Diluted EPS is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of common stock
issuable upon exercise of stock options using the treasury stock method. Common
equivalent shares from preferred stock have been excluded from the computation
of diluted EPS, prior to their conversion into common stock on March 17, 1997,
because the effect of the inclusion would

F-11
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
be antidilutive. The following is a reconciliation of the shares used in the
computation of basic and diluted EPS (in thousands except for per share
amounts):

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic EPS--weighted average number of common shares outstanding....... 3,787 6,476 4,490 7,244
Effect of dilutive common equivalent shares--stock options
outstanding......................................................... 493 484 413 491
--------- --------- --------- ---------
Diluted EPS--weighted average number of common shares and common
equivalents shares outstanding...................................... 4,280 6,960 4,903 7,735
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

STOCK BASED COMPENSATION

The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans.

OTHER ACCUMULATED COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "REPORTING COMPREHENSIVE INCOME." SFAS No. 130 establishes standards of
reporting and display of comprehensive income and its components of net income
and "other comprehensive income" in a full set of general purpose financial
statements. "Other comprehensive income" refers to revenues, expenses, gains and
losses that are not included in net income but rather are recorded directly in
stockholders' equity. SFAS No. 130 is effective for annual and interim periods
beginning after December 15, 1997 and for periods ended before that date when
presented for comparative purposes. SFAS No. 130 was adopted by the Company in
its quarter ended March 31, 1998 and for prior comparative periods. The Company
has not yet determined the format it will use to display the information
required by SFAS No. 130 in the annual financial statements for the year ending
December 31, 1998. Total comprehensive income was $496,000 and $994,000 for the
three months ended March 31, 1997 and 1998, respectively, and $991,000 and
$3,742,000 for the years ended December 31, 1996 and 1997, respectively. The
primary components of other comprehensive income include unrealized gains and
losses resulting from the translation of the Company's foreign subsidiaries
which have a local functional currency and unrealized holding gains and losses
related to the Company's available-for-sale investments.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION." SFAS No. 131 establishes standards of
reporting information about operating segments in annual financial statements by
public business enterprises and requires such enterprises to report selected
information about operating segments in interim financial reports. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, and for periods
ended before that date when presented for comparative purposes. The required
interim disclosures are not required to be made in the initial year of
application but the information for the interim periods for the initial year is
required as comparative information in the second year of application. As such,
the Company intends to display the information required by SFAS No. 131 in the
interim and annual financial statements for the year ending December 31, 1999.

F-12
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REGISTRATION STATEMENT

In December 1996, the Board of Directors authorized the filing of a
registration statement with the SEC permitting the Company and certain
stockholders of the Company to sell shares of the Company's common stock in
connection with a proposed IPO. Upon closing of the IPO, all outstanding shares
of preferred stock automatically converted into 1,376,432 shares of common
stock. In March and April 1997, the Company sold an aggregate of 1,764,016
shares of common stock for $13,234,000, net of $1,531,000 of issuance costs.

REINCORPORATION

In December 1996, the Board of Directors approved the Company's
reincorporation in the state of Delaware which became effective on February 14,
1997. The Certificate of Incorporation of the Delaware successor corporation
authorizes 50,000,000 shares of common stock, $.001 par value per share and
5,000,000 shares of preferred stock, $.001 par value per share. The Board of
Directors also approved a 1 for 1.8 reverse stock split of common and preferred
stock which became effective on February 26, 1997. The accompanying consolidated
financial statements have been retroactively restated to give effect to the
reincorporation and reverse stock split.

(2) FINANCIAL STATEMENT DETAILS

INVENTORIES

Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -------------
<S> <C> <C> <C>
Raw materials............................................................... $ 260 $ 203 $ 216
Work in progress............................................................ 73 -- 161
Finished goods.............................................................. 217 230 168
--- --- ---
$ 550 $ 433 $ 545
--- --- ---
--- --- ---
</TABLE>

PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Machinery and equipment.............................................................. $ 2,977 $ 3,263
Leasehold improvements............................................................... 913 950
Furniture and fixtures............................................................... 429 438
--------- ---------
4,319 4,651
Less accumulated depreciation and amortization....................................... 2,302 2,929
--------- ---------
$ 2,017 $ 1,722
--------- ---------
--------- ---------
</TABLE>

Equipment recorded under capital leases aggregated $518,000 with related
accumulated amortization of $130,000 and $233,000 as of December 31, 1996 and
1997, respectively.

