SECURITIES AND EXCHANGE COMMISSION ~~WASHINGTON, D.C. 20549~~

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF ~~THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~ THE ~~The~~SECURITIES ~~Quarterly~~EXCHANGE ~~Period~~ACT ~~Ended: August~~OF ~~31, 2001~~1934

oFor ~~TRANSITION~~The ~~REPORT~~Quarterly Period ~~PURSUANT~~Ended: May TO31, ~~SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From To

Commission File Number: 0-14779

MEDIA 100 INC.

MEDIA 100 INC.
(Exact name of registrant as specified in its charter)

DELAWARE		04-2532613
(State or other jurisdiction of organization		(I.R.S. Employer Identification Number)
or incorporation)


450 DONALD LYNCH BOULEVARD MARLBOROUGH, MASSACHUSETTS		01752-4748
(Address of principal executive offices)		(Zip code)



(508) 460-1600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (~~Exact~~1) has ~~name~~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 aswas ~~specified~~required into ~~its~~file ~~charter~~such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

DELAWARE	04-2532613
(State or other jurisdiction of organization or incorporation)	(I.R.S. Employer Identification Number)
290 DONALD LYNCH BOULEVARD MARLBOROUGH, MASSACHUSETTS
(Address of principal executive offices)
01752-4748
(Zip code)
(508) 460-1600
(Registrant’s telephone number, including area code)

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 ý No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $.01 per share	12,545,325 shares
Class		Outstanding at July 1, 2002
Class	Outstanding at September 30, 2001
Common Stock, par value $.01 per share		12,834,411 shares

MEDIA 100 INC. ~~AND SUBSIDIARIES~~

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION
PART I — FINANCIAL INFORMATION
ITEM 1	~~ITEM~~Consolidated 1Financial Statements:	~~Consolidated Financial Statements:~~
		Consolidated Balance Sheets as of August 31, 2001 and November 30, 2000
	Consolidated Balance Sheets as of May 31, 2002 and November 30, 2001
		Consolidated Statements of Operations for the three and nine months ended August 31, 2001 and August 31, 2000
	Consolidated Statements of Operations for the three and six months ended May 31, 2002 and May 31, 2001
		Consolidated Statements of Cash Flows for the nine months ended August 31, 2001 and August 31, 2000
	Consolidated Statements of Cash Flows for the six months ended May 31, 2002 and May 31, 2001
		Notes To Consolidated Financial Statements
	Notes to Consolidated Financial Statements
ITEM 2	~~ITEM~~Management’s 2Discussion and Analysis of Financial Condition and Results of Operations	~~Managements Discussion And Analysis Of Financial Condition and Resuts of Operations~~
ITEM 3	~~ITEM~~Quantitative 3and Qualitative Disclosures About Market Risk	~~Item3 Quantitative And Qualitative Disclosure about Market Risk~~
PART II - OTHER INFORMATION
PART II — OTHER INFORMATION
ITEM 1	~~ITEM~~Legal 1Proceedings	~~Legal Proceedings~~
	ITEM 5	Other Information
ITEM 4	Submission of Matters to a Vote of Security Holders
ITEM 6	~~ITEM~~Exhibits 6and Reports on Form 8-K	~~Exhibits and Reports on Form 8-K~~
SIGNATURES
EXHIBIT INDEX

~~PART I - FINANCIAL INFORMATION MEDIA 100 INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)~~2

			August 31,			November 30,
			2001			2000
ASSETS
Current assets:
	Cash and cash equivalents		$	6,438		$	11,987
	Marketable securities		245			5,674
	Accounts receivable, net of allowance for doubtful accounts of $629 in 2001 and $411 in 2000		3,775			6,321
	Inventories		1,649			3,789
	Prepaid expenses and other current assets		830			1,180
	Net assets from discontinued operations (Note 16)		3,888			5,582
		Total current assets	16,825			34,533
Property and equipment, net			4,433			5,616
Intangible assets, net			2,464			4,908
Other assets, net			1,131			1,245
Total assets			$	24,853		$	46,302
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	1,699		$	4,561
	Accrued expenses		6,401			7,142
	Note payable		-			1,492
	Deferred revenue		4,304			5,272
		Total current liabilities	12,404			18,467
Contingencies (Note 9)
Stockholders' equity:
	Preferred stock		-			-
	Common stock		128			123
	Capital in excess of par value		217,681			217,182
	Treasury stock		(78		)	-
	Accumulated deficit		(205,203		)	(189,380		)
	Accumulated other comprehensive loss		(79		)	(90		)
		Total stockholders' equity	12,449			27,835
Total liabilities and stockholders' equity			$	24,853		$	46,302

PART I — FINANCIAL INFORMATION

MEDIA 100 INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	May 31,			November 30,
	2002			2001
ASSETS
Current assets:
Cash and cash equivalents	$	5,911		$	17,369
Available for sale securities, at fair value	250			241
Restricted cash (Notes 4 and 9)	3,170			—
Due from escrow (Notes 4 and 14)	2,000			2,000
Accounts receivable, net of allowance for doubtful
accounts of $466 in 2002 and $512 in 2001	3,073			2,907
Inventories, net	2,647			1,220
Prepaid expenses and other current assets	852			706
Total current assets	17,903			24,443

Property and equipment, net	2,465			3,843
Intangible assets, net	418			1,880

Total assets	$	20,786		$	30,166

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,374		$	1,490
Accrued expenses	7,074			8,000
Deferred revenue	3,670			3,812
Total current liabilities	13,118			13,302

Contingencies (Note 9)	—			—

Stockholders’ equity:
Common stock	131			126
Capital in excess of par value	218,093			217,683
Accumulated deficit	(210,389		)	(200,836		)
Treasury stock, at cost	(78		)	(78		)
Accumulated other comprehensive loss	(89		)	(31		)
Total stockholders’ equity	7,668			16,864

Total liabilities and stockholders’ equity	$	20,786		$	30,166

The accompanying notes are an integral part of these consolidated financial statements.

~~MEDIA 100 INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)~~3

			Three Months Ended August 31,						Nine Months Ended August 31,
			2001			2000			2001			2000
Net sales:
	Products		$	5,993		$	9,839		$	19,087		$	28,549
	Services		2,066			2,703			6,906			7,268
Total net sales			8,059			12,542			25,993			35,817
Cost of sales			4,582			5,381			13,304			15,162
	Gross profit		3,477			7,161			12,689			20,655
Operating expenses:
	Research and development		2,690			2,932			8,056			8,221
	Selling and marketing		2,585			3,264			9,818			9,823
	General and administrative		1,923			1,069			4,594			3,124
	Amortization and write-down of acquisition-related intangible assets		480			303			2,420			668
	Acquired in-process research and development		-			-			-			470
	Restructuring charge		310			-			878			-
		Total operating expenses	7,988			7,568			25,766			22,306
Operating loss			(4,511		)	(407		)	(13,077		)	(1,651		)
Interest income, net			50			260			221			809
Other income (expense), net			464			(328		)	200			(646		)
	Loss from continuing operations before tax provision		(3,997		)	(475		)	(12,656		)	(1,488		)
Tax provision			-			-			-			30
Loss from continuing operations			(3,997		)	(475		)	(12,656		)	(1,518		)
Discontinued Operations (Note 16):
Income (loss) from discontinued operations			(1,021		)	752			(3,167		)	(1,740		)
	Net (loss) income		$	(5,018	)	$	277		$	(15,823	)	$	(3,258	)
Basic net (loss) income per share:
	Continuing operations		$	(0.32	)	$	(0.04	)	$	(1.02	)	$	(0.13	)
	Discontinued operations		$	(0.08	)	$	0.06		$	(0.26	)	$	(0.15	)
	Total		$	(0.40	)	$	0.02		$	(1.28	)	$	(0.28	)
Diluted net (loss) income per share:
	Continuing operations		$	(0.32	)	$	(0.04	)	$	(1.02	)	$	(0.13	)
	Discontinued operations		$	(0.08	)	$	0.06		$	(0.26	)	$	(0.15	)
	Total		$	(0.40	)	$	0.02		$	(1.28	)	$	(0.28	)
Weighted average common shares outstanding:
	Basic		12,415			12,136			12,369			11,916
	Diluted		12,415			13,167			12,369			11,916

MEDIA 100 INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended May 31,						Six Months Ended May 31,
	2002			2001			2002			2001
Net sales:
Products	$	5,079		$	5,716		$	7,931		$	12,779
Services	1,500			2,308			3,146			4,840
Total net sales	6,579			8,024			11,077			17,619

Cost of sales	3,303			4,591			5,541			8,899
Accelerated depreciation and amortization of fixed assets (Note 6)	84			—			331			—
Gross profit	3,192			3,433			5,205			8,720

Operating expenses:
Research and development	2,559			2,788			5,126			5,366
Selling and marketing	2,716			3,591			4,964			7,090
General and administrative	1,427			1,179			2,534			2,671
Amortization and write-off of intangible assets	273			480			765			1,940
Accelerated depreciation and amortization of fixed assets (Note 6)	215			—			849			—
Settlement of litigation (Notes 7 and 9)	—			—			924			—
Restructuring charge	—			568			—			568
Total operating expenses	7,190			8,606			15,162			17,635
Operating loss	(3,998		)	(5,173		)	(9,957		)	(8,915		)

Interest income, net	37			64			115			171
Other income (expense), net	270			(578		)	187			(264		)
Loss from continuing operations before benefit from income taxes	(3,691		)	(5,687		)	(9,655		)	(9,008		)
Benefit from income taxes	—			—			(102		)	—
Loss from continuing operations	(3,691		)	(5,687		)	(9,553		)	(9,008		)
Loss from discontinued operations	—			(1,122		)	—			(1,797		)
Net loss	$	(3,691	)	$	(6,809	)	$	(9,553	)	$	(10,805	)

Loss per share:
Basic
Continuing operations	$	(0.29	)	$	(0.46	)	$	(0.75	)	$	(0.73	)
Discontinued operations	$	—		$	(0.09	)	$	—		$	(0.15	)
Total	$	(0.29	)	$	(0.55	)	$	(0.75	)	$	(0.88	)
Diluted
Continuing operations	$	(0.29	)	$	(0.46	)	$	(0.75	)	$	(0.73	)
Discontinued operations	$	—		$	(0.09	)	$	—		$	(0.15	)
Total	$	(0.29	)	$	(0.55	)	$	(0.75	)	$	(0.88	)
Weighted average common shares outstanding:
Basic	12,784			12,359			12,710			12,346
Diluted	12,784			12,359			12,710			12,346

The accompanying notes are an integral part of these consolidated financial statements.

~~MEDIA 100 INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)~~4

			Nine Months Ended August 31,
			2001				2000
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss		$	(15,823		)	$	(3,258			)
	Loss from discontinued operations		3,167				1,740
	Loss from continuing operations		(12,656			)	(1,518				)
	Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
		Depreciation and amortization	2,067				2,189
		Non-cash interest expense	-				70
		Acquired in-process research and development	-				470
		Amortization and write-down of acquisition-related intangible assets	2,420				669
		Gain on sale of marketable securities	9				15
	Changes in assets and liabilities, excluding effects of acquisitions:
		Accounts receivable	2,546				(1,659				)
		Inventories	2,140				(2,396				)
		Prepaid expenses and other current assets	350				(373				)
		Accounts payable	(2,862			)	(35				)
		Accrued expenses	(741			)	865
		Deferred revenue	(968			)	168
	Net cash used in operating activities		(7,695			)	(1,535				)
	Net cash used in discontinued operations		(1,473			)	(8,148				)
CASH FLOWS FROM INVESTING ACTIVITIES:
		Acquisition of Wired, Inc., net of cash acquired	-				(1,487				)
		Acquisition of 21st Century Media Inc., net of cash acquired	-				(481				)
		Acquisition of J2 Digital Media Inc., net of cash acquired	-				(152				)
		Acquisition of certain assets of Integrated Computing Engines, Inc.	-				(1,797				)
		Purchases of property and equipment	(768			)	(895				)
		Other assets	114				(1,225				)
		Purchase of intangible assets	(91			)	(227				)
		Net proceeds from sales of marketable securities	5,419				5,405
	Net cash provided by (used in) investing activities		4,674				(859				)
CASH FLOWS FROM FINANCING ACTIVITIES:
		Payment of note payable	(1,492			)	-
		Proceeds from issuance of common stock pursuant to stock plans	504				4,472
		Purchase of treasury stock	(78			)	-
	Net cash (used in) provided by financing activities		$	(1,066		)	$	4,472
EFFECT OF EXCHANGE RATE CHANGES ON CASH			11				-
NET DECREASE INCREASE IN CASH AND CASH EQUIVALENTS			$	(5,549		)	$			(6,070	)
CASH AND CASH EQUIVALENTS, beginning of period			11,987				13,858
CASH AND CASH EQUIVALENTS, end of period			$		6,438		$		7,788

MEDIA 100 INC.

		Nine Months Ended August 31,
		2001				2000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash (received) paid for income taxes	$	(42		)	$	13
OTHER TRANSACTIONS NOT USING CASH:
	Change in value of marketable securities	$		(44	)	$	27

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended August 31,
	2001				2000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
In connection with the acquisition of Wired, Inc., the following non-cash transaction occurred:
Fair value of assets acquired	$		-		$		3,180
Cash paid for acquisition and acquisition costs	-				1,487
Note payable and liabilities assumed	$		-		$		1,693
In connection with the acquisition of 21st Century Media, LLC, the following non-cash transaction occurred:
Fair value of assets acquired	$			-	$	1,130
Cash paid for acquisition and acquisition costs	-				481
Common stock issued and liabilities assumed	$	-			$	649
In connection with the acquisition of J2 Digital Media , Inc. the following non-cash transaction occurred:
Fair value of assets acquired	$		-		$		280
Cash paid for acquisition and acquisition costs	-				152
Common stock issued and liabilities assumed	$		-		$	128
In connection with the acquisition of certain assets of Integrated Computing Engines, Inc. the following non-cash transaction occurred:
Fair value of assets acquired	$			-	$		2,775
Cash paid for acquisition and acquisition costs	-				1,797
Common stock issued and liabilities assumed	$			-	$		978

(in thousands)

(unaudited)

	Six Months Ended
	May 31, 2002			May 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(9,553	)	$	(10,805	)
Net loss from discontinued operations	—			1,797
(Loss) from continuing operations	(9,553		)	(9,008		)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization	2,271			1,521
Non-cash settlement of litigation	924			—
Amortization and write-off of intangible assets	765			1,940
Loss on sale of marketable securities	—			15
Changes in assets and liabilities:
Restricted cash	(3,170		)	—
Accounts receivable	(166		)	1,702
Inventories	(1,518		)	848
Prepaid expenses and other current assets	(146		)	61
Accounts payable	884			(1,638		)
Accrued expenses	(1,100		)	312
Deferred revenue	(142		)	(656		)
Net cash used in operating activities	(10,951		)	(4,903		)

Net cash used in discontinued operations	—			(1,099		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of equipment	(822		)	(627		)
Purchase of intangible assets	(33		)	(75		)
Net proceeds from sales of marketable securities	(9		)	4,572
Net cash provided by (used in) investing activities	(864		)	3,870
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on note payable	—			(1,492		)
Purchase of treasury stock	—			(78		)
Proceeds from issuance of common stock	415			225
Net cash provided by (used in) financing activities	415			(1,345		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH	(58		)	77
NET DECREASE IN CASH AND CASH EQUIVALENTS	(11,458		)	(3,400		)
CASH AND CASH EQUIVALENTS, beginning of period	17,369			11,987
CASH AND CASH EQUIVALENTS, end of period	$	5,911		$	8,587

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash received for income taxes	$	(102	)	$	(42	)
OTHER TRANSACTIONS NOT USING CASH:
Change in value of marketable securities	$	—		$	(88	)

The accompanying notes are an integral part of these consolidated financial statements.

~~MEDIA 100 INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, EXCEPT FOR NOVEMBER 30, 2000 AMOUNTS)~~5

MEDIA 100 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, EXCEPT FOR NOVEMBER 30, 2001 AMOUNTS)

1. Basis of Presentation

The accompanying interim consolidated financial statements include the accounts of Media 100 Inc. (“the Company”), a Delaware corporation, and its wholly owned subsidiaries. The interim financial statements are unaudited. However, in the opinion of management, the interim consolidated financial statements and ~~disclosures~~ disclosures reflect all adjustments necessary for a fair presentation. Interim results are not necessarily indicative of results expected for a full year or for any other interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company'’s latest audited financial statements, which are included in the Company'’s Annual Report on Form 10-K for the fiscal year ended November 30, ~~2000~~ 2001, filed with the Securities and Exchange Commission.

The ~~Company’s~~ preparation of ~~financial~~ financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~The~~We ~~Company~~design ~~designs~~ and ~~sells~~sell ~~systems (comprising~~advanced ~~software~~media ~~and~~systems ~~hardware)~~for ~~and~~content ~~services~~design. Our ~~that~~products ~~allow~~are ~~Internet~~personal computer-based ~~(“online”)~~workstations ~~and~~configured ~~traditional~~with ~~broadcasters,~~proprietary ~~corporate~~software ~~marketing professionals~~ and ~~educators~~ tohardware ~~create~~that ~~and~~we ~~deliver high-quality video programs as either~~engineer ~~traditional~~and ~~media or Internet-compatible streams (“streaming media”)~~manufacture. In Onsome ~~August~~cases, ~~29,~~particularly ~~2001,~~with ~~the~~our ~~Company~~recently-introduced ~~signed~~product—844/X™—we ~~an agreement to~~ sell ~~its~~our ~~software product line to~~products ~~Autodesk,~~as ~~Inc.~~“turnkey” ~~for~~systems, ~~$16~~meaning ~~million~~we inconfigure ~~cash. As~~and aship ~~result of this transaction,~~ the ~~assets~~system ofto ~~the~~an ~~software~~end ~~product line~~user, toor bereseller, ~~discontinued~~with ~~consisting~~a ~~primarily~~host ofpersonal ~~accounts receivable~~computer, ~~inventory, equipment,~~our ~~intangible~~software ~~assets~~and hardware, and ~~income taxes payable have been separately~~disk ~~classified~~storage; in ~~the~~other ~~accompanying balance sheet at August 31~~cases, ~~2001. The~~we ~~November~~deliver ~~30,~~only ~~2000~~our ~~balance~~software ~~sheet~~and ~~has been~~hardware ~~restated~~(“unbundled”), totypically ~~conform~~ to ~~the~~an ~~current~~independent ~~year’s~~value-added ~~presentation.~~reseller ~~The~~that ~~disposal date was~~configures ~~October~~the 5,turnkey ~~2001.~~system ~~The~~themselves ~~Company’s~~on ~~software~~behalf ~~product line consisted~~ of ~~products~~an ~~acquired in~~end ~~the Terran acquisition and the merger with Digital Origin~~user.

2. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of significant intercompany transactions and balances. These consolidated financial statements reflect the use of the following significant accounting policies, as described below and elsewhere in the notes to the consolidated financial statements. These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.

3. Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the current period’s presentation.

4. Cash, Cash Equivalents and ~~Marketable~~Available for Sale Securities

Cash equivalents are carried at cost, which approximates fair market value, and have original maturities of less than ~~three~~ ~~months~~ninety days. Cash equivalents include money market accounts and repurchase agreements with overnight maturities. ~~Approximately~~ Approximately $~~0.2~~388,000 ~~million~~ of the cash and cash equivalents ~~were~~is restricted under various letters of credit and is classified as restricted cash in the accompanying balance sheet at ~~August~~May 31, ~~2001~~2002.

~~The~~As ~~Company~~part ~~accounts~~of ~~for~~the ~~marketable securities~~McRoberts inlitigation ~~accordance~~discussed ~~with~~in ~~Statement of Financial Accounting Standards~~Note ~~(SFAS) No. 115~~9, ~~Accounting for Certain Investments in Debt and Equity Securities. Under this standard,~~ the Company ishas ~~required to~~placed ~~classify~~approximately ~~all~~$2.8 ~~investments~~million in ~~debt~~an ~~and~~escrow ~~equity~~account ~~securities into one or more of~~while the ~~following~~case ~~three~~is ~~categories:~~on ~~held-to-maturity, available-for-sale or trading~~appeal. ~~Available-for-sale~~ ~~securities are~~This ~~recorded~~amount atis ~~fair market value with unrealized gains and losses excluded from earnings and~~ included as arestricted ~~component~~cash ofin ~~stockholders’ equity. All of~~ the accompanying ~~Company’s~~balance ~~marketable~~sheet ~~securities are~~at ~~classified~~May as31, ~~available-for-sale~~2002.

~~Marketable~~On ~~securities~~October ~~held~~5, as2001, ~~of August~~the 31Company sold its streaming media software product line to Autodesk, ~~2001~~Inc. ~~and~~for $16.0 ~~November~~million 30in cash, ~~2000~~of ~~consist~~which $2.0 million was deposited into an escrow account for a period of ~~the~~one ~~following~~year (in ~~thousands):~~case indemnification issues arise. The amount is classified as due from escrow on the accompanying balance sheet at May 31, 2002 and November 30, 2001, respectively.

