10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For The Quarterly Period Ended: May 31, 2001
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.

(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)

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  x             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	12,309,157 shares
Class	Outstanding at June 30, 2001

MEDIA 100 INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION
	ITEM 1	Consolidated Financial Statements:
		Consolidated Balance Sheets as of May 31, 2001 and November 30, 2000
		Consolidated Statements of Operations for the three and six months ended May 31, 2001 and  May 31, 2000
		Consolidated Statements of Cash Flows for the six months ended May 31, 2001 and May 31, 2000
		Notes to Consolidated Financial Statements
	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3	Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
	ITEM 1	Legal Proceedings
	ITEM 4	Submission of Matters to a Vote of Security Holders
	ITEM 6	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)

	May 31, 2001	November 30, 2000
ASSETS
Current assets:
Cash and cash equivalents	$8,587	$11,987
Marketable securities	1,087	5,674
Accounts receivable, net of allowance for doubtful accounts of $2,945 in 2001 and $3,812 in 2000	5,845	8,619
Inventories	3,466	4,314
Prepaid expenses and other current assets	1,233	1,180
Total current assets	20,218	31,774
Property and equipment, net	5,284	6,056
Intangible assets, net	6,703	8,316
Other assets, net	1,131	1,245
Total assets	$33,336	$47,391
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$2,923	$4,561
Accrued expenses	8,543	8,231
Note payable	-	1,492
Deferred revenue	4,616	5,272
Total current liabilities	16,082	19,556
Contingencies (Note 9)
Stockholders' equity:
Preferred stock	-	-
Common stock	126	123
Capital in excess of par value	217,404	217,182
Treasury stock	(78)	-
Accumulated deficit	(200,185)	(189,380)
Accumulated other comprehensive loss	(13)	(90)
Total stockholders' equity	17,254	27,835
Total liabilities and stockholders' equity	$33,336	$47,391
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)

	Three Months Ended May 31,		Six Months Ended May 31,
	2001	2000	2001	2000
Net sales:
Products	$9,856	$18,277	$21,173	$33,932
Services	2,308	2,300	4,840	4,565
Total net sales	12,164	20,577	26,013	38,497
Cost of sales	5,893	8,358	11,489	15,894
Gross profit	6,271	12,219	14,524	22,603
Operating expenses:
Research and development	4,078	3,961	7,960	7,609
Selling and marketing	4,906	5,516	9,779	10,643
General and administrative	1,432	2,411	3,341	4,963
Amortization and write-down of acquisition-related intangible assets	1,355	563	3,361	836
Acquired in-process research and development	-	-	-	470
Restructuring charge	795	-	795	-
Merger related costs	-	2,007	-	2,007
Total operating expenses	12,566	14,458	25,236	26,528
Operating loss	(6,295)	(2,239)	(10,712)	(3,925)
Interest income, net	97	275	203	591
Other income (expense), net	(611)	(152)	(296)	(171)
Loss before tax provision	(6,809)	(2,116)	(10,805)	(3,505)
Tax provision	-	-	-	30
Net loss	$(6,809)	$(2,116)	$(10,805)	$(3,535)
Net loss per share:
Basic	$(.55)	$(.18)	$(.88)	$(.30)
Diluted	$(.55)	$(.18)	$(.88)	$(.30)
Weighted average common shares outstanding:
Basic	12,359	11,991	12,346	11,807
Diluted	12,359	11,991	12,346	11,807
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)

	Six Months Ended May 31,
	2001	2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$(10,805)	$(3,535)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization	1,601	1,771
Non-cash interest expense	-	44
Acquired in-process research and development	-	470
Amortization and write-down of acquisition-related intangible assets	3,361	836
Loss on disposition of fixed asset	-	6
Loss on sale of marketable securities	9	-
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable	2,774	(1,401)
Inventories	848	(2,615)
Prepaid expenses and other current assets	(53)	(358)
Accounts payable	(1,638)	399
Accrued expenses	(1,438)	175
Deferred revenue	(656)	31
Net cash used in operating activities	$(5,997)	$(4,177)
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)
Purchases of property and equipment	(751)	(1,058)
Other assets	114	(1,162)
Purchase of intangible assets	(75)	(174)
Net proceeds from sales of marketable securities	4,577	1,717
Net cash provided by (used in) investing activities	$3,865	$(2,645)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note payable	(1,492)	-
Proceeds from issuance of common stock pursuant to stock plans	225	3,770
Purchase of treasury stock	(78)	-
Net cash (used in) provided by financing activities	$(1,345)	$3,770
EFFECT OF EXCHANGE RATE CHANGES ON CASH	77	(2)
NET DECREASE IN CASH OF DIGITAL ORIGIN INC. FOR THE TWO MONTHS ENDED NOVEMBER 30, 1999	-	(1,483)
NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS	$(3,400)	$(4,537)
CASH AND CASH EQUIVALENTS, beginning of period	11,987	13,858
CASH AND CASH EQUIVALENTS, end of period	$8,587	$9,321

	Six Months Ended May 31,
	2001	2000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash (received) paid for income taxes	(42)	1
OTHER TRANSACTIONS NOT USING CASH:
Change in value of marketable securities	$(88)	$(123)

	Six Months Ended May 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
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)

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 reflect all adjustments necessary for 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, filed with the Securities and Exchange Commission.

The Company’s preparation of financial statements in conformity with generally accepted accounting principles 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 Company designs and sells software applications, systems (comprising software 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”).

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.   Acquisitions

Digital Origin, Inc.

On May 9, 2000, the Company completed its merger with Digital Origin, Inc. (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.  As a result, all periods presented have been restated to reflect the combined operations of the two companies.  As part of the transaction, the Company incurred direct, merger-related costs of approximately $2.0 million, consisting primarily of investment banking fees, legal and accounting fees.  All such costs were expensed in the quarter ended May 31, 2000, upon consummation of the Digital Origin merger.

Separate and combined results of Media 100 and Digital Origin during the period preceding the merger were as follows (in thousands):

		Digital
	Media 100	Origin	Eliminations	Combined
Three months ended May 31, 2000 (a)
Net sales	$17,165	$3,797	$(385)	$20,577
Net (loss) income	(2,175)	(1)	60	(2,116)
Six months ended May 31, 2000 (b)
Net sales	$31,647	7,373	(523)	38,497
Net loss	(2,067)	(1,436)	(32)	(3,535)

(a) Digital Origin results represent March 1, 2000 through May 9, 2000.
(b) Digital Origin results represent December 1, 1999 through May 9, 2000.

4.   Cash Equivalents and Marketable Securities

Cash equivalents are carried at cost, which approximates market value, and have original maturities of less than three months.  Cash equivalents include money market accounts and repurchase agreements with overnight maturities. Approximately $0.5 million of the cash and cash equivalents were restricted under various letters of credit at May 31, 2001.

The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities.  Under this standard, the Company is required to classify all investments in debt and equity securities into one or more of the following three categories: held-to-maturity, available-for-sale or trading.  Available-for-sale securities are recorded at fair market value with unrealized gains and losses excluded from earnings and included as a component of stockholders’ equity.  All of the Company’s marketable securities are classified as available-for-sale.

Marketable securities held as of May 31, 2001 and November 30, 2000 consist of the following (in thousands):

Investments available for sale:	Maturity	May 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	673	1,044
Corporate Obligations	less than 1 year	50	1,116
Corporate Obligations	1 - 5 years	1,037	1,512
Total Corporate Obligations		1,087	2,628
Total investments available for sale		1,760	6,718
Less: cash and cash equivalents		(673)	(1,044)
Total marketable securities		$1,087	$5,674

Marketable securities had a cost of  $1,043 and $5,718, and a market value of $1,087 and $5,674 at May 31, 2001 and November 30, 2000, respectively. To adjust the carrying amount of the May 31, 2001 and November 30, 2000 marketable securities portfolio to market value, unrealized losses have been reflected as a component of accumulated other comprehensive loss in stockholders’ equity pursuant to the provisions of SFAS No. 115.

5.   Inventories

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

	May 31,	November 30,
	2001	2000
Raw materials	$2,043	$2,814
Work-in-process	931	733
Finished goods	492	767
	$3,466	$4,314

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, is stated at cost, less accumulated depreciation and amortization, and consists of the following (in thousands):

	May 31,	November 30,
	2001	2000
Machinery and equipment	$13,879	$13,308
Purchased software	6,063	6,062
Furniture and fixtures	1,410	1,733
Vehicles	9	9
Leasehold improvements	1,787	1,618
	$23,148	$22,730
Less accumulated depreciation and amortization	(17,864)	(16,674)
	$5,284	$6,056

7. Intangible Assets

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

	May 31,	November 30,
	2001	2000
Patents and Trademarks	$506	$431
Acquired Technology	3,460	3,460
Goodwill	8,496	7,625
	$12,462	$11,516
Less accumulated amortization	(5,759)	(3,200)
	$6,703	$8,316

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.  In connection with an earn-out provision from a prior acquisition, the Company has accrued $1,750,000 in contingent consideration, which will be paid by September 2001.  The entire amount has been recorded as additional goodwill.  The Company will amortize this additional goodwill over its remaining useful life.

The Company recorded an expense for the amortization and write-down of intangible assets of $2.0 million in the first fiscal quarter of 2001 compared to $.3 million in the first fiscal quarter of fiscal 2000.  Included in the $2.0 million was a write-down of goodwill of $.9 million related to the acquisitions of 21^st Century LLC and J2 Digital Media, Inc.  These two companies 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 (See Note 15).

8.   Net Loss Per Common Share

The Company computes earnings per share pursuant to SFAS No. 128, Earnings per Share.  In accordance with SFAS 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.

