10-K

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, 2010

or

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

Commission File Number 0-22982

NAVARRE CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

NAVARRE CORPORATION

FORM 10-K

TABLE OF CONTENTS

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

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PART I

Item 1 — Business

Overview

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

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

Information About Our Segments

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

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

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

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

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

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

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

     Business Strategy & Strengths

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

• Distribution of a Broad Range of Products

• Provision of Value-Added and Logistical Services

• Acquisition of Attractive Publishing Content

• Integration of Our Technology and Systems with Customers and Vendors

• Established Relationships with Publishers and Customers.

Distribution Markets

     Computer Software

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

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

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

     Video Games

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

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

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

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     Home Video

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

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

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

     Independent Label Music

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

Customers

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

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

Navarre’s Distribution Business Model

     Vendor Relationships

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

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

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     Retail Services

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

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

     Warehouse Systems

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

     E-Commerce

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

Navarre’s Publishing Business Model

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

     Encore

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

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

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

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

     FUNimation

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

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

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

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

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

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

Competition

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

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

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

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Backlog

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

Environmental Matters

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

Employees

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

Capital Resources — Financing

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

Available Information

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

Executive Officers of the Company

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

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

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

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

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     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:

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Risks Relating to Our Business and Industry

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

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

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

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

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

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

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

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

• any new properties, product concepts or programming will achieve commercial acceptance; or

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

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

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

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

• the credit available to our customers;

• the popularity of our products released during the quarter;

• the opening and closing of retail stores by our major customers;

• the extension, termination or non-renewal of existing distribution agreements and licenses;

• the credit available from our vendors and other sources;

• product marketing and promotional activities; and

• general economic changes affecting the buying pattern of retailers, particularly those changes affecting consumer demand for home entertainment products and computer software.

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

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

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

• compliance with foreign regulatory and market requirements;

• variability of foreign economic, political and labor conditions;

• changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by U.S. import and export laws;

• longer accounts receivable payment cycles;

• potentially adverse tax consequences;

• difficulties in protecting intellectual property;

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• burdens of complying with foreign laws; and

• as we generate cash flow in non-U.S. jurisdictions, we may experience difficulty transferring such funds to the U.S. in a tax efficient manner.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Relating to Indebtedness

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

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

• make it more difficult for us to satisfy our obligations with respect to other indebtedness;

• increase our vulnerability to adverse economic and industry conditions;

• require us to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, thereby reducing the availability of cash to fund working capital and capital expenditures and for other general corporate purposes;

• restrict us from acquiring new content, exploring other business opportunities or strategic acquisitions;

• limit our ability to obtain financing for working capital, capital expenditures, general corporate purposes or acquisitions;

• place us at a disadvantage compared to our competitors that have less indebtedness;

• limit our flexibility in planning for, or reacting to, changes in our business and industry; and

• cause vendors to reduce or restrict vendor financing.

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

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

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

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

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

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

• our financial condition at the time;

• the amount of financing outstanding and lender requirements at the time;

• restrictions in our credit agreement or other outstanding indebtedness; and

• other factors, including the condition of the financial markets or the distribution and publishing markets.

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

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

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

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

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

Risks Relating to Our Common Stock

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other Risks

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

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

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Item 1B. Unresolved Staff Comments

     Not applicable.

Item 2. Properties

Distribution

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

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

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

Publishing

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

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

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

Item 3. Legal Proceedings

     See Note 23 to the consolidated financial statements.

Item 4. (Removed and Reserved)

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PART II

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

     Common Stock

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

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

     Holders

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

     Dividend Policy

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

     Comparative Stock Performance

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

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

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* $100 invested on 3/31/05 in stock or index-including reinvestment of dividends. Fiscal year ending March 31.

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

Source: Research Data Group, Inc.

Purchases of Equity Securities

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

Equity Compensation Plan Information

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

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

					Number of securities
			Weighted-average		remaining available for
			exercise		future issuance under
	Number of securities to be		price of		equity
	issued upon exercise of		outstanding		compensation plans
	outstanding options,		options,		(excluding securities
	warrants and rights		warrants and rights		reflected in column (a))
Plan Category	(a)		(b)		(c)
Equity compensation plans approved by security holders		5,651,786	$	4.54		98,913
Equity compensation plans not approved by security holders		—		—		—
Total		5,651,786	$	4.54		98,913

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Item 6. Selected Financial Data

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

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

(1)	Includes acquisition of FUNimation from date of acquisition — May 11, 2005.
(2)	Fiscal years 2008, 2007 and 2006 have been restated for discontinued operations related to the divestiture of NEM.
(3)	See Note 20 to the consolidated financial statements.

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

Overview

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

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

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

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

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

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

Overall Summary of Fiscal 2010 Financial Results

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

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

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

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

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

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

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

Working Capital and Debt

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

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

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

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

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

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Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

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

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

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

Production Costs and License Fees — FUNimation

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

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

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

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

Allowance for Doubtful Accounts

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

Goodwill and Intangible Assets

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

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

Impairment of Long-Lived Assets

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

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

Inventory Valuation

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

Share-Based Compensation

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

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

Income Taxes

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

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

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

Contingencies and Litigation

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

Recently Issued Accounting Pronouncements

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

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

• Acquisition costs are generally expensed as incurred;

• Noncontrolling interests (formerly known as “minority interests”) are valued at fair value at the acquisition date;

• Acquired contingent liabilities are recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

• In-process research and development are recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

• Restructuring costs associated with a business combination are generally expensed subsequent to the acquisition date; and

• Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense.

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

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

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

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

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

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

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

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

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

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

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

     Results of Operations

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

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

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Segment Results

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

Distribution Segment

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

Fiscal 2010 Results Compared With Fiscal 2009

     Net Sales (before inter-company eliminations)

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

     Gross Profit

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

     Operating Expenses

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

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

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

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

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

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

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

     Operating Income

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

Fiscal 2009 Results Compared With Fiscal 2008

     Net Sales (before inter-company eliminations)

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

     Gross Profit

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

     Operating Expenses

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

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

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

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

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

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

     Operating Income

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

Publishing Segment

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

Fiscal 2010 Results Compared With Fiscal 2009

     Net Sales (before inter-company eliminations)

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

     Gross Profit

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

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

     Operating Expenses

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

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

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

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

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

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

     Operating Income (Loss)

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

Fiscal 2009 Results Compared With Fiscal 2008

     Net Sales (before inter-company eliminations)

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

     Gross Profit

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

     Operating Expenses

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

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

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

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

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

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

     Operating Income (Loss)

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

Consolidated Other Income and Expense for All Periods

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

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

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

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

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

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

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

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

Consolidated Net (Loss) Income from Continuing Operations

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

Discontinued Operations

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

Consolidated Net (Loss) Income for All Periods

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

Market Risk

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

Seasonality and Inflation

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

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Liquidity and Capital Resources

Cash Flow Analysis

Operating Activities

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

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

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

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

Investing Activities

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

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

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

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

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

Financing Activities

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

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

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

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

Discontinued Operations

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

Capital Resources

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

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

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

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

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

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

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

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

Liquidity

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

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

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

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

Contractual Obligations

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

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

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

Off-Balance Sheet Arrangements

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

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

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

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

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

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

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Item 8. Financial Statements and Supplementary Data

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

     Reports of Independent Registered Public Accounting Firm

     Consolidated Balance Sheets at March 31, 2010 and 2009

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

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

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

     Notes to Consolidated Financial Statements

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

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

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

     None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Management’s Report on Internal Control over Financial Reporting

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

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

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(ii.) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that an issuer’s receipts and expenditures are being made only in accordance with authorizations of its management and directors; and

(iii.) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of an issuer’s assets that could have a material effect on the consolidated financial statements.

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

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

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

Changes in Internal Control over Financial Reporting

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

Item 9B. Other Information

     None.

PART III

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

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

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

Item 11. Executive Compensation

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

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

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

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

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

Item 14. Principal Accounting Fees and Services

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

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Documents filed as part of this report -

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

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

(2) Financial Statement Schedules

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

(3) Exhibit Listing

		Filed	Incorporated by reference
Exhibit		here		Period			Filing
number	Exhibit description	with	Form	ending	Exhibit		date
3.1	Navarre Corporation Amended and Restated Articles of Incorporation		S-1			3.1	04/13/06
3.2	Navarre Corporation Amended and Restated Bylaws		8-K			3.1	01/25/07
4.1	Form of Specimen Certificate for Common Stock		S-1			4.1	04/13/06
4.2	Form of Warrant dated March 21, 2006		S-1			4.4	04/13/06
4.3	Form of Agent’s Warrant		S-1/A			4.5	06/26/06

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		Filed	Incorporated by reference
Exhibit		here		Period				Filing
number	Exhibit description	with	Form	ending	Exhibit			date
10.1*	Navarre Corporation Amended and Restated 1992 Stock Option Plan		10-K	03/31/02		10.3		07/01/02
10.2*	2003 Amendment to 1992 Stock Option Plan		S-8			99.1		09/23/03
10.3*	Form of Individual Stock Option Agreement under 1992 Stock Option Plan		S-1			10.4		09/03/93
10.4*	Navarre Corporation Amended and Restated 2004 Stock Plan, as amended September 13, 2007 (but only as to the addition of 1,500,000 shares available for issuance)		S-8			4		02/22/06
10.5*	Amendment No. 2 to Amended and Restated 2004 Stock Plan		DEF14A			A		07/28/09
10.6*	Form of Employee Stock Option Agreement under 2004 Stock Plan		10-K	03/31/05		10.58		06/14/05
10.7*	Form of Non-Employee Director Stock Option Agreement under 2004 Stock Plan		10-K	03/31/05		10.59		06/14/05
10.8*	Form of Employee Restricted Stock Agreement under 2004 Stock Plan		8-K			10.2		04/04/06
10.9*	Form of Director Restricted Stock Agreement under 2004 Stock Plan		8-K			10.3		04/04/06
10.10*	Form of TSR Stock Unit Agreement under 2004 Stock Plan		8-K			10.4		04/04/06
10.11*	Form of Performance Stock Unit Agreement under 2004 Stock Plan		8-K			10.5		04/04/06
10.12*	Form of Restricted Stock Unit Agreement under 2004 Stock Plan		10-Q	09/31/07		10.1		11/08/07
10.13*	Employment Agreement dated November 1, 2001 between the Company and Eric H. Paulson		10-Q	12/31/01		10.1		02/13/02
10.14*	Amendment dated December 28, 2006 to Employment Agreement between the Company and Eric H. Paulson		8-K			99.2		12/29/06
10.15*	Amendment dated March 30, 2007 to Employment Agreement between the Company and Eric H. Paulson		8-K			99.1		04/04/07
10.16*	Form of Separation Agreement between the Company and Charles E. Cheney		10-K	03/31/04		10.41		06/29/04
10.17*	Form of Post-Acquisition Employment Agreement among the Company, FUNimation Productions, Ltd. and Gen Fukunaga		8-K			10.1	(b)	01/11/05

45

		Filed	Incorporated by reference
Exhibit		here		Period			Filing
number	Exhibit description	with	Form	ending	Exhibit		date
10.18*	Employment Agreement dated May 7, 2010 among the Company, FUNimation Productions Ltd., animeOnline Ltd. and Gen Fukunaga		8-K			99.1	5/27/10
10.19*	Amended and Restated Employment Agreement dated December 28, 2006 between the Company and Cary L. Deacon		8-K			99.1	12/29/06
10.20*	Amendment dated January 29, 2007 to Amended and Restated Employment Agreement between the Company and Cary L. Deacon		8-K			10.1	01/30/07
10.21*	Amendment dated March 20, 2008 to Amended and Restated Employment Agreement between the Company and Cary L. Deacon		8-K			10.1	03/21/08
10.22*	Amended and Restated Executive Severance Agreement dated March 20, 2008 between the Company and J. Reid Porter		8-K			10.2	03/21/08
10.23*	Executive Severance Agreement dated March 20, 2008 between the Company and Brian Burke		8-K			10.3	03/21/08
10.24*	Executive Severance Agreement dated March 20, 2008 between the Company and John Turner		8-K			10.4	03/21/08
10.25*	Executive Severance Agreement dated March 20, 2008 between the Company and Joyce Fleck		10-K	03/31/09		10.22	06/09/09
10.26*	Executive Severance Agreement dated March 20, 2008 between the Company and Calvin Morrell		10-K	03/31/09		10.23	06/09/09
10.27*	Form of Lock-Up Agreement		8-K			10.1	03/23/06
10.28*	Fiscal Year 2008 Annual Management Incentive Plan		8-K			10.1	07/12/07
10.29*	Fiscal Year 2009 Annual Management Incentive Plan		10-K	03/31/08		10.26	06/16/08
10.30*	Fiscal Year 2010 Annual Management Incentive Plan		8-K			10.1	04/21/09
10.31*	Fiscal Year 2011 Annual Management Incentive Plan		8-K			10.1	05/14/10
10.32	Office/Warehouse Lease dated April 1, 1998 between the Company and Cambridge Apartments, Inc.		10-K	03/31/99		10.6	06/29/99

46

		Filed	Incorporated by reference
Exhibit		here		Period			Filing
number	Exhibit description	with	Form	ending	Exhibit		date
10.33	Amendment dated September 27, 2001 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.		10-Q	06/30/03		10.9.1	08/14/03
10.34	Agreement of Reciprocal Easements, Covenants, Conditions and Restrictions dated June 16, 2003		10-Q	06/30/03		10.9.3	08/14/03
10.35	Amendment dated July 14, 2003 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.		10-Q	06/30/03		10.9.2	08/14/03
10.36	Form of Amendment dated February 23, 2004 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.		10-K	03/31/04		10.48	06/29/04
10.37	Form of Amendment dated June 2004 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.		10-K	03/31/04		10.49	06/29/04
10.38	Addendum dated May 27, 2004 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.		10-K	03/31/04		10.51	06/29/04
10.39	Addendum dated November 12, 2009 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc.	X
10.40	Amendment dated March 21, 2004 to Office/Warehouse Lease between the Company and Airport One Limited Partnership		10-K	03/31/04		10.50	06/29/04
10.41	Amendment dated November 23, 2004 to Office/Warehouse Lease between the Company and Airport One Limited Partnership		10-Q	12/31/04		10.1	02/14/05
10.42	Amendment dated February 2, 2006 to Office/Warehouse Lease between the Company and Airport One Limited Partnership		10-Q	12/31/05		10.1	02/09/06
10.43	Form of Office/Warehouse Lease dated May 27, 2004 between the Company and NL Ventures IV New Hope, L.P.		10-K	03/31/04		10.47	06/29/04
10.44	Office Lease dated October 8, 2004 between Encore Software, Inc. and Kilroy Realty, L.P.		10-Q	09/30/04		10.57	11/15/04
10.45	Amendment dated December 29, 2004 to Office Lease between Encore Software, Inc. and Kilroy Realty, L.P.		10-Q	12/31/04		10.3	02/14/05
10.46	Addendum dated April 29, 2010 to Office Lease between Encore Software, Inc. and Kilroy Realty, L.P.	X

47

		Filed	Incorporated by reference
Exhibit		here		Period				Filing
number	Exhibit description	with	Form	ending	Exhibit			date
10.47	Office/Warehouse Lease dated November 19, 2009 between the Company and Orlando Corporation	X
10.48	Consent to Assignment dated March 1, 2010 of Office/Warehouse Lease between the Company, Navarre Distribution Services ULC and Orlando Corporation	X
10.49	Partnership Interest Purchase Agreement dated January 10, 2005 among FUNimation Sellers and the Company		8-K			10.1		01/11/05
10.50	Form of Assignment and Assumption of FUNimation Limited Partnership Interests		8-K			10.1	(a)	02/14/05
10.51	Form of FUNimation Sellers Non-Competition Agreement		8-K			10.1	(d)	02/14/05
10.52	Amendment dated May 11, 2005 to Partnership Interest Purchase Agreement among FUNimation Sellers and the Company		8-K			10.1		05/17/05
10.53	Memorandum of Understanding dated February 7, 2006 among FUNimation Sellers and the Company		8-K			99.1		02/08/06
10.54	Office Lease dated May 29, 2007 between FUNimation Productions, Ltd. and FMBP Industrial I LP		10-K	03/31/07		10.117		06/14/07
10.55	Form of Securities Purchase Agreement dated March 2006 between the Company and various purchasers		S-1			4.2		04/13/06
10.56	Form of Registration Rights Agreement dated March 2006 between the Company and various purchasers		S-1			4.3		04/13/06
10.57	Purchase and Sale Agreement dated May 11, 2007 by and among the Company, Navarre Entertainment Media, Inc. and Koch Entertainment LP		8-K			10.1		05/14/07
10.58	Form of Fourth Amended and Restated Credit Agreement dated March 22, 2007 among the Company, General Electric Capital Corporation, as Agent, and Lenders		8-K			10.1		03/23/07
10.59	Form of Amendment and Limited Waiver dated May 30, 2007 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders		8-K			10.1		05/31/07

48

		Filed	Incorporated by reference
Exhibit		here		Period			Filing
number	Exhibit description	with	Form	ending	Exhibit		date
10.60	Form of Amendment and Limited Waiver dated June 30, 2007 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders		8-K			10.1	08/13/07
10.61	Form of Amendment and Limited Waiver dated June 12, 2008 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders		10-K	3/31/08		10.59	06/16/08
10.62	Form of Amendment dated October 30, 2008 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders		8-K			10.1	10/31/08
10.63	Form of Amendment and Limited Waiver dated February 5, 2009 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders		10-Q	12/31/08		10.1	02/09/09
10.64	Form of Amendment dated February 17, 2009 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders		8-K			10.1	02/19/09
10.65	Form of Credit Agreement dated March 22, 2007 among the Company, Monroe Capital Advisors, LLC, as Agent, and Lenders		8-K			10.2	03/23/07
10.66	Limited Waiver dated May 30, 2007 to Credit Agreement among the Company, Monroe Capital Advisors, LLC, as Agent, and Lenders		8-K			10.2	05/31/07
10.67	Form of Amendment dated June 30, 2007 to Credit Agreement among the Company, Monroe Capital Advisors, LLC, as Agent, and Lenders		8-K			10.2	08/13/07
10.68	Form of Credit Agreement dated November 12, 2009 among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders		8-K			10.1	11/13/09
10.69	Consent and Amendment dated April 29, 2010 to Credit Agreement among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders	X
10.70	Consent and Amendment dated May 17, 2010 to Credit Agreement among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders		8-K			10.2	05/17/10

49

		Filed	Incorporated by reference
Exhibit		here		Period			Filing
number	Exhibit description	with	Form	ending	Exhibit		date
10.71	Asset Purchase Agreement dated May 17, 2010 by and among Encore Software, Inc., Navarre Corporation and Punch Software, LLC		8-K			10.1	05/17/10
14.1	Navarre Corporation Code of Business Conduct and Ethics		10-K	03/31/04		14.1	06/29/04
21.1	Subsidiaries of the Registrant	X
23.1	Consent of Independent Registered Public Accounting Firm — Grant Thornton LLP	X
24.1	Power of Attorney, contained on signature page	X
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)	X
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)	X
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)	X
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)	X

* Indicates a management contract or compensatory plan or arrangement

50

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.

	Navarre Corporation (Registrant)
June 11, 2010	By	/s/ Cary L. Deacon
		Cary L. Deacon
		President and Chief Executive Officer

     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.

51

POWER OF ATTORNEY

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

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

52

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 (a Minnesota corporation) and subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended March 31, 2010. 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 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2010, 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, 2010, 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 11, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
June 11, 2010

53

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Navarre Corporation

     We have audited Navarre Corporation (a Minnesota corporation) and subsidiaries’ internal control over financial reporting as of March 31, 2010, based on 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 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, 2010, 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, 2010 and 2009 and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended March 31, 2010, and our report dated June 11, 2010 expressed an unqualified opinion on those financial statements.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
June 11, 2010

54

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

	March 31,
	2010			2009
Assets
Current assets:
Marketable securities	$	2		$	1,024
Accounts receivable, less allowances of $13,193 and $19,010, respectively		62,627			72,817
Inventories		26,272			26,732
Prepaid expenses and other current assets		13,727			11,090
Income tax receivable		94			4,866
Deferred tax assets — current, net		7,603			6,219
Total current assets		110,325			122,748
Property and equipment, net of accumulated depreciation of $20,863 and $16,704, respectively		13,307			15,957
Software development costs, net of amortization of $324 and zero, respectively		1,723			677
Other assets:
Intangible assets, net of accumulated amortization of $19,184 and $25,364, respectively		1,500			3,406
License fees, net of accumulated amortization of $28,107 and $21,570, respectively		16,565			17,728
Production costs, net of accumulated amortization of $16,745 and $12,223, respectively		9,814			8,408
Deferred tax assets — non-current, net		13,808			10,299
Other assets		4,561			3,946
Total assets	$	171,603		$	183,169
Liabilities and shareholders’ equity
Current liabilities:
Revolving line of credit	$	6,634		$	24,133
Capital lease obligation — short-term		57			90
Accounts payable		82,451			106,708
Checks written in excess of cash balances		4,816			297
Deferred compensation		1,333			2,149
Accrued expenses		14,248			11,504
Total current liabilities		109,539			144,881
Long-term liabilities
Capital lease obligation — long-term		82			115
Income taxes payable		1,221			1,166
Total liabilities		110,842			146,162
Commitments and contingencies (Note 23)
Shareholders’ equity:
Common stock, no par value:
Authorized shares — 100,000,000; issued and outstanding shares — 36,366,668 at March 31, 2010 and 36,260,116 at March 31, 2009		162,015			161,134
Accumulated deficit		(101,254	)		(124,126	)
Accumulated other comprehensive loss		—			(1	)
Total shareholders’ equity		60,761			37,007
Total liabilities and shareholders’ equity	$	171,603		$	183,169

     See accompanying notes to consolidated financial statements.

55

NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

	Years ended March 31,
	2010			2009			2008
Net sales	$	528,332		$	630,991		$	658,472
Cost of sales (exclusive of depreciation and amortization)		440,407			563,944			556,913
Gross profit		87,925			67,047			101,559
Operating expenses:
Selling and marketing		23,140			25,334			27,371
Distribution and warehousing		9,799			12,166			12,689
General and administrative		29,730			32,664			34,096
Bad debt expense (recovery)		257			300			(15	)
Depreciation and amortization		6,316			10,972			9,587
Goodwill and intangible asset impairment		—			82,729			—
Total operating expenses		69,242			164,165			83,728
Income (loss) from operations		18,683			(97,118	)		17,831
Other income (expense):
Interest expense		(2,818	)		(4,630	)		(6,127	)
Interest income		16			86			259
Other income (expense), net		788			(1,255	)		366
Income (loss) from continuing operations before income tax		16,669			(102,917	)		12,329
Income tax benefit (expense)		6,203			14,483			(5,273	)
Net income (loss) from continuing operations		22,872			(88,434	)		7,056
Discontinued operations, net of tax
Gain on sale of discontinued operations		—			—			4,892
Loss from discontinued operations		—			—			(2,290	)
Net income (loss)	$	22,872		$	(88,434	)	$	9,658
Basic earnings (loss) per common share:
Continuing operations	$	0.63		$	(2.44	)	$	0.20
Discontinued operations		—			—			0.07
Net income (loss)	$	0.63		$	(2.44	)	$	0.27
Diluted earnings (loss) per common share:
Continuing operations	$	0.62		$	(2.44	)	$	0.20
Discontinued operations		—			—			0.07
Net income (loss)	$	0.62		$	(2.44	)	$	0.27
Weighted average shares outstanding:
Basic		36,285			36,207			36,105
Diluted		36,643			36,207			36,269

     See accompanying notes to consolidated financial statements.

56

NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share amounts)

										Accumulated
										Other			Total
	Common Stock						Accumulated			Comprehensive			Shareholders’
	Shares			Amount			Deficit			Income (Loss)			Equity
Balance at March 31, 2007		36,038,295		$	158,801		$	(45,350	)	$	—		$	113,451
Shares issued upon exercise of stock options and for restricted stock		197,209			190			—			—			190
Share based compensation		—			1,072			—			—			1,072
Tax benefit from employee stock option plans		—			67			—			—			67
Redemptions of common stock to cover tax withholdings		(7,618	)		(27	)		—			—			(27	)
Net income		—			—			9,658			—			9,658
Comprehensive income		—			—			—			—			9,658
Balance at March 31, 2008		36,227,886			160,103			(35,692	)		—			124,411
Shares issued upon exercise of stock options and for restricted stock		50,199			12			—			—			12
Share based compensation		—			1,033			—			—			1,033
Tax benefit from employee stock option plans		—			1			—			—			1
Redemptions of common stock to cover tax withholdings		(17,969	)		(15	)		—			—			(15	)
Net loss		—			—			(88,434	)		—			(88,434	)
Unrealized loss on marketable securities		—			—			—			(1	)		(1	)
Comprehensive loss		—			—			—			—			(88,435	)
Balance at March 31, 2009		36,260,116			161,134			(124,126	)		(1	)		37,007
Shares issued upon exercise of stock options and for restricted stock		158,003			5			—			—			5
Share based compensation		—			1,004			—			—			1,004
Redemptions of common stock to cover tax withholdings		(51,451	)		(128	)		—			—			(128	)
Net income		—			—			22,872			—			22,872
Unrealized gain on marketable securities											1			1
Comprehensive income		—			—			—			—			22,873
Balance at March 31, 2010		36,366,668		$	162,015		$	(101,254	)	$	—		$	60,761

See accompanying notes to consolidated financial statements.

57

NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Years ended March 31,
	2010			2009			2008
Operating activities:
Net income (loss)	$	22,872		$	(88,434	)	$	9,658
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss from discontinued operations		—			—			2,290
Gain on sale of discontinued operations		—			—			(4,892	)
Depreciation and amortization		6,316			10,961			9,672
Amortization of debt acquisition costs		502			250			333
Write-off of debt acquisition costs		289			950			—
Amortization of license fees		8,042			13,372			6,907
Amortization of production costs		4,967			6,230			3,284
Amortization of software development costs		324			—			—
Goodwill and intangible asset impairment		—			82,729			—
Change in deferred revenue		(283	)		182			(311	)
Share-based compensation expense		1,004			1,033			1,072
Deferred compensation expense		(816	)		(222	)		(787	)
Tax benefit from employee stock options		—			1			67
Deferred income taxes		(4,893	)		(10,524	)		2,788
Other		60			88			(171	)
Changes in operating assets and liabilities:
Accounts receivable		10,190			3,989			(6,197	)
Inventories		460			5,922			4,137
Prepaid expenses		(2,637	)		1,028			(992	)
Contingent liabilities		—			—			(760	)
Income taxes receivable		4,772			(3,929	)		(109	)
Other assets		319			739			634
Production costs		(6,373	)		(7,322	)		(5,183	)
License fees		(6,879	)		(10,585	)		(11,813	)
Accounts payable		(24,257	)		14,536			5,054
Income taxes payable		55			286			880
Accrued expenses		2,899			(4,811	)		2,824
Net cash provided by operating activities		16,933			16,469			18,385
Investing activities:
Purchases of property and equipment		(1,768	)		(3,544	)		(8,562	)
Purchases of intangible assets		(12	)		(666	)		(1,379	)
Software development costs incurred		(1,370	)		(677	)		—
Purchases of marketable equity securities		—			—			(4,000	)
Proceeds from sale of marketable equity securities		1,028			3,200			—
Proceeds from sale of assets held for sale		—			1,353			—
Proceeds from sale of intangible assets		20			—			—
Net cash used in investing activities		(2,102	)		(334	)		(13,941	)
Financing activities:
Proceeds from revolving line of credit		196,060			208,758			198,379
Payments on revolving line of credit		(213,559	)		(215,939	)		(206,021	)
Repayment of note payable		—			(9,744	)		(5,256	)
Payment of deferred compensation		—			(3,200	)		—
Checks written in excess of cash balances		4,519			297			—
Payment of debt acquisition costs		(1,790	)		(850	)		(240	)
Other		(61	)		98			87
Net cash used in financing activities		(14,831	)		(20,580	)		(13,051	)
Net decrease in cash from continuing operations		—			(4,445	)		(8,607	)
Discontinued operations:
Net cash provided by operating activities		—			—			5,586
Net cash provided by investing activities, proceeds from sale of discontinued operations		—			—			6,500
Net increase (decrease) in cash		—			(4,445	)		3,479
Cash at beginning of year		—			4,445			966
Cash at end of year	$	—		$	—		$	4,445

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	Years ended March 31,
	2010			2009			2008
Supplemental cash flow information:
Cash paid (received) for:
Interest	$	1,861		$	3,885		$	5,460
Income taxes, net of refunds		(5,773	)		(262	)		1,086
Supplemental schedule of non-cash investing and financing activities:
Purchase price adjustments affecting accounts receivable and gain on sale, net		—			—			245
Shares received for payment of tax withholding obligations		128			15			27
Expiration of fully amortized masters		8,078			—			—
Expiration of fully amortized license fees		1,504			11,397			—
Expiration of fully amortized production costs		445			1,446			—

     See accompanying notes to consolidated financial statements.

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NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010

Note 1 Business Description

     Navarre Corporation, (the “Company” or “Navarre”), a Minnesota corporation formed in 1983, distributes and publishes a wide range of computer software and home entertainment and multimedia products and provides value-added services to third-party publishers. The Company operates through two business segments —distribution and publishing. The Company’s broad base of customers includes: (i) wholesale clubs, (ii) mass merchandisers, (iii) other third party distributors, (iv) computer specialty stores, (v) book stores, (vi) office superstores, and (vii) electronic superstores.

     Through the distribution segment, the Company distributes computer software, home video, video games and accessories that are provided by our vendors and provides fee-based third-party logistical services to North American retailers and their suppliers. The Company’s vendors provide products, which in turn are distributed to retail customers. The 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.

     Through the publishing segment, the Company owns or licenses various computer software and home video titles. The publishing segment publishes computer software through Encore Software, Inc. (“Encore”), anime content through FUNimation Productions, Ltd. (“FUNimation”) and formerly published budget home video through BCI Eclipse Company, LLC (“BCI”). In fiscal 2009, BCI began winding down its licensing operations related to budget home video, and the wind-down was completed during the fourth quarter of fiscal 2010.

Note 2 Summary of Significant Accounting Policies

Basis of Consolidation

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

Segment Reporting

     The Company’s current presentation of segment data consists of two operating and reportable segments — distribution and publishing.

Fiscal Year

     References in these footnotes to fiscal 2010, 2009 and 2008 represent the twelve months ended March 31, 2010, March 31, 2009 and March 31, 2008, respectively.

Use of Estimates

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the realizability of accounts receivable, vendor advances, inventories, goodwill, intangible assets, prepaid royalties, production costs, license fees, income taxes and the adequacy of certain accrued liabilities and reserves. Actual results could differ from these estimates.

