UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

     

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Commission File Number 0-22982

NAVARRE CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota		41-1704319
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

7400 49th Avenue North, New Hope, MN 55428
(Address of principal executive offices)

(763) 535-8333
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, No par value		The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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. o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the registrant’s Common Stock, no par value per share, held by non-affiliates of the registrant as of September 30, 2009 was approximately $73,292,600 (based on the closing price of such stock as quoted on The NASDAQ Global Market of $2.20 on such date).

The number of shares outstanding of the registrant’s Common Stock, no par value per share, was 36,366,668 as of June 10, 2010.

Part III incorporates information by reference to portions of the registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders, which the company expects to file with the Securities and Exchange Commission (“SEC”) within 120 days after the fiscal year end.

 

 

NAVARRE CORPORATION

FORM 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1. Business			3
Item 1A. Risk Factors			9
Item 1B. Unresolved Staff Comments			20
Item 2. Properties			20
Item 3. Legal Proceedings			20
Item 4. (Removed and Reserved)			20
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			21
Item 6. Selected Financial Data			23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			41
Item 8. Financial Statements and Supplementary Data			42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			42
Item 9A. Controls and Procedures			42
Item 9B. Other Information			43
PART III
Item 10. Directors, Executive Officers, and Corporate Governance			43
Item 11. Executive Compensation			43
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			43
Item 13. Certain Relationships and Related Transactions, and Director Independence			44
Item 14. Principal Accounting Fees and Services			44
PART IV
Item 15. Exhibits and Financial Statement Schedules			44
Signatures			51
EX-10.39
EX-10.46
EX-10.47
EX-10.48
EX-10.69
EX-21.1
EX-23.1
EX-24.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1 — Business

Overview

     Navarre Corporation distributes and publishes a wide range of computer software, home entertainment and multimedia products and provides value-added services to third-party publishers. Since our founding in 1983, we have established distribution relationships with major retailers including Best Buy, Wal-Mart/Sam’s Club, Costco Wholesale Corporation, Staples, Office Depot and Target, and we distribute to more than 19,000 retail and distribution center locations throughout the United States and Canada. We believe our established relationships throughout the supply chain and our broad product offering permit us to offer these products to our retail customers and provide access to a retail channel for the publishers of such products.

     Historically, our business has focused on providing distribution services, such as third party logistics (3PL), to vendors. Over the past several years, we have expanded our business to include the licensing and publishing of home entertainment and multimedia content, primarily through the acquisition of publishers in select markets. By expanding our product offerings through such acquisitions, we believe we can leverage both our sales experience and distribution capabilities to drive increased retail penetration and more effective distribution of such products, and enable content developers and publishers that we acquire to focus more on their core competencies.

Information About Our Segments

     Our business operates through two business segments —Distribution and Publishing.

     Distribution. Through our distribution business, we distribute computer software, home video, video games and accessories and provide fee-based 3PL services to North American retailers and their suppliers. Our vendors include Symantec Corporation, Kaspersky Lab, Inc., Roxio (a division of Sonic Solutions), Webroot Software, Inc., Nuance Communications, Inc., McAfee, Inc., Corel Corporation, LucasArts Entertainment Company and our own publishing business.

     On May 31, 2007, the Company sold its wholly-owned subsidiary, Navarre Entertainment Media, Inc. (“NEM”) to an unrelated third party. NEM operated the Company’s independent music distribution activities. The Company has presented the independent music distribution business as discontinued operations. As part of this transaction, the Company recorded a gain during fiscal 2008 of $6.1 million ($4.6 million net of tax), which included severance and legal costs of $339,000 and other direct costs to sell of $842,000. The gain is included in “Gain on sale of discontinued operations” in the Consolidated Statements of Operations. For the fiscal year ended March 31, 2008, net sales for NEM were $5.2 million. This transaction divested the Company of all of its independent music distribution activities.

     Publishing. Through our publishing business, which generally has higher gross margins than our distribution business, we own or license various computer software and home video titles, and other related merchandising and broadcasting rights. Our publishing business packages, brands, markets and sells directly to retailers, third party distributors and our distribution business. Our publishing business currently consists of Encore Software, Inc. (“Encore”) and FUNimation Productions, Ltd. (“FUNimation”). Encore, which we acquired in July 2002, publishes print, personal productivity, education, family entertainment and system utilities computer software categories, including titles such as Print Shop, Print Master, Mavis Beacon Teaches Typing, Advantage, Diner Dash, H&R Block, Bicycle and Hoyle PC Gaming products. FUNimation, acquired on May 11, 2005, is the leading anime content provider in North America. FUNimation licenses and distributes titles such as Dragon Ball Z, Dragon Ball Kai, Dragon Ball, Dragon Ball GT, Fullmetal Alchemist, Fullmetal Alchemist Brotherhood, One Piece, Afro Samurai, Shin Chan, Claymore, Darker Than Black, Robotech The Shadow Chronicles, Evangelion1.11, Trigun and Eden of The East. FUNimation also distributes live action films such as Shinobi, Genghis Khan, RoboGeisha, Kamui Gaiden. Our digital strategy consists primarily of the sale of home video titles through online digital retailers such as iTunes. The Company also continues to explore additional digital distribution opportunities for our other product categories.

     In fiscal 2009, a former component of our publishing business, BCI Eclipse Company, LLC (“BCI”), began winding down its licensing operations related to budget home video, and the wind-down was completed during the fourth quarter of fiscal 2010.

     On May 27, 2010, we announced we have engaged Houlihan Lokey to assist it in structuring and negotiating a potential transaction for the sale of FUNimation, although there can be no assurances that this process will result in the consummation of a transaction.

FUNimation, the leading anime content provider in North America, was acquired on May 11, 2005 and operates as part of the Company’s publishing business segment. Accordingly, all results of operations and assets and liabilities of FUNimation for all periods presented in any future filings will be classified as discontinued operations.

     Business Strategy & Strengths

     We seek to grow our business through a combination of organic growth and targeted acquisitions. We intend to execute this strategy by focusing on our competitive strengths, which include:

	•		Distribution of a Broad Range of Products
	•		Provision of Value-Added and Logistical Services
	•		Acquisition of Attractive Publishing Content
	•		Integration of Our Technology and Systems with Customers and Vendors
	•		Established Relationships with Publishers and Customers.

Distribution Markets

     Computer Software

     According to The NPD Group, the leading North American provider of consumer and retail market research information for manufacturers and retailers, the computer software industry achieved $2.9 billion in sales on a trailing 12 month basis ended December 31, 2009 compared to $3.3 billion in 2008. During fiscal 2010, we distributed approximately $430.0 million of software product. We, like the industry, experienced a sales decrease during this time period.

     We presently have relationships with computer software publishers such as Symantec Corporation, Kaspersky Lab, Inc., Roxio (a division of Sonic Solutions) and Webroot Software, Inc. These relationships are important to our distribution business and during the fiscal year ended March 31, 2010, each of these publishers accounted for more than $20.0 million in revenues. In the case of Symantec, net sales accounted for approximately $102.9 million, $104.0 million and $95.0 million in the fiscal years ended March 31, 2010, 2009 and 2008, respectively.

     We have agreements in place with each of the vendors whose products we distribute, but, in most instances, such agreements are short-term in nature and may be cancelled without cause and upon short notice, typically 30 days. The agreements typically cover the right to distribute in the United States and Canada, but do not restrict the vendors from distributing their products through other distributors or directly to retailers and do not guarantee product availability to us for distribution. These agreements allow us to purchase the vendors’ products at a wholesale price and to provide various distribution and fulfillment services in connection with the vendors’ products. We believe these arrangements are standard for such vendors and are essentially operational requirements.

     Video Games

     According to The NPD Group, sales in the video game and accessories industry were $19.3 billion in 2009 compared to $21.0 billion in 2008. During fiscal 2010, we distributed approximately $27.3 million of video game product. According to industry sources, the installed base of video game consoles in North America is expected to grow to approximately 302.2 million users by 2014 compared to 170.5 million users in December 2009.

     Retailers concentrated on a few major releases, most of which were distributed direct to retail by major studios during fiscal year 2010. Additionally, there was a reduction in the number of titles available for us to distribute, which negatively affected our fiscal 2010 sales.

     Our relationships with video game vendors such as Lucas Arts Entertainment, Square Enix, USA, and Southpeak, are important to this category of our distribution business.

     Home Video

     According to industry sources, U.S. home video industry sales totaled $20.0 billion in 2009 compared to $21.0 billion in 2008. During fiscal 2010, we distributed approximately $71.1 million of home video product. We, like the industry, experienced a sales decrease during this time period.

     Economic pressures increased purchase resistance by consumers in home video, as rental spending was up 4.2% and video-on-demand was up 32%, while sell-through on media-based formats was down 13%, according to trade sources. Retailers responded by reducing catalog offerings and shelf space, resulting in significant pressure on smaller publishers who rely on normal distribution channels, while large studios typical distribute directly to major retailers.

     Our relationships with Digital1Stop, Magnolia Pictures and Topics Entertainment, Inc. are important to our home video distribution business.

     Independent Label Music

     Until the May 2007 divestiture of NEM, we were one of a limited number of large, independent distribution companies that represented independent labels exclusively on a regional or national basis.

Customers

     Since our founding in 1983, we have established relationships with retailers across mass merchant, specialty and wholesale club channels, including Best Buy, Wal-Mart/Sam’s Club, Costco Wholesale Corporation, Staples, Office Depot and Target. We annually sell and distribute products to more than 19,000 retail and distribution center locations throughout the United States and Canada. While a significant portion of our revenues is generated from these major retailers, we also supply products to smaller independent retailers and through our business-to-business site located at www.navarre.com. See further disclosure in Part I, Item 1. – Business – Navarre’s Distribution Business Model: E-Commerce. Through these sales channels, we seek to ensure a broad reach of product throughout North America in a cost-efficient manner. References to our website are not intended to and do not incorporate information on the website into this Annual Report.

     In each of the past several years, we have had a small number of customers that each accounted for 10% or more of our net sales. During the fiscal years ended March 31, 2010, 2009 and 2008, sales to two customers, Best Buy and Wal-Mart/Sam’s Club, accounted for approximately 34% and 19%, 35% and 16%, and 31% and 13%, respectively, of our total net sales. Substantially all of the products we distribute to these customers are supplied on a non-exclusive basis under arrangements that may be cancelled without cause and upon short notice. These arrangements do not include such material terms as purchase price of the goods purchased but rather principally address operational requirements of the transactions. None of our retail customers are required to make minimum purchases, including our largest customers — Best Buy and Wal-Mart/Sam’s Club.

Navarre’s Distribution Business Model

     Vendor Relationships

     We view our vendors as customers and work to manage retail relationships to make their business easier and more productive. By doing so, we believe our reputation as a service-oriented organization has helped us expand and retain our vendor relationships with such companies as: Symantec Corporation, Kaspersky Lab, Inc., Roxio (a division of Sonic Solutions), Webroot Software, Inc., Nuance Communications, Inc., McAfee, Inc., Corel Corporation and LucasArts Entertainment Company.

     Furthermore, our dedication to smaller, second-tier vendors has helped to complement our vendor roster. We provide these vendors the opportunity to access shelf space and assist in the solicitation, logistics, promotion and management of products that they otherwise may be unable to obtain. We also conduct one-on-one meetings with smaller vendors to give them the opportunity to establish crucial business relationships with our retail customers.

     Retail Services

     Along with the value-added sales functions we provide to vendors, we also have the ability to customize shipments to each individual customer. With respect to certain customers, we provide products on a consignment basis, which allows the vendors of these products to receive placement at retail while minimizing inventory costs to our customers, and in some cases to Navarre. In the case of the warehouse club channel, we may “pre-sticker” multiple different labels, based on the vendor/customer preference. We assemble creative marketing programs, which include pallet programs, product bundles and specialized packaging. We also create multi-vendor assortments for the club channel, providing the retailer with a broad assortment of products. Our marketing and creative services department designs and produces a variety of advertising vehicles including in-store flyers, direct mail pieces and magazine/newspaper ads, as well as free standing displayers for retail.

     We are committed to offering first-rate information flow for all vendors. We understand the importance of sharing sell-through, inventory, sales forecasts, promotional forecasts, SKU status and all SKU data with the respective vendor. We provide the aforementioned information via a secure online portal for vendors. Furthermore, each individual account manager has account-specific information that is shared on a regular basis with appropriate vendors. We also accommodate specialized reporting requests for our vendors, which we believe helps in the management of their business.

     Warehouse Systems

     A primary focus of our distribution business is logistics and supply chain management. As customer demands become more sophisticated, we have continued to update our technology. With our returns processing system, we process returns and issue both credit and vendor deductions efficiently and timely. We believe our inventory system offers adequate in-stock levels of product, on-time arrivals of product to the customer, inventory management and acceptable return rates, thereby strengthening our customer relationships.

     E-Commerce

     During fiscal year 2010, we continued to expand the number of electronic commerce (“e-commerce”) customers for whom we perform fulfillment and distribution. Our business-to-business web-site www.navarre.com integrates on-line ordering and deployment of text and visual product information, and has been enhanced to allow for easier user navigation and ordering. References to our website are not intended to and do not incorporate information on the website into this Annual Report.

Navarre’s Publishing Business Model

     In July 2002, we acquired Encore, a publisher of computer software. Encore has an exclusive North American licensing agreement with Riverdeep, Inc. (“Riverdeep”) for the sales and marketing of Riverdeep’s interactive products in the print and productivity markets, that includes all products published under the Broderbund brand. Encore also has exclusive licensing agreements with Sony Online Entertainment, Hasbro, H&R Block and The United States Playing Card Company, Inc. FUNimation, acquired on May 11, 2005, is the leading anime content provider in North America. In November 2003, we acquired BCI, a provider of niche home video and audio products. In fiscal 2009, BCI began winding down its licensing operations related to budget home video and the wind-down was completed during the fourth quarter of fiscal 2010.

     Encore

     Encore publishes leading titles in the desktop publishing, family entertainment, education, system utilities, productivity and value software categories, including: Print Shop, Print Master, H&R Block, Advantage, Mavis Beacon Teaches Typing, Diner Dash, Bicycle and Hoyle PC Gaming products.

     Encore focuses on retail and direct to consumer sales by marketing its licensed content, without the distraction and financial risk of significant content development. The benefit to our licensed vendors is that they can focus on their core competencies of content and brand development.

     Encore continues to evaluate emerging computer software brands that have the potential to become successful franchises and also focuses on establishing relationships with developed brands that are seeking to change their business models.

     Encore’s strategy is to continue to license quality branded computer software titles. It has experience in signing single-brand products as well as taking on multiple titles in single agreements, as demonstrated by the signing of the Broderbund, H&R Block, Bicycle and Hoyle publishing agreements.

     FUNimation

     FUNimation is the leading anime content provider in the North American market, which it licenses from Japanese rights holders, and translates and adapts the content for television programming and home videos, primarily targeting audiences between the ages of 18 and 34. FUNimation leverages its licensed content into various revenue streams, including television broadcast, home video distribution, and licensing of merchandising rights for toys, video games and trading cards. FUNimation’s licensed titles include Dragon Ball Z, Dragon Ball Kai, Dragon Ball, Dragon Ball GT, Fullmetal Alchemist, Fullmetal Alchemist Brotherhood, One Piece, Afro Samurai, Shin Chan, Claymore, Darker Than Black, Robotech The Shadow Chronicles, Evangelion1.11, Trigun and Eden of The East. FUNimation also distributes live action films such as Shinobi, Genghis Khan, RoboGeisha, Kamui Gaiden.

     Based on its own market research, FUNimation identifies properties that it believes can be successfully adapted to the U.S. anime market. This market research generally involves analyzing television ratings, merchandise sales trends, home video sales, anime magazines and popularity polls in both the U.S. and Japanese markets. After identifying a property that has the potential for success in the United States, FUNimation seeks to capitalize on its relationships with Japanese rights holders and its reputation as a content provider of anime in North America to obtain the commercial rights to such property, primarily for television programming, home video distribution and merchandising.

     Home Video Distribution. FUNimation seeks to increase the revenue derived from its licensed properties through home video distribution. While a majority of its home videos are sold directly to major retail chains, they are also distributed digitally.

     Broadcast. For television programming, FUNimation translates and adapts its licensed anime titles to conform to U.S. television programming standards. FUNimation performs most of its production work in-house at its production facility in a suburb of Dallas/Fort Worth, Texas.

     Licensing and Merchandising. Over the years, FUNimation has developed a network of over 200 license partners for the merchandising of toys, video games, apparel, trading and collectible card games and books. FUNimation manages its properties in order to provide a consistent and accurate portrayal throughout the marketplace.

     Retail Sales and Web Sites. FUNimation operates websites devoted to the anime fan base. Typically, as part of its brand management strategy, FUNimation will develop an interactive site for each licensed property. These sites provide information about upcoming episodes and the characters associated with the show. In addition, FUNimation’s products can be purchased through its internet store, which offers downloadable videos, as well as home videos and licensed merchandise.

Competition

     All aspects of our business are highly competitive. Our competitors include other national and regional businesses, as well as some suppliers that sell directly to retailers. Certain of these competitors have substantially greater financial and other resources than we do. Our ability to effectively compete in the future depends upon a number of factors, including our ability to: obtain national distribution contracts; obtain publishing rights with various rights holders and brand owners; maintain our margins and volume; expand our sales through a varied range of products and personalized services; anticipate changes in the marketplace including technological developments and consumer interest in our products; and maintain operating expenses at an appropriate level.