Investments available for sale:			Maturity	August 31,		November 30,
				2001		2000
U.S. Treasury Notes			less than 1 year	$	-	$	509
U.S. Treasury Notes			1 - 5 years	-		2,030
	Total U.S. Treasury Notes		-	-		2,539
U.S. Agency Bonds			less than 1 year	-		507
	Total U.S. Agency Bonds		-	-		507
Money Market Instruments			less than 1 year	-		1,044
Corporate Obligations			less than 1 year	-		1,116
Corporate Obligations			1 - 5 years	245		1,512
		Total Corporate Obligations		245		2,628
Total investments available for sale				245		6,718
Less: cash and cash equivalents				-		(1,044		)
Total marketable securities				$	245	$	5,674

~~Marketable~~The Company accounts for securities ~~had~~in aaccordance ~~cost~~with Statement of ~~$245~~ ~~and~~Financial $5Accounting Standards (SFAS) No. 115,~~718,~~ Accounting for Certain Investments in Debt and aEquity ~~market~~Securities. Under ~~value~~this ofstandard, ~~$245~~the Company is required ~~and~~to ~~$5,674~~classify atall ~~August~~investments ~~31,~~in ~~2001~~debt and ~~November~~equity ~~30,~~securities ~~2000,~~into ~~respectively.~~one Toor ~~adjust~~more of the ~~carrying~~following ~~amount~~three ofcategories: ~~the November 30~~held-to-maturity, ~~2000~~available-for-sale ~~marketable~~or trading. Available-for-sale securities ~~portfolio to~~ are recorded at fair market value, with unrealized gains and losses ~~have~~excluded from ~~been~~earnings ~~reflected~~and included as a component of ~~accumulated~~ ~~other comprehensive loss in~~ stockholders’ equity. All ~~pursuant~~of to the Company’s securities are ~~provisions~~classified ofas ~~SFAS~~available ~~No.~~for ~~115~~sale.

Securities held as of May 31, 2002 and November 30, 2001 consists of the following (in thousands):

Investments available for sale:	Maturity	May 31,		November 30,
		2002		2001

Corporate Obligations	1-5 years	$	250	$	241

Total investments available for sale		$	250	$	241

Securities had a cost and market value of $250 and $241 at May 31, 2002 and November 30, 2001, respectively.

5. Inventories

Inventories are stated at the lower of first-in, first-out (FIFO) cost or market and consist of the following (in thousands):

	August 31,			November 30,
		May 31,			November 30,
	2001			2000
		2002			2001
Raw materials	$	~~1,202~~$	1,543	$	~~2,597~~$	811
Work-in-process	~~232~~	368		~~662~~	161
Finished goods	~~215~~	736		~~530~~	248
	$	~~1,649~~$	2,647	$	~~3,789~~$	1,220

Work-in-process and finished goods inventories include material, labor and manufacturing overhead. Management performs periodic reviews of inventory and disposes of items not required by their manufacturing plan.

6. Property and Equipment, net

Property and equipment, net, at May 31, 2002 and November 30, 2001 is stated at cost, less accumulated depreciation and amortization, and consists of the following (in thousands):

	August 31,			November 30,
		May 31,			November 30,
	2001			2000
		2002			2001
Machinery and equipment	$	~~13,564~~$	4,392	$	~~12,894~~$	4,169
Purchased software	~~6,037~~	1,677		~~6,037~~	1,666
Furniture and fixtures	~~1,283~~	55		~~1,603~~	908
Vehicles	9			9
Leasehold improvements		604			1,728
Leasehold improvements	1,730			1,559
		$	6,728		$	8,471
	22,623			22,102
Less accumulated depreciation and amortization		(4,263		)	(4,628		)
Less accumulated depreciation and amortization	(18,190		)	(16,486		)
		$	2,465		$	3,843
	$	4,433		$	5,616

In connection with the signing of an amendment to the lease of the Company’s principal facility in Marlborough, MA in January 2002, the Company revised the estimated useful life of leasehold improvements and certain furniture and fixtures that weren’t moved to the new facility. This charge has been reflected as accelerated depreciation and amortization of fixed assets in the accompanying Consolidated Statements of Operations. Amounts classified as leasehold improvements and furniture and fixtures are additions during the quarter ended May 31, 2002 for the Company’s new principal facility.

7. Intangible Assets

Intangible assets, ~~consist~~net ofat ~~the~~May ~~following as of August~~ 31, ~~2001~~2002 and November 30, ~~2000~~2001 consist of the following (in thousands):

	August 31,			November 30,
		May 31,			November 30,
	2001			2000
		2002			2001
Patents and Trademarks	$	~~498~~$	487	$	~~407~~$	454
Acquired Technology	~~1,900~~	1,000		~~1,900~~	1,900
Goodwill	~~2,784~~	1,225		~~3,992~~	2,757
	5,182			6,299
		$	2,712		$	5,111
Less accumulated amortization	~~(2,718~~	(2,294	)	~~(1,391~~)	(3,231	)	)
	$	~~2,464~~$	418	$	~~4,908~~$	1,880

Patents and trademarks are being amortized over ~~periods ranging from~~ three ~~to five~~ years~~, their estimated useful lives~~. The Company amortizes goodwill and developed acquired technology related to its acquisitions using a straight-line method over periods ranging from 2 to 3 years, their estimated useful life.

The Company recorded an expense for the amortization and write-~~down~~off of intangible assets of $21.0 5 million in the first fiscal quarter of 2001 ~~compared to $0~~.3 ~~million in the first fiscal quarter of fiscal 2000.~~ Included in the $21.05 million was a write-~~down~~off of goodwill of $~~0.9~~880,000 ~~million~~ related to the acquisitions of 21st Century LLC and J2 Digital ~~Digital~~ Media, Inc. These two ~~companies~~acquisitions were ~~were~~ combined to form Streamriver, which was launched in June 2000. During the first quarter of fiscal 2001, the goodwill from these two acquisitions was determined to be impaired due to continued operating losses in Streamriver and the uncertainty surrounding the Company’s ability to recover the goodwill through future cash flows. ~~The Company shutdown the Streamriver division in the second quarter of fiscal year 2001 and wrote off the remaining assets.~~

8During the six months ended May 31, 2002, the Company settled litigation brought against it by the former shareholders of Wired, Inc. (“Wired”), a Company ~~Net~~acquired ~~Income~~by the Company in December 1999 (~~Loss~~See Note 9 Contingencies). As ~~Per~~part ~~Common~~of ~~Share~~the settlement, the Company assigned all rights to the Wired product line, intellectual property relating to Wired products and on-hand inventory related to the Wired product line to the former shareholders. Wired agreed that no further action will be taken related to the lawsuit previously filed against the Company as noted in Note 9 Contingencies. Wired granted the Company an irrevocable license to use the source code, technology, know how and intellectual property; provided, however, the license does not include the right to sell Wired products or any equivalent products incorporating the source code, technology, know how and intellectual property. In addition, Wired agreed to pay the Company a royalty of 5% of adjusted gross sales of the assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. Litigation settlement included in the Consolidated Statements of Operations represents the cost of inventory transferred, the net book value of remaining intangible assets associated with the acquisition, and legal fees associated with the settlement.

~~The Company computes earnings per share pursuant to SFAS No~~8. ~~128, Earnings per Share.~~ InNet ~~accordance~~Loss ~~with~~Per ~~SFAS~~Common No. 128, basic net income (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted income per share is computed using the weighted-average number of common shares outstanding and potential common shares from the assumed exercise of stock options and warrants outstanding during the period, if any, using the treasury stock method.Share

The ~~following~~Company computes isnet aloss ~~reconciliation~~per ofshare ~~the~~pursuant to SFAS No. 128, Earnings Per Share. In accordance with SFAS No. 128, basic net ~~shares~~loss ~~used~~per inshare is computed by dividing net income (loss) available for common shareholders by the ~~computation~~weighted-average number of ~~basic~~common ~~and~~shares ~~diluted~~outstanding during the period. Diluted net income (loss) per share ~~(in~~is computed dividing the net loss available for common stockholders ~~thousands):~~by the weighted-average number of common shares outstanding, including potential common shares from the assumed exercise of stock options and warrants outstanding during the period, if any, using the treasury stock method.

	Three months ended August 31,		Nine months ended August 31,
	2001	2000	2001	2000
Weighted average shares of common stock Outstanding	12,415	12,136	12,369	11,916
Effect of potential common shares - stock options and warrants outstanding (unless antidilutive)	-	1,031	-	-
Weighted average shares and potential common shares outstanding	12,415	13,167	12,369	11,916

~~The~~Options ~~Company~~to ~~excludes potentially dilutive~~purchase ~~securities~~approximately ~~from~~1,784,000 ~~its~~and ~~diluted~~1,566,000 ~~net~~weighted ~~income~~average ~~(loss)~~shares ~~per share computation when either the exercise price~~ of ~~the~~common ~~securities exceeds the fair value of the Company’s~~stock ~~common~~have ~~stock~~been orexcluded ~~when~~from the ~~Company~~computation ~~reports a net loss and the effect~~ of ~~including such~~diluted ~~securities~~average ~~would be antidilutive. Options to purchase approximately 3,520,000 and 1,302,000~~ shares ofoutstanding ~~common stock~~ at ~~August~~May 31, ~~2001~~2002 and ~~August 31~~2001, ~~2000,~~ respectively, ~~were~~as ~~not included in~~ the ~~computation~~effect of ~~diluted~~their ~~net~~inclusion ~~loss per share as a result of their~~would ~~antidilutive~~have ~~effect~~been antidilutive.

9. Contingencies

(i) The ~~company~~Company provides accruals for all direct costs associated with the estimated resolution of known contingencies. The accrual is established at the earliest date at which it is deemed probable that a ~~liability~~ liability has been incurred and the amount of such liability can be reasonably estimated.

(ii) On June 7, 1995, a lawsuit was filed against the Company by Avid Technology, Inc. (“Avid”) in the United States District Court for the District of Massachusetts. The complaint generally alleges patent infringement by the Company arising from the manufacture, sale, and use of the Company'’s Media 100 products. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In July 1995, the Company filed an answer and counterclaim denying any infringement and asserting that the Avid patent in question is invalid. The Company ~~intends~~is to vigorously defending ~~defend~~this ~~the~~ lawsuit. In addition, Avid is seeking reissue of the patent, including claims that it asserts are broader than in the existing patent, and these reissue proceedings remain pending before the U.S. Patent and Trademark Office. On January 16, 1998, the court dismissed the lawsuit without prejudice to either party moving to restore it to the docket upon completion of all matters pending before the U.S. Patent and ~~Trademark~~ Trademark Office.

On August 16, 2000, the U.S. Patent and Trademark Office issued an Office Action rejecting all of the claims made by Avid in their latest request for reexamination of the patent related to the aforementioned lawsuit. In addition, the Examiner at the U.S. Patent and Trademark Office designated the action as “final”. On November 29, 2000, Avid filed a Notice of Appeal of the Examiner’s rejections to the U.S. Patent and Trademark Office Board of Patent Appeals and Interferences. ~~There~~That appeal has now been fully briefed and is awaiting argument and decision. The litigation remains dismissed pending the outcome of the consolidated reissue/reexamination proceedings, and there can be no assurance that the Company will prevail in the appeal by Avid or that the expense or other effects of the appeal, whether or not the Company prevails, will not have a material adverse effect on the Company’s business, operating results and financial condition.

(iii) On January 13, 1999 and January 28, 1999, Digital Origin and one of its former directors, Charles Berger, were named as defendants in two shareholder class action lawsuits against Splash Technology ~~Technology~~ Holdings, Inc. (“Splash”), various directors and executives of Splash and certain selling shareholders of Splash. The lawsuit alleges, among other things, that the defendants made or were responsible for material misstatements, and failed to disclose information ~~information~~ concerning Splash’s business, finances and future business prospects in order to artificially inflate the price of Splash common stock. The complaint does not identify any ~~any~~ statements alleged to have been made by Charles Berger or Digital Origin. The complaint further alleges that Digital Origin engaged in a scheme to artificially inflate the price of Splash common stock to reap an artificially large return on the sale of the common stock in order to pay off its debt. Digital ~~Digital~~ Origin and the former director vigorously deny all allegations of wrongdoing and intend to aggressively defend themselves in these matters. Defendant’s two initial motions to dismiss the action were granted with leave to amend, and plaintiffs have again amended the complaint. Defendants ~~have now~~ filed their third motion to dismiss, which has been dismissed without leave to ~~dismiss~~amend. Plaintiffs have appealed this ruling to the 9th Circuit Court of Appeals.

(iv) On ~~July~~October 1812, ~~1997~~1999, ~~Intelligent~~a lawsuit was filed against ~~Electronics,~~the ~~Inc.~~Company ~~filed~~by aMcRoberts ~~claim~~Software, ~~against~~Inc. ~~Digital~~(“MSI”) ~~Origin~~in ~~alleging~~the aUnited ~~breach~~States ofDistrict ~~contract~~Court ~~and~~for ~~related claims in~~ the ~~approximate~~Southern ~~amount~~District of ~~$800,000, maintaining~~Indiana. ~~that~~The ~~Digital~~complaint ~~Origin~~alleges ~~failed~~copyright toinfringement, ~~comply~~breach ~~with~~of ~~various return~~contract, ~~price protection,~~and ~~inventory~~trade ~~balancing~~secret ~~and marketing development funding undertakings~~misappropriation. InThe complaint ~~1997,~~includes ~~Digital~~requests ~~Origin~~for ~~filed~~unspecified anmonetary ~~answer~~damages toand enhanced ~~the~~damages, ~~complaint~~interest, ~~and~~costs ~~cross-claimed against the plaintiffs~~ and ~~in October 1997~~fees. An ~~additionally~~unfavorable ~~cross~~verdict ~~claimed~~was ~~against~~filed ~~Deutsche~~on ~~Financial,~~February ~~Inc.~~25, a2002 ~~factor~~against the Company in the ~~account~~amount ~~relationship~~of ~~between~~$2.5 ~~the~~million. The Company and MSI ~~the~~filed ~~plaintiffs,~~post-trial ~~seeking the~~motions. Those ~~recovery~~motions ofhave ~~existing~~been ~~accounts~~ruled ~~receivable~~upon ofwith ~~approximately~~the ~~$1.8~~trial ~~million. During~~court ~~May~~reducing ~~2000,~~ the ~~trial~~total ~~was~~amount ~~completed and~~awarded by the ~~Court~~jury ~~entered~~but ~~two~~assessing ~~judgments~~prejudgment ininterest ~~favor~~and ofattorney’s ~~Digital~~fees. The ~~Origin,~~Company ~~one~~is inappealing the ~~amount~~entire ~~of $314~~judgment,~~000~~ ~~plus~~which ~~interest~~approximates ~~against~~$2.8 ~~Intelligent Electronics and one in the amount~~million. ofThe ~~$1,491,000~~entire ~~plus~~amount ~~interest~~of ~~against~~the ~~Deutsche~~award ~~Financial,~~has ~~Inc. In~~been ~~September~~placed ~~2000,~~in ~~Intelligent~~an ~~Electronics,~~escrow account ~~Inc.~~while ~~paid~~the ~~$314,000~~case ~~plus~~is ~~interest~~on ofappeal ~~$139,000~~ and ~~reimbursement~~approximately of$2.8 ~~certain~~million ~~costs~~is included as restricted cash in the ~~amount~~accompanying ofbalance ~~$20,000~~sheet toat ~~the~~May ~~Company~~31, 2002.

Pursuant to APB Opinion No. 20, Accounting Changes, the Company revised its estimate of the allowance for doubtful accounts by reversing $314,000 of the allowance in the three months ended August 31, 2000 by reducing the loss from discontinued operations. The Company considers the balance of the recovery from Intelligent Electronics (interest and court costs) to be a gain contingency, as this term is defined in SFAS No. 5, Accounting for Contingencies. Accordingly, the Company recorded the interest, and court costs, as a reduction in the loss from discontinued operations, in the fourth quarter of 2000, the period in which the gain contingency was realized.9

OnThe ~~August~~Company ~~15,~~had recorded ~~2001,~~a ~~Deutsche~~liability ~~Financial,~~in ~~Inc~~the amount of $2.6 ~~entered~~million ~~into~~that aincluded estimated ~~settlement~~legal ~~agreement~~fees associated with ~~Digital~~the ~~Origin,~~litigation ~~Inc.~~at toNovember ~~pay $1~~30,~~075,000~~ to2001 and the entire ~~Company~~amount was expensed in the three months ended November 30, 2001. ~~Pursuant~~During tothe ~~APB~~quarter ~~Opinion~~ended ~~No. 20~~May 31, ~~Accounting Changes~~2002, the Company ~~revised~~recorded ~~its~~an ~~estimate~~additional ofliability ~~the~~and ~~allowance~~expense ~~for~~of ~~doubtful accounts by reversing~~ $1397,~~171,~~000 offor the adjusted ~~allowance~~judgment inwhich ~~the~~included ~~three~~prejudgment ~~months~~interest ~~ended~~and ~~August~~attorney’s 31fees, ~~2001~~as bywell ~~reducing~~as, ~~the~~estimated ~~loss~~legal ~~from~~fees ~~discontinued~~associated ~~operations~~with the appeal.

(v) On ~~October~~May 129, ~~1999~~ 2001, a lawsuit was filed against the Company by ~~McRoberts Software, Inc. in~~ the ~~United~~former ~~States~~shareholders of ~~District~~Wired, ~~Court~~a ~~for~~company acquired by the ~~Southern~~Company ~~District~~in ofDecember ~~Indiana~~1999. The complaint alleges ~~copyright~~fraud, ~~infringement~~negligent misrepresentation, breach of express and implied-in-fact contract, breach of the implied covenant of good faith and ~~trade~~fair ~~secret~~dealing, ~~misappropriation~~breach of fiduciary duty and violation of California business and professional code section 17200. The complaint includes requests for compensatory and punitive damages, injunctive relief, ~~treble~~and fees. No specific amount or punitive damages are alleged, ~~interest~~other than compensatory damages in an amount to be proven at trial, ~~costs~~but ~~and~~not ~~fees. In~~less ~~November~~than ~~1999~~$25,000, the jurisdictional minimum for the court. The Company filed ana ~~answer~~demurrer ~~and~~challenging ~~counterclaim~~the legal ~~denying~~sufficiency ~~any~~of ~~infringement~~the causes of action alleged. ~~The~~A ~~Company~~hearing ~~intends~~on tothat ~~vigorously~~demurrer ~~defend~~occurred on November 6, 2001 and the ~~lawsuit~~Court sustained the demurrer to one cause of action, for negligent false promise.

~~(vi)~~During Onthe six months ended May 931, ~~2001~~2002, athe ~~lawsuit~~Company settled ~~was~~the ~~filed~~Wired litigation. As part ~~against~~of the settlement, the Company byassigned ~~the~~all ~~former~~rights ~~shareholders~~to ofthe Wired, ~~Inc.~~product line, intellectual aproperty ~~company~~relating to Wired products and on-hand inventory related ~~acquired~~to bythe Wired product line to the ~~Company~~former inshareholders. Wired ~~December~~agreed ~~1999~~that no further action will be taken related to the lawsuit previously filed against the Company. ~~The~~Wired ~~complaint~~granted ~~alleges~~the ~~fraud,~~Company ~~negligent~~an ~~misrepresentation,~~irrevocable ~~breach~~license ofto use the source code, ~~express~~technology, know how and ~~implied-in-fact~~intellectual ~~contract~~property; provided, ~~breach~~however, ofthe license does not include the ~~implied~~right ~~covenant~~to ofsell ~~good~~Wired products or any equivalent products ~~faith~~incorporating the source code, technology, know how and ~~fair~~intellectual property. In ~~dealing~~addition, ~~breach~~Wired promised to pay the Company a royalty of ~~fiduciary~~5% ~~duty~~of ~~and~~adjusted ~~violation~~gross sales of ~~California~~the assigned ~~business~~products, ~~and~~not ~~professional~~to ~~code~~exceed ~~section~~$1.2 ~~17200~~million, plus the cost of the inventory assigned. Litigation settlement ~~The~~included ~~complaint~~in ~~includes~~the ~~requests~~Consolidated ~~for~~Statements ~~compensatory~~of ~~and~~Operations ~~punitive~~represents ~~damages,~~the cost of ~~injunctive~~inventory ~~relief~~transferred, ~~and~~the ~~fees. The~~net ~~Company~~book value of remaining intangible assets ~~intends~~associated towith ~~vigorously~~the ~~defend~~acquisition, and legal fees associated with the ~~lawsuit~~settlement.

(~~vii~~vi) From time to time the Company is involved in other disputes and/or litigation encountered in its normal course of business. The Company does not believe that the ~~ultimate~~ ultimate impact of the resolution of such other outstanding matters will have a ~~material~~ material effect on the Company’s business, operating results or financial condition.

10. ~~Capitalized~~ ~~Software~~Income ~~Development Costs~~Taxes

The Company ~~capitalizes certain computer~~ ~~software~~recorded ~~development~~an ~~costs.~~income ~~Capitalization~~tax benefit of ~~costs~~$102,000 ~~commences~~during ~~upon~~the ~~establishing technological~~six ~~feasibility. There~~months ~~were no~~ended ~~capitalized~~May ~~costs at August~~ 31, ~~2001.~~ ~~Capitalized~~2002 ~~costs, net of accumulated amortization, were $29,000~~ as ~~of November~~the ~~30,~~Company ~~2000,~~received ~~and~~a ~~are~~refund ~~included~~from inthe ~~other assets~~U. ~~These~~S. ~~costs~~Government ~~are~~related ~~amortized~~to on a ~~straight-line basis over two~~ ~~years,~~prior ~~which~~period ~~approximates the economic life of the product~~payment.