Reclassifications

     Certain operating expense amounts included in the consolidated financial statements have been reclassified from the prior years’ presentations to conform to the current year presentation.

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Fair Value of Financial Instruments

     The carrying value of the Company’s current financial assets and liabilities, because of their short-term nature, approximates fair value.

Cash and Cash Equivalents

     The Company considers short-term investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. From time to time, the Company reports “checks written in excess of cash balances”. This amount represent payments made to vendors that have not yet been presented by the vendor to the Company’s bank and drawn against the Company’s revolving line of credit.

Marketable Securities

     The Company has classified all marketable securities as available-for-sale which requires the securities to be reported at fair value, with unrealized gains and losses, net of tax, reported as a separate component of shareholders’ equity. Marketable securities at March 31, 2010 consist of a money market fund and at March 31, 2009 consisted of government agency and corporate bonds and a money market fund. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to income, resulting in the establishment of a new cost basis for the security.

     The fair value of securities is determined by quoted market prices. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in income and are derived using the specific identification method for determining the cost of the securities sold.

Inventories

     Inventories are stated at the lower of cost or market with cost determined on the first-in, first-out (FIFO) method. The Company monitors its inventory to ensure that it properly identifies, on a timely basis, inventory items that are slow-moving and non-returnable. Certain publishing business products may run out of shelf life and be returned. Generally, these products can be sold in bulk to a variety of liquidators. A significant risk is product that cannot be sold at carrying value and is not returnable to the vendor or manufacturer. The Company establishes reserves for the difference between carrying value and estimated realizable value in the periods when the Company first identifies the lower of cost or market issue. Consigned inventory includes product that has been delivered to customers for which revenue recognition criteria have not been met.

Royalties Payable — FUNimation

     Royalties payable, pursuant to ASC 926, Entertainment — Films, represents management’s estimate of accrued and unpaid participation costs as of the end of the period. Royalties are generally due and paid to the licensor one month after each quarterly period for sales of merchandise and license fees received. The Company expects to pay 100% of accrued royalties related to FUNimation in the amount of $1.3 million during the year ended March 31, 2011.

Advertising

     Advertising costs are expensed as incurred. Advertising expense was $3.1 million, $2.6 million and $3.2 million for the years ended March 31, 2010, 2009 and 2008, respectively.

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Property and Equipment

     Property and equipment are recorded at cost. Depreciation is recorded, using the straight-line method, over estimated useful lives, ranging from three to twenty five years. Depreciation is computed using the straight-line method for leasehold improvements over the shorter of the lease term or the estimated useful life. Estimated useful lives by major asset categories are as follows:

Asset	Life in Years
Buildings		25
Furniture and fixtures		7
Office equipment		5
Computer equipment		3-5
Warehouse equipment		5
Production equipment		5
Leasehold improvements		1-10
Enterprise resource planning (ERP) system		7

     Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized.

     In September 2008, the Company completed the sale of the real estate and related assets that were classified as held for sale at March 31, 2008 to an unrelated party for proceeds of $1.4 million. The Company recognized a loss of $48,000 on this transaction, net of costs paid by the purchaser at closing (see further disclosure in Note 12).

Production Costs — FUNimation

     Production costs represent unamortized costs of films and television programs, which have been produced by the Company or for which the Company has acquired distribution rights. Costs of produced films and television programs include all production costs, which are expected to be recovered from future revenues. Amortization of production costs is determined based on the ratio that current revenue earned from the films and television programs bear to the ultimate future revenue, as defined by ASC 926.

     When estimates of total revenues and costs indicate that an individual title will result in an ultimate loss, an impairment charge is recognized to the extent that license fees and production costs exceed estimated fair value, based on cash flows, in the period when estimated.

License Fees — FUNimation

     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 ASC 926. When estimates of total revenues and costs indicate that an individual title will result in an ultimate loss, an impairment charge is recognized to the extent that license fees and production costs exceed estimated fair value, based on cash flows, in the period when estimated.

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 (see further disclosure in Note 3 and Note 4).

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Goodwill

     Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the purchase method. The Company reviews 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. Factors which may cause impairment include negative industry or economic trends and significant underperformance relative to historical or projected future operating results. The Company determines fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analysis. The amount of impairment loss is recognized as the excess of the asset’s carrying value over its fair value (see further disclosure in Note 3 and Note 4).

Intangible Assets

     Intangible assets include license relationships, trademarks related to the FUNimation acquisition, masters acquired during the acquisition of BCI, and other intangibles. Intangible assets (except for trademarks) are amortized on a straight-line basis with estimated useful lives ranging from three to seven and one half years. The straight-line method of amortization of these assets reflects an appropriate allocation of the costs of the intangible assets to its useful life. Intangible assets are tested for impairment whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable. An impairment loss is generally recognized when the carrying amount of an asset exceeds the estimated fair value of the asset. Fair value is generally determined using a discounted cash flow analysis (see further disclosure in Note 3 and Note 4).

     Trademarks are deemed to have indefinite lives and are evaluated for impairment annually.

Debt Issuance Costs

     Debt issuance costs are included in “Other Assets” and are amortized over the life of the related debt. Amortization expense is included in interest expense in the accompanying Consolidated Statements of Operations.

Operating Leases

     The Company conducts substantially all operations in leased facilities. Leasehold allowances, rent holidays and escalating rent provisions are accounted for on a straight-line basis over the term of the lease. Deferred rent is included in accrued expenses in the accompanying Consolidated Balance Sheets.

Revenue Recognition

     Revenue on products shipped, including consigned products owned by the Company, is recognized when title and risk of loss transfers, delivery has occurred, the price to the buyer is determinable and collectability is reasonably assured. Service revenues are recognized upon delivery of the services. Service revenues have represented less than 10% of total net sales for each of the reporting periods, fiscal 2010, 2009 and 2008. The Company permits its customers to return products, under certain conditions. The Company records a reserve for sales returns and allowances against amounts due to reduce the net recognized receivables to the amounts the Company reasonably believes will be collected. These reserves are based on the application of the Company’s historical or anticipated gross profit percent against average sales returns, sales discounts percent against average gross sales and specific reserves for marketing programs.

     The Company’s distribution customers, at times, qualify for certain price protection benefits from the Company’s vendors. The Company serves as an intermediary to settle these amounts between vendors and customers. The Company accounts for these amounts as reductions of revenues with corresponding reductions in cost of sales.

     The Company’s publishing business, at times, provides certain price protection, promotional monies, volume rebates and other incentives to customers. The Company records these amounts as reductions in revenue.

     FUNimation’s revenue is recognized upon meeting the recognition requirements of ASC 926. 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

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other recognition requirements of ASC 926 are met. Revenues received in advance of availability are deferred until revenue recognition requirements have been satisfied. Royalties on sales of licensed products are recognized in the period earned. In all instances, provisions for uncollectible amounts are provided for at the time of sale.

Vendor Allowances

     In the distribution business, the Company receives allowances from certain vendors as a result of purchasing their products. Vendor allowances are initially deferred. The deferred amounts are then recorded as a reduction of cost of sales when the related product is sold.

Marketing Development Funds

     The Company has classified marketing development funds, such as price protection and promotions, as a reduction to revenues in the publishing segment.

Accounts Receivable and Allowance for Doubtful Accounts

     Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30-90 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company does not accrue interest on past due accounts receivable. The Company performs periodic credit evaluations of its customers’ financial condition. The Company makes estimates of the uncollectability of its accounts receivable. In determining the adequacy of its allowances, the Company analyzes customer financial statements, historical collection experience, aging of receivables, substantial down-grading of credit scores, bankruptcy filings and other economic and industry factors. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Although risk management practices and methodologies are utilized to determine the adequacy of the allowance, it is possible that the accuracy of the estimation process could be materially impacted by different judgments as to collectability based on the information considered and further deterioration of accounts. The Company’s largest collection risks exist for customers that are in bankruptcy, or at risk of bankruptcy. The occurrence of these events is infrequent, but can be material when it does occur.

Classification of Shipping Costs

     Costs incurred in the distribution segment related to the shipment of product to its customers are classified in selling expenses. These costs were $7.8 million, $9.4 million and $9.4 million for the years ended March 31, 2010, 2009 and 2008, respectively.

     Costs incurred in the publishing segment related to the shipment of product to its customers are classified in cost of sales. These costs were $456,000, $1.1 million and $1.4 million for the years ended March 31, 2010, 2009 and 2008, respectively.

Foreign Currency Transactions

     Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations when settled or at the most recent balance sheet date if the transaction has not settled. Foreign currency gains and losses were a gain of $788,000, loss of $1.2 million and gain of $252,000 for the years ended March 31, 2010, 2009 and 2008, respectively.

Income Taxes

     Income taxes are recorded under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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Stock-Based Compensation

     The Company has two stock option plans for officers, non-employee directors and key employees. The Company follows ASC 718, which provides guidance on accounting for transactions in which an entity obtains employee services through share-based payment transactions and requires an entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is to be recognized over the period during which an employee is required to provide services in exchange for the award.

     ASC 718 also requires the benefit of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than an operating cash flow as prescribed under previous accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods subsequent to adoption. Total cash flows remain unchanged from those reported under previous accounting rules.

Earnings (Loss) Per Share

     Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of common shares outstanding during the year plus all additional common shares that would have been outstanding if potentially dilutive common shares related to stock options, restricted stock and warrants had been issued. The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except for per share data):

	Years ended March 31,
	2010		2009			2008
Numerator:
Net income (loss) from continuing operations	$	22,872	$	(88,434	)	$	7,056
Denominator:
Denominator for basic earnings per share — weighted average shares		36,285		36,207			36,105
Dilutive securities: Employee stock options, restricted stock and warrants		358		—			164
Denominator for diluted earnings per share — potentially dilutive common shares		36,643		36,207			36,269
Net earnings (loss) per share from continuing operations:
Basic earnings (loss) per share	$	0.63	$	(2.44	)	$	0.20
Diluted earnings (loss) per share	$	0.62	$	(2.44	)	$	0.20

     Approximately 2.8 million and 2.9 million of the Company’s stock options were excluded from the calculation of diluted earnings per share in fiscal 2010 and 2008, respectively, because the exercise prices of the stock options and the grant date fair value of the restricted stock were greater than the average price of the Company’s common stock and therefore their inclusion would have been anti-dilutive.

     Approximately 1.6 million warrants were also excluded for the years ended March 31, 2010, 2009 and 2008, because the exercise prices of the warrants was greater than the average price of the Company’s common stock and therefore their inclusion would have been anti-dilutive.

     Due to the Company’s net loss for the year ended March 31, 2009, diluted loss per share from continuing operations excludes 3.2 million stock options and restricted stock awards because their inclusion would have been anti-dilutive.

Recently Issued Accounting Pronouncements

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

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with the quarter ended June 30, 2009. Earlier adoption was prohibited. The Company did not experience any impact on its financial condition, results of operations and cash flows from the adoption of ASC 810-10.

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

• Acquisition costs are generally expensed as incurred;

• Noncontrolling interests (formerly known as “minority interests”) are valued at fair value at the acquisition date;

• Acquired contingent liabilities are recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

• In-process research and development are recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

• Restructuring costs associated with a business combination are generally expensed subsequent to the acquisition date; and

• Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense.

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

     In March 2008, the FASB issued ASC 815-10, Derivatives and Hedging. ASC 815-10 is intended to improve financial reporting standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects these instruments and activities have on an entity’s financial position, financial performance, and cash flows. ASC 815-10 also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under ASC 815-10; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. ASC 815-10 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted ASC 815-10 on January 1, 2009, which did not have an impact on its consolidated financial statements.

     In May 2009, the FASB issued ASC 855-10, Subsequent Events, which requires all public entities to evaluate subsequent events through the date that the financial statements are available to be issued and disclose in the notes the date through which the Company has evaluated subsequent events and whether the financial statements were issued or were available to be issued on the disclosed date. ASC 855-10 defines two types of subsequent events, as follows: the first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet and the second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009 and must be applied prospectively. In February 2010, subsequent to our adoption of the new guidance discussed above, the FASB issued updated guidance on subsequent events, amending the May 2009 guidance. This updated guidance revised various terms and definitions within the guidance and requires us, as an “SEC filer,” to evaluate subsequent events through the date the financial statements are issued, rather than through the date the financial statements are available to be issued. Furthermore, we no longer are required to disclose the date through which subsequent events have been evaluated. The updated guidance was effective for us immediately upon issuance. As such, we adopted ASC 855-10 during fiscal 2010 and have included the required disclosures in Note 29. Our adoption of both the new and updated guidance did not have an impact on our consolidated financial position or results of operations.

     In June 2009, the FASB issued ASC 860-10, Transfers and Servicing. This Statement eliminates the concept of a “qualified special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets,

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including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. ASC 860-10 is effective for fiscal years beginning after November 15, 2009. The Company will adopt ASC 860-10 in fiscal 2011 and is evaluating the impact, if any, it will have to its consolidated financial statements.

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

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

Note 3 Goodwill and Intangible Assets

Goodwill

     The Company recognizes the excess cost of an acquired entity over the net amount assigned to the fair value of the assets acquired and liabilities assumed as goodwill. The Company reviews goodwill for potential impairment annually for each reporting unit, or when events or changes in circumstances indicate that the carrying value of the goodwill might exceed its current fair value.

     Under ASC 350, the measurement of impairment of goodwill consists of two steps. In the first step, the Company compares the fair value of each reporting unit to its carrying value. Management completes a valuation of the fair value of its reporting units which incorporates existing market-based considerations as well as a discounted cash flow methodology based on current results and projections. Following this assessment, ASC 350 requires the Company to perform a second step in order to determine the implied fair value of each reporting unit’s goodwill, as compared to carrying value. The activities in the second step include hypothetically valuing all of the tangible and intangible assets of the impaired reporting unit as if the reporting unit had been acquired in a business combination.

     Upon completion of the annual evaluation, there was no such goodwill impairment recorded during fiscal 2008. During the fiscal 2009 evaluation however, 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. It was also determined that the fair value of Encore, FUNimation and BCI was less than their carrying value. The Company conducted impairment tests during fiscal 2009 based on facts and circumstances at those times and its business strategy in light of existing industry and economic conditions, as well as taking into consideration future expectations. Accordingly, during fiscal 2009, the Company recorded pre-tax, non-cash goodwill impairment charges of $81.7 million. After recording the above impairments, the Company had no goodwill balance at March 31, 2010 and 2009. These pre-tax, non-cash charges had no impact on the Company’s compliance with the financial covenants in its credit agreement.

Intangible assets

     The Company evaluates its definite lived intangible amortizing assets in accordance with ASC 350 which requires the Company to record impairment losses on amortizing intangible assets when changes in events and circumstances indicate the asset might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. The Company determines fair value utilizing current market values and future market trends. Based on the Company no longer publishing budget home videos at BCI, the Company recorded an impairment charge related to masters of $2.0 million, which is included in depreciation and amortization on the Company’s Consolidated Statements of Operations for the year ended March 31, 2009.

     The Company evaluates its indefinite lived intangible assets in accordance with ASC 350. The Company reviews these intangible assets for impairment annually or when events or a change in circumstances indicate that the carrying value might exceed the current fair

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value. In determining the implied fair value of each reporting unit’s goodwill as compared to carrying value, a hypothetical valuation of all tangible and intangibles assets of the reporting unit as if the reporting unit had been acquired in a business combination was completed. As part of this analysis during fiscal 2009, the trademarks associated with FUNimation were determined to have an estimated fair value less than the carrying value. The Company determines fair value using the relief from royalty valuation techniques. The Company recorded a $1.0 million impairment charge, which is included in goodwill and intangible asset impairment expense in the Consolidated Statements of Operations, for the year ended March 31, 2009.

     Identifiable intangible assets, with zero residual value, are being amortized (except for the trademarks which have an indefinite life) over useful lives of three years for masters, seven and one half years for license relationships and seven years for the domain name and are valued as follows (in thousands):

	As of March 31, 2010
	Gross carrying		Accumulated
	amount		amortization		Net
License relationships	$	20,078	$	19,145	$	933
Domain name		70		39		31
Trademarks (not subject to amortization)		536		—		536
	$	20,684	$	19,184	$	1,500

	As of March 31, 2009
	Gross carrying		Accumulated
	amount		amortization		Net
Masters (1)	$	8,086	$	7,986	$	100
License relationships		20,078		17,350		2,728
Domain name		70		28		42
Trademarks (not subject to amortization)		536		—		536
	$	28,770	$	25,364	$	3,406

(1) Reflects a $2.0 million impairment charge related to masters which reduced both the gross carrying amount and accumulated amortization. The $2.0 million impairment charge was included in amortization expense for the year ended March 31, 2009 (see further disclosure in Note 4).

     Aggregate amortization expense for the years ended March 31, 2010, 2009 and 2008 was $1.9 million (which included $92,000 related to masters), $6.2 million (which included a $2.0 million impairment charge related to masters) and $5.6 million, respectively. The following is a schedule of estimated future amortization expense (in thousands):

2011	$	425
2012		237
2013		302

Debt issuance costs

     Debt issuance costs are included in “Other Assets” and are amortized over the life of the related debt. Gross debt issuance costs totaled $1.8 million and $650,000 at March 31, 2010 and 2009, respectively. Accumulated amortization amounted to approximately $249,000 and $108,000 at March 31, 2010 and 2009, respectively. Amortization expense of $502,000, $250,000 and $333,000 for the years ended March 31, 2010, 2009 and 2008, respectively are included in interest expense in the accompanying Consolidated Statements of Operations. During fiscal 2010, the Company wrote-off $289,000 in debt acquisition costs related to the payoff of the Company’s revolving facility with General Electric Capital Corporation (“GE”), which charges were included in interest expense. During fiscal 2009, the Company wrote-off $950,000 in debt acquisition costs related to the payoff of the Company’s Term Loan facility and material modifications to the Company’s revolving facility with GE, which charges were included in interest expense.

Note 4 Impairments and Other Charges

     Based on an annual impairment review, the Company concluded there were no indicators of impairment during the years ended March 31, 2010 or 2008. During fiscal 2009, however, the Company reviewed its portfolio of businesses for poor performing activities and to identify areas where continued business investments would not meet its requirements for financial returns. Net assets impacted

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included accounts receivable reserves, inventory, prepaid royalties, goodwill, masters, trademarks, license fees and production costs. As a result of the analysis, the Company announced the following actions during fiscal 2009:

• BCI would no longer be involved in licensing operations related to budget home video and the remaining BCI content would be transferred to the distribution segment. For the year ended March 31, 2009, the Company recorded $25.9 million in impairment and other charges related to the restructuring of BCI, which included $7.3 million for inventory, $7.1 million for prepaid royalties, $2.0 million for masters, $2.0 million for accounts receivable reserves and $7.4 million for goodwill.

• FUNimation would no longer be involved in licensing operations related to home video of children’s properties. For the year ended March 31, 2009, the Company recorded $81.0 million in impairment and other charges related to the restructuring of FUNimation, which included $8.2 million for license fees and production costs, $71.2 million for goodwill, $1.0 million for trademarks and $555,000 for inventory.

     License Fees and Production Costs. The total impairment of license fees and production cost charges related to the FUNimation restructuring were $7.0 million and $1.2 million, respectively during fiscal 2009. The Company records a charge to the income statement for the amount by which the unamortized license fees and production costs exceed the film’s fair value. The Company determines the fair value based upon cash flows or quoted market prices.

     Prepaid Royalties. The total prepaid royalty charges related to the BCI restructuring were $7.1 million during fiscal 2009. With the Company no longer publishing content in the budget home video category, the prepaid royalties will not be recouped by earnings from the sale of the product, and as such the Company took an impairment charge during fiscal 2009 for amounts that will not be recouped.

     Masters, Trademarks and Goodwill. The total masters, goodwill and trademark impairment charges related to the publishing segment were $84.7 million during fiscal 2009.

• Masters — The impairment related to BCI masters was $2.0 million during fiscal 2009. Impairment losses are measured by comparing the fair value of the assets (utilizing current market values and future market trends) to their carrying amounts.

• Trademarks — The impairment for FUNimation trademarks was $1.0 million during fiscal 2009. The trademarks associated with FUNimation were determined to have an estimated fair value (using the relief from royalty valuation technique ) less than the carrying value.

• Goodwill — The goodwill impairment charge for the publishing segment was $81.7 million during fiscal 2009 based on the excess of the asset’s carrying value over its fair value.

     Inventory. The total inventory charges related to the publishing segment were $7.9 million during fiscal 2009. The Company records inventory at the lower of cost or market. When it is determined that the market value is lower than the cost, the Company establishes a reserve for the difference between carrying value and estimated realizable value. The Company determines the estimated realizable value by reviewing quoted prices in active markets for similar or identical products.

     Accounts Receivable Reserves. The total accounts receivable reserve charges were $2.0 million during fiscal 2009, which primarily represent anticipated returns of BCI content.

     Severance. The Company completed a company-wide reduction in force during fiscal 2009. The total severance costs related to the reduction in force were $1.1 million, $591,000 of which were associated with the distribution segment and $541,000 with the publishing segment. In accordance with ASC 420-10, Exit or Disposal Cost Obligations, the Company records one-time termination benefit arrangement costs at the date of communication to employees as long as the plan establishes the benefits that employees will receive upon termination in sufficient detail to enable employees to determine the type and amount of benefits the employee would receive if involuntarily terminated. Certain executives had contractual benefits related to involuntary termination. In accordance with ASC 712-10, Compensation — Nonretirement Postemployment Benefits, the Company records severance costs when the payment of the benefits is probable and reasonably estimable.

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     The following table summarizes the impairment and other charges included in the Company’s Consolidated Statements of Operations for the year ended March 31, 2009 (in thousands):

	License Fees				Masters,				Accounts
	and Production		Prepaid		Goodwill and				Receivable
	Costs -		Royalties -		Trademarks-		Inventory-		Reserves-		Severance-		Severance-
	Publishing		Publishing		Publishing		Publishing		Publishing		Publishing		Distribution		Total
Sales	$	—	$	—	$	—	$	—	$	1,057	$	—	$	—	$	1,057
Cost of sales		8,239		7,076		—		7,855		985		52		—		24,207
Selling and marketing		—		—		—		—		—		159		13		172
Distribution and warehousing		—		—		—		—		—		—		74		74
General and administrative		—		—		—		—		—		330		504		834
Depreciation and amortization		—		—		2,029		—		—		—		—		2,029
Goodwill and intangible asset impairment		—		—		82,729		—		—		—		—		82,729
Total	$	8,239	$	7,076	$	84,758	$	7,855	$	2,042	$	541	$	591	$	111,102

     The restructuring reserve activity was as follows (in thousands):

					Accounts
					Receivable
	Severance-		Severance-		Reserves-
	Distribution		Publishing		Publishing		Total
Reserve balance at March 31, 2009	$	45	$	337	$	1,026	$	1,408
Provision for restructuring		—		—		—		—
Cash payments		45		337		1,026		1,408
Reserve balance at March 31, 2010	$	—	$	—	$	—	$	—

Note 5 Discontinued Operations

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

     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 Statements of Operations. The Company believes these adjustments reflect the final transactions related to this divesture.

     The Company’s consolidated financial statements have been 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. The summary of operating results from discontinued operations is as follows (in thousands):

	Years ended March 31,
	2010		2009		2008
Net sales	$	—	$	—	$	5,197
Loss from discontinued operations, before income tax		—		—		(3,947	)
Income tax benefit		—		—		1,657
Loss from discontinued operations, net of tax	$	—	$	—	$	(2,290	)

Note 6 Marketable Securities

     ASC 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. ASC 820-10 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly

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transaction between market participants on the measurement date. ASC 820-10 also describes three levels of inputs that may be used to measure fair value:

• Level 1 — quoted prices in active markets for identical assets and liabilities.

• Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.

• Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

     The effective date for certain aspects of ASC 820-10 was deferred and is currently being evaluated by the Company. Areas impacted by the deferral relate to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applies to such items as nonfinancial long-lived asset groups measured at fair value for an impairment assessment. The effects of these remaining aspects of ASC 820-10 are to be applied by the Company to fair value measurements prospectively beginning April 1, 2010. The Company does not expect them to have a material impact on its financial condition or results of operations.

     Marketable securities consist of a money market fund at March 31, 2010 and government and corporate bonds and a money market fund at March 31, 2009, which are held in a Rabbi trust established for the payment of deferred compensation for a former Chief Executive Officer (see further disclosure in Note 25).

     At March 31, 2010 and 2009, the Company recorded these securities at fair value using Level 1 quoted market prices. Dividend and interest income were recognized when earned. Realized gains and losses for securities classified as available-for-sale were included in income and were derived using the specific identification method for determining the cost of the securities sold.

     Available-for-sale securities consisted of the following (in thousands):

	As of March 31, 2010
			Gross		Gross
	Estimated fair		unrealized		unrealized
	value		holding gains		holding losses
Available-for-sale:
Government agency and corporate bonds	$	—	$	1	$	—
Money market fund		2		—		—
	$	2	$	1	$	—

	As of March 31, 2009
			Gross		Gross
	Estimated fair		unrealized		unrealized
	value		holding gains		holding losses
Available-for-sale:
Government agency and corporate bonds	$	712	$	1	$	2
Money market fund		312		—		—
	$	1,024	$	1	$	2

     At March 31, 2010 and 2009, all marketable securities were classified as current based on the scheduled payout of the deferred compensation, and are restricted to use only for the settlement of the deferred compensation liability. All available-for-sale debt securities are fully matured at March 31, 2010.

Note 7 Comprehensive Income (Loss)

     Other comprehensive income (loss) pertains to net unrealized gains and losses on marketable securities held in a Rabbi Trust for the benefit of a former CEO that are not included in net income (loss) but rather are recorded in shareholders’ equity (see further disclosure in Note 6).

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     Comprehensive income (loss) consisted of the following (in thousands):

	Years Ended March 31,
	2010		2009			2008
Net income (loss) from continuing operations	$	22,872	$	(88,434	)	$	9,658
Net unrealized gain (loss) on marketable securities, net of tax		1		(1	)		—
Comprehensive income (loss)	$	22,873	$	(88,435	)	$	9,658

     The changes in other comprehensive income (loss) are primarily non-cash items.

     Accumulated other comprehensive loss balances, net of tax effects, were zero and $1,000 at March 31, 2010 and 2009, respectively.

Note 8 Accounts Receivable

     Accounts receivable consisted of the following (in thousands):

	March 31, 2010		March 31, 2009
Trade receivables	$	72,641	$	86,345
Vendor receivables		1,700		2,894
Other receivables		1,479		2,588
		75,820		91,827
Less: allowance for doubtful accounts and sales discounts		4,966		7,043
Less: allowance for sales returns, net margin impact		8,227		11,967
Total	$	62,627	$	72,817

Note 9 Inventories

     Inventories, net of reserves, consisted of the following (in thousands):

	March 31, 2010		March 31, 2009
Finished products	$	21,229	$	20,437
Consigned inventory		1,794		1,868
Raw materials		3,249		4,427
Total	$	26,272	$	26,732

Note 10 Prepaid Expenses and Other Current Assets

     Prepaid expenses and other current assets consisted of the following (in thousands):

	March 31, 2010		March 31, 2009
Prepaid royalties	$	12,241	$	9,826
Other		1,486		1,264
Total	$	13,727	$	11,090

Note 11 Property and Equipment

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

	March 31, 2010		March 31, 2009
Furniture and fixtures	$	1,369	$	1,306
Computer and office equipment		18,472		17,782
Warehouse equipment		10,049		10,116
Production equipment		1,421		1,296
Leasehold improvements		2,087		2,081
Construction in progress		772		80
Total		34,170		32,661
Less: accumulated depreciation and amortization		20,863		16,704
Net property and equipment	$	13,307	$	15,957

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Note 12 Assets Held for Sale

     At March 31, 2008, the Company held for sale real estate and related assets located in Decatur, Texas. These assets were no longer required due to the move of FUNimation’s inventory to the Company’s Minnesota distribution center. During fiscal 2009, the Company completed the sale of the real estate and related assets to an unrelated party for proceeds of $1.4 million. The Company recognized a loss of $48,000 on this transaction, net of costs paid by the purchaser at closing.

Note 13 Capitalized Software Development Costs

     The Company incurs software development costs for software to be sold, leased or marketed in the publishing segment. The Company accounts for these costs in accordance with the provisions of ASC 985-20, Software. Software development costs include third-party contractor fees and overhead costs. The Company capitalizes these costs once technological feasibility is achieved. Capitalization ceases and amortization of costs begins when the software product is available for general release to customers. The Company amortizes capitalized software development costs by the greater of the ratio of gross revenues of a product to the total current and anticipated future gross revenues of that product or the straight-line method over the remaining estimated economic life of the product. The carrying amount of software development costs may change in the future if there are any changes to anticipated future gross revenue or the remaining estimated economic life of the product. The Company tests for possible impairment whenever events or changes in circumstances, such as a reduction in expected cash flows, indicate that the carrying amount of the asset may not be recoverable. If indicators exist, the Company compares the undiscounted cash flows related to the asset to the carrying value of the asset. If the carrying value is greater than the undiscounted cash flow amount, an impairment charge is recorded in cost of goods sold in the Consolidated Statements of Operations for amounts necessary to reduce the carrying value of the asset to fair value. Software development costs were $2.0 million and $677,000 at March 31, 2010 and 2009, respectively. Accumulated amortization amounted to approximately $324,000 and zero at March 31, 2010 and 2009, respectively. Amortization expense was $324,000 for the year ended March 31, 2010 and zero for both the years ended March 31, 2009 and 2008.

Note 14 License Fees

     License fees related to the publishing segment consisted of the following (in thousands):

	March 31, 2010		March 31, 2009
License fees	$	44,672	$	39,298
Less: accumulated amortization		28,107		21,570
Total	$	16,565	$	17,728

     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 bears to the estimated remaining unrecognized ultimate revenue for that title, as defined by ASC 926. When estimates of total revenues and costs indicate that an individual title will result in an ultimate loss, an impairment charge is recognized to the extent that license fees and production costs exceed estimated fair value, based on cash flows, in the period when estimated.

     During fiscal 2009, the Company made the decision to no longer be involved in the licensing operations related to home video of children’s properties at FUNimation. Based on this decision, the Company determined that the license advances related to these activities exceeded fair value. Accordingly, the Company recorded an impairment charge of $7.0 million against these license advances, which is included in cost of sales on the Company’s Consolidated Statements of Operations for the year ended March 31, 2009.

     Amortization of license fees for the years ended March 31, 2010, 2009 and 2008 was $8.0 million, $13.4 million (which includes a $7.0 million impairment charge) and $6.9 million, respectively. These amounts have been included in royalty expense in cost of sales in the accompanying Consolidated Statements of Operations.