     We face competition from a number of distributors including Ingram Micro, Inc., Ingram Entertainment, Tech Data Corporation and Activision, as well as from manufacturers and publishers that sell directly to retailers. Encore’s competitors include: Topics Entertainment, Nova/Avanquest, Valusoft, and Phantom EFX. FUNimation’s competitors include: VIZ Media, Bandai Entertainment, Section 23, Starz, Sony Pictures and Media Blasters.

     We believe competition in all of our businesses will remain intense. The Company believes that the keys to our growth and profitability include: (i) customer service, (ii) continued focus on improvements and operating efficiencies, (iii) the ability to license and develop products, and (iv) the ability to attract desirable content and additional suppliers, studios and software publishers.

Backlog

     Because a substantial portion of our products are shipped in response to orders, we do not maintain any significant backlog.

Environmental Matters

     We do not anticipate any material effect on our capital expenditures, earnings or competitive position due to compliance with government regulations involving environmental matters.

Employees

     As of March 31, 2010, we had 530 employees, including 132 in administration, finance, merchandising and licensing, 96 in sales and marketing and 302 in production and distribution. These employees are not subject to collective bargaining agreements and are not represented by unions. We consider our relations with our employees to be good.

Capital Resources — Financing

     See further disclosure in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.

Available Information

     We also make available, free of charge, in the “Investors — SEC Filings” section of our website, www.navarre.com, annual, quarterly and current reports (and amendments thereto) that we may file or furnish to the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(a) or 15(d) of Securities Act of 1934 as soon as reasonably practicable after our electronic filing. In addition, the SEC maintains a website containing these reports that can be located at http://www.sec.gov. These reports may also be read and copied at the SEC’s Public Reference Room at 100 Fifth Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0300. References to our website are not intended to and do not incorporate information on the website into this Annual Report.

Executive Officers of the Company

     The following table sets forth our executive officers and certain management as of June 11, 2010:

Name		Age				Position
Cary L. Deacon			58			President and Chief Executive Officer
J. Reid Porter			61			Executive Vice President, Chief Financial Officer
Joyce Fleck			57			President of Navarre Distribution
Calvin Morrell			54			President of Encore
Gen Fukunaga			49			Chief Executive Officer and President of FUNimation
John Turner			56			Senior Vice President of Global Logistics
Ryan F. Urness			38			General Counsel and Secretary

     Cary L. Deacon has been President and Chief Executive Officer since March 31, 2007. He previously served as President and Chief Operating Officer, Publishing since August 2005. Prior to this, Mr. Deacon was the Corporate Relations Officer since joining the Company in September 2002. Previously, he held executive positions at NetRadio Corporation, SkyMall, Inc. and ValueVision International, Inc.

     J. Reid Porter has been Executive Vice President and Chief Financial Officer since joining the Company in December 2005. From October 2001 to October 2004, Mr. Porter, served as Executive Vice President and Chief Financial Officer of IMC Global Inc., a leading producer and marketer of concentrated phosphate and potash for the agricultural industry. From 1998 to October 2001, Mr. Porter served as Vice President and partner of Hidden Creek Industries and Chief Financial Officer of Heavy Duty Holdings, partnerships in the automotive-related and heavy-duty commercial vehicle industries, respectively. Previously, he held executive positions at Andersen Windows, Onan Corporation and McGraw-Edison Company, Inc.

     Joyce Fleck has been President of Navarre Distribution since March 2008. She previously served as the Vice President of Sales and Marketing since July 2005. Prior to this, Ms. Fleck served as Vice President of Marketing since January 2000. She joined the Company in May 1999 as Director of Marketing. Prior to joining Navarre she held divisional marketing and merchandising positions and senior buying positions at The Musicland Group and Grow Biz International.

     Calvin Morrell has been the President of Encore since joining the Company in April 2008. Prior to joining Navarre, Mr. Morrell was responsible for sales, marketing, business development and operations at Macrovision and TryMedia. Mr. Morrell’s previous experience also includes Vice President of Marketing at Interplay. Mr. Morrell began his career at IBM where he worked for 18 years holding a number of positions, including Director of IBM Multimedia Studios.

     Gen Fukunaga is the Chief Executive Officer and President of FUNimation Productions, Ltd., and has served in that role since May 2005, when the Company acquired FUNimation. Mr. Fukunaga co-founded FUNimation in 1994 and has served as its President from its founding. Prior to starting FUNimation, Mr. Fukunaga served as Product Manager of Software Development Tools for Tandem Computers. Previously, Mr. Fukunaga held a strategic consulting position with Andersen Consulting.

     John Turner has been Senior Vice President of Global Logistics since September 2003. He previously served as Senior Vice President of Operations since December 2001, and Vice President of Operations since joining the Company in September 1995. Prior to joining Navarre, Mr. Turner was Senior Director of Distribution for Nordic Track in Chaska, MN and he also previously held various positions in logistics in the United States and in the United Kingdom.

     Ryan F. Urness has been General Counsel of Navarre since July 2004 and Secretary of Navarre since May 2004. He previously served as Assistant Secretary of Navarre since February 2004 and as Corporate Counsel since January 2003. Prior to joining Navarre, a significant portion of Mr. Urness’ efforts were engaged in various matters for the Company as outside legal counsel in the Minneapolis, Minnesota office of Winthrop & Weinstine, P.A. Mr. Urness is a graduate of the University of St. Thomas and William Mitchell College of Law.

Item 1A — Risk Factors

FORWARD-LOOKING STATEMENTS / RISK FACTORS

     We make written and oral statements from time to time regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, including this Annual Report, news releases, written or oral presentations made by officers or other representatives made by us to analysts, shareholders, investors, news organizations and others and discussions with management and other representatives of us. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

     Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of us speaks only as of the date on which such statement is made. Our forward-looking statements are based on assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by or on behalf of us.

     In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by or on behalf of us. Some of these important factors, but not necessarily all important factors, include the following:

Risks Relating to Our Business and Industry

We derive a substantial portion of our total net sales from two customers. A reduction in sales to either of these customers, or another significant customer, could have a material adverse effect on our net sales and profitability.

     For the fiscal year ended March 31, 2010, net sales to Best Buy and Wal-Mart/Sam’s Club, represented approximately 34% and 19%, respectively, of our total net sales, and, in the aggregate, approximately 53% of our total net sales. For the fiscal year ended March 31, 2009, net sales to Best Buy and Wal-Mart/Sam’s Club accounted for approximately 35% and 16%, respectively, of our total net sales, and, in the aggregate, approximately 51% of our total net sales. For the fiscal year ended March 31, 2008, net sales to Best Buy and Wal-Mart/Sam’s Club accounted for approximately 31% and 13%, respectively, of our total net sales, and, in the aggregate, approximately 44% of our total net sales. Substantially all of the products we distribute to these customers are supplied on a non-exclusive basis under arrangements that may be cancelled without cause and upon short notice. These arrangements do not include such material terms as purchase price of the goods purchased but rather principally address operational requirements of the transactions. None of our retail customers are required to make minimum purchases, including our largest customers — Best Buy and Wal-Mart/Sam’s Club. If we are unable to continue to sell our products to either of these customers or are unable to maintain our sales to these customers at current levels and cannot find other customers to replace these sales, there would be an adverse impact on our net sales and profitability. We believe sales to these customers will continue to represent a significant percentage of our total net sales and there can be no assurance that we will continue to recognize a significant amount of revenue from sales to any specific customer.

The loss of a significant vendor or manufacturer or a decline in the popularity of its products could negatively affect our product offerings and reduce our net sales and profitability.

     A significant portion of net sales in recent years has been due to sales of computer software provided by software publishers such as Symantec Corporation, Kaspersky Lab, Inc., Roxio (a division of Sonic Solutions) and Webroot Software, Inc. During the fiscal year ended March 31, 2010 each of these publishers accounted for more than $20.0 million of our net sales. Symantec products accounted for approximately $102.9 million, $104.0 million and $95.0 million in net sales in the fiscal years ended March 31, 2010, 2009 and 2008, respectively. We have agreements in place with each of the vendors whose products we distribute, but, in most instances, such agreements are short-term in nature and may be cancelled without cause and upon short notice, typically 30 days. The agreements typically cover the right to distribute in the United States and Canada, but do not restrict the vendors from distributing their products through other distributors or directly to retailers and do not guarantee product availability to us for distribution. These agreements allow us to purchase the vendors’ products at a wholesale price and to provide various distribution and fulfillment services in connection with the vendors’ products. We believe these arrangements are standard for such vendors and are essentially operational requirements. If we were to lose our right to distribute products of any of the above computer software publishers or the popularity of such product were to decrease, our net sales and profitability would be adversely impacted.

     Our future growth and success depends partly upon our ability to procure and renew popular product distribution agreements and to sell the underlying products. There can be no assurance that we will enter into new distribution agreements or that we will be able to sell products under existing distribution agreements. Further, our current distribution agreements may be terminated on short notice. The loss of a significant vendor could negatively affect our product offerings and, accordingly, our net sales. Similarly, a decrease in customer demand for such products could negatively affect our net sales.

Our revenues are dependent on consumer preferences and demand, which can change at any time.

     Our business and operating results depend upon the appeal of properties, product concepts and programming to consumers, including the popularity of anime in the North American market and trends in the toy, game and entertainment businesses. A decline in the popularity of existing properties or the failure of new properties and product concepts to achieve and sustain market acceptance could result in reduced overall revenues, which could have a material adverse effect on our financial condition and results of operations. Consumer preferences with respect to entertainment are continuously changing, are difficult to predict and can vary over time. In addition, entertainment properties often have short life cycles. There can be no assurance that:

	•		any of the current properties, product concepts or programming will continue to be popular for any significant period of time;
	•		any new properties, product concepts or programming will achieve commercial acceptance; or

•

any property’s life cycle will be sufficient to permit adequate profitably to recover advance payments, guarantees, development, marketing, royalties and other costs.

     Our failure to successfully anticipate, identify and react to consumer preferences could have a material adverse effect on revenues, profitability and results of operations. In addition, changes in consumer preferences may cause our revenues and net income to vary significantly between comparable periods.

A continued deterioration in the businesses of significant customers, due to weak economic conditions, could harm our business.

     During weak economic times there is an increased risk that certain of our customers will, among other things, reduce orders, delay payment for product purchased, fail or increase product returns. Our revenues could negatively be affected by a number of factors, including the following:

	•		the credit available to our customers;
	•		the popularity of our products released during the quarter;
	•		the opening and closing of retail stores by our major customers;
	•		the extension, termination or non-renewal of existing distribution agreements and licenses;
	•		the credit available from our vendors and other sources;
	•		product marketing and promotional activities; and
	•		general economic changes affecting the buying pattern of retailers, particularly those changes affecting consumer demand for home entertainment products and computer software.

     In addition, if a customer files for bankruptcy, we may be required to forego collection of pre-petition amounts owed and to repay amounts remitted to us during the 90-day preference period preceding the filing. The bankruptcy laws, as well as specific circumstances of each bankruptcy, may limit our ability to collect pre-petition amounts. Although we believe that we have sufficient reserves to cover our exposure resulting from anticipated customer difficulties, bankruptcies or defaults, we can provide no assurance that such reserves will be adequate. If they are not adequate, our business, operating results and financial condition could be adversely affected.

As our non-U.S. sales and operations grow, we could become increasingly subject to additional risks that could harm our business.

     Recently we have generated increasing amounts of sales outside of the Unites States, mainly in connection with our Canadian operations. We have a limited number of customers in Canada, where the sales and purchasing activity results in receivables and accounts payables denominated in Canadian dollars. These transactions expose us to foreign currency exchange risks because gain or loss on these activities is a function of the foreign exchange rate, over which we have no control. In addition, our non-U.S. operations are subject to a variety of risks, which could cause fluctuations in the results of our non-U.S. operations. These additional risks include, but are not limited to:

	•		compliance with foreign regulatory and market requirements;
	•		variability of foreign economic, political and labor conditions;
	•		changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by U.S. import and export laws;
	•		longer accounts receivable payment cycles;
	•		potentially adverse tax consequences;
	•		difficulties in protecting intellectual property;

	•		burdens of complying with foreign laws; and
	•		as we generate cash flow in non-U.S. jurisdictions, we may experience difficulty transferring such funds to the U.S. in a tax efficient manner.

     Any one or more of these factors could have an adverse effect on our business, financial condition and operating results.

Pending SEC investigation or litigation may subject us to significant costs, judgments or penalties and could divert management’s attention.

     Since 2006, we have been the subject of a non-public investigation by the Securities and Exchange Commission (the “SEC”). The SEC has not provided us with notice asserting that any violations of the securities laws have occurred, but there can be no assurance as to the outcome of this investigation. We are also involved in a number of litigation matters. Irrespective of the validity of the assertions made in these suits, or the positions asserted in these proceedings or any final resolution in these matters, we could incur substantial costs and management’s attention could be diverted, either of which could adversely affect our business, financial condition or operating results.

Our business is seasonal and variable in nature and, as a result, the level of sales and profitability during our peak season could adversely affect our results of operations and liquidity.

     Traditionally, our third quarter (October 1-December 31) has accounted for our largest quarterly revenue figures and a substantial portion of our earnings. Our third quarter accounted for approximately 25.2%, 27.2% and 33.0% of our net sales for the fiscal years ended March 31, 2010, 2009 and 2008, respectively. As a distributor of products ultimately sold to consumers, our business is affected by the pattern of seasonality common to other suppliers of retailers, particularly during the holiday season. Because of this seasonality, if we or our customers experience a weak holiday season (like 2008 and 2009), or if we provide price protection for sales during the holiday season or decide to increase our inventory levels to meet anticipated customer demand, our financial results and liquidity could be negatively affected. Our borrowing levels and inventory levels typically increase substantially during the holiday season.

A substantial portion of FUNimation’s revenues are derived from a small number of licensed properties and a small number of licensors and FUNimation’s content is highly concentrated in the anime genre.

     FUNimation derives a substantial portion of its revenues from a small number of properties and such properties usually generate revenues only for a limited period of time. Additionally, FUNimation’s content is concentrated in the anime sector and its revenues are highly subject to the changing trends in the toy, game and entertainment businesses. In particular, one licensed property accounted for $22.6 million, or 40%, of FUNimation’s revenues for the fiscal year ended March 31, 2010. FUNimation’s revenues may fluctuate significantly from year to year due to, among other reasons, the popularity of its licensed properties and the timing of entering into new licensing contracts.

     During the fiscal year ended March 31, 2010, 60% of FUNimation’s revenues were derived from sales of products under multiple licensing arrangements with three licensors. The loss of any one of these licensing relationships could have a material negative effect on FUNimation’s revenues.

FUNimation’s revenues are substantially dependent on television exposure for its licensed properties.

     Television exposure is an important promotional vehicle for home video sales and licensing opportunities for anime content. To the extent that FUNimation’s content is not able to gain television exposure, sales of these products could be limited. Similarly, demand for properties broadcast on television generally is based on television ratings. In addition, FUNimation does not own the broadcast rights for some of its properties, so it relies on third parties to secure or renew broadcast rights for such content. A decline in television ratings or programming time of FUNimation’s licensed properties could adversely affect FUNimation’s revenues.

Technology developments, particularly in the electronic downloading arena, may adversely affect our net sales, margins and results of operations.

     Our products have traditionally been marketed and delivered on a physical delivery basis. If these products continue to be heavily marketed and delivered through technology transfers, such as electronic downloading through the Internet or similar delivery methods,

then our retail and wholesale distribution business could be negatively impacted. As electronic downloading grows through Internet retailers, competition between electronic retailer suppliers using traditional methods will continue to intensify and likely negatively impact our net sales and margins. Furthermore, we may be required to spend significant capital to enter or participate in this delivery channel. If we are unable to develop necessary vendor and customer relationships to facilitate electronic downloading or if the terms of these arrangements or are not as favorable as those related to our physical product sales, our business may be materially harmed.

Increased counterfeiting or piracy may negatively affect the demand for our home entertainment products.

     The product categories that we sell have been adversely affected by counterfeiting, piracy and parallel imports, and also by websites and technologies that allow consumers to illegally download and access this content. Increased proliferation of these alternative access methods to these products could impair our ability to generate net sales and could cause our business to suffer.

We may not be able to successfully protect our intellectual property rights.

     We rely on a combination of copyright, trademark and other proprietary rights laws to protect the intellectual property we license. Third parties may try to challenge the ownership of such intellectual property by us or our licensors. In addition, our business is subject to the risk of third parties infringing on our intellectual property rights or those of our licensors and producing counterfeit products. If we need to resort to litigation in the future to protect our intellectual property rights or those of our licensors, such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business and competitive position.

The loss of key personnel could affect the depth, quality and effectiveness of our management team. In addition, if we fail to attract and retain qualified personnel, the depth, quality and effectiveness of our management team and employees could be negatively affected.

     We depend on the services of our key senior executives and other key personnel because of their experience in the distribution, publishing and licensing areas. The loss of the services of one or several of our key employees could result in the loss of customers or vendor relationships, or otherwise inhibit our ability to operate and grow our business successfully.

     Our ability to enhance and develop markets for our current products and to introduce new products to the marketplace also depends on our ability to attract and retain qualified management personnel. We compete for such personnel with other companies and organizations, many of which have substantially greater capital resources and name recognition than we do. If we are not successful in recruiting or retaining such personnel, it could have a material adverse effect on our business.