The following is a reconciliation of the shares used in the computation of basic and diluted loss per share (in thousands):

	Three months ended May 31,		Six months ended May 31,
	2001	2000	2001	2000
Weighted average shares of common stock Outstanding	12,359	11,991	12,346	11,807
Effect of potential common shares - stock options and warrants outstanding (unless antidilutive)	-	-	-	-
Weighted average shares and potential common shares outstanding	12,359	11,991	12,346	11,807

The Company excludes potentially dilutive securities from its diluted net loss per share computation when either the exercise price of the securities exceeds the fair value of the Company’s common stock or when the Company reports a net loss and the effect of including such securities would be antidilutive.  Options to purchase approximately 1,566,000 and 1,890,000 shares of common stock at May 31, 2001 and May 31, 2000, respectively, were not included in the computation of diluted net loss per share as a result of their antidilutive effect.

9.   Contingencies

(i) The 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 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 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.

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 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 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 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 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 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.

(iv) On July 18, 1997, Intelligent Electronics, Inc. filed a claim against Digital Origin alleging a breach of contract and related claims in the approximate amount of $800,000, maintaining that Digital Origin failed to comply with various return, price protection, inventory balancing and marketing development funding undertakings.  In 1997, Digital Origin filed an answer to the complaint and cross-claimed against the plaintiffs and in October 1997 additionally cross claimed against Deutsche Financial, Inc., a factor in the account relationship between the Company and the plaintiffs, seeking the recovery of existing accounts receivable of approximately $1.8 million.  During May 2000, the trial was completed and the Court entered two judgments in favor of Digital Origin, one in the amount of $314,000 plus interest against Intelligent Electronics and one in the amount of $1,491,000 plus interest against Deutsche Financial, Inc.  In September 2000, Intelligent Electronics, Inc. paid $314,000 plus interest of $139,000 and reimbursement of certain costs in the amount of $20,000 to the Company.  Deutsche Financial, Inc. has filed an appeal, which is expected to be heard during 2001.

(v) On October 12, 1999, a lawsuit was filed against the Company by McRoberts Software, Inc. 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 injunctive relief, treble damages, interest, costs and fees.  In November 1999, the Company filed an answer and counterclaim denying any infringement.  The Company intends to vigorously defend the lawsuit.

(vi) On May 9, 2001, a lawsuit was filed against the Company by the former shareholders of Wired, Inc., a company acquired by the Company in December 1999.  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.  The Company intends to vigorously defend the lawsuit.

(vii) 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.

10.   Capitalized Software Development Costs

The Company capitalizes certain computer software development costs. Capitalization of costs commences upon establishing technological feasibility.  There were no capitalized costs at May 31, 2001.  Capitalized costs, net of accumulated amortization, were $29,000 as of November 30, 2000, and are included in other assets.  These costs are amortized on a straight-line basis over two years, which approximates the economic life of the product.

11.   Income Taxes

The Company has not provided for a tax provision in the first six months of fiscal 2001 due to the net loss incurred during the first six months of the fiscal year and its expectation for no taxable income for the year.

12.   Accrued Expenses

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

	May 31,	November 30,
	2001	2000
Payroll, payroll taxes and other taxes	$2,600	$2,242
Accrued warranty	561	559
Accrued restructuring	150	528
Accrued inventory	615	763
Accrued legal and professional services	403	692
Accrued selling and marketing	335	301
Accrued earn-out payment	1,750	-
Accrued other	2,129	3,146
	$8,543	$8,231

13.   Comprehensive loss

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 are as follows (in thousands):

	Three months ended May 31,		Six months ended May 31,
	2001	2000	2001	2000
Net loss	$(6,809)	$(2,116)	$(10,805)	$(3,535)
Cumulative translation adjustment	-	(3)	(11)	(2)
Unrealized holding gain (loss) on  Available for sale securities	42	(20)	88	(123)
Total comprehensive loss	$(6,767)	$(2,139)	$(10,728)	$(3,660)

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 software Internet tools, services and digital video systems.

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 six months ended May 31, 2001 and May 31, 2000 is as follows:

		Software	Digital
		Internet	Video
Three months ended May 31, 2001	Tools	Services	Systems	Corporate	Total
Net sales from external customers	$4,085	$2,308	$5,771	$-	$12,164
Gross profit	2,432	1,788	2,051	-	6,271
Depreciation and amortization	9	72	644	-	725
Interest income, net	-	-	-	97	97
Six months ended May 31, 2001
Net sales from external customers	$8,974	$4,840	$12,199	$-	$26,013
Gross profit	5,612	3,595	5,317	-	14,524
Depreciation and amortization	162	139	1,300	-	1,601
Interest income	$-	$-	$-	$203	$203
Three months ended May 31, 2000
Net sales from external customers	$9,744	$2,300	$8,533	$-	$20,577
Gross profit	5,715	1,939	4,565	-	12,219
Depreciation and amortization	157	21	709	-	887
Interest income, net	-	-	-	275	275
Six months ended May 31, 2000
Net sales from external customers	$17,139	$4,565	$16,793	$-	$38,497
Gross profit	9,950	3,933	8,720	-	22,603
Depreciation and amortization	308	39	1,424	-	1,771
Interest income	$-	$-	$-	$591	$591
Tax provision	$	$	$	$30	$30

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.

Net sales by geographic area for the three and six months ended May 31, 2001and May 31, 2000 were as follows (in thousands):

	Three months ended
	May 31,	May 31,
	2001	2000
United States	$8,036	$12,754
United Kingdom, Sweden, Denmark and Norway	1,050	1,419
Germany, Austria and Switzerland	579	1,194
France, Spain and Benelux	610	2,126
Japan	589	782
Other foreign countries	1,300	2,302
	$12,164	$20,577

	Six months ended
	May 31,	May 31,
	2001	2000
United States	$17,494	$23,399
United Kingdom, Sweden, Denmark and Norway	2,272	2,905
Germany, Austria and Switzerland	1,131	2,738
France, Spain and Benelux	1,488	3,439
Japan	1,061	1,556
Other foreign countries	2,567	4,460
	$26,013	$38,497

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

	May 31,	November 30,
	2001	2000
United States	$4,989	$5,718
United Kingdom	165	194
Germany	41	33
Italy	11	16
France	78	95
	$5,284	$6,056

15.   Restructuring Expense

             In the second quarter of fiscal 2001, the Company implemented a restructuring plan to reorganize the selling and marketing organizations and the shutdown of Streamriver.  The restructuring charge of $795,000 related to the elimination of approximately 49 employees across the following functions: research and development (11), selling and marketing (28), general and administrative (2) and Streamriver (8) and the write off of certain assets associated with Streamriver.   At May 31, 2001, approximately $150,000 of the accrued restructuring charge, consisting of severance-related costs, remained. The total cash impact of the restructuring was approximately $467,000, all of which will be paid by the end of the third quarter in fiscal 2001.

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

Overview

             Media 100 Inc., a Delaware corporation, (the “Company”) designs and sells software applications, systems (comprising software and hardware), and services (for encoding and hosting digital media) 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).

             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.  Revenue from hosting services is recognized ratably over the term of the contract.  Revenue from encoding services is recognized as the services are performed using the percentage of completion method.  The Company has recently ceased the provision of hosting and encoding services.

Digital Origin Merger

             On May 9, 2000, the Company completed its merger with Digital Origin, Inc. (“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. As a result, all periods presented and Management’s Discussion and Analysis of Financial Condition and Results of Operations have been restated to reflect the combined operations of the two companies.

             The Company also acquired Terran Interactive, Inc. (“Terran”) in fiscal 1999 and Wired, Inc. (“Wired”), J2 Digital Media, Inc. (“J2”), 21^st Century LLC (“21^st Century”) and certain strategic technology assets from Integrated Computing Engines, Inc. (“ICE”) in fiscal year 2000.  Each of these acquisitions was accounted for as a purchase pursuant to APB No. 16.  As a result, the operations of each acquired entity are reflected in the Company’s consolidated statement of operations from the date of acquisition.

Results of Operations

The following table shows certain consolidated statements of operations data as a percentage of net sales.

	Three months ended May 31,		Six months ended May 31,
	2001	2000	2001	2000
Net sales:
Products	81.0%	88.8%	81.4%	88.1%
Services	19.0	11.2	18.6	11.9
Total net sales	100.0	100.0	100.0	100.0
Cost of sales	48.4	40.6	44.2	41.3
Gross profit	51.6	59.4	55.8	58.7
Operating expenses:
Research and development	33.5	19.2	30.6	19.8
Selling and marketing	40.3	26.8	37.6	27.6
General and administrative	11.8	11.7	12.8	12.9
Amortization and write-down of acquisition-related intangible assets	11.1	2.7	12.9	2.2
Acquired in-process research and development	-	-	-	1.2
Restructuring charge	6.5	-	3.1
Merger related costs	-	9.8	-	5.2
Total operating expenses	103.3	70.3	97.0	68.9
Operating loss	(51.8)	(10.9)	(41.2)	(10.2)
Interest income, net	0.8	1.3	0.8	1.5
Other income (expense), net	(5.0)	(0.7)	(1.1)	(0.4)
Loss before tax provision	(56.0)	(10.3)	(41.5)	(9.1)
Tax provision	-	-	-	0.1
Net loss	(56.0)%	(10.3)%	(41.5)%	(9.2)%

