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

For the fiscal year ended March 31, 2009

or

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

NAVARRE CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota		41-1704319
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		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		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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, 2008 was approximately $48,016,165 (based on the closing price of such stock as quoted on The NASDAQ Global Market of $1.44 on such date).

The number of shares outstanding of the registrant’s Common Stock, no par value per share, was 36,260,116 as of June 8, 2009.

Part III incorporates information by reference to portions of the registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

 

 

NAVARRE CORPORATION
FORM 10-K

TABLE OF CONTENTS

				Page
		PART I
Item 1.		Business			3
Item 1A.		Risk Factors			12
Item 1B.		Unresolved Staff Comments			23
Item 2.		Properties			23
Item 3.		Legal Proceedings			24
Item 4.		Submission of Matters to a Vote of Security Holders			24
		PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
Item 6.		Selected Financial Data			26
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			45
Item 8.		Financial Statements and Supplementary Data			46
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			46
Item 9A.		Controls and Procedures			46
Item 9B.		Other Information			47
		PART III
Item 10.		Directors, Executive Officers, and Corporate Governance			48
Item 11.		Executive Compensation			48
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			48
Item 13.		Certain Relationships and Related Transactions, and Director Independence			48
Item 14.		Principal Accounting Fees and Services			48
		PART IV
Item 15.		Exhibits and Financial Statement Schedules			49
		Signatures			55
EX-10.22
EX-10.23
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1 — Business

Overview

     Navarre Corporation is a publisher and distributor of physical and digital home entertainment and multimedia products, including PC software, DVD 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, Target, Staples and Costco Wholesale Corporation, 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 these 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 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 is divided into two segments — Publishing and Distribution.

     Publishing. Through our publishing business, which generally has higher gross margins than our distribution business, we own or license various PC software and DVD 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”), FUNimation Productions, Ltd. (“FUNimation”) and BCI Eclipse Company, LLC (“BCI”). Encore, which we acquired in July 2002, licenses and publishes entertainment, personal productivity, genealogy, system utility, education and value products, including titles such as Print Shop, Print Master, Mavis Beacon Teaches Typing, Family Tree Maker, Diner Dash, Monopoly, Scrabble, Wheel of Fortune, Panda Securities and Hoyle PC Gaming products. FUNimation, acquired on May 11, 2005, is the leading anime content provider in the United States. FUNimation licenses and publishes titles such as Dragon Ball Z, Fullmetal Alchemist, Trinity Blood, Samurai 7, Afro Samurai, Black Blood Brothers, Claymore, D. Gray-man, Darker Than Black, One Piece, Shin Chan, and Robotech The Shadow Chronicles. 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, BCI began winding down its licensing operations related to budget DVD video.

     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 PC software, DVD video, video games, accessories, independent music labels (through May 2007), and 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 (“EDI”) services, fulfillment services and retailer-oriented marketing services. Our vendors include Symantec Corporation, Kaspersky Lab, Inc., Adobe Systems Incorporated, Trend Micro, Incorporated, Webroot Software, Inc., Warner Bros. Home Entertainment Inc., LucasArts Entertainment Company, Square Enix USA, Inc., McAfee, Inc., Corel Corporation and our 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 Statement of Operations. For the fiscal years ended March 31, 2008 and 2007, net sales for NEM were $5.2 million and $53.6 million, respectively. This transaction divested the Company of all its independent music distribution activities.

Business Strategy

     We seek to grow our publishing and distribution businesses through a combination of organic growth and targeted acquisitions, intended to leverage the complementary strengths of our businesses. We intend to execute this strategy as follows:

	•		Acquisitions of Attractive Content. We seek to continue to expand our publishing business through the development or licensing of well-established titles or other attractive content. We believe these acquisitions and/or licenses will help position us to increase our net sales in our publishing business, which historically has had higher margins than our distribution business, and will allow us to distribute additional home entertainment and multimedia content through our distribution business. In addition, we believe that by allowing the management of these publishing companies to focus on content licensing and marketing rather than on distribution operations, they will be able to devote more time and greater resources to their core competency, publishing. We believe that leveraging the core assets and strengths of our distribution business will provide broader retail penetration, distribution expertise and other services for our content and increase sales of our publishing products.
	•		Distribute a Broader Range and Larger Volume of Products. We seek to distribute a broader range and larger volume of home entertainment and multimedia products to our retail customers by providing a broad selection of products and capitalizing on our customer relationships. We seek to capture additional business from new and existing retail customers by providing them with a lower “all-in” cost of procuring merchandise and getting product to retailers’ shelves through efficient distribution. We expect that providing additional products to retailers will enable us to gain category management opportunities and enhance our reputation for product distribution expertise. We believe our strategic account associates located throughout the United States and Canada will help position us to improve the retail penetration of our published products to new and existing retail customers.
	•		Integrating Our Technology and Systems with Retailers and Vendors. We seek to enhance the link in the supply chain between us and our vendors and retail customers through the integration of our respective information and technology systems, including inventory management tools, replenishment systems and point-of-sale information. We believe this integration will lead to better in-stock levels of product, improved on-time arrivals of product to the customer, enhanced inventory management and lower return rates for our customers, thereby strengthening customer relationships.
	•		Providing Value-Added Services. Due to increasing retailer logistic needs and demands and the current economic environment, we believe many publishers will continue to decide whether to spend additional resources to update their distribution capabilities or to select a distributor, such as us, who intends to offer such services. We believe implementing and offering efficiencies and technological improvements should position us to capture additional business from existing and new publishers.

     Our overall goal is to create a structure that leverages the complementary strengths of our businesses: publishing, which provides brand management and marketing, licensing, and home video sales; and distribution, which provides enhanced distribution, logistics and customer relations.

Competitive Strengths

     We believe we possess the following competitive strengths:

	•		Value-Added Services. We offer a wide range of distribution services and procurement solutions intended to capitalize on our broad understanding of the products we distribute, the procurement process and the supply chain, as well as our logistics expertise and systems capabilities. We believe our distribution infrastructure enables us to provide customized procurement programs for our retail customers at a lower overall cost than many of our competitors. In addition, we believe our information technology systems provide cost-effective interfacing with our customers’ information technology systems, supporting integration of the procurement process. We believe our focus on providing customer-specific and cost-effective solutions is a key benefit that we provide to our retail customers.
	•		Broad Product Offering. We provide our retail customers with a broad selection of home entertainment and multimedia products that we believe allows us to better serve their home entertainment and multimedia product requirements. In addition, we regularly survey the markets we serve for new products with significant retail potential, that come from publishers we currently have relationships with as well as from those for which we have not distributed previously.
	•		Established Content in our Publishing Business. We currently license a number of well-known home entertainment and multimedia titles. Encore publishes leading titles in the personal productivity, education, family entertainment and system utilities software categories, including Print Shop, Print Master, Family Tree Maker, Mavis Beacon Teaches Typing, Monopoly, Wheel of Fortune, Diner Dash, Panda Securities and Hoyle PC Gaming products. Through FUNimation we also license and distribute a portfolio of established anime titles in the United States, including Dragon Ball Z, Fullmetal Alchemist, Trinity Blood, Samurai 7, Afro Samurai, One Piece, Shin Chan and Robotech The Shadow Chronicles. FUNimation also distributes live action films such as Shinobi, Genghis Khan, Love and Honor and Hana.
	•		Established Relationships with Publishers and Retailers. Since our founding in 1983, we have established distribution relationships with major retailers including Best Buy, Wal-Mart/Sam’s Club, Target, Staples and Costco Wholesale Corporation, and we distribute to more than 19,000 retail and distribution center locations throughout the United States and Canada. We believe our strong relationships throughout the supply chain, broad product offering and our distribution facility permit us to offer our products to our retail customers and provide access to a retail channel for publishers of these products. We believe our relationships with leading publishers and our efficient distribution of their products should provide opportunities for us to secure distribution rights to leading products in the future. We believe these relationships give us a competitive advantage in the markets in which we operate and provide us with attractive channels to distribute current and future products offered by our publishing business.
	•		Efficient Operations and Operating Leverage. We believe our competitive position is enhanced by the extensive use of automation and technology in our distribution facility and our enterprise resource planning (“ERP”) system which is anticipated to further enhance the efficiency of our operations. We also utilize centralized purchasing, accounting and information systems and economies of scale to maintain efficient operations. The location and size of our warehouse facility adjacent to our corporate headquarters provides us with the ability to efficiently service our vendors and retail customers, and the capacity to increase the number of products we distribute.

