RAVISENT TECHNOLOGIES INC, 10-Q, 2000-11-14

RAVISENT TECHNOLOGIES INC
10-Q, 2000-11-14
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<PAGE>

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the Quarter Ended September 30, 2000

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to ______________
Commission File number 000-26287

RAVISENT Technologies Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware 23-2763854
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

205 Great Valley Parkway
Malvern, Pennsylvania 19355

(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 700-0362

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
----------------------------------------

On November 7, 2000, 17,088,565 shares of the Registrant's Common Stock, $.001
par value, were outstanding.
<PAGE>

RAVISENT Technologies Inc.
FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2000

INDEX

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Page
-----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Part I: Financial Information
-----------------------------------------------------------------------------------------------------------------------------
Item 1: Financial Statements
-----------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets at September 30, 2000 (unaudited) and December 31, 1999 2
-----------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations for the quarters ended September 30, 2000 and 1999, as restated (unaudited) 3
-----------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations for the nine months ended September
30, 2000 and 1999, as restated (unaudited) 4-5
-----------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 6
-----------------------------------------------------------------------------------------------------------------------------
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13
-----------------------------------------------------------------------------------------------------------------------------
Item 3: Quantitative and Qualitative Disclosures About Market Risk 26
-----------------------------------------------------------------------------------------------------------------------------
Part II: Other Information
-----------------------------------------------------------------------------------------------------------------------------
Item 1: Legal Proceedings 42
-----------------------------------------------------------------------------------------------------------------------------
Item 2: Changes in Securities and Use of Proceeds 43
-----------------------------------------------------------------------------------------------------------------------------
Item 3: Defaults upon Senior Securities 44
-----------------------------------------------------------------------------------------------------------------------------
Item 4: Submission of Matters to a Vote of Security Holders 44
-----------------------------------------------------------------------------------------------------------------------------
Item 5: Other Information 44
-----------------------------------------------------------------------------------------------------------------------------
Item 6: Exhibits and Reports on Form 8-K 45
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

1
<PAGE>

ITEM 1: FINANCIAL STATEMENTS

RAVISENT TECHNOLOGIES INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents ............................................................ $ 21,515 $ 48,251
Short-term investments ............................................................... -- 1,018
Accounts receivable, net of allowance for doubtful accounts of $346 in
2000 and $319 in 1999 ................................................................ 14,213 15,597
Inventory, net ....................................................................... 2,605 1,323
Prepaid expenses ..................................................................... 1,104 1,085
Loan receivable-officer .............................................................. 520 340
Advance components ................................................................... 12,999 --
Prepaid distribution rights fee ...................................................... 4,246 --
Prepaid compensation ................................................................. 766 --
Other current assets ................................................................. 724 216
------------- ------------
Total current assets .............................................................. 58,692 67,830
Furniture and equipment, net ............................................................... 3,589 1,598
Loan receivable-officer, less current portion .............................................. 25 138
Goodwill and other intangibles, net of accumulated amortization of $5,950 in
2000 and $ 2,190 in 1999 ................................................................... 18,829 19,357
Restricted cash ............................................................................ -- 525
Other assets ............................................................................... 163 300
------------- ------------
Total assets ...................................................................... $ 81,298 $ 89,748
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................................... $ 11,246 $ 5,743
Deferred revenue ..................................................................... 5,028 4,332
Accrued expenses and other ........................................................... 3,232 3,672
Other current liabilities ............................................................ 605 539
Current installments of obligations under capital leases ............................. 38 40
------------- ------------
Total current liabilities ......................................................... 20,149 14,326
Deferred revenue, less current portion ..................................................... -- 327
Other non-current liabilities .............................................................. 31 472
Obligations under capital leases, excluding current installments ........................... 9 38
------------- ------------
Total liabilities ................................................................ 20,189 15,163
------------- ------------
Commitments and contingencies (note 7)
Preferred stock, $.001 par value; 5,000,000 shares authorized, none issued or
outstanding ................................................................................ -- --

Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares authorized; 17,006,443
and 16,052,866 shares issued in 2000 and 1999, respectively ......................... 17 16
Additional paid-in capital .......................................................... 121,036 109,460
Deferred stock compensation ......................................................... (3,798) (1,678)
Accumulated deficit ................................................................. (55,299) (31,913)
Accumulated other comprehensive loss................................................. (127) (80)
Note receivable ..................................................................... -- (500)
Treasury stock at cost, 200,000 shares in 2000 and 1999 ............................. (720) (720)
------------- ------------
Total stockholders' equity ....................................................... 61,109 74,585
------------- ------------
Total liabilities and stockholders' equity ....................................... $ 81,298 $ 89,748
============= ============
</TABLE>

See accompanying notes to consolidated financial statements.

2
<PAGE>

RAVISENT TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
Quarter Ended September 30,
------------------------------------
1999
2000 (as restated)
(unaudited) (unaudited)
------------------ ---------------
<S> <C> <C>
Revenues:
License and services .................................................................. $ 3,753 $ 4,235
Hardware .............................................................................. 475 1,003
-------- --------
Total revenues ...................................................................... 4,228 5,238

Cost of revenues ........................................................................ 1,263 992
-------- --------

Gross profit ........................................................................ 2,965 4,246

Research and development ................................................................ 2,686 1,633
Sales and marketing ..................................................................... 4,298 1,172
General and administrative .............................................................. 2,182 911
Depreciation and amortization ........................................................... 1,489 364
Compensation and other expenses related to stock options and warrants ................... 1,691 135
Acquired in-process research and development ............................................ 1,373 --
-------- --------

Operating income (loss) ............................................................. (10,754) 31

Other (income) expense:
Interest (income) expense, net ...................................................... (433) (573)

Income (loss) before income taxes ....................................................... (10,321) 604
Provision for income taxes .......................................................... 7 74
-------- --------

Net income (loss) before accretion of discount on mandatory redeemable preferred stock .. $(10,328) $ 530

Accretion of discount on mandatory redeemable preferred stock ........................... -- 94
-------- --------

Net income (loss) attributable to common stockholders ................................... $(10,328) $ 436
======== ========

Basic net income (loss) per common share ................................................ $ (0.61) $ 0.04
======== ========

Diluted net income (loss) per common share .............................................. $ (0.61) $ 0.03
======== ========
Weighted average shares outstanding used in per common share calculation
(basic) ................................................................................. 16,834 12,176
======== ========
Weighted average shares outstanding used in per common share calculation
(diluted) ............................................................................... 16,834 15,832
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

3
<PAGE>

RAVISENT TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999
(as restated)
(unaudited) (unaudited)
--------------- ---------------
<S> <C> <C>
Revenues:
License and services ................................................................. $ 9,973 $ 9,763
Hardware ............................................................................. 4,811 13,966
-------- --------
Total revenues ..................................................................... 14,784 23,729

Cost of revenues ....................................................................... 7,247 13,028
-------- --------
Gross profit ....................................................................... 7,537 10,701

Research and development ............................................................... 7,799 4,470
Sales and marketing .................................................................... 8,836 3,300
General and administrative ............................................................. 7,840 2,894
Depreciation and amortization .......................................................... 4,230 1,050
Compensation and other expenses related to stock options and warrants .................. 2,451 306
Acquired in-process research and development ........................................... 1,373 --
-------- --------
Operating (loss) .................................................................. (24,992) (1,319)

Other (income) expense:
Interest (income) expense, net ..................................................... (1,647) (463)

Net loss before income taxes ........................................................... (23,345) (856)
Provision for income taxes ......................................................... 44 74
-------- --------

Net loss before accretion of discount on mandatory redeemable preferred stock .......... $(23,389) $ (930)

Accretion of discount on mandatory redeemable preferred stock .......................... -- 660
-------- --------

Net loss attributable to common stockholders ........................................... $(23,389) $ (1,590)
======== ========

Basic and diluted net loss per common share ............................................ $ (1.45) $ (0.25)
======== ========
Weighted average shares outstanding used in per common share calculation (basic and
diluted) ............................................................................... 16,137 6,305
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

4
<PAGE>

RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
2000 1999
(as restated)
(unaudited) (unaudited)
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................................. $(23,389) $ (930)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................... 4,230 1,181
Non-cash compensation and other expenses ......................................... 2,451 348
Acquired in-process research and development ..................................... 1,373 --
Restricted cash .................................................................. 525 --
Changes in items affecting operations:
Accounts receivable .............................................................. 1,475 2,944
Inventory ........................................................................ (1,282) (201)
Prepaid expenses and other current assets ........................................ (538) (1,084)
Loan receivable-officer .......................................................... (67) 60
Advance components ............................................................... (12,999) --
Prepaid compensation ............................................................. (766) --
Accounts payable ................................................................. 5,289 (7,808)
Deferred revenue ................................................................. 369 1,605
Other current liabilities......................................................... 66 --
Accrued expenses ................................................................. 31 (321)
-------------- --------------

Net cash used in operating activities .................................................. (23,232) (4,206)

Cash flows from investing activities:
Capital expenditures.............................................................. (2,580) (575)
Proceeds from sale of property ................................................... 131 --
Redemption of short-term investment .............................................. 1,018 --
Loan receivable - officer ........................................................ -- (1,014)
Acquisition, net of cash acquired ................................................ (2,613) --
-------------- --------------
Net cash used in investing activities .................................................. (4,044) (1,589)
-------------- --------------
Cash flows from financing activities:
Repayments under capital lease obligations ....................................... (30) (9)
Note receivable................................................................... 500 (500)
Secured borrowings (repayments) .................................................. -- (625)
Net proceeds from issuance of common stock ....................................... -- 62,052
Net proceeds from exercise of stock options and warrants ......................... 759 --
Net proceeds from Series B and C preferred stock ................................. -- 3,661
Repayments under other liabilities ............................................... (441) --
Legal settlement ................................................................. (200) --
Repayments under other liabilities ............................................... -- (1,119)
-------------- --------------
Net cash provided by financing activities .............................................. 588 63,460
-------------- --------------

Effect of exchange rate changes on cash and cash equivalents ........................... (48) (24)
-------------- --------------

Net (decrease) increase in cash and cash equivalents ................................... (26,736) 57,641
Cash and cash equivalents:
Beginning of period .................................................................. 48,251 1,024
-------------- --------------
End of period ........................................................................ $ 21,515 $ 58,665
============== ==============

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................................................. $ 28 $ 173

Non-cash investing and financing activities:
Compensation related to stock, stock options and warrants ........................ 8,183 --
Amortization of deferred stock compensation ...................................... 650 306
Issuance of Series C preferred stock as consideration for intangible assets ...... -- 1,716
</TABLE>

See accompanying notes to consolidated financial statements.

5
<PAGE>

RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information with respect to September 30, 2000 and 1999 is unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of Business

RAVISENT Technologies Inc., ("the Company") designs, develops, licenses and
markets core-based modular software solutions that enable digital video and
audio stream management in personal computer systems, consumer electronics
devices and Internet appliances. The Company also provides supporting hardware
designs to selected customers as well as customization services and customer
support. The Company's solutions enable decoding (playback) and encoding
(recording) of multimedia formats such as digital versatile disk (DVD); direct
broadcast satellite (DBS) and high-definition television (HDTV) on personal
computers and consumer electronics platforms. The Company's customers consist
principally of personal computer, consumer electronics and Internet appliance
manufacturers. In August 2000, the Company acquired Cinax Designs Inc. (Note 6),
which has enhanced our digital video product line. In November of 1999, the
Company acquired Teknema Inc., which has expanded our product offerings to the
Internet appliance market.

During 1999 the majority of the Company's revenue was generated from
selling hardware-based digital video solutions to personal computer and consumer
electronics original equipment manufacturers. The Company changed its strategic
focus during 1999 from selling a hardware-based digital video solution to
licensing its proprietary technology to provide software-based digital video
solutions to primarily personal computer and consumer electronics original
equipment manufacturers, as well as offering proprietary web browsing and email
solutions to the Internet appliance market.

The Company was incorporated in Pennsylvania in April 1994 as Quadrant
Sales International, Inc. In April 1999, the Company changed its name to
Divicore Inc. In July 1999, the Company reincorporated in Delaware as RAVISENT
Technologies Inc.

The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company plans on investing heavily in
product development, sales and marketing, and to a lesser degree in operations
and administrative areas. There can be no assurances that the Company will be
able to generate sufficient revenues necessary to achieve or sustain
profitability in the short or long term. However, management believes that the
current cash and cash equivalent amounts will be adequate to meet the Company's
cash needs for at least the next twelve months.

(b) Principles of Consolidation

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

The interim consolidated financial statements of the Company for the three
and nine months ended September 30, 2000 and 1999 included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations relating to interim financial statements.
In the opinion of management, the accompanying unaudited interim consolidated
financial statements reflect all adjustments, consisting

6
<PAGE>

only of normal recurring adjustments, necessary to present fairly the financial
position of the Company at September 30, 2000 and the results of its operations
for the three and nine months ended September 30, 2000 and 1999, and its cash
flows for the nine months ended September 30, 2000 and 1999. The unaudited
consolidated financial statements included in this Form 10-Q should be read in
conjunction with the audited consolidated financial statements and notes
thereto, included in the Company's Form 10-K for the year ended December 31,
1999.

