Prepared by MERRILL CORPORATION

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For The Quarterly Period Ended: August 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 or incorporation)	(I.R.S. Employer Identification Number)

290 DONALD LYNCH BOULEVARD MARLBOROUGH, MASSACHUSETTS

(Address of principal executive offices)

01752-4748

(Zip code)

(508) 460-1600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

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

Common Stock, par value $.01 per share	12,545,325 shares

Class	Outstanding at September 30, 2001

MEDIA 100 INC. AND SUBSIDIARIES

INDEX


PART I - FINANCIAL INFORMATION
	ITEM 1	Consolidated Financial Statements:
		Consolidated Balance Sheets as of August 31, 2001 and November 30, 2000

		Consolidated Statements of Operations for the three and nine months ended August 31, 2001 and August 31, 2000

		Consolidated Statements of Cash Flows for the nine months ended August 31, 2001 and August 31, 2000

		Notes To Consolidated Financial Statements

	ITEM 2	Managements Discussion And Analysis Of Financial Condition and Resuts of Operations

	ITEM 3	Item3 Quantitative And Qualitative Disclosure about Market Risk

PART II - OTHER INFORMATION
	ITEM 1	Legal Proceedings

	ITEM 5	Other Information

	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)

			August 31,			November 30,
			2001			2000

ASSETS
Current assets:
	Cash and cash equivalents		$	6,438		$	11,987
	Marketable securities		245			5,674
	Accounts receivable, net of allowance for doubtful accounts of $629 in 2001 and $411 in 2000		3,775			6,321
	Inventories		1,649			3,789
	Prepaid expenses and other current assets		830			1,180
	Net assets from discontinued operations (Note 16)		3,888			5,582

		Total current assets	16,825			34,533

Property and equipment, net			4,433			5,616
Intangible assets, net			2,464			4,908
Other assets, net			1,131			1,245

Total assets			$	24,853		$	46,302


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	1,699		$	4,561
	Accrued expenses		6,401			7,142
	Note payable		-			1,492
	Deferred revenue		4,304			5,272

		Total current liabilities	12,404			18,467


Contingencies (Note 9)

Stockholders' equity:
	Preferred stock		-			-
	Common stock		128			123
	Capital in excess of par value		217,681			217,182
	Treasury stock		(78		)	-
	Accumulated deficit		(205,203		)	(189,380		)
	Accumulated other comprehensive loss		(79		)	(90		)

		Total stockholders' equity	12,449			27,835

Total liabilities and stockholders' equity			$	24,853		$	46,302

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 August 31,						Nine Months Ended August 31,

			2001			2000			2001			2000

Net sales:
	Products		$	5,993		$	9,839		$	19,087		$	28,549
	Services		2,066			2,703			6,906			7,268

Total net sales			8,059			12,542			25,993			35,817

Cost of sales			4,582			5,381			13,304			15,162

	Gross profit		3,477			7,161			12,689			20,655


Operating expenses:
	Research and development		2,690			2,932			8,056			8,221
	Selling and marketing		2,585			3,264			9,818			9,823
	General and administrative		1,923			1,069			4,594			3,124
	Amortization and write-down of acquisition-related intangible assets		480			303			2,420			668
	Acquired in-process research and development		-			-			-			470
	Restructuring charge		310			-			878			-

		Total operating expenses	7,988			7,568			25,766			22,306

Operating loss			(4,511		)	(407		)	(13,077		)	(1,651		)

Interest income, net			50			260			221			809
Other income (expense), net			464			(328		)	200			(646		)

	Loss from continuing operations before tax provision		(3,997		)	(475		)	(12,656		)	(1,488		)
Tax provision			-			-			-			30

Loss from continuing operations			(3,997		)	(475		)	(12,656		)	(1,518		)

Discontinued Operations (Note 16):
Income (loss) from discontinued operations			(1,021		)	752			(3,167		)	(1,740		)

	Net (loss) income		$	(5,018	)	$	277		$	(15,823	)	$	(3,258	)