Comparison of Second Fiscal Quarter of 2001 to Second Fiscal Quarter of 2000

             Net sales.  Total net sales for the second fiscal quarter ended May 31, 2001 decreased 40.9% to $12.2 million from $20.6 million for the second quarter of fiscal 2000.  Net sales from products for the second fiscal quarter ended May 31, 2001 decreased 46.1% to $9.9 million from $18.3 million for fiscal 2000.  The decrease in net sales from products is due to a number of factors including lower unit sales and average selling prices for our digital video systems ($4.3 million), lower sales of software editing products acquired through the merger with Digital Origin, Inc. ($3.1 million), lower sales of the accelerated version of Cleaner, named Powersuite, and other third party products ($1.5 million), and lower sales of the MPEG-based products acquired in the acquisition of Wired, Inc. ($.6 million).  Net sales from products acquired from Integrated Computing Engines, Inc. in August 2000 totaled $1.0 million in the second quarter of fiscal 2001 versus $0 for the second quarter of fiscal 2000.  Net sales of software Internet tools for the second quarter ended May 31, 2001 decreased 58.2% to $4.1 million from $9.8 million for the second quarter of fiscal 2000.  Of the $5.7 million decrease in net sales of software Internet tools, $3.1 million was due to a reduction in sales of products acquired as part of the merger with Digital Origin, Inc.  We anticipate this trend of lower year-over-year net sales to continue for the remainder of this year.  Net sales of digital video systems for the second quarter ended May 31, 2001 decreased 31.8% to $5.8 million from $8.5 million for the second quarter of fiscal 2000.  We attribute the decrease in sales to lower units and average selling prices of our digital video systems due to increased competition and lower demand and anticipate this trend in lower year-over-year sales will continue for the remainder of fiscal 2001.  Net sales from services for the second fiscal quarter ended May 31, 2001 were $2.3 million, flat with the second quarter of fiscal 2000.   During the second quarter of fiscal 2001, we closed our encoding and hosting services division, named Streamriver, and sold certain assets related to the business.   Net sales from Streamriver were $0.1 million in the second quarter of fiscal 2001 and 2000.

             Gross profit.  Gross profit decreased 48.7% to $6.3 million in the second fiscal quarter of 2001 from $12.2 million in the second quarter of fiscal 2000.  Overall gross profit as a percentage of net sales decreased to 51.6% in the second fiscal quarter of 2001 from 59.4% in the second quarter of fiscal 2000.  Specifically, gross profit as a percentage of net product sales decreased to 45.5% in the second fiscal quarter of 2001 from 56.2% in the second quarter of fiscal 2000, while gross profit as a percentage of net sales of services decreased to 77.5% in the second fiscal quarter of 2001 from 84.3% in the second quarter of fiscal 2000.  The percentage decrease in services resulted from increased costs related to encoding and hosting services.  Gross profit as a percentage of net product sales decreased due to lower average selling prices for our digital video systems.  We currently forecast overall gross profit as a percentage of net sales will be relatively stable over the next several quarters, 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.

             Research and development.  Research and development expenses increased 3.0% to $4.1 million in the second fiscal quarter of 2001 from $4.0 million in the second 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.

             Selling and marketing.  Selling and marketing expenses decreased 11.1% to $4.9 million in the second fiscal quarter of 2001 from $5.5 million in the second quarter of fiscal 2000.  Selling 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 anticipates that our selling and marketing expenses will decrease over the next several quarters due to the closing of Streamriver and more generally we intend to take action to decrease our other selling and marketing expenses to be more in line with our forecasted lower level of sales.

             General and administrative.  General and administrative expenses decreased 40.6% to $1.4 million in the second fiscal quarter of 2001 from $2.4 million in the second 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.  The decrease in general and administrative expenses resulted primarily from lower employee, employee-related and legal expenses.  We currently anticipates that our general and administrative expenses will decrease over the next several quarters as we reduce our expense structure and reduce our general and administrative expenses to be more in line with our forecasted lower level of sales.

             As a result of the merger with Digital Origin, Inc. on May 9, 2000, we assumed a significant allowance for doubtful accounts balance of $3,803,000 related to several old, uncollected amounts owed to Digital Origin, Inc.   As of November 30, 2000, the allowance for doubtful accounts totaled $3,812,000, of which $3,401,000 relates to Digital Origin.  As of May 31, 2001, our allowance for doubtful accounts totals $2,945,000 of which $2,458,000 relates to Digital Origin.  During the second quarter of 2001, we wrote-down $213,000 of the remaining balance against the allowance for doubtful accounts.  One account represents approximately $2.2 million of the allowance account and is awaiting resolution in pending litigation (See Note 9).

             Amortization and write-down of acquisition-related intangible assets.  We recorded an expense for the amortization and write-down of acquisition-related intangible assets of $1.4 million in the second fiscal quarter of 2001 compared to $.6 million in the second quarter of fiscal 2000.  Included in the $1.4 million was amortization expense associated with acquisitions that took place subsequent to Q2 2000 and contingent purchase price associated with the Terran acquisition.

             Restructuring charge.  During the second fiscal quarter of 2001, we recorded a restructuring charge of $795,000 in connection with a reorganization of the selling and marketing organizations that resulted in severance payments to terminated employees and the closing of Streamriver.  There was no similar expense recorded in the second fiscal quarter of 2000.

             Interest income, net.  Interest income decreased 64.7% to $.1 million in the second fiscal quarter of 2001 from $.3 million in the second quarter of fiscal 2000.  The decrease in interest income is due to lower cash and 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 anticipates interest income will decline in fiscal 2001 versus 2000 due to lower cash balances.

             Other income (expense), net.  Other expense was $.6 million in the second fiscal quarter of 2001 compared to other expense of $.02 million in the second quarter of fiscal 2000.  The increase is due to foreign exchange losses on intercompany transactions with our foreign subsidiaries.

             Tax provision. We did not provide for a tax provision in the second fiscal quarter of 2001 due to the net loss incurred during the quarter and our expectation of no taxable income for the year.

             Net loss.  As a result of the above factors, we had a loss for the second fiscal quarter of 2001 in the amount of ($6.8) million, or ($0.55) per share, compared to a net loss of ($2.1) million, or ($0.18) per share, in the second quarter of fiscal 2000.

Comparison of First Six Months of Fiscal 2001 to First Six Months of Fiscal 2000

             Net sales.  Total net sales for the first six months ended May 31, 2001 decreased 32.4% to $26.0 million from $38.5 million for the first six months of fiscal 2000.  Net sales from products for the first six months ended May 31, 2001 decreased 37.6% to $21.2 million from $33.9 million for fiscal 2000.  The decrease in net sales from products is due to a number of factors including lower unit sales and average selling prices for our digital video systems ($6.1 million), lower sales of software editing products acquired through the merger with Digital Origin, Inc. ($5.2 million), lower sales of the accelerated version of Cleaner, named Powersuite, and other third party products ($1.8 million), and lower sales of the MPEG-based products acquired in the acquisition of Wired, Inc.  Net sales from products acquired from Integrated Computing Engines, Inc. in August 2000 totaled $2.1 million in the first six months of fiscal 2001 versus $0 for the first six months of fiscal 2000.  Net sales of software Internet tools for the first six months ended May 31, 2001 decreased 47.4% to $9.0 million from $17.1 million for the first six months of fiscal 2000.  Of the $8.1 million decrease in net sales of software Internet tools, $5.2 million was due to a reduction in sales of products acquired as part of the merger with Digital Origin, Inc.  We anticipate this trend of lower year-over-year net sales to continue for the remainder of this year.  Net sales of digital video systems for first six months ended May 31, 2001 decreased 27.4% to $12.2 million from $16.8 million for the first six months of fiscal 2000.  We attribute the decrease in sales to lower unit sales and average selling prices of our digital video systems due to increased competition and lower demand and anticipate this trend in lower year-over-year sales will continue for the remainder of fiscal 2001.  Net sales from services for first six months ended May 31, 2001 were $4.8 million, an increase of $.2 million from the first six months of fiscal 2000.    During the second quarter of fiscal 2001, we closed our encoding and hosting services division, named Streamriver, and sold certain assets related to the business.   Net sales from Streamriver were $0.3 million in the first six months of fiscal 2001.

             Gross profit.  Gross profit decreased 35.7% to $14.5 million in the first six months of 2001 from $22.6 million in first six months of fiscal 2000.  Overall gross profit as a percentage of net sales decreased to 55.8% in the first six months of 2001 from 58.7% in the first six months of fiscal 2000.  Specifically, gross profit as a percentage of net product sales decreased to 51.6% in the first six months of 2001 from 55.0% in the first six months of fiscal 2000, while gross profit as a percentage of net sales of services decreased to 74.3% in the first six months of 2001 from 86.2% in the first six months of fiscal 2000.  The percentage decrease in services resulted from increased costs related to encoding and hosting services.  Gross profit as a percentage of net product sales decreased due to lower average selling prices for our digital video systems.  We currently forecast overall gross profit as a percentage of net sales will be relatively stable over the next several quarters, 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.

             Research and development.  Research and development expenses increased 4.6% to $8.0 million in the first six months of 2001 from $7.6 million in the first six months 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.

             Selling and marketing.  Selling and marketing expenses decreased 8.1% to $9.8 million in the first six months of fiscal 2001 from $10.6 million in the first six months of fiscal 2000.  Selling 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 anticipates that our selling and marketing expenses will decrease over the next several quarters due to the closing of Streamriver and more generally we intend to take actions to decrease our other selling and marketing expenses to be more in line with our forecasted lower level of sales.

             General and administrative.  General and administrative expenses decreased 32.7% to $3.3 million in the first six months of fiscal 2001 from $5.0 million in first six months of fiscal 2000.  General and administrative expenses include the cost of human resources, finance, information technology, legal and other administrative functions of the Company.  The decrease in general and administrative expenses resulted primarily from lower employee, employee-related and legal expenses.  We currently anticipates that our general and administrative expenses will decrease over the next several quarters as we reduce our expense structure and reduce our general and administrative expenses to be more in line with our forecasted lower level of sales.