If we fail to meet our significant working capital requirements or if our working capital requirements increase substantially, our business and prospects could be adversely affected.

     As a distributor and publisher, we purchase and license products directly from manufacturers and content developers for resale to retailers. As a result, we have significant working capital requirements, principally to acquire inventory, procure licenses and finance accounts receivable. Our working capital needs will increase as our inventory, licensing activities and accounts receivable increase in response to growth. In addition, license advances, prepayments to enhance margins, investments and inventory increases to meet customer requirements could increase our working capital needs. The failure to obtain additional financing or maintain working capital credit facilities on reasonable terms in the future could adversely affect our business. In addition, if the cost of financing is too expensive or not available, it could require a reduction in our distribution or publishing activities.

     We rely upon bank borrowings and vendor credit and payment terms to fund our general working capital needs and it may be necessary for us to secure additional financing in the future depending upon the growth of our business and the possible financing of additional acquisitions. If we were unable to borrow under our credit facility, obtain acceptable vendor terms or were otherwise unable to secure sufficient financing on acceptable terms or at all, our future growth and profitability could be adversely affected.

Product returns or inventory obsolescence could reduce our sales and profitability or negatively impact our liquidity.

     We maintain a significant investment in product inventory. Like other companies operating in our industry, product returns from our retail customers are significant when expressed as a percentage of revenues. Adverse financial or other developments with respect to a particular supplier or product could cause a significant decline in the value and marketability of our products, possibly making it difficult for us to return products to a supplier or recover our initial product acquisition costs. Under such circumstances, our sales and

profitability, including our liquidity, could be adversely affected. We maintain a sales return reserve based on historical product line experience rates. There can be no assurance that our reserves will be adequate to cover potential returns.

We are subject to the risk that our inventory values may decline due to, among other things, changes in demand and that protective terms under our supplier agreements may not adequately cover the decline in values, which could result in lower gross margins or inventory write-downs.

     The demand for products that we sell and distribute is subject to rapid technological change, new and enhanced product specification requirements, consumer preferences and evolving industry standards. These changes may cause our inventory to decline substantially in value or to become obsolete which may occur in a short period of time. We offer no assurance that price protection or inventory returnability terms may not change or be eliminated in the future, that unforeseen new product developments will not materially adversely affect our revenues or profitability or that we will successfully manage our existing and future inventories.

     In our distribution business, we generally are entitled to receive a credit from certain suppliers for products returned to us based upon the terms and conditions with those suppliers, including maintaining a minimum level of inventory of their products and limitations on the amount of product that can be returned and/or restocking fees. If major suppliers decrease or eliminate the availability of price protection or inventory returnability to us, such a change in policy could lower our gross margins or cause us to record inventory write-downs. We are also exposed to inventory risk to the extent that supplier protections are not available on all products or quantities and are subject to time restrictions. In addition, suppliers may become insolvent and unable to fulfill their protection obligations to us. As a result, these policies do not protect us in all cases from declines in inventory value or product demand.

     In our publishing business, prices could decline due to decreased demand and, therefore, there may be greater risk of declines in our owned inventory value. To the extent that our publishing business has not properly reserved for inventory exposure or price reductions needed to sell remaining inventory, our profitability may suffer.

Developing software is complex, costly and uncertain and operational errors or defects in such products could result in liabilities and/or impair such products’ marketability.

     We have recently expanded our software development capabilities. The process of developing new software and/or enhancing existing products is complex, costly and uncertain. Any failure by us to anticipate customers’ changing needs and emerging trends accurately could harm the value of our investment in software development activities. In connection with these activities, we must make long-term investments (sometimes long before cash returns are experienced), develop or obtain appropriate intellectual property and commit resources before knowing whether our predictions will accurately reflect customer demand for our products. Failure to successfully develop and/or sell these products could result in the loss/impairment of our investment, which could negatively impact our results of operations.

     In addition, existing and future products may develop operational problems or contain undetected defects or errors. If we do not discover such defects, errors, or other operational problems until after a product has been released and used by the customer, we may incur significant costs to correct such defects, errors, or other operational problems, including product liability claims or other contract liabilities to customers. Moreover, defects or errors in our products may result in claims for damages and questions regarding the integrity of the products, which could cause adverse publicity and impair their market acceptance.

Further impairment in the carrying value of our assets could negatively affect our consolidated results of operations and net worth.

     We recorded significant impairment charges to goodwill and other assets during the fiscal year ended March 31, 2009. We evaluate assets on the balance sheet whenever events or a change in circumstance indicates that their carrying value may not be recoverable. Materially different assumptions regarding the future performance of our businesses could result in additional other asset impairment charges which could negatively affect our operating results and potentially result in future operating losses.

We have significant credit exposure and negative product demand trends or other factors could cause us significant credit loss.

     We provide credit to our customers for a significant portion of our net sales. We are subject to the risk that our customers will not pay for the products they have purchased. This risk may be increased with respect to goods provided under our consignment programs due to our lack of physical control over the inventory. This risk may increase if our customers experience decreases in demand for their

products and services or become less financially stable due to adverse economic conditions or otherwise. If there is a substantial deterioration in the collectability of our receivables, our earnings and cash flows could be adversely affected.

     In addition, from time to time, we may make royalty advances, or invest in, other businesses. These business or investment opportunities may not be successful, which could result in the loss of our invested capital.

We may not be able to adequately adjust our cost structure in a timely fashion in response to a decrease in net sales, which may cause our profitability to suffer.

     A significant portion of our selling, general and administrative expense is comprised of personnel, facilities and costs of invested capital. In the event of a significant downturn in net sales, we may not be able to exit facilities, reduce personnel, improve business processes, reduce inventory or make other significant changes to our cost structure without significant disruption to our operations or without significant termination and exit costs. Additionally, if management is not able to implement such actions in a timely manner, or at all, to offset a shortfall in net sales and gross profit, our profitability could suffer.

Our distribution and publishing businesses operate in highly competitive industries and compete with large national firms. Further competition, among other things, could reduce our sales volume and margins.

     The business of distributing home entertainment and multimedia products is highly competitive. Our competitors in the distribution business include other national and regional distributors as well as suppliers that sell directly to retailers. These competitors include the distribution affiliates of Time-Warner, Ingram Micro, Inc., Ingram Entertainment, Tech Data Corporation and Activision.

     Our competitors in the publishing business include both independent national publishers as well as large international firms. These competitors include Topics Entertainment, Nova/Avanquest, Valusoft, and Phantom EFX. Certain of our competitors have substantially greater financial and other resources than we have. Our ability to compete effectively in the future depends upon a number of factors, including our ability to: obtain national distribution contracts and licenses with manufacturers/vendors; obtain publishing rights with various rights holders and brand owners; maintain our margins and volume; expand our sales through a varied range of products and personalized services; anticipate changes in the marketplace including technological developments and consumer interest in our products; and maintain operating expenses at an appropriate level.

     Our failure to perform adequately one or more of the foregoing may materially harm our business.

     In addition, FUNimation’s business depends upon its ability to procure and renew agreements to license certain rights for attractive titles on favorable terms. Competition for attractive anime and television broadcasting slots is intense. FUNimation’s principal competitors in the anime sector are media companies such as VIZ Media, Bandai Entertainment, Section23, Media Blasters, and Starz. FUNimation also competes with various toy companies, other licensing companies, numerous others acting as licensing representatives and large media companies such as Sony Pictures and Disney. Many of FUNimation’s competitors may have substantially greater resources than FUNimation and own or license properties which are more commercially successful than FUNimation’s properties. There are low capital barriers to enter the licensing and brand management business and therefore there is potential for new competitors to enter the market.

     Competition in the home entertainment and multimedia products industries is intense and is often based on price. Distributors generally experience low gross profit margins and operating margins. Consequently, our distribution profitability is highly dependent upon achieving effective cost and management controls and maintaining sales volumes. A material decrease in our gross profit margins or sales volumes would harm our financial results.

We depend on third party shipping and fulfillment companies for the delivery of our products.

     We rely almost entirely on arrangements with third party shipping and fulfillment companies, principally UPS and Federal Express, for the delivery of our products. The termination of our arrangements with one or more of these third party shipping companies, or the failure or inability of one or more of these third party shipping companies to deliver products on a timely or cost efficient basis from suppliers to us, or products from us to our reseller customers or their end-user customers, would significantly disrupt our business and harm our reputation and net sales. Furthermore, an increase in amounts charged by these shipping companies could negatively affect our gross margins and earnings.

We depend on a variety of systems for our operations, and a failure of these systems could disrupt our business and harm our reputation and net sales and negatively impact our results of operations.

     We depend on a variety of systems for our operations. These systems support our operating functions, including inventory management, order processing, shipping, receiving and accounting. Certain of these systems are operated by third parties and their performance may be outside of our control. Any failures or significant downtime in our systems could prevent us from taking customer orders, printing product pick-lists, and/or shipping product. It could also prevent customers from accessing our price and product availability information.

     From time to time we may acquire other businesses having information systems and records, which may be converted and integrated into our information systems. This can be a lengthy and expensive process that results in a material diversion of resources from other operations. In addition, because our information systems are comprised of a number of legacy, internally-developed applications, they can be harder to upgrade and may not be adaptable to commercially available software. As our needs for technology evolve, we may experience difficulty or significant cost in upgrading or significantly replacing our systems.

     We also rely on the Internet for a portion of our orders and information exchanges with our customers. The Internet and individual websites can experience disruptions and slowdowns. In addition, some websites have experienced security breakdowns. Our website could experience material breakdowns, disruptions or breaches in security. If we were to experience a security breakdown, disruption or breach that compromised sensitive information, this could harm our relationship with our customers or suppliers. Disruption of our website or the Internet in general could impair our order processing or more generally prevent our customers and suppliers from accessing information. This could cause us to lose business.

     We believe customer information systems and product ordering and delivery systems, including Internet-based systems, are becoming increasingly important in the distribution of our products and services. Although we seek to enhance our customer information systems by adding new features, we offer no assurance that competitors will not develop superior customer information systems or that we will be able to meet evolving market requirements by upgrading our current systems at a reasonable cost, or at all. Our inability to develop competitive customer information systems or upgrade our current systems could cause our business and market share to suffer.

Any future acquisitions or divestitures could result in disruptions to our business by, among other things, distracting management time and diverting financial resources. Further, if we are unsuccessful in integrating acquired companies into our business, it could materially and adversely affect our financial condition and operating results.

     If we make acquisitions or divestitures, a significant amount of management’s time and financial resources may be required to complete the acquisition or divestiture and integrate the acquired business into our existing operations or divest a business from our operations. Even with this investment of management time and financial resources, an acquisition may not produce the revenue, earnings or business synergies anticipated. Acquisitions involve numerous other risks, including assumption of unanticipated operating problems or legal liabilities, problems integrating the purchased operations, technologies or products, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with suppliers and customers, incorrect estimates made in the accounting for acquisitions and amortization of acquired intangible assets that would reduce future reported earnings (goodwill impairments), ensuring acquired companies’ compliance with the requirements of the Sarbanes-Oxley Act of 2002 and potential loss of customers or key employees of acquired businesses. We cannot assure you that if we make any future acquisitions, investments, strategic alliances, joint ventures or begin a divestiture of a component of our business, that such transactions will be completed in a timely manner or achieve anticipated synergies, that they will be structured or financed in a way that will enhance our business or creditworthiness or that they will meet our strategic objectives or otherwise be successful. In addition, we may not be able to secure the financing necessary to consummate future acquisitions, and future acquisitions and investments could involve the issuance of additional equity securities or the incurrence of additional debt, which could harm our financial condition or creditworthiness or result in dilution. Moreover, we may be unable to locate a suitable candidate with whom to accomplish a divestiture, or may be unable to do so on terms favorable to us, which failure could negatively impact our profitability.

Interruption of our business or catastrophic loss at any of our facilities could lead to a curtailment or shutdown of our business.

     We receive, manage, distribute and process returns of our inventory from a centralized warehouse and distribution facility that is located adjacent to our corporate headquarters. An interruption in the operation of or in the service capabilities at this facility as a result of equipment failure or other reasons could result in our inability to distribute products, which would reduce our net sales and earnings for the affected period. In the event of a stoppage at such facilities, even if only temporary, or if we experience delays as a result of events

that are beyond our control, delivery times to our customers and our relationship with such customers could be severely affected. Any significant delay in deliveries to our customers could lead to increased returns or cancellations and cause us to lose future sales. Our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions, violent weather conditions or other natural disasters. We may experience a shutdown of our facilities or periods of reduced production as a result of equipment failure, delays in deliveries or catastrophic loss, which could have a material adverse effect on our business, results of operations or financial condition.

Future terrorist or military actions could result in disruption to our operations or loss of assets.

     Future terrorist or military actions, in the U.S. or abroad, could result in destruction or seizure of assets or suspension or disruption of our operations. Additionally, such actions could affect the operations of our suppliers or customers, resulting in loss of access to products, potential losses on supplier programs, loss of business, higher losses on receivables or inventory, or other disruptions in our business, which could negatively affect our operating results. We do not carry insurance covering such terrorist or military actions, and even if we were to seek such coverage and such coverage was available, the cost likely would not be commercially reasonable.

Risks Relating to Indebtedness

The level of our indebtedness could adversely affect our financial condition.

     We have the ability, subject to borrowing base requirements, to borrow up to $65.0 million under the revolving credit agreement. The level of our indebtedness could have important consequences. For example, it could:

	•		make it more difficult for us to satisfy our obligations with respect to other indebtedness;
	•		increase our vulnerability to adverse economic and industry conditions;
	•		require us to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, thereby reducing the availability of cash to fund working capital and capital expenditures and for other general corporate purposes;
	•		restrict us from acquiring new content, exploring other business opportunities or strategic acquisitions;
	•		limit our ability to obtain financing for working capital, capital expenditures, general corporate purposes or acquisitions;
	•		place us at a disadvantage compared to our competitors that have less indebtedness;
	•		limit our flexibility in planning for, or reacting to, changes in our business and industry; and
	•		cause vendors to reduce or restrict vendor financing.

Our outstanding indebtedness bears interest at variable rates. Any increase in interest rates will reduce funds available to us for our operations and future business opportunities and could adversely affect our leveraged capital structure.

     All of the $6.6 million of our outstanding debt at March 31, 2010 is subject to variable interest rates. A 100-basis point change in the current LIBOR rate would cause our projected annual interest expense, based on current borrowed amounts, to change by approximately $66,000. The fluctuation in our debt service requirements, in addition to interest rate changes, may be impacted by future borrowings under our credit facility or other alternative financing arrangements.

We may be unable to generate sufficient cash flow to service our debt obligations.

     Our ability to make payments on and refinance our indebtedness and to fund our operations, working capital and capital expenditures depends on our ability to generate cash in the future. Our ability to generate future cash is subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors that are beyond our control.

     We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit agreement in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.

     We will need to refinance all or a portion of our indebtedness on or before the maturity date of our revolving line of credit (November 2012). Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:

	•		our financial condition at the time;
	•		the amount of financing outstanding and lender requirements at the time;
	•		restrictions in our credit agreement or other outstanding indebtedness; and
	•		other factors, including the condition of the financial markets or the distribution and publishing markets.

     As a result, we may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of asset sales are not available to us, we may not have sufficient cash to enable us to meet all of our obligations.

We may be able to incur additional indebtedness, which could further exacerbate the risks associated with our current indebtedness level.

     We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although our credit facility contains restrictions on the incurrence of additional indebtedness, debt incurred in compliance with these restrictions could be substantial. Our revolving working capital credit facility provided pursuant to a credit agreement, permits, subject to borrowing base requirements, total borrowings of up to $65.0 million. In addition, our credit agreement will not prevent us from incurring certain other obligations. If we and our subsidiaries incur additional indebtedness or other obligations, the related risks that we face could be magnified.

Our credit agreement contains significant restrictions that limit our operating and financial flexibility.

     Our credit agreement requires us to maintain specified financial ratios and includes other restrictive covenants. We may be unable to meet such ratios and covenants. Any of these restrictions may limit our ability to execute our business strategy. Moreover, if operating results fall below current levels, we may be unable to comply with these covenants. If that occurs, our lenders could accelerate our indebtedness, in which case we may not be able to repay all of our indebtedness.

Risks Relating to Our Common Stock

Our common stock price has been volatile. Fluctuations in our stock price could impair our ability to raise capital and make an investment in our securities undesirable.

     The market price of our common stock has fluctuated significantly. During the period from April 1, 2009 to March 31, 2010, the last reported price of our common stock as quoted on The NASDAQ Global Market ranged from a low of $0.40 to a high of $2.96. We believe factors such as the market’s acceptance of our products and the performance of our business relative to market expectations, as well as general volatility in the securities markets, could cause the market price of our common stock to fluctuate substantially. In addition, the stock markets have experienced price and volume fluctuations, resulting in changes in the market prices of the stock of many companies, which may not have been directly related to the operating performance of those companies. Fluctuations in our stock price could impair our ability to raise capital and could make an investment in our securities undesirable.

If we fail to meet the Nasdaq Global Market listing requirements, our common stock could be delisted.