(d) Recent Accounting Pronouncements

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101 summarizes the SEC staff's views in applying generally
accepted accounting principles to revenue recognition.

In March 2000, the SEC issued Staff Accounting Bulletin 101A, Amendment:
Revenue Recognition in Financial Statements ("SAB 101A"). SAB 101A delayed the
implementation of SAB 101 until calendar quarters beginning April 1, 2000. In
June 2000, the SEC issued Staff Accounting Bulletin No. 101B ("SAB 101B"),
Second Amendment: Revenue Recognition in Financial Statements. SAB 101B delays
the implementation date of SAB 101 until no later than the fourth fiscal quarter
of fiscal years beginning after December 15, 1999. The implementation of SAB 101
is not expected to have a material impact on the Company's financial position or
results of operations.

(e) Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three months or
less to be cash equivalents.

(2) ADVANCE COMPONENTS

Represents the cost of components procured in advance on behalf of the
Company's contract manufacturers for use in the contract manufacturers' assembly
of the Company's licensed products. The components will be sold at cost to the
contract manufacturers within one year and will not have a material effect in
the statement of operations.

(3) BANK LINE OF CREDIT

In June 2000, the Company renewed its loan and security agreement with
a commercial bank that provides the Company a line of credit in the amount of
the lesser of $5 million or the borrowing base, as defined (limited to a
percentage of eligible accounts receivable). The line of credit provides for the
Company to issue a maximum of $2 million in the form of letters of credit that
reduces the amount of available borrowings under the line of credit. The line of
credit matures in June 2001 and bears interest at the bank's prime rate (9.5% at
September 30, 2000). The line of credit is collateralized by substantially all
of the assets of the Company. The Company is required to comply with a quarterly
tangible net worth covenant, as defined in the loan and security agreement. At
September 30, 2000, the Company was in compliance with its debt covenants. There
was no amount outstanding under the line of credit at September 30, 2000, and
approximately $2.4 million was available under the terms of the line of credit
at September 30, 2000. At September 30, 2000, there were no letters of credit
outstanding (see note 7).

(4) COMPREHENSIVE INCOME

The components of comprehensive income (loss) are as follows (in
thousands):

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $(10,328) $530 $(23,389) $(930)
----------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (31) 18 (48) (25)
-------- ---- -------- -----
----------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(10,359) $548 $(23,437) $(955)
======== ==== ======== =====
----------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

(5) STOCK OPTIONS AND WARRANTS

In July and August 2000, the Company granted 10,000 stock options to
employees, with an exercise price of $0.01 per share. The Company has recorded
approximately $61,000 of deferred stock compensation in connection with these
options that will be amortized over the option vesting period of 24 months.

On May 2, 2000, the Company granted 78,500 stock options to employees, with
an exercise price of $0.01 per share. The Company has recorded approximately
$633,000 of deferred stock compensation in connection with these options that
will be amortized over the option vesting periods, ranging from 18 to 24 months.
On June 5, 2000 the Company granted 17,500 stock options to employees, with an
exercise price of $0.01 per share. The Company has recorded approximately
$112,000 of deferred stock compensation in connection with these options that
will be amortized over the option vesting period of 24 months.

In June 2000, the Company issued a warrant to purchase 1,500,000 shares of
the Company's common stock to American Trading S.A. ("ATSA") with an exercise
price of $7.00 per share, which approximated fair market value on the date of
grant. The warrant is fully vested and non-forfeitable on the date of grant, has
a two-year term, and contains certain exercise restrictions as described in the
warrant agreement. The Company has recorded the estimated fair value of the
warrant of $5.6 million as prepaid distribution rights fee and additional
paid-in capital and is amortizing the estimated fair value over the shorter of
the one-year contract term or the period benefited. The fair value of the
warrant was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions: risk-free interest rate of 6.12%,
volatility factor of 96%, with no dividend factor, and an expected life of the
warrant of 2 years. For the three and nine months ended September 30, 2000, the
Company has recorded $1.4 million of amortization expense related to the
warrant, which is included in compensation related to stock options and warrants
in the consolidated statements of operations.

(6) ACQUISITION

In August 2000, the Company acquired all of the outstanding capital stock
of Cinax Designs Inc. ("Cinax"), a company located in British Columbia, Canada
involved in the development of digital video software products based on MPEG
audiovisual compression.

The Company paid $2.7 million in cash, issued 138,455 shares of the
Company's common stock and 225,928 shares of no par, non-voting exchangeable
preferred stock of a subsidiary having a total fair market value of $1.6 million
on the date of acquisition, and incurred transaction costs of $0.3 million. The
exchangeable preferred stock is exchangeable into shares of the Company's common
stock on a one-for-one basis at any time at the option of the holder, is non-
voting, has an automatic redemption date of August 1, 2005, and contains certain
dividend restrictions as defined.

The Company also paid $0.8 million in cash, issued 39,807 shares of the
Company's common stock, and issued 420,806 shares of no par, non-voting
exchangeable preferred stock in connection with the acquisition. The cash is
held in escrow for the former employees of Cinax who became employees of the
Company and are required to be employed by the Company during the next year,
measured from the date of acquisition, in order for the cash to be released from
escrow. If an employee leaves the Company during the next year, all unvested
cash for such employees is forfeited back to the Company. The cash escrow will
be released 25% on each quarterly anniversary of the date of acquisition. As of
September 30, 2000, no cash has been forfeited. The Company recorded $0.8
million of prepaid compensation expense in connection with the escrowed cash
that will be amortized over the one-year period. These common and exchangeable
preferred shares are also held in escrow for the former employees and former
non-employee stockholders of Cinax. The former Cinax employees who became
employees of the Company are required to be employed by the Company during the
next three-year period, measured from the date of acquisition, in order for the
shares to be released from escrow. The shares held in escrow for the former
non-employee stockholders of Cinax are for Company indemnification purposes and
are not subject to post-acquisition employment requirements. All of the escrowed
shares will be released as follows: 50% on the one-year anniversary of the
acquisition and one-eighth per quarter thereafter. If an employee

<PAGE>

leaves the Company during the next three-year period, all unvested shares for
such employees are forfeited back to the Company. As of September 30, 2000, no
shares have been forfeited. The Company recorded $2.1 million of deferred stock
compensation in connection with the forfeitable common and exchangeable
preferred shares that will be amortized over the three-year period following the
vesting schedule.

As of September 30, 2000, 138,455 shares of the Company's common stock
issued for this transaction are recorded as issued and outstanding for financial
reporting and earnings per share purposes. As the applicable contingencies
related to the contingently issuable shares described above lapse, such shares
will be recognized as issued and outstanding.

The acquisition of Cinax was recorded under the purchase method of
accounting. The results of operations of Cinax have been included in the
Company's consolidated financial statements from August 11, 2000. A portion of
the purchase price was allocated to in-process research and development (IPR&D)
technology, which resulted in a charge of approximately $1.4 million to the
Company's operations in August 2000. At the date of acquisition, Cinax had two
development projects that had not reached technological feasibility and for
which there was no alternative future use. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 2, Accounting for Research and
Development Costs, and FASB interpretation No. 4, Applicability of SFAS No. 2 to
Business Combinations Accounted for by the Purchase Method, amounts assigned to
IPR&D technology meeting the above stated criteria must be charged to expense as
part of the allocation of purchase price of a business combination. The IPR&D
technology was valued using the income approach, a cash flow model under which
projected income and expenses attributable to the purchased technology were
identified, and potential income streams were discounted using a 25% discount
rate for risks, probabilities and uncertainties, including the stage of
development of the technology, viability of target markets and other factors.
The two development projects were 50% and 75% complete at the date of
acquisition.

The excess of the purchase price over the fair value of the net
identifiable assets and in-process research and development technology acquired
of $3.2 million has been recorded as goodwill and other intangible assets and is
amortized on a straight-line basis over four years. The results of operations of
Cinax were not material to the Company.

The purchase price was allocated as follows (in thousands):

Fair value of assets acquired ................ $ 347
Goodwill ..................................... 3,234
Workforce in place ........................... 80
In-process research and development technology 1,373
Liabilities acquired ......................... (276)
-------
$ 4,758
=======

(7) COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENTS

Litigation

9
<PAGE>

On May 25, 1999, a complaint was filed against the Company in the Superior
Court of California, Santa Clara County, by a former supplier, alleging breach
of oral and written contract and other claims totaling approximately $1.2
million. The complaint was removed to federal court and, on September 23, 1999
the Company filed a counterclaim against the supplier for the damages the
Company incurred as a result of the supplier's failure to timely ship the
Company non-defective parts. On June 30, 2000 the parties entered into a
confidential settlement agreement and mutual release in full settlement of any
claims under the complaint. The amount of the settlement was accrued as of
December 31, 1999.

In February and March 2000, eleven class action lawsuits were filed against
the Company and certain of its officers and directors in the United States
District Court for the Eastern District of Pennsylvania. On May 25, 2000, the
cases were consolidated under Civil Action No. 00-CV-1014, and entitled "In re
RAVISENT Technologies, Inc. Securities Litigation". Pursuant to the court's
consolidation order, a consolidated and amended class action complaint was filed
on June 14, 2000 with an alleged class period of July 15, 1999 through April 27,
2000. This complaint alleges violations of the federal securities laws,
specifically Sections 11 and 15 of the Securities Act of 1933, Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder during the periods stated above. There may be additional purported
class action lawsuits filed against us based upon similar alleged facts and
claims. Certain employees and certain holders of 5% or more of our common stock
are members of the putative classes alleged in these actions and therefore may
have interests adverse to us with respect to the alleged claims in these
actions. We believe that such lawsuits or claims are without merit and that we
have meritorious defenses to the actions. We plan to vigorously defend the
litigation. However, failure to successfully defend these actions could
substantially affect our results of operations, liquidity and financial
condition.

In August 2000, a claim was filed against the Company in the United States
District Court for the Western District of Washington at Seattle alleging breach
of an agreement whereby the plaintiff was to receive a fee in connection with
the sale of Cinax to the Company totaling approximately $0.6 million in cash and
Company stock. In September 2000, the Company filed an answer with appropriate
affirmative defenses.

Leases
------

In February 2000, the Company entered into a 60-month operating lease for
its facilities in San Jose, California, commencing May 2000. The lease provides
for minimum monthly rent of approximately $21,000 per month plus operating
expenses of approximately $8,000, totaling approximately $29,000 monthly. The
lease provides for annual increases to the minimum annual rent of approximately
$12,000 per year. In June 2000, the Company vacated its former Palo Alto and San
Jose offices.

In March 2000, the Company entered into an 84-month operating lease for its
corporate office facilities in Malvern, Pennsylvania, effective June 2000. The
lease provides for minimum annual rent of approximately $660,000, payable in
monthly installments of approximately $55,000 plus operating expenses of
approximately $30,000, totaling approximately $85,000 monthly. The lease
provides for annual increases to the minimum annual rent of approximately
$20,000 per year. The Company vacated its former Malvern facility entirely
during the third quarter of 2000. In connection with vacating this facility, the
Company was reimbursed by the lessor for abandoned leasehold improvements with a
book value of approximately $119,000.

Distribution Agreement
----------------------

10
<PAGE>

terms of the agreement, which are included in sales and marketing expense in the
Company's consolidated statements of operations. The remaining $1.0 million is
likely to be paid to ATSA and expensed in the quarter ending December 31, 2000
(see note 5).

Letter of Credit
----------------

In October 2000, the Company delivered an irrevocable letter of credit,
which expires December 2000, to a vendor for $0.6 million under the
Company's line of credit facility (note 3). Also in October 2000, the Company
delivered an irrevocable standby letter of credit, which expires March 2001, to
a vendor for $1.2 million under the Company's line of credit facility.

<PAGE>

(8) RESTATED QUARTERLY RESULTS OF OPERATIONS

The following table presents certain unaudited quarterly consolidated
statements of operations data for the three and nine months ended September 30,
1999, respectively. In the opinion of management, this information has been
presented on the same basis as the audited consolidated financial statements
appearing elsewhere in this financial information, and all necessary adjustments
have been included in the amounts stated below to present fairly the unaudited
quarterly results when read in conjunction with the audited consolidated
financial statements of RAVISENT. Results of operations for any quarter are not
necessarily indicative of the results to be expected for the entire year or for
any future period.