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Note 15 Production Costs

     Production costs related to the publishing segment consisted of the following (in thousands):

	March 31, 2010		March 31, 2009
Production costs	$	26,559	$	20,631
Less: accumulated amortization		16,745		12,223
Total	$	9,814	$	8,408

     Production costs represent unamortized costs of films and television programs, which have been produced by the Company or for which the Company has acquired distribution rights. Costs of produced films and television programs include all production costs, which are expected to be recovered from future revenues. Amortization of production costs is determined based on the ratio that current revenue earned from the films and television programs bear to the ultimate future revenue, as defined by ASC 926.

     When estimates of total revenues and costs indicate that an individual title will result in an ultimate loss, an impairment charge is recognized to the extent that license fees and production costs exceed estimated fair value, based on cash flows, in the period when estimated.

     During fiscal 2009, the Company made the decision to no longer be involved in the licensing operations related to home video of children’s properties at FUNimation. Based on this decision, the Company determined that the production costs related to these activities exceeded their fair value. Accordingly, a $1.2 million impairment charge was recorded against these production costs, which is included in cost of sales on the Company’s Consolidated Statements of Operations for the year ended March 31, 2009.

     The Company presently expects to amortize 82% of the March 31, 2010 unamortized production costs by March 31, 2013. Amortization of production costs for the years ended March 31, 2010, 2009 and 2008 was $4.5 million, $4.8 million (which includes a $1.2 million impairment charge) and $3.3 million, respectively. These amounts have been included in cost of sales in the accompanying Consolidated Statements of Operations.

Note 16 Accrued Expenses

     Accrued expenses consisted of the following (in thousands):

	March 31, 2010		March 31, 2009
Compensation and benefits	$	7,930	$	3,263
Royalties		1,954		3,056
Rebates		1,253		1,264
Deferred revenue		20		303
Interest		205		39
Other		2,886		3,579
Total	$	14,248	$	11,504

Note 17 Bank Financing and Debt

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

     On June 12, 2008, the Company 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 the Company 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

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

     On February 5, 2009, the Company entered into a Fifth Amendment and Waiver to Fourth Amended and Restated Credit Agreement (the “Fifth Amendment”) with GE which revised the terms of the GE Facility as follows: effective as of December 31, 2008, (i) clarified that the calculation of EBITDA under the credit agreement would not be impacted by certain pre-tax, non-cash restructuring charges to earnings, or in connection with cash charges to earnings recognized in the Company’s financial results related to a force reduction (“adjusted EBITDA”); (ii) eliminated the $6.0 million tranche of borrowings under the credit facility; (iii) modified the interest rate in connection with borrowings under the facility to index rate plus 5.75%, or LIBOR plus 4.75%; (iv) altered the commitment termination date of the GE Facility to June 30, 2010; (v) eliminated the pre-payment penalty; and (vi) modified certain financial covenants as of December 31, 2008 and thereafter. Additionally, the Fifth Amendment modified the total borrowings available to $65.0 million. At March 31, 2009 the Company had $24.1 million outstanding on the GE Facility, which was paid in full on November 12, 2009 in connection with the new credit facility, as described below.

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

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

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

Letters of Credit

     The Company is party to a letter of credit totaling $250,000 related to a vendor at both March 31, 2010 and 2009. In the Company’s past experience, no claims have been made against these financial instruments.

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Note 18 Income Taxes

     The income tax provision (benefit) from continuing operations is comprised of the following (in thousands):

	Years ended March 31,
	2010			2009			2008
Current
Federal	$	(1,418	)	$	(4,020	)	$	1,610
Foreign		—			—			300
State		109			60			429
Valuation allowance		(11,706	)		21,432			—
Deferred		6,812			(31,955	)		2,934
Tax expense (benefit)	$	(6,203	)	$	(14,483	)	$	5,273

A reconciliation of income tax expense (benefit) from continuing operations to the statutory federal rate is as follows (in thousands):

	Years ended March 31,
	2010			2009			2008
Expected federal income tax at statutory rate	$	5,668		$	(34,983	)	$	4,315
State income taxes, net of federal tax effect		361			(2,140	)		523
Valuation allowance		(11,706	)		21,432			—
Equity compensation		101			185			222
Uncertain tax liability		(108	)		90			97
Other		(519	)		933			116
Tax expense (benefit)	$	(6,203	)	$	(14,483	)	$	5,273

	Years ended March 31,
	2010			2009			2008
Expected federal income tax at statutory rate		34.0	%		34.0	%		35.0	%
State income taxes, net of federal tax effect		2.2			2.1			4.2
Valuation allowance		(70.2	)		(20.8	)		—
Equity compensation		0.6			(0.2	)		1.8
Return to provision		(3.2	)		—			—
Other		(0.6	)		(1.0	)		1.8
Effective tax rate (continuing operations)		(37.2	)%		14.1	%		42.8	%

     The Company’s overall effective tax rate, including both continuing and discontinued operations, was 37.2%, 14.1% and 35.7% for the years ended March 31, 2010, 2009 and 2008, respectively. The change in the effective tax rate for the years ended March 31, 2010 and 2009 is principally attributable to the fact that the Company recorded a valuation allowance against its deferred tax assets of $21.4 million during the year ended March 31, 2009 and the Company released $11.7 million of the valuation allowance during the year ended March 31, 2010.

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     Deferred income taxes reflect the available tax carryforwards, which begin to expire in fiscal 2029, and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of March 31, 2010 and 2009 are as follows (in thousands):

	Years ended March 31,
	2010			2009
Deferred tax asset — current
Collectability reserves	$	5,854		$	7,970
Reserve for inventory write-off		349			1,263
Reserve for sales discounts		243			58
Accrued vacations		312			313
Inventory — uniform capitalization		138			147
Incentive based deferred compensation		483			776
Other		214			226
Net operating loss carryforward		3,137			3,535
Subtotal deferred tax asset — current		10,730			14,288
Valuation allowance		(3,127	)		(8,069	)
Deferred tax asset — current, net		7,603			6,219
Deferred tax asset — non-current
Stock based compensation		404			396
Book/tax intangibles amortization		21,562			25,041
Book/tax depreciation		(2,233	)		(2,280	)
Other		674			505
Subtotal deferred tax asset — non-current		20,407			23,662
Valuation allowance		(6,599	)		(13,363	)
Deferred tax asset — non-current, net		13,808			10,299
Total deferred tax asset, net	$	21,411		$	16,518

     At March 31, 2010 and 2009, the Company had federal net operating loss carryforwards of $7.7 million and $10.3 million, respectively, which will begin to expire in 2029. The Company had foreign tax credit carryforwards of $259,000 at March 31, 2010 and 2009, which will begin to expire in 2016.

     For the years ended March 31, 2010 and 2009, the Company recognized an income tax benefit related to stock option deductions of zero and $443,000, respectively. The income tax benefit from these stock option deductions will be recorded as an increase to equity upon utilization of the net operating loss carryforwards.

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

     A reconciliation of the beginning and ending amount of unrecognized tax benefits in fiscal 2010 is as follows (in thousands):

	Years ended March 31,
	2010			2009
Income taxes payable, beginning of period	$	1,166		$	880
Gross increases related to prior year tax positions		74			101
Gross increases related to current year tax positions		195			203
Decrease related to statute of limitations lapses		(214	)		(18	)
Income taxes payable, end of period	$	1,221		$	1,166

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     The Company’s federal income tax returns for tax years ending in 2006 through 2009 remain subject to examination by tax authorities. The Company files in numerous state jurisdictions with varying statutes of limitations. The Company’s unrecognized state tax benefits are related to state returns that remain subject to examination by tax authorities from tax years ending in 2006 through 2009. The Company does not anticipate that the total unrecognized tax benefits will significantly change prior to March 31, 2011.

     For the years ended March 31, 2010 and 2009, the Company recorded an income tax benefit from continuing operations of $6.2 million and $14.5 million, respectively. The effective income tax rate for the year ended March 31, 2010 was 37.2%, compared to 14.1% for the year ended March 31, 2009.

     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, the Company would not be able to realize all or part of its deferred tax assets. An assessment is required of all available evidence, both positive and negative, to determine the amount of any required valuation allowance.

     As a result of the market conditions and their impact on the Company’s future outlook, during the year ended March 31, 2009, management reviewed its deferred tax assets and concluded that the uncertainties related to the realization of some of its assets had become unfavorable. Management considered the positive and negative evidence for the potential utilization of the net deferred tax asset and concluded that it was more likely than not that the Company would not realize the full amount of net deferred tax assets. Accordingly, at March 31, 2009, a valuation allowance of $21.4 million was recorded for a portion of the net deferred tax assets and was included in income tax expense for the year ended March 31, 2009.

     However, during fiscal 2010, the amount of deferred tax assets that the Company will more likely than not be able to realize increased due to a tax law change allowing the Company to carry the net operating losses back additional years as well as the Company having higher than projected book income. As a result, the Company released $11.7 million of the valuation allowance against these deferred tax assets, reducing the valuation allowance balance to $9.7 million at March 31, 2010. As of March 31, 2010, the Company had a net deferred tax asset position, before valuation allowance, of $31.1 million. These deferred tax assets were composed of temporary differences primarily related to the book write-off of certain intangibles and net operating loss carryforwards, which will begin to expire in fiscal 2029.

Note 19 Shareholders’ Equity

     The Company’s Articles of Incorporation authorize 10,000,000 shares of preferred stock, no par value. No preferred shares are issued or outstanding.

     The Company did not repurchase any shares during the years ended March 31, 2010 and 2009.

Note 20 Private Placement Warrants

     As of March 31, 2010 and 2009, the Company had 1,596,001 warrants outstanding related to a private placement completed March 21, 2006, which includes warrants to purchase 171,000 shares issued by the Company to its agent in the private placement. The warrants have a term of five years and are exercisable at $5.00 per share. The Company has the right to require exercise of the warrants if, among other things, the volume weighted average price of the Company’s common stock exceeds $8.50 per share for each of 30 consecutive trading days. In addition, the warrants provide the investors the option to require the Company to repurchase the warrants for a purchase price, payable in cash within five (5) business days after such request, equal to the Black-Scholes value of any unexercised warrant shares, but only if, while the warrants are outstanding, the Company initiates the following change in control transactions: (i) the Company effects any merger or consolidation, (ii) the Company effects any sale of all or substantially all of its assets, (iii) any tender offer or exchange offer is completed whereby holders of the Company’s common stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) the Company effects any reclassification of the Company’s common stock whereby it is effectively converted into or exchanged for other securities, cash or property.

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Note 21 Share-Based Compensation

     The Company has two equity compensation plans: the Navarre Corporation 1992 Stock Option Plan and the Navarre Corporation 2004 Stock Plan (collectively, “the Plans”). The 1992 Plan expired on July 1, 2006, and no further grants are allowed under this Plan, however, there are outstanding options remaining under this Plan. The 2004 Plan provides for equity awards, including stock options, restricted stock and restricted stock units. Eligible participants under the Plans are all employees (including officers and directors), non-employee directors, consultants and independent contractors.

     Equity Compensation Plans

     The Company currently grants stock options, restricted stock and restricted stock units under equity compensation plans. The Company adopted the 1992 Stock Option Plan and 2004 Stock Plan to attract and retain eligible persons to perform services for the Company. Eligible recipients include all employees, without limitation, officers and directors who are also employees as well as non-employee directors, consultants and independent contractors or employees of any of the Company’s subsidiaries. A maximum number of 4.0 million shares of common stock have been authorized and reserved for issuance under the 2004 Stock Plan. The number of shares authorized may also be increased from time to time by approval of the Board of Directors and the shareholders. The 1992 Stock Option Plan terminated in July 2006 and the 2004 Stock Plan terminates in September 2014. There were 98,913 shares remaining for grant under the 2004 Stock Plan at March 31, 2010.

     The Company is authorized to grant, among other equity instruments, stock options and restricted stock under the 2004 Stock Plan. Stock options have a maximum term fixed by the Compensation Committee of the Board of Directors, not to exceed 10 years from the date of grant. Stock options become exercisable during their terms in the manner determined by the Compensation Committee of the Board of Directors. Vesting for performance-based stock awards is subject to the performance criteria being achieved.

     Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards vest as determined by the Compensation Committee of the Board of Directors, depending on the grant. Prior to vesting, ownership of the shares cannot be transferred. The Company expenses the cost of the restricted stock awards, which is the grant date fair value, ratably over the period during which the restrictions lapse. The grant date fair value is the Company’s opening stock price on the date of grant.

     Through fiscal 2010, each director who is not an employee of the Company is granted an option to purchase 6,000 shares of common stock under the 2004 Stock Plan on April 1 of each year, with an exercise price equal to fair market value. These options are designated as non-qualified stock options. Each option granted prior to September 15, 2005, vests in five annual increments of 20% of the original option grant beginning one year from the date of grant and expires on the earlier of (i) six years from the date of the grant, and (ii) one year after the person ceases to serve as a director. Each option granted on or after September 15, 2005, vests in three annual increments of 33 1/3% of the original option grant beginning one year from the date of grant, expires on the earlier of (i) ten years from the date of grant, and (ii) one year after the person ceases to serve as a director, and provides for the acceleration of vesting if the person ceases to serve as a director as a result of the Company’s mandatory director retirement policy.

     The Company is entitled to (a) withhold and deduct from future wages of the participant (or from other amounts that may be due and owing to the participant from the Company), or make other arrangements for the collection of all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related tax requirements (i) attributable to the grant or exercise of an option or a restricted stock award or to a disqualifying disposition of stock received upon exercise of an incentive stock option, or (ii) otherwise incurred with respect to an option or a restricted stock award, or (iii) require the participant promptly to remit the amount of such withholding to the Company before taking any action with respect to an option or a restricted stock award.

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  Stock Options

     A summary of the Company’s stock option activity as of March 31, 2010, 2009 and 2008 and for those years ended is summarized as follows:

	Year ended					Year ended					Year ended
	March 31, 2010					March 31, 2009					March 31, 2008
				Weighted					Weighted					Weighted
				average					average					average
	Number of			exercise		Number of			exercise		Number of			exercise
	options			price		options			price		options			price
Options outstanding, beginning of period		3,165,528		$	5.74		3,132,499		$	6.78		3,601,700		$	6.92
Granted		848,500			1.89		782,500			0.83		429,000			2.68
Exercised		(7,501	)		0.69		(9,600	)		1.26		(237,448	)		1.48
Canceled		(459,228	)		6.18		(739,871	)		4.65		(660,753	)		6.77
Options outstanding, end of period		3,547,299		$	4.77		3,165,528		$	5.74		3,132,499		$	6.78
Options exercisable, end of period		2,149,646		$	6.83		2,071,203		$	7.79		2,296,565		$	7.89
Shares available for future grant, end of period		98,913					933,252					1,756,251

     The weighted average remaining contractual term for options outstanding was 6.8 years and for options exercisable was 5.3 years at March 31, 2010.

     The total intrinsic value of stock options exercised during the years ended March 31, 2010 was $12,000. The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $2.08 as of March 31, 2010, which theoretically could have been received by the option holders had all option holders exercised their options as of that date. The aggregate intrinsic value for options outstanding was $1.0 million and for options exercisable was $278,000 at March 31, 2010. The total number of in-the-money options exercisable as of March 31, 2010 was 1.1 million. There were no in-the-money options exercisable as of March 31, 2009, when the closing stock price was $0.44.

     As of March 31, 2010, total compensation cost related to non-vested stock options not yet recognized was $1.1 million, which is expected to be recognized over the next 1.56 years on a weighted-average basis.

     During the years ended March 31, 2010, 2009 and 2008, the Company received cash from the exercise of stock options totaling $5,000, $12,000 and $190,000, respectively. There was no excess tax benefit recorded for the tax deductions related to stock options during either the years ended March 31, 2010 or 2009.

     Restricted Stock

     Restricted stock granted to employees typically has a vesting period of three years and expense is recognized on a straight-line basis over the vesting period, or when the performance criteria have been met. The value of the restricted stock is established by the market price on the date of the grant or if based on performance criteria, on the date it is determined the performance criteria will be met. Restricted stock awards vesting is based on service criteria or achievement of performance targets. All restricted stock awards are settled in shares of common stock.

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     A summary of the Company’s restricted stock activity as of March 31, 2010, 2009 and 2008 and changes during those years ended is summarized as follows:

	Year ended					Year ended					Year ended
	March 31, 2010					March 31, 2009					March 31, 2008
				Weighted					Weighted					Weighted
				average					average					average
				grant date					grant date					grant date
	Shares			fair value		Shares			fair value		Shares			fair value
Unvested, beginning of period		445,155		$	1.18		171,917		$	3.02		120,000		$	4.68
Granted		242,750			2.08		390,250			0.69		131,000			2.41
Vested		(173,836	)		1.61		(63,932	)		3.23		(73,333	)		4.41
Forfeited		(5,583	)		1.10		(53,080	)		1.11		(5,750	)		2.41
Unvested, end of period		508,486		$	1.47		445,155		$	1.18		171,917		$	3.02

     The weighted average remaining contractual term for restricted stock awards outstanding at March 31, 2009 was 9.0 years.

     The total fair value of shares vested during the years ended March 31, 2010, 2009 and 2008 was approximately $431,000, $52,000 and $271,000, respectively.

     As of March 31, 2010, total compensation cost related to non-vested restricted stock awards not yet recognized was $623,000 which is expected to be recognized over the next 1.54 years on a weighted-average basis. There was no excess tax benefit recorded for the tax deductions related to restricted stock during either the years ended March 31, 2010 or 2009.

     Restricted Stock Units — Performance-Based

     On April 1, 2006, the Company awarded restricted stock units to certain key employees. Receipt of the stock units was contingent upon the Company meeting Total Shareholder Return (“TSR”) targets relative to an external market condition and meeting the service condition. Each participant was granted a base number of units. The units, as determined at the end of the performance year (fiscal 2007), were to be issued at the end of the third year (fiscal 2009) if the Company’s average TSR target was achieved for the fiscal period 2007 through 2009. The total number of base units granted for fiscal 2007 was 66,000. During fiscal 2009, the Company adjusted the forfeiture rate and reduced stock based compensation expense by $134,000 based on actual terminations of recipients. The amount recorded for the years ended March 31, 2010, 2009 and 2008 was zero, a $21,000 recovery and a $113,000 expense, respectively, based upon the number of units granted. The Company did not achieve the TSR target at March 31, 2009, and therefore zero shares were issued and all restricted stock units were forfeited at that time.

     Share-Based Compensation Valuation and Expense Information

     The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an option award. The fair value of options granted during the years ended March 31, 2010, 2009 and 2008 were calculated using the following assumptions:

	Year			Year			Year
	Ended			Ended			Ended
	March 31,			March 31,			March 31,
	2010			2009			2008
Expected life (in years)		5.0			5.0			5.0
Expected volatility		75	%		66	%		67	%
Risk-free interest rate		1.65—2.93	%		2.51—2.87	%		2.53—5.02	%
Expected dividend yield		0.0	%		0.0	%		0.0	%

     Expected life uses historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option. The Company uses a weighted-average expected life for all awards and has identified one employee population. Expected volatility uses the Company stock’s historical volatility for the same period of time as the expected life. The Company has no reason to believe that its future volatility will differ from the past. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant for the same period of time as the expected life. Expected dividend yield is zero, as the Company historically has not paid dividends. The Company used a forfeiture rate of 5.4% during the years ended March 31, 2010, 2009 and 2008.

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     Share-based compensation expense related to employee stock options, restricted stock and restricted stock units, net of estimated forfeitures for the years ended March 31, 2010, 2009 and 2008 was $1.0 million, $1.0 million and $1.1 million, respectively. These amounts are included in general and administrative expenses in the Consolidated Statements of Operations. No amount of share-based compensation was capitalized.

Note 22 401(k) Plan

     The Company has a defined contribution 401(k) profit-sharing plan for eligible employees, which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. The plan covers substantially all full-time employees. Employees are entitled to make tax deferred contributions of up to 100% of their eligible compensation, subject to annual IRS limitations. The Company matches 50% of employee’s contributions up to the first 4% of their base pay, annually. The Company’s contributions charged to expense were $357,000, $324,000 and $450,000 for the years ended March 31, 2010, 2009, and 2008, respectively. The Company’s matching contributions vest over three years.

Note 23 Commitments and Contingencies

Leases

     The Company leases primarily all of its distribution facilities and a portion of its office and warehouse equipment. The terms of the lease agreements generally range from 1 to 15 years. The leases require payment of real estate taxes and operating costs in addition to rent. Total rent expense was $2.9 million, $2.9 million and $3.6 million for the years ended March 31, 2010, 2009 and 2008, respectively.

     The following is a schedule of future minimum rental payments required under noncancelable operating leases as of March 31, 2010 (in thousands):

2011	$	2,973
2012		3,080
2013		3,121
2014		2,778
2015		2,787
Thereafter		8,504
	$	23,243

Litigation and Proceedings

     In the normal course of business, the Company is involved in a number of litigation/arbitration and administrative/regulatory matters that, other than the matter described immediately below, are incidental to the operation of the Company’s business. These proceedings generally include, among other things, various matters with regard to products distributed by the Company and the collection of accounts receivable owed to the Company. The Company does not currently believe that the resolution of any of those pending matters will have a material adverse effect on the Company’s financial position or liquidity, but an adverse decision in more than one of these matters could be material to the Company’s consolidated results of operations. Because of the preliminary status of the Company’s various legal proceedings, as well as the contingencies and uncertainties associated with these types of matters, it is difficult, if not impossible, to predict the exposure to the Company, if any.

SEC Investigation

     On February 17, 2006, the Company received an inquiry from the Division of Enforcement of the U.S. Securities and Exchange Commission (the “SEC”) requesting certain documents and information. This information request, and others received since that date, relate to information regarding the Company’s restatements of previously-issued financial statements, certain write-offs, reserve methodologies, and revenue recognition practices. In connection with this formal non-public investigation, the Company has cooperated fully with the SEC’s requests.

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Note 24 Capital Leases

     The Company leases certain equipment under noncancelable capital leases. At March 31, 2010 and 2009, leased capital assets included in property and equipment were as follows (in thousands):

	March 31, 2010		March 31, 2009
Computer and office equipment	$	343	$	314
Less: accumulated amortization		212		128
Net property and equipment	$	131	$	186

     Amortization expense for the years ended March 31, 2010, 2009 and 2008 was $76,000, $64,000 and $96,000, respectively. Future minimum lease payments, excluding additional costs such as insurance and maintenance expense payable by the Company under these agreements, by year and in the aggregate are as follows (in thousands):

	Minimum Lease
	Commitments
Year ending March 31:
2011	$	66
2012		58
2013		28
Total minimum lease payments	$	152
Less: amounts representing interest at rates ranging from 6.9% to 31.6%		13
Present value of minimum capital lease payments, reflected in the balance sheet as current and noncurrent capital lease obligations of $57 and $82, respectively	$	139

Note 25 Related Party Transactions

Employment/Severance Agreements

     The Company entered into an employment agreement with its former Chief Executive Officer (“CEO”) in 2001, which expired on March 31, 2007. Pursuant to the deferred compensation portion of this agreement, the Company agreed to pay over three years, beginning April 1, 2008, approximately $2.4 million plus interest at approximately 8% per annum. At March 31, 2010 and 2009, outstanding accrued balances due under this arrangement were zero and $815,000, respectively.

     The employment agreement also contained a deferred compensation component that was earned by the former CEO upon the stock price achieving certain targets, which may be forfeited in the event that he does not comply with certain non-compete obligations. In April 2007, the Company deposited $4.0 million into a Rabbi trust, under the required terms of the agreement. Beginning April 1, 2008, the Rabbi trust pays annually $1.3 million, plus interest at 8%, for three years. At both March 31, 2010 and 2009, outstanding accrued balances due under this arrangement were $1.3 million. The Company expensed $141,000, $307,000 and $478,000 for these obligations during each of the years ended March 31, 2010, 2009 and 2008, respectively.

     The Company entered into a separation agreement with a former Chief Financial Officer (“CFO”) in fiscal 2004. The Company was required to pay approximately $597,000 over a period of four years beginning May 2004. The continued payout was contingent upon the individual complying with a non-compete agreement. This amount was accrued and expensed in fiscal 2005. The Company paid zero, $22,000 and $134,000 during the years ended March 31, 2010, 2009 and 2008, respectively. The Company had no further obligation under this agreement as of March 31, 2009.

     The Company entered into a separation agreement with a former Chief Operating Officer (“COO”) in fiscal 2009. The Company was required to pay approximately $390,000 under this agreement. This amount was accrued, expensed and paid during the year ended March 31, 2009.

Employment Agreement — FUNimation

     In connection with the FUNimation acquisition, the Company entered into an employment agreement with a key FUNimation employee providing for his employment as President and Chief Executive Officer of FUNimation Productions, Ltd. (“the FUNimation CEO”). Among other items, the agreement provides the FUNimation CEO with the ability to earn two performance-based bonuses in the

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event that certain financial targets are met by the FUNimation business during the years ending March 31, 2006-2010. No amounts were expensed or paid under this agreement as the targets were not achieved.

Note 26 Major Customers

     The Company has two major customers (both of which are within the distribution segment) who accounted for 53% of consolidated net sales for fiscal 2010, of which each customer accounts for over 10% of consolidated net sales. These customers accounted for 51% of consolidated net sales for fiscal 2009 and 44% of consolidated net sales in fiscal 2008. Accounts receivable from these two customer totaled $26.4 million and $26.0 million at March 31, 2010 and 2009, respectively.

Note 27 Business Segments

     The Company identifies its segments based on its organizational structure, which is primarily by business activity. Operating profit represents earnings before interest expense, interest income, income taxes and allocations of corporate costs to the respective divisions. Intercompany sales are made at market prices. The Company’s corporate office maintains a majority of the Company’s cash under its cash management policy.

     Navarre operates two business segments: distribution and publishing.

     Through the distribution segment, the Company distributes computer software, home video, video games and accessories and independent music labels (through May 2007) and provides fee-based third-party logistical services to North American retailers and their suppliers. The 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.

     Through the publishing segment the Company owns or licenses various computer software and home video titles, and other related merchandising and broadcasting rights. The publishing segment packages, brands, markets and sells directly to retailers, third party distributors, and the Company’s distribution segment.

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     Financial information by reportable segment is included in the following summary for the years ended March 31, 2010, 2009 and 2008 (in thousands):

Fiscal Year 2010	Distribution		Publishing		Eliminations			Consolidated
Net sales	$	487,692	$	86,003	$	(45,363	)	$	528,332
Income from continuing operations		6,353		12,330		—			18,683
Income from continuing operations before income taxes		6,875		9,794		—			16,669
Depreciation and amortization expense		3,687		2,629		—			6,316
Restructuring, impairment and other charges		—		—		—			—
Capital expenditures		1,076		692		—			1,768
Total assets		121,667		56,470		(6,534	)		171,603

Fiscal Year 2009	Distribution			Publishing			Eliminations			Consolidated
Net sales	$	592,893		$	102,828		$	(64,730	)	$	630,991
Income (loss) from continuing operations		1,143			(98,261	)		—			(97,118	)
Income (loss) from continuing operations before income taxes		(484	)		(102,433	)		—			(102,917	)
Depreciation and amortization expense		4,060			6,912			—			10,972
Restructuring, impairment and other charges		591			110,511			—			111,102
Capital expenditures		2,960			584			—			3,544
Total assets		131,401			50,204			1,564			183,169

Fiscal Year 2008	Distribution		Publishing		Eliminations			Consolidated
Net sales	$	611,007	$	117,423	$	(69,958	)	$	658,472
Income from continuing operations		5,138		12,693		—			17,831
Income from continuing operations before income taxes		3,880		8,449		—			12,329
Depreciation and amortization expense		3,280		6,307		—			9,587
Restructuring, impairment and other charges		—		—		—			—
Capital expenditures		7,462		1,100		—			8,562
Total assets		221,912		176,907		(115,357	)		283,462

The following table provides net sales by product line for each business segment for the years ended March 31, 2010, 2009 and 2008 (in thousands):

Fiscal Year 2010	Distribution		Publishing		Eliminations			Consolidated
Software	$	422,280	$	31,823	$	(24,166	)	$	429,937
Home Video		38,142		54,180		(21,197	)		71,125
Video Games		27,270		—		—			27,270
Consolidated	$	487,692	$	86,003	$	(45,363	)	$	528,332

Fiscal Year 2009	Distribution		Publishing		Eliminations			Consolidated
Software	$	467,034	$	32,447	$	(28,537	)	$	470,944
Home Video		55,199		70,381		(36,193	)		89,387
Video Games		70,660		—		—			70,660
Consolidated	$	592,893	$	102,828	$	(64,730	)	$	630,991

Fiscal Year 2008	Distribution		Publishing		Eliminations			Consolidated
Software	$	498,255	$	39,362	$	(37,945	)	$	499,672
Home Video		64,656		78,061		(32,013	)		110,704
Video Games		48,096		—		—			48,096
Consolidated	$	611,007	$	117,423	$	(69,958	)	$	658,472

Note 28 Quarterly Data — Seasonality (Unaudited)

     The Company’s quarterly operating results fluctuate significantly and will likely do so in the future as a result of seasonal variations of products ultimately sold at retail. The Company’s business is affected by the pattern of seasonality common to other suppliers of retailers, particularly the holiday selling season. Traditionally, our third quarter (October 1-December 31) has accounted for our largest

85

quarterly revenue figures and a substantial portion of our earnings. Our third quarter accounted for approximately 25.2%, 27.2% and 33.0% of our net sales for the years ended March 31, 2010, 2009 and 2008, respectively.

     The 2008 and 2009 holiday seasons were disappointing to most retailers and distributors as consumers remained cautious about discretionary spending. As a result, 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 downturn in the economy.

     The following table sets forth certain unaudited quarterly historical financial data of the Company’s operations on a consolidated basis for each of the four quarters in the years ended March 31, 2010 and March 31, 2009 (in thousands, except per share amounts):

	Quarter Ended
Fiscal Year 2010	June 30		September 30		December 31		March 31
Net sales	$	134,306	$	122,411	$	133,298	$	138,317
Gross profit		23,564		20,867		22,049		21,445
Income from operations		6,516		3,807		4,525		3,835
Net income	$	4,161	$	2,280	$	7,239	$	9,192
Earnings per common share:
Basic	$	0.11	$	0.06	$	0.20	$	0.25
Diluted	$	0.11	$	0.06	$	0.20	$	0.25
Restructuring, impairment and other charges		—		—		—		—

	Quarter Ended
Fiscal Year 2009	June 30		September 30			December 31			March 31
Net sales	$	142,025	$	170,296		$	171,580		$	147,090
Gross profit (loss)		22,126		24,230			(1,154	)		21,845
Income (loss) from operations		2,753		(70,191	)		(31,965	)		2,285
Net income (loss)	$	627	$	(44,508	)	$	(47,724	)	$	3,171
Earnings (loss) per common share:
Basic	$	0.02	$	(1.23	)	$	(1.32	)	$	0.09
Diluted	$	0.02	$	(1.23	)	$	(1.32	)	$	0.09
Restructuring, impairment and other charges		—		73,412			34,582			3,108

Note 29 — Subsequent Events

     On May 17, 2010, Encore completed the asset acquisition of Punch Software, LLC, (Punch) a leading provider of home and landscape design and CAD software in the United States. Amounts paid included $8.1 million in cash paid at closing, $1.1 million in deferred payments payable on the first anniversary of the closing, paid into an escrow account to be held for one additional year, plus up to two performance payments of up to $1.25 million each, if earned by Punch based upon net sales achieved by Encore in connection with the acquired assets, payable following the first and second anniversary of the closing date. The purchase price could be increased or decreased on a post-closing basis depending upon a further review of the amount of net working capital delivered to Encore by Punch on the closing date. The acquisition of Punch is a continuation of the Company’s strategy for growth by expanding content ownership and gross margin enhancement. This transaction does not qualify as an acquisition of a significant business pursuant to Regulation S-X and financial statements for the acquired business will not be filed. Future operating results will be included within the publishing business.

