ADDRESSING SOME COMMON MISCONCEPTIONS ABOUT DIVX

HOW IT WORKS

Consumers simply purchase a Divx disc at a local retail outlet. The suggested retail price of less than $5.00 includes a two-day viewing period that begins at the consumer's convenience whether it's the same day or months later. The viewing period begins when the consumer inserts the disc into a DVD player equipped with the Divx feature and pushes play. No telephone connection is required to begin the viewing period or at any time during the viewing period.

Just as they do with today's video tape rental, Divx customers can play, stop, rewind, fast-forward, skip or pause the film as often as desired during this two-day viewing period. Divx is not a pay-per-view or pay-per-play system, because the viewer is not charged each time the film is watched during that two-day viewing period.

The Divx disc does not self-destruct. To replay the movie anytime after the initial viewing period, simply place the disc in the Divx player and push play. The player will record the second viewing period and bill the customer's account accordingly. This entire transaction conveniently takes place from the consumer's home.

CONSUMER CHOICE

Research indicates that the ratio of movie rentals to movie purchases is six to one. Divx gives consumers the ability to choose what is best for them.
We believe that some consumers will find the Divx option attractive and that appeal will help broaden the market for digital video. Since all Divx players are also fully-compliant DVD players, Divx can help grow the market for everyone in the industry.

PRIVACY ISSUES

The information that Divx will receive about a specific consumer's viewing habits will be used for internal control purposes only and will not be provided to third parties. Video rental outlets, pay-per-view and DBS services also have access to similar information for their customers.

THE ENCRYPTION SYSTEM

All movies available through the Divx system are fully encrypted utilizing triple DES (a term used to describe a long-used cryptographic standard) encryption. The encryption system is perhaps the most secure system in use today. It is used in military applications and has received the strongest commercial ratings available. Its security actually exceeds that available in many other military systems. The discs and players are individually serialized, allowing the system to pass individual keys to players and receive accountings from players on a disc-by-disc basis. As a result, Divx can grant individual customers limited access to individual discs and properly account for each viewing period.

THE MODEM CONNECTION

The Divx player never has to call in before you watch a movie and does not require a separate phone line. If a phone jack is not convenient to the player location, the consumer can install a new phone jack or purchase a wireless phone jack, which works through normal electrical outlets.

In "off-hours," the Divx-enhanced player periodically places a toll-free call to the Divx processing center to send billing information. If the consumer tries to use the telephone during a Divx player transaction call, the Divx player will automatically disconnect the call and attempt the call at another time.

No real time call is necessary, so the player will continue to play Divx discs even if the modem line is not connected for a short time. Restricted access to Divx discs would
occur only if a critical problem continued after the customer had been notified. When restricted, the player still will play standard DVD products.

RENTING VS. BUYING

Divx is designed primarily for the rental market. Nevertheless, if consumer demand exists, standard DVD and Divx Gold titles will be available for purchase, and the Divx player will play both. On many Divx titles, consumers also will have the option to pay an additional, one-time fee and "unlock" a specific movie for unlimited viewing.

COST

After the consumer has utilized the initial two-day viewing period, additional periods will generally be available for $3.00.

The Divx player will offer consumers an additional capability not available in a standard DVD player, and is therefore expected to cost more than the base model. As is the case with most consumer electronics technologies, the Divx player also is expected to decrease in price as it reaches a larger market.

DIVX AND DVD

Divx is not a new format; instead Divx builds on the DVD format. All standard DVDs will play on a Divx player, but because of the additional encryption, Divx discs will not play on standard DVD players.

Most early adopters expect changes to first system models and such enhancements are characteristic of virtually all new consumer electronic devices. Divx is an enhanced feature on a DVD player. We believe that a significant number of consumers will choose this new feature but recognize that some will not.

Studios that agree to release titles on Divx are not prohibited from releasing on standard DVD, and in fact several are supporting both products.

CIRCUIT CITY AND DVD

Circuit City has been developing the Divx system for approximately three years. Our decision to bring this product to market was based on achieving the broad studio support needed to provide a large number of titles for consumer use, obtaining name-brand manufacturing commitments to ensure that a variety of players are available and finally making sure the technology is consistent and convenient for the consumer. These factors came together in late summer, and we announced the product shortly thereafter. Given the confidential and competitive nature of new product development, no announcement could be made prior to that date.

Although only about one tenth of one percent (.001%) of U.S. households have purchased a DVD player, we regret that the Divx choice was not available for early adopters. We would note the following points, however:

1. All studios supporting standard DVD prior to the Divx announcement continue to release new titles on DVD, and some studios are supporting both Divx and DVD.

2. We are committed to making the latest technologies available to all Circuit City customers. This commitment included offering DVD players in the appropriate markets. We are pleased that we can help introduce a new system that extends digital technology to the consumers who conduct more than 3.65 billion movie rental transactions per year. We will continue to sell VCRs, DVD players and direct broadcast satellite services in an effort to meet the diverse viewing needs of a wide customer base.

3. Circuit City initially limited DVD sales to the seven markets where titles were available for sale. We expanded DVD player sales nationwide only when titles were launched nationally on August 26, 14 days before the Divx announcement.

ENVIRONMENTAL CONCERNS

Divx understands the environmental concerns related to disc production and disposal. The Divx discs can be recycled, and Divx expects to have a specific plan in place when quantities reach meaningful levels.