<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1999 September 30, 1999
---------------------------- -----------------------------
As previously As previously
reported As restated reported As restated
--------------------------- ----------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
License and services ................ $ 4,985 $ 4,235 $ 11,113 $ 9,763
Hardware ............................ 1,003 1,003 17,288 13,966
--------------------------- ----------------------------
Total revenues ...................... 5,988 5,238 28,401 23,729

Cost of revenues .................... 1,175 992 16,231 13,028
--------------------------- ----------------------------
Gross profit ........................ 4,813 4,246 12,170 10,701
--------------------------- ----------------------------
Research and development ............ 1,633 1,633 4,470 4,470
Sales and marketing ................. 1,172 1,172 3,300 3,300
General and administrative .......... 911 911 2,894 2,894
Depreciation and amortization ....... 364 364 1,050 1,050
Compensation related to stock options 135 135 306 306
--------------------------- ----------------------------
Operating income (loss).............. 598 31 150 (1,319)
Other (income) expense:
Interest (income) expense, net ...... (573) (573) (463) (463)
--------------------------- ----------------------------
Net income before income taxes ...... 1,171 604 613 (856)
Provision for income taxes .......... 74 74 74 74
--------------------------- ----------------------------
Net income (loss) ................... $ 1,097 $ 530 $ 539 ($ 930)
=========================== ============================
</TABLE>

Notes to Quarterly Restatements (in thousands):

License and service revenues decreased due to a multiple element contract
not meeting revenue recognition criteria under SOP 97-2. This amount was
reclassified to deferred revenue pending the establishment of vendor-specific
objective evidence of fair value or the completion of the previously undelivered
elements. On March 31, 2000 Ravisent delivered the previously undelivered
element under the contract. Pursuant to SOP 97-2, beginning April 1, 2000 and
ending December 31, 2000, the Company is amortizing the previously deferred
revenue over the remaining term of post-contract customer support. For the
quarter and nine months ended September 30, 2000, the Company recognized $450
and $900, respectively, of the previously deferred revenue.

Hardware revenue decreased due to two sales transactions, which were deemed
to be a return of inventory and a consignment sale. Gross profit of $255 related
to the return of inventory was recognized in the fourth quarter ended December
31, 1999 as the sale was completed to the end users. The remaining amount
related to the consignment sale will be recognized as those undelivered units
ship to the ultimate end users. Through September 30, 2000 no units have
shipped.

12
<PAGE>

ITEM 2:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion of the financial condition and results of
operations of RAVISENT should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included elsewhere
in this report. The information herein contains forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve a number of risks and uncertainties. A number of factors could cause our
actual results, performance and achievements or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. These factors, as
discussed below, see Risk Factors, and in our Annual Report on Form 10K filed on
March 31, 2000, include, but are not limited to, the competitive environment in
the personal computer, consumer electronics and Internet appliance industries in
general and our specific market areas; changes in prevailing interest rates and
the availability of terms of financing to fund the anticipated growth of our
business; inflation; changes in costs of goods and services; our inability to
protect our intellectual property; economic conditions in general and in our
specific market areas; demographic changes; changes in or failure to comply with
foreign, federal, state and/or local government regulations; claims for damages
asserted against us; changes in operating strategy or development plans; the
ability to attract and retain qualified personnel; changes in our acquisition
and capital expenditure plans; and other factors referenced herein. In addition,
such forward looking statements are necessarily dependent upon assumptions,
estimates and dates that may be incorrect or imprecise and involve known and
unknown risks, uncertainties and other factors. Accordingly, any forward looking
statements included herein do not purport to be predictions of future events or
circumstances and may not be realized. Forward looking statements can be
identified by, among other things, the use of forward looking terminology such
as "believes," "expects," "may," "will," "should," "seeks," "pro forma,"
"anticipates," or "intends," or the negative of any thereof, or other variations
thereon or comparable terminology, or by discussions of strategy or intentions.
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward looking statements. We disclaim any obligations
to update any such factors or to publicly announce the results of any revisions
to any of the forward looking statements contained herein to reflect future
events or developments.

Overview

We design, develop, license and market innovative modular software solutions
that enable digital video and audio stream management in personal computer
systems, consumer electronics devices, and Internet appliances. We also license
supporting hardware designs to selected customers and provide customization
services and customer support. Our solutions enable decoding and encoding of
multimedia formats such as DVD, DBS/DVB and HDTV on personal computer and
consumer electronics platforms as well as web browsing and email solutions on
Internet appliance platforms. Our digital solutions incorporate industry
standards for video and audio compression and are independent of operating
systems and silicon components.

Our customers consist primarily of personal computer, consumer electronics,
and Internet appliance manufacturers and distributors. In addition, we supply
our software solutions and hardware designs to selected peripherals providers
and semiconductor manufacturers. We anticipate that an increasing percentage of
revenues will be derived from consumer electronics, Internet appliances and
semiconductor manufacturers. Approximately $3.8 million or 89% of our third
quarter 2000 revenues were from license and services. Revenues from personal
computer and peripheral manufacturers were derived primarily from Software
CineMaster 99, Hardware CineMaster and our Internet appliance device. In March
2000, we introduced CineMaster 2000, which included encoder functionality.
License revenues consist of fees paid on a per unit basis, or sometimes with new
customers in advance, each time a manufacturer ships a product that incorporates
our software solutions or software with supporting hardware designs. Services
revenues consist of engineering fees from consumer electronics, personal
computer, Internet appliance, peripheral and

13
<PAGE>

semiconductor manufacturers for custom engineering services. Services are
generally billed on either a time and material basis or on a project or contract
basis.

By entering into manufacturing and license agreements with third parties
under which we will no longer manufacture Hardware CineMaster, we are
transforming our business model from a hardware revenue base to a license
revenue base. Once the transition to a licensing business model is completed, we
will receive either a per unit license fee or a flat fee on all future sales of
Hardware CineMaster and future versions of the CineMaster product. In the
future, we expect that most of our revenues will be derived from licenses of our
software and hardware designs. Largely as a result of this change, we will
recognize lower revenues in 2000 than in 1999, which we expect to be accompanied
by a decrease in our cost of revenues.

Currently, our revenues are comprised of hardware revenues, license
revenues and services revenues. Hardware revenues, consisting primarily of
direct sales of hardware subsystems to personal computer and peripherals
manufacturers and Internet appliances, have represented most of our total
revenues in the past but are expected to be nominal in the future. During the
quarter ended September 30, 2000, hardware revenues included sales of Hardware
CineMaster products and Internet appliances. In the quarter ended September 30,
2000, revenue generated by the sale of our hardware products was approximately
$0.5 million.

License revenues consist of fees paid on a per unit basis each time a
manufacturer ships a product that incorporates our software solutions or
software with supporting hardware designs. Services revenues consist of
engineering fees from consumer electronics, personal computer, Internet
appliance, peripherals and semiconductor manufacturers for custom engineering
services. Services are generally billed on either a time and material basis or
on a project or contract basis. License revenues are recognized when earned,
which is generally based on receiving notification from a licensee detailing the
shipments of products incorporating our technology. In a number of cases, this
occurs in the quarter following the sale of the licensee's product to its
customers. Our license agreements generally have a term of one year or less, and
typically require payment within 45 or 60 days after the end of the calendar
quarter in which the product is shipped. Some of our contracts may also require
payment of an up-front license fee. License fees paid in advance, with no
further future commitment, are recognized in the period that the license
agreement is signed, the technology is delivered and accepted, and
collectibility is probable.

The amount and timing of some fixed fees could cause our operating results
to vary significantly from period to period due to the timing and number of
agreements, as well as the timing of the recognition of the associated revenue.
In cases where a fixed or lump sum license fee is associated with the delivery
of multiple elements, and vendor-specific objective evidence of fair value
cannot be established for the individual elements, the entire fee from the
arrangement is deferred until the earlier of the establishment of
vendor-specific objective evidence of fair value or the delivery of all the
elements of the arrangement. In cases where a license grants a customer
unspecified upgrade rights, the fixed or lump sum license fee is deferred and
recognized ratably over the term of the arrangement. Billed amounts due from the
customers in excess of revenue recognized are recorded as deferred revenue.
Services revenues are recognized upon delivery of the service in the case of
time and material contracts or on a percentage completion basis in the case of
project-based contracts. Hardware product sales are recognized upon shipment of
the product to the manufacturer or end user.

In April 1999, we completed a financing agreement in which we issued
convertible securities to an affiliate of Intel of $4.7 million and entered into
a license agreement covering certain Intel technology.

In November 1999, we acquired Teknema, Inc. ("Teknema"), an Internet
technology company dedicated to developing software and hardware designs, for an
aggregate of approximately $16.0 million in cash, stock and stock options. The
acquisition was recorded under the purchase method of accounting. In connection
with the acquisition, we expensed $1.8 million of the purchase price as acquired
in-process research and development. Goodwill and other intangible assets of
$16.2 million recorded in the acquisition are being amortized over a period of
four years. Teknema sold Internet appliance software and hardware technology
through intellectual property licenses and agreements with

14
<PAGE>

Internet service providers.

On August 11, 2000, the Company completed the acquisition of all of the
outstanding capital stock of Cinax Designs Inc. ("Cinax"). Under the terms of
the agreement, the Company paid $3.5 million in cash, issued 178,262 shares of
the Company's common stock, and 646,734 shares of non-voting exchangeable
preferred stock. Including the associated estimated acquisition expenses, the
Cinax acquisition is valued at approximately $7.4 million, although $2.8 million
is contingent upon the former Cinax employees becoming employed with the
Company. Based in Vancouver, British Columbia, Cinax is a leading provider of
digital video technology and tools. Cinax products include a suite of authoring,
editing and encryption tools used by clients in the Internet, multimedia and
consumer electronics industries worldwide. Cinax's flagship product, WinVCR,
enables computer users to record real-time MPEG video straight to their hard
drives. The acquisition was recorded under the purchase method of accounting and
the estimated excess of the purchase price was recorded as goodwill and other
intangible assets and will be amortized over the estimated useful lives of 48
months. The historical results of operations of Cinax are not material to
RAVISENT.

15
<PAGE>

Results of Operations

Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999.

The following table sets forth, for the periods indicated, the amount (in
thousands) and percentage of total revenues represented by certain items
reflected in our consolidated statements of operations:

RAVISENT Technologies
Consolidated Statements of Operations Data
(unaudited)

<TABLE>
<CAPTION>
Quarter Ended September 30,
------------------------------------------------
2000 1999
---------------------- ---------------------
(as restated)
Percent Percent
of of
Amount Revenue Amount Revenue
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License and services ............................. $ 3,753 88.8% $ 4,235 80.9%
Hardware ......................................... 475 11.2% 1,003 19.1%
---------- ---------- --------- ---------

Total revenues ......................... 4,228 100.0% 5,238 100.0%

Cost of revenues ................................. 1,263 29.9% 992 18.9%
---------- ---------- --------- ---------

Gross profit ........................... 2,965 70.1% 4,246 81.1%

Research and development .................................... 2,686 63.5% 1,633 31.2%
Sales and marketing ......................................... 4,298 101.6% 1,172 22.4%
General and administrative .................................. 2,182 51.6% 911 17.4%
Depreciation and amortization ............................... 1,489 35.2% 364 6.9%
Compensation related to stock options ....................... 1,691 40.0% 135 2.6%
Acquired in-process research and development ................ 1,373 32.5% -- --
---------- ---------- --------- ---------

Operating income (loss) ................. (10,754) (254.3)% 31 .6%
Other (income) expense:
Interest (income) expense, net ................... (433) (10.2)% (573) (10.9)%
---------- ---------- --------- ---------

Income (loss) before income taxes ........................... (10,321) (244.1)% 604 11.5%
Provision for income taxes ....................... 7 .2% 74 1.4%
---------- ---------- --------- ---------

Net income (loss) before accretion of discount on mandatory
redeemable preferred stock ................................ (10,328) (244.3)% 530 10.1%

Accretion of discount on mandatory redeemable preferred stock -- -- 94 1.8%
---------- ---------- --------- ---------
Net income (loss) attributable to common stockholders ....... ($10,328) (244.3)% $ 436 8.3%
=========== ========== ========== =========
</TABLE>

16
<PAGE>

Revenues. Total revenues decreased 19% from $5.2 million for the quarter ended
September 30, 1999 to $4.2 million for the quarter ended September 30, 2000.
License and services revenue decreased 11% from $4.2 million to $3.8 million for
the quarter ended September 30, 2000, due primarily to a renegotiated agreement
with a major customer which was partially offset by an increase in the Company's
other software customers. Hardware revenues decreased 53% from $1.0 million for
the quarter ended September 30, 1999 to $0.5 million for the quarter ended
September 30, 2000, the decrease was attributable to our continued movement
towards the change in business model in which we will license our software and
our hardware designs rather than selling finished goods and components and
recording hardware revenue.

Our revenues are concentrated among a few customers. In the quarter ended
September 30, 2000 and September 30, 1999, two customers accounted for 41% and
40% of our revenues, respectively. While we believe that the number of customers
incorporating our technology into their products will grow, we expect that a
significant portion of revenue will continue to be concentrated among a
relatively small number of customers for the foreseeable future. The revenues
from particular customers may vary widely from period to period depending on the
addition of new contracts and the volumes and prices at which licensees sell
RAVISENT-enabled products to end users in any given period.

We sell our products directly to personal computer, consumer electronics,
and Internet appliance manufacturers in North America, Europe, South America and
the Pacific Rim. In the third quarter of 2000 companies based in the Pacific Rim
and North America accounted for a majority of our revenues. Sales outside of the
United States have been primarily through U.S. manufacturers that distribute
their products to end users overseas.