F-13
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
INVESTMENTS IN AND ADVANCES TO INVESTEE COMPANIES

See Note 4 of Notes to Consolidated Financial Statements for a description
of the Company's investment in CAC.

In December 1997, the Company invested $1,500,000 in Digimarc in exchange
for shares of Digimarc's convertible preferred stock, which represents a 6.8%
ownership on an as-converted basis. Digimarc is a private company headquartered
in Portland, Oregon. Its products include proprietary digital watermarking
technology used in information embedding, enabling image identification,
copyright protection and facilitating electronic commerce.

On February 17, 1998, the Company acquired 247,500 shares (approximately
19.8%) of the common stock of C-Dilla, Limited, a United Kingdom company
("C-Dilla"), for a purchase price of L2,121,212 (approximately $3,600,000). On
February 17, 1998, the Company also entered into a Software Marketing Licence
and Development Agreement, (the "Agreement") under which it has obtained, for an
initial five-year term, the worldwide exclusive license to market C-Dilla's
proprietary copy protection technology for CD-ROM and Internet-delivered
software products in the consumer multimedia software market. The Company paid
L606,060 (approximately $1,000,000) in up-front license fees subject to offset
against future royalties and will pay royalty payments to C-Dilla of between 30%
to 45% of revenues from sales of software products incorporating C-Dilla's
technology. In the event that the Company fails to reach minimum royalty levels
of $2,000,000 in the third year of the Agreement, $5,000,000 in the fourth year
or $10,000,000 in the fifth year, the license becomes a non-exclusive license
for the term of the Agreement. Additionally, in connection with C-Dilla's
granting of licenses for certain of its products outside of the markets for
which the Company has been granted rights under the Agreement, C-Dilla will pay
the Company royalties of between 7.5% to 30% of revenues from such licenses. The
Company has the option to extend the initial term of the Agreement for an
additional five-year period upon payment of an option fee of $1,000,000 and an
additional license fee of $5,000,000, which fee may be paid through future
increased royalty payments. Under the terms of the Agreement, the Company also
agreed to develop jointly with C-Dilla certain other proprietary copy protection
technologies for CD-ROM, DVD-ROM and other digital delivery methods.

The Company intends to hold its investments for the long-term and monitors
the recoverability of these investments based on management's estimates of the
net realizable value based on the achievements of milestones in business plans
and third-party financings. The carrying amount of such investments are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Investment in CAC......................................................... $ 357 $ 2,337 $ 2,337
Investment in Digimarc.................................................... -- 1,500 1,500
Investment in C-Dilla..................................................... -- -- 3,553
Prepayments of royalties to C-Dilla....................................... -- -- 1,015
--- --------- -----------
$ 357 $ 3,837 $ 8,405
--- --------- -----------
--- --------- -----------
</TABLE>

F-14
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
ACCRUED EXPENSES

Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Accrued compensation................................................................. $ 1,069 $ 1,142
Accrued professional fees............................................................ 234 409
Accrued rebates...................................................................... 595 30
Other accrued liabilities............................................................ 570 609
--------- ---------
$ 2,468 $ 2,190
--------- ---------
--------- ---------
</TABLE>

INTEREST AND OTHER INCOME (EXPENSE), NET

Interest and other income (expense), net, consisted of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Interest income..................................................................... $ 67 $ 513
Interest expense.................................................................... (284) (12)
Other............................................................................... (43) (23)
--------- ---------
$ (260) $ 478
--------- ---------
--------- ---------
</TABLE>

F-15
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information related to noncash investing and
financing activities is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Acquisition of equipment under capital lease..................... $ 518 -- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
Issuance of common stock in exchange for stockholder notes
receivable..................................................... $ 157 -- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
Conversion of convertible note into preferred stock.............. $ 3,038 -- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
Deferred stock compensation related to stock option grants....... $ 231 -- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
Issuance of common stock in connection with recapitalization..... $ 875 -- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro rata stock dividend distribution in connection with spin-
off............................................................ $ 1,253 -- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
Deferred stock compensation related to spin-off.................. $ 189 -- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
Conversion of preferred stock into common stock.................. -- $ 7,433 $ 7,433 --
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