     On May 17, 2010, the Company entered into a Consent and Amendment to Credit Agreement with Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC) and Capital One Leverage Finance Corp. waiving the application of certain covenants in the Company’s Credit Facility that otherwise prohibited it from consummating the Punch transaction discussed above, as well as modifying certain terms in the Company’s Credit Facility in order to address the terms of this transaction.

     On May 27, 2010, the Company announced it has engaged a third party to provide assistance in the structuring and negotiating of a potential transaction for the sale of FUNimation, although there can be no assurances that this process will result in the consummation of a transaction. FUNimation, was acquired on May 11, 2005 and operates as part of the Company’s publishing business segment. Accordingly, all results of operations and assets and liabilities of FUNimation for all periods presented in any future filings will be classified as discontinued operations.

86

     The Company evaluated its March 31, 2010 consolidated financial statements for subsequent events through the date the consolidated financial statements were issued. The Company is not aware of any subsequent events other than those listed above which would require recognition or disclosure in the consolidated financial statements.

Navarre Corporation
Schedule II — Valuation and Qualifying Accounts and Reserves
(in thousands)

	Balance at		Charged to					Balance at
	Beginning		Costs and		Additions/			End of
Description	of Period		Expenses		(Deductions)			Period
Year ended March 31, 2010:
Deducted from asset accounts:
Allowance for doubtful accounts	$	1,729	$	245	$	(639	)	$	1,335
Allowance for sales returns		11,967		3,988		(7,728	)		8,227
Allowance for MDF and sales discounts		5,314		11,088		(12,771	)		3,631
Total	$	19,010	$	15,321	$	(21,138	)	$	13,193
Year ended March 31, 2009:
Deducted from asset accounts:
Allowance for doubtful accounts	$	1,332	$	742	$	(345	)	$	1,729
Allowance for sales returns		9,350		14,177		(11,560	)		11,967
Allowance for MDF and sales discounts		4,736		16,417		(15,839	)		5,314
Total	$	15,418	$	31,336	$	(27,744	)	$	19,010
Year ended March 31, 2008:
Deducted from asset accounts:
Allowance for doubtful accounts	$	1,036	$	32	$	264		$	1,332
Allowance for sales returns		11,983		10,373		(13,006	)		9,350
Allowance for MDF and sales discounts		5,265		17,721		(18,250	)		4,736
Total	$	18,284	$	28,126	$	(30,992	)	$	15,418

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EX-10.39

Exhibit 10.39

FIFTH AMENDMENT TO LEASE DATED 4-1-98

This amendment of Lease, entered into as of the 12^th day of November, 2009, by and between Cambridge Apartments, Inc., a Minnesota corporation, and Navarre Corporation, a Minnesota corporation.

WHEREAS: Cambridge Apartments, Inc. as lessor and Navarre Corporation as lessee have previously entered into and are now operating under a lease of certain premises dated 4-1-98 as amended.

WHEREAS: Lessee has requested lessor to execute a COLLATERAL ACCESS AGREEMENT (agreement) in favor of Wells Fargo Foothill, LLC (Exhibit 1 attached) which would replace a LANDLORD’S WAIVER AND CONSENT previously furnished in accordance with the FIRST AMENDMENT TO LEASE DATED 9-27-01.

WHEREAS: Said agreement changes lessor’s rights, duties and security under the lease.

NOW, THEREFORE, in consideration of lessor furnishing said agreement the parties agree the lease is amended to provide as follows:

A.	The LANDLORD’S WAIVER AND CONSENT provided for in the FIRST AMENDMENT TO LEASE DATED 9-27-01 is null and void.
B.	The letter of credit from General Electric Capital Corporation provided for in the FIRST AMENDMENT TO LEASE DATED 9-27-01 is no longer effective.
C.	The security and damage deposit in the amount of $100,000.00 previously furnished contemporaneously with the execution of the FIRST AMENDMENT TO LEASE DATED 9-27-01 will continue to be held by lessor under the SECURITY AND DAMAGE DEPOSIT previously executed (Exhibit 2 attached).
	All other terms and provisions of lease shall remain in full force and effect.

IN WITNESS WHEREOF: the lessor and lessee have caused these presents to be executed in form and manner sufficient to bind them at law, as of the day and year first written above.

Lessee: Navarre Corporation, a Minnesota Corporation		Lessor: Cambridge Apartments, Inc., a Minnesota Corporation
By:	/s/ J. Reid Porter	By:	/s/ John R. Paulson
	Its: Executive Vice President and CFO		Its: President

EX-10.46

Exhibit 10.46

SECOND AMENDMENT TO OFFICE LEASE

     This SECOND AMENDMENT TO OFFICE LEASE (this “Second Amendment”) is made and entered into as of the 29^th day of April, 2010, by and between KILROY REALTY, L.P., a Delaware limited partnership (“Landlord”), and ENCORE SOFTWARE, INC., a Minnesota corporation (“Tenant”).

R E C I T A L S:

     A. Landlord and Tenant entered into that certain Office Lease dated October 8, 2004 (the “Original Lease”), as amended by that certain Amendment No. 1 to Lease dated December 29, 2004 (the “First Amendment”), (the Original Lease and the First Amendment are collectively referred to herein as the “Lease”), whereby Landlord leases to Tenant and Tenant leases from Landlord approximately 13,216 rentable square feet of space (the “Premises”) commonly known as Suite 700 and located on the seventh (7th) floor of the building (the “Building”) located at 999 North Sepulveda Boulevard, El Segundo, California. Tenant’s obligations under the Lease have been guaranteed by Navarre Corporation, a Minnesota corporation (the “Guarantor”) pursuant to the terms of that certain Guaranty of Lease dated October 8, 2004 (the “Guaranty”).

     B. Landlord and Tenant are also parties to that certain Parking License Agreement dated July 3, 2006 (the “Parking Agreement”), and that certain Storage Agreement dated February 22, 2005 (the “Storage Agreement”) as amended by that certain Amendment No.1 to Storage Agreement dated March 29, 2006 (the “First Storage Amendment”).

     C. Tenant desires to extend the Lease Term for a period of three (3) years, and in connection therewith, Landlord and Tenant desire to amend the Lease on the terms and conditions set forth in this Second Amendment.

A G R E E M E N T:

     NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

     1. Terms. All capitalized terms when used herein shall have the same respective meanings as are given such terms in the Lease unless expressly provided otherwise in this Second Amendment.

     2. Extended Term. Pursuant to the terms of the Lease, the Lease Term is scheduled to expire on April 30, 2010. Landlord and Tenant hereby extend the Lease Term for a period of three (3) years, from May 1, 2010 (the “Extended Term Commencement Date”) through April 30, 2013 (unless sooner terminated as provided in the Lease, as hereby amended), on the terms and conditions set forth in this Second Amendment. The period of time commencing on the Extended Term Commencement Date and ending on April 30, 2013 shall be referred to herein as the “Extended Term.”

     3. Option Term. Notwithstanding any provision to the contrary contained in the Lease, Tenant shall continue to have one (1) option to extend the Lease Tern, as hereby amended, for a term of three (3) years, commencing on May 1, 2013 and expiring on April 30, 2016, pursuant to the terms and conditions contained in Section 2.2 of the Original Lease, which shall (as of the date hereof) be amended as follows:

          3.1 All references to the “Lease Term” or “initial Lease Term” set forth in Section 2.2 of the Original Lease shall mean the Extended Term.

          3.2 The phrase “or the first Option Term, as the case may be,” is hereby deleted from the second (2nd) sentence of Section 2.2.1 of the Original Lease.

          3.3 The references to “five (5) years” contained in Section 2.2.1 of the Original Lease are each hereby deleted and replaced with “three (3) years.”

     4. Condition of the Premises. Landlord and Tenant acknowledge that Tenant has been occupying the Premises pursuant to the Lease, has had full opportunity to review the condition thereof and has done so. Notwithstanding anything in the Lease to the contrary, Tenant shall continue to accept

the Premises in its presently existing, “as is” condition, and Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises unless specifically provided for in Section 8 of this Second Amendment. Tenant also acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty regarding the condition of the Premises or with respect to the suitability of the same for the conduct of Tenant’s business.

     5. Remeasurement of Building and Premises. Notwithstanding any contrary provisions in the Lease, as amended, Landlord and Tenant acknowledge and agree that Landlord has remeasured the Building and that, according to such remeasurement, as of May 1, 2010 (the Extended Term Commencement Date) the Building shall be deemed to contain approximately 127,901 rentable square feet of space. For the period prior to May 1, 2010, the rentable square footage of the Building shall remain as set forth in the Lease, and Tenant’s Share shall not change. However, commencing on May 1, 2010 and continuing throughout the Extended Term, Tenants Share of the Building shall be adjusted to reflect such remeasurement, as set forth in Section 6.3 below.

     6. Rent.

          6.1 Base Rent. Prior to the Extended Term Commencement Date, Tenant shall continue to pay Base Rent for the Premises in accordance with the terms of the Lease. During the Extended Term, Tenant shall pay Base Rent for the Premises as follows:

					Monthly Rental Rate
Period During	Annual		Monthly		per Rentable
Extended Term	Base Rent		Base Rent		Square Foot
May 1, 2010 — April 30, 2011	$	325,113.60	$	27,092.80	$	2.05
May 1, 2011 — April 30, 2012	$	334,629.12	$	27,885.76	$	2.11
May 1, 2012 — April 30, 2013	$	344,144.64	$	28,678.72	$	2.17

          6.2 Abated Base Rent. Notwithstanding the contrary provisions set forth herein and in the Lease, Tenant shall not be obligated to pay the monthly installments of Base Rent attributable to the Premises (the “Base Rent Abatement”) for the two (2) month period commencing on May 1, 2010 and ending on June 30, 2010 (the “Base Rent Abatement Period”) (such Base Rent Abatement Period shall coincide with the first (1st) and second (2nd) full calendar months of the Extended Term). In connection with the foregoing, the Base Rent Abatement provided to Tenant under this Section 6.2 during the Base Rent Abatement Period shall not exceed an aggregate of Fifty-Four Thousand One Hundred Eighty-Five and 60/100 Dollars ($54,185.60) (i.e., $27,092.80 for each of the two (2) months occurring during the Base Rent Abatement Period). Additionally, notwithstanding the foregoing, Tenant shall be obligated to pay all applicable “Additional Rent” in accordance with the Lease as amended by Section 6.3 of this Second Amendment, during the Base Rent Abatement Period.

          6.3 Additional Rent. Notwithstanding the extension of the Lease Term as provided herein, Tenant shall continue to be obligated to pay Tenant’s Share of increases in Direct Expenses in connection with the Premises which arise or accrue prior to the Extended Term Commencement Date, in accordance with the terms of the Lease. Effective as of the Extended Term Commencement Date, and continuing throughout the Extended Term, Tenant shall pay Tenant’s Share of increases in Direct Expenses in connection with the Premises which arise or accrue on or after the Extended Term Commencement Date in accordance with the terms of the Lease; provided, however, that for purposes of calculating the amount of Tenant’s Share of such increases in Direct Expenses, the Base Year shall be the calendar year 2010 and Tenant’s Share shall equal 10.3330%.

     7. Parking. Through the Extended Term, Tenant shall continue to have the parking rights and obligations set forth in the Lease subject to the terms and conditions contained in this Section 7.Notwithstanding anything to the contrary contained in the Lease or the Parking Agreement, all monthly parking permit fees payable by Tenant pursuant to the terms of the Lease shall be abated during the six (6) month period commencing on May 1, 2010 and ending on October 31, 2010 (the “Parking Abatement Period”). In lieu of any prior parking validation rights granted to Tenant under the Lease, Landlord shall provide to Tenant, free of charge, one-hundred (100) hours of parking validations for each month of the Extended Term, which validations are to utilized by Tenant’s visitors and patrons only. Nothing contained in this Section 7 shall be deemed to waive or otherwise modify Tenant’s additional parking rights and obligations under the Parking Agreement.

Exhibit 10.46

     8. Landlord Work; Tenant’s Supplemental HVAC Repair and Maintenance Obligations; Carpet Allowance.

          8.1 Landlord Work. Notwithstanding any provision contained herein or in the Lease to the contrary, Landlord shall, at its sole cost and expense, cause the following work to be performed within the Premises as soon as reasonably possible following the parties’ execution and delivery of this Second Amendment: (i) touch up certain portions of the painted surfaces of the interior walls of the Premises (which portions shall be determined by Landlord in its reasonable discretion), utilizing Landlord’s ‘Building standard” methods, materials and finishes (the color of which paint shall be determined by Landlord in its reasonable discretion), (ii) cause the carpeted surfaces of the floor of the Premises to be professionally cleaned, and (iii) subject to Landlord’s ability to obtain all required governmental approvals therefor, purchase and cause the supplemental HVAC unit (the “Supplemental HVAC Unit”) identified on Exhibit B (attached hereto and incorporated herein by this reference) to be installed within the Premises for Tenant’s use in connection with its existing server room, which Supplemental HVAC Unit shall be installed in accordance with the scope of work set forth on Exhibit C (attached hereto and incorporated herein by this reference) (the “Scope of Work”) (items (i) through (iii) above to be collectively referred to herein as the “Landlord Work”). With regard to item (iii) of the Landlord Work, Tenant shall fully cooperate with Landlord, at no cost to Tenant, in Landlord’s efforts to obtain all government approvals and/or permits (if any) required for such installation of the Supplemental HVAC Unit, and shall comply with the terms set forth on the Scope of Work. In connection with the foregoing, Tenant shall have no right to alter or modify the Landlord Work within the Premises. Tenant hereby acknowledges that, notwithstanding Tenant’s occupancy of the Premises during the performance of the Landlord Work, Landlord shall be permitted to perform the Landlord Work during normal business hours, and Tenant shall provide Landlord with access to the Premises to carry out the Landlord Work and a reasonably clear working area for the Landlord Work (including, but not limited to, the moving of Tenant’s property away from the area in which Landlord is performing the Landlord Work). Provided that Landlord uses reasonable efforts to minimize any disruption to Tenant’s business. Tenant hereby agrees that the performance of the Landlord Work shall in no event constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of rent or damages of any kind. Furthermore, provided that Landlord uses reasonable efforts to minimize any disruption to Tenant’s business, in no event shall Tenant be entitled to any compensation or damages from Landlord for the loss of the use of the whole or any part of the Premises or of Tenant’s personal property or improvements resulting from the Landlord Work or Landlord’s actions in connection with the Landlord Work, or for any inconvenience or annoyance occasioned by the Landlord Work or Landlord’s actions in connection therewith.

          8.2 Tenant’s Supplemental HVAC Repair and Maintenance Obligations. Throughout the remainder of the Lease Term (as amended hereby and subject to further extension as provided above), Tenant shall repair and maintain the Supplemental HVAC Unit in good working order and condition and in accordance with the applicable terms and conditions of Article 7 of the Original Lease. In connection with the foregoing, Landlord may, at Tenant’s sole cost and expense (without profit or markup by Landlord), separately meter the electricity utilized by the Supplemental HVAC Unit, and Tenant shall reimburse Landlord for the cost as reasonably determined by Landlord of all electricity utilized by the Supplemental HVAC Unit. Notwithstanding any contrary provision contained herein or in the Lease, the Supplemental HVAC Unit shall be deemed Landlord’s property and shall remain in place within the Premises in its then-existing condition and Tenant shall have no obligation to remove or repair the same.

          8.3 Carpet Allowance. Tenant shall be entitled to a one-time allowance (the “Carpet Allowance”) in an amount up to Three Thousand Five Hundred and No/100 Dollars ($3,500.00) for the actual and documented out-of-pocket costs (“Tenant’s Carpet Costs”) incurred by Tenant to repair and/or replace the carpet in the Premises (the “Carpet Work”). After the occurrence of the Extended Term Commencement Date and the completion of Tenant’s Carpet Work, Landlord shall disburse the Carpet Allowance for Tenant’s Carpet Costs within thirty (30) days following receipt by Landlord of receipts for Tenant’s Carpet Work. Landlord shall not be obligated to pay a total amount which exceeds the Carpet Allowance (any such excess being Tenant’s sole responsibility) nor be obligated to disburse any portion of the Carpet Allowance for any purpose other than reimbursement for Tenant’s Carpet Costs. If Landlord fails to timely disburse the Carpet Allowance for Tenant’s Carpet Costs in accordance with this Section 8.3, then Tenant shall have the right to deduct Tenant’s Carpet Costs from the installment of Base Rent first coming due after the Carpet Allowance was payable by Landlord to Tenant. In no event shall the Carpet Allowance provided for herein be available to Tenant as a credit against rent or other amounts owing to Landlord pursuant to the Lease, as hereby amended, or in any manner other than as expressly provided herein. In the event that Tenant shall fail to utilize the Carpet Allowance (or to provide the documentation required hereunder for payment thereof) within one (1) year following the Extended Term Commencement Date, any such unused amounts shall revert to Landlord and Tenant shall have no further rights with respect thereto.

     9. Tenant’s Occupants. Notwithstanding anything to the contrary contained in the Lease, Tenant shall have the right without the payment of a Transfer Premium, and without the receipt of Landlord’s consent, but on prior written notice to Landlord, to permit the occupancy of up to twenty percent (20%) of the rentable square footage of the Premises (i.e., 2,643 rentable square feet) by licensees that have an ongoing, business relationship with Tenant (“Tenant’s Occupants”), on and subject to the following conditions: (i) such individuals or entities shall not be permitted to occupy a separately demised portion of the Premises which contains an entrance to such portion of the Premises other than the primary entrance to the Premises; (ii) all such individuals or entities shall be of a character and reputation consistent with the first-class quality of the Building; (iii) the use of the Premises by Tenant’s Occupants must not conflict with the use permitted by the Lease, as amended; and (iv) such occupancy shall not be a subterfuge by Tenant to avoid its obligations under the Lease or the restrictions on Transfers pursuant to Article 14 of the Original Lease. Tenant shall promptly supply Landlord with any documents or information reasonably requested by Landlord regarding any such licensees. Any occupancy permitted under this Section 9 shall not be deemed a Transfer under Article 14 of the Original Lease. Notwithstanding the foregoing, no such occupancy shall relieve Tenant from any liability under the Lease, as amended.

     10. Security Deposit. Landlord and Tenant acknowledge that in accordance with the terms of Article 8 of the Original Lease Tenant has previously delivered the sum of Twenty-Seven Thousand Ninety-Two and 80/100 Dollars ($27,092.80) to Landlord as security for the faithful performance by Tenant of the terms, covenants and conditions of the Lease. Concurrently with Tenant’s execution and delivery of this Second Amendment to Landlord, Tenant shall deposit with Landlord an amount equal to One Thousand Five Hundred Eighty-Five and 93/100 Dollars ($1,585.92) to be held by Landlord as an addition to the Security Deposit currently held by Landlord. Accordingly, effective as of the date of this Second Amendment, notwithstanding any provision to the contrary contained in the Lease, the total Security Deposit amount to be held by Landlord pursuant to the Lease, as hereby amended, shall equal Twenty-Eight Thousand Six Hundred Seventy-Eight and 72/100 Dollars ($28,678.72).

     11. Deletions. Effective as of the date hereof; Tenant’s rights under Sections 6.6, 29.48 and 29.49 of the Original Lease shall be deemed null and void and of no further force or effect.

     12. Broker. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Second Amendment other than CB Richard Ellis (“Broker’) and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Second Amendment. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including, without limitation, reasonable attorneys’ fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent other than the Broker, occurring by, through, or under the indemnifying party. The terms of this Section 12 shall survive the expiration or earlier termination of the Lease Term, as amended.

     13. Consent of Guarantor. This Second Amendment is subject to and conditioned upon Tenant delivering to Landlord, concurrently with Tenant’s execution and delivery of this Second Amendment, the “Acknowledgment and Consent of Guarantor” (“Consent”) in the form attached hereto as Exhibit A, which Consent shall be fully executed by and binding upon the Guarantor.

     14. No Further Modification; Conflict, Except as specifically set forth in this Second Amendment, all of the terms and provisions of the Lease shall remain unmodified and in full force and effect. In the event of any conflict between the terms and conditions of the Lease and the terms and conditions of this Second Amendment, the terms and conditions of this Second Amendment shall prevail.

[Signatures to appear on the following page]

Exhibit 10.46

IN WITNESS WHEREOF, this Second Amendment has been executed as of the day and year first above written.

“LANDLORD” KILROY REALTY, L.P., a Delaware limited partnership
By:	KILROY REALTY CORPORATION, a
	Maryland corporation,
	general partner

By:
	Its:

By:
	Its:

“TENANT”

ENCORE SOFTWARE, INC.,
a Minnesota corporation
 

By:	/s/ Cal Morrell
	Its: President

By:	/s/ J. Reid Porter
	Its: CFO and Treasurer

EXHIBIT A

ACKNOWLEDGMENT AND CONSENT OF GUARANTOR

     The undersigned, as Guarantor under that certain Guaranty of Lease, dated October 8, 2004 (“Guaranty”), hereby (i) acknowledges and consents to the Second Amendment to Office Lease, dated February 17, 2010 (the “Second Amendment”), and (ii) agrees that the terms and conditions of the Guaranty, including Guarantors’ promises, covenants and guarantees thereunder, shall apply to the Second Amendment.

Paragraph 3 of the Guaranty is deleted and replaced with the following:

Guarantor’s liability under this Guaranty shall continue until all rents due under the Lease have been paid in full and until all other obligations to Landlord have been satisfied. If all or any portion of Tenant’s obligations under the Lease is paid or performed by Tenant, the obligations of Guarantor hereunder shall continue and remain in full force and effect in the event that all or any part of such payment(s) or performance(s) is avoided or recovered directly or indirectly from Landlord as a preference, fraudulent transfer or otherwise. Notwithstanding anything in this Guaranty to the contrary, Guarantor’s liability hereunder for the payment and performance of Tenant’s obligations under the Lease shall be limited to a maximum aggregate amount of $500,000.00 during the first two (2) years of the Extended Term and $250,000.00 thereafter (exclusive of reasonable attorney’s fees and reasonable out-of-pocket costs incurred by Landlord in enforcing this Guaranty) and shall in no event require Guarantor to pay any amounts or to make any expenditures in excess of such maximum aggregate amount except for reasonable attorneys’ fees and reasonable attorneys’ fees and reasonable out-of-pocket enforcement costs.

Dated: April 30, 2010

“GUARANTOR” NAVARRE CORPORATION, a Minnesota corporation
By:	/s/ J. Reid Porter
	Its: CFO and Treasurer

By:	/s/ Cary L. Deacon
	Its: Chief Executive Officer

EXHIBIT A
- -1-

EXHIBIT B

SPECIFICATION FOIL SUPPLEMENTAL HVAC UNIT

One (1) new Data-Aire 3-ton cooling only split system (or similar).

EXHIBIT B
- -1-

EXHIBIT C

SCOPE OF WORK

1.	Landlord shall provide a project schedule and timeline for Tenant’s approval well in advance. Landlord and Tenant shall collaborate through Visio (or similar) on the final layout of the server room, so that the Supplemental HVAC Unit will not be located close to the server racks.
2.	With Landlord’s cooperation (including no charge for freight elevator) Tenant shall remove all unfixed furniture such as shelving units and file cabinets from the server room and temporarily relocate them to Tenant’s storage cage in the basement of the Building.
3.	Landlord shall provide 220-volt 30-amp power outlets far enough away from the server room in a temporary area for the server racks so that Tenant’s business can continue to operate without exposing equipment to dust, debris and damage during construction.
4.	Tenant shall relocate (1) server rack to the temporary location and shall connect equipment using existing data lines. With Landlord’s cooperation (including no charge for freight elevator) Tenant shall remove the remaining (2) server racks from the server room and put them in the storage cage,
5.	Tenant shall relocate any employees currently seated in front of the server room along the south windows. The employees and their computers and belongings will be removed from the area. Fixed furniture shall not be moved but Landlord shall cover the fixed furniture with a drop cloth or similar protective material for the duration of the project.
6.	Landlord shall not shut down power to the server room during construction, as fixed equipment such as the core switch and surveillance equipment will not be relocated and need to remain fully operational.
7.	Landlord shall work around the fixed cabling raceways and relay rack that are connected to the core switch.
8.	Landlord shall remove the inside drywall and insulate between studs with appropriate insulating material such as fiberglas batts.
9.	Landlord shall relocate the (3) 220-volt, 30-amp outlets to above the new server rack location agreed upon in step 1. Power to these outlets may be shut off during the duration of this step, but must be fully tested and operational upon completion.
10.	Landlord shall furnish and install (1) new 3-ton cooling-only split system, all necessary new supply and return air ductwork, (2) new supply air ceiling diffusers, (1) new return air register, all the necessary new DX refrigerant piping to connect the new indoor fan coil unit to a new roof- mounted condensing unit, line and low voltage electrical wiring and conduit, all the necessary new condensate drain piping, sealing of all new duct joints, hoisting and rigging of the new roof- mounted condensing unit, coring and check, test and start-up.
11.	Landlord shall remove any existing duct work that is connected to the existing HVAC system from the server room only after the new system is tested and running. The core switch must be continually kept as cool as possible during the project duration. Landlord shall trim back existing ductwork to the inner wall so that the existing HVAC system can be used as a backup in the event the dedicated Supplemental HVAC Unit requires service, so that Tenant’s business continuity is not disrupted. Landlord shall install cut-off levers on the supply and return vents and they shall be set in the closed position during normal operation of the dedicated Supplemental HVAC Unit
12.	After the Supplemental HVAC Unit is online and functioning properly, Landlord shall redrywall the inside of the server room from floor to ceiling, working around existing pipe and conduit. Gaps between drywall and penetrations shall be scaled with an insulating sealant. The 6’ x 7’ opening in the server room wall facing the south windows shall be framed, insulated and drywalled on both sides so that new drywall is flush with existing drywall. Landlord shall install a building standard suspended ceiling within the server room.

EXHIBIT C
- -1-

13.	Landlord shall keep all drywall dust production to a minimum so that drywall dust does not enter the core switch through its cooling fans. If this is not possible, drywall work may be scheduled for the weekend so that Tenant may shut down the core switch during this phase. Dry sanding should be avoided during tape and mud phase.
14.	Landlord shall paint drywall to match existing white paint color used throughout the suite.
15.	After construction is completed and Tenant can move back into the server room, Tenant and Landlord shall move the (2) racks back from the cage in the basement and position them in the server room as specified in the layout agreed upon in step 1.
16.	Tenant and Landlord shall move the unfixed furniture from step 2 from the cage back into the server room.
17.	Tenant shall be responsible for moving servers from the temporary server rack back into the server room.

EXHIBIT C
- -2-

EX-10.47

Exhibit 10.47

DATED: November 19, 2009

B E T W E E N:

ORLANDO CORPORATION

- and -

NAVARRE CORPORATION

LEASE

Regarding 1695 Drew Road
Unit #3
Mississauga, Ontario L5S 1J5

ORLANDO CORPORATION

INDUSTRIAL LEASE

TABLE OF CONTENTS

	Section
ARTICLE I — DEMISE & TERM
Premises		1.01
Use of Common Areas		1.02
Term		1.03
Early Access		1.04
Option to Extend		1.05
Acceptance of Premises		1.06
Quiet Enjoyment		1.07
ARTICLE II — RENT
Intent of Lease		2.01
Basic Rent		2.02
Calculation of Basic Rent		2.03
Additional Rent		2.04
Deposit Payable to Landlord		2.05
Payments to Landlord		2.06
Pre-Authorized Bank Debit		2.07
Overdue Rent		2.08
Set-Off		2.09
Review of Tenant’s Financial Statements		2.10
ARTICLE III — TAXES
Taxes Payable by Landlord		3.01
Taxes Payable by Tenant		3.02
Tenant’s Business and Other Taxes		3.03
Payment of Taxes		3.04
ARTICLE IV — OPERATING COSTS
Tenant’s Covenant to Pay Operating Costs		4.01
Payment of Operating Costs		4.02
ARTICLE V — UTILITIES
Utility Charges		5.01
Meters		5.02

	Section
Heating		5.03
Service Contracts		5.04
ARTICLE VI — MAINTENANCE & REPAIR
Tenant to Maintain and Repair		6.01
Repair Where Tenant at Fault		6.02
Alterations		6.03
Notice of Accidents		6.04
Construction Liens		6.05
Removal of Fixtures and Improvements		6.06
Roof & Office Rooftop HVAC Replacement		6.07
Repairs on Termination		6.08
Landlord’s Repair Obligation		6.09
ARTICLE VII — ASSIGNING AND SUBLETTING
Assigning or Subletting		7.01
Change of Control		7.02
Sublet of Part of Premises		7.03
Excess Rent		7.04
Mortgage of Leasehold		7.05
Advertising Premises		7.06
Disposition by Landlord		7.07
ARTICLE VIII — USE
Use of Leased Premises		8.01
Rules and Regulations		8.02
Observance of Law		8.03
Waste and Nuisance		8.04
Exterior Walls		8.05
Signs		8.06
Energy Conservation		8.07
Overloading Systems		8.08
Parking		8.09
Refuse and Garbage		8.10
Overloading Floors		8.11
Plumbing Fixtures		8.12
Outside Storage		8.13
ARTICLE IX — INSURANCE AND INDEMNITY
Tenant’s Insurance		9.01
Landlord’s Insurance		9.02

-ii-

	Section
Not to Affect Landlord’s Insurance		9.03
Limit of Landlord’s Liability		9.04
Limit of Tenant’s Liability		9.05
Indemnity		9.06
ARTICLE X — CONTROL OF COMPLEX
Control of Complex		10.01
ARTICLE XI — DAMAGE & DESTRUCTION
Abatement of Rent		11.01
Termination		11.02
ARTICLE XII — DEFAULT
Events of Default		12.01
Accelerated Rent		12.02
Right of Re-entry		12.03
Reletting		12.04
Distress		12.05
Right of Landlord to Cure Defaults		12.06
Cross Default		12.07
Remedies Not Exclusive		12.08
Non-Waiver		12.09
Recovery of Adjustments		12.10
ARTICLE XIII — SUBORDINATION & ACKNOWLEDGEMENTS
Mortgages		13.01
Certificates		13.02
Recognition Agreement		13.03
ARTICLE XII — ACCESS BY LANDLORD
Exhibiting Leased Premises		14.01
Expansion, Alteration		14.02

-iii-

	Section
ARTICLE XV — MISCELLANEOUS
Notice		15.01
Registration		15.02
Planning Act		15.03
Obligations as Covenant		15.04
Severability		15.05
Unavoidable Delays		15.06
Evidence of Payments		15.07
Overholding		15.08
Lien		15.09
Goods and Services Tax		15.10
Time of Essence		15.11
Law		15.12
Captions/Headings		15.13
Joint and Several Liability		15.14
Tenant Partnership		15.15
Environmental Assessments		15.16
Easements		15.17
Entire Agreement		15.18
Effect of Lease		15.19
ARTICLE XVI – ADDITIONAL PROVISIONS
Option to Terminate		16.01
Landlord Interest		16.02

SCHEDULES

SCHEDULE “A” – Site Plan
SCHEDULE “B” – Legal Description of Lands
SCHEDULE “C” – Definitions
SCHEDULE “D” – Landlord’s Work
SCHEDULE “E” – Tenant Confirmation of Maintenance Service
SCHEDULE “F” – Notice by Tenant of Exercise of Option to Extend
SCHEDULE “G” – Landlord Agreement

-iv-

THIS INDENTURE dated as of the 19^th day of November, 2009,

BETWEEN:

ORLANDO CORPORATION,
a corporation duly incorporated under the
laws of the Province of Ontario

(Hereinafter called the “Landlord”)

OF THE FIRST PART

— and —

NAVARRE CORPORATION
(Hereinafter called the “Tenant”)

OF THE SECOND PART

ARTICLE I — DEMISE & TERM:

Premises

     1.01 WITNESSETH that in consideration of the rents, covenants and agreements hereinafter reserved and contained on the part of the Tenant to be paid, observed and performed, the Landlord does demise and lease unto the Tenant and the Tenant leases from the Landlord, the Leased Premises.