Our revenues are derived from primarily three product lines. In the quarter
ended September 30, 2000 our personal computer software and hardware, consumer
electronics software, and Internet appliance software and hardware revenues were
62%, 8% and 30% respectively.

Cost of Revenues. Cost of revenues consist primarily of costs of hardware
components sold to manufacturing firms, and license fees paid to third parties
for technologies incorporated into our products, including Dolby Digital
technology. Cost of revenues increased 27% from $1.0 million for the quarter
ended September 30, 1999 to $1.3 million for the quarter ended September 30,
2000. The increase in cost of revenues was primarily due to increased cost
associated with royalties for Dolby Digital.

Gross Profit. Gross profit decreased from $4.2 million for the quarter ended
September 30, 1999 to $3.0 million for the quarter ended September 30, 2000, due
to lower license and services and hardware revenues. For the quarter ended
September 30, 2000, 89% of total revenue was derived from license and services
revenues, in comparison to 81% for the comparable quarter in 1999. As a
percentage of total revenues, gross profit decreased from 81% for the quarter
ended September 30, 1999 to 70% for the quarter ended September 30, 2000,
primarily as a result of increased hardware costs as well as increases in the
cost of Dolby.

Research and Development Expenses. Research and development expenses consist
primarily of engineering and related costs associated with the development of
new products, customization of existing products for customers, quality
assurance and testing. Research and development expenses increased 64%, from
$1.6 million for the quarter ended September 30, 1999, to $2.7 million for the
quarter ended September 30, 2000. As a percentage of total revenues, research
and development expenses increased from 31% to 64%. The increase in research and
development expenses in absolute dollars was due primarily to the acquisitions
of Teknema and Cinax, which added approximately $0.8 million and $0.2 million,
respectively, to the quarterly increase. The increase in research and
development expenses as a percentage of total revenues resulted from lower
quarterly revenue as well as an increase in research and development spending.

17
<PAGE>

quarter ended September 30, 2000. As a percentage of total revenues, sales and
marketing expenses increased from 22% to 102%. The largest portion of this
increase is due to funding of $2.4 million in marketing expenses in accordance
with the Company's American Trading S.A. Agreement. The remaining increase is
due to the building of the sales and marketing teams in the United States as
well as the impact of the acquisition of Teknema. The increase in sales and
marketing expenses as a percentage of total revenues resulted from both lower
quarterly revenues and increases in selling and marketing spending.

Amortization of Goodwill. We recorded amortization and depreciation of $1.5
million for the quarter ended September 30, 2000, compared to $0.4 million for
the quarter ended September 30, 1999. The increase primarily relates to the
goodwill recorded as part of the Cinax and Teknema acquisitions. See"--Acquired
In-Process Research and Development Expense."

Stock-based Compensation. In September 2000, we recorded $1.7 million of
amortization of deferred stock compensation in connection with stock options
granted to employees in 2000 and 1999. For the quarter ended September 30, 2000,
stock-based compensation expense included $1.4 million of amortization expense
for a warrant issued in connection with the American Trading S.A. Agreement. The
warrant is fully vested and non-forfeitable on the date of grant, has a two-year
term, and contains certain exercise restrictions as described in the warrant
agreement. The Company has recorded the estimated fair value of the warrant of
$5.6 million as prepaid distribution rights fee and additional paid-in capital
and is amortizing the estimated fair value over the shorter of the contract term
or the period benefited. In the third quarter, we granted 10,000 stock options
at less than fair value to certain employees, which we will amortize the $0.1
million of deferred stock compensation as non-cash compensation expense over the
vesting period of the options of 24 months.

18
<PAGE>

Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999

RAVISENT Technologies
Consolidated Statement of Operations Data
(unaudited)

<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------
2000 1999
------------------------ -------------------------
(as restated)
Percent Percent
of of
Amount Revenue Amount Revenue
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues:
License and services ............................. $ 9,973 67.5% $ 9,763 41.1%
Hardware ......................................... 4,811 32.5% 13,966 58.9%
--------- -------- -------- --------
Total revenues ......................... 14,784 100% 23,729 100%

Cost of revenues ................................. 7,247 49.0% 13,028 54.9%
--------- -------- -------- --------

Gross profit ........................... 7,537 51.0% 10,701 45.1%

Research and development .................................... 7,799 52.7% 4,470 18.8%
Sales and marketing ......................................... 8,836 59.8% 3,300 13.9%
General and administrative .................................. 7,840 53.0% 2,894 12.2%
Depreciation and amortization ............................... 4,230 28.6% 1,050 4.4%
Compensation related to stock options ....................... 2,451 16.6% 306 1.3%
Acquired in-process research and development ................ 1,373 9.3% -- --
--------- -------- -------- --------

Operating loss.......................... (24,992) (169.0%) (1,319) (5.5%)
Other (income) expense:
Interest (income) expense, net ................... (1,647) (11.1)% (463) (1.9)%
--------- -------- -------- --------
Loss before income taxes..................................... (23,345) (157.9%) (856) (3.6%)
Provision for income taxes ....................... 44 .3% 74 .3%
--------- -------- -------- --------
Net loss before accretion of discount on mandatory
redeemable preferred stock ............................... (23,389) (158.2%) (930) (3.9%)

Accretion of discount on mandatory redeemable preferred stock -- -- 660 2.8%
--------- -------- -------- --------

Net loss attributable to common stockholders................. ($23,389) (158.2%) ($1,590) (6.7%)
========= ======== ======== =======
</TABLE>

19
<PAGE>

Revenues. Total revenues decreased 38% from $23.7 million for the nine month
ended September 30, 1999 to $14.8 million for the nine months ended September
30, 2000 . License and services revenue increased 2% from $9.8 million for the
nine months September 30, 1999 to $10.0 million for the nine months ended
September 30, 2000. Hardware revenues decreased 66% from $14.0 million for the
nine months ended September 30, 1999 to $4.8 million for the nine months ended
September 30, 2000. The decrease was attributable to our continued movement
towards the change in business model in which we will license our software and
our hardware designs rather than selling finished goods and components and
recording hardware revenue.

Our revenues are concentrated among a few customers. In the nine months
ended September 30, 2000 and September 30, 1999, two customers accounted for 34%
and 71% of our revenues, respectively. While we believe that the number of
customers incorporating our technology into their products will grow, we expect
that a significant portion of revenue will continue to be concentrated among a
relatively small number of customers for the foreseeable future. The revenues
from particular customers may vary widely from period to period depending on the
addition of new contracts and the volumes and prices at which licensees sell
RAVISENT-enabled products to end users in any given period.

We sell our products directly to personal computer, consumer electronics,
and Internet appliances manufacturers and distributors in North America, Europe,
South America and the Pacific Rim. For the nine months ended September 30, 2000
companies based in the Pacific Rim and North America accounted for a majority of
our revenues. Sales outside of the United States have been primarily through
U.S. manufacturers that distribute their products to end users overseas.

Our revenues are derived from primarily three product lines. In the nine
months ended September 30, 2000 our personal computer software and hardware,
consumer electronics software and Internet appliance software and hardware
revenues were 55%, 3%, and 42%, respectively.

Cost of Revenues. Cost of revenues consist primarily of costs of hardware
components sold to manufacturing firms, costs associated with shipment of
CineMaster 99 and license fees paid to third parties for technologies
incorporated into our products, including Dolby Digital technology. Cost of
revenues decreased 44% from $13.0 million for the nine months ended September
30, 1999 to $7.2 million for the nine months ended September 30, 2000. The
decrease in cost of revenues was primarily due to declining hardware business.

Gross Profit. Gross profit decreased from $10.7 million for the nine months
ended September 30, 1999 to $7.5 million for the nine months ended September 30,
2000, primarily due to lower hardware revenues. For the nine months ended
September 30, 2000, 68% of total revenue was derived from license and services
revenues, in comparison to 41% for the comparable nine months in 1999. In
connection with the changes in our business model, the gross profit percentage
for license and services revenues is much higher compared to the gross profit
percentage from hardware revenues. As a percentage of total revenues, gross
profit increased from 45% for the nine months ended September 30, 1999 to 51%
for the nine months ended September 30, 2000, primarily as a result of a higher
proportion of license revenues associated with our transition to a business
model based on licensing our technology rather than direct sales of hardware
products.

Research and Development Expenses. Research and development expenses consist
primarily of engineering and related costs associated with the development of
new products, customization of existing products for customers, quality
assurance and testing. Research and development expenses increased 74%, from
$4.5 million for the nine months ended September 30, 1999, to $7.8 million for
the nine months ended September 30, 2000. As a percentage of total revenues,
research and development expenses increased from 19% to 53%. The increase in
research and development expenses in absolute dollars was due primarily to the
acquisitions of Teknema and Cinax, which added approximately $2.0 million and
$0.2 million, respectively, to the nine month increase, as well as increased
headcount.

20
<PAGE>

The increase in research and development expenses as a percentage of total
revenues resulted from lower quarterly revenues as well as increases in research
and development spending.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
salaries, travel expenses and costs associated with trade shows, advertising and
other marketing efforts, as well as technical support costs. Sales and marketing
expenses increased 168% from $3.3 million for the nine months ended September
30, 1999 to $8.8 million for the quarter ended September 30, 2000. As a
percentage of total revenues, sales and marketing expenses increased from 14% to
60%. A large portion of this increase is due to the funding of $2.4 million in
marketing expenses in accordance with the Company's American Trading S.A.
Agreement. Additionally, increases in staff expense related to the building of
sales and marketing teams in the United States contributed to the increase in
sales and marketing expense. The increase in sales and marketing expenses as a
percentage of total revenues resulted from both lower quarterly revenues and
increases in selling and marketing spending.

General and Administrative Expenses. General and administrative expenses consist
primarily of personnel and support costs for our finance, human resources,
information systems and other management departments. General and administrative
expenses increased 171% from $2.9 million for the nine months ended September
30, 1999 to $7.8 million for the nine months ended September 30, 2000. As a
percentage of total revenues, general and administrative expenses increased from
12% to 53%. In absolute dollars, the general and administrative expenses
increase was due to the acquisitions of Teknema and Cinax as well as additional
employees needed for added infrastructure since going public. Additionally,
higher legal and accounting expenses were incurred in connection with work
associated with a potential acquisition, additional activities in connection
with our year-end audit, and anticipated legal expenses in connection with our
class action legal proceedings. General and administrative expenses increased as
a percentage of total revenues due to increased general and administrative
spending as well as lower quarterly revenues.

Amortization of Goodwill. We recorded amortization and depreciation of $4.2
million for the nine months ended September 30, 2000, compared to $1.1 million
for the nine months ended September 30, 1999. The increase primarily relates to
the goodwill recorded as part of the Cinax and Teknema acquisition.
See"--Acquired In-Process Research and Development Expense."

Stock-based Compensation. Stock-based compensation for the nine months ended
September 2000 included a grant of options with an estimated fair value of $0.7
million to certain employees. This grant and the grants from 1999 are amortized
as non-cash compensation expense over the vesting periods of the options,
ranging from 18 to 48 months. Also included in this expense for the nine
months ended September 30, 2000 is a one-time charge for stock compensation of
$0.3 million to a former employee. Stock-based compensation expense also
included $1.4 million of amortization expense for the warrant issued in
connection with the American Trading S.A. Agreement. The warrant is fully vested
and non-forfeitable on the date of grant, has a two-year term, and contains
certain exercise restrictions as described in the warrant agreement. The Company
has recorded the estimated fair value of the warrant of $5.6 million as prepaid
distribution rights fee and additional paid-in capital and will amortize the
estimated fair value over the shorter of the contract term or the period
benefited.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

In August 2000, we completed the acquisition of Cinax, a company located in
Vancouver, British Columbia. The purchase price included $2.7 million in cash,
approximately 138,000 shares of common stock, and approximately 226,000 shares
of no par, non-voting exchangeable preferred stock of a subsidiary, having a
combined value of $1.6 million. Including the associated acquisition expenses of
$0.3 million and excluding contingent consideration of $2.8 million, the Cinax
acquisition purchase price is valued at approximately $4.8 million.

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The acquisition of Cinax was recorded under the purchase method of
accounting. A portion of the purchase price was allocated to in-process research
and development technology, which resulted in a charge of $1.4 million to our
operations in September 2000. The in-process research and development technology
was valued using the Income Approach, under which projected income and expenses
attributable to the purchased technology were identified, and potential income
streams were discounted using a 25% discount rate for risks, probabilities and
uncertainties, including the stage of development of the technology, viability
of target markets, and other factors.

The excess of the purchase price over the fair value of the net
identifiable assets and in-process research and development technology acquired
of $3.2 million has been recorded as goodwill and other intangible assets. This
amount is being amortized on a straight-line basis over four years.

As of the acquisition date, Cinax was conducting ongoing research and
development into new products in the form of two projects, including
enhancements to the existing products previously developed by Cinax. At the date
of acquisition, these projects had not reached technological feasibility and
there was no alternative future use for them. The two research and development
projects included:

WinVCR version 2. This product enables computer users to record real-time
MPEG video straight to their hard drives. The current upgrade includes a
substantial amount of new features such as better programmability as well as
faster, embedded encoding capabilities with MPEG-2. At the time of acquisition,
this development project was approximately 75% complete.