11. Accrued ~~Income Taxes~~Expenses

~~The~~Accrued ~~Company has not provided for a tax~~expenses ~~provision~~at inMay ~~the~~31, ~~first~~2002 ~~nine~~and ~~months~~November of30, ~~fiscal~~ 2001 ~~due~~consist ~~to the net loss incurred during the first nine months~~ of the ~~fiscal~~following ~~year~~(in ~~and its expectation for no taxable income for the year.~~thousands):

12. Accrued Expenses

	May 31,		November 30,
	2002		2001
Payroll, payroll taxes and other taxes	$	694	$	942
Accrued warranty	525		561
Accrued restructuring	264		527
Accrued inventory	558		323
Accrued legal and professional services	3,403		3,067
Accrued selling and marketing	234		361
Accrued other	1,396		2,219
	$	7,074	$	8,000

~~Accrued expenses at August 31, 2001 and November 30, 2000 consist of the following (in thousands):~~10

	August 31,		November 30,
	2001		2000
Payroll, payroll taxes and other taxes	$	1,436	$	2,242
Accrued warranty	561		559
Accrued restructuring	309		528
Accrued inventory	867		763
Accrued legal and professional services	712		692
Accrued selling and marketing	483		301
Accrued other	2,033		2,057
	$	6,401	$	7,142

12. Comprehensive loss

13The Company records items of comprehensive loss in accordance with SFAS No. 130, Reporting Comprehensive ~~income~~Income, (and presents such information in the statement of stockholders’ equity. The components of accumulated other comprehensive loss are as follows (in thousands):

The Company records items of comprehensive income or loss in accordance with SFAS No.130, Reporting Comprehensive Income, and presents such information in the statement of stockholders’ equity. The components of accumulated other comprehensive (loss) income is as follows (in thousands):

	Three months ended May 31,						Six months ended May 31,
	2002			2001			2002			2001

Net loss	$	(3,691	)	$	(6,809	)	$	(9,553	)	$	(10,805	)

Cumulative translation adjustment	(88		)	—			(58		)	(11		)
Unrealized holding gain on available for sale securities	—			42			—			88

Total comprehensive loss	$	(3,779	)	$	(6,767	)	$	(9,611	)	$	(10,728	)

	Three months ended August 31,					Nine months ended August 31,
	2001			2000		2001			2000
Net (loss) income	$	(5,018	)	$	277	$	(15,823	)	$	(3,258	)
Cumulative translation adjustment	(22		)	2		(33		)	-
Unrealized holding gain on available for sale securities	44			150		44			27
Total comprehensive (loss) income	$	(4,996	)	$	429	$	(15,812	)	$	(3,231	)

13. Segment Information

14. Segment Information

The Company applies the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for public companies to report operating segment information in annual and interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-making group is composed of the Chief Executive Officer and members of senior management. The Company’s reportable operating segments are digital video systems and services.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Revenues are attributed to geographic areas based on where the customer is located. Segment information for the three and nine months ended August 31, 2001 and August 31, 2000 is as follows:11

Three months ended August 31, 2001	Digital Video Systems		Services		Corporate		Total
Net sales from external customers	$	5,993	$	2,066	$	-	$	8,059
Gross profit	1,759		1,718		-		3,477
Depreciation and amortization	607		21		-		628
Interest income, net	-		-		50		50
Nine months ended August 31, 2001
Net sales from external customers	$	19,087	$	6,906	$	-	$	25,993
Gross profit	7,376		5,313		-		12,689
Depreciation and amortization	1,907		160		-		2,067
Interest income, net	-		-		221		221
Three months ended August 31, 2000
Net sales from external customers	$	9,839	$	2,703	$	-	$	12,542
Gross profit	5,093		2,068		-		7,161
Depreciation and amortization	701		25		-		726
Interest income, net	-		-		260		260
Nine months ended August 31, 2000
Net sales from external customers	$	28,549	$	7,268	$	-	$	35,817
Gross profit	14,654		6,001		-		20,655
Depreciation and amortization	2,125		64		-		2,189
Interest income, net	-		-		809		809
Tax provision					30		30

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Net sales are attributed to geographic areas based on where the customer is located. Segment information for the three and six months ended May 31, 2002 and May 31, 2001 is as follows:

Interest income and income taxes are considered corporate level activities and are, therefore, not allocated to segments. Management believes transfers between geographic areas are accounted for on an arms length basis.

	Digital Video Systems

*Three months ended May 31, 2002*			Services		Corporate		Total

Net sales from external customers	$	5,079	$	1,500	$	—	$	6,579

Gross profit	1,965		1,227		—		3,192

Depreciation and amortization	806		10		—		816

Interest income, net	—		—		37		37

*Six months ended May 31, 2002*

Net sales from external customers	$	7,931	$	3,146	$	—	$	11,077

Gross profit	2,634		2,571		—		5,205

Depreciation and amortization	2,246		25		—		2,271

Interest income, net	—		—		115		115

*Three months ended May 31, 2001*

Net sales from external customers	$	5,716	$	2,308	$	—	$	8,024

Gross profit	1,645		1,788		—		3,433

Depreciation and amortization	644		72		—		716

Interest income, net	—		—		64		64

*Six months ended May 31, 2001*

Net sales from external customers	$	12,779	$	4,840	$	—	$	17,619

Gross profit	5,125		3,595		—		8,720

Depreciation and amortization	1,382		139		—		1,521

Interest income, net	—		—		171		171

~~Net sales by geographic area for the three and nine months ended August 31, 2001and August 31, 2000 were as follows (in thousands):~~12

	Three months ended
	August 31, 2001		August 31, 2000
North America	$	5,333	$	8,803
United Kingdom, Sweden, Denmark and Norway	767		1,271
Germany, Austria and Switzerland	372		481
France, Spain, Benelux and Italy	543		864
Asia Pacific	1,044		1,123
	$	8,059	$	12,542

Interest income is considered a corporate level activity and is, therefore, not allocated to segments. Management believes transfers between geographic areas are accounted for on an arms-length basis.

	Nine months ended
	August 31, 2001		August 31, 2000
North America	$	17,518	$	22,566
United Kingdom, Sweden, Denmark and Norway	2,581		3,660
Germany, Austria and Switzerland	921		2,022
France, Spain, Benelux and Italy	1,996		2,808
Asia Pacific	2,977		4,761
	$	25,993	$	35,817

Net sales by geographic area for the quarters ended May 31, 2002 and 2001 were as follows (in thousands):

Long-lived tangible assets by geographic area for the quarters ended August 31, 2001 and November 30, 2000 consist of the following (in thousands):

	Three months ended
	May 31, 2002		May 31, 2001

North America	$	3,695	$	5,425
United Kingdom, Sweden, Denmark and Norway	894		1,006
France, Spain and Benelux	396		440
Germany, Austria and Switzerland	400		256
Asia, Japan and other foreign countries	1,194		897

	$	6,579	$	8,024

	August 31, 2001			November 30, 2000
		Six months ended
North America	$	4,156		$	5,278
		May 31,2002			May 31, 2001
United Kingdom	144			194
North America		$	6,474		$	11,932
Germany	43			33
United Kingdom, Sweden, Denmark and Norway		1,367			1,982
Italy	9			16
France, Spain and Benelux		633			1,286
France	81			95
Germany, Austria and Switzerland		588			548
	$	4,433		$	5,616
Asia, Japan and other foreign countries		2,015			1,871
		$	11,077		$	17,619

~~15.~~ Long-lived ~~Restructuring~~tangible ~~Expense~~assets by geographic area for the quarters ended May 31, 2002 and November 30, 2001 consist of the following (in thousands):

In the third quarter of fiscal 2001, the Company implemented a restructuring plan to better align its operating costs with its anticipated future revenue stream. The restructuring charge of $310,000 related to the elimination of approximately 42 employees across all functions: operations (14), product development (4), selling and marketing (16), and general and administrative (8). At August 31, 2001, all of the accrued restructuring charge, consisting of severance-related costs, remained. The total cash impact of the restructuring is $310,000, all of which will be paid by the end of the fourth quarter in fiscal 2001.

	May 31, 2002		November 30, 2001

United States	$	2,258	$	3,651
United Kingdom	140		123
Germany	18		1
France	49		68

	$	2,465	$	3,843

1614. Discontinued Operations

On ~~August~~October 295, 2001, the ~~Company signed an~~ ~~agreement~~Company tosold ~~sell~~ its streaming media software product line to Autodesk, Inc. for $16.0 million in cash~~. As a result of this transaction~~, ~~the~~ ~~assets~~ of ~~the~~which ~~software~~$2 ~~product~~million ~~line~~is todue befrom ~~discontinued~~escrow ~~consisting~~and ~~primarily of~~is ~~accounts receivable, inventory, equipment, intangible assets, income taxes~~ payable ~~and have been separately classified in the accompanying balance sheet~~on ~~at August 31, 2001. The November 30, 2000 balance sheet has been restated to conform to the current year’s presentation. The disposal date was~~ October 5, ~~2001~~2002. The Company’s streaming media software product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin.

The net income (loss) from these operations is included in the accompanying statements of operations under “discontinued operations”. Net sales of the software product line for the three and nine months ended August 31, 2001 were $1.9 million and $10.0 million, respectively. Net sales of the software product line for the three and nine months ended August 31, 2000 were $6.8 million and $22.0 million, respectively.13

~~Net~~The ~~assets~~net loss from these operations is included in the accompanying statements of operations under “Loss from discontinued operations”. atOperating ~~August~~results ~~31,~~of ~~2001~~the software product line for the three and ~~November~~six months 30ended May 31, ~~2000~~2002 ~~consist~~and of2001 ~~the~~are ~~following~~as follows (in thousands):

	August 31, 2001			November 30, 2000
		Three months ended May 31,						Six months ended May 31,
Accounts receivable	$	1,100		$	2,298
		2002			2001			2002		2001
Inventory	552			525
Net sales of discontinued operations		$	—		$	4,079		$	—	$	8,327
Property and equipment, net	418			440
Loss from discontinued operations		$	—		$	(1,122	)	$	—	$	(1,797	)
Intangible assets, net	2,907			3,408
Income taxes payable	(1,089		)	(1,089		)
	$	3,888		$	5,582

1715. New Accounting Standards

InEmerging ~~July~~Issues ~~2001~~Task Force (EITF) Issue No. 01-09 (“Issue”), “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the ~~Financial~~Vendor’s ~~Accounting~~Products,” issued during ~~Standards~~November ~~Board~~2001, ~~(FASB)~~codifies previously issued ~~SFAS~~EITF Issue No. ~~141~~00-25, “~~Business~~Vendor Income ~~Combinations”. SFAS~~Statement ~~No.~~Characterization ~~141~~of ~~supercedes~~Consideration ~~APB~~Paid Noto 16a ~~“Business~~Reseller of the ~~Combinations~~Vendor’s Products.” ~~and~~EITF ~~FASB~~Issue ~~Statement~~ No. 3800-25 ~~“Accounting~~addresses various aspects of the accounting for ~~Preacquisition~~consideration given by a vendor to a customer or a ~~Contingencies~~reseller of ~~Purchased~~the ~~Enterprises~~vendor’s products.” ~~SFAS~~Consideration ~~141~~includes ~~requires~~sales ~~all~~incentives ~~business~~such ~~combinations~~as ~~initiated~~discounts, ~~after~~coupons, rebates, ~~June~~free 30products or services, slotting fees, coop advertising and buydowns. Pursuant to EITF 00-25, such consideration ~~2001~~is presumed to be ~~accounted~~a reduction of revenue unless certain criteria are met. The Issue should be applied no later than in annual or interim financial statements for ~~using~~periods beginning after December 15, 2001 and requires retroactive restatement. The Company previously recorded coop advertising expenses and other sales incentives to resellers within selling and marketing expense in the ~~purchase~~statement ~~method~~of operations. ~~Accordingly~~The Company adopted EITF Issue No. 01-09 in the first quarter ended February 28, 2002. As a result, the Company ~~will~~has berecorded ~~adopting~~$10,000 as an increase to product sales for the ~~provisions~~three months ended May 31, 2002 and $3,000 as a reduction to product sales for the six months ended May 31, 2002, respectively. Additionally, the Company reclassified $ 94,000 and $143,000 as reductions of ~~this~~product sales that were previously classified as selling and ~~statement~~marketing ~~upon~~expenses ~~any~~for ~~business~~the ~~combination~~three ~~entered~~and ~~into~~six ~~after~~months ~~June~~ended 30May 31, 2001, respectively.

In ~~July~~September ~~2001~~2000, the EITF ~~FASB~~ issued ~~SFAS~~00-10 ~~No. 142,~~ “~~Goodwill~~Accounting for Shipping and ~~Other~~Handling ~~Intangible~~Fees ~~Assets~~and costs,”. relating ~~This~~to ~~statement~~the ~~applies~~accounting tofor ~~goodwill~~reimbursement for shipping and ~~intangible~~handling ~~assets~~fees ~~acquired~~and ~~after~~related ~~June~~costs ~~30,~~by ~~2001~~customers. In accordance with EITF 00-10, asreimbursements ~~well~~received asfor ~~goodwill~~shipping and ~~intangible~~handling ~~assets~~fees ~~previously~~and costs ~~acquired~~incurred should be characterized as revenue in the statement of operations. ~~Under~~The ~~this~~Company ~~statement~~has historically ~~goodwill~~accounted for reimbursement received for shipping and handling fees as ~~well~~a asreduction ~~certain~~of ~~other~~cost ~~intangible~~of ~~assets,~~sales ~~determined~~in tothe ~~have~~statement anof ~~infinite~~operations to offset ~~life,~~the ~~will~~costs noincurred. The ~~longer~~Company ~~be amortized.~~ adopted ~~These~~EITF ~~assets~~00-10 ~~will~~in bethe ~~reviewed~~first ~~for~~quarter ~~impairment~~ended onFebruary a28, ~~periodic basis~~2002. ~~This~~As a result, the ~~statement~~Company ishas ~~effective~~recorded ~~for~~$14,000 ~~the~~and ~~Company~~$21,000 inas ~~the~~product ~~first~~sales ~~quarter~~for ofthe ~~fiscal~~three ~~year~~and six ~~2003. Management~~months isended ~~currently~~May 31, 2002, respectively. ~~evaluating~~Additionally, the ~~impact~~Company reclassified $33,000 and $76,000 as product sales that ~~this~~were ~~statement~~previously ~~will~~classified ~~have~~as onreductions ~~the~~to ~~Company’s~~cost ~~financial~~of sales for the ~~statements~~three and six months ended May 31, 2001, respectively.

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~14

~~Overview~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

~~Media 100~~CONDITION ~~Inc., a Delaware corporation, (the “Company”) designs and sells systems~~AND ~~(comprising~~RESULTS ~~software~~OF and hardware) and services that allow Internet-based (“online”) and traditional broadcasters, corporate marketing professionals and educators to create and deliver high-quality video programs as either traditional media or Internet-compatible streams (“streaming media”).OPERATIONS

The Company recognizes revenue in accordance with Statement of Position, “Software Revenue Recognition” (SOP 97-2) as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain Transactions”. Net sales are recognized following establishment of persuasive evidence of an arrangement, provided that the license fee is fixed and determinable, delivery of product has occurred via physical shipment or electronically, a determination has been made by management that collection is probable and the Company has no remaining obligations. Revenues under multiple element arrangements, which typically include products and maintenance sold together, are allocated to each element using the residual method in accordance with SOP 98-9. Sales to certain resellers and distributors are subject to agreements allowing certain rights of return and price protection on unsold merchandise held by these resellers and distributors. The Company provides for estimated returns and refunds at the time of shipment. The Company recognizes maintenance revenue from the sale of post-contract support services ratably over the life of the contract.Overview

OnThe ~~August~~following ~~30,~~discussion ~~2001,~~and ~~the~~analysis ~~Company~~of ~~signed~~our anfinancial ~~agreement~~condition toand ~~sell~~results ~~its~~of operations ~~software~~should ~~product~~be read in conjunction with our consolidated financial ~~line~~statements toand ~~Autodesk,~~the ~~Inc.~~related ~~for~~notes ~~$16~~appearing ~~million~~elsewhere in ~~cash~~this report. As aThe discussion ~~result~~and ofanalysis ~~this~~contains ~~transaction,~~forward-looking ~~the~~statements ~~assets~~that ofinvolve ~~the software~~risks, ~~product~~uncertainties ~~line~~and toassumptions. The preparation beof ~~discontinued~~these ~~consisting~~financial ~~primarily~~statements ofand ~~inventory,~~related ~~equipment~~discussions requires ~~and~~management ~~intangible~~to ~~assets~~make estimates and ~~have~~judgments ~~been~~that ~~separately~~affect ~~classified~~the inreported ~~the~~amounts ~~accompanying~~of ~~balance~~assets, ~~sheet~~liabilities, atrevenue ~~August~~and 31expenses, ~~2001~~and the related disclosure of contingent assets and liabilities. ~~The~~On ~~November~~an 30on-going basis, ~~2000~~we ~~balance~~evaluate ~~sheet~~our ~~has~~estimates ~~been~~including ~~restated~~those related to ~~conform~~product returns, tobad ~~the~~debts, ~~current~~inventories, contingencies and litigation. We base our estimates on historical ~~year’s~~experience ~~presentation.~~and ~~The~~on ~~disposal~~various ~~date~~other ~~was~~assumptions ~~October~~that 5,are ~~2001~~believed to be reasonable under the circumstances. ~~The~~ ~~Company’s~~Our ~~software~~actual ~~product~~results ~~line~~may differ materially from those ~~consisted~~anticipated in these forward-looking statements as a result of ~~products~~a ~~acquired~~number inof factors, ~~the~~including ~~Terran~~those ~~acquisition~~set ~~and~~forth ~~the~~under ~~merger~~“Cautionary ~~with~~Statements” and elsewhere ~~Digital~~in ~~Origin~~this report.

~~Results~~We design and sell advanced media systems for content design. Our products are personal computer-based workstations configured with proprietary software and hardware that we engineer and manufacture. In some cases, particularly with our recently-introduced product—844/X™—we sell our products as “turnkey” systems, meaning we configure and ship the system to an end user, or reseller, with a host personal computer, our software and hardware, and disk storage; in other cases, we deliver only our software and hardware (“unbundled”), typically to an independent value-added reseller that configures the turnkey system themselves on behalf of ~~Operations~~an end user.

~~The~~Digital ~~following~~Origin ~~table~~Merger ~~shows certain~~and ~~consolidated~~Other ~~statements of operations data as a percentage of net sales.~~Acquisitions

				Three months ended August 31,				Nine months ended August 31,
				2001		2000		2001		2000
Net sales:
	Products			74.4	%	78.4	%	73.4	%	79.7	%
	Services			25.6		21.6		26.6		20.3
Total net sales				100.0		100.0		100.0		100.0
Cost of sales				56.9		42.9		51.2		42.3
			Gross profit	43.1		57.1		48.8		57.7
Operating expenses:
	Research and development			33.4		23.4		31.0		23.0
	Selling and marketing			32.1		26.0		37.8		27.4
	General and administrative			23.9		8.5		17.7		8.7
	Amortization and write-down of acquisition-related intangible assets			6.0		2.4		9.3		1.9
	Acquired in-process research and development			-		-		-		1.3
	Restructuring charge			3.8		-		3.4		-
		Total operating expenses		99.1		60.3		99.1		62.3
Operating loss				(56.0	)	(3.2	)	(50.3	)	(4.6	)
Interest income, net				0.6		2.1		0.9		2.3
Other income (expense), net				5.8		(2.6	)	0.8		(1.8	)
Loss from continuing operations				(49.6	)	(3.8	)	(48.7	)	(4.2	)
Tax provision				-		-		-		-
	Net loss from continuing operations			(49.6	)	(3.8	)	(48.7	)	(4.2	)
Discontinued operations
Income (loss) from discontinued operations				(12.7	)	6.0		(12.2	)	(4.9	)
Net (loss) income				(62.3	)%	2.2	%	(60.9	)%	(9.1	)%

On May 9, 2000, we completed our merger with Digital Origin. Under the terms of the agreement, Digital Origin’s shareholders and option holders received 0.5347 equivalent shares, or approximately 3.7 million Media 100 common shares, to effect the business combination. The transaction has been accounted for as a pooling of interests. With the sale of the streaming media software product line in on October 5, 2001, the results from Digital Origin have now been classified as discontinued operations in the accompanying statements of operations.

~~Comparison~~We also acquired Terran in fiscal 1999 and Wired, J2 Digital Media, 21st Century Media and certain assets of ~~Third~~Integrated ~~Fiscal~~Computing ~~Quarter~~Engines, Inc. in fiscal year 2000. Each of ~~2001~~these acquisitions was accounted for as a purchase pursuant to ~~Third~~APB ~~Fiscal~~No. ~~Quarter~~16. As a result, the operations of ~~2000~~each acquired entity are reflected in the Company’s consolidated statement of operations from the date of acquisition. With the sale of the streaming media software product line on October 5, 2001, the results from Terran have now been classified as discontinued operations in the accompanying statements of operations.