     Our common stock is traded on the Nasdaq Global Market, which has various listing requirements. If our stock price does not meet minimum standards, we may not be able to maintain the standards for continued listing on the Nasdaq Global Market, which include, among other things, that our common stock maintain a minimum closing bid price of at least $1.00 per share and minimum shareholders’ equity of $10.0 million (subject to applicable grace and cure periods). During fiscal year 2010, our common stock traded below the minimum $1.00 closing bid price for 42 consecutive business days. There is no guarantee it will remain above $1.00. If, as a result of the

application of such listing requirements, our common stock is delisted from the Nasdaq Global Market, our stock could become more difficult to buy and sell. Consequently, if we were removed from the Nasdaq Global Market, the ability or willingness of broker-dealers to sell or make a market in our common stock might decline. As a result, the ability to purchase or resell shares of our common stock could be adversely affected.

The exercise of outstanding warrants and options may adversely affect our stock price.

     As of March 31, 2010, options and warrants to purchase 5,651,786 shares of our common stock were outstanding, of which 2,149,646 options and 1,596,001 warrants were exercisable as of that date. Our outstanding options and warrants are likely to be exercised at a time when the market price for our common stock is higher than the exercise prices of the options and warrants. If holders of these outstanding options and warrants sell the common stock received upon exercise, it may have a negative effect on the market price of our common stock.

Our anti-takeover provisions, our ability to issue preferred stock and our staggered board may discourage takeover attempts that could be beneficial for our shareholders.

     We are subject to Sections 302A.671 (Control Share Acquisitions) and 302A.673 (Business Combinations) of the Minnesota Business Corporation Act, which may have the effect of limiting third parties from acquiring significant amounts of our common stock without our approval. These laws, among others, may have the effect of delaying, deferring or preventing a third party from acquiring us or may serve as a barrier to shareholders seeking to amend our articles of incorporation or bylaws. Our articles of incorporation also permit us to issue preferred stock, which could allow us to delay or block a third party from acquiring us. The holders of preferred stock could also have voting and conversion rights that could adversely affect the voting power of the holders of the common stock. Finally, our articles of incorporation and bylaws divide our board of directors into three classes that serve staggered, three-year terms. Each of these factors could make it difficult for a third party to effect a change in control of us. As a result, our shareholders may lose opportunities to dispose of their shares at the higher prices typically available in takeover attempts or that may be available under a merger or other proposal.

     In addition, these measures may have the effect of permitting our current directors to retain their positions and place them in a better position to resist changes that our shareholders may wish to make if they are dissatisfied with the conduct of our business.

We currently do not intend to pay dividends on our common stock and, consequently, there will be no opportunity for our shareholders to achieve a return on their investment through dividend payments.

     We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. Further, the payment of dividends by us is restricted by our credit facility and loan agreements. Consequently, shareholders should not expect an opportunity to achieve a return on their investment through dividend payments.

Our directors may not be held personally liable for certain actions, which could discourage shareholder suits against them.

     Minnesota law and our articles of incorporation and bylaws provide that our directors shall not be personally liable to us or our shareholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. These provisions may discourage shareholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by shareholders on behalf of us against a director. In addition, our bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Minnesota law.

Other Risks

     Our business operates in a continually changing environment that involves numerous risks and uncertainties. It is not reasonable for us to itemize all of the factors that could affect us and/or the products and services or the distribution industry or the publishing industry as a whole. Future events that may not have been anticipated or discussed here could adversely affect our business, financial condition, results of operations or cash flows.

     Thus, the foregoing is not a complete description of all risks relevant to our future performance, and the foregoing risk factors should be read and understood together with and in the context of similar discussions which may be contained in the documents that we file with the SEC in the future.

Item 1B. Unresolved Staff Comments

     Not applicable.

Item 2. Properties

Distribution

     Located in the Minneapolis suburb of New Hope, Minnesota, our corporate headquarters consists of approximately 322,000 square feet of combined office and warehouse space situated on three contiguous properties. The leases for two of the properties expire on June 30, 2019 and the lease for the third property expires on February 29, 2016. These leased properties include approximately 44,000 square feet of office space; approximately 73,000 square feet of space utilized in the manufacturing and assembly of new products; and approximately 205,000 square feet of space devoted to warehousing, product picking and shipping.

     Additionally, we operate a satellite sales office in Bentonville, Arkansas which occupies 2,000 square feet of leased office space. The lease for this space expires on February 28, 2013. In March, 2010, we began start-up operations for a satellite distribution center in Mississauga, Ontario which occupies 30,000 square feet of leased warehouse space. The lease for this space expires on February 28, 2015.

     The present aggregate base monthly rent for all of our distribution and office facilities is approximately $167,000.

Publishing

     Encore currently operates its offices out of approximately 13,000 square feet of leased office space located in Los Angeles, California. This lease currently provides for base monthly payments to be made in the amount of $27,000 and expires April 30, 2013. Encore also operates a call center in Cedar Rapids, Iowa which occupies 3,000 square feet of leased office space. The lease for this space expires on March 31, 2013 and currently provides for base monthly payments to be made in the amount of $3,000.

     FUNimation currently operates its offices out of approximately 48,500 square feet of leased office space located in a suburb of Dallas/Fort Worth, Texas. This lease currently provides for base monthly rental payments to be made in the amount of $50,000 and expires October 31, 2017. In September 2008, we completed the sale of an unused facility owned by FUNimation (see Note 12 to the consolidated financial statements).

     We believe our facilities are adequate for our present operations as well as for the incorporation of growth. We continually explore alternatives to certain of these facilities that could expand our capacities and enhance efficiencies, and we believe we can renew or obtain replacement or additional space, if required, on commercially reasonable terms.

Item 3. Legal Proceedings

     See Note 23 to the consolidated financial statements.

Item 4. (Removed and Reserved)

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     Common Stock

     Our common stock, no par value, is traded on The NASDAQ Global Market under the symbol “NAVR”. The following table presents the range of high and low closing sale prices for our stock for each period indicated as reported on The NASDAQ Global Market. Such prices reflect inter-dealer prices, do not include adjustments for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions.

		Quarter		High				Low
Fiscal 2010		First		$	1.65			$	0.40
		Second			2.28				1.53
		Third			2.96				2.03
		Fourth			2.17				1.90
Fiscal 2009		First			1.87				1.48
		Second			1.79				1.41
		Third			1.45				0.38
		Fourth			0.57				0.34

     Holders

     At June 10, 2010, we had 593 common shareholders of record and an estimated 6,800 beneficial owners whose shares were held by nominees or broker dealers.

     Dividend Policy

     We have never declared or paid cash dividends on our common stock. We currently intend to retain all earnings for use in our business and do not intend to pay any dividends on our common stock in the foreseeable future.

     Comparative Stock Performance

     The following Performance Graph compares performance of our common stock on The NASDAQ Global Market of The NASDAQ Stock Market LLC (US companies), the NASDAQ Composite Index and the Peer Group Indices described below. The graph compares the cumulative total return from March 31, 2005 to March 31, 2010 on $100 invested on March 31, 2005, assumes reinvestment of all dividends, and has been adjusted to reflect stock splits.

     The Peer Group Index below includes the stock performance of the following companies: Handleman Company, Ingram Micro Inc., Tech Data Corp., 4 Kids Entertainment Inc. and Take Two Interactive Software Inc. These companies have operations similar to our distribution and publishing businesses.

		3/05				3/06				3/07				3/08				3/09				3/10
Navarre Corporation		$	100.00			$	53.96			$	47.17			$	22.14			$	5.53			$	26.16
NASDAQ Composite		$	100.00			$	119.97			$	134.27			$	118.46			$	85.30			$	142.80
Peer Group		$	100.00			$	96.43			$	95.14			$	86.83			$	52.88			$	79.54

Source: Research Data Group, Inc.

Purchases of Equity Securities

We did not purchase any shares of our common stock during the fourth quarter of fiscal 2010.

Equity Compensation Plan Information

During fiscal 2010 we granted 848,500 options and awarded 242,750 restricted shares.

     The following table below presents certain information regarding our Equity Compensation Plans:

Number of securities

Weighted-average

remaining available for

exercise

future issuance under

Number of securities to be

price of

equity

issued upon exercise of

outstanding

compensation plans

outstanding options,

options,

(excluding securities

warrants and rights

warrants and rights

reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

5,651,786

$

4.54

98,913

Equity compensation plans not approved by security holders

—

—

—

Total

5,651,786

$

4.54

98,913

Item 6. Selected Financial Data

     The following selected financial data should be read in conjunction with Item 8, Financial Statements and Supplementary Data and related notes and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other financial information appearing elsewhere in this Annual Report on Form 10-K. We derived the following historical financial information from our consolidated financial statements for the fiscal years ended March 31, 2010, 2009, 2008, 2007 and 2006 which have been audited by Grant Thornton LLP. (In thousands, except per share data)

		Fiscal Years ended March 31,
		2010				2009				2008				2007				2006(1)
Statement of operations data (2):
Net sales		$	528,332			$	630,991			$	658,472			$	644,790			$	615,557
Gross profit, exclusive of depreciation and amortization			87,925				67,047				101,559				107,357				101,425
Income (loss) from operations			18,683				(97,118	)			17,831				16,362				6,767
Interest expense			(2,818	)			(4,630	)			(6,127	)			(10,220	)			(11,217	)
Other income (expense)			804				(1,169	)			625				56				2,764
Income (loss) from continuing operations			16,669				(102,917	)			12,329				6,198				(1,686	)
Income tax benefit (expense)			6,203				14,483				(5,273	)			(2,594	)			654
Net income (loss) from continuing operations			22,872				(88,434	)			7,056				3,604				(1,032	)
Gain on sale of discontinued operations			—				—				4,892				—				—
Income (loss) from discontinued operations			—				—				(2,290	)			455				(2,143	)
Net income (loss)		$	22,872			$	(88,434	)		$	9,658			$	4,059			$	(3,175	)
Basic earnings (loss) per common share:
Continuing operations		$	0.63			$	(2.44	)		$	0.20			$	0.10			$	(0.04	)
Discontinued operations			—				—				0.07				0.01				(0.07	)
Net income (loss)		$	0.63			$	(2.44	)		$	0.27			$	0.11			$	(0.11	)
Diluted earnings (loss) per common share:
Continuing operations		$	0.62			$	(2.44	)		$	0.20			$	0.10			$	(0.04	)
Discontinued operations			—				—				0.07				0.01				(0.07	)
Net income (loss)		$	0.62			$	(2.44	)		$	0.27			$	0.11			$	(0.11	)
Weighted average shares outstanding:
Basic			36,285				36,207				36,105				35,786				29,898
Diluted			36,643				36,207				36,269				36,228				29,898
Balance sheet data:
Total assets		$	171,603			$	183,169			$	283,462			$	288,225			$	309,614
Short-term debt			6,634				24,133				31,523				39,208				5,115
Long-term debt			—				—				9,654				14,970				75,352
Temporary equity — Unregistered common stock (3)			—				—				—				—				16,634
Shareholders’ equity			60,761				37,007				124,411				113,451				88,906

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     We are a distributor and publisher of physical and digital home entertainment and multimedia products, including computer software, home video, video games and accessories. Since our founding in 1983, we have established distribution relationships with major retailers including Best Buy, Wal-Mart/Sam’s Club, Costco Wholesale Corporation, Staples, Office Depot and Target, and we distribute to more than 19,000 retail and distribution center locations throughout the United States and Canada. We believe our established relationships throughout the supply chain, our broad product offering and our distribution facility permit us to offer industry-leading home entertainment and multimedia products to our retail customers and to provide access to a retail channel for the publishers of such products.

     Historically, our business has focused on providing distribution services for third party vendors. Over the past several years, we have expanded our business to include the licensing and publishing of home entertainment and multimedia content, primarily through our acquisitions of publishers in select markets. By expanding our product offerings through such acquisitions, we believe we can leverage both our sales experience and distribution capabilities to drive increased retail penetration and more effective distribution of such products, and enable content developers and publishers that we acquire to focus more on their core competencies.

     Our business is divided into two segments — Distribution and Publishing.

     Distribution. Through our distribution business, we distribute and provide fulfillment services in connection with a variety of finished goods that are provided by our vendors, which include computer software, home video, video games, accessories and independent music labels (through May 2007), and by our publishing business. These vendors provide us with products, which we, in turn, distribute to our retail customers. Our distribution business focuses on providing vendors and retailers with a range of value-added services including: vendor-managed inventory, Internet-based ordering, electronic data interchange services, fulfillment services and retailer-oriented marketing services. Our vendors include Symantec Corporation, Kaspersky Lab, Inc., Roxio (a division of Sonic Solutions), Webroot Software, Inc., Nuance Communications, Inc., McAfee, Inc. Corel Corporation, LucasArts Entertainment Company and our own publishing business.

     On May 31, 2007, we sold our wholly-owned subsidiary, NEM, to an unrelated third party. NEM operated our independent music distribution activities. We received $6.5 million in cash proceeds from the sale, plus the assignment of the trade receivables related to this business. As part of this transaction, we recorded a gain in the first quarter of fiscal 2008 of $6.1 million ($4.6 million net of tax), which included severance and legal costs of $339,000 and other direct costs to sell of $842,000. The gain is included in “Gain on sale of discontinued operations” in the Consolidated Statements of Operations. Net sales from discontinued operations for the fiscal year ended March 31, 2008 were $5.2 million. Net income from discontinued operations was $2.6 million or $0.07 per diluted share for the fiscal year ended March 31, 2008. The consolidated financial statements were reclassified to segregate the assets, liabilities and operating results of the discontinued operations for all periods presented.

     Publishing. Through our publishing business, which generally has higher gross margins than our distribution business, we own or license various computer software, and home video titles, and other related merchandising and broadcasting rights. Our publishing business packages, brands, markets and sells directly to retailers, third party distributors and our distribution business. Our publishing business is the leading provider of anime home video products in North America through FUNimation Productions, Ltd. (“FUNimation”) and publishes software through Encore Software, Inc. (“Encore”). In fiscal 2009, a former component of our publishing business, BCI, began winding down its licensing operations related to budget home video, and the wind-down was completed during the fourth quarter of fiscal 2010.

Overall Summary of Fiscal 2010 Financial Results

     We reduced our debt balance by $17.5 million to $6.6 million at March 31, 2010, from $24.1 million at March 31, 2009. Working capital management, strong earnings and lack of cash federal tax payments contributed to the debt balance reduction.

     At March 31, 2010, the amount of deferred tax assets that we will more likely than not be able to realize increased due to a tax law change allowing us to carry our net operating losses back additional years as well as us having higher than projected book income. As a result, we released $11.7 million of the valuation allowance against these deferred tax assets, reducing the valuation allowance balance to $9.7 million at March 31, 2010.

     Consolidated net sales decreased 16.3% during fiscal 2010 to $528.3 million compared to $631.0 million in fiscal 2009. This decrease in net sales, primarily in the software and video game categories, was due to a $36.3 million loss of sales to a large retailer that filed for bankruptcy and was liquidated during fiscal 2009, a shift to fee-based value-added services, departure of low margin vendors (which generated $57.2 million additional net sales during fiscal 2009), a decrease in distribution sales resulting from a lack of new major video game and software releases versus the prior fiscal year, the weak retail market and poor overall economic conditions as well as the inclusion of BCI in fiscal 2009 (which generated $10.0 million in net sales during fiscal 2009).

     Our gross profit increased to $87.9 million or 16.6% of net sales for fiscal 2010 compared to $67.0 million or 10.6% of net sales for fiscal 2009. The increase in gross margin of $20.9 million was a result of fiscal 2009 impairment and other charges of $25.2 million which were offset by decreased sales volume in fiscal 2010.

     The increase in gross profit margin percent to 16.6% from 10.6%, a total increase of 6.0%, was due principally to a more beneficial product sales mix, which included increased sales of higher margin software products, departure of low margin vendors and an increase in fee-based value-added services during fiscal 2010, and the prior year results being impacted by impairment and other charges related to our restructuring (which constituted 4.0% of the increase).

     Total operating expenses for fiscal 2010 were $69.2 million or 13.1% of net sales, compared with $164.2 million or 26.0% of net sales for fiscal 2009. The $95.0 million decrease was primarily a result of pre-tax, non-cash goodwill and trademark impairment charges of $82.7 million which were recorded in fiscal 2009, $2.0 million of impairment related to masters recorded in fiscal 2009 and severance costs of $1.1 million related to reduction in force recorded in fiscal 2009. We experienced additional decreases in all expense categories during fiscal 2010 due to the elimination of costs related to BCI in fiscal 2010, the benefit received from the implementation of company-wide expense reduction initiatives during fiscal 2009 (which included workforce reductions), a decrease in enterprise resource planning (“ERP”) expenses for systems that were implemented in fiscal 2009 and operational efficiencies. These expense reductions were partially offset by a $4.8 million increase of performance-based compensation expense for fiscal 2010 compared to fiscal 2009.

     Net income for fiscal 2010 was $22.9 million or $0.62 per diluted share compared to net loss of $88.4 million or a loss of $2.44 per diluted share last year.

Working Capital and Debt

     Our business is working capital intensive and requires significant levels of working capital primarily to finance accounts receivable and inventories. We finance our operations through cash and cash equivalents, funds generated through operations, accounts payable and our revolving credit facility. The timing of cash collections and payments to vendors requires usage of our revolving credit facility in order to fund our working capital needs. We have a cash sweep arrangement with our lender, whereby, daily, all cash receipts from our customers reduce borrowings outstanding under the credit facility. Additionally, all payments to our vendors that are presented by the vendor to our bank for payment increase borrowings outstanding under the credit facility. “Checks written in excess of cash balances” may occur from time to time, including period ends, and represent payments made to vendors that have not yet been presented by the vendor to our bank. On a terms basis, we extend varying levels of credit to our customers and receive varying levels of credit from our vendors. We have not had any significant changes in the terms extended to customers or provided by vendors which would have a material impact to the reported financial statements.