Distribution Markets

     PC Software

     According to The NPD Group, the PC software industry achieved $3.3 billion in sales on a trailing 12 month basis ended December 31, 2008. The category that experienced an increase during this time period was business products.

     We presently have relationships with PC software publishers such as Symantec Corporation, Kaspersky Lab, Inc., Adobe Systems, Inc., Trend Micro, Inc. and Webroot Software, Inc. These relationships are important to our distribution business and during the fiscal year ended March 31, 2009 each of these publishers accounted for more than $30.0 million in revenues. In the case of Symantec, net sales accounted for approximately $104.0 million, $95.0 million and $81.9 million in the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

     While we have agreements in place with our major suppliers, they are generally short-term in nature, with terms of one to three years. They typically cover the right to distribute in the United States and Canada, do not restrict the publisher from distributing their products through other distributors or directly to retailers and they do not guarantee product availability to us for distribution. Our agreements with these publishers provide us the ability to purchase products at a reduced wholesale price and allow us to provide a variety of distribution and fulfillment services in connection with the products. We continue our attempts to increase market share in the PC software industry by expanding our publisher and customer relationships.

     Video Games Software and Accessories

     According to The NPD Group, sales in the video games software and accessories industry were $21.0 billion in 2008 compared to $17.9 billion in 2007. According to industry sources, the installed base of video game consoles in North America is expected to grow to approximately 275.1 million users in 2013 compared to 133.3 million users in December 2008.

     We continued to expand our distribution of console-based video games in fiscal 2009. Our relationships with video game vendors such as Warner Home Video Games, Lucas Arts Entertainment, Square Enix, USA, Southpeak, Disney Interactive and Bethesda and are important to this category of our distribution business.

     Home Video

     According to industry sources, U.S. home video industry sales totaled $22.4 billion in 2008 compared to $23.7 billion in 2007.

     Our relationships with Warner Home Video, Buena Vista Home Video, Lionsgate and 20^th Century Fox are important to our major studio 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. These companies provide products and services to the nation’s leading music specialty stores and wholesalers.

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, Target, Staples and Costco Wholesale Corporation. We annually sell and distribute products to more than 19,000 retail and distribution center locations throughout the United States and Canada. While a major portion of our revenues are 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. References to our website are not intended to and do not incorporate information on the website into this Annual Report. See Navarre’s Distribution Business Model-E-Commerce. Through these sales channels, we seek to ensure a broad reach of product throughout the country in a cost-efficient manner.

     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, 2009, 2008 and 2007, sales to two customers, Best Buy and Wal-Mart/Sam’s Club, accounted for approximately 35% and 16%, 31% and 13%, and 23% and 11%, respectively, of our total net sales. The increase in net sales to Best Buy resulted primarily from the sale of new product lines to this customer.

Navarre’s Publishing Business Model

     In July 2002, we acquired Encore, a publisher of PC products and an exclusive owner or licenser and producer of PC/DVD/video products. Encore has an exclusive North American publishing agreement with Riverdeep, Inc. (“Riverdeep”) for the sales and marketing of Riverdeep’s interactive products in the productivity markets, that includes all products published under the Broderbund Brand. Encore also has exclusive licensing agreements with The Generations Network, Sony Online Entertainment, Hasbro, Panda Securities, and The United States Playing Card Company, Inc. FUNimation, acquired on May 11, 2005, is the leading anime content provider in the United States. In November 2003, we acquired BCI, a provider of niche DVD/video and audio products, however in fiscal 2009, BCI began winding down its licensing operations related to budget DVD video.

     Encore

     Encore publishes leading titles in the desktop publishing, family entertainment, education, system utilities, productivity and value software categories, including: Print Shop, Print Master, Family Tree Maker, Mavis Beacon Teaches Typing, Monopoly, Scrabble, Wheel of Fortune, Diner Dash, Panda Securities 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 PC software brands that have the potential to become successful franchises. Encore also continues to focus on establishing relationships with developed brands that are seeking to change their business models.

     Encore’s strategy is to continue to license quality branded PC 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, Panda and Hoyle publishing agreements.

     FUNimation

     FUNimation is the leading content provider in the United States market for anime, 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, DVD home video distribution, and licensing of merchandising rights for toys, video games and trading cards. FUNimation’s licensed titles include Dragon Ball Z, Fullmetal Alchemist, Trinity Blood, Samurai 7, Basilisk, Yu Yu Hakusho, Negima, Afro Samurai, Shin Chan, Black Blood Brothers, Claymore, Darker Than Black, and Robotech The Shadow Chronicles.

     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 the United States 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.

     BCI

     BCI developed, licensed, packaged and marketed entertainment video and audio products. In fiscal 2009, BCI began winding down its licensing operations related to budget DVD video.

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 our vendor roster. We believe companies such as Symantec Corporation, Kaspersky Lab, Inc., Adobe Systems Incorporated, Trend Micro, Incorporated, Webroot Software, Inc., Warner Bros. Home Entertainment Inc., LucasArts Entertainment Company, Square Enix USA, Inc., McAfee, Inc. and Corel Corporation have been added to our vendor roster because of our reputation as a service-driven organization.

     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. 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 2009, 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.

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 exclusive national distribution contracts; obtain proprietary 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 proprietary 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, ADV Films, 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 proprietary 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, 2009, we had 569 employees, including 139 in administration, finance, merchandising and licensing, 83 in sales and marketing and 347 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 9, 2009:

Name		Age				Position
Cary L. Deacon			57			President and Chief Executive Officer
J. Reid Porter			60			Executive Vice President, Chief Financial Officer
Joyce Fleck			56			President of Navarre Distribution
Calvin Morrell			53			President of Encore
Gen Fukunaga			48			Chief Executive Officer and President of FUNimation
John Turner			55			Senior Vice President of Global Logistics
Ryan F. Urness			37			General Counsel and Secretary

     Cary L. Deacon has been President and Chief Executive Officer since March 31, 2007. He previously served as the 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, 2009, net sales to Best Buy and Wal-Mart/Sam’s Club, represented 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. For the fiscal year ended March 31, 2007, net sales to Best Buy and Wal-Mart/Sam’s Club accounted for approximately 23% and 11%, respectively, of our total net sales, and, in the aggregate, approximately 34% 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, and our retail customers generally are not required to make minimum purchases. 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 our increase in net sales in recent years has been due to increased sales of PC software provided by software publishers such as Symantec Corporation, Kaspersky Lab, Inc., Adobe Systems, Inc., Trend Micro, Inc. and Webroot Software, Inc. During the fiscal year ended March 31, 2009 each of these publishers accounted for more than $30.0 million of our net sales. Symantec products accounted for approximately $104.0 million, $95.0 million and $81.9 million in net sales in the fiscal years ended March 31, 2009, 2008 and 2007, respectively. While we have agreements in place with each of these parties, such agreements generally are short-term in nature and may be cancelled without cause and upon short notice. The agreements typically cover the right to distribute in the United States and Canada, do not restrict the publishers 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 publishers’ products at a reduced wholesale price and to provide various distribution and fulfillment services in connection with the publishers’ products. If we were to lose our right to distribute products of any of the above PC 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.

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

     We are 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 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 United States 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 the financial condition and results of operations of the Company. 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 reduce orders, delay payment for product purchased or fail. 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;
	•		product marketing and promotional activities;
	•		the opening and closing of retail stores by our major customers;
	•		the extension, termination or non-renewal of existing distribution agreements and licenses; and
	•		general economic changes affecting the buying pattern of retailers, particularly those changes affecting consumer demand for home entertainment products and PC 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.

Our business is seasonal and variable in nature and, as a result, the level of sales 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 27.2%, 33.0% and 30.3% of our net sales for the fiscal years ended March 31, 2009, 2008 and 2007, 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 or if we provide price protection for sales during the holiday season or determine to increase our inventory levels to meet anticipated retail customer demand, our financial results and liquidity could be negatively affected. Our borrowing levels and inventory levels typically increase substantially during the holiday season.