Use of Common Areas

     1.02 The use and occupation by the Tenant of the Leased Premises includes the non-exclusive right of the Tenant, its employees, agents and invitees and persons having business with the Tenant, in common with the Landlord and all others entitled thereto, to use the common areas on the Lands including the driveways, sidewalks and entrances.

Term

     1.03 To have and to hold the Leased Premises for and during the term of five (5) years commencing on the 1^st day of March, 2010 (the “Commencement Date”) and ending on the 28^th day of February, 2015.

If the Leased Premises are not substantially ready for occupation by the Tenant on the Commencement Date by reason of a delay or delays not caused or contributed to by the Tenant or anyone acting for or on behalf of the Tenant and the Tenant has not gone into occupancy, then Rent shall abate and shall not accrue or be payable until the Leased Premises are substantially ready for occupation by the Tenant and all dates provided for herein shall be adjusted accordingly in order to provide for a period of five (5) years from the date Rent becomes payable hereunder. Any such abatement of Rent shall be accepted by the Tenant as full and final settlement of any and all claims which the Tenant may have by reason of the Leased Premises not being substantially ready for occupancy on the Commencement Date. A certificate or report by the Landlord’s Architect verifying that the Leased Premises are substantially ready for occupation shall be conclusive and binding upon the Tenant.

Early Access

     1.04 Provided that: (i) the Tenant has delivered to the Landlord this Lease duly executed in form acceptable to the Landlord; (ii) the Tenant has delivered to the Landlord the deposit as set out in Section 2.05 of this Lease; and (iii) the

Tenant on behalf of itself and its employees, contractors, subcontractors, agents and representatives agree in writing with the Landlord to comply with all requirements under the Landlord’s “Health and Safety Policy and Procedures Handbook” (a copy of which is available upon request), the Tenant shall be entitled to have early access (“Early Access”) to the warehouse portion of the Leased Premises for the period which is thirty (30) days prior to the Commencement Date (the “Early Access Period”) in order to prepare the Leased Premises for its occupancy, provided that: (a) such Early Access shall not interfere with or delay the Landlord in the performance of the Landlord’s Work; and (b) the Tenant, its employees, contractors, subcontractors, agents or representatives shall not breach any of the requirements of the “Health and Safety Policy & Procedures Handbook” during such Early Access, failing which such Early Access shall be denied. During the Early Access Period the Tenant shall not be obligated to pay Basic Rent, but shall pay Additional Rent and utility costs and shall observe and perform all of the Tenant’s other covenants and obligations set out in this Lease.

Option to Extend

1.05 If the Tenant pays the Rent as and when due and is not in material default of the terms, covenants and conditions to be performed by it hereunder (without limitation, non-payment of Rent shall be deemed to be a “material” default), and provided no cure periods have expired if the Tenant has at any point during the Term been in default of the terms herein, and provided that the financial strength of the Tenant has not diminished from that existing as at the date of this Lease and further provided that the Tenant has maintained the Leased Premises to standards required herein subject to reasonable wear and tear, the cumulative effect of which does not amount to a state of disrepair, the Tenant shall have the option to extend this Lease for a further term of five (5) years upon the same terms and conditions contained in this Lease except:

(a)	There shall be no Landlord’s Work or Early Access;
(b)	There shall be no further option to extend this Lease; and
(c)	The Basic Rent payable by the Tenant during such extended term shall be fair market rent as of the date of commencement of the extended term based on similar terms, considering premises of similar age, location and use as the Leased Premises. If the Landlord and the Tenant cannot agree on the Basic Rent for the extended term at least ninety (90) days prior to the commencement of the extended term, the same shall be determined by arbitration as hereinafter set out.
	In the case of any dispute between the Landlord and the Tenant with respect to the Basic Rent payable in the extended term, each of the Landlord and the Tenant shall at once agree upon the appointment of an arbitrator and shall submit the dispute to the arbitrator for determination in accordance with the provisions of the Arbitration Act, 1991 of Ontario. The decision of the arbitrator so appointed shall be final and binding upon the Landlord and the Tenant who covenant one with the other that such dispute shall be decided by arbitration alone and not by recourse to any court by action at law. If within a reasonable time the Landlord and the Tenant do not agree upon an arbitrator, the arbitrator may upon petition of either the Landlord or the Tenant be appointed by a justice of the Superior Court of Justice. The cost of arbitration shall be apportioned between the Landlord and the Tenant as the arbitrator may decide.

In order to exercise the extension option, the Tenant shall be required to give written notice to the Landlord in the form attached hereto as Schedule “F” not less than nine (9) months and not more than fifteen (15) months before the expiry of the initial Term of this Lease, failing which, this option to extend will become null and void.

Acceptance of Premises

     1.06 The Tenant shall examine the Leased Premises before taking possession thereof and such taking of possession shall be conclusive evidence as against the Tenant that at the time thereof the Leased Premises were in good order and satisfactory condition and that all promises, representations and undertakings by or binding upon the Landlord with respect to any alteration, remodeling or decorating of or installation of fixtures in the Leased Premises, have been fully satisfied and performed by the Landlord. The Tenant acknowledges that the existing leasehold improvements, if any, are acceptable and that the Tenant is taking possession of the Leased Premises as is, subject to the completion of the Landlord’s Work itemized in Schedule “D” attached to this Lease.

Quiet Enjoyment

     1.07 If the Tenant pays the Rent hereby reserved and observes and performs the covenants on its part contained in this Lease, then the Tenant may peaceably possess and enjoy the Leased Premises for the Term hereby granted without disturbance from the Landlord or any other party lawfully claiming by, from or under the Landlord.

ARTICLE II — RENT:

Intent of Lease

     2.01 The Tenant acknowledges that it is intended and agreed that this is a completely carefree net lease for the Landlord except as expressly hereinafter set out and it is the mutual intention of the parties hereto that the Basic Rent herein provided to be paid shall be net to the Landlord clear of all taxes, costs, charges, expenses and outlays arising from or relating to the Complex and that the Tenant shall bear its Proportionate Share of all costs relating to the operation, maintenance and repair of the Complex (save only as otherwise specifically set out in this Lease) including, and without limiting the generality of the foregoing, the Tenant’s Proportionate Share of Taxes and Operating Costs and all taxes, costs, charges, expenses and outlays of any nature or kind whatsoever relating to the Leased Premises, the use and occupancy thereof, the contents thereof and the business carried on therein. Any amount and any obligation which is not expressly declared herein to be that of the Landlord pertaining to the Complex or the Leased Premises shall be deemed to be the obligation of the Tenant to be performed by or at the Tenant’s expense. Charges of a kind personal to the Landlord such as by way of example taxes assessed upon the income of the Landlord and principal and interest payments to be made by the Landlord in satisfaction of mortgages now or hereafter registered against the Complex, shall not be the responsibility or obligation of the Tenant.

Basic Rent

     2.02 Yielding and paying therefor yearly and every year during the Term unto the Landlord as Basic Rent for the Leased Premises the sum of $132,709.50 in lawful money of Canada to be paid in advance in equal consecutive monthly installments of $11,059.13 on the first day of each and every month during the Term, the first of such payments to be made on the Commencement Date. If the Term commences on any day other than the first or ends on any day other than the last day of a month, then Basic Rent for the fractions of a month at the commencement and at the end of the Term shall be adjusted pro rata on a per diem basis.

Calculation of Basic Rent

     2.03 The Basic Rent is calculated on the basis of the Rentable Area of the Leased Premises being 29,491 square feet multiplied by $4.50 per square foot per annum.

Additional Rent

     2.04 The Tenant shall pay Additional Rent due and owing to the Landlord within ten (10) days of written demand therefor or as otherwise hereinafter expressly set out and all other Additional Rent on the due date thereof.

Deposit Payable to Landlord

     2.05 In order to induce the Landlord to enter into this Lease and to secure all obligations and covenants of the Tenant hereunder (including without limitation, the repair and restoration obligations of the Tenant with regard to improvements to the Leased Premises) as well as the Landlord’s Leasing Costs and, without limiting any claims or other remedies which the Landlord may have against the Tenant, to compensate the Landlord, in part, for damages that may be suffered by the Landlord as a result of an Event of Default and/or early termination of the Lease, the Tenant agrees to deliver to the Landlord (without any liability on the part of the Landlord for payment of interest thereon), the following deposits (receipt of which is hereby acknowledged by the Landlord):

(a) $17,882.61 (inclusive of goods and services tax), to be held by the Landlord and applied on account of the Basic Rent and Additional Rent for the first month of the Term; and

(b) $17,031.06 (exclusive of goods and services tax), to be held by the Landlord as security for the full and faithful performance by the Tenant of all the agreements, terms, covenants and conditions herein set forth and applied against expenses or other costs or damages incurred by the Landlord and, subject to Section 12.02 hereof to be payable as liquidated damages and not as penalty, upon forfeiture, default or early termination, without prejudice to any further claims by the Landlord for damages and/or any remedy for recovery thereof. In the event the Tenant observes and performs the terms and conditions on its part under this Lease throughout the Term and the Leased Premises are then in proper repair, such monies shall be returned to the Tenant within thirty (30) days following the expiry of the Term of this Lease.

Payments to Landlord

     2.06 All payments to be made by the Tenant to the Landlord under this Lease shall be made at the address hereinafter designated or, at such other place or places as the Landlord may designate in writing, or to such agent of the Landlord as the Landlord may from time to time direct. In the case of any default in payment of Rent hereunder, the Landlord may at its option apply the next payments received by the Tenant firstly toward overdue charges, secondly to overdue Rent and lastly to Rents currently owing.

Pre-Authorized Bank Debit

     2.07 If the Tenant is late in the payment of any Rent (or any part thereof) in any two (2) consecutive months or more than twice in any twenty-four (24) month period, then the Tenant shall forthwith provide the Landlord upon written demand with such written authorization as may be required from time to time to debit the Tenant’s bank account in favour of the Landlord for outstanding amounts owing by the Tenant to the Landlord under the Lease.

Overdue Rent

     2.08 The Tenant covenants to pay the Basic Rent and all other charges provided for in this Lease on their respective due dates in full. The Tenant shall pay the Landlord an administration fee of $200.00 for each month or part thereof plus interest on all overdue Rent, such interest to be calculated from the date upon which the amount is first due hereunder until actual payment thereof and at a rate of five percent (5%) per annum in excess of the minimum lending rate charged to prime commercial borrowers by the Landlord’s bank from time to time. Notwithstanding the foregoing, if Rent is not paid on its due date more than twice in any twenty-four (24) month period, then thereafter for each subsequent occasion on which the Tenant is late in the payment of Rent, in whole or in part, beyond the date appointed for the payment thereof, the Tenant shall pay to the Landlord interest equal to 2% of such Rent payable for that month calculated monthly for each and every month (or part month) that such Rent remains outstanding. Interest as aforesaid shall be deemed to be Rent hereunder.

Set-Off

     2.09 All Rent payable by the Tenant to the Landlord shall be paid without any deduction, set-off or abatement whatsoever except as hereinafter expressly provided.

Review of Tenant’s Financial Statements

     2.10 If the Tenant is late in the payment of any Rent (or any part thereof) in any two (2) consecutive months or more than twice in any twenty-four (24) month period, then the Tenant shall, at its own cost and expense, forthwith provide the Landlord within ten (10) days of receipt of written demand with its most recent annual audited financial statement and such other financial records and books of account of the Tenant as may be required by the Landlord so as to adequately enable it to determine to its satisfaction the financial status of the Tenant.

ARTICLE III — TAXES:

Taxes Payable by Landlord

     3.01 The Landlord shall pay the Taxes charged on the Complex to the applicable taxing authority, subject to reimbursement by the Tenant as hereinafter set out. The Landlord shall have no obligation to contest or litigate the

imposition of any Taxes. The Landlord may defer payment of Taxes to the extent permitted by law if it diligently pursues or causes to be pursued the contest or appeal of the Taxes, however, the Tenant is not liable for any interest, penalties or additional Taxes incurred as a result of the Landlord’s deferment of the payment of Taxes to the taxing authorities, except to the extent the Tenant has not paid Taxes to the Landlord under this Lease.

Taxes Payable by Tenant

3.02  (a)  If there is a separate assessment for Taxes with respect to the Leased Premises (which separate assessment shall be deemed to include any valuation of the Leased Premises by the relevant realty tax assessor, as evidenced by such assessor’s separate valuation and/or working papers that may be available to the Landlord from time to time), and if such separate assessment together with all other separate assessments for such other lands and/or buildings included in the assessment roll (the “Complex”) equals the total assessment for Taxes for the Complex, and if the Landlord so directs, the Tenant shall pay as Additional Rent, the amount calculated by multiplying such assessment for the Leased Premises by the applicable Tax Rate which amount shall, for the purposes of this Article III only and notwithstanding anything else herein contained, be the Tenant’s “Proportionate Share” of Taxes for the Complex.

(b)

If there is no separate assessment for Taxes with respect to the Leased Premises, or if there is a separate assessment but such assessment together with all other separate assessments relating to the Complex does not equal the total assessment for the Taxes for the Complex, then until such time as there is a separate assessment for Taxes with respect to the Leased Premises which together with all other such separate assessments equals the total assessment for Taxes for the Complex, and until such time as the Landlord has issued a direction to pay Taxes pursuant to paragraph (a) of this Section 3.02, the Tenant shall pay to the Landlord, as Additional Rent, its Proportionate Share of the Taxes for the Complex, adjusting the occupied tax rate for the Tenant’s specific use of the Leased Premises; provided that the Landlord may, at its option acting reasonably, apportion the total assessment for Taxes for the Complex amongst the leaseable premises of the Complex, including the Leased Premises, based on generally accepted real estate appraisal practices applied consistently and equitably.

(c)

Notwithstanding paragraphs (a) and (b) of this Section 3.02, if the Leased Premises or the Complex is not fully assessed as an occupied commercial or industrial property for determination of Taxes in any Year, then the Landlord shall adjust the Taxes to an amount that would have been determined if the Leased Premises and the Complex were fully assessed as an occupied commercial or industrial property. Furthermore, if the Leased Premises are at any time during the Term assessed for the support of Separate Schools, or if the Taxes are increased by reason of any installations made in or upon or any alterations made in or to the Leased Premises by the Tenant or by the Landlord on behalf of the Tenant, the Tenant shall pay the amount of such increase forthwith to the Landlord upon receipt of notice thereof.

Tenant’s Business and Other Taxes

     3.03 In addition to the Taxes payable by the Tenant pursuant to Section 3.02, the Tenant shall pay to the lawful taxing authorities or to the Landlord if the Landlord so directs:

(a)

all taxes, rates, duties, assessments and other charges that are levied, rated, charged or assessed against or in respect of all improvements, equipment and facilities of the Tenant on or in the Leased Premises or the Complex or any part thereof; and

(b)

every tax and license fee which is levied, rated, charged or assessed against or in respect of and every business carried on in the Leased Premises or in respect of the use or occupancy thereof or any part of the Lands or the Building by the Tenant and every subtenant or licensee of the Tenant or against the Landlord on account of its interest in the Complex, save and except capital tax personal to the Landlord (which is not otherwise provided for under this Lease) and whether in any case, any such taxes, rates, duties, assessments or license fees are rated, charged or assessed by any federal, provincial, municipal, school or other body during the Term; and

(c) the full amount of any taxes in the nature of a business transfer tax, value added tax, sales tax or any other tax levied, rated, charged or assessed in respect of the Rent payable by the Tenant under this Lease or in respect of the rental of space under this Lease, whether characterized as a goods and services tax, sales tax, value added tax, business transfer tax or otherwise.

Payment of Taxes

3.04  (a)  The Landlord shall be entitled at any time or times in any Year, upon at least fifteen (15) days notice to the Tenant to require the Tenant to pay to the Landlord the Tenant’s Proportionate Share of the Taxes for such Year in equal monthly installments. Such monthly amount shall be determined by dividing the Tenant’s Proportionate Share of Taxes by the number of months for the period from January 1st in each Year of the Term until the due date of the final installment of Taxes as established by the applicable taxing authority from time to time in each Year (“Installment Period”) and shall be paid by the Tenant to the Landlord, monthly as Additional Rent, on the date for payment of monthly rental payments during the Installment Period. The Landlord shall be entitled subsequently during such Year, upon at least fifteen (15) days notice to the Tenant, to revise its estimate of the amount of increase of such Taxes and the said monthly installment shall be revised accordingly. All amounts received under this provision in any Year on account of the estimated amount of such Taxes shall be applied in reduction of the actual amount of such Taxes for such Year. If the amount received is less than the Tenant’s Proportionate Share of the actual Taxes, the Tenant shall pay any deficiency to the Landlord as Additional Rent within fifteen (15) days following receipt by the Tenant of notice of the amount of such deficiency. If the amount received is greater than the Tenant’s Proportionate Share of the actual Taxes, the Landlord shall either refund the excess to the Tenant as soon as possible after the end of the Year in respect of which such payments were made or, at the Landlord’s option, shall apply such excess against any amounts owing or becoming due to the Landlord by the Tenant, provided that if the Tenant is then in default hereunder, the Landlord may defer dealing with such excess until the default is cured.

(b)	Taxes payable pursuant to paragraphs (a) and (b) of Section 3.03 shall be paid by the Tenant when due if separate tax bills are issued and otherwise shall be paid to the Landlord within ten (10) days written demand therefor.
(c)	Taxes payable pursuant to paragraph (c) of Section 3.03 shall be paid to the Landlord within ten (10) days written demand therefor or at such time or times as the Landlord from time to time determines by notice in writing to the Tenant.
(d)	If the Term of this Lease commences or ends on any day other than the first or last day, respectively, of a Year, the Tenant shall be liable only for the portion of the Taxes for such Year as falls within the Term, determined on a per diem basis.

ARTICLE IV — OPERATING COSTS:

Tenant’s Covenant to Pay Operating Costs

     4.01 The Tenant covenants to pay to the Landlord as Additional Rent the Tenant’s Proportionate Share of the Operating Costs for the Year during each Year of the Term in accordance with the provisions of Section 4.02.

Payment of Operating Costs

     4.02 The Landlord shall be entitled at any time or times in any Year, upon at least fifteen (15) days’ notice to the Tenant to require the Tenant to pay to the Landlord monthly, on the date for payment of monthly rental installments, as Additional Rent, an amount equal to one-twelfth (1/12) of the amount estimated by the Landlord to be the amount of the Tenant’s Proportionate Share of the Operating Costs for such Year. The Landlord shall be entitled subsequently during such Year, upon at least fifteen (15) days’ notice to the Tenant, to revise its estimate of the amount of the Tenant’s Proportionate Share of the Operating Costs and the said monthly installment shall be revised accordingly. All amounts received under this provision in any Year on account of the estimated amount of the Tenant’s Proportionate Share of the

Operating Costs shall be applied in reduction of the actual amount of the Tenant’s Proportionate Share of the Operating Costs for such Year. Within a reasonable time after the end of the period for which the estimated payments have been made, and in no event later than one hundred and eighty (180) days after the expiry of the previous calendar year, the Landlord shall deliver to the Tenant a written statement (the “Reconciliation Statement”) setting out in reasonable detail the amount of the Operating Costs for such period calculated on the basis of a calendar year and the Tenant’s Proportionate Share thereof. If the amount received is less than the actual amount of the Tenant’s Proportionate Share of the Operating Costs for such Year, the Tenant shall pay any deficiency to the Landlord as Additional Rent within fifteen (15) days following receipt by the Tenant of notice of the amount of such deficiency. If the amount received is greater than the actual amount of the Tenant’s Proportionate Share of the Operating Costs, the Landlord shall either refund the excess to the Tenant as soon as possible after the end of the Year in respect of which such payments were made, or at the Landlord’s option, shall apply such excess against any amounts owing or becoming due to the Landlord by the Tenant, provided that if the Tenant is then in default hereunder, the Landlord may defer dealing with such excess until such default is cured.

Upon written request from the Tenant (Tenant agreeing to act reasonably and in a bona fide manner in making a request), the Landlord shall make available to the Tenant (at the Landlord’s office and on a confidential basis) reasonable information pertaining to the Year for which the Reconciliation Statement has been rendered and which is readily available within Landlord’s possession or control in order to assist Tenant in substantiating the Reconciliation Statement (“Additional Information”). The Tenant shall have ninety (90) days following the delivery of the Reconciliation Statement to notify the Landlord in writing that it disputes or continues to dispute the Reconciliation Statement (or any Additional Information or the sufficiency of Additional Information), failing which the Reconciliation Statement (and any Additional Information delivered by the Landlord) shall be deemed to be sufficient, accurate, conclusive and binding on the Tenant and Landlord in all respects. If the Tenant disputes or continues to dispute any portion of the Reconciliation Statement (or the Additional Information or the sufficiency of the Additional Information), its sole remedy shall be to give the Landlord written notice specifying the items or issues in dispute and requiring the Landlord to have its external accountant review the Reconciliation Statement (and Additional Information, if applicable) and prepare a report (the “Report”) in respect of the disputed items, provided that such notice shall be delivered to the Landlord within ninety (90) days following delivery of the Reconciliation Statement, failing which the Reconciliation Statement shall be deemed to be accurate, conclusive and binding on the Tenant in all respects. Such Report shall be at the Tenant’s sole cost and expense (to be added to Additional Rent hereunder) unless the Report states that Operating Costs as determined by such accountant are actually lower by three (3%) percent or more than Operating Costs as set out in the Reconciliation Statement, in which case such Report shall be at the Landlord’s sole cost and expense. Any Report issued by the Landlord’s accountant shall be conclusive and binding upon the Tenant.

If as a result of the Landlord providing any Additional Information or Report to the Tenant, it is determined that any item shown on the Reconciliation Statement is not accurate (whether or not such item was in dispute), the parties will make appropriate adjustments to such items for the Year concerned, and any corrected amount on account of Operating Costs determined to be owing by the Tenant to the Landlord, as a result of such readjustment, shall be payable within fifteen (15) days of written demand. Any corrected amount determined to be owing by the Landlord to the Tenant shall be payable within fifteen (15) days of the Tenant confirming to the Landlord in writing that all issues concerning the Reconciliation Statement in question have been resolved, or at the Landlord’s option, such corrected amount may be applied against any amounts owing or becoming due to the Landlord by the Tenant.

Any request for Additional Information or a Report hereunder must be made by the named Tenant herein or a permitted assignee of the Tenant’s interest in this Lease, and the Landlord shall not be required to respond if: i) the request is not made within the time period provided for herein; or ii) at the time of making any such request the Tenant is insolvent or otherwise in default under this Lease after any applicable cure periods. Should the Tenant choose to use an agent to review any Additional Information or Report or to assist it in verifying the Reconciliation Statement or any Additional Information, it shall disclose to the Landlord the terms of the agent’s engagement, and the Landlord may require that all communications be conducted through a senior financial officer of the Tenant. The Tenant expressly agrees that any such agent shall not be retained by Tenant on a contingency fee basis and must be an accounting or other recognized consulting firm that agrees to maintain the confidentiality of all information received by it.

ARTICLE V — UTILITIES:

Utility Charges

     5.01 The Tenant shall pay to the Landlord, or if the Landlord so directs, to suppliers thereof on the due dates, all charges for electric current and all other utilities supplied to or used in connection with the Leased Premises. The parties acknowledge that the Leased Premises are separately metered for all utilities, except water. The Tenant shall pay to the Landlord, in advance by monthly installments as Additional Rent, such amount as may be reasonably estimated by the Landlord’s engineer from time to time as the cost of such water for the Leased Premises (which amount shall include, without limitation, the Landlord’s management fee of fifteen percent (15%) of the invoiced charges therefore). In the event of any dispute between the Landlord and the Tenant as to the amount of such water costs, the opinion of the Landlord’s engineer shall be final and binding on the Landlord and the Tenant. In no event, and notwithstanding anything to the contrary in this Lease, shall the Landlord be liable for any temporary or additional utility costs or charges, any business loss or injury to the Tenant, its servants, agents, employees, customers or invitees or to any property of the Tenant or any loss or injury to any property of any other person, firm or corporation on or about the Leased Premises caused by an interruption or failure in the supply of any such utilities to the Leased Premises.

Meters

     5.02 In the event of any abnormal consumption of any utility on the Leased Premises due to the nature of the Tenant’s business or the use of particular machinery, equipment or appliances, the Landlord shall have the right to require the Tenant to install a separate meter at the Tenant’s expense. The Tenant shall advise the Landlord forthwith of any installations, appliances, machinery or equipment used by the Tenant which consume or are likely to consume large amounts of electricity, water or other utilities.

Heating

     5.03 Subject to the Landlord’s obligation to replace the office area roof top HVAC units in accordance with Section 6.07 of this Lease, the Tenant covenants and agrees to heat the Leased Premises at its own expense to a reasonable temperature to prevent the occurrence of any damage to the Leased Premises and/or the Building, by cold or frost.

Service Contracts

     5.04 The Tenant covenants and agrees to take out and keep in force throughout the Term, at it own cost, a standard servicing contract (the “Servicing Contract”) with a capable and reputable company for the preventative maintenance and service of the heating units and furnaces and air-conditioning equipment serving the Leased Premises (the “Equipment”), such contract to include, without limitation, the quarterly inspection of rooftop heating and cooling units and controls and the annual inspection of exhaust fans, electric force flow heaters, electric heating coils and gas fired unit heaters. During each such inspection, the manufacturer’s recommended service shall be carried out, all air filters shall be replaced, any required adjustments to V-belt drives shall be made, and all other required service shall be undertaken. The Tenant agrees to provide the Landlord, annually throughout the Term, confirmation of Equipment maintenance and service in the form attached hereto as Schedule “E”, which confirmation shall include, without limitation, copies of each Servicing Contract together with reports of the service contractor setting out the maintenance work undertaken. Should the Tenant fail to provide the Landlord with copies of each Servicing Contract or such annual confirmation of maintenance and service by the end of each calendar year, the Landlord may, at its option, without obligation and without notice to the Tenant, inspect the Equipment and the Landlord’s cost of such inspections and any re-inspections in connection therewith, plus the Landlord’s management fee of 15% of such costs, shall be paid to the Landlord by the Tenant forthwith on demand as Additional Rent.

ARTICLE VI — MAINTENANCE & REPAIR:

Tenant to Maintain and Repair

     6.01 Subject only to Section 6.07 of this Lease, the Tenant shall at its own cost repair, replace, maintain and keep the Leased Premises and every part thereof, including without limitation the Leasehold Improvements and the heating, ventilating and air- conditioning equipment exclusively serving the Leased Premises (whether within or outside of the Leased Premises), fixtures and furnishings (whether or not installed or furnished by the Tenant), in good and substantial repair and condition as a prudent owner would do, subject to reasonable wear and tear, the cumulative effect of which does not amount to a state of disrepair. The Tenant agrees that the Landlord may enter and view the state of repair and condition and that the Tenant shall repair in accordance with forty-eight (48) hours notice in writing from the Landlord (save and except in the case of an emergency, in which case no notice shall be required); provided that if the Tenant neglects to so maintain or to make such repairs or replacements promptly after notice, the Landlord may, at its option and without

obligation, do such maintenance or make such repairs or replacements at the expense of the Tenant, and in any and every such case the Tenant covenants with the Landlord to pay to the Landlord forthwith as Additional Rent all sums which the Landlord may have expended in doing such maintenance and making such repairs and/or replacements together with such further or other costs or fees pursuant to Section 12.06 of this Lease; provided further that the doing of such maintenance or the making of any such repairs or replacements by the Landlord shall not relieve the Tenant from its obligation to maintain, repair and replace.

Repair Where Tenant At Fault

     6.02 If the Lands or the Building (save only the Leased Premises), including, without limitation, the boilers, engines, pipes and other apparatus (or any of them) used for the purposes of heating, ventilating or air-conditioning the Building or if the water pipes, drainage pipes, electric lighting or other equipment of the Building or if the roof or outside walls of the Building require repair or become damaged or destroyed through the use of the Leased Premises or the willful act, negligence or misuse of the Tenant or those for whom at law it is responsible, the expense of the necessary repairs, replacements or alterations, together with such further or other costs or fees pursuant to Section 12.05 of this Lease shall be borne by the Tenant who shall pay the same to the Landlord forthwith upon written demand as Additional Rent.

