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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

For the fiscal year ended March 31, 2005 or

For the transition period from                                                                               to                                                                              

Commission File Number: 72870

SONIC SOLUTIONS

(Exact name of registrant as specified in its charter)

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 x        No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.             

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)(2) of the Act).

Yes x        No ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant on September 30, 2004, based upon the closing price of the Common Stock on the NASDAQ National Market for such date was approximately $362,963,850.¹

The aggregate market value of the voting stock held by non affiliates of the registrant on June 20, 2005, based upon the closing price of the Common Stock on the NASDAQ National Market for such date, was approximately $379,125,911.²

Documents incorporated by reference: Portions of the Registrant’s proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end of March 31, 2005 are incorporated herein by reference into Part II, Item 5 and Part III of this annual report.

The number of outstanding shares of the registrant’s Common Stock on June 20, 2005 was 24,335,154.

¹           Excludes 1,187,994 shares held by directors, officers and ten percent or greater shareholders on September 30, 2004. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

²           Excludes 1,189,494 shares held by directors, officers and ten percent or greater shareholders on June 20, 2005. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

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Forward Looking Statements

This Annual Report on Form 10-K, including the documents incorporated by reference in this report, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included or incorporated by reference into this report, other than statements that are purely historical in nature, are forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Words such as “believe,” “anticipate,” “expect,” ‘intend,” “plan,” “estimate,” “project,” “will,” “may” and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include, but are not necessarily limited to, those relating to:

Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described under the caption “Risk Factors” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below. We do not assume any obligation to update or revise these forward-looking statements to reflect new events or circumstances. You should assume that the information appearing in this document is accurate only as of the date on the front cover of this document. Our business, financial condition, results of operations and prospects may have changed since that date.

A Note on Dates

Quantities or results referred to as “to date” or “as of this date” mean as of or to March 31, 2005, unless otherwise specifically noted. References to “FY” or “fiscal year” refer to the Company’s fiscal year ending on March 31 of the designated year. For example, “FY 2005” and “fiscal year 2005” each refer to the fiscal year ending March 31, 2005. Other references to “years” mean calendar years.

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PART I

Item 1.    BUSINESS

OVERVIEW

We develop and market computer software related to digital media – that is, data, photographs, audio, and video in digital formats. Our product lines focus particularly on the two most successful optical disc based digital media formats – the Compact Audio Disc (“CD-Audio”) and the DVD Video Disc (“DVD-Video”). Our software is used to accomplish a variety of tasks, including:

Most of the products we sell include only software, though sometimes we include “plug-in” computer hardware with our software. We also license the software technology underlying our tools to other companies to incorporate in products they develop. Most of the software we sell is intended for use on Windows personal computers, but some of our products operate on the Macintosh OS, and some operate on Linux and on embedded OS’s for consumer electronics devices.

We organize our business into three operating units:

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It is difficult to draw a clear distinction between some of the business conducted by the Roxio Division and some of the business conducted by the Advanced Technology Group. Thus, for purposes of reporting financial results by business segment we group the business of the Roxio Division together with that of the Advanced Technology Group under the category of “consumer software.” See Note (9) to Consolidated Financial Statements included in this Annual Report for a summary of our financial data by business segment.

We were incorporated in California in 1986 and completed our initial public offering in 1994. Our principal executive headquarters are located at 101 Rowland Way, Suite 110, Novato, California 94945. Our telephone number is (415) 893-8000. Our fax number is (415) 893-8008. We maintain a web site at www.sonic.com.

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our web site as soon as reasonably practicable after they are filed with the Securities and Exchange Commission (“SEC”).

DVD-VIDEO AND RELATED OPTICAL FORMATS

Many of our products involve the creation or playback of DVD-Video discs and related formats.

The DVD-Video optical disc format, introduced in 1996, offers high quality video, surround audio and extensive interactivity on a Compact Disc-sized disc. DVD-Video is built upon the DVD-ROM standard, which specifies a disc capable of storing a significantly greater amount of digital information than the earlier Compact Disc (“CD”) format. A single-layer, single-sided DVD-ROM disc holds 4.7 Gigabytes of data, which equals more than 7 times the 650 Megabyte capacity of a CD-ROM. A double-layer, double-sided DVD can hold up to 17 Gigabytes of information, which equals more than 26 times that stored on a CD-ROM. The DVD-Video format utilizes this large capacity to offer content publishers and video consumers a compelling set of features and options, including:

Since its introduction, based on published industry statistics DVD-Video has proven to be the most rapidly adopted consumer electronics format of all time. By the end of 2004, over 600 million DVD players had been shipped worldwide, including “set-top” players, video game console based players, and personal computer based software players. In the United States more than 70% of all homes had DVD players by the end of 2004, and during 2004 more than 1.5 billion DVD-Video discs were replicated worldwide.