Basic net (loss) income per share:
	Continuing operations		$	(0.32	)	$	(0.04	)	$	(1.02	)	$	(0.13	)

	Discontinued operations		$	(0.08	)	$	0.06		$	(0.26	)	$	(0.15	)

	Total		$	(0.40	)	$	0.02		$	(1.28	)	$	(0.28	)

Diluted net (loss) income per share:
	Continuing operations		$	(0.32	)	$	(0.04	)	$	(1.02	)	$	(0.13	)

	Discontinued operations		$	(0.08	)	$	0.06		$	(0.26	)	$	(0.15	)

	Total		$	(0.40	)	$	0.02		$	(1.28	)	$	(0.28	)

Weighted average common shares outstanding:
	Basic		12,415			12,136			12,369			11,916

	Diluted		12,415			13,167			12,369			11,916

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)

			Nine Months Ended August 31,

			2001				2000

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss		$	(15,823		)	$	(3,258			)
	Loss from discontinued operations		3,167				1,740
	Loss from continuing operations		(12,656			)	(1,518				)
	Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
		Depreciation and amortization	2,067				2,189
		Non-cash interest expense	-				70
		Acquired in-process research and development	-				470
		Amortization and write-down of acquisition-related intangible assets	2,420				669
		Gain on sale of marketable securities	9				15
	Changes in assets and liabilities, excluding effects of acquisitions:
		Accounts receivable	2,546				(1,659				)
		Inventories	2,140				(2,396				)
		Prepaid expenses and other current assets	350				(373				)
		Accounts payable	(2,862			)	(35				)
		Accrued expenses	(741			)	865
		Deferred revenue	(968			)	168

	Net cash used in operating activities		(7,695			)	(1,535				)

	Net cash used in discontinued operations		(1,473			)	(8,148				)


CASH FLOWS FROM INVESTING ACTIVITIES:
		Acquisition of Wired, Inc., net of cash acquired	-				(1,487				)
		Acquisition of 21^st Century Media Inc., net of cash acquired	-				(481				)
		Acquisition of J2 Digital Media Inc., net of cash acquired	-				(152				)
		Acquisition of certain assets of Integrated Computing Engines, Inc.	-				(1,797				)
		Purchases of property and equipment	(768			)	(895				)
		Other assets	114				(1,225				)
		Purchase of intangible assets	(91			)	(227				)
		Net proceeds from sales of marketable securities	5,419				5,405

	Net cash provided by (used in) investing activities		4,674				(859				)

CASH FLOWS FROM FINANCING ACTIVITIES:
		Payment of note payable	(1,492			)	-
		Proceeds from issuance of common stock pursuant to stock plans	504				4,472
		Purchase of treasury stock	(78			)	-

	Net cash (used in) provided by financing activities		$	(1,066		)	$	4,472

EFFECT OF EXCHANGE RATE CHANGES ON CASH			11				-

NET DECREASE INCREASE IN CASH AND CASH EQUIVALENTS			$	(5,549		)	$			(6,070	)

CASH AND CASH EQUIVALENTS, beginning of period			11,987				13,858

CASH AND CASH EQUIVALENTS, end of period			$		6,438		$		7,788

		Nine Months Ended August 31,

		2001				2000

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash (received) paid for income taxes	$	(42		)	$	13

OTHER TRANSACTIONS NOT USING CASH:
	Change in value of marketable securities	$		(44	)	$	27

	Nine Months Ended August 31,

	2001				2000

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:

In connection with the acquisition of Wired, Inc., the following non-cash transaction occurred:
Fair value of assets acquired	$		-		$		3,180
Cash paid for acquisition and acquisition costs	-				1,487

Note payable and liabilities assumed	$		-		$		1,693


In connection with the acquisition of 21^st Century Media, LLC, the following non-cash transaction occurred:
Fair value of assets acquired	$			-	$	1,130
Cash paid for acquisition and acquisition costs	-				481

Common stock issued and liabilities assumed	$	-			$	649


In connection with the acquisition of J2 Digital Media , Inc. the following non-cash transaction occurred:
Fair value of assets acquired	$		-		$		280
Cash paid for acquisition and acquisition costs	-				152