     The 2008 holiday season was disappointing to most retailers as consumers remained cautious about discretionary spending. As a consequence of all of these factors, several of our customers have recently experienced significant financial difficulty, with one major customer filing for bankruptcy and subsequently deciding to liquidate. Consequently, our financial results have been negatively impacted by the downtown in the economy.

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 $32.0 million, or 46%, of FUNimation’s revenues for the fiscal year ended March 31, 2009. 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, 2009, 66% of FUNimation’s revenues were derived from sales of products under multiple licensing arrangements with three licensors. The loss of any 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 of 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.

     Home entertainment products have traditionally been marketed and delivered on a physical delivery basis. If these products are increasingly 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 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 differ from 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 by us or our licensors of such intellectual property. 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. We may need to resort to litigation in the future to protect our intellectual property rights or those of our licensors, which 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 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 or 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.

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 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 collectibility 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 exclusive national distribution contracts and licenses with manufacturers/vendors; obtain proprietary 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 proprietary products; and maintain operating expenses at an appropriate level.

     Our failure to perform adequately one or more of these tasks 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, ADV Films, 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 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 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, a significant amount of management’s time and financial resources may be required to complete the acquisition and integrate the acquired business into our existing 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 or joint ventures, they 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.

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 were 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 significant debt service obligations. As of March 31, 2009, our total indebtedness under our revolving facility was $24.1 million. 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; and
	•		limit our flexibility in planning for, or reacting to, changes in our business and industry.

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.

     Our debt service requirements will be impacted by changing interest rates. All of the $24.1 million of our outstanding debt at March 31, 2009 is subject to variable interest rates. A 100-basis point change in LIBOR would cause our projected annual interest expense, based on current borrowed amounts, to change by approximately $241,000. 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 line of credit (June 2010). Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:

	•		our financial condition 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, 2008 to March 31, 2009, the last reported price of our common stock as quoted on The NASDAQ Global Market ranged from a low of $0.34 to a high of $1.87. 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). However, Nasdaq has currently suspended the rules requiring a minimum $1.00 closing bid price and a minimum market value of publicly held shares. Enforcement of these rules is scheduled to resume on Monday, July 20, 2009. On June 8, 2009, our stock traded at $1.32. However, during fiscal year 2009, our common stock traded below the minimum $1.00 closing bid price for 30 consecutive business days and 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 harder 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 resell shares of our common stock could be adversely affected.

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

     Our stock option plans authorize the issuance of options and other securities to purchase 9.2 million shares of our common stock. As of March 31, 2009, options and warrants to purchase 5,206,684 shares of our common stock were outstanding, of which 2,069,669 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 and 302A.673 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

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, 2010.

     We also operate 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, 2010 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 $49,000 and expires October 31, 2017. In September 2008, the Company completed the sale of an unused facility owned by FUNimation (see Note 12 to the consolidated financial statements).

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.

     We also 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, 2010. The present aggregate base monthly rent for all our distribution facilities is approximately $153,000.

     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 24 to the consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

     There were no matters submitted to a vote of shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report.

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 2009				First		$	1.87			$	1.48
				Second			1.79				1.41
				Third			1.45				0.38
				Fourth			0.57				0.34
Fiscal 2008				First			4.45				3.78
				Second			4.10				3.62
				Third			3.90				2.02
				Fourth			2.00				1.57

     Holders

     At June 8, 2009, we had 599 common shareholders of record and an estimated 5,200 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, 2004 to March 31, 2009 on $100 invested on March 31, 2004, 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.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Navarre Corporation, The NASDAQ Composite Index
And A Peer Group

				3/04					3/05					3/06					3/07					3/08					3/09
	Navarre Corporation			$	100.00				$	134.06				$	72.34				$	63.24				$	29.68				$	7.42
	NASDAQ Composite			$	100.00				$	101.44				$	120.49				$	127.08				$	118.90				$	78.48
	Peer Group			$	100.00				$	94.05				$	90.69				$	89.48				$	81.66				$	49.74

     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 2009.

     Equity Compensation Plan Information

     During fiscal 2009 we granted 782,500 options and awarded 390,250 restricted shares.

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

Weighted-average

Number of securities

exercise

remaining available for

Number of securities to be

price of

future issuance under 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

5,206,684

$

5.74

1,334,672

Equity compensation plans not approved by security holders

—

—

—

Total

5,206,684

$

5.74

1,334,672

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 Form 10-K Report. We derived the following historical financial information from our consolidated financial statements for the fiscal years ended March 31, 2009, 2008, 2007, 2006 and 2005 which have been audited by Grant Thornton LLP.

     (In thousands, except per share data)

		Fiscal Years ended March 31,
		2009				2008				2007				2006(1)				2005
Statement of operations data (2):
Net sales		$	630,991			$	658,472			$	644,790			$	615,557			$	532,249
Gross profit, exclusive of depreciation and amortization			67,047				101,559				107,357				101,425				81,915
Income (loss) from operations			(97,118	)			17,831				16,362				6,767				9,494
Interest expense			(4,630	)			(6,127	)			(10,220	)			(11,217	)			(783	)
Other income (expense)			(1,169	)			625				56				2,764				(138	)
Income (loss) from continuing operations			(102,917	)			12,329				6,198				(1,686	)			8,573
Income tax benefit (expense)			14,483				(5,273	)			(2,594	)			654				942
Net income (loss) from continuing operations			(88,434	)			7,056				3,604				(1,032	)			9,515
Gain on sale of discontinued operations			—				4,892				—				—				—
Income (loss) from discontinued operations			—				(2,290	)			455				(2,143	)			651
Net income (loss)		$	(88,434	)		$	9,658			$	4,059			$	(3,175	)		$	10,166
Basic earnings (loss) per common share:
Continuing operations		$	(2.44	)		$	.20			$	.10			$	(.04	)		$	.36
Discontinued operations			—				.07				.01				(.07	)			.02
Net income (loss)		$	(2.44	)		$	.27			$	.11			$	(.11	)		$	.38
Diluted earnings (loss) per common share:
Continuing operations		$	(2.44	)		$	.20			$	.10			$	(.04	)		$	.33
Discontinued operations			—				.07				.01				(.07	)			.02
Net income (loss)		$	(2.44	)		$	.27			$	.11			$	(.11	)		$	.35
Weighted average shares outstanding:
Basic			36,207				36,105				35,786				29,898				26,830
Diluted			36,207				36,269				36,228				29,898				28,782
Balance sheet data:
Total assets		$	183,169			$	283,462			$	288,225			$	309,614			$	195,892
Short-term debt			24,133				31,523				39,208				5,115				334
Long-term debt			—				9,654				14,970				75,352				237
Temporary equity — Unregistered common stock (3)			—				—				—				16,634				—
Shareholders’ equity			37,007				124,411				113,451				88,906				77,284

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

Overview

     We are a publisher and distributor of physical and digital home entertainment and multimedia products, including PC software, DVD 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, Target, Staples and Costco Wholesale Corporation, 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 these 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 — Publishing and Distribution.

     Publishing. Through our publishing business, which generally has higher gross margins than our distribution business, we own or license various PC software, and DVD 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”), FUNimation Productions, Ltd. (“FUNimation”) and BCI Eclipse Company, LLC (“BCI”). Encore licenses and publishes personal productivity, genealogy, system utility, education and interactive gaming PC products, including titles such as Print Shop, Print Master, Mavis Beacon Teaches Typing, Family Tree Maker, Diner Dash, Monopoly, Scrabble, Wheel of Fortune, Panda Securities and Hoyle PC Gaming products. FUNimation, acquired on May 11, 2005, is the leading provider of anime home video products in the United States and licenses and publishes titles such as Dragon Ball Z, Fullmetal Alchemist, Trinity Blood, Samurai 7, Afro Samurai, Black Blood Brothers, Claymore, D. Gray-man, Darker Than Black, One Piece, Shin Chan and Robotech The Shadow Chronicles. In fiscal 2009, BCI began winding down its licensing operations related to budget DVD video.