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Our products and technology are used to encode video, audio and graphics elements in the particular formats supported by the DVD-Video specification, to prescribe and specify disc navigation, which is the interactive behavior of the DVD title in response to user commands, and then to weave or “multiplex” together the encoded elements and navigation information in the particular manner required by the DVD-Video format. Sometimes, particularly in professional settings, this process is referred to as “DVD Authoring.” In other instances, particularly in consumer settings, it is referred to as “DVD Creation.”

There are some other optical disc audio and video formats that are supported by some of our products including Video CD, DVD-Audio, and CD-Audio. Video CD (“VCD”) is a CD-ROM based format utilizing relatively low resolution Moving Pictures Expert Group-1 (“MPEG-1”) video. DVD-Audio is a sister format to DVD-Video, emphasizing more audio-related features. CD-Audio (“CD-A”) was the first widely adopted digital audio format, introduced in 1982, that made 5.25 inch optical discs the standard for distributing recorded music. CD-ROM is a data format that was introduced in 1985, and began to create a personal computer data application for CD technology.

CD and DVD discs are available in both read-only, pre-manufactured versions, as well as in recordable versions. Recordable discs figure prominently in our consumer business because they create demand among a large portion of the PC industry for disc creation software. There are a number of variations in recordable discs: CD-R, DVD-R, and DVD+R refer to recordable discs that can be written only once; and CD-RW, DVD-RW, DVD+RW, and DVD-RAM refer to recordable discs that can be erased after writing to be written on again with different data. The “-” and “+” symbols refer to somewhat different physical recording strategies for DVD recording promoted by different consortia of companies that developed the underlying recording technology.

PROFESSIONAL PRODUCTS – PROFESSIONAL PRODUCTS GROUP

We currently offer a number of professional product lines including DVD Creator^®, Sonic Scenarist^®, DVD Producer^™ and ReelDVD^®.

Professional Customers

Our professional customers are mainly facilities that process and prepare audio, video and film programming and that provide DVD authoring services as part of their offering. Most of the titles authored by our professional customers involve entertainment, educational and/or business content.

Some of our professional customers are independent organizations that supply services to audio and video content holders and publishers, while some are in-house facilities that are owned by particular content holders or publishers. Our professional customers range in size from relatively small organizations with few employees to larger facilities with hundreds of employees. Our customers include facilities that are independent, privately owned companies, as well as facilities which are part of much larger public, private, or non-profit organizations.

Professional DVD Production

Our tools enable professional customers to prepare DVD-Video titles. The tools we sell support some or all of the following processes:

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Professional Product Lines

DVD Creator

DVD Creator^® is a high-end professional DVD authoring system that we introduced in 1996. DVD Creator^® is intended for use by “Hollywood” class professionals. It offers audio and video encoding, a convenient and efficient workflow, and a high degree of creative control over the authoring process. It is designed to support a “mastering” model, where a piece of video content is completely finished and the main objective is to publish that content as a DVD-Video disc. The archetypical project for DVD Creator^® is the release of a major feature film on DVD. We also offer a number of software and some hardware options to our DVD Creator^® system packages.

Scenarist

Scenarist^® is a tool for DVD-Video authoring that we introduced in 1996, and that is targeted at “Hollywood” video professionals. Scenarist^® gives authoring professionals a great degree of control over the interactivity and feature set of DVD titles they produce. Along with superior audio and video encoding, it offers extensive “scripting” capabilities that can be used by DVD-Video production facilities to automate much of the work involved in producing multiple versions of the same title. For example, Scenarist^® can be used to release a movie on DVD-Video that will be released in different parts of the world with different language audio and subtitle tracks. It also can be used in producing various DVD-Video titles that share a common “look and feel,” for example, a set of classic movie titles being released as part of a series.

ReelDVD

ReelDVD^® is a DVD-Video authoring tool that we introduced in 2000, and that is intended for video professionals who are not experts in the DVD-Video specification but who still need significant flexibility in utilizing the features of the DVD-Video specification. ReelDVD^® is available as a standalone software application as well in a system packaged with a hardware MPEG video encoder. In addition to selling ReelDVD^® to end-users, we have marketed it through OEM agreements with other companies who include or “bundle” it with their products.