(3) DEBT

The Company issued to Pacific Media Development, Inc. ("Pacific Media"), an
indirect wholly owned subsidiary of JVC and the holder of the Series A
convertible preferred stock (see Note 5), a convertible note with a principal
value of $3,038,000, which bore interest at a rate of 16.38% per annum payable
quarterly. The note was due in June 2001 and could have been extended for an
additional 10 years upon the mutual agreement of Pacific Media and the Company.
At the option of Pacific Media, the note was convertible into 543,099 shares of
Series A convertible preferred stock, subject to adjustment based upon certain
provisions of the note agreement. The note entitled Pacific Media to voting
rights equal to one vote for each share of common stock into which the note
could be converted, and the note entitled the holder to representation on the
Company's Board of Directors. In July 1996, the note was converted into 543,099
shares of Series A convertible preferred stock, which was subsequently converted
into 543,099 shares of common stock upon consummation of the Company's IPO.

(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES

DISCONTINUED OPERATIONS

In October 1995, Command Audio Corporation ("CAC") was incorporated as a
wholly-owned subsidiary of the Company to commercialize a distinctly new
audio-on-demand technology. On June 28, 1996, the Board of Directors approved
the discontinuation of the Company's involvement in CAC. CAC's operations,
technology, and employee base were discrete and separate from those of the
Company. From its inception until separation,

F-16
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
CAC generated no revenues and concentrated exclusively on research and
development activities. In conjunction with this decision, the Company entered
into a Recapitalization and Stock Purchase Agreement whereby the Company
invested an additional $1,000,000 into CAC, provided 194,444 shares of the
Company's common stock to CAC pursuant to a Restricted Stock Acquisition
Agreement, and surrendered the Company's 500,000 shares of CAC's Series A
preferred stock in exchange for 604,000 shares of CAC common stock and 396,000
shares of CAC Series B preferred stock. Additionally, the Company assigned to
CAC all rights in certain technology and released its reversion rights in
technology that the Company had previously assigned to CAC. In consideration of
such assignment and release, CAC agreed to pay to the Company royalties equal to
2% of CAC's gross revenues for 12 years, beginning when CAC has operating
revenues from certain sources or, at the election of the Company, at any time
prior thereto. No amounts have been paid to the Company under this arrangement.

In August 1996, the Company distributed a portion of the 1,604,000 shares of
CAC common stock to the Company's stockholders on a pro rata basis as a dividend
and the remainder of the CAC common stock to the Company's employees as a stock
bonus while retaining the 396,000 shares of CAC Series B preferred stock,
representing a 19.8% interest in CAC. The CAC Common Stock that was distributed
to the Company's employees resulted in the recognition of $189,000 of deferred
compensation expense. This amount is being amortized over the 17-month vesting
period.

On December 6, 1996, the Company offered to repurchase 55,555 shares of its
common stock issued to CAC pursuant to a Restricted Stock Acquisition Agreement
for $9.00 per share and CAC released their demand registration rights. The offer
was subsequently rescinded and the Company agreed to allow CAC to sell its
shares of the Company in the IPO.

During 1997, in order to maintain its 19.8% ownership, the Company invested
an additional $1,980,000 in CAC as part of various external rounds of
third-party financings by CAC.

Information relating to discontinued operations for the year ended December
31, 1996, is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Costs and expenses................................................................... $ (1,081)
-------
Operating loss..................................................................... (1,081)
Other income, net.................................................................... 5
-------
Loss before income taxes........................................................... (1,076)
Income tax benefit, net.............................................................. 249
-------
Loss from discontinued operations.................................................. $ (827)
-------
-------
</TABLE>

CAC maintained its own set of accounts and identified expenses directly
attributable to CAC's operations. Where the Company provided services to CAC and
the specific identification of the related expenses was not practicable, the
expenses were recorded based upon an allocation of such items. This allocation
was based upon the proportional benefit received by CAC and, in management's
opinion, represents a fair and reasonable estimate of expenses incurred by CAC.
Amounts receivable from CAC related to such services are included in the
accompanying consolidated balance sheets as of December 31, 1996 and 1997, as
receivable from a related party.