MediaLock. This product is designed for rights management of video
distribution over digital networks. This product is expected to allow content
producers to easily protect their copyrights prior to distribution given its
frame scrambling, playtime decryption and unique password system capabilities.
At the time of acquisition, this development project was approximately 50%
complete.

In November 1999, we completed the acquisition of Teknema, a company
located in Palo Alto, California and dedicated to developing software and
solutions for the emerging market for information appliances. The purchase price
included $2.5 million in cash, 266,169 shares of RAVISENT common stock and
537,582 options to acquire common stock with a combined value of $12.4 million
In connection with the acquisition, we incurred transaction costs of $0.9
million.

The acquisition of Teknema was recorded under the purchase method of
accounting. A portion of the purchase price was allocated to in-process research
and development technology, which resulted in a charge of $1.9 million to our
operations in December 1999. The in-process research and development technology
was valued using a combination of the Income Approach, Projected Earnings
Approach calculating EBIT as well as after-tax earnings from technology and a
cash flow model, under which projected income and expenses attributable to the
purchased technology were identified, and potential income streams were
discounted using a 30% discount rate for risks, probabilities and uncertainties,
including the stage of development of the technology, viability of target
markets, and other factors.

The excess of the purchase price over the fair value of the net
identifiable assets and in-process research and development technology acquired
of $ 16.2 million has been recorded as goodwill and other intangible assets.
This amount is being amortized on a straight-line basis over four years.

As of the acquisition date, Teknema was conducting ongoing research and
development into new products in the form of three projects, including
enhancements to the existing products previously developed by Teknema. At the
date of acquisition, these projects had not reached technological feasibility
and there was no alternative future use for them. The three research and
development projects included:

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Advance Set-Top Box/Technology. This product was a customized television
set-top box which incorporated an easy-to-use Web browser and electronic
mail ("e-mail") consumer application. This product was enhanced with secure
transaction smartcard application and JavaScript capabilities, as well as
V.90 modem and broadband capabilities. Subsequent enhancements included an
Internet integration platform, scripting and graphic capabilities of an
embedded Web browser. At the time of acquisition, the primary development
efforts were focused on developing a full-featured advanced set-top box
(and associated technology that can be licensed to third parties) that will
be a complete redesign of an existing Teknema product using a new operating
system, a new, faster processor and adding multimedia capabilities. Some of
the development efforts include developing or utilizing:

. Chat and messaging functions for its Internet Integration Platform;
. Network interfaces and LCD displays for its Internet Integration
Platform;
. Multimedia functions such as digital video and audio streaming and
decoding and bi-directional video communication capabilities;
. A faster processor, broadband network interface, video engine chip and
a POSIX-compliant operating system which provides native application
programming interfaces for the development of browser plug-ins; and

. A port for hardware expansion

At the time of acquisition, this development project was approximately 30%
complete. This project is still under development and is planned to be completed
in the next six months.

Telephony. Teknema was developing an expansion of its Internet appliance
platform for the Internet telephony market. The product would leverage its
current set-top box platform into a multimedia platform capable of offering
video, data and voice over the Internet for video conferencing-over-the-
Internet. At the time of acquisition, this development project was
approximately 50% complete. This product is still under development and is
planned to be completed in the next nine months.

Home & Industrial. Teknema was developing various products for the home
automation and consumer products market. Teknema was in the early stages of
developing a graphical, interactive control system for home appliances such
as televisions. In addition, Teknema was developing a DVD player with
Internet capabilities. At the time of acquisition, this development project
was approximately 15% complete. Prototypes of the DVD player were built
combining technology from our consumer electronics group. Current plans are
to incorporate this technology into the advanced set-top box designs and
next generation DVD designs over the next nine months.

In April 1998, we completed the acquisition of Viona, a company specializing
in the development of digital video technology. We paid $6.1 million in cash, of
which $2.6 million was paid at closing, $2.1 million will be paid during 1999,
and $1.4 million will be paid in equal installments at the end of each of the
next three fiscal years, issued 1,204,820 shares of RAVISENT common stock valued
at $4.8 million and incurred transaction costs of $0.8 million. For accounting
purposes, payments due in future periods have been discounted.

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The acquisition of Viona was recorded under the purchase method of
accounting. A portion of the purchase price was allocated to in-process research
and development technology, which resulted in a charge of approximately $7.9
million to our operations in April 1998. The in-process research and development
technology was valued using a cash flow model, under which projected income and
expenses attributable to the purchased technology were identified, and potential
income streams were discounted using a 30%-35% discount rate for risks,
probabilities and uncertainties, including the stage of development of the
technology, viability of target markets, and other factors.

As of the acquisition date, Viona was conducting significant ongoing
research and development into five new software and hardware products including
enhancements to the existing digital video and audio system solutions previously
developed by us. At the date of acquisition, these projects had not reached
technological feasibility and there was no alternative future use for them. The
five research and development projects included:

CineMaster LC Hardware DVD Decoder, a single circuit board or card that can
be added to a personal computer to allow the personal computer to process
digital video signals. At the time of the acquisition, Viona was conducting
research and development to integrate this product into a single chip-based
design in an effort to reduce manufacturing costs and to improve playback
performance quality. This research and development project had completed only
alpha testing and was approximately 80% complete at the date of acquisition.
Viona had incurred approximately $117,000 of research and development expense
and estimated that $35,000 would be required to complete the development of the
project. Development was completed during 1998.

CE DVD Set-top Player/Portable Player, a DVD playback set-top reference
design for equipment manufacturers which was expected to provide full DVD
playback capabilities such as fast forward, rewinding, multi-language and
surround sound audio. At the time of the acquisition, this project had not yet
completed alpha testing and there was significant uncertainty of completion. We
estimated that the project was approximately 5% complete. Viona had incurred
approximately $30,000 of research and development expense and estimated that
$500,000 would be required to complete the development of the project. Several
consumer electronics manufactures are now shipping products (both set-top and
portable) based upon this completed development effort. The development team has
moved on porting this technology to the next generation of DVD hardware designs
for our customers.

DVD Software Encoder, a software solution to enable the processing of
digital video signals which is designed to eliminate the need for a DVD encoder
chip or circuit board by utilizing software to record DVD and video streams on a
personal computer. At the time of the acquisition, this project had not yet
completed alpha testing and there was significant uncertainty of completion. We
estimated that the project was approximately 40% complete. Viona had incurred
approximately $121,000 of research and development expense and estimated that
$203,000 would be required to complete the development of the project. This core
technology was completed in the second quarter of 2000 and was released in
RAVISENT'S CinePlayer(TM) DVR product for use by PC OEMs and IHVs.

HDTV Hardware Decoder, a circuit board or card that could enable personal
computers to process HDTV signals. At the time of the acquisition, this project
had not yet completed alpha testing and there was significant uncertainty of
completion. We estimated that the project was approximately 35% complete. Viona
had incurred approximately $63,000 of research and development expense and
estimated that $111,000 would be required to complete the development of the
project. This effort was re-targeted to provide HDTV tuner support for the HDTV
Software Decoder development effort. This development effort was completed by
the end of 1999 and the technology integrated into the HDTV Software Decoder
project and our partner's HDTV tuner hardware and software driver
implementations.

HDTV Software Decoder, a software solution designed to allow a personal
computer to process HDTV signals without the need for a hardware solution. At
the time of the acquisition, this project had not yet completed alpha testing
and there was significant uncertainty of completion. We estimated that the
project was approximately 15% complete. Viona had incurred approximately $15,000
of research and development expense and estimated that $150,000 would be

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required to complete the development of the project. Development was completed
in the second quarter of 2000 and released to a customer in a development kit
form. This HDTV development kit offers full software-based audio/video decoding
and data extraction.

The efforts required to develop the acquired in-process technology into
commercially viable products principally relate to the completion of all
planning, designing and testing activities that are necessary to establish that
the products can meet their design requirements, including function, features
and technical performance requirements.

We based our determination of the acquired in-process technology allocation
on recently issued guidance by the Securities and Exchange Commission and
considered such factors as degree of completion, technological uncertainties,
costs incurred and projected costs to complete. Acquired in-process technology
projects continue to progress, in all material respects, consistent with
management's original assumptions used to value the acquired in-process
technology.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the
issuance and sale of debt and equity securities to investors including our
initial public offering which was completed July 16, 1999. As of September 30,
2000 we had approximately $21.5 million in cash and cash equivalents.

Net cash used in operating activities for the nine months ended September
30, 2000 was $23.2 million, compared to cash used in operating activities of
$4.2 million for the nine months ended September 30,1999. Cash used in operating
activities was primarily the result of net losses, adjusted for non-cash items,
including non-cash compensation expense.

Net cash used in investing activities for the nine months ended September
30, 2000 was $4.0 million, compared to cash used in investing activities of $1.6
million for the nine months ended September 30, 1999. Cash used in investing
activities for the nine months ended September 30, 2000 consists primarily of
the acquisition of Cinax and the expansion of our facilities.

Net cash provided by financing activities for the nine months ended
September 30, 2000 was $0.6 million, compared to cash provided by financing
activities of $63.5 million for the nine months ended September 30, 1999. Cash
provided by financing activities for the nine months ended September 30, 2000
was primarily attributable to the net proceeds from stock option and warrant
exercises, and the payment of the balance due on a note receivable for the
purchase of equity securities of the Company. Cash provided by financing
activities for the nine months ended September 30, 1999 was primarily
attributable to net proceeds from the issuance of debt and equity securities to
investors.

As of September 30, 2000, our principal commitments consisted of
obligations outstanding under a distribution rights agreement, equipment and
facilities leases and notes payable to partially fund our operations and capital
purchases. The equipment leasing arrangements consist primarily of paying rental
fees to third party leasing providers at interest rates between 15% to 18% that
maintain title to the leased equipment. In most cases, there are no obligations
for us to purchase the equipment at the end of the term. Although we have no
material commitments for capital expenditures, we anticipate an increase in our
capital expenditures consistent with anticipated growth in operations,
infrastructure and personnel. In addition, we have approximately $0.5 million at
September 30, 2000 of payments due to the former owners of Viona. This amount is
payable during the fourth quarter of 2000.

In June 2000, the Company entered into a one-year distribution rights agreement
with ATSA for distribution of the Company's Internet television set-top box
product in Brazil. Under the terms of the agreement the Company is obligated to
share in the cost of joint marketing initiatives totaling $3.4 million. For the
three and nine months ended September 30, 2000, the Company paid $2.4 million of
the joint marketing initiatives pursuant to the terms of the agreement, which
are included in sales and marketing expense in the Company's consolidated
statements of operations. The remaining $1.0 million is expected to be paid to
ATSA and expensed in the quarter ending December 31, 2000.

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increases to the minimum annual rent of approximately $12,000 per year. In
September 2000, the Company vacated its former Palo Alto and San Jose offices.

In March 2000, the Company entered into an 84-month operating lease for
its corporate office facilities in Malvern, Pennsylvania, effective September 1,
2000. The lease provides for minimum annual rent of approximately $660,000,
payable in monthly installments of approximately $55,000 plus operating expenses
of approximately $30,000, totaling approximately $85,000 monthly. The lease
provides for annual increases to the minimum annual rent of approximately
$20,000 per year. The Company vacated its former Malvern facility during the
third quarter of 2000.

As of September 30, 2000, we had a $5.0 million line of credit with Silicon
Valley Bank. Under the terms of the line of credit, borrowings are subject to a
percentage of "eligible" accounts receivable, as defined in the credit
agreement, and bears interest at the bank's prime rate (9.5% at September 30,
2000).

At September 30, 2000, no borrowings against this line of credit were
outstanding and $2.4 million was available under the line of credit. This line
of credit expires in June 2001. Silicon Valley Bank has senior security
interest in substantially all of our assets. We are required to comply with a
quarterly tangible net worth covenant, as defined in the loan and security
agreement. On September 30, 2000 the Company was in compliance with all debt
covenants.

We believe that our current cash, cash equivalents balance and cash
anticipated to be provided by operations, if any, together with borrowings
available under our line of credit, will be adequate to meet our cash needs for
at least the next twelve months.

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and sell such products in North
America, Asia and Europe. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all sales are currently made in U.S. dollars,
a strengthening of the dollar could make our products less competitive in
foreign markets. We do not use derivative instruments to hedge our foreign
exchange risk. Our interest income is sensitive to changes in the general level
of U.S. interest rates, particularly since the majority of our investments are
in short-term instruments. Due to the nature of our short-term investments, we
have concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Our business and the value of our shares is subject to numerous risks. Some
of these risks are described above and certain additional risks are described
below:

RISKS RELATED TO RAVISENT

WE HAVE A LIMITED OPERATING HISTORY AND OUR HISTORICAL FINANCIAL INFORMATION IS
OF LIMITED VALUE IN PROJECTING OUR FUTURE OPERATING RESULTS OR EVALUATING OUR
OPERATING HISTORY

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As a result of our relatively brief operating history, we believe that
comparing different periods of our operating results is not meaningful and you
should not rely on the results for any period as an indication of our future
performance. In addition at some point in the future, fluctuations in our
operating results may cause us to perform below the expectations of public
market analysts and investors. If our results were to fall below market
expectations, the price of our common stock may fall significantly. Our limited
operating results have varied widely in the past, and we expect that they will
continue to vary significantly from quarter-to-quarter as we attempt to
establish our products in the market.