~~Net~~On ~~sales. Total~~October ~~net sales from continuing operations for the third fiscal quarter ended August 31~~5, 2001, ~~decreased~~we ~~35.7%~~sold toour ~~$8.1 million~~streaming ~~from~~media ~~$12.5~~software ~~million~~product ~~for the third quarter of fiscal 2000. Net sales of products from continuing~~line ~~operations~~to ~~for the third fiscal quarter ended August 31~~Autodesk, ~~2001 decreased 39~~Inc.~~1% to~~ for $616.0 million ~~from $9.8 million for fiscal 2000. The decrease~~ in ~~net~~cash, ~~sales from products is due to a number~~ of ~~factors~~ ~~including~~which ~~lower unit sales on both the Macintosh and Windows operating platforms and lower average selling prices for our digital video systems (~~$32.~~1 million) and lower sales of our MPEG-based products ($~~0.7 million~~). We~~ ~~attribute the decrease in sales of our~~was ~~digital~~deposited ~~video~~into ~~systems~~an toescrow ~~increased~~account ~~competition~~for ~~and~~a ~~lower~~period ~~demand~~of ~~and~~one ~~anticipate this~~year ~~trend~~ in ~~lower year-over-year sales will continue for the remainder of~~case ~~fiscal~~indemnification ~~2001~~issues arise. ~~Net~~The ~~sales from continuing~~net ~~operations~~loss ~~for services for the third fiscal quarter ended August 31, 2001 were $2.1 million, a decrease of 23.6%~~ from ~~the~~these ~~third~~operations ~~quarter~~is ofincluded ~~fiscal 2000. The decrease~~ in ~~net~~the ~~sales~~accompanying ~~from~~statements ~~services is~~of ~~the~~operations ~~result~~under of“discontinued ~~lower~~operations” ~~sales~~(see ofNote ~~service~~14 ~~contracts due~~ to ~~lower~~the ~~units sales of our~~Consolidated ~~digital~~Financial ~~video~~Statements ~~systems~~included ~~and the elimination of encoding and hosting services~~herein).

Gross profit. Gross profit from continuing operations decreased 51.4% to $3.5 million in the third fiscal quarter of 2001 from $7.2 million in the third quarter of fiscal 2000. Gross profit as a percentage of net sales from continuing operations decreased to 43.1% in the third fiscal quarter of 2001 from 57.1% in the third quarter of fiscal 2000. Specifically, gross profit as a percentage of net product sales from continuing operations decreased to 29.4% in the third fiscal quarter of 2001 from 51.8% in the third quarter of fiscal 2000, while gross profit as a percentage of net sales of services from continuing operations increased to 83.2% in the third fiscal quarter of 2001 from 76.5% in the third quarter of fiscal 2000. The percentage increase in services resulted from the elimination of encoding and hosting services during the second quarter of fiscal 2001. Gross profit as a percentage of net product sales from continuing operations decreased due to lower average selling prices for our digital video systems and lower units sales. We currently forecast overall gross profit as a percentage of net sales will be relatively stable for the remainder of this fiscal year, however, due to uncertainty regarding the level of sales and potential fluctuations in the mix of products sold, gross profit as a percentage of net sales may vary from one quarter to another.15

~~Research and~~Results ~~development. Research and development expenses from continuing operations decreased 8.3% to $2.7 million in the third fiscal quarter~~ of 2001 from $2.9 million in the third quarter of fiscal 2000. Research and development expenses consist primarily of salaries and related benefits, consultants, outside services, occupancy and depreciation. At this time, we anticipate research and development expenses will remain relatively stable, in dollar terms, over the next several quarters as we continue to develop new products and maintain existing products.Operations

~~Selling and~~The ~~marketing. Selling~~following ~~and~~table ~~marketing expenses~~shows ~~from~~certain ~~continuing operations decreased 20.8% to $2.6 million in the~~consolidated ~~third~~statements ~~fiscal quarter~~ of ~~2001~~operations ~~from~~data ~~$3.3~~as ~~million~~a inpercentage ~~the third quarter~~ of ~~fiscal 2000. Selling~~net expenses consist primarily of salaries and related benefits, commissions, travel, occupancy and depreciation. Marketing expenses consist primarily of salaries and related benefits, trade shows, seminars, advertising, sales ~~literature and lead generation activities~~. The decrease in selling and marketing expenses resulted primarily from reduced marketing expenses including salaries and related benefits, advertising and lead generation activities. We currently anticipate that our selling and marketing expenses will decrease in our fiscal fourth quarter due to lower salary and other employee-related expenses as we adjust our expenses to be more in line with our forecasted lower level of sales.

General and administrative. General and administrative expenses from continuing operations increased 79.9% to $1.9 million in the third fiscal quarter of 2001 from $1.0 million in the third quarter of fiscal 2000. General and administrative expenses include the cost of human resources, finance, information technology, legal and other administrative functions of the Company. We increased the allowance for doubtful accounts by $150,000 due to softening economy and our expectation that some of our customers will experience difficulties in meeting their financial obligations. We also increased our legal reserve for several lawsuits (see Note 9) that we currently anticipate may result in a settlement by the company and we increased our bonus accrual by $200,000 for payments to employees that made significant contributions to the company. We currently anticipate that our general and administrative expenses will decrease in the fourth quarter as we reduce expenses to be more in line with our forecasted lower level of sales.

	Three months ended May 31,				Six months ended May 31,
	2002		2001		2002		2001
Net sales:
Products	77.2	%	71.2	%	71.6	%	72.5	%
Services	22.8		28.8		28.4		27.5
Total net sales	100.0		100.0		100.0		100.0
Cost of sales	50.2		57.2		50.0		50.5
Accelerated depreciation and amortization of fixed assets (Note 6)	1.3		—		3.0		—
Gross profit	48.5		42.8		47.0		49.5
Operating expenses:
Research and development	38.9		34.7		46.3		30.5
Selling and marketing	41.3		44.8		44.8		40.2
General and administrative	21.7		14.7		22.9		15.2
Amortization and write-off of intangible assets	4.1		6.0		6.9		11.0
Accelerated depreciation and amortization of fixed assets (Note 6)	3.3		—		7.7		—
Settlement of litigation (Note 7 and 9)	—		—		8.3		—
Restructuring charge	—		7.1		3.2
Total operating expenses	109.3		107.3		136.9		100.1
Operating loss	(60.8	)	(64.5	)	(89.9	)	(50.6	)
Interest income, net	0.6		0.8		1.0		1.0
Other income (expense), net	4.1		(7.2	)	1.7		(1.5	)
Loss from continuing operations	(56.1	)	(70.9	)	(87.2	)	(51.1	)
Benefit from income taxes	—		—		(1.0	)	—
Loss from continuing operations	(56.1	)	(70.9	)	(86.2	)	(51.1	)
Loss from discontinued operations	—		(14.0	)	—		(10.2	)
Net loss	(56.1	)%	(84.9	)%	(86.2	)%	(61.3	)%

~~Amortization~~Comparison ~~and write-down~~ of ~~acquisition-related~~Second ~~intangible~~Fiscal ~~assets. We~~Quarter ~~recorded an expense for the amortization and write-down~~ of ~~acquisition-related~~2002 ~~intangible assets from continuing operations of $0.5 million in the third fiscal quarter of 2001 compared~~ to ~~$0.3 million~~Second inFiscal ~~the~~Quarter ~~third quarter~~ of ~~fiscal 2000. Included in the $0.5 million was amortization expense associated with the acquisitions of Wired, Inc. and certain assets of Integrated Computing Engines, Inc.~~2001

~~Restructuring~~Net sales. Total net sales for the second fiscal ~~charge~~quarter ended May 31, 2002 decreased 18. ~~During~~0% to $6.6 million from $8.0 million for the ~~third~~second quarter of fiscal 2001. Net sales from products for the second fiscal quarter of 2002 decreased 11.1% to $5.1 million from $5.7 million for the second quarter of fiscal 2001,. The wedecrease ~~recorded~~in net sales from products is due to a ~~restructuring~~number ~~charge~~of factors including increased competition for our digital video systems resulting in lower unit sales and average selling prices ($2.8 million), and lower sales of the MPEG-based products acquired in the acquisition of Wired, Inc. (“Wired”)($~~310~~400,000). These indecreases ~~connection~~were ~~with~~partially aoffset by sales of our new content ~~reorganization~~design ofsystem, ~~the~~844/X ~~company~~($2.6 ~~that~~million), ~~resulted~~which began shipping in ~~severance~~April ~~payments~~2002. We anticipate this trend of lower year-over-year sales of our digital video systems to ~~terminated~~continue for the remainder ~~employees~~of this year, partially offset by sales from 844/X. ~~There~~In ~~was~~addition, as part of the settlement of litigation with the former shareholders of Wired, dated April 15, 2002, we will no ~~similar~~longer ~~expense~~sell the ~~recorded~~Wired inMPEG-based products. Sales of the Wired product line for the second quarter ended May 31, 2002 were approximately $100,000. Net sales from services for the second fiscal quarter ended May 31, 2002 decreased 35.0% to $1.5 million from $2.3 million for the second quarter of ~~2000~~fiscal 2001. The decrease in net sales from services is due to lower sales of service contracts to support our digital video systems ($800,000).

~~Interest income,~~Gross ~~net~~profit. ~~Interest~~Gross ~~income~~profit decreased 80 7.80% to $03.12 million in the ~~third~~second fiscal quarter of ~~2001~~2002 from $0.3.4 million in the ~~third~~second quarter of fiscal ~~2000~~2001. ~~The~~Overall gross profit as a ~~decrease~~percentage inof ~~interest~~net ~~income~~sales isincreased ~~due~~ to ~~lower~~48.5% ~~cash~~in ~~and~~the ~~cash~~second ~~equivalent~~fiscal ~~balances~~quarter of 2002 from 42.8% in the second quarter of fiscal 2001. Specifically, ~~versus~~gross ~~2000~~profit as a percentage of net product sales increased to 38. ~~During~~7% in the second fiscal quarter of 2002 from 28.8% in the second quarter of fiscal ~~2000~~2001, wewhile ~~purchased~~gross ~~several~~profit ~~companies~~as ~~utilizing~~a ~~our~~percentage ~~existing~~of ~~cash~~net ~~and~~sales ~~cash~~of ~~equivalents~~services increased to ~~pay~~81.8% ~~for~~in ~~these~~the ~~acquisitions~~second fiscal quarter of 2002 from 77. We5% in ~~currently~~the ~~anticipate~~second ~~interest~~quarter ~~income~~of ~~will~~fiscal 2001. The increase in ~~fiscal~~gross profit as a percentage of net sales of services ~~2001~~resulted ~~versus~~from ~~2000~~lower ~~due~~expenses toin ~~higher~~support ~~cash~~of ~~balances~~customers, partially offset by our lower sales of services. Gross profit as a ~~result~~percentage of ~~the~~net ~~sale~~product ofsales ~~our~~increased due to lower manufacturing ~~streaming~~expenses, ~~media~~partially ~~software~~offset ~~business~~by a charge for accelerated depreciation. The accelerated depreciation charge, related primarily to ~~Autodesk~~leasehold improvements, ~~Inc~~was due to our decision to relocate our facility to a new location better suited to meet our needs. We currently forecast overall

Other income (expense), net. Other income was $0.5 million in the third fiscal quarter of 2001 compared to other expense of $0.3 million in the third quarter of fiscal 2000. The increase is due to foreign exchange gains on intercompany transactions with our foreign subsidiaries.16

~~Tax~~gross profit as a ~~provision.~~percentage Weof ~~did~~net ~~not~~sales ~~provide~~will ~~for~~remain arelatively ~~tax~~constant ~~provision~~over in the ~~third~~next ~~fiscal quarter~~several ofquarters ~~2001~~however, due to ~~the~~potential ~~net~~fluctuations ~~loss~~in ~~incurred~~the ~~during~~mix ~~the~~of ~~quarter~~products ~~and~~sold, gross ~~our~~profit ~~expectation~~as a percentage of no ~~taxable~~net ~~income~~sales ~~for~~may ~~the~~vary ~~year~~from one quarter to another.

~~Discontinued~~Research and ~~operations~~development. WeResearch ~~recorded~~and ~~a loss from~~development ~~discontinued~~expenses ~~operations~~decreased of8.2% (to $12.0)6 million orin (the second fiscal quarter of 2002 from $02.~~08)~~8 ~~per~~million ~~share,~~ in the ~~third fiscal~~second quarter of fiscal 2001. Research ~~versus~~and ~~net~~development ~~income~~expenses consist primarily of ~~$0.8~~salaries ~~million~~and related benefits for our personnel, orconsultants, outside $0services, occupancy and depreciation.06 ~~per~~At ~~share~~this time, we anticipate inresearch and development expenses will decrease over the ~~third~~next ~~quarter~~several quarters due to the completion of ~~fiscal~~the ~~2000.~~ development effort related to the first version of ~~The~~our ~~loss~~recently inintroduced ~~the~~content ~~third~~design ~~quarter~~system, 844/X. We plan to continue to invest a significant amount of ~~fiscal~~our resources ~~2001~~into ~~includes~~further ~~all~~development of 844/X; however, for the ~~operations~~second half of ~~that~~fiscal ~~were~~2002, ~~sold~~we do not anticipate this future development to ~~Autodesk,~~be ~~Inc.~~as ~~and~~costly ~~all~~as the ~~transaction-related~~development ~~expenses~~costs associated with the first version of 844/X.

~~Net~~Selling and ~~loss~~marketing. AsSelling aand ~~result of the above factors,~~marketing weexpenses ~~had~~decreased a24.4% ~~net~~to ~~loss~~$2.7 ~~from~~million ~~continuing~~in ~~operations for~~ the ~~third~~second fiscal quarter of 2002 ~~2001~~from $3.6 million in the ~~amount~~second quarter of ~~($4~~fiscal 2001.0) Selling ~~million,~~expenses orconsist ~~($0.32)~~primarily ~~per~~of salaries ~~share~~and related benefits for our sales force, ~~compared~~sales tocommissions, atravel, occupancy ~~net~~and depreciation. Marketing ~~loss~~expenses consist primarily of ~~($0.5)~~salaries ~~million,~~and orrelated ~~($0.04)~~benefits, ~~per~~trade ~~share~~shows, seminars, inadvertising, ~~the~~sales ~~third~~literature ~~quarter~~and oflead ~~fiscal 2000~~generation activities. ~~Total~~The ~~net~~decrease ~~loss,~~in ~~including~~selling and marketing ~~discontinued~~expenses ~~operations,~~resulted ~~for~~primarily ~~the~~from ~~third~~reduced ~~quarter~~marketing expenses due to lower product sales of ~~fiscal~~our ~~2001~~digital ~~was~~video ~~($5~~systems.0) ~~million~~We orcurrently ~~($0.40)~~anticipate ~~per~~that ~~share,~~our ~~versus~~selling ~~net~~and ~~income~~marketing ofexpenses ~~$0.3~~will decrease ~~million,~~over orthe ~~$0.02~~next ~~per~~several quarters due to the completion of the initial ~~share,~~marketing ~~for~~rollout of 844/X in the second quarter of fiscal ~~2000~~2002.

~~Comparison~~General and administrative. ofGeneral ~~First~~and ~~Nine~~administrative ~~Months~~expenses increased 21.0% to $1.4 million in the second fiscal quarter of ~~Fiscal~~2002 from $1.2 million in the second quarter of fiscal 2001. General toand ~~First~~administrative expenses ~~Nine~~include ~~Months~~the cost of ~~Fiscal~~human ~~2000~~resources, finance, information technology, legal and other administrative functions. The increase in general and administrative expenses resulted primarily from a charge of $397,000 related to the McRoberts litigation. We currently anticipate that our general and administrative expenses will decrease over the next several quarters due to lower legal and headcount related expenses.

~~Net sales. Total net sales from continuing operations~~Amortization ~~for~~and ~~the~~write-off ~~first~~of ~~nine~~intangible ~~months ended August 31, 2001 decreased 27~~assets.~~4% to $26.0~~ We ~~million~~recorded ~~from~~an ~~$35.8~~expense ~~million~~ for the ~~first~~amortization ~~nine~~and ~~months~~write-off of ~~fiscal~~intangible ~~2000. Net~~assets ~~sales~~ of ~~products from continuing~~ ~~operations~~$273,000 ~~for~~in the ~~first~~second ~~nine~~fiscal ~~months~~quarter ~~ended~~of ~~August~~2002 ~~31,~~compared ~~2001~~to ~~decreased~~$480,000 ~~33.1%~~in tothe ~~$19.1~~second ~~million~~quarter ~~from~~of ~~$28.5 million for~~ fiscal ~~2000~~2001. The $273,000 ~~decrease~~recorded in ~~net~~the ~~sales~~second quarter of ~~products~~fiscal ~~from~~2002 ~~continuing~~related ~~operations is due~~ to ~~a number of factors including lower unit sales on both~~ the ~~Macintosh~~ ~~and~~amortization ~~Windows~~of ~~operating~~goodwill ~~platforms,~~associated ~~lower~~with ~~average selling prices for~~ our ~~digital video systems, and lower sales of the MPEG-based products acquired in the~~ acquisition of ~~Wired,~~certain ~~Inc. Net~~assets ~~sales~~of ~~from products acquired from~~ Integrated Computing Engines, Inc. ~~in August 2000~~ The ~~totaled~~ $~~2.9~~480,000 ~~million~~recorded in the ~~first~~second ~~nine~~quarter ~~months~~ of fiscal 2001 ~~versus~~related ~~$0.5 million~~to ~~for~~Wired, ~~the first nine months of fiscal 2000~~Inc. ~~We attribute the decrease in sales of our digital video systems~~ ~~to increased competition~~ and ~~lower~~certain ~~demand~~assets ~~and~~acquired ~~anticipate~~from ~~this~~Integrated ~~trend~~Computing inEngines, ~~lower year-over-year sales will continue for the remainder of fiscal 2001~~Inc. ~~Net~~We ~~sales~~will ~~from~~record ~~continuing~~an ~~operations~~expense for ~~services~~ ~~for first nine months ended August 31, 2001 were $6.9 million, a~~the ~~decrease~~amortization of ~~$.4~~intangible ~~million~~assets ~~from the first nine months~~ of ~~fiscal~~$273,000 ~~2000. During~~in the ~~second~~third quarter of fiscal ~~2001,~~ we2002 ~~closed~~thereby ~~our~~completing ~~encoding and hosting services division, named Streamriver, and sold certain assets related to~~ the ~~business. Prior~~write-off toof ~~shutting~~all ~~down~~of ~~Streamriver,~~our ~~net~~goodwill ~~sales~~currently ~~were~~on ~~$0.3 million in~~our ~~fiscal~~balance ~~2001~~sheet.

~~Gross~~Accelerated ~~profit. Gross~~depreciation ~~profit~~and ~~from~~amortization ~~continuing operations decreased 38.6% to $12.7 million in the first nine months~~ of ~~2001~~fixed ~~from $20~~assets.~~7 million~~ We inrecorded ~~first nine months of fiscal 2000. Gross profit as~~ a ~~percentage~~charge of ~~net~~$215,000 ~~sales from continuing operations decreased to 48.8%~~ in the ~~first nine months of 2001 from 57.7% in the first~~ ~~nine~~second ~~months~~quarter of fiscal ~~2000. Specifically,~~2002 ~~gross~~related ~~profit~~primarily asto aleasehold ~~percentage~~improvements ~~of net product sales from~~at ~~continuing~~our ~~operations~~previous ~~decreased~~facility ~~to 38.6%~~ in ~~the~~Marlboro, ~~first nine months of 2001 from 51~~Massachusetts.3% During in the ~~first~~second ~~nine~~quarter ~~months~~ of fiscal ~~2000,~~2002 ~~while~~we ~~gross~~completed ~~profit as a~~our ~~percentage~~relocation ~~of net sales of services~~ from ~~continuing~~this ~~operations~~facility ~~decreased~~ to ~~76.9%~~ ina ~~the~~new ~~first~~facility, ~~nine~~also ~~months~~located ~~of 2001 from 82.6%~~ in ~~the first nine months of~~Marlboro, ~~fiscal~~Massachusetts, ~~2000. The~~better ~~percentage~~suited ~~decrease in services resulted from increased costs related~~ to ~~encoding~~meet ~~and~~our ~~hosting services~~needs. ~~Gross~~As ~~profit~~result ~~as a percentage~~ of ~~net~~this ~~product~~decision ~~sales~~and ~~from~~the ~~continuing~~signing ~~operations~~of ~~decreased~~a ~~due~~lease tofor ~~lower~~the ~~average~~new ~~selling~~facility ~~prices~~we ~~for~~amortized ~~our~~the ~~digital~~remaining ~~video~~book ~~systems~~value ~~and~~as ~~lower~~of ~~unit~~the ~~sales. We~~beginning ~~currently~~of ~~forecast overall gross profit~~fiscal as2002 ~~a percentage~~ of ~~net~~all ~~sales~~leasehold ~~will~~improvements, befurniture ~~relatively~~and ~~stable~~fixtures over the ~~next several~~remaining ~~quarters,~~months ~~however,~~in ~~due~~fiscal to2002 ~~uncertainty~~(four) ~~regarding~~that ~~the~~we ~~level~~occupied ofour ~~sales~~previous ~~and potential~~facility. There ~~fluctuations~~was inno ~~the~~similar ~~mix~~expense ofrecorded ~~products~~in ~~sold, gross profit as a~~the ~~percentage~~second ~~of net sales may vary from one~~ quarter toof ~~another~~fiscal 2001.