Common stock issued and liabilities assumed	$		-		$	128


In connection with the acquisition of certain assets of Integrated Computing Engines, Inc. the following non-cash transaction occurred:
Fair value of assets acquired	$			-	$		2,775
Cash paid for acquisition and acquisition costs	-				1,797

Common stock issued and liabilities assumed	$			-	$		978

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

The Company designs and sells 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”). On August 29, 2001, the Company signed an agreement to sell its software product line to Autodesk, Inc. for $16 million in cash. As a result of this transaction, the assets of the software product line to be discontinued consisting primarily of accounts receivable, inventory, equipment, intangible assets, and income taxes payable have been separately classified in the accompanying balance sheet at August 31, 2001. The November 30, 2000 balance sheet has been restated to conform to the current year’s presentation. The disposal date was October 5, 2001. The Company’s software product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin.

2. Principles of Consolidation

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

3. Reclassifications

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

4. Cash 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 $0.2 million of the cash and cash equivalents were restricted under various letters of credit at August 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 August 31, 2001 and November 30, 2000 consist of the following (in thousands):

Investments available for sale:			Maturity	August 31,		November 30,
				2001		2000

U.S. Treasury Notes			less than 1 year	$	-	$	509
U.S. Treasury Notes			1 - 5 years	-		2,030

	Total U.S. Treasury Notes		-	-		2,539

U.S. Agency Bonds			less than 1 year	-		507

	Total U.S. Agency Bonds		-	-		507

Money Market Instruments			less than 1 year	-		1,044

Corporate Obligations			less than 1 year	-		1,116
Corporate Obligations			1 - 5 years	245		1,512

		Total Corporate Obligations		245		2,628

Total investments available for sale				245		6,718
Less: cash and cash equivalents				-		(1,044		)

Total marketable securities				$	245	$	5,674

Marketable securities had a cost of $245 and $5,718, and a market value of $245 and $5,674 at August 31, 2001 and November 30, 2000, respectively. To adjust the carrying amount of the 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):

	August 31,		November 30,
	2001		2000

Raw materials	$	1,202	$	2,597
Work-in-process	232		662
Finished goods	215		530

	$	1,649	$	3,789

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):

	August 31,			November 30,
	2001			2000

Machinery and equipment	$	13,564		$	12,894
Purchased software	6,037			6,037
Furniture and fixtures	1,283			1,603
Vehicles	9			9
Leasehold improvements	1,730			1,559

	22,623			22,102
Less accumulated depreciation and amortization	(18,190		)	(16,486		)

	$	4,433		$	5,616

7. Intangible Assets

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

	August 31,			November 30,
	2001			2000

Patents and Trademarks	$	498		$	407
Acquired Technology	1,900			1,900
Goodwill	2,784			3,992

	5,182			6,299
Less accumulated amortization	(2,718		)	(1,391		)

	$	2,464		$	4,908

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

The Company recorded an expense for the amortization and write-down of intangible assets of $2.0 million in the first fiscal quarter of 2001 compared to $0.3 million in the first fiscal quarter of fiscal 2000. Included in the $2.0 million was a write-down of goodwill of $0.9 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.

8. Net Income (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 income (loss) per share (in thousands):

	Three months ended August 31,		Nine months ended August 31,

	2001	2000	2001	2000

Weighted average shares of common stock Outstanding	12,415	12,136	12,369	11,916
Effect of potential common shares - stock options and warrants outstanding (unless antidilutive)	-	1,031	-	-

Weighted average shares and potential common shares outstanding	12,415	13,167	12,369	11,916

The Company excludes potentially dilutive securities from its diluted net income (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 3,520,000 and 1,302,000 shares of common stock at August 31, 2001 and August 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.

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

On August 15, 2001, Deutsche Financial, Inc. entered into a settlement agreement with Digital Origin, Inc. to pay $1,075,000 to the Company. Pursuant to APB Opinion No. 20, Accounting Changes, the Company revised its estimate of the allowance for doubtful accounts by reversing $1,171,000 of the allowance in the three months ended August 31, 2001 by reducing the loss from discontinued operations.