Alterations

     6.03 The Tenant shall not, without the prior written approval of the Landlord (such approval not to be unreasonably withheld or delayed), make any installations, alterations, additions, partitions, repairs or improvements (“Changes”) in or to the Leased Premises (including, without limitation the electrical, lighting, heating, ventilating, air-conditioning, sprinkler, roofing, fire protection, security or other systems therein), provided that the Landlord’s approval may be unreasonably withheld if such Changes affect or increase the load upon any of the structural portions of the Leased Premises. The Tenant’s request for approval shall be in writing and accompanied by an adequate description of the contemplated work and the working drawings and specifications therefor in print form and on CAD disks. The Landlord’s costs of having its architects, engineers or others examine such drawings and specifications shall be payable by the Tenant upon written demand as Additional Rent. Once consent of the Landlord has been obtained in connection with any such work, the Tenant shall not make any modifications thereto (including, without limitation, changes required in order to obtain a building permit) unless and until it has submitted revised drawings and specifications and obtained the Landlord’s further written approval of the proposed changes. The Landlord may require that any or all such work be done by contractors or workmen first approved by the Landlord, acting reasonably, and where the Landlord is working inside the Leased Premises at the time of such approval, the Landlord may require that such contractors and workmen have union affiliations compatible with those of the Landlord’s contractors and workmen). All such work shall be subject to inspection by and the reasonable supervision of the Landlord and shall be performed in accordance with all Applicable Laws and any reasonable conditions and regulations imposed by the Landlord (including but not limited to payment of a reasonable security deposit to ensure the Tenant’s compliance with the obligations hereunder and the Landlord’s reasonable supervision fees), and shall be completed in a good and workmanlike manner and with reasonable diligence in accordance with the approvals given by the Landlord. Any connections of apparatus to the base electrical, plumbing, heating, ventilating or air-conditioning systems shall be deemed to be an alteration within the meaning of this Section. The Tenant shall, at its own cost and before commencement of any work, obtain all necessary building or other permits and keep same in force. The Tenant shall not apply for any applicable permits or approvals unless the Tenant provides to the Landlord a copy of the approval or permit application, as the case may be, together with all supporting documentation or drawings attached thereto and obtains the Landlord’s authorization in writing to submit such application to the relevant authority. The Tenant shall obtain and provide to the Landlord within a reasonable period of time from substantial completion a final inspection and clearance of such work permits/approvals. Within sixty (60) days of substantial completion of the work, the Tenant shall also deliver to the Landlord “as-built” drawings in print form and on CAD disks, failing which the Landlord shall be entitled to charge the Tenant $50.00 for each day of delay until the required drawings are in the Landlord’s possession. Notwithstanding the foregoing, the Landlord’s consent shall not be required in connection with the Tenant’s routine repairs and equipment hook-ups (other than installation of security systems that affect fire exits) where no building permit or modification to base Building systems is required. The Tenant acknowledges and agrees that notwithstanding that the Landlord may review and approve or undertake on behalf of the Tenant the installation of any alterations or Tenant modifications or improvements in or relating to the Leased Premises, it is the responsibility of the Tenant (and not that of the Landlord) to ensure that such alterations, modifications and improvements and the Tenant’s occupancy thereof fully comply in all respects with Applicable Laws, including, without limitation, ensuring that all exit doors and corridors, door locking mechanisms and security systems comply with applicable fire codes and regulations from time to time in effect. Should the Tenant fail to deliver any required final “as-built” drawings or specifications, the Landlord shall be entitled to prepare the same on behalf

of the Tenant, and should the Tenant otherwise fail to comply with any of the other requirements of this Section 6.03, the Landlord may (without obligation) complete such restoration, modify its building records, and/or conduct such inspections and re-inspections, all as it may deem necessary, and the Landlord’s cost in so doing shall be paid by the Tenant to the Landlord together with fifteen percent (15%) of such costs as a management and supervisory fee, forthwith on written demand as Additional Rent.

Notice of Accidents

     6.04 The Tenant shall notify the Landlord promptly and in writing of any accident or damages to or defect in the Leased Premises, the Building, or any part thereof including, without limitation, the heating, ventilating and air conditioning apparatus, water and gas pipes, telephone lines, electrical apparatus or other building services of which it is aware.

Construction Liens

     6.05 The Tenant covenants to pay promptly all its contractors and material men and do any and all things necessary to minimize the possibility of a lien attaching to the Leased Premises or to any part of the Building or the Lands and, should any such lien be made or filed, the Tenant shall discharge the same forthwith (after notice thereof is given to the Tenant), but in any event not later than ten (10) days after notice, at the Tenant’s expense. In the event the Tenant shall fail to cause any such lien to be discharged as aforesaid, then, in addition to any other right or remedy of the Landlord, the Landlord may, but it shall not be so obligated, vacate from title or discharge same by paying into Court the amount necessary to vacate the lien, and the amount so paid by the Landlord and all costs and expenses including but not limited to solicitor’s fees (on a substantial indemnity basis), incurred for the discharge of such lien shall be due and payable by the Tenant to the Landlord as Additional Rent on written demand. In the event that any lien claimant in respect of work performed on behalf of the Tenant commences an action in which the Landlord is named as a party defendant and service of the statement of claim is effected upon the Landlord, the Tenant shall indemnify the Landlord for all of its legal costs.

Removal of Fixtures and Improvements

     6.06 Leasehold Improvements shall immediately become the property of the Landlord upon affixation or installation without compensation therefor to the Tenant but the Landlord is under no obligation to repair, maintain or insure Leasehold Improvements. Leasehold Improvements shall not be removed from the Leased Premises either during or at the expiration or earlier termination of the Term, except that the Tenant shall, at the end of the Term remove such Leasehold Improvements installed or constructed by or on behalf of the Tenant, as the Landlord may require to be removed, save and except for the Landlord’s Work as set out in Schedule “D” attached to this Lease. The Tenant may, during the Term, remove its trade fixtures provided that the Tenant is not in default under this Lease beyond any applicable cure period and such trade fixtures are immediately replaced by trade fixtures of equal or comparable value. The Tenant shall at the expiration or earlier termination of the Term remove its trade fixtures as the Landlord may require. Any removal of Leasehold Improvements and/or the Tenant’s trade fixtures shall be done at the Tenant’s sole cost and expense and the Tenant shall forthwith repair at its own cost any damage caused to the Leased Premises or the Building or any part thereof by the installation or removal of Leasehold Improvements and/or trade fixtures. If the Tenant does not remove its trade fixtures at the expiration or earlier termination of the Term, then the trade fixtures shall, at the option of the Landlord, become the property of the Landlord and may be removed from the Leased Premises and/or sold or otherwise disposed of by the Landlord in such manner as it deems advisable, all at the sole cost and expense of the Tenant. For greater certainty, the Tenant’s trade fixtures shall not include any heating, ventilating or air-conditioning equipment or other building services or floor covering affixed to the floor of the Leased Premises. The obligations of the Tenant set forth in this Section shall survive the expiry or other termination of the Term.

Roof & Office Rooftop HVAC Replacement

     6.07 The Tenant covenants to pay to the Landlord as Additional Rent hereunder the amount of $0.25 per square foot of the Rentable Area of the Leased Premises per annum toward eventual built-up roof and roof membrane replacement and the amount of $0.04 per square foot of the Rentable Area of the Leased Premises per annum toward eventual replacement of office area rooftop HVAC units including major components (i.e. compressors and heat exchangers). Provided that: (i) the Tenant has been charged and has paid such amounts; (ii) the office rooftop HVAC equipment or built-up roof and roof membrane replacement as the case may be, is not required due to the negligence or misuse of the Tenant; and (iii) in the case of the office rooftop HVAC units, the Tenant has complied with its reporting and maintenance obligations hereunder,

then the Landlord shall, at its expense, replace the office rooftop HVAC units, including the major components thereof, and the built-up roof and roof membrane when the same reach the end of their economically useful lives, as determined by the Landlord, acting reasonably. The foregoing charges shall be paid in equal monthly installments as Additional Rent and shall be fixed for the initial Term of this Lease but shall be adjusted by the Landlord at the commencement of any extension to amounts that equal the then replacement costs amortized, in the case of the built-up roof (including the membrane), over a twenty-five (25) year period and, in the case of the office rooftop HVAC units, over a ten (10) year period.

Repair on Termination

     6.08 At the expiration or sooner termination of the Term the Tenant shall, at its own expense:

(a)	deliver up possession of the Leased Premises to the Landlord together with all Leasehold Improvements which the Tenant is required or permitted to leave therein or thereon in the same condition in which the Tenant is required under this Lease to repair and maintain the Leased Premises subject to reasonable wear and tear, the cumulative effect of which does not amount to a state of disrepair, free and clear of all encumbrances and in a clean and tidy condition and free of all rubbish and to deliver to the Landlord all keys and security devices;
(b)	remove from the Complex, at the option of and to the satisfaction of the Landlord, all machine bases, cabling (electrical or otherwise), piping (pneumatic, water or otherwise) and wiring (electrical, computer or otherwise) and wall plates for telephones, computers and other appliances (together with associated repairs such as drywall patching and painting as may be required by the Landlord) installed by or on behalf of the Tenant;
(c)	remove any and all materials which may be deemed by any applicable legislation as contaminated or hazardous and which have been brought onto the Complex by the Tenant or those for whom the Tenant is in law responsible or which have been brought onto the Leased Premises during the Term by any party (other than by the Landlord or those for whom the Landlord is in law responsible), and clean up any and all resultant contamination in compliance with all Applicable Laws and regulations; and
(d)	remove from the Complex, in compliance with all Applicable Laws and regulations, any and all storage and/or holding tanks and associated bases (whether above or below ground) installed by or on behalf of the Tenant and all pits, trench drains and sloped floors created by or on behalf of the Tenant and restore the Leased Premises to base building condition in good repair.

The Landlord and the Tenant, at the Tenant’s written request, at least one hundred and twenty (120) days (and not more than one hundred and fifty (150) days) prior to the expiry of the Term, or any extension thereof, shall conduct a preliminary inspection of the Leased Premises for purposes of determining any repair and/or replacement work to the Leased Premises required to be carried out by the Tenant in accordance with the terms of this Lease to the extent determinable at such time and the Landlord shall, at least sixty (60) days prior to the expiry of the Term, provide to the Tenant in writing a report setting out in reasonable detail any and all repair and/or replacement work to the Leased Premises required to be carried out by the Tenant in accordance with the Lease. Such investigations and the aforementioned report shall be subject to a final inspection of the Leased Premises upon the expiry of the Term and the foregoing shall not diminish nor in any way restrict the Tenant’s obligations under this Lease or the Landlord’s rights and remedies

The covenants contained in this Section shall survive the expiry or other termination of the Term and if the Tenant should breach any of the foregoing provisions of this Section then, without prejudice to or limitation of any of the rights or remedies of the Landlord hereunder or at law and in addition to paying any costs or expenses incurred by the Landlord, together with such further or other costs or fees pursuant to Section 12.05 of this Lease, the Tenant shall pay the Rent required hereunder to be paid by an overholding tenant, notwithstanding that the Tenant may have vacated the Leased Premises, for so long as it may reasonably take to complete the required repairs, removal, restoration or clean-up.

Landlord’s Repair Obligation

     6.09 In the event that any of the footings, foundations, bearing walls, structural steel and/or metal roof deck (excluding, for clarity, the roof membrane which will be replaced in accordance with Section 6.07 of this Lease) of the

Building require repair or replacement due to defects in their original construction or design, the same shall be undertaken by the Landlord at its own expense without chargeback to the Tenant. If such Building components require repair or replacement as a result of the Tenant’s specific use thereof or its operations or activities at the Leased Premises or any negligent act or omission of the Tenant, its employees, agents, contractors or those for whom in law the Tenant is responsible, then the Tenant shall bear the full cost of such repair and/or replacement together with the Landlord’s management fee of fifteen percent (15%) of such costs and expenses.

ARTICLE VII — ASSIGNING & SUBLETTING:

Assigning or Subletting

7.01	(a)	The Tenant shall not assign this Lease or sublet or franchise, license, grant concessions in, or otherwise part with or share possession of the Leased Premises, or any part thereof, (each of the foregoing hereinafter referred to as a “Transfer”) without the prior written consent of the Landlord, which consent will not be unreasonably or arbitrarily withheld or delayed; at the time the Tenant requests such consent the Tenant shall deliver to the Landlord such information in writing (the “required information”) as the Landlord may reasonably require, including, without limitation, a copy of the proposed offer or agreement, if any, to Transfer and the name, address and nature of business and evidence as to the financial strength of the proposed assignee or subtenant or other user (any of the foregoing hereinafter referred to as a “Transferee”). The Landlord shall have fifteen (15) days from the date of its receipt of the required information to respond to the Tenant’s request for any consent to a Transfer.
		Notwithstanding anything else herein contained, in no event shall any Transfer of this Lease release or relieve the Tenant in any regard whatsoever from any of its obligations or liabilities under or in respect of this Lease including any renewal or extension thereof.
		PROVIDED however, and it is made a condition to any Transfer that:

(i)	The proposed Transferee of this Lease shall agree in writing with the Landlord to assume and perform all of the terms, covenants, conditions and agreements by this Lease imposed upon the Tenant herein in a form to be approved by the solicitor for the Landlord acting reasonably (which form shall also be executed by the Tenant) and shall obtain occupancy approval from the local building and fire departments and provide evidence thereof to the Landlord prior to taking occupancy of the Leased Premises;
(ii)	The Transferee shall also waive any rights which it may have at common law in respect of relief from forfeiture and any rights it may have pursuant to Sections 21 and 39 (2) of the Commercial Tenancies Act (Ontario), as amended from time to time;
(iii)	The Tenant shall pay the Landlord all property inspection, administration and legal fees in connection with the Transfer;
(iv)	The consent of the Landlord is not a waiver of the requirement of the Landlord’s consent for subsequent Transfers;
(v)	The acceptance by the Landlord of Rent from a Transferee without the Landlord’s consent shall not constitute a waiver of the requirement of such consent nor shall it constitute an acceptance of such party as the Tenant;
(vi)	The Landlord may, at its option, cancel any rights of first refusal or first opportunity on additional space referred to in this Lease, if any;
(vii)	The Leased Premises, at the time of the Transfer, shall comply in all respects with the standard of repair and maintenance required of the Tenant pursuant to this Lease and the Lease shall otherwise be in good standing;

(viii)	The Landlord shall have received from the Tenant or the Transferee a cash deposit or letter of credit (on terms satisfactory to the Landlord) equal to the last three (3) month’s Basic Rent hereunder (pro-rated in the case of a request relating to a portion only of the Leased Premises), as security for the performance of the repair and maintenance obligations of the Tenant and the Transferee, to be held by the Landlord pending delivery up of the Leased Premises (or the portion thereof which is subject to the Transfer) by the Transferee in the condition and to the standard required hereunder;
(ix)	If the Transfer of the Leased Premises does not take place within sixty (60) days of the giving of consent by the Landlord the consent shall, at the Landlord’s option, expire and become null and void; and
(x)	If, following any assignment of this Lease, it is disaffirmed, disclaimed or terminated by any trustee in bankruptcy of a Transferee, the original Tenant named in this Lease will be deemed on notice from the Landlord given within sixty (60) days from the date of such disaffirmation, disclaimer or termination to have entered into a Lease with the Landlord containing the same terms and conditions as in this Lease.

(b)	If a Transfer occurs without the consent of the Landlord when required, the Landlord may collect Rent from the party in whose favour the Transfer was made and apply the net amount collected to the Rent herein reserved but no such Transfer will be considered a waiver of this covenant or the acceptance of the party in whose favour the Transfer was made as a tenant hereunder.
(c)	Subject to the Landlord’s rights to terminate this Lease as set out above, the Tenant acknowledges and agrees that the Landlord is permitted to take into account all reasonable factors, information and other criteria regarding a proposed Transferee when considering a Tenant’s request for a Transfer pursuant to paragraph (a) of this Section 7.01, and that the Landlord may refuse to grant a consent where the proposed Transferee does not have a sound financial covenant or a sound business history, reputation or experience.
(d)	Notwithstanding anything to the contrary contained in this Lease, the Tenant shall have the right, without consent but on prior written notice to the Landlord, to effect a Transfer to an affiliate of the Tenant (as that term is defined in the Business Corporations Act (Ontario)) or the sale of all or substantially all of the assets of the Tenant, provided that the tangible net worth of the resulting purchaser shall be no less than $20,000,000.00 immediately prior to such purchase, and further provided that such Transferee and the Tenant sign and deliver to the Landlord prior to the date of such Transfer, the Landlord’s form of lease assumption agreement (to be prepared by the Landlord’s solicitor at the reasonable cost of the Tenant) in accordance with the provisions of this Lease. In no event shall such Transfer of the Lease release or relieve the Tenant from any of its obligations or liabilities under or in respect this Lease as the same may be extended from time to time by such Transferee. For purposes of this section, “tangible net worth” shall mean the shareholders equity in the Tenant (being the amount of its total assets in excess of the amount of its total liabilities, less its goodwill and other intangible assets set forth in its current balance sheet, prepared on a review engagement basis).

Change of Control

     7.02 If the Tenant is a private corporation and any part or all of the corporate shares shall be transferred by sale, assignment, amalgamation, bequest, inheritance, operation of law or other disposition or dispositions so as to result in a change in the control of the corporation, such change of control shall be considered a Transfer of this Lease and shall be subject to the provisions of Section 7.01 hereof. The Tenant shall make available to the Landlord upon its request for inspection and copying, all books and records of the Tenant, any assignee or subtenant and their respective shareholders which, alone or with other data, may show the applicability or inapplicability of this Section.

Sublet of Part of Premises

     7.03 Notwithstanding anything else to the contrary provided in this Lease and/or any act or rule of law or regulation now or hereafter in force to the contrary, the Landlord may in its sole and unfettered discretion refuse to give its consent to any Transfer by the Tenant of less than the whole of the Leased Premises resulting in separate premises therein.

Excess Rent

     7.04 In the event that the Basic Rent payable under any Transfer is in excess of the Basic Rent reserved hereunder or is in excess of the proportionate Basic Rent reserved in the event of a sublease of part of the Leased Premises, whether the excess be in the form of cash, goods or services from the Transferee or anyone acting on its behalf, the Tenant shall pay all of such excess after deducting all reasonable leasing costs, tenant inducements, leasehold allowances and legal and other professional fees incurred by the Tenant (acting reasonably) in respect of such Transfer (the “Net Excess”) to the Landlord immediately upon receipt thereof; in the event that the Net Excess is represented by goods or services rendered to the Tenant or its nominee, the value of those goods or services shall be determined by the Landlord and Tenant, both acting reasonably, and that value of the Net Excess shall be paid in cash by the Tenant to the Landlord immediately upon such determination.

Mortgage of Leasehold

7.05 The Tenant shall not mortgage, pledge, hypothecate or otherwise encumber all or any portion of the Tenant’s interest in this Lease or the Leasehold Improvements and shall not permit any lender to register any security interest against title to the Lands. Notwithstanding the foregoing, this shall not prohibit the Tenant from granting a general security agreement to its lender that includes a charge over the Tenant’s inventory, trade fixtures and equipment in the Leased Premises provided that such general security agreement or notice thereof is not registered on title to the Leased Premises. The Landlord acknowledges that the Tenant’s lender may require comfort that it will have access to personal property of the Tenant at the Leased Premises. In this regard, the Landlord agrees to provide the Tenant’s lender with a postponement and access agreement substantially in the form attached hereto as Schedule “G”.

Advertising Premises

     7.06 The Tenant shall not advertise or allow the Leased Premises or a portion thereof to be advertised as being available for assignment, sublease or otherwise without the prior written approval of the Landlord as to the form, size, content and location of such advertisement, which approval shall not be unreasonably withheld, provided that (i) no such advertising shall contain any reference to the Rent for the Leased Premises and (ii) any such advertising shall be on a standard ground-mounted real estate sign.

Disposition by Landlord

     7.07 If the Landlord sells or leases the Lands, the Building or any part thereof, or assigns this Lease, and to the extent that the covenants and obligations of the Landlord under this Lease are assumed by the purchaser, lessee or assignee, the Landlord in writing, without further written agreement, will be discharged and relieved of liability under the said covenants and obligations.

ARTICLE VIII — USE:

Use of Leased Premises

     8.01 The Tenant shall not use or permit the Leased Premises to be used for any retail sales whatsoever, nor shall the Tenant use or permit the Leased Premises to be used for any other purpose except warehousing, distribution and sales of non-hazardous products (i.e. products that do not constitute Hazardous Substances) and ancillary office use related thereto as well as the hand assembly of retail software packages from purchased components, such as discs, boxes, printed materials, etc. Such permitted use shall at all times be in compliance with: (i) the provisions of this Lease; and (ii) all Applicable Laws from time to time in force.

Rules and Regulations

     8.02 The Tenant and its employees and all persons visiting or doing business on the Leased Premises shall be bound by and shall observe and perform all reasonable rules and regulations made by the Landlord from time to time and of which

notice in writing shall be given to the Tenant, and all such rules and regulations shall be deemed to be incorporated into and form part of this Lease.

Observance of Law

     8.03 The Tenant shall comply promptly with and conform to the requirements of all applicable statutes, by-laws, laws, regulations, ordinances and orders from time to time or at any time in force during the Term and affecting the condition, maintenance, repair, use or occupation of the Leased Premises (or equipment therein) and with every applicable regulation, order and requirement of the Insurance Advisory Organization or any body having similar functions or of any liability or fire insurance company by which the Landlord and the Tenant or either of them may be insured at any time during the Term, and, in the event of the default of the Tenant under the provisions of this Section, the Landlord may itself comply with any such requirements as aforesaid and the Tenant will forthwith pay all costs and expenses incurred by the Landlord together with such further or other costs or fees pursuant to Section 12.05 of this Lease and the Tenant agrees that all such costs and expenses shall be recoverable by the Landlord as if the same were Additional Rent reserved and in arrears under this Lease. The Landlord represents and warrants that the Leased Premises in its vacant state complies with all Applicable Laws without reference to the Tenant’s improvements or alterations to the Leased Premises and without taking into account the Tenant’s particular use or activities within the Leased Premises. In fulfilling its obligations set out in Section 6.07 and Section 6.09 of this Lease, the Landlord agrees that it shall comply with all Applicable Laws without regard or reference to the Tenant’s Improvements or alterations to the Leased Premises and without taking into account the Tenant’s particular use or activities within the Leased Premises.

Waste and Nuisance

8.04	(a)	The Tenant shall not do, suffer or permit any waste, damage, disfiguration or injury to the Leased Premises or the fixtures and equipment thereof and shall not permit any dangerous or noxious conditions to exist at the Leased Premises and shall not do or permit anything to be done or brought upon or about the Leased Premises or the Complex which may reasonably be a nuisance, annoyance, grievance, interference or disturbance to the use or occupation of the Building or adjacent lands or premises by its owners or occupants, nor cause or permit any fire alarm to be falsely triggered (and in the case of any alarm response charge levied by the local fire department the cost thereof, plus the Landlord’s fifteen percent (15%) management fee, shall be paid by the Tenant to the Landlord on written demand), nor use the Leased Premises in any manner nor conduct any processes (whether contemplated by the permitted uses herein or not) which, in the opinion of the Landlord acting reasonably, are detrimental or may cause damage to the Building, or any part thereof (and in the case of any damage to the Building caused by such use or conduct, including without limitation, the Building’s floors, steel and other structural components, the Tenant shall be required upon reasonable written notice, at its expense, to make good such damage or replace the damaged Building components if required to the satisfaction of the Landlord); nor keep, sell, use, handle or dispose of any goods, materials or things which may cause persistent odours either inside or outside the Building or which may reasonably be considered a nuisance in, at or on the Leased Premises; nor cause any annoyance, nuisance or disturbance to the occupiers or owners of, or damage to any adjoining lands and/or premises; and the Tenant shall keep the Leased Premises and the Complex free of hazardous waste and contamination and shall take every reasonable precaution to protect the Leased Premises and the Complex from danger of fire, water damage or the elements.
	(b)	The Tenant covenants and agrees to utilize the Leased Premises and operate its business in a manner so that no part of the Leased Premises or surrounding lands are used to generate, manufacture, refine, treat, transport, store, handle, dispose of, transfer, produce or process any Hazardous Substances. Furthermore, and without limiting the foregoing, the Tenant covenants and agrees with the Landlord not to install any underground storage tanks at the Leased Premises. Further the Tenant hereby covenants and agrees to indemnify and save harmless the Landlord and those for whom the Landlord is in law responsible from any and all losses, costs, claims, damages, liabilities, expenses or injuries caused or contributed to by any Hazardous Substances which are at any time after the Tenant takes occupancy of the Leased Premises located, handled, placed, stored or incorporated in any part of the Leased Premises except by the Landlord, its workmen or contractors or migrating onto the Leased Premises from adjacent properties through no fault or neglect of the Tenant, its employees, agents, contractors, or those for whom in law it is responsible. The Tenant hereby agrees that the Landlord or its authorized representatives shall have the right at the Landlord’s expense to conduct such environmental site reviews and investigations (“Audit”) as it may deem

necessary for the purposes of ensuring compliance with this Section 8.04, provided that if such Audit discloses that the Tenant is in violation of any of the foregoing provisions of this Section 8.04, or if such Audit is undertaken to ensure compliance with this Section 8.04 at the end of the Term, then the Tenant shall pay all of the Landlord’s costs of such Audit and all follow-up enquiries and investigations (plus the Landlord’s management and administrative fee of fifteen percent (15%) as Additional Rent) within fifteen (15) days of receipt of an invoice therefore.

Exterior Walls

     8.05 The Tenant covenants that it will not erect on, or attach, affix or fasten to the roof or the steel frame inside the Building or to the outside walls of the Leased Premises or the Building any television or radio antenna, fixture or other attachment of any kind whatsoever without first receiving the Landlord’s written consent thereto, which consent shall not be unreasonably withheld.

Signs

     8.06 The Tenant covenants and agrees not to paint, affix, display, or cause to be painted, affixed or displayed any picture, advertisement, notice, lettering, decoration or sign on any part of the Leased Premises visible from its exterior (including, without limitation, window signage) without in each instance the prior written approval of the Landlord. All signs erected by the Tenant with the Landlord’s approval, as aforesaid, shall nevertheless be of uniform size, lettering and location as the signs of all other tenants in the Complex (provided, however, that if the Landlord shall, in its sole discretion, desire to establish a uniform sign policy for the tenants of the Complex, then the Tenant acknowledges and agrees that the Landlord, at its option, shall be entitled to erect all such signage material in or on the Building advertising the respective tenant’s business operations therein (including the Tenant’s business)). The cost of all such signs and the installation and erection thereof shall be borne by the Tenant and shall be payable forthwith on demand. All signs shall be erected in strict conformance with all applicable municipal regulations, requirements and by-laws in existence from time to time. All signs shall be removed by the Tenant at its own expense at the termination of this Lease and the Tenant shall promptly repair at its own expense to the satisfaction of the Landlord any and all damage caused by such removal and this covenant shall survive the expiry or other termination of the Term. Subject to the foregoing, the Tenant shall be entitled to place its corporate sign on the exterior of the Leased Premises denoting its tenancy therein.

Energy Conservation

     8.07 The Tenant shall co-operate with the Landlord in conserving energy of all types in the Building, including but not limited to complying at the Tenant’s own cost with all reasonable requests and demands of the Landlord made with a view to energy conservation.

Overloading Systems

     8.08 The Tenant shall not install or use any electrical or other equipment or electrical arrangement which may overload the electrical or other service facilities unless it does so with the express prior written consent of the Landlord and at its own expense makes whatever changes are necessary to comply with the reasonable and lawful requirements of the Landlord’s insurance underwriters and governmental authorities having jurisdiction. The Tenant shall submit all applicable plans and specifications to the Landlord at the time of applying for such consent.

Parking

     8.09 The Tenant shall have the right to park not more than fifteen (15) cars belonging to its employees, servants, agents, contractors and invitees in those areas on the Lands designated by the Landlord from time to time as parking areas for the Leased Premises. The Tenant shall only park trucks or trailers in such areas of the Lands designated by the Landlord for truck or trailer parking, as the case may be as more particularly shown highlighted in blue on Schedule “A” attached to this Lease and shall not at any time park nor permit its employees, servants, agents, contractors or invitees to park elsewhere on the Lands or adjacent public streets and roads.

Refuse and Garbage

8.10 The Tenant agrees that it will not allow any waste, refuse, garbage, ashes or other loose or objectionable material to accumulate in or about the Leased Premises and will provide covered metal receptacles for the same and will at all times keep the Leased Premises in a clean and tidy condition.

Overloading Floors

     8.11 The Tenant covenants that it will not bring upon the Leased Premises or any part thereof any machinery, equipment, article or thing that, by reason of its weight, size, configuration, operation or otherwise, might damage the Leased Premises and will not at any time overload or damage the floors of the Leased Premises. The Tenant shall remove any such machinery, equipment (including but not limited to mobile equipment such as a forklift), article or thing within five (5) days written notice thereof and if any damage is caused to the Leased Premises by any machinery, equipment, article or thing or by overloading, the Tenant shall forthwith repair such damage at its own expense to the satisfaction of the Landlord.

Plumbing Fixtures

     8.12 The plumbing fixtures shall not be used for any purpose other than that for which they were constructed and no foreign substances of any kind shall be deposited therein, and the expense of any breakage, stoppage, or damage shall be borne by the Tenant.

Outside Storage

     8.13 The Tenant agrees that it will not store any goods or matter of any kind whatsoever outside the Leased Premises without the express written consent of the Landlord first had and obtained.