F-17
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

The Company has recorded its investment in CAC based upon its historical
cost adjusted for losses incurred by CAC. The Company intends to hold this
investment for the long-term and monitors the recoverability of this investment
based on management's estimates of the fair value of CAC based on the
achievements of milestones specified in CAC's business plan. In the future, the
Company expects to evaluate the recoverability of this investment based on
successive rounds of third-party financing obtained by CAC. The Company is not
obligated by contract to provide future funding to CAC and does not have the
ability to exert significant influence over the financial and operating policies
of CAC. The Company accounts for this investment by the cost method.

TRANSACTIONS WITH RELATED PARTIES

The Company and JVC are parties to a Technology Application Agreement dated
November 29, 1988 (the "Application Agreement"), a Duplicator Agreement dated
June 1, 1988 (the "Duplicator Agreement") and an Agreement dated July 15, 1994
(the "Video Agreement"). Pursuant to the Application Agreement, JVC has applied
the Company's copy protection process to prerecorded videocassettes manufactured
and distributed in Japan by JVC. Pursuant to the Duplicator Agreement, JVC has
applied the Company's copy protection process to prerecorded videocassettes
manufactured and distributed in Japan by certain of the Company's licensees.
Pursuant to the Video Agreement, JVC developed a prototype of equipment to apply
a copy protection process to prerecorded videocassettes, and granted the Company
exclusive rights to purchase such equipment from JVC for resale and to
sublicense the copy protection technology for use with the equipment. For the
years ended December 31, 1996 and 1997 and for the three months ended March 31,
1997 and 1998, the Company recorded revenue from JVC of approximately $78,000,
$234,000, $16,000 and $78,000, respectively, and recorded expenses payable to
JVC of approximately $12,000, $22,000, $1,000 and $5,000, respectively, under
these agreements.

In connection with a license agreement dated September 26, 1995 among the
Company, Victor Technobrain Co., Ltd. ("Techno"), a wholly owned subsidiary of
JVC, and an unrelated party, the Company has paid Techno a development fee of
$50,000 which has been recorded as an offset to the revenue recognized from the
unrelated party. An additional $50,000 was owed to Techno as of December 31,
1996 and paid in 1997 upon receipt of the final license payment from the
unrelated party.

The Company's Japanese subsidiary and Techno are parties to a Technical
Consulting Agreement dated July 1, 1996 pursuant to which Techno provides
technical consulting services as assigned by certain officers of the Company or
Macrovision Japan in connection with technical support subject to an hourly rate
of approximately $85 per hour, subject to a minimum consulting fee of
approximately $1,700 per quarter, and reimbursement of expenses related to the
performance under the agreement.

In January 1997, the Company and JVC entered into a Copy Protection
Technology Agreement in which the Company agreed to continue to license its copy
protection technologies to third parties in the event of the acquisition of the
Company by a party other than JVC. Further, the Company has granted to JVC the
right to sublicense the Company's copy protection technologies with 95% of the
royalties from such sublicenses payable to the Company or successor in the event
that the Company fails to make its copy protection technologies generally
available for licensing to third parties following an acquisition of the
Company.

In 1997, the Company entered into several agreements with JVC or its wholly
owned subsidiaries including a Copy Protection License Agreement, a Digital
Versatile Disc Player/Digital Video Cassette Recorder License

F-18
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Agreement for Anticopy Technology and a Replicator Agreement. The terms and
conditions of these agreements are not more favorable to JVC or its subsidiaries
than the terms offered to other unrelated parties. The Company recorded revenues
from JVC of approximately $59,000 during the year ended December 31, 1997 and
$3,000 for the three months ended March 31, 1998.

In 1996 and 1997, the Company entered into agreements with Matsushita, which
owns approximately 52% of JVC, including a Copy Protection Technology License
Agreement, a Digital Versatile Disc Player/Digital Video Cassette Recorder
License Agreement for Anticopy Technology and a Component Supplier Non-Assertion
and Technical Services Agreement. The terms and conditions of such agreements
are not more favorable to Matsushita or its subsidiaries than the terms offered
to other unrelated parties. The Company recorded revenues from Matsushita of
approximately $56,000, $111,000, $33,000 and $47,000 during the years ended
December 31, 1996 and 1997, and for the three months ended March 31, 1997 and
1998, respectively.