     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 PC software, DVD video, video games, accessories and independent music labels (through May 2007), and 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., Adobe Systems Incorporated, Trend Micro, Incorporated, Webroot Software, Inc., Warner Bros. Home Entertainment Inc., LucasArts Entertainment Company, Square Enix USA, Inc., McAfee, Inc., Corel Corporation and our 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. Accordingly, the Company has presented the independent music distribution business as discontinued operations for all periods presented. This transaction divested the Company of all of its independent music distribution activities.

Overall Summary of Fiscal 2009 Financial Results

     Recently, the business environment has become more challenging due to extraordinarily adverse economic conditions. These conditions have slowed economic growth and have resulted in significant numbers of companies suffering financial difficulties, particularly in the retail industry. In addition, factors such as the volatile financial market, historic stock market losses, rising unemployment and the housing crisis have continued to pressure consumer spending in the U.S. Our operations are subject to seasonality, with the third quarter typically being the Company’s strongest. The 2008 holiday season, however, was disappointing to most retailers and distributors as consumers remained cautious about discretionary spending. As a consequence of all of these factors, several of our customers have recently experienced significant financial difficulty, with one major customer filing for bankruptcy

and subsequently deciding to liquidate. Consequently, our financial results have been negatively impacted by the downtown in the economy.

     During fiscal 2009, we reviewed our portfolio of businesses for poor performing activities to identify areas where continued business investments would not meet our requirements for financial returns. As such, the following occurred:

	•		BCI began winding down its licensing operations related to budget DVD video. For the year ended March 31, 2009, we recorded impairment and other charges of $25.9 million in connection with these activities.
	•		FUNimation is no longer involved in licensing operations related to DVD video of children’s properties. For the year ended March 31, 2009, we recorded $81.0 million in impairment and other charges, which included $8.2 million for license fees and production costs, $71.2 million for goodwill (see further disclosure in Note 3), $1.0 million for trademarks and $555,000 for inventory.

     We, like many public companies, experienced a significant decline in our stock price as the market reacted to the overall worsening of the economy and the “credit crisis” among major lending institutions. This decline triggered an impairment of goodwill and other intangibles in our publishing segment. During the year ended March 31, 2009, we recorded pre-tax. non-cash goodwill and intangible impairment charges in the amount of $82.7 million. Additionally, we completed a company-wide reduction in force with a restructuring cost of $1.1 million. The total restructuring, impairment and other charges recorded for fiscal 2009 were $111.1 million.

     Consolidated net sales decreased 4.2% during fiscal 2009 to $631.0 million compared to $658.5 million in fiscal 2008. This decrease in net sales, primarily in the software and home video categories, was due to decreased sales related to overall deteriorating economic conditions and the loss of sales from a large retailer that filed for bankruptcy and subsequently decided to liquidate.

     Our gross profit decreased to $67.0 million or 10.6% of net sales for fiscal 2009 compared with $101.6 million or 15.4% of net sales for fiscal 2008. The decrease in gross margin of $34.6 million was a result of:

	•		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.

     The decrease in gross profit margin percent from 15.4% to 10.6%, a total decrease of 4.8%, was due principally to the impairment and other charges related to our restructuring (which constituted 4.0% of the decrease) and product sales mix.

     Total operating expenses for fiscal 2009 were $164.2 million or 26.0% of net sales, compared with $83.7 million or 12.7% of net sales for fiscal 2008. The increase in operating expenses of $80.5 million in fiscal 2009 was primarily a result of pre-tax, non-cash goodwill and trademark impairment charges of $82.7 million, $2.0 million of impairment related to masters and severance costs of $1.1 million. These increased expenses were offset by $5.4 million decrease in the professional fee expenses resulting from the completion of the enterprise resource planning (“ERP”) system implementation.

     Net loss for fiscal 2009 was $88.4 million or $2.44 per diluted share compared to net income of $9.7 million or $0.27 per diluted share for last year.

     The restructuring activities that we undertook during fiscal 2009, including a company-wide workforce reduction and the winding down of the budget DVD video publishing business, have created an operating platform that yields a reduced expense base. In addition to improving profitability through expense-reduction initiatives, we anticipate that such initiatives will allow us to focus greater attention on maximizing the results of the more profitable areas of our business.

     Despite these challenging times, we are committed to licensing, acquisition of content and driving sales and efficiencies. We intend to monitor the current business environment in order to adjust our strategies appropriately.

Discontinued Operations

     On May 31, 2007, the Company sold all of the outstanding capital stock of its wholly-owned subsidiary, Navarre Entertainment Media, Inc. (“NEM”) to an unrelated third party. In accordance with SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets, the Company has presented the independent music distribution business as discontinued operations. The Company received $6.5 million in cash proceeds from the sale, plus the assignment to the Company of the trade receivables related to this business. The consolidated financial statements were reclassified to segregate the assets, liabilities and operating results of the discontinued operations for all periods presented. Prior to reclassification, the discontinued operations were reported in the distribution operating segment.

     As part of this transaction, the Company 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.

     During fiscal 2008, the Company adjusted the carrying value of the assets and liabilities of discontinued operations by $502,000, ($245,000 net of tax) to reflect settled contingencies and reserve adjustments. The additional gain is included in “Gain on sale of discontinued operations” in the Consolidated Statement of Operations.

     Net sales from discontinued operations for the years ended March 31, 2009, 2008 and 2007 were zero, $5.2 million and $53.6 million, respectively. Net income (loss) from discontinued operations was zero, $2.6 million or $0.07 per diluted share and $455,000 or $0.01 per diluted share for the years ended March 31, 2009, 2008 and 2007, respectively.

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 have relied on trade credit from vendors, amounts received on accounts receivable and our revolving credit facility for our working capital needs. In March 2007, we amended and restated our credit agreement with General Electric Capital Corporation (“GE”) and entered into a four year Term Loan facility with Monroe Capital Advisors, LLC (“Monroe”). The GE agreement currently provides for a $65.0 million revolving credit facility and the Monroe agreement provided for a $15.0 million Term Loan facility, which was paid in full in connection with the Third Amendment of the GE revolving facility. At March 31, 2009 we had $24.1 million outstanding on the revolving facility and, based on the facility’s borrowing base and other requirements, $16.2 million was available. At March 31, 2008 we had total debt outstanding of $31.3 million related to our revolving credit facility and $9.7 million outstanding related to our Term Loan facility.

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 collectibility is reasonably assured. We recognize service revenues upon delivery of the services. Service revenues represented less than 10% of total net sales for fiscal 2009, 2008 and 2007. 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 10% 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 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.

     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.

     FUNimation’s revenue is recognized upon meeting the recognition requirements of American Institute of Certified Public Accountants Statement of Position No. 00-2 (“SOP 00-2”) Accounting by Producers or Distributors of 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 the Company’s 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 SOP 00-2 are met. Fees 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, the Company amortizes 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.

     Management regularly reviews, and revises when necessary, its 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. The Company determines the estimated fair value for properties based on the estimated future ultimate revenues and costs in accordance with SOP 00-2.

     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 the Company’s 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 by the Company 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 by the Company 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 SOP 00-2. 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 collectibility 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, such as the bankruptcy of certain customers in fiscal 2009 and 2007. 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.

     Our publishing segment had goodwill balances of zero and $81.7 million as of March 31, 2009 and 2008. We have no goodwill associated with our distribution segment. 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 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, SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), requires the Company 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.

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 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, SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) and SOP 00-2, Accounting by Producers or Distributors of Films, require the Company 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 properly 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 SFAS 123R. Under the fair value recognition provisions of SFAS 123R, 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 SFAS 123R, we accounted for share-based payments under APB Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”) and accordingly, 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. We carried a valuation allowance at March 31, 2007 of $1.0 million related to the loss associated with the variable interest entity (“VIE”), Mix & Burn. We determined in fiscal year 2008 that certain deferred tax assets could be realized due to the recognition of the gain on the sale of NEM, and the previously recorded valuation allowance was then reversed. 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.

     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 became effective for and was adopted by the Company on April 1, 2007. FIN 48 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. FIN 48 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 materially 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

     In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements, (“SFAS No. 157”), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. In February 2008, the FASB issued FSP 157-2, which delays the effective date of FAS 157 for all nonfinancial assets and liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until our fiscal year 2010. Effective April 1, 2008, the Company adopted SFAS No. 157. The adoption of SFAS No. 157 did not have a material impact on the Company’s financial condition or results of operations.