(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 August 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 nine months of fiscal 2001 due to the net loss incurred during the first nine months of the fiscal year and its expectation for no taxable income for the year.

12. Accrued Expenses

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

	August 31,		November 30,
	2001		2000

Payroll, payroll taxes and other taxes	$	1,436	$	2,242
Accrued warranty	561		559
Accrued restructuring	309		528
Accrued inventory	867		763
Accrued legal and professional services	712		692
Accrued selling and marketing	483		301
Accrued other	2,033		2,057

	$	6,401	$	7,142

13. Comprehensive income (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) income is as follows (in thousands):

	Three months ended August 31,					Nine months ended August 31,

	2001			2000		2001			2000

Net (loss) income	$	(5,018	)	$	277	$	(15,823	)	$	(3,258	)

Cumulative translation adjustment	(22		)	2		(33		)	-
Unrealized holding gain on available for sale securities	44			150		44			27

Total comprehensive (loss) income	$	(4,996	)	$	429	$	(15,812	)	$	(3,231	)

14. Segment Information

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

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

*Three months ended August 31, 2001*	Digital Video Systems		Services		Corporate		Total

Net sales from external customers	$	5,993	$	2,066	$	-	$	8,059

Gross profit	1,759		1,718		-		3,477

Depreciation and amortization	607		21		-		628

Interest income, net	-		-		50		50

*Nine months ended August 31, 2001*

Net sales from external customers	$	19,087	$	6,906	$	-	$	25,993

Gross profit	7,376		5,313		-		12,689

Depreciation and amortization	1,907		160		-		2,067

Interest income, net	-		-		221		221


*Three months ended August 31, 2000*

Net sales from external customers	$	9,839	$	2,703	$	-	$	12,542

Gross profit	5,093		2,068		-		7,161

Depreciation and amortization	701		25		-		726

Interest income, net	-		-		260		260

*Nine months ended August 31, 2000*

Net sales from external customers	$	28,549	$	7,268	$	-	$	35,817

Gross profit	14,654		6,001		-		20,655

Depreciation and amortization	2,125		64		-		2,189

Interest income, net	-		-		809		809

Tax provision					30		30

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 nine months ended August 31, 2001and August 31, 2000 were as follows (in thousands):

	Three months ended

	August 31, 2001		August 31, 2000

North America	$	5,333	$	8,803
United Kingdom, Sweden, Denmark and Norway	767		1,271
Germany, Austria and Switzerland	372		481
France, Spain, Benelux and Italy	543		864
Asia Pacific	1,044		1,123

	$	8,059	$	12,542

	Nine months ended

	August 31, 2001		August 31, 2000

North America	$	17,518	$	22,566
United Kingdom, Sweden, Denmark and Norway	2,581		3,660
Germany, Austria and Switzerland	921		2,022
France, Spain, Benelux and Italy	1,996		2,808
Asia Pacific	2,977		4,761

	$	25,993	$	35,817

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

	August 31, 2001		November 30, 2000

North America	$	4,156	$	5,278
United Kingdom	144		194
Germany	43		33
Italy	9		16
France	81		95

	$	4,433	$	5,616

15. Restructuring Expense

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

16. Discontinued Operations

On August 29, 2001, the Company signed an agreement to sell its software product line to Autodesk, Inc. for $16 million in cash. As a result of this transaction, the assets of the software product line to be discontinued consisting primarily of accounts receivable, inventory, equipment, intangible assets, income taxes payable and have been separately classified in the accompanying balance sheet at August 31, 2001. The November 30, 2000 balance sheet has been restated to conform to the current year’s presentation. The disposal date was October 5, 2001. The Company’s software product line consisted of products acquired in the Terran acquisition and the merger with Digital Origin.