(5) STOCKHOLDERS' EQUITY

SERIES A CONVERTIBLE PREFERRED STOCK

The Company's Certificate of Incorporation provides for the issuance of up
to 5,000,000 shares of preferred stock, of which 1,376,432 shares were
designated as Series A. In June 1991, the Company issued to Pacific Media (the
"Purchaser") 833,333 shares of Series A convertible preferred stock for gross
proceeds of $4,500,000. The shares were convertible into the Company's common
stock on a one-for-one basis at the option of the holder or automatically upon a
qualifying IPO. Each share of Series A convertible preferred stock entitled its
holder to one vote for each share of common stock into which such shares could
be converted, not to exceed voting rights equivalent to 49% of the outstanding
voting stock. Cumulative dividends at the rate of $.54 per share per year were
payable quarterly to the holder of the Series A convertible preferred stock. The
holder of the Series A convertible preferred stock is entitled to $5.40 per
share in the event of any liquidation, dissolution, or winding up of the
Company, plus an amount equal to all declared but unpaid dividends, prior and in
preference to any distribution to the holders of common stock.

In conjunction with the issuance of the Series A convertible preferred stock
and the convertible note, the Company agreed to grant certain rights to the
Purchaser, which included a first right to purchase a pro rata share of any
equity offering of the Company excluding shares issued for (a) an IPO or (b) an
acquisition of another corporation, if such exclusions will not reduce the
purchaser's pro rata ownership share of the Company below 25%, (c) stock
dividend or splits, and (d) stock compensation plans. Further, the purchaser has
entered into an agreement with the holders of common stock and optionees of the
Company as of June 12, 1991, giving the purchaser the right to acquire all of
their shares of common stock and options at a predetermined price upon notice
from the Company that it has filed a registration statement in connection with
an IPO. In January 1997, the Company and Pacific Media entered into a Waiver
Agreement, pursuant to which Pacific Media waived its right to purchase shares
of the Company's common stock from stockholders and optionholders triggered by
the filing of the registration statement in connection with the IPO and any
pre-effective amendments thereto filed prior to April 1, 1997. Upon the
completion of the IPO, all rights of Pacific Media to purchase common stock of
the Company from such persons expired.

F-19
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(5) STOCKHOLDERS' EQUITY (CONTINUED)
RESTRICTED STOCK

On June 7, 1996, the Company issued 58,333 shares of common stock at a price
of $2.70 per share pursuant to a restricted stock purchase agreement to an
officer of the Company in exchange for a full recourse promissory note secured
by the shares in the principal amount of $157,000. Interest accrues at the rate
of 6.58% per annum. Principal and accrued interest, if any, are due and payable
on June 7, 2001. The Company has the right to repurchase the stock at the
original sales price upon the termination of the purchaser's employment with the
Company. The repurchase right lapses at a rate of 1/6 after June 7, 1997, 1/3
after June 7, 1998, and 1/2 after June 7, 1999. As of December 31, 1997, there
were 48,611 shares subject to the repurchase right and the remaining principal
of the note was $131,000.

STOCK OPTION AND PURCHASE PLANS

In December 1996, the Company adopted the 1996 Equity Incentive Plan (the
"Equity Incentive Plan"), which serves as the successor to the Company's 1988
Stock Option Plan (the "1988 Plan"). Options granted under the 1988 Plan before
its termination continue to remain outstanding in accordance with their terms,
but no further options may be granted under the 1988 Plan. Nonstatutory stock
options and incentive stock options granted under the 1988 Plan are exercisable
at prices not less than 85% and 100%, respectively, of the fair value of the
Company's common stock on the date of grant, as determined by the Company's
Board of Directors. The options are generally exercisable over a 3-year vesting
period and expire 7 to 10 years from date of grant.