     In February 2007, the FASB issued SFAS No. 159 (“SFAS No. 159”), The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115. SFAS No. 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under SFAS No. 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS No. 159, changes in fair value are recognized in earnings. Effective April 1, 2008, the Company adopted SFAS No. 159. The Company has elected not to measure any additional financial instruments or other items at fair value.

     During December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS No. 160 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. SFAS No. 160 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, SFAS No. 160 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. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning with the quarter ended June 30, 2009. Earlier adoption is prohibited. The Company is currently determining the impact, if any, SFAS No. 160 will have on its financial condition, results of operations and cash flows.

     On December 4, 2007, the FASB issued FASB Statement No. 141 (Revised 2007), Business Combinations (“FAS 141(R)”). FAS 141(R) will significantly change the accounting for business combinations. Under Statement

141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. FAS 141(R) will change the accounting treatment for certain specific items, including:

	•		Acquisition costs will generally be expensed as incurred;
	•		Noncontrolling interests (formerly known as “minority interests”)will be valued at fair value at the acquisition date;
	•		Acquired contingent liabilities will be 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 will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;
	•		Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and
	•		Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

     FAS 141(R) also includes 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, and will be adopted by the Company in the first quarter of fiscal 2010.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133 (“SFAS No. 161”). SFAS No. 161 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. SFAS No. 161 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 under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted SFAS No. 161 on January 1, 2009, which did not have an impact on its consolidated financial statements.

     In May 2008, the FASB issued Statements of Financial Standards No. 162 (“SFAS No. 162”), The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for non-governmental entities. The Company adopted SFAS No. 162 on its effective date, November 15, 2008, and it did not have a material impact on the preparation of its consolidated financial statements.

     In May 2009, the FASB issued Statements of Financial Standards No. 165 (“SFAS No. 165”), Subsequent Events. SFAS No. 165 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 the Company has evaluated subsequent events and whether the financial statements were issued or were available to be issued on the disclosed date. SFAS No. 165 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. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009 and must be applied prospectively.

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:

		Year Ended
(Unaudited)		March 31,				March 31,				March 31,
(In thousands)		2009				2008				2007
Net sales
Publishing		$	102,828			$	117,423			$	126,651
Distribution			592,893				611,007				587,881
Net sales before inter-company eliminations			695,721				728,430				714,532
Inter-company sales			(64,730	)			(69,958	)			(69,742	)
Net sales as reported		$	630,991			$	658,472			$	644,790

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,
		2009				2008				2007
Net sales:
Publishing			16.3	%			17.8	%			19.6	%
Distribution			94.0				92.8				91.2
Inter-company sales			(10.3	)			(10.6	)			(10.8	)
Total net sales			100.0				100.0				100.0
Cost of sales, exclusive of depreciation and amortization			89.4				84.6				83.4
Gross profit			10.6				15.4				16.6
Operating Expenses
Selling and marketing			4.0				4.2				4.4
Distribution and warehousing			1.9				1.9				1.9
General and administrative			5.2				5.2				5.5
Bad debt			—				—				0.6
Depreciation and amortization			1.8				1.4				1.7
Goodwill and intangible impairment			13.1				—				—
Total operating expenses			26.0				12.7				14.1
Income (loss) from operations			(15.4	)			2.7				2.5
Interest expense			(0.7	)			(0.9	)			(1.6	)
Interest income			—				—				0.1
Other income (expense), net			(0.2	)			0.1				—
Income (loss) from continuing operations — before taxes			(16.3	)			1.9				1.0
Income tax benefit (expense)			2.3				(0.8	)			(0.4	)
Net income (loss) from continuing operations			(14.0	)			1.1				0.6
Discontinued operations, net of tax
Gain on sale of discontinued operations			—				0.7				—
Loss from discontinued operations			—				(0.3	)			—
Net income (loss)			(14.0	)%			1.5	%			0.6	%

     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 risks and uncertainties inherent in our business, dependency upon key employees, the seasonality of our business, dependency upon significant customers and vendors, erosions in our gross profit margins, dependency upon financing, obtaining additional financing when required, dependency upon software developers and manufacturers, risks of returns and inventory obsolescence, effect of technology developments, effect of free product downloads, change in retailers methods of distribution and the possible volatility of our stock price. See also Business — Forward-Looking Statements/Risk Factors in Item 1A of this Form 10-K.

Publishing Segment

     The publishing segment includes Encore, FUNimation and BCI. In fiscal 2009, BCI began winding down its licensing operations related to budget DVD video.

Fiscal 2009 Results Compared With Fiscal 2008

     Net Sales

     Net sales for the publishing segment decreased 12.4% to $102.8 million (before inter-company eliminations) for fiscal 2009 from $117.4 million (before inter-company eliminations) for fiscal 2008. The decrease in net sales was primarily due to an overall retail decline and deteriorating economic conditions. The Company believes 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 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. We expect future gross profit rates to fluctuate depending principally upon the make-up of product sales.

     Operating Expenses

     Total operating expenses increased $82.0 million for the publishing segment 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 which decreased.

     Selling and marketing expenses were $11.2 million or 10.9% of net sales for fiscal 2009 and $13.2 million or 11.2% of net sales for fiscal 2008. The decrease of $2.0 million from the prior year is 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 and $11.0 million or 9.4% of net sales for fiscal 2008. The 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 was $100,000 for fiscal 2009 and bad debt recovery was $75,000 for fiscal 2008.

     Depreciation and amortization expense was $6.9 million for fiscal 2009 and $6.3 million for fiscal 2008. The 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 impairment for the publishing segment was $82.7 million for fiscal 2009 compared to zero for fiscal 2008. During fiscal 2009, the Company concluded that indicators of potential impairment were present due to the sustained decline in the Company’s share price which resulted in the market capitalization of the Company being less than its book value. The Company 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.

Fiscal 2008 Results Compared With Fiscal 2007

     Net Sales

     Net sales for the publishing segment decreased 7.3% to $117.4 million (before inter-company eliminations) for fiscal 2008 from $126.7 million (before inter-company eliminations) for fiscal 2007. The decrease in net sales was

primarily due to a softness in net sales due to a decline in certain PC software and DVD categories, offset by strong anime home video net sales from releases which included Afro Samurai, Fullmetal Alchemist, Witchblade, Dragon Ball Z.

     Gross Profit

     Gross profit for the publishing segment was $43.2 million or 36.8% as a percent of net sales for fiscal 2008 and $46.6 million or 36.8% as a percent of net sales for fiscal 2007. The gross margin rate remained relatively flat between the periods.

     Operating Expenses

     Operating expenses for the publishing segment were $30.5 million, or 26.0% of net sales, for fiscal 2008 and $36.5 million, or 28.8% of net sales for fiscal 2007. Overall expenses decreased in all categories of operating expenses.

     Selling and marketing expenses were $13.2 million or 11.2% of net sales for fiscal 2008 and $14.2 million or 11.2% of net sales for fiscal 2007. The decrease of $1.0 million from the prior year is primarily due to decreased product development and advertising spending on products.

     General and administrative expenses were $11.0 million or 9.4% of net sales for fiscal 2008 and $11.8 million or 9.3% of net sales for fiscal 2007. Decreases of $1.4 million in personnel costs and $183,000 in professional fees were offset by increases in legal fees of $481,000 related to a settlement and rent expense of $361,000 related to costs associated with the new FUNimation lease and termination of prior BCI and FUNimation leases.

     Bad debt recovery was $75,000 for fiscal 2008 and bad debt expense was $2.2 million for fiscal 2007. Fiscal 2007 included the write-off of amounts due to the bankruptcy of a retailer and the write-off of amounts due from a FUNimation acquisition accounts receivable.

     Depreciation and amortization expense was $6.3 million for fiscal 2008 and $8.3 million for fiscal 2007. Fiscal 2008 amortization expense was reduced by $2.4 million on intangibles related to the FUNimation acquisition.