             As a result of the merger with Digital Origin, Inc. on May 9, 2000, we assumed a significant allowance for doubtful accounts balance of $3,803,000 related to several old, uncollected amounts owed to Digital Origin, Inc.   As of November 30, 2000, the allowance for doubtful accounts totaled $3,812,000, of which $3,401,000 relates to Digital Origin.  As of May 31, 2001, our allowance for doubtful accounts totals $2,945,000 of which $2,458,000 relates to Digital Origin.  During the second quarter of 2001, we wrote-down $213,000 of the remaining balance against the allowance for doubtful accounts.  One account represents approximately $2.2 million of the allowance account and is awaiting resolution in pending litigation (See Note 9).

             Amortization and write-down of acquisition-related intangible assets.  We recorded an expense for the amortization and write-down of acquisition-related intangible assets of $3.4 million in the first six months of fiscal 2001 compared to $.8 million in the first six months of fiscal 2000.  Included in the $3.4 million was amortization expense associated with acquisitions that took place subsequent to Q2 2000, contingent purchase price associated with the Terran acquisition and a write-down of goodwill of $.9 million related to the acquisitions of 21^st Century Media 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 2001, 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 six months of fiscal 2001, we recorded a restructuring charge of $795,000 in connection with a reorganization of the selling and marketing organizations that resulted in severance payments to terminated employees and the closing of Streamriver.  There was no similar expense recorded in the first six months of fiscal 2000.

             Interest income, net.  Interest income decreased 65.7% to $.2 million in the first six months of fiscal 2001 from $.6 million in the first six months of fiscal 2000.  The decrease in interest income is due to lower cash and 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 decline in fiscal 2001 versus 2000 due to lower cash balances.

             Other income (expense), net.  Other expense was $.3 million in the first six months of fiscal 2001 compared to other expense of $.02 million in the first six months of fiscal 2000.  The increase is due to foreign exchange losses on intercompany transactions with our foreign subsidiaries.

             Tax provision. We did not provide for a tax provision in the first six months of fiscal 2001 due to the net loss incurred during the period and our expectation of no taxable income for the year.

Net loss.  As a result of the above factors, we had a loss for the first six months of fiscal 2001 in the amount of ($10.8) million, or ($0.88) per share, compared to a net loss of ($3.5) million, or ($0.30) per share, in the first six months of fiscal 2000.Comparison of First Fiscal Quarter of 2001 to First Fiscal Quarter of 2000

Liquidity and Capital Resources

             We have funded our operations to date primarily from public offerings of equity securities and cash flows from operations.  As of May 31, 2001, the Company’s principal sources of liquidity included cash and cash equivalents and marketable securities totaling approximately $9.7 million.

             For the six months ended May 31, 2001, cash used in operating activities was approximately $5,997,000 compared to approximately $4,177,000 for the same period a year ago.  The Company incurred a net loss of $10,805,000 offset by significant non-cash items, including depreciation and amortization, in the amount of $4,961,000.   A significant portion of the cash used in operating activities is attributable to a significant reduction in accounts payable of $1,638,000.  Accounts receivable provided cash in operating activities in the amount of $2,774,000 due to the timing of sales in the quarter and the subsequent collection of those sales, which resulted in days sales outstanding of 45.   Inventory provided cash in operating activities in the amount of $848,000 during the first six months of fiscal 2001, compared with inventory utilizing cash in operating activities of $2,615,000 in the year ago period.

             Net cash provided by investing activities was approximately $3,865,000 during the six months of fiscal 2001, compared to cash used in investing activities of approximately $2,645,000 for the same period a year ago.  Cash provided by investing activities during the first six months of fiscal 2001 consisted of net proceeds from the sale of marketable securities.  The proceeds from the sales of marketable securities was used to fund purchases of equipment and working capital needs due to the net loss incurred the first six months of fiscal 2001.

             Cash used in financing activities during the first six months of fiscal 2001 was approximately $1,345,000, compared to cash provided by financing activities of $3,770,000 for the same period a year ago.  Cash used in financing activities resulted from the non-recurring payment of an acquisition-related note payable in the amount of $1,492,000, offset by $225,000 from proceeds from the issuance of common stock pursuant to stock plans.  The reduction in cash provided by financing activities that came from proceeds from the issuance of common stock pursuant to stock plans is due to a significantly lower price for the Company’s common stock in the first six months of fiscal 2001 versus the same period a year ago.  Given the recent reduced price of the Company’s common stock, we do not currently expect cash provided by proceeds from the issuance of common stock pursuant to stock plans to be a significant source of liquidity in fiscal 2001.

             As of May 31, 2001, the Company’s principal sources of liquidity included cash and marketable securities.  The Company believes that its current cash, marketable securities and cash provided by future operations will be sufficient to meet the Company’s working capital and anticipated capital expenditures requirements for at least the next twelve months.  Although operating activities may provide cash in certain periods, to the extent the Company experiences growth in the future, its operating and investing activities may require significant cash.  Consequently, any such future growth may require the Company to obtain additional equity or debt financing.  In addition, we may consider the sale of certain assets to raise capital.

Cautionary Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following cautionary statements and elsewhere in this Quarterly Report on Form 10-Q.  If any of the following risks were to occur, our business, financial condition, or results of operations would likely suffer.  In that event, the trading price of our common stock would decline.

Merger and Acquisition Related Risks.  During fiscal year ended November 30, 2000, we completed the merger with Digital Origin and the acquisitions of Wired, 21^st Century, and J2. In addition, we completed the acquisition of certain assets of ICE.  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 business 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, as well as the diversion of management’s attention during the acquisition and integration process.  We 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 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, we may determine to dispose of assets, either assets we have historically used in the business or that we have acquired.  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 on existing and proposed product lines and 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 for liabilities of divested operations, as well as the diversion of management’s attention during the disposition process.  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.

Significant Fluctuations and Unpredictability of Operating Results.  Our 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 of reasons, including new product announcements and introductions by ourselves or our competitors, changes in pricing, and the volume and timing of orders received during the quarter. Also, in the past, we have experienced delays in the development of new products and enhancements, and such delays may occur in the future.  These factors make the forecasting of revenue inherently uncertain.  Additionally, a significant portion of our operating expenses is relatively fixed, and operating expense levels are based primarily on internal expectations of future revenue.  As a consequence, quarterly operating expense levels cannot be reduced rapidly in the event that quarterly revenue levels fail to meet internal expectations.  For these reasons, you should not rely on period-to-period comparisons of our financial results to forecast 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.   If quarterly revenue or earnings levels fail to meet internal or external expectations, the market price of our common stock may decline significantly.

Emerging Markets.  The markets in which we offer our software and systems products and services are intensely competitive and rapidly changing.  We are targeting the emerging market of new Internet-based broadcasters that are building streaming media web sites and businesses and institutions that are adding Internet video to their web sites.  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.

Risks Associated With Development and Introduction of New Products.  If we are not successful in developing and introducing new products to the markets we serve our business and operating results will suffer.  In addition, new product announcements by our competitors and by us could have the effect of reducing customer demand for our existing products.  Also, when we introduce new or enhanced products we must effectively manage the transitions from existing products to minimize disruption of orders from our customers.  New product introductions require us to devote time and resources to the training of our sales channel in the features and target customers for such new products, which efforts could result in less selling efforts being made by the sales channel during such training period.  Our failure to effectively manage new product announcements or introductions could contribute to significant quarterly fluctuations in operating results as orders for new products commence and orders for existing products decline and, as a result, our operating results will suffer.

Rapid Technological Change.  The market for our products is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions.  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.

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., AnyStream, Inc., Adobe Systems Inc., Apple Computer Inc., Avid Technology, Inc., Discreet (a division of Autodesk, Inc.), FAST Electronic GmbH, Loudeye Technologies, Inc., Matrix Electronic Systems Ltd., Pinnacle Systems, Inc., Real Networks 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 it 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.

Dependence on and competition with Apple Computer, Inc.  As a competitor, Apple Computer, Inc. (“Apple”) could, in the future, inhibits our ability to develop our products that operate on the Macintosh platform.  Additionally, new products and enhancements to existing products from Apple such as Final Cut Pro could cause customers to delay purchases of our products or alter their purchase decision altogether.  Furthermore, as the sole supplier of Macintosh computers, any disruption in the availability of these computers could cause customers to defer or alter their purchase of our products.  We rely on access to key information from Apple to continue development of our products and 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.

Dependence on Microsoft Corporation.  Many of our products operate in the Windows environment 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.

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.

Dependence on Propriety Technology.  Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing the rights of others.  Previously, we have received, and may in the future continue to receive, communications suggesting that our products may infringe on the patents or other intellectual property rights of third parties.  Our policy is to investigate the factual basis of such communications and negotiate licenses where appropriate.  While it may be necessary or desirable in the future to obtain licenses relating to one or more products, or relating to current or future technologies, there can be no assurance that we will be able to do so on commercially reasonable terms or at all.  There can be no assurance that these or other future communications can be settled on commercially reasonable terms or that they will not result in protracted and costly litigation.  Any failure to secure the necessary intellectual property right of third parties on commercially reasonable terms may adversely affect our business and operating results and negatively affect the price of our common stock.

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 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 on Distributors and Resellers.  We rely primarily on our worldwide network of independent distributors and VARs to distribute and sell our products to end-users.  Our distributors and resellers generally offer products of several different companies, including in some cases products that are competitive with our own products.  In addition, many of the VARs are small organizations with limited capital resources.  There can be no assurance that our distributors and resellers will continue to purchase products from us, or that our efforts to expand our network of distributors and resellers will be successful.  Any significant failure on our part to maintain or expand our network or distributors and resellers could have a material adverse effect on our business and operating results and negatively affect the price of our common stock.