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

Net assets from discontinued operations at August 31, 2001 and November 30, 2000 consist of the following (in thousands):

	August 31, 2001			November 30, 2000

Accounts receivable	$	1,100		$	2,298
Inventory	552			525
Property and equipment, net	418			440
Intangible assets, net	2,907			3,408
Income taxes payable	(1,089		)	(1,089		)

	$	3,888		$	5,582

17. New Accounting Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations”. SFAS No. 141 supercedes APB No 16 “Business Combinations” and FASB Statement No. 38 “Accounting for Preacquisition Contingencies of Purchased Enterprises.” SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Accordingly, the Company will be adopting the provisions of this statement upon any business combination entered into after June 30, 2001.

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. This statement applies to goodwill and intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired. Under this statement goodwill as well as certain other intangible assets, determined to have an infinite life, will no longer be amortized. These assets will be reviewed for impairment on a periodic basis. This statement is effective for the Company in the first quarter of fiscal year 2003. Management is currently evaluating the impact that this statement will have on the Company’s financial statements.

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

Overview

Media 100 Inc., a Delaware corporation, (the “Company”) designs and sells 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”).

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.

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

Results of Operations

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

				Three months ended August 31,				Nine months ended August 31,

				2001		2000		2001		2000

Net sales:
	Products			74.4	%	78.4	%	73.4	%	79.7	%
	Services			25.6		21.6		26.6		20.3

Total net sales				100.0		100.0		100.0		100.0
Cost of sales				56.9		42.9		51.2		42.3

			Gross profit	43.1		57.1		48.8		57.7
Operating expenses:
	Research and development			33.4		23.4		31.0		23.0
	Selling and marketing			32.1		26.0		37.8		27.4
	General and administrative			23.9		8.5		17.7		8.7
	Amortization and write-down of acquisition-related intangible assets			6.0		2.4		9.3		1.9
	Acquired in-process research and development			-		-		-		1.3
	Restructuring charge			3.8		-		3.4		-

		Total operating expenses		99.1		60.3		99.1		62.3
Operating loss				(56.0	)	(3.2	)	(50.3	)	(4.6	)
Interest income, net				0.6		2.1		0.9		2.3
Other income (expense), net				5.8		(2.6	)	0.8		(1.8	)

Loss from continuing operations				(49.6	)	(3.8	)	(48.7	)	(4.2	)
Tax provision				-		-		-		-

	Net loss from continuing operations			(49.6	)	(3.8	)	(48.7	)	(4.2	)
Discontinued operations
Income (loss) from discontinued operations				(12.7	)	6.0		(12.2	)	(4.9	)

Net (loss) income				(62.3	)%	2.2	%	(60.9	)%	(9.1	)%

Comparison of Third Fiscal Quarter of 2001 to Third Fiscal Quarter of 2000

Net sales. Total net sales from continuing operations for the third fiscal quarter ended August 31, 2001 decreased 35.7% to $8.1 million from $12.5 million for the third quarter of fiscal 2000. Net sales of products from continuing operations for the third fiscal quarter ended August 31, 2001 decreased 39.1% to $6.0 million from $9.8 million for fiscal 2000. The decrease in net sales from products is due to a number of factors including lower unit sales on both the Macintosh and Windows operating platforms and lower average selling prices for our digital video systems ($3.1 million) and lower sales of our MPEG-based products ($0.7 million). We attribute the decrease in sales of our digital video systems 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 continuing operations for services for the third fiscal quarter ended August 31, 2001 were $2.1 million, a decrease of 23.6% from the third quarter of fiscal 2000. The decrease in net sales from services is the result of lower sales of service contracts due to lower units sales of our digital video systems and the elimination of encoding and hosting services.

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

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

Selling and marketing. Selling and marketing expenses from continuing operations decreased 20.8% to $2.6 million in the third fiscal quarter of 2001 from $3.3 million in the third 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 anticipate that our selling and marketing expenses will decrease in our fiscal fourth quarter due to lower salary and other employee-related expenses as we adjust our expenses to be more in line with our forecasted lower level of sales.