YOU SHOULD EXPECT OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE IN FUTURE PERIODS
AND THEY MAY FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE

Our revenues and operating results will vary significantly from quarter-to-
quarter due to a number of factors, including:

. variations in demand for our products and services, which are relatively
few in number;

. the timing of sales of our products and services and the timing of new
releases of personal computer systems, consumer electronics devices and
semiconductors that incorporate our products;

. delays in introducing our products and services;

. changes in our pricing policies or the pricing policies of our
competitors;

. the timing and accuracy of royalty reports received from our customers,
which we have to date not audited;

. the timing of large contracts that materially affect our operating
results in a given quarter;

. changes in the usage of digital media;

. our ability to develop and attain market acceptance of enhancements to
our products;

. new product introductions by competitors;

. the mix of license, services and hardware revenues;

. unanticipated customer demands which impact on our ability to deliver
our products and ultimately recognize revenue;

. the mix of domestic and international sales;

. costs related to acquisitions of technologies or businesses;

. our ability to attract, integrate, train, retain and motivate a

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substantial number of sales and marketing, research and development,
administrative and product management personnel;

. our ability to expand our operations; and

. global economic conditions as well as those specific to personal
computer, consumer electronics, peripherals and semiconductor
manufacturers and other providers of digital video and audio stream
management solutions.

We plan to significantly increase our operating expenses to expand our
sales and marketing operations, including opening new sales offices and adding
additional sales professionals, broaden our product management and customer
support capabilities and fund greater levels of research and development,
particularly in the consumer electronics markets. We determine our operating
expenses largely on the basis of anticipated revenue trends and a high
percentage of our expenses are fixed in the short term and are significant. As a
result, any delay in generating or recognizing revenue could cause significant
variations in our operating results from quarter-to-quarter and could result in
substantial operating losses.

Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. In future quarters, our operating results may be below the
expectations of public market analysts and investors. In this event, the price
of our common stock may fall significantly. Since our license revenue is based
upon customer sales reports and we have never audited our customers, we may be
required to restate our recognized revenues or adjust our revenues for
subsequent periods, which could cause our stock price to drop.

WE HAVE NEVER BEEN PROFITABLE AND MAY NEVER ACHIEVE PROFITABLITIY IN THE FUTURE

We had a net operating loss of $10.3 million for the quarter ended
September 30, 2000. To date, we have not achieved profitability on an annual
basis, and revenues from our software and hardware design solutions may not
result in sufficient revenues to sustain profitability in any future period. In
addition, we cannot be certain that we can increase profitability, particularly
to the extent that we face price competition. We expect to significantly
increase our sales and marketing, product development, engineering and
administrative expenses. As a result, we will need to generate significant
revenues to sustain profitability.

INCREASING COMPETITION MAY CAUSE OUR PRICES TO DECLINE, WHICH WOULD HARM OUR
OPERATING RESULTS

We expect our prices for our digital entertainment products to decline over
the next few years. We expect to face increased competition in markets where we
license our digital entertainment products, which will make it more difficult to
maintain our prices and profit margins even if our sales volumes increase. If
anticipated increases in sales volume did not keep pace with anticipated pricing
pressures, our revenues would decline and our business could be harmed. Despite
our efforts to introduce enhancements to our products, we may not be successful
in maintaining our pricing.

OUR BUSINESS SIGNIFICANTLY DEPENDS UPON OUR CINEMASTER PRODUCTS, AND IT IS
UNCERTAIN WHETHER THE MARKET WILL CONTINUE TO ACCEPT THESE PRODUCTS

In the quarter ended September 30, 2000, we derived approximately 61% of
our license revenues from sales of devices incorporating our CineMaster
products. We expect that license revenues from our CineMaster products will
continue to account for a significant portion of our revenues for the
foreseeable future. In particular, our business will be harmed if our existing
manufacturing customers do not continue to incorporate our CineMaster products
or if we are unable to

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obtain new customers for our CineMaster products. In seeking market acceptance,
it may be difficult for our digital solutions to displace incumbent solutions
employed by manufacturers not currently licensing our CineMaster products.
Manufacturers that are using other solutions would need to invest in additional
training and development tools and convert software for existing hardware
solutions in order to change to a new digital solution. Accordingly, potential
customers may not accept our digital solutions, which could limit our growth
opportunities and harm our prospects.

SINCE MOST OF OUR REVENUE IS DERIVED FROM A SMALL NUMBER OF CUSTOMERS, PROBLEMS
THAT THOSE CUSTOMERS EXPERIENCE WILL DIRECTLY IMPACT OUR BUSINESS

As a result of our concentrated customer base, problems that our customers
experience could materially harm our business. These risks are beyond our
control. For example, because we do not control the business practices of our
customers, we do not influence the degree to which they promote our technology
or set the prices at which the products incorporating our technology are sold to
end users. Risks that may influence the success or failure of the personal
computer or consumer electronics manufacturers that are our customers include:

. the competition the manufacturer faces and the market acceptance of its
products;

. the engineering, marketing and management capabilities of the
manufacturer and the technical challenges unrelated to our technology
that it faces in developing its products;

. the financial and other resources of the manufacturer;

. new governmental regulations or changes in taxes or tariffs applicable
to the manufacturer; and

. the failure of third parties to develop and introduce content for
digital entertainment applications in a timely fashion.

The inability of our customers or us to successfully address any of these
risks could harm our business.

SINCE OUR CUSTOMERS HAVE NOT EXECUTED LONG-TERM CONTRACTS WITH US, OUR REVENUES
COULD DECLINE SIGNIFICANTLY WITH LITTLE OR NO NOTICE

Our agreements with our customers are typically of limited duration and do
not contain minimum purchase commitments or are terminable with little or no
notice. Rather than long-term contracts, we typically enter into licensing
agreements with one-year terms that automatically renew each subsequent year
unless either party receives a written cancellation. As a result, many of our
customers could elect not to renew these agreements and we could have little
warning of this election. Also, since our agreements with our customers do not
include minimum purchase requirements, the demand for our products is
unpredictable. As a result of competition or fluctuations in demand, we could be
required to reach an accommodation with our customers with respect to
contractual provisions such as price or delivery time in order to obtain
additional business and maintain our customer relationships. Any termination,
decrease in orders or election not to renew a contract by our principal
customers would harm our business.

WE DEPEND UPON TECHNOLOGY LICENSED FROM THIRD PARTIES, AND IF WE DO NOT MAINTAIN
THESE LICENSE ARRANGEMENTS, WE WILL NOT BE ABLE TO SHIP MANY OF OUR PRODUCTS AND
OUR BUSINESS WILL BE SERIOUSLY HARMED

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We license technology that is used in our products from third parties under
agreements with a limited duration and we may not be able to maintain these
license arrangements. If we fail to maintain these license arrangements, we
would not be able to ship many of our digital entertainment products and our
business would be seriously harmed. For example, we have a license agreement
with Dolby Laboratories Licensing Corporation for the audio format that is used
in all of our DVD-related products. Without this technology, we could not ship
product for DVD markets. In addition, we license encryption and decryption
software technology from Matsushita Electric, which must also be included in any
DVD products we ship. The license for the Dolby Digital technology is for a term
expiring at the expiration of the patent covered thereby with the furthest
expiration date from the date of the license. The license for the encryption and
decryption technology may be terminated by Matsushita at any time after the
giving of notice. We may not be able to renew either license. If we failed to
renew either of these licenses, we would not be able to ship products for the
DVD market, and we would accordingly lose a substantial amount of our revenue.

THE LOSS OF ANY OF OUR STRATEGIC RELATIONSHIPS WOULD MAKE IT MORE DIFFICULT TO
KEEP PACE WITH EVOLVING INDUSTRY STANDARDS AND TO DESIGN PRODUCTS THAT APPEAL TO
THE MARKETPLACE

We rely on strategic relationships, such as those with ATI Technologies
Inc., Cirrus Logic, Dolby Laboratories, Intel Corporation and
STMicroelectronics, Inc. to provide us with state of the art technology, assist
us in integrating our products with leading industry applications and help us
make use of economies of scale in manufacturing and distribution. Through our
interaction with our strategic partners, we gain valuable insights on evolving
industry standards and trends. For example, we may be able to learn about future
product lines in advance so that we can more efficiently design products that
our customers find valuable. However, we do not have written agreements with any
of our strategic partners that can ensure these relationships will continue for
a significant period of time. All of our agreements with these partners are
informal, and may be terminated by them at any time. The loss of any one of
these relationships could harm our business

DELAYS IN PROVIDING OUR PRODUCTS TO OUR CUSTOMERS MAY AFFECT HOW MUCH BUSINESS
WE RECEIVE

Our product development efforts may not be successful and we may encounter
significant delays in bringing our products to market. Since the product life
cycle in the personal computer, consumer electronics and Internet appliance
industries can be as short as six to twelve months or less, if our product
development efforts are not successful or are significantly delayed, our
business will be harmed. In the past, we have failed to deliver new products,
upgrades or customizations on time, including customization projects for DVD
products that are requested from time to time by our customers. In the future,
our efforts to remedy this situation may not be successful and we may lose
customers as a result. Delays in bringing to market new products, enhancements
to old products or interfaces between existing products and new models of
personal computers, consumer electronics or Internet appliance devices could be
exploited by our competitors. If we were to lose market share as a result of
lapses in our product management, our business would be harmed.

OUR BUSINESS MODEL DEPENDS UPON LICENSING OUR INTELLECTUAL PROPERTY, AND IF WE
FAIL TO PROTECT OUR PROPRIETARY RIGHTS, OUR BUSINESS COULD BE HARMED

Our ability to compete depends substantially upon our internally developed
technology. We have a comprehensive program for securing and protecting rights
in patentable inventions, trademarks, trade secrets and copyrightable materials.
If we are not successful in protecting our intellectual property, our business
could be substantially harmed.

Our pending patents may never be issued, and even if issued, may provide us
with little protection.

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We regard the protection of patentable inventions as important to our
future opportunities. We currently have seven U.S. patent applications pending
relating to our digital video and audio stream management technology. We also
have one issued patent and one patent pending application under the Patent
Cooperation Treaty. However, none of our technology is patented outside of the
United States nor do we currently have any international patent applications
pending. It is possible that:

. our pending patent applications may not result in the issuance of
patents;

. our patents may not be broad enough to protect our proprietary rights;

. any issued patent could be successfully challenged by one or more third
parties, which could result in our loss of the right to prevent others
from exploiting the inventions claimed in those patents;

. current and future competitors may independently develop similar
technology, duplicate our products or design around any of our patents;
and

. effective patent protection may not be available in every country in
which we do business.

We rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which are only of limited value.

We rely on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. We currently have
three pending trademark applications for the marks "RAVISENT," "RAVISENT
Technologies" and the RAVISENT logo. We also have an issued U.S. trademark for
the mark "CineMaster." We also have numerous other trademark applications
pending in the U.S. Patent and Trademark Office. None of our trademarks are yet
registered outside of the United States. Moreover, despite any precautions which
we have taken:

. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;

. other companies may claim common law trademark rights based upon state
or foreign law which precede our federal registration of such marks;

. current federal laws that prohibit software copying provide only limited
protection from software "pirates," and effective trademark, copyright
and trade secret protection may be unavailable or limited in certain
foreign countries;

. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming and we are unable to determine the extent
to which piracy of our products and trademarks may occur, particularly
overseas;

. we have provided our source code for our products to a few of our

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customers as part of our licensing arrangements with them and the
procedures and practices implemented under the terms of these licenses
may not be sufficient to prevent them from exploiting the source code;
and

. the tamper-resistant copy protection codes in our software have been
broken in the past and may not be successful in preventing unauthorized
use of our software in the future.

WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION OVER PROPRIETARY
RIGHTS

Intellectual property litigation is typical in our industry.

Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software and hardware in our industry may be
increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry
segments overlaps. Third parties may currently have, or may eventually be
issued, patents that would be infringed by our products or technology. We cannot
be certain that any of these third parties will not make a claim of infringement
against us with respect to our products and technology.

Any litigation, brought by others, or us could result in the expenditure of
significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement may
cause product shipment delays, require us to develop non-infringing technology
or require us to enter into royalty or license agreements even before the issue
of infringement has been decided on the merits. If any litigation were not to be
resolved in our favor, we could become subject to substantial damage claims and
be enjoined from the continued use of the technology at issue without a royalty
or license agreement. These royalty or license agreements, if required, might
not be available on acceptable terms, or at all, and could harm our business. If
a successful claim of infringement were made against us and we could not develop
non-infringing technology or license the infringed or similar technology on a
timely and cost-effective basis, our business could be significantly harmed.

We have received notices of claims that may result in litigation.