Reliance on International Sales.  International sales and operations may be subject to risks such as the imposition of government controls, export license requirements, restrictions on the export of critical technology, less effective enforcement of proprietary rights; currency exchange fluctuations, generally longer collection periods, political instability, trade restrictions, changes in tariffs, difficulties in staffing and managing international operations, potential insolvency of international resellers and difficulty in collecting accounts receivable.  Our international sales are also subject to more seasonal fluctuation than domestic sales.  In this regard, the traditional summer vacation period, which occurs during our third fiscal quarter, may result in a decrease in sales, particularly in Europe.  There can be no assurance that these factors will not have an adverse effect on our future international operations and consequently, on our business and operating results.  This fluctuation may be material and negatively affect the price of our common stock.

Internet-based Sales.  In the second half of fiscal 1999, we implemented e-commerce systems allowing customers to purchase our products directly from one of our web sites.  Since implementation of the e-commerce system, our sales through this channel have increased as a percentage of our total sales. There can be no assurances that our customers will continue to purchase our products from one of our web sites or that these web sites will not experience technical difficulties thereby causing customers to delay purchases.  Any significant technical difficulties could have a material adverse affect on our business and operating results and negatively affect the price of our common stock.

Dependence on Key Personnel.  Competition for employees with the skills required by us is intense in the geographic areas in which we maintain physical operations.  We believe that our future success will depend on our continued ability to attract and retain qualified employees, especially in research and development.  Any significant delay in hiring key personnel could have a material adverse affect on our business and operating results and negatively affect the price of our common stock.

History of Losses.  We have incurred substantial operating losses during the current year and in each of the past five fiscal years.  We incurred operating losses of approximately $10.7 million for the first six months of fiscal 2001 and $10.9 million, $2.0 million, $13.9 million, $27.2 million and $16.0 million for fiscal 2000, 1999, 1998, 1997 and 1996, respectively.  As of May 31, 2001, we had an accumulated deficit of approximately $200.2 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.

Stock Price Volatility.  The trading price of our common stock has been highly volatile and has fluctuated significantly in the past.  During 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 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.

Euro Conversion.  On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the Euro.  As of January 1, 2002, the transition to the Euro will be complete.  We maintain operations within the European Union and have prepared for the Euro conversion.  We do not expect the costs associated with the transition to be material.  However, the overall effect of the transition to the Euro may have a material adverse affect on our business, financial condition and financial results.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.  The Company is not a party to any derivative financial instruments or other financial instruments for which the fair value disclosure or accounting would be required under Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities ( SFAS No. 133).  All of the Company’s 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 the Company’s books.  Accordingly, the Company believes that the market risk of such investments is minimal.

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

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

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.

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 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.

(ii) 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 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 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 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 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.

(iii)        On July 18, 1997, Intelligent Electronics, Inc. filed a claim against Digital Origin alleging a breach of contract and related claims in the approximate amount of $800,000, maintaining that Digital Origin failed to comply with various return, price protection, inventory balancing and marketing development funding undertakings.  In 1997, Digital Origin filed an answer to the complaint and cross-claimed against the plaintiffs and in October 1997 additionally cross claimed against Deutsche Financial, Inc., a factor in the account relationship between the Company and the plaintiffs, seeking the recovery of existing accounts receivable of approximately $1.8 million.  During May 2000, the trial was completed and the Court entered two judgments in favor of Digital Origin, one in the amount of $314,000 plus interest against Intelligent Electronics and one in the amount of $1,491,000 plus interest against Deutsche Financial, Inc.  In September 2000, Intelligent Electronics, Inc. paid $314,000 plus interest of $139,000 and reimbursement of certain costs in the amount of $20,000 to the Company. Deutsche Financial, Inc. has filed an appeal, which is expected to be heard during 2001.

(iv)       On October 12, 1999, a lawsuit was filed against the Company by McRoberts Software, Inc. 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 injunctive relief, treble damages, interest, costs and fees.  In November 1999, we filed an answer and counterclaim denying any infringement.  We intend to vigorously defend the lawsuit.

(vi) On May 9, 2001, a lawsuit was filed against the Company by Wired, a California general partnership, in the Santa Clara County Superior Court.  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.  The Company intends to vigorously defend the lawsuit.

(v) 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 June 12, 2001, 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	Against
John A. Molinari	10,920,348	35,181
Maurice L. Castonguay	10,847,404	108,125
Carl Rosendahl	10,758,789	196,740
Paul J. Severino	10,920,740	34,789

	Number of Shares
(2)	Voted For	Voted Against	Abstained
Increase the number of shares of Common Stock Authorized for issuance under the 1986 Employee Stock Purchase Plan by 500,000 shares to 1,700,000	10,153,937	313,661	487,931

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 in the exhibit index on page 28.

b)  Reports on Form 8-K

There were no reports on Form 8-K during the quarter ended May 31, 2001.

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 16, 2001	By:	/s/ Steven D. Shea
			Steven D. Shea
			Chief Financial Officer
			Treasurer

EXHIBIT INDEX

Number	Description
10.2	1986 Employee Stock Purchase Plan, as amended through June 12, 2001.
10.3	Key Employee Incentive Plan (1992), as amended through June 12, 2001.

EX-10.2

EXHIBIT 10.2

MEDIA 100 INC.

1986 Employee Stock Purchase Plan,
as amended through June 12, 2001

Section 1.  Purpose of Plan.

             The Media 100 Inc. ("Media 100") 1986 Employee Stock Purchase Plan (the "Plan") is intended to provide a method by which eligible employees of Media 100 (formerly Data Translation, Inc.) and its subsidiaries (collectively, the "Company") may use voluntary, systematic payroll deductions to purchase shares of Common Stock of Media 100 ("stock") and thereby acquire an interest in the future of the Company.  For purposes of the Plan, a subsidiary is any corporation in which Media 100 owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock.

Section 2.  Options to Purchase Stock.

             Under the Plan, there is available an aggregate of not more than 1,700,000¹ shares of stock (subject to adjustment as provided in Section 16) for sale pursuant to the exercise of options ("options") granted under the Plan to employees of the Company ("employees").  The stock to be delivered upon exercise of options under the Plan may be either shares of Media 100's authorized but unissued stock, or shares of reacquired stock, as the Board of Directors of Media 100 (the "Board of Directors") shall determine.

¹  An increase in the number of shares authorized for issuance under the Plan by 500,000 to a total of 1,700,000 shares was approved by the requisite vote of stockholders at the Annual Meeting of Stockholders of Media 100 held on June 12, 2001.

Section 3.  Eligible Employees.

             Except as otherwise provided in Section 20, each employee who has completed one month of continuous service in the employ of the Company shall be eligible to participate in the Plan.

Section 4.  Method of Participation.

             Subject to the second paragraph of Section 8, the periods January 1 to June 30 and July 1 to December 31 of each year shall be option periods. Each person who will be an eligible employee on the first day of any option period may elect to participate in the Plan by executing and delivering, at least 15 days prior to such day, a payroll deduction authorization in accordance with Section 5.  Such employee shall thereby become a participant ("participant") on the first day of such option period and shall remain a participant until his participation is terminated as provided in the Plan.  Each participant shall execute, prior to or contemporaneously with his election to participate in the Plan, the Company's then standard form of Employee Agreement relating to confidentiality, inventions and the like.

Section 5.  Payroll Deductions.

             The payroll deduction authorization shall request withholding, at a rate of not less than 2% nor more than 10%, from the participant's compensation, by means of substantially equal payroll deductions over the option period.  For purposes of the Plan, "compensation" shall mean all compensation paid to the participant by the Company including compensation paid as bonuses and commissions, but excluding overrides, overseas allowances, and payments under stock option plans and other employee benefit plans   A participant may change the withholding rate of his payroll deduction authorization by written notice delivered to the Company at least 15 days prior to the first day of the option period as to which the change is to be effective.  All amounts withheld in accordance with a participant's payroll deduction authorization shall be credited to a withholding account for such participant.

Section 6.  Grant of Options.

             Each person who is a participant on the first day of an option period shall as of such day be granted an option for such period.  Such option shall be for the number of shares of stock to be determined by dividing (a) the balance in the participant's withholding account on the last day of the option period by (b) the purchase price per share of the stock determined under Section 7, and eliminating any fractional share from the quotient.  The Company shall reduce on a substantially proportionate basis the number of shares of stock receivable by each participant upon exercise of his option for an option period in the event that the number of shares then available under the Plan is otherwise insufficient.

Section 7.  Purchase Price.

             The purchase price of stock issued pursuant to the exercise of an option shall be 85% of the fair market value of the stock at (a) the time of grant of the option or (b) the time at which the option is deemed exercised, whichever is less.  Fair market value shall be determined in accordance with the applicable provisions of the Internal Revenue Code of 1986, as amended or restated from time to time (the "Code") or regulations issued thereunder, or in the absence of any such provisions or regulations, shall be deemed to be the last sale price at which the stock is traded on the day in question or the last prior date on which a trade occurred as reported in the Wall Street Journal; or, if the Wall Street Journal is not published or does not list the stock, then in such other appropriate newspaper of general circulation as the Board of Directors may prescribe; or, if the last price at which the stock traded is not generally reported, then the mean between the reported bid and asked prices at the close of the market on the day in question or the last prior date when such prices were reported.

Section 8.  Exercise of Options.

             If an employee is a participant in the Plan on the last business day of an option period, he shall be deemed to have exercised the option granted to him for that period.  Upon such exercise, the Company shall apply the balance of the participant's withholding account to the purchase of the number of whole shares of stock determined under Section 6, and as soon as practicable thereafter shall issue and deliver certificates for said shares to the participant and shall return to him the balance, if any, of his withholding account in excess of the total purchase price of the shares so issued.  No fractional shares shall be issued hereunder.