     In March 2007, we amended and restated our credit agreement with General Electric Capital Corporation (“GE”) (the “GE Facility”) and entered into a four year Term Loan facility with Monroe Capital Advisors, LLC (“Monroe”). The GE Facility provided for a $65.0 million revolving credit facility and the Monroe agreement provided for a $15.0 million Term Loan facility. The Monroe facility was paid in full in connection with the Third Amendment of the GE Facility on June 12, 2008 and the GE Facility itself was paid in full on November 12, 2009, when we obtained a new credit facility.

     On November 12, 2009, we entered into a three year, $65.0 million revolving credit facility (the “Credit Facility”) with Wells Fargo Foothill, LLC as agent and lender, and Capital One Leverage Financing Corp. as a participating lender. The Credit Facility is secured by a first priority security interest in all of our assets, as well as the capital stock of our subsidiary companies. Additionally, the Credit Facility calls for monthly interest payments at the bank’s base rate, as defined in the Credit Facility, plus 4.0% or LIBOR plus 4.0%, at our discretion. The entire outstanding balance of principal and interest is due in full on November 12, 2012.

     At March 31, 2010, we had $6.6 million outstanding on the Credit Facility and, based on the facility’s borrowing base and other requirements, we had excess availability of $38.4 million. Amounts available under the credit facility are subject to a borrowing base formula. Changes in the assets within the borrowing base formula can impact the amount of availability. At March 31, 2009, we had $24.1 million outstanding on the GE Facility and, based on that facility’s borrowing base and other requirements, $16.2 million was available.

     In association with both credit facilities, and per the respective terms, we pay and have paid certain facility and agent fees. Weighted average interest on the Credit Facility was 7.5% at March 31, 2010 and at March 31, 2009 under the GE Facility was 5.6%. Such interest amounts have been and continue to be payable monthly.

Critical Accounting Policies and Estimates

     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we review and evaluate our estimates, including those related to customer programs and incentives, product returns, bad debt, production costs and license fees, inventories, long-lived assets including intangible assets, goodwill, share-based compensation, income taxes, contingencies and litigation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies are affected by our judgment, estimates and/or assumptions used in the preparation of our consolidated financial statements.

Revenue Recognition

     We recognize revenue on products shipped when title and risk of loss transfers, delivery has occurred, the price to the buyer is determinable and collectability is reasonably assured. We recognize service revenues upon delivery of the services. Service revenues represented less than 10% of total net sales for fiscal 2010, 2009 and 2008. Under specific conditions, we permit our customers to return products. We record a reserve for sales returns and allowances against amounts due to reduce the net recognized receivables to the amounts we reasonably believe will be collected. These reserves are based on the application of our historical gross profit percent against average sales returns. Our actual sales return rates have averaged between 9% and 13% over the past three years. Although our past experience has been a good indicator of future reserve levels, there can be no assurance that our current reserve levels will be adequate in the future.

     Our distribution customers at times qualify for certain price protection and promotional monies from our vendors. We serve as an intermediary to settle these amounts between vendors and customers. We account for these amounts as reductions of revenues with corresponding reductions in cost of sales.

     Our publishing business at times provides certain price protection, promotional monies, volume rebates and other incentives to customers. We record these amounts as reductions in revenue.

     FUNimation’s revenue is recognized upon meeting the recognition requirements of ASC 926, Entertainment-Films. Revenues from home video distribution are recognized, net of an allowance for estimated returns, in the period in which the product is available for sale by our customers (generally upon shipment to the customer and in the case of new releases, after “street date” restrictions lapse). Revenues from broadcast licensing and home video sublicensing are recognized when the programming is available to the licensee and other recognition requirements of ASC 926 are met. Revenues received in advance of availability are deferred until revenue recognition requirements have been satisfied. Royalties on sales of licensed products are recognized in the period earned. In all instances, provisions for uncollectible amounts are provided for at the time of sale.

Production Costs and License Fees — FUNimation

     In accordance with accounting principles generally accepted in the United States and industry practice, we amortize the costs of production using the individual-film-forecast method under which such costs are amortized for each title or group of titles in the ratio that revenue earned in the current period for such title bears to management’s estimate of the total revenues to be realized for such titles. All exploitation costs, including advertising and marketing costs are expensed as incurred.

     We regularly review, and revise when necessary, our total revenue estimates on a title-by-title or group of titles basis, which may result in a change in the rate of amortization and/or a write-down of the asset to estimated fair value. We determine the estimated fair value for properties based on the estimated future ultimate revenues and costs in accordance with ASC 926.

     Any revisions to ultimate revenues can result in significant quarter-to-quarter and year-to-year fluctuation in production cost write-downs and amortization. The commercial potential of individual films can vary dramatically, and is not directly correlated with production or acquisition costs. Therefore, it is difficult to predict or project the impact that individual films will have on our results of operations. Significant fluctuations in reported income or loss can occur, particularly on a quarterly basis, depending on the release schedules, broadcast dates, the timing of advertising campaigns and the relative performance of the individual films.

     License fees represent advance license/royalty payments made to program suppliers for exclusive distribution rights. A program supplier’s share of distribution revenues (“participation/royalty cost”) is retained until the share equals the license fees paid to the program supplier plus recoupable production costs. Thereafter, any excess is paid to the program supplier. License fees are amortized as recouped which equals participation/royalty costs earned by the program suppliers. Participation/royalty costs are accrued/expensed in the same ratio that current period revenue for a title or group of titles bear to the estimated remaining unrecognized ultimate revenue for that title, as defined by ASC 926. When estimates of total revenues and costs indicate that an individual title will result in an ultimate loss, an impairment charge is recognized to the extent that license fees and production costs exceed estimated fair value, based on cash flows, in the period when estimated.

Allowance for Doubtful Accounts

     We perform periodic credit evaluations of our customers’ financial condition. In determining the adequacy of our allowances, we analyze customer financial statements, historical collection experience, aging of receivables, substantial down-grading of credit scores, bankruptcy filings, and other economic and industry factors. Although we utilize risk management practices and methodologies to determine the adequacy of the allowance, the accuracy of the estimation process can be materially impacted by different judgments as to collectability based on the information considered and further deterioration of accounts. Our largest collection risks exist for customers that are in bankruptcy, or at risk of bankruptcy. If customer circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due could be reduced by a material amount.

Goodwill and Intangible Assets

     We review goodwill for potential impairment annually for each reporting unit, or when events or changes in circumstances indicate the carrying value of the goodwill might exceed its current fair value. We also assess potential impairment of goodwill and intangible assets when there is evidence that recent events or changes in circumstances have made recovery of an asset’s carrying value unlikely. The amount of impairment loss would be recognized as the excess of the asset’s carrying value over its fair value. Factors which may cause impairment include negative industry or economic trends and significant underperformance relative to historical or projected future operating results.

     We determine fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analysis. These types of analyses require us to make certain assumptions and estimates regarding industry economic factors and the profitability of future business strategies. We conduct impairment testing at least once annually based on our most current business strategy in light of present industry and economic conditions, as well as future expectations. If the operating results for our publishing segment deteriorate considerably and are not consistent with our assumptions and estimates, we may be exposed to a goodwill impairment charge that could be material. As discussed above, during the fiscal year ended March 31, 2009, we determined that the fair value of three of our reporting units was less than their fair values, and accordingly, an impairment of goodwill and other intangibles was recorded. In determining the amount of impairment, ASC 350, Intangibles — Goodwill and Other, requires us to analyze the fair values of the assets and liabilities of the reporting units as if the reporting units had been acquired in a current business combination. At March 31, 2010 and 2009 we had no goodwill associated with our publishing or distribution segments.

Impairment of Long-Lived Assets

     Long-lived assets, such as property and equipment and amortizable intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value. If our results from operations deteriorate considerably and are not consistent with our assumptions, we may be exposed to a material impairment charge. As discussed above, during the fiscal year ended March 31, 2009, we determined that the fair value of various long-lived assets was less than their fair values, and accordingly, an impairment of other intangibles was recorded. In

determining the amount of impairment, ASC 350 and ASC 360, require us to analyze the fair values of the assets and liabilities of the reporting units as if the reporting units had been acquired in a current business combination.

Inventory Valuation

     Our inventories are recorded at the lower of cost or market. We use certain estimates and judgments to value inventory. We monitor our inventory to ensure that we properly identify inventory items that are slow-moving, obsolete or non-returnable, on a timely basis. A significant risk in our distribution business is product that has been purchased from vendors that cannot be sold at full distribution prices and is not returnable to the vendors. A significant risk in our publishing business is that certain products may run out of shelf life and be returned by our customers. Generally, these products can be sold in bulk to a variety of liquidators. We establish reserves for the difference between carrying value and estimated realizable value in the periods when we first identify the lower of cost or market issue. If future demand or market conditions are less favorable than current analyses, additional inventory write-downs or reserves may be required and would be reflected in cost of sales in the period the determination is made.

Share-Based Compensation

     We have granted stock options, restricted stock units and restricted stock to certain employees and non-employee directors. We recognize compensation expense for all share-based payments granted after March 31, 2006 and all share-based payments granted prior to but not yet vested as of March 31, 2006, in accordance with ASC 718, Compensation — Stock Compensation. Under the fair value recognition provisions of ASC 718, we recognize share-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award (normally the vesting period) or when the performance condition has been met. Prior to the adoption of ASC 718, we only recognized compensation expense for stock options or restricted stock, which had a grant date intrinsic value.

     Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. We use the Black-Scholes model to value our stock option awards and a lattice model to value restricted stock unit awards. We believe future volatility will not materially differ from the historical volatility. Thus, the fair value of the share-based payment awards represents our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, share-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from the estimate, share-based compensation expense could be significantly different from what has been recorded in the current period.

Income Taxes

     Income taxes are recorded under the liability method, whereby deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities. In the preparation of our consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposures together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. Management reviews our deferred tax assets for recoverability on a quarterly basis and assesses the need for valuation allowances. These deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income streams and the impact of tax planning strategies. A valuation allowance is recorded to reduce deferred tax assets when it is determined that it is more likely than not that we would not be able to realize all or part of our deferred tax assets. At March 31, 2009 we carried a valuation allowance against our net deferred tax assets of $21.4 million which represents the amount of temporary differences which we do not anticipate recognizing with future projected income for fiscal years 2010 through 2013, or by net operating loss carrybacks. During fiscal 2010, the amount of deferred tax assets that we will more likely than not be able to realize increased due to a tax law change allowing us to carry our net operating losses back additional years as well as us having higher than projected book income. As a result, we released $11.7 million of the valuation allowance against these deferred tax assets, reducing the valuation allowance balance to $9.7 million at March 31, 2010.

     In July 2006, ASC 740-10, Income Taxes was issued and was adopted and became effective for us on April 1, 2007. ASC 740-10 defines the threshold for recognizing the benefits of tax positions in the financial statements as “more-likely-than-not” to be sustained upon examination. The interpretation also provides guidance on the de-recognition, measurement and classification of income tax

uncertainties, along with any related interest and penalties. ASC 740-10 also requires expanded disclosure at the end of each annual reporting period including a tabular reconciliation of unrecognized tax benefits.

Contingencies and Litigation

     There are various claims, lawsuits and pending actions against us. If a loss arising from these actions is probable and can be reasonably estimated, we record the amount of the estimated loss. If the loss is estimated using a range within which no point is more probable than another, the minimum estimated liability is recorded. Based on current available information, we believe the ultimate resolution of existing actions will not have a material adverse effect on our consolidated financial statements. As additional information becomes available, we assess any potential liability related to existing actions and may need to revise our estimates. Future revisions of our estimates could materially impact our consolidated results of operations, cash flows or financial position.

Recently Issued Accounting Pronouncements

     During December 2007, the FASB issued ASC 810-10, Consolidation. ASC 810-10 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, ASC 810-10 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. ASC 810-10 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, ASC 810-10 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. ASC 810-10 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. ASC 810-10 was effective, and adopted by us, beginning with the quarter ended June 30, 2009. We did not experience any impact on our financial condition, results of operations and cash flows from the adoption of ASC 810-10.

     On December 4, 2007, the FASB issued ASC 805-10, Business Combinations. ASC 805-10 significantly changed the accounting for business combinations. Under ASC 805-10, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. ASC 805-10 changed the accounting treatment for certain specific items, including:

	•		Acquisition costs are generally expensed as incurred;
	•		Noncontrolling interests (formerly known as “minority interests”) are valued at fair value at the acquisition date;
	•		Acquired contingent liabilities are recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;
	•		In-process research and development are recorded at fair value as an indefinite-lived intangible asset at the acquisition date;
	•		Restructuring costs associated with a business combination are generally expensed subsequent to the acquisition date; and
	•		Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense.

     ASC 805-10 also included a substantial number of new disclosure requirements. The statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of an entity’s fiscal year that begins after December 15, 2008. We adopted ASC 805-10 in the first quarter of fiscal 2010, which did not have an impact on our consolidated financial statements.

     In March 2008, the FASB issued ASC 815-10, Derivatives and Hedging. ASC 815-10 is intended to improve financial reporting standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects these instruments and activities have on an entity’s financial position, financial performance, and cash flows. ASC 815-10 also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. ASC 815-10 is effective for financial statements issued for fiscal years and interim

periods beginning after November 15, 2008. We adopted ASC 815-10 on January 1, 2009, which did not have an impact on our consolidated financial statements.

     In May 2009, the FASB issued ASC 855-10, Subsequent Events which requires all public entities to evaluate subsequent events through the date that the financial statements are available to be issued and disclose in the notes the date through which we have evaluated subsequent events and whether the financial statements were issued or were available to be issued on the disclosed date. ASC 855-10 defines two types of subsequent events as follows: the first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet and the second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009 and must be applied prospectively. In February 2010, subsequent to our adoption of the new guidance discussed above, the FASB issued updated guidance on subsequent events, amending the May 2009 guidance. This updated guidance revised various terms and definitions within the guidance and requires us, as an “SEC filer,” to evaluate subsequent events through the date the financial statements are issued, rather than through the date the financial statements are available to be issued. Furthermore, we no longer are required to disclose the date through which subsequent events have been evaluated. The updated guidance was effective for us immediately upon issuance. As such, we adopted ASC 855-10 during fiscal 2010. Our adoption of both the new and updated guidance did not have an impact on our consolidated financial position or results of operations.

     In June 2009, the FASB issued ASC 860-10, Transfers and Servicing. This Statement eliminates the concept of a “qualified special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. ASC 860-10 is effective for fiscal years beginning after November 15, 2009. We will adopt ASC 860-10 in fiscal 2011 and are evaluating the impact, if any, it will have to our consolidated financial statements.

     In June 2009, the FASB also amended ASC 810-10, Consolidation, which addresses the effects of eliminating the qualified special purpose entity concept from ASC 860-10 and responds to concerns about the application and transparency of enterprises’ involvement with Variable Interest Entities (VIEs). ASC 810-10 is effective for fiscal years beginning after November 15, 2009. We will adopt ASC 810-10 in fiscal 2011 and are evaluating the impact, if any, it will have to our consolidated financial statements.

     In July 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Principles (“GAAP”). This standard will become the source of authoritative non-SEC authoritative GAAP. ASC 105-10 establishes a two-level GAAP hierarchy for nongovernmental entities: authoritative guidance and nonauthoritative guidance. Authoritative guidance consists of the Codification and, for SEC registrants, rules and interpretative releases of the Commission. Nonauthoritative guidance consists of non-SEC accounting literature that is not included in the Codification and has not been grandfathered. ASC 105-10, including the Codification, is effective for financial statements of interim and annual periods ending after September 15, 2009 and we adopted ASC 105-10 during the period ending September 30, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact to our consolidated financial statements.

Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations

     In evaluating our financial performance and operating trends, management considers information concerning our net sales before inter-company eliminations of sales that are not prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. Management believes these non-GAAP measures are useful because they provide supplemental information that facilitates comparisons to prior periods and for the evaluations of financial results. Management uses these non-GAAP measures to evaluate its financial results, develop budgets and manage expenditures. The method we use to produce non-GAAP results is not computed according to GAAP, is likely to differ from the methods used by other companies and should not be regarded as a replacement for corresponding GAAP measures. Net sales before inter-company eliminations has limitations as a supplemental measure, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

     The following table represents a reconciliation of GAAP net sales to net sales before inter-company eliminations:

		Fiscal Year Ended
(Unaudited)		March 31,				March 31,				March 31,
(In thousands)		2010				2009				2008
Net sales
Distribution		$	487,692			$	592,893			$	611,007
Publishing			86,003				102,828				117,423
Net sales before inter-company eliminations			573,695				695,721				728,430
Inter-company sales			(45,363	)			(64,730	)			(69,958	)
Net sales as reported		$	528,332			$	630,991			$	658,472

     Results of Operations

     The following table sets forth for the periods indicated, the percentage of net sales represented by certain items included in our Consolidated Statements of Operations.