~~Research and development~~Restructuring. ~~Research~~ ~~and development~~In ~~expenses~~the ~~from~~second ~~continuing~~quarter ~~operations~~of ~~decreased~~fiscal ~~2.0%~~2001 ~~to $8.1 million~~we inrecorded ~~the~~a ~~first~~restructuring ~~nine~~charge ~~months~~ of ~~2001 from~~ $~~8.2~~568,000 ~~million~~related into ~~the~~reorganization ~~first nine months of~~that ~~fiscal~~resulted ~~2000. Research~~in ~~and~~consolidation ~~development expenses consist primarily~~ of ~~salaries~~selling and ~~related~~marketing ~~benefits,~~activities ~~consultants, outside services, occupancy~~ and ~~depreciation~~headcount reductions. There Atwas ~~this~~no ~~time,~~such ~~we anticipate~~expense ~~research~~recorded ~~and development expenses will remain relatively stable,~~ in ~~dollar terms, over~~ the ~~next~~second ~~several~~quarter ~~quarters~~of asfiscal ~~we continue to develop new products and maintain existing products~~2002.

~~Selling~~Interest income, ~~and marketing~~net. ~~Selling~~ Interest ~~and~~income ~~marketing expenses~~decreased ~~from~~42.2% ~~continuing operations were~~ to $~~9.8~~37,000 ~~million~~ in the ~~first~~second ~~nine months of~~ fiscal ~~2001~~quarter ~~compared~~of to2002 from $~~9.8~~64,000 ~~million~~ in the ~~first~~second ~~nine months~~ quarter of fiscal ~~2000~~ 2001. ~~Selling~~The ~~expenses~~decrease ~~consist~~in ~~primarily~~interest ofincome ~~salaries~~is ~~and~~due ~~related~~to ~~benefits,~~lower ~~commissions,~~cash ~~travel, occupancy~~ and ~~depreciation. Marketing~~ ~~expenses consist~~cash ~~primarily~~equivalent ofbalances ~~salaries~~in ~~and related benefits, trade shows, seminars,~~fiscal ~~advertising,~~2002 ~~sales~~versus ~~literature and lead generation activities~~2001. We currently ~~anticipate that our selling and~~ ~~marketing~~anticipate ~~expenses~~interest income will ~~decrease~~decline in ~~our~~ fiscal ~~fourth~~2002 ~~quarter~~versus 2001 due to lower ~~salary~~cash ~~and other employee-related expenses as we adjust our expenses to be more in line with our forecasted lower level of sales~~balances.

~~General~~Other income ~~and~~(expense), ~~administrative~~net. ~~General~~Other ~~and administrative~~income, ~~expenses~~net ~~from continuing operations increased 47.1% to $4.6~~was ~~million~~$270,000 in the ~~first~~second ~~nine months of~~ fiscal ~~2001~~quarter ~~from $3.1 million in first nine months~~ of ~~fiscal~~2002 ~~2000. General~~compared ~~and administrative~~to ~~expenses~~other ~~include the cost of human resources~~expense, ~~finance, information~~net ~~technology, legal and other administrative functions~~ of ~~the~~ ~~Company. We increased the allowance for doubtful accounts by~~ $~~150~~578,000 ~~due to softening economy and our expectation that some of our customers will experience difficulties~~ in ~~meeting their financial obligations. We also increased our legal reserve in~~ the ~~third~~second quarter of fiscal 2001 ~~for several lawsuits (see~~. ~~Note~~The 9)change ~~that~~from weother ~~currently~~expense ~~anticipate~~to ~~may~~other ~~result~~income inis adue ~~settlement~~to byforeign ~~the company~~exchange ~~and~~gains weon ~~increased~~intercompany ~~our~~transactions ~~bonus~~with ~~accrual~~our byforeign ~~$200,000~~subsidiaries ~~for~~due ~~payments~~ to ~~employees that~~the ~~made~~weakened ~~significant contributions to the company~~U. WeS. ~~currently~~dollar ~~anticipate~~relative ~~that~~to ~~our general and administrative expenses will decrease in~~ the ~~fourth quarter as we reduce expenses to be more in line with our forecasted lower level of sales~~Euro.

~~Amortization~~Loss ~~and~~from ~~write-down of~~continuing ~~acquisition-related intangible assets~~operations. We As ~~recorded~~a anresult ~~expense~~of ~~for~~ the ~~amortization and write-down of~~above ~~acquisition-related~~factors, ~~intangible~~we ~~assets~~had a loss from continuing operations offor ~~$2.4 million in~~ the ~~first~~second ~~nine months of~~ fiscal ~~2001 compared to $0.7 million in the~~quarter ~~first nine months~~ of ~~fiscal~~2002 ~~2000. Included~~ in the ~~$2.4~~amount ~~million was amortization expense associated with the acquisitions~~ of ~~Wired, Inc~~($3.7) ~~and certain assets of Integrated Computing Engines~~million, ~~Inc.~~ ~~and~~or ~~a write-down of goodwill of~~ ($0.929) ~~million~~per ~~related~~share, compared to ~~the acquisitions~~a ofnet ~~21st~~loss ~~Century~~from ~~Media~~continuing ~~LLC~~operations ~~and~~of ~~J2 Digital Media, Inc~~($5. ~~These~~7) ~~two acquisitions were combined to form Streamriver~~million, ~~which~~or ~~was launched in June 2000~~($0. ~~During~~46) ~~the~~per ~~first quarter of fiscal 2001~~share, ~~the goodwill from these two acquisitions was determined to be impaired due to continued operating losses~~ in ~~Streamriver and~~ the ~~uncertainty surrounding our ability to recover the goodwill through future cash flows. During the~~ second quarter of fiscal 2001~~, we closed Streamriver and sold some of the assets related to the business~~.

Restructuring charge. During the first nine months of fiscal 2001, we recorded a restructuring charge of $878,000 in connection with a reorganization of the company that resulted in severance payments to terminated employees and the closing of Streamriver. There was no similar expense recorded in the first nine months of fiscal 2000.17

~~Interest~~Comparison ~~income, net. Interest income decreased 72.7% to $0.2 million in the first nine months~~ of ~~fiscal~~First ~~2001~~Six ~~from~~Months ~~$0.8~~Fiscal ~~million in~~2002 ~~the first nine months of fiscal 2000. The decrease in interest income is due~~ to ~~lower~~First ~~cash~~Six ~~and~~Months cash equivalent balances in fiscal 2001 versus 2000. During fiscal 2000, we purchased several companies utilizing our existing cash and cash equivalents to pay for these acquisitions. We currently anticipate interest income will increase in fiscal 2001 versus 2000 due to higher cash balances as a result of ~~the~~ ~~sale~~Fiscal ~~of our streaming media software business to Autodesk, Inc.~~2001

~~Other~~Net sales. Total net sales for the first six months of ~~income~~fiscal ~~(expense)~~2002 ended May 31, ~~net~~2002 decreased 37.1% to $11.1 million from $17.6 million for the first six months of fiscal 2001. ~~Other~~Net ~~income~~sales ~~was~~from products for the first six months of fiscal 2002 decreased 37.9% to $07.29 million infrom ~~the~~$12.8 million for first ~~nine~~six months of fiscal 2001. The ~~compared~~decrease in net sales from products is due to ~~other~~a ~~expense~~number of factors including increased competition for our digital video systems resulting in lower unit sales and average selling prices ($6.8 million), and lower sales of the MPEG-based products acquired in the acquisition of Wired, Inc. (“Wired”) ($0654,000). These decreases were partially offset by net sales of our new content-design system, 844/X ($2.6 million), which began shipping in April 2002. We anticipate this trend of lower year-over-year net sales of our digital video systems to continue for the remainder of this year, partially offset by net sales from 844/X. In addition, as part of the settlement of litigation with the former shareholders of Wired, dated April 15, 2002, we will no longer sell the Wired MPEG-based products. Sales of the Wired product line for the first ~~nine~~six months of fiscal ~~2000~~2002 were approximately $0.5 million. ~~The~~Net sales ~~increase~~from isservices ~~due~~for the first six months of fiscal 2002 decreased 35.0% to $3.1 ~~foreign~~million ~~exchange~~from $4.8 million for the first six months of fiscal 2001. The decrease in net sales from services is ~~gains~~due onto ~~intercompany~~lower ~~transactions~~sales ~~with~~of service contracts to support our ~~foreign~~digital ~~subsidiaries~~video systems ($1.7 million).

~~Tax~~Gross profit. Gross profit decreased 40.3% to $5.2 million ~~provision~~in the first six months of fiscal 2002 from $8.7 Wemillion ~~did~~in ~~not~~the ~~provide~~first ~~for~~six months of fiscal 2001. Overall gross profit as a ~~tax~~percentage ~~provision~~of net sales decreased to 47.0% in the first ~~nine~~six months of fiscal 2002 from 49.5% in the first six months of fiscal 2001. Specifically, gross profit as a percentage of net product sales decreased to 33.2% in the first six months of fiscal 2002 from 40.1% in the first six months of fiscal 2001, ~~due~~while gross profit as a percentage of net sales of services increased to 81.7% in the ~~net~~first ~~loss~~six ~~incurred~~months of ~~during~~fiscal 2002 from 74.3% in the ~~period~~first ~~and~~six months of fiscal 2001. The increase in gross profit as a percentage of net sales of services resulted primarily from lower expenses in support of customers, partially offset by our ~~expectation~~lower sales of services. Gross profit as a percentage of net product sales decreased due to lower unit sales of noour ~~taxable~~digital ~~income~~video systems and a charge for accelerated depreciation. The accelerated depreciation charge, related primarily to leasehold improvements, was due to our decision to relocate our facility to a new location better suited to meet our needs. We currently forecast overall gross profit as a percentage of net sales will remain relatively constant over the ~~year~~next several quarters, however, due to potential fluctuations in the mix of products sold, gross profit as a percentage of net sales may vary from one quarter to another.

~~Discontinued~~Research and ~~operations~~development. WeResearch ~~recorded~~and ~~a loss from~~development ~~discontinued~~expenses ~~operations~~decreased of4.5% (to $35.2)1 million orin (the first six months of fiscal 2002 from $05.~~26)~~4 ~~per~~million ~~share,~~ in the first ~~nine~~ six months of fiscal 2001. Research ~~versus~~and adevelopment ~~net~~expenses ~~loss~~consist primarily of ~~($1.7)~~salaries ~~million~~and orrelated ~~($0.15)~~benefits ~~per~~for our personnel, consultants, ~~share~~outside services, inoccupancy and depreciation. At this time, we anticipate research and development expenses will decrease over the ~~first~~next ~~nine~~several ~~months~~quarters due to the completion of ~~fiscal~~the ~~2000. The~~development ~~loss~~effort inrelated to the first ~~nine~~version ~~months~~of our recently introduced content design system, 844/X. We plan to continue to invest a significant amount of ~~fiscal~~our resources ~~2001~~into ~~includes~~further ~~all~~development of 844/X; however, for the second half of fiscal ~~operations~~2002, ~~that~~we ~~were~~do ~~sold~~not anticipate this future development to ~~Autodesk,~~be ~~Inc.~~as ~~and~~costly ~~all~~as ~~transaction-related~~the ~~expenses~~development costs associated with the first version of 844/X.

~~Net~~Selling and ~~loss~~marketing. As Selling aand ~~result~~marketing expenses ofdecreased ~~the~~30.0% ~~above factors,~~to we$5.0 ~~had~~million ain ~~net~~the ~~loss~~first six months of fiscal 2002 from ~~continuing~~$7.1 ~~operations~~million ~~for~~in the first ~~nine~~six months of fiscal 2001. Selling inexpenses ~~the~~consist ~~amount~~primarily of salaries ~~($12.7)~~and ~~million,~~related orbenefits ~~($1.02)~~for ~~per~~our ~~share~~sales force, ~~compared~~sales tocommissions, atravel, ~~net~~occupancy ~~loss~~and depreciation. Marketing expenses consist primarily of ~~($1.5)~~salaries ~~million,~~and orrelated ~~($0.13)~~benefits, ~~per~~trade ~~share~~shows, seminars, advertising, sales literature and lead generation activities. The decrease in ~~the~~selling ~~first~~and ~~nine~~marketing expenses ~~months~~resulted ofprimarily from reduced marketing expenses due to lower ~~fiscal~~product ~~2000. Total~~sales ~~net~~of ~~loss~~our digital video systems, ~~including~~partially offset by initial ~~discontinued~~marketing ~~operations,~~expenses for the ~~first~~rollout ~~nine~~of ~~months~~844/X. We ofcurrently ~~fiscal~~anticipate ~~2001~~that ~~was~~our ~~($15.8)~~selling and marketing expenses will ~~million,~~decrease orover ~~($1.28)~~the ~~per~~next ~~share,~~several ~~versus~~quarters adue ~~net~~to ~~loss~~the completion of ~~($3.3)~~the ~~million, or ($0.28)~~initial ~~per~~marketing ~~share,~~rollout ~~for~~of 844/X in the second quarter of fiscal ~~2000~~2002.

~~Liquidity~~General and ~~Capital~~administrative. General ~~Resources~~and administrative expenses decreased 5.1% to $2.5 million in the first six months of fiscal 2002 from $2.7 million in the first six months of fiscal 2001. General and administrative expenses include the cost of human resources, finance, information technology, legal and other administrative functions. We currently anticipate that our general and administrative expenses will decrease over the next several quarters due to lower legal and headcount related expenses.

Amortization and write-off of intangible assets. We ~~have~~recorded ~~funded~~an ~~our~~expense ~~operations~~for the amortization and write-off of intangible assets of $765,000 in the first six months of fiscal 2002 compared to ~~date~~$1.9 ~~primarily~~million ~~from~~in ~~public~~the first ~~offerings~~six months of ~~equity~~fiscal 2001. The ~~securities~~$765,000 ~~and~~recorded ~~cash~~in ~~flows~~the ~~from~~first ~~operations~~six months of fiscal 2002 related to the amortization of goodwill associated with our acquisitions of Wired, Inc. and Ascertain assets of ~~August~~Integrated 31Computing Engines, Inc. The $1.9 million recorded in the first six months of fiscal 2001 related to Wired, Inc., Integrated Computing Engines, Inc. and a write-off of goodwill of $880,000 related to the ~~Company’s~~acquisitions ~~principal~~of ~~sources~~21st Century LLC and J2 Digital Media, Inc. These two acquisitions were combined to form Streamriver, which was launched in June 2000. During the first quarter of fiscal ~~liquidity~~2001, the goodwill from these two acquisitions was determined to be ~~included~~impaired ~~cash~~due to continued operating losses in Streamriver and the uncertainty surrounding our ability to recover the goodwill through future cash ~~equivalents~~flows. We ~~and~~shut ~~marketable~~down ~~securities~~Streamriver ~~totaling~~in the second ~~approximately~~quarter ~~$6.7~~of ~~million~~fiscal 2001. We will record an expense for the amortization of

For the nine months ended August 31, 2001, cash used in operating activities from continuing operations was approximately $7,695,000 compared to approximately $1,535,000 for the same period a year ago. For the nine months ended August 31, 2001, cash used in operating activities from discontinued operations was approximately $1,473,000 compared to approximately $8,148,000 for the same period a year ago. The Company incurred a net loss from continuing operations of $12,656,000 offset by significant non-cash items, including depreciation, amortization and write-down of intangible assets for continuing operations, in the amount of $4,487,000. A significant portion of the cash used in operating activities is attributable to a significant reduction in accounts payable of $2,862,000. Accounts receivable provided cash in operating activities in the amount of $2,546,000 due to the timing of sales in the quarter and the subsequent collection of those sales, which resulted in days sales outstanding of 43. Inventory provided cash in operating activities in the amount of $2,140,000 during the first nine months of fiscal 2001, compared with inventory utilizing cash in operating activities of $2,396,000 for the same period a year ago. Deferred revenue for the first nine months of fiscal 2001 utilized cash of $968,000, compared to providing cash of $168,000 for the same period a year ago. Deferred revenue declined during the first nine months of fiscal 2001 due to lower unit sales of our digital video systems and, therefore, lower unit sales of service contracts for those systems. Accrued expenses utilized cash of $741,000, compared to providing cash of $865,000 for the same period a year ago. Accrued expenses declined during the first nine months of 2001 due primarily to accrued legal and audit expenses that were paid during the period.18

~~Net~~intangible ~~cash~~assets ~~provided~~of ~~by investing activities was approximately~~ $4273,~~674,~~000 ~~during the nine months of fiscal 2001, compared to cash used~~ in ~~investing activities of approximately $859,000 for~~ the ~~same~~third ~~period~~quarter ~~a year ago. Cash provided by investing activities during the first nine months~~ of fiscal ~~2001~~2002 ~~consisted~~thereby ofcompleting ~~net proceeds from~~ the ~~sale of~~ ~~marketable~~write-off ~~securities~~ of ~~$5,419,000,~~all ~~partially offset by the purchases~~ of ~~equipment~~ ~~for~~our ~~$768,000. The~~goodwill ~~proceeds from~~currently ~~the~~on ~~sales~~our ofbalance ~~marketable securities were used to fund the purchases of equipment and working capital needs due to the net loss incurred the first nine months of fiscal 2001~~sheet.

~~Cash used~~Accelerated indepreciation ~~financing~~and ~~activities~~amortization ~~during the first nine months~~ of ~~fiscal~~fixed ~~2001~~assets. We ~~was approximately~~recorded ~~$1,066,000,~~a ~~compared~~charge ~~to cash provided by financing activities~~ of $4849,~~472,~~000 ~~for~~in the ~~same period a year ago.~~ ~~Cash~~first ~~used~~six inmonths ~~financing activities resulted from the non-recurring payment~~ of anfiscal ~~acquisition-~~2002 related ~~note~~primarily ~~payable~~to inleasehold ~~the~~improvements ~~amount of $1,492,000,~~at ~~offset~~our byprevious ~~$504,000~~facility ~~from~~in ~~proceeds~~Marlboro, ~~from~~Massachusetts. During the ~~issuance~~second quarter of ~~common~~fiscal ~~stock~~2002 ~~pursuant~~we ~~to stock~~completed ~~plans. The reduction in cash~~our ~~provided~~relocation byfrom ~~financing~~this ~~activities~~facility ~~that~~to ~~came~~a ~~from~~new ~~proceeds~~facility, ~~from~~also ~~the~~located ~~issuance~~in ofMarlboro, ~~common~~Massachusetts, ~~stock~~better ~~pursuant~~suited to ~~stock~~meet ~~plans~~our isneeds. As ~~due to~~ a ~~significantly~~result ~~lower~~of ~~price~~this ~~for the~~decision ~~Company’s~~and ~~common stock in~~ the ~~first~~signing ~~nine months~~ of ~~fiscal 2001 versus the same period~~ a ~~year~~lease ~~ago. Given~~for the ~~recent~~new ~~reduced~~facility ~~price~~we ofamortized the ~~Company’s~~remaining ~~common~~book ~~stock,~~value weas doof ~~not~~the ~~currently~~beginning ~~expect~~of ~~cash~~fiscal ~~provided~~2002 byof ~~proceeds~~all ~~from~~leasehold ~~the~~improvements, ~~issuance~~furniture ofand ~~common~~fixtures ~~stock~~over ~~pursuant to stock~~the ~~plans~~remaining tomonths bein afiscal ~~significant~~2002 ~~source~~(four) ofthat ~~liquidity~~we inoccupied ~~fiscal~~our ~~2001~~previous facility.

AsSettlement of litigation. We agreed to settle oflitigation ~~August~~brought ~~31,~~against ~~2001,~~us by the ~~Company’s~~former ~~principal~~shareholders ~~sources~~ of ~~liquidity~~Wired, ~~included~~a ~~cash~~company we ~~and~~acquired ~~marketable~~by ~~securities~~the Company in December 1999. ~~Additionally,~~As onpart ~~August~~of 29the settlement, ~~2001~~we ~~the~~assigned ~~Company~~all ~~executed~~rights anto ~~agreement~~the toWired product ~~sell~~line, ~~our~~intellectual ~~streaming~~property ~~media~~relating ~~software business~~ to ~~Autodesk,~~Wired ~~Inc.~~products ~~for~~and ~~$16~~on-hand ~~million in~~inventory ~~cash. The~~related ~~transaction~~to ~~was~~the ~~completed~~Wired ~~on October~~product 5,line ~~2001~~to ~~and,~~the ~~subsequent~~former toshareholders. Wired ~~closure,~~agreed ~~the~~that ~~company~~no ~~received~~further ~~$14~~action ~~million~~will inbe ~~cash~~taken ~~with~~related to the ~~remaining~~lawsuit $2previously ~~million~~filed ~~deposited~~against us as noted in ~~escrow~~Note ~~for~~9 ~~one~~to the ~~year~~Consolidated Financial Statements. ~~The~~ Wired ~~Company~~granted ~~believes~~us ~~that~~an ~~its~~irrevocable ~~current~~license ~~cash~~to use the source code, ~~marketable~~technology, ~~securities~~know how and ~~cash~~intellectual property; provided, byhowever, ~~future~~the ~~operations will be sufficient~~license todoes ~~meet~~not include the ~~Company’s~~right ~~working~~to ~~capital~~sell ~~and~~Wired ~~anticipated~~products ~~capital~~or ~~expenditure~~any equivalent products ~~requirements~~incorporating ~~for~~the atsource ~~least~~code, ~~the~~technology, ~~next~~know ~~twelve~~how ~~months~~and intellectual property. ~~Although~~In ~~operating~~addition, ~~activities~~we ~~may~~will provide limited ~~cash~~manufacturing inand ~~certain periods,~~marketing support to the ~~extent~~former ~~the~~shareholders ~~Company~~in exchange ~~experiences~~for ~~growth~~a inroyalty of 5% of adjusted gross sales of the ~~future,~~assigned ~~its~~products, ~~operating~~not ~~and~~to ~~investing~~exceed ~~activities~~$1.2 ~~may~~million, ~~require~~plus ~~significant~~the ~~cash. Consequently,~~cost ~~any~~of ~~such~~the ~~future~~inventory ~~growth~~assigned. ~~may~~This ~~require~~agreement ~~the~~resulted ~~Company~~in toa ~~obtain~~write-off ~~additional~~of ~~equity~~the orremaining ~~debt~~goodwill ~~financing~~created through the acquisition of Wired. InThere ~~addition,~~was weno ~~may~~similar expense ~~consider~~recorded in the ~~sale~~first ~~of certain~~six ~~assets~~months toof ~~raise~~fiscal ~~capital~~2001.