ARTICLE IX — INSURANCE AND INDEMNITY:

Tenant’s Insurance

     9.01 The Tenant shall, at its expense, obtain and maintain in force throughout the Term and any period when it is in possession of the Leased Premises, in the name of the Tenant with the Landlord and the Landlord’s mortgagee (if any) as additional insureds, the following insurance:

(a)	Public Liability insurance, written on a comprehensive basis, with coverage against third-party claims for bodily injury, including death, and property damage (including but not limited to personal injury liability, blanket contractual liability, products liability, employers liability, owners & contractors protective liability in the case of construction, and tenant’s legal liability) with such coverage to include the activities and operations conducted by the Tenant, or for which the Tenant is legally liable, and any other person performing work on behalf of the Tenant and those for whom the Tenant is in law responsible, in amounts required by the Landlord and any mortgagee of the Building or any part thereof from time to time but in no event less than Five Million Dollars ($5,000,000.00) per occurrence; and
(b)	All risks insurance covering all property owned by the Tenant, or installed by or on behalf of the Tenant, located within the Leased Premises and all other property for which the Tenant is responsible pursuant to this Lease and/or which has been installed by or on behalf of the Tenant (including without limitation chattels, equipment, machinery, furniture, inventory, fixtures, property of others in the Tenant’s care, custody or control, and all Leasehold Improvements) in an amount equal to the full (100%) replacement value thereof; and
(c)	Comprehensive boiler and machinery insurance on a blanket repair and replacement basis with limits for each accident in an amount of at least the replacement cost of all leasehold improvements and of all boilers, pressure vessels, air conditioning equipment and miscellaneous electrical apparatus or mechanical equipment owned or operated by the Tenant or by others (except for the Landlord) on behalf of the Tenant in the Leased Premises, or relating to or serving the Leased Premises; and
(d)	Business interruption insurance in an amount that will reimburse the Tenant for direct or indirect loss of gross earnings attributable to all perils insured against under Section 9.01 (b) and (c) herein, and other

perils commonly insured against by prudent tenants, or attributable to prevention of access to the Leased Premises as a result of those perils; and

(e) (i)   Environmental Impairment Liability insurance (“EIL” insurance) for claims arising from the use of or operations at the Leased Premises, including coverage for sudden and accidental and gradual pollution conditions, and including incidents arising out of the storage, disposal, release or escape of any Hazardous Substances into or upon the Leased Premises, land, sediments, soils, groundwater, atmosphere, or any watercourse or body of water, and for all third-party claims for bodily injury or property damage as well as the cost of clean-up and/or remediation of any contamination or environmental hazard in, upon or around the Leased Premises, Lands and adjoining lands, which insurance shall be issued for a limit of no less than Five Million Dollars ($5,000,000.00) per claim; and

(ii)   In the case of the Tenant in use and occupation of the Leased Premises being Navarre Corporation only, the Landlord acknowledges that the Tenant is not required to obtain EIL insurance unless: (i) Hazardous Substances at any time during the Term are found to be present at the Leased Premises; (ii) the use permitted under this Lease is modified or changed, with or without the Landlord’s consent; or (iii) any assignment of this Lease or sublease of all or part of the Leased Premises takes place, in which case, the Tenant shall immediately comply with the original requirement for EIL insurance set out in Section 9.01 (e) (i) above covering both sudden and accidental and gradual pollution exposures. If pursuant to this Section 9.01 (e) (ii), the Tenant is not required to obtain EIL insurance, it shall nonetheless obtain limited pollution liability insurance covering claims for bodily injury and property damage resulting from: (i) an unexpected or unintentional spill, discharge, dispersal, release or escape of pollutants upon or around the Leased Premises or the Lands that does not occur in a quantity or with a quality that is routine or usual to the business of the Tenant conducted at the Leased Premises and that is detected within 120 hours of the occurrence and reported within 120 hours of detection; and/or (ii) caused by the heat, smoke or fumes from a fire which becomes uncontrollable or breaks out from where it was intended to be, all with a limit of no less than Five Million Dollars ($5,000,000.00) per claim; and

(f)	Standard owners form automobile insurance providing third-party liability insurance with Two Million Dollars ($2,000,000.00) inclusive limits, and accident benefits insurance, covering all licensed vehicles owned or operated by or on behalf of the Tenant; and
(g)	Such other forms of insurance as may be reasonably required by the Landlord and its mortgagee from time to time.

All policies shall: (i) contain a cross liability and/or severability of interest clause; (ii) be primary and non-contributing to any other insurance available to the Landlord and/or its mortgagee(s); (iii) not be invalidated with respect to the interests of the Landlord and its mortgagee(s) by reason of any breach or violation of warranties, representations, declarations or conditions contained in the policies; and (iv) contain an undertaking by the insurers to notify the Landlord and its mortgagee(s) in writing not less than thirty (30) days prior to any material change, cancellation or termination thereof and shall be subject only to such deductibles and exclusions as the Landlord may approve, acting reasonably. All policies written pursuant to paragraph (b), (c) or (d) of this Section shall contain a waiver of any subrogation rights which the Tenant’s insurers may have against the Landlord and its mortgagees. Any policy written pursuant to paragraph (e) of this Section shall include a contractual liability clause and coverage for liability arising from the escape of Hazardous Substances (whether sudden or accidental or gradual) from any storage tanks, whether above ground or below ground, if any such storage tanks are present at the Leased Premises. The Tenant shall promptly furnish, upon request from the Landlord, verification of compliance with the provisions of this Section.

Landlord’s Insurance

     9.02 Throughout the Term of this Lease the Landlord shall provide and keep in force property insurance in respect of the Building (including the Leased Premises but not including the property which the Tenant is required to insure for pursuant to paragraph (b) of Section 9.01 hereof) and the Complex against fire and such other perils as are normally insured against in the circumstances by prudent landlords of similar buildings and loss of rental income insurance, subject to reasonable deductions and exceptions as the Landlord may reasonably determine and to amounts which the Landlord shall from time to time determine as being reasonable or sufficient. Notwithstanding any contribution by the Tenant to the cost

of any insurance effected by the Landlord, no insurable interest is conferred upon the Tenant under any such policies of insurance and the Tenant has no right to receive any proceeds under any such insurance.

Not to Affect Landlord’s Insurance

     9.03 Neither the Tenant nor its officers, directors, agents, servants, licensees or concessionaires, assignees or subtenants shall bring onto the Leased Premises or do or omit or permit to be done or omitted to be done upon or about the Leased Premises anything which shall cause the rate of insurance upon the Leased Premises or the Building or any part thereof or its contents to be increased, and if the said rate of insurance shall be increased by reason of the use made of the Leased Premises even though such use may be a permitted use hereunder or by reason of anything done or omitted or permitted to be done or omitted to be done by the Tenant or its officers, directors, agents, servants, licensees, concessionaires, assignees or subtenants or by anyone permitted by the Tenant to be upon the Leased Premises, the Tenant shall pay to the Landlord forthwith upon demand the amount of such increase.

Limit of Landlord’s Liability

9.04	(a)	The Landlord shall not be responsible in any way for, and is hereby released and discharged in respect of: (i) any injury to any person (including death) except to the extent directly caused by the negligence or willful misconduct of the Landlord or those for whom it is in law responsible; or (ii) for any loss of or damage to any property within the Leased Premises or belonging to the Tenant or to other occupants of the Leased Premises or to their respective employees, agents, invitees, customers, licensees or other persons from time to time attending at the Leased Premises, howsoever caused, while such person or property is in or about the Lands, the Leased Premises, the Building, or any areaways, parking areas, lawns, sidewalks, steps, truckways, platforms, corridors, stairways, elevators or escalators in connection therewith, including without limiting the foregoing, any loss of or damage to any property caused by theft or breakage, or by steam, water, rain or snow or for any loss or damage caused by or attributable to the condition or arrangements of any electrical or other wiring or for any damage caused by smoke or anything done or omitted to be done by any other tenant of premises in the Building or Buildings or for any other loss whatsoever with respect to the Leased Premises, goods placed therein or any business carried on therein.
	(b)	In the event that the Leased Premises or the Complex or any part or parts thereof are closed, inaccessible or unusable by reason of damage, necessary repair or by virtue of any other cause or condition whatsoever, whether within or beyond the Landlord’s control, the Landlord shall not be liable or responsible in any way for any loss of business or any other damage to or loss, direct, indirect, consequential or otherwise sustained or suffered by the Tenant nor shall the Tenant be entitled to any abatement of Rent, except, in the case of damage to the Leased Premises and as expressly provided in Article XI hereof.

Limit of Tenant’s Liability

     9.05 The Tenant shall not be liable to the Landlord for any direct injury, loss or damage in excess of $50,000.00 per occurrence (subject to increase as hereinafter provided, the “Threshold Amount”), where such injury, loss or damage is required to be insured by the Landlord pursuant to Section 9.02, to the extent of proceeds actually recovered, whether or not such injury, loss or damage is caused by the negligent act or omission of the Tenant or its officers, directors or employees (provided that the Tenant advises the Landlord of the occurrence of such injury, loss or damage as soon as practicable) and the Tenant shall be and is hereby released in respect of the same, it being understood and agreed that the Landlord shall not be required to look to its insurance under Section 9.02 hereof for that portion of any injury, loss or damage caused by the Tenant or its operations at the Leased Premises which is below the Threshold Amount. The Landlord and Tenant agree that the initial Threshold Amount of $50,000.00 shall be increased at the end of every 5^th year of this Lease by the cumulative increase during the relevant years in the non-residential building construction price index [Toronto] published by Statistics Canada, or any comparable index should Statistics Canada no longer publish the same.

Indemnity

     9.06 The Tenant shall promptly indemnify and save the Landlord harmless from any and all liabilities, damages, costs, expenses, claims, suits or actions arising out of any breach, violation or non-observance by the Tenant of any of its obligations under the Lease; from any damage to the Leased Premises, the Complex or to any property while such property shall be in or about the Leased Premises including but not limited to the systems, furnishings and amenities thereof, caused by or arising out of the willful or negligent act or omission of the Tenant, its employees, agents, invitees or licensees; and from any injury to any employee, agent, invitee or licensee, of the Tenant, including but not limited to death resulting at any time therefrom, occurring on or about the Complex or any part thereof. Notwithstanding anything else herein contained, this indemnity shall survive the expiry or earlier termination of the Term.

ARTICLE X — CONTROL OF COMPLEX:

Control of Complex

10.01  (a)   The Complex shall, at all times, be subject to the exclusive control of the Landlord and, without limiting the generality of the foregoing, the Landlord shall have the right from time to time throughout the Term:

(i)	to construct in, to or on the Complex, to make alterations, additions and subtractions thereto and therefrom to erect new buildings on the Complex and to build additional storeys on the existing buildings;
(ii)	to monitor access to any of the parking areas by means of barriers, control booths or any other method which the Landlord deems proper;
(iii)	to change the location of driveways and sidewalks and the location, layout or size of the parking area; and
(iv)	to do or perform such other acts in and to the Complex as the Landlord, acting as a prudent owner, deems advisable for the more efficient and proper operation of the Complex.

(b)	The Landlord will operate and maintain the Complex in such a first class manner consistent with a complex of the same age, location and use. Without limiting the scope of such discretion, the Landlord shall have the full right and authority to employ all personnel and to make all rules and regulations pertaining to and necessary for the proper operation and maintenance of the Complex.
(c)	The Landlord shall not be liable for any diminution or alteration of the common area of the Complex resulting from the exercise of the Landlord’s rights under this Section and the Tenant shall not be entitled to a reduction or abatement of Rent or to compensation therefor.

The foregoing shall not be deemed to permit the Landlord to do anything that would materially, adversely interfere with the Tenant’s access to or use and enjoyment of the Leased Premises unless otherwise required by Applicable Law, and the Landlord shall use all commercially reasonable efforts in exercising its rights as set out above to ensure that any disruption to the Tenant’s business and use of the Leased Premises shall be minimized to the extent possible.

ARTICLE XI — DAMAGE AND DESTRUCTION

Abatement of Rent

     11.01 If the Leased Premises or any portion thereof is damaged or destroyed by fire or by other casualty against which the Landlord is required to insure under this Lease, Rent shall abate in proportion to the area of that portion of the Leased Premises which, in the reasonable opinion of the Landlord, is thereby rendered unfit for the purposes of the Tenant bears to the area of the entire Leased Premises and the Rent shall abate entirely if fifty percent (50%) or more of the Leased Premises is damaged or destroyed (but only to the extent to which the Landlord actually receives proceeds under its loss of rental income insurance or which would have been received if the Landlord had complied with its obligations under Section 9.02) until the Leased Premises are repaired and rebuilt as certified by the Landlord’s Architect and the Landlord agrees that it will, with reasonable diligence, repair and rebuild the Leased Premises, subject to Section 11.02. The Landlord’s obligation to rebuild and restore the Leased Premises shall not include the obligation to rebuild, restore, replace or repair

any chattel, fixture or Leasehold Improvements or any other thing that is the property of the Tenant and/or for which the Tenant is to maintain insurance under paragraph (b) and (c) of Section 9.01 (in this Section collectively called “Tenant’s Improvements”); the Leased Premises shall be deemed repaired and rebuilt when the Landlord’s Architect certifies that it has been substantially repaired and rebuilt to the state where the Tenant could occupy it for the purpose of rebuilding, restoring, replacing or repairing the Tenant’s Improvements. The issuance of the certificate of the Landlord’s Architect shall not relieve the Landlord of its obligation to complete the repairing and rebuilding as aforesaid, but the Tenant shall forthwith after issuance of such certificate proceed to rebuild, restore, replace and repair the Tenant’s Improvements, and the provisions of Section 6.03 shall apply to such work, mutatis mutandis.

Termination

11.02	(a)	Notwithstanding the provisions of Section 11.01 hereof, if the Leased Premises or any portion thereof are (i) damaged or destroyed by any cause whatsoever and cannot in the reasonable opinion of the Landlord be rebuilt or made fit for the purposes of the Tenant as aforesaid within two hundred and seventy (270) days of the date of such damage or destruction, or (ii) the Leased Premises are damaged or destroyed by an uninsured peril, the Landlord may, at its option, terminate this Lease by giving to the Tenant, within sixty (60) days after the date of such damage or destruction, notice of termination and thereupon Rent shall be apportioned and paid to the date of such damage or destruction and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord.
	(b)	Irrespective of whether the Leased Premises or any portion thereof are damaged or destroyed as aforesaid, in the event that fifty per cent (50%) or more of the Building, as determined by the Landlord, is damaged or destroyed by any cause whatsoever and if, in the reasonable opinion of the Landlord, such area cannot be rebuilt or made fit for the purposes of the tenants thereof within one hundred and eighty (180) days of the date of such damage or destruction or the Building is damaged or destroyed by an uninsured peril, the Landlord may at its option terminate this Lease by giving to the Tenant within sixty (60) days after the date of such damage and destruction, notice of termination requiring vacant possession of the Leased Premises sixty (60) days after delivery of the notice of termination and thereupon Rent shall be apportioned and paid to the date on which vacant possession is given and the Tenant shall deliver up possession of the Leased Premises to the Landlord in accordance with such notice of termination.
	(c)	If the Landlord does not elect to terminate the Lease pursuant to paragraphs (a) or (b) of this Section, it shall, with reasonable diligence, repair and restore the Leased Premises and/or the Building, in accordance with the provisions of Section 11.01.

ARTICLE XII — DEFAULT:

Events of Default

12.01 An “Event of Default” shall occur whenever:

(a)	the Tenant fails to pay the Rent hereby reserved or any part thereof within five (5) days from the giving of written notice by the Landlord to the Tenant in respect thereof (provided that if the Landlord is required to give the notice hereunder on two (2) occasions in any twenty-four (24) consecutive months, the Landlord shall for have no further obligation to give notice hereunder and an Event of Default shall be deemed to occur on the date the Tenant fails to pay Rent on the due date as provided for in the Lease);
(b)	the Tenant shall have breached or failed to comply with any of its covenants and agreements contained in this Lease (save for non-payment of Rent) and shall have failed to remedy such breach or non-compliance within fifteen (15) days (or such longer period as the Landlord may reasonably determine, having regard to the nature of the default) after written notice thereof given by the Landlord to the Tenant;
(c)	the Tenant shall make any assignment for the benefit of creditors or become bankrupt or insolvent or take the benefit of any Act now or hereinafter in force for bankrupt or insolvent debtors;

(d)	the Tenant is a corporation and any order shall be made for the winding-up of the Tenant or other termination of the corporate existence of the Tenant;
(e)	the Tenant makes or attempts to make a bulk sale of assets not in the ordinary course of the Tenant’s business;
(f)	a trustee, receiver, interim receiver, receiver and manager, custodian or liquidator is appointed for the business, property, affairs or revenue of the Tenant;
(g)	this Lease or any of the Tenant’s assets on the Leased Premises are taken or seized under writ of execution, an assignment, pledge, charge, debenture or other security instrument;
(h)	the Tenant abandons or attempts to abandon the Leased Premises;
(i)	the Tenant makes or applies to the relevant authority for a permit or approval for, any installation, alteration, addition, modification or improvement to the Leased Premises without the prior written approval or authorization of the Landlord except when such approval or authorization is not required under this Lease;
(j)	the Leased Premises shall be used by any person other than the Tenant or the Tenant’s permitted assignees or for any purpose other than as set out in Section 8.01;
(k)	any insurance policy on the Building or any part thereof shall be cancelled or shall be threatened by the insurer to be cancelled or the coverage thereunder reduced in any way by the insurer by reason of the use or occupation of the Leased Premises or any part thereof by the Tenant and the Tenant shall have failed to remedy the condition giving rise to such cancellation, threatened cancellation or reduction of coverage within forty-eight (48) hours written notice given by the Landlord to the Tenant;
(l)	the Tenant sells or disposes of the goods, chattels or equipment in the Leased Premises or removes, commences or threatens to remove them from the Leased Premises so that in the opinion of the Landlord there would not, in the event of such sale, disposal or removal, be sufficient goods on the Leased Premises subject to distress which would satisfy all Rent due or accruing hereunder for a period of six (6) months;
(m)	the Tenant shall at any time during the Term use the Leased Premises, whether within the use permitted by Section 8.01 or not, in a manner which imposes upon the Landlord any obligation to modify, extend, alter or replace any part of the Leased Premises or any of the machinery, equipment or other facilities used in connection with the Leased Premises, which obligation is not fulfilled by the Tenant at its own cost in a timely manner;
(n)	the Leased Premises are vacant for any period in excess of twenty (20) days other than during repairs or renovations; or
(o)	the Tenant defaults in the performance or observation of any terms, conditions, covenants or provisions of any other lease agreement in respect of premises leased by the Tenant from the Landlord, which default is not remedied or cured within any applicable grace period.

Accelerated Rent
12.02	Upon the occurrence of an Event of Default then:

(a) notwithstanding anything to the contrary in this Lease, such portion of the Landlord’s Leasing Costs as are unamortized as at the day prior to such Event of Default (assuming a straight-line amortization over the Term of this Lease) shall be deemed to be outstanding to the Landlord and shall become immediately due and payable as Rent, and the Landlord may, at its option, apply all or any monies or

other security as may have been deposited or lodged with the Landlord as security for the performance of the Tenant’s obligations under this Lease (collectively, “Security”), against such amounts owing, all without prejudice to any further claims by the Landlord for damages and/or remedy for recovery thereof and/or the right of the Landlord to apply any Security against other amounts owing hereunder or against other expenses, costs or damages incurred by the Landlord; and

(b)

in addition to and without limiting the foregoing and notwithstanding the Bankruptcy and Insolvency Act (Canada) or otherwise the then current month’s Rent and next ensuing three (3) months Rent, after appropriate adjustments to take into account the fact that portions of the Leasing Costs amortized into Basic Rent may have been accelerated under paragraph (a) of this Section, shall immediately become due and be paid by the Tenant to the Landlord as accelerated Rent and the Landlord may immediately distrain for the same together with any Rent arrears then unpaid.

Right of Re-entry

     12.03

(a)	Upon the occurrence of an Event of Default, the Landlord may at any time thereafter, without notice to the Tenant, re-enter the Leased Premises or any part thereof in the name of the whole and terminate this Lease and all the rights of the Tenant thereunder.
(b)	If and whenever the Landlord exercises its option to re-enter the Leased Premises and terminate this Lease pursuant to paragraph (a) of this Section:

(i)

the Tenant shall immediately vacate the Leased Premises and the Landlord may remove or cause to be removed from the Leased Premises the Tenant and/or any other occupant or occupants thereof and if the Tenant has not removed all property therefrom or completely vacated the Leased Premises within three (3) days of the Landlord terminating this Lease and entering the Leased Premises, then such property shall be deemed to be abandoned and the Landlord may, at its discretion, remove all property therefrom and sell or dispose of such property as the Landlord considers appropriate without liability for loss or damage and without prejudice to the rights of the Landlord to recover arrears of Rent or damages incurred by the Landlord;

(ii)

the Landlord shall be immediately entitled to the payment of Rent up to the date of termination together with all expenses incurred by the Landlord in respect of such termination and the value of the Rent, calculated at the date of termination, for the unexpired portion of the Term.

Reletting

     12.04 At any time when the Landlord is entitled to re-enter the Leased Premises or terminate this Lease, the Landlord may without notice to the Tenant and without terminating the Lease enter upon and take custody of the Leased Premises in the name of and as agent of the Tenant, together with all the Tenant’s improvements, fixtures and furnishings, and sublet the Leased Premises in the name of and as the agent of the Tenant on whatever terms the Landlord may deem appropriate but no such action by the Landlord shall waive any of the obligations of the Tenant or limit the subsequent exercise of any of the Landlord’s remedies for default. If the Landlord shall sublet the Leased Premises as aforesaid, the Landlord shall be entitled to receive all sublease rent and apply the same in its discretion to any indebtedness of the Tenant to the Landlord under this Lease and/or to the payment of any costs and expenses of reletting, and the Landlord shall be liable to account to the Tenant only for the excess, if any, of monies actually received by it. If the sublease rent is less than is necessary to pay and discharge all the then existing and continuing obligations of the Tenant hereunder, the Tenant shall pay such deficiency to the Landlord upon written demand from time to time. Notwithstanding any such re-entry and subletting without termination, the Landlord may at any time thereafter terminate this Lease by reason of the previous or any other default under the Lease and the provisions of Section 12.03 shall apply.

Distress

     12.05 The Tenant waives and renounces the benefit of any present or future statute taking away or limiting the Landlord’s right of distress with the exception of its client and files whether in hard or soft copy and its software, and covenants and agrees that notwithstanding any such statute, none of the goods and/or chattels of the Tenant on the Leased Premises at any time during the Term shall be exempt from levy by distress for rent in arrears.

Right of Landlord to Cure Defaults

     12.06 If the Tenant fails to perform or cause to be performed any of the covenants or obligations of the Tenant herein, the Landlord shall have the right (but shall not be so obligated) after delivery of written notice to the Tenant and the expiry of the relevant cure period, to perform or cause to be performed and to do or cause to be done such things as may be necessary or incidental thereto (including without limiting the foregoing, the right to make repairs, installations, erections and expend monies), and all payments, expenses, charges, fees and disbursements incurred or paid by or on behalf of the Landlord (including without limitation the Landlord’s fifteen percent (15%) supervisory fee) in respect thereof shall be paid by the Tenant to the Landlord within ten (10) days written demand therefor together with all reasonable legal and administrative costs of the Landlord in respect thereof and all such amounts shall be payable as Additional Rent.

Cross Default

     12.07 (INTENTIONALLY DELETED)

Remedies Not Exclusive

     12.08 Mention in this Lease of any particular remedy or remedies in respect of any default or threatened default by the Tenant in the performance of its obligations shall not preclude the Landlord from exercising, or limit the extent of, any other remedy in respect thereof, whether at law, in equity or pursuant to any express provision hereof. No remedy shall be interpreted as exclusive or dependent upon any other remedy, and the Landlord may from time to time exercise any one or more of such remedies independently or in combination.

Non-Waiver

     12.09 No condoning, excusing or overlooking by the Landlord of any default, breach or non-observance by the Tenant at any time or times in respect of any covenant, proviso or condition herein contained shall operate as a waiver of the Landlord’s rights hereunder in respect of any continuing or subsequent default, breach or non-observance, or so as to defeat or affect in any way the rights of the Landlord herein in respect of any such continuing or subsequent default or breach, and no waiver shall be inferred from or implied by anything done or omitted by the Landlord, save only an express waiver by the Landlord in writing.

Recovery of Adjustments

     12.10 The Landlord shall have (in addition to any other right or remedy of the Landlord) the same rights and remedies in the event of default by the Tenant in payment of any amount payable by the Tenant hereunder as the Landlord would have in the case of default in payment of Rent.

ARTICLE XIII — SUBORDINATION & ACKNOWLEDGEMENTS:

Mortgages

     13.01 At the option of the Landlord or the applicable mortgagee, chargee or trustee (as the case may be), this Lease shall be subject and subordinate to any and all mortgages, charges and deeds of trust (and instruments supplemental thereto), which may now or at any time hereafter affect the Leased Premises in whole or in part, or the Lands, or the Building whether or not any such mortgage, charge or deed of trust affects only the Leased Premises or the Lands or the Building or affects other premises as well. The Tenant acknowledges and agrees that any such mortgagee, chargee or trustee may unilaterally postpone and subordinate its mortgage, charge or deed of trust to this Lease and any renewals, modifications, consolidations, replacements or extensions thereof to the intent that this Lease and all right, title and interest of the Tenant in the Leased Premises shall be prior to the rights of such mortgagee, chargee or trustee as fully as if such Lease had been executed and registered before the registration of the mortgage, charge or deed of trust, as applicable. On request at any time and from time to time of the Landlord or of the mortgagee, chargee or trustee under any such mortgage,

charge or deed of trust, the Tenant shall promptly, at no cost to the Landlord or mortgagee, chargee or trustee, but provided that the holder of any such mortgage, charge or deed of trust agrees in writing with the Tenant not to disturb the Tenant’s use and occupation of the Leased Premises so long as no Event of Default shall have occurred:

(a)

attorn to such mortgagee, chargee or trustee and become its tenant of the Leased Premises or the tenant of the Leased Premises of any purchaser from such mortgagee, chargee or trustee in the event of an exercise of any permitted power of sale contained in any such mortgage, charge or deed of trust for the then unexpired residue of the Term on the terms herein contained; and/or

(b)

postpone and subordinate this Lease to such mortgage, charge or deed of trust to the intent that this Lease and all right, title and interest of the Tenant in the Leased Premises shall be subject to the rights of such mortgagee, chargee or trustee as fully as if such mortgage, charge or deed of trust had been executed and registered and the money thereby secured had been advanced before the execution of this Lease (and notwithstanding any authority or consent of such mortgagee, or trustee, express or implied, to the making of this Lease).

     Any such attornment or postponement and subordination shall extend to all renewals, modifications, consolidations, replacements and extension of any such mortgage, charge or deed of trust and every instrument supplemental or ancillary thereto or in implementation thereof. The Tenant shall forthwith execute any instruments of attornment or postponement and subordination which may be so requested to give effect to this Section. The Tenant shall, if required, also confirm to the Landlord’s mortgagee: (i) that no prepayments of rent (except as provided in this Lease) and no material amendments, early termination, surrender or assignment of this Lease shall be binding on such mortgagee unless the mortgagee consents thereto; (ii) that the mortgagee shall not be liable for any default of the Landlord under this Lease arising prior to the mortgagee becoming a mortgagee in possession of the Leased Premises or succeeding to the Landlord’s interest in this Lease; (iii) that the mortgagee shall be responsible for landlord obligations only so long as the mortgagee realizes on its security by entering into ownership, possession or control of the Leased Premises; and (iv) that the Tenant will deliver such mortgagee, simultaneously with delivery to the Landlord, a copy of any notice to the Landlord alleging default by the Landlord of its obligations under this Lease.

Certificates

     13.02 The Tenant shall, within not more than fifteen (15) days written request therefor, execute and return to the Landlord, its mortgagee or any purchaser of the Leased Premises as required by the Landlord from time to time and without cost to the Landlord or such mortgagee or purchaser, a statement in writing certifying that this Lease is unmodified and in full force and effect (or if modified, stating the modifications and that the Lease is in full force and effect as modified), the amount of the annual Basic Rent then being paid hereunder, the dates to which the same, by installment or otherwise, and other charges hereunder have been paid, whether or not there is any existing default on the part of the Landlord of which the Tenant has notice, and any other information reasonably required.

ARTICLE XIV — ACCESS BY LANDLORD:

Exhibiting Leased Premises

     14.01 The Tenant shall permit the Landlord or its agents to post “For Rent/Lease” signage at and to exhibit the Leased Premises to prospective tenants during the last nine (9) months of the Term thereof during normal business hours upon at least 24 hours advance notice. Notwithstanding the foregoing, in the event the Tenant does not exercise any option that is available to it to renew or extend the Term, the Landlord may (during business hours after at least twenty-four (24) hours notice) exhibit the Leased Premises at any time after the earlier of the date the Tenant notifies the Landlord that it will not be exercising such option or, in the absence of such notice, the last day on which the Tenant may exercise such option.

Expansion, Alteration

     14.02 The Landlord shall have the right to enter into the Leased Premises and to bring its workmen and materials thereon to inspect the Leased Premises and to make additions, alterations, improvements, installations and repairs to the Leased Premises and the Lands, the Building, and the common areas and services thereof as such may exist from time to time. All such work shall be carried out as expeditiously as reasonably practicable so as to minimize interference with the Tenant’s business operations at the Leased Premises, and the Landlord shall not be liable for any necessary or unavoidable

obstructions to or interference with the use and enjoyment of the Lands, the Building and the Leased Premises as may be necessary for the purposes aforesaid and may interrupt or suspend the supply of electricity, water or other utilities or services when necessary and until the additions, alterations, improvements, installations or repairs have been completed, and there shall be no abatement in Rent (except as provided in Section 11.01 hereof) nor shall the Landlord be liable by reason thereof, provided all such work is done as expeditiously as reasonably possible. The Landlord shall have the right to use, install, maintain and repair pipes, wires, ducts, shafts or other installations in, under or through the Leased Premises for or in connection with the supply of any services to the Leased Premises or any other premises in the Building.

ARTICLE XV — MISCELLANEOUS:

Notice

15.01	(a)	Any notice, request, statement or other writing pursuant to this Lease shall be deemed to have been given if mailed by registered prepaid post or by facsimile transmission as follows:
		In the case of the Landlord, to:
		ORLANDO CORPORATION
		6205 Airport Road
		5th Floor
		Mississauga, Ontario
		L4V lE3
		Attention:      President
		Facsimile #:      (905) 677-2824
		In the case of the Tenant, to:
		NAVARRE CORPORATION
		at the Leased Premises
		Attention:      General Counsel
		Facsimile #      (763) 504-1107
		With a copy to:
		NAVARRE CORPORATION
		7400 49th Avenue North
		New Hope, MN 55428
		Attention:       General Counsel
		Facsimile #:       (763) 504-1107
		and such notice shall be deemed to have been received by the Landlord or the Tenant (as applicable) on the third business day after the date on which it shall have been so mailed (provided that in the event that there is an interruption of postal service, the aforesaid period shall be extended for a period equivalent to the period of such interruption) or on the day of facsimile transmission if made before 5:00 p.m. Eastern Time on a business day, otherwise on the business day next following, as evidenced by a written confirmation of such facsimile transmission.
	(b)	Notice shall also be sufficiently given if and when the same shall be delivered, in the case of notice to the Landlord, to an executive officer of the Landlord or a person holding an executive position with the Landlord, and in the case of notice to the Tenant, to him personally or if the Tenant is a

corporation to an officer or manager of the Tenant or to the most senior employee present at the Leased Premises when service is effected. Such notice, if delivered, shall be conclusively deemed to have been given and received at the time of such delivery. If in this Lease two or more persons are named as Tenant, such notice shall also be sufficiently given if and when the same shall be delivered personally to any one of such persons.

Either the Landlord or the Tenant may from time to time, by notice to the other as aforesaid, designate another address in Canada and/or facsimile number to which notices issued more than ten (10) days thereafter shall be addressed.

Registration

     15.02 The Tenant covenants and agrees with the Landlord that the Tenant will not register or record this Lease or any part thereof against the title to the Lands or any part thereof except by way of notice prepared by the Tenant, which shall be subject to the written approval of the Landlord prior to registration, which will not be unreasonably withheld or delayed and which shall only describe the parties, the Leased Premises, and the Term and any options to renew or extend (as applicable). The Landlord, on its own behalf, may also register notice of this Lease, or a short form thereof, against title to the Lands and the Tenant hereby covenants to execute and return to the Landlord such notice, within ten (10) days written request therefor.