		Fiscal Years Ended March 31,
		2010				2009				2008
Net sales:
Distribution			92.3	%			94.0	%			92.8	%
Publishing			16.3				16.3				17.8
Inter-company sales			(8.6	)			(10.3	)			(10.6	)
Total net sales			100.0				100.0				100.0
Cost of sales, exclusive of depreciation and amortization			83.4				89.4				84.6
Gross profit			16.6				10.6				15.4
Operating Expenses
Selling and marketing			4.4				4.0				4.2
Distribution and warehousing			1.9				1.9				1.9
General and administrative			5.6				5.2				5.2
Depreciation and amortization			1.2				1.8				1.4
Goodwill and intangible asset impairment			—				13.1				—
Total operating expenses			13.1				26.0				12.7
Income (loss) from operations			3.5				(15.4	)			2.7
Interest expense			(0.5	)			(0.7	)			(0.9	)
Other income (expense), net			0.2				(0.2	)			0.1
Income (loss) from continuing operations — before taxes			3.2				(16.3	)			1.9
Income tax benefit (expense)			1.2				2.3				(0.8	)
Net income (loss) from continuing operations			4.4				(14.0	)			1.1
Discontinued operations, net of tax
Gain on sale of discontinued operations			—				—				0.7
Loss from discontinued operations			—				—				(0.3	)
Net income (loss)			4.4	%			(14.0	)%			1.5	%

Segment Results

     Certain information in this section contains forward-looking statements. Our actual results could differ materially from the statements contained in the forward-looking statements as a result of a number of factors, including but not limited to risks and uncertainties inherent in our business, dependency upon significant customers and vendors, the seasonality of our business, dependency upon software developers and manufacturers, effect of technology developments, effect of free product downloads, dependency upon key employees, risks of returns and inventory obsolescence, erosions in our gross profit margins, change in retailers methods of distribution, dependency upon financing, obtaining additional financing when required and the possible volatility of our stock price. See also Business — Forward-Looking Statements/Risk Factors in Item 1A of this Form 10-K.

Distribution Segment

     The distribution segment distributes computer software, home video, video games and independent music (through May 2007).

Fiscal 2010 Results Compared With Fiscal 2009

     Net Sales (before inter-company eliminations)

     Net sales for the distribution segment were $487.7 million for fiscal 2010 compared to $592.9 million for fiscal 2009, a decrease of $105.2 million or 17.7%. Net sales decreased $44.7 million in the software product group to $422.3 million for fiscal 2010 compared to $467.0 million for fiscal 2009, primarily due to approximately $28.3 million loss of sales from a large retailer that filed for bankruptcy and was liquidated during fiscal 2009, the departure of a low margin vendor (which accounted for an additional $33.1 million of sales in fiscal 2009), a shift to fee-based value-added services and the overall retail decline and weak economic conditions. These decreases in net sales were partially offset by increased sales to current customers by providing additional product offerings. Home video net sales decreased $17.1 million to $38.1 million for fiscal 2010 from $55.2 million in fiscal 2009, due primarily to shelf space reductions at retailer locations and the weak retail market and poor overall economic conditions. Video games net sales decreased $43.4 million to $27.3 million in fiscal 2010 from $70.7 million in fiscal 2009, due to an $8.0 million loss of sales from a large retailer that filed for bankruptcy and was liquidated during fiscal 2009, the departure of a low margin vendor (which accounted for an additional $24.1 million of sales in fiscal 2009) and a lack of new releases versus the prior fiscal year. We believe future net sales will be dependent upon the ability to continue to add new, appealing content and upon the strength of the retail environment and overall economic conditions.

     Gross Profit

     Gross profit for the distribution segment was $53.5 million or 11.0% of net sales for fiscal 2010 compared to $52.8 million or 8.9% of net sales for fiscal 2009. The $700,000 increase in gross profit and 2.1% increase in gross profit margin were primarily due to increased sales of higher margin software products, an increase in fee-based value-added services and the departure of low margin vendors. We expect gross profit rates to fluctuate depending principally upon the make-up of products sold.

     Operating Expenses

     Total operating expenses for the distribution segment were $47.1 million or 9.7% of net sales for fiscal 2010 compared to $51.7 million or 8.7% of net sales for fiscal 2009. Overall expenses decreased in all categories.

     Selling and marketing expenses for the distribution segment decreased to $13.3 million or 2.7% of net sales for fiscal 2010 compared to $14.1 million or 2.4% of net sales for fiscal 2009 primarily due to a decrease in variable freight expenses. The reduction in current period expenses resulted from lower sales volumes and lower freight rates. These cost decreases were partially offset by an increase in marketing expenses resulting from reduced vendor participation during fiscal 2010.

     Distribution and warehousing expenses for the distribution segment decreased $2.4 million to $9.8 million or 2.0% of net sales for fiscal 2010 compared to $12.2 million or 2.1% of net sales for fiscal 2009 due to lower shipment volume compared to the prior year, which contributed to a workforce reduction.

     General and administration expenses for the distribution segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administration expenses for the distribution segment were $20.1 million or 4.1% of net sales for fiscal 2010 compared to $21.2 million or 3.6% of net sales for fiscal 2009. The $1.1 million

decrease was primarily a result of reduced expenses related to the fiscal 2009 ERP implementation of $1.8 million, a workforce reduction during fiscal 2009 and a decrease in professional fees, which were partially offset by the $3.4 million performance-based compensation expense recorded during fiscal 2010 compared to zero in fiscal 2009.

     Bad debt expense for the distribution segment was $160,000 for fiscal 2010 compared to $200,000 in fiscal 2009. Our regular review of the trade receivables portfolio resulted in an adjustment to the allowance reserves.

     Depreciation and amortization for the distribution segment was $3.7 million for fiscal 2010 compared to $4.1 million for fiscal 2009. The decrease is principally due to certain assets becoming fully depreciated.

     Operating Income

     Net operating income from continuing operations for the distribution segment was $6.4 million for fiscal 2010 compared to a net operating income from continuing operations of $1.1 million for fiscal 2009.

Fiscal 2009 Results Compared With Fiscal 2008

     Net Sales (before inter-company eliminations)

     Net sales for the distribution segment were $592.9 million for fiscal 2009 compared to $611.0 million for fiscal 2008. The $18.1 million or 3.0% decrease in net sales for fiscal 2009 was due to decreased sales in the software and home video categories, offset by increased sales of video game product. Sales decreased $31.3 million in the software product group to $467.0 million for fiscal 2009 compared to $498.3 million for fiscal 2008 primarily due to the approximately $24.5 million loss of sales from a large retailer that filed a bankruptcy petition and the overall retail decline and deteriorating economic conditions. Home video decreased to $55.2 million for fiscal 2009 from $64.7 million in fiscal 2008 due primarily to overall retail decline and deteriorating economic conditions. Video games increased to $70.7 million in fiscal 2009 from $48.1 million in fiscal 2008, due to increased sales from new product releases.

     Gross Profit

     Gross profit for the distribution segment was $52.8 million or 8.9% of net sales for fiscal 2009 compared to $58.4 million or 9.6% of net sales for fiscal 2008. The decrease in gross profit of $5.6 million was primarily due to the sales volume decrease. The decrease in gross profit margin percentage for fiscal 2009 was due to the increased sales of lower margin products.

     Operating Expenses

     Total operating expenses for the distribution segment were $51.7 million or 8.7% of net sales for fiscal 2009 compared to $53.3 million or 8.7% of net sales for fiscal 2008. Overall expenses for selling and marketing, distribution and warehouse and general and administrative expenses decreased, which were partially offset by increases in bad debt expense and depreciation and amortization.

     Selling and marketing expenses for the distribution segment remained flat at $14.1 million or 2.4% of net sales for fiscal 2009 compared to $14.2 million or 2.3% of net sales for fiscal 2008.

     Distribution and warehousing expenses for the distribution segment remained flat at $12.2 million or 2.1% of net sales for fiscal 2009 compared to $12.7 million or 2.1% of net sales for fiscal 2008.

     General and administration expenses for the distribution segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administration expenses for the distribution segment were $21.2 million or 3.6% of net sales for fiscal 2009 compared to $23.1 million or 3.8% of net sales for fiscal 2008. The $1.9 million decrease was primarily due to $1.4 million of decreased professional and legal fees and a decrease of $1.4 million in fees related to the ERP implementation offset by severance costs of $504,000.

     Bad debt expense for the distribution segment was $200,000 for fiscal 2009 compared to $60,000 for fiscal 2008 due to an increase in reserves for a large retailer that filed for bankruptcy and subsequently decided to liquidate.

     Depreciation and amortization for the distribution segment was $4.1 million for fiscal 2009 compared to $3.3 million for fiscal 2008. The increase was principally due to the depreciation of the ERP system.

     Operating Income

     Net operating income from continuing operations for the distribution segment was $1.1 million for fiscal 2009 compared to a net operating income from continuing operations of $5.1 million for fiscal 2008.

Publishing Segment

     The publishing segment includes Encore and FUNimation. In fiscal 2009, a former component of our publishing business, BCI, began winding down its licensing operations related to budget home video, and the wind-down was completed during the fourth quarter of fiscal 2010.

Fiscal 2010 Results Compared With Fiscal 2009

     Net Sales (before inter-company eliminations)

     Net sales for the publishing segment were $86.0 million for fiscal 2010 versus $102.8 million for fiscal 2009. The $16.8 million or 16.4% decrease in net sales was primarily due to the inclusion of BCI in fiscal 2009 (which generated $10.0 million in net sales in fiscal 2009), shelf space reductions at retailer locations and decreased sales due to the weak retail market and poor overall economic conditions. We believe sales results in the future will be dependent upon the ability to continue to add new, appealing content and upon the strength of the retail environment.

     Gross Profit

     Gross profit for the publishing segment was $34.5 million or 40.1% of net sales for fiscal 2010 compared to $14.2 million or 13.8% of net sales for fiscal 2009. The $20.3 million increase in gross profit was primarily a result of the impairment and other charges of $16.4 million recorded in fiscal 2009 related to accounts receivable reserves, inventory and prepaid royalties associated with the BCI restructuring and impairment of $8.8 million recorded during fiscal 2009 related to license advances, production costs and inventory associated with the FUNimation restructuring, all of which impairment charges were offset by reduced sales during fiscal 2010.

     The increase in gross profit margin percentage to 40.1% from 13.8%, a total increase of 26.3%, was due to impairment and other charges recorded in fiscal 2009 (24.6% of the increase), and improved margins from product sales mix and reduced royalty rates payable to certain licensors in fiscal 2010. We expect future gross profit rates to fluctuate depending principally upon the make-up of product sales.

     Operating Expenses

     Total operating expenses decreased $90.4 million for the publishing segment to $22.1 million or 25.7% of net sales, for fiscal 2010, from $112.5 million or 109.4% of net sales for fiscal 2009. Expenses in fiscal 2009 included goodwill and other impairment charges recorded of $85.2 million. Overall expenses decreased in all categories of operating expenses.

     Selling and marketing expenses for the publishing segment were $9.8 million or 11.4% of net sales for fiscal 2010 compared to $11.2 million or 10.9% of net sales for fiscal 2009. The $1.4 million decrease was primarily due to $160,000 in severance expenses during fiscal 2009, personnel cost savings resulting from the restructuring activities that we undertook during fiscal 2009 and a reduction in travel expenses.

     General and administrative expenses for the publishing segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administrative expenses for the publishing segment were $9.6 million or 11.1% of net sales for fiscal 2010 compared to $11.5 million or 11.2% of net sales for fiscal 2009. The $1.9 million decrease was primarily due to restructuring severance costs of $330,000 recorded during fiscal 2009, personnel cost savings resulting from the restructuring activities that we undertook during fiscal 2009 and a reduction of professional fees, partially offset by $1.4 million of performance-based compensation expense recorded during fiscal 2010 compared to zero recorded during the prior year.

     Bad debt expense was $97,000 for fiscal 2010 and $100,000 for fiscal 2009. Our regular review of the trade receivables portfolio resulted in additional allowance reserves.

     Depreciation and amortization expense for the publishing segment was $2.6 million for fiscal 2010 compared to $6.9 million for fiscal 2009. The $4.3 million decrease was primarily due to a $2.0 million impairment of intangibles charge that was recorded during fiscal 2009 and was related to the operations of BCI, the reduction in amortization expense associated with the masters’ cost basis reduction, which occurred as part of the restructuring activities that we undertook during fiscal 2009, as well as a decrease in the amortization of acquisition-related intangibles in fiscal 2010.

     Goodwill and intangible asset impairment for the publishing segment was zero for fiscal 2010 compared to $82.7 million for fiscal 2009. The prior year charge primarily reflected the sustained decline in our share price during fiscal 2009, which resulted in our market capitalization being less than book value.

     Operating Income (Loss)

     The publishing segment had operating income from continuing operations of $12.3 million for fiscal 2010 compared to operating loss of $98.3 million for fiscal 2009.

Fiscal 2009 Results Compared With Fiscal 2008

     Net Sales (before inter-company eliminations)

     Net sales for the publishing segment decreased 12.4% to $102.8 million for fiscal 2009 from $117.4 million for fiscal 2008. The $14.6 million decrease in net sales was primarily due to an overall retail decline and deteriorating economic conditions.

     Gross Profit

     Gross profit for the publishing segment was $14.2 million or 13.8% as a percent of net sales for fiscal 2009 and $43.2 million or 36.8% as a percent of net sales for fiscal 2008. The $29.0 million decrease in gross profit was primarily a result of the impairment and other charges of $16.4 million related to accounts receivable reserves, inventory and prepaid royalties associated with the BCI restructuring; impairment and other charges of $8.8 million related to license advances, production costs and inventory associated with the FUNimation restructuring and decreased sales volume, offset by a reduction in royalty rates to certain licensors. The decrease in gross profit margin percentage from 36.8% to 13.8%, a total decrease of 23.0%, was due to impairment and other charges (24.6% of the decrease), which was offset by improved margins from product sales mix and reduced royalty rates to certain licensors.

     Operating Expenses

     Total operating expenses for the publishing segment increased $82.0 million to $112.5 million or 109.4% of net sales, for fiscal 2009, from $30.5 million or 26.0% of net sales for fiscal 2008. Overall expenses increased in all categories of operating expenses except selling and marketing expenses.

     Selling and marketing expenses for the publishing segment were $11.2 million or 10.9% of net sales for fiscal 2009 compared to $13.2 million or 11.2% of net sales for fiscal 2008. The $2.0 million decrease from the prior year was primarily due to personnel cost savings of $950,000 primarily from BCI’s headcount reduction, a $400,000 reduction in travel and entertainment expenses and a $650,000 reduction of discretionary marketing and advertising program expense.

     General and administrative expenses for the publishing segment consist principally of executive, accounting and administrative personnel and related expenses, including professional fees. General and administrative expenses for the publishing segment were $11.5 million or 11.2% of net sales for fiscal 2009 compared to $11.0 million or 9.4% of net sales for fiscal 2008. The $500,000 increase was primarily due to restructuring severance costs of $330,000, $560,000 in increased legal and professional costs related to new business initiatives offset by decreased rent expense in fiscal 2009, resulting from the BCI relocation from California to Minnesota during fiscal 2008.

     Bad debt expense for the publishing segment was $100,000 for fiscal 2009 compared to bad debt recovery was $75,000 for fiscal 2008. Our regular review of the trade receivables portfolio resulted in additional allowance reserves.

     Depreciation and amortization expense for the publishing segment was $6.9 million for fiscal 2009 compared to $6.3 million for fiscal 2008. The $600,000 increase was primarily due to impairment of intangibles related to the operations of BCI of $2.0 million, offset by a reduction in amortization expense related to acquisition related intangibles.

     Goodwill and intangible asset impairment for the publishing segment was $82.7 million for fiscal 2009 compared to zero for fiscal 2008. During fiscal 2009, we concluded that indicators of potential impairment were present due to the sustained decline in our share price which resulted in our market capitalization being less than its book value. We conducted impairment tests during fiscal 2009 based on present facts and circumstances and its business strategy in light of existing industry and economic conditions, as well as taking, into consideration future expectations. Accordingly, goodwill impairments were recorded throughout fiscal 2009.

     Operating Income (Loss)

     The publishing segment had operating loss from continuing operations of $98.3 million for fiscal 2009 compared to operating income of $12.7 million for fiscal 2008.

Consolidated Other Income and Expense for All Periods

     Other income and expense, net, decreased to net expense of $2.0 million in fiscal 2010 from net expense of $5.8 million in fiscal 2009. Interest expense was $2.8 million for fiscal 2010 compared to $4.6 million for fiscal 2009. The decrease in interest expense for fiscal 2010 was a result of a reduction in debt borrowings and a write-off of debt acquisition costs of $289,000 during fiscal 2010 compared to $950,000 during fiscal 2009.

     Other income (expense) amounts for fiscal 2010 consisted primarily of interest income of $16,000 and $788,000 of other income, primarily related to foreign exchange gain. Other income (expense) amounts for fiscal 2009 consisted primarily of interest income of $86,000 and $1.3 million of other expense, primarily related to foreign exchange loss.

     Other income and expense, net, increased to net expense of $5.8 million in fiscal 2009 from net expense of $5.5 million in fiscal 2008. Interest expense was $4.6 million for fiscal 2009 compared to $6.1 million for fiscal 2008. The decrease in interest expense for fiscal 2009 was a result of a reduction in total outstanding debt and effective interest rates from the prior year, partially offset by the write-off of debt acquisition fees and prepayment penalty fees.

     Other income (expense) amounts for fiscal 2009 consisted primarily of interest income of $86,000 and $1.3 million of other expense, primarily related to foreign exchange loss. Other income (expense) amounts for fiscal 2008 consisted primarily of interest income of $259,000 and $366,000 of net other income, primarily related to foreign exchange gain.