     Operating Income

     The publishing segment had operating income from continuing operations of $12.7 million for fiscal 2008 and $10.1 million for fiscal 2007.

Distribution Segment

     The distribution segment distributes PC software, DVD video, video games and accessories and independent music (through May 2007).

Fiscal 2009 Results Compared With Fiscal 2008

     Net Sales

     Net sales for the distribution segment were $592.9 million (before inter-company eliminations) for fiscal 2009 compared to $611.0 million (before inter-company eliminations) 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. DVD 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. The Company believes 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 $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. 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 $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 is 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 was $200,000 or 0.0% as a percent of net sales for fiscal 2009 compared to $60,000 or 0.0% 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 is 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.

Fiscal 2008 Results Compared With Fiscal 2007

     Net Sales

     Net sales for the distribution segment were $611.0 million (before inter-company eliminations) for fiscal 2008 compared to $587.9 million (before inter-company eliminations) for fiscal 2007. The $23.1 million or 3.9% increase in net sales for fiscal 2008 was principally due to increases in sales in all categories except for our DVD video category. Sales increased in the software product group to $498.3 million for fiscal 2008 compared to $466.4 million for fiscal 2007. Software continued to expand its market share presence. DVD video decreased to $64.7 million for fiscal 2008 from $76.7 million in fiscal 2007 due primarily to the loss of business with an electronics department store retailer. Video games increased to $48.1 million in fiscal 2008 from $44.8 million in fiscal 2007, due to increased publisher rosters and strong releases.

     Gross Profit

     Gross profit for the distribution segment was $58.4 million or 9.6% of net sales for fiscal 2008 compared to $60.7 million or 10.3% of net sales for fiscal 2007. The decrease in gross profit as a percent of net sales for fiscal 2008 was due to a shift in sales mix from higher gross margin products. The Company expects gross profit to fluctuate depending upon the make-up of product sold.

     Operating Expenses

     Total operating expenses for the distribution segment were $53.3 million or 8.7% of net sales for fiscal 2008 compared to $54.5 million or 9.3% of net sales for fiscal 2007. Overall expenses for general and administrative and bad debt expense decreased, which were partially offset by increases in selling and marketing expenses, distribution and warehouse expenses and depreciation and amortization.

     Selling and marketing expenses for the distribution segment remained flat at $14.2 million or 2.3% of net sales for fiscal 2008 compared to $14.1 million or 2.4% of net sales for fiscal 2007.

     Distribution and warehousing expenses for the distribution segment remained flat at $12.7 million or 2.1% of net sales for fiscal 2008 compared to $12.3 million or 2.1% of net sales for fiscal 2007.

     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 $23.1 million or 3.8% of net sales for fiscal 2008 compared to $24.0 million or 4.1% of net sales for fiscal 2007. The total fluctuation between periods reflected higher expenses for fiscal 2008, primarily an increase of $1.7 million due to the implementation of a new ERP system and $1.5 million of professional and legal fees. These increases were offset by decreases in salaries of $1.4 million, of which $817,000 primarily related to incentive-based deferred compensation expense related to the former CEO’s employment agreement, decreased bonus expense of $711,000 due to the overall performance of the Company and other general and administrative expenses.

     Bad debt expense was $60,000 or 0.0% as a percent of net sales for fiscal 2008 compared to $1.4 million or 0.2% for fiscal 2007. Fiscal 2007 included the write-off of accounts receivable of $1.7 million due to the bankruptcy of a retailer. This was partially offset by recoveries of other accounts receivable that were previously written off.

     Depreciation and amortization for the distribution segment was $3.3 million for fiscal 2008 compared to $2.6 million for fiscal 2007. The increase was principally due to the new ERP system.

     Operating Income

     Net operating income from continuing operations for the distribution segment was $5.1 million for fiscal 2008 compared to a net operating income from continuing operations of $6.3 million for fiscal 2007.

Consolidated Other Income and Expense for All Periods

     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 is 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.

     Other income and expense, net, decreased to net expense of $5.5 million in fiscal 2008 from net expense of $10.2 million in fiscal 2007. Interest expense was $6.1 million for fiscal 2008 compared to $10.2 million for fiscal 2007. The decrease in interest expense for fiscal 2008 was a result of a reduction in debt levels in fiscal 2008 and the write-off of debt financing costs in fiscal 2007 of $2.4 million, related to our prior debt facility. 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. Other income (expense) amounts for fiscal 2007 consisted primarily of interest income of $357,000, $251,000 of warrant expense related to the March 2006 private placement and $50,000 of net other expense.

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

     We recorded consolidated income tax benefit of $14.5 million for fiscal 2009, or an effective rate of 14.1%. Income tax expense for fiscal 2008 of $5.3 million, or an effective tax rate of 42.8% and income tax expense of $2.6 million for fiscal 2007, or an effective tax rate of 41.9%.

     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. The change in the effective tax rate for the year ended March 31, 2009 is principally attributable to the fact that we recorded a valuation allowance against the deferred tax assets of $21.4 million during fiscal 2009 which represents the amount of temporary differences we do not anticipate recognizing with future projected income for fiscal years 2010 through 2013, or by net operating loss carrybacks.

     We adopted the provisions of FIN 48 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 FIN 48 and approximately $327,000 of UTB’s, net of 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, 2008, interest accrued was approximately $56,000, which was net of federal and state tax benefits. Total UTB’s net of deferred federal and state tax benefits that would impact the effective tax rate if recognized, were $734,000. During the year ended March 31, 2009 an additional $230,000 of UTB’s were accrued, which was net of $57,000 of federal and state income tax benefits. As of March 31, 2009, interest accrued was $127,000 and total UTB’s, net of deferred federal and state income tax benefits were $964,000.

Consolidated Net (Loss) Income from Continuing Operations

     We recorded a net loss from continuing operations of $88.4 million for fiscal 2009 and net income from continuing operations of $7.1 million and $3.6 million for fiscal 2008 and 2007, respectively.

Discontinued Operations

     The Company’s businesses classified as discontinued operations recorded net income from operations of zero, net loss from operations of $2.3 million, net of tax, and net income from operations of $455,000, net of tax, for the years ended March 31, 2009, 2008 and 2007, respectively. The Company recorded a gain on the sale of discontinued operations of $4.9 million, net of tax, for the year ended March 31, 2008.

Consolidated Net (Loss) Income for All Periods

     Net loss for fiscal year 2009 was $88.4 million compared to net income of $9.7 million and $4.1 million for fiscal years 2008 and 2007, respectively.

Market Risk

     The Company’s exposure to market risk is 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 27.2%, 33.0%, and 30.3% of our net sales for the fiscal years ended March 31, 2009, 2008 and 2007. 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 holiday season, however, was 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 downtown in the economy, particularly during the third quarter of fiscal 2009. 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 2009 totaled $16.5 million, compared to $18.4 million and $21.4 million for fiscal 2008 and 2007, respectively.

     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 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.

     The net cash provided by operating activities for fiscal 2007 mainly reflected our net income, combined with various non-cash charges, including depreciation and amortization of $11.0 million, amortization and write-off of deferred financing costs of $3.0 million, amortization of license fees of $7.4 million, amortization of production costs of $2.3 million, share-based compensation expense of $910,000, deferred compensation costs of $1.1 million, offset by a change in deferred income taxes of $1.2 million and by our working capital demands. The following are changes in the operating assets and liabilities during fiscal 2007: accounts receivable increased by $1.0 million; inventories decreased by $3.9 million, primarily reflecting a focus on reducing inventory levels; prepaid expenses increased by $2.0 million, primarily reflecting royalty advances in the publishing segment; income taxes receivable

decreased by $3.6 million, primarily due to the timing of required tax payments and tax refunds; other assets decreased $1.9 million, primarily due to amortization and recoupments; production costs and license fees increased $3.9 million and $9.6 million, respectively, due primarily to new content acquisitions; accounts payable increased $2.3 million, primarily due to timing of disbursements; and accrued expenses decreased $2.2 million, primarily due to decreased accrued interest expense and royalty payments.

Investing Activities

     Cash flows used in investing activities totaled $334,000, $13.9 million and $8.9 million in fiscal 2009, 2008 and 2007, respectively.