             Notwithstanding anything herein to the contrary, the Company shall not be obligated to deliver any shares unless and until, in the opinion of the Company's counsel, all requirements of applicable federal and state laws and regulations (including any requirements as to legends) have been complied with, nor, if the outstanding stock is at the time listed on any securities exchange, unless and until the shares to be delivered have been listed (or authorized to be added to the list upon official notice of issuance) upon such exchange, nor unless or until all other legal matters in connection with the issuance and delivery of shares have been approved by the Company's counsel.

Section 9.  Interest.

             No interest will be payable on withholding accounts.

Section 10.  Cancellation and Withdrawal.

             A participant who holds an option under the Plan may at any time prior to exercise thereof under Section 8 cancel all (but not less than all) of his option by written notice delivered to the Company.  Upon such cancellation, the balance in his withholding account shall be returned to him.

             A participant may terminate his payroll deduction authorization as of any date by written notice delivered to the Company and shall thereby cease to be a participant as of such date.  Any participant who voluntarily terminates his payroll deduction authorization prior to the last business day of an option period shall be deemed to have canceled his option.

Section 11.  Termination of Employment.

             Except as otherwise provided in Section 12, upon the termination of a participant's employment with the Company for any reason whatsoever, he shall cease to be a participant, and any option held by him under the Plan shall be deemed cancelled, the balance of his withholding account shall be returned to him, and he shall have no further rights under the Plan.  For purposes of this Section 11, a participant's employment will not be considered terminated in the case of sick leave or other bona fide leave of absence approved for purposes of this Plan by Media 100 or a subsidiary or in the case of a transfer to the employment of a subsidiary or to the employment of Media 100.

Section 12.  Death or Retirement of Participant.

             In the event a participant holds any option hereunder at the time his employment with the Company is terminated (1) by his retirement with the consent of the Company, and such retirement is within three months of the time such option becomes exercisable, or (2) by his death whenever occurring, then such participant (or in the event of death, his legal representative) may, by a writing delivered to the Company on or before the date such option is exercisable, elect either (a) to cancel any such option and receive in cash the balance in his withholding account, or (b) to have the balance in his withholding account applied as of the last day of the option period to the exercise of his option pursuant to Section 8.  In the event such participant (or his legal representative) does not file a written election as provided above, any outstanding option shall be treated as if an election had been filed pursuant to subparagraph (a) above.

Section 13.  Participant's Rights Not Transferable, Etc.

             All participants granted options under the Plan shall have the same rights and privileges.  Each participant's rights and privileges under any option granted under the Plan shall be exercisable during his lifetime only by him, and shall not be sold, pledged, assigned, or otherwise transferred in any manner whatsoever except by will or the laws of descent and distribution.  In the event any participant violates the terms of this Section, any options held by him may be terminated by the Company and upon return to the participant of the balance of his withholding account, all his rights under the Plan shall terminate.

Section 14.  Employment Rights.

             Neither the adoption of the Plan nor any of the provisions of the Plan shall confer upon any participant any right to continued employment with Media 100 or a subsidiary or affect in any way the right of the Company to terminate the employment of a participant at any time.

Section 15.  Rights as a Shareholder.

             A participant shall have the rights of a shareholder only as to stock actually acquired by him under the Plan.

Section 16.  Change in Capitalization.

             In the event of a stock dividend, stock split or combination of shares, recapitalization, merger in which Media 100 is the surviving corporation or other change in Media 100's capital stock, the number and kind of shares of stock or securities of Media 100 to be subject to the Plan and to options then outstanding or to be granted hereunder, the maximum number of shares or securities which may be delivered under the Plan, the option price and other relevant provisions shall be appropriately adjusted by the Board of Directors, whose determination shall be binding on all persons.  In the event of a consolidation or merger in which Media 100 is not the surviving corporation or in the event of the sale or transfer of substantially all Media 100's assets (other than by the grant of a mortgage or security interest), all outstanding options shall thereupon terminate, provided that prior to the effective date of any such merger, consolidation or sale of assets, the Board of Directors shall either (a) return the balance in all withholding accounts and cancel all outstanding options, or (b) accelerate the exercise date provided for in Section 8, or (c) if there is a surviving or acquiring corporation, arrange to have that corporation or an affiliate of that corporation grant to the participants replacement options having equivalent terms and conditions as determined by the Board of Directors.

Section 17.  Administration of Plan.

             The Plan will be administered by the Board of Directors.  The Board of Directors will have authority, not inconsistent with the express provisions of the Plan, to take all action necessary or appropriate hereunder, to interpret its provisions, and to decide all questions and resolve all disputes which may arise in connection therewith.  Such determinations of the Board of Directors shall be conclusive and shall bind all parties.

             The Board may, in its discretion, delegate its powers with respect to the Plan to an Employee Benefit Plan Committee or any other committee (the "Committee"), in which event all references to the Board of Directors hereunder, including without limitation the references in Section 18, shall be deemed to refer to the Committee.  A majority of the members of any such Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members.  Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members.

Section 18.  Amendment and Termination of Plan.

             The Board of Directors may at any time or times amend the Plan or amend any outstanding option or options for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law, provided that (except to the extent explicitly required or permitted herein) no such amendment will, without the approval of the shareholders of Media 100, (a) increase the maximum number of shares available under the Plan, (b) reduce the option price of outstanding options or reduce the price at which options may be granted, or (c) amend the provisions of this Section 18 of the Plan, and no such amendment will adversely affect the rights of any participant (without his consent) under any option theretofore granted.

             The Plan may be terminated at any time by the Board of Directors, but no such termination shall adversely affect the rights and privileges of holders of the outstanding options.

Section 19.  Approval of Shareholders.

             The Plan shall be subject to the approval of the shareholders of the Company, which approval shall be secured within twelve months after the date the Plan is adopted by the Board of Directors.  Notwithstanding any other provisions of the Plan, no option shall be exercised prior to the date of such approval.  For purposes of the foregoing, any increase in the number of shares described in Section 2, other than pursuant to adjustment as provided in Section 16, shall be treated as an adoption of the Plan with respect to the additional shares.

Section 20.  Limitations on Eligibility.

             Notwithstanding any other provision of the Plan,

             (a) An employee shall not be eligible to receive an option pursuant to the Plan if, immediately after the grant of such option to him, he would (in accordance with the provisions of Sections 423 and 425(d) of the Code) own or be deemed to own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the employer corporation or of its parent or subsidiary corporation, as defined in Section 425 of the Code.

             (b) No employee shall be granted an option under the Plan which would permit his rights to purchase shares of stock under all employee stock purchase plans of the Company and any parent and subsidiary corporations to accrue at a rate which exceeds $25,000 in fair market value of such stock (determined at the time the option is granted) for each calendar year during which any such option granted to such employee is outstanding at any time, as provided in Sections 423 and 425 of the Code.  Without limiting the foregoing, the maximum number of shares for which an employee may be granted an option under the Plan for any six-month option period shall be the number of whole shares obtained by dividing $12,500 by the fair market value of one share of Common Stock on the date of grant.

EX-10.3

EXHIBIT 10.3

MEDIA 100 INC.

Key Employee Incentive Plan (1992),
as amended through May 5, 2000

1.          Plan; Purpose; General.  The purpose of this Key Employee Incentive Plan (1992) (the "Plan") is to advance the interests of Media 100 Inc. (formerly Data Translation, Inc.) (the "Company") by enhancing the ability of the Company and its subsidiaries to attract and retain selected advisers, consultants, key employees and directors, by creating for such persons incentives and rewards for their contributions to the success of the Company, and by encouraging such persons to become owners of shares of the Company's Common Stock, par value $0.01 per share (the "common stock" or "stock").  Options granted pursuant to the Plan may be incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") (such options being referred to herein as "incentive options") or non-incentive options.  The proceeds received from the sale of stock pursuant to the Plan shall be used for general corporate purposes.  Except as otherwise expressly provided with respect to an option grant, no option granted pursuant to the Plan shall be an incentive option.

2.          Effective Date of Plan.  This Plan will become effective upon approval by at least a majority of the votes cast at the next duly called Annual Meeting of Stockholders of the Company at which a quorum representing a majority of the voting power of all outstanding voting stock of the Company is, either in person or by proxy, present and voting thereon or at any adjournment thereof.  Grants of awards under the Plan may be made prior to that date (but after Board adoption of the Plan), subject to approval of the Plan by such shareholders.¹

¹  The Plan was approved by the requisite vote of stockholders at the Annual Meeting of Stockholders of the Company held on April 8, 1992.

3.          Administration of the Plan.  The Plan will be administered by the Board of Directors (the "Board") of the Company.  The Board will have authority to take all action necessary or appropriate hereunder, to interpret its provisions, and to decide all questions and resolve all disputes which may arise in connection therewith.  Such determinations of the Board shall be conclusive and shall bind all parties.

             The Board may, in its discretion, delegate some or all of its powers with respect to the Plan to the Executive Compensation and Stock Option Committee or any other committee (the "Committee"), in which event all references to the Board hereunder, except the references in Section 11 hereof, shall be deemed to refer to the Committee.  The Committee, if one is appointed, shall consist of not fewer than two members, and each member of the Committee shall be, at the time of his appointment and at any time he exercises discretion in administering the Plan, a "non-employee director" as that term is defined in Rule 16b-3 adopted pursuant to the Securities Exchange Act of 1934, as amended.  A majority of the members of any such Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members.  Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members.

4.          Eligibility.  The "Participants" in the Plan will be such key employees, including part-time employees, advisers, consultants and directors whether or not they are employees, of the Company or of any of its present or future subsidiaries (as defined in Section 10) as may be selected from time to time by the Board in its discretion.