The Company's Board of Directors has reserved 1,332,222 shares of common
stock for issuance under the Equity Incentive Plan (see Note 10 of Notes to
Consolidated Financial Statements). The Equity Incentive Plan provides for the
grant of stock options, stock appreciation rights and restricted stock awards by
the Company to employees, officers, directors, consultants, independent
contractors and advisers of the Company. The Equity Incentive Plan permits the
grant of either incentive or nonqualified stock options at the then current
market price. Options granted under the Equity Incentive Plan will have a
maximum term of ten years and generally vest as to one-sixth of the shares in
the first year, one-third of the shares in the second year and one-half of the
shares in the third year.

In December 1996, the Company's Board of Directors adopted the 1996 Employee
Stock Purchase Plan (the "Purchase Plan") and reserved 140,000 shares of common
stock for issuance thereunder. The Purchase Plan was effective upon the
Company's proposed IPO. The Purchase Plan permits eligible employees to purchase
common stock, through payroll deductions of between 1% and 20% of the employee's
compensation, at a price equal to 85% of the lower of the fair market value of
the common stock on the first day of the offering period or on the last day of
the purchase period. The Company's stockholders approved the Purchase Plan in
February 1997. In 1997, the Company issued 11,646 shares pursuant to the
Purchase Plan.

In December 1996, the Company's Board of Directors adopted the 1996
Directors Stock Option Plan (the "Directors Plan") and reserved 60,000 shares of
common stock for issuance thereunder. The Directors Plan provides for the
initial grant of a nonqualified option to purchase 5,000 shares of common stock
on the date the eligible director first becomes a director and the additional
grant of a nonqualified option to purchase 3,000 shares of Common Stock annually
thereafter. Options will vest at the rate of 2.08% per month so long as the
director continues to serve on the Board on such dates. The Company's
stockholders approved the Directors Plan in February 1997. During 1997, the
Company granted options to purchase 15,000 shares of common stock.

F-20
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(5) STOCKHOLDERS' EQUITY (CONTINUED)
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans. Accordingly, no compensation cost has
been recognized in the accompanying consolidated financial statements for its
plans because the exercise price of each option equaled or exceeded the fair
value of the underlying common stock as of the grant date for each stock option,
except for options and restricted stock granted in May and June 1996. With
respect to the options and restricted stock granted in May and June 1996, the
Company has recorded deferred stock compensation of $231,000 for the difference
at the grant date between the exercise price and the fair value, as determined
by an independent valuation, of the restricted stock and the common stock
underlying the options. This amount is being amortized on a straight-line basis
over the vesting period of the individual options and restricted stock,
generally three years.

If compensation cost for the Company's stock-based compensation plans had
been determined in a manner consistent with the fair value approach described in
SFAS No. 123, the Company's net income and net income per share as reported
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C> <C>
Net income As reported.............................. $ 1,008 $ 3,821
Adjusted pro forma....................... 931 3,388
Diluted net income per share As reported.............................. .10 .53
Adjusted pro forma....................... .08 .46
</TABLE>

The fair value of each option is estimated on the date of grant using the
Black-Scholes method in 1997 and the minimum value method in 1996 with the
following weighted average assumptions for options and the ESPP plan:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997
---------------- -----------
<S> <C> <C>
OPTION PLANS:
Dividends................................................................ None None
Expected term............................................................ 4.0 years 4.56 years
Risk free interest rate.................................................. 5.82% 6.07%
Volatility rate.......................................................... None 64.7%
ESPP PLAN:
Dividends................................................................ Not applicable None
Expected term............................................................ Not applicable 1.25 years
Risk free interest rate.................................................. Not applicable 5.42%
Volatility rate.......................................................... Not applicable 62.4%
</TABLE>

F-21
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(5) STOCKHOLDERS' EQUITY (CONTINUED)

Activity under the Company's option plans is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Outstanding as of December 31, 1995............................. 707,889 $ 2.66
Granted......................................................... 142,050 4.26
Canceled........................................................ (83,111) 2.69
Exercised....................................................... (66,263) 2.57
-----------
Outstanding as of December 31, 1996............................. 700,565 2.99
Granted......................................................... 126,154 11.81
Canceled........................................................ (17,034) 4.17
Exercised....................................................... (111,342) 2.59
-----------
Outstanding as of December 31, 1997............................. 698,343 4.62
Granted......................................................... 166,495 15.00
Canceled........................................................ (1,502) 2.70
Exercised....................................................... (41,560) 3.04
-----------
Outstanding as of March 31, 1998................................ 821,776 6.80
-----------
-----------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Options exercisable at period-end....................................... 365,258 379,042