     Acquisition of property and equipment totaled $3.5 million, $8.6 million and $7.1 million in fiscal 2009, 2008 and 2007, respectively. Purchases of assets in fiscal 2009 consisted primarily of computer equipment and the final implementation of our ERP project. Purchases of fixed assets in fiscal 2008 and 2007 primarily related to the ERP project and warehouse equipment.

     Purchase of intangible assets totaled $666,000, $1.4 million and $1.5 million for fiscal 2009, 2008 and 2007, respectively. The acquisition of software development totaled $677,000 for fiscal 2009.

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

     The sale of marketable securities held in a Rabbi trust was $3.2 million during fiscal 2009 related to deferred compensation payments to our former CEO. 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.

Financing Activities

     Cash flows used in financing activities were $20.6 million in fiscal 2009, $13.1 million in fiscal 2008 and $26.9 million in fiscal 2007.

     The Company had proceeds from notes payable-line of credit of $208.8 million, repayments of notes payable-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 of $297,000 and debt acquisition costs of $850,000 for fiscal 2009.

     The Company recorded net payments on note payable — line of credit of $7.6 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 for fiscal 2008.

     The Company recorded net proceeds from note payable — line of credit of $39.0 million, net proceeds from note payable of $15.0 million and repayments of note payable of $80.1 million for fiscal 2007. Debt acquisition costs were $990,000 and proceeds received upon the exercise of common stock options were $466,000 for fiscal 2007.

Discontinued Operations

     Cash flows provided by operating activities of discontinued operations were zero for fiscal 2009, $5.6 million for fiscal 2008 and $1.1 million for fiscal 2007. Proceeds from the sale of discontinued operations were $6.5 million for the year ended March 31, 2008.

Capital Resources

     In October 2001, we entered into a credit agreement (the “GE Facility”) with General Electric Capital Corporation (“GE”). The credit agreement was amended and restated on May 11, 2005 in order to provide the Company with funding to complete the FUNimation acquisition, was amended and restated on June 1, 2005 and again on March 22, 2007. The credit agreement provided for a senior secured three-year $95.0 million revolving credit facility. The revolving facility is available for working capital and general corporate needs and is subject to a borrowing base requirement. The revolving facility is secured by a first priority security interest in all of our assets, as well as the capital stock of our subsidiary companies. At March 31, 2009 we had $24.1 million outstanding and

based on the facility’s borrowing base and other requirements, excess availability was $16.2 million on the revolving facility.

     We entered into a four-year $15.0 million term loan facility with Monroe Capital Advisors, LLC (“Monroe”) as administrative agent, agent and lender on March 22, 2007. The Term Loan facility called for monthly installments of $12,500, annual excess cash flow payments and final payment on March 2011. The facility was secured by a second priority security interest in all of our assets of the Company. At March 31, 2008 we had $9.7 million outstanding on the Term Loan facility. This facility was paid in full on June 12, 2008 in connection with the Third Amendment to the GE revolving 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 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 will not be impacted by any pre-tax, non-cash charges to earnings related to goodwill impairment; and (ii) revised the definition of “Index Rate” to indicate that the interest rate for non-LIBOR borrowings will 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 will 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 for the period ending December 31, 2008 related to a force reduction; (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 credit 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.

     In association with the credit agreement, we also pay certain facility and agent fees. Weighted average interest on the revolving facility was 5.6% at March 31, 2009 and 4.7% at March 31, 2008 and is payable monthly. Interest under the Term Loan facility was at 10.6% at March 31, 2008.

     Under the revolving 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 EBITDA to fixed charges, minimum EBITDA, and a borrowing base availability requirement. At March 31, 2009, we were in compliance with all covenants under the revolving facility.

Liquidity

     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; (2) investments in our distribution segment in order to sign exclusive distribution agreements; (3) equipment needs for

our operations; and (4) amounts payable to our former Chief Executive Officer for post-retirement benefits. During fiscal year 2009, we invested approximately $22.4 million, before recoveries, in connection with the acquisition of licensed and exclusively distributed product in our publishing and distribution segments. Additionally, we had cash outlays of $3.4 million in connection with the licensing and implementation of our ERP system during the year ended March 31, 2009. We do not anticipate any future cash outlays in connection with the ERP system implementation.

     Our credit agreement provides for an eighteen month (through June 30, 2010), $65.0 million revolving 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 $24.1 million outstanding on the revolving sub-facility and excess availability of $16.2 million, based on the terms of the agreement.

     We currently believe cash and cash equivalents, funds generated from the expected results of operations and funds available under our existing credit facility will be sufficient to satisfy our working capital requirements, other cash needs, and to finance expansion plans and strategic initiatives in the foreseeable future, absent significant acquisitions. 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, 2009 by fiscal year (in thousands).

						Less than 1				1 — 3				3 — 5				More than 5
		Total				Year				Years				Years				Years
Operating leases		$	24,278			$	2,868			$	5,053			$	5,187			$	11,170
Capital leases			231				106				102				23				—
License and distribution agreements			14,097				10,099				2,798				1,200				—
Deferred compensation			2,149				2,149				—				—				—
Total		$	40,755			$	15,222			$	7,953			$	6,410			$	11,170

     We have excluded our FIN 48 liabilities 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 note payable have been excluded.

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, 2009 we had $24.1 million of indebtedness, which was subject to interest rate fluctuations. Based on these borrowings subject to interest rate fluctuations outstanding on March 31, 2009, a 100-basis point change in LIBOR would cause the Company’s annual interest expense to change by $241,000.

     Foreign Currency Risk. The Company has 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, 2009, 2008 and 2007, the Company had $1.2 million of foreign exchange loss, $252,000 of foreign exchange gain and $413,000 of foreign exchange loss, 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 the Company’s control, the Company periodically monitors its 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, 2009 and 2008

     Consolidated Statements of Operations for the years ended March 31, 2009, 2008 and 2007

     Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended March 31, 2007, 2008 and 2009

     Consolidated Statements of Cash Flows for the years ended March 31, 2009, 2008 and 2007

     Notes to Consolidated Financial Statements

     Schedule II — Valuation and Qualifying Accounts and Reserves for the years ended March 31, 2009, 2008 and 2007

     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 the Company’s Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is 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, 2009. 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 our assessment, we believe that, as of March 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.

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

(c) Changes in Internal Control over Financial Reporting

     There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s 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

     We refer you to our Proxy Statement for our 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission (“SEC”) within 120 days after the close of our fiscal year, for information regarding this item and our directors and nominees for director. This information is incorporated by reference into this item of the report.

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

     We refer you to our Proxy Statement for our 2009 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close of our fiscal year, for information regarding our Audit Committee members and “audit committee financial experts”. This information is incorporated by reference into this item of the report.

     We refer to our Proxy Statement for our 2009 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close of our fiscal year, for information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934. This information is incorporated by reference into this item of the report.

     The information regarding the Company’s Code of Business Ethics is incorporated by reference to the information to be contained in our Proxy Statement for our 2009 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close our fiscal year.

Item 11. Executive Compensation

     Information required under this item will be contained in our Proxy Statement for our 2009 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close our fiscal year 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 2009 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close our fiscal year 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 2009 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close our fiscal year 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 2009 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close our fiscal year 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, 2009 and 2008.
	(iii)		Consolidated Statements of Operations for the years ended March 31, 2009, 2008 and 2007
	(iv)		Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended March 31, 2007, 2008 and 2009.
	(v)		Consolidated Statements of Cash Flows for the years ended March 31, 2009, 2008 and 2007.
	(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