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

Restructuring charge. During the third fiscal quarter of 2001, we recorded a restructuring charge of $310,000 in connection with a reorganization of the company that resulted in severance payments to terminated employees. There was no similar expense recorded in the second fiscal quarter of 2000.

Interest income, net. Interest income decreased 80.8% to $0.1 million in the third fiscal quarter of 2001 from $0.3 million in the third 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 anticipate interest income will increase in fiscal 2001 versus 2000 due to higher cash balances as a result of the sale of our streaming media software business to Autodesk, Inc.

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

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

Discontinued operations. We recorded a loss from discontinued operations of ($1.0) million or ($0.08) per share, in the third fiscal quarter of 2001 versus net income of $0.8 million, or $0.06 per share, in the third quarter of fiscal 2000. The loss in the third quarter of fiscal 2001 includes all the operations that were sold to Autodesk, Inc. and all transaction-related expenses.

Net loss. As a result of the above factors, we had a net loss from continuing operations for the third fiscal quarter of 2001 in the amount of ($4.0) million, or ($0.32) per share, compared to a net loss of ($0.5) million, or ($0.04) per share, in the third quarter of fiscal 2000. Total net loss, including discontinued operations, for the third quarter of fiscal 2001 was ($5.0) million or ($0.40) per share, versus net income of $0.3 million, or $0.02 per share, for fiscal 2000.

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

Net sales. Total net sales from continuing operations for the first nine months ended August 31, 2001 decreased 27.4% to $26.0 million from $35.8 million for the first nine months of fiscal 2000. Net sales of products from continuing operations for the first nine months ended August 31, 2001 decreased 33.1% to $19.1 million from $28.5 million for fiscal 2000. The decrease in net sales of products from continuing operations is due to a number of factors including lower unit sales on both the Macintosh and Windows operating platforms, lower average selling prices for our digital video systems, 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 $2.9 million in the first nine months of fiscal 2001 versus $0.5 million for the first nine months of fiscal 2000. We attribute the decrease in sales of our digital video systems 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 continuing operations for services for first nine months ended August 31, 2001 were $6.9 million, a decrease of $.4 million from the first nine 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. Prior to shutting down Streamriver, net sales were $0.3 million in fiscal 2001.

Gross profit. Gross profit from continuing operations decreased 38.6% to $12.7 million in the first nine months of 2001 from $20.7 million in first nine months of fiscal 2000. Gross profit as a percentage of net sales from continuing operations decreased to 48.8% in the first nine months of 2001 from 57.7% in the first nine months of fiscal 2000. Specifically, gross profit as a percentage of net product sales from continuing operations decreased to 38.6% in the first nine months of 2001 from 51.3% in the first nine months of fiscal 2000, while gross profit as a percentage of net sales of services from continuing operations decreased to 76.9% in the first nine months of 2001 from 82.6% in the first nine 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 from continuing operations decreased due to lower average selling prices for our digital video systems and lower unit sales. 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 from continuing operations decreased 2.0% to $8.1 million in the first nine months of 2001 from $8.2 million in the first nine 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 from continuing operations were $9.8 million in the first nine months of fiscal 2001 compared to $9.8 million in the first nine 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. We currently anticipate that our selling and marketing expenses will decrease in our fiscal fourth quarter due to lower salary and other employee-related expenses as we adjust our expenses to be more in line with our forecasted lower level of sales.

General and administrative. General and administrative expenses from continuing operations increased 47.1% to $4.6 million in the first nine months of fiscal 2001 from $3.1 million in first nine 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. We increased the allowance for doubtful accounts by $150,000 due to softening economy and our expectation that some of our customers will experience difficulties in meeting their financial obligations. We also increased our legal reserve in the third quarter of fiscal 2001 for several lawsuits (see Note 9) that we currently anticipate may result in a settlement by the company and we increased our bonus accrual by $200,000 for payments to employees that made significant contributions to the company. We currently anticipate that our general and administrative expenses will decrease in the fourth quarter as we reduce expenses to be more in line with our forecasted lower level of sales.