~~Cautionary~~Restructuring. In the first six months of fiscal 2001 ~~Statements~~we recorded a restructuring charge of $568,000 related to reorganization that resulted in consolidation of selling and marketing activities and headcount reductions. There was no such expense in the first six months of fiscal 2002.

~~This~~Interest income, ~~Quarterly~~net. Interest ~~Report~~income ondecreased ~~Form~~32.7% ~~10-Q contains forward-looking statements within the~~to ~~meaning~~$115,000 ofin the ~~Securities~~first ~~Litigation~~six ~~Reform~~months ~~Act~~ of ~~1995~~fiscal ~~that~~2002 ~~involve~~from ~~risks~~$171,000 ~~and uncertainties. Our~~in ~~actual~~the ~~results~~first ~~could~~six ~~differ~~months ~~materially~~of ~~from~~fiscal ~~those~~2001. The ~~anticipated~~decrease in ~~these forward-looking statements as~~ ainterest ~~result~~income ofis ~~certain~~due ~~factors,~~to ~~including~~lower ~~those~~cash ~~set~~and ~~forth~~cash inequivalent ~~the~~balances ~~following~~in fiscal ~~cautionary~~2002 ~~statements~~versus ~~and elsewhere in this Quarterly Report on Form 10-Q~~2001. IfWe ~~any of the following risks were to occur,~~currently ~~our~~anticipate ~~business,~~interest ~~financial~~income ~~condition,~~will ordecline ~~results~~in offiscal ~~operations~~2002 ~~would~~versus ~~likely suffer. In~~2001 ~~that~~due ~~event,~~to ~~the trading~~lower ~~price~~cash ~~of our common stock would decline~~balances.

~~Merger~~Other ~~and Acquisition Related Risks. During fiscal year ended November 30, 2000,~~income ~~we completed the merger with Digital Origin and the acquisitions of Wired~~(expense), ~~21st Century, and J2~~net. Other ~~In addition~~income, wenet ~~completed the acquisition of certain assets of~~was ~~ICE. Our~~$187,000 ~~business and results of operations could be materially adversely affected~~ in the ~~event~~first wesix ~~fail~~months ~~to complete~~of ~~publicly~~fiscal ~~announced~~2002 ~~acquisitions~~compared or to ~~successfully~~other ~~integrate~~expense, ~~the~~net ~~business and operations~~ of ~~the~~$264,000 ~~merger~~in or the ~~acquisitions. In~~first ~~the~~six ~~future,~~months ~~we may continue to acquire or merge with existing businesses, products, and technologies to enhance and expand our line~~ of ~~products. Such mergers~~fiscal ~~and acquisitions may be material in size and in scope~~2001. ~~There~~The ~~can~~change befrom noother ~~assurance~~expense ~~that we will be able~~ to ~~identify, acquire, or profitably manage additional business or successfully integrate any acquired businesses into our business without substantial expenses, delays, or~~ other ~~operational~~income oris ~~financial~~due problems. Acquisitions involve a number of special risks and factors, including increasing competition for attractive acquisition candidates in our markets, the technological enhancement and incorporation of acquired products into existing product lines and services, the assimilation of the operations and personnel of the acquired companies, failure to ~~retain key~~foreign ~~acquired~~exchange ~~personnel,~~gains ~~adverse short-term effects~~ on ~~reported~~intercompany ~~operating~~transactions ~~results, the~~with ~~amortization~~our offoreign ~~acquired~~subsidiaries ~~intangible assets, the assumption of undisclosed~~due ~~liabilities of any acquired companies, the failure~~ to ~~achieve anticipated benefits such as cost savings and synergies, as well as~~ the ~~diversion~~weakened ~~of management’s attention during the acquisition and integration process~~U. WeS. ~~may~~dollar ~~not~~relative ~~be able~~ to ~~operate~~ the ~~acquired businesses properly and may not be able to successfully recover amounts paid for such businesses~~Euro. Some or all of these special risks and factors may have a material adverse impact on our business, operating results, and financial condition and, as a result, may negatively affect the market price of our common stock.

~~Similarly,~~Benefit ~~we may determine to dispose of~~from ~~assets,~~income ~~either assets we have historically used in the business or that we have acquired~~taxes. ~~Our~~We ~~business~~recorded ~~and~~a ~~results of~~benefit ~~operations~~from ~~could~~income ~~materially~~taxes ~~change depending on whether or not we are able to dispose~~ of ~~assets~~$102,000 in ~~an advantageous manner. In addition to obtaining an advantageous price for~~ the ~~assets~~first tosix bemonths ~~disposed~~ of~~, dispositions~~ ~~involve~~fiscal a2002 ~~number~~due ofto ~~special risks and factors, including searching~~an ~~for~~income ~~appropriate~~tax ~~acquirers;~~refund ~~managing~~we ~~the~~received. We ~~effect of the disposition on existing~~did ~~and~~not ~~proposed~~record ~~product~~a ~~lines~~tax ~~and~~provision ~~services, the divestiture of operations and personnel of the acquired companies, adverse short-term effects on reported operating results, potential post-divestiture indemnification~~ or ~~liability~~benefit ~~for liabilities~~in ~~of divested operations, as well as~~ the ~~diversion~~first ofsix ~~management’s attention~~months ~~during the disposition process. Some or all~~ of ~~these~~fiscal ~~special risks and factors may have a material adverse impact on our business, operating results, and financial condition and, as a result, may negatively affect the market price of our common stock~~2001.

~~Significant~~Loss ~~Fluctuations and~~from ~~Unpredictability~~continuing ~~of Operating Results~~operations. ~~Our~~As ~~quarterly operating results are difficult to predict, have varied significantly in the past and are likely to vary significantly in the future for~~ a ~~number~~result of ~~reasons, including new product~~ ~~announcements~~the ~~and~~above ~~introductions by ourselves or our competitors~~factors, ~~changes~~we ~~in pricing,~~had ~~and~~a ~~the~~loss ~~volume~~from ~~and~~continuing ~~timing~~operations offor ~~orders received during~~ the ~~quarter.~~first ~~Also,~~six inmonths ~~the past, we have experienced delays in the development~~ of ~~new~~fiscal ~~products~~2002 ~~and enhancements, and such delays may occur~~ in the ~~future. These~~amount ~~factors make the forecasting~~ of ~~revenue~~ ~~inherently uncertain~~($9. ~~Additionally,~~6) ~~a significant portion of our operating expenses is relatively fixed~~million, ~~and~~or ~~operating expense levels are based primarily on internal expectations of future revenue~~($0. As75) ~~a consequence,~~per ~~quarterly operating expense levels cannot be reduced rapidly in the event that quarterly revenue levels fail to meet internal expectations. For these reasons~~share, ~~you~~ ~~should~~compared ~~not rely on period-~~to~~-period~~ ~~comparisons~~a ofnet ~~our~~loss ~~financial~~from ~~results~~continuing ~~to forecast~~operations ~~our future performance. It is likely that in some future quarter or quarters our operating results will be below the expectations~~ of ~~securities analysts or investors~~($9. If0) ~~quarterly~~million, ~~revenue~~ or ~~earnings levels~~($0.73) ~~fail~~per ~~to meet internal or external expectations~~share, in the ~~market~~first ~~price~~six months of ~~our~~fiscal ~~common stock may decline significantly~~2001.

~~Emerging Markets. The markets in which we offer our systems~~Liquidity ~~products~~ and ~~services~~Capital are intensely competitive and rapidly changing. We are targeting the emerging market of broadcast designers, effects artists, and creative professionals. This market and the products utilized by these users are relatively new. Our success in this emerging market will depend on the rate at which the market develops and our ability to penetrate that market. We will not succeed if we cannot compete effectively in this market and, as a result, our business and operating results could be materially and adversely affected.Resources

~~Risks Associated With~~We ~~Development~~have ~~and~~funded ~~Introduction~~our ofoperations ~~New~~to ~~Products. If~~date weprimarily ~~are~~from ~~not~~public ~~successful~~offerings inof ~~developing and~~equity ~~introducing~~securities ~~new~~and ~~products~~cash toflows ~~the~~from ~~markets~~operations, weas ~~serve~~well ~~our~~as ~~business~~the ~~and~~sale ~~operating~~of our streaming ~~results~~media ~~will~~software ~~suffer. In~~product ~~addition,~~line ~~new~~to Autodesk. ~~product~~As ~~announcements~~of byMay ~~our~~31, ~~competitors~~2002, ~~and~~our byprincipal ussources ~~could~~of ~~have~~liquidity ~~the~~included ~~effect of~~cash, ~~reducing~~cash ~~customer~~equivalents ~~demand~~and ~~for~~marketable ~~our~~securities ~~existing~~totaling ~~products~~approximately $6.2 million. ~~Also,~~This ~~when~~was wea ~~introduce~~decrease ~~new or enhanced products we must~~of ~~effectively~~approximately ~~manage~~$11.5 ~~the~~million ~~transitions~~of ~~from~~cash, ~~existing~~cash ~~products~~equivalents toand ~~minimize~~marketable securities ~~disruption~~since ofthe ~~orders~~end ~~from~~of our ~~customers. New~~previous ~~product~~fiscal ~~introductions~~year, ~~require~~which usended toNovember ~~devote~~30, ~~time~~2001. Approximately ~~and~~$2.8 ~~resources~~million toof the $11.5 was ~~training~~placed ofin ~~our~~an ~~sales~~escrow ~~channel~~account inwhile the ~~features~~McRoberts ~~and~~litigation ~~target~~is ~~customers~~under ~~for such new~~appeal. ~~products,~~This ~~which~~amount ~~efforts~~is ~~could~~classified ~~result~~as inrestricted ~~less~~cash ~~selling~~at ~~efforts~~May ~~being~~31, ~~made~~2002. In byaddition, the Company has restricted cash ~~sales~~of ~~channel~~approximately ~~during~~$388,000 ~~such~~relating ~~training~~to ~~period~~several letters of credit. ~~Our~~ In ~~failure~~addition to ~~effectively~~the ~~manage~~$6.2 ~~new~~million ~~product~~as ~~announcements~~of orMay ~~introductions~~31, ~~could~~2002, ~~contribute~~an toadditional ~~significant~~$2.0 ~~quarterly~~million ~~fluctuations~~is held in ~~operating~~ ~~results~~escrow asuntil ~~orders~~October ~~for~~2002 ~~new~~as ~~products~~a result ~~commence~~of ~~and~~the ~~orders~~sale ~~for~~of ~~existing products~~our ~~decline~~streaming ~~and,~~media assoftware aproduct ~~result,~~line ~~our~~to ~~operating~~Autodesk, Inc. ~~results~~in ~~will~~October ~~suffer~~2001.

~~Rapid~~During ~~Technological~~the ~~Change. The~~first ~~market~~six ~~for~~months ~~our~~of ~~products~~fiscal is2002 ~~characterized by~~ended ~~rapidly~~May ~~changing~~31, ~~technology~~2002, ~~evolving industry standards and frequent new~~cash ~~product~~used ~~introductions. Our future success will depend~~ in ~~part~~operating ~~upon~~activities ~~our~~from ~~ability~~continuing tooperations ~~enhance~~was ~~existing~~approximately ~~products and~~$11.0 tomillion ~~introduce~~compared ~~new~~to ~~products~~cash ~~and~~used ~~features~~ in aoperating ~~timely~~activities ~~manner~~from ~~to address customer~~continuing ~~requirements,~~operations ~~respond to competitive offerings, adapt to new emerging industry standards and take advantage~~ of ~~new~~approximately ~~enabling technologies that could render our existing products obsolete~~$4.9 Wemillion ~~plan~~for tothe ~~continue~~first tosix ~~invest~~months inof ~~research and~~fiscal ~~development, in connection with our development strategy~~2001. ~~Any~~There ~~delay~~was orno ~~failure~~cash onprovided ~~our~~by ~~part in~~or ~~developing~~used ~~additional~~in ~~new~~discontinued ~~products~~operations ~~or features~~ for ~~existing~~the ~~products~~first orsix ~~any failure~~months of ~~such~~fiscal ~~new~~2002. Cash ~~products~~used orin ~~features~~discontinued tooperations ~~achieve~~for ~~market acceptance, could~~the ~~have~~first asix ~~material~~months ~~adverse~~of ~~effect~~fiscal on2001 ~~our~~totaled ~~business~~$1.1 ~~and~~million. Cash ~~operating~~used ~~results~~in ~~and~~continuing ~~our stock price will suffer.~~

Competition. The market for our products is highly competitive and characterized by pressure to reduce prices, incorporate new features and accelerate the release of new products. A number of companies currently offer products that compete directly or indirectly with our products, including Accom, Inc., Adobe Systems Inc., Apple Computer Inc., Avid Technology, Inc., Discreet (a division of Autodesk, Inc.), FAST Electronic GmbH, Leitch, Inc., Matrox Electronic Systems Ltd., Pinnacle Systems, Inc., and Sonic Foundry, Inc. In addition, we expect much larger vendors, such as Matsushita Electric Industrial Company Ltd., Microsoft Corporation, and Sony Corporation, to develop and introduce digital editing systems that may compete with our products. Many of these current and potential competitors have greater financial, technical and marketing resources than us, including, without limitation, larger and more established selling and marketing capabilities, greater brand recognition and a larger installed base of customers, and well-established relationships with our existing and potential customers, complementary technology vendors and other business partners. As a result, our competitors may be able to develop products comparable to or superior to our own products, adapt more quickly than us to new technologies, evolving industry standards or customer requirements, or lower their product costs and thus be able to lower prices to levels at which we could not operate profitably, the occurrence of any of which could have a material adverse effect on our business and operating results. In this regard, we believe that we will continue to experience competitive pressure to reduce prices, particularly for our high data rate systems. We have historically realized higher gross profit on the sale of these high data rate systems, and such continued competitive pricing pressure could result in lower sales and gross margin, which in turn could adversely affect our business and operating results and negatively affect the price of our common stock.19

~~Dependence~~operations onduring ~~and~~fiscal ~~competition~~2002 ~~with~~included ~~Apple~~a ~~Computer,~~net ~~Inc~~loss of $9. As6 amillion including ~~competitor~~depreciation and amortization of $2.3 million, ~~Apple~~amortization ~~Computer~~of intangible assets of $765,000 ~~Inc~~and a settlement of litigation of $924,000. Cash used in continuing operations was ~~(“Apple”)~~affected ~~could,~~by changes in assets and liabilities including an increase in restricted cash of $3.2 million relating to the ~~future~~McRoberts litigation and several letters of credit, ~~inhibits~~an ~~our~~increase ~~ability~~in inventories of $1,518,000 relating primarily to ~~develop~~the ~~our~~initial ~~products~~buildup of inventory for 844/X and an increase in ~~that~~inventory ~~operate~~for onour ~~the~~digital ~~Macintosh~~video ~~platform.~~ systems, a decrease in accrued expenses of ~~Additionally~~$1,100,000, ~~new~~an ~~products~~increase ~~and~~in ~~enhancements~~accounts toreceivable ~~existing~~of ~~products~~$166,000, ~~from~~an increase in ~~Apple~~prepaid ~~such~~expenses asand ~~Final~~other ~~Cut~~current ~~Pro~~assets ~~could~~of ~~cause~~$146,000, ~~customers~~and toa ~~delay~~decrease ~~purchases~~in deferred revenue of ~~our~~$142,000. Cash was ~~products~~provided orby ~~alter~~an ~~their~~increase ~~purchase~~in ~~decision~~accounts ~~altogether~~payable of $884,000. ~~Furthermore~~Net cash used in investing activities for continuing operations was approximately $864,000 asfor the ~~sole~~first ~~supplier~~six months of fiscal ~~Macintosh~~2002 ~~computers,~~compared ~~any~~to cash provided by investing activities of approximately ~~disruption~~$3.9 inmillion for the ~~availability~~first six months of ~~these~~fiscal ~~computers~~2001. Cash ~~could~~used ~~cause~~in ~~customers~~investing toactivities for continuing operations ~~defer~~during orthe ~~alter~~first ~~their~~six ~~purchase~~months of ~~our~~fiscal ~~products.~~ 2002 was primarily for purchases of capital Weequipment ~~rely~~of on$822,000. Cash ~~access~~provided toby financing ~~key~~activities ~~information~~ from ~~Apple~~continuing tooperations ~~continue~~during ~~development~~the first six months of offiscal ~~our~~2002 ~~products~~was ~~and~~approximately ~~any~~$415,000 ~~failure~~compared to ~~continue~~cash ~~supplying~~used ~~our~~in ~~engineers~~financing activities ~~with~~from ~~this~~continuing operations of $1.3 million for the first six months ~~information~~of ~~could~~fiscal ~~have~~2001. In athe ~~material~~first ~~adverse~~six ~~affect~~months of onfiscal ~~our~~2002, ~~business~~cash ~~and~~provided ~~financial~~by financing activities from continuing ~~results~~operations ~~and~~was ~~negatively~~proceeds ~~affect~~from the ~~price~~issuance of ~~our~~ common stock pursuant to stock plans of $415,000.

~~Dependence~~At onMay ~~Microsoft~~31, ~~Corporation. Many~~2002, of our ~~products~~contractual ~~operate~~cash inobligations ~~the Windows~~were ~~environment~~as and our engineers depend upon access to information in advance from Microsoft Corporation (“Microsoft”). Any failure to continue supplying our engineers with this information could have a material adverse affect on our business and financial results and negatively affect the price of our common stock.follows:

Dependence on Single or Limited Source Suppliers. The Company is dependent on single or limited source suppliers for several key components used in its products that have no ready substitutes, including various audio and video signal processing integrated circuits manufactured in each case only by Crystal Semiconductor Corp., Raytheon Company, LSI Logic Corp., Philips Semiconductors or Zoran Corp. The availability of many of these components is dependent on our ability to provide suppliers with accurate forecasts of our future requirements, and certain components we use to build our products have been subject to industry-wide shortages. We do not carry significant inventories of these components and have no guaranteed supply arrangements with such suppliers. There can be no assurance that our inventory levels will be adequate to meet production needs during any interruption of supply. Our inability to develop alternative supply sources, if required, or a reduction or stoppage in supply, could delay product shipments until new sources of supply become available, and any such delay could adversely affect our business and operating results in any given period and negatively affect the price of our common stock.

	Total		Less than 1 year		1-3 years
Lease commitments	$	2,892,000	$	1,075,000	$	1,817,000
Inventory commitments	$	622,000	$	622,000	$	—

~~Dependence~~We oncurrently ~~Propriety~~anticipate ~~Technology. Our~~that ~~ability~~our tocurrent ~~compete successfully and~~cash ~~achieve~~and ~~future~~equivalents ~~revenue~~plus ~~growth~~cash ~~will~~due ~~depend,~~from inescrow ~~part,~~will onbe ~~our~~sufficient ~~ability~~ to ~~protect~~fund our ~~our~~anticipated ~~proprietary~~cash ~~technology~~requirements ~~and~~for ~~operate~~working ~~without~~capital ~~infringing~~and ~~the~~capital ~~rights~~expenditures offor ~~others~~at least the next twelve months. ~~Previously,~~We wemay ~~have received,~~need ~~and~~to ~~may~~raise inadditional ~~the~~funds, ~~future~~however, ~~continue~~in order to ~~receive,~~fund ~~communications~~our ~~suggesting~~business, ~~that~~develop ~~our~~new ~~products~~and ~~may~~enhance ~~infringe~~existing onproducts ~~the~~and ~~patents~~services, or ~~other~~acquire ~~intellectual~~complementary ~~property rights of~~products, ~~third~~businesses ~~parties~~or technologies. ~~Our policy is to~~If ~~investigate~~additional ~~the~~funds ~~factual~~are ~~basis~~raised ofthrough ~~such~~the ~~communications~~issuance ~~and~~of ~~negotiate~~equity ~~licenses where~~or ~~appropriate. While~~convertible ~~it may be~~debt ~~necessary~~securities, ~~or desirable in~~ the ~~future~~percentage toownership ~~obtain~~or ~~licenses~~our ~~relating~~stockholders tomay ~~one~~be orreduced, ~~more~~our ~~products,~~stockholders ormay ~~relating~~experience toadditional ~~current or future technologies~~dilution, ~~there~~and ~~can~~such besecurities nomay have ~~assurance~~rights, ~~that~~preferences weor ~~will~~privileges besenior ~~able~~ to dothose soof onour ~~commercially reasonable terms or at~~existing ~~all~~stockholders. ~~There~~Additional ~~can~~financing ~~be no assurance that~~may ~~these~~not ~~or other future communications can~~ be ~~settled~~available on ~~commercially reasonable~~ terms orfavorable ~~that~~to ~~they~~us, ~~will~~or ~~not~~at ~~result~~all. If inadequate ~~protracted~~funds ~~and~~are ~~costly~~not ~~litigation. Any~~available ~~failure~~or toare ~~secure~~not ~~the~~available ~~necessary~~on ~~intellectual~~acceptable ~~property~~terms, ~~right~~our ofability ~~third~~to ~~parties~~fund onexpansion, ~~commercially~~take ~~reasonable~~advantage ~~terms~~of ~~may~~unanticipated ~~adversely~~opportunities ~~affect~~or ~~our~~develop ~~business~~or ~~and~~enhance ~~operating~~our ~~results~~products ~~and~~or ~~negatively affect~~services ~~the~~would ~~price~~be ofsignificantly ~~our common stock~~limited.