Incorporated by reference

Exhibit

Filed

Period

Filing

number

Exhibit description

herewith

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

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*

Navarre Corporation Amended and Restated 2004 Stock Plan

S-8

4

02/22/06

Incorporated by reference

Exhibit

Filed

Period

Filing

number

Exhibit description

herewith

Form

ending

Exhibit

date

10.4*

Form of Employee Stock Option Agreement under 2004 Stock Plan

10-K

03/31/05

10.58

06/14/05

10.5*

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

10-K

03/31/05

10.59

06/14/05

10.6*

Form of Employee Restricted Stock Agreement under 2004 Stock Plan

8-K

10.2

04/04/06

10.7*

Form of Director Restricted Stock Agreement under 2004 Stock Plan

8-K

10.3

04/04/06

10.8*

Form of TSR Stock Unit Agreement under 2004 Stock Plan

8-K

10.4

04/04/06

10.9*

Form of Performance Stock Unit Agreement under 2004 Stock Plan

8-K

10.5

04/04/06

10.10*

Form of Restricted Stock Unit Agreement under 2004 Stock Plan

10-Q

09/31/07

10.1

11/08/07

10.11*

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

10-Q

12/31/01

10.1

02/13/02

10.12*

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

8-K

99.2

12/29/06

10.13*

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

8-K

99.1

04/04/07

10.14*

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

10-K

03/31/04

10.41

06/29/04

10.15*

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

8-K

10.1

(b)

01/11/05

10.16*

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

8-K

99.1

12/29/06

10.17*

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

10.18*

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

10.19*

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

8-K

10.2

03/21/08

10.20*

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

8-K

10.3

03/21/08

Incorporated by reference

Exhibit

Filed

Period

Filing

number

Exhibit description

herewith

Form

ending

Exhibit

date

10.21*

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

8-K

10.4

03/21/08

10.22*

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

X

10.23*

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

X

10.24*

Form of Lock-Up Agreement

8-K

10.1

03/23/06

10.25*

Fiscal Year 2007 Annual Management Incentive Plan

8-K

10.1

04/04/06

10.26*

Fiscal Year 2008 Annual Management Incentive Plan

8-K

10.1

07/12/07

10.27*

Fiscal Year 2009 Annual Management Incentive Plan

10-K

03/31/08

10.26

06/16/08

10.28*

Fiscal Year 2010 Annual Management Incentive Plan

8-K

10.1

04/21/09

10.29

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

10-K

03/31/99

10.6

06/29/99

10.30

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

10.31

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

10-Q

06/30/03

10.9.3

08/14/03

10.32

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

10.33

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

10.34

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

10.35

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

10.36

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

Incorporated by reference

Exhibit

Filed

Period

Filing

number

Exhibit description

herewith

Form

ending

Exhibit

date

10.37

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

10.38

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

10.39

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

10.40

License and Distribution Agreement (Manufacturing Rights) (2004-2005) between Encore Software, Inc. and Riverdeep Inc. dated March 29, 2004

10-Q/A

09/30/04

10.1

11/19/04

10.41

License and Distribution Agreement (Manufacturing Rights) (2005-2007) between Encore Software, Inc. and Riverdeep Inc. dated March 29, 2004

10-Q/A

09/30/04

10.2

11/19/04

10.42

Addendum dated April 13, 2004 to License and Distribution Agreements (Manufacturing Rights) (2004-2005 and 2005-2007) between Encore Software, Inc. and Riverdeep Inc.

10-Q/A

09/30/04

10.3

11/19/04

10.43

Form of Addendum dated October 2004 to License and Distribution Agreements (Manufacturing Rights) (2004-2005 and 2005-2007) between Encore Software, Inc. and Riverdeep Inc.

10-Q/A

09/30/04

10.4

11/19/04

10.44

Form of Addendum dated November 2004 to License and Distribution Agreements (Manufacturing Rights) (2004-2005 and 2005-2007) between Encore Software, Inc. and Riverdeep Inc

10-Q

12/31/04

10.2

02/14/05

10.45

Addendum dated October 6, 2005 to License and Distribution Agreements (Manufacturing Rights) (2004-2005 and 2005-2007) between Encore Software, Inc. and Riverdeep Inc.

10-Q

09/30/05

10.1

11/14/05

10.46

Addendum dated April 1, 2006 to License and Distribution Agreements (Manufacturing Rights) (2004-2005 and 2005-2007) between Encore Software, Inc. and Riverdeep Inc.

10-K

03/31/06

10.98

06/14/06

10.47

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

10.48

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

Incorporated by reference

Exhibit

Filed

Period

Filing

number

Exhibit description

herewith

Form

ending

Exhibit

date

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

10.47

06/29/04

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

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

03/31/08

10.59

06/16/08

Incorporated by reference

Exhibit

Filed

Period

Filing

number

Exhibit description

herewith

Form

ending

Exhibit

date

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

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

10-K

03/31/08

21.1

06/16/08

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   Cary L. Deacon		President and Chief Executive Officer and Director (principal executive officer)		June 9, 2009
/s/ J. Reid Porter   J. Reid Porter		Chief Financial Officer (principal financial and accounting officer)		June 9, 2009
/s/ Eric H. Paulson   Eric H. Paulson		Chairman of the Board		June 9, 2009
/s/ Keith A. Benson   Keith A. Benson		Director		June 9, 2009
/s/ Timothy R. Gentz   Timothy R. Gentz		Director		June 9, 2009
/s/ Kathleen P. Iverson   Kathleen P. Iverson		Director		June 9, 2009
/s/ Michael L. Snow   Michael L. Snow		Director		June 9, 2009
/s/ Tom F. Weyl   Tom F. Weyl		Director		June 9, 2009
/s/ Deborah L. Hopp   Deborah L. Hopp		Director		June 9, 2009
/s/ Richard Gary St. Marie   Richard Gary St. Marie		Director		June 9, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Navarre Corporation

     We have audited the accompanying consolidated balance sheets of Navarre Corporation and subsidiaries (the Company) as of March 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and other comprehensive income (loss), and cash flows for each of the three years in the period ended March 31, 2009. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

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

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Navarre Corporation and subsidiaries as of March 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Navarre Corporation and subsidiaries’ internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 9, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
June 9, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Navarre Corporation

     We have audited Navarre Corporation and subsidiaries’ (the Company) internal control over financial reporting of as of March 31, 2009, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, Navarre Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by COSO.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Navarre Corporation and subsidiaries as of March 31, 2009 and 2008 and the related consolidated statements of operations, shareholders’ equity and other comprehensive income (loss), and cash flows for each of the three years in the period ended March 31, 2009, and our report dated June 9, 2009 expressed an unqualified opinion on those consolidated financial statements.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
June 9, 2009

NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

		March 31,
		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	—			$	4,445
Marketable securities			1,024				1,506
Accounts receivable, less allowances of $19,010 and $15,417, respectively			72,817				76,806
Inventories			26,732				32,654
Prepaid expenses and other current assets			11,090				12,118
Income taxes receivable			4,866				937
Deferred tax assets — current, net			6,219				9,100
Total current assets			122,748				137,566
Property and equipment, net of accumulated depreciation of $16,704 and $14,484, respectively			15,957				17,181
Assets held for sale, net of accumulated depreciation of $194 at March 31, 2008			—				1,428
Software development costs, net			677				—
Other assets:
Marketable securities			—				2,667
Goodwill			—				81,697
Intangible assets, net of amortization of $25,364 and $21,180, respectively			3,406				9,984
License fees, net of amortization of $21,570 and $19,595, respectively			17,728				20,515
Production costs, net of amortization of $12,223 and $7,439, respectively			8,408				7,316
Deferred tax assets — non-current, net			10,299				—
Other assets			3,946				5,108
Total assets		$	183,169			$	283,462
Liabilities and shareholders’ equity
Current liabilities:
Note payable — line of credit		$	24,133			$	31,314
Note payable — short-term			—				150
Capital lease obligation — short-term			90				59
Accounts payable			106,708				92,199
Checks written in excess of cash balance			297				—
Deferred compensation			2,149				2,080
Accrued expenses			11,504				16,118
Total current liabilities			144,881				141,920
Long-term liabilities
Note payable — long-term			—				9,594
Capital lease obligation — long-term			115				60
Deferred compensation			—				3,491
Deferred tax liabilities — non-current			—				3,106
Income taxes payable			1,166				880
Total liabilities			146,162				159,051
Commitments and contingencies (Note 24)
Shareholders’ equity:
Common stock, no par value:
Authorized shares — 100,000,000; issued and outstanding shares — 36,260,116 and 36,227,886, respectively			161,134				160,103
Accumulated deficit			(124,126	)			(35,692	)
Accumulated other comprehensive loss			(1	)			—
Total shareholders’ equity			37,007				124,411
Total liabilities and shareholders’ equity		$	183,169			$	283,462