From time to time, we have received, and we expect to continue to receive,
notice of claims of infringement of other parties' proprietary rights. For
example:

. Our digital video stream management solutions comply with industry DVD
specifications, which incorporates technology known as MPEG-2 that governs
the process of storing a video input in digital form. We have received
notice from several of our largest customers which are personal computer
manufacturers, that a third party with a history of litigating its
proprietary rights and which has substantial financial resources has
alleged that aspects of MPEG-2 technology infringe upon patents held by the
third party. These customers may in the future seek compensation or
indemnification from us arising out of the third-party claims and may be
required to agree to indemnify them to secure future business or otherwise.
We do not have written agreements with these customers that limit our
liability to these customers should litigation ensue. Moreover, we may be
required to pay license fees in connection with the use of the third
party's technology in the future.

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. A group of companies mostly comprised of consumer electronics manufacturers
has formed a consortium known as MPEG-LA to enforce the proprietary rights
of other holders of patents covering essential aspects of MPEG-2 technology
that are incorporated into our products. MPEG-LA has notified a number of
personal computer manufacturers, including our customers, that patents
owned by members of the consortium are infringed by the personal computer
manufacturers in their distribution of products that incorporate the MPEG-2
technology. MPEG-LA has requested that these personal computer
manufacturers pay license fees for use of the technology covered by MPEG-LA
patents. These personal computer manufacturers may in the future seek
compensation or indemnification from us arising out of the MPEG-LA members'
claims, and we may be required to pay license fees in connection with the
use of MPEG-2 technology in the future.

. Another group of companies mostly comprised of consumer electronics
manufacturers has formed a consortium known as the DVD Patent Licensing
Program to enforce the proprietary rights of other holders of patents
covering essential aspects of DVD technology that are incorporated into our
products. The DVD Patent Licensing Program has notified us, as well as a
number of computer manufacturers and other companies manufacturing or
licensing DVD-related products, including our customers, that patents owned
by members of the consortium are infringed by the personal computer
manufacturers in their distribution of products that incorporate the DVD
technology. The DVD Patent Licensing Program has requested that these
personal computer manufacturers pay license fees for use of the technology
covered by DVD Patent Licensing Program patents. We may be required to pay
license fees in connection with the use of such DVD technology in the
future as a result of such claims. Further, a court could determine that we
infringe any such patents and we would be liable for resulting damages. In
addition, our customers who have been contacted by the DVD Patent Licensing
Program may in the future seek compensation or indemnification from us
arising out of the DVD Patent Licensing Program claims, and we may be
required to pay license fees on their behalf in connection with the use of
such DVD technology in the future.

. A third party has asserted that the parental control features of our
CineMaster products infringe patents held by the third party. A court could
determine that we did infringe these patents and we would be liable for
resulting damages.

Any of these notices could result in litigation, which would include all of
the risks discussed above.

WE MAY NOT BE ABLE TO PROFIT FROM GROWTH IN OUR BUSINESS IF WE ARE UNABLE TO
EFFECTIVELY MANAGE THE GROWTH

Our ability to successfully offer our products and services in rapidly
evolving markets requires an effective planning and management process. We have
limited experience in managing rapid growth. In the last several months, we have
added engineering, sales, marketing, administrative and other management
personnel. Our business will suffer dramatically if we fail to manage our
growth. On September 30, 2000, we had a total of 167 employees compared to a
total of 104 employees on September 30, 1999. Our growth so far has placed
strains on our managerial, financial and

33
<PAGE>

personnel resources. We expect these strains to continue in the future. The pace
of our expansion, together with the complexity of the technology involved in our
products, demands an unusual amount of focus upon the operational needs of our
customers for quality, reliability, timely delivery and post-installation field
support. Our existing licensees rely heavily on our technical expertise in
customizing our digital solutions to their new products. In addition,
relationships with new manufacturing customers generally require significant
engineering support. Therefore, any increases in adoption of our products by
existing or new customers will increase the strain on our resources, especially
our engineers. To reach our goals, we will need to continue hiring on a rapid
basis while, at the same time, investing in our infrastructure. We will also
need to increase the scale of our operations. We expect that we will also have
to expand our facilities, and we may face difficulties identifying and moving
into suitable office space. In addition, we will need to:

. successfully train, motivate and manage new employees;

. expand our sales and support organization;

. integrate new management and employees into our overall operations;

. adopt and staff an investor relations program; and

. continue to improve our financial and accounting systems.

We may not succeed in anticipating all of the changing demands that growth
will impose on our systems, procedures and structure. If we fail to effectively
manage our expansion, our results of operations will suffer.

WE ARE IN THE PROCESS OF CHANGING THE INTERNET APPLIANCE PORTION OF OUR BUSINESS
FROM SELLING HARDWARE TO LICENSING SOFTWARE AND SUPPORTING HARDWARE DESIGNS, AND
OUR REVENUES ARE EXPECTED TO DECLINE AS A RESULT

In November 1999, we acquired all of the capital stock of Teknema, Inc.,
which forms the basis for our Internet appliance division. Teknema's business
model was focused on selling hardware-based solutions. Following the
acquisition, we have begun changing the business model for our Internet
appliance division from selling hardware-based digital solutions to licensing
software-based digital solutions. This change requires us to adjust our business
processes and make additions to our engineering and marketing teams. In
addition, we expect that revenues from this division will be lower in 2000 than
in 1999 in part because it will no longer be selling hardware solutions.

You should consider the risks and challenges we may face in this area of
our business as a result of this change in business model, which include, among
others:

. increasing demand for Internet appliances and services;

. maintaining and increasing our base of Internet appliance manufacturers;

. competing effectively with existing and potential competitors; and

. developing further this relatively new and unproven business model.

We cannot be certain that this change in business strategy will be
successful or that we will successfully address these risks.

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<PAGE>

WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS OF OR INVESTMENTS IN OTHER
COMPANIES

We have very limited experience in acquiring or making investments in
companies, technologies or services. From time to time we have had discussions
with companies regarding our acquiring, or investing in, their businesses,
products or services. In he future, we may make acquisitions or investments in
other companies, products or technologies. Acquisitions in our industry are
particularly difficult to assess because of the rapidly changing technological
standards in our industry. If we make any acquisitions, we will be required to
assimilate the personnel, operations and products of the acquired businesses and
train, retain and motivate key personnel from the acquired businesses. However,
the key personnel of the acquired company may decide not to work for us.
Moreover, acquisitions may cause disruptions in our operations and divert
management's attention from day-to-day operations, which could impair our
relationships with our current employees, customers and strategic partners. We
may be unable to maintain uniform standards, controls, procedures and policies
if we fail in our efforts to assimilate acquired businesses that could make
management of our business very difficult.

WE ARE DEPENDENT UPON OUR KEY MANAGEMENT FOR OUR FUTURE SUCCESS, AND FEW OF OUR
MANAGERS ARE OBLIGATED TO STAY WITH US

Our success depends on the efforts and abilities of our senior management
and certain other key personnel, particularly technical personnel in our
engineering subsidiary in Germany. Many of our officers and key employees are
employed at will. In addition, Mr. Wilde, CEO, and the principal engineers in
our German subsidiary, Messrs. Sigmund, Horak and Ringelberg, are the only
employees upon whom we have obtained key man life insurance and we do not expect
to obtain life insurance on any of our other senior managers. If any of these or
other key employees left or was seriously injured and unable to work and we were
unable to find a qualified replacement, then our business could be harmed. We
have recently hired new managers and intend to continue hiring key management
personnel. We may not be able to successfully assimilate our recently hired
managers or to hire qualified key management personnel to replace them.

WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED EMPLOYEES, WHICH WOULD IMPAIR
OUR ABILITY TO GROW

We intend to hire a significant number of additional sales, support,
marketing, engineering and product management personnel in 2000 and beyond.
Competition for these individuals is intense, and we may not be able to attract,
assimilate or retain additional highly qualified personnel in the future. Hiring
qualified personnel, particularly sales, marketing, engineering and product
management personnel, is very competitive in our industry due to the limited
number of people available with the necessary technical skills and understanding
of the digital video and audio stream management industry. In addition, we are
headquartered in Malvern, Pennsylvania and we have significant operations in San
Jose, California. We have in the past and expect in the future to face
difficulties locating qualified personnel in these locations. We have had, and
expect to continue having greater difficulty attracting these personnel with
equity incentives as a public company than we did as a privately held company.

WE MAY ENCOUNTER SIGNIFICANT DIFFICULTIES IN INTEGRATING OUR NEWEST SUBSIDIARIES
THAT COULD RESULT IN UNEXPECTED FUTURE EXPENSES AND DIFFICULTIES IN FINANCIAL
REPORTING

In November 1999, we completed the acquisition of Teknema, Inc. and in
August 2000 we completed the acquisition of Cinax Designs Inc. However, we may
not be able to successfully integrate the companies. Combining our companies
requires, among other things, integrating our respective technologies,
coordinating our research and development and financial reporting efforts, and
continuously evaluating whether existing systems and procedures meet our growth
requirements, especially our financial and internal control systems and
management structure. Important aspects of the integration, such as improving
financial controls and reporting, are

35
<PAGE>

still in process and may not be completed smoothly or successfully. If we fail
to integrate these areas, we may be unable to maintain uniform standards,
procedures, controls and policies. Integrating operations such as engineering,
may require our management to dedicate resources that may temporarily distract
them from our day-to-day business, including from the development of new
products, which could result in delays in introducing these new products.
Coordinating geographically separated organizations with distinct cultures may
increase the difficulty of our integration. If we fail to successfully complete
the integration of Teknema's operations, our business could be harmed.

WE MAY BE SUBJECT TO PRODUCT RETURNS, PRODUCT LIABILITY CLAIMS AND REDUCED SALES
BECAUSE OF DEFECTS IN OUR PRODUCTS

Our products are very complex and frequently contain undetected errors. The
likelihood of errors is higher when a new product is introduced or when new
versions or enhancements are released. Errors may also arise as a result of
defects in the products into which our products are incorporated. Despite our
extensive quality assurance process, we have in the past shipped product
releases with some defects, and have discovered other errors in our products
after their commercial shipment. Despite our quality assurance process and that
of our customers, defects and errors may be found in new products or in new
versions or enhancements of existing products after commercial shipment has
begun. We may be required to devote significant financial resources and
personnel to correct any defects. Known or unknown errors or defects that affect
the operation of our products could result in the following, any of which could
harm our business:

. delay or loss of revenue;

. cancellation of customer contracts;

. diversion of development resources;

. damage to our reputation;

. failure of our products to achieve market acceptance;

. increased service and warranty costs; and

. litigation costs.

Although some of our licenses with customers contain provisions designed to
limit our exposure to potential product liability claims, these contractual
limitations on liability may not be enforceable. In addition, our product
liability insurance may not be adequate to cover our losses in the event of a
product liability claim resulting from defects in our products and may not be
available to us in the future.

SINCE OUR LICENSE REVENUE IS BASED UPON CUSTOMER SALES REPORTS AND WE HAVE NEVER
AUDITED OUR CUSTOMERS, WE MAY BE REQUIRED TO MAKE AN ADJUSTMENT TO OUR REVENUES
FOR SUBSEQUENT PERIODS, WHICH COULD CAUSE OUR STOCK PRICE TO DROP

We receive a license royalty for each personal computer, consumer
electronics device, Internet appliance or peripheral sold that contains our
products and a royalty for each silicon device sold by a semiconductor
manufacturer that incorporates our technology. In collecting these fees,
preparing our financial reports, projections and budgets and in directing our
sales efforts and product development, we rely on our customers to accurately
report the number of units sold. We have never undertaken an audit of any of our
customers to verify that their reported sales unit numbers were accurate. These
reports are subject to potential revision by these manufacturers. If any of our
customers revised

36
<PAGE>

their product sales reports, we might be required to adjust our revenues for
subsequent periods, which could harm our business and the price of our common
stock.

OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS SUCH AS LEGAL
UNCERTAINTY, TARIFFS AND TRADE BARRIERS AND POLITICAL AND ECONOMIC INSTABILITY

In the quarter ended September 30, 2000, we derived approximately 32% of
our revenues from sales to foreign companies, and we expect to derive an
increasing amount of our revenue from sales outside North America. We have
limited experience in marketing and distributing our products internationally.
In addition, there are many risks inherent in doing business on an international
basis, including, among others:

. legal uncertainty regarding liability;

. tariffs, trade barriers and other regulatory barriers;

. problems in collecting accounts receivable;

. political and economic instability;
. changes in diplomatic and trade relationships;

. seasonal reductions in business activity;

. potentially adverse tax consequences;

. the impact of recessions in economies outside the United States; and

. variance and unexpected changes in local laws and regulations.

Our licensees are subject to many of the risks described above with respect
to their manufacturing or end-user customers. Currently, all of our
international sales are denominated in U.S. dollars; therefore, a strengthening
of the dollar could make our products less competitive in foreign markets. We do
not use derivative instruments to hedge foreign exchange risk. In the future, we
may conduct sales in local currencies, in which case, changes in exchange rates
could adversely affect our operating results. In addition, if we conduct sales
in local currencies, we may engage in hedging activities, which may not be
successful and could expose us to additional risks.