~~Risks~~Cautionary of Third-Party Claims of Infringement. There has been substantial industry litigation regarding patent, trademark and other intellectual property rights involving technology companies. In the future, litigation may be necessary to enforce any patents issued to us or to enforce trade secrets, trademarks and other intellectual property rights owned by us, to defend ourselves against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. For a description of certain pending litigation instituted against the Company, see Item 1, Legal Proceedings of Part II, Other Information and Note 9 to the Consolidated Financial Statements included herein. Any such litigation could be costly and a diversion of management’s attention, which could adversely affect our business and operating results and our financial condition. Adverse determinations in any such litigation could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could adversely affect our business and operating results and our financial condition.

~~Dependence~~This onQuarterly ~~Distributors~~Report ~~and Resellers. We rely primarily~~ on ~~our~~Form ~~worldwide~~10-Q ~~network~~contains ~~of independent distributors and VARs to distribute and sell our products to end~~forward-~~users. Our~~looking ~~distributors~~statements ~~and resellers~~within ~~generally~~the ~~offer~~meaning ~~products~~of ~~from~~the ~~several~~Securities ~~different companies, including~~Litigation inReform ~~some~~Act ~~cases~~of ~~products~~1995 that ~~are~~involve ~~competitive~~risks ~~with~~and ~~our own products~~uncertainties. InOur ~~addition,~~actual ~~many~~results ofcould ~~the~~differ ~~VARs are small~~materially ~~organizations~~from ~~with~~those ~~limited~~anticipated ~~capital~~in ~~resources. There~~these ~~can~~forward-looking bestatements noas ~~assurance~~a ~~that~~result ~~our distributors and resellers will~~of ~~continue~~certain ~~to purchase products from us~~factors, orincluding ~~that~~those ~~our~~set ~~efforts~~forth toin ~~expand~~the ~~our~~following cautionary ~~network~~statements ofand ~~distributors~~elsewhere ~~and~~in ~~resellers~~this ~~will~~Quarterly beReport ~~successful~~on Form 10-Q. ~~Any~~If ~~significant~~any ~~failure~~of onthe ~~our~~following ~~part~~risks were to ~~maintain~~occur, orour ~~expand~~business, ~~our~~financial ~~network~~condition, or ~~distributors~~results ~~and~~of ~~resellers~~operations ~~could~~would ~~have a material~~likely ~~adverse~~suffer. In ~~effect~~that onevent, ~~our business and operating results and negatively affect~~ the trading price of our common stock would decline.

~~Reliance~~Risks Associated onWith ~~International~~Development and Introduction of New Products. ~~Sales. International~~If ~~sales~~we are not successful in developing and ~~operations~~introducing ~~may~~new beproducts to the ~~subject~~markets towe ~~risks~~serve ~~such~~our asbusiness ~~the~~and ~~imposition~~operating ofresults ~~government~~will ~~controls~~suffer. In late April 2002, ~~export~~we ~~license~~shipped our latest ~~requirements~~new product, ~~restrictions~~844/X, onand ~~the~~currently ~~export~~anticipate ofthis ~~critical~~new ~~technology,~~product ~~less~~will ~~effective~~generate ~~enforcement~~greater than 50% of ~~proprietary~~the ~~rights;~~revenue ~~currency~~from ~~exchange~~product ~~fluctuations,~~sales ~~generally~~in the current fiscal ~~longer~~year. If ~~collection~~the ~~periods,~~adoption ~~political~~of ~~instability,~~844/X ~~trade~~is slower ~~restrictions,~~than ~~changes~~we anticipate or if there are delays in releasing subsequent inversions ~~tariffs~~of 844/X, ~~difficulties~~our incurrent ~~staffing~~revenue expectations may be too high and ~~managing~~our operating ~~international~~results ~~operations,~~may be negatively affected. ~~potential~~In ~~insolvency~~addition, ofnew ~~international~~product ~~resellers~~announcements by our competitors and ~~difficulty~~other innew product ~~collecting~~announcements by us could have the effect of reducing customer demand ~~accounts~~for ~~receivable~~our existing products. ~~Our~~Also, ~~international~~when ~~sales~~we ~~are~~introduce ~~also~~new ~~subject~~or enhanced products we must effectively manage the transitions from existing products to ~~more~~minimize ~~seasonal~~disruption ~~fluctuation~~of ~~than~~orders ~~domestic~~from ~~sales~~our customers. InNew ~~this~~product ~~regard,~~introductions require ~~the~~us ~~traditional~~to ~~summer vacation~~devote ~~period,~~time ~~which~~and ~~occurs~~resources ~~during~~to ~~our~~the ~~third~~training ~~fiscal~~of ~~quarter,~~our ~~may~~sales ~~result~~channel in a ~~decrease~~the infeatures ~~sales~~and target customers for such new products, ~~particularly~~which inefforts ~~Europe.~~ could ~~There~~result ~~can~~in beless noselling ~~assurance~~efforts ~~that~~being ~~these~~made ~~factors~~by ~~will~~the ~~not~~sales ~~have~~channel anduring ~~adverse~~such ~~effect~~training onperiod. Our ~~our~~failure ~~future~~to effectively ~~international~~manage ~~operations~~new ~~and~~product ~~consequently,~~announcements onor ~~our~~introductions ~~business~~could contribute ~~and~~to significant quarterly fluctuations in operating results~~. This~~ ~~fluctuation~~as orders for new ~~may~~products becommence ~~material~~ and ~~negatively~~orders ~~affect~~for ~~the~~existing ~~price~~products ofdecline and, as a result, our ~~common~~operating ~~stock~~results will suffer.

~~Dependence~~Significant Fluctuations onand ~~Key~~Unpredictability ~~Personnel~~of Operating Results. ~~Competition~~ Our ~~for~~quarterly ~~employees~~operating ~~with~~results are difficult to predict, have varied significantly in the ~~skills~~past and are likely to vary significantly in the future for a number of ~~required~~reasons, including new product announcements and introductions by usourselves isor our ~~intense~~competitors, changes in pricing, and the ~~geographic~~volume ~~areas~~and timing of orders received during the quarter. Also, in ~~which~~the past, we ~~maintain~~have ~~physical~~experienced delays in ~~operations~~the development of new products and enhancements, and such delays may occur in the future. WeThese ~~believe~~factors ~~that~~make ~~our~~the forecasting ~~future~~of revenue inherently uncertain. ~~success~~Additionally, ~~will~~a ~~depend~~significant onportion of our ~~continued~~operating ~~ability~~expenses tois relatively ~~attract~~fixed, and ~~retain~~operating ~~qualified~~expense levels are based primarily on internal ~~employees~~expectations of future revenue. As a consequence, ~~especially~~quarterly inoperating ~~research~~expense ~~and~~levels ~~development. Any~~cannot ~~significant~~be ~~delay~~reduced rapidly in the ~~hiring~~event ~~key~~that ~~personnel~~quarterly ~~could~~revenue ~~have~~levels afail to meet internal ~~material~~expectations. For ~~adverse~~these ~~affect~~reasons, you should not rely on ~~our~~period-to-period ~~business~~comparisons ~~and~~of ~~operating~~our financial results ~~and~~to forecast ~~negatively~~our future performance. It is ~~affect~~likely ~~the~~that ~~price~~in ofsome future quarter or quarters our ~~common~~operating ~~stock.~~results

History of Losses. We have incurred substantial operating losses during the current year and in each of the past five fiscal years. We incurred an operating loss from continuing operations of approximately $12.7 million for the first nine months of fiscal 2001 and as of August 31, 2001, we had an accumulated deficit of approximately $205.2 million. Over the past three years we have significantly increased our research and development expenses as a percentage of total sales and we plan to continue to invest in new technology, and as a result, we may incur operating losses in future periods. We will need to generate increases in our current sales levels to achieve profitability and we may not be able to do so. If our sales grow more slowly than we anticipate or if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenue, our business will be significantly and adversely affected. Our failure to achieve profitability or achieve the level of profitability expected by investors and securities analysts may adversely affect the market price of our common stock.20

~~Stock~~will ~~Price~~be ~~Volatility. The~~below ~~trading price of our common stock has been highly volatile and has fluctuated significantly in~~ the ~~past. During~~expectations ~~fiscal 2000, our stock price fluctuated between a low~~ of $2.125 per share and a high of $52.75 per share. We believe that the price of our common stock may continue to fluctuate significantly in the future in response to a number of events and factors relating to our company, our competitors, and the market for our products and services, many of which are beyond our control, such as, variations in our quarterly operating results; changes in financial estimates and recommendations by securities analysts~~; changes in market~~ ~~valuations~~or ofinvestors. If ~~companies~~quarterly inrevenue ~~our markets; announcements by us~~ or ~~our competitors~~ ofearnings ~~significant~~levels ~~products,~~fail ~~acquisitions, or strategic partnerships; failure~~ to ~~complete~~ ~~significant~~meet ~~business~~internal ~~transactions; departures of key personnel; purchases~~ or ~~sales~~external ~~of common stock or other securities by us; or news relating to trends in our markets. In addition~~expectations, ~~the~~ ~~stock market in general, and~~ the market ~~for technology companies in~~ particular, have experienced extreme volatility over the past twelve months. This volatility has often been unrelated to the operating performance of particular companies. These broad and industry fluctuations may adversely affect the market price of our common stock, ~~regardless~~may ofdecline ~~our operating performance~~significantly.

~~Euro~~Emerging ~~Conversion~~Markets. OnThe ~~January~~markets 1,in ~~1999,~~which 11we ofoffer ~~the~~our ~~15 member countries~~systems ofproducts ~~the~~and ~~European~~services ~~Union~~are ~~established~~intensely ~~fixed~~competitive ~~conversion~~and ~~rates~~rapidly ~~between~~changing. We ~~their~~are ~~existing~~targeting the emerging market of ~~sovereign~~broadcast ~~currencies~~designers, effects artists, and ~~the~~creative ~~Euro~~professionals. AsThis market and the products utilized by ofthese ~~January~~users 1,are ~~2002,~~relatively ~~the~~new. Our success ~~transition~~in tothis ~~the~~emerging ~~Euro~~market will bedepend ~~complete. We~~on ~~maintain~~the ~~operations~~rate ~~within~~at which the ~~European~~market ~~Union~~develops and ~~have~~our ~~prepared~~ability ~~for~~to ~~the~~penetrate ~~Euro~~that ~~conversion~~market. We dowill not ~~expect~~succeed ~~the~~if ~~costs~~we ~~associated~~cannot ~~with~~compete ~~the~~effectively ~~transition~~in ~~to be~~this ~~material. However~~market and, ~~the~~as ~~overall~~a ~~effect of~~result, ~~the~~our ~~transition~~business toand ~~the~~operating ~~Euro~~results ~~may~~could ~~have~~be ~~a material adverse affect on our~~materially ~~business, financial condition~~ and ~~financial~~adversely ~~results~~affected.

~~Item~~Rapid 3Technological Change. ~~Quantitative~~Rapidly changing technology, evolving industry standards and ~~Qualitative~~frequent new product introductions characterize ~~Disclosures~~the ~~About~~market ~~Market~~for ~~Risk~~our products. Our future success will depend in part upon our ability to enhance existing products and to introduce new products and features in a timely manner to address customer requirements, respond to competitive offerings, adapt to new emerging industry standards and take advantage of new enabling technologies that could render our existing products obsolete. We plan to continue to invest in research and development, in connection with our development strategy. Any delay or failure on our part in developing additional new products or features for existing products or any failure of such new products or features to achieve market acceptance, could have a material adverse effect on our business and operating results and our stock price will suffer.

~~Derivative~~Competition. ~~Financial~~The ~~Instruments~~market for our products is highly competitive and characterized by pressure to reduce prices, ~~Other~~incorporate ~~Financial~~new ~~Instruments~~features and ~~Derivative~~accelerate ~~Commodity~~the release ~~Instruments~~of new products. ~~The~~A ~~Company~~number isof ~~not~~companies currently aoffer ~~party~~products that compete directly or indirectly with our products, toincluding ~~any~~Accom, ~~derivative~~Inc., ~~financial~~Adobe ~~instruments~~Systems orInc., ~~other~~Apple ~~financial~~Computer, ~~instruments~~Inc., ~~for~~Avid ~~which~~Technology, ~~the~~Inc., ~~fair~~Discreet ~~value~~(a ~~disclosure~~division orof ~~accounting~~Autodesk, ~~would~~Inc.), beLeitch, ~~required~~Inc., ~~under~~Matrox Electronic ~~Statement~~Systems Ltd., Pinnacle Systems, Inc. and Quantel Ltd. In addition, ofwe ~~Financial~~expect ~~Accounting~~much ~~Standards~~larger Novendors, such as Matsushita Electric Industrial Company Ltd., ~~133~~Microsoft ~~Accounting~~Corporation, ~~for~~and ~~Derivative~~Sony ~~Instruments~~Corporation, to develop and ~~Hedging~~introduce ~~Activities~~digital (editing ~~SFAS~~systems ~~No.~~that ~~133)~~may compete with our products. ~~All~~Many of ~~the~~these ~~Company’s~~current ~~investments~~and ~~are~~potential competitors inhave ~~short-term~~greater financial, ~~investment~~technical and marketing resources than we ~~grade~~have, ~~commercial~~including, ~~paper~~without limitation, ~~certificates~~larger and more established selling and marketing capabilities, greater brand recognition and a larger installed base of ~~deposit~~customers, and ~~U.S.~~well-established ~~Government~~relationships with our existing and potential ~~agency~~customers, complementary technology vendors and other business ~~securities~~partners. As ~~that~~a ~~are~~result, ~~carried~~our competitors may be able to develop products comparable to or superior to our own products, adapt more quickly than us to new technologies, evolving industry standards or customer requirements, or lower their product costs and thus be able to lower prices to levels at ~~fair~~which ~~value~~we oncould not operate profitably, the ~~Company’s~~occurrence ~~books~~of any of which could have a material adverse effect on our business and operating results. ~~Accordingly,~~In ~~the~~this ~~Company~~regard, ~~believes~~we believe that ~~the~~we ~~market~~will continue to experience competitive pressure to reduce prices, ~~risk~~particularly for our high data rate systems. We have historically realized higher gross profit on the sale of these high data rate systems, and such ~~investments~~continued iscompetitive ~~minimal~~pricing pressure could result in lower sales and gross margin, which in turn could adversely affect our business and operating results and negatively affect the price of our common stock.

~~Primary~~Dependence on ~~Market~~Propriety ~~Risk Exposures~~Technology. ~~The~~Our ~~Company’s~~ability ~~primary~~to ~~market risk exposures~~compete ~~are~~successfully and achieve future revenue growth will depend, in ~~the~~part, ~~area~~on ofour ability ~~interest~~to ~~rate~~protect ~~risk~~our ~~and~~proprietary ~~foreign~~technology ~~currency~~and ~~exchange~~operate ~~rate~~without infringing ~~risk~~the rights of others. ~~The~~Previously, ~~Company’s investment~~we ~~portfolio~~have ofreceived, ~~cash~~and ~~equivalents~~may isin ~~subject~~the tofuture ~~interest~~continue ~~rate~~to ~~fluctuations~~receive, ~~but~~communications suggesting that our products may infringe on the patents or other intellectual ~~Company~~property ~~believes~~rights ~~this~~of ~~risk~~third parties. Our policy is ~~immaterial due~~ to investigate the ~~short-term~~factual ~~nature~~basis of ~~these~~such communications and negotiate ~~investments~~licenses where appropriate. ~~The~~While ~~Company’s~~it may ~~business~~be necessary or desirable in the future to obtain licenses relating to one ~~Europe~~or ismore ~~conducted~~products, inor ~~local~~relating ~~currency.~~ to current or future technologies, there can be Inno ~~Asia,~~assurance ~~business~~that iswe ~~conducted~~will inbe ~~U.S.~~able ~~currency~~to do so on commercially reasonable terms or at all. ~~The~~There ~~Company~~can ~~has~~be no ~~foreign~~assurance ~~exchange contracts,~~that ~~option~~these ~~contracts~~ or other ~~foreign~~future ~~hedging~~communications ~~arrangements. However,~~can ~~the~~be ~~Company~~settled ~~estimates~~on ~~that~~commercially ~~any~~reasonable ~~market~~terms ~~risk~~or ~~associated~~that ~~with~~they ~~its~~will ~~foreign~~not ~~operations~~result isin ~~not~~protracted ~~significant~~ and ~~is unlikely~~costly litigation. Any failure to ~~have~~secure athe ~~material~~necessary intellectual ~~adverse~~property ~~effect~~right of third parties on ~~the~~commercially ~~Company’s~~reasonable terms may adversely affect our business, and operating results and negatively affect ofthe ~~operations,~~price orof ~~financial~~our ~~condition~~common stock.

~~PART~~Risks of Third-Party Claims of Infringement. There has been substantial industry litigation regarding patent, trademark and other intellectual property rights involving technology companies. In the future, litigation may be necessary to enforce any patents issued to us or to enforce trade secrets, trademarks and other intellectual property rights owned by us, to defend ourselves against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. For a description of certain pending litigation instituted against us, see Item 1, Legal Proceedings of Part II, Other Information and Note 9 to the Consolidated Financial Statements included herein. ~~OTHER~~Any ~~INFORMATION~~such litigation could be costly and a diversion of management’s attention, which could adversely affect our business and operating results and our financial condition. Adverse determinations in any such litigation could result in the loss of our proprietary rights, subject us to significant liabilities, and require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could adversely affect our business and operating results and our financial condition.

~~Item~~Dependence 1on Single or Limited Source Suppliers. We ~~Legal~~are dependent ~~Proceedings~~on single or limited source suppliers for several key components used in its products that have no ready substitutes, including various audio and video signal processing integrated

i) On June 7, 1995, a lawsuit was filed against the Company by Avid Technology, Inc. (“Avid”) in the United States District Court for the District of Massachusetts. The complaint generally alleges patent infringement by the Company arising from the manufacture, sale, and use of the Company's Media 100 products. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In July 1995, the Company filed an answer and counterclaim denying any infringement and asserting that the Avid patent in question is invalid. The Company intends to vigorously defend the lawsuit. In addition, Avid is seeking reissue of the patent, including claims that it asserts are broader than in the existing patent, and these reissue proceedings remain pending before the U.S. Patent and Trademark Office. On January 16, 1998, the court dismissed the lawsuit without prejudice to either party moving to restore it to the docket upon completion of all matters pending before the U.S. Patent and Trademark Office.21

Oncircuits ~~August~~manufactured ~~16,~~in ~~2000~~each case only by Crystal Semiconductor Corp., ~~the~~Fairchild USemiconductor Corp.S., ~~Patent~~Gennum ~~and~~Corporation, Toshiba, Kawasaki LSI ~~Trademark~~USA ~~Office~~Inc., ~~issued~~LSI anLogic ~~Office~~Corp., ~~Action~~Philips ~~rejecting~~Semiconductors ~~all~~or Zoran Corp. The availability of ~~the~~many ~~claims~~of ~~made~~these bycomponents ~~Avid~~is independent ~~their~~on ~~latest~~our ~~request~~ability ~~for~~to ~~reexamination~~provide ofsuppliers ~~the~~with ~~patent~~accurate ~~related~~forecasts toof ~~the~~our ~~aforementioned~~future ~~lawsuit. In addition~~requirements, ~~the~~ ~~Examiner~~and atcertain ~~the~~components ~~U.S.~~we ~~Patent~~use ~~and~~to ~~Trademark~~build ~~Office~~our ~~designated~~products ~~the action as~~have ~~“final”. On~~been ~~November~~subject ~~29,~~to ~~2000,~~industry-wide ~~Avid~~shortages. ~~filed~~We ado ~~Notice~~not ofcarry ~~Appeal~~significant inventories of ~~the~~these ~~Examiner’s~~components ~~rejections~~and tohave ~~the U.S. Patent and~~no ~~Trademark~~guaranteed ~~Office~~supply ~~Board~~arrangements ofwith ~~Patent~~such ~~Appeals and Interferences~~suppliers. There can be no assurance that ~~the~~our ~~Company~~inventory levels will be ~~will~~adequate ~~prevail~~to inmeet ~~the~~production ~~appeal~~needs byduring ~~Avid~~any orinterruption ~~that~~of ~~the~~supply. Our ~~expense~~inability orto ~~other~~develop ~~effects~~alternative ~~of the~~supply ~~appeal~~sources, ~~whether~~if required, or ~~not~~a ~~the~~reduction ~~Company~~or ~~prevails~~stoppage in supply, ~~will~~could ~~not~~delay ~~have~~product shipments auntil ~~material~~new ~~adverse~~sources of supply become available, and any such delay ~~effect~~could onadversely ~~the~~affect ~~Company’s~~our business, and operating results in any given period and ~~financial~~negatively ~~condition~~affect the price of our common stock.