             No incentive option shall be granted to a Participant who is not an "employee" as defined in the provisions of the Code or regulations thereunder applicable to incentive options.  No incentive option shall be granted to a Participant who at the time of grant owns, directly or indirectly through application or the attribution rules of Section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its subsidiaries (a "Ten-Percent Shareholder") unless (i) the option price at the time it is granted is at least 110% of the fair market value of the stock subject to the option, and (ii) the period of the option does not exceed five years from the date of grant.

5.          Grant of Awards.  Subject to the express provisions of the Plan, the Board shall have the sole authority and discretion (a) to determine which Participants will be granted awards; (b) to grant awards consisting of options or stock appreciation rights ("SARs"), or both to Participants; (c) to determine whether the options granted to any Participants shall be incentive options or non-incentive options; (d) to determine the time or times when awards will be granted and the number of shares of common stock to be subject to each award; (e) to determine the option price of the shares subject to each option in accordance with Section 6(a) hereof and the value of the shares subject to each SAR on the exercise date of such SAR in accordance with Section 6(d) hereof, and the method of payment of such price; (f) to determine the time or times when each award becomes exercisable and the duration of the exercise period; (g) to impose additional conditions or restrictions on any award, such conditions or restrictions, if any, to be set forth in the award form or other instrument evidencing the award; (h) to prescribe the form or forms of any instruments evidencing any awards granted under the Plan and of any other instruments required under the Plan and to make changes in such forms from time to time; (i) to determine the price, vesting schedule and other attributes of awards granted to Participants working abroad; and (j) to adopt, amend and rescind rules and regulations for the administration of the Plan and the awards and for its own acts and proceedings.  Subject to Section 12 hereof, the Board shall also have the authority, in its sole discretion, both generally and in particular instances, to waive compliance by a Participant with any obligation to be performed by him under an award, to waive any condition or provision of an award, and to amend or cancel any award (and if an award is cancelled, to grant a new award on such terms as the Board shall specify) except that the Board may not take any action with respect to an outstanding award that would adversely affect the rights of the Participant under such award without such Participant's consent.  Nothing in the preceding sentence shall be construed as limiting the power of the Board to make adjustments required by Section 8(c) hereof.

             No award shall be granted on or after February 20, 2002 but awards previously granted may extend beyond that date.

6.          Terms and Conditions of Awards.

a.          Exercise Price of Options.  The purchase price per share for shares issuable upon exercise of options shall be determined by the Board but in the case of incentive options shall not be less than 100% (110% in the case of an incentive option granted to a Ten-Percent Shareholder) of the fair market value of the stock on the date of grant; nor shall the option price be less, in the case of an original issue of authorized stock, than par value per share.  For this purpose, "fair market value" will be determined as set forth in Section 10 hereof.

b.          Period of Options.  An option shall be exercisable during such period or periods as the Board may specify.  The latest date on which an option may be exercised (the "Final Exercise Date") shall be the date which is ten years (five years, in the case of an incentive option granted to a Ten-Percent Shareholder) from the date the option was granted or such earlier date as may be specified by the Board at the time the option is granted.

c.          Exercise of Options.

(i)          Unless the Board at the time of grant or at any other time otherwise specifies in the case of a particular option or options, each option shall first become exercisable with respect to one-fifth of the shares covered by it upon the completion of one year from the date of the grant of the option (the "Initial Exercise Date"), and with respect to an additional one-fifth each succeeding year until the option becomes exercisable with respect to all of the shares covered by it.

(ii)         In the case of options intended to be incentive options, any award forms or other instruments evidencing such options shall contain such provisions relating to exercise and other matters as are required of incentive options under the applicable provisions of the Code and Treasury Regulations, as from time to time in effect.

(iii)        A person electing to exercise part or all of his options shall give written notice to the Company, as specified by the Board, of his election and of the number of shares he has elected to purchase, such notice to be accompanied by the instrument evidencing such option and any other documents required by the Board, and shall at the time of such exercise tender the purchase price of the shares he has elected to purchase.  If the notice of election to exercise is given by the executor or administrator of a deceased Participant, or by the person or persons to whom the option has been transferred by the Participant's will or the applicable laws of descent and distribution, the Company will be under no obligation to deliver shares pursuant to such exercise unless and until the Company is satisfied that the person or persons giving such notice is or are entitled to exercise the option.

(iv)       In the case of an option that is not an incentive option, the Board shall have the right to require that the Participant exercising the option remit to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements (or make other arrangements satisfactory to the Company with regard to such taxes) prior to the delivery of any common stock pursuant to the exercise of the option.  If permitted by the Board, either at the time of the grant of the option or the time of exercise, the Participant may elect, at such time and in such manner as the Board may prescribe, to satisfy such withholding obligation by (i) delivering to the Company common stock owned by such individual having a fair market value equal to such withholding obligation, or (ii) requesting that the Company withhold from the shares of common stock to be delivered upon exercise of the option a number of shares of common stock having a fair market value equal to such withholding obligation.

In the case of an incentive option, if at the time the option is exercised the Board determines that under applicable law and regulations the Company could be liable for the withholding of any federal, state or local tax with respect to a disposition of the common stock received upon exercise, the Board may require as a condition of exercise that the Participant exercising the option agree (i) to inform the Company promptly of any disposition (within the meaning of Section 424(c) of the Code and the regulations thereunder) of common stock received upon exercise, and (ii) to give such security as the Board deems adequate to meet the potential liability of the Company for the withholding of tax, and to augment such security from time to time in any amount reasonably deemed necessary by the Board to preserve the adequacy of such security.

d.          Stock Appreciation Rights.  The Board in its discretion may grant SARs either in tandem with or independent of options awarded under the Plan.  Except as hereinafter provided, each SAR will entitle the Participant to receive upon exercise, with respect to each share of common stock to which the SAR relates, the excess of (i) the share's value on the date of exercise, over (ii) the share's fair market value on the date it was granted.  For purposes of clause (i), "value" shall mean fair market value; provided, that the Board may adjust such value to take into account dividends on the stock and may also grant SARs that provide, in such limited circumstances following a change in control of the Company (as determined by the Board) as the Board may specify, that "value" for purposes of clause (i) is to be determined by reference to a specified value (which may include an average of values) for the common stock during a period immediately preceding the change in control, all as determined by the Board.  The amount payable to a Participant upon exercise of an SAR shall be paid either in cash or in shares of common stock, as the Board determines.  Each SAR shall be exercisable during such period or periods and on such terms as the Board may specify.  No SAR shall be exercisable after the date which is ten years from the date of grant.

e.          Payment for and Delivery of Shares.  Shares which are subject to options shall be issued only upon receipt by the Company of full payment of the purchase price for the shares as to which the award is exercised.  The purchase price shall be payable by the option holder to the Company either (i) in cash or by check, bank draft or money order payable to the order of the Company; or (ii) if so permitted by the Board (which in the case of an incentive option, shall specify such method of payment at the time of grant), (A) through the delivery of shares of common stock (duly owned by the option holder and for which the option holder has good title free and clear of any liens and encumbrances and which, in the case of common stock acquired from the Company, shall have been held for at least six months) having a fair market value on the last business day preceding the date of exercise equal to the purchase price or (B) by delivery of a promissory note of the option holder to the Company, such note to be payable on such terms as are specified by the Board or (C) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price; or (iii) by a combination of the permissible forms of payment as provided in (i) and (ii) above; provided, that if the common stock delivered upon exercise of the option is an original issue of authorized common stock, at least so much of the exercise price as represents the par value of such common stock shall be paid other than with a personal check or promissory note of the person exercising the option.

             The Company shall not be obligated to deliver any shares unless and until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, nor, if the outstanding common stock is at the time listed on any securities exchange, unless and until the shares to be delivered have been listed (or authorized to be added to the list upon official notice of issuance) upon such exchange, nor unless and until all other legal matters in connection with the issuance and delivery of shares have been approved by the Company's counsel.  Without limiting the generality of the foregoing, the Company may require from the person exercising an option such investment representation or such agreement, if any, as counsel for the Company may consider necessary in order to comply with the Securities Act of 1933, as amended, and may require that such person agree that any sale of the shares will be made only on a national securities exchange or in such other manner as is permitted by the Board and that he will notify the Company before he makes any disposition of the shares whether by sale, gift or otherwise.

             A Participant shall have the rights of a shareholder only as to shares actually acquired by him under the Plan.

f.           Nontransferability of Awards.  No award may be sold, assigned or otherwise transferred or disposed of in any manner whatsoever other than by will or by the laws of descent and distribution, and during the Participant's lifetime the award may be exercised only by him.

g.          Forfeiture of Awards upon Termination of Employment.  If a Participant’s (other than a non-employee director’s) employment or service with the Company and its subsidiaries terminates for any reason other than death, the portion of any award held by the Participant that was not exercisable immediately prior to such termination of employment or service shall immediately expire and except as the Board may otherwise determine, in its sole discretion, the remaining portion, if any, of the award shall continue to be exercisable for a period of ninety (90) days immediately following the date of termination of the Participant’s employment or other service with the Company and its subsidiaries.  Notwithstanding the foregoing, if the Participant was terminated for cause all awards held by the Participant immediately prior to such termination, whether or not then exercisable, shall immediately expire.²  For purposes of this Section 6(g), employment shall not be considered terminated (i) in the case of sick leave or other bona fide leave of absence approved for purposes of the Plan by the Board, so long as the Participant's right to reemployment is guaranteed either by statute or by contract, (ii) in the case of a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which Section 424(a) of the Code applies, or (iii) in the case of a transfer of employment between the Company and its wholly-owned subsidiary Data Translation, Inc. (formerly Data Translation II, Inc.) ("DTI") and subsequent distribution  of the stock of such subsidiary to the Company's stockholders (the "Distribution"); provided, that this clause (iii) shall apply only in the case of Participants whose transfer of employment to DTI occurs in connection with the Distribution; and further provided, that in the case of any such Participant, post-Distribution service for DTI shall be treated for purposes of this paragraph as service for the Company and any post-Distribution termination of employment with DTI shall be treated for purposes of this paragraph as a termination of employment with the Company and its subsidiaries.  The Company may require that any Participant described in clause (iii) above provide, prior to any post-Distribution exercise of an award hereunder by such Participant and as a condition thereto, evidence satisfactory to the Company as to the period of such Participant's employment with DTI.