DVD Producer

DVD Producer^™ is a DVD-Video authoring tool that we introduced in 2002, and that is intended for video professionals in the corporate and multimedia segments who wish to produce high quality professional-

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looking DVD-Video titles, but who need an easy-to-use system that supports a streamlined and efficient workflow. It features convenient capabilities such as the ability to combine video, graphical, and textual elements to create DVD menu assets that have a quality similar to menus that would normally be developed outside the authoring environment in separate graphic editing or video compositing applications. DVD Producer^™ includes a number of Sonic technologies that make it unnecessary for customers to have deep knowledge of the DVD-Video specification, but still enables them to author discs supporting advanced navigation capabilities consumers associate with Hollywood caliber titles.

DVD Producer^™ is available both as a standalone software application and also in a system packaged with a hardware MPEG video encoder. In addition to selling DVD Producer^™ to end-users, we have marketed it through OEM agreements with other companies who include, rebrand, and/or bundle it with their products.

InterActual Services and Technology

InterActual^® is a technology for increasing the interactivity of DVD-Video titles by making use of the computing power of the personal computer. In an InterActual^®-enabled title, software embodying enhanced features is placed in the “ROM zone” (the “extra information” zone) of an otherwise standard DVD-Video disc. When played back in a PC equipped with the InterActual^® player, this software offers the user an enhanced viewing experience, as well as, in some cases, connection to designated web sites. The InterActual^® player installer application is included with an InterActual^®-enabled disc or available as a free download from the InterActual.com website. Also, the InterActual^® player is available in software development kit (SDK) form under license agreement that enables third-party developers to incorporate native playback of InterActual^®-enabled content within their products. As of today, there have been over 40 million installations of the InterActual^® player or its technology via third-party applications. Additionally, the InterActual^® player incorporates technology that allows the anonymous measurement of the number of uses it receives by end-users, which surpassed 10 million on a monthly basis in February 2005.

Our Professional Products Group develops InterActual^® technology and the InterActual^® player. It also markets content design and programming services to film and video studios to develop the extra features associated with an InterActual^®-enabled disc. We receive revenues from content publishers for these design and programming services as well as for licenses to use InterActual^® technology.

In 2004 10 out of the top 15 selling DVD-Videos (North American market) were InterActual^®-enabled.

Professional DVD Market and Strategy

Market Segments for Professional DVD Production Systems

We divide the professional DVD production market into three segments:

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Competition

A number of companies produce or have produced products that compete with all or part of our professional product offerings. These companies include:

A number of these companies have financial or organizational resources significantly greater than ours and/or greater familiarity than we do with certain technologies involved in DVD production.

Strategy

Our Professional Market strategy will continue to be based on the following elements:

Sales and Distribution

We sell our professional products through a field sales force in combination with a network of professional audio/video dealers. As of June 1, 2005, we employed 8 people in our field sales organization for professional products. Sales personnel are based in our headquarters offices in Novato and Santa Clara, California as well as in our offices in Burbank, California, London and Tokyo. We have other sales personnel based out of various home office locations. Our field sales force includes sales managers and sales engineers. Most of our field sales personnel operate under compensation arrangements in which a substantial portion of their compensation is contingent upon performance relative to revenue targets.

The vast majority of our professional product sales involve one of our dealers. We have dealers for our professional products in most areas of the world. As of June 1, 2005, we had 32 dealers in the Americas, 16 in Europe, Africa and the Middle East and 47 dealers in Asia. We generally do not grant contractual exclusivity to our dealers, though as a matter of practice, depending on the dealer’s territory and capabilities, we may maintain only one dealer in a particular region.

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Customer Support

We offer our professional customers the SonicCare^™ maintenance program. Customers purchase annual SonicCare^™ service contracts from us that may (depending on customer choice of options) provide for:

Customers typically add a one-year SonicCare^™ option to their initial system purchase and a significant number of customers renew SonicCare^™ after their first year.

Outlook

While we expect our professional products and services to continue to represent a significant source of our revenues in the future, we have recently experienced revenue declines in this segment and, absent new format introductions (see below), we expect such declines to continue. Professional DVD facilities began equipping to prepare DVD titles as early as 1997, and significant expansion of DVD creation capacity occurred during 1998, 1999 and 2000. While the number of DVD discs replicated will continue to grow in future years, we do not expect that the number of titles published will expand as dramatically. Therefore, we do not expect that DVD production facilities will increase the rate of their capacity expansion; instead they may decrease the rate of their expansion, resulting in a lower level of sales for us.