~~(ii) On January 13, 1999 and January 28,~~Dependence ~~1999,~~on ~~Digital~~Key ~~Origin and one of its former directors, Charles Berger, were named as defendants in two shareholder class action lawsuits against Splash Technology Holdings, Inc~~Personnel. ~~(“Splash”), various directors and executives of Splash and certain selling shareholders of Splash.~~ ~~The~~We ~~lawsuit~~believe ~~alleges, among other things,~~ that ~~the~~our ~~defendants~~future ~~made~~success will ordepend ~~were~~on ~~responsible~~our ~~for~~continued ~~material~~ability ~~misstatements, and failed~~ to ~~disclose information~~attract ~~concerning Splash’s business, finances~~ and ~~future~~retain ~~business~~qualified employees, ~~prospects~~especially in ~~order~~research toand ~~artificially inflate the price of Splash common stock~~development. ~~The complaint does not identify~~ ~~any~~Our ~~statements~~inability ~~alleged~~ to ~~have~~attract ~~been~~and ~~made~~retain byqualified ~~Charles~~personnel ~~Berger~~on ~~or Digital Origin. The complaint further alleges that Digital Origin engaged in~~ a ~~scheme to artificially inflate the price of~~timely ~~Splash~~basis, ~~common~~or ~~stock to reap an artificially large return on~~ the ~~sale~~departure of ~~the common~~key ~~stock~~employees incould ~~order~~have toa ~~pay~~material ~~off~~adverse ~~its debt.~~ affect ~~Digital~~on ~~Origin~~our ~~and~~business ~~the former director vigorously deny all allegations of wrongdoing~~ and ~~intend~~operating toresults ~~aggressively defend themselves in these matters. Defendant’s two initial motions to dismiss the action were granted with leave to amend,~~ and ~~plaintiffs~~negatively ~~have~~affect ~~again amended~~ the ~~complaint. Defendants~~price ~~have~~of ~~now filed their third motion~~our tocommon ~~dismiss~~stock.

OnDependence on ~~July~~and ~~18,~~competition ~~1997,~~with ~~Intelligent Electronics~~Apple Computer, Inc. As ~~filed~~ a ~~claim against Digital Origin alleging a breach of~~ ~~contract~~competitor, ~~and~~Apple ~~related~~Computer, ~~claims~~Inc. (“Apple”) could, in the ~~approximate amount of $800~~future,~~000,~~ ~~maintaining~~inhibit our ~~that~~ability ~~Digital Origin failed~~ to ~~comply~~develop ~~with~~our ~~various~~products ~~return,~~that ~~price~~operate ~~protection, inventory~~on ~~balancing~~the ~~and~~Macintosh ~~marketing development funding undertakings~~platform. ~~In 1997~~Additionally, ~~Digital~~new ~~Origin~~products ~~filed~~and ~~an answer to~~enhancements ~~the~~to ~~complaint~~existing ~~and~~products ~~cross-claimed~~from ~~against~~Apple ~~the~~such ~~plaintiffs~~as ~~and~~Final inCut ~~October~~Pro ~~1997 additionally~~could ~~cross~~cause ~~claimed~~customers ~~against Deutsche Financial, Inc., a factor in the~~to ~~account~~delay ~~relationship~~purchases ~~between~~of ~~the~~our ~~Company~~products ~~and~~or ~~the~~alter ~~plaintiffs,~~their ~~seeking~~purchase ~~the~~decision ~~recovery of existing accounts receivable of approximately $1~~altogether.~~8 million.~~ ~~During May 2000~~Furthermore, as the ~~trial was completed and~~sole ~~the~~supplier ~~Court entered two judgments in favor~~ of ~~Digital~~Macintosh ~~Origin~~computers, ~~one~~any disruption in the ~~amount~~availability of these ofcomputers ~~$314,000~~could ~~plus~~cause ~~interest~~customers ~~against~~to ~~Intelligent~~defer ~~Electronics~~or ~~and~~alter ~~one~~their inpurchase ~~the~~of ~~amount~~our ~~of $1,491,000 plus interest against Deutsche Financial, Inc~~products. InWe ~~September~~rely ~~2000,~~on ~~Intelligent~~access ~~Electronics,~~to key ~~Inc.~~information ~~paid~~from ~~$314,000~~Apple ~~plus~~to ~~interest~~continue development of ~~$139,000~~our products and ~~reimbursement~~any ~~of certain costs~~failure into ~~the~~continue ~~amount~~supplying ofour ~~$20,000~~engineers towith ~~the~~this ~~Company.~~information Oncould ~~August~~have ~~15,~~a ~~2001, Deutsche~~material ~~Financial,~~adverse ~~Inc.~~affect ~~entered~~on ~~into~~our abusiness ~~settlement~~and ~~agreement~~financial ~~with~~results ~~Digital~~and ~~Origin,~~negatively ~~Inc.~~affect the toprice ~~pay~~of ~~$1,075,000~~our tocommon ~~the Company~~stock.

~~(iii)~~Dependence on OnMicrosoft ~~October~~Corporation. Many ~~12,~~of ~~1999,~~our aproducts ~~lawsuit was~~operate ~~filed~~in ~~against~~ the ~~Company~~Windows byenvironment ~~McRoberts~~and ~~Software,~~our ~~Inc.~~engineers independ ~~the~~upon ~~United~~access ~~States~~to information ~~District~~in ~~Court~~advance ~~for~~from ~~the~~Microsoft ~~Southern~~Corporation ~~District of Indiana~~(“Microsoft”). ~~The~~Any ~~complaint~~failure ~~alleges~~to ~~copyright~~continue ~~infringement,~~supplying ~~breach~~our ofengineers ~~contract, and~~with ~~trade~~this ~~secret misappropriation. The~~information ~~complaint~~could ~~includes~~have ~~requests~~a ~~for~~material ~~injunctive~~adverse ~~relief,~~affect ~~treble~~on ~~damages,~~our ~~interest, costs~~business and ~~fees. In~~financial ~~November~~results ~~1999, we~~and ~~filed~~negatively anaffect ~~answer~~the ~~and~~price ~~counterclaim~~of ~~denying~~our ~~any~~common ~~infringement~~stock. ~~We intend to vigorously defend the lawsuit.~~

~~(vi)~~Dependence on OnDistributors ~~May~~and 9,Resellers. We ~~2001,~~rely primarily aon ~~lawsuit~~our ~~was~~worldwide ~~filed against~~network ~~the~~of ~~Company~~independent bydistributors ~~Wired,~~and avalue-added resellers ~~California~~(“VARs”) ~~general~~to ~~partnership,~~distribute inand ~~the~~sell ~~Santa Clara~~our ~~County~~products ~~Superior~~to ~~Court~~end-users. ~~The~~Our distributors and resellers generally ~~complaint~~offer ~~alleges~~products ~~fraud,~~from ~~negligent~~several ~~misrepresentation~~different companies, ~~breach~~including ofin ~~express~~some ~~and~~cases ~~implied-in-fact~~products ~~contract~~that are competitive with our own products. In addition, ~~breach~~many of the ~~implied~~VARs ~~covenant~~are ofsmall ~~good~~organizations ~~faith~~with limited capital resources. There can be no assurance that our distributors and ~~fair~~resellers will continue to purchase ~~dealing~~products from us, ~~breach~~or ofthat ~~fiduciary~~our ~~duty~~efforts ~~and~~to ~~violation~~expand ofour ~~California~~network ~~business~~of distributors and ~~professional~~resellers ~~code~~will ~~section~~be ~~17200~~successful. ~~The~~Any ~~complaint~~significant ~~includes~~failure ~~requests~~on ~~for~~our ~~compensatory~~part ~~and~~to ~~punitive~~maintain ~~damages,~~or ~~injunctive~~expand our network of ~~relief,~~distributors and ~~fees. The~~resellers ~~Company~~could ~~intends~~have a material adverse effect on our business toand ~~vigorously~~operating ~~defend~~results and negatively affect the ~~lawsuit~~price of our common stock.

~~(iv)~~Reliance on ~~From~~International ~~time~~Sales. International sales and operations may be subject to ~~time~~risks such as the ~~Company~~imposition isof government ~~involved~~controls, inexport ~~other~~license ~~disputes~~requirements, ~~and/or~~restrictions ~~litigation~~on ~~encountered~~the export of critical technology, less effective enforcement of proprietary rights; currency exchange fluctuations, generally longer collection periods, political instability, trade restrictions, changes in ~~its~~tariffs, ~~normal~~difficulties ~~course~~in staffing and managing international operations, potential insolvency of ~~business~~international resellers and difficulty in collecting accounts receivable. ~~The~~ Our ~~Company~~international ~~does~~sales ~~not~~are also subject to more seasonal fluctuation ~~believe~~than ~~that~~domestic sales. In this regard, the ~~ultimate~~traditional ~~impact~~summer ofvacation ~~the~~period, ~~resolution~~which ofoccurs ~~such~~during ~~other~~our ~~outstanding~~third fiscal ~~matters~~quarter, may result in a decrease in sales, particularly in Europe. There can be no assurance that these factors will not have aan ~~material~~adverse effect on ~~the~~our ~~Company’s~~future ~~business~~international operations and consequently, on our business and operating results. This fluctuation may be material and negatively affect the price ~~results~~of orour ~~financial~~common ~~condition~~stock.

~~Item~~Merger 5and Acquisition Related Risks. During ~~Other~~the fiscal ~~Information~~year ended November 30, 2000, we completed the merger with Digital Origin and the acquisitions of Wired, 21st Century Media LLC, and J2 Digital Media, Inc. In addition, we completed the acquisition of certain assets of Integrated Computing Engines, Inc. Our business and results of operations could be materially adversely affected in the event we fail to complete publicly announced acquisitions or to successfully integrate the business and operations of the merger or the acquisitions. In the future, we may continue to acquire or merge with existing businesses, products, and technologies to enhance and expand our line of products. Such mergers and acquisitions may be material in size and in scope. There can be no assurance that we will be able to identify, acquire, or profitably manage additional businesses or successfully integrate any acquired businesses into our business without substantial expenses, delays, or other operational or financial problems. Acquisitions involve a number of special risks and factors, including increasing competition for attractive acquisition candidates in our markets, the technological enhancement and incorporation of acquired products into existing product lines and services, the assimilation of the operations and personnel of the acquired companies, failure to retain key acquired personnel, adverse short-term effects on reported operating results, the amortization of acquired intangible assets, the assumption of undisclosed liabilities of any acquired companies, the failure to achieve anticipated benefits such as cost savings and synergies,

On August 30, 2001, the Company signed an agreement to sell its software product line to Autodesk, Inc. for $16 million in cash. As a result of this transaction, the assets of the software product line to be discontinued consisting primarily of inventory, equipment and intangible assets and have been separately classified in the accompanying balance sheet at August 31, 2001. The November 30, 2000 balance sheet has been restated to conform to the current year’s presentation. The disposal date was October 5, 2001. The Company’s software product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin.22

~~Item~~as 6well as the diversion of management’s attention during the acquisition and integration process. We ~~Exhibits~~may not be able to operate the acquired businesses properly and may not be able to successfully recover amounts paid for such businesses. Some or all of these special risks and factors ~~Reports~~may have a material adverse impact on ~~Form~~our ~~8-K~~business, operating results, and financial condition and, as a result, may negatively affect the market price of our common stock.

Similarly, we may dispose of assets, either assets we have historically used in the business or that we have acquired. During the year ended November 30, 2001, operations of Streamriver, which combined the acquisitions of 21st Century LLC and J2 Digital Media Inc., and the sale of our streaming media software product line, comprising products acquired from Terran and Digital Origin, were disposed. During the first quarter of 2002, we settled litigation resulting in the disposition of certain assets relating to our Wired products. Our business and results of operations could materially change depending on whether or not we are able to dispose of assets in an advantageous manner. In addition to obtaining an advantageous price for the assets to be disposed of, dispositions involve a) number of special risks and factors, including searching for appropriate acquirers; managing the effect of the disposition on existing and proposed product lines and services, the divestiture of operations and personnel, adverse short-term effects on reported operating results, potential post-divestiture indemnification or liability for liabilities of divested operations, as well as the diversion of management’s attention during the disposition process. ~~Exhibits~~Some or all of these special risks and factors may have a material adverse impact on our business, operating results, and financial condition and, as a result, may negatively affect the market price of our common stock.

~~Exhibits~~History of ~~required~~Losses asand ~~part~~Negative ofCash ~~this~~Flows. We have ~~Quarterly~~incurred ~~Report~~substantial onoperating ~~Form~~losses ~~10-Q~~during ~~are~~the ~~listed~~current year and in the ~~exhibit~~past five ~~index~~fiscal onyears, ~~page~~and 29have experienced negative cash flow from ongoing operations during the current fiscal year. We incurred an operating loss from continuing operations of approximately $9.6 million for the six months ended May 31, 2002 and as of May 31, 2002, we had an accumulated deficit of approximately $210.4 million.

b)Over the past four years we have significantly increased our research and development expenses as a percentage of total sales and we plan to continue to invest in new technology, and as a result, we may incur operating losses in future periods. We will need to generate increases in our current sales levels to achieve profitability and we may not be able to do so. ~~Reports~~If onour ~~Form~~sales ~~8-K~~grow more slowly than we anticipate or if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenue, our business will be significantly and adversely affected. Our failure to achieve profitability or achieve the level of profitability expected by investors and securities analysts may adversely affect the market price of our common stock.

~~There~~In addition, we believe we may continue to experience ~~were~~negative nooperating ~~reports~~cash flows for the remainder of this fiscal year and into next fiscal year, although we currently anticipate that our current cash plus due from escrow will be sufficient to fund our anticipated cash requirements for working capital and capital expenditures for at least the next twelve months. Depending on ~~Form~~future ~~8-K~~cash ~~during~~flow, we may need to raise additional capital in the ~~quarter~~future ~~ended~~to ~~August~~meet 31our cash requirements. We may not be able to find additional financing, ~~2001~~if required, on favorable terms or at all.

~~SIGNATURES~~Stock Price Volatility. The trading price of our common stock has been highly volatile and has fluctuated significantly in the past. During the six months ended May 31, 2002 our stock price fluctuated between a low of $1.10 per share and a high of $3.75 per share. During fiscal 2001, our stock price fluctuated between a low of $0.81 per share and a high of $3.81 per share. We believe that the price of our common stock may continue to fluctuate significantly in the future in response to a number of events and factors relating to our company, our competitors, and the market for our products and services, many of which are beyond our control, such as, variations in our quarterly operating results; changes in financial estimates and recommendations by securities analysts; changes in market valuations of companies in our markets; announcements by us or our competitors of significant products, acquisitions, or strategic partnerships; failure to complete significant business transactions; departures of key personnel; purchases or sales of common stock or other securities by us; or news relating to trends in our markets. In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme volatility over the past twelve months. This volatility has often been unrelated to the operating performance of particular companies. These broad and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

~~Pursuant~~Item to3. Quantitative ~~the~~and ~~requirements of the~~Qualitative ~~Securities~~Disclosures ~~Exchange~~About ~~Act~~Market ~~of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~Risk

		Media 100 Inc.
Date: October 15, 2001	By:	/s/ Steven D. Shea
		Steven D. Shea
		Chief Financial Officer
		Treasurer

Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. We are not a party to any derivative financial instruments or other financial instruments for which the fair value disclosure would be required under Statement of Financial Accounting Standards No. 107 Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments (SFAS No. 107). All of our investments are in short-term, investment grade commercial paper, certificates of deposit and U.S. Government and agency securities that are carried at fair value on our books. Accordingly, we believe that the market risk of such investments is minimal.

~~EXHIBIT INDEX~~23

Number	Description
2.10	Asset Purchase Agreement by and among Media 100 Inc. and Autodesk, Inc, and with respect to Section 9.5 of Article IX only Computershare Trust Company, Inc. dated August 30, 2001.

Primary Market Risk Exposures. Our primary market risk exposures are in the area of interest rate risk and foreign currency exchange rate risk. Our investment portfolio of cash equivalents is subject to interest rate fluctuations, but we believe this risk is immaterial due to the short-term nature of these investments. Our business in Europe is conducted in local currency. In Asia, business is conducted in U.S. currency. We have no foreign exchange contracts, option contracts or other foreign hedging arrangements. However, we estimate that any market risk associated with its foreign operations is not significant and is unlikely to have a material adverse effect on our business, results of operations, or financial condition.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

(i) On October 12, 1999, a lawsuit was filed against the Company by McRoberts Software, Inc. (“MSI”) in the United States District Court for the Southern District of Indiana. The complaint alleges copyright infringement, breach of contract, and trade secret misappropriation. The complaint includes requests for unspecified monetary damages and enhanced damages, interest, costs and fees. An unfavorable verdict was filed on February 25, 2002 against the Company in the amount of $2.5 million. The Company and MSI filed post-trial motions. Those motions have been ruled upon with the trial court reducing the total amount awarded by the jury but assessing prejudgment interest and attorney’s fees. The Company is appealing the entire judgment, which approximates $2.8 million. The entire amount of the award has been placed in an escrow account while the case is on appeal and approximately $2.8 million is included as restricted cash in the accompanying balance sheet at May 31, 2002.

The Company had recorded a liability in the amount of $2.6 million that included estimated legal fees associated with the litigation at November 30, 2001. During the quarter ended May 31, 2002, the Company recorded an additional liability of $397,000 for the adjusted judgment which included prejudgment interest and attorney’s fees, as well as, estimated legal fees associated with the appeal.

(ii) On May 9, 2001, a lawsuit was filed against the Company by the former shareholders of Wired, a company acquired by the Company in December 1999 (see Note 9 to the Consolidated Financial Statements). The complaint alleges fraud, negligent misrepresentation, breach of express and implied-in-fact contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty and violation of California business and professional code section 17200. The complaint includes requests for compensatory and punitive damages, injunctive relief, and fees. No specific amount or punitive damages are alleged, other than compensatory damages in an amount to be proven at trial, but not less than $25,000, the jurisdictional minimum for the court. The Company filed a demurrer challenging the legal sufficiency of the causes of action alleged. A hearing on that demurrer occurred on November 6, 2001 and the Court sustained the demurrer to one cause of action, for negligent false promise.

During the six months ended May 31, 2002, the Company settled the Wired litigation. As part of the settlement, the Company assigns all rights to the Wired product line, intellectual property relating to Wired products and remaining inventory to the former shareholders of Wired. Wired agreed that no further action will be taken related to the lawsuit previously filed against the Company as noted in Note 9 to the Consolidated Financial Statements. Wired granted the Company an irrevocable license to use the source code, technology, know how and intellectual property; provided however the license does not include the right to sell Wired products or any equivalent products incorporating the source code, technology, know how and intellectual property. In addition, Wired agreed to pay to the Company a royalty of 5% of adjusted gross sales of the assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. Litigation settlement included in the Consolidated Statements of Operations represents the cost of inventory transferred, the net book value of remaining intangible assets associated with the acquisition, and legal fees associated with the settlement.

(iii) From time to time the Company is involved in other disputes and/or litigation encountered in its normal course of business. The Company does not believe that the ultimate impact of the resolution of such other outstanding matters will have a material effect on the Company’s business, operating results or financial condition.

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

The Company held an annual meeting of stockholders on May 10, 2002, at which the stockholders approved the following proposals by the number of shares of Common Stock voted below:

Proposal
(1) Election of Directors	Number of Shares
	Voted For	Withheld
John A. Molinari	11,085,154	731,469
Maurice L. Castonguay	11,346,717	469,906
Roger W. Redmond	11,345,831	470,792
Paul J. Severino	11,340,355	476,268

		Number of Shares
		Voted		Broker
(2)	Voted For	Against	Abstained	Non-Votes
To approve the 2002 Stock Option and Incentive Plan providing for 950,000 shares of the Company’s Common stock reserved for the grant of incentive Options to employees of the Company	2,632,671	1,446,946	593,790	7,143,216

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

Exhibits required as part of this Quarterly Report on Form 10-Q are listed on the exhibit index on page 27.

b) Reports on Form 8-K

There were no reports on Form 8-K during the quarter ended May 31, 2002.

SIGNATURES

Pursuant to the requirements 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.

		Media 100 Inc.



Date:	July 15, 2002		By:	/s/ Steven D. Shea
				Steven D. Shea
				Chief Financial Officer and
				Treasurer
				(Principal Financial Officer)

EXHIBIT INDEX

	Number		Description

Filing Compare · MEDIA 100 INC