Weighted average fair value of options granted during the
period................................................................. $ .88 $ 6.87
</TABLE>

The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:

<TABLE>
<CAPTION>
EXERCISABLE
OUTSTANDING --------------------------
------------------------------------------------- WEIGHTED
WEIGHTED AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER EXERCISE
PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- ---------------------- --------- ------------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$2.25 - 2.70.......... 530,252 6.90 year $ 2.70 369,844 $ 2.70
$7.20 - 9.00.......... 99,114 9.07 8.10 8,678 7.60
$13.62 - 14.50........ 68,977 9.78 14.44 520 14.13
--------- -----------
698,343 7.49 4.62 379,042 2.82
--------- -----------
--------- -----------
</TABLE>

F-22
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(6) INCOME TAXES

Income taxes consisted of the following (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Current:
Federal.................................................................. $ 1,146 $ 2,169
Foreign.................................................................. 71 383
State.................................................................... 208 544
--------- ---------
Total current.......................................................... 1,425 3,096
--------- ---------

Deferred:
Federal.................................................................. (305) (554)
State.................................................................... (146) (129)
--------- ---------
Total deferred......................................................... (451) (683)
--------- ---------
$ 974 $ 2,413
--------- ---------
--------- ---------
</TABLE>

Total tax expense (benefit) has been allocated as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Continuing operations...................................................... $ 1,223 $ 2,413
Discontinued operations.................................................... (249) --
--------- ---------
$ 974 $ 2,413
--------- ---------
--------- ---------
</TABLE>

The Company's effective tax rate differs from the statutory federal tax rate
as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Computed "expected" tax expense.............................................. $ 674 $ 2,120
State tax expenses, net of federal benefit................................... 98 274
Tax credits.................................................................. (45) (87)
Foreign taxes................................................................ 15 47
Exempt interest.............................................................. (13) (144)
Write-off of discontinued operations deferred tax asset...................... 203 --
Other........................................................................ 42 203
--- ---------
$ 974 $ 2,413
--- ---------
--- ---------
</TABLE>

F-23
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(6) INCOME TAXES (CONTINUED)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities and reserves......................................... $ 598 $ 673
Allowance for doubtful accounts.......................................... 106 272
Depreciation and amortization............................................ 338 707
Deferred revenue......................................................... 238 382
Other.................................................................... 32 --
--------- ---------
Total gross deferred tax assets........................................ 1,312 2,034

Deferred tax liabilities:
Patents.................................................................. 743 782
--------- ---------
Net deferred tax assets................................................ $ 569 $ 1,252
--------- ---------
--------- ---------
</TABLE>

Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.

(7) COMMITMENTS

LEASES

The Company leases its facilities and certain equipment pursuant to
noncancelable operating lease agreements. Additionally, the Company leases
certain equipment pursuant to a capital lease agreement.

Future minimum lease payments pursuant to these leases as of December 31,
1997, were as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
----------- -----------
<S> <C> <C>
1998..................................................................... $ 116 $ 463
1999..................................................................... 116 448
2000..................................................................... 78 411
2001..................................................................... -- 426
2002 and thereafter...................................................... -- 217
--- -----------
Total.................................................................... 310 $ 1,965
-----------
-----------
Less amounts representing interest....................................... 14
---
Present value of minimum capital lease payments.......................... 296
Less current portion of capital lease liability.......................... 108
---
Capital lease liability, net of current portion.......................... $ 188
---
---
</TABLE>

Rent expense was $441,000 and $469,000 as of December 31, 1996 and 1997,
respectively.

F-24
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(7) COMMITMENTS (CONTINUED)
EMPLOYEE BENEFIT PLAN

The Company has a 401(k) plan that allows eligible employees to contribute
up to 20% of their compensation, which contribution was limited to $9,500 in
1997. Employee contributions and earnings thereon vest immediately. The Company
is not required to contribute to the 401(k) plan and had made no voluntary
contributions. The Company made matching contributions to the 401(k) plan equal
to 20% of each participating employee's contribution, up to a maximum annual
matching contribution of $1,900 in each of 1996 and 1997. Matching contributions
aggregated $60,000 and $54,000 for the years ended December 31, 1996 and 1997,
respectively, and are fully vested after three years of service.