²  The preceding two sentences were adopted by amendment dated January 19, 1998 and are effective as to awards granted, regranted or amended on or after such date, except as the Board may otherwise determine; provided, that any incentive option granted prior to such date that is amended on or after such date shall not be subject to such amendment without the consent of the Participant holding the option if application of such amendment would cause the option (as amended) to fail to qualify as an incentive stock option.  With respect to all awards which are not subject to the foregoing amendment, the following provision shall apply:

"If a Participant's (other than a non-employee director's) employment or service with the Company and its subsidiaries terminates for any reason other than death, all awards held by the Participant shall terminate unless the Board determines, in its sole discretion, that such awards as were exercisable immediately prior to termination shall continue to be exercisable for a period of time after termination shall continue to be exercisable for a period of time after termination (but in no event beyond the Final Exercise Date). If the Board determines that a post-termination exercise period for exercisable awards is appropriate, such awards shall terminate and be forfeited after completion of such period to the extent not previously exercised, expired or terminated."

h.          Death.  If a Participant dies at a time when he is entitled to exercise an option, then at any time or times within one year after his death (or such further period as the Board may allow) such option may be exercised, as to all or any of the shares which the Participant was entitled to purchase immediately prior to his death, by his executor or administrator or the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, and except as so exercised such option will expire at the end of such period.  In no event, however, may any option be exercised after the Final Exercise Date.

i.           Confidentiality Agreement.  Each Employee, including employees of DTI who received options while employees of the Company, shall execute, prior to or contemporaneously with the grant of any option to such Participant hereunder, the Company's then standard form of agreement relating to confidentiality, inventions and the like.

7.          Replacement Awards.  The Company may grant awards under the Plan on terms differing from those provided in Section 6, where such awards are granted in substitution for awards held by employees of another corporation who concurrently become employees of the Company or a subsidiary as the result of a merger or consolidation of that corporation with the Company or a subsidiary, or the acquisition by the Company or a subsidiary of property or stock of that corporation.  The Board may direct that the substitute awards be granted on such terms and conditions as the Board considers appropriate in the circumstances.  Such awards will be in addition to those which may be granted under the Plan and will not be counted as granted under the Plan.

8.          Shares Subject to Plan.

a.          Number of Shares and Stock to be Delivered.  Shares delivered pursuant to this Plan shall in the discretion of the Board be authorized but unissued shares of common stock or previously issued stock acquired by the Company.  Subject to adjustment as described below and exclusive of the shares that are subject to the options provided for in Section 13, the aggregate number of shares which may be delivered under this Plan shall not exceed 4,200,000 shares of common stock of the Company.

b.          Limitations on Grants to Individuals.   Subject to adjustment as described below and exclusive of the shares that are subject to the options provided for in Section 13, the aggregate number of shares for which options may be granted under this Plan to any individual in any calendar year shall not exceed 500,000 shares of common stock of the Company.

c.          Changes in Stock.  In the event of a stock dividend, stock split or combination of shares, recapitalization, merger in which the Company is the surviving corporation or other change in the Company's capital stock, the number and kind of shares of stock or securities of the Company to be subject to the Plan and to options then outstanding or to be granted thereunder, the maximum number of shares or securities which may be delivered under the Plan, the option price and other relevant provisions shall be appropriately adjusted by the Board, whose determination shall be binding on all persons.  In the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding stock by a single person or entity, or in the event of the sale or transfer of substantially all the Company's assets, all outstanding awards shall thereupon terminate, provided that at least twenty days prior to the effective date of any such merger, consolidation or sale of assets, all outstanding awards shall become exercisable immediately prior to consummation of such merger, consolidation or sale of assets, unless the Board shall have arranged for the surviving or acquiring corporation or an affiliate of that corporation to assume the awards or to grant to the Participants replacement awards having equivalent terms and conditions as determined by the Board including, in the case of incentive options, terms and conditions that satisfy the requirements of Section 424(a) of the Code.

             The Board may also adjust the number of shares subject to outstanding awards granted under Sections 5 or 6 hereof, the exercise price of outstanding options and the terms of outstanding options to take into consideration material changes in accounting practices or principles, consolidations or mergers (except those described in the immediately preceding paragraph), acquisitions or dispositions of stock or property or any other event if it is determined by the Board that such adjustment is appropriate to avoid distortion in the operation of the Plan, including without limitation, the special option adjustments made in connection with the Distribution and described in Section 14 herein.

9.          Employment Rights.  Neither the adoption of the Plan nor the grant of awards shall confer upon any Participant any right to continued employment with the Company or a subsidiary or affect in any way the right of the Company to terminate the employment of a Participant at any time.  Except as specifically provided by the Board, in its sole discretion, in any particular case, the loss of existing or potential profit in awards granted under this Plan shall not constitute an element of damages in the event of termination of the relationship of a Participant even if the termination is in violation of an obligation of the Company to the Participant by contract or otherwise.

10.        Definitions.

a.          For purposes of the Plan a subsidiary is any corporation (i) in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock, or (ii) over which the Company has effective operating control; provided, however, that no corporation shall be deemed a subsidiary for the purpose of any provisions applicable to incentive options, and no incentive options shall be granted to employees of such corporation, unless in each case, such corporation shall constitute a subsidiary as defined in clause (i) above.  For special rules relating to DTI, see Section 14, below.

b.          The fair market value of the common stock shall be determined in accordance with the applicable provisions of the Code or regulations issued thereunder, or in the absence of any such provisions or regulations, shall be deemed to be the last sale price at which such common stock is traded on the date in question as reported in the Wall Street Journal; or, if the Wall Street Journal is not published at the date in question or does not list the common stock, then in such other appropriate newspaper of general circulation as the Board may prescribe; or, if there is no sale of the common stock on the date in question or the last price at which the common stock traded is not listed, then the mean between the bid and asked price at the close of the market on such day.

11.        Indemnification of Board.  In addition to and without affecting such other rights of indemnification as they may have as members of the Board or otherwise, each member of the Board shall be indemnified by the Company to the extent legally possible against reasonable expenses, including attorneys' fees, actually and reasonably incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which he may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any option granted thereunder, and against all judgments, fines and amounts paid by him in settlement thereof; provided that such payment of amounts so indemnified is first approved by a majority of the members of the Board who are not parties to such action, suit or proceeding, or by independent legal counsel selected by the Company, in either case on the basis of a determination that such member acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; and except that no indemnification shall be made in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Board member is liable for negligence or misconduct in his duties; and provided, further that the Board member shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same.

12.        Amendments.  The Board may at any time discontinue granting awards under the Plan.  The Board may at any time or times amend the Plan or amend any outstanding award or awards for the purpose of satisfying the requirements of Section 422 of the Code or of any changes in applicable laws or regulations, to comply with any applicable laws and requirements of foreign jurisdictions or for any other purpose that may at the time be permitted by law, provided that no such amendment will adversely affect the rights of any Participant (without his consent) under any award theretofore granted.

13.        Non-Employee Directors.  Notwithstanding anything to the contrary contained elsewhere herein:

a.          Eligible Directors and Grant.  Each director of the Company who is not a full-time employee of the Company or any of its subsidiaries and is a director on April 8, 1992 shall be automatically granted on such date non-incentive stock options covering 10,000 shares of common stock and each non-employee director who is initially elected after April 8, 1992 and prior to February 20, 2002 shall be granted on the date of such election non-incentive stock options covering 10,000 shares of common stock (notwithstanding the two-for-one split of the common stock effected on July 31, 1995), all such options to be exercisable with respect to one-fifth of the covered shares one year from the date of grant and with respect to an additional one-fifth each succeeding year.

b.          Terms of Options.  The Final Exercise Date of options granted pursuant to Section 13(a) hereof shall be 10 years from the date of grant.  If a director's service with the Company terminates for any reason other than death, in lieu of the provisions of Section 6(g) hereof, all options held by the director that are exercisable on the date of termination shall continue to be exercisable for a period of six months, but shall terminate immediately if the director was removed for cause or resigned under circumstances which in the opinion of the Board of Directors casts such discredit on the Company or him as to justify termination of his options.  After completion of said six-month period, such options shall terminate to the extent not previously exercised, expired or terminated.  All options held by a director that are not exercisable on the date such director's service with the Company terminates shall immediately terminate.  The purchase price for shares of common stock issuable upon the exercise of options granted pursuant to Section 13(a) hereof shall be the fair market value of the common stock at the close of business on the date the option is granted, determined in accordance with Section 10(b) hereof; provided, however, that in no event shall the exercise price be less than par value per share.

14.        Special Option Adjustments.  Notwithstanding any other provision of the Plan, each option outstanding under the Plan immediately prior to the Distribution (an "affected option") shall be adjusted in accordance with Section 8.7 of the Distribution Agreement between the Company and DTI dated as of November 19, 1996 (the "Distribution Agreement"). Except as otherwise provided herein, the adjusted option shall have substantially the same terms as prior to the Distribution.  To the extent any such adjustment shall be treated as an option grant for purposes of Section 8.7 of such Agreement, it shall be made in accordance with the terms of said Section 8.7 and without regard to the option-grant rules and limitations set forth in this Plan.