Planning Act

     15.03 Where applicable, this Lease shall be subject to the condition that it is effective only if the Planning Act (Ontario) is complied with. Pending such compliance, the Term and any extension periods shall be deemed to be for a total period of one (1) day less than the maximum lease term permitted by law without such compliance.

Obligations as Covenants

     15.04 Each obligation or agreement of the Landlord or the Tenant expressed in this Lease, even though not expressed as a covenant, is considered to be a covenant for all purposes.

Severability

     15.05 Any provision of this Lease that is determined to be illegal or unenforceable at law shall be considered separate and severable from the remaining provisions which shall remain in force and be binding upon the Landlord and the Tenant.

Unavoidable Delays

     15.06 Whenever and to the extent the Landlord or the Tenant, as the case may be, (the “First Party) is unable to fulfill or shall be delayed or restricted in the fulfilment of any obligation hereunder by reason of being unable to obtain the material, goods, equipment, service, utility or labour required to enable it to fulfil such obligation or by reason of any statute, law, regulation, by-law or order or by reason of any other cause beyond its reasonable control, whether of the same nature as the foregoing or not (the “Unavoidable Delay”) (provided that insolvency or lack of funds shall be deemed to not be an Unavoidable Delay), the First Party shall be relieved from the fulfilment of such obligation for so long as such cause continues and the other party shall not be entitled to compensation for any inconvenience, nuisance or discomfort thereby occasioned. There shall be no deduction from the Rent or other monies payable under this Lease by reason of any such failure or cause.

Evidence of Payments

     15.07 The Tenant shall produce to the Landlord upon request, satisfactory evidence of due payment by the Tenant of all payments to third parties required to be made by the Tenant under this Lease.

Overholding

15.08 If the Tenant shall continue to occupy all or part of the Leased Premises after the expiration of the Term with the consent of the Landlord, and without any further written agreement, the Tenant shall be a monthly tenant at one hundred

and twenty-five percent (125%) of the monthly Basic Rent payable during the last year of this Lease and otherwise on the terms and conditions herein set out except as to length of tenancy.

Lien

     15.09 (INTENTIONALLY DELETED)

Goods and Services Tax

     15.10 Any amount which is, by the terms of this Lease payable by the Tenant to the Landlord and which is subject to goods and services tax pursuant to the Excise Tax Act (Canada) or subject to any provincial sales tax or harmonized tax or taxes shall be deemed to be exclusive of such tax or taxes with the intent that such tax or taxes shall be calculated thereon and paid by the Tenant to the Landlord at the time such amount is payable pursuant to the terms of this Lease.

Time of Essence

     15.11 Time shall be of the essence of this Lease and every part thereof.

Law

     15.12 This Lease shall be governed by and construed in accordance with the laws of the Province of Ontario.

Captions/Headings

     15.13 The captions appearing in the margin of this Lease and in the headings to the Articles of this Lease have been inserted as a matter of convenience of reference only and do not in any way whatsoever define, limit or enlarge the scope or meaning of this Lease or any part thereof.

Joint and Several Liability

     15.14 If the Tenant shall be comprised of more than one (1) party, the liability of each such party under this Lease shall be joint and several.

Tenant Partnership

     15.15 If the Tenant shall be a partnership, each person who shall be a member of such partnership or successor thereof shall be and continue to be jointly and severally liable for the performance and observance of all covenants, obligations and agreements of the Tenant under this Lease even if such person ceases to be a member of such partnership or successor thereof.

Environmental Assessments

15.16	(a)	The Landlord or its agent shall have the right to enter upon the Complex (including but not limited to the Leased Premises) and conduct environmental assessment audits from time to time during the Term upon forty-eight (48) hours prior notice (except where contamination is actually present or threatened, in which case no notice shall be required). In exercising its rights under this section, the Landlord shall use commercially reasonable efforts to minimize its interference with the Tenant’s business operations.
	(b)	Subject to and in accordance with Section 8.04 (b) of this Lease, the Tenant covenants and agrees to execute forthwith upon written demand therefor, at its own cost and expense, the complete remediation/clean-up of any and all contamination of the Complex arising out of the Tenant’s use or occupation of the Leased Premises. The aforesaid covenant contained in this paragraph (b) shall survive the expiry or other termination of the Term.

Easements

     15.17 The Tenant acknowledges that the Lands are subject to such rights-of-way and other easements as are designated, if any, in Schedule “B” hereto. The Tenant agrees to postpone this Lease, upon written demand by the Landlord to:

(a)	such further easements in favour of adjoining lands for purposes of ingress and egress, as may be requested by the Landlord from time to time; and
(b)	easements regarding utilities, services or sewers, as may be required from time to time.

Entire Agreement

     15.18 The Tenant acknowledges that there have been no representations made by the Landlord which are not set out in the Lease. The Tenant further acknowledges that the Lease constitutes the entire agreement between the Landlord and Tenant and may not be modified except as herein explicitly provided or by subsequent agreement in writing duly signed by the Landlord and the Tenant.

Effect of Lease

     15.19 This Indenture and everything herein contained shall extend to and bind and may be taken advantage of by the respective heirs, executors, administrators, successors and assigns, as the case may be, of each of the parties hereto, subject to the granting of consent by the Landlord as provided herein to any assignment or sublease, and where there is more than one tenant or there is a female party or a corporation, the provisions hereof shall be read with all grammatical changes thereby rendered necessary and all covenants shall be deemed joint and several.

ARTICLE XVI — ADDITIONAL PROVISIONS

Option to Terminate

     16.01 Provided that the Tenant in use and occupation of all of the Leased Premises is Navarre Corporation or a permitted Transferee as provided for in Section 7.01(d) herein and it has not been and is not then in default of its covenants and obligations under this Lease beyond any applicable cure period, the Tenant shall have an option to terminate this Lease (the “Option to Terminate”) effective on such date falling between March 1, 2012 and February 28, 2013, both inclusive (the “Effective Termination Date”), as may be elected by the Tenant in accordance with this section. This Option to Terminate is conditional upon the Tenant delivering to the Landlord a written notice (the “Termination Notice”) electing to exercise the same, which Termination Notice must be received by the Landlord by the date which is six (6) months prior to the Effective Termination Date. The Termination Notice: (i) shall specify an effective termination date that shall be at least six (6) months following the date that the Termination Notice is delivered to the Landlord; and (ii) shall be accompanied by a lease termination fee payable to the Landlord in an amount equal to six (6) months gross Rent (the “Termination Fee”). Such Termination Fee shall be based on; (a) the Basic Rent otherwise payable in the year in which the Effective Termination Date occurs and; (b) the Additional Rent payable at the time the Termination Notice is delivered, plus applicable goods and services or harmonized sales tax. For clarity, it is understood and agreed that the Termination Fee is in addition to and shall not be credited against the Rent payable pursuant to this Lease prior to the Effective Termination Date. In the event that the Tenant fails to deliver the Termination Notice to the Landlord prior to November 1, 2012 accompanied by the Termination Fee, then the Option to Terminate shall not be effective and shall no longer be available to the Tenant. The Tenant covenants and agrees that if the Termination Notice and the Termination Fee are delivered by the Tenant to the Landlord, as aforesaid, then the following shall apply:

(a)	the Tenant shall surrender the Leased Premises and deliver up vacant possession thereof to the Landlord on the Termination Date, all in accordance with and subject to the repair/surrender provisions set out in this Lease;
(b)	Rent shall (if necessary) be adjusted as of the Termination Date and shall become payable by the Tenant to the Landlord in full within thirty (30) days of invoicing;
(c)	neither party shall have any further liability or obligation to the other after the Termination Date except for any default under this Lease by the Landlord or Tenant occurring on or before the

	Termination Date, subject to final adjustment by the Landlord and Tenant on account of Additional Rent; and
(d)	if requested by the Landlord, the Tenant shall fully surrender this Lease to the Landlord on the Termination Date by execution of a formal document of surrender prepared by the Landlord.

Landlord Interest

     16.02 The Landlord represents and warrants to the Tenant that as of the date hereof: (a) the Landlord owns and holds fee title in and to the Complex and the Leased Premises enabling the Landlord to enter into an enforceable lease with the Tenant on the terms and conditions contained herein; (b) the real property identified in Schedule “B” contains the Leased Premises; and (c) the Landlord is unaware of any impending expropriation plans, proposed assessments or other adverse conditions relating to the Lands. The Landlord will indemnify and hold the Tenant harmless if any of the foregoing representations and warranties proves to be untrue.

               IN WITNESS WHEREOF the parties hereto have duly executed this Lease.

LANDLORD:	ORLANDO CORPORATION
	Per:	/s/ Phil King
		Authorized Signing Officer
		Name:	Phil King
		Title:	President
	Per:	/s/ William O’Rourke
		Authorized Signing Officer
		Name:	William O’Rourke
		Title:	Senior Vice President, Finance
TENANT:	We have authority to bind the Corporation NAVARRE CORPORATION
	Per:	/s/ Cary L. Deacon
		Authorized Signing Office
		Name:	Cary L. Deacon
		Title:	CEO
	Per:	/s/ Diane Lapp
		Authorized Signing Officer
		Name:	Diane Lapp
		Title:	VP Finance
	I/We have authority to bind the Corporation

EX-10.48

Exhibit 10.48

CONSENT TO ASSIGNMENT

THIS AGREEMENT dated as of the 1st day of March, 2010.

BETWEEN:

ORLANDO CORPORATION
(hereinafter called the “Landlord”)

OF THE FIRST PART

– and –

NAVARRE DISTRIBUTION SERVICES UIJC
(hereinafter called the “Assignee”

OF THE SECOND PART

– and –

–
NAVAREE CORPORATION
(hereinafter called the “Assignor”)

OF THE THIRD PART

     WHEREAS:

(a)	Orlando Corporation as landlord and the Assignor as tenant entered into a lease dated as of the 19th day of November, 2010 (the ‘Lease’) of certain premises municipally known as 1695 Drew Road, and being more particularly described therein (“Leased Premises”); and
(b)	The Assignor is assigning the Lease to the Assignee and has requested the consent of the Landlord to such assignment.

          NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the Landlord’s consent herein contained and other good and valuable consideration, the parties agree as follows:

1.	The Landlord hereby consents to the assignment of the Lease by the Assignor to the Assignee subject to the payment of the rent reserved by and the performance and observance of the covenants, conditions and agreements in the Lease and this Agreement and subject to the Assignee using the Leased Premises only for the purposes permitted m the Lease. This consent is given upon the basis that the Landlord does not acknowledge or approve of any of the terms of the said assignment between the Assignee and the Assignor except for the said assignment itself.
2.	This consent shall in no way affect or release the Assignor from its liabilities and responsibilities under the Lease notwithstanding the assignment and is given without prejudice to the Landlord’s rights under the Lease.
3.	This consent shall not be deemed to authorize any further assignments or subletting or parting with or sharing possession of all or part of the Leased Premises, which may only be done in fill compliance with the Lease.

4.	In consideration of the Landlord consenting to the assignment, the Assignee hereby covenants and agrees with the Landlord to observe, comply with and perform all terms, conditions and covenants in the Lease and to pay all sums of any kind whatsoever and perform all obligations of any kind whatsoever as and when the same are due to be paid or performed by the tenant pursuant to the terms of the Lease during all of the term of the Lease and any renewals or extensions thereof. The Assignee acknowledges that it has received a copy of the Lease and is familiar with all terms, covenants, agreements and obligations set out therein.
5.	The Assignor hereby acknowledges and agrees with the Landlord that it shall continue to remain liable on all the terms and covenants in the Lease on the part of the tenant to be observed and performed including, without limitation any renewal or extension thereof.
6.	The Assignor and the Assignee hereby irrevocably direct and authorize the Landlord to make all adjustments/reconciliations on account of Rent for the current or any prior or fixture Lease Year with, and to pay any resulting credits to, the Assignee, notwithstanding that the Assignor remains responsible for paying any underpayment of Rent (including without limitation any underpayment of Additional Rent for any Lease Year) to the Landlord, it being understood and agreed that the foregoing direction and authorization shall not limit or restrict the Assignor’s covenants and obligations under the Lease in any manner whatsoever.
7.	The Assignee covenants and agrees with the Landlord that it shall not take occupancy of the Leased Premises until such time as it has obtained occupancy approval from local building and fire departments and has given evidence thereof to the Landlord.
8.	Effective as of the date of this Agreement and notwithstanding anything contained in this Agreement or the Lease to the contrary, if the Assignee is a private corporation and any part or all of the corporate shares of the Assignee or any corporation holding (whether directly or indirectly) the shares of the Assignee shall be transferred by sale, assignment, amalgamation, bequest, inheritance, operation of law or other disposition or dispositions so as to result in a change in the control of any such corporation, such change of control shall be considered a Transfer (as defined in the Lease) of the Lease and shall be subject to the provisions of Section 7 thereof. The Assignee shall make available to the Landlord upon its request for inspection and copying, all books and records of the Assignee or subtenant and their respective shareholders which, alone or with other data, may show the applicability or inapplicability of this Section.
9.	The Assignee confirms that all elections and notices to the Assignee pursuant to Section 15.01 of the Lease shall be delivered to:
	NAVARRE DISTRIBUTION SERVICES ULC 7400 49th Avenue North New Hope, MN 55428 Attention: General Counsel Facsimile #: (763) 504-1107
10.	The Assignor and the Assignee shall jointly and severally be liable for and shall indemnify the Landlord against all costs incurred by the Landlord with respect to the assignment referred to herein and the Landlord’s consent with respect thereto.

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11. This Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns.

IN WITNESS WHEREOF the parties hereto have executed this Agreement.

		ORLANDO CORPORATION
		Per:	/s/ D. Kilner
			Authorized signing officer
		Name:	Doug Kilner
		Title:	Vice Chairman
		Per:	/s/ Wm. O’Rourke
			Authorized signing officer
		Name:	William O’Rourke
		Title:	Sr. Vice President, Finance
		We have authority to bind the Corporation
NAVARRE DISTRIBUTION SERVICES ULC		NAVARRE CORPORATION
Per:	/s/ Joyce A. Fleck	Per:	/s/ Cary L. Deacon
	Authorized signing officer		Authorized signing officer
Name:	Joyce A. Fleck	Name:	Cary L. Deacon
Title:	President	Title:	President and CEO
Per:	/s/ J. Reid Porter	Per:	/s/ J. Reid Porter
	Authorized signing officer		Authorized signing officer
Name:	J. Reid Porter	Name:	J. Reid Porter
Title:	CFO and Treasurer	Title:	Exec. Vice President and CFO
We have authority to bind the Corporation		We have authority to bind the Corporation

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EX-10.69

Exhibit 10.69

CONSENT AND AMENDMENT NO. 1
TO CREDIT AGREEMENT

          THIS CONSENT AND AMENDMENT NO. 1 CREDIT AGREEMENT (this “Amendment”) is entered into as of April 29, 2010, by and among the Lenders identified on the signature pages hereof (such Lenders, together with their respective successors and permitted assigns, are referred to hereinafter each individually as a “Lender” and collectively as the “Lenders”), WELLS FARGO CAPITAL FINANCE, LLC, formerly known as Wells Fargo Foothill, LLC, a Delaware limited liability company, as the arranger and administrative agent for the Lenders (in such capacity, “Agent”) and NAVARRE CORPORATION, a Minnesota corporation (“Borrower”).

          WHEREAS, Borrower, Agent, and Lenders are parties to that certain Credit Agreement dated as of November 12, 2009 (as amended, modified or supplemented from time to time, the “Credit Agreement”);

          WHEREAS, Borrower, Agent and Lenders are parties to that certain Consent Under Credit Agreement dated as of January 22, 2010 (the “January Consent”);

          WHEREAS, under the January Consent, Agent and Lenders consented to the formation of Navarre Distribution Services ULC, an unlimited liability company established under the laws of the Province of British Columbia (the “Canada Subsidiary”), but prohibited the Canadian Subsidiary from engaging in any business activity apart from becoming a party to a warehouse lease in the Toronto area absent the further written consent of Agent and Lenders;

          WHEREAS, Borrower has requested that Agent and Lenders consent to the commencement of the business operations of the Canadian Subsidiary, and Agent and Lenders have agreed to the foregoing subject to the terms and conditions contained herein; and

          WHEREAS, in connection with the foregoing, Borrower, Agent and Lenders have agreed to amend the Credit Agreement in certain respects;

          NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows:

          1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Credit Agreement.

          2. Consent. Subject to the satisfaction of the conditions set forth in Section 7 below and in reliance upon the representations and warranties of Borrower set forth in Section 8 below, Agent and Lenders hereby consent to the conduct of distribution business operations by the Canadian Subsidiary consistent with the description of the nature of the business of Borrower and its Subsidiaries described on Schedule 6.6 of the Credit Agreement that is currently conducted by Navarre Distribution Services, Inc. This is a limited consent and shall not be deemed to constitute a consent or waiver of any other term, provision or condition of the Credit Agreement or any other Loan Document, as applicable, or to prejudice any right or remedy that

Agent or any Lender may now have or may have in the future under or in connection with the Credit Agreement or any other Loan Document.

          3. Amendments to Credit Agreement: In reliance upon the representations and warranties of Borrower set forth in Section 8 below, the Credit Agreement is hereby amended in the following respects:

          (a) Article 6 of the Credit Agreement is amended by adding the following new Section 6.16 thereto:

          6.16. Symantec Inventory and Navarre Distribution Canada.

     Permit Navarre Distribution Canada to directly purchase any Inventory from Symantec Corporation or to otherwise acquire title to any Inventory produced by Symantec Corporation (other than acquiring title at the moment of sale of such Inventory to a customer of Navarre Distribution Canada from Navarre Distribution Services, Inc. immediately prior to such title passing to such customer) unless a joinder in form and substance acceptable to Agent adding Navarre Distribution Canada as a party to the Symantec Intercreditor Agreement has been executed and delivered by each party thereto.

          (b) Schedule 1.1 of the Credit Agreement is amended by adding the defined term “Navarre Distribution Canada” thereto in its appropriate alphabetical order as follows:

     “Navarre Distribution Canada” means Navarre Distribution Services ULC, an unlimited liability company established under the laws of the Province of British Columbia.

          (c) Schedule 1.1 of the Credit Agreement is amended by amending the defined term “Eligible Accounts” set forth therein by (i) adding the parenthetical “(excluding Accounts created by Navarre Distribution Canada)” following the phrase “those Accounts created by a Loan Party” set forth in the first paragraph of such definition, (ii) deleting the word “or” following the first clause (p) of such definition, (iii) changing the lettering of the second clause (p) of such definition to clause “(q)”, (iv) deleting the period at the end of clause (q) of such definition, (v) adding “, or” to the end of clause (q) of such definition, and (vi) adding the following new clause (r) to such definition:.

          (r) Accounts owing to Navarre Distribution Canada.

          (d) Schedule 1.1 of the Credit Agreement is amended by amending the defined term “Eligible Inventory” set forth therein by (i) adding the parenthetical “(excluding the Inventory of Navarre Distribution Canada)” following the phrase “Inventory consisting of first qualify finished goods held for sale in the ordinary course of the Loan Parties’ business” set forth in the first paragraph of such definition, (ii) deleting the word “or” following clause (l) of such definition, (iii) deleting the period at the end of clause (m) of such definition, (iv) adding “, or” to the end of (m) of such definition, and (v) adding the following new clause (n) to such definition:

          (m) it is Inventory of Navarre Distribution Canada.

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          (e) The following Schedules to the Credit Agreement are amended and restated in their entirety as set forth on Exhibit A to this Amendment: Schedule 4.1(c) (Capitalization of Borrower’s Subsidiaries); Schedule 4.6(a) (Official Name and Jurisdiction of Organization); Schedule 4.6(b) (Chief Executive Officers); Schedule 4.6(c) (Organizational Identification Numbers); and Schedule 4.30 (Locations of Inventory and Equipment).

          4. Acknowledgment. The Borrower hereby acknowledges and agrees that under no circumstances shall any assets of the Canada Subsidiary constitute Eligible Accounts or Eligible Inventory under the Credit Agreement unless and until the Credit Agreement is amended to the contrary, and that Agent and Lenders shall be under no obligation to include any assets of the Canada Subsidiary in the Borrowing Base under the Credit Agreement unless and until the Credit Agreement is amended to the contrary and Agent has completed its due diligence with respect to the Canada Subsidiary and its assets, the results of which are satisfactory to Agent.

          5. Continuing Effect. Except as expressly set forth in Section 2 and Section 3 of this Amendment, nothing in this Amendment shall constitute a modification or alteration of the terms, conditions or covenants of the Credit Agreement or any other Loan Document, or a waiver of any other terms or provisions thereof, and the Credit Agreement and the other Loan Documents shall remain unchanged and shall continue in full force and effect, in each case as amended hereby.

          6. Reaffirmation and Confirmation. Borrower hereby ratifies, affirms, acknowledges and agrees that the Credit Agreement and the other Loan Documents represent the valid, enforceable and collectible obligations of Borrower, and further acknowledges that there are no existing claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to the Credit Agreement or any other Loan Document. Borrower hereby agrees that this Amendment in no way acts as a release or relinquishment of the Liens and rights securing payments of the Obligations. The Liens and rights securing payment of the Obligations are hereby ratified and confirmed by Borrower in all respects.

          7. Conditions to Effectiveness. This Amendment shall become effective upon the satisfaction of each of the following conditions precedent, each in form and substance acceptable to Agent:

          (a) Agent shall have received a fully executed copy of this Amendment (along with the Consent and Reaffirmation attached hereto) and each of the additional documents, instruments and agreements listed on the Closing Checklist attached hereto as Exhibit B, each in form and substance acceptable to Agent, together with such other documents, agreements and instruments as Agent may require or reasonably request; and

          (b) No Default or Event of Default shall have occurred and be continuing on the date hereof or as of the date of the effectiveness of this Amendment.

          8. Representations and Warranties. In order to induce Agent and Lenders to enter into this Amendment, Borrower hereby represents and warrants to Agent and Lenders that, after giving effect to this Amendment:

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          (a) All representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct on and as of the date of this Amendment, in each case as if then made, other than representations and warranties that expressly relate solely to an earlier date (in which case such representations and warranties were true and correct on and as of such earlier date);

          (b) No Default or Event of Default has occurred and is continuing; and

          (c) This Amendment and the Credit Agreement, as modified hereby, constitute legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms.

          9. Miscellaneous.

          (a) Expenses. Borrower agrees to pay on demand all Lender Group Expenses of Agent (including, without limitation, the fees and expenses of US and Canada outside counsel for Agent) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided herein shall survive any termination of this Amendment and the Credit Agreement as modified hereby.

          (b) Governing Law. This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois.

          (c) Counterparts. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. Delivery of an executed counterpart of this Amendment by facsimile or electronic mail shall be equally effective as delivery of an original executed counterpart of this Amendment.

          10. Release.

          (a) In consideration of the agreements of Agent and Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower and each Guarantor (by its execution and delivery of the attached Consent and Reaffirmation), on behalf of itself and its successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges Agent and Lenders, and their successors and assigns, and their present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Agent, each Lender and all such other Persons being hereinafter referred to collectively as the “Releasees” and individually as a “Releasee”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever (individually, a “Claim” and collectively, “Claims”) of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which Borrower, any Guarantor or any of their respective successors, assigns, or other legal representatives may now or hereafter

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own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever in relation to, or in any way in connection with any of the Credit Agreement, or any of the other Loan Documents or transactions thereunder or related thereto which arises at any time on or prior to the day and date of this Amendment.

          (b) Each of Borrower and each Guarantor understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.

          (c) Each of Borrower and each Guarantor agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.

[signature pages follow]

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          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written.

NAVARRE CORPORATION, a Minnesota corporation
By:	/s/ J. Reid Porter
	Title: Executive Vide President and CFO

Signature Page to Consent Under Credit Agreement

WELLS FARGO CAPITAL FINANCE, LLC, formerly known as Wells Fargo Foothill, LLC, a Delaware limited liability company, as Agent and as a Lender
By:	/s/ Jonathan T. Boynton
	Title: Vice President

Signature Page to Consent Under Credit Agreement

CAPITAL ONE LEVERAGE FINANCE CORP., as a Lender
By:	/s/ Vik Dewhnjin
	Title: Vice President

Signature Page to Consent Under Credit Agreement

CONSENT AND REAFFIRMATION

          Each of the undersigned hereby (i) acknowledges receipt of a copy of the foregoing Consent and Amendment No. 1 to Credit Agreement (terms defined therein and used, but not otherwise defined, herein shall have the meanings assigned to them therein); (ii) consents to Borrower’s execution and delivery thereof; (iii) agrees to be bound by the terms of the Amendment, including Section 10 thereof; and (iv) affirms that nothing contained therein shall modify in any respect whatsoever any Loan Document to which any of the undersigned is a party and reaffirm that each such Loan Document is and shall continue to remain in full force and effect. Although each of the undersigned has been informed of the matters set forth herein and has acknowledged and agreed to same, each of the undersigned understands that Agent and Lenders have no obligation to inform any of the undersigned of such matters in the future or to seek any of the undersigned’s acknowledgment or agreement to future consents, amendments or waivers, and nothing herein shall create such a duty.

          IN WITNESS WHEREOF, each of the undersigned has executed this Consent and Reaffirmation on and as of the date of such Amendment.

NAVARRE DISTRIBUTION SERVICES, INC., a Minnesota corporation
By:
	Title:
NAVARRE ONLINE FULFILLMENT SERVICES, INC., a Minnesota corporation
By:
	Title:
ENCORE SOFTWARE, INC., a Minnesota Corporation
By:
	Title:

Consent and Reaffirmation to Consent under Credit Agreement

FUNIMATION PRODUCTIONS, LTD., a Texas limited partnership
By:	Navarre CP, LLC, its General Partner
By:
	Title:
ANIMEONLINE, LTD., a Texas limited partnership
By:	Navarre CS, LLC, its General Partner
By:
	Title:
NAVARRE CP, LLC, a Minnesota limited liability company
By:
	Title:
NAVARRE CLP, LLC, a Minnesota limited liability company
By:
	Title:
NAVARRE CS, LLC, a Minnesota limited liability company
By:
	Title:
FUNIMATION CHANNEL, INC., a Minnesota corporation
By:
	Title:

Consent and Reaffirmation to Consent under Credit Agreement

BCI ECLIPSE COMPANY, LLC, a Minnesota limited liability company
By:
	Title:
NAVARRE LOGISTICAL SERVICES, INC., a Minnesota corporation
By:
	Title:
NAVARRE DIGITAL SERVICES, INC., a Minnesota corporation
By:
	Title:
NAVARRE DISTRIBUTION SERVICES ULC, a British Columbia unlimited liability company
By:
	Title:

Consent and Reaffirmation to Consent under Credit Agreement

EXHIBIT A

Certain Amended and Restated Schedules

See Attached.

Consent and Reaffirmation to Consent under Credit Agreement

EXHIBIT B

Closing Checklist

See Attached.

Consent and Reaffirmation to Consent under Credit Agreement

EX-21.1

Exhibit 21.1

List of Subsidiaries of Navarre Corporation

Encore Software, Inc.	Minnesota corporation
Navarre CS, LLC	Minnesota limited liability company
Navarre CP, LLC	Minnesota limited liability company
Navarre CLP, LLC	Minnesota limited liability company
FUNimation Productions, Ltd.	Texas limited partnership
animeOnline, Ltd.	Texas limited partnership
Navarre Distribution Services, Inc.	Minnesota corporation
Navarre Logistical Services, Inc.	Minnesota corporation
Navarre Online Fulfillment Services, Inc.	Minnesota corporation
Navarre Digital Services, Inc.	Minnesota corporation
FUNimation Channel, Inc.	Minnesota corporation
Navarre Distribution Services ULC	British Columbia unlimited liability company

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We have issued our reports dated June 11, 2010, with respect to the consolidated financial statements, schedule and internal control over financial reporting included in the Annual Report of Navarre Corporation on Form 10-K for the year ended March 31, 2010. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Navarre Corporation on Form S-3 (File No. 333-161514, effective October 23, 2009), on Form S-1, as amended on Form S-3 (File No. 333-133280, effective January 12, 2007) and on Forms S-8 (File No. 333-147280, effective November 9, 2007; File No. 333-119260, effective September 24, 2004; File No. 333-131986, effective February 22, 2006; File No. 33-80218, effective June 14, 1994; File No. 33-86762, effective November 29, 1994; File No. 333-31017, effective July 16, 1997; File No. 333-87143, effective September 15, 1999; File No. 333-91710, effective July 1, 2002 and File No. 333-109056, effective September 23, 2003).

Minneapolis, Minnesota
June 11, 2010

EX-24.1

Exhibit 24.1

POWER OF ATTORNEY

     Each person whose signature appears below constitutes and appoints Cary L. Deacon and J. Reid Porter, or either of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Annual Report on Form 10-K and to file the same, with all 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 11, 2010
/s/ J. Reid Porter J. Reid Porter	Chief Financial Officer (principal financial and accounting officer)	June 11, 2010
/s/ Eric H. Paulson Eric H. Paulson	Chairman of the Board	June 11, 2010
/s/ Keith A. Benson Keith A. Benson	Director	June 11, 2010
/s/ David F. Dalvey David F. Dalvey	Director	June 11, 2010
/s/ Timothy R. Gentz Timothy R. Gentz	Director	June 11, 2010
/s/ Frederick C. Green IV Frederick C. Green IV	Director	June 11, 2010
/s/ Deborah L. Hopp Deborah L. Hopp	Director	June 11, 2010
/s/ Kathleen P. Iverson Kathleen P. Iverson	Director	June 11, 2010
/s/ Tom F. Weyl Tom F. Weyl	Director	June 11, 2010

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Cary L. Deacon, certify that:

1.	I have reviewed this annual report on Form 10-K of Navarre Corporation (the “annual report”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, 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;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 11, 2010

By	/s/ Cary L. Deacon
	Cary L. Deacon
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, J. Reid Porter, certify that:

1.	I have reviewed this annual report on Form 10-K of Navarre Corporation (the “annual report”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, 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;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 11, 2010

By	/s/ J. Reid Porter
	J. Reid Porter
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report on Form 10-K of Navarre Corporation (the “Company”) for the fiscal year ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof, (the “Annual Report”), I, Cary L. Deacon, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1.	The Annual Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: June 11, 2010

By	/s/ Cary L. Deacon
	Cary L. Deacon
	President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report on Form 10-K of Navarre Corporation (the “Company”) for the fiscal year ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof, (the “Annual Report”), I, J. Reid Porter, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1.	The Annual Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: June 11, 2010

By	/s/ J. Reid Porter
	J. Reid Porter
	Chief Financial Officer