IT MAY BE DIFFICULT TO RAISE NEEDED CAPITAL IN THE FUTURE, WHICH COULD
SIGNIFICANTLY HARM OUR BUSINESS

We may require substantial additional capital to finance our future growth
and fund our ongoing research and development activities beyond 2000. Our
capital requirements will depend on many factors, including:

. acceptance of and demand for our products;

. the number and timing of acquisitions;

. the costs of developing new products;

. the costs associated with our expansion; and

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<PAGE>

. the extent to which we invest in new technology and research and
development projects.

To the extent that the proceeds from our initial public offering are
exhausted, our existing sources of cash and cash flow from operations, if any,
are insufficient to fund our activities, we may need to raise additional funds.
If we issue additional stock to raise capital, your percentage ownership in
RAVISENT would be reduced. Additional financing may not be available when needed
and, if such financing is available, it may not be available on terms favorable
to us.

BECAUSE OF THEIR SIGNIFICANT STOCK OWNERSHIP, OUR OFFICERS AND DIRECTORS WILL BE
ABLE TO EXERT SIGNIFICANT CONTROL OVER OUR FUTURE DIRECTION

Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately twenty-five percent (25%) of our
outstanding common stock. These stockholders, if acting together, would be able
to significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions.

CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAKE CHANGES
OF CONTROL DIFFICULT EVEN IF THEY WOULD BE BENEFICIAL TO SHAREHOLDERS

The board of directors has the authority without any further vote or action
on the part of the stockholders to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if it is ever issued,
may have preference over and harm the rights of the holders of common stock.
Although the issuance of this preferred stock will provide us with flexibility
in connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority of
our outstanding voting stock. We currently have no plans to issue preferred
stock.

Our certificate of incorporation and by-laws include provisions that may
have the effect of deterring an unsolicited offer to purchase our stock. These
provisions, coupled with the provisions of the Delaware General Corporation Law,
may delay or impede a merger, tender offer or proxy contest involving RAVISENT.
Furthermore, our board of directors is divided into three classes, only one of
which is elected each year. Directors are only capable of being removed by the
affirmative vote of 66 2/3% or greater of all classes of voting stock. These
factors may further delay or prevent a change of control of RAVISENT.

RISKS RELATED TO OUR INDUSTRY

Our revenues are dependent upon acceptance of products that incorporate our
digital entertainment technology in the personal computer, consumer electronics
and Internet appliance industries.

We rely on the personal computer, consumer electronics and Internet
appliance industries, and these industries have risks and uncertainties that are
beyond our control.

The personal computer, consumer electronics and Internet appliance
industries are presently the only markets for our digital entertainment
solutions. As a result, our results of operations will depend almost entirely on
consumer acceptance of the products that incorporate our technology. Our
dependence on these industries involves several risks and uncertainties,
including:

. whether semiconductor manufacturers developing silicon devices for personal
computer, consumer electronics and Internet appliance manufacturers will
design our digital solutions into their devices and successfully introduce

38
<PAGE>

these devices;

. changes in consumer requirements and preferences;

. the small number of product manufacturers in these industries and the short
product life cycles which can be six months or less;

. the difficulty in predicting the level of consumer interest in and
acceptance of many digital product applications, such as handheld personal
computers and set-top boxes, which have only recently been introduced to
the market; and

. the current lack of open industry standards for software and hardware in
the consumer electronics and Internet appliance industries.

We currently depend upon demand for digital entertainment products, which
may not be sustained.

Our success currently depends upon continued demand for digital
entertainment products in the personal computer, consumer electronics and
Internet appliance markets. The majority of our revenues for the quarter ended
September 30, 2000 resulted from sales of digital entertainment products. In
addition to the risks inherent in the personal computer, consumer electronics
and Internet appliance industries, the market for digital entertainment products
also contains risk and uncertainties, including:

. the developing and marketing of content by third party content providers
for end-user systems such as DVD players and desktop computers in a format
compatible with our digital solutions;

. the sustaining and developing of the demand for DVD players or other
existing digital entertainment applications; and

. the potential for declining demand for DVD solutions in lower price
personal computers.

Factors negatively affecting the personal computer, consumer electronics or
Internet appliance industries in general or the DVD market in particular could
harm our business. Moreover, to the extent that the performance, functionality,
price and power characteristics of our digital solutions fail to satisfy
customers who have a critical need for specific digital applications, the use of
our digital solutions could become confined to a limited segment of these
industries.

COMPETITION IN OUR MARKETS IS LIKELY TO CONTINUE TO INCREASE AND COULD HARM OUR
BUSINESS

We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing and which are characterized by short product life cycles
and price erosion. Our principal competitors in the software-based digital
solution market are Mediamatics, Inc. (a subsidiary of National Semiconductor,
Inc.), Zoran Corporation, InterVideo Inc, and RealNetworks, Inc. Our principal
competitors in the hardware-based digital solution market are Sigma Designs,
Inc., CyberDrive and we also compete against several smaller companies. We also
compete with the internal research and development departments of other software
companies as well as those of personal computer, peripherals, consumer
electronics and semiconductor manufacturers who are in the market for specific
digital video or audio software applications. Numerous other major personal
computer manufacturers, software developers and other

39
<PAGE>

companies are focusing significant resources on developing and marketing
products and services that will compete with our CineMaster products. At least
two semiconductor manufacturers, including C-Cube Microsystems and Zoran, are
positioning their products as offering hardware-based digital video and audio
management capabilities and marketing such products as equal or superior to our
CineMaster products. In the future, operating system providers with a larger
established customer base, such as Microsoft, may enter the digital video or
audio stream management markets by building video or audio stream management
applications into their operating systems. For example, Microsoft currently
markets a basic MPEG-1 compliant digital solution that is bundled into its
operating system, which is used by a substantial number of personal computer
users. If Microsoft were to successfully develop or license a DVD-compliant
digital video solution and incorporate the solution into its operating system,
our revenues could be substantially harmed.

We anticipate continued growth and competition in the personal computer,
consumer electronics and Internet appliance industries and the entrance of new
competitors into our markets, and accordingly, the market for our products will
remain intensely competitive. We expect that competition will increase in the
near term and that our primary long-term competitors may not yet have entered
the market. Our future competitors may have significantly more personnel or
greater financial, technical, marketing and other resources than either we or
our current competitors do. Furthermore, our future competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements than we can. Also, future competitors may have greater name
recognition and more extensive customer bases that they can leverage. Increased
competition could result in price reductions, fewer customer orders, reduced
gross profit margins and loss of market share, any of which could harm our
business.

IF WE FAIL TO MANAGE TECHNOLOGICAL CHANGE, RESPOND TO EVOLVING INDUSTRY
STANDARDS OR ENHANCE OUR PRODUCTS' INTEROPERABILITY WITH THE PRODUCTS OF OUR
CUSTOMERS, DEMAND FOR OUR PRODUCTS WILL DROP AND OUR BUSINESS WILL SUFFER

Future versions of software and hardware platforms embodying new
technologies or the emergence of new industry standards could render our
products obsolete or uncompetitive. The market for digital video and audio
solutions is characterized by rapid technological change and evolving industry
standards, such as standards for DVD audio, DVD random access memory and DTV in
Europe as well as other digital entertainment applications. If we fail to
respond to evolving industry standards, our products could rapidly become
obsolete, which would harm our business. If the characteristics of our digital
solutions are not compatible with the requirements of specific system or program
applications, the likelihood that our customers will design our products into
their systems and devices will decrease and our business will be harmed.

WE MAY NOT BE ABLE TO RESPOND TO RAPIDLY CHANGING CONSUMER PREFERENCES

Our results of operations will depend on the extent to which our products
are incorporated into the products of leading personal computer, consumer
electronics, Internet appliance, peripherals and semiconductor manufacturers.
Their willingness to incorporate our products depends upon whether we succeed in
developing enhancements and new generations of our software and hardware that
satisfy consumer preferences in their markets and introducing these new
technologies to the marketplace in a timely manner. We must constantly modify or
improve our products to keep pace with changing consumer preferences. For
example, DVD drives became widespread on new personal computers in the last two
years. It is particularly difficult to keep pace with changing consumer
preferences in the personal computer and consumer electronics industries as a
result of a number of factors, including:

. the difficulty of anticipating and timely responding to the latest consumer
trends and requirements;

. the introduction by our competitors of new products embodying popular new
technologies or features that appeal to consumers; and

40
<PAGE>

. the significant investment that is often required before commercial
viability is achieved to market a new feature or function.

Any failure by us to adequately address these risks could render our
existing digital solutions obsolete and could harm our business. In addition, we
may not have the financial and other resources necessary to develop any
enhancements or new generations of the technology that generate revenue in
excess of the costs of development.

WE FACE RISKS FROM THE UNCERTAINTIES OF ANY FUTURE GOVERNMENTAL REGULATION

We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally.
However, due to the increasing popularity and use of the digital delivery
mediums, it is possible that future laws and regulations may be adopted that
regulate DSS/DBS or other markets in which our products are sold. Future
regulatory measures may include, among other things:

. pricing;

. content;

. copyrights;

. export controls (particularly regarding data encryption);

. distribution; and

. characteristics and quality of products and services.

The growth and development of the digital media market may prompt calls for
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business in this segment. The adoption of any
additional laws or regulations may decrease the expansion of this market and
harm our business. Our business could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the digital media market.

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PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

In February and March 2000, eleven (11) securities class action lawsuits
were filed against the Company and certain of its officers and directors in the
United States District Court for the Eastern District of Pennsylvania. On May
25, 2000, the cases were consolidated under Civil Action No. 00-CV-1014, and
entitled "In re RAVISENT Technologies, Inc. Securities Litigation". Pursuant to
the court's consolidation order, a consolidated and amended class action
complaint was filed on June 14, 2000 with an alleged class period of July 15,
1999 through April 27, 2000. This complaint alleges violations of the federal
securities laws, specifically Sections 11 and 15 of the Securities Act of 1933
and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder during the periods stated above. There may be
additional purported class action lawsuits filed against us based upon similar
alleged facts and claims. Certain of our employees and certain holders of 5% or
more of our common stock are members of the putative classes alleged in these
actions and therefore may have interests adverse to us with respect to the
alleged claims in these actions. We believe that such lawsuits or claims are
without merit and that we have meritorious defenses to the actions. We plan to
vigorously defend the litigation. However, failure to successfully defend these
actions could substantially affect our results of operations, liquidity and
financial condition.

In August 2000 a claim was filed against the Company in the United States
District Court for the Western District of Washington at Seattle alleging breach
of an agreement whereby the plaintiff was to receive a fee in connection with
the sale of Cinax to the Company totaling approximately $0.6 million in cash and
Company common stock. In September 2000, the Company filed an answer with
appropriate affirmative defenses.

From time to time, we have received, and expect to continue to receive,
notices of claims of infringement of other parties' proprietary rights and other
claims in the ordinary course of our business.

<PAGE>
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) CHANGES IN SECURITIES: NONE

(b) DIVIDENDS:

We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and such other
factors as the board of directors deems relevant.

On July 15, 1999, the Company's Registration Statement on Form S-1 covering
the Offering of 5,750,000 shares of the Company's Common Stock, Commission file
number 333-77269 was declared effective.

From the effective date the amount of expenses incurred for the issuer's
account in connection with the issuance and distribution of the securities
registered was incurred as follows:

Underwriting discounts and commissions $4,830,000
Finders Fees --
Expenses paid to or for underwriters --
Other expenses $2,748,000
----------

Total Expenses $7,578,000
==========

All of the foregoing payments were direct or indirect payments to persons
other than (i) directors, officers or their associates: (ii) persons owning ten
percent (10%) or more of the Company's common stock; or (iii) affiliates of the
Company.

The net proceeds of the Offering to the Company (after deducting the
foregoing expenses) were $61,422,000. From the effective date of the
Registration Statement to September 30, 2000, the net proceeds have been used
for the following purposes:

Construction of plant, building and facilities .................... 167,266
Purchase and installation of furniture
and equipment .................................................... 3,480,000
Acquisition of other business (including
transaction costs) ............................................... 8,311,670
Working Capital ................................................... 26,948,064
Temporary investments, including cash
and cash equivalents ............................................. 21,515,000
Other purposes (for which at least $100,000
has been used), including:
Investments, including debt instruments of the
United States Government and its agencies and
in high quality corporate Issuers ............................. 1,000,000
-----------
$61,422,000
===========

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All of the foregoing payments were direct or indirect payments to persons
other than (i) directors, officers or their associates: (ii) persons owning ten
percent (10%) or more of the company's common stock; or (iii) affiliates of the
Company.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5: OTHER INFORMATION

None

44
<PAGE>

ITEM 6: Exhibits and Reports on Form 8-K

(a) EXHIBITS

NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------

27.1 Financial data schedule

99 Acquisition Agreement Dated July 13, 2000

(b) REPORTS ON FORM 8K

None

November 14, 2000 RAVISENT TECHNOLOGIES INC.

/s/ Thomas J. Fogarty

Thomas J. Fogarty
Chief Financial Officer

THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.