(8) CONTINGENCIES

In October 1995, a former officer and director of the Company filed suit
against the Company in the Superior Court of the State of California alleging
monetary damages suffered as a result of alleged fraud, misrepresentation, and
other malfeasance in connection with the Company's grant of stock options to
him. The plaintiff maintains that the Company induced him to accept employment
by falsely representing to him that the options granted to him eventually would
have substantial value. Between August 1990 and December 1993, the Company
granted to him options to purchase approximately 200,000 shares of the Company's
common stock with per share exercise prices of $2.25 or $2.70. Substantially all
of these options expired unexercised within three months following his departure
from the Company in June 1995. In December 1996, the court ordered this matter
to binding arbitration in accordance with a written agreement between the
plaintiff and the Company. The arbitration agreement contains limitations on the
types of damages available to him and expressly precludes punitive damages. The
plaintiff filed his claim in arbitration for this matter with the American
Arbitration Association in June 1997 and the arbitration hearings are scheduled
for October 1998. The Company believes that the case is without merit and
intends to contest it vigorously. In the opinion of counsel, it is not possible
to determine with precision the probable outcome or the amount of liability, if
any, under this lawsuit.

F-25
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)

(9) SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in one industry segment and is engaged in developing
and licensing or selling its video copy protection and video scrambling
technologies to customers in the home videocassette, pay-per-view, cable,
satellite, and corporate communications markets primarily in the United States,
Europe, Japan and the Far East. The distribution of revenues, operating income,
and assets by geographic area is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Revenues:
United States......................................................... $ 15,823 $ 18,960
Foreign operations.................................................... 1,257 1,380
--------- ---------
Total revenues........................................................ $ 17,080 $ 20,340
--------- ---------
--------- ---------
Operating income from continuing operations:
United States......................................................... $ 3,064 $ 5,513
Foreign operations.................................................... 254 242
--------- ---------
Total operating income.............................................. $ 3,318 $ 5,755
--------- ---------
--------- ---------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Identifiable assets:
United States......................................................... $ 10,844 $ 27,524
Foreign operations.................................................... 1,215 1,438
--------- ---------
Subtotal identifiable assets........................................ 12,059 28,962
Eliminations.......................................................... (106) (106)
--------- ---------
Total identifiable assets........................................... $ 11,953 $ 28,856
--------- ---------
--------- ---------
</TABLE>

United States revenue includes export sales to the following geographic
areas (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Europe.................................................................. $ 2,166 $ 3,200
Japan................................................................... 1,099 1,500
Rest of world........................................................... 1,947 3,382
--------- ---------
$ 5,212 $ 8,082
--------- ---------
--------- ---------
</TABLE>

(10) SUBSEQUENT EVENTS (UNAUDITED)

In May 1998, the Company's stockholders approved an amendment to the Equity
Incentive Plan that increased the number of shares reserved for issuance under
the Equity Incentive Plan by 400,000 shares.

F-26
<PAGE>
PROTECTING YOUR IMAGE

[Words "Protecting Your Image" superimposed on floating DVD-ROM, videocassette,
satellite dish, and television set]

Macrovision, PhaseKrypt and Protecting Your Image are registered trademarks, and
CineGuard, ColorStripe, VES and VES-TM are trademarks of Macrovision
Corporation.

Logo
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

--------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
The Company............................................................... 17
Use of Proceeds........................................................... 17
Price Range of Common Stock............................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Selected Consolidated Financial Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 30
Management................................................................ 47
Principal and Selling Stockholders........................................ 50
Underwriting.............................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 53
Incorporation of Certain Documents by Reference........................... 53
Available Information..................................................... 54
Index to Consolidated Financial Statements................................ F-1
</TABLE>

1,500,000 SHARES

[LOGO]

COMMON STOCK

-----------

PROSPECTUS
-------------

HAMBRECHT & QUIST

NATIONSBANC MONTGOMERY SECURITIES LLC

COWEN & COMPANY

, 1998

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