High Definition DVD

In the past few years there have been a number of proposals for a high definition video optical disc format. Two of these seem most likely to actually launch as consumer formats:    (1) HD-DVD, a proposal developed by the DVD Forum, the Toshiba Corporation-led trade association that developed and now controls the DVD specification; and (2) Blu-ray Disc (sometimes referred to as “BD”), a proposal originally developed by a consortium of companies led by Sony Corporation and now managed by the Blu-ray Disc Association. Sonic is a member of both the DVD Forum and the Blu-ray Disc Association.

While there are some significant differences between the two proposals, both incorporate a blue reading laser, in contrast to the red laser used by DVD and CD players. The shorter wavelength blue light permits smaller “pits” to be recorded on and read from the disc, thereby increasing information capacity; roughly speaking, data density is quadrupled with use of a blue laser rather than a red laser. Both formats also employ other newly developed techniques, including multi-layer technology, to further increase data capacity beyond the current DVD format.

Neither of these proposals currently constitutes a fully complete standard ready for commercial introduction, but we expect both to move to completion in the near future. Though there have been some efforts to combine the two formats in a single high definition standard, as of June 1, 2005, such a development seems unlikely. Accordingly, it seems likely to us that both HD-DVD and Blu-ray Disc will launch with limited production of consumer players and some modest amount of “Hollywood” content by the end of 2005 or early 2006. We have begun developing professional authoring tools for both of the proposed formats. We also have begun early development of technology components needed to support the new formats in our consumer application products and in our technology licensing programs.

If either or both of the formats launch commercially, this may have the effect of increasing the revenue level of our professional business. Of course, there can be no assurance that either of these formats will launch or, if they do launch, that they will achieve widespread adoption. Also, it is not unusual for developing formats to take longer to launch than anticipated and to enjoy only slow consumer acceptance.

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Professional Audio Products — SonicStudio Spin Off

For a number of years we developed and marketed a line of professional audio workstations under the SonicStudio brand name. On March 21, 2002, we executed an agreement to form a new company, SonicStudio LLC, in partnership with a limited liability corporation controlled by two individuals. Under the terms of the agreement, we transferred our SonicStudio workstation business to SonicStudio LLC, and licensed this company to utilize the technology underlying SonicStudio in the professional audio workstation market. The book value of net assets and liabilities transferred to SonicStudio LLC, including receivables, inventory, fixed assets, and net of customer service liabilities was $235,661. Certain employees transferred from Sonic to join SonicStudio LLC.

Under the terms of the agreement, SonicStudio LLC compensated us for the SonicStudio business with a three year note for $500,000. The note, which does not carry interest, will be repaid to us with a percentage royalty based on sales received by SonicStudio LLC, plus any share of profits paid by them to us. Once the note is retired, Sonic will continue to retain a 15% interest in SonicStudio LLC.

As we discussed in our Annual Report for FY 2003, we executed this spin off because we understood the market for professional audio workstations designed for use by CD mastering engineers in the recording industry (the segment addressed by the SonicStudio product line) to be quite depressed and unlikely to present us with any growth opportunities for the foreseeable future.

During fiscal year 2004, the business prospects for SonicStudio LLC deteriorated. Accordingly, we wrote down the book value of our investment in SonicStudio LLC to zero.

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CONSUMER APPLICATION PRODUCTS — THE ROXIO DIVISION

Our consumer applications empower customers to perform a wide range of activities related to digital media. We offer our consumer products under a variety of brand names, including Backup MyPC^™, CinePlayer^™, DVDit^®, Easy DVD Copy^™, MyDVD^®, PhotoSuite^®, Popcorn^™, RecordNow!^®, Roxio Easy Media Creator^™, Sonic DigitalMedia^™ Studio, Sonic PrimeTime^®, Toast^®, VideoWave^® and others. The following table identifies our current major consumer application products. Most of these products are sold in a number of different versions and languages. Not all of our products are sold through all of our channels.

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Some of the products listed in this table became part of our business via acquisition. For every product listed, “year introduced” refers to what we believe was the year in which first commercial shipment of the product occurred, regardless of whether Sonic or another company was then offering the product.

*A predecessor product – Easy CD Creator – was introduced in 1997. Easy CD Creator functionality is now included within Roxio Easy Media Creator^™.

**Easy DVD Copy^™ will not copy published DVD-Video discs protected with the encryption mechanism specified in the DVD standard. Sonic’s policy is to honor all standard copy protection mechanisms employed by content publishers. We encourage users of our software to respect copyrights and admonish them not to engage in illegal copying of copyrighted wor