Consolidated Income Tax Expense or Benefit from Continuing Operations for All Periods

     We recorded a consolidated income tax benefit of $6.2 million for fiscal 2010, or an effective rate of 37.2%, income tax benefit for fiscal 2009 of $14.5 million, or an effective tax rate of 14.1% and income tax expense of $5.3 million, or an effective tax rate of 42.8% for fiscal 2008. The change in our effective tax rate for fiscal 2010 compared to fiscal 2009 is primarily due to a $11.7 million release of the valuation allowance and a change in the effective state income tax rate as a result of our completed fiscal 2009 income tax returns. We reduced the valuation allowance during fiscal 2010 because of an increase in deferred tax assets that the Company will more likely than not be able to realize due to a tax law change allowing the Company to carry its net operating losses back additional years as well as the Company having higher than projected book income.

     Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income streams and the impact of tax planning strategies. A valuation allowance is recorded to reduce deferred tax assets when it is determined that it is more likely than not, based on the weight of available evidence, we would not be able to realize all or part of our deferred tax assets. An assessment is required of all available evidence, both positive and negative, to determine the amount of any required valuation allowance. During fiscal 2009, we recorded a valuation allowance against the deferred tax assets of $21.4 million, which represented the amount of temporary differences we do not anticipate recognizing with future projected taxable income, or by net operating loss carrybacks. During fiscal 2010, we released $11.7 million of the valuation allowance against these deferred tax assets, thus reducing the valuation allowance to $9.7 million.

     We adopted the provisions of ASC 740-10 on April 1, 2007 which had no impact on our retained earnings. At adoption, we had approximately $417,000 of gross unrecognized income tax benefits (“UTB’s”) as a result of the implementation of ASC 740-10 and approximately $327,000 of UTB’s, net of deferred federal and state income tax benefits, related to various federal and state matters, that would impact the effective tax rate if recognized. We recognize interest accrued related to UTB’s in the provision for income taxes. As of April 1, 2009, interest accrued was approximately $127,000, which was net of federal and state tax benefits and total UTB’s net of federal and state tax benefits that would impact the effective tax rate if recognized were $964,000. During the fiscal year ended March 31, 2010 an additional $83,000 of UTB’s were accrued, which was net of $152,000 of deferred federal and state income tax benefits. Additionally, $191,000 of UTB’s were reversed related to a statute of limitations lapse and $140,000 UTB’s were reversed related to provision adjustments during the fiscal year ended March 31, 2010. As of March 31, 2010, interest accrued was $147,000 and total UTB’s, net of deferred federal and state income tax benefits that would impact the effective tax rate if recognized, were $716,000.

Consolidated Net (Loss) Income from Continuing Operations

     We recorded net income from continuing operations of $22.9 million for fiscal 2010, a net loss from continuing operations of $88.4 million for fiscal 2009 and net income from continuing operations of $7.1 million for fiscal 2008.

Discontinued Operations

     Our business classified as discontinued operations recorded net loss from operations of $2.3 million, net of tax, for the fiscal year ended March 31, 2008. We recorded a gain on the sale of discontinued operations of $4.9 million, net of tax, for the fiscal year ended March 31, 2008. This transaction divested the Company of all of its independent music distribution activities.

Consolidated Net (Loss) Income for All Periods

     Net income for fiscal 2010 was $22.9 million, net loss for fiscal 2009 was $88.4 million and net income for fiscal 2008 was $9.7 million.

Market Risk

     Our exposure to market risk was primarily due to the fluctuating interest rates associated with variable rate indebtedness. See Item 7A — Quantitative and Qualitative Disclosure About Market Risk.

Seasonality and Inflation

     Quarterly operating results are affected by the seasonality of our business. Specifically, our third quarter (October 1-December 31) typically accounts for our largest quarterly revenue figures and a substantial portion of our earnings. Our third quarter accounted for approximately 25.2%, 27.2%, and 33.0% of our net sales for the fiscal years ended March 31, 2010, 2009 and 2008, respectively. As a supplier of products ultimately sold to retailers, our business is affected by the pattern of seasonality common to other suppliers of retailers, particularly during the holiday selling season. The 2008 and 2009 holiday seasons, however, were disappointing to most retailers and distributors as consumers remained cautious about discretionary spending. As a result, several of our customers recently experienced significant financial difficulty, with one major customer filing for bankruptcy and subsequently liquidating. Consequently, our financial results have been negatively impacted by the downturn in the economy. Inflation is not expected to have a significant impact on our business, financial condition or results of operations since we can generally offset the impact of inflation through a combination of productivity gains and price increases.

Liquidity and Capital Resources

Cash Flow Analysis

Operating Activities

     Cash provided by operating activities for fiscal 2010 totaled $16.9 million, compared to $16.5 million and $18.4 million for fiscal 2009 and 2008, respectively.

     The net cash provided by operating activities for fiscal 2010 mainly reflected our net income, combined with various non-cash charges, including depreciation and amortization of $19.6 million, amortization of debt-acquisition costs of $502,000, write-off of debt acquisition costs of $289,000, share-based compensation of $1.0 million, increase in deferred income taxes of $4.9 million, a decrease in deferred compensation of $816,000, and a decrease in deferred revenue of $283,000, offset by our working capital demands. The following are changes in the operating assets and liabilities during fiscal 2010: accounts receivable decreased by $10.2 million primarily due to a sales decrease and the timing of receipts; inventories decreased by $460,000, primarily due to decreased sales; prepaid expenses increased by $2.6 million primarily due to prepaid royalty advances; production costs and license fees increased $6.4 million and $6.9 million, respectively, due primarily to new content acquisitions; income taxes receivable decreased $4.8 million, primarily due to our net operating loss carryback refund; other assets decreased $319,000 due to amortization and recoupments; accounts payable decreased $24.3 million, primarily as a result of reduced purchases driven by lower sales volume, timing of disbursements, cash collections and operations of the Company; and accrued expenses increased $2.9 million primarily related to accrued performance-based compensation expense offset by a decrease in sales driven royalty expenses.

     The net cash provided by operating activities for fiscal 2009 mainly reflected our net loss, combined with various non-cash charges, including depreciation and amortization of $30.6 million, write-off of debt acquisition costs of $950,000, goodwill and intangible asset impairment of $82.7 million, share-based compensation of $1.0 million, deferred income taxes of $10.5 million and an increase in deferred revenue of $182,000, offset by our working capital demands. The following are changes in the operating assets and liabilities during fiscal 2009: accounts receivable decreased by $4.0 million primarily due to a sales decrease and the timing of receipts; inventories decreased by $5.9 million, primarily due to the inventory impairment of $7.2, offset by operating needs associated with broadened title selections; prepaid expenses decreased by $1.0 million primarily due to prepaid royalty advances, net of impairment of $7.1 million; production costs and license fees increased $7.3 million and $10.6 million, respectively, due primarily to new content acquisitions; income taxes receivable increased $3.9 million, primarily due to our anticipated net operating loss carryback; other assets decreased $739,000 due to amortization and recoupments; accounts payable increased $14.5 million, primarily as a result of timing of disbursements; and accrued expenses decreased $4.8 million primarily related to sales driven royalty expenses.

     The net cash provided by operating activities for fiscal 2008 mainly reflected our net income combined with various non-cash charges, including depreciation and amortization of $9.7 million, amortization of license fees of $6.9 million, amortization of production costs of $3.3 million, share-based compensation expense of $1.1 million, deferred compensation costs of $787,000, a change in deferred income taxes of $2.8 million and by our working capital demands. The following are changes in the operating assets and liabilities during fiscal 2008: accounts receivable increased by $6.2 million, reflecting timing of collections; inventories decreased by $4.1 million, primarily reflecting a focus on reducing inventory; prepaid expenses increased by $1.0 million, primarily reflecting royalty advances in the publishing segment; other assets decreased $600,000, primarily due to amortization and recoupments; production costs and license fees increased $5.2 million and $11.8 million, respectively, due primarily to new content acquisitions; accounts payable increased $5.1 million, primarily due to timing of disbursements and accrued expenses increased $2.8 million, primarily as result of royalties payable on sales.

Investing Activities

     Cash flows used in investing activities totaled $2.1 million, $334,000 and $13.9 million in fiscal 2010, 2009 and 2008, respectively.

     Acquisition of property and equipment totaled $1.8 million, $3.5 million and $8.6 million in fiscal 2010, 2009 and 2008, respectively. Purchases of assets in fiscal 2010 consisted primarily of computer equipment and system development and equipment for our Canadian warehouse. Purchases of fixed assets in fiscal 2009 consisted primarily of computer equipment and the final implementation of our ERP project. Purchases of fixed assets in fiscal 2008 primarily related to the ERP project and warehouse equipment.

     Purchase of intangible assets totaled $12,000, $666,000 and $1.4 million for fiscal 2010, 2009 and 2008, respectively. The costs incurred related to software development totaled $1.4 million and $677,000 for fiscal 2010 and fiscal 2009, respectively.

     Proceeds from the sales of assets held for sale were $1.4 million for fiscal 2009 and were realized in conjunction with the sale of real estate and related assets located in Decatur, Texas to an unrelated party.

     Purchases of marketable equity securities totaled $4.0 million for fiscal 2008, which related to the creation of a Rabbi trust formed for purposes of funding future deferred compensation payments to our former CEO. These securities were sold for $1.0 million and $3.2 million during fiscal 2010 and fiscal 2009, respectively.

Financing Activities

     Cash flows used in financing activities were $14.8 million in fiscal 2010, $20.6 million in fiscal 2009 and $13.1 million in fiscal 2008.

     We had proceeds from the revolving line of credit of $196.1 million, repayments of the revolving line of credit of $213.6 million, increase in checks written in excess of cash balances of $4.5 million and debt acquisition costs of $1.8 million in fiscal 2010.

     We had proceeds from the revolving line of credit of $208.8 million, repayments of the revolving line of credit of $215.9 million, repayments on notes payable of $9.7 million, payment of deferred compensation of $3.2 million, checks written in excess of cash balances of $297,000 and debt acquisition costs of $850,000 in fiscal 2009.

     We had proceeds from the revolving line of credit of $198.4 million, repayments of the revolving line of credit of $206.0 million, and net payments on note payable of $5.3 million for fiscal 2008. Debt acquisition costs were $240,000 and proceeds received upon the exercise of common stock options were $190,000 in fiscal 2008.

Discontinued Operations

     Cash flows provided by operating activities of discontinued operations were $5.6 million for fiscal 2008. Proceeds from the sale of discontinued operations were $6.5 million for fiscal 2008.

Capital Resources

     In March 2007, we amended and restated our credit agreement with General Electric Corporation (“GE”) (the “GE Facility”) and entered into a four-year Term Loan facility with Monroe Capital Advisors, LLC (“Monroe”). The GE Facility provided for a $65.0 million revolving credit facility and the Monroe agreement provided for a $15.0 million Term Loan facility. The Monroe facility was paid in full on June 12, 2008 in connection with the Third Amendment to the GE Facility.

     On June 12, 2008, we entered into a Third Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the “Third Amendment”) with GE which, among other things, revised the terms of the GE Facility as follows: (i) permitted us to pay off the remaining $9.7 million balance of the term loan facility with Monroe; (ii) created a $6.0 million tranche of borrowings subject to interest at the index rate plus 6.25%, or LIBOR plus 7.5%; (iii) modified the interest rate payable in connection with borrowings to range from an index rate of 0.75% to 1.75%, or LIBOR plus 2.0% to 3.0%, depending upon borrowing availability during the prior fiscal quarter; (iv) extended the term of the GE Facility to March 22, 2012; (v) modified the prepayment penalty to 1.5% during the first year following the date of the Third Amendment, 1% during the second year following the date of the Third Amendment, and 0.5% during the third year following the date of the Third Amendment; and (vi) modified certain financial covenants as of March 31, 2008.

     On October 30, 2008, we entered into a Fourth Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the “Fourth Amendment”) with GE which revised the GE Facility as follows: effective as of September 30, 2008, (i) clarified the calculation of EBITDA under the credit agreement to indicate that it would not be impacted by any pre-tax, non-cash charges to earnings related to goodwill impairment (“adjusted EBITDA”); and (ii) revised the definition of “Index Rate” to indicate that the interest rate for non-LIBOR borrowings would not be less than the LIBOR rate for an interest period of three months.

     On February 5, 2009, we entered into a Fifth Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the “Fifth Amendment”) with GE which revised the terms of the GE Facility as follows: effective as of December 31, 2008, (i) clarified that the

calculation of EBITDA under the credit agreement would not be impacted by certain pre-tax, non-cash restructuring charges to earnings, or in connection with cash charges to earnings recognized in our financial results related to a force reduction (“adjusted EBITDA”); (ii) eliminated the $6.0 million tranche of borrowings under the credit facility; (iii) modified the interest rate in connection with borrowings under the facility to index rate plus 5.75%, or LIBOR plus 4.75%; (iv) altered the commitment termination date of the GE Facility to June 30, 2010; (v) eliminated the pre-payment penalty; and (vi) modified certain financial covenants as of December 31, 2008 and thereafter. Additionally, the Fifth Amendment modified the total borrowings available to $65.0 million. At March 31, 2009, we had $24.1 million outstanding on the GE Facility, which was paid in full on November 12, 2009 in connection with us obtaining a new credit facility, as described below.

     On November 12, 2009, we entered into a three year, $65.0 million revolving credit facility (the “Credit Facility”) with Wells Fargo Foothill, LLC as agent and lender, and Capital One Leverage Financing Corp. as a participating lender. The Credit Facility is secured by a first priority security interest in all of our assets, as well as the capital stock of our subsidiary companies. Additionally, the Credit Facility calls for monthly interest payments at the bank’s base rate, as defined in the Credit Facility, plus 4.0% or LIBOR plus 4.0%, at our discretion. The entire outstanding balance of principal and interest is due in full on November 12, 2012. Amounts available under the credit facility are subject to a borrowing base formula. Changes in the assets within the borrowing base formula can impact the amount of availability. At March 31, 2010 we had $6.6 million outstanding and based on the facility’s borrowing base and other requirements, we had excess availability of $38.4 million.

     In association with both credit facilities, and per the respective terms, we pay and have paid certain facility and agent fees. Weighted average interest on the Credit Facility was 7.5% at March 31, 2010 and under the GE Facility was 5.6% and 4.7% at March 31, 2009 and 2008, respectively. Such interest amounts have been and continue to be payable monthly. The interest rate payable under the Term Loan facility was 10.6% at March 31, 2008.

     Under the Credit Facility we are required to meet certain financial and non-financial covenants. The financial covenants include a variety of financial metrics that are used to determine our overall financial stability and include limitations on our capital expenditures, a minimum ratio of adjusted EBITDA to fixed charges, limitations on net vendor advances and a borrowing base availability requirement. At March 31, 2010, we were in compliance with all covenants under the revolving facility. We currently believe we will be in compliance with all covenants over the next twelve months.

Liquidity

     We finance our operations through cash and cash equivalents, funds generated through operations, accounts payable and our revolving credit facility. The timing of cash collections and payments to vendors requires usage of our revolving credit facility in order to fund our working capital needs. We have a cash sweep arrangement with our lender, whereby, daily, all cash receipts from our customers reduce borrowings outstanding under the credit facility. Additionally, all payments to our vendors that are presented by the vendor to our bank for payment increase borrowings outstanding under the credit facility. “Checks written in excess of cash balances” may occur from time to time, including period ends, and represent payments made to vendors that have not yet been presented by the vendor to our bank. On a terms basis, we extend varying levels of credit to our customers and receive varying levels of credit from our vendors. We have not had any significant changes in the terms extended to customers or provided by vendors which would have a material impact on the reported financial statements.

     We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources. We plan for potential fluctuations in accounts receivable, inventory and payment of obligations to creditors and unbudgeted business activities that may arise during the year as a result of changing business conditions or new opportunities. In addition to working capital needs for the general and administrative costs of our ongoing operations, we have cash requirements for among other things: (1) investments in our publishing segment in order to license content and develop software for established products; (2) investments in our distribution segment in order to sign exclusive distribution agreements; (3) equipment needs for our operations; and (4) asset or company acquisitions. During fiscal 2010, we invested approximately $11.8 million, before recoveries, in connection with the acquisition of licensed and exclusively distributed product in our publishing and distribution segments.

     Our credit agreement provides for a $65.0 million revolving credit facility, which is subject to certain borrowing base requirements and is available for working capital and general corporate needs. As of March 31, 2009, we had $6.6 million outstanding on the revolving sub-facility and excess availability of $38.4 million, based on the terms of the agreement. Amounts available under the credit facility are subject to a borrowing base formula. Changes in the assets within the borrowing base formula can impact the amount of availability.