Amortization and write-down of acquisition-related intangible assets. We recorded an expense for the amortization and write-down of acquisition-related intangible assets from continuing operations of $2.4 million in the first nine months of fiscal 2001 compared to $0.7 million in the first nine months of fiscal 2000. Included in the $2.4 million was amortization expense associated with the acquisitions of Wired, Inc. and certain assets of Integrated Computing Engines, Inc. and a write-down of goodwill of $0.9 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 nine months of fiscal 2001, we recorded a restructuring charge of $878,000 in connection with a reorganization of the company that resulted in severance payments to terminated employees and the closing of Streamriver. There was no similar expense recorded in the first nine months of fiscal 2000.

Interest income, net. Interest income decreased 72.7% to $0.2 million in the first nine months of fiscal 2001 from $0.8 million in the first nine 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 increase in fiscal 2001 versus 2000 due to higher cash balances as a result of the sale of our streaming media software business to Autodesk, Inc.

Other income (expense), net. Other income was $0.2 million in the first nine months of fiscal 2001 compared to other expense of $0.6 million in the first nine months of fiscal 2000. The increase is due to foreign exchange gains on intercompany transactions with our foreign subsidiaries.

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

Discontinued operations. We recorded a loss from discontinued operations of ($3.2) million or ($0.26) per share, in the first nine months of fiscal 2001 versus a net loss of ($1.7) million or ($0.15) per share, in the first nine months of fiscal 2000. The loss in the first nine months of fiscal 2001 includes all the operations that were sold to Autodesk, Inc. and all transaction-related expenses.

Net loss. As a result of the above factors, we had a net loss from continuing operations for the first nine months of 2001 in the amount of ($12.7) million, or ($1.02) per share, compared to a net loss of ($1.5) million, or ($0.13) per share, in the first nine months of fiscal 2000. Total net loss, including discontinued operations, for the first nine months of fiscal 2001 was ($15.8) million, or ($1.28) per share, versus a net loss of ($3.3) million, or ($0.28) per share, for fiscal 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 August 31, 2001, the Company’s principal sources of liquidity included cash and cash equivalents and marketable securities totaling approximately $6.7 million.

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

Net cash provided by investing activities was approximately $4,674,000 during the nine months of fiscal 2001, compared to cash used in investing activities of approximately $859,000 for the same period a year ago. Cash provided by investing activities during the first nine months of fiscal 2001 consisted of net proceeds from the sale of marketable securities of $5,419,000, partially offset by the purchases of equipment for $768,000. The proceeds from the sales of marketable securities were used to fund the purchases of equipment and working capital needs due to the net loss incurred the first nine months of fiscal 2001.

Cash used in financing activities during the first nine months of fiscal 2001 was approximately $1,066,000, compared to cash provided by financing activities of $4,472,000 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 $504,000 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 nine 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 August 31, 2001, the Company’s principal sources of liquidity included cash and marketable securities. Additionally, on August 29, 2001 the Company executed an agreement to sell our streaming media software business to Autodesk, Inc. for $16 million in cash. The transaction was completed on October 5, 2001 and, subsequent to closure, the company received $14 million in cash with the remaining $2 million deposited in escrow for one year. 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 expenditure 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 disposition 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 systems products and services are intensely competitive and rapidly changing. We are targeting the emerging market of broadcast designers, effects artists, and creative professionals. This market and the products utilized by these users are relatively new. Our success in this emerging market will depend on the rate at which the market develops and our ability to penetrate that market. We will not succeed if we cannot compete effectively in this market and, as a result, our business and operating results could be materially and adversely affected.

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

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 from 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.

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

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.

(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.

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. On August 15, 2001, Deutsche Financial, Inc. entered into a settlement agreement with Digital Origin, Inc. to pay $1,075,000 to the Company.

(iii) 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.

(iv) 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 5. Other Information

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 29.

b) Reports on Form 8-K

There were no reports on Form 8-K during the quarter ended August 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: October 15, 2001	By:	/s/ Steven D. Shea

		Steven D. Shea
		Chief Financial Officer
		Treasurer

EXHIBIT INDEX

Number	Description

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