     We currently believe cash and cash equivalents, funds generated from the expected results of operations, funds available under our existing credit facility and vendor terms will be sufficient to satisfy our working capital requirements, other cash needs, and to finance expansion plans and strategic initiatives for at least the next 12 months, absent significant acquisitions. Additionally, with respect to long term liquidity, we have an effective shelf registration statement covering the offer and sale of up to $20.0 million of common and/or preferred shares. Any growth through acquisitions would likely require the use of additional equity or debt capital, some combination thereof, or other financing

Contractual Obligations

     The following table presents information regarding contractual obligations that exist as of March 31, 2010 by fiscal year (in thousands):

						Less than 1				1-3				3-5				More than 5
		Total				Year				Years				Years				Years
Operating leases		$	23,243			$	2,973			$	6,201			$	5,565			$	8,504
Capital leases			152				66				86				—				—
License and distribution agreements			12,812				2,687				8,965				1,160				—
Deferred compensation			1,333				1,333				—				—				—
Total		$	37,540			$	7,059			$	15,252			$	6,725			$	8,504

     We have excluded liabilities resulting from uncertain tax positions of $1.2 million from the table above because we are unable to make a reasonably reliable estimate of the period of cash settlement with the respective taxing authorities. Additionally, interest payments related to the Credit Facility have been excluded as future interest rates are uncertain.

Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements (as such term is defined in Item 303 of regulation S-K) that are reasonably likely to have a current or future effect on our financial condition or changes in financial condition, operating results, or liquidity.

Item 7A. — Quantitative and Qualitative Disclosures About Market Risk

     Market Risk. Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors such as liquidity will result in losses for a certain financial instrument or group of financial instruments. We do not hold or issue financial instruments for trading purposes, and do not enter into forward financial instruments to manage and reduce the impact of changes in foreign currency rates because we have few foreign relationships and substantially all of our foreign transactions are negotiated, invoiced and paid in U.S. dollars. Based on the controls in place and the relative size of the financial instruments entered into, we believe the risks associated with not using these instruments will not have a material adverse effect on our consolidated financial position or results of operations.

     Interest Rate Risk. Our exposure to changes in interest rates results primarily from credit facility borrowings. As of March 31, 2010 we had $6.6 million of indebtedness, which was subject to interest rate fluctuations. Based on these borrowings subject to interest rate fluctuations outstanding on March 31, 2010, a 100-basis point change in the current LIBOR rate would cause our annual interest expense to change by $66,000.

     Foreign Currency Risk. We have a limited number of customers in Canada, where the sales and purchasing activity results in receivables and accounts payables denominated in Canadian dollars. When these transactions are translated into U.S. dollars at the effective exchange rate in effect at the time of each transaction, gain or loss is recognized. These gains and/or losses are reported as a separate component within other income and expense.

     During the years ended March 31, 2010, 2009 and 2008, we had $788,000 of foreign exchange gain, $1.2 million of foreign exchange loss and $252,000 of foreign exchange gain, respectively. Gain or loss on these activities is a function of the change in the foreign exchange rate between the sale or purchase date and the collection or payment of cash. Though the change in the exchange rate is out of our control, we periodically monitors our Canadian activities and can reduce exposure from the exchange rate fluctuations by limiting these activities or taking other actions, such as exchange rate hedging.

Item 8. Financial Statements and Supplementary Data

     The information called for by this item is set forth in the Consolidated Financial Statements and Schedule covered by the Reports of Independent Registered Public Accounting Firms at the end of this report commencing at the pages indicated below:

     Reports of Independent Registered Public Accounting Firm

     Consolidated Balance Sheets at March 31, 2010 and 2009

     Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008

     Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended March 31, 2008, 2009 and 2010

     Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008

     Notes to Consolidated Financial Statements

     Schedule II — Valuation and Qualifying Accounts and Reserves for the years ended March 31, 2010, 2009 and 2008

     All of the foregoing Consolidated Financial Statements and Schedule are hereby incorporated in this Item 8 by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     We maintain disclosure controls and procedures (“Disclosure Controls”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports, including our Annual Report on Form 10-K, was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

     As required by Rule 13a-15(b) and 15d-15(b) promulgated under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation.

Management’s Report on Internal Control over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of an issuer’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Internal control over financial reporting includes policies and procedures that:

(i.) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of an issuer’s assets;

			(ii.) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that an issuer’s receipts and expenditures are being made only in accordance with authorizations of its management and directors; and
			(iii.) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of an issuer’s assets that could have a material effect on the consolidated financial statements.

     An internal control material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, the application of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that compliance with the policies or procedures may deteriorate.

     As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of March 31, 2010. Management’s assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (“COSO”). Based on Management’s assessment, Management believes that, as of March 31, 2010, our internal control over financial reporting is effective based on those criteria.

     Grant Thornton LLP, our independent registered public accounting firm, has issued an attestation report, included herein, on our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

     There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

Item 9B. Other Information

     None.

PART III

Item 10. Directors, Executive Officers of the Registrant and Corporate Governance

     Information regarding our executive officers is found in Part I, Item 1 of this report under the heading Executive Officers of the Company.

     All other information required under this item will be contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our fiscal year end and is incorporated herein by reference.

Item 11. Executive Compensation

     Information required under this item will be contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our fiscal year end and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     Information required under this item will be contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our fiscal year end and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

     Information required under this item will be contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our fiscal year end and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

     Information required under this item will be contained in our Proxy Statement for our 2010 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our fiscal year end and is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Documents filed as part of this report -

(1)

Financial Statements. Our following consolidated financial statements and the Reports of Independent Registered Public Accounting Firm thereon are set forth at the end of this document:

	(i)		Reports of Independent Registered Public Accounting Firm.
	(ii)		Consolidated Balance Sheets as of March 31, 2010 and 2009.
	(iii)		Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008
	(iv)		Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended March 31, 2008, 2009 and 2010.
	(v)		Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008.
	(vi)		Notes to Consolidated Financial Statements

(2)

Financial Statement Schedules

	(i)		Schedule II — Valuation and Qualifying Accounts and Reserves
			Schedules other than those listed above have been omitted because they are inapplicable or the required information is either immaterial or shown in the Consolidated Financial Statements or the notes thereto.

(3)

Exhibit Listing

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

Exhibit description

with

Form

ending

Exhibit

date

3.1

Navarre Corporation Amended and Restated Articles of Incorporation

S-1

3.1

04/13/06

3.2

Navarre Corporation Amended and Restated Bylaws

8-K

3.1

01/25/07

4.1

Form of Specimen Certificate for Common Stock

S-1

4.1

04/13/06

4.2

Form of Warrant dated March 21, 2006

S-1

4.4

04/13/06

4.3

Form of Agent’s Warrant

S-1/A

4.5

06/26/06

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

Exhibit description

with

Form

ending

Exhibit

date

10.1*

Navarre Corporation Amended and Restated 1992 Stock Option Plan

10-K

03/31/02

10.3

07/01/02

10.2*

2003 Amendment to 1992 Stock Option Plan

S-8

99.1

09/23/03

10.3*

Form of Individual Stock Option Agreement under 1992 Stock Option Plan

S-1

10.4

09/03/93

10.4*

Navarre Corporation Amended and Restated 2004 Stock Plan, as amended September 13, 2007 (but only as to the addition of 1,500,000 shares available for issuance)

S-8

4

02/22/06

10.5*

Amendment No. 2 to Amended and Restated 2004 Stock Plan

DEF14A

A

07/28/09

10.6*

Form of Employee Stock Option Agreement under 2004 Stock Plan

10-K

03/31/05

10.58

06/14/05

10.7*

Form of Non-Employee Director Stock Option Agreement under 2004 Stock Plan

10-K

03/31/05

10.59

06/14/05

10.8*

Form of Employee Restricted Stock Agreement under 2004 Stock Plan

8-K

10.2

04/04/06

10.9*

Form of Director Restricted Stock Agreement under 2004 Stock Plan

8-K

10.3

04/04/06

10.10*

Form of TSR Stock Unit Agreement under 2004 Stock Plan

8-K

10.4

04/04/06

10.11*

Form of Performance Stock Unit Agreement under 2004 Stock Plan

8-K

10.5

04/04/06

10.12*

Form of Restricted Stock Unit Agreement under 2004 Stock Plan

10-Q

09/31/07

10.1

11/08/07

10.13*

Employment Agreement dated November 1, 2001 between the Company and Eric H. Paulson

10-Q

12/31/01

10.1

02/13/02

10.14*

Amendment dated December 28, 2006 to Employment Agreement between the Company and Eric H. Paulson

8-K

99.2

12/29/06

10.15*

Amendment dated March 30, 2007 to Employment Agreement between the Company and Eric H. Paulson

8-K

99.1

04/04/07

10.16*

Form of Separation Agreement between the Company and Charles E. Cheney

10-K

03/31/04

10.41

06/29/04

10.17*

Form of Post-Acquisition Employment Agreement among the Company, FUNimation Productions, Ltd. and Gen Fukunaga

8-K

10.1

(b)

01/11/05

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

Exhibit description

with

Form

ending

Exhibit

date

10.18*

Employment Agreement dated May 7, 2010 among the Company, FUNimation Productions Ltd., animeOnline Ltd. and Gen Fukunaga

8-K

99.1

5/27/10

10.19*

Amended and Restated Employment Agreement dated December 28, 2006 between the Company and Cary L. Deacon

8-K

99.1

12/29/06

10.20*

Amendment dated January 29, 2007 to Amended and Restated Employment Agreement between the Company and Cary L. Deacon

8-K

10.1

01/30/07

10.21*

Amendment dated March 20, 2008 to Amended and Restated Employment Agreement between the Company and Cary L. Deacon

8-K

10.1

03/21/08

10.22*

Amended and Restated Executive Severance Agreement dated March 20, 2008 between the Company and J. Reid Porter

8-K

10.2

03/21/08

10.23*

Executive Severance Agreement dated March 20, 2008 between the Company and Brian Burke

8-K

10.3

03/21/08

10.24*

Executive Severance Agreement dated March 20, 2008 between the Company and John Turner

8-K

10.4

03/21/08

10.25*

Executive Severance Agreement dated March 20, 2008 between the Company and Joyce Fleck

10-K

03/31/09

10.22

06/09/09

10.26*

Executive Severance Agreement dated March 20, 2008 between the Company and Calvin Morrell

10-K

03/31/09

10.23

06/09/09

10.27*

Form of Lock-Up Agreement

8-K

10.1

03/23/06

10.28*

Fiscal Year 2008 Annual Management Incentive Plan

8-K

10.1

07/12/07

10.29*

Fiscal Year 2009 Annual Management Incentive Plan

10-K

03/31/08

10.26

06/16/08

10.30*

Fiscal Year 2010 Annual Management Incentive Plan

8-K

10.1

04/21/09

10.31*

Fiscal Year 2011 Annual Management Incentive Plan

8-K

10.1

05/14/10

10.32

Office/Warehouse Lease dated April 1, 1998 between the Company and Cambridge Apartments, Inc.

10-K

03/31/99

10.6

06/29/99

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

Exhibit description

with

Form

ending

Exhibit

date

10.33

Amendment dated September 27, 2001 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.

10-Q

06/30/03

10.9.1

08/14/03

10.34

Agreement of Reciprocal Easements, Covenants, Conditions and Restrictions dated June 16, 2003

10-Q

06/30/03

10.9.3

08/14/03

10.35

Amendment dated July 14, 2003 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.

10-Q

06/30/03

10.9.2

08/14/03

10.36

Form of Amendment dated February 23, 2004 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.

10-K

03/31/04

10.48

06/29/04

10.37

Form of Amendment dated June 2004 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.

10-K

03/31/04

10.49

06/29/04

10.38

Addendum dated May 27, 2004 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.

10-K

03/31/04

10.51

06/29/04

10.39

Addendum dated November 12, 2009 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.

X

10.40

Amendment dated March 21, 2004 to Office/Warehouse Lease between the Company and Airport One Limited Partnership

10-K

03/31/04

10.50

06/29/04

10.41

Amendment dated November 23, 2004 to Office/Warehouse Lease between the Company and Airport One Limited Partnership

10-Q

12/31/04

10.1

02/14/05

10.42

Amendment dated February 2, 2006 to Office/Warehouse Lease between the Company and Airport One Limited Partnership

10-Q

12/31/05

10.1

02/09/06

10.43

Form of Office/Warehouse Lease dated May 27, 2004 between the Company and NL Ventures IV New Hope, L.P.

10-K

03/31/04

10.47

06/29/04

10.44

Office Lease dated October 8, 2004 between Encore Software, Inc. and Kilroy Realty, L.P.

10-Q

09/30/04

10.57

11/15/04

10.45

Amendment dated December 29, 2004 to Office Lease between Encore Software, Inc. and Kilroy Realty, L.P.

10-Q

12/31/04

10.3

02/14/05

10.46

Addendum dated April 29, 2010 to Office Lease between Encore Software, Inc. and Kilroy Realty, L.P.

X

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

Exhibit description

with

Form

ending

Exhibit

date

10.47

Office/Warehouse Lease dated November 19, 2009 between the Company and Orlando Corporation

X

10.48

Consent to Assignment dated March 1, 2010 of Office/Warehouse Lease between the Company, Navarre Distribution Services ULC and Orlando Corporation

X

10.49

Partnership Interest Purchase Agreement dated January 10, 2005 among FUNimation Sellers and the Company

8-K

10.1

01/11/05

10.50

Form of Assignment and Assumption of FUNimation Limited Partnership Interests

8-K

10.1

(a)

02/14/05

10.51

Form of FUNimation Sellers Non-Competition Agreement

8-K

10.1

(d)

02/14/05

10.52

Amendment dated May 11, 2005 to Partnership Interest Purchase Agreement among FUNimation Sellers and the Company

8-K

10.1

05/17/05

10.53

Memorandum of Understanding dated February 7, 2006 among FUNimation Sellers and the Company

8-K

99.1

02/08/06

10.54

Office Lease dated May 29, 2007 between FUNimation Productions, Ltd. and FMBP Industrial I LP

10-K

03/31/07

10.117

06/14/07

10.55

Form of Securities Purchase Agreement dated March 2006 between the Company and various purchasers

S-1

4.2

04/13/06

10.56

Form of Registration Rights Agreement dated March 2006 between the Company and various purchasers

S-1

4.3

04/13/06

10.57

Purchase and Sale Agreement dated May 11, 2007 by and among the Company, Navarre Entertainment Media, Inc. and Koch Entertainment LP

8-K

10.1

05/14/07

10.58

Form of Fourth Amended and Restated Credit Agreement dated March 22, 2007 among the Company, General Electric Capital Corporation, as Agent, and Lenders

8-K

10.1

03/23/07

10.59

Form of Amendment and Limited Waiver dated May 30, 2007 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders

8-K

10.1

05/31/07

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

Exhibit description

with

Form

ending

Exhibit

date

10.60

Form of Amendment and Limited Waiver dated June 30, 2007 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders

8-K

10.1

08/13/07

10.61

Form of Amendment and Limited Waiver dated June 12, 2008 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders

10-K

3/31/08

10.59

06/16/08

10.62

Form of Amendment dated October 30, 2008 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders

8-K

10.1

10/31/08

10.63

Form of Amendment and Limited Waiver dated February 5, 2009 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders

10-Q

12/31/08

10.1

02/09/09

10.64

Form of Amendment dated February 17, 2009 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders

8-K

10.1

02/19/09

10.65

Form of Credit Agreement dated March 22, 2007 among the Company, Monroe Capital Advisors, LLC, as Agent, and Lenders

8-K

10.2

03/23/07

10.66

Limited Waiver dated May 30, 2007 to Credit Agreement among the Company, Monroe Capital Advisors, LLC, as Agent, and Lenders

8-K

10.2

05/31/07

10.67

Form of Amendment dated June 30, 2007 to Credit Agreement among the Company, Monroe Capital Advisors, LLC, as Agent, and Lenders

8-K

10.2

08/13/07

10.68

Form of Credit Agreement dated November 12, 2009 among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders

8-K

10.1

11/13/09

10.69

Consent and Amendment dated April 29, 2010 to Credit Agreement among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders

X

10.70

Consent and Amendment dated May 17, 2010 to Credit Agreement among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders

8-K

10.2

05/17/10

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

Exhibit description

with

Form

ending

Exhibit

date

10.71

Asset Purchase Agreement dated May 17, 2010 by and among Encore Software, Inc., Navarre Corporation and Punch Software, LLC

8-K

10.1

05/17/10

14.1

Navarre Corporation Code of Business Conduct and Ethics

10-K

03/31/04

14.1

06/29/04

21.1

Subsidiaries of the Registrant

X

23.1

Consent of Independent Registered Public Accounting Firm — Grant Thornton LLP

X

24.1

Power of Attorney, contained on signature page

X

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)

X

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)

X

32.1

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

X

32.2

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

X

SIGNATURES

     Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Cary L. Deacon and J. Reid Porter, or either of them, as his/her true and lawful attorney-in-fact and agent, each with the power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Signature		Title		Date
/s/ Cary L. Deacon		President and Chief Executive Officer and Director		June 11, 2010
Cary L. Deacon		(principal executive officer)
/s/ J. Reid Porter   J. Reid Porter		Chief Financial Officer (principal financial and accounting officer)		June 11, 2010
/s/ Eric H. Paulson		Chairman of the Board		June 11, 2010
Eric H. Paulson
/s/ Keith A. Benson		Director		June 11, 2010
Keith A. Benson
/s/ Timothy R. Gentz		Director		June 11, 2010
Timothy R. Gentz
/s/ Kathleen P. Iverson		Director		June 11, 2010
Kathleen P. Iverson
/s/ David F. Dalvey		Director		June 11, 2010
David F. Dalvey
/s/ Tom F. Weyl		Director		June 11, 2010
Tom F. Weyl
/s/ Deborah L. Hopp		Director		June 11, 2010
Deborah L. Hopp
/s/ Frederick C. Green IV		Director		June 11, 2010
Frederick C. Green IV